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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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
incorporation or organization) Identification No.)
8572 KATY FREEWAY, SUITE 101
HOUSTON, TEXAS 77024
(Address of principal executive offices) (Zip Code)
(713) 464-9384
(Issuer's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. Yes No
--- ---
The total number of shares of Common Stock, par value $.01 per share,
outstanding as of March 13, 1998 was 4,813,542.
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PACKAGED ICE, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Description of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . 11
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . 14
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . . . . . . . 18
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . 23
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 28
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FORWARD LOOKING STATEMENTS
Some of the statements made in this Form 10-K Report, as well as statements
made by the Company in periodic press releases, oral statements made by the
Company's officials to analysts and shareholders in the course of presentations
about the Company, constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
that may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or achievements
expressed or implied by the forward looking statements. Such factors include,
among other things, (i) general economic trends and seasonality, (ii)
substantial leverage and ability to service debt, (iii) availability of credit
facilities and restrictive covenants, (iv) risks of acquisition and failure to
integrate acquired businesses, (v) availability of capital sources, and (vi)
competition. Investors are cautioned that all forward-looking statements
involve risks and uncertainty.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Packaged Ice, Inc. (the "Company") was incorporated in 1990 in Texas. The
Company is a leading manufacturer and distributor of packaged ice and is
pursuing a consolidation strategy within the highly fragmented packaged ice
industry. The Company conducts its operations within a single segment of the
industry, i.e., the manufacturing and sale of packaged ice products.
Distribution of the products is made using two methods, (i) traditional delivery
of ice from a central point of production, and (ii) point of sale production by
a proprietary ice bagging system ("Packaged Ice System"). The Company currently
serves over 25,000 customer locations in 17 states and has grown significantly
through strategic acquisitions of traditional ice companies and the placement of
proprietary ice machines which produce, package and store ice through an
automated, self-contained process. Management believes the acquisition of
traditional ice companies provides the Company with significant competitive
advantages in the "roll out" of Packaged Ice Systems. Through these strategic
acquisitions, the Company enters new markets, gains additional production
capacity and leverages the relationships of acquired companies with grocery and
convenience store customers. Since April 1997, the Company has completed 45
acquisitions (33 through December 31, 1997-the "Acquisitions" ), adding annual
historical revenues of approximately $67.2 million, on a pro forma basis, ($47.8
million through December 31, 1997), and expanded the Company's presence
throughout key markets in the southern half of the United States. In addition,
the Company increased its installed base of Packaged Ice Systems from 658
machines at December 31, 1996 to 1,031 machines, and, as of December 31, 1997,
had a backlog of approximately 175 Packaged Ice System additional installations.
INDUSTRY OVERVIEW
The packaged ice industry is seasonal, but on a year-to-year basis remains
stable, generally only affected by abnormally cold or rainy weather within a
region. The packaged ice industry remains highly fragmented with over 3,000
companies, consisting primarily of "mom and pop" packaged ice companies that
lack significant capital resources. Traditional ice manufacturers produce and
package ice at centrally located facilities and distribute to a limited market
radius of approximately 100 miles, mainly due to high shipping and product
distribution costs. Efficient distribution and customer concentration is
important, as transportation is a high cost component in the price of
manufactured ice within a traditional ice delivery system. It is difficult to
ensure prompt and reliable delivery during peak seasonal months in large markets
with traditional ice delivery systems. As a result, the ice business has
historically been a regional service business.
THE PACKAGED ICE SYSTEM
In 1994, the Company completed the development of its proprietary system
("Packaged Ice System") that utilizes state-of- the-art technology to produce,
package and store ice directly at customer locations. The Packaged Ice System
consists of standard Hoshizaki America, Inc. ("Hoshizaki") ice cubers, an ice
merchandiser built to the Company's specifications by Beverage Air Corporation
("Beverage Air") and a bagging machine, the heart of the Packaged Ice System,
manufactured by Lancer Corporation ("Lancer"), a shareholder of the Company,
under an exclusive original equipment manufacturing agreement. Lancer is an
engineering and manufacturing company that is a primary vendor of fountain soft
drink dispensing machines for Coca-Cola, Inc. Arrow Industries, Inc., a
subsidiary of ConAgra Corporation, manufactures the majority of bags used in the
Packaged Ice System to the Company's specifications.
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The Packaged Ice System is capable of producing up to 40,000 bags of ice per
year and is most frequently used in large supermarkets. The latest generation of
the Packaged Ice System is equipped with remote communication capability which
allows the Company's national service center to track production, monitor the
systems, and diagnose and correct system errors through the use of a central
processing unit. The Packaged Ice Systems are serviced by trained
representatives and are designed to provide a high degree of reliability and
serviceability through the use of interchangeable parts and a durable stainless
steel cabinet. To guard against product contamination and satisfy consumer
demand for high quality, sanitary ice, the Packaged Ice System was engineered to
meet all specifications delineated by the National Sanitation Foundation ("NSF")
for ice production and contains a patented automatic sanitizing system. In
addition, the Packaged Ice System is U.L. approved.
The Company began development of the Packaged Ice System in 1990, and
experienced cumulative losses from continuing operations of $1.4 million during
the first four years, which were devoted primarily to research and development.
In addition, management estimates that the Company's strategic partners,
Hoshizaki, Lancer and Beverage Air, funded an aggregate of over $3.5 million of
the development costs of the Packaged Ice System. Management believes that the
technology utilized in the Packaged Ice System is unique, with several patents
covering the bagging device, and that there are significant barriers to entry
for new and existing competitors with respect to the development of a
competitive and reliable machine that performs the same functions as the
Packaged Ice System.
BUSINESS STRATEGY
The Company intends to continue its efforts to acquire traditional ice companies
in strategic markets. Acquisitions of existing manufacturers and distributors of
packaged ice have provided the Company with (i) quick access to key markets,
accelerating the roll out of Packaged Ice Systems, (ii) a source of stable cash
flow, (iii) a national scope to better service large supermarket and convenience
store chains and (iv) economies of scale and cost savings. Management believes
that the Company's proven ability to enter new markets through traditional
acquisitions and the numerous advantages that the Packaged Ice System provides
to retailers will enable the Company to increase the penetration of Packaged Ice
Systems in supermarkets and convenience stores.
Acquire Traditional Ice Manufacturing Companies in Highly Fragmented Industry.
The Company believes that the highly fragmented packaged ice industry contains
numerous acquisition opportunities for service-oriented companies with superior
ice delivery systems and significant capital resources. The Company's
acquisition strategy is to target well- managed, traditional ice producers with
favorable demographics and significant customer bases in both new and existing
market areas. This acquisition strategy allows the Company to broaden geographic
coverage, increase market share, provide for additional distribution channels
through which to place Packaged Ice Systems, and achieve greater economies of
scale. In determining which businesses may be suitable acquisition candidates,
management conducts demographic and competitive analyses and performs
comprehensive due diligence on the target's facilities, management, existing
customer base and it's growth opportunities.
Upon closing an acquisition, the Company seeks reductions in operating costs and
working capital requirements by (i) closing or combining less efficient or
redundant manufacturing and distribution facilities, (ii) maximizing routing
efficiencies, (iii) managing vendor relationships to ensure a high level of
responsiveness and favorable pricing, (iv) increasing market concentration of
Packaged Ice Systems to improve merchandising and servicing efficiencies and (v)
consolidating certain administrative and selling functions to eliminate
redundancies and excess costs. Since the Company is focusing its acquisition
efforts on related businesses, it anticipates that the customer base of any
acquired business will be similar to its own and therefore administrative areas
such as management information systems, accounting systems and customer support
may be consolidated.
Expand Market Presence Through Placement of Packaged Ice Systems. Management
believes that the Packaged Ice System provides numerous advantages to the
retailer including (i) providing a continuous supply of ice, and thus reducing
the frequency of product shortages typical of traditional ice delivery, (ii)
significantly reducing costs associated with delivery and storage at the retail
location, (iii) satisfying consumer demand for a higher quality and more
sanitary ice than typically found with traditional ice delivery, (iv)
effectively managing inventory through computerized production tracking and
dedicated technical support and (v) increasing safety by reducing "slip and
fall" accidents.
The Packaged Ice System, when combined with traditional delivery methods,
provides the Company with significant advantages, including (i) higher operating
margins due to significantly reduced production and distribution costs, (ii) a
delivery system designed to supply high volume locations and capable of
cost-effectively
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servicing a market in excess of 100 miles from its traditional ice manufacturing
facilities, (iii) the ability to redistribute production from its traditional
ice facilities to additional customers as well as satisfy seasonal peak demand
at stores with Packaged Ice Systems and (iv) superior product quality.
Management has recognized these benefits of combining traditional delivery
methods with the Packaged Ice System. As a result, the Company's strategy has
been to enter new markets through traditional acquisitions and, soon thereafter,
to begin placing Packaged Ice Systems throughout the region.
ACQUISITIONS
In April 1997, the Company initiated its strategy of controlled growth through
acquisitions of traditional ice companies with the purchase of Mission Party
Ice, Inc. (Mission), Southwest Texas Packaged Ice, Inc. (STPI) and Southwestern
Ice, Inc. (SWI), collectively, the "April Acquisitions". Since initiating the
acquisition strategy, the Company has completed 45 acquisitions through March
20, 1998, with annual historical revenues of approximately $67.2 million,
expanding the Company's presence throughout numerous key markets as highlighted
below:
APPROXIMATE
HISTORICAL
NUMBER OF ANNUAL
MANUFACTURING REVENUES
LOCATION FACILITIES ($MM)
-------- ---------- -----------
Texas ........... 9 $13.6
Florida ......... 4 7.3
Arkansas ........ 2 5.5
California ...... 5 6.5
Arizona ......... 3 13.3
Utah ............ 1 1.3
Oklahoma ........ 2 5.4
Louisiana ....... 5 5.5
Tennessee ....... 1 1.2
New Mexico ...... 1 0.3
Colorado ........ 1 7.3
-- -----
Total ... 34 $67.2
== =====
The Company has entered, or expects to enter, into definitive agreements to
acquire five (5) additional traditional ice companies (the "Pending
Acquisitions") in 1998. The total aggregate consideration for the Pending
Acquisitions is estimated to be $20.6 million, consisting of $17.6 million in
cash and $3.0 million in shares of the Company's Common Stock issued to selling
shareholders.
The Company has signed a definitive agreement to purchase all of the common
stock of Reddy Ice Corporation (with 1997 revenues of $66.3 million) for
approximately $172 million in cash. The transaction is subject to customary
conditions including review under the Hart Scott Rodino Act and receipt of
financing by the Company. The Company intends to fund the acquisition through a
combination of financing sources including a new credit facility from a banking
institution, the sale of preferred stock and the issuance of additional New
Senior Notes. Management believes that these financing facilities will be
sufficient to conclude the proposed acquisition and provide the Company with
adequate liquidity for future working capital requirements. The Company
anticipates the transaction to close by the end of May 1998.
DISTRIBUTION AND SALES
Efficient service, distribution and pricing are the key determinants of
profitability due to the limited amount of product differentiation in the
packaged ice industry. The Company delivers ice to consumers through (i)
traditional distribution methods and (ii) placement of Packaged Ice Systems.
Traditional Distribution. The Company transports packaged ice produced at its
traditional manufacturing facilities to its retail and commercial customers. The
Company utilizes an extensive computerized database which tracks the time and
quantity of customer purchases, estimates customer inventory levels, catalogues
client service histories and details on- site storage capacities. The system
then integrates this data with information concerning truck availability and
capacity. This allows the Company to efficiently schedule daily deliveries and
service calls. In addition, the Company's market presence provides it with the
necessary customer density to efficiently transport its products.
Packaged Ice System Placement. By producing and bagging the ice at the
customer's location, the Company's Packaged Ice System reduces the Company's
distribution costs. To store and inventory ice, traditional producers build
expensive refrigerated facilities and incur significant utility costs to
maintain temperatures significantly below freezing (20degrees to -10degrees).
The Packaged Ice System eliminates these storage costs by moving ice production
to the site of the customer. Traditional manufacturers are also subject to high
transportation costs, especially over long distances. These expenses are
minimized by on-site production. Remote communications systems between the
Packaged Ice Systems and the Company's national service center allow for
monitoring of on-site inventories and usage, thereby enhancing the Company's
service quality and efficiency. As a result of these cost savings, the
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proprietary Packaged Ice System provides the Company with (i) higher operating
margins, and (ii) a delivery system designed to supply high volume locations and
capable of cost-effectively servicing a market in excess of 100 miles from its
traditional ice manufacturing facilities.
The Company places its Packaged Ice Systems inside supermarkets and other
commercial locations, such as airport catering facilities, construction staging
areas, and large manufacturing plants. The Company provides the machines and
pays for all installation costs, while the retailer provides and pays for the
cost of water, sewer and electricity. The Company maintains ownership of the
machines and charges its customers by the bag. The Company's prices are
competitive with prices for bagged ice delivered by traditional ice companies.
The Company believes that retailers are becoming increasingly aware of the
benefits of the Packaged Ice System, which provides a high quality product
without the necessity of receiving large shipments of ice on a weekly or more
frequent basis.
In accordance with the Company's expansion strategy, the placement of the
Packaged Ice Systems at customer locations is based upon a thorough review of
each site, which primarily focuses on the historical ice sales at the site. Also
included in the site review is an analysis of the surrounding trade area, the
level of overall retail activity, the level of direct competition and the
proximity of the site to other Packaged Ice Systems operated by the Company.
Further, the Company reviews each site in order to ensure that the site has high
visibility and easy access for the consumer, that the site meets the Company's
standards for sanitary conditions including a connection to the municipal water
supply, that it has received, where available, an acceptable rating from the
local health department, and that it has an acceptable power source. Upon
completion of this review, the Company makes a determination as to the viability
of the location and whether a single machine or multiple machines are required
at the time of initial installation. Multiple machines may be installed at a
site if the volume of sales so warrants.
The Company believes that providing frequent, regular and reliable service and
support is one of the most important elements in the operation of its machine
network. In order to maintain this level of service and support, the Company has
implemented its route servicing system, utilizing trained service
representatives to perform the Company's regularly scheduled service procedures.
A service representative has a route consisting of up to 30 Packaged Ice
Systems, each of which are visited on a regular basis. The Company maintains
regional service centers, which are designed to support the activities of the
service representatives. Inventories of filters, supplies and machine parts are
maintained at the centers for use in service calls. In addition, the Company
maintains 24-hour, toll-free telephone support for responding to customer calls
regarding machine operation problems.
PRODUCTS
The Company markets its products to satisfy a broad range of customers,
including retailers, commercial users, restaurants and agricultural users under
a variety of brand names, including Mission Party Ice and Crystal Ice. Through a
Trademark License Agreement, the Company has also obtained the right to use the
name Ice by Culligan(R). The Company produces its ice in cube, half-moon,
cylindrical, and crushed forms to satisfy the demand of particular customers.
The Company's primary ice product is cocktail ice packaged in seven-pound or
eight-pound bags, which it sells principally to convenience stores and
supermarkets. The Company also sells cocktail ice in assorted bag sizes ranging
from 20 to 40 pounds to restaurants, bars, stadiums, vendors and caterers. In
addition, the Company sells block ice in 10 and 300 pound sizes, primarily to
commercial, agricultural and industrial customers.
CUSTOMERS
The Company markets its products to a broad range of customers, including
supermarket chains, convenience stores, commercial users, agricultural buyers,
resorts and restaurants and competitive producers and self-suppliers who
experience supply shortages. Management believes that its geographic
diversification and the superior economics and product quality of the Packaged
Ice System have allowed the Company to develop relationships with certain high
volume national supermarket chains. The Company will continue its penetration
into this segment of the industry.
Retailers with no internal ice production capacity are the primary purchasers of
the Company's manufactured ice products and users of its Packaged Ice System.
Management believes that reasonable pricing when combined with quality service
results in customer loyalty. The Company has a diversified customer base, with
no one customer accounting for more than 10% of net sales in 1997. In addition,
the Company has a geographically diversified customer base, with operations in
17 states throughout the southern and western United States. The geographic
expansion of the Company's customer base helps protect it from adverse
environmental factors such as abnormally cold or wet summer weather in a
particular region.
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COMPETITION
The traditional manufactured ice industry is highly competitive. In addition to
the Company's direct competition, numerous convenience and grocery retailers
operate commercial ice plants for internal use or manufacture and bag ice at
their store locations. Because only one ice manufacturer typically services an
individual retail site, the Company's products generally do not face competition
at the retail level. The traditional packaged ice industry in the United States
is led by six regional, multi-facility competitors, consisting of the Company,
Reddy Ice, Home City Ice, Cassco Ice, Mountain Water Ice and Triangle Ice, and
includes numerous local and regional companies of varying sizes and competitive
resources.
Competition in the packaged ice industry is based primarily on service, price
and quality. To successfully compete in the market, an ice manufacturer must be
able to substantially increase production and distribution on a seasonal basis
while maintaining cost efficiency. Management believes that the Company's high
quality traditional production facilities, substantial financial resources, high
regional market share and associated route density and proprietary ice machine
technology provide it with numerous competitive advantages.
INTELLECTUAL PROPERTY
The Company regards the Packaged Ice System as proprietary and relies primarily
on a combination of patents, nondisclosure and confidentiality agreements, and
other copy protection methods to secure and protect its intellectual property
rights. The Company holds or has exclusive rights to several patents relating to
the Packaged Ice Systems.
While the Company views the patents relating to the bagging device as important
to the value of the Packaged Ice System as a whole, there can be no assurance
that any issued patent will provide the Company with a meaningful competitive
advantage, that competitors will not design alternatives to reduce or eliminate
the benefits of any issued patent or that challenges will not be instituted
against the validity or enforceability of these patents. Other companies may
obtain patents claiming products or processes that are necessary for, or useful
to, the development of the Company's products, in which case the Company may be
required to obtain licenses for patents or for proprietary technology in order
to develop, manufacture or market its products. There can be no assurance that
the Company would be able to obtain such licenses on commercially reasonable
terms, if at all.
The Company has developed or acquired a number of trademarks and trade names,
of which at least two are registered, for use in its ice business, and holds a
license for the use of at least one additional unregistered trademark from a
third party. Although the Company's use of its trademarks has created goodwill
and results in product differentiation, management does not believe that the
loss of any of the Company's trademarks would have a material adverse effect on
its operations.
The Company protects certain of its proprietary materials and processes by
relying on trade secret laws and nondisclosure and confidentiality agreements
and requires all of its key employees and third-party developers to sign
nondisclosure 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.
GOVERNMENT REGULATION
The packaged ice industry is subject to various federal, state and local laws
and regulations, which require the Company, among other things, to obtain
licenses for its business plants and machines, to pay annual license and
inspection fees, to comply with certain detailed design and quality standards
regarding its plants and the Packaged Ice Systems and to continuously control
the quality and quantity of its ice.
The Company's packaged ice products are subject to federal and state regulation
as a food pursuant to the Federal Food, Drug and Cosmetic Act, regulations
promulgated thereunder by the Food and Drug Administration ("FDA") and analogous
state statutes. These statutes and regulations impose comprehensive
manufacturing practices
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requirements governing the sanitary conditions of the facilities where ice is
manufactured, the design and maintenance of the equipment used to manufacture
the ice, the quality of source water and the sanitary practices of employees
during ice production. The State of Florida has imposed additional requirements
that include quarterly testing of the ice for the presence of microbes and
certain substances regulated under the federal Safe Drinking Water Act, specific
requirements for keeping ice packaging operations separate from other activities
and labeling requirements for the bags used including the name of the company
and the net weight. All of the Company's Packaged Ice Systems and ice
manufacturing facilities are subject to routine and random safety, health and
quality inspections. The Company believes that its facilities, manufacturing
practices and Packaged Ice Systems are in compliance with all applicable
Federal, state and local laws and regulations and that the Company will be able
to maintain compliance in the future.
The Company is subject to certain health and safety regulations including
regulations issued pursuant to the Occupational Safety and Health Act ("OSHA").
These regulations require the Company to comply with certain manufacturing,
health and safety standards to protect its employees from accidents.
ENVIRONMENTAL MATTERS
The Company's ice manufacturing and ice storage operations are subject to
federal, state and local environmental laws and regulations. As a result, the
Company has the potential to be involved from time to time in administrative or
legal proceedings relating to environmental matters. There can be no assurance
that the aggregate amount of any environmental liabilities that might be
asserted in any such proceeding will not be material. The Company cannot predict
the types of environmental laws or regulations that may from time to time be
enacted in the future by federal, state or local governments, how existing or
future laws or regulations will be interpreted or enforced or the types of
environmental conditions that may be found to exist at its facilities. The
enactment of more stringent laws or regulations or a more strict interpretation
of existing laws and regulations may require additional expenditures by the
Company, some of which could be material.
The Company generates and handles certain hazardous substances in connection
with the manufacture and storage of packaged ice. The handling and disposal of
these substances and wastes is subject to Federal, state and local regulations,
and site contamination originating from the release or disposal of such
substances or wastes can lead to significant liabilities. In addition, certain
of the Company's current and former facilities are located in industrial areas
and have been in operation for many years. As a consequence, it is possible that
historical activities on property currently or formerly owned by the Company or
that current or historical activities on neighboring properties have affected
properties currently or formerly owned by the Company and that, as a result,
additional environmental issues may arise in the future, the precise nature of
which the Company cannot now predict.
The Company thus may become liable for site contamination at properties
currently or formerly owned by the Company. Although such liability has not had
a material adverse affect on the financial condition or operating results of the
Company in the past, and the Company has no knowledge of claims that could be
expected to have a material adverse affect on its financial condition or
operations, there can be no assurance that the Company will not incur
significant costs in connection with historical handling or disposal of such
substances and wastes.
SEASONALITY OF ICE BUSINESS AND WEATHER
The Company's ice business is seasonal, with its highest sales occurring during
the second and third calendar quarters. In 1997, the Company recorded an average
of approximately 66% of its annual net sales of ice during these two quarters.
Because the Company's operating results depend significantly on sales during its
peak season, adverse weather during this season (such as an unusually cold or
rainy period) could have a disproportionate impact on the Company's operating
results for the full year.
RAW MATERIALS
Except with respect to its water supply and electricity, the Company is not
dependent upon any single supplier for materials used in the manufacturing and
packaging of its ice products. The Company has not experienced any material
supply problems in the past with respect to its ice business. The Company uses
large quantities of plastic bags. Historically, market prices for plastic bags
have fluctuated in response to a number of factors, including changes in
polyethylene prices. The Company historically has not attempted to pass through
changes in the price of plastic bags; therefore, a large, abrupt change in the
price of plastic bags could have a material adverse effect on the Company's
operating margins, although such adverse effects historically have been
temporary. There can be no assurance that significant changes in plastic bag,
electricity, fuel or other commodity prices would not have a material adverse
effect on the Company's business, results of operations and debt service
capabilities.
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CAPITAL REQUIREMENTS
The Company must continue to make capital expenditures to maintain its operating
base, including investments in equipment and contract maintenance, and to expand
its base of Packaged Ice Systems. The Company spent approximately $10.8 million
on capital expenditures for the year ended December 31, 1997, exclusive of the
acquisition of traditional ice companies. While the Company estimates that it
will generate sufficient cash flow from operations to finance anticipated
capital expenditures (exclusive of acquisitions), there can be no assurance that
it will be able to do so.
INSURANCE
The Company carries general and product liability insurance. The Company's
combined coverage per occurrence and aggregate loss coverages are in amounts
that the Company believes to be adequate. Although the Company is not aware of
any actions having ever been filed and believes that the technology utilized at
its manufacturing facilities and contained in its machines makes any
contamination of the ice manufactured at its plants or dispensed by its machines
unlikely, any significant damage awards against the Company in excess of the
Company's insurance coverage could result in a material loss to the Company.
EMPLOYEES
At December 31, 1997, the Company had 800 employees, 772 of who are full-time
employees and 28 of who are part-time or seasonal employees. The Company
generally has not experienced difficulty in meeting its seasonal employment
needs.
Twenty-nine (29) employees are represented by a union or are subject to a
collective bargaining agreement. The Company has never experienced a work
stoppage due to labor difficulties, and management believes its relationship
with its employees is generally excellent.
OUTLOOK AND UNCERTAINTIES
Certain information in this Annual Report may contain "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. All statements other than statements of historical fact are
"forward-looking statements" for purposes of these provisions, including any
projections of earnings, revenues or other financial items, any statements of
the plans and objectives of management for future operations, any statements
concerning proposed new products or services, any statements regarding future
economic conditions or performance, and any statement of assumptions underlying
any of the foregoing. In some cases, forward-looking statements can be
identified by the use of terminology such as "may," "will," "expects," "plans,"
"anticipates," "estimates," "potential," or "continue," or the negative thereof
or other comparable terminology. Although the Company believes that the
expectations reflected in its forward-looking statements are reasonable, it can
give no assurance that such expectations or any of its forward-looking
statements will prove to be correct, and actual results could differ materially
from those projected or assumed in the Company's forward-looking statements. The
Company's future financial condition and results, as well as any forward-looking
statements, are subject to inherent risks and uncertainties, some of which are
summarized in this section.
Potential Limitations on Expansion. The Company may encounter increased
competition for acquisitions in the future, which could result in acquisition
prices the Company does not consider acceptable. There can be no assurance that
the Company will find suitable acquisition candidates at acceptable prices or
succeed in integrating any acquired business into the Company's existing
business or in retaining key customers of acquired businesses. There can also be
no assurance that the Company will have sufficient available capital resources
to realize its acquisition strategy.
Competition. The packaged ice business is highly competitive. The Company faces
a number of competitors in the packaged ice business, including other ice
manufacturers, convenience and grocery retailers that operate captive commercial
ice plants, and retailers that manufacture and package ice at store locations.
Competition exists primarily on a regional basis, with price, service and
quality as the principal competitive factors. Certain of the Company's
competitors have greater financial resources than the Company, which may enable
them to compete more effectively on the basis of price and for acquisitions, and
to better withstand industry downturns. In certain markets, the wholesale price
of ice has decreased significantly as a direct result of competition, resulting
in lower margins. Additional wholesale price reductions, a significant increase
in the utilization of captive commercial ice plants, on-site manufacturing and
packaging by operators of large retail chains served by the Company, or the
successful roll out by a competitor of a machine which duplicates the function
of the Packaged Ice System, could have a material adverse effect on the
Company's operations.
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Substantial Indebtedness. The Company is highly leveraged, with substantial debt
service in addition to operating expenses and planned capital expenditures. At
December 31, 1997, as adjusted to give effect to the issuance of the 9 3/4%
Senior Notes Due 2005 ("Senior Notes"), the total indebtedness of the Company
(excluding debt discount) would have been approximately $145.0 million. The
Company's level of indebtedness will have several important effects on its
future operations, including, without limitation, (i) a substantial portion of
the Company's cash flow from operations must be dedicated to the payment of
interest and principal on its indebtedness, (ii) covenants contained in the
Company's indenture or existing credit facility or any new credit facility will
require the Company to meet certain financial tests, and other restrictions will
limit its ability to borrow additional funds or to dispose of assets, and may
affect the Company's flexibility in planning for, and reacting to, changes in
its business, including possible acquisition activities, (iii) the Company's
leveraged position will substantially increase its vulnerability to adverse
changes in general economic, industry and competitive conditions and (iv) the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate and other purposes may be limited.
The Company's ability to meet its debt service obligations and to reduce its
total indebtedness will be dependent upon the Company's future performance,
which will be subject to general economic, industry and competitive conditions
and to financial, business and other factors affecting the operations of the
Company, many of which are beyond its control. There can be no assurance that
the Company's business will continue to generate cash flow at or above current
levels. If the Company is unable to generate sufficient cash flow from
operations in the future to service its debt, it may be required, among other
things, to seek additional financing in the debt or equity markets, to refinance
or restructure all or a portion of its indebtedness, including the Senior Notes,
to sell selected assets, or to reduce or delay planned capital expenditures.
There can be no assurance that any such measures would be sufficient to enable
the Company to service its debt, or that any of these measures could be effected
on satisfactory terms, if at all.
Seasonality of Ice Business. The Company's ice business is seasonal, with its
highest sales occurring during the second and third calendar quarters. Because
the Company's results of operations for its ice business depend significantly on
sales during its peak season, adverse weather during this season (such as an
unusually mild or rainy period) could have a disproportionate impact on the
Company's results of operations for the full year.
El Nino Phenomenon. "El Nino" is an abnormal warming of the ocean temperatures
across the eastern tropical Pacific Ocean that affects weather around the globe.
This climate phenomenon typically brings wetter, cooler weather for the southern
half of the United States from November through March. Based on historical data
from past El Nino events, some areas in the South may see as much as 150 to 200
percent of normal rainfall accumulation. Because inclement weather such as the
type caused by El Nino is believed to be a primary cause for decreased volume in
the ice industry, the Company could be adversely affected by this weather
phenomenon.
Key Management. The future success of the Company's business operations is
dependent in part on the efforts and skills of certain key members of
management, including James F. Stuart, Chairman and Chief Executive Officer, and
A.J. Lewis III, President and Chief Operating Officer. The loss of any of its
key members of management could have an adverse effect on the Company. The
Company maintains $2.0 million of key-man life insurance on James F. Stuart. The
success of the Company will also depend in part upon the Company's ability to
find, hire and retain additional key management personnel, including senior
management, who are also being sought by other businesses.
ITEM 2. PROPERTIES
Packaged Ice, Inc. maintains its principal executive offices in Houston, Texas
where the Company leases approximately 13,050 square feet of space. The lease
expires on April 30, 2001. The following table lists the location, use and
approximate size of the Company's principal distribution and manufacturing
facilities utilized in the Company's operations as of March 20, 1998.
Total Square Feet
-----------------------
Location Use Owned Leased
-------- --- ------- --------
Houston , TX Corporate Office, District Office & Warehouse 13,050
Dallas, TX District Office & Warehouse 16,150
Phoenix, AZ Manufacturing, Distribution, Cold Storage &
Administrative Office 67,562 19,100
Tucson, AZ Manufacturing & Distribution 41,988
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Albuquerque, NM Distribution 1,500
Memphis, TN Manufacturing & Distribution 19,832
San Diego, CA Manufacturing, Distribution and Cold Storage 86,900
Brawley, CA Manufacturing & Distribution 5,000
El Centro, CA Manufacturing & Distribution 61,000
Salt Lake City, UT Manufacturing & Distribution 10,000
Denver, CO Manufacturing, Distribution and Cold Storage 109,100
San Antonio, TX Manufacturing, Distribution, Repair Facility &
Administrative Office 18,984 4,000
Corpus Christi, TX Manufacturing & Distribution 8,754
Harlingen, TX Manufacturing & Distribution 35,500
Uvalde, TX Manufacturing & Distribution 11,400
Kerrville, TX Distribution 1,550
Del Rio, TX Distribution 3,112
Laredo, TX Manufacturing & Distribution 2,850
Refugio, TX Manufacturing & Distribution 5,675
Austin, TX Distribution 5,000
New Braunfels, TX Distribution 2,250
Oklahoma City, OK Manufacturing & Distribution 17,500
Tulsa, OK Distribution 12,600
Muskogee, Ok Maintenance 16,000
Little Rock, AR Manufacturing & Distribution 7,000
Hot Springs, AR Distribution 7,200
Pine Bluff, AR Manufacturing & Distribution 32,000
Van Buren, AR Distribution 2,800
Springdale, AR Warehouse 17,000
Bogalusa, LA Manufacturing & Distribution 21,000
Baton Rouge, LA Manufacturing & Distribution 19,184
Hammond, LA Manufacturing & Distribution 2,624
St. Martinville, LA Manufacturing & Distribution 3,520
Alexandria, LA Manufacturing & Distribution 3,000
Lake Charles, LA Distribution 2,400
Lafayette, LA Distribution 1,600
Pensacola, FL Manufacturing & Distribution 8,750
Panama City, FL Manufacturing & Distribution 5,300
Naples, FL Manufacturing & Distribution 4,522
Del Ray Beach, FL Manufacturing & Distribution 18,000
Miami, FL Distribution 2,800
------- -------
Total 508,579 246,478
======= ========
ITEM 3. LEGAL PROCEEDINGS
The Company is a party in certain legal proceedings that have resulted from the
ordinary conduct of its business, including several personal injury lawsuits. In
the opinion of the Company's management, none of these proceedings is expected
to have a material adverse effect on the Company.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 16, 1997, the Company consummated a private placement of 25,000 units
(the "Series C Offering") consisting of $25,000,000 aggregate principal amount
of Series C 12% Senior Notes due 2004 and warrants to purchase 255,943 shares of
common stock of the Company. The Series C Notes were issued on substantially
identical terms as its outstanding Series A Notes and Series B Notes due 2004.
The proceeds of the Series C Offering were applied to reduce a portion of the
Company's outstanding borrowings under its senior credit facility, for
acquisition of assets, capital expenditures and working capital.
Contemporaneously with the Series C Offering, the Company solicited consents
from holders of the Series A Notes and Series B Notes pursuant to the terms of a
consent solicitation statement (the "Consent Solicitation Statement")
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to amend (the "Amendment") the indenture governing the Series A Notes and Series
B Notes (the "Indenture") to modify the covenant restricting the Company's
ability to incur debt. The completion of the Series C Offering was conditioned
upon the effectiveness of the Amendment.
The consent solicitation with respect to the Amendment expired at 5:00 p.m., New
York City time, on October 10, 1997 on or prior to which time the Company had
received consents from holders of at least a majority of the consents required
to give effect to the Amendment.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common Stock, $.01 par value per share (the "Common Stock"), has
not been registered pursuant to the Exchange Act and is not publicly traded.
As of December 31, 1997, the approximate number of holders of record of the
Company's Common Stock was 92.
The Company has paid no dividends on its Common Stock since its inception. The
payment by the Company of cash dividends, if any, in the future rests within
the discretion of the Board of Directors of the Company, and will depend, among
other things, upon the Company's earnings, its capital requirements and its
financial condition, as well as other relevant factors. The Company has no
plans to pay any cash dividends on the Common Stock in the foreseeable future.
In addition, the Company's ability to pay cash dividends is restricted by the
indenture providing for the issuance of the Company's $145 million 9 3/4% New
Senior Notes due 2005, the 10% Manditorily Redeemable Preferred Stock due 2005,
and certain stock purchase agreements requiring the vote of two-thirds of the
Company's Board of Directors.
On October 10, 1997, the Company issued 10,000 shares of the Company's common
stock to two accredited investors as partial consideration for substantially all
of the assets of one of the Company's acquisitions. On October 27, 1997, the
Company issued 120,000 and 7,800 shares, respectively, of the Company's common
stock to an accredited investor in partial consideration for all of the
outstanding stock of two of the Company's acquisitions. All such shares of the
Company's common stock were valued at $10 per share. The Company issued the
stock in reliance upon the exemption from registration under Section 4(2) of the
Securities Act of 1933, as amended. The investors represented to the Company
that the investors acquired the stock for the investors' own account and not
with a view to distribution. The investors had available to the investors all
material information concerning the Company. The certificate evidencing the
stock bears an appropriate restrictive legend under the Securities Act of 1933,
as amended.
On December 2, 1997, the Company sold 100,000 shares of the Company's 10%
Exchangeable Preferred Stock due 2005 and 40 shares of the Company's Series C
preferred stock for an aggregate purchase price of $10,000,000 to Culligan Water
Technologies, Inc. In connection with the transaction, the Company also issued a
warrant to the investor to purchase up to an additional 1,807,692 shares of the
Company's common stock for $13 per share. The warrant expires on April 15, 2005
if not previously exercised. The Company issued the stock and warrant in
reliance upon the exemption from registration under Section 4(2) of the
Securities Act of 1933, as amended. The investor represented to the Company that
the investor acquired the stock and warrant for the investor's own account and
not with a view to distribution. The investor had available to the investor all
material information concerning the Company. The certificates evidencing the
stock and warrant bear an appropriate restrictive legend under the Securities
Act of 1933, as amended.
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On December 2, 1997, the Company sold 15,000 shares of the Company's 10%
Exchangeable Preferred Stock due 2005 and 6 shares of the Company's Series C
preferred stock for an aggregate purchase price of $1,500,000 to an accredited
investor. In connection with the transaction, the Company also issued a warrant
to the investor to purchase up to an additional 115,385 shares of the Company's
common stock for $13 per share. The warrant expires on April 15, 2005 if not
previously exercised. The Company issued the stock and warrant in reliance upon
the exemption from registration under Section 4(2) of the Securities Act of
1933, as amended. The investor represented to the Company that the investor
acquired the stock and warrant for the investor's own account and not with a
view to distribution. The investor had available to the investor all material
information concerning the Company. The certificates evidencing the stock and
warrant bear an appropriate restrictive legend under the Securities Act of 1933,
as amended.
On December 15, 1997, the Company sold 135,000 shares of the Company's 10%
Exchangeable Preferred Stock due 2005 and 54 shares of the Company's Series C
preferred stock for an aggregate purchase price of $13,500,000 to Culligan Water
Technologies, Inc. The Company issued the stock in reliance upon the exemption
from registration under Section 4(2) of the Securities Act of 1933, as amended.
The investor represented to the Company that the investor acquired the stock and
warrant for the investor's own account and not with a view to distribution. The
investor had available to the investor all material information concerning the
Company. The certificates evidencing the stock bear an appropriate restrictive
legend under the Securities Act of 1933, as amended.
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ITEM 6: SELECTED FINANCIAL DATA
The following table sets forth, for the periods and dates indicated, selected
consolidated data of the Company for the five years ended December 31, 1997
derived from the Company's audited consolidated financial statements. The
following information should be read in conjunction with the Consolidated
Financial Statements of the Company, including the notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this report
FISCAL YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- --------------
($ THOUSANDS EXCEPT PER SHARE)
OPERATING DATA:
Revenues $ 28,981 $ 4,427 $ 2,830 $ 784 $ 155
Cost of sales 18,724 2,035 1,251 352 56
Gross profit 10,257 2,392 1,579 432 99
Operating expenses 7,636 1,981 1,515 974 431
Depreciation and amortization 5,130 1,456 751 224 48
Interest expense 6,585 130 76 25 11
Other income (expense) 655 185 75 69 --
Net loss (8,439) (990) (688) (722) (391)
NET LOSS TO COMMON SHAREHOLDERS (8,637) (990) (688) (722) (391)
LOSS PER SHARE OF COMMON STOCK
- Basic and diluted (2.40) (.35) (.26) (.28) (.25)
WEIGHTED AVERAGE COMMON
SHARES FOR PER SHARE AMOUNTS (3): 3,600,109 2,826,371 2,682,261 2,614,681 1,538,435
OTHER FINANCIAL DATA:
Cash flows - operating activities (3,248) 1,094 148 (647) (289)
Cash flows - investing activities (61,541) (5,925) (2,961) (3,497) (292)
Cash flows - financing activities 79,488 3,968 3,034 4,897 492
EBIT (2) (1,854) (860) (612) (697) (380)
EBITDA (2) 3,276 596 139 (473) (332)
Capital expenditures (1) 10,765 5,745 2,717 2,999 252
BALANCE SHEET DATA:
Cash and equivalents 14,825 170 1,033 812 58
Working capital (deficiency) 16,553 (1,228) 696 639 (137)
Total assets 122,300 11,523 8,050 5,513 618
Total long-term obligations 67,501 3,582 211 566 125
Total manditorily redeemable preferred
stock 25,198 -- -- -- --
Total preferred stock with put
redemption option 3,223 2,497 2,497 -- --
Total common stock with put
redemption option 1,972 1,972 1,972 -- --
Total shareholders' equity 15,819 1,597 2,582 4,427 247
(1) - Excludes expenditures used to acquire traditional ice businesses.
(2) - EBITDA represents earnings before interest, income taxes, depreciation
and amortization. EBIT represents earnings before interest and income taxes.
The Company has included EBITDA and EBIT data (which are not measures of
financial performance under GAAP) because it understands such data are used by
certain investors to determine a company's historical ability to service its
indebtedness. EBITDA and EBIT should not be considered by an investor as
alternatives to net income, as indicators of the Company's operating
performance or as alternatives to cash flow as measures of liquidity.
(3) - Shares of common stock issuable under stock options have not been included
in the computation of earnings per share as their effect is antidilutive.
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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Historical Financial Data," and the Company's Consolidated Financial Statements,
and the notes thereto, included elsewhere herein.
OVERVIEW
The Company operates in one business segment, the manufacturing and sale of
packaged ice products. These revenues are derived from the sale of packaged ice
through traditional delivery methods, whereby ice is manufactured, packaged and
stored at a central facility and transported to the retail location when needed
and through Packaged Ice Systems, which manufacture, package and store ice at
the retail location. The Company had historically sold ice primarily through
Packaged Ice Systems, but upon acquiring certain traditional ice business assets
in the April Acquisitions, the Company now sells ice through both distribution
methods. Such combination of distribution methods is expected to provide the
Company with (i) higher operating margins due to reduced production and
distribution costs, (ii) a delivery system designed to supply high volume
locations and capable of cost-effectively servicing a market in excess of 100
miles from its traditional ice manufacturing facilities, and (iii) an ability to
redistribute production from its traditional ice facilities to additional
customers and satisfy seasonal peak demands at customer locations with Packaged
Ice Systems.
The Company manufactures its ice in crushed, cubed, half-moon and cylindrical
forms and packages its ice primarily in seven to 40 pound bags for eventual sale
to retail customers and sells block ice in 10 and 300 pound sizes primarily to
commercial and agricultural users. Seven or eight pound bags are the most
commonly purchased size in the industry. Packaged ice sold in 20 pound and 40
pound bags is typically purchased by restaurants and other commercial users.
Block ice in 10 pound and 300 pound units is typically sold to customers in the
commercial and agricultural sectors. The Company also provides other services
including cold storage rental.
Prices for packaged ice are generally stable with some price variation between
markets based on geography and customer base. The Company services over 25,000
customer locations in 17 states, with Texas, Arizona, California and Florida the
most significant markets. The Company services the significant segments of the
ice industry, including supermarket and convenience store retailers,
restaurants, commercial users and the agricultural sector. Management believes
that this market diversity helps insulate the Company from both price and demand
fluctuations caused by geography, weather, customer base and product segment.
The Company's costs of goods sold include costs associated with both traditional
ice delivery and the Packaged Ice Systems. In the traditional ice business,
plant occupancy, plastic bags, delivery, labor and utility-related expenses
account for the largest costs. Costs vary significantly by region and fluctuate
based upon, among other things, freezer capacity and local utility rates. With
the Packaged Ice System, ice storage costs and general operating utility costs
are normally paid by the retailer. The Company's costs of goods sold also
include the cost of plastic bags, which are incurred by both the traditional ice
manufacturer and the Packaged Ice Systems. The cost of the bag used in the
Packaged Ice System is substantially higher than that used in traditional
delivery due to special components and greater thickness. Costs of goods sold
for both systems also includes labor costs associated with manufacturing,
delivery and maintenance. The Packaged Ice System eliminates certain costs
related to production and distribution but does require in-store customer
service representatives and machine technicians. In the aggregate, labor costs
associated with the Packaged Ice System are substantially lower than labor costs
associated with traditional ice manufacturing.
The Company's operating expenses include costs associated with selling, general
and administrative functions. These costs include executive officers'
compensation, office and administrative salaries and costs associated with
leasing office space. Selling, general and administrative functions are similar
at both the traditional facilities operated by the various subsidiaries and at
Packaged Ice, which exclusively handles the Packaged Ice System. These operating
expenses are typically higher when the Company enters new markets in which it
intends to place Packaged Ice Systems, as new marketing, systems and office
facilities must be established.
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RESULTS OF OPERATIONS
The following table sets forth, for the three years ended December 31, 1997,
selected operating data and supplemental data expressed as a percentage of
total revenue at the end of each period.
FISCAL YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
------- ----- ------
OPERATING DATA:
Revenues ................................... 100.0% 100.0% 100.0%
Cost of goods sold ......................... 64.6 46.0 44.2
Gross profit ............................... 35.4 54.0 55.8
Operating expenses(1) ...................... 26.3 44.7 53.5
Depreciation and amortization .............. 17.7 32.9 26.5
Interest expense ........................... 22.7 2.9 2.7
Other income ............................... 2.3 4.2 2.7
Net loss ................................... (29.1) (22.3) (24.3)
- ----------
(1) Excludes depreciation and amortization.
HISTORICAL RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
Revenues. Revenues increased $24.6 million, from $4.4 million for the year
ended December 31, 1996 to $29.0 million for the year ended December 31, 1997.
Revenues increased $2.7 million due to the placement of additional Packaged Ice
Systems, which was the only method of distribution prior to the April
Acquisitions, during the year and $21.9 million as a result of revenue
contributed by the April Acquisitions.
Cost of Sales. Cost of sales increased $16.7 million from $2.0 million at
December 31, 1996 to $18.7 million at December 31, 1997. This increase is due to
the Acquisitions during the year. The cost of sales as a percentage of sales has
increased from 46.0% in 1996 to 64.6% in 1997. This increase is a reflection of
the higher cost associated with traditional ice production as compared to the
Packaged Ice System.
Gross Profit. Gross profit increased $7.9 million, from $2.4 million for
the year ended December 31, 1996 to $10.3 million for the year ended December
31, 1997. The Acquisitions contributed $7.2 million of the increase in gross
profit. As a percentage of revenues, gross profit decreased 18.6 percentage
points from 54.0% at December 31, 1996 to 35.4% at December 31, 1997. Gross
margins decreased because of the higher cost of sales reflected in the
traditional ice businesses of the Acquisitions. Traditional ice companies have
higher costs of goods sold than the lower costs of on- site manufacturing and
delivery associated with the Packaged Ice Systems. As a result of (1) unusually
wet El Nino related weather throughout the Sunbelt, but especially in
California, Arizona and South Texas, and (2) very competitive pricing in Arizona
and South Texas, the Company did not meet expected gross profit (or earnings)
levels.
Operating Expenses. Operating expenses exclusive of depreciation and
amortization increased $5.7 million, from $2.0 million for the year ended
December 31, 1996 to $7.6 million for the year ended December 31, 1997. As a
percentage of revenues, operating expenses decreased 18.4 percentage points from
44.7% at December 31, 1996 to 26.3% at December 31, 1997. This decrease was due
to greater efficiencies realized by the Company as its general and
administrative expenses were spread over the larger base of sales resulting from
the Acquisitions.
Depreciation and Amortization. Depreciation and amortization increased $
3.7 million, from $1.5 million for the year ended December 31, 1996 to $5.1
million for the year ended December 31, 1997. As a percentage of revenues,
depreciation and amortization decreased 15.2 percentage points from 32.9% to
17.7%. This decrease was due primarily to the lower historical depreciation and
amortization percentages at the Acquisitions. These percentages reflect the
longer estimated useful lives of traditional ice plant and equipment as compared
to Packaged Ice Systems. This decrease more than offset the increase related to
the amortization of goodwill resulting from the Acquisitions.
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Interest Expense. Interest expense increased $6.5 million from $0.1 million
for the year ended December 31, 1996 to $6.6 million for the year ended December
31, 1997. This increase was a result of higher levels of debt associated with
the issuance of $75 million of Series A, B and C Senior Notes due 2004.
Other Income. Other income increased $0.5 million from $0.2 million for the
year ended December 31, 1996 to $0.7 million for the year ended December 31,
1997. This increase was due primarily to interest and lease income.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
Revenues. Revenues increased $1.6 million, or 56.4%, from $2.8 million for
the year ended December 31, 1995 to $4.4 million for the year ended December 31,
1996. Revenues increased due to the Company's continued success in penetrating
existing markets and its entry into the Arizona market under the terms of its
master lease arrangement with SWI. In fiscal 1996, the Company placed 241
Packaged Ice Systems, 92 of which were placed in Arizona, and benefited from an
entire year of revenues from an installed machine base of 417 machines at
December 31, 1995.
Cost of Sales. Cost of sales increased $7 million from $1.3 million for
1996 to $2.0 million for 1997 due principally to the increased number of
machines in service (from 417 at December 31, 1995 to 658 at December 31, 1997).
Gross Profit. Gross profit increased $0.8 million, or 51.5%, from $1.6
million for the year ended December 31, 1995 to $2.4 million for the year ended
December 31, 1996. As a percentage of revenues, gross profit decreased 1.8
percentage points from 55.8% in fiscal 1995 to 54.0% in fiscal 1996. Gross
margins decreased primarily as a result of purchases of manufactured ice needed
to supplement the Company's Packaged Ice Systems. This increase in demand was
due to unseasonably hot weather in the Company's primary markets. Purchases as a
percentage of total revenues increased 1.3 percentage points from 0.6% in fiscal
1995 to 1.9% in fiscal 1996.
Operating Expenses. Operating expenses increased $0.5 million, or 30.8%,
from $1.5 million for the year ended December 31, 1995 to $2.0 million for the
year ended December 31, 1996. As a percentage of revenues, operating expenses
decreased 8.8 percentage points from 53.5% in fiscal 1995 to 44.7% in fiscal
1996. This decrease was due primarily to salary-related expenses that, as a
percentage of revenues, decreased 4.4 percentage points from 25.4% in fiscal
1995 to 21.0% in fiscal 1996. This decrease reflected greater efficiencies
realized by the Company as it continued to consolidate its sales force in its
primary markets.
Depreciation and Amortization. Depreciation and amortization increased $0.7
million, or 93.9%, from $0.8 million for the year ended December 31, 1995 to
$1.5 million for the year ended December 31, 1996. This increase was due
primarily to an increase in capital expenditures from $2.7 million in fiscal
1995 to $5.7 million in fiscal 1996.
Interest Expense. Interest expense increased $0.05 million, or 71.1%, from
$0.08 million for the year ended December 31, 1995 to $0.13 million for the year
ended December 31, 1996. This increase was a result of higher levels of
indebtedness associated with the Company borrowing $3.5 million from its credit
facility with Bank One, Texas, N.A. and $0.8 million of convertible notes from
its shareholders to finance equipment placements in fiscal 1996. The convertible
notes were converted into Series B Convertible Preferred Stock in January 1997.
Other Income. Other income increased $0.1 million, or 146.7%, from $0.1
million for the year ended December 31, 1995 to $0.2 million for the year ended
December 31, 1996. As a percentage of revenues, other income increased 1.5
percentage points from 2.7% in fiscal 1995 to 4.2% in fiscal 1996. The increase
was due primarily to increased lease and management income derived from the
Company's master lease agreement with SWI.
LIQUIDITY AND CAPITAL RESOURCES
For the fiscal year ended December 31, 1997, the Company had net cash provided
by operating activities of $3.2 million; net cash used in investing activities
of $61.5 million, consisting primarily of $44.1 million used to complete
acquisitions of traditional ice companies and $10.6 million used to purchase
Packaged Ice Systems; and net cash provided by financing activities of $79.5
million, consisting of $9.9 million of borrowings under the Existing Credit
Facility, $69.6 million of net proceeds from the issuance of the Series A, B and
C Senior Notes (the Old Senior Notes) due 2004, after the refinancing of
existing indebtedness, and $27.1 million from the issuance of common and
preferred stock (net of the Company's $1.5 million purchase of treasury stock),
resulting in a net increase in cash and equivalents of $14.7 million.
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For the fiscal year ended December 31, 1996, the Company had net cash provided
by operating activities of $1.1 million; net cash used in investing activities
of $5.9 million, consisting primarily of $5.7 million used to purchase Packaged
Ice Systems; and net cash provided by financing activities of $4.0 million,
consisting of $3.2 million of additional net debt and $0.8 million from the
issuance of convertible demand notes, resulting in a net decrease in cash and
cash equivalents of $0.9 million.
In September 1997, the Company executed a six year Senior Credit Facility (the
"Existing Credit Facility") with two banks that expires in September 2003. The
Existing Credit Facility provides for borrowings of up to $20 million, subject
to a borrowing base limitation (as defined). Interest is payable at the
Company's option at either the prime rate plus 1% or the London Interbank
Offered Rate, plus a defined margin. At December 31, 1997, the selected interest
rate was 9.5%. There was no principal amount outstanding at that date. The
Existing Credit Facility is secured by substantially all of the Company's
assets. In addition, the Existing Credit Facility also contains restrictive
covenants that, among other things, require the maintenance of certain financial
ratios and limits total indebtedness of the Company. All loans under the
Existing Credit Facility are guaranteed by each of the Company's current and
future subsidiaries.
Through December 31, 1997, the Company has acquired certain traditional ice
businesses and certain assets to complement its core business for purchase
prices totaling approximately $44.1 million in cash, $13.5 in assumed
liabilities paid at closing and $12.8 million in common stock reflected at the
Company's valuation of $10.00 per share. Such expenditures were funded from the
proceeds of the sale of the Old Senior Notes and the Equity Investment. The
excess of the purchase price, based on fair value of the net assets acquired,
over the net book value of the acquired business has been allocated to goodwill.
In conjunction with the Company's ongoing assessment of the fair value of the
net assets acquired from the acquisitions discussed above, management has
estimated the amortization period of goodwill to be 40 years. The amortization
period reflects management's current estimate of the ultimate period to be
benefited by these intangible assets. The acquired businesses were recorded
using the purchase method of accounting, and therefore, the results of their
operations are included in the Company's consolidated financial statements from
the date of their respective purchase.
The Company believes that its liquidity position as of December 31, 1997 of $19
million in cash and short-term cash investments, and total availability of its
Existing Credit Facility of $20 million, when combined with anticipated cash
from operations will be sufficient to meet the Company's working capital
requirements over the next twelve months.
The Company has signed a definitive agreement to purchase all of the common
stock of Reddy Ice Corporation (with 1997 revenues of $66.3 million) for
approximately $172 million in cash. The transaction is subject to customary
conditions including review under the Hart Scott Rodino Act and receipt of
financing by the Company. The Company intends to fund the acquisition through a
combination of financing sources including a new credit facility from a banking
institution, the sale of preferred stock and the issuance of additional New
Senior Notes. Management believes that these financing facilities will be
sufficient to conclude the proposed acquisition and provide the Company with
adequate liquidity for future working capital requirements. The Company
anticipates the transaction to close by the end of May 1998.
17
19
On December 2, 1997, the Company entered into a securities purchase agreement
with Culligan Water Technologies, Inc. (Culligan) and an existing shareholder
pursuant to which the Company issued 250,000 shares of the 10% exchangeable
preferred stock , 100 shares of Series C preferred stock and warrants, with an
exercise price of $13.00 per share, to purchase 1,923,077 shares of the
Company's common stock, in exchange for an aggregate price of $25.0 million. The
warrants are valid until the earlier to occur of (a) April 15, 2005 and (b) the
first anniversary of the last day of the first period of twenty consecutive days
following a qualifying IPO, as defined, during which there is a closing price on
each such trading day and the closing price on each such trading day equals or
exceeds the threshold price, as defined. The Series C preferred stock was
created to provide Culligan and the existing shareholder the right to vote a
number of shares equal to the number of warrants issued to them, such rights to
be effective only at such time or times that Culligan owns less than twenty
percent of the fully diluted common stock of the Company. The Company may redeem
the outstanding Series C preferred stock (but not less than 100%) at such time
as the investors cease to own at least 50% of the warrants.
On January 28, 1998, the Company completed a private offering of $145,000,000
aggregate principal amount of its 9 3/4% Series A Senior Notes due 2005 (the
"New Senior Notes"). The New Senior Notes are general unsecured obligations of
the Company, senior in right of payment to all existing and future Subordinated
Indebtedness of the Company and pari passu to all senior indebtedness of the
Company except the New Senior Notes will be effectively subordinated to the
Existing Credit Facility and any future credit facility. The New Senior Notes
contain certain covenants that, among other things, limit the ability of the
Company and its restricted subsidiaries to pay any cash dividends or make
distributions with respect to the Company's capital stock, to incur indebtedness
or to create liens. Net proceeds from the sale of the New Senior Notes were
applied to (i) repurchase the Series B Notes and Series C Notes as discussed
above, (ii) repay all outstanding obligations under the Existing Credit
Facility, (iii) fund acquisitions of traditional ice companies and (iv) for
working capital and general corporate purposes.
The Company expects to finance the acquisition of additional traditional ice
manufacturing companies, the placement of additional Packaged Ice Systems and
capital expenditures to maintain existing operations with cash provided by
operations, the proceeds of the sale of notes, borrowings under credit
facilities and the issuance of equity securities. The Company expects the
requirements for additional system placements to be about $5 million during
1998, and the requirements for maintenance capital expenditures to be about $5
million during 1998.
The Company may also seek additional debt or equity capital through private or
public offerings of securities. The availability of such capital will depend
upon prevailing market conditions and other factors over which the Company has
no control, as well as the Company's financial condition and results of
operations. There can be no assurance that sufficient funds will be available
to finance intended acquisitions or other capital expenditures to sustain the
Company's recent rate of growth.
The Company is in the process of addressing the impact of the Year 2000 problem
on its computer and information systems. Key financial, information and
operational systems are being assessed to modify or replace each affected system
on a timely basis. Many of the company's systems include hardware and packaged
software recently purchased from large vendors who have represented that these
systems are already Year 2000 compliant. However, failure of the Company's
suppliers or its customers to become year 2000 compliant might have a material
impact on the Company's operations. The financial impact of making required
systems changes is unknown, however, it is not expected to be material to the
company's consolidated financial position, results of operations or cash flows.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, and
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments and related information in interim and annual financial statements SFAS
Nos. 130 and 131 are effective for fiscal years beginning after December 15,
1997. Management is evaluating what, if any, additional disclosures may be
required upon the implementation of SFAS No. 130 and 131.
GENERAL ECONOMIC TRENDS AND SEASONALITY
The Company's results of operations are generally affected by the economic
trends in its market area but results to date have not been impacted by
inflation. If an extended period of high inflation is encountered, the Company
believes that it will be able to pass on its higher costs to its customers.
The packaged ice industry, as a whole is extremely seasonal. In the warm
weather regions where the Company primarily operates, however, this seasonality
is less pronounced. Historically, approximately 66% of the Company's revenues
occur during the second and third fiscal quarters when the weather conditions
are generally warmer and demand is greater. Approximately, 15% of the Company's
revenues occur during the first fiscal quarter, and approximately 19% of the
Company's revenues occur in the fourth fiscal quarter when the weather is
generally cooler. These percentages can vary from region to region within the
sunbelt depending upon the degree of volatility of the seasons, and other
weather phenomenon such as "El Nino".
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index of financial statements and financial statement schedules under
Item 14.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
-19-
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PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company has assembled an experienced management team to oversee its
development and operations. The name, age and respective position of each
director and executive officer of the Company are as follows:
Name Age Position
- ---- --- --------
James F. Stuart ........................... 56 Chairman of the Board of Directors
and Chief Executive Officer
A.J. Lewis III ............................ 42 President, Chief Operating Officer,
Director and Secretary
J.D. Wiginton ............................. 60 Vice President, Marketing
James C. Hazlewood ........................ 50 Chief Financial Officer and Treasurer
Stephen R. Sefton ......................... 42 Director
Steven P. Rosenberg ....................... 39 Director
Richard A. Coonrod ........................ 66 Director
Robert G. Miller .......................... 47 Director
Rod J. Sands .............................. 49 Director
The following is a brief description of the business background and principal
occupation of each director and executive officer:
James F. Stuart, Chairman of the Board and Chief Executive Officer and a
founder of Packaged Ice, served as President of the Company from 1990 until
January 1997, when he was elected Chairman of the Board of Directors and Chief
Executive Officer. Mr. Stuart is Chairman of the Executive Committee of the
Board of Directors and a member of the Compensation Committee.
A.J. Lewis III is President and Chief Operating Officer, a position to
which he was elected in January 1997. In addition, Mr. Lewis is the Secretary of
the Company. Mr. Lewis has been an investor and director of the Company since
1991, and also serves on the Executive and Audit Committees. Mr. Lewis acquired
Mission in 1988 and was its president and the sole director until its
acquisition by the Company. He founded STPI in 1991 and was its president and a
director from inception until its acquisition by the Company. Since 1989, Mr.
Lewis has been a director and president of Southwest Texas Equipment
Distributors, Inc., which is a distributor of Hoshizaki ice equipment.
H.D. Wiginton is Vice President, Marketing. He joined the Company in
November 1996. For the five years prior to joining the Company, Mr. Wiginton was
Executive Vice President of Tower Marketing, a Texas-based, regional food
brokerage concern.
James C. Hazlewood is Chief Financial Officer and Treasurer. Mr. Hazlewood
joined the Company in October 1997. From September 1996 until October 1997, Mr.
Hazlewood was Chief Financial Officer of Harrison Electronics, Inc., a privately
owned electronics distribution company based in Stafford, Texas. From September
1994 until September 1996, Mr. Hazlewood was Chief Financial Officer at Intile
Designs, Inc., a publicly held, wholesale distributor of floor coverings
headquartered in Houston, Texas. From September 1993 to September 1994, Mr.
Hazlewood was an independent consultant. From April 1993 until September 1993,
Mr. Hazlewood was president of Gulf Environmental Corporation of Kellogg, Idaho,
a wholly owned subsidiary of Gulf U.S.A. Mr. Hazlewood is a Certified Public
Accountant who initiated his career with Arthur Andersen LLP.
Stephen R. Sefton has been a director since 1995 and is a member of Audit
Committee of the Board of Directors. Mr. Sefton was designated to be elected as
a director by Norwest. Since 1989, Mr. Sefton has been a general partner of
several Norwest affiliated investment partnerships. Since 1997, Mr. Sefton has
been president and owner of Equity Research, Inc., a firm that provides
consulting services to Norwest and engages in other investment related
activities. Mr. Sefton is a general partner of Itasca Partners V that is general
partner of Norwest.
Steven P. Rosenberg has been an investor in the Company and a director
since 1991. Mr. Rosenberg is Chairman of the Board and Chief Executive Officer
of Nutricept, Inc., a development stage company engaged in the manufacture and
distribution of nutriceutical products. From 1992 to February 1997, Mr.
Rosenberg was President of Arrow, now a wholly owned subsidiary of ConAgra. Mr.
Rosenberg is a member of the Audit Committee.
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Richard A. Coonrod has been a director since 1995 and is a member of the
Compensation Committee of the Board of Directors. Mr. Coonrod was designated to
be elected as a director by The Food Fund Limited Partnership ("Food Fund"), a
shareholder of the Company. Mr. Coonrod has been a general partner of The Food
Fund, a Minneapolis-based limited partnership specializing in food-related
investments, since 1989 and has been President of Coonrod Agriproduction
Corporation, a food and agribusiness consulting and investment firm, since 1985.
Mr. Coonrod has been a director of Orange-co, Inc. since 1987, and has been a
director of Michael Foods, Inc. since 1994.
Robert G. Miller is a director of the Company. Mr. Miller is a private
investor and was Chairman of the Board of Directors of SWI for the five years
preceding its acquisition by the Company. From 1980 to 1992, Mr. Miller was
President and Chief Executive Officer of Glacier Water, Inc., a publicly traded
water vending company.
Rod J. Sands is a director of the Company and is a member of the
Compensation Committee of the Board of Directors. Mr. Sands is a limited partner
in SV Capital Partners, L.P. ("SV"), and a member of its investment committee.
From 1992 to 1997, Mr. Sands served as President and Chief Operating Officer of
Pace Foods, Inc., a leading producer of picante sauce products. See "Certain
Relationships and Related Transactions -- Stock Purchase Agreement with SV
Capital Partners, L.P."
VOTING AGREEMENT
In excess of 80% of the shareholders have entered into a voting agreement (the
"Voting Agreement") which fixes the number of directors at no more than twelve
and provides for the election of the following to the Board of Directors of the
Company - (i) James F. Stuart, (ii) one representative designated by The Food
Fund, who shall initially be Richard A. Coonrod, (iii) one representative
designated by Norwest, who shall initially be Stephen R. Sefton, (iv) one
representative designated by Steven P. Rosenberg, who shall initially be Steven
P. Rosenberg, and (v) A. J. Lewis III.
The Voting Agreement terminates upon the earlier of (i) the agreement of the
holders of 80% of the Company's Common Stock, Series A Preferred Stock and
Series B Preferred Stock voting as a single class on an as converted basis, (ii)
the completion by the Company of a public offering of its Common Stock resulting
in aggregate net proceeds to the Company and any selling shareholders of
$7,500,000 or more, (iii) the merger or consolidation of the Company with or
into another entity which results in the shareholders holding less than 50% of
the voting securities of the surviving entity, or the sale of all or
substantially all of the Company's assets, or (iv) as to any party's right to
designate a director, the reduction of such shareholder's holdings to less than
50% of the September 20, 1995 levels.
Amendments to the Voting Agreement require the agreement of holders of 80% of
the Company's Common Stock, Series A Preferred Stock and Series B Preferred
Stock voting on an as converted basis. In addition, certain holders of in excess
of 50% of the Company's voting stock have entered into a Voting Agreement with
certain former shareholders of SWI to elect Robert G. Miller to the Board of
Directors. Moreover, in connection with the investment in the Company by SV on
July 17, 1997, the holders of at least 60% of the outstanding capital stock of
the Company executed a voting agreement pursuant to which SV may designate a
representative to be elected to the Board of Directors of the Company. SV has
designated Rod J. Sands to be its board representative. In addition, holders of
Series C Preferred Stock have the right to elect two directors, such right being
effective only at such time or times that Culligan owns less than 20% of the
fully diluted Common Stock.
DIRECTOR COMPENSATION
Directors of the Company are elected annually and hold office until the next
annual meeting of shareholders or until their successors are elected and
qualified. See "-- Voting Agreement." Directors are not compensated for their
services as directors. Directors are reimbursed, however, for ordinary and
necessary expenses incurred in attending board or committee meetings.
20
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ITEM 11: EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth certain compensation information for the Chief
Executive Officer of the Company and three additional highly compensated
executive officers (the "Named Executive Officers"). Compensation information
is shown for fiscal 1995, 1996 and 1997.
LONG-TERM COMPENSATION
--------------------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
----------------------------------- OPTIONS/ ALL OTHER
NAME/PRINCIPAL POSITION YEAR SALARY BONUS OTHER SARS COMPENSATION
----------------------- ------- -------- -------- -------- --------- ------------
James F. Stuart, 1997 $125,000 $ 50,000 --(1) 30,000 $ 2,500(2)
Chairman, Chief 1996 125,000 --(1) -- $ 1,827(2)
Executive Officer
1995 75,000 --(1) -- --
A.J. Lewis III, 1997(3) $ 83,173 $ 50,000 --(1) 25,000 $ 769(2)
President, Chief -- --(1) -- --
Operating Officer
H.D. Wiginton 1997 $110,000 $ 32,810 --(1) 5,000 $ 6,000(5)
Vice President, 1996(4) 18,333 -- --(1) 6,000 1,000(5)
Marketing
James C. Hazlewood 1997(6) $ 14,873 -- --(1) 20,000 $ 738(5)
Chief Financial Officer
- ----------
(1) Did not receive perquisites and other personnel benefits from
Packaged Ice in excess of $50,000 or 10% of the Named Executive
Officer's total annual salary and bonus paid for the years indicated.
(2) Contributions to Packaged Ice's 401(k) plan made by Packaged Ice.
(3) Represents partial year compensation. No compensation is provided for
prior years as Mr. Lewis's employment commenced April 1997.
(4) Represents partial year compensation. No compensation information is
provided for prior years as Mr. Wiginton's employment commenced
November 1996.
(5) Automobile allowance.
(6) Represents partial year compensation. No compensation is provided for
prior years as Mr. Hazlewood's employment commenced October 1997.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
The following table provides certain information regarding the number of stock
options to purchase shares of the Company's Common Stock granted to the Named
Executive Officers during the year ended December 31, 1997.
Potential Realizable
Value at Assumed
Number of Percentage Annual Rate of Stock
Securities of Total Price Appreciation
Underlying Options Per Share for Option Term
Options Granted in Exercise or Expiration --------------------------
Name Granted Fiscal 1997 Base Price Date 5% 10%
---- ------- ----------- ---------- ----------- --------------------------
James F. Stuart ....... 30,000 11.7% $ 10.00 11/1/2007 $ 188,668 $ 478,123
A.J. Lewis III ........ 25,000 9.8% $ 10.00 11/1/2007 157,224 398,436
H.D. Wiginton ......... 5,000 2.0% $ 10.00 12/19/2007 31,445 79,687
James C. Hazlewood .... 20,000 7.8% $ 10.00 11/1/2007 125,779 318,748
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AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
The following table provides certain information regarding the exercise of stock
options to purchase shares of the Company's Common Stock during the year ended
December 31, 1997, by the Named Executive Officers, and the fiscal year-end
value of stock options held by such officers.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/
NUMBER OF OPTIONS/SARS AT SARS AT FISCAL
SHARES FISCAL YEAR END YEAR END(1)
ACQUIRED ON --------------------------- -----------------------------
NAME EXERCISE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------- ----------- --------------------------- -----------------------------
James F. Stuart .......... -- -- 30,000 -- $90,000
A.J. Lewis III ........... -- -- 25,000 -- $75,000
H.D. Wiginton ............ -- 1,200 $ 6,875 $41,125
9,800
James C. Hazlewood ....... -- -- 20,000 -- $60,000
- ----------
(1) Based on a fiscal year end of December 31, 1997, and a fair market
value of $13.00 per share, as determined by the Company's Board of
Directors. The value of in-the-money options is calculated as the
difference between the fair market value of the Packaged Ice Common
Stock underlying the options at fiscal year end and the exercise price
of the options. Exercisable options refer to those options that are
exercisable as of December 31, 1997, while unexercisable options refer
to those options that become exercisable at various times thereafter.
STOCK OPTION PLAN
The Company adopted the Packaged Ice, Inc. Stock Option Plan on July 26, 1994
(the "Option Plan"), as amended effective December 1997. Under the Option Plan,
options to purchase up to 400,000 shares of Common Stock may be granted to
employees, outside directors and consultants and advisers to the Company or any
subsidiary. The purposes of the Option Plan are to further the growth,
development and financial success of the Company by providing additional
financial incentives to key personnel and to retain and attract qualified
individuals who will contribute to the overall success of the Company. Shares
that by reason of the expiration of an option (other than by reason of exercise)
or which are no longer subject to purchase pursuant to an option granted under
the Option Plan may be reoptioned thereunder. The Option Plan is currently
administered by the Compensation Committee, which has the authority to set
specific terms, and conditions of options granted under the Option Plan and
administer the Option Plan. Options granted under the Option Plan are
non-qualified options and are not intended to be "incentive stock options" under
Section 422 of the Internal Revenue Code of 1986, as amended. Stock options
granted under the Option Plan may be granted for a term not to exceed ten years
and are not transferable other than by will or the laws of descent and
distribution. Each option may be exercised within the term of the option
pursuant to which it was granted (so long as the optionee, if an employee,
continues to be employed by the Company). In addition, an option may be
exercised as to vested shares within 90 days after the termination of employment
of the optionee (except in the case of a termination for cause, in which case
the option shall automatically expire on termination), and in the event of a
termination in case of death, disability or eligible retirement, all options
shall become exercisable and may be exercised until the earlier of the first
anniversary of such event or the stated expiration date.
The exercise price of all stock options must be at least equal to the fair
market value of the Common Stock on the date of grant. Stock options may be
exercised by payment in cash of the exercise price with respect to each share to
be purchased, or by a method in which a concurrent sale of the acquired stock is
arranged, with the exercise price payable in cash from such sale proceeds.
At December 31, 1997, the Company had outstanding options for 256,000 shares of
Common Stock at a weighted average exercise price of $9.28 of which 31,200 were
exercisable. All options granted under the Option Plan have a five-year vesting
period, which will be accelerated in the event of a change of control or initial
public offering. All of the outstanding options were granted at exercise prices
determined by the Board of Directors to be equal to the fair market value of the
Common Stock on the date of grant. To date, no options have been exercised under
the Option Plan.
EMPLOYMENT AND TERMINATION
H.D. Wiginton, the Company's Vice President, Marketing, entered into an
employment agreement effective November 1, 1996, which establishes a base salary
of $110,000 per year, provides for certain cash bonus incentives
22
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relating to his performance and grants Mr. Wiginton the immediate right to
purchase 6,000 shares of Common Stock plus 6,000 shares under the Option Plan.
James C. Hazlewood, the Company's Chief Financial Officer, entered into an
employment agreement effective November 1, 1997, which establishes a base salary
of $105,000 per year and grants Mr. Hazlewood the right to purchase 20,000
shares under the Option Plan.
As a result of the Acquisitions during 1997, the Company entered into certain
employment contracts with former employees of the acquired companies with an
aggregate annual commitment of approximately $868,000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1997, Stephen R. Sefton, Rod J. Sands and
Richard A. Coonrod served as members of the Compensation Committee. During 1997,
no member of the Compensation Committee was an officer, former officer or
employee of the Company or any of its subsidiaries. During 1997, no executive
officer of the Company served as a member of - (i) the compensation committee of
another entity in which one of the executive officers of such entity served on
the Company's Compensation Committee, (ii) the board of directors of another
entity in which one of the executive officers of such entity served on the
Company's Compensation Committee, or (iii) the compensation committee of another
entity in which one of the executive officers of such entity served as a member
of the Company's Board of Directors.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December 31, 1997 with
respect to the beneficial ownership of Packaged Ice Common Stock, assuming
conversion of the Series A Preferred Stock and Series B Preferred Stock which
have voting rights equivalent to that of the Common Stock, exercise of stock
options and warrants to purchase Common Stock by - (i) each director of the
Company, (ii) each Named Executive Officer of the Company, (iii) each other
person known to hold 5% or more of the outstanding shares of Common Stock, and
(iv) all current executive officers (regardless of salary and bonus level) and
directors of the Company as a group. Unless otherwise indicated, the persons
listed in the table below have sole voting and investment powers with respect to
the shares indicated.
SHARES
BENEFICIALLY
OWNED %
------------ ---------
James F. Stuart(1)
8572 Katy Freeway, Suite 101
Houston, Texas 77024 388,700 4.94%
A. J. Lewis III(2)
1120 E. Durango
San Antonio, Texas 78205 418,943 5.32%
Steven P. Rosenberg(3)
5430 LBJ Freeway, Suite 1600
Dallas, Texas 75219 438,423 5.57%
Stephen R. Sefton(4)
222 South Ninth Street, Suite 2800
Minneapolis, Minnesota 55402-3388 820,449 10.42%
Norwest Equity Partners V(5)
222 South Ninth St, Suite 2800
Minneapolis, Minnesota 55402-3388 820,449 10.42%
Culligan Water Technologies, Inc.(6)
One Culligan Parkway
Northbrook, IL 60062-6209 1,807,692 22.95%
Richard A. Coonrod(7)
5720 Smetana Drive, Suite 300
Minnetonka, Minnesota 55343 91,161 1.16%
H. D. Wiginton(8)
8572 Katy Freeway, Suite 101
Houston, Texas 77024 17,000 0.22%
Robert G. Miller(9)
4425 West Olive, Suite 310
Glendale, Arizona 85302 309,040 3.92%
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SV Capital Partners, L.P.(10)(12)
200 Concord Plaza, Suite 620
San Antonio, Texas 78216....... 400,000 5.08%
Rod J. Sands(11)(12)
5121 Broadway
San Antonio, Texas 78204....... 400,000 5.08%
James C. Hazlewood(13)
8572 Katy Freeway, Suite 101
Houston, Texas 77024........... 20,000 0.25%
All directors and executive officers as a
group (9 persons)(1)(14)....... 2,903,716 36.87%
- ----------
(1) Includes stock options to purchase 30,000 shares of Common Stock at
$10.00 per share, all of which is currently unvested.
(2) Includes stock options to purchase 25,000 shares of Common Stock at
$10.00 per share, all of which is currently unvested, 2,000 shares of
Common Stock held by Mr. Lewis, as Trustee, 25,000 shares owned by
South Texas Equipment Distributors, Inc., a corporation owned by Mr.
and Mrs. Liza B. Lewis, and 69,350 shares held by Mr. and Mrs. Lewis
as tenants in common.
(3) Includes 83,221 shares of Series B Preferred Stock.
(4) Includes 405,000 shares of Series A Preferred Stock and 37,449 shares
of Series B Preferred Stock. Mr. Sefton does not own any shares of
record. However, as general partner of Itasca Partners V, the general
partner of Norwest, Mr. Sefton may be deemed to be the beneficial
owner of the shares held by Norwest. Mr. Sefton disclaims beneficial
ownership of the shares held by Norwest.
(5) Includes 405,000 shares of Series A Preferred Stock and 37,449 shares
of Series B Preferred Stock.
(6) Includes 1,807,692 shares of Common Stock subject to warrants
currently exercisable.
(7) Includes 45,000 shares of Series A Preferred Stock and 4,161 shares
of Series B Preferred Stock. Mr. Coonrod does not own any shares of
record. However, as general partner of Food Fund, Mr. Coonrod may be
deemed to be the beneficial owner of the shares held by Food Fund.
Mr. Coonrod disclaims beneficial ownership of the shares held by Food
Fund.
(8) Includes stock options to purchase 11,000 shares of Common Stock at
an average price of $8.64 per share, of which 1,250 stock options are
currently vested.
(9) Includes stock options to purchase 22,500 shares of Common Stock at
$10.00 per share, all of which is currently unvested.
(10) Christopher Goldsbury, Jr. is a director, majority limited partner
and controlling shareholder of the corporate general partner of SV.
As a result, Mr. Goldsbury may be deemed to have indirect beneficial
ownership of the shares of the Company owned by SV.
(11) Comprised solely of 400,000 shares of Common Stock beneficially owned
by SV. Mr. Sands, a limited partner of SV and a member of its
investment committee, may be deemed to have indirect beneficial
ownership of the shares of the Company owned by SV. Mr. Sands
disclaims any such beneficial ownership.
(12) Includes 100,000 shares of Common Stock subject to warrants currently
exercisable.
(13) Includes stock options to purchase 20,000 shares of Common Stock at
$10.00 per share, all of which is currently unvested.
(14) Includes 450,000 shares of Series A Preferred Stock and 124,831
shares of Series B Preferred Stock.
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ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain decisions concerning the operations or financial structure of the
Company may present conflicts of interest between the Company, certain
shareholders, and directors and officers.
Shareholders Agreement. All current holders of the Company's Common Stock are
parties to a shareholders agreement (the "Shareholders Agreement") which
restricts the transfer of their shares of capital stock of the Company and
grants the Company and the other shareholders a right of first refusal to
purchase shares which a shareholder attempts to transfer. The Shareholders
Agreement terminates upon the occurrence of any of the following: (i) if the
Company permanently ceases to do business; (ii) the Company completes an
underwritten public offering of its Common Stock which results in net proceeds
to the Company and any selling shareholders of at least $7,500,000; or (iii)
upon the written agreement of the holders of no less than eighty percent (80%)
of the voting power of the outstanding Common Stock and Preferred Stock voting
as a single class.
Tag-Along and Co-Sale Rights. James F. Stuart, A.J. Lewis III, Jack Stazo and
Steven P. Rosenberg, founding shareholders, have entered into agreements with
certain other shareholders granting such shareholders the right to participate
pro rata in sales to third parties.
Voting Agreement. In excess of 80% of the Company's shareholders are bound by a
Voting Agreement which establishes the number and make up of the Board of
Directors. See "Management -- Voting Agreement."
Stock Purchase Agreements with Norwest, et al. On September 20, 1995, Packaged
Ice entered into a stock purchase agreement with Norwest and Food Fund ("Norwest
Agreement") pursuant to which the Company issued 450,000 shares of Series A
Preferred Stock at a price of $5.56 per share and 420,000 shares of Common Stock
at a price of $5.00 per share. In addition, the Stock Purchase Agreement
requires a vote of two-thirds of the Board of Directors before the Company may
take certain actions relating to distributions, granting demand registration
rights, guaranteeing indebtedness, making loans, changing the business, making
acquisitions, issuing securities and pledging assets. In connection with the
issuance of stock, Norwest and Food Fund were granted demand and piggy-back
registration rights under a registration rights agreement. The demand right
gives the investors the right to cause the Company to register their securities
at any time after September 20, 2000 and before September 20, 2004. In addition,
Norwest and Food Fund were granted a put option to sell their stock back to the
Company at fair market value, which option becomes effective only if Norwest and
Food Fund have been unable to register their stock by September 20, 2004. The
put option terminates in the event the Company completes a firmly underwritten
public offering of Common Stock, provided that the gross offering price equals
or exceeds $7,500,000. In December 1996, Norwest, Food Fund and Steven P.
Rosenberg advanced $750,000 to the Company under convertible demand notes. On
January 17, 1997, the Company entered into a stock purchase agreement with
Norwest, Food Fund and Steven P. Rosenberg pursuant to which the Company issued
124,831 shares of Series B Preferred Stock at a price of $6.07 per share in
exchange for the cancellation of the $750,000 of demand notes. As a result of
the issuance of Series B Preferred Stock, the Shareholders Agreement and the
Voting Agreement were amended to include the Series B Preferred Stock. In
addition, Mr. Rosenberg was granted demand registration rights under the
September 20, 1995 registration rights agreement. The Company has amended the
September 20, 1995 registration rights agreement to grant demand registration
rights to Mr. Rosenberg, Food Fund and Norwest, which are substantially similar
to those granted in connection with the issuance of the warrants. Holders of
Series A Preferred Stock and Series B Preferred Stock have contractual
preemptive rights to acquire capital stock.
Stock Purchase Agreements with Individual Investors. The Company entered into a
stock purchase agreement dated December 23, 1993 which granted certain
individual shareholders piggy-back registration rights with respect to the
Common Stock and the right to receive financial and other information and notice
of certain events. The Company entered into a stock purchase agreement on
September 20, 1995 with individual investors which granted them piggy-back
registration rights, contractual preemptive rights to acquire capital stock, and
the right to receive financial and other information. In addition, this
agreement requires a vote of two-thirds of the Board of Directors before the
Company may take certain actions relating to distributions, granting demand
registration rights, guaranteeing indebtedness, making loans, changing the
business, making acquisitions, issuing securities and pledging assets. The Board
of Directors has unanimously approved the issuance of the securities and all
ancillary agreements.
Agreements with A. J. Lewis III. A. J. Lewis III is the President and Chief
Operating Officer and a director of the Company. At December 31, 1997, Mr. Lewis
and his wife, Liza B. Lewis, owned 5.3% of the fully diluted shares of Common
Stock of the Company. Mr. and Mrs. Lewis have been granted demand registration
rights in connection with the acquisitions of Mission and STPI. Prior to
completion of these acquisitions, Mr. Lewis and his wife owned
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100% of Mission and 80% of STPI. Mr. Lewis and his wife also own Southwest Texas
Equipment Distributors, Inc. which is a shareholder of the Company. Southwest
Texas Equipment Distributors, Inc., an ice equipment sales and rental company,
has the exclusive right to supply Hoshizaki ice cubers to the Company under an
agreement dated September 9, 1991. Mr. Lewis holds the option to purchase the
real estate on which Mission's facilities are located. Mr. Lewis intends to
exercise this option in 1998. As part of the acquisitions of Mission and STPI,
the Company will lease these facilities from Mr. Lewis on arms-length terms
approved by a disinterested majority of the Board of Directors. These agreements
with Mr. Lewis may result in conflicts of interest with respect to certain
matters affecting the Company, such as potential business opportunities,
business dealings, demands on Mr. Lewis' time, possible corporate transactions
and other strategic decisions affecting the future of the Company and Mr. Lewis.
Agreements with Southwestern Ice, Inc. and its Principals. Prior to completion
of the acquisition of SWI by the Company, Dale M. Johnson, Robert G. Miller and
Alan S. Bernstein together owned 95% of SWI. At December 31, 1997, Messrs.
Johnson, Miller and Bernstein owned an aggregate of 8.2% of the fully diluted
shares of Common Stock of the Company. Messrs. Johnson, Miller and Bernstein
were granted demand registration rights in connection with the issuance of
shares. Prior to the acquisition of SWI, Packaged Ice and SWI were parties to an
option agreement and master lease agreement under which SWI granted to the
Company the right to acquire SWI on specified terms, and under which SWI
obtained the right to lease Packaged Ice Systems and place them in SWI's market
area. The option agreement and master lease agreement with SWI terminated upon
consummation of the acquisition. Mr. Miller owns and leases to the Company the
real property on which an ice manufacturing plant in Phoenix, Arizona is
located.
Stock Purchase Agreement with SV Capital Partners, L.P. On July 17, 1997,
Packaged Ice entered into a stock purchase agreement with SV Capital Partners,
L.P. pursuant to which the Company issued 300,000 shares of Common Stock at a
price of $10.00 per share and a warrant to purchase 100,000 shares of Common
Stock at an exercise price of $14.00 per share until July 17, 2002. In addition,
the stock purchase agreement with SV requires a vote of two-thirds of the Board
of Directors before the Company may take certain action relating to
distributions, granting demand registration rights, guaranteeing indebtedness,
making loans, changing the business, making acquisitions, pledging assets and
becoming a party to a merger, consolidation or reorganization resulting in less
than 51% voting power by persons who held at least 51% of the voting power
before such transaction or selling all or substantially all of the Company's
assets. In connection with the investment by SV, the holders of at least 60% of
the outstanding capital stock of the Company executed a voting agreement
pursuant to which SV may designate a representative to be elected to the Board
of Directors and the shareholders shall elect such person to the Board. Also in
connection with the issuance of stock, SV was granted demand and piggy back
registration rights under a registration rights agreement. The demand gives SV
the right to cause the Company to register its securities at any time after 180
days following completion by the Company of a public equity offering. In
addition, James F. Stuart, A. J. Lewis III and Steven P. Rosenberg entered into
a parallel exit agreement with SV guaranteeing SV the right to participate pro
rata in sales to third parties. SV also became a party to the Shareholders
Agreement and Voting Agreement in connection with the issuance of stock to SV.
Securities Purchase Agreement with Culligan Water Technologies, Inc. On
December 2, 1997, the Company entered into a Securities Purchase Agreement (the
"Culligan Securities Purchase Agreement") with Culligan pursuant to which
Culligan acquired 235,000 shares of Mandatorily Redeemable Preferred Stock, 94
shares of Series C Preferred Stock and warrants, with an exercise price of
$13.00 per share, to purchase 1,807,692 shares of Common Stock, for an
aggregate price of $23.5 million, $10.0 million of which was paid on December
2, 1997 and $13.5 million of which was paid on December 15, 1997. In addition,
the Company entered into a Securities Purchase Agreement pursuant to which an
existing investor purchased 15,000 shares of Mandatorily Redeemable Preferred
Stock, 6 shares of Series C Preferred Stock and warrants to acquire 115,385
shares of Common Stock for an aggregate price of $1.5 million. The warrants are
valid until the earlier to occur of (a) April 15, 2005 and (b) the first
anniversary of the last day of the first period of twenty (20) consecutive
Trading Days following a Qualifying IPO during which there is a Closing Price on
each such Trading Day and the Closing Price on each such Trading Day equals or
exceeds the Threshold Price. "Qualifying IPO" means an underwritten public
offering of Common Stock at an aggregate price to the public of at least
$40,000,000 and after which the Common Stock is listed on a national securities
exchange or automated quotation system. "Closing Price" means, with respect to
any Trading Day, the last reported sale price per share on such day of the
Common Stock on the principal national securities exchange or automated
quotation system on which the Common Stock is then listed. "Threshold Price"
means, initially, $26.00, subject to adjustment. "Trading Day" means any day on
which the principal national securities exchange or automated quotation system
on which the Common Stock is listed is open for business. The Company intends to
use the net proceeds to support the Company's plan of strategic acquisitions and
for working capital.
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Holders of the Mandatorily Redeemable Preferred Stock shall be entitled to
receive dividends equal to 10% of the liquidation preference thereof, and all
dividends shall be fully cumulative. Dividends may be paid in cash or in kind by
issuing a number of additional shares of Mandatorily Redeemable Preferred Stock.
If dividends are paid in kind, the Company shall also issue additional warrants
to purchase Common Stock at an exercise price of $13.00 per share to the holders
of the Mandatorily Redeemable Preferred Stock. Holders of the Mandatorily
Redeemable Preferred Stock have no voting rights other than approval rights with
respect to the issuance of parity or senior securities. The Company may redeem
the Mandatorily Redeemable Preferred Stock at any time subject to contractual
and other restrictions with respect thereto and to applicable provisions of the
Texas Business Corporation Act and to the legal availability of funds therefor.
The Company is obligated to redeem the Mandatorily Redeemable Preferred Stock
for cash on April 15, 2005 subject to applicable provisions of the Texas
Business Corporation Act. The Company may redeem all of the Mandatorily
Redeemable Preferred Stock for notes in an aggregate principal amount of the
liquidation preference amount of the Mandatorily Redeemable Preferred Stock.
The Series C Preferred Stock was created to provide Culligan and Jesselson the
right to vote a number of shares equal to the number of warrants issued to them,
such rights to be effective only at such time or times that Culligan owns less
than twenty percent (20%) of the fully diluted Common Stock. The Company may
redeem all (but not less than all) of the Series C Preferred Stock at such time
as the investors cease to own at least fifty percent (50%) of the Fully Diluted
Warrant Common Stock (as defined in the Certificate of Designation of the Series
C Preferred Stock).
The securities purchase agreements require a vote of two-thirds of the Board of
Directors before the Company may take certain action relating to distributions,
granting demand registration rights, guaranteeing indebtedness, making loans,
changing the business, making acquisitions, pledging assets and becoming a party
to a merger, consolidation or reorganization resulting in less than 51% of the
Company's assets. The securities purchase agreements also contain certain
restrictive covenants, which the Company is required to adhere to while any of
the Mandatorily Redeemable Preferred Stock is outstanding. In connection with
the investment by Culligan, the holders of over 80% of the outstanding capital
stock of the Company executed a voting agreement pursuant to which Culligan may
designate two representatives to be elected to the Board of Directors and the
shareholders shall elect such persons to the Board. Also in connection with the
issuance of stock, Culligan was granted demand and piggy back registration
rights under a registration rights agreement. The demand gives Culligan the
right to cause the Company to register its securities at any time after 180 days
following completion by the Company of a public equity offering. In addition,
James F. Stuart, A.J. Lewis III and Steven P. Rosenberg entered into a parallel
exit agreement with Culligan guaranteeing Culligan the right to participate pro
rata in sales to third parties. Culligan and Jesselson also entered into a Stock
Transfer Restriction Agreement that precludes them from transferring the Series
C Preferred Stock or Common Stock issued under the warrants to the Company's
primary competitor.
Other Transactions and Relationships with Shareholders. Akin, Gump, Strauss,
Hauer & Feld, L.L.P. ("Akin Gump") provides legal services to the Company. Cecil
Schenker, a shareholder of the Company, is a partner of Akin Gump. Alan
Schoenbaum, the son of Stanley Schoenbaum, a shareholder of the Company, is a
partner of Akin Gump. Kenneth H. Johnson, a shareholder, provides legal services
to the Company. Bill Highsmith, a shareholder, has acted as an insurance agent
for the Company in connection with the Company's health insurance and key-man
life insurance. James M. Raines, a shareholder, is affiliated with Williams
Financial Group, which provided investment banking services to the Company in
connection with the sale of the Notes, for which it will receive a finder's fee
from the Initial Purchaser. Lancer Corporation, a shareholder, supplies the
Company's proprietary bagging devices under an exclusive contract.
The Company believes that the transactions referred to above are no less
favorable than transactions, which would have been obtained from unrelated third
parties. Any future transactions between the Company and related parties will be
approved by outside directors and will be on terms no less favorable than those,
which could have been obtained from unrelated third parties.
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PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements.
Page
----
Independent Auditors' Report F-1
Consolidated Balance Sheets at December 31, 1997 and 1996 F-2
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995 F-3
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1997 and 1996 F-4
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997 and 1996 F-5
Notes to Consolidated Financial Statements F-6
(a)(2) Financial Statement Schedules
All schedules and other statements for which provision is made in the
applicable regulations of the Commission have been omitted because they
are not required under the relevant instructions or are inapplicable.
(a)(3) Exhibits
The following is a list of exhibits filed as part of this Form 10-K.
Where so indicated by footnote, exhibits that were previously filed, are
incorporated by reference.
Exhibit No. Description
3.1 Articles of Incorporation of Packaged Ice, Inc. (the
"Company") filed with the Secretary of State of the
State of Texas on August 14, 1990. (Exhibit 3.1)(1)
3.2 Restated Articles of Incorporation of the Company filed
with the Secretary of State of the State of Texas on
February 5, 1992. (Exhibit 3.2)(1)
3.3 Certificate of Designation of Series A Convertible
Preferred Stock of the Company filed with the Secretary
of State of the State of Texas on September 19, 1995.
(Exhibit 3.3)(1)
3.4 Certificate of Designation of Series B Convertible
Preferred Stock of the Company filed with the Secretary
of State of the State of Texas on January 10, 1997.
(Exhibit 3.4)(1)
3.5 Amended and Restated Bylaws of the Company effective
as of January 20, 1997. (Exhibit 3.5)(1)
4.1 Indenture, dated April 17, 1997, among the Company, as
Issuer, the Subsidiary Guarantors identified therein
(the "Guarantors"), and U.S. Trust Company of Texas,
N.A. as Trustee. (Exhibit 4.1)(1)
30
4.2 Registration Rights Agreement, dated as of April 17, 1997,
among the Company, the Subsidiary Guarantors, and the
purchasers of the Notes. (Exhibit 4.2)(1)
4.3 First Supplemental Indenture, dated as of October 16, 1997,
among the Company, the Subsidiary Guarantors, and the
Purchasers of the Notes. (Exhibit 4.3) (3)
4.4 Supplemental Indenture, dated as of October 23, 1997, for
Indenture dated as of April 17, 1997. (Exhibit 4.4) (3)
10.1 Stock Purchase Agreement, dated as of July 17, 1997, by and
between Packaged Ice, Inc. and SV Capital Partners, L.P.
(Exhibit 10.38)(2)
10.2 Common Stock Purchase Warrant No. SV-1, dated July 17, 1997,
executed by Packaged Ice, Inc. for the benefit of SV Capital
Partners, L.P. (Exhibit 10.39)(2)
10.3 Voting Agreement, dated July 17, 1997, by and among Packaged
Ice, Inc., SV Capital Partners, L.P. and substantially all of
the shareholders of Packaged Ice, Inc. (Exhibit 10.40)(1)
10.4 Registration Rights Agreement, dated as of July 17, 1997, by
and between Packaged Ice, Inc. and SV Capital Partners, L.P.
(Exhibit 10.41)(2)
10.5 Parallel Exit Agreement, dated July 17,1997, by and among
Packaged Ice, Inc., SV Capital Partners, L.P., and certain of
Packaged Ice, Inc.'s shareholders (James F. Stuart, A. J.
Lewis III, and Steven P. Rosenberg). (Exhibit 10.42)(2)
10.6 Indemnification Agreement, dated July 17, 1997, by and between
Packaged Ice, Inc. and Rod Sands, indemnifying Mr. Sands as a
director of Packaged Ice, Inc. (Exhibit 10.43)(2)
10.7 Warrant Agreement among the Company and U.S. Trust Company of
Texas, N.A., a national banking association, as Warrant Agent,
dated as of October 16, 1997. (Exhibit 10.7) (3)
10.8 Credit Agreement by and among the Company, The Frost National
Bank (individually and as Agent for Zions and other Banks),
and Zions First National Bank (individually), dated as of
September 15, 1997. (Exhibit 10.8) (3)
10.9 First Amendment to Credit Agreement dated as of October 16,
1997. (Exhibit 10.9) (3)
10.10 Agreement (Patents) (United States) dated as of September 15,
1997, executed by the Company in favor of Agent. (Exhibit
10.10) (3)
10.11 Revolving Credit Note dated as of September 15, 1997, in the
stated principal amount of $10,000,000.00, executed by the
Company and payable to the order of The Frost National Bank.
(Exhibit 10.11) (3)
10.12 Revolving Credit Note dated as of September 15, 1997, in the
stated principal amount of $10,000,000.00, executed by the
Company and payable to the order of Zions First National Bank.
(Exhibit 10.12) (3)
10.13 Subsidiary Guaranty Agreement dated as of September 15, 1997,
executed by SWI in favor of Agent and Banks. (Exhibit 10.13)
(3)
31
10.14 Subsidiary Guaranty Agreement dated as of September 15, 1997,
executed by MPI in favor of Agent and Banks. (Exhibit 10.14)
(3)
10.15 Subsidiary Guaranty Agreement dated as of September 15, 1997,
executed by PILI in favor of Agent and Banks. (Exhibit 10.15)
(3)
10.16 Subsidiary Guaranty Agreement dated as of September 15, 1997,
executed by SII in favor of Agent and Banks. (Exhibit 10.16)
(3)
10.17 Subsidiary Guaranty Agreement dated as of September 15, 1997,
executed by STPI in favor of Agent and Banks. (Exhibit 10.17)
(3)
10.18 Security Agreement dated as of September 15, 1997, executed by
the Company as Debtor in favor of Agent. (Exhibit 10.18) (3)
10.19 Security Agreement dated as of September 15, 1997, executed by
STPI as Debtor in favor of Agent. (Exhibit 10.19) (3)
10.20 Security Agreement dated as of September 15, 1997, executed by
SWI as Debtor in favor of Agent. (Exhibit 10.20) (3)
10.21 Security Agreement dated as of September 15, 1997, executed by
MPI as Debtor in favor of Agent. (Exhibit 10.21) (3)
10.22 Security Agreement dated as of September 15, 1997, executed by
PILI as Debtor in favor of Agent. (Exhibit 10.22) (3)
10.23 Deed of Trust, Assignment of Rents, Security Agreement, and
Fixture Filing dated as of September 15, 1997, executed by
SWI, as filed of record in the Real Property Records of
Maricopa County, Arizona. (Exhibit 10.23) (3)
10.24 Pledge and Security Agreement (Subsidiary Stock) dated as of
September 15, 1997, executed by the Company as Pledgor in
favor of Agent. (Exhibit 10.24) (3)
10.25 Deed of Trust, Assignment of Rents, Security Agreement, and
Fixture Filing dated as of September 15, 1997, executed by
SWI, as filed of record in the Real Property Records of Pima
County, Arizona. (Exhibit 10.25) (3)
10.26 Leasehold Deed of Trust, Assignment of Rents, Security
Agreement, and Fixture Filing dated as of September 15, 1997,
executed by SWI, as filed of record in the Real Property
Records of Maricopa County, Arizona. (Exhibit 10.26) (3)
10.27 Deed of Trust, Security Agreement, Assignment of Rents, and
Fixture Filing dated as of September 15, 1997, executed by
SWI, as filed of record in the Real Property Records of
Imperial and San Diego Counties, California. (Exhibit 10.27)
(3)
10.28 Leasehold Deed of Trust, Security Agreement, Assignment of
Rents, and Fixture Filing dated as of September 15, 1997,
executed by SWI, as filed of record in the Real Property
Records of San Diego County, California. (Exhibit 10.28) (3)
10.29 Deed of Trust, Security Agreement, and Fixture Filing dated as
of September 15, 1997, executed by SWI, as filed of record in
the Real Property Records of Shelby County, Tennessee.
(Exhibit 10.29) (3)
32
10.30 Deed of Trust, Assignment Security Agreement, and Financing
Statement (Refugio County) dated as of September 15, 1997,
executed by MPI, as filed of record in the Real Property
Records of Refugio County, Texas. (Exhibit 10.30) (3)
10.31 Deed of Trust, Assignment Security Agreement, and Financing
Statement (Cameron and Hidalgo Counties) dated as of September
15, 1997, executed by SWI, as filed of record in the Real
Property Records of Cameron and Hidalgo Counties, Texas.
(Exhibit 10.31) (3)
10.32 Subordination, Attornment and Non-Disturbance Agreement dated
as of September 15, 1997, by and between Mid Valley
Industries, as Tenant, and Agent, covering property located at
101 North 16th Street, McAllen, Texas 78501. (Exhibit 10.32)
(3)
10.33 Leasehold Deed of Trust, Assignment, Security Agreement, and
Financing Statement (Nueces County) dated as of September 15,
1997, executed by MPI, as filed of record in the Real Property
Records of Nueces County, Texas. (Exhibit 10.33) (3)
10.34 Leasehold Deed of Trust, Assignment, Security Agreement, and
Financing Statement (Dallas County) dated as of September 15,
1997, executed by the Company, as filed of record in the Real
Property Records of Dallas County, Texas. (Exhibit 10.34) (3)
10.35 Indenture, dated October 16, 1997, among the Company, as
Issuer, the guarantors identified therein (the "Guarantors"),
and U.S. Trust Company of Texas, N.A. as Trustee. (Exhibit
10.35) (3)
10.36 Registration Rights Agreement, dated as of October 16, 1997,
among the Company, the Subsidiary Guarantors, and the
purchasers of the Notes. (Exhibit 10.36) (3)
10.37 Purchase Agreement, dated October 10, 1997, among the Company,
the Guarantors, and Jefferies & Company, Inc. (the Initial
Purchaser of the Notes). (Exhibit 10.37) (3)
10.38 Securityholder's and Registration Rights Agreement, dated as
of October 16, 1997, among the Company and the Initial
Purchaser. (Exhibit 10.38) (3)
10.39 Supplemental Indenture dated as of October 23, 1997, for
Indenture dated as of October 16, 1997. (Exhibit 10.39) (3)
10.40 Trademark License Agreement between Culligan International
Company and Packaged ice, Inc. dated as of October 31, 1997.
(Exhibit 10.40) (3)
10.41 Asset Purchase Agreement between Southwestern Ice, Inc. and
Pure Flo Package Water and Ice Co. dated as of June 30, 1997.
(Exhibit 10.41) (3)
10.42 Stock Purchase Agreement among Packaged Ice, Inc., Buyer, and
W. Brad Troutman and James V. White, Jr., Stockholders,
holders of all of the outstanding stock of First Ice Company
and Codurus Leasing Company, dated as of September 4, 1997.
(Exhibit 10.42) (3)
10.43 Asset Purchase Agreement between Southwestern Ice, Inc. and
CMC Ice, Inc., Carlos Shannon, and Linda Shannon dated as of
September 4, 1997. (Exhibit 10.43) (3)
10.44 Asset Purchase Agreement between Southwestern Ice, Inc. and
CJC Ice, Inc. dated as of September 4, 1997. (Exhibit 10.44)
(3)
33
10.45 Stock Purchase Agreement among Packaged Ice, Inc., Buyer, and
Warren F. Kruger and Julie S. Kruger, stockholders, holders of
all of the outstanding stock of Century Ice of Tulsa, Inc. and
Ice Cold Enterprises, Inc., dated as of September 12, 1997.
(Exhibit 10.45) (3)
10.46 Asset Purchase Agreement between Southwestern Ice, Inc. and
Ed's Refrigeration, Inc. d/b/a The Ice Co. and the
Shareholders of Ed's Refrigeration, Inc., Edmond Pacques and
True Dee Packs dated as of October 9, 1997. (5)
10.47 Agreement and Plan of Merger by and among Packaged Ice, Inc.,
Golden Eagle Ice-Texas, Inc., Golden Eagle Ice Company and
Diane C. Bray dated as of October 27, 1997. (5)
10.48 Agreement and Plan of Merger by and among Packaged Ice, Inc.,
Central Arkansas Cold Storage-Texas, Inc., Central Arkansas
Cold Storage, Inc. and Diane C. Bray dated as of October 27,
1997. (5)
10.49 Asset Purchase Agreement by and among Mission Party Ice, Inc.,
Packaged Ice, Inc. and R2D2, Inc. and David Peters and Robert
Pierce dated as of October 30, 1997. (5)
10.50 Asset Purchase Agreement by and among Mission Party Ice, Inc.,
Packaged Ice, Inc. and New Braunfels Smokehouse, Inc. and Sue
Snyder dated as of November 7, 1997. (5)
10.51 Asset Purchase Agreement by and among Southwestern Ice, Inc.,
Ice Company Enterprises, Inc. and David Jensen and Steve
Jensen dated as of November 11, 1997. (5)
10.52 Stock Purchase Agreement by and among Packaged Ice, Inc. and
Herbert F. Stackhouse, Jr. and Earl Milton Spaulding, Jr.,
holders of all of the outstanding stock of Peoples Crystal Ice
Company dated November 21, 1997. (5)
10.53 Certificate of Designation of Series C Preferred Stock as
filed with the Texas Secretary of State on December 2, 1997.
(Exhibit 4.1) (4)
10.54 Certificate of Designation of 10% Exchangeable Preferred Stock
as filed with the Texas Secretary of State on December 2,
1997. (Exhibit 4.2) (4)
10.55 Securities Purchase Agreement between Packaged Ice, Inc. and
Culligan Water Technologies, Inc. dated December 2, 1997.
(Exhibit 10.1) (4)
10.56 Securities Purchase Agreement between Packaged Ice, Inc. and
Erica Jesselson dated December 2, 1997. (Exhibit 10.2) (4)
10.57 Common Stock Purchase Warrant issued by Packaged Ice, Inc. and
issued to Culligan Water Technologies, Inc. issuing 1,807,692
fully paid and nonassessable shares of the Company's common
stock at an exercise price of $13.00 per share dated December
2, 1997. (Exhibit 10.3) (4)
10.58 Common Stock Purchase Warrant issued by Packaged Ice, Inc. and
issued to Erica Jesselson issuing 115,385 fully paid and
nonassessable shares of the Company's common stock at an
exercise price of $13.00 per share dated December 2, 1997.
(Exhibit 10.4) (4)
10.59 Registration Rights Agreement by and among Packaged Ice, Inc.,
Culligan Water Technologies, Inc. and Erica Jesselson dated
December 2, 1997. (Exhibit 10.5) (4)
10.60 Culligan Voting Agreement by and among Packaged Ice, Inc. and
Culligan Water Technologies, Inc. dated December 2, 1997.
(Exhibit 10.6) (4)
10.61 Letter Agreement dated December 2, 1997. (Exhibit 10.7) (4)
34
10.62 Parallel Exit Agreement by and among Packaged Ice, Inc., James
F. Stuart, A.J. Lewis, III, Steven P. Rosenberg, Culligan
Water Technologies, Inc. and Erica Jesselson dated December 2,
1997. (Exhibit 10.8) (4)
10.63 Amendment No. 3 to The Amended and Restated Voting Agreement
by and among Packaged Ice, Inc. and the Shareholders of the
Company dated November 4, 1997. (Exhibit 10.9) (4)
10.64 Transfer Restriction Agreement by and between Packaged Ice,
Inc. and Culligan Water Technologies, Inc. dated December 2,
1997. (Exhibit 10.10) (4)
10.65 Transfer Restriction Agreement by and between Packaged Ice,
Inc. and Erica Jesselson dated December 2, 1997. (Exhibit
10.11) (4)
10.66 Asset Purchase Agreement by and among Packaged Ice, Inc. and
Ronnie Joe Evans dated December 19, 1997. (5)
10.67 Asset Purchase Agreement by and among Southwestern Ice, Inc.,
Superior Ice Company, Inc., Robert N. Pratt and John Kelly
dated December 29, 1997. (5)
10.68 Asset Purchase Agreement by and among Golden Eagle Ice-Texas,
Inc., Big "R" Ice Company, Inc., Sellit, Inc., Ratliff Bros.,
Joe D. Ratliff and Richard D. Ratliff dated December 30,
1997. (5)
10.69 Asset Purchase Agreement by and among Golden Eagle Ice-Texas,
Inc. and Simmons Poultry Farms, Inc. dated December 31,
1997. (5)
11 Computation of Income Per Common Share
21 Subsidiaries of the Company
23 Independent Auditors' Consent
27.1 Financial data schedule
99(1) Financial Statements for Mission Party Ice, Inc. and Southwest
Texas Packaged Ice, Inc. for the period January 1, 1997 to
April 16, 1997.
99(2) Financial Statements for Southwestern Ice, Inc. for the period
January 1, 1997 to April 16, 1997.
(1) Filed as an Exhibit to the Company's Registration Statement on Form
S-4 (file No. 333-29357) filed with the SEC on June 16, 1997.
(2) Filed as an Exhibit to Amendment No. 1 to the Company's Registrant
Statement No. 333-29357 on Form S-4 filed with the SEC on July 29,
1997.
(3) Filed as an Exhibit to the Company's Form 10-Q for the Quarterly
period ended September 30, 1997, filed with the SEC on November 14,
1997.
(4) Filed as an Exhibit to the Company's Form 8-K dated November 20,
1997, filed with the SEC on December 15, 1997.
(5) Filed herewith.
35
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K on October 31, 1997 regarding
the Trademark License Agreement between the Company and Culligan
Water Technologies, Inc. dated October 31, 1997 and discussions with
Culligan and other investors with respect to a possible investment in
the Company.
The Company filed a report on Form 8-K on December 15, 1997 regarding
an investment in the Company by Culligan Water and another previous
investor of the Company of $25 million.
The Company filed a report on Form 8-K on February 9, 1998 regarding
the issuance of $145,000,000 Series A Senior Notes due 2005.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
PACKAGED ICE, INC.
, 1998
- --------------- ---------------------------
James C. Hazlewood
Chief Financial and
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
- ----------------------- Chairman of the Board and , 1998
James F. Stuart Chief Executive Officer --------------------
- ----------------------- President, Chief Operating Officer
A. J. Lewis III and Director , 1998
--------------------
- ----------------------- Vice Chairman of the Board , 1998
Steven P. Rosenberg --------------------
- ----------------------- Director
Stephen R. Sefton --------------------, 1998
- ----------------------- Director
Richard A. Coonrod --------------------, 1998
- ----------------------- Director
Robert G. Miller --------------------, 1998
- ----------------------- Director
Rod J. Sands --------------------, 1998
32
37
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Packaged Ice, Inc.:
We have audited the accompanying consolidated balance sheets of Packaged Ice,
Inc. and its subsidiaries (the "Company") as of December 31, 1997 and 1996, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1997
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
March 27, 1998
-F-1-
38
PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1997 1996
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and equivalents ........................................... $ 14,825,259 $ 169,535
Short-term cash investment ..................................... 4,543,552 --
Accounts receivable:
Trade ....................................................... 4,038,582 213,811
Affiliates .................................................. 64,727 119,476
Inventory ...................................................... 1,347,496 115,825
Prepaid expense ................................................ 321,492 29,309
------------- -------------
Total current assets ................................... 25,141,108 647,956
PROPERTY, net .................................................... 43,297,449 9,887,687
OTHER ASSETS:
Goodwill, net .................................................. 44,280,568 --
Debt issuance cost, net ........................................ 6,297,712 144,460
Other .......................................................... 3,283,617 842,685
------------- -------------
TOTAL .................................................. $ 122,300,454 $ 11,522,788
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations ....................... $ -- $ 703,077
Accounts payable ............................................... 1,965,093 324,624
Payable to affiliates .......................................... 1,309,083 634,585
Accrued expense ................................................ 1,461,030 170,750
Accrued interest ............................................... 1,875,972 39,272
Notes payable .................................................. 1,975,968 3,425
------------- -------------
Total current liabilities .............................. 8,587,146 1,875,733
LONG-TERM OBLIGATIONS ........................................... 67,501,537 2,831,955
CONVERTIBLE NOTES ................................................ -- 750,000
COMMITMENTS AND CONTINGENCIES
MANDITORILY REDEEMABLE PREFERRED STOCK
Series C,10%, Exchangeable - 250,000 shares issued and
outstanding at December 31, 1997, liquidation
preference of $100 per share ................................ 25,198,630 --
PREFERRED STOCK WITH PUT REDEMPTION OPTION:
Series A Convertible -- 450,000 shares issued and
outstanding at December 31, 1997 and 1996 ................... 2,496,527 2,496,527
Series B Convertible -- 124,831 shares issued
and outstanding at December 31, 1997 ........................ 726,226 --
COMMON STOCK WITH PUT REDEMPTION OPTION,
420,000 shares issued and outstanding at December 31,
1997, and 1996 ................................................ 1,971,851 1,971,851
SHAREHOLDERS' EQUITY:
Preferred stock, Series C, $.01 par value, 100 shares
authorized and outstanding
Common stock, $.01 par value; 50,000,000 shares ................ -- --
authorized; shares issued of 4,015,981 at
December 31, 1997, and 2,406,371 at December 31,1996......... 40,160 24,064
Additional paid-in capital
28,804,811 4,669,301
Less: 298,231 shares of treasury stock, at cost ................ (1,491,155) --
Accumulated deficit ............................................ (11,535,279) (3,096,643)
------------- -------------
Total shareholders' equity ............................. 15,818,537 1,596,722
------------- -------------
TOTAL .................................................. $ 122,300,454 $ 11,522,788
============= =============
See notes to consolidated financial statements.
-F-2-
39
PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
------------------------------------------------
1997 1996 1995
------------ ------------ ------------
Revenues ............................... $ 28,980,564 $ 4,426,860 $ 2,830,493
Cost of sales .......................... 18,723,786 2,034,828 1,251,527
------------ ------------ ------------
Gross profit ........................... 10,256,778 2,392,032 1,578,966
Selling, general and administrative .... 7,635,538 1,981,278 1,514,542
Depreciation and amortization .......... 5,129,879 1,455,693 751,291
------------ ------------ ------------
Loss from operations ................... (2,508,639) (1,044,939) (686,867)
Other income, net ...................... 655,320 184,982 75,314
Interest expense ....................... (6,585,317) (130,475) (76,929)
------------ ------------ ------------
Loss before income taxes ............... (8,438,636) (990,432) (688,482)
Income taxes ........................... -- -- --
------------ ------------ ------------
Net loss ............................... $ (8,438,636) $ (990,432) $ (688,482)
============ ============ ============
Net loss to common shareholders ........ $ (8,438,636) $ (990,432) $ (688,482)
============ ============ ============
Loss per share of common stock
- basic and diluted .............. $ (2.40) $ (0.35) $ (0.26)
============ ============ ============
Weighted average common shares
outstanding ............................ 3,600,109 2,826,371 2,682,261
============ ============ ============
See notes to consolidated financial statements.
-F-3-
40
PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock
---------------------
Number of Par Paid-In Subsciption Treasury Accumulated
Shares Value Capital Receivable Stock Deficit Total
---------- -------- ------------ ----------- -------- ------------- -----------
BALANCE AT December 31, 1994 2,626,371 $ 26,264 $ 5,853,334 $(34,399) $ - $ (1,417,729) $4,427,470
Issuance of common stock 280,000 2,800 1,311,767 29,600 1,344,167
Repurchase of common stock (500,000) (5,000) (2,495,800) (2,500,800)
--------- -------- ------------ ----------- -------- ------------ -----------
Net loss (688,482) (688,482)
--------- -------- ------------ ----------- -------- ------------ -----------
BALANCE AT December 31, 1995 2,406,371 24,064 4,669,301 (4,799) - (2,106,211) 2,582,355
Issuance of common stock 4,799 4,799
Net loss (990,432) (990,432)
--------- -------- ------------ ----------- -------- ------------ -----------
BALANCE AT December 31, 1996 2,406,371 24,064 4,669,301 - - (3,096,643) 1,596,722
Issuance of common stock 1,609,610 16,096 15,767,822 15,783,918
Issuance of detachable
warrants to
purchase common stock 9,422,335 9,422,335
Accretion of manditorily
Redeemable preferred
stock (856,017) (856,017)
Dividends accumulated on
maditorily redeemable
preferred stock (198,630) (198,630)
Purchase of treasury stock
(1,491,155) (1,491,155)
Net loss (8,438,636) (8,438,636)
---------- --------- ------------ ----------- ----------- ------------ -----------
BALANCE AT December 31, 1997 4,015,981 $ 40,160 $ 28,804,811 $ $ - $(1,491,155) $(11,535,279 $15,818,537
========= ========= ============ =========== =========== ============ ===========
-F-4-
See notes to consolidated financial statements.
41
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996 1995
--------------- --------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................... $ (8,438,636) $ (990,432) $ (688,482)
Adjustments to reconcile net loss to net cash
Provided by (used in) operating activities
(excluding working capital from acquisitions):
Depreciation and amortization ........................ 5,129,879 1,455,693 751,291
Amortization of debt discount ........................ 576,805 -- --
Gain from disposal of assets ......................... (4,030) (2,584) --
Changes in assets and liabilities:
Accounts receivable, inventory and prepaid expenses (996,731) (26,189) (106,107)
Accounts Payable and accrued expenses ............. 440,928 657,540 191,181
--------------- --------------- ----------------
Net cash provided by (used in) operating
activities ................................... (3,291,785) 1,094,028 147,883
--------------- --------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions .................................... (10,764,733) (5,744,900) (2,717,444)
Cost of acquisitions .................................. (44,144,926) -- --
Purchase of short-term cash investments ............... (4,499,415) -- --
Increase in other assets .............................. (2,279,504) (333,918) (243,621)
Proceeds from disposition of property ................. 147,776 153,733 --
--------------- --------------- ----------------
Net cash used in investing activities ........... (61,540,802) (5,925,085) (2,961,065)
--------------- --------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred stock . 27,100,791 -- 5,812,545
Repurchase of common stock and preferred stock ........ (1,491,155) -- (2,500,800)
Proceeds from debt issuance, net ...................... 69,562,179 3,604,403 82,232
Proceeds from issuance and conversion of convertible
demand notes ....................................... (23,774) 750,000 --
Borrowings from lines of credit ....................... 9,900,000 -- --
Repayment of lines of credit .......................... (13,385,000) -- --
Repayment of debt ..................................... (12,174,730) (386,622) (359,510)
--------------- --------------- ----------------
Net cash provided by financing activities ....... 79,488,311 3,967,781 3,034,467
--------------- --------------- ----------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS .......... 14,655,724 (863,276) 221,285
CASH AND EQUIVALENTS, BEGINNING OF PERIOD ................ 169,535 1,032,811 811,526
--------------- --------------- ----------------
CASH AND EQUIVALENTS, END OF PERIOD ...................... $ 14,825,259 $ 169,535 $ 1,032,811
=============== =============== ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION-- Cash payments for interest ............... $ 4,748,482 $ 114,383 $ 75,606
=============== =============== ================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Common stock issued in consideration for business
acquisitions ......................................... $ 12,814,283 $ -- $ --
===============
Fair value of warrants issued in connection with
debt and acquisitions ................................ $ 9,422,335 $ -- $ --
===============
Demand notes converted to preferred stock .............. $ 750,000 $ -- $ --
===============
-F-5-
See notes to consolidated financial statements
42
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Packaged Ice, Inc. and its wholly owned subsidiaries (the "Company") manufacture
and distribute packaged ice by traditional delivery methods and stand-alone
automated merchandising ice systems ("ice systems") installed primarily in
retail locations. The ice systems produce and package bags of cubed ice at the
customer's location. At December 31, 1997, the Company's customers were located
primarily in the southern half of the United States.
2. RECENT EVENTS
On January 28, 1998, the Company completed a private offering of $145,000,000
aggregate principal amount of its 9 3/4% Series A Senior Notes due 2005 (the
"New Senior Notes"). The New Senior Notes are general unsecured obligations of
the Company, senior in right of payment to all existing and future Subordinated
Indebtedness of the Company and pari passu to all senior indebtedness of the
Company except the New Senior Notes will be effectively subordinated to the
Existing Credit Facility and any future credit facility. The New Senior Notes
contain certain covenants that, among other things, limit the ability of the
Company and its restricted subsidiaries to pay any cash dividends or make
distributions with respect to the Company's capital stock, to incur indebtedness
or to create liens. Net proceeds from the sale of the New Senior Notes were
applied to (i) repurchase the Series B Notes and Series C Notes as (see Note 6),
(ii) repay all outstanding obligations under the Existing Credit Facility, (iii)
fund acquisitions of traditional ice companies and (iv) for working capital and
general corporate purposes.
Simultaneous with the issuance of the New Senior Notes, the Company purchased
and retired the $75 million of 12% Senior Notes due 2004 (see Note 6), the
Company will record an extraordinary charge of approximately $18.3 million for
such debt extinguishment relating to the write-off of debt discount, and
associated redemption premiums and issuance costs.
The Company's New Senior Notes are guaranteed, fully, jointly and severally, and
unconditionally, on a senior subordinated basis by each of the Company's current
and future wholly owned subsidiaries. (see Note 11 regarding condensed financial
information on subsidiary guarantors).
From January 1, 1998 through March 27, 1998, the Company has acquired fifteen
(15) traditional ice companies for a total purchase price of $ 55.9 million. In
the aggregate, the Company paid $45.3 million in cash and issued 900,260 shares
of stock valued at between $10 and $13 per share. The Company issued the stock
in reliance upon the exemption from registration under Section 4 (2) of the
Securities Act of 1933, as amended. Each investor represented to the Company
that the investor acquired the stock for the investor's own account and not with
a view to distribution. The investor had access to all available material
information concerning the Company. The certificates evidencing the stock bear
an appropriate restrictive legend under the Securities Act of 1933, as amended.
The Company has not completed an assessment of the fair value of the net assets
acquired for purposes of allocating the excess of the purchase price over the
net book value of the acquired businesses. In conjunction with the Company's
ongoing assessment of the fair value of the net assets acquired from the
acquisitions discussed above, management has estimated the amortization period
of goodwill to be 40 years. The amortization period reflects management's
current estimate of the ultimate period to be benefited by these intangible
assets. The acquired businesses will be recorded using the purchase method of
accounting, and therefore, the results of their operations will be included in
the Company's unaudited consolidated financial statements from the date of their
respective purchase.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements
include the accounts of Packaged Ice, Inc. and its wholly owned subsidiaries.
All significant intercompany transactions have been eliminated upon
consolidation.
Inventories -- Inventories consist of ice packaging polyethylene bags and
spare parts, and are valued at the lower of first-in first-out cost or market
basis.
-F-6-
43
Property -- Property is carried at cost and is being depreciated on a
straight-line basis over an estimated life of three to seven years. Maintenance
and repairs are charged to expense as incurred, while capital improvements that
extend the useful lives of the underlying assets are capitalized.
Goodwill -- Goodwill is being amortized on a straight-line basis, primarily
over 40 years. Accumulated amortization of goodwill was $411,541, $ 0, and $ 0
at December 31, 1997, 1996, and 1995, respectively.
Other Assets -- Other assets, consisting primarily of costs to acquire a
competitor's ice system location contracts, ice system patents and deferred
financing costs, are being amortized over 5, 17 and 3 years, respectively (see
Note 5).
Long-lived Assets -- The Company records impairment losses on long-lived
assets, including goodwill, used in operations when events and circumstances
indicate that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amounts of
those assets.
Income Taxes -- The Company accounts for income taxes under the liability
method, which requires, among other things, recognition of deferred income tax
liabilities and assets for the expected future tax consequences of events that
have been recognized in the Company's consolidated financial statements or tax
returns. Under this method, deferred income tax liabilities and assets are
determined based on the temporary differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities and the
recognition of available tax carryforwards.
Revenue Recognition -- Revenue from owned ice systems is recognized based
upon the number of ice packaging bags delivered to and accepted by customers
under contract terms. Once accepted, there is no right of return with respect to
the bags delivered. Revenue from the sale of ice systems is recognized when the
equipment is shipped. Revenues resulting from leased ice systems is recognized
as earned under contract terms.
Earnings Per Share -- The computation of earnings per share is based on net
income (loss), after deducting the dividend requirement of preferred stock
($198,630 in 1997), divided by the weighted average number of shares
outstanding. Shares of common stock issuable under stock options have not been
included in the computation of earnings per share as their effect is
antidilutive. For the years ended December 31, 1997, 1996 and 1995, all
potentially dilutive securities are anti-dilutive and therefore are not included
in the earnings per share calculation.
The following table presents information necessary to calculate basic earnings
per share for the periods indicated, with 1996 and 1995 being restated to
conform to the requirements of the Statement of Financial Accounting Standards
No. 128, Earnings Per Share, described below:
For the Year Ended December 31,
-------------------------------------------
1997 1996 1995
----------- ----------- ---------
BASIC EARNINGS PER SHARE
Weighted Average Common Shares Outstanding 3,600,109 2,826,371 2,682,261
----------- ----------- ---------
Basic and Diluted Loss Per Share $ (2.40) $ (0.35) $ (0.26)
----------- ----------- ---------
EARNINGS FOR BASIC AND DILUTED COMPUTATION
Net Loss $(8,438,636) $ (990,432) $(688,482)
Preferred Share Dividends $ (198,630) -- --
----------- ----------- ---------
Net Loss to Common Shareholders $(8,637,266) $ (984,196) $(688,482)
=========== =========== =========
Cash Flows -- The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents.
Fair Values of Financial Instruments -- The Company's financial instruments
consist primarily of cash, accounts receivable, accounts payable and debt
obligations. The carrying amount of cash, trade accounts receivable and trade
accounts payable are representative of their respective fair values due to the
short-term maturity of these instruments. It is not practicable to estimate the
fair values of the affiliate amounts due to their related party nature. The fair
values of the Company's debt obligations (see Note 6) are representative of
their carrying values based upon the variable rate terms for the Senior Credit
Facility and mangement's opinion that the current rates offered to the Company
for fixed-rte long-term debt with the same remaining maturities and security
structure are equivalent to that of the Company's 12% Senior Notes.
-F-7-
44
Use of Estimates -- The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Stock Based Compensation -- In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No. 123,
Accounting for Stock Based Compensation ("SFAS 123"), effective for the Company
on January 1, 1996. SFAS 123 permits, but does not require, a fair value based
method of accounting for employee stock option plans, resulting in compensation
expense being recognized in the results of operations when stock options are
granted. The Company plans to continue the use of its current intrinsic value
based method of accounting for stock option plans where no compensation expense
is recognized.
New Accounting Pronouncements -- In February 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings Per Share. SFAS No. 128, which was effective for
periods ending after December 15, 1997, specifies the computation, presentation
and disclosure requirements of earnings per share and supercedes Accounting
Principles Board Opinion No. 15. SFAS No. 128 requires a dual presentation of
basic and diluted earnings per share. Basic earnings per share, which excludes
the impact of potential common share equivalents, replaces primary earnings per
share. Diluted earnings per share, which utilizes the average market price per
share when applying the treasury stock method in determining potential common
share equivalents, replaces fully diluted earnings per share.
In February 1997, the FASB also issued SFAS No. 129, Disclosure of Information
about Capital Structure, which establishes standards for disclosing information
about an entity's capital structure. SFAS No. 129 was effective for periods
ending after December 15, 1997. The adoption of SFAS No. 129 did not impact the
Company's capital structure disclosures.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, and
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments and related information in interim and annual financial statements.
SFAS No. 131 will not impact the Company's financial statements as it reports as
a single segment. SFAS Nos. 130 and 131 are effective for fiscal years beginning
after December 15, 1997. Management is evaluating what, if any, additional
disclosures may be required upon the implementation of SFAS No. 130 and 131.
Reclassification -- Certain amounts from previous years have been
reclassified to conform to the current presentation.
4. PROPERTY AND EQUIPMENT
Property and equipment were as follows at December 31:
1997 1996
----------- -----------
Land ................................... $ 1,880,974 $ --
Buildings .............................. 5,159,086
Ice Systems Equipment .................. 19,518,650 11,634,671
Plant Equipment & Machinery ............ 10,662,952 --
Furniture & Fixtures ................... 134,455 32,278
Computer equipment ..................... 481,470 65,725
Vehicles ............................... 4,509,823 25,492
Leasehold improvements ................. 1,400,891 16,526
Merchandisers .......................... 4,970,400 --
Construction in Progress ............... 253.892 --
----------- -----------
Total property and equipment ........... 48,972,623 11,774,692
Less: accumulated depreciation and
amortization ........................... 5,675,144 1,887,005
----------- -----------
Total .................................. $43,297,449 $ 9,887,687
=========== ===========
-F-8-
45
Depreciation and amortization expense for the three years ended December 31,
1997 was $3,788,139, $1,147,540, and $502,161, respectively.
5. ACQUISITIONS
Through December 31, 1997, the Company has acquired certain traditional ice
business and certain assets (the "Acquisitions") to compliment its core business
for purchase prices totaling approximately $44.1 million in cash, $13.5 of
assumed liabilities paid at closing and $12.8 million in common stock
(approximately 1.3 million shares) reflected at the Company's valuation of
$10.00 per share.
The Acquisitions have been accounted for using the purchase method of
accounting, and accordingly, the purchase price has been preliminarily allocated
to the assets and liabilities acquired based on fair value at the date of the
Acquisitions. As a result of the number of acquisitions and their proximity to
year-end, the Company has not completed the assessment of the fair value of the
net assets acquired for the purposes of allocating the purchase price. The
Acquisitions included at fair value current assets of $4,341,282, property plant
and equipment of $26,576,914, and current liabilities of $5,613,070. The excess
of aggregate purchase price over of the fair market value of the net assets
acquired of approximately $44,692,109 was recognized as goodwill and is being
amortized over 40 years. Amortization expense of Goodwill and Other Assets for
the three years ended December 31, 1997 was $1,341,740, $308,153, and $249,130,
respectively.
The operating results of the Acquisitions have been included in the Company's
consolidated financial statements from the date of their respective purchases.
The following unaudited pro forma information presents a summary of consolidated
results of operations as if the Acquisitions had occurred on January 1, 1997.
Revenue $ 53,901,660
Net loss 11,564,921
Loss per share 2.81
6. LONG-TERM OBLIGATIONS
In December 1996 the Company received $750,000 in exchange for convertible
demand notes bearing interest at a 10% annual rate. The notes were issued in
contemplation of converting into a new class of preferred stock, subject to
appropriate shareholder approval. Such approval occurred in January 1997 and the
notes plus accrued interest thereon were converted into 124,831 shares of Series
B Convertible Preferred Stock (see Note 9) at a conversion price of $6.07 per
share ($726,226 net of expenses).
On April 17, 1997 the Company completed the sale of $50 million 12% Series A
Senior Notes due 2004 (the "Series A Notes") in connection with a private
placement offering. In connection with the debt issuance, detachable warrants to
purchase 511,885 and 127,972 shares, respectively, of the Company's common stock
were issued to Series A note holders and the investment banking firm that
marketed the Series A Notes. The exercise price is $.01 per share. Concurrent
with the sale of the Series A Notes, the Company consummated agreements with
Mission Party Ice, Inc. and Southwest Texas Packaged Ice, Inc. (the "Mission
Acquisition" and "STPI Acquisition", respectively) and SWI (the "Southwestern
Acquisition"). The Mission Acquisition and STPI Acquisition companies are
controlled by an existing shareholder of the Company and operate separate and
distinct ice manufacturing facilities primarily in South Texas. SWI operates
ice-manufacturing facilities in Arizona, New Mexico, California, Texas and
Tennessee. Total combined consideration for the Mission and STPI Acquisitions
was $10.4 million, consisting of $3.4 million in cash, $3.4 million in the
assumption and repayment of seller debt and $3.6 million in shares of the
Company's common stock. Total consideration for the SWI Acquisition was $18.8
million, consisting of $3.5 million in cash, $9.3 million in the assumption and
repayment of seller debt and $6.0 million in shares of the Company's common
stock. The Company sold the Series A Notes at a price of 96% of the par value,
or $48,000,000, which was used to finance the cash portion plus certain related
expenses of the purchase price for the above acquisitions, repay outstanding
indebtedness, make capital expenditures and provide additional working capital.
The Series A Notes are unconditionally guaranteed, on a senior subordinated
basis by each of the Company's current and future wholly-owned subsidiaries
other than unrestricted subsidiaries (the "Subsidiary Guarantors").
In August 1997, the Company issued 12% Senior Notes ("Series B Notes"). The
Company offered to exchange all outstanding Series A Notes for the Series B
Notes which are identical in all material aspects to the form and term of the
Series A Notes except for certain transfer restrictions and registration rights
relating to the Series A Notes. On October 6, 1997, all of the Series A Notes
were exchanged for the Series B Notes. The Series B Notes are
-F-9-
46
unconditionally guaranteed, on a senior subordinated basis by the Subsidiary
Guarantors (See Note 11). The Series B Notes bear an interest rate of 12 percent
per annum. The Series B Notes contain certain covenants that, among other
things, limit the ability of the Company and its subsidiaries to pay dividends
or make distributions with respect to the Company's capital stock of make
certain other payments, to incur indebtedness, or to create liens.
On October 16, 1997, the Company completed the sale of $25 million principal
amount 12% Series C Senior Notes due 2004 (the "Series C Notes") in connection
with a private placement offering. In connection with the debt issuance,
detachable warrants to purchase 255,943 shares of the Company's common stock
were issued to the holders of the Series C Notes at an exercise price of $.01
per share. The Series C Notes were issued under the same terms, interest rates
and covenants as the Series A Notes and Series B Notes discussed above. The net
proceeds, after payment of fees and expenses, from the sale of the Series C
Notes were used to repay the outstanding indebtedness under the Senior Credit
Facility and for working capital purposes. The Series C Notes are
unconditionally guaranteed, on a senior subordinated basis by the Subsidiary
Guarantors
In September 1997, the Company executed a six-year Senior Credit Facility (the
"Existing Credit Facility") with two banks that expires in September 2003. The
Existing Credit Facility provides for borrowings of up to $20 million, subject
to a borrowing base limitation (as defined). Interest is payable at the
Company's option at the prime rate plus 1% or the London Interbank Offered Rate,
plus a defined margin. At December 31, 1997, the selected interest rate was
9.5%. There was no principal amount outstanding at that date. The Existing
Credit Facility is secured by substantially all of the Company's assets. In
addition, the Existing Credit Facility contains restrictive covenants that,
among other things, require the maintenance of certain financial ratios and
limits total indebtedness of the Company. All loans under the Existing Credit
Facility are guaranteed by each of the Company's current and future
subsidiaries.
See Note 2 regarding New Senior Notes issued to retire outstanding Series B and
C senior notes at December, 1997. At December 31, 1997 and 1996, long-term
obligations consisted of the following:
1997 1996
------------ ------------
Senior notes ................. $ 75,000,000 $ --
Less: unamortized debt
discount on detachable
warrants issued ........... (7,498,463) --
Bank credit facilities ....... -- 3,485,000
Other ........................ -- 50,032
------------ ------------
Total ........................ 67,501,537 3,535,032
Less: current maturities ..... -- 703,077
------------ ------------
Long-tern debt, net .......... $ 67,501,537 $ 2,831,955
============ ============
There are no principal maturities of long-term obligations for any of the next
five years as of December 31, 1997.
See Note 11 for information regarding subsidiary guarantors of long-term
obligations.
7. INCOME TAXES
The Company incurred losses for each of the three years ended December 31, 1997,
1996 and 1995 for both financial reporting and tax return purposes. Due to the
uncertainty of being able to utilize such losses to reduce future taxes, a
valuation allowance has been provided to reduce to zero the net deferred tax
assets resulting primarily from the loss carryforwards available.
The total provision for income taxes varied from the U.S. federal statutory rate
due to the following:
Year Ended December 31,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
Federal income tax benefit at
statutory rate .................... $(2,869,136) $ (336,747) $ (234,084)
Acquired tax liabilities ............ 2,567,710 -- --
Increase in valuation allowance ..... 201,006 288,994 240,136
Non-deductible expenses ............. 100,420 5,408 4,037
Other ............................... -- 42,345 (10,089)
----------- ----------- -----------
Total provision for income taxes .... $ -- $ -- $ --
=========== =========== ===========
-F-10-
47
Deferred tax assets and liabilities computed at the statutory rate related to
temporary differences were as follows:
Year Ended December 31,
----------------------------
1997 1996
----------- -----------
Deferred tax liabilities:
Property and equipment ..... $(4,169,050) $ (780,604)
Deferred tax assets:
Other assets ............... 20,720 91,841
Net operating loss
carryforwards ............ 5,354,991 1,694,418
----------- -----------
Total deferred tax assets .... 5,375,711 1,786,259
----------- -----------
Net deferred tax assets ...... 1,206,661 1,005,655
Valuation allowance .......... (1,206,661) (1,005,655)
----------- -----------
Total deferred taxes ......... $ -- $ --
=========== ===========
At December 31, 1997, the Company had approximately $15 million of net operating
loss carryforwards that expire between 2006 and 2012.
8. RELATED PARTIES
Certain affiliates of Company shareholders sell equipment and inventory to the
Company. Total expenditures incurred related to these entities were $4,799,240
in 1997, $4,058,656 in 1996, and $2,527,000 in 1995. At December 31, 1997 and
1996, accrued liabilities to these entities totaled $159,719 and $605,336,
respectively.
Law firms associated with certain Company shareholders provided services
totaling $888,673 in 1997, $67,768 in 1996, and $109,000 in 1995.
A shareholder of the Company performed investment banking services in 1992 in
exchange for $60,000 and a stock warrant to purchase up to 43,296 shares of the
Company's common stock for $5.78 per share, subject to antidilution adjustments.
The warrant was amended and exercised in April 1997 at the fair value of the
stock as of the exercise date.
During 1996 the Company entered into a consulting arrangement with an individual
affiliated through ownership with SWI. Under the terms of the arrangement this
individual would be paid $10,000 per month. At December 31, 1996, the Company
had accrued $30,000 for these services. This arrangement was terminated on April
17, 1997.
On April 17, 1997 the Company entered into a consulting arrangement with another
individual affiliated through ownership with SWI. Under the terms of the
arrangement this individual would be paid $125,000 per year. At December 31,
1997 the Company has accrued $88,195 for these services.
9. CAPITAL STOCK
Preferred Stock -- During September 1995, the Company's Board of Directors
authorized the designation of 450,000 shares of $.01 par value Series A
convertible preferred stock ("Series A"). Series A has no sinking fund
provisions, but upon liquidation of the Company, the Company must pay the Series
A holders $5.56 per share (aggregate of $2,502,000) before any amounts may be
paid to the holders of common stock. Series A holders are entitled to vote on
all matters upon which the holders of common stock have the right to vote and
are generally entitled to vote as a class on any matters adversely affecting
their rights as holders of this series of preferred stock. Each Series A holder
is entitled to vote the number of equivalent common shares that underlie their
respective Series A investment. Each Series A share is convertible into common
stock without payment of additional consideration at a conversion price of $5.56
per share, subject to antidilution adjustments.
On September 20, 1995, the Company received net proceeds of approximately $5.8
million from a private placement offering and, in exchange, issued 700,000
shares of common stock and 450,000 shares of Series A convertible preferred
stock. The proceeds from the offering were used (i) to repurchase and retire
420,000 shares of
-F-11-
48
common stock from an unrelated shareholder for $2.5 million, (ii) to finance the
purchase and installation of ice systems in additional customer locations, and
(iii) for working capital and general corporate purposes. The Company also
repurchased and retired 80,000 shares of common stock for $800. With respect to
the above issuance of 700,000 common shares, 420,000 shares contain a "put"
option that provides the respective shareholders with the ability to require the
Company to repurchase the common shares if certain registration rights with
respect to the Series A Convertible Preferred Stock are not effected by
September, 2004. The put price would be at the fair market value, as defined, at
the time the put option is exercised. The 420,000 common shares subject to this
redemption feature are shown on the consolidated balance sheet under the heading
"Common Stock With Put Redemption Option".
During January 1997, the Company's board of directors authorized and the
shareholders approved the designation of 200,000 shares of $.01 par value Series
B convertible preferred stock ("Series B"). The Company issued 124,831 Series B
shares in full satisfaction of the 10% convertible demand notes (see Note 6).
Series B has no sinking fund provisions, but upon liquidation of the Company,
the Company must pay the Series B holders $6.07 per share (aggregate $757,724)
before any amounts may be paid to the holders of common stock. Series B holders
are entitled to vote on all matters upon which the holders of common stock have
the right to vote and are generally entitled to vote as a class on any matters
adversely affecting their rights as holders of this series of preferred stock.
Each Series B holder is entitled to vote the number of equivalent common shares
that underlie their respective Series B investment. Each Series B share is
convertible into common stock without payment of additional consideration at a
conversion price of $6.07 per share, subject to antidilution adjustments.
The Series A and Series B convertible preferred shares are also subject to the
same put redemption option described above for the 420,000 common shares. This
redemption feature would be available beginning September, 2004 if the preferred
stockholder has converted its holding to common shares and if certain
registration rights with respect to the common shares are not effected by
September, 2004. The Series A and Series B shares are shown on the consolidated
balance sheet under the heading "Preferred Stock With Put Redemption Option".
On July 17, 1997, the Company sold to an unaffiliated entity 300,000 shares of
common stock for $10 per share and issued a warrant entitling the new
shareholder the right to purchase 100,000 shares of common stock at an exercise
price of $14. The warrant expires on July 17, 2002. During the first nine months
of 1997, the Company sold 26,899 shares of common stock to other investors not
related to any acquisitions at prices ranging from $7.50 to $10.00 per share.
On July 24, 1997, the Company repurchased, at cost, treasury stock for
approximately $1,491,155 million from a customer.
On December 2, 1997, the Company's Board of Directors authorized the designation
of 500,000 shares of $0.01 par value 10% manditorily redeemable preferred stock,
and 100 shares of $0.01 par value Series C preferred stock. Holders of the 10%
manditorily redeemable preferred stock shall be entitled to receive dividends
equal to 10% of the liquidation preference of $100 per share, and all dividends
shall be fully cumulative. Dividends may be paid in cash or in kind by issuing a
number of additional shares of the 10% manditorily redeemable preferred stock.
If dividends are paid in kind, the Company shall also issue to holders of the
10% manditorily redeemable preferred stock, additional warrants to purchase
common stock at an exercise price of $13.00 per share. Holders of the 10%
manditorily redeemable preferred stock have no voting rights other than approval
rights with respect to the issuance of parity or senior securities. The Company
may redeem the 10% manditorily redeemable preferred stock at any time subject to
contractual and other restrictions. The Company is obligated to redeem the 10%
manditorily redeemable preferred stock for cash on April 15, 2005.
On December 2, 1997, the Company entered into a securities purchase agreement
with Culligan Water Technologies, Inc. and an existing shareholder pursuant to
which the Company issued 250,000 shares of the 10% mandatorily redeemable
preferred stock, 100 shares of Series C preferred stock and warrants, with an
exercise price of $13.00 per share, to purchase 1,923,077 shares of the
Company's common stock, in exchange for an aggregate price of $25.0 million less
issuance cost of $856,017. The warrants are valid until the earlier to occur of
(a) April 15, 2005 and (b) the first anniversary of the last day of the first
period of twenty consecutive days following a qualifying IPO, as defined, during
which there is a closing price on each such trading day and the closing price on
each such trading day equals or exceeds the threshold price, as defined. The
Series C preferred stock was created to provide Culligan and the existing
shareholder the right to vote a number of shares equal to the number of warrants
issued to them, such rights to be effective only at such time or times that
Culligan owns less than twenty percent of the fully diluted common stock of the
Company. The Company may redeem the outstanding Series C preferred stock (but
not less than 100%) at such time as the investors cease to own at least 50% of
the warrants.
-F-12-
49
Common Stock -- Holders of the Company's common stock are entitled to one vote
per share on all matters to be voted on by shareholders and are entitled to
receive dividends, if any, as may be declared from time to time by the Board of
Directors of the Company. Upon any liquidation or dissolution of the Company,
the holders of common stock are entitled, subject to any preferential rights of
the holders of preferred stock, to receive a pro rata share of all of the assets
remaining available for distribution to shareholders after payment of all
liabilities.
10. EMPLOYEE BENEFIT PLAN
During 1996 the Company established a 401(k) defined contribution savings plan
for the benefit of all employees who have completed one year of service and have
met the eligibility requirements to participate. Employees may contribute up to
the maximum amount allowed by the Internal Revenue Service, while Company
contributions are made at the discretion of the Board of Directors. The Company
contributed approximately $49,012 and $20,000 to the plan during 1997 and 1996,
respectively.
The Company adopted the Packaged Ice, Inc. Stock Option Plan on July 26, 1994
(the "Option Plan"), as amended effective December 1997. Under the Option Plan,
options to purchase up to 400,000 shares of Common Stock may be granted to
employees, outside directors and consultants and advisers to the Company or any
subsidiary. At December 31, 1997, 144,000 shares were available for future
grants.
Stock option activity for the two years ended December 31, 1997 is summarized
below:
Weighted
Average
Exercise
Number of Exercise Price Price
OPTIONS Shares Per Share Per Share
------- --------- -------------- ---------
Granted during 1996.................. 6,000 $ 7.50 $ 7.50
Granted during 1997.................. 194,500 $ 10.00 $ 10.00
Outstanding at December 31, 1997 .... 256,000 $6.22 -$10.00 $ 9.28
Such options vest ratably over five years and expire ten years from the date of
grant. The weighted average remaining contractual life of stock options
outstanding under the Option Plan was 5.3 years at December 31, 1997.
Exercisable stock options at December 31, 1997 and 1996 were 31,200 and 18,500,
respectively. The Company measures compensation cost for this Plan using the
intrinsic value method of accounting prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no
compensation cost has been recognized. Had compensation cost for the Option
Plan been determined using the fair value method of accounting as set forth in
SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's pro
forma net loss and net loss per share would have been $ (8,637,266) and $
(2.45) in 1997 and $ (1,017,747) and $(0.36) in 1996, respectively. Adjusted
pro forma information regarding net loss and net loss per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that statement. The fair
value for these options was estimated at the date of grant using the "minimal
value" method for option pricing with the following weighted average
assumptions: risk free interest rate of 6.4%; no expected dividend yield;
expected life of 8.2 years; expected volatility of zero.
-F-13-
50
11. SUBSIDIARY GUARANTORS
The Company's Series B Notes and the Series C Notes are guaranteed, fully,
jointly and severally, and unconditionally, on a senior subordinated basis by
all of the Company's current and future, direct and indirect subsidiaries (the
"Subsidiary Guarantors"), all wholly owned. The following table sets forth the
"summarized financial information" of the Subsidiary Guarantors. Full financial
statements of the Subsidiary Guarantors are not presented because management
believes they are not material to the investors. There are currently no
restrictions on the ability of the subsidiary guarantors to transfer funds to
the Company in the form of cash dividends, loans or advances.
As of December 31,
----------------------------
1997 1996
----------- ------------
Balance Sheet Data:
Current Assets $ 6,591,604 $ 184,434
Property and Equipment 32,622,152 5,422,595
Total Assets 71,391,168 6,099,388
Current Liabilities 3,094,149 795,913
Long-Term Debt -- 43,814
Total Shareholder's Equity 16,707,700 (1,195,995)
Year Ended December 31,
-----------------------------------------------
1997 1996 1995
------------ ------------ ------------
Operating Data:
Net Revenue $ 24,811,023 $ 2,403,516 $ 2,123,701
Gross Profit 9,756,164 1,307,557 1,332,591
Net Loss (8,878,049) (235,960) (848,779)
12. COMMITMENTS AND CONTINGENCIES
In April 1993 the Company entered into an agreement to purchase all of the ice
system packaging components from a shareholder for a period of three years or
until a minimum of 3,600 components had been purchased. Since inception of this
agreement, the Company has purchased 1,253 components.
Beginning June, 1992, the Company has agreed to purchase all of the merchandiser
portions of the ice systems from an unaffiliated company for a period of two
years or until a minimum of 2,400 merchandisers is purchased. Since inception of
this agreement, the Company has purchased 1,251 merchandisers.
The Company entered into employment contracts with two executive officers of the
Company. The aggregate annual commitment for base salary under these agreements
is approximately $ 215,000.
As a result of the Acquisitions during 1997, the Company entered into certain
employment contracts with former employees of the acquired companies with an
aggregate annual commitment of approximately $868,000.
The Company has leased certain facilities in Texas, Arizona and California.
Under these and other operating leases, minimum annual rentals at December 31,
1997 aggregate approximately $1,040,141 in 1998, $889,269 in 1999, $800,419 in
2000, $723,563 in 2001, $687,735 in 2002 and $2,764,529 thereafter.
The Company is involved in various claims, lawsuits and proceedings arising in
the ordinary course of business. While there are uncertainties inherent in the
ultimate outcome of such matters and it is impossible to presently determine the
ultimate costs that may be incurred, management believes the resolution of such
uncertainties and the incurrence of such costs should not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
On October 31, 1997, the Company entered into a Trademark License Agreement with
Culligan Water (the "TLA"). The TLA includes automatic renewals for successive
one-year terms through December 31, 2001, subject to early termination. The
Company paid an initial license fee and is required to make the greater of 1)
minimum royalty payments of $0 in 1997, $50,000 in 1998, $500,000 in 1999,
$1,000,000 in 2000 and $1,500,000 in 2001 or 2) 2.5% of all revenues, as
defined.
-F-14-
51
13. SUBSEQUENT EVENTS (UNAUDITED)
The Company has signed a definitive agreement to purchase all of the common
stock of Reddy Ice Corporation (with 1997 revenues of $66.3 million) for
approximately $172 million in cash. The transaction is subject to customary
conditions including review under the Hart Scott Rodino Act and receipt of
financing by the Company. The Company intends to fund the acquisition through a
combination of financing sources including a new credit facility from a banking
institution, the sale of preferred stock and the issuance of additional New
Senior Notes. Management believes that these financing facilities will be
sufficient to conclude the proposed acquisition and provide the Company with
adequate liquidity for future working capital requirements. The Company
anticipates the transaction to close by the end of May 1998.
-F-15-
52
INDEPENDENT AUDITORS' REPORT
To the Stockholder of Mission Party Ice, Inc. and
Stockholders of Southwest Texas Packaged Ice, Inc.:
We have audited the accompanying combined balance sheet of Mission Party Ice,
Inc. (a S corporation) and Southwest Texas Packaged Ice, Inc. (an affiliated S
corporation) (collectively, the "Companies"), both of which are under common
ownership and common management, as of April 16, 1997 and the related combined
statements of operations and retained earnings (deficit) and of cash flows for
the period from January 1, 1997 to April 16, 1997. These combined financial
statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the combined financial position of the Companies at April 16, 1997 and
the combined results of their operations and their cash flows for the period
from January 1, 1997 to April 16, 1997 in conformity with generally accepted
accounting principles.
Houston, Texas
January 26, 1998
53
MISSION PARTY ICE, INC. (a S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (a S CORPORATION)
COMBINED BALANCE SHEET
APRIL 16, 1997
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Accounts receivable:
Trade, net $ 444,068
Affiliates 751,187
Inventories 147,017
Prepaid expenses 91,459
-----------
Total current assets 1,433,731
PROPERTY, NET 4,530,616
OTHER ASSETS, NET 249,952
-----------
TOTAL $ 6,214,299
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,924,186
Accounts payable (includes bank overdraft of $188,284) 638,705
Payable to affiliates 311,017
Accrued expenses 228,710
-----------
Total current liabilities 3,102,618
-----------
LONG-TERM DEBT, NET 1,694,101
-----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock (Mission: 1,000,000 shares authorized,
$.01 par value, 1,000 shares issued
and outstanding; STPI: 1,000,000 shares authorized,
$1 par value; 1,250 shares issued) 1,260
Additional paid-in capital 1,538,026
Retained earnings (deficit) (111,706)
Less 25 shares of STPI treasury stock at cost (10,000)
-----------
Total shareholders' equity 1,417,580
-----------
TOTAL $ 6,214,299
===========
See notes to combined financial statements.
-2-
54
MISSION PARTY ICE, INC. (a S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (a S CORPORATION)
COMBINED STATEMENT OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
FOR THE PERIOD FROM JANUARY 1, 1997 TO APRIL 16, 1997
- --------------------------------------------------------------------------------
Revenues $ 1,204,541
Costs of sales 1,013,673
-----------
Gross profit 190,868
Selling, general and administrative expenses 564,759
Depreciation and amortization expense 318,192
-----------
Loss from operations (692,083)
Other expense, net 70,592
Interest expense 117,275
-----------
Net loss (879,950)
Retained earnings, beginning of period 768,244
-----------
Retained earning (deficit), end of period $ (111,706)
===========
See notes to combined financial statements.
-3-
55
MISSION PARTY ICE, INC. (a S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (a S CORPORATION)
COMBINED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1997 TO APRIL 16, 1997
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(879,950)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 318,192
Gain from disposal of assets (1,426)
Changes in assets and liabilities:
Accounts receivable 57,809
Inventories 16,996
Prepaid expenses and other assets (19,879)
Accounts payable 172,752
Accrued expenses 146,003
---------
Net cash used in operating activities (189,503)
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (278,579)
Proceeds from disposition of property 3,576
---------
Net cash used in investing activities (275,003)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt issuance 787,518
Repayment of debt (369,480)
---------
Net cash provided by financing activities 418,038
---------
NET DECREASE IN CASH AND EQUIVALENTS (46,468)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 46,468
---------
CASH AND EQUIVALENTS, END OF PERIOD $
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
FORMATION - Cash payments for interest $ 131,224
=========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING
ACTIVITIES - Receivable incurred through sale of discontinued operations $ 316,520
=========
See notes to combined financial statements.
-4-
56
MISSION PARTY ICE, INC. (a S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (a S CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE PERIODS FROM JANUARY 1, 1997 TO APRIL 16, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION
Mission Party Ice, Inc. ("Mission") and Southwest Texas Packaged Ice, Inc.
("STPI") (collectively, the "Company" or "Companies") were incorporated to do
business in Texas in 1988 and 1991, respectively. Mission owns and operates ice
manufacturing facilities in San Antonio, Corpus Christi and Gonzales, Texas.
STPI owns and operates stand-alone automated merchandising ice systems ("ice
systems") installed primarily in retail grocery locations. These ice systems
produce and package bags of cubed ice at the customer's location. The Company
operates in the South Texas region. 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
PRINCIPLES OF COMBINATION - Both Mission and STPI are controlled through
ownership by the same stockholder and are under common management. As a result
the April 16, 1997 financial statements and related footnote disclosures are
presented on a combined basis. All significant intercompany accounts and
transactions have been eliminated upon combination. INVENTORIES - Inventories
are valued at the lower of first-in first-out cost or market basis and consisted
of the following:
Manufactured ice $ 22,743
Ice packaging bags 77,111
Parts and supplies 47,163
---------
Total inventory $ 147,017
=========
PROPERTY - Property is carried at cost and is being depreciated on a
straight-line basis over estimated lives of five to seven years. Maintenance and
repairs are charged to expense as incurred, while capital improvements which
extend the useful lives of the underlying assets are capitalized.
OTHER ASSETS - Other assets, consisting primarily of costs associated with
the acquisition of competitors' ice manufacturing facilities and ice system
location contracts, are being amortized over three to five years (see Note 5).
Accumulated amortization was $234,798 at April 16, 1997.
IMPAIRMENT OF LONG-LIVED ASSETS - Long-lived assets are reviewed for
impairment whenever events or circumstances indicate that the carrying amount of
an asset may not be recoverable.
INCOME TAXES - Mission and STPI are not subject to income taxes as both
have elected, under applicable provisions of the Internal Revenue Code, to be
treated as a Subchapter S corporation. Accordingly, the proportionate share of
each Company's taxable income or loss is reported in the respective
stockholder's individual tax return. Therefore, no liability for federal income
taxes has been recorded in the accompanying combined financial statements.
REVENUE RECOGNITION - Mission's revenues are recognized upon the delivery
and acceptance of ice products to customer locations. Revenue is recognized by
STPI in accordance with contracted terms based upon the number of ice packaging
bags delivered to and accepted by customers. Once accepted, there is no right of
return with respect to the bags delivered.
CASH FLOWS - The Company considers all highly liquid investments purchased
with a remaining maturity of three months or less to be cash equivalents.
FAIR VALUES OF FINANCIAL INSTRUMENTS - The Company's financial instruments
include certain current assets and liabilities where carrying value approximates
fair value. In addition, the carrying value of financial instruments related to
long-term debt approximate fair value based on management's opinion that stated
interest rates are representative of rates currently available to the Companies
for comparable borrowings. It is not practicable to estimate the fair value of
the related party balances due to the instruments, nature.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
-5-
57
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
3. DISCONTINUED OPERATIONS
In December 1996, Mission entered into formal negotiations to sell Mission
Ice Equipment Company ("MIECO"), a division of Mission, to Southwest Texas
Equipment Distributors ("STED"). STED is affiliated with Mission through common
ownership. MIECO's business involves the sale or lease of commercial food
service equipment to retail establishments. The net assets of MIECO were sold on
January 2, 1997 in exchange for a promissory note in the principal amount of
$316,520, which equaled their net book value at this date. No gain or loss was
recorded on the disposal. Costs and expenses directly associated with the
disposition were paid by STED.
4. CHANGE IN OWNERSHIP
On March 25, 1997, Mission and STPI entered into separate agreements with
Packaged Ice, Inc. (the "Buyer") to merge the Companies into wholly-owned
subsidiaries of the Buyer. The purchase price for Mission was $5,575,660
consisting of $2,719,160 in cash and $2,856,500 in shares of the Buyer's common
stock (valued at $10 per share) payable to the Mission's stockholders. The
purchase price for STPI was $1,353,840 consisting of $660,340 in cash and
$693,500 in shares of the Buyer's common stock (valued at $10 per share) payable
to the STPI's stockholders. In conjunction with the purchase of the Companies,
all long-term debt and notes payable (note 7) were assumed by the Buyer on April
17, 1997, the closing date of the acquisitions.
5. PROPERTY AND EQUIPMENT
Property and equipment were as follows:
Ice systems machinery and equipment $ 6,535,737
Furniture and fixtures 87,762
Auto/truck 1,482,746
Computer equipment 266,380
Leasehold improvements 13,578
Land 35,095
-----------
Total property and equipment 8,421,298
Less accumulated depreciation (3,890,682)
-----------
Total $ 4,530,616
===========
Depreciation expense was $293,792 for the period ended April 16, 1997.
6. ACQUISITIONS
MCGEHEE - NEUTZE, INC. ("MNI") - In May 1996 Mission acquired certain
assets of MNI including ice merchandising equipment and a vehicle for $77,500.
The acquisition was funded through Mission's bank credit facility. As part of
the acquisition, MNI agreed to perform sales and customer relations work within
the MNI market area, primarily Webb County, Texas in exchange for approximately
$170,000 to be paid over a three year term. Such purchase consideration was
recorded in other assets with an offsetting amount in accounts payable. Payment
of amounts under this service agreement are guaranteed by Mission's sole
stockholder. The assigned value of this agreement is being amortized over the
agreement term with accumulated amortization of approximately $10,000 at April
16, 1997.
SOUTHCO, INC. ("SOUTHCO") CONTRACTS - On November 21, 1994, STPI entered
into a purchase agreement (the "Purchase Agreement") with Southco to purchase
certain of its assets, primarily the right to operate ice systems at 33
locations and firm orders to operate ice systems in the future at seven
additional locations. The cost was approximately $188,000 and was partially
financed by a $105,620 note payable (see Note 6). The purchase price and related
note are subject to reduction (as defined) for a three year period for
cancellations/terminations of any existing locations or in the event that any of
the identified firm order locations do not become customers.
The assigned value of the right to operate ice systems and associated costs
has been recorded within other assets and is being amortized over five years.
The accumulated amortization related to this asset was approximately $91,000 at
April 16, 1997.
-6-
58
7. LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt of the Companies consisted of the following:
Frost National Bank $3,114,823
Jefferson State Bank 478,824
Southco Note 24,640
----------
Total debt 3,618,287
Less current maturities 1,924,186
----------
Long-term debt, net $1,694,101
==========
FROST NATIONAL BANK - The Company and Frost National Bank have entered into
a secured loan agreement (the "Bank Loan Agreement"), as last amended January
1997, to finance capital expenditures and seasonal working capital needs. Under
the provisions of the Bank Loan Agreement, available financing consists of a
term loan (the "Term Loan"), a working capital line of credit and an equipment
purchase line of credit (collectively, the "Lines of Credit"). Borrowings under
the Bank Loan Agreement are secured by Mission's machinery and equipment,
accounts receivable, the pledge of Mission's common stock and the personal
guarantee of Mission's sole shareholder as well as the guarantees of STPI and
STED. The Bank Loan Agreement contains restrictive covenants which, among other
things, requires the Company to maintain a minimum tangible net worth (as
defined) and a specific ratio of cash flow to current maturities of long-term
debt. The terms of the Bank Loan Agreement also prohibit the payment of
dividends, limit annual capital expenditures and limit the Companies' ability to
incur additional debt. The maximum combined credit under the Lines of Credit is
$1,475,000 at April 16, 1997, subject to borrowing base limitations which are
generally computed as a percentage of various classes of eligible accounts
receivable, qualifying inventory and fixed assets (as defined) of Mission, STPI
and STED. The Company pays no annual facility fee related to the Lines of
Credit.
The balance of the Term Loan was $837,927 at April 16, 1997. The Term Loan
bears interest at prime plus 1% (8.75% at April 16, 1997) and is payable in
monthly installments of $21,840 through July 2000. The balance of the Lines of
Credit was $1,021,000 at April 16, 1997. The Lines of Credit mature on May 31,
1997 and bear interest at prime plus 1% (8.75% at April 16, 1997).
In addition, the Companies enter into secured promissory note agreements
with Frost National Bank from time to time in order to finance the purchase of
equipment, which is in turn used as collateral for the notes. The borrowings
under such notes were $1,255,896 at April 16, 1997. These notes bear interest at
prime plus 1% (8.75% at April 16, 1997) and require principal and interest
payments in equal monthly installments ranging from three to five years.
JEFFERSON STATE BANK - The Companies enter into secured promissory note
agreements ("Promissory Notes") with Jefferson State Bank at various dates in
order to finance the purchase of ice merchandisers and/or transportation
vehicles, which are in turn used as collateral for the Promissory Notes. The
notes outstanding at April 16, 1997 bear interest at a fixed rate ranging from
6.5% to 9.0%. The Promissory Notes require principal and interest payments in
equal monthly installments ranging from two to four years.
-7-
59
SOUTHCO NOTE - In November 1994 STPI issued a note (the "Southco Note") to
finance a portion of the Southco acquisition (see Note 5). The Southco Note
bears interest at an annual rate of prime plus 2% (9.75% at April 16, 1997) and
is secured by the contracts to operate ice systems. The Southco Note required
interest-only payments for the first six months and thereafter 36 monthly
payments of $3,521 plus accrued interest.
The weighted average interest rate for the Companies was 9.65% for the
period ended April 16, 1997.
As discussed in Note 4, all of the above long-term debt was paid in full on
April 17, 1997.
8. RELATED PARTIES
STPI entered into a distributor agreement (the "Distributor Agreement") to
purchase ice systems machinery and equipment from Packaged Ice, Inc. ("Packaged
Ice"), an entity affiliated through common ownership. Under provisions of the
Distributor Agreement, STPI has exclusive purchasing rights in certain Texas
counties for a period of ten years effective May 19, 1994. STPI purchases each
ice system at an agreed upon price and pays a royalty, as defined. Packaged Ice
has the right to repurchase all of the ice systems at a price defined in the
Distributor Agreement. STPI's purchases under the Distributor Agreement were
$109,215 for the period ended April 16, 1997. No amounts were payable related to
these transactions at April 16, 1997. Upon completion of the sale on April 17,
1997 (see Note 4) the Distributor Agreement was terminated.
The Companies, from time to time, advance and receive funds from affiliates
in the normal course of operations for working capital purposes. Such
transactions are reflected in accounts receivable-affiliates and accounts
payable-affiliates on the combined balance sheet in the respective amounts of
$751,187 and $205,494 at April 16, 1997. In addition, Mission has $105,523 of
8.75% interest bearing demand notes due affiliates and $19,768 of employee
receivables at April 16, 1997.
The Companies lease certain property from individuals affiliated through
ownership. Total payments under these leases were $25,842 for the period from
January 1, 1997 to April 16, 1997. See Note 9 for additional information
regarding noncancellable lease commitments.
9. CAPITAL STOCK
COMMON STOCK - Respective holders of Mission and STPI's common stock are
entitled to one vote per share on all matters to be voted on by shareholders and
are entitled to receive dividends, if any, as may be declared from time to time
by the respective Board of Directors of the Companies. Upon any liquidation or
dissolution of either Company, the holders of common stock are entitled to
receive a pro rata share of all of the assets remaining available for
distribution to shareholders after payment of all liabilities.
In 1993, STPI entered into a Stock Purchase and Restriction Agreement (the
"Agreement") with certain employees of STPI. The Agreement allowed these
employees to purchase up to a 20% interest in STPI's $1 par value common stock
for a purchase price of $50,000. The Agreement gave the new shareholders a put
option whereby STPI would repurchase the shares at a price equal to the greater
of the original purchase price or the then adjusted book value (as defined).
Upon termination of employment or death, STPI has the option to repurchase such
shares in accordance with the put option formula. The Agreement restricts such
shares from being sold, pledged, gifted or otherwise disposed of without
offering such shares to the majority stockholder. During 1996 STPI repurchased
and placed in treasury 25 shares of common stock from minority shareholders for
$10,000.
10. COMMITMENTS AND CONTINGENCIES
Relating to the Purchase Agreement with Southco, STPI leased certain ice
systems from Southco for a five year period. Rental payments are $110 per month
per ice system.
The Companies have entered into various noncancellable operating leases for
buildings and other property. The Company subleases some of the property
included under these leases. For the period from January 1, 1997 to April 16,
1997 rent expense, net of subleases was $59,000. The annual future minimum lease
payments under these leases, and the related sublease amounts, are as follows:
PAYMENT SUBLEASE NET
1998 $74,000 $ 2,000 $72,000
1999 16,000 16,000
The Companies may be involved in various claims, lawsuits and proceedings
arising in the ordinary course of business. While there are uncertainties
inherent in the ultimate outcome of such matters and it is impossible to
presently determine the ultimate costs that may be incurred, management believes
the resolution of such uncertainties and the incurrence of such costs should not
have a material adverse effect on the Companies' combined financial position or
results of operations.
-8-
60
11. EMPLOYEE BENEFIT PLANS
On January 1, 1994, the Company, in conjunction with affiliated companies
controlled through ownership by the same stockholder established a 401(k)
defined contribution savings plan (the "Plan") covering substantially all of the
affiliates' employees. Employees may elect to contribute on a pre-tax basis up
to 15% of their eligible compensation to the Plan. For those participants who
have elected to make voluntary contributions to the Plan, the Company's matching
contributions consist of an amount of up to 2% of the eligible compensation of
the participants. An additional matching contribution may be made by the Company
at the discretion of the Board of Directors. Such contributions vest ratably
over a period of five years. The Company contributed approximately $8,850 to the
Plan for the period from January 1, 1997 to April 16, 1997.
-9-
61
INDEPENDENT AUDITORS' REPORT
ON ADDITIONAL INFORMATION
To the Stockholder of Mission Party Ice, Inc. and
Stockholders of Southwest Texas Packaged Ice, Inc.:
Our audit was conducted for the purpose of forming an opinion on the basic
combined financial statements taken as a whole. The additional combined balance
sheet with combining information as of April 16, 1997 and the combined statement
of operations with combining information for the period from January 1, 1997 to
April 16, 1997 are presented for the purpose of additional analysis of the basic
combined financial statements rather than to present the financial position and
results of operations of the individual companies and are not a required part of
the basic combined financial statements. This additional combining information
is the responsibility of the Companies' management. Such combining information
has been subjected to the auditing procedures applied in our audit of the basic
combined financial statements and, in our opinion, is fairly stated in all
material respects when considered in relation to the basic combined financial
statements taken as a whole.
Houston, Texas
January 26, 1998
-10-
62
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
COMBINED BALANCE SHEET WITH COMBINING INFORMATION
APRIL 16, 1997
- --------------------------------------------------------------------------------
SOUTHWEST
MISSION TEXAS
PARTY ICE PACKAGED COMBINING COMBINED
ASSETS INC. ICE, INC. ADJUSTMENTS BALANCE
CURRENT ASSETS:
Accounts receivable
Trade, net $ 361,997 $ 82,071 $ 444,068
Affiliates 891,951 66,159 $(206,923) 751,187
Inventories 129,567 17,450 147,017
Prepaid expenses 91,459 91,459
---------- ---------- --------- ----------
Total current assets 1,474,974 165,680 (206,923) 1,433,731
PROPERTY, NET 3,514,768 1,015,848 4,530,616
OTHER ASSETS, NET 148,289 101,663 249,952
---------- ---------- --------- ----------
TOTAL $5,138,031 $1,283,191 $(206,923) $6,214,299
========== ========== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt $1,589,335 $ 334,851 $1,924,186
Accounts payable 553,190 85,515 638,705
Payable to affiliates 105,523 412,417 $(206,923) 311,017
Accrued expenses 206,759 21,951 228,710
---------- ---------- --------- ----------
Total current liabilities 2,454,807 854,734 (206,923) 3,102,618
---------- ---------- --------- ----------
LONG-TERM DEBT, NET 1,192,643 501,458 1,694,101
---------- ---------- --------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, 2,000,000 shares authorized; (1,000,000
shares, $.01 par value, authorized for Mission, 1,000
shares issued and outstanding, 1,000,000 shares, $1 par
value; authorized for STPI 1,250 shares issued) 10 1,250 1,260
Additional paid-in capital 1,514,513 23,513 1,538,026
Retained deficit (23,942) (87,764) (111,706)
Less 25 shares of STPI treasury stock at cost (10,000) (10,000)
---------- ---------- --------- ----------
Total shareholders' equity (deficit) 1,490,581 (73,001 1,417,580
---------- ---------- --------- ----------
TOTAL $5,138,031 $1,283,191 $(206,923) $6,214,299
========== ========== ========= ==========
See notes to combined financial statements.
11
63
MISSION PARTY ICE, INC. (a S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (a S CORPORATION)
COMBINED STATEMENT OF OPERATIONS WITH COMBINING INFORMATION
FOR THE PERIOD ENDED APRIL 16, 1997
- --------------------------------------------------------------------------------
SOUTHWEST
MISSION TEXAS
PARTY ICE PACKAGED COMBINING COMBINED
INC. ICE, INC. ADJUSTMENTS BALANCE
Revenues $ 1,068,295 $ 136,246 $ 1,204,541
Costs of sales 944,506 69,167 1,013,673
----------- ----------- ----------- -----------
Gross profit 123,789 67,079 190,868
Selling, general and administrative
expenses 503,511 61,248 564,759
Depreciation and amortization expense 224,699 93,493 318,192
----------- ----------- ----------- -----------
Loss from operations (604,421) (87,662) (692,083)
Other (expense) income, net (114,944) 58,248 $ (13,896) (70,592)
Interest expense (95,510) (35,661) 13,896 (117,275)
----------- ----------- ----------- -----------
Net loss $ (814,875) $ (65,075) $ $ (879,950)
=========== =========== =========== ===========
See notes to combined financial statements.
12
64
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders'
Southwestern Ice, Inc.:
We have audited the accompanying combined balance sheet of Southwestern Ice,
Inc. (the "Company") as of April 16, 1997, and the related statements of
operations and stockholders' deficit and cash flows for the period from January
1, 1997 to April 16, 1997. The financial statements are the responsibility of
the Companies' management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the combined financial position of the Company as of April 16, 1997
and the results of its operations and its cash flows for the period January 1,
1997 to April 16, 1997 in conformity with generally accepted accounting
principles.
Phoenix, Arizona
December 24, 1997
13
65
SOUTHWESTERN ICE, INC.
BALANCE SHEETS
APRIL 16, 1997
ASSETS (NOTE 4)
CURRENT ASSETS:
Cash $ 31,666
Short-term investments 50,000
Accounts receivable, less allowance for doubtful accounts 1,128,230
of $26,775
Inventories 457,099
Prepaid expenses and other current assets 31,636
------------
Total current assets 1,698,631
PROPERTY, PLANT AND EQUIPMENT, net (Note 3) 9,642,976
GOODWILL AND INTANGIBLE ASSETS - net 110,205
OTHER ASSETS 20,108
------------
TOTAL $ 11,471,920
============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current portion of debt and obligations under Capital $ 8,614,285
leases (Note 4)
Operating line of credit (Note 4) 600,000
Accounts payable 1,239,985
Accrued liabilities 664,335
Accounts Payable-Officers (Note 7) 356,534
------------
Total current liabilities 11,475,139
------------
COMMITMENTS AND CONTINGENCIES (Notes 5 and 6)
STOCKHOLDERS' DEFICIT:
Capital stock; no par value - authorized 1,000,000 shares;
issued and outstanding, 1,110 shares 1,110
Additional Paid-in Capital
147,303
Retained earnings (151,632)
------------
Total stockholders' deficit (3,219)
------------
TOTAL $ 11,471,920
============
The accompanying notes are an integral part of these balance sheets.
14
66
SOUTHWESTERN ICE, INC.
STATEMENT OF OPERATIONS
PERIOD FROM JANUARY 1, 1997 TO APRIL 16, 1997
SALES ................................................................ $ 2,586,165
COST OF SALES ........................................................ 2,387,171
Gross profit ............................................... 198,994
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ......................... 1,008,704
LOSS FROM OPERATIONS ................................................. (809.710)
OTHER INCOME (EXPENSE):
Interest expense ................................................... (312,730)
Gain on sale of property, plant and equipment (Note 7) ............. 172,085
Other expense ...................................................... (116,031)
===========
Total other expense ........................................ (256,676)
===========
NET LOSS ............................................................. (1,066,386)
See notes to financial statements.
15
67
SOUTHWESTERN ICE, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
PERIOD FROM JANUARY 1, 1997 TO APRIL 16, 1997
COMMON STOCK ADDITIONAL RETAINED TOTAL
------------ PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) DEFICIT
------ ------ ---------- --------- -------------
BALANCE, JANUARY 1, 1997 1,110 $ 1,110 $ 1,673,087 $ 1,674,197
Net loss (1,066,386) (1,066,386)
Property Distributions to stockholders (Note 7) (254,495) (254,495)
Stockholder tax liability distributions (Note 7) (318,266) (318,266)
Sale of Albuquerque plant distribution (Note 7) (185,572) (185,572)
Conversion of accounts payable to additional
paid-in-capital (Note 7) 147,303
$ 147,303
----------- ----------- ----------- ----------- -----------
BALANCE, APRIL 16, 1997 1,110 $ 1,110 $ 147,303 $ 151,632) $ (3,219)
=========== =========== =========== =========== ===========
See notes to financial statements.
16
68
SOUTHWESTERN ICE, INC.
STATEMENT OF CASH FLOWS
PERIOD ENDED
APRIL 16, 1997
--------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,066,386)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 345,818
Debt discount amortization 11,545
Gain on sale of property, plant and equipment (172,085)
Loss on land and buildings transferred to stockholders 114,500
Changes in operating assets and liabilities:
Accounts receivable 76,515
Inventories (85,666)
Prepaid expenses and other current assets 57,963
Other assets 39,729
Accounts payable 506,186
Accrued liabilities 188,822
Accounts payable-stockholders 356,534
-----------
Net cash (used in) provided by operating activities 373,475
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property, plant and equipment and assets
held for sale 328,494
Purchase of property, plant and equipment (77,014)
Proceeds from (purchase of) short-term Investments 45,000
-----------
Net cash provided by investing activities 296,480
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (321,575)
Distributions to stockholders (356,635)
-----------
Net cash used in financing activities (678,210)
-----------
NET DECREASE IN CASH (8,255)
CASH, beginning balance 39,821
-----------
CASH, ending balance $ 31,566
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 264,584
===========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Property distribution to stockholders $ 264,495
===========
The accompanying notes are an integral part of these financial statements.
17
69
SOUTHWESTERN ICE, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Southwestern Ice, Inc. (the Company) was incorporated in the State of
Arizona on February 25, 1992. The Company's primary business activity is
the production, marketing, and distribution of ice products in Arizona,
southern Texas, Memphis, Tennessee, Albuquerque, New Mexico and El Centro,
California. The Company has elected to be organized as an S corporation and
therefore, is generally not subject to income taxes. Accordingly, there is
no provision for income taxes reflected in the financial statements.
The following are the significant accounting policies of the Company:
a. Short-term investments consist of certificates of deposit with a
financial institution, which have original maturities in excess of
three months and are carried at cost, which approximates market.
b. Inventories are stated at the lower of cost (first-in, first-out
basis) or market. The Company's inventory consists of wet ice and bags
for the transportation and storage of ice.
c. Property, plant and equipment are recorded at cost. Property and
equipment held under capital leases are stated at the present value of
minimum lease payments, net of accumulated amortization. These assets
are amortized over the lesser of the lease term or the estimated
useful life of the underlying assets using the straight-line method.
Additions, improvements and major renewals are capitalized.
Maintenance, repairs and minor renewals, which do not improve or
significantly extend the life of assets, are expensed as incurred.
Depreciation is computed on a straight-line basis over the following
estimated useful lives:
ASSET ESTIMATED LIFE
- ----- --------------
Buildings and improvements ....................... 31 years
Machinery and equipment .......................... 7-12 years
Furniture and fixtures ........................... 7-12 years
Vehicles ......................................... 5 years
d. Intangible Assets - The cost of customer lists, trade name and other
identifiable intangible assets acquired in connection with business
acquisitions are amortized on a straight-line basis over 15 years.
Accumulated amortization was $43,161 as of April 16, 1997.
e. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. CHANGE IN OWNERSHIP
On March 25, 1997, the Company entered into an agreement ("Merger
Agreement") with Packaged Ice, Inc. (the Buyer") to merge the Company into
a wholly owned subsidiary of the Buyer. The purchase price was $9,500,000
consisting of $3,500,000 in cash and $6,000,000 in shares of the Buyer's
common stock (valued at $10 per share) payable to the Company's
stockholders. In conjunction with the purchase of the Company, all of the
notes payable to bank (Note 4) were all assumed by the Buyer on April 17,
1996, the closing date of the acquisition.
18
70
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at April 16, 1997:
Land $ 712,226
Buildings and improvements 3,346,134
Machinery and equipment 5,242,845
Furniture and fixtures
2,085,805
Vehicles
1,485,141
------------
Total 12,872,151
Less -- Accumulated depreciation and amortization (3,229,175)
------------
Property, plant and equipment-net $ 9,642,976
============
4. DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
Debt and obligations under capital leases consists of the following at
April 16, 1997:
APRIL 16,
1997
----------
Senior note payable to bank, monthly installments of $65,775
including interest at prime (8.5% at April 16, 1997), plus 1.5%
through June 2006, collateralized by substantially all the $4,523,935
assets of the Company
Secondary note payable to bank, payable in monthly installments
of interest only at prime (8.5% at April 16, 1997) plus 1.5%
through June 2006, collateralized by substantially all the 3,000,000
assets of the Company
Obligations under capital lease, net of amounts representing
interest. Interest ranges from 9% to 13%, matures October 2001 772,105
Note payable to shareholder, monthly installments of $6,458
plus interest at 10% through April 1999 283,167
Other 35,078
----------
Total debt and obligations under capital leases $8,614,285
==========
During 1996, the Company entered into a revolving line of credit with a
bank, which is collateralized by personal property, real estate, capital
stock and a stockholder certificate of deposit. Interest payable monthly at
prime plus 1.5% until maturity of the line of credit in May 1997. The
maximum borrowing base is determined by the Company's accounts receivable
balance, as defined, not to exceed $600,000. The line of credit was fully
drawn on in the amount of $600,000 at April 16, 1997.
As discussed in Note 2, all of the above debt and obligations under capital
leases were paid in full on April 7, 1997.
5. COMMITMENTS AND CONTINGENCIES
The Company entered into a Master Equipment Lease Agreement in September
1996 with the Buyer to lease various ice manufacturing and merchandising
systems for retail and commercial use. The lease agreement is for an
initial term of five years with an option to renew for an additional
five-year term. Each annual unit lease rate is equal to 25% of the Buyer's
cost to manufacture and install the ice merchandising systems. The Company
has agreed to lease 157 systems as of September 1997 and an additional 100
systems each year thereafter. As of April 16, 1997, the Company had leased
119 machines. Rental expense under these leases was $136,074 for the period
January 1, 1997 to April 16, 1997. Upon completion of the sale on April 17,
1997, this lease was terminated.
In connection with the lease agreement, the Company entered into a service
agreement with the Buyer whereby the Company will pay a monthly management
fee of $10,000 for the Buyer to have primary responsibility for marketing
the ice merchandising systems and oversight responsibility for installing,
operating, managing and servicing the systems. In addition, the Company is
required to reimburse the Buyer for all costs relating to activities under
the agreement including all costs associated with the operation, repair and
maintenance of the systems. The Company also must pay directly or through
reimbursement to the Buyer, all salaries, wages and other compensation and
benefits of all personnel employed by the Buyer and involved with the
operation of the Company's leased systems. The term of the original
agreement was for 10 years or the termination of the Master Equipment Lease
Agreement. The Company incurred management fees of $35,333 for the period
January 1, 1997 to April 16, 1997. Upon completion of the sale of the
Company to the Buyer on April 17, 1997, the service agreement was
terminated.
19
71
6. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) profit sharing plan (the "Plan") for all employees
who are 21 of years of age or older and have completed one year of service.
The Plan provides for a mandatory matching contribution equal to 25% of the
amount of the employee's salary deduction not to exceed 5% of an employee's
annual compensation. The Company's matching contribution was $3,131 for the
period January 1, 1997 to April 16, 1997.
Due to the acquisition, the Company has subsequently terminated the Plan
and all the assets of the Plan were rolled into the Buyer's 401(k) Plan and
all eligible employees of the Company are covered under the Buyer's 401(k)
Plan.
7. RELATED PARTY TRANSACTIONS
The Company makes monthly payments of $5,000 to a company owned by a
shareholder to rent an ice manufacturing and storage facility. The Company
is also responsible for the related property taxes on the facility. Total
lease and tax obligations paid or accrued to or on behalf of the
shareholder were $28,411 for the period ended April 16, 1997.
The Company has entered into a management consulting agreement with a
shareholder. The management contract is renewable annually. Under the
management contract, the shareholder is entitled to receive monthly
payments of $12,850. Fees paid or accrued to the shareholder were
$44,975 for the period from January 1, 1997 to April 16, 1997. The
stockholder became an employee of Packaged Ice, Inc. after the sale of the
Company, and the consulting contract has since expired and was not renewed.
Pursuant to terms of the Merger Agreement, three properties that were not
included in the Merger Agreement were distributed to a newly formed
corporation owned by the stockholders of the Company. The distribution was
accounted for under APB No. 29, Accounting for Nonmonetary Transactions
and, accordingly, the property distribution was transferred at fair market
value in the amount of $254,495 which resulted in a loss in the amount of
$114,500 during the period from January 1, 1997 to April 16, 1997.
Prior to the sale of the Company to the Buyer, the Company sold its
Albuquerque, New Mexico facility for the benefit of its stockholders at the
time. Such facility was not part of the Merger Agreement. The proceeds of
this sale ($185,572) were retained in the Company as a loan.
As permitted by the Merger Agreement, the stockholders were entitled to
distribute funds for their tax liabilities. The amount of these
distribution accrued at April 16, 1997 was $318,266.
As part of the sale of the Company to the Buyer, any amounts payable to the
Buyer as of April 16, 1997 were not assumed by the Buyer according to the
Merger Agreement. Accounts payable to the Buyer in the amount of $147,303
were contributed to the capital of the Company.
20
72
INDEX TO EXHIBITS
Exhibit
No. Description
------- -----------
3.1 Articles of Incorporation of Packaged Ice, Inc. (the
"Company") filed with the Secretary of State of the
State of Texas on August 14, 1990. (Exhibit 3.1)(1)
3.2 Restated Articles of Incorporation of the Company filed
with the Secretary of State of the State of Texas on
February 5, 1992. (Exhibit 3.2)(1)
3.3 Certificate of Designation of Series A Convertible
Preferred Stock of the Company filed with the Secretary
of State of the State of Texas on September 19, 1995.
(Exhibit 3.3)(1)
3.4 Certificate of Designation of Series B Convertible
Preferred Stock of the Company filed with the Secretary
of State of the State of Texas on January 10, 1997.
(Exhibit 3.4)(1)
3.5 Amended and Restated Bylaws of the Company effective
as of January 20, 1997. (Exhibit 3.5)(1)
4.1 Indenture, dated April 17, 1997, among the Company, as
Issuer, the Subsidiary Guarantors identified therein
(the "Guarantors"), and U.S. Trust Company of Texas,
N.A. as Trustee. (Exhibit 4.1)(1)
73
4.2 Registration Rights Agreement, dated as of April 17, 1997,
among the Company, the Subsidiary Guarantors, and the
purchasers of the Notes. (Exhibit 4.2)(1)
4.3 First Supplemental Indenture, dated as of October 16, 1997,
among the Company, the Subsidiary Guarantors, and the
Purchasers of the Notes. (Exhibit 4.3) (3)
4.4 Supplemental Indenture, dated as of October 23, 1997, for
Indenture dated as of April 17, 1997. (Exhibit 4.4) (3)
10.1 Stock Purchase Agreement, dated as of July 17, 1997, by and
between Packaged Ice, Inc. and SV Capital Partners, L.P.
(Exhibit 10.38)(2)
10.2 Common Stock Purchase Warrant No. SV-1, dated July 17, 1997,
executed by Packaged Ice, Inc. for the benefit of SV Capital
Partners, L.P. (Exhibit 10.39)(2)
10.3 Voting Agreement, dated July 17, 1997, by and among Packaged
Ice, Inc., SV Capital Partners, L.P. and substantially all of
the shareholders of Packaged Ice, Inc. (Exhibit 10.40)(1)
10.4 Registration Rights Agreement, dated as of July 17, 1997, by
and between Packaged Ice, Inc. and SV Capital Partners, L.P.
(Exhibit 10.41)(2)
10.5 Parallel Exit Agreement, dated July 17,1997, by and among
Packaged Ice, Inc., SV Capital Partners, L.P., and certain of
Packaged Ice, Inc.'s shareholders (James F. Stuart, A. J.
Lewis III, and Steven P. Rosenberg). (Exhibit 10.42)(2)
10.6 Indemnification Agreement, dated July 17, 1997, by and between
Packaged Ice, Inc. and Rod Sands, indemnifying Mr. Sands as a
director of Packaged Ice, Inc. (Exhibit 10.43)(2)
10.7 Warrant Agreement among the Company and U.S. Trust Company of
Texas, N.A., a national banking association, as Warrant Agent,
dated as of October 16, 1997. (Exhibit 10.7) (3)
10.8 Credit Agreement by and among the Company, The Frost National
Bank (individually and as Agent for Zions and other Banks),
and Zions First National Bank (individually), dated as of
September 15, 1997. (Exhibit 10.8) (3)
10.9 First Amendment to Credit Agreement dated as of October 16,
1997. (Exhibit 10.9) (3)
10.10 Agreement (Patents) (United States) dated as of September 15,
1997, executed by the Company in favor of Agent. (Exhibit
10.10) (3)
10.11 Revolving Credit Note dated as of September 15, 1997, in the
stated principal amount of $10,000,000.00, executed by the
Company and payable to the order of The Frost National Bank.
(Exhibit 10.11) (3)
10.12 Revolving Credit Note dated as of September 15, 1997, in the
stated principal amount of $10,000,000.00, executed by the
Company and payable to the order of Zions First National Bank.
(Exhibit 10.12) (3)
10.13 Subsidiary Guaranty Agreement dated as of September 15, 1997,
executed by SWI in favor of Agent and Banks. (Exhibit 10.13)
(3)
74
10.14 Subsidiary Guaranty Agreement dated as of September 15, 1997,
executed by MPI in favor of Agent and Banks. (Exhibit 10.14)
(3)
10.15 Subsidiary Guaranty Agreement dated as of September 15, 1997,
executed by PILI in favor of Agent and Banks. (Exhibit 10.15)
(3)
10.16 Subsidiary Guaranty Agreement dated as of September 15, 1997,
executed by SII in favor of Agent and Banks. (Exhibit 10.16)
(3)
10.17 Subsidiary Guaranty Agreement dated as of September 15, 1997,
executed by STPI in favor of Agent and Banks. (Exhibit 10.17)
(3)
10.18 Security Agreement dated as of September 15, 1997, executed by
the Company as Debtor in favor of Agent. (Exhibit 10.18) (3)
10.19 Security Agreement dated as of September 15, 1997, executed by
STPI as Debtor in favor of Agent. (Exhibit 10.19) (3)
10.20 Security Agreement dated as of September 15, 1997, executed by
SWI as Debtor in favor of Agent. (Exhibit 10.20) (3)
10.21 Security Agreement dated as of September 15, 1997, executed by
MPI as Debtor in favor of Agent. (Exhibit 10.21) (3)
10.22 Security Agreement dated as of September 15, 1997, executed by
PILI as Debtor in favor of Agent. (Exhibit 10.22) (3)
10.23 Deed of Trust, Assignment of Rents, Security Agreement, and
Fixture Filing dated as of September 15, 1997, executed by
SWI, as filed of record in the Real Property Records of
Maricopa County, Arizona. (Exhibit 10.23) (3)
10.24 Pledge and Security Agreement (Subsidiary Stock) dated as of
September 15, 1997, executed by the Company as Pledgor in
favor of Agent. (Exhibit 10.24) (3)
10.25 Deed of Trust, Assignment of Rents, Security Agreement, and
Fixture Filing dated as of September 15, 1997, executed by
SWI, as filed of record in the Real Property Records of Pima
County, Arizona. (Exhibit 10.25) (3)
10.26 Leasehold Deed of Trust, Assignment of Rents, Security
Agreement, and Fixture Filing dated as of September 15, 1997,
executed by SWI, as filed of record in the Real Property
Records of Maricopa County, Arizona. (Exhibit 10.26) (3)
10.27 Deed of Trust, Security Agreement, Assignment of Rents, and
Fixture Filing dated as of September 15, 1997, executed by
SWI, as filed of record in the Real Property Records of
Imperial and San Diego Counties, California. (Exhibit 10.27)
(3)
10.28 Leasehold Deed of Trust, Security Agreement, Assignment of
Rents, and Fixture Filing dated as of September 15, 1997,
executed by SWI, as filed of record in the Real Property
Records of San Diego County, California. (Exhibit 10.28) (3)
10.29 Deed of Trust, Security Agreement, and Fixture Filing dated as
of September 15, 1997, executed by SWI, as filed of record in
the Real Property Records of Shelby County, Tennessee.
(Exhibit 10.29) (3)
75
10.30 Deed of Trust, Assignment Security Agreement, and Financing
Statement (Refugio County) dated as of September 15, 1997,
executed by MPI, as filed of record in the Real Property
Records of Refugio County, Texas. (Exhibit 10.30) (3)
10.31 Deed of Trust, Assignment Security Agreement, and Financing
Statement (Cameron and Hidalgo Counties) dated as of September
15, 1997, executed by SWI, as filed of record in the Real
Property Records of Cameron and Hidalgo Counties, Texas.
(Exhibit 10.31) (3)
10.32 Subordination, Attornment and Non-Disturbance Agreement dated
as of September 15, 1997, by and between Mid Valley
Industries, as Tenant, and Agent, covering property located at
101 North 16th Street, McAllen, Texas 78501. (Exhibit 10.32)
(3)
10.33 Leasehold Deed of Trust, Assignment, Security Agreement, and
Financing Statement (Nueces County) dated as of September 15,
1997, executed by MPI, as filed of record in the Real Property
Records of Nueces County, Texas. (Exhibit 10.33) (3)
10.34 Leasehold Deed of Trust, Assignment, Security Agreement, and
Financing Statement (Dallas County) dated as of September 15,
1997, executed by the Company, as filed of record in the Real
Property Records of Dallas County, Texas. (Exhibit 10.34) (3)
10.35 Indenture, dated October 16, 1997, among the Company, as
Issuer, the guarantors identified therein (the "Guarantors"),
and U.S. Trust Company of Texas, N.A. as Trustee. (Exhibit
10.35) (3)
10.36 Registration Rights Agreement, dated as of October 16, 1997,
among the Company, the Subsidiary Guarantors, and the
purchasers of the Notes. (Exhibit 10.36) (3)
10.37 Purchase Agreement, dated October 10, 1997, among the Company,
the Guarantors, and Jefferies & Company, Inc. (the Initial
Purchaser of the Notes). (Exhibit 10.37) (3)
10.38 Securityholder's and Registration Rights Agreement, dated as
of October 16, 1997, among the Company and the Initial
Purchaser. (Exhibit 10.38) (3)
10.39 Supplemental Indenture dated as of October 23, 1997, for
Indenture dated as of October 16, 1997. (Exhibit 10.39) (3)
10.40 Trademark License Agreement between Culligan International
Company and Packaged ice, Inc. dated as of October 31, 1997.
(Exhibit 10.40) (3)
10.41 Asset Purchase Agreement between Southwestern Ice, Inc. and
Pure Flo Package Water and Ice Co. dated as of June 30, 1997.
(Exhibit 10.41) (3)
10.42 Stock Purchase Agreement among Packaged Ice, Inc., Buyer, and
W. Brad Troutman and James V. White, Jr., Stockholders,
holders of all of the outstanding stock of First Ice Company
and Codurus Leasing Company, dated as of September 4, 1997.
(Exhibit 10.42) (3)
10.43 Asset Purchase Agreement between Southwestern Ice, Inc. and
CMC Ice, Inc., Carlos Shannon, and Linda Shannon dated as of
September 4, 1997. (Exhibit 10.43) (3)
10.44 Asset Purchase Agreement between Southwestern Ice, Inc. and
CJC Ice, Inc. dated as of September 4, 1997. (Exhibit 10.44)
(3)
76
10.45 Stock Purchase Agreement among Packaged Ice, Inc., Buyer, and
Warren F. Kruger and Julie S. Kruger, stockholders, holders of
all of the outstanding stock of Century Ice of Tulsa, Inc. and
Ice Cold Enterprises, Inc., dated as of September 12, 1997.
(Exhibit 10.45) (3)
10.46 Asset Purchase Agreement between Southwestern Ice, Inc. and
Ed's Refrigeration, Inc. d/b/a The Ice Co. and the
Shareholders of Ed's Refrigeration, Inc., Edmond Pacques and
True Dee Packs dated as of October 9, 1997.(5)
10.47 Agreement and Plan of Merger by and among Packaged Ice, Inc.,
Golden Eagle Ice-Texas, Inc., Golden Eagle Ice Company and
Diane C. Bray dated as of October 27, 1997.(5)
10.48 Agreement and Plan of Merger by and among Packaged Ice, Inc.,
Central Arkansas Cold Storage-Texas, Inc., Central Arkansas
Cold Storage, Inc. and Diane C. Bray dated as of October 27,
1997.(5)
10.49 Asset Purchase Agreement by and among Mission Party Ice, Inc.,
Packaged Ice, Inc. and R2D2, Inc. and David Peters and Robert
Pierce dated as of October 30, 1997.(5)
10.50 Asset Purchase Agreement by and among Mission Party Ice, Inc.,
Packaged Ice, Inc. and New Braunfels Smokehouse, Inc. and Sue
Snyder dated as of November 7, 1997.(5)
10.51 Asset Purchase Agreement by and among Southwestern Ice, Inc.,
Ice Company Enterprises, Inc. and David Jensen and Steve
Jensen dated as of November 11, 1997.(5)
10.52 Stock Purchase Agreement by and among Packaged Ice, Inc. and
Herbert F. Stackhouse, Jr. and Earl Milton Spaulding, Jr.,
holders of all of the outstanding stock of Peoples Crystal Ice
Company dated November 21, 1997.(5)
10.53 Certificate of Designation of Series C Preferred Stock as
filed with the Texas Secretary of State on December 2, 1997.
(Exhibit 4.1) (4)
10.54 Certificate of Designation of 10% Exchangeable Preferred Stock
as filed with the Texas Secretary of State on December 2,
1997. (Exhibit 4.2) (4)
10.55 Securities Purchase Agreement between Packaged Ice, Inc. and
Culligan Water Technologies, Inc. dated December 2, 1997.
(Exhibit 10.1) (4)
10.56 Securities Purchase Agreement between Packaged Ice, Inc. and
Erica Jesselson dated December 2, 1997. (Exhibit 10.2) (4)
10.57 Common Stock Purchase Warrant issued by Packaged Ice, Inc. and
issued to Culligan Water Technologies, Inc. issuing 1,807,692
fully paid and nonassessable shares of the Company's common
stock at an exercise price of $13.00 per share dated December
2, 1997. (Exhibit 10.3) (4)
10.58 Common Stock Purchase Warrant issued by Packaged Ice, Inc. and
issued to Erica Jesselson issuing 115,385 fully paid and
nonassessable shares of the Company's common stock at an
exercise price of $13.00 per share dated December 2, 1997.
(Exhibit 10.4) (4)
10.59 Registration Rights Agreement by and among Packaged Ice, Inc.,
Culligan Water Technologies, Inc. and Erica Jesselson dated
December 2, 1997. (Exhibit 10.5) (4)
10.60 Culligan Voting Agreement by and among Packaged Ice, Inc. and
Culligan Water Technologies, Inc. dated December 2, 1997.
(Exhibit 10.6) (4)
10.61 Letter Agreement dated December 2, 1997. (Exhibit 10.7) (4)
77
10.62 Parallel Exit Agreement by and among Packaged Ice, Inc., James
F. Stuart, A.J. Lewis, III, Steven P. Rosenberg, Culligan
Water Technologies, Inc. and Erica Jesselson dated December 2,
1997. (Exhibit 10.8) (4)
10.63 Amendment No. 3 to The Amended and Restated Voting Agreement
by and among Packaged Ice, Inc. and the Shareholders of the
Company dated November 4, 1997. (Exhibit 10.9) (4)
10.64 Transfer Restriction Agreement by and between Packaged Ice,
Inc. and Culligan Water Technologies, Inc. dated December 2,
1997. (Exhibit 10.10) (4)
10.65 Transfer Restriction Agreement by and between Packaged Ice,
Inc. and Erica Jesselson dated December 2, 1997. (Exhibit
10.11) (4)
10.66 Asset Purchase Agreement by and among Packaged Ice, Inc. and
Ronnie Joe Evans dated December 19, 1997.(5)
10.67 Asset Purchase Agreement by and among Southwestern Ice, Inc.,
Superior Ice Company, Inc., Robert N. Pratt and John Kelly
dated December 29, 1997.(5)
10.68 Asset Purchase Agreement by and among Golden Eagle Ice-Texas,
Inc., Big "R" Ice Company, Inc., Sellit, Inc., Ratliff Bros.,
Joe D. Ratliff and Richard D. Ratliff dated December 30,
1997.(5)
10.69 Asset Purchase Agreement by and among Golden Eagle Ice-Texas,
Inc. and Simmons Poultry Farms, Inc. dated December 31,
1997.(5)
11 Computation of Income Per Common Share
21 Subsidiaries of the Company
23 Independent Auditors' Consent
27.1 Financial data schedule
99(1) Financial Statements for Mission Party Ice, Inc. and Southwest
Texas Packaged Ice, Inc. for the period January 1, 1997 to
April 16, 1997.
99(2) Financial Statements for Southwestern Ice, Inc. for the period
January 1, 1997 to April 16, 1997.
(1) Filed as an Exhibit to the Company's Registration Statement on Form
S-4 (file No. 333-29357) filed with the SEC on June 16, 1997.
(2) Filed as an Exhibit to Amendment No. 1 to the Company's Registrant
Statement No. 333-29357 on Form S-4 filed with the SEC on July 29,
1997.
(3) Filed as an Exhibit to the Company's Form 10-Q for the Quarterly
period ended September 30, 1997, filed with the SEC on November 14,
1997.
(4) Filed as an Exhibit to the Company's Form 8-K dated November 20,
1997, filed with the SEC on December 15, 1997.
(5) Filed herewith.
78
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K on October 31, 1997 regarding
the Trademark License Agreement between the Company and Culligan
Water Technologies, Inc. dated October 31, 1997 and discussions with
Culligan and other investors with respect to a possible investment in
the Company.
The Company filed a report on Form 8-K on December 15, 1997 regarding
an investment in the Company by Culligan Water and another previous
investor of the Company of $25 million.
The Company filed a report on Form 8-K on February 9, 1998 regarding
the issuance of $145,000,000 Series A Senior Notes due 2005.