**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Markone)**

| ý |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------|--------|-----------------------------------------------------------------------------------------------------|
|   |   |                                                                                                |
|   |   | **For the quarterly period ended  March 31, 2004**                                             |
|   |   |                                                                                                |
|   |   | **OR**                                                                                              |
|   |   |                                                                                                |
| o      |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition period from          to         **

 

**Commissionfile number 333-110442-04**

 

**REDDY ICE HOLDINGS, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **DELAWARE**                                                    |   | **56-2381368**                       |
|-----------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer Identification No.) |

 

**3535 TRAVIS STREET, SUITE 170**

**DALLAS, TEXAS 75204**

(Address ofprincipal executive offices)

 

**(214) 526-6740**

(Registrant’stelephone number, including area code)

 

Indicateby check mark whether the registrant (1) filed all reports required to be filedby Section 13 or 15(d) of the Exchange Act during the past 12 months (orfor 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 ý No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.  o  NotApplicable

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No ý

 

The aggregate market value of the commonequity held by non-affiliates is inapplicable as the registrant is privatelyheld.

 

The number of shares of registrant’s commonstock outstanding as of May 11, 2004 was 99,050.

 

DOCUMENTS INCORPORATED BY REFERENCE: None

 

 

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### **REDDY ICEHOLDINGS, INC. AND SUBSIDIARY**

### **QUARTERLY REPORTON FORM 10-Q**

**FOR THE PERIOD ENDED MARCH 31,2004**

 

**TABLE OF CONTENTS**

 
| **PART I – FINANCIAL  INFORMATION** |                                                                                                                                                 |
|------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                     |                                                                                                                                                 |
| *Item  1.*                               | *Condensed  Consolidated Financial Statements*                                                                                                       |   |
|                                     |                                                                                                                                                 |
|                                     | Condensed  Consolidated Balance Sheets as of March 31, 2004 (Successor)(unaudited)  and December 31, 2003 (Successor)                      |   |
|                                     |                                                                                                                                                 |
|                                     | Condensed  Consolidated Statements of Operations for the three months ended  March 31, 2004 (Successor) and 2003 (Predecessor) (each unaudited) |   |
|                                     |                                                                                                                                                 |
|                                     | Condensed  Consolidated Statement of Shareholders’ Equity as of March 31, 2004  (Successor)(Unaudited)                                     |   |
|                                     |                                                                                                                                                 |
|                                     | Condensed  Consolidated Statements of Cash Flows for the three months ended  March 31, 2004 (Successor) and 2003 (Predecessor) (each unaudited) |   |
|                                     |                                                                                                                                                 |
|                                     | Notes  to the Condensed Consolidated Financial Statements                                                                                            |   |
|                                     |                                                                                                                                                 |
| Item  2.                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                          |   |
|                                     |                                                                                                                                                 |
| Item  3.                                 | Quantitative  and Qualitative Disclosures about Market Risk                                                                                          |   |
|                                     |                                                                                                                                                 |
| Item 4.                                  | Controls and Procedures                                                                                                                              |   |
|                                     |                                                                                                                                                 |
| ***PART II – OTHER INFORMATION***   |                                                                                                                                                 |
|                                     |                                                                                                                                                 |
| Item 1.                                  | Legal Proceedings                                                                                                                                    |   |
|                                     |                                                                                                                                                 |
| Item 2.                                  | Changes in Securities,  Use of Proceeds and Issuer Purchases of Equity Securities                                                                    |   |
|                                     |                                                                                                                                                 |
| Item 3.                                  | Defaults Upon  Senior Securities                                                                                                                     |   |
|                                     |                                                                                                                                                 |
| Item  4.                                 | Submission  of Matters to a Vote of Security Holders                                                                                                 |   |
|                                     |                                                                                                                                                 |
| Item 5.                                  | Other Information                                                                                                                                    |   |
|                                     |                                                                                                                                                 |
| Item 6.                                  | Exhibits and  Reports on Form 8-K                                                                                                                    |   |
|                                     |                                                                                                                                                 |
| SIGNATURES                               |                                                                                                                                                 |
|                                          |                                                                                                                                                      |  |  |

 

----

 

**PART I -FINANCIAL INFORMATION**

 

# **Item 1.  *FinancialStatements***

# ** **

**REDDY ICE HOLDINGS, INC. ANDSUBSIDIARY**

###### **CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(SUCCESSOR)**

 
|                                                                                                                                                                                   |   | **March 31,  2004** |    | **December 31,  2003** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|-----------------------------|--------|
|                                                                                                                                                                                   |   | **unaudited**            |    |                        |   |
|                                                                                                                                                                                   |   | **(in thousands)**       |    |
| **ASSETS**                                                                                                                                                                             |   |                     |    |
|                                                                                                                                                                                   |   |                     |    |
| CURRENT  ASSETS:                                                                                                                                                                       |   |                     |    |                        |   |
| Cash  and cash equivalents                                                                                                                                                             |   | $                        | 3,921   |                        | $      | 12,801 |   |
| Accounts  receivable, net                                                                                                                                                              |   | 17,160                   |    | 18,032                      |   |
| Inventories                                                                                                                                                                            |   | 9,053                    |    | 7,846                       |   |
| Prepaid  expenses                                                                                                                                                                      |   | 1,955                    |    | 1,952                       |   |
| Assets  held for sale                                                                                                                                                                  |   | 790                      |    | 790                         |   |
| Total  current assets                                                                                                                                                                  |   | 32,879                   |    | 41,421                      |   |
| PROPERTY  AND EQUIPMENT, net                                                                                                                                                           |   | 231,970                  |    | 233,440                     |   |
| GOODWILL  AND OTHER INTANGIBLES, net                                                                                                                                                   |   | 339,223                  |    | 339,465                     |   |
| OTHER  ASSETS                                                                                                                                                                          |   | 10                       |    | 10                          |   |
| TOTAL                                                                                                                                                                                  |   | $                        | 604,082 |                        | $      | 614,336 |   |
|                                                                                                                                                                                   |   |                     |    |                        |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                         |   |                     |    |                        |   |
|                                                                                                                                                                                   |   |                     |    |                        |   |
| CURRENT  LIABILITIES:                                                                                                                                                                  |   |                     |    |                        |   |
| Current  portion of long-term obligations                                                                                                                                              |   | $                        | 1,865   |                        | $      | 1,859 |   |
| Line  of credit                                                                                                                                                                        |   | 8,650                    |    | —                      |   |
| Accounts  payable                                                                                                                                                                      |   | 10,655                   |    | 11,237                      |   |
| Accrued  expenses                                                                                                                                                                      |   | 13,824                   |    | 20,674                      |   |
| Total  current liabilities                                                                                                                                                             |   | 34,994                   |    | 33,770                      |   |
| LONG-TERM  OBLIGATIONS                                                                                                                                                                 |   | 328,647                  |    | 329,088                     |   |
| DEFERRED  TAX LIABILITIES, net                                                                                                                                                         |   | 60,160                   |    | 60,160                      |   |
| COMMITMENTS  AND CONTINGENCIES                                                                                                                                                         |   |                     |    |                        |   |
| SHAREHOLDERS’  EQUITY:                                                                                                                                                            |   |                     |    |                        |   |
|                                                                                                                                                                                   |   |                     |    |                        |   |
| Preferred  Stock, 12% Cumulative, Series A, $0.01 par value – 100,000 shares authorized,  99,050 shares issued and outstanding at March 31, 2004 and  December 31, 2003 |   | 1                        |    | 1                           |   |
|                                                                                                                                                                                   |   |                     |    |                        |   |
| Common  stock:, $0.01 par value; 300,000 shares authorized; 99,050 shares issued and  outstanding at March 31, 2004 and December 31, 2003                                    |   | 1                        |    | 1                           |   |
| Additional  paid-in capital                                                                                                                                                            |   | 196,672                  |    | 193,568                     |   |
| Unearned  compensation                                                                                                                                                                 |   | (395                     | )       | (437                        | )      |
| Accumulated  deficit                                                                                                                                                                   |   | (17,502                  | )       | (2,713                      | )      |
| Accumulated  other comprehensive income                                                                                                                                                |   | 1,504                    |    | 898                         |   |
| Total  shareholders’ equity                                                                                                                                                       |   | 180,281                  |    | 191,318                     |   |
| TOTAL                                                                                                                                                                                  |   | $                        | 604,082 |                        | $      | 614,336 |   |

 

Seenotes to condensed consolidated financial statements.

 

1

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### **REDDY ICEHOLDINGS, INC. AND SUBSIDIARY**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
|                                       |   | **Successor**                          |       | **Predecessor** |       |
|--------------------------------------------|--------|----------------------------------------|------------|-----------------|------------|
|                                       |   | **Three Months Ended  March 31,** | ** ** |
|                                       |   | **2004**                               | ** ** | **2003**        | ** ** |
|                                       |   | **(in thousands)**                     | ** ** |
|                                       |   |                                   |       |            |       |
| Revenues                                   |   | $                                      | 37,380     |            | $          | 32,567 |   |
| Cost  of sales                             |   | 28,508                                 |       | 25,791          |       |
| Gross  profit                              |   | 8,872                                  |       | 6,776           |       |
| Operating  expenses                        |   | 8,318                                  |       | 7,345           |       |
| Depreciation  and amortization expense     |   | 5,562                                  |       | 5,791           |       |
| Gain  on dispositions of assets            |   | —                                 |       | (10             | )          |
| Loss  from operations                      |   | (5,008                                 | )          | (6,350          | )          |
| Other  expense, net                        |   | —                                 |       | (10             | )          |
| Interest  expense                          |   | (6,677                                 | )          | (8,360          | )          |
| Loss  before income taxes                  |   | (11,685                                | )          | (14,720         | )          |
| Income  taxes                              |   | —                                 |       | —          |       |
| Net  loss before preferred dividends       |   | (11,685                                | )          | (14,720         | )          |
| Preferred  dividends                       |   | (3,104                                 | )          | (994            | )          |
| Net  loss available to common shareholders |   | $                                      | (14,789    | )               | $          | (15,714 | ) |

 

See notes tocondensed consolidated financial statements.

 

2

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### **REDDY ICEHOLDINGS, INC. AND SUBSIDIARY**

### **CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’EQUITY**

**(SUCCESSOR)**

**(Unaudited)**

 
|                                         |   | **Number of  Shares** |   | **Par Value** |   | **Additional** |   |       |   |        |   | **Accumulated  Other** |    |            |   |
|----------------------------------------------|--------|-----------------------|--------|---------------|--------|----------------|--------|------------|--------|-------------|--------|------------------------|---------|-----------------|--------|
|                                         |   | **Preferred**         |   | **Common**    |   | **Preferred**  |   | **Common** |   | **Paid-In** |   | **Unearned**           |    | **Accumulated** |   | **Comprehensive** |   |   |   |
|                                         |   | **Stock**             |   | **Stock**     |   | **Stock**      |   | **Stock**  |   | **Capital** |   | **Compensation**       |    | **Deficit**     |   | **Income** |   | **Total** |   |
|                                         |   | **(in  thousands)**   |   |
|                                         |   |                  |   |          |   |           |   |       |   |        |   |                   |    |            |   |   |   |   |   |
| Balance at December 31, 2003            |   | 99                    |   | 99            |   | $              | 1      |       | $      | 1           |   | $                      | 193,568 |            | $      | (437 | ) | $ | (2,713 | ) | $ | 898 |   | $ | 191,318 |   |
| Dividends on 12% cumulative preferred stock  |   | —                |   | —        |   | —         |   | —     |   | 3,104       |   | —                 |    | (3,104          | )      | — |   | — |   |
| Amortization of unearned compensation        |   | —                |   | —        |   | —         |   | —     |   | —      |   | 42                     |    | —          |   | — |   | 42 |   |
| Comprehensive loss:                          |   |                  |   |          |   |           |   |       |   |        |   |                   |    |            |   |   |   |   |   |
| Net loss                                     |   | —                |   | —        |   | —         |   | —     |   | —      |   | —                 |    | (11,685         | )      | — |   | (11,685 | ) |
| Change in fair value of derivative liability |   | —                |   | —        |   | —         |   | —     |   | —      |   | —                 |    | —          |   | 606 |   | 606 |   |
| Total comprehensive loss                     |   | —                |   | —        |   | —         |   | —     |   | —      |   | —                 |    | —          |   | — |   | (11,079 | ) |
| Balance at March 31, 2004               |   | 99                    |   | 99            |   | $              | 1      |       | $      | 1           |   | $                      | 196,672 |            | $      | (395 | ) | $ | (17,502 | ) | $ | 1,504 |   | $ | 180,281 |   |

 

See notes to condensed consolidated financial statements.

 

3

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### **REDDY ICEHOLDINGS, INC. AND SUBSIDIARY**

### **CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
|                                                                              |   | **Successor**                           |       | **Predecessor** |       |
|-----------------------------------------------------------------------------------|--------|-----------------------------------------|------------|-----------------|------------|
|                                                                              |   | **Three  Months Ended  March 31,** |       |
|                                                                              |   | **2004**                                | ** ** | **2003**        | ** ** |
|                                                                              |   | **(in  thousands)**                     | ** ** |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                            |   |                                    |       |            |       |
| Net  loss                                                                         |   | $                                       | (11,685    | )               | $          | (14,720 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities:      |   |                                    |       |            |       |
| Depreciation  and amortization                                                    |   | 5,562                                   |       | 5,791           |       |
| Amortization  of debt issue costs and debt discount                               |   | 592                                     |       | 9               |       |
| Gain  on dispositions of assets                                                   |   | —                                  |       | (10             | )          |
| Amortization  of unearned compensation                                            |   | 42                                      |       | —          |       |
| Change  in assets and liabilities:                                                |   |                                    |       |            |       |
| Accounts  receivable, inventory and prepaid expenses                              |   | (338                                    | )          | (1,272          | )          |
| Accounts  payable, accrued expenses and other                                     |   | (6,874                                  | )          | (11,986         | )          |
| Net  cash used in operating activities                                            |   | (12,701                                 | )          | (22,188         | )          |
|                                                                              |   |                                    |       |            |       |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                            |   |                                    |       |            |       |
| Property  and equipment additions                                                 |   | (3,122                                  | )          | (2,703          | )          |
| Proceeds  from disposition of property and equipment                              |   | 298                                     |       | 973             |       |
| Cost  of acquisitions                                                             |   | (1,052                                  | )          | —          |       |
| Net  cash used in investing activities                                            |   | (3,876                                  | )          | (1,730          | )          |
|                                                                              |   |                                    |       |            |       |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                            |   |                                    |       |            |       |
| Deferred  debt costs                                                              |   | (485                                    | )          | —          |       |
| Borrowings  under the credit facility, net                                        |   | 8,650                                   |       | 18,721          |       |
| Repayment  of long-term obligations                                               |   | (468                                    | )          | (22             | )          |
| Net  cash provided by financing activities                                        |   | 7,697                                   |       | 18,699          |       |
|                                                                              |   |                                    |       |            |       |
| NET  DECREASE IN CASH AND CASH EQUIVALENTS                                        |   | (8,880                                  | )          | (5,219          | )          |
| CASH  AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                   |   | 12,801                                  |       | 6,500           |       |
| CASH  AND CASH EQUIVALENTS, END OF PERIOD                                         |   | $                                       | 3,921      |            | $          | 1,281 |   |
|                                                                              |   |                                    |       |            |       |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                |   |                                    |       |            |       |
| Cash  payments for interest                                                       |   | $                                       | 9,773      |            | $          | 14,508 |   |
| Borrowings  under the credit facility                                             |   | $                                       | 11,750     |            | $          | 58,610 |   |
| Repayments  on the credit facility                                                |   | $                                       | (3,100     | )               | $          | (39,889 | ) |
|                                                                              |   |                                    |       |            |       |
| SUPPLEMENTAL  SCHEDULE OF NON-CASH INVESTING AND                             |   |                                    |       |            |       |
| FINANCING  ACTIVITIES:                                                            |   |                                    |       |            |       |
| Change  in fair value of derivative liability                                     |   | $                                       | (606       | )               | $          | (590 | ) |
|                                                                              |   |                                    |       |            |       |
| Long-term  debt incurred to purchase property and equipment and intangible assets |   | $                                       | —     |            | $          | 201 |   |

 

See notes tocondensed consolidated financial statements.

 

4

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**REDDYICE HOLDINGS, INC, AND SUBSIDIARY**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

**FORTHE THREE MONTHS ENDED MARCH 31, 2004**

**1.  General**

 

The condensed consolidated financial statements ofReddy Ice Holdings, Inc. and its wholly owned subsidiary (the “Company”)included herein are unaudited, except for the balance sheet as ofDecember 31, 2003 that has been prepared from the audited financialstatements for that date.  Thesefinancial statements have been prepared by the Company pursuant to the rulesand regulations of the Securities and Exchange Commission (“SEC”).  As applicable under the SEC’s regulations,certain information and footnote disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted.  All significant intercompany balances andtransactions have been eliminated upon consolidation, and all adjustmentswhich, in the opinion of management, are necessary for a fair presentation ofthe financial position, results of operations and cash flows for the periodscovered have been made and are of a normal and recurring nature.  Accounting measurements at interim datesinherently involve greater reliance on estimates than at year end and are notnecessarily indicative of results for the full year.  The financial statements included herein should be read inconjunction with the consolidated financial statements and the related notesthereto included in the Company’s annual report on Form 10-K for the year endedDecember 31, 2003.

 

Reddy Ice Holdings, Inc., a Delaware corporation (the“Parent”), and its wholly owned subsidiary, Cube Acquisition Corp. (“Cube”), aTexas corporation, were formed on behalf of Trimaran Fund Management LLC(“Trimaran”) and Bear Stearns Merchant Banking (“Bear Stearns”) on May 8, 2003for the purpose of acquiring Packaged Ice, Inc. (“Packaged Ice”) and effectingcertain capital transactions in connection with such acquisition.  On August 15, 2003, Cube merged withand into Packaged Ice, with Packaged Ice being the surviving corporation.  As a result of the merger, Packaged Ice wasdelisted from the American Stock Exchange. The Parent and Cube conducted no operations during the period from May 8,2003 through August 14, 2003.  Inconnection with the merger, Packaged Ice was renamed Reddy Ice Group, Inc.(“Reddy Group”).  The Parent and itswholly owned subsidiary Reddy Group are referred to collectively herein as the“Company” or “Successor”.  Packaged Iceprior to the merger on August 15, 2003 is referred to as the “Predecessor”.  As a result of purchase accounting, thePredecessor balances and amounts presented in these consolidated financialstatements and footnotes may not be comparable to the Successor balances andamounts.

 

The Company manufacturesand distributes packaged ice products and bottled water and owns and operatesrefrigerated warehouses.  The Company isthe largest manufacturer of packaged ice products in the United States.  The Company serves approximately 82,000customer locations in 32 states and the District of Columbia.

 

**2.  Stock-Based Compensation**

 

At March 31, 2004,the Company had one stock-based employee compensation plan, the Reddy IceHoldings, Inc. 2003 Stock Option Plan (the “Stock Option Plan”), under whichstock options are granted from time to time. All of the Predecessor’s stock-based compensation plans were terminatedand all in-the-money options were paid out in cash in connection with themerger on August 15, 2003 (see Notes 1 and 3).

 

The Company accounts forthe Stock Option Plan under the intrinsic value method prescribed by APBOpinion No. 25, “Accounting for Stock Issued to Employees,” and relatedInterpretations.  No stock-basedemployee compensation cost is reflected in the net loss available to commonshareholders for the three months ended March 31, 2004 as all stockoptions granted under the Stock Option Plan had an exercise price equal to orgreater than the market value of the underlying common stock on the date ofgrant.  The following table illustratesthe effect on the net loss available to common shareholders if the Company hadapplied the fair

 

5

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value recognitionprovisions of stock-based compensation as described in SFAS No. 123,“Accounting for Stock-Based Compensation,” as amended by SFAS 148, “Accountingfor Stock-Based Compensation Transition and Disclosure.”

 
|                                                    |                                                                                              | **Three  Months Ended****March 31,  2004** |    |
|---------------------------------------------------------|---------------------------------------------------------------------------------------------------|-------------------------------------------------|---------|
|                                                    |                                                                                              | **(in  thousands)**                             |    |
|                                                    |                                                                                              |                                            |    |
| Net  loss available to common shareholders, as reported |                                                                                              | $                                               | (14,789 | ) |
| Less:                                                   | Total stock-based  compensation expense determined under  fair value based methods for all awards |                                            | (22     | ) |
| Proforma  net loss available to common shareholders     |                                                                                              | $                                               | (14,811 | ) |
|                                                         |                                                                                                   |                                                 |         |  |  |

 

**3.  Acquisitions**

 

On August 15, 2003,Cube merged with and into Packaged Ice, with Packaged Ice being the survivingcorporation.  Concurrent with theclosing of the merger, Packaged Ice was named Reddy Ice Group, Inc.  The merger was consummated pursuant to theAgreement and Plan of Merger, dated as of May 12, 2003, by and among theParent, Cube and Packaged Ice.  Subsequent to the merger, all of the Company’s operations wereconducted through Reddy Group.  Themerger was accounted for as a purchase by Cube of Packaged Ice in accordancewith Statement of Financial Accounting Standards No.141, “Business Combinations.”  Total consideration was $461.0 million,including $113.0 million for common and preferred securities, $316.7 millionfor assumption of debt and revolving loans, $12.8 million for debt issue costsand $18.5 million in direct merger costs. The total purchase price was allocated to the acquired assets andassumed liabilities based upon estimates of their respective fair values as ofthe closing date using valuations and other studies. The excess of theaggregate purchase price over the liabilities assumed of $280.9 million wasallocated to property and equipment ($42.8 million), goodwill and otherintangible assets ($289.0 million), assets held for sale ($0.2 million) and netdeferred tax liabilities ($51.1 million). Other intangibles identified included customer lists, which are beingamortized over useful lives of 15 to 30 years, and a trade name.

 

The Company purchased theService Ice division of L.D. Plante, Inc. (“Service Ice”) and Triangle Ice Co.,Inc. (“Triangle Ice”) on October 1, 2003 and November 6, 2003,respectively.  The total acquisitionconsideration was $68.7 million ($3.2 for Service Ice and $65.5 for TriangleIce), which included debt issue costs of $0.7 million and direct acquisitioncosts of $0.6 million.  The excess ofthe aggregate purchase price over the net assets acquired of $56.6 million wasallocated to property and equipment ($11.9 million), goodwill and otherintangible assets ($52.7 million) and net deferred tax liabilities ($8.0million).  Other intangible assets werecomprised of customer lists, which are being amortized over useful lives of 15to 30 years.

 

The results of operationsof Service Ice and Triangle Ice are included in the Company’s consolidatedresults of operations from October 1, 2003 and November 1, 2003,respectively.  The following unauditedpro forma information presents the Predecessor’s consolidated results ofoperations for the three months ended

 

6

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March 31, 2003 as ifthe acquisitions of Packaged Ice, Service Ice and Triangle Ice had all occurredon January 1, 2003:

 
|                                       |   | **Three  Months EndedMarch 31, 2003** |   |
|--------------------------------------------|--------|--------------------------------------------|--------|
|                                       |   | **(in  thousands)**                        |   |
|                                       |   |                                       |   |
| Revenues                                   |   | $                                          | 36,109 |   |
| Net  loss available to common shareholders |   | (15,660                                    | )      |
|                                            |        |                                            |        |  |

 

During the three monthsended March 31, 2004, the Company completed three acquisitions for a totalcash purchase price of approximately $1.1 million.  Annual revenues associated with these acquisitions isapproximately $0.8 million.  Informationregarding pro forma revenues and net income (loss) available to commonshareholders has not been provided as the acquisitions are immaterialindividually and in the aggregate.

 

**4.  Inventories**

 

Inventories contain rawmaterials, supplies and finished goods. Raw materials and supplies consist of ice packaging materials, spareparts, bottled water supplies and merchandiser parts.  Finished goods consist of packaged ice and bottled water.  Inventories are valued at the lower of costor market basis.  Cost is determinedusing the first-in, first-out and average cost methods.

 
|                        |   | **March 31,  2004** |   | **December 31,  2003** |   |
|-----------------------------|--------|--------------------------|--------|-----------------------------|--------|
|                        |   | **(in thousands)**       |   |
|                        |   |                     |   |                        |   |
| Raw  materials and supplies |   | $                        | 6,589  |                        | $      | 6,310 |   |
| Finished  goods             |   | 2,464                    |   | 1,536                       |   |
| Total                       |   | $                        | 9,053  |                        | $      | 7,846 |   |

 

**5.  Accrued Expenses**

 
|                                        |   | **March 31,  2004** |       | **December 31,  2003** |   |
|---------------------------------------------|--------|--------------------------|------------|-----------------------------|--------|
|                                        |   | **(in  thousands)**      | ** ** |
|                                        |   |                     |       |
| Accrued  compensation and employee benefits |   | $                        | 6,034      |                        | $      | 8,090 |   |
| Accrued  interest                           |   | 2,658                    |       | 6,346                       |   |
| Derivative  liability                       |   | 1,858                    |       | 2,464                       |   |
| Accrued  property and sales taxes           |   | 1,672                    |       | 1,128                       |   |
| Accrued  utilities                          |   | 838                      |       | 1,029                       |   |
| Other                                       |   | 764                      |       | 1,617                       |   |
| Total                                       |   | $                        | 13,824     |                        | $      | 20,674 |   |

 

7

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**6.  Line of Credit andLong-Term Obligations**

 

On July 17, 2003, Cube completed the sale of$152 million of 8-7/8% Senior Subordinated Notes due August 1, 2011(the “Senior Notes”).  The Senior Noteswere issued in connection with a private placement offering and weresubsequently registered with the SEC. The Senior Notes were sold at 99.297% of the stated principal amount,which resulted in net proceeds of $150.9 million.  At the closing of the merger on August 15, 2003, Reddy Groupassumed Cube’s obligations under the Senior Notes and the related indenture andreceived the net proceeds of the offering. The net proceeds were used to consummate the merger as discussed in Notes1 and 3, which included the repayment of the Predecessor’s $255 millionaggregate principal amount of 9-3/4% Senior Notes due February 1, 2005 andthe outstanding balance of $61.7 million under its bank credit facility.

 

Interest on the Senior Notes is payable semiannuallyon February 1 and August 1, commencing on February 1, 2004.  In conjunction with issuance of the SeniorNotes, $7.0 million of debt issuance costs were incurred.  The Senior Notes are unsecured seniorsubordinated obligations of Reddy Group and are:

 

•                  subordinated inright of payment to all of Reddy Group’s existing and future seniorindebtedness;

 

•                  equal with anyof the Reddy Group’s existing and future senior subordinated indebtedness; and

 

•                  senior to anyother of Reddy Group’s future subordinated indebtedness, if any.

 

The Senior Notes include customary covenants thatrestrict, among other things, the ability to incur additional debt, paydividends or make certain other restricted payments, incur liens, merge or sellall or substantially all of the assets, or enter into various transactions withaffiliates.  Prior to August 1,2006, Reddy Group may redeem up to 35% of the principal amount of the notes ata redemption price of 108.875% of the principal amount thereof, plus accrued andunpaid interest to the date of redemption, with funds raised in specifiedequity offerings.

 

The Senior Notes****are guaranteed, fully, jointly andseverally, and unconditionally, on a senior subordinated basis by the Parentand all of Reddy Group’s subsidiaries (the “Subsidiary Guarantors”).  There are currently no restrictions on theability of the Subsidiary Guarantors to transfer funds to Reddy Group in theform of cash dividends, loans or advances. Condensed consolidating financial statements for the Parent and itswholly-owned subsidiary are not presented as the Parent has no significantindependent assets or operations. Condensed consolidating financial statements for Reddy Group and itssubsidiaries, all of which are wholly owned, are not presented as Reddy Grouphas no significant independent assets or operations.  Reddy Group has no subsidiaries that do not guarantee the SeniorNotes.

 

On August 15, 2003, Reddy Group entered into a$170 million senior secured credit facility, with the lenders being a syndicateof banks, financial institutions and other entities, including Credit SuisseFirst Boston as Administrative Agent, Canadian Imperial Bank of Commerce andBear Stearns Corporate Lending, Inc. (the “Credit Facility”).  The Credit Facility provides for a six-yearterm loan in the amount of $135 million (the “Original Term Loan”) and afive-year revolving credit facility (the “Line of Credit”) in the amount of$35 million.  Proceeds of theOriginal Term Loan were used to consummate the merger as discussed in Note3.  On November 6, 2003, the CreditFacility was amended to provide a Supplemental Term Loan (together with theOriginal Term Loan, referred to as the “Term Loans”) in the amount of $45million, the proceeds of which were used to fund a portion of the Triangle Iceacquisition (see Note 3).  TheSupplemental Term Loan has substantially the same terms as the Original TermLoan.

 

At March 31, 2004, the Company had $17.0 millionof availability under the Line of Credit, net of outstanding standby letters ofcredit of $9.3 million.  The standbyletters of credit are used primarily to secure certain insurance obligations.

 

8

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Principal balances outstanding under the CreditFacility bear interest per annum, at Reddy Group’s option, at the sum of thebase rate plus the applicable margin or LIBOR plus the applicable margin.  The base rate is defined as the greater ofthe prime rate (as announced from time to time by the Administrative Agent) orthe federal funds rate plus 0.5%.  Theapplicable margin is different for revolving and term loans and variesdepending on Reddy Group’s leverage ratio. On February 20, 2004, the Credit Facility was amended to reduce theapplicable margin on term loans by 0.5%. At March 31, 2004, the weighted average interest rate of borrowingsoutstanding under the Credit Facility was 3.69%.  Interest on base rate loans is payable on the last day of eachquarter.  Interest on LIBOR loans ispayable upon maturity of the LIBOR loan or on the last day of the quarter ifthe term of the LIBOR loan exceeds 90 days. Reddy Group pays a quarterly fee on the average availability under theLine of Credit based on an annual rate of 0.5%.

 

The Credit Facility requires that beginning in 2004, ReddyGroup will repay all borrowings under the Line of Credit and maintain a zerooutstanding balance for a period of 30 consecutive calendar days during eachyear.  The Term Loans amortize inquarterly installments over a five-year period in an annual aggregate amountequal to 1% of the original balance, with any remaining unpaid balance to berepaid in the sixth year in equal, quarterly installments.  Subject to certain conditions, mandatoryrepayments of the Line of Credit and Term Loans are required to be made withportions of the proceeds from (1) asset sales, (2) the issuance ofdebt securities (3) an initial public offering of stock of theParent,  and (4) insurance andcondemnation awards.  Furthermore,within 100 days after close of the each fiscal year (beginning with the closeof the 2004 fiscal year), a mandatory prepayment of the Term Loans is requiredin an amount equal to a certain percentage of Reddy Group’s annual excess cashflow, as defined in the Credit Facility. The percentage is based on Reddy Group’s leverage ratio at the end ofsuch fiscal year and ranges from 25% to 75%.

 

The Credit Facility contains financial covenants whichinclude limitations on capital expenditures and the maintenance of certainfinancial ratios, as defined in the Credit Facility, and is collateralized bysubstantially all of Reddy Group’s assets and the capital stock of all of itssignificant subsidiaries.  AtMarch 31, 2004, Reddy Group was in compliance with these covenants.

 

On November 28, 2000, the Predecessor enteredinto an interest rate collar agreement (the “Collar Agreement”), which remainedin effect after the merger.  Under theCollar Agreement, if the Index Rate (30-day LIBOR, as defined in the CollarAgreement) exceeds 7.75%, Reddy Group will receive the difference between theIndex Rate and 7.75%.  If the Index Ratefalls below 5.75%, Reddy Group will pay the difference plus 1%.  Any amounts payable or receivable are settledmonthly.  The Collar Agreement has anotional amount of $50 million and a term of 4 years.  When Reddy Group’s debt was refinanced on August 15, 2003,$0.3 million of amounts previously deferred in accumulated other comprehensiveloss on the balance sheet were written off as the hedged, forecastedtransaction was no longer deemed probable of occurring.  The Collar Agreement was redesignated as ahedge of the new Credit Facility, with subsequent changes in fair valuedeferred in other comprehensive income or loss.

 

If Reddy Group had been required to settle the CollarAgreement as of March 31, 2004, it would have had to pay $1.9 million plusaccrued interest of $0.2 million.  ReddyGroup is exposed to credit risk in the event of nonperformance by thecounterparty to the Collar Agreement, however it anticipates that thecounterparty will fully perform its obligations under the Collar Agreement.

 

9

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At March 31, 2004and December 31, 2003, long-term obligations consisted of the following:

 
|                                                          |   | **March 31,  2004** |       | **December 31,  2003** |   |
|---------------------------------------------------------------|--------|--------------------------|------------|-----------------------------|--------|
|                                                          |   | **(in thousands)**       | ** ** |
|                                                          |   |                     |       |
| 8-7/8%  Senior Notes                                          |   | $                        | 152,000    |                        | $      | 152,000 |   |
| Less:  Unamortized debt discount on 8-7/8% Senior  Notes |   | (980                     | )          | (1,013                      | )      |
| Credit  facility – term loans                            |   | 179,100                  |       | 179,550                     |   |
| Other                                                         |   | 392                      |       | 410                         |   |
| Total  long-term obligations                                  |   | 330,512                  |       | 330,947                     |   |
| Less:  Current maturities                                |   | 1,865                    |       | 1,859                       |   |
| Long-term  obligations, net                                   |   | $                        | 328,647    |                        | $      | 329,088 |   |

 

**7.  Capital Stock**

 

*Common Stock.******* **The Company is authorized to issueup to 300,000 shares of common stock, par value $0.01 per share.  Holders of the Company’s common stock areentitled to one vote per share on all matters to be voted on by shareholdersand are entitled to receive dividends, if any, as may be declared from time totime by the Board of Directors of the Company. Upon any liquidation or dissolution of the Company, the holders ofcommon stock are entitled, subject to any preferential rights of the holders ofpreferred stock, to receive a pro rata share of all of the assets remainingavailable for distribution to shareholders after payment of all liabilities.  As of March 31, 2004, 11,434 shares ofcommon stock were reserved for issuance under the Reddy Ice Holdings, Inc. 2003Stock Option Plan.

 

*Preferred Stock.** ***The Company is authorized to issueup to 200,000 shares of $0.01 par value preferred stock, consisting of 100,000shares of Series A Cumulative Redeemable Preferred Stock (“Series A PreferredStock”) and 100,000 shares of preferred stock that is currentlyundesignated.  The liquidationpreference per share of the Series A Preferred Stock is equal to the sum of (a)$1,000 plus (b) the amount of all accumulated but unpaid dividends on suchshares.  The holders of the outstandingshares of Series A Preferred Stock immediately preceding the dividend paymentdate shall be entitled to receive dividends, as declared by the Board ofDirectors, at a rate per annum equal to 12% of the liquidation amount pershare.  All dividends are cumulative,whether or not earned or declared, accruing on a daily basis from the issuedate and shall be payable in cash quarterly in arrears on each dividend paymentdate commencing on November 15, 2003. If the Company does not pay the cash dividends on a quarterly basis, allunpaid dividends will be added to the liquidation amount in respect of suchshares on each dividend payment date. If the Company fails to make a liquidation payment following theoccurrence of a liquidation event or default, as defined in the agreement, theper annum dividend rate will be increased by 2% per annum during thecontinuation of any such event or default. In the event of liquidation, theholders of the Series A shares are entitled to an amount in cash equal to theliquidation amount for each share. The Company may redeem the Series A sharesat its option in whole at any time or in part from time to time, subject torestrictions as defined in the agreement. Series A holders are not entitled orpermitted to vote on any matter upon which the holders of common stock arerequired or permitted to vote upon.

 

10

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**8.  Commitments and Contingencies**

 

The Company is involvedin various claims, lawsuits and proceedings arising in the ordinary course ofbusiness.  There are uncertaintiesinherent in the ultimate outcome of such matters and it is impossible topresently determine the ultimate costs that may be incurred.  Other than those lawsuits described below,management believes the resolution of such uncertainties and the incurrence ofsuch costs will not have a material adverse effect on the Company’s consolidatedfinancial position, results of operations or cash flows.

 

The Company is a party toa lawsuit in connection with an ammonia release at its Baton Rouge, Louisianamanufacturing facility in June 2001. The case, which is a consolidation of seven lawsuits, is titled WallaceAcey, Jr. et al vs. Reddy Ice Corporation. This lawsuit was filed August 30, 2001 in the 19th JudicialDistrict Court, Parish of East Baton Rouge, Louisiana and has been assigned docketnumber 487373 Division N.  There aremultiple plaintiffs who have primarily alleged injuries consisting ofinconvenience, watery eyes and offensive odors.  The plaintiffs have not made a specific request for relief in thelawsuit.  The Company maintainsinsurance to cover such events and its insurance carrier is contesting the suitand plans to vigorously defend against any claims.

 

The Company is a party totwo lawsuits filed in connection the merger. The first lawsuit was filed on May 23, 2003 in the County Court at LawNumber 1, Dallas County, Texas and is titled Cause No. *CC-03-06056-A; Glenn Robbins, On Behalf of Himselfand All Others Similarly Situated, and Derivatively on Behalf of Packaged Ice,Inc. vs. William P. Brick, Jimmy C. Weaver, A.J. Lewis III, Tracy L. Noll,Robert G. Miller, Steven P. Rosenberg and Richard A. Coonrod, Defendants, andPackaged Ice, Inc., a Texas corporation*.  The second lawsuit was filed on May 23, 2003 in County Court atLaw Number 3, Dallas County, Texas, and is titled Cause No. CC-03-06055-C, *Imperial County, On Behalf of Itself and All OthersSimilarly Situated, and Derivatively on Behalf of Packaged Ice, Inc. vs.William P. Brick, Jimmy C. Weaver, A.J. Lewis III, Tracy L. Noll, Robert G.Miller, Steven P. Rosenberg and Richard A. Coonrod, Defendants, and PackagedIce, Inc., a Texas corporation*. The two lawsuits are identical adversarial proceedings filed by twoshareholders on their own behalf, on behalf of a purported class, andderivatively on behalf of Packaged Ice, Inc., now known as Reddy Group.  The plaintiffs allege various breaches offiduciary duty by the Board of Directors of Reddy Group and unjust enrichmentrelated to the merger.  The claimsallege that Reddy Group failed to maximize shareholder value in the mergertransaction.  No specific amount ofdamages has been claimed.  Reddy Grouphas answered both suits and filed a Motion to Consolidate, Special Exceptions,and Motion to Dismiss, or, in the alternative, Motion to Stay in the Robbinsaction.  The Company has also filed aMotion to Stay and Special Exception and Motion to Dismiss in the ImperialCounty action.  The plaintiffs filedResponses in Opposition to these motions on July 16, 2003.  Based on those filings, Reddy Group removedboth cases to the United States District Court for the Northern District ofTexas Dallas Division on July 25, 2003.  Plaintiffs opposed removaland filed motions to remand as to both actions on August 21, 2003. The Court remanded the actions to state court on February 19, 2004.

 

These lawsuits are stillin a preliminary stage and the ultimate outcomes are impossible to determine atthis time.  An unfavorable result inexcess of the available insurance coverage could have a material adverse effecton the Company’s consolidated financial position, results of operations or cashflows.

 

**9. Segment Information**

 

The Company has tworeportable segments: (1) ice products and (2) non-ice products andservices.  Ice products include themanufacture and distribution of packaged ice products through traditional icemanufacturing and delivery and THE ICE FACTORY®.  The Ice Factory is a proprietary machine that produces, packages,stores and merchandises ice at the point of sale through an automated,self-contained

 

11

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system.  Non-ice products and services includerefrigerated warehouses and the manufacturing and distribution of bottledwater.

 

The Company evaluatesperformance of each segment based on earnings before interest, taxes,depreciation, amortization, gain or loss on disposition of assets, impairmentof assets, gain on extinguishment of debt and the cumulative effect of changesin accounting principles (“Segment EBITDA”). Segment assets are not a factor in the evaluation of performance.  There were no intersegment sales during thethree months ended March 31, 2004 and 2003.  Segment information for the three months ended March 31,2004 and 2003 was as follows:

 

For the Three MonthsEnded March 31, 2004:

 
|                |   | **Successor**       |       |
|---------------------|--------|---------------------|------------|
|                |   | **Ice**             |       | **Non-Ice** |   | **Total** |   |
|                |   | **(in  thousands)** | ** ** |
|                |   |                |       |   |   |   |   |
| Revenues            |   | $                   | 33,581     |   | $ | 3,799 |   | $ | 37,380 |   |
| Cost  of sales      |   | 26,250              |       | 2,258 |   | 28,508 |   |
| Gross  profit       |   | 7,331               |       | 1,541 |   | 8,872 |   |
| Operating  expenses |   | 7,840               |       | 478 |   | 8,318 |   |
| Other  expense, net |   | —              |       | — |   | — |   |
| Segment  EBITDA     |   | $                   | (509       | ) | $ | 1,063 |   | $ | 554 |   |

 

For the Three MonthsEnded March 31, 2003:

 
|                |   | **Predecessor**     |       |
|---------------------|--------|---------------------|------------|
|                |   | **Ice**             |       | **Non-Ice** |   | **Total** |   |
|                |   | **(in  thousands)** | ** ** |
|                |   |                |       |   |   |   |   |
| Revenues            |   | $                   | 28,134     |   | $ | 4,433 |   | $ | 32,567 |   |
| Cost  of sales      |   | 22,763              |       | 3,028 |   | 25,791 |   |
| Gross  profit       |   | 5,371               |       | 1,405 |   | 6,776 |   |
| Operating  expenses |   | 6,639               |       | 706 |   | 7,345 |   |
| Other  expense, net |   | (10                 | )          | — |   | (10 | ) |
| Segment  EBITDA     |   | $                   | (1,278     | ) | $ | 699 |   | $ | (579 | ) |

 

12

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A reconciliation ofSegment EBITDA to net loss before preferred dividends for the three monthsended March 31, 2004 and 2003 is as follows:

 
|                                 |   | **Successor**                           |          | **Predecessor** |   |
|--------------------------------------|--------|-----------------------------------------|---------------|-----------------|--------|
|                                 |   | **Three  Months Ended  March 31,** |          |
|                                 |   | **2004**                                |          | **2003**        |   |
|                                 |   | **(in  thousands)**                     |          |
|                                 |   |                                    |          |            |   |
| Segment  EBITDA                      |   | $                                       | 554           |            | $      | (579 | ) |
| Depreciation  and amortization       |   | (5,562                                  | )             | (5,791          | )      |
| Gain  on dispositions of assets      |   | —                                  |          | 10              |   |
| Interest  expense, net               |   | (6,677                                  | )             | (8,360          | )      |
| Income  taxes                        |   | —                                  |          | —          |   |
| Net  loss before preferred dividends |   | $                                       | (11,685  | )               | $      | (14,720 | )  |

 

**10. Subsequent Events**

 

During the period ofApril 1, 2004 to May 11, 2004, the Company completed the acquisition ofthree ice companies for a total cash purchase price of approximately $4.1million.  The combined annual revenuefor the acquired businesses is approximately $5 million.

 

13

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# **Item 2.  *Management’sDiscussion and Analysis of Financial Condition and Results of Operations***

# ** **

The following discussion and analysis of our financialcondition and results of operations should be read in conjunction with ourconsolidated financial statements and the related notes and other informationincluded elsewhere in this Form 10-Q and our Annual Report on Form 10-K for theyear ended December 31, 2003, previously filed with the Securities &Exchange Commission (“SEC”).

 

# **Uncertainty ofForward Looking Statements and Information**

# ** **

Other than statements ofhistorical facts, statements made in this Form 10-K, statements made by us inperiodic press releases or oral statements made by our management to analystsand shareholders within the meaning of such terms under the Private SecuritiesLitigation Reform Act of 1995 and statements made in the course ofpresentations about our company, constitute “forward-looking statements.”  We believe the expectations reflected insuch forward-looking statements are accurate. However, we cannot assure you that such expectations will occur.  These forward-looking statements involveknown and unknown risks, uncertainties and other factors that may cause ouractual results, performance or achievements to be materially different fromfuture results expressed or implied by the forward-looking statements.  Factors you should consider that could causethese differences are:

 

•                  generaleconomic trends and seasonality;

•                  weatherconditions;

•                  oursubstantial leverage and ability to service our debt;

•                  therestrictive covenants under our indebtedness;

•                  availabilityof capital sources;

•                  fluctuationsin operating costs;

•                  competitivepractices in the industry in which we compete;

•                  changesin labor conditions;

•                  ourcapital expenditure requirements;

•                  therisks associated with acquisitions and the failure to integrate acquiredbusinesses;

•                  technologicalchanges and innovations;

•                  legislativeor regulatory requirements; and

•                  allthe other factors described herein under “Risk Factors.”

 

You should not unduly relyon these forward-looking statements as they speak only as of the date of thisreport.  Except as required by law, weare not obligated to publicly release any revisions to these forward lookingstatements to reflect events or circumstances occurring after the date of thisreport or to reflect the occurrence of unanticipated events.  Important factors that could cause ouractual results to differ materially from our expectations are discussedelsewhere in this report.

 

**General**

** **

We are the largestmanufacturer and distributor of packaged ice in the United States and currentlyserve approximately 82,000 customer locations in 32 states and the District ofColumbia.  We operate in two businesssegments—ice products and non-ice products and operations.  Ice products accounted for approximately 90%of our revenues in the three months ended March 31, 2004 and 86% ofrevenues in the three months ended March 31, 2003.  Due to acquisitions of certain ice companiesin the fourth quarter of 2003 (see “-Acquisitions” below), the proportion ofour ice sales has increased.  We expectthe annual proportion of ice sales to increase from 92% in 2003 toapproximately 93% - 94% in 2004.  Ourice products business consists of the following two activities:

 

•the traditional manufacture and delivery of ice from a central point ofproduction to the point of sale; and

 

14

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•the installation and operation of the Ice Factory, our proprietary equipmentlocated in our customers’ high volume locations that produces, packages andstores ice through an automated, self-contained system.

 

Our other businesssegment, non-ice products and operations, consists of refrigerated warehousingfor third parties and the manufacture and sale of bottled water.  This business segment accounted for 10% ofour revenues in the three months ended March 31, 2004 and 14% of revenuesin the three months ended March 31, 2003. As noted above, the proportion of sales due to our non-ice segment hasdecreased due to the acquisition of ice companies in the fourth quarter of 2003(see “-Acquisitions” below).  On anannual basis, we expect this percentage to decrease from 8% in 2003 toapproximately 6% - 7% in 2004.

 

***Revenues****. *Our revenuesprimarily represent sales of packaged ice, packaged ice bags for use in our IceFactory equipment, bottled water and cold storage services.  There is no right of return with respect tothese products or services.  A portionof our revenue also represents fees earned under management agreements for IceFactories located outside our primary territories that are recognized asearnings under contract terms.

 

***Cost of Sales****. *Ourcost of sales includes costs associated with labor, raw materials, productdelivery and utilities related to the manufacture and distribution of ourproducts.  Labor costs, includingassociated payroll taxes and benefit costs included in cost of sales, accountedfor approximately 35% of sales in the three months ended March 31, 2004and 2003.  Raw materials consist primarilyof polyethylene-based plastic bags, which represented approximately 7% of salesin the three months ended March 31, 2004 and 2003.  Product delivery expenses include labor,fuel and vehicle rental expense related to products delivered by our own distributionnetwork, as well as fees paid to distributors who deliver ice to our customerson our behalf.  Fuel purchased fordelivery by our own distribution network represented approximately 3% of salesin the three months ended March 31, 2004 and 2003.  Expenses for independent third partydistribution services represented approximately 4% of sales in the three monthsended March 31, 2004 and 2003. Utility expenses consist primarily of electricity used in connectionwith the manufacturing, storage and distribution processes and representedapproximately 7% of sales in the three months ended March 31, 2004 and2003.  Ice Factory revenues do notincrease our plant occupancy, delivery or utility costs, however, we do incurcosts associated with customer service representatives and machine technicianswhich are included in our cost of sales.

 

***Operating Expenses****. *Ouroperating expenses are costs associated with selling, general andadministrative functions.  These costsinclude executive officers’ compensation, office and administrative salaries,insurance, legal and other professional services and costs associated withleasing office space.  Labor costs,including associated payroll taxes and benefit costs, included in operatingexpenses represented approximately 14% and 13% of sales in the three monthsended March 31, 2004 and 2003, respectively.

 

Our results of operationsare highly seasonal, characterized by peak demand during the warmer months ofMay through September, with an extended peak selling season in the southernUnited States.  As a result of thisseasonality and the fixed costs in our business, the proportion of revenuesearned in our ice and non-ice business segments and the ratio of costs torevenues in any given quarter are not necessarily indicative of the ratios fora full year.  Revenues within specificmarkets can also be affected by weather conditions, with cool or rainy weathernegatively impacting demand and extremely hot weather increasing our costs aswe respond to excess customer demand for our products.  Approximately 68%, 68% and 66% of ourrevenues occurred during the second and third calendar quarters in 2001, 2002and 2003, respectively.  We believe thatapproximately 68% of our revenues will occur during the second and thirdcalendar quarters in 2004.  As a resultof seasonal revenue declines and a less than proportional decline in expensesduring the first and fourth quarters, we typically experience lower profitmargins resulting in losses during these periods.  In addition, because a significant portion of our annual salesare generated during the second and third calendar quarters, our annual resultsof operations may fluctuate significantly if the weather during these periodsis cool or rainy.

 

15

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***Acquisitions.**** *OnOctober 1, 2003, we, acquired the “Service Ice” division of L.D. Plante,Inc. (“Service Ice”) for total consideration of $3.1 million (subject tocustomary post-closing adjustments). Service Ice operated one ice manufacturing facility in Orlando, Floridaand was the largest supplier of packaged ice in Orlando with annual revenues ofapproximately $3.8 million.  OnNovember 6, 2003, we purchased all of the outstanding shares of capitalstock of Triangle Ice Co., Inc. (“Triangle Ice”) for an aggregate purchaseprice of approximately $64.3 million (subject to customary post-closingadjustments).  Triangle Ice operatesprimarily in North and South Carolina and had annual revenues of approximately$30 million.  During the three monthsended March 31, 2004, we completed three acquisitions for a total purchaseprice of $1.1 million.  Annual revenueassociated with these acquisitions is approximately $0.8 million.

 

At March 31, 2004, we owned or operated 55 icemanufacturing facilities, 52 distribution centers, approximately 79,000merchandisers (cold storage units installed at customer locations),approximately 3,000 Ice Factories, six refrigerated warehouses and one bottledwater plant.  We had an aggregate dailyice manufacturing capacity of approximately 16,000 tons, the equivalent of 4.5million seven pound bags of ice.

 

On August 15, 2003,Packaged Ice, Inc. merged with Cube Acquisition Corp., a wholly-ownedsubsidiary of Reddy Ice Holdings, Inc. (the “Merger”).  Packaged Ice was the surviving corporation,changed its name to Reddy Ice Group, Inc. and became a wholly-owned subsidiaryof Reddy Holdings, which was established on May 8, 2003.  The following discussion of the results ofoperations for the three months ended March 31, 2004 versus the threemonths ended March 31, 2003 is based on the results of Packaged Ice forthe three months ended March 31, 2003 and Reddy Holdings for the threemonths ended March 31, 2004.  ReddyHoldings and Cube Acquisition conducted no operations from May 8, 2003 throughAugust 14, 2003.  Reddy Holdingsand Reddy Group are collectively referred to as the ‘‘Successor”.  Packaged Ice prior to the Merger is referredto as the “Predecessor”.  Because ofpurchase accounting, certain amounts may not be comparable between thePredecessor and Successor.

 

16

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***Three Months Ended March 31, 2004 Compared to ThreeMonths Ended March 31, 2003***

 
|                                   |   | **Successor**                                 |    | **Predecessor**            |   |        |   |   |   |
|----------------------------------------|--------|-----------------------------------------------|---------|----------------------------|--------|-------------|--------|--------|--------|
|                                   |   | **Three  Months Ended  March 31,**       |    | **Change from  Last Year** |   |
|                                   |   | **2004**                                      |    | **2003**                   |   | **Dollars** |   | **%**  |   |
|                                   |   | **(in  thousands, except per share amounts)** |    |
|                                   |   |                                          |    |                       |   |        |   |   |   |
| **Consolidated Results**               |   |                                          |    |                       |   |        |   |   |   |
| Revenues                               |   | $                                             | 37,380  |                       | $      | 32,567      |   | $      | 4,813  |   | 14.8 |   |
| Cost  of sales                         |   | 28,508                                        |    | 25,791                     |   | 2,717       |   | 10.5   |   |
| Gross  profit                          |   | 8,872                                         |    | 6,776                      |   | 2,096       |   | 30.9   |   |
| Operating  expenses                    |   | 8,318                                         |    | 7,345                      |   | 973         |   | 13.2   |   |
| Depreciation  and amortization expense |   | 5,562                                         |    | 5,791                      |   | (229        | )      | (4.0   | )      |
| Gain  on dispositions of assets        |   | —                                        |    | (10                        | )      | 10          |   | (100.0 | )      |
| Income  from operations                |   | (5,008                                        | )       | (6,350                     | )      | 1,342       |   | 21.1   |   |
| Other  expense, net                    |   | —                                        |    | (10                        | )      | 10          |   | (100.0 | )      |
| Interest  expense                      |   | (6,677                                        | )       | (8,360                     | )      | (1,683      | )      | (20.1  | )      |
| Loss  before income taxes              |   | (11,685                                       | )       | (14,720                    | )      | 3,035       |   | 20.6   |   |
| Income  taxes                          |   | —                                        |    | —                     |   | —      |   | — |   |
| Loss  before preferred dividends       |   | $                                             | (11,685 | )                          | $      | (14,720     | )      | $      | 3,035  |   | 20.6 |   |
|                                   |   |                                          |    |                       |   |        |   |   |   |
| **Ice Operations:**                    |   |                                          |    |                       |   |        |   |   |   |
| Revenues                               |   | $                                             | 33,581  |                       | $      | 28,134      |   | $      | 5,447  |   | 19.4 |   |
| Cost  of sales                         |   | 26,250                                        |    | 22,763                     |   | 3,487       |   | 15.3   |   |
| Gross  profit                          |   | 7,331                                         |    | 5,371                      |   | 1,960       |   | 36.5   |   |
| Operating  expenses                    |   | 7,840                                         |    | 6,639                      |   | 1,201       |   | 18.1   |   |
|                                   |   |                                          |    |                       |   |        |   |   |   |
| **Non-Ice Operations:**                |   |                                          |    |                       |   |        |   |   |   |
| Revenues                               |   | $                                             | 3,799   |                       | $      | 4,433       |   | $      | (634   | ) | (14.3 | ) |
| Cost  of sales                         |   | 2,258                                         |    | 3,028                      |   | (770        | )      | (25.4  | )      |
| Gross  profit                          |   | 1,541                                         |    | 1,405                      |   | 136         |   | 9.7    |   |
| Operating  expenses                    |   | 478                                           |    | 706                        |   | (228        | )      | (32.3  | )      |

 

*Revenues: *Revenues increased $4.8 million from the threemonths ended March 31, 2003 to the three months ended March 31,2004.  This increase is primarily due tothe acquisitions of Service Ice and Triangle Ice in October 2003 andNovember 2003, respectively.  Theseacquisitions provided additional revenue of $4.1 million in the three monthsended March 31, 2004.  Excludingthe effects of the Service Ice and Triangle Ice acquisitions, revenues in ourice business increased $1.3 million, which was primarily driven by volumeincreases.  Offsetting the improvedrevenues in our ice business was a decline of $0.6 million in our non-iceoperations.  The decline was causedprimarily by a reduction in volumes in our cold storage operations as a resultof the restructuring of a certain customer contract in the second quarter of2003.

 

*Cost of Sales:*  Cost of sales increased $2.7 million fromthe three months ended March 31, 2003 to the three months endedMarch 31, 2004.  This increase incost of sales is primarily due to (i) $3.2 million of costs in the three monthsended March 31, 2004 associated with the operations acquired from ServiceIce and Triangle Ice, (ii) a $0.3 million increase in costs in our other iceoperations related to increased volume sales noted above, offset by the eliminationof certain operating lease expenses associated with our Ice Factories and (iii)a $0.8 million decrease in costs of sales associated with our non-iceoperations.  The decrease in costs inour non-ice operations is due to headcount reductions and the restructuring ofa certain cold storage customer contract in the second quarter of 2003, whichresulted in a reduction in cold storage volumes.

 

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*Operating Expenses: *Operating expensesincreased $1.0 million from the three months ended March 31, 2003 to thethree months ended March 31, 2004. This increase is primarily due to $0.9 million of costs in the threemonths ended March 31, 2004 attributable to the operations of Service Iceand Triangle Ice.

 

*Depreciation and Amortization: *Depreciation andamortization decreased $0.2 million from the three months ended March 31,2003 to the three months ended March 31, 2004.  This decrease is primarily due to the revaluation of our propertyand equipment in connection with the Merger on August 15, 2003, offset byadditional depreciation and amortization expense of $0.8 million associatedwith the Service Ice and Triangle Ice acquisitions.

 

*Interest Expense:*  Interest expense decreased $1.7 million fromthe three months ended March 31, 2003 to the three months endedMarch 31, 2004.  This decrease isprimarily due to lower average outstanding borrowings under our line of creditand lower average interest rates, which resulted from the refinancing of ourdebt on August 15, 2003.

 

**Liquidity and CapitalResources**

** **

We generate cash from thesale of packaged ice through traditional delivery methods, by which we****manufacture,package and store ice at a central facility and transport it to our customers’retail****locationswhen needed, and through Ice Factories, which manufacture, package and storeice in ourcustomers’ retail locations. Our primary uses of cash are (a) cost of sales, (b) operating expenses,****(c)debt service, (d) capital expenditures related to replacing and modernizing thecapital****equipmentin our traditional ice plants and acquiring and installing additional IceFactories and (e) acquisitions. ** **Historically,we have financed our capital and working capital requirements, including ouracquisitions, through a combination ofcash flows from operations, borrowings under our revolving credit facilitiesand operating leases.

 

During the three monthsended March 31, 2004, capital expenditures totaled $3.1 million.  We estimate that our capital expendituresfor 2004 will approximate $15 million, which includes the effect of allacquisitions closed through May 11, 2004, and will primarily be used tomaintain and expand our traditional ice operations.  There can be no assurance that capital expenditures will notexceed this estimate.  As we haveconsolidated acquisitions into the existing company infrastructure, we haveidentified non-core and excess assets which can be disposed of.  From time to time, we also dispose of otherassets which are no longer useful in our operations.  As a result of dispositions of these non-core and excess assets,we realized proceeds of approximately $0.3 million in the three months endedMarch 31, 2004 and estimate that we will generate total proceeds ofapproximately $1.5 million to $2.0 million in 2004.

 

During the three months ended March 31, 2004, wecompleted the acquisition of three small ice companies for a total cashpurchase price of approximately $1.1 million. During the period April 1, 2004 to May 11, 2004, we have completedanother three acquisitions for a total cash purchase price of approximately$4.1 million.  We will continue toevaluate small acquisition opportunities as they become available.  In conjunction with these evaluations, wewill consider our liquidity, availability under our revolving line of credit,mandatory principal repayments under our debt agreements and availability ofother capital resources.

 

### **CashFlows for the Three Months Ended March 31, 2004 and 2003**

### ** **

Net cash used byoperating activities was $12.7 million and $22.2 million the three months endedMarch 31, 2004 and the three months ended March 31, 2003,respectively.  The increase from 2003 to2004 was a result of improved results of operations and a reduction in cashflows used by changes in working capital. In the three months ended March 31, 2003, changes in workingcapital accounts used cash of $13.3 million, primarily related to the paymentof accrued incentive compensation earned in 2002 and the payment of accruedinterest on our 9-3/4% senior notes.  Inthe three months ended March 31, 2004, changes in working capital accountsused $7.2 million of cash, which was primarily due to the payment of incentivecompensation amounts that were accrued in 2003 and the payment of accruedinterest on our 8-7/8% senior notes.

 

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Net cash used ininvesting activities was $3.9 million and $1.7 million in the three monthsended March 31, 2004 and the three months ended March 31, 2003,respectively.  The increase in cash usedby investing activities from 2003 to 2004 is primarily due to the expenditureof $1.1 million in the three months ended March 31, 2004 for three smallacquisitions of ice companies and a reduction of $0.7 million in proceedsgenerated from the sale of excess and non-core assets.

 

Net cash provided byfinancing activities was $7.7 million and $18.7 in the three months endedMarch 31, 2004 and the three months ended March 31, 2003,respectively.  Borrowings under our lineof credit decreased from $18.7 million in the three months ended March 31,2003 to $8.7 million in the three months ended March 31, 2004 due to thenet decrease in cash flows used in operating and investing activities discussedabove and the higher balance of cash on hand at the beginning of the threemonths ended March 31, 2004 as compared to the three months endedMarch 31, 2003.  Cash on hand was$12.8 million and $6.5 million at December 31, 2003 and 2002,respectively.  In the three months endedMarch 31, 2004, we also incurred $0.5 million of debt issuance costs inconnection with the execution of the second amendment to our credit facilityand made principal payments on our debt that were $0.4 million greater than inthe three months ended March 31, 2003.

 

### **Long-termDebt and Other Obligations**

### ** **

At March 31, 2004,we had approximately $339.2 million of total debt outstanding as follows:  $151.0 million of Reddy Group’s 8-7/8%senior notes due August 1, 2011 (net of discount of $1.0 million);  $179.1 million outstanding term loans underReddy Group’s senior credit facility which matures on August 15, 2009;$8.7 million outstanding on Reddy Group’s line of credit which matures onAugust 15, 2008; and $0.4 million of other debt.

 

On July 17, 2003, weissued $152.0 million of 8-7/8% senior subordinated notes.  These notes were issued in connection with aprivate placement offering and were subsequently registered with the Securities& Exchange Commission.  The 8-7/8%senior subordinated notes were sold at 99.297% of the stated principal amount,which resulted in net proceeds of $150.9 million.  Interest on the 8-7/8% senior subordinated notes is payablesemiannually on February 1 and August 1, commencing onFebruary 1, 2004.  The 8-7/8%senior subordinated notes are unsecured obligations of Reddy Group and are:

 

• subordinated in right of payment toall of Reddy Group’s existing and future senior indebtedness;

• equal with any of Reddy Group’sexisting and future senior subordinated indebtedness; and

•senior to any other of Reddy Group’s future subordinated indebtedness, if any.

 

The 8-7/8% seniorsubordinated notes include customary covenants that restrict, among otherthings, the ability to incur additional debt, pay dividends or make certainother restricted payments, incur liens, merge or sell all or substantially allof the assets or enter into various transactions with affiliates.  Prior to August 1, 2006, we may redeemup to 35% of the principal amount of the 8-7/8% senior subordinated notes at aredemption price of 108.875% of the principal amount thereof, plus accrued andunpaid interest to the date of redemption, with funds raised in equityofferings that are specified in the indenture governing the 8-7/8% seniorsubordinated notes.

 

The 8-7/8% seniorsubordinated notes are guaranteed, fully, jointly and severally, andunconditionally, on a senior subordinated basis by Reddy Holdings, and all ofReddy Group’s subsidiaries.  The termsof the indenture governing the 8-7/8% senior subordinated notes significantlyrestrict Reddy Group from paying dividends and otherwise transferring assets toReddy Holdings.  For example, ReddyGroup’s ability to make such payments is governed by a formula based on 50% ofits consolidated net income.  Inaddition, as a condition to making such payments based on such formula, ReddyGroup must have an EBITDA to interest expense ratio of a at least 2.0 to 1.0prior to August 1, 2006, and 2.25 to 1 thereafter, after giving effect toany such payments.  Notwithstanding suchrestrictions, the indenture permits an aggregate of $10.0 million of suchpayments to be made whether or not there is availability under the formula orthe conditions to its use are met;

 

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provided that at the timeof such payment, no default shall have occurred and be continuing under thatindenture.

 

On August 15, 2003,Reddy Group entered into a $170 million senior credit facility, with thelenders being a syndicate of banks, financial institutions and other entities,including Credit Suisse First Boston as Administrative Agent, Canadian ImperialBank of Commerce and Bear Stearns Corporate Lending, Inc.  The credit facility provides for a six-yearterm loan in the amount of $135 million and a five-year revolving creditfacility in the amount of $35 million. Proceeds of the term loan were used to consummate the Merger aspreviously discussed.  OnOctober 17, 2003, the senior credit facility was amended to, among otherthings, allow for an additional term loan of $45 million to consummate theTriangle Ice acquisition, which was completed on November 6, 2003.  The new term loan contains substantially allthe same terms, conditions and financial covenants as the original term loan.

 

At March 31, 2004,we had $17.0 million of availability under the line of credit, net ofoutstanding standby letters of credit of $9.3 million. The standby letters ofcredit are used primarily to secure certain insurance obligations.  As our insurance policies are renewed in 2004,we may be required to increase the balances of the standby letters of credit.

 

Principal balancesoutstanding under the line of credit bear interest per annum, at our option, atthe sum of the base rate plus the applicable margin or LIBOR plus theapplicable margin. The base rate is defined as the greater of the prime rate(as announced from time to time by the Administrative Agent) or the federalfunds rate plus 0.5%.  The applicablemargin is different for revolving and term loans and varies depending on ourleverage ratio.  On February 20,2004, the senior credit facility was amended to reduce the applicable margin onterm loans by 0.5%.  At March 31,2004, the weighted average interest rate of borrowings outstanding under thesenior credit facility was 3.69%. Interest on base rate loans is payable on the last day of eachquarter.  Interest on LIBOR loans ispayable upon maturity of the LIBOR loan or on the last day of the quarter ifthe LIBOR loan exceeds 90 days.

 

The terms of the seniorcredit facility prohibit Reddy Group from paying dividends and otherwisetransferring assets to Reddy Holdings, except for certain limited dividends,the proceeds of which must be used to maintain Reddy Holdings’ corporateexistence.

 

The senior creditfacility requires that beginning in 2004, we will repay all borrowings underthe line of credit and maintain a zero outstanding balance for a period of 30consecutive calendar days during each year. The term loan amortizes in quarterly installments over a five-year periodin an annual aggregate amount equal to 1% of the original balance, with anyremaining unpaid balance to be repaid in the sixth year in equal, quarterlyinstallments.  Subject to certainconditions, mandatory repayments of the line of credit and term loan arerequired to be made with portions of the proceeds from (1) asset sales, (2) theissuance of debt securities, (3) an initial public offering of stock of ReddyHoldings and (4) insurance and condemnation awards.  Furthermore, within 100 days after close of each fiscal year(beginning with the close of the 2004 fiscal year), a mandatory prepayment ofthe term loan is required based on a percentage of Reddy Group’s annual excesscash flow, as defined in the senior credit facility.  The percentage is based on Reddy Group’s leverage ratio at theend of such fiscal year and ranges from 25% to 75%.  The senior credit facility contains financial covenants whichinclude limitations on capital expenditures and the maintenance of certainfinancial ratios, as defined in the credit agreement, and is collateralized bysubstantially all of its assets and the capital stock of it and all of itscurrent subsidiaries.  At March 31,2004, we were in compliance with these covenants.

 

On November 28,2000, we entered into an interest rate collar agreement.  If the Index Rate (30-day LIBOR, as definedin the collar agreement) exceeds 7.75%, we will receive the difference betweenthe Index Rate and 7.75%.  If the IndexRate falls below 5.75%, we will pay the difference plus 1%.  Any amounts payable or receivable aresettled monthly.  The collar agreementhas a notional amount of $50.0 million and a term of 4 years.  When our debt was refinanced onAugust 15, 2003, $0.3 million of amounts previously deferred inaccumulated other comprehensive loss on the balance sheet were written off asthe hedged, forecasted transaction was no longer deemed probable ofoccurring.  The collar agreement wasredesignated as a hedge of the senior credit facility, with subsequent changesin fair value deferred in other comprehensive

 

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income or loss.  If we had been required to settle the collaragreement as of March 31, 2004, we would have had to pay $1.9 million plusaccrued interest of $0.2 million.  Weare exposed to credit risk in the event of nonperformance by the counterpartyto the collar agreement, however we anticipate that the counterparty will fullyperform its obligations under the collar agreement.

 

Based on our expectedlevel of operations, we believe that cash flow from operations, together withavailable borrowings under our line of credit, will be adequate to meet ourfuture liquidity needs for at least the next twelve months.  As of May 11, 2004, we had approximately $14million of availability under our line of credit.  We expect availability to increase slightly through June 30,2004.

 

Due to the seasonalnature of our business, we record the majority of our sales and profits duringthe months of May through September. The majority of the cash generated from those operations is receivedbetween July and November.  Duringthose months we expect to repay all amounts currently outstanding under theline of credit, fund current capital expenditures, service our debt (includingprincipal and interest payments) and build up cash on hand.  We anticipate that a significant portion ofsuch cash flow will be used in early 2005 to repay amounts outstanding underthe senior credit facility as required by mandatory prepayment provisions inthe senior credit facility.

 

**Critical AccountingPolicies**

** **

*Allowances for Doubtful Accounts.*  We maintain allowances for doubtful accountsfor estimated losses resulting from the inability of our customers to make therequired payments on their accounts.  Wehave attempted to reserve for these estimated losses based on our pastexperience with similar accounts receivable and believe our reserves to beadequate.  If the financial condition ofour customers were to deteriorate, resulting in an impairment of their abilityto make payments on their accounts, additional allowances may be required.

 

*Long-Lived Assets.*  Property and equipment is carried at costand is being depreciated on a straight-line basis over estimated lives of 2.5to 40 years.  Maintenance and repairsare charged to expense as incurred, while capital improvements that extend theuseful lives of the underlying assets are capitalized.  We accounted for all of our historicalacquisitions using the purchase method of accounting and as a result recordedsignificant amounts of goodwill.  Otherintangible assets include the following that are amortized over their usefullives:

 
| **Intangible Assets**   |   | **Useful  Life**                                            |
|-------------------------|--------|-------------------------------------------------------------|
| Goodwill                |   | Indefinite life                                             |
| Trade  name             |   | Indefinite life                                             |
| Customer  relationships |   | Straight line method  over economic lives of 15 to 30 years |
| Debt  issue costs       |   | Interest method over  the term of the debt                  |

 

*Impairment of Long-Lived Assets.*  In accordance with SFAS No. 144, “Accountingfor Impairment or Disposal of Long-Lived Assets,” long-lived assets and certainidentifiable intangible assets to be held and used are reviewed for impairmenton an annual basis or whenever events or changes in circumstances indicate thatthe carrying amount of such assets may not be recoverable.  The determination of recoverability oflong-lived assets and certain other identifiable intangible assets is based onan estimate of undiscounted future cash flows resulting from the use of theasset or its disposition.  Measurementof an impairment loss for long-lived assets and other intangible assets thatmanagement expects to hold and use are based on the fair value of theasset.  Long-lived assets to be disposedof are reported at the lower of carrying amount or net realizable value.  In accordance with SFAS No. 142, “Goodwilland Other Intangible Assets,” goodwill is evaluated using a market valuationapproach based on valuations of comparable businesses.

 

Inherent in thedetermination of such future cash flows and valuations are certain estimatesand judgements, including the interpretation of current economic indicators andmarket values and assumptions about our strategic plans with regards to ouroperations.  To the extent additionalinformation arises or our

 

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strategies change,it is possible that our conclusions regarding the impairment of goodwill orother long-lived assets could change and result in a material effect on ourfinancial position or results of operations.

 

*Revenue Recognition.*  Revenue is recognized when product (packagedice, ice packaging bags, bottled water and ice equipment) is delivered to andaccepted by customers.  There is noright of return with respect to the packaged ice, bags delivered and bottledwater.  Revenue resulting from IceFactory management agreements and cold storage services is recognized as earnedunder contract terms.

 

### **General Economic Trends and Seasonality**

### ** **

Our results of operationsare generally affected by the economic trends in our market area, but resultsto date have not been significantly impacted by inflation.  If we experience an extended period of highinflation, which affects multiple expense items, we believe that we will beable to pass on these higher costs to our customers.  The ice business is highly seasonal.  We experience seasonal fluctuations in our net sales andprofitability.  We make adisproportionate amount of our sales in the second and third calendarquarters.  We also typically have netincome in these same periods.  Webelieve that over two-thirds of our revenues will occur during the second andthird calendar quarters when the weather conditions are generally warmer anddemand is greater, while less than one-third of our revenues will occur duringthe first and fourth calendar quarters when the weather is generally cooler.  As a result of seasonal revenue declines andthe lack of proportional corresponding expense decreases, we will most likelyexperience lower profit margins and even losses during the first and fourthcalendar quarters.  In addition, becauseour operating results depend significantly on sales during our peak season, ourquarterly results of operations may fluctuate significantly as a result ofadverse weather during this peak selling period if the weather is unusuallycool or rainy on a more national or regional basis.

 

### **Risks Relating to Our Indebtedness**

### ** **

***Our substantialleverage and debt service obligations could harm our ability to operate ourbusiness and make payments on our indebtedness.***

 

We are highly leveraged and have significant debtservice obligations.  As ofMarch 31, 2004, we had total debt of approximately $339.2 million andtotal shareholders’ equity of $180.3 million. Our substantial level of indebtedness increases the possibility that wemay be unable to generate cash sufficient to repay principal amounts orinterest when due or repay other amounts due in respect of our indebtedness.

 

Our substantial debt could have other importantconsequences to you, including the following:

 

• we will berequired to use a substantial portion, if not all, of our free cash flow from operationsto pay principal and interest on our debt, and our level of debt may restrictus from raising additional financing on satisfactory terms to fund workingcapital, strategic acquisitions, investments, joint ventures and other generalcorporate requirements;

 

• our interestexpense could increase if interest rates in general increase, because asubstantial portion of our debt will bear interest at floating rates and wecannot assure you that we will be able to effectively hedge againstfluctuations in interest rates or that such hedging activities will not resultin payments by us;

 

• oursubstantial leverage will increase our vulnerability to general economicdownturns and adverse competitive and industry conditions and could place us ata competitive disadvantage compared to those of our competitors that are lessleveraged;

 

• our debtservice obligations could limit our flexibility in planning for, or reactingto, changes in our business; and

 

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• our failureto comply with the financial and other restrictive covenants in the indenturegoverning the senior subordinated notes, as well as the credit agreementgoverning our senior credit facility, which require us to maintain specifiedfinancial ratios and limit our ability to incur debt and sell assets, couldresult in an event of default that, if not cured or waived, could harm ourbusiness or prospects and could result in our bankruptcy.

 

***We could incur moreindebtedness, which may increase the risks associated with our substantialleverage, including our ability to service our indebtedness.***

 

The indenture governing the senior subordinated notesand our senior credit facility permit us, under certain circumstances, to incura significant amount of additional indebtedness. In addition, we may incuradditional indebtedness through our revolving credit facility.  If we incur additional debt, the risksassociated with our substantial leverage, including our ability to service ourdebt, would increase.

 

***Our ability toservice our indebtedness requires a significant amount of cash, and our abilityto generate cash depends on many factors beyond our control.***

 

We cannot be certain that our earnings and theearnings of our operating subsidiaries will be sufficient to allow us to makepayments in respect of the securities and meet our other obligations.  Our ability to generate cash from ouroperations is subject to weather, general economic, financial, competitive,legislative, regulatory and other factors that are beyond our control.  As a result, we cannot assure you that ourbusiness will generate sufficient cash flow from operations in amountssufficient to enable us to make payments in respect of the securities or serviceour debt and to fund our other liquidity needs.  If we do not have sufficient liquidity, we will have to takeactions such as reducing or delaying strategic acquisitions, investments andjoint ventures, selling assets, restructuring or refinancing our debt orseeking additional equity capital.  Wecannot assure you that any of these remedies could, if necessary, be effectedon commercially reasonable terms, or at all. In addition, the terms of existing or future debt instruments, includingthe credit agreement governing our senior credit facility and the indenture forthe subordinated notes, may restrict us from adopting some of thesealternatives.  Therefore, because ofthese and other factors beyond our control, we may be unable to pay dividendsor service our debt.

 

***If we fail to meetour payment or other obligations under our senior credit facility, the lendersunder the senior credit facility could foreclose on, and acquire control of,substantially all of our assets.***

 

The lenders under the our senior credit facilityreceived a pledge of all of our equity interests of Reddy Group and its currentsubsidiaries.  Additionally, theselenders have a lien on substantially all of our assets.  As a result of these pledges and liens, ifwe fail to meet our payment or other obligations under our senior creditfacility, those lenders are entitled to foreclose on substantially all of ourassets and liquidate those assets.

 

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***Risks Relating to Our Business***

 

***Our failure to successfully compete could adversely affectour prospects and financial results.***

 

Our businesses are highlycompetitive.  We have many competitorsin each of our geographic markets offering similar products and services.  Competition in our businesses is basedprimarily on service, quality and price. If we fail to successfully compete against our competitors in any ofthese areas, our business will be adversely affected.  There are low barriers to entry in the ice industry and we couldbe adversely affected by any expansion of capacity by our existing competitorsor by new entrants in our markets. Retaining existing customers and obtaining new customers is important toour future performance.  If we fail to adequatelyserve our existing base of customers, our financial performance will benegatively impacted.  We could also beadversely affected if our larger grocery or convenience store customers decideto manufacture their own ice rather than purchase our products.

 

***The seasonal nature of the ice business results in lossesand lower profit margins in the first and fourth quarters of the year.***

 

We experience significantseasonal fluctuations in our net sales and profitability.  We make a disproportionate amount of oursales in the second and third calendar quarters when the weather is generallywarmer, which results in an increased demand for ice.  We also earn our net income during these same periods.  As a result of seasonal revenue declines andthe lack of a corresponding decrease in expenses, we experience net losses andmaterially lower profit margins during the first and fourth calendarquarters.  Variations in demand couldhave a material adverse effect on the timing of our cash flows and thereforeour ability to service our obligations with respect to our indebtedness,including the securities.  In addition,because our operating results depend significantly on sales during the secondand third calendar quarters, our results of operations may fluctuatesignificantly if the weather during these periods is cool or rainy.

 

***The results of our operations may be adversely affected byweather.***

 

Cool or rainy weather candecrease sales, while extremely hot weather may increase our expenses, eachresulting in a negative impact on our operating results and cash flow.  Ice consumers demand ice for a variety ofreasons, but many of them buy ice in connection with outdoor relatedactivities, both commercial and recreational. As a result, demand for ice increases during periods of warm, sunnyweather, and conversely, demand decreases during periods of cool, rainyweather.  During extended periods ofcool or rainy weather on a national basis, our revenues and resulting netincome may substantially decline.  Hotweather does not necessarily result in greater net income.  During extended periods of hot weather, ourprofits and cash flow may decline because of an increase in expenses inresponse to excess demand.  We may haveto transport ice from one plant to another and, in some cases, purchase icefrom third party sources and transport it to a specific market to meet thisexcess demand, resulting in higher expenses and inconsistent service andproduct quality.

 

***Increases in the prices of electricity, certain rawmaterials, insurance and other required expenses could have an adverse effecton our results of operations.***

 

We use substantialamounts of electricity in connection with our manufacturing process. Increasesin market rates for electricity could have an adverse impact on ouroperations.  Our business is alsosensitive to increases in the cost of fuel required to operate the refrigeratedtrucks we use to deliver ice and to increases in the cost of polyethylene,which is the primary raw material used to manufacture the bags we use topackage our ice.  Our business issensitive to increases in insurance costs, including in the areas of generalliability, workers compensation, health and vehicle insurance.  We have already experienced increases infuel costs, bag costs and insurance costs and may experience further increasesin the future.  If the prices for theseitems or other expenses should increase significantly, we will incur additionalcosts that we may not be able to pass along to our customers.  There can be no assurance that significantchanges in the prices of electricity, polyethylene, fuel, insurance or othercommodities would not have a material adverse effect on our business, resultsof operations and cash flows.

 

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***We could incur substantial costs as a result of violationsof or liabilities under environmental laws.***

 

Our ice manufacturing andcold storage operations are subject to a wide range of environmental laws andregulations governing, among other things, air emissions, wastewaterdischarges, the use, management and disposal of hazardous and non-hazardousmaterials and wastes and the cleanup of contamination.  Non compliance with such laws andregulations, or incidents resulting in environmental releases, could cause usto incur substantial costs, including cleanup costs, fines and penalties, thirdparty claims for personal injury, investments to retrofit or upgrade ourfacilities and programs or curtailment of our operations.  For example, our ice manufacturing and coldstorage operations use refrigerants such as ammonia and freon.  Several of our ammonia facilities have notyet implemented certain required elements of risk and safety managementprograms mandated under applicable laws. Other facilities may not be in compliance with certain freon refrigerantrequirements, such as leak detection and repair, recordkeeping orreporting.  In addition, the marketprice of freon is rising as a result of phase outs under federal laws, whichcould significantly increase our operating costs in the future if we are notable to obtain approved substitutes. From time to time, our use of ammonia has resulted in releases that havetemporarily disrupted our manufacturing operations and resulted in lawsuits oradministrative penalties.  We arecurrently involved in litigation resulting from an ammonia release inJune 2001 at our Baton Rouge, Louisiana facility. See Part II, Item 1 –“Legal Proceedings”.  We cannot assureyou that we will not incur material environmental costs or liabilities in thefuture or that such costs or liabilities will not have a material adverseeffect on our business, financial condition or results of operations.

 

***Government laws and regulations could have an adverse effecton our results of operations.***

 

Like any food company, weare subject to various federal, state and local laws relating to many aspectsof our business, including labeling, sanitation, health and safety andmanufacturing processes.  We cannotpredict the types of government regulations that may be enacted in the future bythe various levels of government or how existing or future laws or regulationswill be interpreted or enforced.  Theenactment of more stringent laws or regulations or a stricter interpretation ofexisting laws and regulations may require additional expenditures by us, someof which could be material.

 

***If we are unable to retain senior executives and attract andretain other qualified employees, our business might be adversely affected.***

 

Our success depends inpart on our ability to attract, hire, train and retain qualified managerial,sales and marketing personnel. Competition for these types of personnel is high.  We may be unsuccessful in attracting andretaining the personnel we require to conduct our operations successfully and,in such an event, our business could be materially and adversely affected.  Our success also depends to a significantextent on the continued service and performance of our senior management teamand in particular on the continued service of William P. Brick, our Chairmanand Chief Executive Officer, and Jimmy C. Weaver, our President and ChiefOperating Officer.  The loss of anymember of our senior management team could impair our ability to execute ourbusiness plan and could therefore have a material adverse effect on our business,results of operations and financial condition.

 

***Our acquisitions may not be successfully integrated andcould cause unexpected financial difficulties.***

 

We anticipate that wemay, from time to time, selectively acquire additional businesses, assets orsecurities of companies that we believe would provide a strategic fit with ourbusiness.  Acquired businesses will needto be integrated with our existing operations. There can be no assurance that we will effectively assimilate thesecompanies into our business.  Anyacquisitions will also be accompanied by risks, such as potential exposure tounknown liabilities of acquired companies and the possible loss of keyemployees and customers of the acquired business.  Acquisitions are also subject to risks associated with thedifficulty and expense of integrating the operations and personnel of theacquired companies, the potential disruption to our business and the diversionof management time and attention.  Inaddition, as a result of future acquisitions, we may increase our debtlevel.  Our failure to adequately managethe risks associated with any acquisitions could have a material adverse effecton our financial condition or results of operations.

 

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We acquired Service Icein October 2003 and Triangle Ice in November 2003.  These acquisitions have been integrated intoour operations.  Although theintegration efforts are complete, these operations have only been a part of ourcompany for a short period of time and may still result in potential disruptionto our business and the diversion of management’s time and attention.  From January 1, 2004 through May 11,2004, we have completed 6 additional acquisitions.  Although the size of the recently acquired operations is notsignificant, they may still be source of disruption for our business anddiversion for our management.  Materialdisruptions or diversions due to these acquisitions, particularly in the caseof Triangle Ice, could have a material adverse effect on our business.

 

***Accidents involving our products and equipment could exposeus to product liability claims.***

 

We are subject to a riskof product liability claims and adverse publicity if a consumer is or claims tobe harmed while using our products or equipment.  Any such claim may result in negative publicity, loss of revenuesor higher costs associated with litigation. We currently carry product liability insurance that we believe isadequate to cover our losses in these situations.  However, this insurance may be insufficient to pay for all or alarge part of these losses.  If ourinsurance does not adequately cover these losses, our results of operations andcash flow would decrease and such a decrease could be material.

 

***We may lose customers’ business to competitors as a resultof our limited intellectual property protection, including on The Ice Factory.***

 

As the sole major icesupplier using an on-site production and delivery system at our customers’retail locations, we have enjoyed a competitive advantage over ourcompetitors.  Our proprietary Ice Factory system is preferred by certainof our high volume customers to traditional ice delivery and gives us moreflexibility during peak seasons.  In2001, a competitor began testing a machine similar to the Ice Factory incertain of its markets.  Although thecompetitor has not deployed its machine to a significant degree, if thiscompetitor or any new competitors are successful with the rollout of acompeting system, we could lose business to these companies, which would resultin decreased cash flows and results of operations.  It is also our practice to protect certain of our proprietarymaterials and processes by relying on trade secrets laws and non-disclosure andconfidentiality agreements.  There canbe no assurance that confidentiality or trade secrets will be maintained orthat others will not independently develop or obtain access to such materialsor processes.

 

***We are party to two lawsuits related to the Merger, which ifdetermined adversely to us, could result in the imposition of damages againstus and could harm our business and financial condition.***

 

We have been served withtwo complaints asserting putative class action lawsuits in Texas in connectionwith the Merger.  In addition, we may besubject to other lawsuits in connection with the Merger that have not yet beenfiled.  In the event that the currentlawsuits with respect to the Merger are not dismissed or decided in our favoror we become subject to additional suits, these lawsuits could result in theimposition of damages against us or even the rescission of the Merger andrelated transactions.  In the event thatdamages are awarded, our business and financial condition could be harmed. SeePart II, Item 1 – “Legal Proceedings”.

 

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***We are controlled by our sponsors and their affiliates,whose interests in our business may be different from yours.***

 

By reason of oursponsors’ and their affiliates’ ownership of us and their collective ability,pursuant to a stockholders agreement among our stockholders, to designate amajority of the members of the board of directors, our sponsors will controlactions to be taken by us and our board of directors, including amendments toour certificate of incorporation and by-laws and approval of significantcorporate transactions, including mergers and sales of substantially all of ourassets.  The interests of our sponsorsand their affiliates will likely differ from yours in material respects.

 

### **ITEM 3.  Quantitative andQualitative Disclosures About Market Risks**

### ** **

Market risk generally represents the risk that losses may occur in thevalue of financial instruments as a result of movements in interest rates,foreign currency exchange rates and commodity prices.

 

On November 28,2000, we entered into an interest rate collar agreement (the “CollarAgreement”).  The Collar Agreement has anotional amount of $50 million and a term of 4 years.  If the Index Rate (30-day LIBOR, as defined in the CollarAgreement) exceeds 7.75%, we will receive the difference between the Index Rateand 7.75%.  If the Index Rate fallsbelow 5.75%, we will pay the difference plus 1%.  If we had been required to settle the Collar Agreement as ofMarch 31, 2004, we would have had to pay $1.9 million plus accrued interestof $0.2 million.

 

We are exposed to somemarket risk due to the floating interest rates under our senior creditfacility.  Principal balancesoutstanding under the line of credit bear interest, at our option, at theLondon Inter-Bank Offered Rate (“LIBOR”) plus 3.5% or the prime rate (asannounced from time to time by the administrative agent) plus 1.5%.  The term loans bear interest, at our option,at LIBOR plus 2.5% or the prime rate plus 1.5%.

 

As of March 31,2004, the senior credit facility had an outstanding principal balance of $187.8million at a weighted average interest rate of 3.69% per annum.  Due to our interest rate collar agreement,the effect of a change in interest rates on our interest expense depends on thelevel of LIBOR rates.  At March 31,2004, the 30-day LIBOR rate was 1.1%.

 

The following table showsthe approximate annual increase in interest expense given the current principalbalances on all of our debt if LIBOR were to increase by 1% from the initiallevels indicated below:

 
| **Initial LIBOR Rate**                           |   | **Increase  in the  LIBOR rate** |   | **Estimated  Annual Impact** |        |
|--------------------------------------------------|--------|----------------------------------|--------|------------------------------|-------------|
|                                             |   |                             |   | **(in  thousands)**          |        |
|                                             |   |                             |   |                         |        |
| Less  than or equal to 4.5%                      |   | 1%                               |   | $                            | 1,291       |   |   |
|                                             |   |                             |   |                         |        |   |   |
| Greater  than 4.5%, less than or equal to 5.75%  |   | 1%                               |   | $                            | 1,541       |   |   |
|                                             |   |                             |   |                         |        |   |   |
| Greater  than 5.75%, less than or equal to 6.75% |   | 1%                               |   | $                            | 1,791       |   |   |
|                                             |   |                             |   |                         |        |   |   |
| Greater  than 6.75%, less than or equal to 7.75% |   | 1%                               |   | $                            | 1,541       |   |   |
|                                             |   |                             |   |                         |        |   |   |
| Greater  than 7.75%                              |   | 1%                               |   | $                            |  1,291 |   |   |

 

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**Item4*.  Controls and Procedures***

 

Under the supervision andwith the participation of our management, including our chief executive officerand our chief financial officer, we have evaluated the effectiveness of thedesign and operation of our disclosure controls and procedures as defined inRule 13a-15(e) of the Securities Exchange Act of 1934. These controls andprocedures are designed to ensure that material information relating to thecompany and its subsidiaries is communicated to the chief executive officer andthe chief financial officer.  Based onthat evaluation, our chief executive officer and our chief financial officerconcluded that, as of March 31, 2004, our disclosure controls andprocedures are effective to ensure that information disclosed by us in reportsthat we file or submit with the Securities Exchange Commission is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms.

 

There were no changes inour internal control over financial reporting during the first quarter endedMarch 31, 2004, that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

### **PART II - OTHER INFORMATION**

### ** **

**Item1.  *Legal Proceedings***

 

We are from time to timeparty to legal proceedings that arise in the ordinary course of business.  We do not believe that the resolution of anythreatened or pending legal proceedings will have a material adverse affect onour financial position, results of operations or liquidity.

 

We are a party to alawsuit in connection with an ammonia release at our Baton Rouge, Louisianamanufacturing facility in June 2001. The case, which is a consolidation of seven lawsuits, is titled *WallaceAcey, Jr. et al vs. Reddy Ice Corporation* and was reported on ourForm 10-K for the fiscal year ended December 31, 2003.  Since that report, there have been nomaterial developments.

 

We are a party to twolawsuits filed in connection the Merger. The first lawsuit was filed on May 23, 2003 and is titled Cause No. *CC-03-06056-A; Glenn Robbins, On Behalf of Himselfand All Others Similarly Situated, and Derivatively on Behalf of Packaged Ice,Inc. vs. William P. Brick, Jimmy C. Weaver, A.J. Lewis III, Tracy L. Noll,Robert G. Miller, Steven P. Rosenberg and Richard A. Coonrod, Defendants, andPackaged Ice, Inc., a Texas corporation*.  The second lawsuit was filed on May 23, 2003 and is titled CauseNo. CC-03-06055-C, *Imperial County, OnBehalf of Itself and All Others Similarly Situated, and Derivatively on Behalfof Packaged Ice, Inc. vs. William P. Brick, Jimmy C. Weaver, A.J. Lewis III,Tracy L. Noll, Robert G. Miller, Steven P. Rosenberg and Richard A. Coonrod,Defendants, and Packaged Ice, Inc., a Texas corporation*.  The two lawsuits are identical adversarialproceedings filed by two shareholders on their own behalf, on behalf of apurported class, and derivatively on behalf of Packaged Ice, Inc., now known asReddy Ice Group, Inc.  The plaintiffsallege various breaches of fiduciary duty by our Board of Directors and unjustenrichment related to the Merger.  Theclaims allege that we failed to maximize shareholder value in the Mergertransaction.  These cases were reportedon our Form 10-K for the fiscal year ended December 31, 2003.  Since that report, there have been nomaterial developments.

 

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**Item2.  *Changes in Securities******, Use of Proceeds and IssuerPurchases of Equity Securities***

 

On February 3, 2004,we issued options to purchase 60 shares of our common stock to each our twoindependent directors in consideration for their service on our board ofdirectors, pursuant to our 2003 Stock Option Plan.  The issuance of the options is exempt from registration pursuantto Regulation 201 under the Securities Act of 1933, as amended.

 

**Item3.  *Defaults Upon Senior Securities***

 

None.

 

**Item4.  *Submission of Matters to a Vote of Security Holders***

 

None

 

**Item5.  *Other Information***

** **

None.

 

**Item6.  *Exhibits and Reports on Form 8-K***

** **

**(a) Exhibits**:

 

The following is alist of exhibits filed as part of this Form 10-Q.  Where so indicated by footnote, exhibits, which were previouslyfiled, are incorporated by reference.

 
| **Exhibit No.** |   | **Description**                                                                                                                                       |
|-----------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                  |
| 31.1†      |   | William P. Brick  Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.  |
| 31.2†      |   | Steven J. Janusek  Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |

 

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†                                                      Filedherewith.

 

**(b)  Reports on Form8-K:**

 

Reddy Ice Holdings, Inc.(the “Company”) furnished a report on Form 8-K to the Securities & ExchangeCommission (“SEC”) on March 3, 2004 to provide:  (i) a copy of the Company’s press release issued on February 25,2004 to announce (a) its financial results for the quarter endedDecember 31, 2003 and for the period from May 8, 2003 to December 31,2003 and (b) its earnings guidance for the first quarter ending March 31,2004 and the twelve months ending December 31, 2004, (ii) a copy of thetranscript of the Company’s conference call held with investors onFebruary 25, 2004 and (iii) a copy of the Second Amendment to the CreditAgreement among Reddy Ice Group, Inc. and certain of the Lenders, dated as ofFebruary 20, 2004.

 

The Company furnished areport on Form 8-K/A to the SEC on March 22, 2004 to provide a revisedpress release dated February 25, 2004 to reflect certain revised amountsin the “Condensed Consolidated Balance Sheet Data”.

 

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### **SIGNATURES**

### ** **

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|               |   | **REDDY ICE HOLDINGS, INC.**            |
|--------------------|--------|-----------------------------------------|
|               |   |                                    |
|               |   |                                    |
| Date: May 11, 2004 | By:    | /s/ WILLIAM P. BRICK                    |   |
|               |   | William P. Brick                        |
|               |   | Chief  Executive Officer                |
|               |   |                                    |
|               |   |                                    |
| Date: May 11, 2004 | By:    | /s/ STEVEN J. JANUSEK                   |   |
|               |   | Steven J. Janusek                       |
|               |   | Chief Financial and  Accounting Officer |

 

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