**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

**(Mark one)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**For the quarterly period ended March 31, 2007**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934

For the transition period from *              *to *              *

Commission file number 001-32596

**REDDY ICEHOLDINGS, INC.**

(Exact name ofregistrant as specified in its charter)

| **DELAWARE**                     |   | **156-2381368**                       |
|----------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)  |   | ** **                            |

 

**8750 N. CENTRALEXPRESSWAY, SUITE 1800**

**DALLAS, TEXAS 75231**

(Address of principalexecutive offices)

**(214) 526-6740**

(Registrant’s telephonenumber, including area code)

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theExchange Act during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x   No o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one): Large accelerated filer o  Accelerated filer x  Non-acceleratedfiler  ̈

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

Thenumber of shares of registrant’s common stock outstanding as of April 24,2007 was 21,809,395.

 

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**REDDY ICE HOLDINGS,INC. AND SUBSIDIARYQUARTERLY REPORT ON FORM 10-QFOR THE PERIOD ENDED MARCH 31, 2007**

**TABLEOF CONTENTS**

|                    | ** ** | ** **                                                                                                                | ** ** | **Page** | ** ** |
|--------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| *** ***       |       | **PART I—FINANCIAL  INFORMATION**                                                                               |       |     |       |   |   |
| Item  1.           | * *   | Condensed  Consolidated Financial Statements                                                                              |       |     |       |   |   |
|               |       | Condensed Consolidated Balance Sheets as of  March 31, 2007 and December 31, 2006 (unaudited)                   |       |     | 2          |   |   |
|               |       | Condensed Consolidated Statements of Operations for  the three months ended March 31, 2007 and 2006 (unaudited)      |       |     | 3          |   |   |
|               |       | Condensed Consolidated Statement of Stockholders’  Equity for the three months ended March 31, 2007 (unaudited) |       |     | 4          |   |   |
|               |       | Condensed Consolidated Statements of Cash Flows for  the three months ended March 31, 2007 and 2006 (unaudited)      |       |     | 5          |   |   |
|               |       | Notes to the  Condensed Consolidated Financial Statements                                                                 |       |     | 6          |   |   |
| Item 2.            |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                               |       |     | 15         |   |   |
| Item 3.            |       | Quantitative and Qualitative Disclosures about Market  Risk                                                               |       |     | 28         |   |   |
| Item 4.            |       | Controls and Procedures                                                                                                   |       |     | 28         |   |   |
| *** ***       |       | **PART II—OTHER  INFORMATION**                                                                                  |       |     |       |   |   |
| Item  1.           |       | Legal  Proceedings                                                                                                        |       |     | 29         |   |   |
| Item  1A.          |       | Risk Factors                                                                                                              |       |     | 29         |   |   |
| Item 2.            |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                                              |       |     | 29         |   |   |
| Item 3.            |       | Defaults Upon Senior Securities                                                                                           |       |     | 29         |   |   |
| Item 4.            |       | Submission of Matters to a Vote of Security Holders                                                                       |       |     | 29         |   |   |
| Item  5.           |       | Other  Information                                                                                                        |       |     | 29         |   |   |
| Item 6.            |       | Exhibits                                                                                                                  |       |     | 29         |   |   |
| SIGNATURES         |       |                                                                                                                      | 30         |     |       |
| INDEX TO  EXHIBITS |       |                                                                                                                      | 31         |     |       |

 

1

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**PART I—FINANCIALINFORMATION**

**Item 1.**                        FinancialStatements

**REDDY ICE HOLDINGS, INC. AND SUBSIDIARYCONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)**

| ** **                                                                                                                                                | ** ** | **March 31,**                                    | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                | ** ** | **2007**                                              | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                                | ** ** | **(in thousands, except  share data)** | ** ** |
| **ASSETS**                                                                                                                                                |       |                                                  |       |                  |       |   |   |
| CURRENT ASSETS:                                                                                                                                           |       |                                                  |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                                |       | $                                                     | 9,999      |                  |       | $ | 39,434 |   |   |
| Accounts receivable, net                                                                                                                                  |       | 23,757                                                |       |                  | 25,723     |   |   |
| Inventories                                                                                                                                               |       | 13,689                                                |       |                  | 11,455     |   |   |
| Prepaid expenses and  other current assets                                                                                                                |       | 2,679                                                 |       |                  | 2,719      |   |   |
| Deferred tax assets                                                                                                                                       |       | 1,773                                                 |       |                  | 1,620      |   |   |
| Total current assets                                                                                                                                      |       | 51,897                                                |       |                  | 80,951     |   |   |
| PROPERTY AND EQUIPMENT, net                                                                                                                               |       | 235,596                                               |       |                  | 230,242    |   |   |
| GOODWILL                                                                                                                                                  |       | 220,787                                               |       |                  | 216,370    |   |   |
| OTHER INTANGIBLES, net                                                                                                                                    |       | 81,167                                                |       |                  | 79,889     |   |   |
| OTHER ASSETS                                                                                                                                              |       | 2,011                                                 |       |                  | 2,820      |   |   |
| TOTAL                                                                                                                                                     |       | $                                                     | 591,458    |                  |       | $ | 610,272 |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                            |       |                                                  |       |                  |       |   |   |
| CURRENT  LIABILITIES:                                                                                                                                     |       |                                                  |       |                  |       |   |   |
| Current portion of  long-term obligations                                                                                                                 |       | $                                                     | 57         |                  |       | $ | 51 |   |   |
| Revolving credit  facility                                                                                                                                |       | 6,300                                                 |       |                  | —     |   |   |
| Accounts payable                                                                                                                                          |       | 14,986                                                |       |                  | 14,090     |   |   |
| Accrued expenses                                                                                                                                          |       | 15,830                                                |       |                  | 18,659     |   |   |
| Dividends payable                                                                                                                                         |       | 8,827                                                 |       |                  | 8,828      |   |   |
| Total current  liabilities                                                                                                                                |       | 46,000                                                |       |                  | 41,628     |   |   |
| LONG-TERM OBLIGATIONS                                                                                                                                     |       | 368,043                                               |       |                  | 364,844    |   |   |
| DEFERRED TAXES AND OTHER LIABILITIES, net                                                                                                                 |       | 30,377                                                |       |                  | 36,152     |   |   |
| COMMITMENTS AND CONTINGENCIES (Note 10)                                                                                                                   |       | —                                                |       |                  | —     |   |   |
| STOCKHOLDERS’  EQUITY:                                                                                                                               |       |                                                  |       |                  |       |   |   |
| Common stock, $0.01 par  value; 75,000,000 shares authorized; 21,809,395 shares issued and outstanding  at March 31, 2007 and December 31, 2006 |       | 218                                                   |       |                  | 218        |   |   |
| Additional paid-in  capital                                                                                                                               |       | 217,888                                               |       |                  | 216,802    |   |   |
| Accumulated deficit                                                                                                                                       |       | (72,860                                               | )          |                  | (51,990    | ) |   |
| Accumulated other  comprehensive income                                                                                                                   |       | 1,792                                                 |       |                  | 2,618      |   |   |
| Total stockholders’  equity                                                                                                                          |       | 147,038                                               |       |                  | 167,648    |   |   |
| TOTAL                                                                                                                                                     |       | $                                                     | 591,458    |                  |       | $ | 610,272 |   |   |

 

See notes to condensed consolidated financial statements.

2

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARYCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**

| ** **                                     | ** ** | **Three Months Ended**                                  | ** ** |
|------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **March 31,**                                                | ** ** |
| ** **                                     | ** ** | **2007**                                                          | ** ** | **2006** | ** ** |
| ** **                                     | ** ** | **(in thousands, except per  share amounts)** | ** ** |
| Revenues                                       |       | $                                                                 | 47,028     |   | $ | 44,808 |   |
| Cost of sales  (excluding depreciation)        |       | 38,071                                                            |       | 34,413 |   |
| Depreciation  expense related to cost of sales |       | 5,091                                                             |       | 4,714 |   |
| Gross profit                                   |       | 3,866                                                             |       | 5,681 |   |
| Operating  expenses                            |       | 10,701                                                            |       | 11,089 |   |
| Depreciation and  amortization expense         |       | 1,530                                                             |       | 1,428 |   |
| Loss on  dispositions of assets                |       | 123                                                               |       | 104 |   |
| Loss from  operations                          |       | (8,488                                                            | )          | (6,940 | ) |
| Interest expense                               |       | 7,533                                                             |       | 6,954 |   |
| Interest income                                |       | (216                                                              | )          | — |   |
| Loss before  income taxes                      |       | (15,805                                                           | )          | (13,894 | ) |
| Income tax  benefit                            |       | 5,597                                                             |       | 5,655 |   |
| Net loss                                       |       | $                                                                 | (10,208    | ) | $ | (8,239 | ) |
| Basic and diluted  net loss per share:         |       |                                                              |       |   |   |
| Net loss                                       |       | $                                                                 | (0.47      | ) | $ | (0.39 | ) |
| Weighted average common shares outstanding     |       | 21,686                                                            |       | 21,273 |   |
| Cash dividends  declared per share             |       | $                                                                 | 0.4000     |   | $ | 0.3825 |   |

 

See notes to condensed consolidated financial statements.

3

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**REDDYICE HOLDINGS, INC. AND SUBSIDIARYCONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY(Unaudited)**
|                                                                    | ** ** | ** **              | ** ** | ** **     | ** ** | ** **  | ** ** | ** **      | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------|------------|----------------|------------|-------------|------------|-----------------|------------|-------------------|------------|------------|------------|
| ** **                                                         | ** ** | **Common Stock**   | ** ** | **Additional** | ** ** | ** **  | ** ** | **Other**       | ** ** | ** **        | ** ** |
| ** **                                                         | ** ** | **Number of**      | ** ** | **Par**        | ** ** | **Paid-In** | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **Shares**              | ** ** | **Value**      | ** ** | **Capital** | ** ** | **Deficit**     | ** ** | **Income**        | ** ** | **Total**  | ** ** |
| ** **                                                         | ** ** | **(in thousands)** | ** ** |
| Balance at January 1, 2007                                    |       |                    | 21,809     |           |       |        | $          | 218             |       |              |       | $          | 216,802    |   |   |   | $ | (51,990 | ) |   |   | $ | 2,618 |   |   | $ | 167,648 |   |
| Compensation expense related to stock-based awards                 |       |                    | —     |           |       |        | —     |            |       |              | 1,086      |       |       |   | — |   |   |   | — |   |   | 1,086 |   |
| Cash dividends declared                                            |       |                    | —     |           |       |        | —     |            |       |              | —     |       |       |   | (8,827 | ) |   |   | — |   |   | (8,827 | ) |
| Cumulative effect of change in accounting principle  (Note 9) |       |                    | —     |           |       |        | —     |            |       |              | —     |       |       |   | (1,835 | ) |   |   | — |   |   | (1,835 | ) |
| Comprehensive loss:                                                |       |                    |       |           |       |        |       |            |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                           |       |                    | —     |           |       |        | —     |            |       |              | —     |       |       |   | (10,208 | ) |   |   | — |   |   | (10,208 | ) |
| Change in fair value of derivative asset                           |       |                    | —     |           |       |        | —     |            |       |              | —     |       |       |   | — |   |   |   | (826 | ) |   | (826 | ) |
| Total comprehensive loss                                           |       |                    |       |           |       |        |       |            |       |              |       |       |       |   |   |   |   |   |   |   |   | (11,034 | ) |
| Balance at  March 31, 2007                                    |       |                    | 21,809     |           |       |        | $          | 218             |       |              |       | $          | 217,888    |   |   |   | $ | (72,860 | ) |   |   | $ | 1,792 |   |   | $ | 147,038 |   |

 

See notes to condensed consolidated financial statements.

4

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**REDDYICE HOLDINGS, INC. AND SUBSIDIARYCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**

| ** **                                                                                                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                                  | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                                                                                                                  | ** ** | **(in thousands)**                          | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                                                      |       |                                             |       |   |   |
| Net loss                                                                                                                    |       | $                                                | (10,208    | ) | $ | (8,239 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities (excluding  working capital from acquisitions): |       |                                             |       |   |   |
| Depreciation and amortization expense                                                                                       |       | 6,621                                            |       | 6,142 |   |
| Amortization of debt issue costs and debt discount                                                                          |       | 3,584                                            |       | 3,271 |   |
| Loss on dispositions of assets                                                                                              |       | 123                                              |       | 104 |   |
| Stock-based compensation expense                                                                                            |       | 1,086                                            |       | 1,245 |   |
| Deferred taxes                                                                                                              |       | (5,597                                           | )          | (5,655 | ) |
| Change in assets  and liabilities:                                                                                          |       |                                             |       |   |   |
| Accounts receivable, inventory and prepaid expenses                                                                         |       | (145                                             | )          | (980 | ) |
| Accounts payable, accrued expenses and other                                                                                |       | (6,309                                           | )          | (5,264 | ) |
| Net cash used in operating activities                                                                                       |       | (10,845                                          | )          | (9,376 | ) |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                                                      |       |                                             |       |   |   |
| Property and equipment additions                                                                                            |       | (4,632                                           | )          | (3,957 | ) |
| Proceeds from dispositions of property and equipment                                                                        |       | 56                                               |       | 353 |   |
| Cost of acquisitions                                                                                                        |       | (11,476                                          | )          | (1,404 | ) |
| Collection of note receivable                                                                                               |       | 3                                                |       | — |   |
| Net cash used in investing activities                                                                                       |       | (16,049                                          | )          | (5,008 | ) |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                                                      |       |                                             |       |   |   |
| Cash dividends paid                                                                                                         |       | (8,828                                           | )          | (8,296 | ) |
| Repurchase and retirement of common stock                                                                                   |       | —                                           |       | (1,035 | ) |
| Borrowings under the credit facility, net                                                                                   |       | 6,300                                            |       | — |   |
| Repayment of long-term obligations                                                                                          |       | (13                                              | )          | (17 | ) |
| Net cash used in financing activities                                                                                       |       | (2,541                                           | )          | (9,348 | ) |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                                                                   |       | (29,435                                          | )          | (23,732 | ) |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                                                             |       | 39,434                                           |       | 33,997 |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                                                                   |       | $                                                | 9,999      |   | $ | 10,265 |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                                                          |       |                                             |       |   |   |
| Cash payments for interest                                                                                                  |       | $                                                | 4,019      |   | $ | 3,739 |   |
| Cash receipts of interest income                                                                                            |       | $                                                | 337        |   | $ | — |   |
| Cash payments for income taxes                                                                                              |       | $                                                | 15         |   | $ | — |   |
| Borrowings under the credit facility                                                                                        |       | $                                                | 7,700      |   | $ | 1,700 |   |
| Repayments on the credit facility                                                                                           |       | $                                                | (1,400     | ) | $ | (1,700 | ) |
| Increase (decrease) in fair value of derivative                                                                             |       | $                                                | (826       | ) | $ | 2,196 |   |
| Cash dividends declared, not paid                                                                                           |       | $                                                | 8,827      |   | $ | 8,276 |   |
| Additions to  property and equipment included in accounts payable                                                           |       | $                                                | 2,063      |   | $ | 399 |   |

 

See notes to condensed consolidated financial statements.

5

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006**

**1.   General**

The condensed consolidated financial statements ofReddy Ice Holdings, Inc. included herein are unaudited; however, thebalance sheet as of December 31, 2006 has been derived from the auditedfinancial statements for that date. These financial statements have beenprepared by the Company pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”). As applicable under the SEC’sregulations, certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted. All significant intercompany balances and transactions have beeneliminated upon consolidation, and all adjustments which, in the opinion ofmanagement, are necessary for a fair presentation of the financial position,results of operations and cash flows for the periods covered have been made andare of a normal and recurring nature. The financial statements included hereinshould be read in conjunction with the consolidated financial statements andthe related notes thereto included in the Company’s annual report on Form 10-Kfor the year ended December 31, 2006. Operating results for the threemonths ended March 31, 2007 are not necessarily indicative of the resultsto be achieved for the full year.

Reddy Ice Holdings, Inc.(“Reddy Holdings”), and its wholly-owned subsidiary, Reddy Ice Corporation (“ReddyCorp.”), referred to collectively as the “Company”, manufactures anddistributes packaged ice products and bottled water and owns and operatesrefrigerated warehouses. The Company is the largest manufacturer of packagedice products in the United States. The Company serves approximately 82,000 customerlocations in 31 states and the District of Columbia.

**2.   Acquisitions**

During the three months ended March 31, 2007, theCompany purchased five ice companies. Including direct acquisition costs, thetotal acquisition consideration was $11.5 million. The total purchase price wasallocated to the acquired assets and assumed liabilities based upon estimatesof their respective fair values as of the respective closing dates usingvaluations and other studies. The following table summarizes the estimated fairvalues of the assets acquired and the liabilities assumed at the date ofacquisition (dollars in millions):

| Total assets  acquired     |   | $ 4.8 |   |
|----------------------------|--------|------------|--------|
| Total liabilities  assumed |   | (0.5       | )      |
| Net assets acquired        |   | $ 4.3 |   |

 

The excess $7.2 million of aggregate purchase priceover the net assets acquired was allocated to goodwill ($4.4 million) and otherintangible assets ($2.8 million). Other intangible assets are comprised of customerlists, which are being amortized on a straight line basis over useful lives of11 to 30 years.

During 2006, the Company purchased ten ice companiesfor total acquisition consideration of $12.9 million. The results ofoperations of the 2006 and 2007 acquisitions are included in the Company’sconsolidated results of operations from the date of each acquisition, whichranged from January 6, 2006 to December 22, 2006 and from January 2,2007 to February 21, 2007.

6

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006**

**2.**   Acquisitions (Continued)

The following unaudited pro forma information presentsthe Company’s consolidated results of operations (i) for the three monthsended March 31, 2007 as if the 2007 acquisitions had all occurred on January 1,2007 and (ii) for the three months ended March 31, 2006 as if the2007 and 2006 acquisitions had all occurred on January 1, 2006:

| ** **                                      | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **March 31,**               | ** ** |
| ** **                                      | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                                      | ** ** | **(in thousands)**          | ** ** |
| Pro forma  revenues                             |       | $ 47,286                    |       | $ 46,647 |   |
| Pro forma net  loss                             |       | (10,312                          | )          | (9,123 | ) |
| Pro forma basic  and diluted net loss per share |       | (0.48                            | )          | (0.43 | ) |

 

**3.   Inventories**

Inventories consist of raw materials, supplies andfinished goods. Raw materials and supplies consist of ice packaging materials,spare parts, bottled water supplies and merchandiser parts. Finished goodsconsist of packaged ice and bottled water. Inventories are valued at the lowerof cost or market and include overhead allocations. Cost is determined usingthe first-in, first-out and average cost methods.

| ** **                  | ** ** | **March 31,**      | ** **    | **December 31,** | ** ** |
|-----------------------------|------------|-------------------------|---------------|-----------------------|------------|
| ** **                  | ** ** | **2007**                | ** **    | **2006**              | ** ** |
| ** **                  | ** ** | **(in thousands)** | ** **    |
| Raw materials and  supplies |       |                    | $ 9,500  |                  |       |   | $ 8,664 |   |   |
| Finished goods              |       |                    | 4,189         |                  |       |   | 2,791 |   |   |
| Total                       |       |                    | $ 13,689 |                  |       |   | $ 11,455 |   |   |

 

**4.**   AccruedExpenses

| ** **                                                                                                     | ** ** | **March 31,**      | ** **    | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-------------------------|---------------|-----------------------|------------|
| ** **                                                                                                     | ** ** | **2007**                | ** **    | **2006**              | ** ** |
| ** **                                                                                                     | ** ** | **(in thousands)** | ** **    |
| Accrued  compensation and employee benefits, including payroll taxes and workers’  compensation insurance |       |                    | $ 4,373  |                  |       |   | $ 9,951 |   |   |
| Accrued interest                                                                                               |       |                    | 3,750         |                  |       |   | 3,850 |   |   |
| Accrued utilities                                                                                              |       |                    | 1,387         |                  |       |   | 1,433 |   |   |
| Accrued property,  sales and other taxes                                                                       |       |                    | 988           |                  |       |   | 440 |   |   |
| Unrecognized tax  benefits                                                                                     |       |                    | 2,639         |                  |       |   | — |   |   |
| Other accrued  insurance                                                                                       |       |                    | 1,524         |                  |       |   | 1,872 |   |   |
| Other                                                                                                          |       |                    | 1,169         |                  |       |   | 1,113 |   |   |
| Total                                                                                                          |       |                    | $ 15,830 |                  |       |   | $ 18,659 |   |   |

 

**5.   Revolving CreditFacility and Long-Term Obligations**

*10**1**¤**2*% Senior Discount Notes.*  *On October 27, 2004, Reddy Holdingsissued $151 million at maturity of 10*1**¤**2**%*Senior Discount Notes due 2012 (the “Discount Notes”) in a private placementoffering. Each Discount Note had an initial accreted value of $663.33 per$1,000 principal amount at maturity. The accreted value of each Discount Notewill increase from the date of issuance until November 1, 2008 at a 

7

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006**

**5.**   Revolving Credit Facility and Long-Term Obligations(Continued)

rate of 101¤2%per annum such that the accreted value will equal the stated principal amountat maturity on November 1, 2008. Thereafter, cash interest will accrue andbe payable semi-annually at a rate of 101¤2% per annum.

The Discount Notesare unsecured obligations of Reddy Holdings and are:

·       notguaranteed by any of Reddy Holdings’ subsidiaries;

·       seniorin right of payment to all of Reddy Holdings’ future subordinated indebtedness;

·       equalin right of payment with Reddy Holdings’ existing and future unsecured seniorindebtedness;

·       effectivelysubordinated to Reddy Holdings’ existing and future secured debt, includingdebt under the Company’s credit facilities that is guaranteed by ReddyHoldings; and

·       structurallysubordinated to all obligations and preferred equity of Reddy Holdings’subsidiaries.

The Discount Notes include customary covenants thatrestrict, among other things, Reddy Holdings’ ability to incur additional debtor issue certain preferred stock, pay dividends or redeem, repurchase or retireits capital stock or subordinated indebtedness, make certain investments,create liens, enter into arrangements that restrict dividends from itssubsidiaries, merge or sell all or substantially all of its assets or enterinto various transactions with affiliates. Prior to November 1, 2007,Reddy Holdings may redeem up to 35% of the principal amount of the DiscountNotes at a redemption price of 110.5% of the accreted value thereof, plusaccrued and unpaid interest to the date of redemption, with funds raised inequity offerings that are specified in the indenture governing the DiscountNotes. From and after November 1, 2008, Reddy Holdings may redeem anyor all of the Discount Notes by paying a redemption premium, which is initially5.25% of the principal amount at maturity of the notes and declines annually to0% for the period commencing on November 1, 2010 and thereafter. If achange of control occurs prior to November 1, 2007, Reddy Holdings may, atits option, redeem all, but not less than all, of the Discount Notes at aredemption price equal to the sum of (i) the accreted value of the notesas of the redemption date, (ii) a premium equal to 125% of one year’scoupon payment and (iii) any accrued and unpaid interest to the date ofredemption. If Reddy Holdings experiences a change of control and does notelect to make the optional redemption described in the previous sentence, ReddyHoldings will be required to make an offer to repurchase the Discount Notes ata price equal to 101% of their accreted value, plus accrued and unpaidinterest, if any, to the date of purchase. Reddy Holdings may also be requiredto make an offer to purchase the senior discount notes with proceeds of assetsales that are not reinvested in the Company’s business or used to repay otherindebtedness.

*SeniorCredit Facilities.**  *On August 12,2005, the Company amended and restated its credit facilities with a syndicateof banks, financial institutions and other entities as lenders, includingCredit Suisse, Cayman Islands Branch, as Administrative Agent, CIBC WorldMarkets Corp., Bear Stearns Corporate Lending Inc. and LehmanCommercial Paper, Inc., (the “Credit Facilities”). The Credit Facilitiesprovide for a $60 million revolving credit facility (the “Revolving CreditFacility”) and a $240 million term loan (the “Term Loan”). The RevolvingCredit Facility and Term Loan mature on August 12, 2010 and August 12,2012, respectively.

8

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006**

**5.**   Revolving Credit Facility and Long-Term Obligations(Continued)

At March 31, 2007, the Company had$46.8 million of availability under the Revolving Credit Facility, whichwas net of outstanding balances under the Revolving Credit Facility of $6.3million and standby letters of credit of $6.9 million. The standby lettersof credit are used primarily to secure certain insurance obligations.

Principal balances outstanding under the CreditFacilities bear interest per annum, at the Company’s option, at the sum of thebase rate plus 0.75% or LIBOR plus 1.75%. The base rate is defined as thegreater of the prime rate (as announced from time to time by the AdministrativeAgent) or the federal funds rate plus 0.5%. At March 31, 2007, theweighted average interest rate of borrowings outstanding under the CreditFacilities was 7.1%. Interest on base rate loans is payable on the last day ofeach quarter. Interest on LIBOR loans is payable upon maturity of the LIBORloan or on the last day of the quarter if the term of the LIBOR loan exceeds90 days. The Company pays a quarterly fee on the average availabilityunder the Revolving Credit Facility based on an annual rate of 0.5%.

The Revolving Credit Facility and Term Loan do notrequire any scheduled principal payments prior to their stated maturity dates.Subject to certain conditions, mandatory repayments of the Revolving CreditFacility and Term Loan (and if the Term Loan is no longer outstanding,mandatory commitment reductions of the Revolving Credit Facility) are requiredto be made with portions of the proceeds from (1) asset sales, (2) theissuance of debt securities and (3) insurance and condemnation awards,subject to various exceptions. In the event of a change in control, as definedin the Credit Facilities, an event of default will occur under the Credit Facilities.Under the Credit Facilities, Reddy Corp. may only pay dividends to ReddyHoldings if Reddy Corp.’s leverage ratio for the most recently ended fiscalquarter is less than or equal to 3.75 to 1.0. In addition, the CreditFacilities preclude Reddy Corp. from declaring any dividends if an event ofdefault under the Credit Facilities has occurred and is continuing. In particular,it will be an event of default if Reddy Corp.’s leverage ratio exceeds 4.0 to 1.0or Reddy Corp.’s interest coverage ratio is less than 3.25 to 1.0.

The Credit Facilities contain financial covenants,which include the maintenance of certain financial ratios, as defined in theCredit Facilities, and are collateralized by substantially all of the Company’sassets and the capital stock of its subsidiaries. Reddy Holdings guarantees theCredit Facilities and such guarantee is secured by the capital stock of ReddyCorp. At March 31, 2007, Reddy Corp. was in compliance with these covenants.

On January 1, 2007, Reddy Corp. merged with itsparent, Reddy Ice Group, Inc., with Reddy Corp. being the survivingentity. The Credit Facilities were amended on that date to allow the merger andto provide for the assumption of the Credit Facilities by Reddy Corp.

*InterestRate Hedging Agreement.**  *Effective September 12, 2005, the Companyentered into an interest rate hedging agreement (the “Hedge”) to fix theinterest rate on a portion of its Term Loan. The Hedge has a term of threeyears and ten months and an initial notional balance of $220 million. Thenotional balance decreases by $20 million on October 12 of each of thefollowing three years, beginning on October 12, 2006. The Company pays afixed rate of 4.431% on the notional balance outstanding and receives an amountequal to 3-month LIBOR. Any net payable or receivable amount is settledquarterly. If the Company had been required to settle the Hedge as of March 31,2007, it would have received $1.8 million. The fair value of the Hedge isincluded in the caption “Other Assets” in the consolidated balance 

9

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006**

**5.**   Revolving Credit Facility and Long-Term Obligations(Continued)

sheet. Changes in the fairvalue of the Hedge are recorded as “Other Comprehensive Income” in theconsolidated statement of stockholders’ equity. The Company is exposed to riskof loss in the event of non-performance by the counterparty to the Hedge;however, it does not anticipate non-performance by the counterparty.

At March 31, 2007 and December 31, 2006,long-term obligations consisted of the following:

| ** **                                                          | ** ** | **March 31,**      | ** ** | **December 31,** | ** **     |
|---------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|----------------|
| ** **                                                          | ** ** | **2007**                | ** ** | **2006**              | ** **     |
| ** **                                                          | ** ** | **(in thousands)** | ** ** |
| Credit  Facility—Term Loan                                     |       | $ 240,000          |       |                  | $ 240,000 |   |   |
| 101⁄2% Senior  Discount Notes                                    |       | 150,500                 |       |                  | 150,500        |   |   |
| Less: unamortized  debt discount on 101⁄2% Senior Discount Notes |       | (22,488                 | )          |                  | (25,706        | ) |   |
| Other                                                               |       | 88                      |       |                  | 101            |   |   |
| Total long-term  obligations                                        |       | 368,100                 |       |                  | 364,895        |   |   |
| Less: current  maturities                                           |       | 57                      |       |                  | 51             |   |   |
| Long-term  obligations, net of current maturities                   |       | $ 368,043          |       |                  | $ 364,844 |   |   |

 

**6.   Capital Stock**

*CommonStock.**  *ReddyHoldings is authorized to issue up to 75,000,000 shares of common stock, parvalue $0.01 per share. Holders of Reddy Holdings’ common stock are entitled toone vote per share on all matters to be voted on by stockholders and areentitled to receive dividends, if any, as may be declared from time to time bythe Board of Directors of Reddy Holdings. Upon any liquidation or dissolutionof Reddy Holdings, the holders of common stock are entitled, subject to anypreferential rights of the holders of preferred stock, to receive a pro ratashare of all of the assets remaining available for distribution to stockholdersafter payment of all liabilities.

Since August 1, 2005, the board of directors ofReddy Holdings has declared the following dividends on the Company’s commonstock:

| ** **                | ** ** | ** **               | ** ** | ** **             | ** ** | **Dividend**       | ** ** | **Total**          | ** ** |
|---------------------------|------------|--------------------------|------------|------------------------|------------|--------------------|------------|--------------------|------------|
| **Declaration Date** | ** ** | **Record Date**     | ** ** | **Payable Date**  | ** ** | **Per share** | ** ** | **Dividend**       | ** ** |
| August 11,  2005     |       | September 30,  2005 |       | October 17,  2005 |       | $ 0.20788     |       | $ 4.5 million |       |
| December 15,  2005   |       | December 30,  2005  |       | January 17,  2006 |       | $ 0.3825      |       | $ 8.3 million |       |
| March 15,  2006      |       | March 31,  2006     |       | April 17,  2006   |       | $ 0.3825      |       | $ 8.3 million |       |
| June 15,  2006       |       | June 30,  2006      |       | July 17,  2006    |       | $ 0.4000      |       | $ 8.7 million |       |
| September 15,  2006  |       | September 29,  2006 |       | October 16,  2006 |       | $ 0.4000      |       | $ 8.8 million |       |
| December 15,  2006   |       | December 29,  2006  |       | January 16,  2007 |       | $ 0.4000      |       | $ 8.8 million |       |
| March 15, 2007       |       | March 30, 2007      |       | April 16, 2007    |       | $ 0.4000      |       | $ 8.8 million |       |

*Preferred Stock.**  *Reddy Holdings is authorized toissue up to 25,000,000 shares of $0.01 par value preferred stock, all of whichis currently undesignated and unissued.

**7.   Employee BenefitPlans**

*2005Equity Incentive Plan.**  *On August 8, 2005, theboard of directors and stockholders of Reddy Holdings approved the Reddy IceHoldings, Inc. 2005 Long Term Incentive & Share Award Plan (the 

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006**

**7.**   Employee Benefit Plans (Continued)

“2005 Equity IncentivePlan”). Under the 2005 Equity Incentive Plan, up to 750,000 shares of commonstock may be issued to employees, directors and certain third parties inconnection with various incentive awards, including stock options, restrictedshares and restricted share units.

On November 3, 2005, 9,300 unrestricted commonshares were granted to certain employees under the 2005 Equity Incentive Plan.Restricted share units (“RSUs”) have been granted to certain employees and theindependent directors of Reddy Holdings in the following amounts: 682,000 RSUson November 3, 2005, 10,000 RSUs on November 15, 2005, 9,625RSUs on February 22, 2006, 13,650 RSUs on August 12, 2006, 4,500 RSUson September 1, 2006, 2,250 RSUs on September 29, 2006, 4,625 RSUs onFebruary 19, 2007 and 10,000 RSUs on April 10, 2007. Each RSUprovides for the grant of one share of unrestricted common stock on the datethat the vesting terms of each RSU is satisfied.

Generally, fifty percent of each award of RSUs (the “Time-vestedRSUs”) will vest in four equal annual installments beginning on August 12,2006 and continuing on August 12 of each of the following three years,provided the recipient remains employed with the Company through such vestingdates. The remaining fifty percent of each award of RSUs (the “Performance-vestedRSUs”) will vest in four equal annual installments beginning on August 12,2006 and continuing on August 12 of each of the following three years,provided the recipient remains employed with the Company through such vestingdates and the applicable performance condition for the applicable vestingperiod is met. The performance condition for each vesting period will be basedon the Company’s earned distributable cash per share (as defined in the relatedrestricted share unit agreement) for such vesting period. Each vesting periodwill begin on July 1 and end on June 30 of the subsequent year. AllRSUs will immediately vest in full, and shares will be distributed, at the timeof a Change in Control (as defined in the 2005 Equity Incentive Plan). If inany performance period the performance condition for a subsequent performanceperiod is achieved, Performance-vested RSUs will be entitled to dividendequivalent rights in the subsequent performance period equal to the dividendswhich would be payable on the shares of common stock represented by the RSUssubject to vesting in that period. Payments of such dividend equivalents willbe made in cash to the holders of RSUs at the time of actual dividend paymentsand will not be subject to vesting. Time-vested RSUs will not be entitled todividend equivalent rights. Based on the Company’s financial results for thevesting period ended June 30, 2006, the performance condition for thePerformance-vested RSUs eligible for vesting on August 12, 2006 was met. Atotal of 172,375 Time-vested RSUs and Performance-vested RSUs vested on August 12,2006. Furthermore, the performance targets for the remaining three vestingperiods were met as of June 30, 2006. Therefore, the holders of unvestedPerformance-based RSUs will be entitled to dividend equivalent payments for theperiod from July 1, 2006 to June 30, 2007. Dividend equivalentpayments of $0.1 million were accrued during the three months ended March 31,2007 and paid in April 2007.

Compensation expense associated with the 2005 EquityIncentive Plan was $0.8 million and $0.9 million during the three monthsended March 31, 2007 and 2006, respectively. This compensation expense wasrecorded in “Operating Expenses” in the consolidated statements of operations.Approximately twenty-five percent of the Time-vested RSUs are being expensedduring each twelve-month period ending August 12 in 2006 to 2009.Performance-vested RSUs are being expensed on the same basis as the firstannual installment met the performance condition as of June 30, 2006 andit is management’s belief that the performance condition for each subsequentperiod will also be met.

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006**

**7.**   Employee BenefitPlans (Continued)

As of March 31, 2007,537,575 shares were reserved for issuance and 30,750 shares were available forgrant under the 2005 Equity Incentive Plan.

*2003 Stock Option Plan.**  *During 2003, the board of directorsapproved the Reddy Ice Holdings, Inc. 2003 Stock Option Plan (the “2003Stock Option Plan”) that reserved for issuance 1,555,150 shares of commonstock, subject to adjustment under certain circumstances. This plan providesfor the granting of incentive awards in the form of stock options to directors,officers and employees of the Company or any of its subsidiaries and affiliatesat the discretion of the Compensation Committee of the Board of Directors. On August 12,2005, all outstanding options under the 2003 Stock Option Plan were exercisedin exchange for restricted shares. At March 31, 2007, 57,883 shares ofcommon stock were available for grant under the 2003 Stock Option Plan. TheCompany does not intend to make any additional grants under this plan.Compensation expense associated with the 2003 Stock Option Plan was $0.3million during the three months ended March 31, 2007 and 2006. Thiscompensation expense was recorded in “Operating Expenses” in the consolidatedstatements of operations.

On January 16, 2007,184,750 shares of restricted stock vested according to their terms. Inconnection with the scheduled vesting of restricted shares on February 28,2006, the Company purchased and retired 51,256 shares of common stock fromemployees for $1.0 million to provide the employees with funds to satisfy theirminimum statutory federal and state tax withholding obligations related to thevesting of their restricted stock on that date. The purchase price was $20.20per share, the closing market price on February 28, 2006.

**8.**   EarningsPer Share

The computation of netloss per share is based on net loss divided by the weighted average number ofshares outstanding. For the three months ended March 31, 2007 and 2006,there were 0.6 million and 1.0 million shares, respectively, ofdilutive securities which are not included in the computation of diluted netloss per share as their effect would be anti-dilutive.

**9.**   IncomeTaxes

The Company’s effectivetax rate differs from the federal statutory income tax rate of 35% due to stateincome taxes and the effect of permanent differences, primarily thenon-deductible portion of the interest expense recognized on the 101⁄2% SeniorDiscount Notes. The effective rate for the three months ended March 31,2007 includes the effect of the internal merger and consolidation of certainwholly-owned subsidiaries effective January 1, 2007, which resulted in thewrite-down of certain net state deferred tax assets.

In connection with thevesting of restricted stock on January 16, 2007, the Company realized anexcess tax benefit of $3.8 million during the three months ended March 31,2007. Because the Company is not currently making cash payments for incometaxes due to its net operating loss (“NOL”) carryforwards, such excess benefithas not been recognized in the Company’s financial statements and is beingreported as a “suspended NOL carryforward” in the footnotes to the consolidatedfinancial statements in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 123(R), “Share-Based Payment”. In connection withthe vesting of restricted stock on February 28, 2006, the Company realizedan excess tax benefit of $3.6 million during the three months endedMarch 31, 2006.

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006**

**9.**   IncomeTaxes (Continued)

In June 2006, the FASB issued FASB InterpretationNo. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes”. FIN 48clarifies the accounting for uncertainty in income taxes recognized in anentity’s financial statements in accordance with SFAS No. 109, “Accountingfor Income Taxes”. FIN 48 prescribes a recognition threshold and measurementattribute for financial statement recognition and measurement of a tax positiontaken or expected to be taken in a return and also provides guidance onderecognition, classification, interest and penalties, accounting for interimperiods, disclosure and transition.

FIN 48 is effective for fiscal years beginningafter December 15, 2006. The Company is required to record the impact ofadopting FIN 48 as an adjustment to the January 1, 2007 beginning balanceof retained earnings (deficit). Upon adoption of FIN 48, the Company’sunrecognized tax benefits totaled $3.7 million. As a result of adoption, theCompany’s liability for unrecognized tax benefits increased $2.9 million. Thisalso resulted in a $1.8 million increase to the January 1, 2007 balance ofretained deficit, a $1.1 million increase in deferred tax benefits related tothe federal benefit of the unrecognized tax positions and a $0.8 millionreclassification of amounts previously reserved at December 31, 2006. Ifrecognized in future periods, the net unrecognized tax benefit would reduce theCompany’s effective tax rate. Adoption of this standard had no impact on theconsolidated statement of operations.

To the extent penalties and interest would be assessedon any underpayment of  income tax, suchamounts have been accrued and classified as a component of income tax expensein the financial statements. As of January 1, 2007, the Company hasaccrued $1.2 million of interest and penalties relating to unrecognized taxbenefits.

As a result of netoperating loss carryforwards, the Company’s federal statute of limitationsremains open for all years since 1990 with no years currently under examinationby the Internal Revenue Service, and U.S. state jurisdictions are generallyopen to examination for the tax year 1997 and beyond. A $2.6 million reductionin the amount of unrecognized tax benefits is possible in the next 12 months asa result of potential settlements with U.S. state taxing authorities.

**10.   Commitments andContingencies**

The Company is involved invarious claims, lawsuits and proceedings arising in the ordinary course ofbusiness. There are uncertainties inherent in the ultimate outcome of suchmatters and it is impossible to presently determine the ultimate costs that maybe incurred. Management believes the resolution of such uncertainties and the incurrenceof such costs will not have a material adverse effect on the Company’sconsolidated financial position, results of operations or cash flows.

**11.**   SegmentInformation

The Company has two reportable segments: (1) iceproducts and (2) non-ice products and services. Ice products include themanufacture and distribution of packaged ice products through traditional icemanufacturing and delivery and The Ice Factory®, which is a proprietary machinethat produces, packages, stores and merchandises ice at the point of salethrough an automated, self-contained system. Non-ice products and servicesinclude refrigerated warehousing for third parties and the manufacturing andsale of bottled water.

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006**

**11.**   Segment Information (Continued)

The Company evaluates the performance of each segmentbased on earnings before interest, taxes, depreciation, amortization, gain orloss on disposition of assets, impairment of assets, loss on extinguishment ofdebt and management agreement termination fees and transaction bonuses andexpenses (“Segment EBITDA”). Segment assets are not a factor in the evaluationof performance. There were no intersegment sales during the three months ended March 31,2007 and 2006.

Segmentinformation for the three months ended March 31, 2007 and 2006 was asfollows:

| ** **                              | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **March 31, 2007**     | ** ** | **March 31, 2006**     | ** ** |
| ** **                              | ** ** | **Ice**                          | ** ** | **Non-Ice**                      | ** ** | **Total** | ** ** | **Ice** | ** ** | **Non-Ice** | ** ** | **Total** | ** ** |
| ** **                              | ** ** | **(in thousands)**          | ** ** |
| Revenues                                |       | $                                | 45,120     |                             | $          | 1,908 |   | $ | 47,028 |   | $ | 41,738 |   | $ | 3,070 |   | $ | 44,808 |   |
| Cost of sales  (excluding depreciation) |       | 36,435                           |       | 1,636                            |       | 38,071 |   | 32,351 |   | 2,062 |   | 34,413 |   |
| Operating  expenses                     |       | 10,292                           |       | 409                              |       | 10,701 |   | 10,700 |   | 389 |   | 11,089 |   |
| Segment EBITDA                          |       | $                                | (1,607     | )                                | $          | (137 | ) | $ | (1,744 | ) | $ | (1,313 | ) | $ | 619 |   | $ | (694 | ) |
| Total assets                            |       | $                                | 572,250    |                             | $          | 19,208 |   | $ | 591,458 |   | $ | 556,225 |   | $ | 24,615 |   | $ | 580,840 |   |

 

Thereconciliation of Total Segment EBITDA to net loss for the three months ended March 31,2007 and 2006 was as follows:

| ** **                                     | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | **March 31,**               | ** ** |
| ** **                                     | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                                     | ** ** | **(in thousands)**          | ** ** |
| Total Segment  EBITDA                          |       | $                                | (1,744     | ) | $ | (694 | ) |
| Depreciation  expense related to cost of sales |       | (5,091                           | )          | (4,714 | ) |
| Depreciation and  amortization expense         |       | (1,530                           | )          | (1,428 | ) |
| Loss on  dispositions of assets                |       | (123                             | )          | (104 | ) |
| Interest expense                               |       | (7,533                           | )          | (6,954 | ) |
| Interest income                                |       | 216                              |       | — |   |
| Income tax  benefit                            |       | 5,597                            |       | 5,655 |   |
| Net loss                                       |       | $                                | (10,208    | ) | $ | (8,239 | ) |

 

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

The following discussionand analysis of our financial condition and results of operations should beread in conjunction with our condensed consolidated financial statements andthe related notes and other information included elsewhere in this Form 10-Qand our Annual Report on Form 10-K for the year ended December 31,2006, previously filed with the SEC. Reddy Ice Holdings, Inc. (“ReddyHoldings”) acquired Packaged Ice, Inc. on August 15, 2003 and renamedit Reddy Ice Group, Inc. (“Reddy Group”). On January 1, 2007, ReddyGroup merged with its wholly-owned subsidiary, Reddy Ice Corporation (“ReddyCorp.”), with Reddy Corp. being the surviving entity.

**Uncertainty ofForward Looking Statements and Information**

Other thanstatements of historical facts, statements made in this Form 10-Q,statements made by us in periodic press releases, oral statements made by ourmanagement to analysts and stockholders and statements made in the course ofpresentations about our company constitute “forward-looking statements”intended to qualify for the safe harbor from liability established by thePrivate Securities Litigation Reform Act of 1995. We believe the expectationsreflected in such forward-looking statements are accurate. However, we cannotassure you that such expectations will occur. These forward-looking statementsinvolve known and unknown risks, uncertainties and other factors that may causeour actual results, performance or achievements to be materially different fromfuture results expressed or implied by the forward-looking statements. Factorsyou should consider that could cause these differences are:

·       generaleconomic trends and seasonality;

·       weatherconditions;

·       theability of our subsidiary to make distributions to us in amounts sufficient tomake dividend payments to our stockholders in accordance with our dividendpolicy;

·       oursubstantial leverage and ability to service our debt and pay dividends;

·       the restrictive covenants under our indebtedness;

·       theavailability of capital sources;

·       fluctuationsin our operating costs, including in the prices of electricity, fuel,polyethylene and other required expenses;

·       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

·       all the other factors described herein under Item 1Aof Part II and in Item 1A of Part I of our Annual Report on Form 10-K.

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

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**General**

***Overview.******  ***We are thelargest manufacturer and distributor of packaged ice in the United States andcurrently serve approximately 82,000 customer locations in 31 states and theDistrict of Columbia. We operate in two business segments—ice products andnon-ice products and operations. Ice products accounted for approximately 96%of our revenues in the three months ended March 31, 2007 and 93% ofrevenues in the three months ended March 31, 2006. Our ice productsbusiness consists of:

·       the traditional manufacture and delivery of ice from acentral point of production to the point of sale; and

·       the installation and operation of The Ice Factory®,our proprietary equipment located in our customers’ high volume locations thatproduces, packages and stores ice through an automated, self-contained system.

Our other business segment, non-ice products andoperations, consists of refrigerated warehousing for third parties and themanufacture and sale of bottled water.

***Seasonality.  ***Thepackaged ice business is highly seasonal, characterized by peak demand duringthe warmer months of May through September, with an extended peak sellingseason in the southern United States. Approximately 69%, 69% and 68% of ourannual revenues occurred during the second and third calendar quarters in eachof 2006, 2005 and 2004. Approximately 66% of our annual revenues also occurredduring the second and third calendar quarters of 2003 and 68% occurred duringthe second and third calendar quarters of 2002, 2001 and 2000. The lower levelin 2003 was primarily due to the timing of our acquisitions, which occurred inthe fourth quarter of that year. As a result of seasonal revenue declines and aless than proportional decline in expenses during the first and fourthquarters, we typically experience lower margins resulting in losses duringthese periods.

***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 rightof return with respect to these products or services. A portion of our revenuesalso represents fees earned under management agreements for Ice Factorieslocated outside our primary territories that are recognized as earned undercontract terms.

***Cost of Sales (Excluding Depreciation).******  ***Our cost ofsales (excluding depreciation) consists of costs related to the manufacture anddistribution of our products, including, in particular:

·       manufacturingand distribution labor costs;

·       rawmaterials (primarily of polyethylene-based plastic bags);

·       product delivery expenses, including fuel and vehiclerental expense related to products delivered by our own distribution network,as well as fees paid to distributors who deliver ice to our customers on ourbehalf;

·       utilityexpenses (primarily electricity used in connection with the manufacturing, storageand distribution processes); and

·       Ice Factory-related costs associated with customerservice representatives and machine technicians (note, however, that IceFactories generally do not increase our plant occupancy, delivery orutility costs).

***DepreciationExpense Related to Cost of Sales and Depreciation and Amortization Expense.******  ***Depreciationand amortization are divided into two line items—depreciation expense relatedto cost of sales and depreciation and amortization expense. Depreciationexpense related to cost of sales consists of depreciation expense for ourproduction and distribution equipment. Depreciation and amortization 

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expense consists ofdepreciation and amortization expense for our selling, general andadministrative functions.

***Operating Expenses.******  ***Our operatingexpenses are costs associated with selling, general and administrativefunctions. These costs include executive officers’ compensation, office andadministrative salaries, insurance, legal and other professional services andcosts associated with leasing office space. Labor costs, including associatedpayroll taxes and benefit costs but excluding non-cash stock-based compensationexpense, included in operating expenses represented approximately 12% ofrevenues in the three months ended March 31, 2007 and 2006.

***Facilities.******  ***At March 31,2007, we owned or operated 63 ice manufacturing facilities, 59 distributioncenters, approximately 79,000 merchandisers (cold storage units installed atcustomer locations), approximately 3,000 Ice Factories, five refrigeratedwarehouses and one bottled water plant. As of the same date, we had anaggregate daily ice manufacturing capacity of approximately 17,000 tons.

**Three Months Ended March 31, 2007 Compared toThree Months Ended March 31, 2006**

| ** **                                     | ** ** | **Three Months Ended  March 31,** | ** ** | **Change from  Last Year** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                     | ** ** | **2007**                                         | ** ** | **2006**                             | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                     | ** ** | **(in thousands)**                          | ** ** |
| **Consolidated Results**                       | ** ** | ** **                                       | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                       |       | $                                                | 47,028     |                                 | $          | 44,808 |   | $ | 2,220 |   | 5.0 |   |
| Cost of sales  (excluding depreciation)        |       | 38,071                                           |       | 34,413                               |       | 3,658 |   | 10.6 |   |
| Depreciation  expense related to cost of sales |       | 5,091                                            |       | 4,714                                |       | 377 |   | 8.0 |   |
| Gross profit                                   |       | 3,866                                            |       | 5,681                                |       | (1,815 | ) | (31.9 | ) |
| Operating  expenses                            |       | 10,701                                           |       | 11,089                               |       | (388 | ) | (3.5 | ) |
| Depreciation and  amortization expense         |       | 1,530                                            |       | 1,428                                |       | 102 |   | 7.1 |   |
| Loss on  dispositions of assets                |       | 123                                              |       | 104                                  |       | 19 |   | 18.3 |   |
| Loss from  operations                          |       | (8,488                                           | )          | (6,940                               | )          | (1,548 | ) | (22.3 | ) |
| Interest expense,  net                         |       | 7,317                                            |       | 6,954                                |       | 363 |   | 5.2 |   |
| Loss before  income taxes                      |       | (15,805                                          | )          | (13,894                              | )          | (1,911 | ) | (13.8 | ) |
| Income tax  benefit                            |       | 5,597                                            |       | 5,655                                |       | (58 | ) | (1.0 | ) |
| Net loss                                       |       | $                                                | (10,208    | )                                    | $          | (8,239 | ) | $ | (1,969 | ) | (23.9 | ) |
| **Ice  Operations:**                           | ** ** | ** **                                       | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                       |       | $                                                | 45,120     |                                 | $          | 41,738 |   | $ | 3,382 |   | 8.1 |   |
| Cost of sales  (excluding depreciation)        |       | 36,435                                           |       | 32,351                               |       | 4,084 |   | 12.6 |   |
| Depreciation  expense related to cost of sales |       | 4,846                                            |       | 4,464                                |       | 382 |   | 8.6 |   |
| Gross profit                                   |       | 3,839                                            |       | 4,923                                |       | (1,084 | ) | (22.0 | ) |
| Operating  expenses                            |       | 10,292                                           |       | 10,700                               |       | (408 | ) | (3.8 | ) |
| **Non-Ice  Operations:**                       | ** ** | ** **                                       | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                       |       | $                                                | 1,908      |                                 | $          | 3,070 |   | $ | (1,162 | ) | (37.9 | ) |
| Cost of sales  (excluding depreciation)        |       | 1,636                                            |       | 2,062                                |       | (426 | ) | (20.7 | ) |
| Depreciation  expense related to cost of sales |       | 245                                              |       | 250                                  |       | (5 | ) | (2.0 | ) |
| Gross profit                                   |       | 27                                               |       | 758                                  |       | (731 | ) | (96.4 | ) |
| Operating expenses                             |       | 409                                              |       | 389                                  |       | 20 |   | 5.1 |   |

 

*Revenues:**  *Revenues increased $2.2 million from the three monthsended March 31, 2006 to the three months ended March 31, 2007. Thisincrease is primarily due to the effects of the higher volume sales of icerelated to acquisitions and the continuing positive effects of package sizinginitiatives, which consists primarily of converting a portion of our ice salesfrom seven to ten pound bags. Also contributing to the 

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increase was higheraverage pricing. Offsetting these increases were wetter average weatherconditions in most of our markets and a $1.2 million decline in revenues in ournon-ice operations, primarily due to a general decline in the poultry industry,which is a significant portion of the customer base for our cold storagewarehouses, and the loss of the bottled water business’ largest customer in2006.

*Costof Sales (Excluding Depreciation):*   Cost of sales(excluding depreciation) increased $3.7 million from the three months ended March 31,2006 to the three months ended March 31, 2007. This increase in cost ofsales is due to volume increases in our ice business related to acquisitionsand package sizing initiatives, as well as additional fixed costs associatedwith acquired operations. Bag costs and electricity costs also increasedslightly due to higher market prices of energy as compared to last year.Offsetting these increases was a $0.4 million decrease in costs in our non-ice operationsrelated to the reduced level of activity in those operations.

Labor costs, including associated payroll taxes andbenefit costs (including health insurance), accounted for approximately 34% and32% of revenues in the three months ended March 31, 2007 and 2006,respectively. Cost of plastic bags represented approximately 8% and 7% ofrevenues in the three months ended March 31, 2007 and 2006, respectively. Fuelexpenses represented approximately 4% of revenues in the three months ended March 31,2007 and 2006. Expenses for independent third party distribution servicesrepresented approximately 6% of revenues in the three months ended March 31,2007 and 2006. Electricity expense represented approximately 7% of revenues inthe three months ended March 31, 2007 and 2006.

*DepreciationExpense Related to Cost of Sales:**  *Depreciationexpense related to cost of sales increased $0.4 million due to the effect ofacquired assets and new capital expenditures, partially offset by dispositions.

*OperatingExpenses:**  *Operatingexpenses decreased $0.4 million from the three months ended March 31, 2006to the three months ended March 31, 2007. This decrease is primarily dueto a decrease of $0.7 million in accrued incentive compensation and adecrease of $0.5 million in professional services and insurance expenses,partially offset by a $0.5 million increase in labor and benefit costs anda $0.2 million increase in bad debt expense. Professional services duringthe three months ended March 31, 2006 included $0.5 million of costsassociated with a potential acquisition that was not completed.

*Depreciationand Amortization:**  *Depreciationand amortization increased $0.1 million from the three months ended March 31,2006 to the three months ended March 31, 2007. This increase is primarilydue to additional amortization expense associated with the intangible assetsrecorded in connection with the acquisitions completed in 2006 and the threemonths ended March 31, 2007.

*Interest Expense, net:*   Netinterest expense increased $0.4 million from the three months ended March 31,2006 to the three months ended March 31, 2007, primarily due to scheduledincreases in the non-cash interest expense associated with our 101¤2% seniordiscount notes and increased interest rates on the unhedged portion our bankterm loan.

**Liquidity andCapital Resources**

We intend to fund our ongoing capital and workingcapital requirements as well as debt service, including our internal growth andacquisitions, through a combination of cash flows from operations andborrowings under our credit facilities.

We generate cash from the sale of packaged ice throughtraditional delivery methods, by which we manufacture, package and store ice ata central facility and transport it to our customers’ retail locations whenneeded, and through Ice Factories, which manufacture, package and store ice in ourcustomers’ retail locations. Our primary uses of cash are (a) cost ofsales, (b) operating expenses, (c) debt service, (d) dividendson our common stock, (e) capital expenditures related to replacing andmodernizing the 

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capital equipment in ourtraditional ice plants and acquiring and installing additional Ice Factoriesand (f) acquisitions. Historically, we have financed our capital andworking capital requirements, including our acquisitions, through a combinationof cash flows from operations, borrowings under our revolving credit facilitiesand operating leases.

Our ability to generate cash from our operations issubject to weather, general economic, financial, competitive, legislative,regulatory and other factors that are beyond our control. As a result, wecannot assure you that our business will generate sufficient cash flow fromoperations in amounts sufficient to enable us to service our debt and to fundour other liquidity needs. If we do not have sufficient liquidity, we will haveto take actions such as reducing or delaying the payment of dividends to ourcommon stockholders, strategic acquisitions, investments and joint ventures,selling assets, restructuring or refinancing our debt or seeking additionalequity capital. We cannot assure you that any of these remedies could, ifnecessary, be effected on commercially reasonable terms, or at all. Inaddition, the terms of existing or future debt instruments, including the termsof the credit agreement governing our credit facilities and the Reddy Holdingsindenture, may restrict us from adopting some of these alternatives.

During the three months ended March 31, 2007, capitalexpenditures totaled $4.6 million. As we have consolidated acquisitionsinto the existing company infrastructure, we have identified non-core andexcess assets which can be disposed of. From time to time, we also dispose ofother assets which are no longer useful in our operations. As a result ofdispositions of these non-core and excess assets, we realized proceeds ofapproximately $0.06 million in the three months ended March 31, 2007.As a result, our net capital expenditures in the three months ended March 31,2007 were $4.6 million.

In the three months ended March 31,2007, we completed the acquisitions of five ice companies for a total cashpurchase price of approximately $11.5 million, including directacquisition costs of $0.2 million. We will continue to evaluateacquisition opportunities as they become available. In conjunction with theseevaluations, we will consider our liquidity, availability under our creditfacilities, mandatory principal repayments under our debt agreements and theavailability of other capital resources.

**Cash Flows for theThree Months Ended March 31, 2007 and 2006**

Net cash used in operating activities was$10.8 million and $9.4 million in the three months ended March 31,2007 and 2006, respectively. The increase in cash used in operating activitieswas primarily the result of a $2.0 million increase in our net loss, whichwas primarily driven by a reduction in gross profit related to (i) theimpact of acquisitions, which increased our fixed costs, (ii) weakness inour non-ice operations as a result of customer losses and volume reductions and(iii) increased prices for plastic bags and electricity.

Net cash used in investing activities was$16.0 million and $5.0 million in the three months ended March 31,2007 and 2006, respectively. The increase in cash used in investing activitiesis primarily due to a $10.1 million increase in the cost of acquisitionsand a $0.7 million increase in property and equipment additions, primarilyrelated to the timing of our capital expenditure budget in the 2007 versus 2006.During the three months ended March 31, 2007, we completed five acquisitionsfor a total cost of $11.5 million. During the three months ended March 31,2006, we completed two acquisitions for a total cost of $1.4 million.

Financing activities usednet cash of $2.5 million and $9.3 million in the three months ended March 31,2007 and 2006, respectively. In the three months ended March 31, 2007, weborrowed a net $6.3 million from our revolving credit facility and$8.8 million was used to pay cash dividends to our common stockholders. Inthe three months ended March 31, 2006, there were no cash inflows fromfinancing activities while $8.3 million was used to pay cash dividends toour common stockholders and $1.0 million was used to repurchase commonstock.

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**Long-term Debt andOther Obligations**

*Overview.*   AtMarch 31, 2007, we had approximately $374.4 million of total debtoutstanding as follows:

·       $128.0 millionof Reddy Holdings’ 101⁄2% senior discount notes due 2012 (net of unamortized discountof $22.5 million);

·       $240.0 millionoutstanding term loan under our credit facilities which matures on August 12,2012;

·       $6.3 million of outstanding balances under ourrevolving credit facility which matures on August 12, 2010; and

·       $0.1 millionof other debt.

On October 27,2004, Reddy Holdings issued $151 million in aggregate principal amount atmaturity of 101⁄2% senior discount notes due 2012. Each senior discount note hadan initial accreted value of $663.33 per $1,000 principal amount at maturity.The accreted value of each senior discount note increases from the date ofissuance until November 1, 2008 at a rate of 101⁄2% per annum such that theaccreted value will equal the stated principal amount at maturity onNovember 1, 2008. Thereafter, cash interest will accrue and be payablesemi-annually at a rate of 101⁄2% per annum. The senior discount notes areunsecured obligations of Reddy Holdings and are:

·       notguaranteed by any of Reddy Holdings’ subsidiaries;

·       seniorin right of payment to all of Reddy Holdings’ future subordinated indebtedness;

·       equal in right of payment with Reddy Holdings’existing and future unsecured senior indebtedness;

·       effectively subordinated to Reddy Holdings’ existingand future secured debt, including Reddy Holdings’ guarantee of our creditfacilities; and

·       structurally subordinated to all obligations andpreferred equity of Reddy Holdings’ subsidiaries.

The senior discount notes includecustomary covenants that restrict, among other things, the ability to incuradditional debt or issue certain preferred stock, pay dividends or redeem,repurchase or retire our capital stock or subordinated indebtedness, makecertain investments, incur liens, enter into arrangements that restrictdividends from our subsidiaries, merge or sell all or substantially all of theassets or enter into various transactions with affiliates. Prior toNovember 1, 2007, we may redeem up to 35% of the principal amount of thesenior discount notes at a redemption price of 110.5% of the accreted valueamount thereof, plus accrued and unpaid interest to the date of redemption,with funds raised in equity offerings that are specified in the indenturegoverning the senior discount notes. From and after November 1, 2008, wemay redeem any or all of the senior discount notes by paying a redemption premiumwhich is initially 5.25% of the principal amount at maturity of the notes, andwill decline annually to zero commencing on November 1, 2010. If a changeof control occurs on or prior to November 1, 2007, we may, at our option,redeem all, but not less than all, of the senior discount notes at a redemptionprice equal to the sum of (i) the accreted value of the notes as of theredemption date, (ii) a premium equal to 125% of one year’s coupon paymentand (iii) any accrued and unpaid interest to the date of redemption. If weexperience a change of control and do not elect to make the optional redemptiondescribed in the previous sentence, we will be required to make an offer torepurchase the senior discount notes at a price equal to 101% of their accretedvalue, plus accrued and unpaid interest, if any, to the date of purchase. Wemay also be required to make an offer to purchase the senior discount noteswith proceeds of asset sales that are not reinvested in our business or used torepay other indebtedness.

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The indenturegoverning our senior discount notes restricts the amount of dividends,distributions and other restricted payments we may pay. Under the indenture, weare restricted from paying dividends on our common stock unless, at the time ofsuch payment:

·       nodefault or event of default has occurred and is continuing or would occur as aconsequence thereof;

·       theconsolidated coverage ratio set forth in the indenture governing our seniordiscount notes exceeds 2.0 to 1.0; and

·       thereis sufficient capacity under the buildup amount under the indenture governingour senior discount notes.

The consolidated coverage ratio under the indenturegoverning our senior discount notes means the ratio of our EBITDA for the mostrecent four fiscal quarters to our consolidated interest expense for such fourquarter period. “EBITDA” under the indenture governing our senior discountnotes is defined as the sum of our consolidated net income plus our income taxexpense, our interest expense, our depreciation and amortization expense,unrealized non-cash gains or losses or non-cash charges in respect of hedgingobligations required to be taken under generally accepted accountingprinciples, unrealized foreign currency translation gains or losses and allother non-cash charges, except to the extent representing an accrual or reservefor a future cash expenditure). “Consolidated net income” under the indenturegoverning our senior discount notes is defined as net income of Reddy Holdingsand its restricted subsidiaries: plus or minus cash dividends received oninvestments or equity in net losses of persons other than restrictedsubsidiaries, respectively; provided that the following are not included inconsolidated net income: (i) net income or loss of subsidiaries acquiredin pooling of interests transactions for any period prior to the date of theiracquisition, (ii) any net income of a subsidiary restricted in the paymentof a dividend (other than certain permitted restrictions, including those underour credit facilities), (iii) gains or losses from non-ordinary courseasset sales, (iv) extraordinary gains or losses, (v) the cumulativeeffect of changes in accounting principles, (vi) non-recurring fees andexpenses and write offs of deferred financing costs related to the financingtransactions in connection with the 2003 merger with Packaged Ice and, (vii) anyfees, charges, costs or expenses relating to our initial public offering andthe related transactions and paid in cash, to the extent deducted in thedetermination of consolidated net income. “Consolidated interest expense” underthe indenture governing our senior discount notes is defined as total interestexpense plus, to the extent not included in total interest expense, (i) interestexpense attributable to capital leases, (ii) amortization of debt discountand issuance costs, (iii) capitalized interest, (iv) non-cashinterest expense, (v) fees on letters of credit, (vi) net paymentspursuant to hedging obligations, (vii) dividends accrued on certaindisqualified stock (viii) interest incurred in connection with investmentsin discontinued operations, (ix) interest on guaranteed indebtedness and (x) cashcontributions to employee stock ownership plans to the extent they are used topay interest or fees on indebtedness incurred by such plans. We are generallyrequired to calculate our consolidated coverage ratio on a pro forma basis togive effect to incurrences and repayments of indebtedness as well asacquisitions and dispositions.

The buildup amount equals 50% of our consolidated netincome accrued during the period (treated as one accounting period) from July 1,2003 to the end of the most recent fiscal quarter for which internal financialstatements are available (or, if such consolidated net income is a deficit,minus 100% of such deficit), plus, the net cash proceeds of the issuance ofcapital stock, subject to certain exceptions, and any cash capital contributionreceived by us from our stockholders in each case after August 15, 2003plus the amount by which our indebtedness is reduced on our balance sheet as aresult of the conversion or exchange of such indebtedness for our capitalstock, plus the net reduction in certain restricted investments made by us,less the amount of certain restricted payments we make from time to time,including, among other things, the payment of cash dividends.

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In addition, regardless of whether we could make anyrestricted payments under the buildup amount provision referred to above, wemay (1) make dividend payments at any time in an aggregate amount of up to$15.0 million if no default has occurred and is continuing under theindenture and (2) following our initial public offering, pay dividends onour capital stock of up to 6.0% per year of the cash proceeds (net ofunderwriters’ fees, discounts, commissions or other expenses paid by us)received by us from all such public equity offerings subject to specifiedconditions. Accordingly, we are able to pay approximately $7.0 millionannually in dividends under this 6.0% provision. However, the amount ofdividend payments permitted under this 6.0% provision will correspondinglyreduce the amount we would otherwise have available to us under the buildupamount for restricted payments, including dividends. At March 31, 2007,Reddy Holdings had $8.2 million of cash on hand that was not subject toany restrictions under our credit facilities.

***Credit Facilities.  ***OnAugust 12, 2005, Reddy Group, our wholly-owned subsidiary, entered intonew credit facilities in an aggregate principal amount of $300 millionwith a syndicate of banks, financial institutions and other entities aslenders, including Credit Suisse, Cayman Islands Branch, as AdministrativeAgent, CIBC World Markets Corp., Bear Stearns Corporate Lending Inc. andLehman Commercial Paper, Inc. Our credit facilities provided for aseven-year term loan in the amount of $240 million and a five-year revolvingcredit facility in the amount of $60 million. Proceeds of the term loanwere used to repay our prior senior credit facility.

On January 1, 2007, Reddy Group merged with itswholly-owned subsidiary, Reddy Corp., with Reddy Corp. being the survivingentity. Our credit facilities were amended on that date to allow the merger andto provide for the assumption of our credit facilities by Reddy Corp.

At March 31, 2007, we had $46.8 million ofavailability under the revolving credit facility, which was net of outstandingstandby letters of credit of $6.9 million and outstanding balances underour revolving credit facility of $6.3 million. The standby letters of creditare used primarily to secure certain insurance obligations. In connection withthe renewal of certain insurance policies in the second and third quarters of2007, our outstanding standby letters of credit will increase through the firstquarter of 2008. However, later in 2007, this additional new collateral will bepartially offset by reductions in collateral related to earlier policy years.

Principal balances outstanding under our creditfacilities bear interest per annum, at our option, at the sum of the base rateplus 0.75% or LIBOR plus 1.75%. The base rate is defined as the greater of theprime rate (as announced from time to time by the Administrative Agent) or thefederal funds rate plus 0.5%. At March 31, 2007, the weighted averageinterest rate of borrowings outstanding under our credit facilities was 7.1%.Interest on base rate loans is payable on the last day of each quarter.Interest on LIBOR loans is payable upon maturity of the LIBOR loan or on thelast day of the quarter if the LIBOR loan exceeds 90 days. Reddy Corp.pays a quarterly fee on the average availability under our existing revolvingcredit facility based on an annual rate of 0.5% except as described below. Theterms of our credit facilities prohibit Reddy Corp. from paying dividends andotherwise transferring assets to Reddy Holdings, except for certain limiteddividends, the proceeds of which must be used to maintain Reddy Holdings’ corporateexistence.

In addition, our credit facilities will allow us toincur up to an additional $80 million of incremental term loans under ourcredit facilities, subject to certain conditions. No lenders have committed toprovide the incremental term loans. In the event that we incur incremental termloans that mature on or before the one year anniversary of the final maturityof the existing term loans and that bear interest with margins higher than themargin applicable to any term loans outstanding under our credit facilities,the margins applicable to the existing term loans will be increased to equalthe margins applicable to the incremental term loans. In the event that weincur incremental term loans that mature after the one-year anniversaryof the final maturity of the existing term loans and that bear interest withmargins more than 0.25% higher 

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than the marginsapplicable to any term loans outstanding under our credit facilities, themargins applicable to the existing term loans will be increased to equal themargins applicable to the incremental term loans, less 0.25%.

Our credit facilities do not require any scheduledprincipal payments prior to the stated maturity dates. Subject to certainconditions, mandatory repayments of the revolving credit facility and term loan(and if the term loan is no longer outstanding, mandatory commitment reductionsof the revolving credit facility) are required to be made with portions of theproceeds from (1) asset sales, (2) the issuance of debt securitiesand (3) insurance and condemnation awards, subject to various exceptions.In the event of a change in control, as defined in our credit facilities, anevent of default will occur under our credit facilities. Under our creditfacilities, Reddy Corp. may only pay dividends to Reddy Holdings if Reddy Corp.’stotal leverage ratio for the most recently ended fiscal quarter is less than orequal to 3.75 to 1.0. In addition, our credit facilities preclude Reddy Corp.from declaring any dividends if an event of default under our credit facilitieshas occurred and is continuing. In particular, it will be an event of defaultif Reddy Corp.’s leverage ratio exceeds 4.0 to 1.0 or Reddy Corp.’s interestcoverage ratio is less than 3.25 to 1.0.

Our credit facilities contain financial covenants,which include the maintenance of certain financial ratios, as defined in our creditfacilities, and is collateralized by substantially all of Reddy Corp.’s assetsand the capital stock of all of its subsidiaries. Reddy Holdings guaranteesReddy Corp.’s credit facilities and such guarantee is secured by the capitalstock of Reddy Corp. At March 31, 2007, Reddy Corp. was in compliance withthese covenants.

Under the restricted payments covenant in our creditfacilities, we generally are restricted from paying dividends. However, thecovenant includes an exception for paying dividends in an amount not greaterthan our Cumulative Distributable Cash for the period (taken as one accountingperiod) from July 1, 2005 to the end of our most recently-ended fiscalquarter for which a covenant compliance certificate under our credit facilitieshas been delivered to the lenders.

“CumulativeDistributable Cash” is defined under our credit facilities as:

(a)    $10,000,000,plus

(b)   “AvailableCash” for the period (taken as one accounting period) from July 1, 2005 tothe end of our most recently-ended fiscal quarter for which a covenantcompliance certificate under our credit facilities has been delivered to thelenders, plus

(c)    the amountof any net cash proceeds received by Reddy Holdings from issuances of shares ofReddy Holdings capital stock after the closing of our initial public offeringto the extent we have contributed such proceeds to Reddy Corp., less

(d)   (i) theamount of payments made by Reddy Corp. to Reddy Holdings to fund dividendpayments on, or repurchases of, Reddy Holdings capital stock or to pay cashinterest expense on, or redeem or repurchase, Reddy Holdings notes, (ii) amountsused to make restricted investments, less

(e)    to theextent occurring after the end of the most recently ended reference period anduntil taken into account in determining Available Cash for the fiscal quarterin which such event has occurred, (i) cash payments for acquisitions(except to the extent funded with indebtedness or proceeds of asset sales orcasualty events) and (ii) mandatory repayment of loans under our creditfacilities (other than under the revolving credit facility) during a dividendsuspension period.

“Available Cash”for any fiscal quarter is defined under our credit facilities as:

(a)    AdjustedEBITDA for such fiscal quarter, plus,

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(b)   to theextent not included in net income used to calculate for any fiscal quarter suchAdjusted EBITDA, the cash amount realized in respect of extraordinary,non-recurring or unusual gains, and less

(c)    (i) tothe extent included in net income used to calculate for any fiscal quarter suchAdjusted EBITDA, the amount of Reddy Corp.’s cash interest expense, Reddy Corp.’scash tax expense, the cash cost of any extraordinary, nonrecurring or unusuallosses, cash payments on account of non-cash losses or non-cash charges, (ii) capitalexpenditures (except to the extent funded with indebtedness (other than therevolving credit facility) or proceeds of asset sales or casualty events), (iii) cashpayments for acquisitions (except to the extent funded with indebtedness orproceeds of asset sales or casualty events) and (iv) payments andprepayments of the principal amount of indebtedness (other than payments andprepayments of the revolving credit facility) other than to the extent fundedwith indebtedness (other than indebtedness under our revolving creditfacility).

“Adjusted EBITDA”is defined under our credit facilities to be the sum of:

(a)    netincome, plus

(b)   to theextent deducted in determining net income, the sum of (i) amountsattributable to depreciation and amortization, (ii) income tax expense, (iii) interestexpense, (iv) any other non-cash charges (less non-cash income) for whichno cash reserves (or receivables) have been or will be set aside (or created)including non-cash compensation expenses, (v) any loss from theextinguishment of indebtedness, (vi) any fees paid prior to the closingdate of our initial public offering in respect of the monitoring agreement, (vii) transactionadjustments (as defined in our credit facilities and including the fees andexpenses incurred in connection with our initial public offering and therelated transactions), (viii) all fees and expenses incurred in connectionwith permitted acquisitions to the extent accounted for as expenses, (ix) forthe four fiscal quarters ending after September 30, 2004, an amount equalto the sum of (x) the special transaction payments paid to certain membersof management and certain directors in connection with the issuance of thesenior discount notes not to exceed $1.3 million plus (y) an amount not toexceed $4.0 million for other expenses incurred in connection with the issuanceof the senior discount notes and the related amendment to our credit facilitieswhich was in effect at the time of the senior discount notes offering.

Under Reddy Corp.’s credit facilities, Reddy Corp. mayonly pay dividends to us to make dividend payments on our common stock if ReddyCorp.’s total leverage ratio for the most recently ended fiscal quarter forwhich a covenant compliance certificate has been delivered is less than orequal to 3.75 to 1.0. If at the end of any fiscal quarter, Reddy Corp.’sleverage ratio is greater than 3.75 to 1.0, and therefore Reddy Corp. is notpermitted to pay dividends, Reddy Corp. will be required by Reddy Corp.’s creditfacilities to apply 50% of Reddy Corp.’s Available Cash generated during eachsuch quarter to make a mandatory prepayment of the loans under Reddy Corp.’s creditfacilities.

In addition, we and Reddy Corp. will be precluded frompaying any dividends if an event of default under Reddy Corp.’s credit facilitieshas occurred and is continuing. In particular, it will be an event of defaultif Reddy Corp.’s total leverage ratio exceeds 4.0 to 1.0 or Reddy Corp.’sinterest coverage ratio is less than 3.25 to 1.0.

Thefollowing table presents Adjusted EBITDA on a pro forma basis after givingeffect to the adjustments permitted under the description of the definition ofAdjusted EBITDA set forth above. Adjusted EBITDA is different from EBITDA thatis derived solely from GAAP components. Adjusted EBITDA should not be construedas an alternative to net loss, cash flows from operations or net cash fromoperating or investing activities as defined by GAAP, and it is not necessarilyindicative of cash available to fund our cash needs as determined in accordancewith GAAP. In addition, not all companies use identical 

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calculations, and this presentation may not becomparable to similarly titled measures of other companies. A reconciliation ofnet income to EBITDA and Adjusted EBITDA follows the table.

| ** **                 | ** ** | **Twelve Months Ended** | ** ** |
|----------------------------|------------|-----------------------------------|------------|
| ** **                 | ** ** | **March 31, 2007**      | ** ** |
| ** **                 | ** ** | **(unaudited,**                   | ** ** |
| ** **                 | ** ** | **in thousands)**            | ** ** |
| Pro forma  adjusted EBITDA |       |                              | $          | 90,300 |   |   |
| Total leverage  ratio      |       |                              | 2.7:1.0    |   |   |
| Interest coverage ratio    |       |                              | 5.6:1.0    |   |   |

 

Thefollowing table sets forth a reconciliation of net income to EBITDA andAdjusted EBITDA:

| ** **                                      | ** ** | **Twelve Months Ended** | ** ** |
|-------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                      | ** ** | **March 31, 2007**      | ** ** |
| ** **                                      | ** ** | **(in thousands)**           | ** ** |
| Net income                                      |       |                              | $          | 12,692 |   |   |
| Depreciation  expense related to costs of sales |       |                              | 19,894     |   |   |
| Depreciation and  amortization expense          |       |                              | 5,981      |   |   |
| Interest expense                                |       |                              | 30,023     |   |   |
| Interest income                                 |       |                              | (905       | ) |   |
| Income tax  expense                             |       |                              | 9,630      |   |   |
| EBITDA                                          |       |                              | 77,315     |   |   |
| Other non-cash charges:                         |       |                              |       |   |   |
| Stock-based compensation expense                |       |                              | 4,635      |   |   |
| Loss on disposition of assets                   |       |                              | 1,126      |   |   |
| Impairment of assets                            |       |                              | 3,718      |   |   |
| Transaction  expenses(a)                        |       |                              | 649        |   |   |
| Adjusted EBITDA                                 |       |                              | $          | 87,443 |   |   |
| Acquisition  adjustments(b)                     |       |                              | $          | 2,857 |   |   |
| Pro forma adjusted  EBITDA                      |       |                              | $          | 90,300 |   |   |

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(a)           Represents costsincurred in connection with our secondary stock offering in May 2006. Thesecondary offering costs were paid by Reddy Holdings from the excess cashremaining from the initial public offering of its common stock in August 2005.

(b)          Represents theincremental Adjusted EBITDA of acquired businesses as if each acquisition hadbeen consummated on the first day of the period presented. All acquisitionsincluded herein were consummated on or before March 31, 2007.

***Interest RateHedging Agreement.***   EffectiveSeptember 12, 2005, we entered into an interest rate hedging agreement(the “Hedge”) to fix the interest rate on a portion of our term loan facility.The Hedge has a term of three years and ten months and an initial notionalbalance of $220 million. The notional balance decreases by$20 million on October 12 of each of the following three years,beginning on October 12, 2006. We pay a fixed rate of 4.431% on thenotional balance outstanding and receive an amount equal to 3-monthLIBOR. Any net payable or receivable amount is settled quarterly. If we hadbeen required to settle the Hedge as of March 31, 2007, we would havereceived $1.8 million. The fair value of the Hedge is included in thecaption “Other Assets” in the consolidated balance sheet. Changes in the fairvalue of the Hedge are recorded as “Other Comprehensive Income” in theconsolidated statement of stockholders’ equity. We are exposed to risk of lossin the event of non-performance by the counterparty to the Hedge; however, wedo not anticipate non-performance by the counterparty.

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***Liquidity Outlook.  ***Dueto the seasonal nature of our business, we record the majority of our revenuesand profits during the months of May through September. The majority ofthe cash generated from those operations is received between July andNovember. We have used the excess cash generated from our 2006 selling seasonto fund our operations during the winter months, as well as capitalexpenditures, acquisitions and dividends to our common stockholders.

We estimate that our capital expenditures for 2007 willbe approximately $19 million to $21 million, which will primarily beused to maintain and expand our traditional ice operations. There can be noassurance that our capital expenditures will not exceed this estimate. In thenormal course of our business, we dispose of obsolete, worn-out and unneededassets. As a result of dispositions of excess assets, we estimate that we willgenerate proceeds of approximately $2 million to $3 million in 2007 fornet capital expenditures of approximately $16 million to $19 million.

Based on our expected level of operations, we believethat cash flows from operations, together with available borrowings under ourrevolving credit facility, will be adequate to meet our future liquidity needsfor at least the next twelve months. As of April 24, 2007, we hadapproximately $10 million of cash on hand and $31.5 million ofavailability under our revolving credit facility, which reflected outstandingstandby letters of credit of $6.9 million and outstanding balances of $21.6under our revolving credit facility.

From January 1, 2007 through April 25, 2007,we completed five acquisitions with an aggregate acquisition cost of $11.5million. We intend to pursue additional acquisitions throughout the remainder of2007, although such future acquisitions are subject to significantuncertainties as to timing, price and availability. 

On April 25, 2007, we announced that our board ofdirectors had approved an increase in our annual dividend rate from $1.60 pershare to $1.68 per share, effective for dividends expected to be declared forthe quarter ending June 30, 2007.

As noted previously, werecord the majority of our sales and profits during the months of May throughSeptember and the majority of the cash generated from those operations isreceived in August through November. During those months in 2007, weexpect to repay all amounts borrowed under our revolving credit facility in thespring, fund dividends on our common stock, fund current capital expendituresand debt service and build up cash balances.

**Recently AdoptedAccounting Pronouncements**

In September 2005, the SEC issued StaffAccounting Bulletin (“SAB”) No. 108. SAB 108 provides guidance on theconsideration of the effects of prior year misstatements in quantifying currentyear misstatements. SAB 108 is effective for fiscal years beginning after November 15,2006. Adoption of this standard did not have a material impact on our resultsof operations and financial position.

In June, 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”)No. 48, “Accounting for Uncertainty in Income Taxes”. FIN 48 clarifies theaccounting for uncertainty in income taxes by prescribing the minimumrecognition threshold a tax position is required to meet before beingrecognized in the financial statements. FIN 48 utilizes a two-step approach forevaluating tax positions. The first step, recognition, occurs when anenterprise concludes that a tax position, based solely on its technical merits ismore likely than not to be sustained upon examination. The second step,measurement, is only addressed if the recognition criteria have been satisfied.In the measurement process, the tax benefit is measured at the largest amountof benefit, determined on a cumulative probability basis, that is more likelythan not to be realized upon final settlement. FIN 48’s use of the term “morelikely than not” is consistent with how the term is used in SFAS No. 109(i.e. the likelihood of an occurrence greater than 50%). FIN 48 applies to alltax positions related to income taxes subject to SFAS 109. We adopted FIN 48 asof January 1, 2007. As a result of adoption, we recognized a 

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$2.9million increase in our liability for unrecognized tax benefits. This alsoresulted in a $1.8 million increase to our January 1, 2007 retaineddeficit balance and a $1.1 million increase in federal deferred tax benefitsrelated to the federal benefit of the unrecognized tax positions and a$0.8 million reclassification of amounts previously reserved atDecember 31, 2006. Adoption of this standard had no impact on our resultsof operations.

**New AccountingPronouncements**

In September 2006, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 157, “Fair Value Measurements”. SFAS No. 157 defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles and expands disclosures about fair value estimates. Thisstandard is effective for fiscal years beginning after November 15, 2007.We are currently evaluating the impact that this standard may have on ourresults of operations and financial position.

In February 2007, theFASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities, including an Amendment of FASB Statement No. 115”.SFAS No. 159 permits entities to choose to measure many financialinstruments and certain other items at fair value that are not currentlyrequired to be measured at fair value. The objective is to improve financialreporting by providing entities with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions. SFAS No. 159is effective for fiscal years beginning after November 15, 2007, althoughearlier adoption is permitted. We are currently evaluating the impact that thisstandard may have on our results of operations and financial position.

**Off-Balance SheetArrangements**

We have no off-balancesheet arrangements that have or are reasonably likely to have a current orfuture effect on our financial condition, changes in financial condition,revenues or expenses, results of operations, liquidity, capital expenditures orcapital resources.

**General EconomicTrends and Seasonality**

Our results of operations are generally affected bythe economic trends in our market area, but results to date have not beensignificantly impacted by inflation. If we experience an extended period ofhigh inflation, which affects multiple expense items, we believe that we willbe able to pass on these higher costs to our customers.

The ice business is highlyseasonal, with the bulk of demand coming in the warmer spring and summer months.We experience seasonal fluctuations in our net sales and profitability. We makea disproportionate amount of our sales in the second and third calendarquarters. We also typically have net income in these same periods, whereas wetypically experience net loss in the first and fourth quarters. We believe thatover two-thirds of our revenues will occur during the second and third calendarquarters when the weather conditions are generally warmer and demand isgreater, while less than one-third of our revenues will occur during the firstand fourth calendar quarters when the weather is generally cooler. This beliefis consistent with historical trends. As a result of seasonal revenue declinesand the lack of proportional corresponding expense decreases, we will mostlikely experience lower margins and even losses during the first and fourthcalendar quarters. In addition, because our operating results dependsignificantly on sales during our peak season, our quarterly results ofoperations may fluctuate significantly as a result of adverse weather duringthis peak selling period if the weather is unusually cool or rainy on a morenational or regional basis.

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**Item 3.**                        Quantitativeand Qualitative Disclosures About Market Risks

Market risk generally represents the risk that lossesmay occur in the value of financial instruments as a result of movements ininterest rates, foreign currency exchange rates and commodity prices. Our mainmarket risk category is interest rate risk.

We are exposed to some market risk due to the floatinginterest rates under our credit facilities. Principal balances outstandingunder the term loan and the revolving credit facility bear interest, at ouroption, at the London Inter-Bank Offered Rate (“LIBOR”) plus 1.75% or the primerate (as announced from time to time by the administrative agent) plus 0.75%.

Effective September 12, 2005, we entered into aninterest rate hedging agreement (the “Hedge”) to fix the interest rate on aportion of the term loan outstanding under our credit facilities. See “Liquidityand Capital Resources—Interest Rate Hedging Agreement”.

As of March 31, 2007,our credit facilities had an outstanding principal balance of$246.3 million at a weighted average interest rate of 7.1% per annum. Includingthe effect of the Hedge, the weighted average interest rate was 6.4%. At March 31,2007, the 30-day LIBOR rate was 5.32%. If LIBOR were to increase by 1%from that level, the annual increase in interest expense, given our principalbalances at March 31, 2007 and the effect of the Hedge, would beapproximately $0.5 million.

**Item 4.**                        Controlsand Procedures

The Company, under thesupervision and with the participation of its management, including the ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofthe design and operation of our “disclosure controls and procedures” (asdefined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934 (the “Exchange Act”)) as of the end of theperiod covered by this report. Based on that evaluation, the Chief ExecutiveOfficer and the Chief Financial Officer concluded that our disclosure controlsand procedures were effective as of March 31, 2007 to ensure thatinformation relating to us and our consolidated subsidiaries required to bedisclosed in our reports filed or submitted under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and that such information is accumulated and communicatedto our management, including our Chief Executive Officer and Chief FinancialOfficer, as appropriate to allow timely discussions regarding requireddisclosure. It should be noted, however, that the design of any system ofcontrols is limited in its ability to detect errors, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions, regardless of how remote. There has been no changein our internal control over financial reporting during the quarter ended March 31,2007 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

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**PART II—OTHERINFORMATION**

**Item 1.**                        LegalProceedings

We are from time to timeparty to legal proceedings that arise in the ordinary course of business. We donot believe that the resolution of any such threatened or pending legalproceedings will have a material adverse affect on our financial position,results of operations or liquidity.

**Item 1A.**                RiskFactors

There have been nomaterial changes to the risk factors disclosed in our Annual Report on Form 10-Kfor the year ended December 31, 2006.

**Item 2.**                        UnregisteredSales of Equity Securities and Use of Proceeds

None.

**Item3.****                        DefaultsUpon Senior Securities**

None.

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

None.

**Item 5.**                        OtherInformation

None.

**Item 6.**                        Exhibits

See Index to Exhibits on page 31.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.
|                            |   |   |   | **REDDY ICE HOLDINGS, INC.**           |
|----------------------------|--------|--------|--------|----------------------------------------|
| Date: April 26,  2007 |   | By:    |   | /s/ WILLIAM P. BRICK                   |
|                       |   |   |   | William P. Brick                       |
|                       |   |   |   | Chief Executive Officer                |
| Date: April 26,  2007 |   | By:    |   | /s/ STEVEN J. JANUSEK                  |
|                       |   |   |   | Steven J. Janusek                      |
|                       |   |   |   | Chief Financial and Accounting Officer |

 

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**INDEXTO EXHIBITS**
| Exhibit No. | ** ** | **Description**                                                                                                                                          |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1†       |       | Rules 13a-14(a) and  15d-14(a) Certification of Chief Executive Officer, pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2†       |       | Rules 13a-14(a) and  15d-14(a) Certification of Chief Financial Officer, pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1†       |       | Section 1350  Certification of Chief Executive Officer, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                 |
| 32.2†       |       | Section 1350  Certification of Chief Financial Officer, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                 |

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†                   Filed herewith.

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