**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**
| (Mark one)                                              |                                                                                                |
|---------------------------------------------------------|-----------------------------------------------------------------------------------------------------|
| x                                                       | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**   |
| **For the quarterly period ended March 31,  2006** |
| **OR**                                                  |
| o                                                       | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition period from          to           **

**Commissionfile number 001-32596**

**REDDY ICE HOLDINGS, INC.**

(Exact name of registrantas specified in its charter)

| **DELAWARE**                     |   | **56-2381368**                        |
|----------------------------------|--------|---------------------------------------|
| (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 thatthe registrant was required to file such reports), and (2) has beensubject to such 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   o   Non-accelerated filer x

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 25,2006 was 21,637,020.

 

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**REDDY ICE HOLDINGS,INC. AND SUBSIDIARYQUARTERLY REPORT ON FORM 10-QFOR THE PERIOD ENDED MARCH 31, 2006**

**TABLE OF CONTENTS**

|                   | ** ** |                                                                                                                      | ** ** | **Page** |
|-------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------|
|              |       | **PART I—FINANCIAL  INFORMATION**                                                                          |       |     |
| Item  1.          |       | Condensed  Consolidated Financial Statements                                                                         |       | 2        |
|              |       | Condensed Consolidated Balance Sheets as of  March 31, 2006 and December 31, 2005 (unaudited)              |       | 2        |
|              |       | Condensed Consolidated Statements of Operations for  the three months ended March 31, 2006 and 2005 (unaudited) |       | 3        |
|              |       | Condensed Consolidated Statement of Stockholders’  Equity as of March 31, 2006 (unaudited)                 |       | 4        |
|              |       | Condensed Consolidated Statements of Cash Flows for  the three months ended March 31, 2006 and 2005 (unaudited) |       | 5        |
|              |       | Notes to the Condensed Consolidated Financial  Statements                                                            |       | 6        |
| Item 2.           |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                          |       | 17       |
| Item 3.           |       | Quantitative and Qualitative Disclosures about Market  Risk                                                          |       | 29       |
| Item  4.          |       | Controls  and Procedures                                                                                             |       | 29       |
|              |       | **PART II—OTHER  INFORMATION**                                                                             |       |     |
| Item  1.          |       | Legal Proceedings                                                                                                    |       | 30       |
| Item  1A.         |       | Risk Factors                                                                                                         |       | 30       |
| Item 2.           |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                                         |       | 39       |
| Item 3.           |       | Defaults Upon Senior Securities                                                                                      |       | 39       |
| Item 4.           |       | Submission of Matters to a Vote of Security Holders                                                                  |       | 39       |
| Item  5.          |       | Other Information                                                                                                    |       | 39       |
| Item 6.           |       | Exhibits                                                                                                             |       | 39       |
| SIGNATURES        |       | 40                                                                                                                   |
| INDEX TO EXHIBITS |       | 41                                                                                                                   |

 

1

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**PART I—FINANCIALINFORMATION**

**Item 1.   *Financial Statements***

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

| ** **                                                                                                                                                                            | ** ** | **March 31,**                                                                                                   | ** ** | **December 31,**                                                                                          | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                                            | ** ** | **         2006         ** | ** ** | **         2005        ** | ** ** |
| ** **                                                                                                                                                                            | ** ** | **(in thousands, except share data)**                                                            | ** ** |
| **ASSETS**                                                                                                                                                                            |       |                                                                                                                 |       |                                                                                                           |       |   |   |   |   |
| CURRENT ASSETS:                                                                                                                                                                       |       |                                                                                                                 |       |                                                                                                           |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                             |       |                                                                                                                 | $          | 10,265                                                                                                         |       |   |   | $ | 33,997 |   |   |
| Accounts receivable, net                                                                                                                                                              |       |                                                                                                                 | 21,955     |                                                                                                           |       |   | 23,376 |   |   |
| Inventories                                                                                                                                                                           |       |                                                                                                                 | 12,425     |                                                                                                           |       |   | 10,087 |   |   |
| Prepaid expenses                                                                                                                                                                      |       |                                                                                                                 | 2,466      |                                                                                                           |       |   | 2,356 |   |   |
| Deferred tax assets                                                                                                                                                                   |       |                                                                                                                 | 2,484      |                                                                                                           |       |   | 2,740 |   |   |
| Total current assets                                                                                                                                                                  |       |                                                                                                                 | 49,595     |                                                                                                           |       |   | 72,556 |   |   |
| PROPERTY AND  EQUIPMENT, net                                                                                                                                                          |       |                                                                                                                 | 230,414    |                                                                                                           |       |   | 231,816 |   |   |
| GOODWILL                                                                                                                                                                              |       |                                                                                                                 | 215,334    |                                                                                                           |       |   | 214,968 |   |   |
| OTHER INTANGIBLES,  net                                                                                                                                                               |       |                                                                                                                 | 81,231     |                                                                                                           |       |   | 82,345 |   |   |
| OTHER ASSETS                                                                                                                                                                          |       |                                                                                                                 | 4,266      |                                                                                                           |       |   | 2,079 |   |   |
| TOTAL                                                                                                                                                                                 |       |                                                                                                                 | $          | 580,840                                                                                                        |       |   |   | $ | 603,764 |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                         |       |                                                                                                                 |       |                                                                                                           |       |   |   |   |   |
| CURRENT LIABILITIES:                                                                                                                                                                  |       |                                                                                                                 |       |                                                                                                           |       |   |   |   |   |
| Current portion of long-term obligations                                                                                                                                              |       |                                                                                                                 | $          | 73                                                                                                             |       |   |   | $ | 65 |   |   |
| Revolving credit facility                                                                                                                                                             |       |                                                                                                                 | —     |                                                                                                           |       |   | — |   |   |
| Accounts payable                                                                                                                                                                      |       |                                                                                                                 | 10,964     |                                                                                                           |       |   | 12,962 |   |   |
| Accrued expenses                                                                                                                                                                      |       |                                                                                                                 | 14,375     |                                                                                                           |       |   | 18,150 |   |   |
| Dividends payable                                                                                                                                                                     |       |                                                                                                                 | 8,276      |                                                                                                           |       |   | 8,296 |   |   |
| Total current liabilities                                                                                                                                                             |       |                                                                                                                 | 33,688     |                                                                                                           |       |   | 39,473 |   |   |
| LONG-TERM  OBLIGATIONS                                                                                                                                                                |       |                                                                                                                 | 355,776    |                                                                                                           |       |   | 352,895 |   |   |
| DEFERRED TAX  LIABILITIES, net                                                                                                                                                        |       |                                                                                                                 | 22,302     |                                                                                                           |       |   | 28,213 |   |   |
| COMMITMENTS AND  CONTINGENCIES (Note 10)                                                                                                                                              |       |                                                                                                                 | —     |                                                                                                           |       |   | — |   |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                            |       |                                                                                                                 |       |                                                                                                           |       |   |   |   |   |
| Common stock, $0.01 par value; 75,00,000 shares  authorized; 21,637,020 and 21,690,042 shares issued and outstanding at  March 31, 2006 and December 31, 2005, respectively |       |                                                                                                                 | 216        |                                                                                                           |       |   | 217 |   |   |
| Additional paid-in capital                                                                                                                                                            |       |                                                                                                                 | 213,255    |                                                                                                           |       |   | 213,096 |   |   |
| Unearned compensation                                                                                                                                                                 |       |                                                                                                                 | —     |                                                                                                           |       |   | (52 | ) |   |
| Accumulated deficit                                                                                                                                                                   |       |                                                                                                                 | (48,580    | )                                                                                                              |       |   | (32,065 | ) |   |
| Accumulated other comprehensive income                                                                                                                                                |       |                                                                                                                 | 4,183      |                                                                                                           |       |   | 1,987 |   |   |
| Total stockholders’ equity                                                                                                                                                       |       |                                                                                                                 | 169,074    |                                                                                                           |       |   | 183,183 |   |   |
| TOTAL                                                                                                                                                                                 |       |                                                                                                                 | $          | 580,840                                                                                                        |       |   |   | $ | 603,764 |   |   |

 

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,**                                                | ** ** |
| ** **                                     | ** ** | **2006**                                                          | ** ** | **2005** | ** ** |
| ** **                                     | ** ** | **(in thousands, except per  share amounts)** | ** ** |
| Revenues                                       |       | $                                                                 | 44,808     |   | $ | 39,244 |   |
| Cost of sales  (excluding depreciation)        |       | 34,413                                                            |       | 31,679 |   |
| Depreciation  expense related to cost of sales |       | 4,714                                                             |       | 4,741 |   |
| Gross profit                                   |       | 5,681                                                             |       | 2,824 |   |
| Operating  expenses                            |       | 11,089                                                            |       | 8,834 |   |
| Depreciation and  amortization expense         |       | 1,428                                                             |       | 1,415 |   |
| Loss on  dispositions of assets                |       | 104                                                               |       | 149 |   |
| Loss from  operations                          |       | (6,940                                                            | )          | (7,574 | ) |
| Interest expense                               |       | 6,954                                                             |       | 9,308 |   |
| Loss before  income taxes                      |       | (13,894                                                           | )          | (16,882 | ) |
| Income tax  benefit                            |       | 5,655                                                             |       | 6,702 |   |
| Net loss                                       |       | $                                                                 | (8,239     | ) | $ | (10,180 | ) |
| Basic and diluted  net loss per share:         |       |                                                              |       |   |   |
| Net loss                                       |       | $                                                                 | (0.39      | ) | $ | (0.74 | ) |
| Weighted average common shares outstanding     |       | 21,273                                                            |       | 13,728 |   |
| Cash dividends  declared per share             |       | $                                                                 | 0.3825     |   | $ | — |   |

 

See notes to condensed consolidated financial statements.

3

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARYCONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)(in thousands)**
| ** **                                                                       | ** ** | ** **            | ** ** | ** **     | ** ** | ** **  | ** ** | ** **       | ** ** | ** **      | ** **     | **Accumulated**   | ** ** | ** ** | ** **    |
|----------------------------------------------------------------------------------|------------|-----------------------|------------|----------------|------------|-------------|------------|------------------|------------|-----------------|----------------|-------------------|------------|------------|---------------|
| ** **                                                                       | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | ** **  | ** ** | ** **       | ** ** | **Other**       | ** **     | ** **        | ** ** |
| ** **                                                                       | ** ** | **Number**            | ** ** | **Par**        | ** ** | **Paid-In** | ** ** | **Unearned**     | ** ** | **Accumulated** | ** **     | **Comprehensive** | ** ** | ** ** | ** **    |
| ** **                                                                       | ** ** | **of Shares**    | ** ** | **Value**      | ** ** | **Capital** | ** ** | **Compensation** | ** ** | **Deficit**     | ** **     | **Income**        | ** ** | **Total**  | ** **    |
| Balance at January 1, 2006                                                  |       |                  | 21,690     |           |       |        | $ 217 |             |       |            | $ 213,096 |              |       |       | $ (52    | ) |   |   | $ (32,065 | ) |   |   | $ 1,987 |   |   | $ 183,183 |   |
| Reclassification of unearned compensation upon  adoption of SFAS No. 123(R) |       |                  | —     |           |       |        | —     |             |       |            | (52            | )                 |       |       | 52            |   |   |   | — |   |   |   | — |   |   | — |   |
| Compensation expense related to stock-based awards                               |       |                  | —     |           |       |        | —     |             |       |            | 1,245          |              |       |       | —        |   |   |   | — |   |   |   | — |   |   | 1,245 |   |
| Cash dividends declared                                                          |       |                  | —     |           |       |        | —     |             |       |            | —         |              |       |       | —        |   |   |   | (8,276 | ) |   |   | — |   |   | (8,276 | ) |
| Repurchase and retirement of common stock                                        |       |                  | (53        | )              |       |        | (1         | )                |       |            | (1,034         | )                 |       |       | —        |   |   |   | — |   |   |   | — |   |   | (1,035 | ) |
| Comprehensive loss:                                                              |       |                  |       |           |       |        |       |             |       |            |           |              |       |       |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                         |       |                  | —     |           |       |        | —     |             |       |            | —         |              |       |       | —        |   |   |   | (8,239 | ) |   |   | — |   |   | (8,239 | ) |
| Change in fair value of derivative asset                                         |       |                  | —     |           |       |        | —     |             |       |            | —         |              |       |       | —        |   |   |   | — |   |   |   | 2,196 |   |   | 2,196 |   |
| Total comprehensive loss                                                         |       |                  | —     |           |       |        | —     |             |       |            | —         |              |       |       | —        |   |   |   | — |   |   |   | — |   |   | (6,043 | ) |
| Balance at  March 31, 2006                                                  |       |                  | 21,637     |           |       |        | $ 216 |             |       |            | $ 213,255 |              |       |       | $ — |   |   |   | $ (48,580 | ) |   |   | $ 4,183 |   |   | $ 169,074 |   |

 

See notes to condensed consolidated financial statements.

4

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

| ** **                                                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                                                  | ** ** | **(in thousands)**                          | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                      |       |                                             |       |   |   |
| Net loss                                                                    |       | $                                                | (8,239     | ) | $ | (10,180 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities |       |                                             |       |   |   |
| (excluding  working capital from acquisitions):                             |       |                                             |       |   |   |
| Depreciation and amortization expense                                       |       | 6,142                                            |       | 6,156 |   |
| Amortization of debt issue costs and debt discount                          |       | 3,271                                            |       | 3,373 |   |
| Loss on dispositions of assets                                              |       | 104                                              |       | 149 |   |
| Stock-based compensation expense                                            |       | 1,245                                            |       | 284 |   |
| Deferred taxes                                                              |       | (5,655                                           | )          | (6,702 | ) |
| Change in assets  and liabilities:                                          |       |                                             |       |   |   |
| Accounts receivable, inventory and prepaid expenses                         |       | (980                                             | )          | 1,008 |   |
| Accounts payable, accrued expenses and other                                |       | (5,264                                           | )          | (8,750 | ) |
| Net cash used in operating activities                                       |       | (9,376                                           | )          | (14,662 | ) |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                      |       |                                             |       |   |   |
| Property and equipment additions                                            |       | (3,957                                           | )          | (5,729 | ) |
| Proceeds from dispositions of property and equipment                        |       | 353                                              |       | 388 |   |
| Cost of acquisitions                                                        |       | (1,404                                           | )          | — |   |
| Net cash used in investing activities                                       |       | (5,008                                           | )          | (5,341 | ) |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                      |       |                                             |       |   |   |
| Proceeds from the exercise of employee stock options                        |       | —                                           |       | 1,799 |   |
| Cash dividends paid                                                         |       | (8,296                                           | )          | — |   |
| Repurchase and retirement of common stock                                   |       | (1,035                                           | )          | — |   |
| Borrowings under the credit facility, net                                   |       | —                                           |       | 17,250 |   |
| Repayment of long-term obligations                                          |       | (17                                              | )          | (708 | ) |
| Net cash provided by (used in) financing activities                         |       | (9,348                                           | )          | 18,341 |   |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                   |       | (23,732                                          | )          | (1,662 | ) |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                             |       | 33,997                                           |       | 4,478 |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                   |       | $                                                | 10,265     |   | $ | 2,816 |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                          |       |                                             |       |   |   |
| Cash payments for interest                                                  |       | $                                                | 3,739      |   | $ | 9,332 |   |
| Borrowings under the credit facility                                        |       | $                                                | 1,700      |   | $ | 28,100 |   |
| Repayments on the credit facility                                           |       | $                                                | (1,700     | ) | $ | (10,850 | ) |
| Increase in fair value of derivative                                        |       | $                                                | 2,196      |   | $ | — |   |
| Cash dividends declared, not paid                                           |       | $                                                | 8,276      |   | $ | — |   |
| Excess tax benefit from vesting of restricted stock                         |       | $                                                | —     |   | $ | 600 |   |
| Additions to property and equipment included in  accounts payable           |       | $                                                | 399        |   | $ | — |   |
| Issuance of notes  payable                                                  |       | $                                                | —     |   | $ | 88 |   |

 

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, 2006 AND 2005**

**1.**   General

The condensed consolidated financial statements ofReddy Ice Holdings, Inc. and its wholly owned subsidiary (together, the “Company”)included herein are unaudited; however, the balance sheet as of December 31,2005 has been derived from the audited financial statements for that date.These financial statements have been prepared by the Company pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”). As applicableunder the SEC’s regulations, certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted. All significant intercompany balances and transactionshave been eliminated upon consolidation, and all adjustments which, in theopinion of management, are necessary for a fair presentation of the financialposition, results of operations and cash flows for the periods covered havebeen made and are of a normal and recurring nature. The financial statementsincluded herein should be read in conjunction with the consolidated financialstatements and the related notes thereto included in the Company’s annualreport on Form 10-K for the year ended December 31, 2005. Operatingresults for the three months ended March 31, 2006 are not necessarilyindicative of the results to be achieved for the full year.

Reddy Ice Holdings, Inc., a Delaware corporation(“Reddy Holdings”), and its wholly owned subsidiary, Cube Acquisition Corp. (“Cube”),a Texas corporation, were formed on behalf of Trimaran Fund Management LLC (“Trimaran”)and Bear Stearns Merchant Banking (“Bear Stearns”) on May 8, 2003 for thepurpose of acquiring Packaged Ice, Inc. (“Packaged Ice”) and effecting certaincapital transactions in connection with such acquisition. On August 15,2003, Cube merged with and into Packaged Ice, with Packaged Ice being the survivingcorporation. As a result of the merger, Packaged Ice was delisted from theAmerican Stock Exchange. Reddy Holdings and Cube conducted no operations duringthe period from May 8, 2003 through August 14, 2003. In connectionwith the merger, Packaged Ice was renamed Reddy Ice Group, Inc. (“ReddyGroup”). Reddy Holdings and its wholly owned subsidiary, Reddy Group, arereferred to collectively herein as the “Company”.

On August 12, 2005, Reddy Holdings completed aninitial public offering of its common stock (see Note 6). As a result ofthe offering, Reddy Holdings’ common shares are publicly traded on the New YorkStock Exchange under the ticker symbol “FRZ”.

The Company manufactures and distributes packaged iceproducts and bottled water and owns and operates refrigerated warehouses. TheCompany is the largest manufacturer of packaged ice products in the UnitedStates. The Company serves approximately 82,000 customer locations in 31 statesand the District of Columbia.

On August 2, 2005,the Company effected a 138 for 1 stock split and, in conjunction therewith,amended and restated the Company’s certificate of incorporation to increase thenumber of authorized shares of the Company’s common stock and preferred stock.All common share and per common share amounts in these condensed consolidatedfinancial statements prior to August 2, 2005 have been retroactivelyadjusted for all periods presented to give effect to the stock split, includingreclassifying an amount equal to the increase in par value from additionalpaid-in capital to common stock.

6

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (Continued)**

**2.   Acquisitions**

During the three monthsended March 31, 2006, the Company purchased two ice companies. Includingdirect acquisition costs, the total acquisition consideration was $1.4 million.The total purchase price was allocated to the acquired assets and assumedliabilities based upon estimates of their respective fair values as of the respectiveclosing dates using valuations and other studies. The following tablesummarizes the estimated fair values of the assets acquired and the liabilitiesassumed at the date of acquisition (dollars in millions):

| Total assets  acquired     |   | $      | 0.7    |   |
|----------------------------|--------|--------|--------|--------|
| Total liabilities  assumed |   | — |   |
| Net assets acquired        |   | $      | 0.7    |   |

 

The excess of the aggregate purchase price over thenet assets acquired of $0.7 million was allocated to goodwill ($0.3 million)and other intangible assets ($0.4 million). Other intangible assets arecomprised of customer lists, which are being amortized on a straight line basisover useful lives of 15 to 30 years.

During 2005, the Company purchased two ice companiesfor total acquisition consideration of $0.9 million. The results ofoperations of the 2005 acquisitions are included in the Company’s consolidatedresults of operations from the date of each acquisition, which occurred on August 1,2005 and September 30, 2005.

The following unauditedpro forma information presents the Company’s consolidated results of operations(i) for the three months ended March 31, 2006 as if the 2006acquisitions had all occurred on January 1, 2006 and (ii) for thethree months ended March 31, 2005 as if the 2006 and 2005 acquisitions hadall occurred on January 1, 2005:

| ** **          | ** ** | **Three Months Ended** | ** ** |
|---------------------|------------|----------------------------------|------------|
| ** **          | ** ** | **March 31,**               | ** ** |
| ** **          | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **          | ** ** | **(in thousands)**          | ** ** |
| Pro forma  revenues |       | $                                | 44,823     |   | $ | 39,460 |   |
| Pro forma net loss  |       | (8,254                           | )          | (10,237 | ) |
|                     |            |                                  |            |  |  |  |  |

 

**3.**   Inventories

Inventories consists ofraw materials, supplies and finished goods. Raw materials and supplies consistof ice packaging materials, spare parts, bottled water supplies andmerchandiser parts. Finished goods consist of packaged ice and bottled water.Inventories are valued at the lower of cost or market and include overhead allocations.Cost is determined using the first-in, first-out and average cost methods.

| ** **                  | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2006**                | ** ** | **2005**              | ** ** |
| ** **                  | ** ** | **(in thousands)** | ** ** |
| Raw materials and  supplies |       |                    | $          | 8,854                 |       |   |   | $ | 7,801 |   |   |
| Finished goods              |       | * *                | 3,571      |                  |       |   | 2,286 |   |   |
| Total                       |       |                    | $          | 12,425                |       |   |   | $ | 10,087 |   |   |

 

7

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (Continued)**

In November 2004, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 151, “Inventory Costs—an amendment ofARB No. 43, chapter 4”. SFAS No. 151 seeks to clarify the accountingfor abnormal amounts of idle facility expense, freight, handling costs, andwasted material (spoilage) in the determination of inventory carrying costs.The statement requires such costs to be treated as a current period expense.This statement is effective for fiscal years beginning after July 15,2005. The Company adopted SFAS No. 151 on January 1, 2006. Theadoption of SFAS No. 151 did not have a material effect on the Company’s resultsof operations and financial position.

**4.**   AccruedExpenses

| ** **                                                                                                     | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                                                                     | ** ** | **2006**                | ** ** | **2005**              | ** ** |
| ** **                                                                                                     | ** ** | **(in thousands)** | ** ** |
| Accrued  compensation and employee benefits, including payroll taxes and workers’  compensation insurance |       |                    | $          | 6,255                 |       |   |   | $ | 9,758 |   |   |
| Accrued interest                                                                                               |       |                    | 3,273      |                  |       |   | 3,329 |   |   |
| Accrued utilities                                                                                              |       |                    | 1,027      |                  |       |   | 1,425 |   |   |
| Accrued property,  sales and other taxes                                                                       |       |                    | 1,112      |                  |       |   | 539 |   |   |
| Other accrued  insurance                                                                                       |       |                    | 1,411      |                  |       |   | 1,940 |   |   |
| Other                                                                                                          |       |                    | 1,297      |                  |       |   | 1,159 |   |   |
| Total                                                                                                          |       |                    | $          | 14,375                |       |   |   | $ | 18,150 |   |   |

 

**5.   RevolvingCredit Facility and Long-Term Obligations**

*10**1**¤**2% SeniorDiscount Notes.**  *On October 27,2004, Reddy Holdings issued $151 million at maturity of 101¤2% SeniorDiscount Notes due 2012 (the “Discount Notes”) in a private placement offering.The Discount Notes were sold at 66.333% of the stated principal amount, whichresulted in gross proceeds of $100.2 million. The net proceeds of the offering,together with a dividend of approximately $28.4 million from Reddy Group,were used to redeem all of Reddy Holdings’ existing series A preferredstock for approximately $99.2 million, to pay accumulated dividends onsuch stock as of the date of redemption in the amount of approximately$15.0 million and to pay a dividend of approximately $10.4 million toReddy Holdings’ common stockholders. In connection with these transactions,Reddy Group made a special transaction payment of approximately$1.2 million in the aggregate to certain members of management and certaindirectors.

Each Discount Note had an initial accreted value of$663.33 per $1,000 principal amount at maturity. The accreted value of eachDiscount Note will increase from the date of issuance until November 1,2008 at a rate of 101⁄2% per annum such that the accreted value will equal thestated principal amount at maturity on November 1, 2008. Thereafter, cashinterest will accrue and be payable semi-annually at a rate of 101⁄2% perannum.

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;

8

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (Continued)**

·        equalin right of payment with any of Reddy Holdings’ existing and future unsecuredsenior indebtedness;

·        effectivelysubordinated to Reddy Holdings’ existing and future secured debt, includingReddy Holdings’ guarantee of Reddy Group’s senior credit facility; 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 principal amount 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 any orall 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 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. IfReddy Holdings experiences a change of control and does not elect to make theoptional redemption described in the previous sentence, Reddy Holdings will berequired to make an offer to repurchase the Discount Notes at a price equal to101% of their accreted value, plus accrued and unpaid interest, if any, to thedate of purchase. Reddy Holdings may also be required to make an offer topurchase the senior discount notes with proceeds of asset sales that are notreinvested in the Company’s business or used to repay other indebtedness.

The Discount Notes were registered with the SECeffective August 26, 2005, pursuant to the Registration Rights Agreement(the “Rights Agreement”) entered into at the time of issuance.

On July 28, 2005, Reddy Holdings obtained therequisite consents from the holders of the Discount Notes to amend thedefinition of “Consolidated Net Income” in the indenture governing the DiscountNotes in order to exclude certain one-time costs and expenses associated withReddy Holdings’ initial public offering of its common stock (See Note 6).

On August 26, 2005, Reddy Holdings paid $0.4million to purchase and retire Discount Notes with an aggregate principalamount at maturity of $0.5 million. A loss of $0.046 million was recognized inconnection with this transaction.

*8**7**¤**8% SeniorSubordinated Notes.*   On July 17, 2003, Cube completed thesale of $152 million of 87¤8%Senior Subordinated Notes due August 1, 2011 (the “Subordinated Notes”) inconnection with a private placement offering. The Subordinated Notes werepriced at 99.297%, which resulted in gross proceeds of $150.9 million. At theclosing of the merger on August 15, 2003 (see Note 1), Reddy Group assumedCube’s obligations under the Subordinated Notes and the related indenture andreceived the net proceeds of the offering. The net proceeds were used toconsummate Reddy Holding’s acquisition of Packaged Ice, 

9

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (Continued)**

which included therepayment of  the Packaged Ice’s $255million aggregate principal amount of 93⁄4% Senior Subordinated Notes due February 1,2005 and the outstanding balance of $61.7 million under its bank creditfacility. Interest was payable semiannually on February 1 and August 1,commencing on February 1, 2004. In conjunction with issuance of theSubordinated Notes, $7.0 million of debt issuance costs were incurred. Inconnection with the closing of Reddy Holdings’ initial public offering of itscommon stock, substantially all the outstanding Subordinated Notes wereredeemed (see discussion below in “Senior Credit Facility” for furtherinformation).

*SeniorCredit Facility.**  *On August 15,2003, Reddy Group entered into a $170 million senior secured credit facility,with the lenders being a syndicate of banks, financial institutions and otherentities, including Credit Suisse First Boston as Administrative Agent,Canadian Imperial Bank of Commerce and Bear Stearns Corporate Lending, Inc.(the “Old Credit Facility”). The Old Credit Facility provided for a six-yearterm loan in the amount of $135 million (the “Original Term Loan”) and afive-year revolving credit facility (the “Old Revolving Credit Facility”) inthe amount of $35 million. Proceeds of the Original Term Loan were used toconsummate the merger as discussed in Note 1. On November 6, 2003, the OldCredit Facility was amended to provide a Supplemental Term Loan (together withthe Original Term Loan, referred to as the “Old Term Loans”) in the amount of$45 million, the proceeds of which were used to fund a portion of the cost ofan acquisition. The Supplemental Term Loan had substantially the same terms asthe Original Term Loan.

On August 12, 2005, Reddy Group amended andrestated its credit facility with a syndicate of banks, financial institutionsand other entities as lenders, including Credit Suisse First Boston, asAdministrative Agent, Canadian Imperial Bank of Commerce, Bear StearnsCorporate Lending, Inc. and Lehman Brothers, Inc. (the “CreditFacility”), to increase the maximum amount of the revolving credit facility to$60 million (the “Revolving Credit Facility”), provide for a $240 million termloan (the “Term Loan”), reduce the applicable margins on both the RevolvingCredit Facility and Term Loan and extend the maturity of the Revolving CreditFacility to August 12, 2010 and the Term Loan to August 12, 2012.Borrowings under the Revolving Credit Facility and the Term Loan, along withproceeds from the Company’s initial public offering (see Note 6), were used torepay the Old Credit Facility, repurchase substantially all of the Company’sexisting Subordinated Notes and fund other related transactions. A loss onextinguishment of debt of $28.1 million was incurred in connection with thesetransactions. The loss was due to the payment of tender premiums and consentfees to the holders of the Subordinated Notes ($17.3 million), the write-off ofdeferred debt costs and original issue discount related to the SubordinatedNotes and the Old Credit Facility ($10.6 million) and other fees and expenses($0.2 million).

At March 31, 2006, the Company had$54.2 million of availability under the Revolving Credit Facility, whichwas net of outstanding standby letters of credit of $5.8 million. The standbyletters of credit are used primarily to secure certain insurance obligations.

Principal balances outstanding under the CreditFacility bear interest per annum, at Reddy Group’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, 2006, theweighted average interest rate of borrowings outstanding under the CreditFacility was 6.3%. 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 

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (Continued)**

the term of the LIBOR loanexceeds 90 days. Reddy Group pays a quarterly fee on the averageavailability under the Revolving Credit Facility based on an annual rate of0.5%.

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 Facility, an event of default will occur under the Credit Facility.Under the Credit Facility, Reddy Group may only pay dividends to Reddy Holdingsif Reddy Group’s leverage ratio for the most recently ended fiscal quarter isless than or equal to 3.75 to 1.0. In addition, the Credit Facility precludesReddy Group from declaring any dividends if an event of default under theCredit Facility has occurred and is continuing. In particular, it will be anevent of default if Reddy Group’s leverage ratio exceeds 4.0 to 1.0 or ReddyGroup’s interest coverage ratio is less than 3.25 to 1.0.

The Credit Facility contains financial covenants,which include the maintenance of certain financial ratios, as defined in theCredit Facility, and is collateralized by substantially all of Reddy Group’sassets and the capital stock of all of its subsidiaries. Reddy Holdingsguarantees the Credit Facility and such guarantee is secured by the capitalstock of Reddy Group. At March 31, 2006, Reddy Group was in compliancewith these covenants.

*InterestRate Hedging Agreement.*   EffectiveSeptember 12, 2005, Reddy Group entered into an interest rate hedgingagreement (the “Hedge”) to fix the interest rate on a portion of its Term Loan.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 onOctober 12 of each of the next three years, beginning on October 12,2006. Reddy Group pays a fixed rate of 4.431% on the notional balanceoutstanding and receives an amount equal to 3-month LIBOR. Any netpayable or receivable amount is settled quarterly. If Reddy Group had been requiredto settle the Hedge as of March 31, 2006, it would have received $4.2million. The fair value of the Hedge is included in the caption “Other Assets”in the consolidated balance sheet. Changes in the fair value of the Hedge arerecorded as “Other Comprehensive Income” in the consolidated statement ofstockholders’ equity. Reddy Group is exposed to risk of loss in the event ofnon-performance by the counterparty to the Hedge; however, it does notanticipate non-performance by the counterparty.

At March 31, 2006 andDecember 31, 2005, long-term obligations consisted of the following:

| ** **                                                          | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **2006**                | ** ** | **2005**              | ** ** |
| ** **                                                          | ** ** | **(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 |       | (34,940                 | )          |                  | (37,846    | ) |   |
| Other                                                               |       | 289                     |       |                  | 306        |   |   |
| Total long-term  obligations                                        |       | 355,849                 |       |                  | 352,960    |   |   |
| Less: current  maturities                                           |       | 73                      |       |                  | 65         |   |   |
| Long-term  obligations, net of current maturities                   |       | $                       | 355,776    |                  |       | $ | 352,895 |   |   |

 

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***REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (Continued)***

**6.**   Capital Stock

*Common Stock.**  *Reddy Holdingsis authorized to issue up to 75,000,000 shares of common stock, par value $0.01per share. Holders of Reddy Holdings’ common stock are entitled to one vote pershare on all matters to be voted on by stockholders and are entitled to receivedividends, if any, as may be declared from time to time by the Board ofDirectors of Reddy Holdings. Upon any liquidation or dissolution of ReddyHoldings, the holders of common stock are entitled, subject to any preferentialrights of the holders of preferred stock, to receive a pro rata share of all ofthe assets remaining available for distribution to stockholders after paymentof all liabilities.

On February 11, 2005,Reddy Holdings filed a registration statement on Form S-1 with theSEC for a proposed initial public offering of its common stock. Theregistration statement was declared effective by the SEC on August 10,2005 at a public offering price of $18.50 per share. A portion of the shareswere sold by Reddy Holdings and a portion were sold by certain of ReddyHoldings’ stockholders. The number of shares offered by Reddy Holdings and theselling stockholders was 6,911,765 and 3,288,235, respectively. The sellingstockholders also granted the underwriters a 30-day option to purchase upto 1,530,000 additional shares to cover any over-allotments. The underwriters’over-allotment option was exercised on August 11, 2005. Reddy Holdingsreceived proceeds from the offering, net of issuance costs, of $116.2 millionon August 12, 2005.

On March 17, 2005,certain employees exercised stock options granted under the 2003 Stock OptionPlan to purchase 248,198 shares of Reddy Holdings’ common stock for anaggregate purchase price of approximately $1.8 million. On August 8,2005, Reddy Holdings amended the 2003 Stock Option Plan to accelerate the schedulefor vesting of time-based options, immediately vest all outstandingperformance-based options, allow unvested options to be exercised for restrictedstock with identical vesting schedules and provide for accelerated vesting ofoptions upon the termination of an option holder’s employment under certaincircumstances. During the three months ended September 30, 2005, a chargeof $0.5 million was recorded in “Operating Expenses” in the consolidatedstatements of operations in connection with the acceleration of vestingschedules.

On August 12, 2005,certain employees and directors performed a cashless exercise of stock optionsgranted under the 2003 Stock Option Plan, which resulted in the issuance of808,818 shares of common stock, 465,651 of which were restricted shares. Inaccordance with the 2003 Stock Option Plan, as amended, restricted shares veston the following schedule: 40% on February 28, 2006, 40% on January 16,2007 and 20% on July 1, 2007. In connection with the scheduledvesting on February 28, 2006, the Company purchased and retired 51,256shares of common stock from employees for $1.0 million to provide the employeeswith funds to satisfy their minimum statutory federal and state tax withholdingobligations related to the vesting of their restricted stock on that date. Thepurchase price was $20.20 per share, the closing market price on February 28,2006.

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***REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (Continued)***

Since August 1, 2005,the board of directors of Reddy Holdings have declared the following dividendson the Company’s common stock:

| ** **             | ** ** | ** **              | ** ** | ** **            | ** ** | **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 |

* *

*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 Benefit Plans**

*2005 Equity IncentivePlan.**  *On August 8,2005, the board of directors and stockholders of Reddy Holdings approved the2005 Equity Incentive Plan. Under the 2005 Equity Incentive Plan, up to 750,000shares of common stock may be issued to employees, directors and certain thirdparties in connection with various incentive awards, including stock options,restricted shares and restricted share units. On October 18, 2005, ReddyHoldings filed a Registration Statement on Form S-8 with the SEC tocover the reoffer and resale of up to 750,000 shares of Reddy Holdings’ commonstock that Reddy Holdings may issue in the future to participants in the 2005 EquityIncentive Plan.

On November 3, 2005,9,300 unrestricted common shares were granted to certain employees under the2005 Equity Incentive Plan. Restricted share units (“RSUs”) have been grantedto certain employees and the independent directors of Reddy Holdings in thefollowing amounts: 682,000 RSUs on November 3, 2005,  10,000 RSUs on November 15, 2005 and 9,625RSUs on February 22, 2006. Each RSU provides for the grant of one share ofunrestricted common stock on the date that the vesting terms of each RSU issatisfied.

Generally, fifty percentof each award of RSUs (the “Time-vested RSUs”) will vest in four equal annualinstallments beginning on August 12, 2006 and continuing on August 12of each of the following three years, provided the recipient remains employedwith the Company through such vesting dates. The remaining fifty percent ofeach award of RSUs (the “Performance-vested RSUs”) will vest in four equalannual installments beginning on August 12, 2006 and continuing on August 12of each of the following three years, provided the recipient remains employedwith the Company through such vesting dates and the applicable performancecondition for the applicable vesting period is met. The performance conditionfor each vesting period will be based on the Company’s earned distributablecash per share (as defined in the related restricted share unit agreement) forsuch vesting period. Each vesting period will begin on July 1 and end on June 30of the subsequent year. All RSUs will immediately vest in full, and shares willbe distributed, at the time of a Change in Control (as defined in the 2005Equity Incentive Plan). If in any performance period the performance conditionfor a subsequent performance period is achieved, Performance-vested RSUs willbe entitled to dividend equivalent rights in the subsequent performance periodequal to the dividends which would be payable on the shares of common stockrepresented by the RSUs subject to vesting in that period. Payments of such dividendequivalents will be made in cash to the 

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***REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (Continued)***

holdersof RSUs at the time of actual dividend payments and will not be subject tovesting. Time-vested RSUs will not be entitled to dividend equivalent rights.

Compensation expenseassociated with the 2005 Equity Incentive Plan was $0.9 million during thethree months ended March 31, 2006. Such compensation expense was recordedin “Operating Expenses” in the consolidated statements of operations. Approximatelytwenty-five percent of the Time-vested RSUs are being expensed during eachperiod ending August 12 in 2006 to 2009. Performance-vested RSUs are beingexpensed on the same basis as it is management’s belief that the performancecondition for each period will be met. As of March 31, 2006, 697,625shares were reserved for issuance and 43,075 shares were available for grantunder the 2005 Equity Incentive Plan.

*2003 Stock Option Plan.**  *The 2003 Stock Option Plan wasamended on August 8, 2005 (see Note 6). On August 12, 2005, alloutstanding options under the 2003 Stock Option Plan were exercised in exchangefor restricted shares (see Note 6). At March 31, 2006, 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. Compensationexpense associated with the 2003 Stock Option Plan was $0.3 million during thethree months ended March 31, 2006 and 2005. Such compensation expense wasrecorded in “Operating Expenses” in the consolidated statements of operations.

Effective January 1,2005, the Company adopted the fair value recognition provisions of SFAS No. 123,“Accounting for Stock-Based Compensation”, as amended by SFAS No. 148,“Accounting for Stock-Based Compensation—Transition and Disclosure”.Under the provisions of SFAS No. 148, the Company selected the modifiedprospective method of adoption and therefore began recognizing stock-basedemployee compensation cost related to all employee equity grants outstanding atthe date of adoption, as well as grants made or modified thereafter.

In December 2004, theFASB issued SFAS No. 123(R), “Share-Based Payment”, whichestablished accounting standards for all transactions in which an entityexchanges its equity instruments for goods and services. SFAS No. 123(R) generallyrequires companies to measure the cost of employee services received inexchange for an award of equity instruments based on the fair value of theaward on the date of the grant. The standard requires grant date fair value tobe estimated using either an option-pricing model which is consistentwith the terms of the award or a market observed price, if such a price exists.Such cost must be recognized over the period during which an employee isrequired to provide service in exchange for the award, which is usually thevesting period. The standard also requires the Company to estimate the numberof instruments that will ultimately be issued, rather than accounting forforfeitures as they occur.

The Company adopted SFAS No. 123(R) onJanuary 1, 2006 using the modified prospective method and straight lineamortization of compensation cost. The adoption of this standard did not have amaterial effect on the Company’s results of operations and financial position.

**8.**   Net Loss Per Share

The computation of netloss per share is based on net loss divided by the weighted average number ofshares outstanding. For the three months March 31, 2006, there were399,000 shares of restricted stock and 691,000 RSUs which are not included inthe computation of diluted net loss per share as their effect would 

14

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***REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (Continued)***

beanti-dilutive. For the three months March 31, 2005, there were 1,536,000stock options which are not included in the computation of diluted net loss pershare as their effect would be anti-dilutive.

**9.   Income Taxes**

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.

In connection with thevesting of restricted stock on February 28, 2006 (see Note 6), the Companyrealized an excess tax benefit of $1.3 million. Because the Company is notcurrently making cash payments for income taxes due to its net operating loss (“NOL”)carryforwards, such excess benefit has not been recognized in the Company’sfinancial statements and is being reported as a “suspended NOL carryforward” inthe footnotes to the consolidated financial statements in accordance with SFAS No. 123(R).

**10.   Commitments and Contingencies**

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 theincurrence of 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 warehouses and the manufacturing and distribution ofbottled water.

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 endedMarch 31, 2006 and 2005.

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (Continued)**

Segmentinformation for the three months ended March 31, 2006 and 2005 was asfollows:

| ** **                              | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **March 31, 2006**     | ** ** | **March 31, 2005**     | ** ** |
| ** **                              | ** ** | **Ice**                          | ** ** | **Non-Ice**                      | ** ** | **Total** | ** ** | **Ice** | ** ** | **Non-Ice** | ** ** | **Total** | ** ** |
| ** **                              | ** ** | **(in thousands)**          | ** ** |
| Revenues                                |       | $                                | 41,738     |                             | $          | 3,070 |   | $ | 44,808 |   | $ | 35,989 |   | $ | 3,255 |   | $ | 39,244 |   |
| Cost of sales  (excluding depreciation) |       | 32,351                           |       | 2,062                            |       | 34,413 |   | 29,464 |   | 2,215 |   | 31,679 |   |
| Operating  expenses                     |       | 10,700                           |       | 389                              |       | 11,089 |   | 8,317 |   | 517 |   | 8,834 |   |
| Segment EBITDA                          |       | $                                | (1,313     | )                                | $          | 619 |   | $ | (694 | ) | $ | (1,792 | ) | $ | 523 |   | $ | (1,269 | ) |
| Total assets                            |       | $                                | 556,225    |                             | $          | 24,615 |   | $ | 580,840 |   | $ | 551,559 |   | $ | 32,987 |   | $ | 584,546 |   |

 

Thereconciliation of Segment EBITDA to net loss for the three months ended March 31,2006 and 2005 was as follows:

| ** **                                     | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | **March 31,**               | ** ** |
| ** **                                     | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                                     | ** ** | **(in thousands)**          | ** ** |
| Total Segment  EBITDA                          |       | $                                | (694       | ) | $ | (1,269 | ) |
| Depreciation  expense related to cost of sales |       | (4,714                           | )          | (4,741 | ) |
| Depreciation and  amortization expense         |       | (1,428                           | )          | (1,415 | ) |
| Loss on  dispositions of assets                |       | (104                             | )          | (149 | ) |
| Interest expense                               |       | (6,954                           | )          | (9,308 | ) |
| Income tax  benefit                            |       | 5,655                            |       | 6,702 |   |
| Net loss                                       |       | $                                | (8,239     | ) | $ | (10,180 | ) |

 

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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 31,2005, previously filed with the SEC. As used in this section, “Reddy Group”refers to Reddy Ice Group, Inc., formerly known as Packaged Ice, Inc.,and not its subsidiaries, and “Reddy Holdings” refers to Reddy Ice Holdings, Inc.and not its subsidiaries.

**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, wecannot assure you that such expectations will occur. These forward-lookingstatements involve known and unknown risks, uncertainties and other factorsthat may cause our actual results, performance or achievements to be materiallydifferent from future results expressed or implied by the forward-lookingstatements. Factors you should consider that could cause these differences are:

·       generaleconomic trends and seasonality;

·       weatherconditions;

·       theability of our subsidiaries 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;

·       therestrictive covenants under our indebtedness;

·       availabilityof capital sources;

·       fluctuationsin operating costs, including the prices of electricity, fuel, polyethylene andother 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 acquired businesses;

·       technologicalchanges and innovations;

·       legislativeor regulatory requirements; and

·       allthe other factors described herein under Item 1A of Part II.

You should not unduly relyon these forward-looking statements, as they speak only as of the date ofthis report. Except as required by law, we are not obligated to publicly releaseany revisions to these forward-looking statements to reflect events orcircumstances occurring after the date of this report or to reflect the occurrenceof unanticipated events. Important factors that could cause our actual resultsto differ materially from our expectations are discussed elsewhere in thisreport.

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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 93%of our revenues in the three months ended March 31, 2006 and 92% ofrevenues in the three months ended March 31, 2005. Our ice productsbusiness consists of:

·       thetraditional manufacture and delivery of ice from a central point of productionto the point of sale; and

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

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

***Seasonality.******  ***The packagedice business is highly seasonal, characterized by peak demand during the warmermonths of May through September, with an extended peak selling season inthe southern United States. Approximately 69%, 68% and 66% of our annualrevenues occurred during the second and third calendar quarters in each of2005, 2004 and 2003. Approximately 68% of our annual revenues also occurredduring the second and third calendar quarters of 2002, 2001 and 2000. Thehigher level of sales in 2005 was primarily due to the effects of the hurricaneseason, which caused a significant increase in sales during the third quarterof 2005. The lower level in 2003 was primarily due to the timing of our acquisitions,which occurred in the fourth quarter of that year. As a result of seasonal revenuedeclines and a less than proportional decline in expenses during the first andfourth quarters, we typically experience lower margins resulting in lossesduring these periods. In addition, because our operating results depend significantlyon sales during our peak season, our quarterly results of operations mayfluctuate significantly as a result of adverse weather during this peak sellingperiod if the weather is unusually cool or rainy on a national or regionalbasis.

***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);

·       productdelivery expenses, including fuel and vehicle rental expense related toproducts delivered by our own distribution network, as well as fees paid todistributors who deliver ice to our customers on our behalf;

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

·       IceFactory-related costs associated with customer service representativesand machine technicians (note, however, that Ice Factories generally do notincrease our plant occupancy, delivery or utility costs).

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***Depreciation andAmortization.******  ***Depreciation and amortization aredivided into two line items—depreciation expense related to cost of sales anddepreciation and amortization expense. Depreciation expense related to cost ofsales consists of depreciation expense for our production and distributionequipment. Depreciation and amortization expense consists of depreciation andamortization expense for our selling, general and administrative 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-basedcompensation expense, included in operating expenses represented approximately12% of revenues in the three months ended March 31, 2006 and 2005.

***Facilities.******  ***At March 31,2006, we owned or operated 58 ice manufacturing facilities,54 distribution centers, approximately 79,000 merchandisers (cold storageunits installed at customer locations), approximately 3,000 Ice Factories, fiverefrigerated warehouses and one bottled water plant. As of the same date, wehad an aggregate daily ice manufacturing capacity of approximately 17,000 tons.

**Three Months Ended March 31, 2006 Compared toThree Months Ended March 31, 2005**

| ** **                                     | ** ** | **Three Months Ended  March 31,** | ** ** | **Change from Last  Year** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                     | ** ** | **2006**                                         | ** ** | **2005**                             | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                     | ** ** | **(in thousands)**                          | ** ** |
| **Consolidated  Results**                      | ** ** | ** **                                       | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                       |       | $                                                | 44,808     |                                 | $          | 39,244 |   | $ | 5,564 |   | 14.2 |   |
| Cost of sales  (excluding depreciation)        |       | 34,413                                           |       | 31,679                               |       | 2,734 |   | 8.6 |   |
| Depreciation  expense related to cost of sales |       | 4,714                                            |       | 4,741                                |       | (27 | ) | (0.6 | ) |
| Gross profit                                   |       | 5,681                                            |       | 2,824                                |       | 2,857 |   | 101.2 |   |
| Operating  expenses                            |       | 11,089                                           |       | 8,834                                |       | 2,255 |   | 25.5 |   |
| Depreciation and  amortization expense         |       | 1,428                                            |       | 1,415                                |       | 13 |   | 0.9 |   |
| Loss on  dispositions of assets                |       | 104                                              |       | 149                                  |       | (45 | ) | (30.2 | ) |
| Loss from operations                           |       | (6,940                                           | )          | (7,574                               | )          | 634 |   | 8.4 |   |
| Interest expense                               |       | 6,954                                            |       | 9,308                                |       | (2,354 | ) | (25.3 | ) |
| Loss before  income taxes                      |       | (13,894                                          | )          | (16,882                              | )          | 2,988 |   | 17.7 |   |
| Income tax  benefit                            |       | 5,655                                            |       | 6,702                                |       | (1,047 | ) | (15.6 | ) |
| Net loss                                       |       | $                                                | (8,239     | )                                    | $          | (10,180 | ) | $ | 1,941 |   | 19.1 |   |
| **Ice Operations:**                            | ** ** | ** **                                       | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                       |       | $                                                | 41,738     |                                 | $          | 35,989 |   | $ | 5,749 |   | 16.0 |   |
| Cost of sales  (excluding depreciation)        |       | 32,351                                           |       | 29,464                               |       | 2,887 |   | 9.8 |   |
| Depreciation  expense related to cost of sales |       | 4,464                                            |       | 4,466                                |       | (2 | ) | (0.0 | ) |
| Gross profit                                   |       | 4,923                                            |       | 2,059                                |       | 2,864 |   | 139.1 |   |
| Operating  expenses                            |       | 10,700                                           |       | 8,317                                |       | 2,383 |   | 28.7 |   |
| **Non-Ice Operations:**                        | ** ** | ** **                                       | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                       |       | $                                                | 3,070      |                                 | $          | 3,255 |   | $ | (185 | ) | (5.7 | ) |
| Cost of sales  (excluding depreciation)        |       | 2,062                                            |       | 2,215                                |       | (153 | ) | (6.9 | ) |
| Depreciation  expense related to cost of sales |       | 250                                              |       | 275                                  |       | (25 | ) | (9.1 | ) |
| Gross profit                                   |       | 758                                              |       | 765                                  |       | (7 | ) | (0.9 | ) |
| Operating expenses                             |       | 389                                              |       | 517                                  |       | (128 | ) | (24.8 | ) |

* *

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***Revenues:****  *Revenues increased $5.6 million from the three monthsended March 31, 2005 to the three months ended March 31, 2006. Thisincrease is primarily due to the effects of the higher average pricing,increases in ice volume sales due to warmer and drier average weatherconditions in our markets and the continuing positive effects of package sizinginitiatives, which consists primarily of converting a portion of our ice salesfrom seven to ten pound bags.

***Cost ofSales (Excluding Depreciation):***   Cost ofsales (excluding depreciation) increased $2.7 million from the three monthsended March 31, 2005 to the three months ended March 31, 2006. Thisincrease in cost of sales is primarily due to increased costs of plastic bags,electricity, fuel and third party distribution expense related to sales volumeincreases. Bag costs and fuel costs also increased due to higher market pricesof energy related items. Partially offsetting these increases was a $0.6million decrease in insurance costs, primarily health insurance, and a $0.4million decrease in other employee benefit costs.

Labor costs, includingassociated payroll taxes and benefit costs (including health insurance),accounted for approximately 32% and 36% of revenues in the three months ended March 31,2006 and 2005, respectively. Cost of plastic bags represented approximately 7%of revenues in the three months ended March 31, 2006 and 6% of revenues inthe three months ended March 31, 2005. Fuel expenses representedapproximately 4% and 3% of revenues in the three months ended March 31,2006 and 2005, respectively. Expenses for independent third party distributionservices represented approximately 6% of revenues in the three months ended March 31,2006 and 2005. Electricity expense represented approximately 7% of revenues inthe three months ended March 31, 2006 and 2005.

***DepreciationExpense Related to Cost of Sales:****  *Depreciation expense related to cost of salesdecreased $0.03 million due to the effect of asset dispositions and assetsbecoming fully depreciated, partially offset by additional depreciation expenseof approximately $0.5 million associated with production and distributionequipment placed in service during 2005 and early 2006.

***OperatingExpenses:****  *Operatingexpenses increased $2.3 million from the three months ended March 31, 2005to the three months ended March 31, 2006. This increase is primarily dueto an increase of $1.0 million in non-cash stock-based compensation expense, anincrease of $0.7 million in accrued incentive compensation and $0.5 million ofprofessional services and other costs incurred during the three months ended March 31,2006 in connection with a potential acquisition that we are no longer pursuing,partially offset by reduced bad debt expense of $0.4 million.

***Depreciationand Amortization:****  *Depreciationand amortization increased $0.01 million from the three months ended March 31,2005 to the three months ended March 31, 2006. This increase is primarilydue to additional amortization expense associated with the intangible assetsrecorded in connection with the acquisitions completed in 2005 and the threemonths ended March 31, 2006.

***InterestExpense:***   Interest expense decreased $2.4million from the three months ended March 31, 2005 to the three monthsended March 31, 2006, primarily due to the repurchase of substantially allof our 87¤8%senior subordinated notes on August 15, 2005, partially offset by a$1.5 million increase in term loan interest.

**Liquidity and Capital Resources**

We generate cash from thesale of packaged ice through traditional delivery methods, by which we manufacture,package and store ice at a central facility and transport it to our customers’retail locations when needed, and through Ice Factories, which manufacture,package and store ice in our customers’ retail locations. Our primary uses ofcash are (a) cost of sales, (b) operating expenses, (c) debtservice, (d) dividends on our common stock, (e) capital expendituresrelated to replacing and modernizing the capital equipment in our traditionalice plants and acquiring and installing additional Ice Factories and (f) acquisitions.Historically, we have financed our capital and working capital requirements, includingour 

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acquisitions,through a combination of cash flows from operations, borrowings under ourrevolving credit facilities and operating leases.

Our ability to generatecash from our operations is subject to weather, general economic, financial, competitive,legislative, regulatory and other factors that are beyond our control. As aresult, we cannot assure you that our business will generate sufficient cashflow from operations in amounts sufficient to enable us to service our debt andto fund our other liquidity needs. If we do not have sufficient liquidity, wewill have to take actions such as reducing or delaying the payment of dividendsto our common stockholders, strategic acquisitions, investments and jointventures, selling assets, restructuring or refinancing our debt or seekingadditional equity capital. We cannot assure you that any of these remediescould, if necessary, be effected on commercially reasonable terms, or at all.In addition, the terms of our debt instruments may restrict us from adoptingsome of these alternatives.

During the three monthsended March 31, 2006, capital expenditures totaled $4.0 million. Aswe have consolidated acquisitions into the existing company infrastructure, wehave identified non-core and excess assets which can be disposed of. From timeto time, we also dispose of other assets which are no longer useful in ouroperations. As a result of dispositions of these non-core and excess assets, werealized proceeds of approximately $0.4 million in the three months ended March 31,2006. Our net capital expenditures in the three months ended March 31,2006 were $3.6 million.

In the three months ended March 31,2006, we completed the acquisition of two small ice companies for a total cashpurchase price of approximately $1.4 million, including direct acquisitioncosts of $0.03 million. We will continue to evaluate acquisitionopportunities as they become available. In conjunction with these evaluations,we will consider our liquidity, availability under Reddy Group’s senior creditfacility, mandatory principal repayments under our debt agreements andavailability of other capital resources.

***Cash Flows for theThree Months Ended March 31, 2006 and 2005***

Net cash used in operatingactivities was $9.4 million and $14.7 million in the three months ended March 31,2006 and 2005, respectively. The decrease in cash used in operating activitieswas primarily the result of a $1.8 million reduction in our net loss, which wasprimarily driven by a $2.4 million reduction in interest expense as a result ofthe debt refinancing and principal reductions completed in connection with theinitial public offering of our common stock on August 12, 2005. In addition,$1.5 million less cash was used in operating activities by changes inworking capital in the three months ended March 31, 2006 as compared tochanges in working capital in the three months ended March 31, 2005,principally as a result of changes in the timing of our interest paymentsfollowing the initial public offering of our common stock, partially offset byincreases in accounts receivable due to increased revenues in the three monthsended March 31, 2006.

Net cash used in investingactivities was $5.0 million and $5.3 million in the three months ended March 31,2006 and 2005, respectively. The decrease in cash used in investing activitiesis primarily due to a $1.8 million decrease in property and equipmentadditions, primarily related to the timing of our capital expenditure budget in2006 versus 2005, partially offset by a $1.4 million increase in the cost ofacquisitions. During the three months ended March 31, 2006, we completedtwo acquisitions for $1.4 million. We did not complete any acquisitions in thethree months ended March 31, 2005.

Financing activities usednet cash of $9.3 million in the three months ended March 31, 2006,compared to providing net cash of $18.3 million in the three months ended March 31,2005. During the three months ended March 31, 2005, the exercise ofemployee stock options and net borrowings under our revolving credit facilityprovided cash of $19.0 million, only $0.7 million of which was used to repaydebt. In the three months ended March 31, 2006, there were no cash inflowsfrom financing activities while $8.3 million was used to pay cashdividends to our common stockholders and $1.0 million was used to repurchasecommon stock.

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***Long-term Debt and Other Obligations***

***Overview.****  *At March 31, 2006, we had approximately $355.8million of total debt outstanding as follows:

·       $115.6 millionof Reddy Holdings’ 101¤2%senior discount notes due 2012 (net of unamortized discount of $34.9 million);

·       $240.0 millionof outstanding term loans under Reddy Group’s senior credit facility whichmatures on August 12, 2012; and

·       $0.2 million of otherdebt.

***Senior DiscountNotes.***   On October 27,2004, Reddy Holdings issued $151.0 million in aggregate principal amount atmaturity of 101¤2%senior discount notes due 2012 in a private placement offering. The senior discountnotes were sold at 66.333% of the stated principal amount, which resulted ingross proceeds of $100.2 million. We used the net proceeds of theoffering, together with a dividend of approximately $28.4 million fromReddy Group to redeem all of Reddy Holdings’ existing series A preferredstock for approximately $99.2 million, to pay accumulated dividends onsuch stock as of the date of redemption in the amount of approximately$15.0 million and to pay a dividend of approximately $10.4 million toour common stockholders. In connection with these transactions, Reddy Groupmade a special transaction payment of approximately $1.2 million in the aggregateto certain members of management and certain directors.

Each seniordiscount note had an initial accreted value of $663.33 per $1,000 principalamount at maturity. The accreted value of each senior discount note increasesfrom the date of issuance until November 1, 2008 at a 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 senior discount notes are 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 any of Reddy Holdings’ existing and future unsecuredsenior indebtedness;

·       effectivelysubordinated to Reddy Holdings’ existing and future secured debt, includingReddy Holdings’ guarantee of Reddy Group’s senior credit facility; and

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

The senior discount notes include customary covenantsthat restrict, among other things, the ability to incur additional debt orissue certain preferred stock, pay dividends or redeem, repurchase or retireour capital stock or subordinated indebtedness, make certain investments, incurliens, enter into arrangements that restrict dividends from our subsidiaries,merge or sell all or substantially all of the assets or enter into varioustransactions with affiliates. Prior to November 1, 2007, we may redeem upto 35% of the principal amount of the senior discount notes at a redemptionprice of 110.5% of the principal amount thereof, plus accrued and unpaidinterest to the date of redemption, with funds raised in equity offerings thatare specified in the indenture governing the senior discount notes. From andafter November 1, 2008, we may redeem any or all of the senior discountnotes by paying a redemption premium which is initially 5.25% of the principalamount at maturity of the notes, and will decline annually to zero commencingon November 1, 2010. If a change of control occurs on or prior to November 1,2007, we may, at our option, redeem all, but not less than all, of the seniordiscount notes at a redemption price equal to the sum of 

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(i) the accretedvalue of the notes as of the redemption date, (ii) a premium equal to 125%of one year’s coupon payment and (iii) any accrued and unpaid interest tothe date of redemption. If we experience a change of control and do not electto make the optional redemption described in the previous sentence, we will berequired to make an offer to repurchase the senior discount notes at a priceequal to 101% of their accreted value, plus accrued and unpaid interest, ifany, to the date of purchase. We may also be required to make an offer topurchase the senior discount notes with proceeds of asset sales that are notreinvested in our business or used to repay other indebtedness. We registeredthe senior discount notes with the SEC pursuant to a registration statementthat was declared effective on August 26, 2005.

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.

In addition, regardless of whether we could make any restrictedpayments under the buildup amount provision referred to above, we may (1) makedividend 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, 2006,Reddy Holdings had $8.4 million of cash on hand that was not subject toany restrictions under Reddy Group’s senior credit facility.

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 restricted subsidiaries,respectively; provided that the following are not included in consolidated netincome: (i) net income or loss of subsidiaries acquired in pooling ofinterests transactions for any period prior to the date of their acquisition, (ii) anynet income of a subsidiary restricted in the payment of a dividend (other thancertain permitted restrictions, including those under our existing credit facilitiesand our new credit facilities), (iii) gains or losses from non-ordinarycourse asset sales, (iv) extraordinary gains or losses, (v) thecumulative effect of changes in accounting principles, (vi) non-recurringfees and expenses 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 

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of consolidated netincome. “Consolidated interest expense” under the indenture governing oursenior discount notes is defined as total interest expense plus, to the extentnot included in total interest expense, (i) interest expense attributableto capital leases, (ii) amortization of debt discount and issuance costs, (iii) capitalizedinterest, (iv) non-cash interest expense, (v) fees on letters ofcredit, (vi) net payments pursuant to hedging obligations, (vii) dividendsaccrued on certain disqualified stock (viii) interest incurred inconnection with investments in discontinued operations, (ix) interest onguaranteed indebtedness and (x) cash contributions to employee stockownership plans to the extent they are used to pay interest or fees onindebtedness incurred by such plans. We are generally required to calculate ourconsolidated coverage ratio on a pro forma basis to give effect to incurrencesand repayments of indebtedness as well as acquisitions 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.

***Senior CreditFacility.***   On August 12, 2005, ReddyGroup entered into a senior credit facility in an aggregate amount of$300.0 million, with the lenders being a syndicate of banks, financialinstitutions and other entities, including Credit Suisse First Boston, asAdministrative Agent, Canadian Imperial Bank of Commerce and Bear StearnsCorporate Lending, Inc. and Lehman Brothers Inc. The senior creditfacility provided for a seven-year term loan in the amount of$240.0 million and a five-year revolving credit facility in the amount of$60.0 million. Proceeds of the term loan were used to repay Reddy Group’sprior senior credit facility.

At March 31, 2006, we had $54.2 million ofavailability under the revolving credit facility, net of outstanding standbyletters of credit of $5.8 million. The standby letters of credit are usedprimarily to secure certain insurance obligations. At this time, we do notanticipate any significant changes in our standby letters of credit until latein the second quarter of 2006, at which time collateral will be required forour 2006 policy renewals. However, later in 2006, this additional newcollateral will be offset by reductions in collateral related to earlier policyyears. Principal balances outstanding under the revolving credit facility bearinterest per annum, at our option, at the sum of the base rate plus 0.75% orLIBOR plus 1.75%. The base rate is defined as the greater of the prime rate (asannounced from time to time by the Administrative Agent) or the federal fundsrate plus 0.5%. At March 31, 2006, the weighted average interest rate ofborrowings outstanding under the senior credit facility was 6.3%. Interest onbase rate loans is payable on the last day of each quarter. Interest on LIBORloans is payable upon maturity of the LIBOR loan or on the last day of thequarter if the LIBOR loan exceeds 90 days. Reddy Group pays a quarterlyfee on the average availability under our existing revolving credit facilitybased on an annual rate of 0.5%. Except as described below, the terms of thesenior credit facility prohibit Reddy Group from paying dividends and otherwisetransferring assets to Reddy Holdings, except for certain limited dividends,the proceeds of which must be used to maintain Reddy Holdings’ corporateexistence.

The senior credit facilitydoes not require any scheduled principal payments prior to the stated maturitydates. Subject to certain conditions, mandatory repayments of the revolvingcredit facility 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 senior credit facility, an event of default will occur under 

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thesenior credit facility. Under the senior credit facility, Reddy Group may onlypay dividends to Reddy Holdings if Reddy Group’s total leverage ratio for themost recently ended fiscal quarter is less than or equal to 3.75 to 1.0. In addition,the senior credit facility precludes Reddy Group from declaring any dividendsif an event of default under the senior credit facility has occurred and iscontinuing. In particular, it will be an event of default if Reddy Group’sleverage ratio exceeds 4.0 to 1.0 or Reddy Group’s interest coverage ratio isless than 3.25 to 1.0.

The senior credit facilitycontains financial covenants, which include the maintenance of certainfinancial ratios, as defined in the senior credit facility, and iscollateralized by substantially all of Reddy Group’s assets and the capitalstock of all of its subsidiaries. Reddy Holdings guarantees Reddy Group’ssenior credit facility and such guarantee is secured by the capital stock ofReddy Group. At March 31, 2006, Reddy Group was in compliance with thesecovenants.

Under the restrictedpayments covenant in Reddy Group’s senior credit facility, we generally arerestricted from paying dividends. However, the covenant includes an exceptionfor paying dividends in an amount not greater than our Cumulative DistributableCash 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 Reddy Group’s senior credit facility has beendelivered to the lenders.

“CumulativeDistributable Cash” is defined under Reddy Group’s senior credit facility as:

(a)         $10,000,000, plus

(b)         “Available 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 Reddy Group’s seniorcredit facility has been delivered to the lenders, plus

(c)         the amount of any net cash proceeds received by ReddyHoldings from issuances of shares of Reddy Holdings capital stock after theclosing of our initial public offering to the extent we have contributed suchproceeds to Reddy Group, less

(d)         (i) the amount of payments made by Reddy Group to ReddyHoldings to fund dividend payments on, or repurchases of, Reddy Holdingscapital stock or to pay cash interest expense on, or redeem or repurchase,Reddy Holdings notes, (ii) amounts used to make restricted investments,less

(e)         to the extent occurring after the end of the most recentlyended reference period and until taken into account in determining AvailableCash for the fiscal quarter in which such event has occurred, (i) cashpayments for acquisitions (except to the extent funded with indebtedness orproceeds of asset sales or casualty events) and (ii) mandatory repaymentof loans under our new credit facilities (other than under the revolving creditfacility) during a dividend suspension period.

“AvailableCash” for any fiscal quarter is defined under Reddy Group’s senior creditfacility as:

(a)         Adjusted EBITDA for such fiscal quarter, plus,

(b)         to the extent not included in net income used to calculatefor any fiscal quarter such Adjusted EBITDA, the cash amount realized inrespect of extraordinary, non-recurring or unusual gains, and less

(c)         (i) to the extent included in net income used tocalculate for any fiscal quarter such Adjusted EBITDA, the amount of ReddyGroup’s cash interest expense, Reddy Group’s cash tax expense, the cash cost ofany extraordinary, nonrecurring or unusual losses, cash payments on account ofnon-cash losses or non-cash charges, (ii) capital expenditures (except tothe extent funded with indebtedness (other than the revolving credit facility)or proceeds of asset sales or casualty events), (iii) cash payments foracquisitions (except to the extent funded with indebtedness or proceeds ofasset sales or casualty events) and (iv) payments and prepayments of theprincipal amount of 

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indebtedness(other than payments and prepayments of the revolving credit facility) otherthan to the extent funded with indebtedness (other than indebtedness under ourrevolving credit facility).

“AdjustedEBITDA” is defined under Reddy Group’s senior credit facility to be the sum of:

(a)         net income, plus

(b)         to the extent deducted in determining net income, the sum of(i) amounts attributable to depreciation and amortization, (ii) incometax expense, (iii) interest expense, (iv) any other non-cash charges(less non-cash income) for which no cash reserves (or receivables) have been orwill be set aside (or created) including non-cash compensation expenses, (v) anyloss from the extinguishment of indebtedness, (vi) any fees paid prior tothe closing date of our initial public offering in respect of the monitoringagreement, (vii) transaction adjustments (as defined in Reddy Group’ssenior credit facility and including the fees and expenses incurred inconnection with our initial public offering and the related transactions), (viii) allfees and expenses incurred in connection with permitted acquisitions to theextent accounted for as expenses, (ix) for the four fiscal quarters endingafter September 30, 2004, an amount equal to the sum of (x) the specialtransaction payments paid to certain members of management and certaindirectors in connection with the issuance of the senior discount notes not toexceed $1.3 million plus (y) an amount not to exceed $4.0 million forother expenses incurred in connection with the issuance of the senior discountnotes and the related amendment to Reddy Group’s senior credit facility whichwas in effect at the time of the senior discount notes offering.

Under Reddy Group’s seniorcredit facility, Reddy Group may only pay dividends to us to make dividendpayments on our common stock if Reddy Group’s total leverage ratio for the mostrecently ended fiscal quarter for which a covenant compliance certificate hasbeen delivered is less than or equal to 3.75 to 1.0. If at the end of anyfiscal quarter, Reddy Group’s leverage ratio is greater than 3.75 to 1.0, andtherefore Reddy Group is not permitted to pay dividends, Reddy Group will berequired by Reddy Group’s senior credit facility to apply 50% of Reddy Group’sAvailable Cash generated during each such quarter to make a mandatoryprepayment of the loans under Reddy Group’s senior credit facility.

In addition, we and ReddyGroup will be precluded from paying any dividends if an event of default underReddy Group’s senior credit facility has occurred and is continuing. Inparticular, it will be an event of default if Reddy Group’s total leverageratio exceeds 4.0 to 1.0 or Reddy Group’s interest coverage ratio is less than3.25 to 1.0.

The following table presents Adjusted EBITDA on a proforma basis after giving effect to the adjustments permitted under thedescription of the definition of Adjusted EBITDA set forth above. AdjustedEBITDA is different from EBITDA that is derived solely from GAAP components.Adjusted EBITDA should not be construed as an alternative to net loss, cashflows from operations or net cash from operating or investing activities asdefined by GAAP, and it is not necessarily indicative of cash available to fundour cash needs as determined in accordance with GAAP. In addition, not allcompanies use identical calculations, and this presentation may not becomparable to similarly titled measures of other companies. A reconciliation ofnet loss to EBITDA and Adjusted EBITDA follows the table.

| ** **                 | ** ** | **Twelve Months Ended** | ** ** |
|----------------------------|------------|-----------------------------------|------------|
| ** **                 | ** ** | **March 31, 2006**      | ** ** |
| ** **                 | ** ** | **(in thousands)**           | ** ** |
| Pro forma  adjusted EBITDA |       |                              | $          | 86,430 |   |   |
| Total leverage  ratio      |       |                              | 2.8:1.0    |   |   |
| Interest coverage  ratio   |       |                              | 5.8:1.0    |   |   |

 

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Thefollowing table sets forth a reconciliation of net loss to EBITDA and AdjustedEBITDA:

| ** **                                      | ** ** | **Twelve  Months Ended** | ** ** |
|-------------------------------------------------|------------|-------------------------------|------------|
| ** **                                      | ** ** | **March 31, 2006**  | ** ** |
| ** **                                      | ** ** | **(in thousands)**       | ** ** |
| Net loss                                        |       |                          | $          | (10,175 | ) |   |
| Depreciation  expense related to costs of sales |       |                          | 18,811     |   |   |
| Depreciation and  amortization expense          |       |                          | 5,704      |   |   |
| Interest expense                                |       |                          | 32,067     |   |   |
| Income tax  benefit                             |       |                          | (6,201     | ) |   |
| EBITDA                                          |       |                          | 40,206     |   |   |
| Other non-cash  charges:                        |       |                          |       |   |   |
| Stock-based compensation expense                |       |                          | 3,432      |   |   |
| Loss on disposition of assets                   |       |                          | 1,803      |   |   |
| Loss on extinguishment of debt                  |       |                          | 28,189     |   |   |
| Impairment of assets                            |       |                          | 5,725      |   |   |
| Monitoring  fees(a)                             |       |                          | 235        |   |   |
| Transaction  expenses(b)                        |       |                          | 6,171      |   |   |
| Adjusted EBITDA                                 |       |                          | $          | 85,761 |   |   |
| Acquisition  adjustments(c)                     |       |                          | $          | 495 |   |   |
| Elimination of  lease expense(d)                |       |                          | 174        |   |   |
| Pro forma adjusted  EBITDA                      |       |                          | $          | 86,430 |   |   |

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(a)           Represents theelimination of monitoring fees paid to affiliates of our Sponsors prior to theclosing of our initial public offering on August 12, 2005.

(b)          Represents costsincurred in connection with our initial public offering and relatedtransactions and includes $0.5 million of non-cash stock-basedcompensation expense related to a grant of common stock to certain employees.

(c)           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, 2006.

(d)          Represents theelimination of historical lease expense resulting from the purchase of certainleased real estate in the third quarter of 2005.

***Liquidity Outlook.***   Dueto the seasonal nature of our business, we record the majority of our sales andprofits during the months of May through September. The majority of thecash generated from those operations is received between July andNovember. We have used the excess cash generated from our 2005 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 2006will be approximately $16 million to $18 million, which will primarily be usedto 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 2006 for netcapital expenditures of approximately $13 million to $16 million.

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Based on ourexpected level of operations, we believe that cash flows from operations,together with available borrowings under our revolving credit facility, will beadequate to meet our future liquidity needs for at least the next twelvemonths. As of April 26, 2006, we had approximately $54.2 million ofavailability under our revolving credit facility, which reflected a $13.5 millionoutstanding balance under our revolving credit facility and standby letters ofcredit of $5.8 million. During the next two months, we expect availabilityunder our revolving credit facility will range between approximately $52 millionto $56 million due to borrowings on our revolving credit facility to fundoperations, capital expenditures and debt service. Such borrowing under ourrevolving credit facility are expected on a seasonal basis as our cash flowsfrom operations decline to their lowest point during March and April dueto reduced sales in January and February and the need to finance seasonalincreases in accounts receivable and inventories as temperatures and salesvolumes begin to increase in April and May. As part of our ongoing acquisitionprogram, we are currently pursuing several small acquisition opportunitieswhich are in various stages of negotiations. If we are successful in completingany of these transactions during the next two months, additional borrowingsunder our revolving credit facility may be required.

During the latter part ofthe second quarter of 2006 and into the third quarter of 2006, we expectavailability under our revolving credit facility will increase to approximately$50 million to $55 million. As noted previously, we record themajority of our sales and profits during the months of May through September andthe majority of the cash generated from those operations is received in August throughNovember. During those months in 2006, we expect to repay all amounts borrowedunder our revolving credit facility in the spring, fund dividends on our commonstock, fund current capital expenditures and debt service and build up cashbalances.

**Off-Balance SheetArrangements**

We have no off-balance sheet arrangements that have orare reasonably likely to have a current or future effect on our financialcondition, changes in financial condition, revenues or expenses, results ofoperations, liquidity, capital expenditures or capital 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 summermonths. We experience seasonal fluctuations in our net sales and profitability.We make a 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.        Quantitative and Qualitative DisclosuresAbout 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 Reddy Group’s senior credit facility. Principal balancesoutstanding under the term loan and the revolving credit facility bearinterest, at our option, at the London Inter-Bank Offered Rate (“LIBOR”) plus1.75% or the prime rate (as announced from time to time by the administrativeagent) 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 the senior credit facility. TheHedge has a term of three years, ten months and an initial notional balance of$220 million. The notional balance decreases by $20 million on each October 12during 2006-2008. We pay a fixed rate of 4.431% on the notional amountand receive an amount equal to 3-month LIBOR. Any net payable orreceivable amount is settled quarterly. If we had been required to settle theHedge as of December 31, 2005, we would have received $4.2 million. ReddyGroup is exposed to risk of loss in the event of non-performance by thecounterparty to the Hedge. However, we do not anticipate non-performance by thecounterparty.

As of March 31, 2006,the senior credit facility had an outstanding principal balance of $240.0 millionat a weighted average interest rate of 6.3% per annum. At March 31, 2006,the 30-day LIBOR rate was 4.8%. If LIBOR were to increase by 1% from thatlevel, the annual increase in interest expense, given our principal balances atMarch 31, 2006 and the effect of the Hedge, would be approximately$0.2 million.

**Item 4.**                        Controlsand Procedures

The Company, under the supervision and with theparticipation of its management, including the Chief Executive Officer andChief Financial Officer, evaluated the effectiveness of the design andoperation of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934 (the “ExchangeAct”)) as of the end of the period covered by this report. Based on thatevaluation, the Chief Executive Officer and the Chief Financial Officerconcluded that our disclosure controls and procedures were effective as of March 31,2006 to ensure that information relating to us and our consolidated subsidiariesrequired to be disclosed in our reports filed or submitted under the ExchangeAct is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms, and that such information isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Chief Financial Officer, as appropriate to allow timely discussionsregarding required disclosure. It should be noted, however, that the design ofany system of controls is limited in its ability to detect errors, and therecan be no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions, regardless of how remote. There has beenno change in our internal control over financial reporting during the quarterended March 31, 2006 that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

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**PART II—OTHERINFORMATION**

**Item 1.**                        *Legal Proceedings*

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.**                *Risk Factors*

**Risks Relating toOur Dividend Policy**

***The payment of dividends is at the sole discretion ofour board of directors and the reduction or elimination of dividends wouldnegatively affect the market price of our common stock.***

We are not obligated topay dividends on our common stock. The payment of dividends is at the sole discretionof our board of directors and our board of directors may decide to eliminate orreduce any dividends paid on our common stock. Any reduction or elimination ofdividends could cause the market price of our common stock to decline and couldfurther cause your shares of common stock to become less liquid, which mayresult in losses by you.

***Even if our board of directors desires to declare andpay dividends, we might not have cash in the future to pay dividends in theintended amounts or at all.***

Our ability to paydividends, and our board of directors’ determination to keep our dividendpolicy, will depend on numerous factors, including the following:

·       thestate of our business, competition and changes in our industry;

·       changesin the factors, assumptions and other considerations made by our board ofdirectors in reviewing and revising our dividend policy;

·       ourfuture results of operations, financial condition, liquidity needs and capitalresources;

·       ourvarious expected cash needs, including cash interest and principal payments onour indebtedness, capital expenditures, the purchase price of acquisitions,costs associated with being a public company and taxes; and

·       potentialsources of liquidity, including borrowing under our revolving credit facilityor possible asset sales.

We cannot assure you thatour actual cash available to pay dividends will in fact equal or exceed theamount necessary to pay dividends at any time. Over time, our capital and othercash needs will invariably be subject to uncertainties, which could affectwhether we pay dividends and the level of any dividends we may pay in thefuture. In addition, to the extent that we would seek to raise additional cashfrom additional debt incurrence or equity security issuances, we cannot assureyou that such financing will be available on reasonable terms or at all. Eachof the factors listed above could negatively affect our ability to paydividends in accordance with our dividend policy or at all.

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***If our estimates relating to dividends payable in thefuture change, you may not receive the amount of dividends you expected.***

If our estimates ofcash available to pay dividends in the future were to fall below ourexpectations, our assumptions as to estimated cash needs were to be too low orif other applicable assumptions were to prove incorrect, we may need to:

·       eitherreduce or eliminate dividends, which may result in a decline in the marketprice or liquidity, or both, of our common stock;

·       funddividends by incurring additional debt (to the extent we were permitted to doso under the agreements governing our then existing debt), which would increaseour leverage and limit our funding alternatives for other uses;

·       amendthe terms of Reddy Group’s senior credit facility or the indenture governingour senior discount notes to permit us to pay dividends or make other paymentsif we are otherwise not permitted to do so, which is likely to require us toincur significant costs;

·       funddividends from future issuances of equity securities, which could be dilutiveto our stockholders and negatively affect the market price of our common stock;

·       funddividends from other sources, such as by asset sales or by working capital,which would leave us with less cash available for other purposes; and

·       reduce other expected usesof cash, such as capital expenditures and acquisitions, which could limit ourability to grow.

***Our ability to pay dividends will be restricted byagreements governing our debt, including Reddy Group’s senior credit facilityand the indenture governing our senior discount notes and by Delaware law.***

Reddy Group’s senior credit facility and the indenturegoverning our senior discount notes restrict our ability to pay dividends. Werefer you to “Liquidity and Capital Resources” under Item 2 of Part I,where we describe the terms of our indebtedness, including provisions limitingour ability to declare and pay dividends.

Additionally, under the Delaware General CorporationLaw, or DGCL, our board of directors may not authorize payment of a dividendunless it is either paid out of our surplus, as calculated in accordance withthe DGCL, or if we do not have a surplus, it is paid out of our net profits forthe fiscal year in which the dividend is declared and/or the preceding fiscalyear.

If, as a result of theserestrictions, we are required to reduce or eliminate the payment of dividends,a decline in the market price or liquidity, or both, of our common stock couldresult. This may in turn result in losses by you.

***Our dividend policy may limit our ability to pursuegrowth opportunities, which may harm our competitive position and cause themarket price of our common stock to decline.***

If we continue payingdividends at the level currently anticipated under our dividend policy, we maynot retain a sufficient amount of cash to consummate acquisitions, and may needto seek financing to fund a material expansion of our business, including anysignificant acquisitions or to pursue growth opportunities requiring capital expendituressignificantly beyond our current expectations. The risks relating to fundingany dividends, or other cash needs as a result of paying dividends, aresummarized in the preceding risk factors. If we are unable to take timelyadvantage of growth opportunities, our future financial condition andcompetitive position may be harmed, which in turn may adversely affect themarket price of our common stock.

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**RisksRelating to Our Business**

***We have asubstantial amount of indebtedness, which may reduce our cash flow and impedeour ability to pay dividends on our common stock, remain in compliance withdebt covenants, make payments on our indebtedness and operate our business.***

As of March 31, 2006,we had outstanding indebtedness of approximately $355.8 million, whichrepresented approximately 68% of our total consolidated capitalization on abook basis. As of March 31, 2006, we also had availability of$54.2 million under Reddy Group’s revolving credit facility (net ofstandby letters of credit of approximately $5.8 million).

Oursubstantial indebtedness could have important consequences. For example, itcould:

·       makeit more difficult for us to comply with the terms of our outstanding debt;

·       requireus to dedicate a substantial portion of our cash flow to pay principal andinterest on our debt, thus making it more difficult for us to pay dividends onour common stock;

·       makeus more vulnerable to, and reduce our flexibility in planning for, changes ingeneral economic, industry and competitive conditions;

·       limitour ability to borrow additional amounts for working capital, capitalexpenditures, acquisitions, debt service requirements, execution of ourstrategy, or other purposes; and

·       placeus at a disadvantage compared to our competitors with less debt.

Any of the above listedfactors could make us more vulnerable to defaults and place us at a competitivedisadvantage, therefore making an investment in our common stock lessattractive when compared to other investments. Further, if we do not havesufficient earnings to service our debt, we would need to refinance all or partof our existing debt, sell assets, borrow more money or sell securities, noneof which we can guarantee we will be able to do on commercially reasonableterms or at all.

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

The indenture governingour senior discount notes and Reddy Group’s senior credit facility permit us, undercertain circumstances, to incur a significant amount of additionalindebtedness. For example, Reddy Group’s senior credit facility allows us toincur up to an additional $80.0 million of incremental term loans underthe credit facility, subject to certain conditions. In addition, we may incuradditional indebtedness through Reddy Group’s revolving credit facility. If weincur additional debt, the risks associated with our substantial leverage, includingour ability to service our debt and pay dividends on our common stock, wouldincrease. This, in turn, could negatively affect the market price of our commonstock.

***The terms of ReddyGroup’s senior credit facility and the indenture governing our senior discountnotes may restrict our current and future operations, particularly our abilityto respond to changes in our business or to take certain actions.***

Reddy Group’s seniorcredit facility and the indenture governing our senior discount notes contain,and any future indebtedness of ours would likely contain, a number of financialand other restrictive covenants that impose significant operating and financialrestrictions on us, including restrictions that may limit our ability to engagein acts that may be in our best long-term interests. For a more completedescription of these covenants and restrictions, see “Liquidity and CapitalResources” under Item 2 of Part I.

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The operating andfinancial restrictions and covenants in our existing and future debt agreementsmay adversely affect our ability to finance future operations or capital needsor to engage in other business activities. A breach of any of the restrictivecovenants in our new credit facilities could result in a default under suchfacilities. If any such default occurs, the lenders may elect to declare allobligations under Reddy Group’s senior credit facility to be immediately due andpayable, enforce their security interest or require us to apply all of ouravailable cash to repay these borrowings, any of which would result in an eventof default under our senior discount notes. If the debt under Reddy Group’ssenior credit facility or our senior discount notes were to be accelerated, ourbusiness operations would be interrupted, which would adversely affect themarket price of our common stock.

***The seasonal natureof the ice business results in losses and lower margins in the first and fourthquarters of the year.***

We experience significantseasonal fluctuations in our net sales and profitability. We make a disproportionateamount of our sales in the second and third calendar quarters when the weatheris generally warmer, which results in an increased demand for ice. We also earnour net income during these same periods. As a result of seasonal revenuedeclines and the lack of a corresponding decrease in certain expenses, weexperience net losses and materially lower margins during the first and fourthcalendar quarters. Variations in demand could have a material adverse effect onthe timing of our cash flows and therefore limit our ability to timely serviceour obligations with respect to our indebtedness and to pay dividends. In addition,because our operating results depend significantly on sales during the secondand third calendar quarters, our results of operations may fluctuatesignificantly if the weather during these periods is cool or rainy.

***Weather conditionsand weather events can decrease our sales or increase our expenses.***

Cool or rainy weather candecrease sales, while extremely hot weather may increase our expenses, each resultingin a negative impact on our operating results and cash flow. Ice consumersdemand ice for a variety of reasons, but many of them buy ice in connectionwith outdoor related activities, both commercial and recreational. As a result,demand for ice increases during periods of warm, sunny weather, and conversely,demand decreases during periods of cool, rainy weather. During extended periodsof cool or rainy weather on a national basis, our revenues and results ofoperations may substantially decline. Also, hot weather does not necessarilyresult in greater net income. During extended periods of hot weather, ourprofits and cash flow may decline because of an increase in expenses inresponse to excess demand. We may have to transport ice from one plant toanother and, in some cases, purchase ice from third party sources and transportit to a specific market to meet this excess demand, resulting in higherexpenses and inconsistent service and product quality. Finally, althoughextreme weather events such as hurricanes can cause an increase in volumesales, those sales are not necessarily profitable due to added costs and disruptionsto our normal service and distribution routes.

***Our failure tosuccessfully compete in our markets, retain existing customers and obtain newcustomers could limit our prospects and cause us to lose market share.***

Our businesses are highlycompetitive. We have many competitors in each of our geographic markets offeringsimilar products and services. Competition in our businesses is based primarilyon service, quality and price. We could lose market share if we fail tosuccessfully compete against our competitors in any of these areas, if ourexisting competitors expand their capacity, if new entrants successfullypenetrate our markets, if we fail to adequately serve our existing base ofcustomers, or if our larger grocery or convenience store customers decide tomanufacture their own ice rather than purchase our products.

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***Increases in theprices of certain raw materials, electricity, insurance and other requiredexpenses could, if we cannot pass those price increases along to our customers,have an adverse effect on our results of operations.***

We use substantial amountsof polyethylene, which is the primary raw material used to manufacture the bagswe use to package our ice, electricity in connection with our manufacturingprocess and fuel to operate the refrigerated trucks for ice delivery. We alsocarry general liability, workers’ compensation, health and vehicle insurance.We have already experienced increases in bag costs, fuel costs and insurancecosts and may experience further increases in the future, including as a resultof the expiration in June 2006 of a fixed price electricity contract to supplythe electricity to the majority of our Texas facilities, which we have renewedat higher rates. If the prices for these items or other expenses increasebeyond the amounts that we are able to pass along to our customers, our marginsand our operating cash flow would decrease.

***Our acquisitionsmay not be successfully integrated and could cause unexpected financial oroperational difficulties.***

In 2005 and the threemonths ended March 31, 2006, we completed a total of four acquisitions. Weanticipate that we may, from time to time, selectively acquire additionalbusinesses, assets or securities of companies that we believe would provide astrategic fit with our business. Acquisitions are also accompanied by risks,such as potential exposure to unknown liabilities of acquired companies and thepossible loss of key employees and customers of the acquired business. Further,acquisitions are subject to risks associated with the difficulty and expense ofintegrating the operations and personnel of the acquired companies, thepotential disruption to our business and the diversion of management time andattention, any of which could increase the costs of operating our business,negate the expected benefits of the acquisitions or result in the loss ofcustomers.

***We could incursubstantial costs as a result of violations of or liabilities underenvironmental laws.***

Our operations are subjectto a wide range of environmental laws and regulations governing, among otherthings, air emissions, wastewater discharges, the use, management and disposalof hazardous and non-hazardous materials and wastes and the cleanup ofcontamination. Noncompliance with such laws and regulations, or incidentsresulting in environmental releases, could cause us to incur substantial costs,including cleanup costs, fines and penalties, third party claims for personalinjury, investments to retrofit or upgrade our facilities and programs, or curtailmentof our operations. For example, our ice manufacturing and cold storageoperations use refrigerants such as ammonia and Freon. Some of our facilitiesmay not be in compliance with certain Freon refrigerant requirements, such asleak detection and repair, recordkeeping or reporting. In addition, the marketprice of Freon is rising as a result of phase-outs under federal laws, whichcould significantly increase our operating costs in the future if we are notable to obtain approved substitutes. From time to time, our use of ammonia hasresulted in releases that have temporarily disrupted our manufacturingoperations and resulted in lawsuits or administrative penalties.

Material violations of, orliabilities under, environmental laws may require us to incur substantial costswhich could reduce our margins, or to divert resources from ongoingenvironmental programs and improvements, which could delay our efforts tointegrate acquisitions and upgrade our operations, or expose us to risk offurther environmental liability.

***Our business couldbe disrupted or we could incur substantial costs because of government laws andregulations.***

We are subject to variousfederal, state and local laws relating to many aspects of our business,including labeling, sanitation, health and safety and manufacturing processes.We cannot predict the types of government regulations that may be enacted inthe future by the various levels of government or how existing or future lawsor regulations will be interpreted or enforced. The enactment of more stringentlaws or regulations or a stricter interpretation of existing laws andregulations may cause a disruption in our 

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operationsor require additional expenditures by us, some of which could be material. Wemay incur material costs and liabilities in order to comply with any such lawsand regulations and such costs and liabilities may result in substantialexpenses to us and could divert management’s time and attention.

***If we are unable toretain senior executives and attract and retain other qualified employees, ourbusiness might be adversely affected.***

Our success depends inpart on our ability to attract, hire, train and retain qualified managerial,sales and marketing personnel. Competition for these types of personnel ishigh. We may be unsuccessful in attracting and retaining the personnel werequire to conduct our operations successfully. Our success also depends to asignificant extent on the continued service and performance of our seniormanagement team and in particular on the continued service of William P. Brick,our Chairman and Chief Executive Officer, and Jimmy C. Weaver, our Presidentand Chief Operating Officer. In addition, we do not carry “key man” lifeinsurance. Our inability to successfully attract and retain personnel or theloss of any member of our senior management team could impair our ability toexecute our business plan.

***Accidents involvingour products and equipment could expose us to increased costs as a result ofproduct liability claims.***

We are subject to a riskof product liability claims and adverse publicity if a consumer is or claims tobe harmed while using our products or equipment. Any such claim may result innegative publicity, loss of revenues or higher costs associated withlitigation.

We currently carry productliability insurance. However, this insurance may be insufficient to pay for allor a large part of these losses. If our insurance does not adequately coverthese losses, our results of operations and cash flow would decrease and such adecrease could be material.

***We may losecustomers’ business to competitors as a result of our limited intellectualproperty protection, including on The Ice Factory***®.

As the sole major icesupplier using an on-site production and delivery system at our customers’retail locations, we have enjoyed a competitive advantage over our competitors.Our proprietary Ice Factory system is preferred by certain of our high volumecustomers to traditional ice delivery and gives us more flexibility during peakseasons. Competitors sometimes test machines similar to The Ice Factory. If anyof our competitors are successful with the rollout of a competing system, wecould lose business to these companies, which would result in decreased cashflows and results of operations.

It is our practice toprotect certain of our proprietary materials and processes by relying on tradesecrets laws and non-disclosure and confidentiality agreements. Confidentialityor trade secrets may not be maintained and others may independently develop orobtain access to such materials or processes, which could adversely affect ourcompetitive position and ability to differentiate our products and servicesfrom our competitors’ offerings.

***Limitations on ourability to utilize our tax assets before they expire may negatively affectfinancial results and the ability to pay dividends to you.***

As of December 31,2005, we had net operating loss carry-forwards for U.S. federal income tax purposesof approximately $122 million, of which approximately $84 million wasgenerated prior to August 15, 2003. There are annual limitations on theutilization of this portion of the net operating loss carry-forwards due tochanges in ownership on and prior to August 15, 2003. We cannot assure youthat we will be able to utilize our tax assets. Further, since at the closingof our initial public offering on August 12, 2005 our existing equity investorsceased to own a majority of our common stock, new limitations apply to theapproximately $38 million of net operating loss carry-forwards that weregenerated between August 15, 2003 and that date and additional limitationsapply to the net operating loss carry-forwards generated prior 

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toAugust 15, 2003. If we are not able to utilize our tax assets in themanner or in the timeframe we anticipate, our future after-tax cash flowavailable for payment of dividends on our common stock will be reduced.

***Any significant reduction in goodwill and otherintangible assets would have an adverse effect on the value of our business.***

Ouracquisitions have resulted in significant amounts of goodwill and otherintangible assets. Goodwill, which relates to the excess of cost over the fairvalue of the net assets of the businesses acquired, and intangible assetstotaled approximately $296.6 million at March 31, 2006, representingapproximately 51% of our total assets. In the future, goodwill and intangibleassets may increase as a result of future acquisitions. Goodwill and intangibleassets are reviewed at least annually for impairment. Impairment may resultfrom, among other things, deterioration in the performance of acquiredbusinesses, adverse market conditions, adverse changes in applicable laws orregulations, including changes that restrict the activities of the acquiredbusiness, and a variety of other circumstances. During the three months ended June 30,2005, we recorded a non-cash impairment charge of $5.7 million to thegoodwill in the cold storage portion of our non-ice products and operationsbusiness segment as a result of a significant reduction in cold storage salesvolumes related to a particular customer. The amount of this and any future impairmentmust be charged to earnings. Any future determination requiring the write-offof a significant portion of the goodwill and intangible assets recorded on ourbalance sheet could have an adverse effect on the value of our business.

***We are subject to additional regulations as a resultof being a public company, which will result in a greater burden on ourmanagement resources and increased costs.***

As apublic company with listed equity securities, we are required to comply withnew laws, regulations and requirements, certain additional provisions of theSarbanes-Oxley Act of 2002, related SEC regulations and requirements of the NewYork Stock Exchange that we did not need to comply with as a private company.Preparing to comply and complying with new statutes, regulations andrequirements will occupy a significant amount of the time of our board ofdirectors, management and our officers, will increase our costs and expensesand may divert management’s attention from other business concerns. We willneed to:

·       create or expand the rolesand duties of our board of directors, our board committees and management;

·       institute a morecomprehensive compliance function;

·       establish new internalpolicies, such as those relating to disclosure controls and procedures andinsider trading.

·       involve and retain to agreater degree outside counsel and accountants in the above activities; and

·       enhanceour investor relations function.

As of March 31, 2006,certain of these requirements are not yet applicable to us.

***Our status as apublic company has increased our insurance costs and may make it more difficultfor us to attract and retain qualified officers and directors.***

Being a public company has made it more expensive forus to obtain director and officer liability insurance due to potentiallygreater personal liability faced by public company officers and directors. Wemay also, in the future, be required to accept reduced coverage or incursubstantially higher costs to obtain coverage. These factors could also make itmore difficult for us to attract and retain qualified members of our managementand board of directors, particularly to serve on our audit committee, andqualified executive officers.

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***We will be exposed to risks relating to evaluations ofour internal controls over financial reporting as required by Section 404of the Sarbanes-Oxley Act of 2002, which could cause the market price of ourcommon stock to decline.***

We are in the process of evaluatingour internal controls systems to allow management to report on, and ourindependent auditors to attest to, our internal controls over financialreporting. We will be performing the system and process evaluation and testing(and any necessary remediation) required to comply with the management certificationand auditor attestation requirements of Section 404 of the Sarbanes-OxleyAct of 2002. While we anticipate being able to fully implement the requirementsrelating to internal controls and all other aspects of Section 404 by our December 31,2006 deadline, we cannot be certain as to the timing of completion of ourevaluation, testing and remediation actions or the impact of the same on ouroperations. If we are not able to implement the requirements of Section 404in a timely manner or with adequate compliance, we might be subject tosanctions or investigation by regulatory authorities, such as the SEC or theNew York Stock Exchange. Any such action could increase expenses, divertmanagement’s attention or lower investors’ confidence in our company, whichcould cause the market price of our common stock to decline. In addition, ourcontrols and procedures may not comply with all of the relevant rules andregulations of the SEC and the New York Stock Exchange. If we fail to developand maintain effective controls and procedures, we may be unable to providefinancial information in a timely and reliable manner.

**Risks Relating toOur Common Stock**

***We are a recently listed public company. As a result,the market for our common stock may be volatile, which could cause the value ofyour investment to decrease.***

Before our recentlycompleted initial public offering, there had been no public market for ourcommon stock. Because our common stock has a limited trading history, themarket price of our common stock may fluctuate widely as a result of variousfactors, such as period-to-period fluctuations in our actual or anticipatedoperating results, sales of our common stock by our existing equity investors,failure to pay dividends at anticipated levels, developments in our industry,the failure of securities analysts to cover our common stock or changes infinancial estimates by analysts, failure to meet financial estimates byanalysts, competitive factors, general economic and securities marketconditions and other external factors. Also, securities markets worldwide experiencesignificant price and volume fluctuations. This market volatility, as well asgeneral economic or market conditions, and market conditions affecting thestock of companies in our industry in particular, could reduce the market priceof our common stock in spite of our operating performance.

***If our share price is volatile, we may be the targetof securities litigation, which is costly and time-consuming to defend.***

In the past, followingperiods of market volatility in the price of a company’s securities, securityholders have often instituted class action litigation. If the market value ofour common stock experiences adverse fluctuations and we become involved inthis type of litigation, regardless of the outcome, we could incur substantiallegal costs and our management’s attention could be diverted from the operationof our business, causing our business to suffer.

***Future sales of our shares could depress the marketprice of our common stock.***

The market price of our common stock could decline asa result of sales of a large number of shares of common stock in the market orthe perception that such sales could occur. These sales, or the possibilitythat these sales may occur, also might make it more difficult for us to sell equitysecurities in the future at a time and at a price that we deem appropriate. Asof April 25, 2006 we had 21,637,020 shares of common 

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stock outstanding. Ofthose shares, the 11,730,000 shares sold in our initial public offering in August 2005are freely tradable. Of the remaining shares, 279,390 shares representrestricted shares, all of which are subject to vesting on or prior to July 1,2007. The 9,627,630 remaining shares will be eligible for resale from time totime, subject to contractual and Securities Act restrictions. In addition toour common stock outstanding, 697,625 restricted share units were outstandingas of April 25, 2006 and are subject to vesting on or prior to August 12,2009.

Our Sponsors, as definedbelow, collectively own 8,674,388 shares, and have the ability to cause us toregister the resale of their shares. Certain other holders of our common stock,including members of our management, will be able to participate in suchregistration. We have previously registered on Form S-8 all 750,000shares reserved in connection with our 2005 Equity Incentive Plan, includingthe shares underlying the outstanding restricted shares units, and such sharesmay be sold as provided therein.

***We are a holding company with no operations, andunless we receive dividends, distributions, advances, transfers of funds orother payments from our subsidiaries, we will be unable to pay dividends on ourcommon stock and meet our debt service and other obligations.***

We are a holding company and conduct all of ouroperations through our subsidiaries. We do not have, apart from our ownershipof Reddy Group, any independent operations. As a result, we will rely ondividends and other payments or distributions from Reddy Group and our othersubsidiaries to pay dividends on our common stock and meet our debt service andother obligations. The ability of Reddy Group and our other subsidiaries to paydividends or make other payments or distributions to us will depend on ouroperating results and may be restricted by, among other things, the covenantsthat are contained in our new credit facilities and the covenants of any futureoutstanding indebtedness we or our subsidiaries incur.

In addition, because weare a holding company, claims by our stockholders will be structurally subordinatedto all existing and future liabilities and obligations (whether or not forborrowed money) of our subsidiaries, including obligations under our new creditfacilities. Therefore, in the event of our bankruptcy, liquidation or reorganization,our assets and those of our subsidiaries will be able to satisfy the claims ofour stockholders only after all of our and our subsidiaries’ liabilities andobligations have been paid in full.

***Our Sponsors may have significant influence on ourcompany, including control over decisions that require the approval of equityholders, whether or not such decisions are believed by the other equity holdersto be in their own best interests.***

Trimaran Fund ManagementL.L.C. and Bear Stearns Merchant Banking (together, our “Sponsors”)beneficially own approximately 40.1% of our common stock. Accordingly, in theevent that our Sponsors decide to act in concert, so long as our Sponsorscontinue to own a significant percentage of our common stock they would havethe collective ability to significantly influence or effectively control theoutcomes of various matters requiring stockholder approval, including thenomination and election of directors, the determination of our corporate and managementpolicies and the determination of the terms of and outcome of any corporatetransaction or other matter submitted to our stockholders for approval,including potential mergers or acquisitions, asset sales and other significantcorporate transactions.

***Provisions of our charter documents and the DGCL mayinhibit a takeover, which could negatively affect our stock price.***

Provisions of ourcharter documents and the DGCL, the state in which we are incorporated, coulddiscourage potential acquisition proposals or make it more difficult for athird party to acquire control of our company, even if doing so might bebeneficial to our stockholders. Our amended and restated 

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certificateof incorporation and by-laws provide for various procedural and otherrequirements that could make it more difficult for stockholders to effectcertain corporate actions. For example, our amended and restated certificate ofincorporation authorizes our board of directors to determine the rights,preferences, privileges and restrictions of unissued series of preferred stockwithout any vote or action by our stockholders. Our board of directors couldtherefore authorize and issue shares of preferred stock with voting orconversion rights that could dilute the voting power or diminish other rightsof holders of our common stock. Additional provisions are included in ouramended and restated certificate of incorporation and by-laws which could makeit more difficult for stockholders to effect certain corporate actions,including:

·       thesole power of a majority of the board of directors to fix the number ofdirectors and to fill any vacancy on the board of directors;

·       requirementsfor advance notification of stockholder nominations and proposals; and

·       theinability of stockholders to act by written consent and restrictions on theability of stockholders to call special meetings.

These provisions maydiscourage acquisition proposals and may make it more difficult or expensivefor a third party to acquire a majority of our outstanding voting stock or maydelay, prevent or deter a merger, acquisition, tender offer or proxy contest,which may negatively affect our stock price.

**Item 2.**                        *Unregistered Sales of Equity Securities and Use of Proceeds*

None.

**Item 3.**                        *Defaults Upon Senior Securities*

None.

**Item 4.**                        *Submission of Matters to a Vote of Security Holders*

None.

**Item 5.**                        *Other Information*

None.

**Item 6.**                        *Exhibits*

See Index to Exhibits which follows the signature pagehereto.

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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 28,  2006 | By:                          | /s/ WILLIAM P. BRICK |
|                       |                         | William P. Brick |
|                       |                         | Chief Executive Officer |
| Date: April 28,  2006 | By:                          | /s/ STEVEN J. JANUSEK |
|                       |                         | Steven J. Janusek |
|                       |                         | Chief Financial and Accounting Officer |

 

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**INDEXTO EXHIBITS**
| Exhibit No. | ** ** | **Description** |
|------------------|------------|-----------------|
|             | 31.1† |            |   | Rule 15d-14(a) Certification of  Chief Executive Officer. |
|             | 31.2† |            |   | Rule 15d-14(a) Certification  of Chief Financial Officer. |
|             | 32.1† |            |   | Rule 1350  Certification of Chief Executive Officer. |
|             | 32.2† |            |   | Rule 1350  Certification of Chief Financial Officer. |

 

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†                    Filedherewith.

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