**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark one)**
| ý                                                  | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|---------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                    |       |                                                                                                    |
| **For the  quarterly period ended March 31, 2005** |
|                                                    |       |                                                                                                    |
| **OR**                                                  |
|                                                    |       |                                                                                                    |
| **o**                                                   | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**                                 |
|                                                    |       | **SECURITIES  EXCHANGE ACT OF 1934**                                                                    |

 

**For thetransition period from               to               **

 

**Commissionfile number 333-110442-04**

 

**REDDY ICEHOLDINGS, INC.**

(Exact name ofregistrant as specified in its charter)

 
|                                                       | **DELAWARE**                                                    | ** ** | **56-2381368**                       |   |
|------------------------------------------------------------|-----------------------------------------------------------------|------------|--------------------------------------|--------|
|                                                       | (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer Identification No.) |   |
|                                                       |
| **8750 N.  CENTRAL EXPRESSWAY, SUITE 1800**                |
| **DALLAS,  TEXAS 75231**                                   |
| (Address of  principal executive offices)                  |
|                                                       |
| **(214)  526-6740**                                        |
| (Registrant’s  telephone number, including area code) |
|                                                            |                                                                 |            |                                      |        |

 

Indicateby check mark whether the registrant (1) filed all reports required to befiled by Section 13 or 15(d) of the Exchange Act during the past 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes o   No ý (1)

 

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

 

The number of shares ofregistrant’s common stock outstanding as of May 13, 2005 was 100,974.

 

(1) Although the registrant has not been subject to such filingrequirements for the past 90 days, it has filed all reports required to befiled by Section 15(d) of the Exchange Act during the preceding twelvemonths. Pursuant to Section 15(d) of the Exchange Act, the registrant'sduty to file reports is automatically suspended as a result of having fewerthan 300 holders of record of each class of its debt securities outstanding asof January 1, 2004, but the registrant agreed under the terms of certainlong-term debt covenants to continue these filings.

 

 

 

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### **REDDYICE HOLDINGS, INC. AND SUBSIDIARYQUARTERLY REPORT ON FORM 10-Q**

**FOR THEPERIOD ENDED MARCH 31, 2005**

 

**TABLE OFCONTENTS**

 
|                                                                                                                             |     |
|----------------------------------------------------------------------------------------------------------------------------------|----------|
| ***PART I –  FINANCIAL INFORMATION***                                                                                  | * * |
|                                                                                                                             |     |
| *Item 1.    Condensed Consolidated Financial  Statements*                                                         | * * |
| * *                                                                                                                         | * * |
| Condensed  Consolidated Balance Sheets (unaudited) as of March 31, 2005 and December 31,  2004                         |     |
|                                                                                                                             |     |
| Condensed  Consolidated Statements of Operations (unaudited) for the three months ended March 31,  2005 and 2004 (restated) |     |
|                                                                                                                             |     |
| Condensed  Consolidated Statement of Stockholders’ Equity (unaudited) for the three  months ended March 31, 2005       |     |
|                                                                                                                             |     |
| Condensed  Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31,  2005 and 2004            |     |
|                                                                                                                             |     |
| Notes  to the Condensed Consolidated Financial Statements                                                                        |     |
|                                                                                                                             |     |
| Item  2.    Management’s Discussion and  Analysis of Financial Condition and Results of Operations           |     |
|                                                                                                                             |     |
| Item  3.    Quantitative and Qualitative  Disclosures about Market Risk                                           |     |
|                                                                                                                             |     |
| Item 4.    Controls and Procedures                                                                                |     |
|                                                                                                                             |     |
| ***PART II – OTHER  INFORMATION***                                                                                     | * * |
| * *                                                                                                                         | * * |
| Item 1.    Legal Proceedings                                                                                      |     |
|                                                                                                                             |     |
| Item  2.    Unregistered Sales of Equity  Securities and Use of Proceeds                                          |     |
|                                                                                                                             |     |
| Item 3.    Defaults Upon Senior Securities                                                                        |     |
|                                                                                                                             |     |
| Item  4.    Submission of Matters to a Vote of  Security Holders                                                  |     |
|                                                                                                                             |     |
| Item 5.    Other Information                                                                                      |     |
|                                                                                                                             |     |
| Item 6.    Exhibits                                                                                               |     |
|                                                                                                                             |     |
| SIGNATURES                                                                                                                       |     |
|                                                                                                                             |     |
| INDEX TO EXHIBITS                                                                                                                |     |

 

1

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### ** **

### **PART I -FINANCIAL INFORMATION**

### ** **

# **Item 1.**           *Financial Statements*

# ** **

**REDDY ICEHOLDINGS, INC. AND SUBSIDIARY**

###### **CONDENSED CONSOLIDATED BALANCE SHEETS**

###### **(Unaudited)**

**(in thousands, except shareamounts)**

 
| ** **                                                                                                                                                                   | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                   | ** ** | **2005**           | ** ** | **2004**              | ** ** |
| **ASSETS**                                                                                                                                                                   |       |               |       |                  |       |
| CURRENT  ASSETS:                                                                                                                                                             |       |               |       |                  |       |
| Cash  and cash equivalents                                                                                                                                                   |       | $                  | 2,816      |                  | $          | 4,478 |   |
| Accounts  receivable, net                                                                                                                                                    |       | 19,239             |       | 21,861                |       |
| Inventories                                                                                                                                                                  |       | 11,200             |       | 9,435                 |       |
| Prepaid  expenses                                                                                                                                                            |       | 2,588              |       | 2,651                 |       |
| Assets  held for sale                                                                                                                                                        |       | 447                |       | 790                   |       |
| Deferred  tax assets                                                                                                                                                         |       | 2,174              |       | 2,174                 |       |
| Total  current assets                                                                                                                                                        |       | 38,464             |       | 41,389                |       |
| PROPERTY  AND EQUIPMENT, net                                                                                                                                                 |       | 234,318            |       | 233,661               |       |
| GOODWILL                                                                                                                                                                     |       | 220,451            |       | 220,451               |       |
| OTHER  INTANGIBLE ASSETS, net                                                                                                                                                |       | 91,303             |       | 93,109                |       |
| OTHER  ASSETS                                                                                                                                                                |       | 10                 |       | 10                    |       |
| TOTAL                                                                                                                                                                        |       | $                  | 584,546    |                  | $          | 588,620 |   |
|                                                                                                                                                                         |       |               |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                               |       |               |       |                  |       |
|                                                                                                                                                                         |       |               |       |                  |       |
| CURRENT  LIABILITIES:                                                                                                                                                        |       |               |       |                  |       |
| Current  portion of long-term obligations                                                                                                                                    |       | $                  | 1,867      |                  | $          | 1,869 |   |
| Notes  payable                                                                                                                                                               |       | 204                |       | 355                   |       |
| Revolving  credit facility                                                                                                                                                   |       | 22,700             |       | 5,450                 |       |
| Accounts  payable                                                                                                                                                            |       | 10,845             |       | 15,509                |       |
| Accrued  expenses                                                                                                                                                            |       | 12,119             |       | 15,998                |       |
| Total  current liabilities                                                                                                                                                   |       | 47,735             |       | 39,181                |       |
| LONG-TERM  OBLIGATIONS                                                                                                                                                       |       | 431,563            |       | 429,392               |       |
| DEFERRED  TAX LIABILITIES, net                                                                                                                                               |       | 29,812             |       | 37,114                |       |
| COMMITMENTS  AND CONTINGENCIES (Note 9)                                                                                                                                      |       |               |       |                  |       |
| STOCKHOLDERS’  EQUITY:                                                                                                                                                  |       |               |       |                  |       |
| Common  stock, $0.01 par value; 300,000 shares authorized; 100,974 and 99,175 shares  issued and outstanding at March 31, 2005 and December 31, 2004, respectively |       | 1                  |       | 1                     |       |
| Additional  paid-in capital                                                                                                                                                  |       | 92,875             |       | 90,213                |       |
| Unearned  compensation                                                                                                                                                       |       | (114               | )          | (135                  | )          |
| Accumulated  deficit                                                                                                                                                         |       | (17,326            | )          | (7,146                | )          |
| Total  stockholders’ equity                                                                                                                                             |       | 75,436             |       | 82,933                |       |
| TOTAL                                                                                                                                                                        |       | $                  | 584,546    |                  | $          | 588,620 |   |

 

Seenotes to condensed consolidated financial statements.

 

2

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### **REDDYICE HOLDINGS, INC. AND SUBSIDIARY**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**(Unaudited)**

**(inthousands, except per share amounts)**

 
| ** **                                     | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **March 31,**     | ** ** |
| ** **                                     | ** ** | **2005**               | ** ** | **2004** | ** ** |
| ** **                                     | ** ** | ** **             | ** ** | **(as restated,** | ** ** |
| ** **                                     | ** ** | ** **             | ** ** | **see Note 11)** | ** ** |
|                                           |       |                   |       |
| Revenues                                       |       | $                      | 39,244     |   | $ | 37,380 |   |
| Cost  of sales (excluding depreciation)        |       | 31,679                 |       | 28,508 |   |
| Depreciation  expense related to cost of sales |       | 4,741                  |       | 4,500 |   |
| Gross  profit                                  |       | 2,824                  |       | 4,372 |   |
| Operating  expenses                            |       | 8,834                  |       | 8,318 |   |
| Depreciation  and amortization expense         |       | 1,415                  |       | 1,062 |   |
| Loss  on dispositions of assets                |       | 149                    |       | — |   |
| Loss  from operations                          |       | (7,574                 | )          | (5,008 | ) |
| Interest  expense                              |       | 9,308                  |       | 6,677 |   |
| Loss  before income taxes                      |       | (16,882                | )          | (11,685 | ) |
| Income  tax benefit                            |       | 6,702                  |       | — |   |
| Net  loss                                      |       | (10,180                | )          | (11,685 | ) |
| Preferred  dividends                           |       | —                 |       | 3,104 |   |
| Net  loss available to common stockholders     |       | $                      | (10,180    | ) | $ | (14,789 | ) |
|                                           |       |                   |       |   |   |
| Basic  and diluted net loss per share:         |       |                   |       |   |   |
| Net  loss available to common stockholders     |       | $                      | (102.83    | ) | $ | (149.38 | ) |
| Weighted  average common shares outstanding    |       | 99                     |       | 99 |   |

 

See notes tocondensed consolidated financial statements.

 

3

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### **REDDYICE HOLDINGS, INC. AND SUBSIDIARY**

### **CONDENSEDCONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY**

**(Unaudited)**

**(inthousands)**

 
| ** **                             | ** ** | **Common Stock** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **       | ** ** | ** **      | ** ** |
|----------------------------------------|------------|------------------|------------|------------|------------|----------------|------------|------------------|------------|-----------------|------------|
| ** **                             | ** ** | **Number**       | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **       | ** ** | ** **      | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **of**           | ** ** | **Par**    | ** ** | **Paid-In**    | ** ** | **Unearned**     | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Shares**       | ** ** | **Value**  | ** ** | **Capital**    | ** ** | **Compensation** | ** ** | **Deficit**     | ** ** | **Total** | ** ** |
| Balance  at January 1, 2005       |       | 99               |       | $          | 1          |           | $          | 90,213           |       | $               | (135       | ) | $ | (7,146 | ) | $ | 82,933 |   |
| Amortization  of unearned compensation |       | —           |       | —     |       | —         |       | 21               |       | —          |       | 21 |   |
| Compensation  expense related to       |       |             |       |       |       |           |       |             |       |            |       |   |   |
| stock  options                         |       | —           |       | —     |       | 263            |       | —           |       | —          |       | 263 |   |
| Exercise  of stock options             |       | 2                |       | —     |       | 1,799          |       | —           |       | —          |       | 1,799 |   |
| Tax  benefit of stock option exercises |       | —           |       | —     |       | 600            |       | —           |       | —          |       | 600 |   |
| Net  loss                              |       | —           |       | —     |       | —         |       | —           |       | (10,180         | )          | (10,180 | ) |
| Balance  at March 31, 2005        |       | 101              |       | $          | 1          |           | $          | 92,875           |       | $               | (114       | ) | $ | (17,326 | ) | $ | 75,436 |   |

 

See notes to condensed consolidated financial statements.

 

4

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### **REDDYICE HOLDINGS, INC. AND SUBSIDIARY**

### **CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

**(inthousands)**

 
| ** **                                                                   | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                   | ** ** | **March 31,**     | ** ** |
| ** **                                                                   | ** ** | **2005**               | ** ** | **2004** | ** ** |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                       |       |                   |       |   |   |
| Net  loss                                                                    |       | $                      | (10,180    | ) | $ | (11,685 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |       |                   |       |   |   |
| Depreciation  and amortization expense                                       |       | 6,156                  |       | 5,562 |   |
| Amortization  of debt issue costs and debt discount                          |       | 3,373                  |       | 592 |   |
| Loss  on dispositions of assets                                              |       | 149                    |       | — |   |
| Stock-based  compensation expense                                            |       | 284                    |       | 42 |   |
| Deferred  taxes                                                              |       | (7,302                 | )          | — |   |
| Tax  benefit of stock option exercises                                       |       | 600                    |       | — |   |
| Change  in assets and liabilities, net of the effects of acquisitions:       |       |                   |       |   |   |
| Accounts  receivable, inventory and prepaid expenses                         |       | 1,008                  |       | (338 | ) |
| Accounts  payable, accrued expenses and other                                |       | (8,750                 | )          | (6,874 | ) |
| Net  cash used in operating activities                                       |       | (14,662                | )          | (12,701 | ) |
|                                                                         |       |                   |       |   |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                       |       |                   |       |   |   |
| Property  and equipment additions                                            |       | (5,729                 | )          | (3,122 | ) |
| Proceeds  from dispositions of property and equipment                        |       | 388                    |       | 298 |   |
| Cost  of acquisitions                                                        |       | —                 |       | (1,052 | ) |
| Net  cash used in investing activities                                       |       | (5,341                 | )          | (3,876 | ) |
|                                                                         |       |                   |       |   |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                       |       |                   |       |   |   |
| Proceeds  from the exercise of employee stock options                        |       | 1,799                  |       | — |   |
| Deferred  debt costs                                                         |       | —                 |       | (485 | ) |
| Borrowings  under the credit facility, net                                   |       | 17,250                 |       | 8,650 |   |
| Repayment  of long-term obligations                                          |       | (708                   | )          | (468 | ) |
| Net  cash provided by financing activities                                   |       | 18,341                 |       | 7,697 |   |
|                                                                         |       |                   |       |   |   |
| NET  DECREASE IN CASH AND CASH EQUIVALENTS                                   |       | (1,662                 | )          | (8,880 | ) |
| CASH  AND CASH EQUIVALENTS, BEGINNING OF PERIOD                              |       | 4,478                  |       | 12,801 |   |
| CASH  AND CASH EQUIVALENTS, END OF PERIOD                                    |       | $                      | 2,816      |   | $ | 3,921 |   |
|                                                                         |       |                   |       |   |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                           |       |                   |       |   |   |
| Cash  payments for interest                                                  |       | $                      | 9,332      |   | $ | 9,773 |   |
| Borrowings  under the credit facility                                        |       | $                      | 28,100     |   | $ | 11,750 |   |
| Repayments  on the credit facility                                           |       | $                      | (10,850    | ) | $ | (3,100 | ) |
|                                                                         |       |                   |       |   |   |
| SUPPLEMENTAL  SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:  |       |                   |       |   |   |
| Issuance  of notes payable                                                   |       | $                      | 88         |   | $ | — |   |
| Change  in fair value of derivative liability                                |       | $                      | —     |   | $ | (606 | ) |

 

See notes tocondensed consolidated financial statements.

 

5

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**REDDY ICEHOLDINGS, INC. AND SUBSIDIARY**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

**FOR THETHREE MONTHS ENDED MARCH 31, 2005 AND 2004**

 

**1.  General**

 

The condensedconsolidated financial statements of Reddy Ice Holdings, Inc. and itswholly owned subsidiary (the “Company”) included herein are unaudited, howeverthe balance sheet as of December 31, 2004 has been derived from theaudited financial statements for that date. These financial statements have been prepared by the Company pursuant tothe rules and regulations of the Securities and Exchange Commission (“SEC”).  As applicable under the SEC’s regulations,certain information and footnote disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted.  All significant intercompany balances andtransactions have been eliminated upon consolidation, and all adjustmentswhich, in the opinion of management, are necessary for a fair presentation ofthe financial position, results of operations and cash flows for the periodscovered have been made and are of a normal and recurring nature.  Accounting measurements at interim datesinherently involve greater reliance on estimates than at year end and are notnecessarily indicative of results for the full year.  The financial statements included hereinshould be read in conjunction with the consolidated financial statements andthe related notes thereto included in the Company’s annual report on Form 10-Kfor the year ended December 31, 2004.

 

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 ofTrimaran Fund Management LLC (“Trimaran”) and Bear Stearns Merchant Banking (“BearStearns”) on May 8, 2003 for the purpose of acquiring Packaged Ice, Inc.(“Packaged Ice”) and effecting certain capital transactions in connection withsuch acquisition.  On August 15,2003, Cube merged with and into Packaged Ice, with Packaged Ice being thesurviving corporation.  As a result ofthe merger, Packaged Ice was delisted from the American Stock Exchange.  Reddy Holdings and Cube conducted nooperations during the period from May 8, 2003 through August 14, 2003.  In connection with the merger, Packaged Icewas renamed Reddy Ice Group, Inc. (“Reddy Group”).  Reddy Holdings and its wholly ownedsubsidiary Reddy Group are referred to collectively herein as the “Company”.

 

The Company manufacturesand distributes packaged ice products and bottled water and owns and operatesrefrigerated warehouses.  The Company isthe largest manufacturer of packaged ice products in the United States.  The Company serves approximately 82,000customer locations in 31 states and the District of Columbia.

 

**2. Acquisitions**

 

During 2004, the Companypurchased 11 ice companies at various dates throughout the year. The totalacquisition consideration was $16.9 million, which included direct acquisitioncosts of $0.5 million.  The total purchaseprice was allocated to the acquired assets and assumed liabilities based uponestimates of their respective fair values as of the closing dates usingvaluations and other studies. The following table summarizes the estimated fairvalues of the assets acquired and the liabilities assumed at the date ofacquisition (dollars in millions):

 
| Total  assets acquired     |   | $   | 6.1    |   |
|----------------------------|--------|-----|--------|--------|
| Total  liabilities assumed |   | 1.8 |   |
| Net  assets acquired       |   | $   | 4.3    |   |

 

6

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The excess of the aggregatepurchase price over the net assets acquired of $12.6 million was allocated togoodwill ($8.3 million) and other intangible assets ($4.3 million). Otherintangible assets were comprised of customer lists, which are being amortizedover useful lives of 15 to 30 years.

 

The results of operationsof the 2004 acquisitions are included in the Company’s consolidated results ofoperations from the date of each acquisition, which ranged from March 1,2004 to November 1, 2004.  Thefollowing unaudited pro forma information presents the Company’s consolidatedresults of operations for the three months ended March 31, 2004 as if the2004 acquisitions had all occurred on January 1, 2004:

 
| Pro  forma revenues                                      |   | $       | 38,527 |   |
|----------------------------------------------------------|--------|---------|--------|--------|
| Pro  forma net loss available to common stockholders (1) |   | (15,083 | )      |

 

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(1)          Excludes the recognition of any income taxbenefit as no such benefit was recognized in the Company’s historical resultsfor the three months ended March 31, 2004 (see Note 8).

 

**3.  Inventories**

 

Inventories contain rawmaterials, supplies and finished goods. Raw materials and supplies consist of ice packaging materials, spareparts, bottled water supplies and merchandiser parts.  Finished goods consist of packaged ice andbottled water.  Inventories are valued atthe 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,** | ** ** |
|-----------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2005**           | ** ** | **2004**              | ** ** |
| ** **                  | ** ** | **(in thousands)** | ** ** |
| ** **                  | ** ** | ** **         | ** ** |
| Raw  materials and supplies |       | $                  | 8,495      |                  | $          | 7,584 |   |
| Finished  goods             |       | 2,705              |       | 1,851                 |       |
| Total                       |       | $                  | 11,200     |                  | $          | 9,435 |   |

 

In November 2004, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 151, ‘‘Inventory Costs—an amendment of ARBNo. 43, Chapter 4’’.  SFAS No. 151 seeksto clarify the accounting for abnormal amounts of idle facility expense,freight, handling costs, and wasted material (spoilage) in the determination ofinventory carrying costs.  The statementrequires such costs to be treated as a current period expense. This statementis effective for fiscal years beginning after July 15, 2005.  The Company is currently evaluating theeffect this standard could have on its results of operations and financialposition.

 

**4.  Accrued Expenses**

 
| ** **                                  | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2005**           | ** ** | **2004**              | ** ** |
| ** **                                  | ** ** | **(in thousands)** | ** ** |
| ** **                                  | ** ** | ** **         | ** ** |
| Accrued  compensation and employee benefits |       | $                  | 5,557      |                  | $          | 6,411 |   |
| Accrued  interest                           |       | 2,340              |       | 5,740                 |       |
| Accrued  property, sales and other taxes    |       | 1,272              |       | 806                   |       |
| Accrued  utilities                          |       | 857                |       | 1,191                 |       |
| Other                                       |       | 2,093              |       | 1,850                 |       |
| Total                                       |       | $                  | 12,119     |                  | $          | 15,998 |   |

 

**5.  Revolving Credit Facility and Long-TermObligations**

 

On July 17, 2003, Cube issued $152.0 millionof 87/8% Senior Subordinated Notes due August 1,2011 (the “Senior Subordinated Notes”) in a private placement offering. The Senior Subordinated Notes were subsequently registered with theSEC.  The Senior Subordinated Notes weresold at 99.297% of the stated principal amount, which resulted in grossproceeds of $150.9 million.  Interest onthe Senior Subordinated Notes is payable semiannually on February 1 and August 1,with such payments having commenced on

 

7

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February 1, 2004. The Senior Subordinated Notes are unsecured senior subordinatedobligations of Reddy Group and are:

 

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

•                  equal in rightof payment with any of Reddy Group’s existing and future senior subordinatedindebtedness; and

•                  senior in rightof payment to any other of Reddy Group’s future subordinated indebtedness, ifany.

 

The Senior Subordinated Notes include customarycovenants that restrict, among other things, the ability to incur additionaldebt, pay dividends or make certain other restricted payments, incur liens,merge or sell all or substantially all of the assets, or enter into varioustransactions with affiliates.  Prior to August 1,2006, Reddy Group may redeem up to 35% of the principal amount of the SeniorSubordinated Notes at a redemption price of 108.875% of the principal amountthereof, plus accrued and unpaid interest to the date of redemption, with fundsraised in specified equity offerings.  Onor after August 1, 2007, Reddy Group may redeem all or a portion of theSenior Subordinated Notes at a pre-determined redemption price plus any accruedinterest.  The redemption price, as apercentage of the outstanding principal amount, is 104.438% in 2007, 102.219%in 2008 and 100.000% in 2009 and subsequent years.  If Reddy Group experiences a change ofcontrol and does not elect to redeem the outstanding Senior Subordinated Notesas previously described, Reddy Group will be required to make an offer torepurchase the Senior Subordinated Notes at a price equal to 101% of theoutstanding principal amount plus accrued interest.

 

The Senior Subordinated Notes****areguaranteed, fully, jointly and severally, and unconditionally, on a seniorsubordinated basis by Reddy Holdings and all of Reddy Group’s subsidiaries (the“Subsidiary Guarantors”).  There are currentlyno restrictions on the ability of the Subsidiary Guarantors to transfer fundsto Reddy Group in the form of cash dividends, loans or advances.  Condensed consolidating financial statementsfor Reddy Holdings and its wholly-owned subsidiary are not presented as ReddyHoldings has no significant independent assets or operations.  Condensed consolidating financial statementsfor Reddy Group and its subsidiaries, all of which are wholly owned, are notpresented as Reddy Group has no significant independent assets oroperations.  Reddy Group has nosubsidiaries that do not guarantee the Senior Subordinated Notes.

 

On October 27, 2004, Reddy Holdings issued $151.0million in aggregate principal amount at maturity of 101/2%Senior Discount Notes due 2012 (the “Discount Notes”) in a private placementoffering.  The Discount Notes were soldat 66.333% of the stated principal amount, which resulted in gross proceeds of$100.2 million.  Each Discount Note hasan initial accreted value of $663.33 per $1,000 principal amount atmaturity.  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 accretedvalue will equal the stated principal amount at maturity on November 1,2008.**** Thereafter, cash interest will accrue and bepayable semi-annually at a rate of 101/2% per annum.

 

The Discount Notes areunsecured obligations of Reddy Holdings and are:

 

•                  not guaranteedby any of Reddy Holdings’ subsidiaries;

•                  senior in rightof payment to all of Reddy Holdings’ future subordinated indebtedness;

•                  equal in rightof payment with any of Reddy Holdings’ existing and future unsecured seniorindebtedness;

•                  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.

 

8

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The Discount Notes includecustomary covenants that restrict, among other things, the ability to incuradditional debt or issue certain preferred stock, pay dividends or redeem,repurchase or retire our capital stock or subordinated indebtedness, makecertain investments, incur liens, enter into arrangements that restrictdividends from our subsidiaries, merge or sell all or substantially all of theassets or enter into various transactions with affiliates.  Prior to November 1, 2007, ReddyHoldings may redeem up to 35% of the principal amount of the Discount Notes ata redemption price of 110.5% of the principal amount thereof, plus accrued andunpaid interest to the date of redemption, with funds raised in equityofferings that are specified in the indenture governing the DiscountNotes.  If a change of control occurs onor prior to November 1, 2007, Reddy Holdings may, at its option, redeemall, but not less than all, of the Discount Notes at a redemption price equalto the sum of (i) the accreted value of the notes as of the redemptiondate, (ii) a premium equal to 125% of one year’s coupon payment and (iii) anyaccrued and unpaid interest to the date of redemption.  If Reddy Holdings experiences a change ofcontrol and does not elect to make the optional redemption described in theprevious sentence, Reddy Holdings will be required to make an offer torepurchase the Discount Notes at a price equal to 101% of their accreted value,plus accrued and unpaid interest, if any, to the date of purchase.

 

The Discount Notes aresubject to registration with the SEC pursuant to the Registration RightsAgreement (the “Rights Agreement”) entered into at the time of issuance.  Pursuant to the Rights Agreement, ReddyHoldings must, within 150 days after the issuance date, file a registration statementwith the SEC to exchange the Discount Notes for new notes of Reddy Holdingshaving terms substantially identical in all material respects to the DiscountNotes.  The 150th day following theissuance of the Discount Notes was March 26, 2005.  The Company did not file the requiredregistration statement until April 6, 2005 and, as a result, incurredadditional interest expense from March 26, 2005 to April 6, 2005 atan annual rate of 0.50%.  Reddy Holdingsmust also use its commercially reasonable efforts to cause the registrationstatement to be declared effective within 240 days after the issuance date.

 

On August 15, 2003, Reddy Group entered into a$170 million senior secured credit facility, with the lenders being a syndicateof banks, financial institutions and other entities, including Credit SuisseFirst Boston as Administrative Agent, Canadian Imperial Bank of Commerce andBear Stearns Corporate Lending, Inc. (the “Credit Facility”).  The Credit Facility provides for a six-yearterm loan in the amount of $135 million (the “Original Term Loan”) and afive-year revolving credit facility (the “Revolving Credit Facility”) in theamount of $35 million.  On November 6,2003, the Credit Facility was amended to provide a Supplemental Term Loan(together with the Original Term Loan, referred to as the “Term Loans”) in theamount of $45 million.  The SupplementalTerm Loan has substantially the same terms as the Original Term Loan.

 

At March 31, 2005, the Company had $6.5 millionof availability under the Revolving Credit Facility, which was net ofoutstanding standby letters of credit of $5.8 million.  In addition, the Company had $2.9 million ofavailable cash on hand. The standby letters of credit are used primarily tosecure 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 the applicable margin or LIBOR plus the applicable margin.  The base rate is defined as the greater ofthe prime rate (as announced from time to time by the Administrative Agent) orthe federal funds rate plus 0.5%.  Theapplicable margin is different for revolving and term loans and variesdepending on Reddy Group’s leverage ratio. On February 20, 2004, the Credit Facility was amended to reduce theapplicable margin on term loans by 0.5%. At March 31, 2005, the weighted average interest rate of borrowingsoutstanding under the Credit Facility was 5.6%. Interest on base rate loans is payable on the last day of eachquarter.  Interest on LIBOR loans ispayable upon maturity of the LIBOR loan or on the last day of the quarter ifthe term of the LIBOR loan exceeds 90 days. Reddy Group pays a quarterly fee on the average availability under theRevolving Credit Facility based on an annual rate of 0.5%.

 

9

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The Credit Facility requires that, beginning in 2004,Reddy Group will repay all borrowings under the Revolving Credit Facility andmaintain a zero outstanding balance for a period of 30 consecutive calendardays during each year.  The Term Loansamortize in quarterly installments over a five-year period in an annualaggregate amount equal to 1% of the original balance, with any remaining unpaidbalance to be repaid in the sixth year in equal, quarterly installments.  Subject to certain conditions, mandatoryrepayments of the Revolving Credit Facility and Term Loans are required to bemade with portions of the proceeds from (1) asset sales, (2) theissuance of debt securities (3) an initial public offering of stock ofReddy Holdings,  and (4) insuranceand condemnation awards.  In the event ofa change in control, as defined in the Credit Facility, all amounts outstandingwill become due and payable immediately. Furthermore, within 100 days after close of the each fiscal year(beginning with the close of the 2004 fiscal year), a mandatory prepayment ofthe Term Loans is required in an amount equal to a certain percentage of ReddyGroup’s annual excess cash flow, as defined in the Credit Facility.  The percentage is based on Reddy Group’sleverage ratio at the end of such fiscal year and ranges from 25% to 75%.  In connection with the offering of theDiscount Notes discussed above, Reddy Group amended the Credit Facility on October 27,2004 to permit certain related transactions (see Note 6).  In addition to allowing those relatedtransactions, the amendment modified the calculation of Reddy Group’s excesscash flow for 2004 such that a mandatory prepayment based on Reddy Group’s 2004results was not required.

 

The Credit Facility contains financial covenants whichinclude limitations on capital expenditures and the maintenance of certainfinancial ratios, as defined in the Credit Facility, and is collateralized bysubstantially all of Reddy Group’s assets and the capital stock of all of itssignificant subsidiaries.  At March 31,2005, Reddy Group was in compliance with these covenants.

 

In connection with the proposed initial publicoffering (“IPO”) of its common stock (see Note 6), the Company also indicatedits intention to enter into a new bank credit facility.  This new credit facility is currently beingnegotiated and will be contingent upon the closing of the IPO.  In addition to paying fees and expenses, theproceeds of the new bank credit facility, along with proceeds from the IPO,will be used to repay the existing Credit Facility and repurchase the Company’sexisting Senior Subordinated Notes.

 

On March 22, 2005, Reddy Group commenced a cashtender offer for any and all of its outstanding Senior Subordinated Notes.  Inconnection with the tender offer, Reddy Group also solicited consents to amendthe indenture governing the Senior Subordinated Notes to, among other things,eliminate substantially all of the restrictive covenants and certain events ofdefault.  The offer is subject to thesatisfaction of certain conditions, including there being validly tendered andnot validly withdrawn at least a majority of the aggregate principal amountof  the Senior Subordinated Notesoutstanding and Reddy Group having available funds sufficient to pay theaggregate total consideration to the holders of tendered notes from theanticipated proceeds of the borrowings under Reddy Group’s new creditfacilities and from the proposed initial public offering of Reddy Holdings’common stock.

 

 

10

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At March 31, 2005and December 31, 2004, long-term obligations consisted of the following:

 
| ** **                                                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                           | ** ** | **2005**           | ** ** | **2004**              | ** ** |
| ** **                                                           | ** ** | **(in thousands)** | ** ** |
| ** **                                                           | ** ** | ** **         | ** ** |
| 87/8%  Senior Subordinated Notes                                     |       | $                  | 152,000    |                  | $          | 152,000 |   |
| Less:  Unamortized debt discount on 87/8% Senior Subordinated  Notes |       | (846               | )          | (879                  | )          |
| 101/2%  Senior Discount Notes                                        |       | 151,000            |       | 151,000               |       |
| Less:  Unamortized debt discount on 101/2% Senior Discount  Notes    |       | (46,352            | )          | (48,957               | )          |
| Credit  facility – term loans                                   |       | 177,300            |       | 177,750               |       |
| Other                                                                |       | 328                |       | 347                   |       |
| Total  long-term obligations                                         |       | 433,430            |       | 431,261               |       |
| Less:  Current maturities                                            |       | 1,867              |       | 1,869                 |       |
| Long-term  obligations, net                                          |       | $                  | 431,563    |                  | $          | 429,392 |   |

 

**6.  Capital Stock**

 

*CommonStock.******* **Reddy Holdings is authorized toissue up to 300,000 shares of common stock, par value $0.01 per share.  Holders of Reddy Holdings’ common stock areentitled to one vote per share on all matters to be voted on by stockholders andare entitled to receive dividends, if any, as may be declared from time to timeby the Board of Directors of Reddy Holdings. Upon any liquidation or dissolution of Reddy Holdings, the holders ofcommon stock are entitled, subject to any preferential rights of the holders ofpreferred stock, to receive a pro rata share of all of the assets remainingavailable for distribution to stockholders after payment of all liabilities.

 

On February 11, 2005, Reddy Holdings filed aregistration statement on Form S-1 with the SEC for a proposedinitial public offering of its common stock. A portion of the shares will be sold by Reddy Holdings and a portionwill be sold by certain of Reddy Holdings’ stockholders.  The number of shares to be offered and theprice range for the offering have not yet been determined.  Amendment No. 1 to the registrationstatement was filed on April 6, 2005.

 

On March 17, 2005, certain employees exercisedstock options granted under the Reddy Ice Holdings, Inc. 2003 Stock OptionPlan (the “Stock Option Plan”) to purchase 1,799 shares of Reddy Holdings’common stock for an aggregate purchase price of approximately $1.8million.  As of March 31, 2005,10,070 shares of common stock were reserved for issuance under the Stock OptionPlan.

 

*PreferredStock.** ***Reddy Holdings is authorized to issue up to200,000 shares of $0.01 par value preferred stock.  During 2003 and 2004, Reddy Holdings issued atotal of 99,075 shares of Series A Cumulative Redeemable Preferred Stock (“Series APreferred Stock”).  The terms of the Series APreferred Stock were set forth in a certificate of designation (the “Series APreferred Stock Designation”).  Theliquidation preference per share of the Series A Preferred Stock was equalto the sum of (a) $1,000 plus (b) the amount of all accumulated butunpaid dividends on such shares.  Theholders of the outstanding shares of Series A Preferred Stock immediatelypreceding the dividend payment date were entitled to receive dividends,

 

11

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as declared by the Board of Directors, at a rate perannum equal to 12% of the liquidation amount per share.  All dividends were cumulative, whether or notearned or declared, accruing on a daily basis from the issue date and werepayable in cash quarterly in arrears on each dividend payment date commencingon November 15, 2003.  If ReddyHoldings did not pay the cash dividends on a quarterly basis, all unpaiddividends were to be added to the liquidation amount in respect of such shareson each dividend payment date.  ReddyHoldings had the ability to redeem the Series A Preferred Stock at itsoption in whole at any time or in part from time to time, subject torestrictions as defined in the Series A Preferred Stock Designation.  Series A Preferred Stock holders werenot entitled or permitted to vote on any matter upon which the holders ofcommon stock are required or permitted to vote upon.

 

On October 27, 2004, Reddy Holdings issued $151million of its 101/2% Senior Discount Notes (see Note 5). Reddy Holdings used the net proceeds ofthe note offering, together with an approximately $28.4 million dividend fromReddy Group, to redeem all of Reddy Holdings’ outstanding Series APreferred Stock (99,175 shares) for an aggregate liquidation amount of $114.2million and to pay a dividend of $10.4 million on its common stock.  In connection with these events, Reddy Groupmade a special transaction payment of approximately $1.2 million in theaggregate to certain members of management and certain directors.

 

**7. Stock-Based Compensation**

 

At March 31, 2005,the Company had one stock-based employee compensation plan, the Reddy IceHoldings, Inc. 2003 Stock Option Plan (the “Stock Option Plan”), underwhich stock options are granted from time to time.  Effective January 1, 2005, the Companyadopted the fair value recognition provisions of SFAS No. 123, “Accountingfor Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting forStock-Based Compensation - Transition and Disclosure”.  Under the provisions of SFAS No. 148,the Company selected the modified prospective method of adoption and thereforebegan recognizing stock-based employee compensation cost related to the StockOption Plan beginning January 1, 2005, as if the fair value basedaccounting method had been used to account for all employee awards granted,modified, or settled since the inception of the Stock Option Plan on August 15,2003. The Company has also recorded stock-based compensation expense related tothe issuance of restricted common and preferred stock since the date of grantof August 15, 2003.

 

 Through December 31, 2004, the Companyaccounted for the Stock Option Plan under the intrinsic value method prescribedby APB Opinion No. 25, “Accounting for Stock Issued to Employees,” andrelated Interpretations.  No stock-basedemployee compensation cost is reflected in net loss available to commonstockholders for the three months ended March 31, 2004.  The following table illustrates the effect onthe net income available to common stockholders for the three months ended March 31,2004 as if the Company had applied the fair value recognition provisions ofstock-based compensation as described in SFAS No. 123, as amended by SFAS148.

 

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| ** **                                                                                                                  | ** ** | **Three Months**                              | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                  | ** ** | **Ended**                                     | ** ** |
| ** **                                                                                                                  | ** ** | **March 31,**                            | ** ** |
| ** **                                                                                                                  | ** ** | **2004**                                      | ** ** |
| ** **                                                                                                                  | ** ** | **(in thousands  except per  share amounts)** | ** ** |
| ** **                                                                                                                  | ** ** | ** **                                    | ** ** |
| Net  loss available to common stockholders, as reported                                                                     |       | $                                             | (14,789    | ) |
| Add:  Employee stock-based compensation expense included in reported net loss  available to common stockholders, net of tax |       | 42                                            |       |
| Less:  Total stock-based compensation expense determined under fair value based  methods for all awards, net of tax         |       | (94                                           | )          |
| Pro  forma net loss available to common stockholders                                                                        |       | $                                             | (14,841    | ) |
|                                                                                                                        |       |                                          |       |
| Basic  and diluted net loss per share:                                                                                      |       |                                          |       |
| As  reported                                                                                                                |       | $                                             | (149.38    | ) |
| Pro  forma                                                                                                                  |       |                                          | (149.91    | ) |

 

In December 2004, the FASB issued SFAS No. 123(R),‘‘Share-Based Payment’’, which establishes accounting standards for all transactions in which an entity exchangesits equity instruments for goods and services. SFAS No. 123(R) focuses primarily on accounting for transactionswith employees, and carries forward without change prior guidance forshare-based payments for transactions with non-employees.

 

SFAS No. 123(R) eliminates the intrinsic valuemeasurement objective in APB Opinion 25 and generally requires companies tomeasure the cost of employee services received in exchange for an award ofequity instruments based on the fair value of the award on the date of thegrant.  The standard requires grant datefair value to be estimated using either an option-pricing model which isconsistent with the terms of the award or a market observed price, if such aprice exists.  Such cost must berecognized over the period during which an employee is required to provideservice in exchange for the award, which is usually the vesting period.  The standard also requires the Company toestimate the number of instruments that will ultimately be issued, rather thanaccounting for forfeitures as they occur.

 

The Company is required to apply SFAS No. 123(R)to all awards granted, modified or settled on or after the first day of the nextfiscal year beginning after June 15, 2005. SFAS No. 123(R) are alsorequires the use of either the ‘‘modified prospective method’’ or the ‘‘modifiedretrospective method.’’  Under themodified prospective method, compensation cost is recognized for all awardsgranted after adoption of the standard and for the unvested portion ofpreviously granted awards that are outstanding on that date.  Under the modified retrospective method,previously issued financial statements must be restated to recognize theexpense amounts previously calculated and reported on a pro forma basis, as ifthe prior standard had been adopted. Under both methods, either the straight line or an accelerated methodmay be used to amortize the compensation cost associated with awards withgraded vesting.  The standard permits andencourages early adoption.

 

The Company plans to adopt SFAS No. 123(R) on January 1,2006 using the modified prospective method. Management does not believe that the adoption of this standard will havea material effect on the Company’s results of operations or financial position.

 

**8.  IncomeTaxes**

 

The Company’s effectivetax rate differs from the federal statutory income tax rate of 35% due to stateincome taxes and the effect of permanent differences, primarily thenon-deductible portion of the interest expense recognized on the 101/2%Senior Discount Notes.  The Company didnot report any income tax benefit for the three months ended March 31,2004 due to uncertainty regarding the Company’s ability to utilize such abenefit in the future.

 

**9. Commitments and Contingencies**

 

The Company is involvedin various claims, lawsuits and proceedings arising in the ordinary course ofbusiness.  There are uncertaintiesinherent in the ultimate outcome of such matters and it is impossible topresently determine the ultimate costs that may be incurred.  Other than those lawsuits described below,

 

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managementbelieves the resolution of such uncertainties and the incurrence of such costswill not have a material adverse effect on the Company’s consolidated financialposition, results of operations or cash flows.

 

The Company was a partyto a lawsuit in connection with an ammonia release at its Baton Rouge,Louisiana manufacturing facility in June 2001.  The case, which was a consolidation of sevenlawsuits, was titled Wallace Acey, Jr., et al vs. Reddy IceCorporation.  This lawsuit was filed August 30,2001 in the 19th Judicial District Court, Parish of East BatonRouge, Louisiana.  The plaintiffs, whichwere certified as a settlement class, alleged injuries primarily consisting ofinconvenience, watery eyes and offensive odors. The fairness of the settlement was approved by the court on January 25,2005.  Unless the fairness of thesettlement is appealed by any member of the settlement class prior to theexpiration of the appeal period, management believes the settlement will befinalized during the second quarter of 2005. The Company’s insurance carrier will pay the majority of the settlementand related legal fees.  The Companyrecognized $150,000 of expense in its 2004 results related to its obligationunder the settlement.  Management doesnot believe that the final resolution of this litigation will have a materialimpact on the Company’s business, financial condition or results of operations.

 

**10.  Segment Information**

 

The Company has two reportablesegments: (1) ice products and (2) non-ice products andservices.  Ice products include themanufacture and distribution of packaged ice products through traditional icemanufacturing and delivery and The Ice Factory®, 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 services include refrigerated warehouses and themanufacturing and distribution of bottled water.

 

The Company evaluatesperformance of each segment based on earnings before interest, taxes,depreciation, amortization, gain or loss on disposition of assets, impairmentof assets, gain on extinguishment of debt and the cumulative effect of changesin accounting principles (“Segment EBITDA”). Segment assets are not a factor in the evaluation of performance.  There were no intersegment sales during thethree months ended March 31, 2005 and 2004.

 

Segment information forthe three months ended March 31, 2005 and 2004 was as follows:

 
| ** **                              | ** ** | **Three Months Ended**  | ** ** | **Three Months Ended**  | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                              | ** ** | **March 31, 2005** | ** ** | **March 31, 2004** | ** ** |
| ** **                              | ** ** | **Ice**                 | ** ** | **Non-Ice**             | ** ** | **Total** | ** ** | **Ice** | ** ** | **Non-Ice** | ** ** | **Total** | ** ** |
|                                    |       |                    |       |                    |       |   |   | **(as restated, see Note  11)** |   |
|                                    |       | **(in thousands)**      |       |
|                                    |       | ** **              |       |
| Revenues                                |       | $                       | 35,989     |                    | $          | 3,255 |   | $ | 39,244 |   | $ | 33,581 |   | $ | 3,799 |   | $ | 37,380 |   |
| Cost  of sales (excluding depreciation) |       | 29,464                  |       | 2,215                   |       | 31,679 |   | 26,250 |   | 2,258 |   | 28,508 |   |
| Operating  expenses                     |       | 8,317                   |       | 517                     |       | 8,834 |   | 7,840 |   | 478 |   | 8,318 |   |
| Segment  EBITDA                         |       | $                       | (1,792     | )                       | $          | 523 |   | $ | (1,269 | ) | $ | (509 | ) | $ | 1,063 |   | $ | 554 |   |
| Total  assets                           |       | $                       | 551,559    |                    | $          | 32,987 |   | $ | 584,546 |   | $ | 570,503 |   | $ | 33,579 |   | $ | 604,082 |   |

 

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The reconciliation ofSegment EBITDA to net loss for the three months ended March 31, 2005 and2004 was as follows:

 
| ** **                                     | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **March 31,**     | ** ** |
| ** **                                     | ** ** | **2005**               | ** ** | **2004** | ** ** |
| ** **                                     | ** ** | **(in thousands)**     | ** ** |
| ** **                                     | ** ** | ** **             | ** ** |
| Segment  EBITDA                                |       | $                      | (1,269     | ) | $ | 554 |   |
| Depreciation  expense related to cost of sales |       | (4,741                 | )          | (4,500 | ) |
| Depreciation  and amortization expense         |       | (1,415                 | )          | (1,062 | ) |
| Loss  on dispositions of assets                |       | (149                   | )          | — |   |
| Interest  expense                              |       | (9,308                 | )          | (6,677 | ) |
| Income  tax benefit                            |       | 6,702                  |       | — |   |
| Net  loss                                      |       | $                      | (10,180    | ) | $ | (11,685 | ) |

 

**11.  Restatement of Condensed Consolidated Statementof Operations**

 

*** ***In the process ofpreparing its consolidated financial statements for the year ended December 31,2004, and in responding to comments from the SEC on the Company’s RegistrationStatement on Form S-1 relating to the Company’s contemplated initialpublic offering of common stock (see Note 6), the Company determined that itspresentation of ‘‘cost of sales’’ and ‘‘gross profit’’, as previously reported,was not consistent with accounting principles generally accepted in the UnitedStates of America.

 

Historically, the Company did not include depreciationexpense related to cost of sales as a component of cost of sales and thereforehad excluded it from gross profit calculations. Consistent with presentations of other companies in related industries,the Company added the caption ‘‘depreciation expense related to cost of sales’’above ‘‘gross profit’’ in its consolidated statements of operations.  In addition, the Company renamed the caption ‘‘costof sales’’ to ‘‘cost of sales (excluding depreciation)’’ to clarify thatdepreciation expense attributable to cost of sales is not included in thatcaption.  The Company has restated theaccompanying consolidated statement of operations for the three months ended March 31,2004 to reclassify $4.5 million from ‘‘depreciation and amortization expense’’to ‘‘depreciation expense related to cost of sales’’, which had the effect ofreducing gross profit, but did not have any effect on income from operations ornet loss.  This restatement did notaffect the Company’s historical consolidated balance sheets or consolidatedstatements of cash flows.

 

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# **Item 2.  *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations***

# ** **

The following discussion and analysis of our financialcondition and results of operations should be read in conjunction with ourcondensed consolidated financial statements and the related notes and otherinformation included elsewhere in this Form 10-Q and our AnnualReport on Form 10-K for the year ended December 31, 2004,previously filed with the Securities & Exchange Commission (“SEC”).  As used in this section, “Reddy Group” refersto 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 of Forward Looking Statements and Information**

# ** **

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

 

•                  generaleconomic trends and seasonality;

•                  weatherconditions;

•                  oursubstantial leverage and ability to service our debt;

•                  therestrictive covenants under our indebtedness;

•                  availabilityof capital sources;

•                  fluctuationsin operating costs, 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 acquiredbusinesses;

•                  technologicalchanges and innovations;

•                  legislativeor regulatory requirements; and

•                  allthe other factors described herein under “Risks Relating to our Indebtedness”and  “Risks Relating to our Business”.

 

You should not undulyrely on 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 release any revisions to these forward lookingstatements to reflect events or circumstances occurring after the date of thisreport or to reflect the occurrence of unanticipated events.  Important factors that could cause our actualresults to differ materially from our expectations are discussed elsewhere inthis report.

 

**General**

** **

***OurBusiness.**** *We are the largest manufacturerand distributor of packaged ice in the United States and currently serveapproximately 82,000 customer locations in 31 states and the District ofColumbia.  We operate in two businesssegments - ice products and non-ice products and operations.  Ice products accounted for approximately 92%of our revenues in the three months ended March 31, 2005 and 90% ofrevenues in the three months ended March 31, 2004.  Our ice products business consists of:

 

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

 

16

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•                  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 businesssegment, non-ice products and operations, consists of refrigerated warehousingfor third parties and the manufacture and sale of bottled water.

 

***Seasonality. ***Our results ofoperations are highly seasonal, characterized by peak demand during the warmermonths of May through September, with an extended peak selling season inthe southern United States. Revenues within specific markets can also beaffected by weather conditions, with cool or rainy weather negatively impactingdemand and extremely hot weather increasing our costs as we respond to excesscustomer demand for our products. Approximately 68%, 66% and 68% of our revenues occurred during thesecond and third calendar quarters in 2004, 2003 and 2002, respectively.  The proportion of revenues in the second andthird calendar quarters of 2003 was lower than in 2004 and 2002 primarily dueto the timing of our 2003 acquisitions, which all occurred in the fourthquarter of 2003.  As a result of seasonalrevenue declines and a less than proportional decline in expenses during thefirst and fourth quarters, we typically experience lower profit marginsresulting in losses during these periods. In addition, because a significant portion of our annual sales are generatedduring the second and third calendar quarters, our annual results of operationsmay fluctuate significantly if the weather during these periods is cool orrainy.

 

***Predecessor andSuccessor. ***On August 15,2003, Packaged Ice, Inc. merged with Cube Acquisition Corp., a whollyowned subsidiary of Reddy Ice Holdings, Inc.  Packaged Ice was the surviving corporationand became a wholly owned subsidiary of Reddy Holdings, which was establishedon May 8, 2003.  In connection withthe merger, Packaged Ice was renamed Reddy Ice Group, Inc.  Reddy Holdings and Reddy Group arecollectively referred to as the ‘‘Successor’’. Packaged Ice prior to the merger is referred to as the ‘‘Predecessor’’.  Reddy Holdings and Cube Acquisition conductedno operations from May 8, 2003 through August 14, 2003.

 

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

 

***Cost of Sales (Excluding Depreciation)****. *Ourcost of sales (excluding depreciation) consists of costs related to themanufacture and distribution 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,storage and distribution processes); and

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

 

***Depreciation Relatedto Cost of Sales and Depreciation and Amortization Expense. ***Depreciation andamortization are divided into two line items - depreciation expense related tocost of sales and depreciation and amortization expense.  Depreciation expense related to cost of salesconsists of depreciation expense for our production and distributionequipment.  Depreciation and amortizationexpense consists of depreciation and amortization expense for our selling, generaland administrative functions.

 

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***Operating Expenses****. *Ouroperating expenses are costs associated with selling, general andadministrative functions.  These costsinclude executive officers’ compensation, office and administrative salaries,insurance, legal and other professional services and costs associated withleasing office space.  Labor costs,including associated payroll taxes and benefit costs but excluding non-cashstock-based compensation expense, included in operating expenses representedapproximately 12% and 14% of sales in the three months ended March 31,2005 and 2004, respectively.

 

***Facilities.***  At March 31, 2005, we owned or operated59 ice manufacturing facilities, 55 distribution centers, approximately 79,000merchandisers (cold storage units installed at customer locations),approximately 3,000 Ice Factories, six refrigerated warehouses and one bottledwater plant.  We had an combined, rated manufacturingcapacity of over 16,000 tons per day.

 

***Restatement ofStatement of Operations. ***Inthe process of preparing our consolidated financial statements for the yearended December 31, 2004, and in responding to comments from the SEC on ourRegistration Statement on Form S-1 relating to our contemplatedinitial public offering of common stock, we determined that our presentation of‘‘cost of sales’’ and ‘‘gross profit’’, as previously reported, was notconsistent with accounting principles generally accepted in the United Statesof America.

 

Historically, we have not included depreciationexpense related to cost of sales as a component of cost of sales and thereforehad excluded it from gross profit calculations. Consistent with presentations of other companies in related industries,we added the caption ‘‘depreciation expense related to cost of sales’’ above ‘‘grossprofit’’ in our consolidated statements of operations.  In addition, we renamed the caption ‘‘cost ofsales’’ to ‘‘cost of sales (excluding depreciation)’’ to clarify that depreciationexpense attributable to cost of sales is not included in that caption.  We have restated the accompanyingconsolidated statement of operations for the three months ended March 31,2004 to reclassify $4.5 million from ‘‘depreciation and amortization expense’’to ‘‘depreciation expense related to cost of sales’’, which had the effect ofreducing gross profit, but did not have any effect on income from operations ornet loss.  This restatement did notaffect our historical consolidated balance sheets or consolidated statements ofcash flows.

 

Management’s discussion and analysis of financialcondition and results of operations which follows gives effect to therestatement.

 

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***Three Months Ended March 31, 2005 Compared to ThreeMonths Ended March 31, 2004***

 
| ** **                                     | ** ** | **Three  Months Ended** | ** ** | ** **                 | ** ** | ** **  | ** ** |
|------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|-------------|------------|
| ** **                                     | ** ** | **March 31,**      | ** ** | **Change  from Last Year** | ** ** |
| ** **                                     | ** ** | **2005**                | ** ** | **2004**                   | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                     | ** ** | ** **              | ** ** | **(as  restated)**         | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **(in  thousands)**     | ** ** |
|                                           |       |                    |       |                       |       |        |       |   |   |
| **Consolidated Results**                       | ** ** | ** **              | ** ** | ** **                 | ** ** | ** **  | ** ** | ** ** | ** ** |
| Revenues                                       |       | $                       | 39,244     |                       | $          | 37,380      |       | $ | 1,864 |   | 5.0 |   |
| Cost  of sales (excluding depreciation)        |       | 31,679                  |       | 28,508                     |       | 3,171       |       | 11.1 |   |
| Depreciation  expense related to cost of sales |       | 4,741                   |       | 4,500                      |       | 241         |       | 5.4 |   |
| Gross  profit                                  |       | 2,824                   |       | 4,372                      |       | (1,548      | )          | (35.4 | ) |
| Operating  expenses                            |       | 8,834                   |       | 8,318                      |       | 516         |       | 6.2 |   |
| Depreciation  and amortization expense         |       | 1,415                   |       | 1,062                      |       | 353         |       | 33.2 |   |
| Loss  on dispositions of assets                |       | 149                     |       | —                     |       | 149         |       | — |   |
| Loss  from operations                          |       | (7,574                  | )          | (5,008                     | )          | (2,566      | )          | (51.2 | ) |
| Interest  expense                              |       | 9,308                   |       | 6,677                      |       | 2,631       |       | 39.4 |   |
| Loss  before income taxes                      |       | (16,882                 | )          | (11,685                    | )          | (5,197      | )          | (44.5 | ) |
| Income  tax benefit                            |       | 6,702                   |       | —                     |       | 6,702       |       | — |   |
| Net  loss                                      |       | $                       | (10,180    | )                          | $          | (11,685     | )          | $ | 1,505 |   | 12.9 |   |
|                                           |       |                    |       |                       |       |        |       |   |   |
| **Ice Operations:**                            | ** ** | ** **              | ** ** | ** **                 | ** ** | ** **  | ** ** | ** ** | ** ** |
| Revenues                                       |       | $                       | 35,989     |                       | $          | 33,581      |       | $ | 2,408 |   | 7.2 |   |
| Cost  of sales (excluding depreciation)        |       | 29,464                  |       | 26,250                     |       | 3,214       |       | 12.2 |   |
| Depreciation  expense related to cost of sales |       | 4,466                   |       | 4,232                      |       | 234         |       | 5.5 |   |
| Gross  profit                                  |       | 2,059                   |       | 3,099                      |       | (1,040      | )          | (33.6 | ) |
| Operating  expenses                            |       | 8,317                   |       | 7,840                      |       | 477         |       | 6.1 |   |
|                                           |       |                    |       |                       |       |        |       |   |   |
| **Non-Ice Operations:**                        | ** ** | ** **              | ** ** | ** **                 | ** ** | ** **  | ** ** | ** ** | ** ** |
| Revenues                                       |       | $                       | 3,255      |                       | $          | 3,799       |       | $ | (544 | ) | (14.3 | ) |
| Cost  of sales (excluding depreciation)        |       | 2,215                   |       | 2,258                      |       | (43         | )          | (1.9 | ) |
| Depreciation  expense related to cost of sales |       | 275                     |       | 268                        |       | 7           |       | 2.6 |   |
| Gross  profit                                  |       | 765                     |       | 1,273                      |       | (508        | )          | (39.9 | ) |
| Operating  expenses                            |       | 517                     |       | 478                        |       | 39          |       | 8.2 |   |

 

*Revenues: *Revenues increased $1.9million from the three months ended March 31, 2004 to the three monthsended March 31, 2005.  This increaseis primarily due to the effects of the acquisitions of 11 ice companies madefrom March 1, 2004 to November 1, 2004 (approximately $1.0 million),higher average pricing (approximately $1.1 million) and changes in terms underwhich we do business with the majority of our distributors (approximately $1.0million).  The modifications to ourdistributor business occurred mostly in the second quarter of 2004 and resultedin a corresponding increase in cost of sales (excluding depreciation).  Offsetting these increases in revenues was a$0.7 million decrease in ice revenue attributable to a decrease in volume salesin our core markets related to cooler and wetter weather conditions and a $0.5million decrease in non-ice revenue, primarily due to volume decreases in ourcold storage business.

 

*Cost ofSales (Excluding Depreciation):*  Cost of sales (excluding depreciation)increased $3.2 million from the three months ended March 31, 2004 to thethree months ended March 31, 2005. This increase in cost of sales (excluding depreciation) is primarily dueto an additional $1.0 million of costs in the three months ended March 31,2005 associated with the ice operations acquired during 2004, a $0.8 millionincrease in insurance costs, primarily health insurance, a $1.0 millionincrease in distribution costs related to changes in terms under which we dobusiness with the majority of our distributors and a $0.4 million net increasein other costs, primarily increases in fuel and bag costs related to marketincreases in energy prices, which were partially offset by reductions in laborcosts. The company has put initiatives in place related to health insurance andother insurance lines, which will make up a portion if not all of the firstquarter insurance impact as compared with last year’s first quarter.

 

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Labor costs, including associated payroll taxes andbenefit costs (including health insurance), accounted for approximately 36% and35% of sales in the three months ended March 31, 2005 and 2004, respectively.  Cost of plastic bags representedapproximately 6% of sales in the three months ended March 31, 2005 and2004.  Fuel expenses representedapproximately 3% of sales in the three months ended March 31, 2005 and2004.  Expenses for independent thirdparty distribution services represented approximately 6% of sales in the threemonths ended March 31, 2005, as compared to 4% of sales in the same periodin 2004.  Electricity expense representedapproximately 7% of sales in the three months ended March 31, 2005 and2004.

 

* Depreciation Expense Related to Cost ofSales: * Depreciation expense related to cost of salesincreased $0.2 million from the three months ended March 31, 2004 to the threemonths ended March 31, 2005 as a result of additional depreciation expenseassociated with production and distribution equipment placed in service during2004 and early 2005 and the ice operations acquired in 2004, partially offsetby the effect of asset dispositions.

 

*OperatingExpenses: *Operatingexpenses increased $0.5 million from the three months ended March 31, 2004to the three months ended March 31, 2005. This increase is primarily due to the effects of the ice operationsacquired in 2004 and increases in bad debt expense, insurance costs andnon-cash stock-based compensation expense, partially offset by reductions inprofessional services and labor costs.

 

*Depreciationand Amortization: *Depreciationand amortization increased $0.4 million from the three months ended March 31,2004 to the three months ended March 31, 2005.  This increase is primarily due to additionalamortization expense associated with the intangible assets recorded inconnection with the acquisitions completed in 2004.

 

*InterestExpense:*  Interestexpense increased $2.6 million from the three months ended March 31, 2004to the three months ended March 31, 2005, primarily due to the non-cashinterest expense associated with the senior discount notes issued on October 27,2004.

 

**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 facilityand transport it to our customers’ retail****locations whenneeded, and through Ice Factories, which manufacture, package and store ice inour****customers’ retail locations. Ourprimary uses of cash are (a) cost of sales, (b) operating expenses,****(c) debt service, (d) capital expendituresrelated to replacing and modernizing the capital****equipmentin our traditional ice plants and acquiring and installing additional IceFactories and (e) acquisitions. ** **Historically, we have financed ourcapital and working capital requirements, including our acquisitions, through a combination of cash flows fromoperations, borrowings under our revolving credit facilities and operatingleases.

 

Our ability to generate cash from our operations issubject to weather, general economic, financial, competitive, legislative,regulatory and other factors that are beyond our control.  As a result, we cannot assure you that ourbusiness will generate sufficient cash flow from operations in amountssufficient to enable us to service our debt and to fund our other liquidityneeds.  If we do not have sufficientliquidity, we will have to take actions such as reducing or delaying strategicacquisitions, investments and joint ventures, selling assets, restructuring orrefinancing our debt or seeking additional equity capital.  We cannot assure you that any of theseremedies could, if necessary, be effected on commercially reasonable terms, orat all.  In addition, the terms of ourdebt instruments may restrict us from adopting some of these alternatives.

 

During the three monthsended March 31, 2005, capital expenditures totaled $5.7 million.  As we have consolidated acquisitions into theexisting company infrastructure, we have identified non-core and excess assetswhich can be disposed of.  From time totime, we also dispose of other assets which are no longer useful in ouroperations.  As a result of dispositionsof these non-core and excess assets, we realized proceeds of

 

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approximately $0.4million in the three months ended March 31, 2005.  Our net capital expenditures in the threemonths ended March 31, 2005 were $5.3 million.

 

During 2004, we completed the acquisition of 11 smallice companies for a total cash purchase price of approximately $16.9million.  Although we have not made anyacquisitions during the three months ended March 31, 2005, we willcontinue to evaluate acquisition opportunities as they become available.  In conjunction with these evaluations, wewill consider our liquidity, availability under Reddy Group’s senior creditfacility, mandatory principal repayments under our debt agreements and theavailability of other capital resources.

 

### **Cash Flows for the Three Months Ended March 31,2005 and 2004**

### ** **

Net cash used inoperating activities was $14.7 million and $12.7 million in the three monthsended March 31, 2005 and 2004, respectively.  The increase in net cash used in operatingactivities from 2004 to 2005 was primarily the result of a $2.6 millionincrease in our net loss from operations, which was driven by a decline insales in our non-ice operations and increases in insurance, fuel and bag costs.

 

Net cash used ininvesting activities was $5.3 million and $3.9 million in the three monthsended March 31, 2005 and 2004, respectively.  The increase in net cash used in investingactivities from 2004 to 2005 was primarily due to increased net property andequipment additions of $2.5 million, primarily related to the timing of ourbudgeted capital expenditures in 2005 as compared with 2004, partially offsetby a $1.1 million reduction in the cost of acquisitions.  In the three months ended March 31,2004, we completed three acquisitions for $1.1 million.  We did not complete any acquisitions in thethree months ended March 31, 2005.

 

Net cash provided byfinancing activities was $18.3 million and $7.7 million in the three monthsended March 31, 2005 and 2004, respectively.  The increase is due to a $8.6 millionincrease in net borrowings under our revolving credit facility, primarily dueto a $8.3 million decrease in beginning available cash at January 1, 2005versus January 1, 2004, offset by the receipt of $1.8 million of proceedsfrom the exercise of employee stock options in the three months ended March 31,2005.

 

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

### ** **

*Overview.*  At March 31, 2005, we had approximately$456.3 million of total debt outstanding as follows:

 

•                  $104.6million of Reddy Holdings’ 101/2% senior discount notesdue 2012 (net of unamortized discount of $46.4 million);

•                  $151.2million of Reddy Group’s 87/8% senior subordinated notesdue August 1, 2011 (net of unamortized discount of $0.8 million);

•                  $177.3million of outstanding term loans under Reddy Group’s senior credit facilitywhich matures on August 15, 2009;

•                  $22.7million of outstanding revolving credit facility balances under Reddy Group’ssenior credit facility which matures on August 15, 2008; and

•                  $0.5million of other debt.

 

***SeniorSubordinated Notes.***** On July 17, 2003, Reddy Group issued$152.0 million of 87/8% senior subordinated notes.  These notes were issued in connection with aprivate placement offering and were subsequently registered with the SEC.  The 87/8% seniorsubordinated notes were priced at 99.297%, which resulted in gross proceeds of$150.9 million.  Interest on the 87/8%senior subordinated notes is payable semiannually on February 1 and August 1,with such payments having commenced on February 1, 2004.  The 87/8% seniorsubordinated notes are unsecured obligations of Reddy Group and are:

 

•                  subordinatedin right of payment to all of Reddy Group’s existing and future seniorindebtedness;

 

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•                  equalin right of payment with any of Reddy Group’s existing and future seniorsubordinated indebtedness; and

•                  seniorin right to any other of Reddy Group’s future subordinated indebtedness, ifany.

 

The 87/8%senior subordinated notes include customary covenants that restrict, amongother things, the ability to incur additional debt, pay dividends or makecertain other restricted payments, incur liens, merge or sell all orsubstantially all of the assets or enter into various transactions withaffiliates.  Prior to August 1,2006, Reddy Group may redeem up to 35% of the principal amount of the 87/8%senior subordinated notes at a redemption price of 108.875% of the principalamount thereof, plus accrued and unpaid interest to the date of redemption,with funds raised in equity offerings that are specified in the indenturegoverning the 87/8% senior subordinated notes.  On or after August 1, 2007, Reddy Groupmay redeem all or a portion of the senior subordinated notes at apre-determined redemption price plus any accrued interest.  The redemption price, as a percentage of theoutstanding principal amount, is 104.438% in 2007, 102.219% in 2008 and100.000% in 2009 and subsequent years. If Reddy Group experiences a change of control and does not elect toredeem the outstanding senior subordinated notes as previously described, ReddyGroup will be required to make an offer to repurchase the senior subordinatednotes at a price equal to 101% of the outstanding principal amount plus accruedinterest.

 

The 87/8%senior subordinated notes are guaranteed, fully, jointly and severally, andunconditionally, on a senior subordinated basis by Reddy Holdings and all ofReddy Group’s subsidiaries.  The terms ofthe indenture governing the 87/8% senior subordinatednotes significantly restrict Reddy Group from paying dividends and otherwisetransferring assets to Reddy Holdings. For example, Reddy Group’s ability to make such payments is governed bya formula based on 50% of its consolidated net income.  In addition, as a condition to making suchpayments based on such formula, Reddy Group must have an EBITDA (as defined inthe Reddy Group indenture) to interest expense ratio of at least 2.0 to 1.0prior to August 1, 2006, and 2.25 to 1.0 thereafter, after giving effectto any such payments.  Notwithstandingsuch restrictions, the indenture permits an aggregate of $10.0 million of suchpayments to be made whether or not there is availability under the formula orthe conditions to its use are met, provided that at the time of such payment,no default shall have occurred and be continuing under that indenture.

 

On March 22, 2005 Reddy Group commenced a cashtender offer for any and all of its outstanding 87/8%senior subordinated notes.  In connectionwith the tender offer Reddy Group is also soliciting consents to amend theindenture governing these notes to, among other things, eliminate substantiallyall of the restrictive covenants and certain events of default.  The offer is subject to the satisfaction ofcertain conditions, including there being validly tendered and not validlywithdrawn at least a majority of the aggregate principal amount of these notesoutstanding and our having available funds sufficient to pay the aggregatetotal consideration to the holders of tendered notes from the anticipatedproceeds of our borrowings under our new credit facilities and from theproposed initial public offering of our common stock.  On April 13, 2005, Reddy Group announcedthat we had received the requisite number of consents to amend the indenture asdescribed above.  On May 13, 2005, ReddyGroup extended the expiration date of the tender offer and consent solicitationto June 3, 2005 and announced that the expected total purchase pricefor each $1,000 principal amount note tendered will be approximately $1,118.60,which included $20 per $1,000 principal amount of each note for the consentfee.  As of the close of business on May12, 2005, tenders and consents had been received with respect to approximately 99.9%of the outstanding principal amount of the senior subordinated notes.

 

***Senior Discount Notes****.*  On October 27,2004, Reddy Holdings issued $151.0 million in aggregate principal amount atmaturity of 101/2% Senior Discount Notes due 2012 in aprivate placement offering.  The seniordiscount notes were sold at 66.333% of the stated principal amount, whichresulted in gross proceeds of $100.2 million. We used the net proceeds of the offering, together with a dividend ofapproximately $28.4 million from Reddy Group to redeem all of ReddyHoldings’ existing series A preferred stock  for approximately $99.2 million, to payaccumulated dividends on such stock as of the date of redemption in the amountof approximately $15.0 million and to pay a dividend of approximately$10.4 million to our common stockholders. In connection with these transactions, Reddy Group made a specialtransaction payment of

 

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approximately $1.2 million in the aggregate tocertain members of management and certain directors.  In connection with the offering of notes andthe related transactions, Reddy Ice Group amended its credit agreement (see “-SeniorCredit Facility” below).

 

Each senior discount notehas an initial accreted value of $663.33 per $1,000 principal amount atmaturity.  The accreted value of eachsenior discount note increases from the date of issuance until November 1,2008 at a rate of 101/2% per annum such that the accretedvalue will equal the stated principal amount at maturity on November 1,2008.**** Thereafter cash interest will accrue and bepayable semi-annually at a rate of 101/2% per annum.  The senior discount notes are unsecuredobligations 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 notesinclude customary covenants that restrict, among other things, the ability toincur additional debt or issue certain preferred stock, pay dividends orredeem, repurchase or retire our capital stock or subordinated indebtedness,make certain investments, incur liens, enter into arrangements that restrictdividends from our subsidiaries, merge or sell all or substantially all of theassets or enter into various transactions with affiliates.  Prior to November 1, 2007, we may redeemup to 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 and after November 1, 2008, we mayredeem any or all of the senior discount notes by paying a redemption premiumwhich is initially 5.25% of the principal amount at maturity of the notes, andwill decline annually to 0% commencing on 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 (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 experiencea change of control and do not elect to make the optional redemption describedin the previous sentence, we will be required to make an offer to repurchasethe senior discount notes at a price equal to 101% of their accreted value,plus accrued and unpaid interest, if any, 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.

 

The senior discount notes are subject to registrationwith the SEC pursuant to the Registration Rights Agreement (the “RightsAgreement”) entered into at the time of issuance.  Pursuant to the Rights Agreement, ReddyHoldings was required to, within 150 days after the issuance date, file aregistration statement with the SEC to exchange the senior discount notes fornew notes of Reddy Holdings having terms substantially identical in allmaterial respects to the senior discount notes. The 150th day following the issuance of the senior discount notes was March 26,2005 and, as a result of not filing the registration statement with the SEC onor prior to that date, we accrued additional interest on the senior discountnotes from March 26, 2005 through April 5, 2005, the date on which theregistration statement was actually filed.  Reddy Holdings must also use its commerciallyreasonable efforts to cause the registration statement to be declared effectivewithin 240 days after the issuance date.

 

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***Senior Credit Facility.***  On August 15, 2003, Reddy Group enteredinto a senior credit facility in an aggregate amount of $170.0 million, withthe 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 credit facility provided for a six-yearterm loan in the amount of $135.0 million and a five-year revolving creditfacility in the amount of $35.0 million. On October 17, 2003, the senior credit facility was amended to,among other things, allow for an additional term loan of $45.0 million, whichcontains substantially all the same terms, conditions and financial covenantsas the original term loan.  The combinedterm loan continues to amortize in quarterly installments over a five-yearperiod in an annual aggregate amount equal to 1% of the combined term loanbalance of $180.0 million, with any remaining unpaid balance to be repaid inthe sixth year in equal, quarterly installments

 

At March 31, 2005,we had $6.5 million of availability under the revolving credit facility, whichwas net of outstanding standby letters of credit of $5.8 million.  In addition, we had $2.9 million of availablecash on hand.  The standby letters ofcredit are used primarily to secure certain insurance obligations.  As our insurance policies are renewed in2005, we expect to issue new standby letters of credit during the last half of2005 for the new policy year.  However,we also expect to receive some reductions in previously issued standby lettersof credit related to earlier policy years.

 

Principal balances outstanding under the revolvingcredit facility bear interest per annum, at our option, at the sum of the baserate plus the applicable margin or LIBOR plus the applicable margin.  The base rate is defined as the greater ofthe prime rate (as announced from time to time by the Administrative Agent) orthe federal funds rate plus 0.5%.  Theapplicable margin is different for revolving and term loans and variesdepending on our leverage ratio.  At March 31,2005, the weighted average interest rate of borrowings outstanding under thesenior credit facility was 5.6%. Interest on base rate loans is payable on the last day of eachquarter.  Interest on LIBOR loans ispayable upon maturity of the LIBOR loan or on the last day of the quarter ifthe term of the LIBOR loan exceeds 90 days. Reddy Group pays a quarterly fee on the average availability under ourexisting revolving credit facility based on an annual rate of 0.5%.

 

The terms of the senior credit facility prohibit ReddyGroup from paying dividends and otherwise transferring assets to ReddyHoldings, except for certain limited dividends, the proceeds of which must beused to maintain Reddy Holdings’ corporate existence.

 

The senior creditfacility requires that, beginning in 2004, we will repay all borrowings underthe revolving credit facility and maintain a zero outstanding balance for aperiod of 30 consecutive calendar days during each year.  The term loan amortizes in quarterlyinstallments over a five-year period in an annual aggregate amount equal to 1%of the original balance, with any remaining unpaid balance to be repaid in thesixth year in equal, quarterly installments. Subject to certain conditions, mandatory repayments of the revolvingcredit facility and term loans are required to be made with portions of theproceeds from (1) asset sales, (2) the issuance of debt securities, (3) aninitial public offering of stock of Reddy Holdings and (4) insurance andcondemnation awards.  In the event of achange in control, as defined in the credit agreement governing the seniorcredit facility, all amounts outstanding will become due and payableimmediately.  Furthermore, within 100days after close of each fiscal year (beginning with the close of the 2004fiscal year), a mandatory prepayment of the term loan is required based on apercentage of Reddy Group’s annual excess cash flow, as defined in the seniorcredit facility.  The percentage is basedon Reddy Group’s leverage ratio at the end of such fiscal year and ranges from25% to 75%.

 

On October 27, 2004, in connection with the offeringof the senior discount notes and related transactions discussed above, the seniorcredit facility was amended

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to, among other things, modify the calculation ofReddy Group’s excess cash flow for 2004 such that a mandatory prepayment basedon Reddy Group’s 2004 results was not required.

 

The senior creditfacility also contains financial covenants which include limitations on capitalexpenditures and the maintenance of certain financial ratios, as defined in thecredit agreement, and is collateralized by substantially all of its assets andthe capital stock of it and all of its current subsidiaries.  At March 31, 2005, we were in compliancewith these covenants.

 

*LiquidityOutlook.*  Due to theseasonal nature of our business, we record the majority of our sales andprofits during the months of May through September.  The majority of the cash generated from thoseoperations is received between July and November.

 

We estimate that our capital expenditures for 2005will approximate $17.5 million to $18.5 million, which will primarily be usedto maintain and expand our traditional ice operations.  This estimate includes approximately $2.0 millionof expenditures related to the implementation of mobile technology with ourdelivery personnel to create and record sales transactions.  There can be no assurance that capitalexpenditures will not exceed this estimate. As we have consolidated acquisitions into the existing companyinfrastructure we have identified non-core and excess assets.  As a result of dispositions of these non-coreand excess assets, we estimate that we will generate proceeds of approximately$1.5 million to $2.5 million in 2005.

 

Based on our expected level of operations, we believethat cash flows from operations, together with available borrowings under ourrevolving credit facility, will be adequate to meet our future liquidity needsfor at least the next twelve months.  Asof May 13, 2005, we had approximately $6.3 million of availability underour revolving credit facility, which reflected an outstanding balance under ourrevolving credit facility of $23.0 million and standby letters of credit of $5.7million.  The availability under ourrevolving credit facility typically decreases to its annual low point in late-April orearly May of each year due to the seasonality of our business.  Our cash flows from operations decline totheir lowest point each March and April due to reduced sales in January andFebruary and the need to finance seasonal increases in accounts receivableand inventories as temperatures and sales volumes begin to increase in April andMay.  We do not expect that theavailability under the revolving credit facility will decline significantly thisyear from its current level, based on past experience, as we believe that wehave already reached the seasonal low point for 2005.

 

Beginning in the latter part of the second quarter of2005 and continuing into the third quarter of 2005, availability under ourrevolving credit facility is expected to increase significantly due to theseasonality of our business and reach a maximum of $24 million to $29million.  As noted previously, we recordthe majority 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 2005,we expect to repay all amounts borrowed under our revolving credit facility inthe spring, fund current capital expenditures and debt service and build upcash balances.  We anticipate that asignificant portion of such excess cash flow will be used in early 2006 torepay amounts outstanding under the senior credit facility as required bymandatory prepayment provisions in the senior credit facility.

 

**Critical Accounting Policies**

** **

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

 

25

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*Long-Lived Assets.*  Property and equipment is carried at cost andis being depreciated on a straight-line basis over estimated lives of 2.5 to 36years.  Maintenance and repairs arecharged to expense as incurred, while capital improvements that extend theuseful lives of the underlying assets are capitalized.  We accounted for all of our historicalacquisitions using the purchase method of accounting and as a result recordedsignificant amounts of goodwill.  Otherintangible assets include the following that are amortized over their usefullives:

 

26

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

 

*Impairment of Long-Lived Assets.*  In accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 144, “Accounting for Impairment orDisposal of Long-Lived Assets,” long-lived assets and certain identifiableintangible assets to be held and used are reviewed for impairment on an annualbasis or whenever events or changes in circumstances indicate that the carryingamount of such assets may not be recoverable. The determination of recoverability of long-lived assets and certainother identifiable intangible assets is based on an estimate of undiscountedfuture cash flows resulting from the use of the asset or its disposition.  Measurement of an impairment loss forlong-lived assets and other intangible assets that management expects to holdand use are based on the fair value of the asset.  Long-lived assets to be disposed of arereported at the lower of carrying amount or net realizable value.  In accordance with SFAS No. 142, “Goodwilland Other Intangible Assets,” goodwill is evaluated using a market valuationapproach based on valuations of comparable businesses, multiples of earnings ofcomparable businesses and discounted cash flows.

 

Inherent in thedetermination of such future cash flows and valuations are certain estimatesand judgements, including the interpretation of current economic indicators andmarket values and assumptions about our strategic plans with regards to ouroperations.  To the extent additionalinformation arises or our strategies change, it is possible that ourconclusions regarding the impairment of goodwill or other long-lived assetscould change and result in a material effect on our financial position orresults of operations.

 

*Revenue Recognition.*  Revenue is recognized when product (packagedice, ice packaging bags, bottled water and ice equipment) is delivered to andaccepted by customers.  There is no rightof return with respect to the packaged ice, bags delivered and bottled water.  Revenue resulting from Ice Factory managementagreements and cold storage services is recognized as earned under contractterms.

 

**Recently Adopted Accounting Pronouncements**

 

Effective January 1, 2005, we adopted the fairvalue recognition provisions of SFAS No. 123, as amended by SFAS No. 148.Under the provisions of SFAS No. 148, we have selected the modifiedprospective method of adoption; therefore, we will recognize stock-basedemployee compensation cost beginning January 1, 2005, as if the fair valuebased accounting method had been used to account for all employee and directorawards granted, modified, or settled since the merger on August 15, 2003.

 

### **Recent Accounting Pronouncements**

### ** **

In December 2004, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 123(R), ‘‘Share-Based Payment’’,which establishes  accounting standardsfor all transactions in which an entity exchanges its equity instruments forgoods and services.  SFAS No. 123(R)focuses primarily on accounting for transactions with employees, and carriesforward without change prior guidance for share-based payments for transactionswith non-employees.

 

SFAS No. 123(R) eliminates the intrinsic valuemeasurement objective in APB Opinion 25 and generally requires companies tomeasure the cost of employee services received in exchange for an award ofequity instruments based on the fair value of the award on the date of thegrant.  The standard requires grant datefair value to be estimated using either an option-pricing model which isconsistent with the terms of the award or a market observed price, if such aprice exists.  Such cost must berecognized over the period during which an employee is required to provideservice in exchange for the award, which is usually the vesting period.  The standard also requires us to estimate thenumber of instruments that will ultimately be issued, rather than accountingfor forfeitures as they occur.

 

We are required to apply SFAS No. 123(R) to allawards granted, modified or settled on or after the first day of our nextfiscal year beginning after June 15, 2005. We are also required to use either the ‘‘modified prospective method’’or the ‘‘modified retrospective method.’’ Under the modified prospective method, compensation cost is recognizedfor all awards granted after adoption of the standard and for the unvestedportion of previously granted awards that are outstanding on that date.  Under the modified retrospective method,previously issued financial statements must be restated to recognize theexpense amounts previously calculated and reported on a pro forma basis, as ifthe prior standard had been adopted. Under both methods, either the straight line or an accelerated methodmay be used to amortize the compensation cost associated with awards with gradedvesting. The standard permits and encourages early adoption.

 

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We plan to adopt SFAS No. 123(R) on January 1,2006 using the modified prospective method. We do not believe that the adoption of this standard will have amaterial effect on our results of operations or financial position.

 

In November 2004, the FASB issued SFAS No. 151,‘‘Inventory Costs—an amendment of ARB 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 carryingcosts.  The statement requires such coststo be treated as a current period expense. This statement is effective forfiscal years beginning after July 15, 2005. We are currently evaluating the effect this standard could have on ourresults of operations and financial position.

 

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

### ** **

Our results of operationsare generally affected by the economic trends in our market area, but resultsto date have not been significantly impacted by inflation.  If we experience an extended period of highinflation, which affects multiple expense items, we believe that we will beable to pass on these higher costs to our customers.

 

The ice business is highly seasonal, with the bulk ofdemand coming in the warmer spring and summer months.  We experience seasonal fluctuations in ournet sales and profitability.  We make adisproportionate amount of our sales in the second and third calendarquarters.  We also typically have netincome in these same periods, whereas we typically experience net losses in thefirst and fourth quarters.  We believethat over two-thirds of our revenues will occur during the second and thirdcalendar quarters when the weather conditions are generally warmer and demandis greater, while less than one-third of our revenues will occur during thefirst and fourth calendar quarters when the weather is generally cooler.  This belief is consistent with historicaltrends.  As a result of seasonal revenuedeclines and the lack of proportional corresponding expense decreases, we willmost likely experience lower profit margins and even losses during the firstand fourth calendar quarters.  In addition,because our operating results depend significantly on sales during our peakseason, our quarterly results of operations may fluctuate significantly as aresult of adverse weather during this peak selling period if the weather isunusually cool or rainy on a more national or regional basis.

 

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

### ** **

***We have asubstantial amount of indebtedness, which may reduce our cash flow and impedeour ability to remain in compliance with debt covenants, make payments on ourindebtedness and operate our business.***

 

We are highly leveraged and have significant debtservice obligations.  As of March 31,2005, we had total debt of approximately $456.3 million and total stockholders’equity of $75.4 million.

 

Our substantial indebtedness could have otherimportant consequences.  For example, itcould:

 

•                  make it moredifficult for us to comply with the terms of our outstanding debt;

•                  require us todedicate a substantial portion of our cash flow to pay principal and intereston our debt;

•                  make us morevulnerable to, and reduce our flexibility in planning for, changes in generaleconomic, industry and competitive conditions;

•                  limit ourability to borrow additional amounts for working capital, capital expenditures,acquisitions, debt service requirements, execution of our strategy, or otherpurposes; and

•                  place us at adisadvantage compared to our competitors with less debt.

 

Any of the above listed factors could make us morevulnerable to defaults and place us at a competitive disadvantage. Further, ifwe do not have sufficient earnings to service our debt, we would need torefinance all or part of our existing debt, sell assets, borrow more money orsell securities, none of which we can guarantee we will be able to do oncommercially reasonable terms or at all.

 

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

 

The indentures governing Reddy Group’s 87/8%senior subordinated notes and Reddy Holdings’ 101/2%senior discount notes and our senior credit facility permit us, under certaincircumstances, to incur a significant amount of additional indebtedness.  In addition, we may incur additionalindebtedness through our revolving credit facility.  If we incur additional debt, the risksassociated with our substantial leverage, including our ability to service ourdebt, would increase.

 

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

 

We cannot be certain that our earnings and theearnings of our operating subsidiaries will be sufficient to allow us to makepayments in respect of the securities and meet our other obligations.  Our ability to generate cash from ouroperations is subject to weather, general economic, financial, competitive,legislative, regulatory and other factors that are beyond our control.  As a result, our business may not generatecash flows from operations in amounts sufficient to enable us to make paymentsin respect of the notes or service our debt and to fund our other liquidityneeds.  If we do not have sufficientliquidity, we will have to take actions such as reducing or delaying strategicacquisitions, investments and joint ventures, selling assets, restructuring orrefinancing our debt or seeking additional equity capital.  These remedies may not, if necessary, beeffected on commercially reasonable terms, or at all. In addition, the terms ofexisting or future debt instruments, including the credit agreement governingour senior credit facility and the indentures for Reddy Group’s 87/8%subordinated notes and Reddy Holdings’ 101/2% seniordiscount notes, may restrict us from adopting some of these alternatives.  Therefore, because of these and other factorsbeyond our control, we may be unable to service our debt.

 

***Our subsidiariesmay not be able to generate sufficient cash to service all of theirindebtedness and may be forced to take other actions to satisfy theirobligations under such indebtedness, which may not be successful.***

 

If our subsidiaries are unable to generate sufficientcash flow and are otherwise unable to obtain funds necessary to meet requiredpayments of principal, premium, if any, and interest on their indebtedness, orif they otherwise fail to comply with the various covenants, includingfinancial and operating covenants, in the instruments governing theirindebtedness (including the financial maintenance covenants in our seniorcredit facility), we or they could be in default under the terms of theagreements governing such indebtedness. If Reddy Group’s operating performance declines in the future, ReddyGroup may need to obtain waivers from the lenders under our senior creditfacility to avoid being in default under that facility.  If Reddy Group breaches its covenants underits senior credit facility and seeks a waiver, it may not be able to obtain awaiver from the required lenders.  In theevent of such default, the holders of such indebtedness could elect to declareall the funds borrowed thereunder to be due and payable, together with accruedand unpaid interest, the lenders under Reddy Group’s senior credit facilitycould elect to terminate their commitments thereunder, cease making furtherloans and institute foreclosure proceedings against Reddy Group’s assets andReddy Group could be forced into bankruptcy or liquidation.

 

In connection with the proposed initial publicoffering of our common stock and the related transactions, Reddy Holdings andReddy Group will have substantial expenses payable.  If the initial public offering of our commonstock and the related transactions are not consummated, our financial conditionand results of operations may be adversely affected when these expenses are realizedand we may be unable to comply with the financial covenants under our seniorcredit facility as a result.  Inaddition, if the initial public offering and the related transactions are notconsummated, we would need to obtain a waiver from the lenders under our seniorcredit facility in order to pay the expenses incurred by Reddy Holdings.

 

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

 

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

 

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### ***Risks Relating to Our Business***

### ** **

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

 

We experience significantseasonal fluctuations in our net sales and profitability.  We make a disproportionate amount of oursales in the second and third calendar quarters when the weather is generallywarmer, which results in an increased demand for ice.  We also earn our net income during these sameperiods. As a result of seasonal revenue declines and the lack of acorresponding decrease in expenses, we experience net losses and materiallylower profit margins during the first and fourth calendar quarters.  Variations in demand could have a materialadverse effect on the timing of our cash flows and therefore our ability toservice our obligations with respect to our indebtedness, including thesecurities.  In addition, because ouroperating results depend significantly on sales during the second and thirdcalendar quarters, our results of operations may fluctuate significantly if theweather during these periods is cool or rainy.

 

***Weather conditions and weather events can decrease our salesand increase our expenses.***

 

Cool or rainy weather can decrease sales, whileextremely hot weather may increase our expenses, each resulting in a negativeimpact on our operating results and cash flow. Ice consumers demand ice for a variety of reasons, but many of them buyice in connection with outdoor related activities, both commercial andrecreational.  As a result, demand forice increases during periods of warm, sunny weather, and conversely, demanddecreases during periods of cool, rainy weather.  During extended periods of cool or rainyweather on a national basis, our revenues and resulting net income may declinesubstantially.  Hot weather does notnecessarily result in greater net income. During extended periods of hot weather, our profits and cash flow maydecline because of an increase in expenses in response to excess demand.  We may have to transport ice from one plantto another and, in some cases, purchase ice from third party sources andtransport it to a specific market to meet this excess demand, resulting inhigher expenses and inconsistent service and product quality.  Finally, although extreme weather events suchas hurricanes can cause an increase in volume sales, those sales are notnecessarily profitable due to added costs and disruptions to our normal serviceand distribution routes.

 

***Our failure to successfully compete in our markets, retainexisting customers and obtain new customers could limit our prospects and causeus to lose market share.***

 

Our businesses are highly competitive.  We have many competitors in each of ourgeographic markets offering similar products and services.  Competition in our businesses is basedprimarily on service, quality and price. We could lose market share if we fail to successfully compete againstour competitors in any of these areas, if our existing competitors expand theircapacity, if new entrants enter our markets, if we fail to adequately serve ourexisting base of customers or if our larger grocery or convenience storecustomers decide to manufacture their own ice rather than purchase our products.

 

***Increases in the prices of electricity, certain rawmaterials, insurance and other required expenses could, if we cannot pass thoseprice increases along to our customers, have an adverse effect on our resultsof operations.***

 

We use substantial amounts of electricity inconnection with our manufacturing process, fuel to operate our refrigeratedtrucks for ice delivery and polyethylene, which is the primary raw materialused to manufacture the bags we use to package our ice.  We also carry general liability, workerscompensation, health and vehicle insurance. We have already experienced increases in fuel costs, bag costs andinsurance costs and may experience further increases in the future.  If the prices for these items or otherexpenses increase beyond the amounts that we are able to pass along to ourcustomers, our profits and our operating cash flow would decrease.

 

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

 

In 2004, we completed 11 acquisitions.  We anticipate that we may, from time to time,selectively acquire additional businesses, assets or securities of companiesthat we believe would provide a strategic 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 risksassociated with the difficulty and expense of integrating the operations andpersonnel of the acquired companies, the potential disruption to our businessand the diversion of management time and attention, any of which could increasethe costs of operating our business, negate the expected benefits of theacquisitions or result in the loss of customers.

 

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

 

Our ice manufacturing and cold storage operations aresubject to a wide range of environmental laws and regulations governing, amongother things, air emissions, wastewater discharges, the use, management anddisposal of hazardous and non-hazardous materials and wastes and the cleanup ofcontamination.  Noncompliance with suchlaws and regulations, or incidents resulting in environmental releases, couldcause us to incur substantial costs, including cleanup costs, fines andpenalties, third party claims for personal injury, investments to retrofit orupgrade our facilities and programs or curtailment of our operations.  For example, our ice manufacturing and coldstorage operations use refrigerants such as ammonia and freon.  Some of our facilities may not be incompliance with certain freon refrigerant requirements, such as leak detectionand repair, recordkeeping or reporting. In addition, the market price of freon is rising as a result of phaseouts under federal laws, which could significantly increase our operating costsin the future if we are not able 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.  For example, we are currently in the processof settling litigation resulting from an ammonia release in June 2001 atour Baton Rouge, Louisiana facility.  SeePart II, Item 1 – “Legal Proceedings”. Material violations of, or liabilities under, environmental laws mayrequire us to incur substantial costs which could reduce our profits, or todivert resources from ongoing environmental programs and improvements, whichcould delay our efforts to integrate acquisitions and upgrade our operations,or expose us to risk of further environmental liability.

 

***Our business could be disrupted or we could incursubstantial costs because of government laws and regulations.***

 

We are subject to various federal, state and locallaws 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 beenacted in the future by the various levels of government or how existing orfuture laws or regulations will be interpreted or enforced.  The enactment of more stringent laws orregulations or a stricter interpretation of existing laws and regulations maycause a disruption in our operations or require additional expenditures by us,some of which could be material.  We mayincur material costs and liabilities in order to comply with any such laws andregulations and such costs and liabilities may result in substantial expensesto us and could divert management’s time and attention.

 

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

 

Our success depends in part on our ability to attract,hire, train and retain qualified managerial, sales and marketingpersonnel.  Competition for these typesof personnel is high.  We may be unsuccessfulin attracting and retaining the personnel we require to conduct our operationssuccessfully.  Our success also dependsto a significant 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

 

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Jimmy C. Weaver, our President and ChiefOperating Officer.  In addition, we donot carry “key man” life insurance.  Ourinability to successfully attract and retain personnel or the loss of anymember of our senior management team could impair our ability to execute ourbusiness plan.

 

***Accidents involving our products and equipment could exposeus to increased costs as a result of product liability claims.***

 

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

 

We currently carryproduct liability insurance.  However,this insurance may be insufficient to pay for all or a large part of theselosses.  If our insurance does notadequately cover these losses, our results of operations and cash flow woulddecrease and such a decrease could be material.

 

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

 

As the sole major ice supplier using an on-siteproduction and delivery system at our customers’ retail locations, we haveenjoyed a competitive advantage over our competitors.  Our proprietary Ice Factory system ispreferred by certain of our high volume customers to traditional ice deliveryand gives us more flexibility during peak seasons.  Competitors sometimes test machines similarto The Ice Factory.  If any of ourcompetitors are successful with the rollout of a competing system, we couldlose business to these companies, which would result in decreased cash flowsand results of operations.

 

It is also our practice to protect certain of ourproprietary materials and processes by relying on trade secrets laws andnon-disclosure and confidentiality agreements. Confidentiality or trade secrets may not be maintained and others mayindependently develop or obtain access to such materials or processes whichcould adversely affect our competitive position and ability to differentiateour products and services from our competitors’ offerings.

 

***Limitations on ourability to utilize our tax assets before they expire may negatively affectfinancial results.***

 

As of December 31, 2004, we had net operatingloss carry-forwards for U.S. federal income tax purposes of approximately $109million, of which approximately $86 million was attributable to thePredecessor.  There are annuallimitations on the utilization of the net operating loss carry-forwardsgenerated by the Predecessor due to changes in ownership on and prior to August 15,2003.  We cannot assure you that we willbe able to utilize these tax assets. Further, if our existing equity investors cease to own a majority of ourcommon stock, then new limitations will apply to the approximately $23 millionof net operating loss carry-forwards that are currently unrestricted andadditional limitations may apply to the net operating loss carry-forwardsgenerated by the Predecessor.  If we arenot able to utilize our tax assets in the manner or in the timeframe we anticipate,our future after-tax cash flow will be reduced.

 

***Any significantreduction in goodwill and other intangible assets would have an adverse effecton the value of our business.***

 

Our acquisitions have resulted in significant amountsof goodwill and other intangible assets. Goodwill, which relates to the excess of cost over the fair value of thenet assets of the businesses acquired, and intangible assets totaledapproximately $311.8 million at March 31, 2005, representing approximately53.3% of our total assets.  In thefuture, goodwill and intangible assets may increase as a result of futureacquisitions.  Goodwill and intangibleassets are reviewed at least annually for impairment.  Impairment may result from, among otherthings, deterioration in the performance of acquired businesses, adverse marketconditions, adverse changes in applicable laws or regulations,

 

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including changes that restrict the activities of theacquired business, and a variety of other circumstances.  The amount of any impairment must be chargedto earnings.  Any future determinationrequiring the write-off of a significant portion of the goodwill and intangibleassets recorded on our balance sheet would have an adverse effect on ourfinancial condition and results of operations.

 

***We are controlledby our sponsors and their affiliates, whose interests in our business may bedifferent from yours.***

 

By reason of our sponsors’ and their affiliates’ownership of us and their collective ability, pursuant to a stockholders agreementamong our stockholders, to designate a majority of the members of the board ofdirectors, our sponsors will control actions to be taken by us and our board ofdirectors, including amendments to our certificate of incorporation and by-lawsand approval of significant corporate transactions, including mergers and salesof substantially all of our assets.  Theinterests of our sponsors and their affiliates will likely differ from yours inmaterial respects.

 

### **ITEM3.  Quantitative and Qualitative DisclosuresAbout Market Risks**

### ** **

Market riskgenerally represents the risk that losses may occur in the value of financialinstruments as a result of movements in interest rates, foreign currencyexchange rates and commodity prices.  Ourmain market risk exposure category is interest rate risk.

 

We are exposed to somemarket risk due to the floating interest rates under our senior creditfacility.  Principal balances outstandingunder the revolving credit facility bear interest, at our option, at the LondonInter-Bank Offered Rate (“LIBOR”) plus 3.5% or the prime rate (as announcedfrom time to time by the administrative agent) plus 2.5%.  The term loans bear interest, at our option,at LIBOR plus 2.5% or the prime rate plus 1.5%.

 

As of March 31,2005, the senior credit facility had an outstanding principal balance of $200.0million at a weighted average interest rate of 5.6% per annum.  At March 31, 2005, the 30-dayLIBOR rate was 2.86% and the prime rate was 5.75%.  If LIBOR and the prime rate were to increaseby 1% from March 31, 2005 levels, the annual increase in interest expensegiven our principal balances at March 31, 2005 would be approximately $2.0million.

 

**Item 4*.  Controls and Procedures***

 

Under the supervision andwith the participation of our management, including our chief executive officerand our chief financial officer, we have evaluated the effectiveness of thedesign and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) ofthe Securities Exchange Act of 1934. These controls and procedures are designed to ensure that materialinformation relating to the Company and its subsidiaries is communicated to thechief executive officer and the chief financial officer.  Based on that evaluation, our chief executiveofficer and our chief financial officer concluded that, as of March 31,2005, our disclosure controls and procedures are effective to ensure thatinformation disclosed by us in reports that we file or submit with the SEC isrecorded, processed, summarized and reported within the time periods specifiedin SEC rules and forms.

 

There were no changes inour internal control over financial reporting during the quarter ended March 31,2005, that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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

### ** **

**Item 1.  *Legal Proceedings***

 

We are from time to timeparty to legal proceedings that arise in the ordinary course of business.  We do not believe that the resolution of anysuch threatened or pending legal proceedings will have a material adverseaffect on our financial position, results of operations or liquidity.

 

We are a party to alawsuit in connection with an ammonia release at its Baton Rouge, Louisianamanufacturing facility in June 2001. The case, which was a consolidation of seven lawsuits, was titledWallace Acey, Jr., et al vs. Reddy Ice Corporation.  This lawsuit was filed August 30, 2001in the 19th Judicial District Court, Parish of East Baton Rouge,Louisiana.  The plaintiffs, which werecertified as a settlement class, alleged injuries primarily consisting ofinconvenience, watery eyes and offensive odors. The fairness of the settlement was approved by the court on January 25,2005.  Unless the fairness of thesettlement is appealed by any member of the settlement class prior to theexpiration of the appeal period, we believe the settlement will be finalizedduring the second quarter of 2005.  Ourinsurance carrier will pay the majority of the settlement and related legalfees.  We recognized $150,000 of expensein our 2004 results related to our obligation under the settlement.  We do not believe that the final resolutionof this litigation will have a material impact on our business, financialcondition or results of operation in 2005.

 

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

 

On March 17, 2005,we issued 1,799 shares of common stock in connection with the exercise ofemployee stock options.   The options hadan exercise price $1,000 per share or an aggregate of $1,798,535.  These shares were issued without registrationunder the Securities Act by reason of the exemption from registration affordedby the provisions of Section 4(2) thereof, and Rule 701promulgated thereunder, as a transaction by an issuer not involving any publicoffering.

 

**Item 3.  *Defaults Upon SeniorSecurities***

 

None.

 

**Item 4.  *Submission of Matters to aVote of Security Holders***

 

None.

 

**Item 5.  *OtherInformation***

** **

None.

 

**Item 6.  *Exhibits***

** **

See Index to Exhibits on page 36.

 

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### **SIGNATURES**

### ** **

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

 
|                    |   | **REDDY ICE HOLDINGS, INC.**            |
|-------------------------|--------|-----------------------------------------|
|                    |   |                                    |
|                    |   |                                    |
| Date: May 16, 2005 | By:    | /s/ WILLIAM P. BRICK                    |   |
|                    |   | William P. Brick                        |
|                    |   | Chief Executive  Officer                |
|                    |   |                                    |
|                    |   |                                    |
| Date: May 16, 2005 | By:    | /s/ STEVEN J. JANUSEK                   |   |
|                    |   | Steven J. Janusek                       |
|                    |   | Chief Financial and  Accounting Officer |

 

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**INDEX TO 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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