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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended March 31, 2003

OR

For the transition period from       to

Commission file number 333-29357

PACKAGED ICE, INC.

3535 TRAVIS STREET, SUITE 170
DALLAS, TEXAS 75204
(Address of principal executive offices)

(214) 526-6740
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes   [X]   No [  ]

     Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12-b2 of the Exchange Act):    Yes   [  ]   No   [X]

     The total number of shares of common stock, par value $0.01 per share, outstanding as of May 6, 2003 was 20,157,304.

PACKAGED ICE, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2003

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PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

PACKAGED ICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

     See notes to condensed consolidated financial statements.

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PACKAGED ICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

See notes to condensed consolidated financial statements.

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PACKAGED ICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ DEFICIT
(Unaudited)

See notes to condensed consolidated financial statements.

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PACKAGED ICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See notes to condensed consolidated financial statements.

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PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2003

1.    General

     The condensed consolidated financial statements of Packaged Ice, Inc. and its wholly owned subsidiaries (the “Company”) included herein are unaudited, except for the balance sheet as of December 31, 2002 that has been prepared from the audited financial statements for that date. These financial statements have been prepared by the Company pursuant to the 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 financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. All significant intercompany balances and transactions have been eliminated upon consolidation, and all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position, results of operations and cash flows for the periods covered have been made and are of a normal and recurring nature. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end and are not necessarily indicative of results for the full year. The financial statements included herein should be read in conjunction with the consolidated financial statements and the related notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2002.

2.    New Accounting Pronouncements

     In June 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 replaces Emerging Issues Task Force (EITF) Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” This standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This statement is effective for exit or disposal activities that are initiated after December 31, 2002. Adoption of this statement on January 1, 2003 did not have a significant effect on the Company’s consolidated financial position or results of operations.

     In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” SFAS No. 148 amended SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternate methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amended the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the effects of stock-based compensation on reported results. The provisions of SFAS No. 148 are effective for years ending after December 15, 2002 and interim periods beginning after December 15, 2002. The Company adopted the disclosure provisions of SFAS No. 148 upon issuance and the adoption did not have any impact on the Company’s results of operations or financial position.

3.    Inventories

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

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PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 (Continued)

4.   Accrued Expenses

5.    Line of Credit and Long-Term Obligations

     The Company had $255 million aggregate principal amount of 9³/₄% Senior Notes outstanding as of March 31, 2003. The 9³/₄% Senior Notes were issued pursuant to the indenture dated January 28, 1998, as amended (the “Indenture”). The 9³/₄% Senior Notes have a final maturity date of February 1, 2005. The 9³/₄% Senior Notes are general unsecured obligations of the Company and are senior in right of payment to all existing and future subordinated indebtedness of the Company and pari passu to all senior indebtedness of the Company. The 9³/₄% Senior Notes are effectively subordinated to the Company’s bank credit facility. The 9³/₄% Senior Notes contain certain covenants that, among other things, limit the ability of the Company and its restricted subsidiaries to pay any cash dividends or make distributions with respect to the Company’s capital stock, to incur indebtedness or to create liens.

     The Company’s 9³/₄% Senior Notes are guaranteed, fully, jointly and severally, and unconditionally, on a senior subordinated basis by all of the Company’s current and future, direct and indirect subsidiaries (the “Subsidiary Guarantors”). There are currently no restrictions on the ability of the Subsidiary Guarantors to transfer funds to Packaged Ice, Inc. (the “Parent”) in the form of cash dividends, loans or advances. Condensed consolidating financial statements for the Parent and its subsidiaries, all of which are wholly owned, are not presented as the Parent has no significant independent assets or operations.

     The Company has an $88 million senior credit facility (the “Credit Facility”), consisting of a $38 million revolving loan (the “Line of Credit”) and a $50 million term loan (the “Term Loan”). At March 31, 2003, the Company had $11.9 million of availability under the Line of Credit, net of outstanding standby letters of credit of $7.4 million. The standby letters of credit are used primarily to secure certain insurance obligations.

     Principal balances outstanding under the Line of Credit bear interest per annum, at the Company’s option, at the London Inter-Bank Offered Rate (“LIBOR”) plus 3.5% or the prime rate (as announced from

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PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 (Continued)

time to time by JPMorgan Chase Bank) plus 1.5%. The outstanding balance of $18.7 million at March 31, 2003 was classified as a current liability because of the Company’s intention to use the Line of Credit to fund its working capital. No principal payments are required until the final maturity date of October 31, 2004. Principal balances outstanding under the Term Loan bear interest per annum, at the Company’s option, at LIBOR plus 4% or the prime rate plus 2%, with a minimum of 9.5%. At March 31, 2003, the weighted average interest rate of borrowings outstanding under the Credit Facility was 8.27%. Interest is payable monthly. The Company pays a monthly fee on the average availability under the Credit Facility based on an annual rate of 0.5%, a $20,000 per quarter loan servicing fee and a $360,000 annual fee on the anniversary date of the Credit Facility.

     There is a mandatory principal payment on the Term Loan equal to 65% of the Company’s Excess Cash Flow (as defined in the Credit Facility). This principal payment is due within 10 days of delivery of the annual audited financial statements to the lenders, which may occur no later than 90 days after a fiscal year end. In accordance with the Credit Facility, the principal payment can be waived if certain conditions are met and the Company pays the Amortization Waiver Fee (as defined in the Credit Facility). The Company obtained a waiver for the 2002 principal payment and paid the related Amortization Waiver Fee of $0.4 million in April 2003. The Amortization Waiver Fee was accrued as of December 31, 2002. Any balance outstanding under the Term Loan is due upon the final maturity date of October 31, 2004.

     The Credit Facility contains financial covenants which include limitations on capital expenditures and the maintenance of certain financial ratios, as defined in the Credit Facility, and is collateralized by substantially all of the Company’s assets and the capital stock of all of the Company’s significant subsidiaries. At March 31, 2003, the Company was in compliance with these covenants.

     On November 28, 2000, the Company entered into an interest rate collar agreement (the “Collar Agreement”). If the Index Rate (30-day LIBOR, as defined in the Collar Agreement) exceeds 7.75%, the Company will receive the difference between the Index Rate and 7.75%. If the Index Rate falls below 5.75%, the Company will pay the difference plus 1%. Any amounts payable or receivable are settled monthly. The Collar Agreement has a notional amount of $50 million and a term of 4 years.

     If the Company had been required to settle the Collar Agreement as of March 31, 2003, the Company would have had to pay $4.4 million plus accrued interest of $0.2 million. The Company is exposed to credit risk in the event of nonperformance by the counterparty to the Collar Agreement, however the Company anticipates that the counterparty will fully perform its obligations under the Collar Agreement.

     At March 31, 2003 and December 31, 2002, long-term obligations consisted of the following:

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PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 (Continued)

6.   Capital Stock

     The Company currently is authorized to issue up to 50,000,000 shares of common stock, par value $0.01 per share, of which 20,157,304 shares were outstanding at March 31, 2003 and up to 5,000,000 shares of preferred stock, par value $0.01 per share. As of March 31, 2003, the Company had authorized 500,000 shares of 10% exchangeable preferred stock, of which 403,181 shares were issued and outstanding. As of March 31, 2003, the Company had reserved shares of common stock for the exercise of stock options under its various stock option plans as follows:

     As of March 31, 2003, 3,691,125 shares were reserved for issuance upon the exercise of outstanding warrants. Additionally, 500,000 shares were reserved for issuance under the 2000 Employee Stock Purchase Plan (the “ESPP”). Through March 31, 2003, 499,809 shares had been issued under the ESPP. Contributions to the ESPP were suspended in the fourth quarter of 2001 until such time that additional shares are approved by the Company’s shareholders.

     In May 2002, the Company adopted the 2002 Senior Executive Restricted Stock Plan (the “Restricted Stock Plan”). Upon adoption of the Restricted Stock Plan, certain executives were granted a total of 200,000 shares of the Company’s common stock. Such restricted shares were not transferable by the executives and had no voting rights. The removal of the restrictions was contingent upon the Company achieving certain performance goals for the fiscal year ended December 31, 2002. Subsequent to year end, it was determined that the performance goals were not met and the shares of restricted stock were forfeited and cancelled in February 2003.

7.    Loss Per Share

     The computation of loss per share is based on net loss, after deducting the dividend requirement of preferred stock ($0.994 million and $0.902 million in the three months ended March 31, 2003 and 2002, respectively), divided by the weighted average number of shares outstanding. For the three months ended March 31, 2003 and 2002, options to purchase 1.9 million and 2.1 million shares of common stock, respectively, and warrants to purchase 3.2 million and 2.9 million shares of common stock, respectively, that are outstanding but exercisable at prices above the Company’s average common stock price have not been included in the computation of diluted net loss per share and weighted average common shares outstanding. For the three months ended March 31, 2003 and 2002, there are 0.486 million shares of dilutive securities which are not included in the computation of diluted net loss per share as their effect would be anti-dilutive.

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PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 (Continued)

8.   Stock Based Compensation

     At March 31, 2003, the Company had three stock-based employee compensation plans under which stock options are granted from time to time. The Company accounts for these plans under the intrinsic value method proscribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. No stock-based employee compensation cost is reflected in the net loss available to common shareholders for the three months ended March 31, 2003 and 2002, as all stock options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of stock-based compensation as described in SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS 148, “Accounting for Stock-Based Compensation - Transition and Disclosure.”

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PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 (Continued)

9.   Commitments and Contingencies

     The Company is involved in various claims, lawsuits and proceedings arising in the ordinary course of business. While there are uncertainties inherent in the ultimate outcome of such matters and it is impossible to presently determine the ultimate costs that may be incurred, management believes the resolution of such uncertainties and the incurrence of such costs will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

     The Company is a party to a lawsuit in connection with an ammonia release at its Baton Rouge, Louisiana manufacturing facility in June 2001. The case, which is a consolidation of seven lawsuits, is titled Wallace Acey, Jr. et al vs. Reddy Ice Corporation. This lawsuit was filed August 30, 2001 in the 19^th Judicial District Court, Parish of East Baton Rouge, Louisiana and has been assigned docket number 487373 Division N. There are multiple plaintiffs who have primarily alleged injuries consisting of inconvenience, watery eyes and offensive odors. The plaintiffs have not made a specific request for relief in the lawsuit. The Company maintains insurance to cover such events and its insurance carrier is contesting the suit and plans to vigorously defend against any claims. This lawsuit is still in a preliminary stage and the ultimate outcome is impossible to determine at this time. An unfavorable result in excess of the available insurance coverage could have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

10.    Segment Information

     The Company has two reportable segments: (1) ice products and (2) non-ice products and services. Ice products include the manufacture and distribution of packaged ice products through traditional ice manufacturing and delivery and THE ICE FACTORY®. The Ice Factory is a proprietary machine that produces, packages, stores and merchandises ice at the point of sale through an automated, self-contained system. Non-ice products and services include refrigerated warehouses and the manufacturing and distribution of bottled water.

     The Company evaluates performance of each segment based on earnings before interest, taxes, depreciation, amortization, gain or loss on disposition of assets, impairment of assets, gain on extinguishment of debt and the cumulative effect of changes in accounting principles (“EBITDA”). Segment assets are not a factor in the evaluation of performance. There were no intersegment sales during the three months ended March 31, 2003 and 2002. Segment information for the three months ended March 31, 2003 and 2002 was as follows:

     For the Three Months Ended March 31, 2003:

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PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 (Continued)

     For the Three Months Ended March 31, 2002:

     Reconciliation of EBITDA to net loss before preferred dividends:

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes and other information included elsewhere in this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2002, previously filed with the Securities & Exchange Commission (“SEC”).

Uncertainty of Forward Looking Statements and Information

     Other than statements of historical facts, statements made in this Form 10-Q, statements made by us in periodic press releases or oral statements made by our management to analysts and shareholders within the meaning of such terms under the Private Securities Litigation Reform Act of 1995 and statements made in the course of presentations about our company, constitute “forward-looking statements.” We believe the expectations reflected in such forward-looking statements are accurate. However, we cannot assure you that such expectations will occur. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from future results expressed or implied by the forward-looking statements. Factors you should consider that could cause these differences are:

	•		general economic trends and seasonality;
	•		substantial leverage and ability to service debt;
	•		availability of credit facilities and restrictive covenants under the credit facilities;
	•		risks associated with acquisitions and failure to integrate acquired businesses;
	•		availability of capital sources;
	•		competitive practices in the industry in which we compete;
	•		fluctuations in operating costs;
	•		technological changes and innovations;
	•		changes in labor conditions;
	•		capital expenditure requirements;
	•		legislative or regulatory requirements; and
	•		weather.

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

General

     Packaged Ice, Inc. is the largest manufacturer and distributor of packaged ice in the United States and currently serves over 73,000 customer locations in 31 states and the District of Columbia. We have grown significantly since our incorporation in 1990, primarily through the implementation of a consolidation strategy within the highly fragmented packaged ice industry. Since April 1997, we have completed 84 acquisitions of traditional ice companies, principally in the southern half of the United States. We are currently focused on increasing profitability and strengthening our balance sheet through operating improvements and leverage reduction. Revenue enhancements, expense control and selective acquisitions are an important part of this strategy.

     We operate in two business segments - ice products and non-ice products and operations. Ice products accounted for approximately 92% of revenues in 2002 and approximately 86% of revenues for the three months ended March 31, 2003. Ice products consist of the following two activities:

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	•		the manufacture and delivery of traditional ice from a central point of production to the point of sale; and
	•		the installation of THE ICE FACTORY®, our proprietary machine that produces, packages, stores and merchandises ice at the point of sale through an automated, self-contained system.

     Our other business segment, non-ice products and operations, consists of refrigerated warehousing and the manufacturing and sale of bottled water.

     Our cost of sales includes costs associated with plant occupancy, raw materials, delivery, labor and utility-related expenses. With the Ice Factory, plant occupancy, delivery and utility costs are eliminated, but costs associated with customer service representatives and machine technicians are added to the cost of sales.

     Our operating expenses are costs associated with selling, general and administrative functions. These costs include executive officers’ compensation, office and administrative salaries and costs associated with leasing office space.

     At March 31, 2003, we owned or operated 47 ice manufacturing plants, 52 distribution centers, seven refrigerated warehouses, one bottled-water manufacturing facility and had an installed base of 3,010 Ice Factories.

Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002

     Revenues: Revenues decreased $0.2 million, from $32.8 million for the three months ended March 31, 2002 to $32.6 million for the three months ended March 31, 2003. There was no significant change in revenues in our ice segment. However, we did experience a small decrease in volume sales in the three months ended March 31, 2003 related to adverse weather conditions in several of our significant markets during the month of February 2003, which was offset by increases in average selling prices. Revenues in our non-ice operations decreased $0.2 million, primarily due to decreased volume sales in our bottled water business.

     Cost of Sales: Cost of sales decreased $0.4 million, from $26.2 million for the three months ended March 31, 2002 to $25.8 million for the three months ended March 31, 2003. As a percentage of revenues, cost of sales decreased from 79.8% for the three months ended March 31, 2002 to 79.2% for the three months ended March 31, 2003. This decrease in cost of sales and the relative percentage is attributable primarily to reduced volume sales in our ice operations and effective control of labor and other variable costs in our ice operations.

     Gross Profit: Gross profit increased $0.2 million, from $6.6 million for the three months ended March 31, 2002 to $6.8 million for the three months ended March 31, 2003. As a percentage of revenues, gross profit increased from 20.2% for the three months ended March 31, 2002 to 20.8% for the three months ended March 31, 2003. The increase in gross profit and the gross profit percentage is attributable primarily to higher average selling prices in our ice operations that offset sales volume decreases and the reduction in costs in response to corresponding volume decreases. Gross profit as a percentage of revenues from ice operations increased from 17.9% for the three months ended March 31, 2002 to 19.1% for the three months ended March 31, 2003, while gross profit on non-ice operations decreased from 33.9% in 2002 to 31.7% in 2003.

     Operating Expenses: Operating expenses decreased $0.9 million, from $8.2 million for the three months ended March 31, 2002 to $7.3 million for the three months ended March 31, 2003. As a percentage of revenues, operating expenses decreased from 24.9% for the three months ended March 31, 2002 to 22.6% for the three months ended March 31, 2003. This decrease was primarily due to lower incentive compensation expense related to the company’s overall financial performance. Operating expenses from ice

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operations decreased from 26.9% of revenues for the three months ended March 31, 2002 to 23.6% of revenues for the three months ended March 31, 2003. Operating expenses in non-ice operations increased from 12.8% of revenues to 15.9%.

     Depreciation and Amortization Expense: Depreciation and amortization decreased $0.6 million, from $6.4 million for the three months ended March 31, 2002 to $5.8 million for the three months ended March 31, 2003. This decrease was primarily due to a decrease in depreciation expense related to reduced capital expenditures over the last two years and sales of excess property and equipment. As a percentage of revenues, depreciation and amortization decreased from 19.6% for the three months ended March 31, 2002 to 17.8% for the three months ended March 31, 2003.

     Gain or Loss on Disposition of Assets: During the three months ended March 31, 2003 and 2002, we sold certain excess assets for a net gain of $0.01 million and a net loss of $0.06 million, respectively.

     Interest Expense: Interest expense decreased $0.3 million, from $8.7 million for the three months ended March 31, 2002 to $8.4 million for the three months ended March 31, 2003. As a percentage of revenues, interest expense decreased from 26.7% for the three months ended March 31, 2002 to 25.7% for the three months ended March 31, 2003. The decrease in interest expense was primarily due to lower average outstanding borrowings under our credit facility and reduced outstanding principal balances of our 9³/₄% senior notes. During 2002, we repurchased and retired 9³/₄% senior notes with an aggregate face value of $15 million.

     Gain on Extinguishment of Debt: On January 30, 2002, we repurchased and retired 9³/₄% senior notes with a face value of $2.5 million, which resulted in a gain of $0.4 million. There were no repurchases in the three months ended March 31, 2003.

     Cumulative Effect of Change in Accounting Principle: On January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” Adoption of this statement resulted in a charge to net income of $73.2 million (net of $0 tax).

Liquidity and Capital Resources

     We generate cash from the sale of packaged ice through traditional delivery methods, by which we manufacture, package, and store ice at a central facility and transport it to our customers’ retail locations when needed, and through Ice Factories, which manufacture, package and store ice in our customers’ retail locations. Our primary uses of cash are (a) cost of sales, (b) operating expenses, (c) debt service and (d) capital expenditures related to replacing and modernizing the capital equipment in our traditional ice plants and acquiring and installing additional Ice Factories.

     We estimate our capital expenditures for 2003 will range between $12.0 and $13.0 million, which will primarily be used to maintain and expand our traditional ice operations. There can be no assurance that capital expenditures will not exceed this estimate. In addition, we initiated a leasing program for some of our Ice Factory installations in late 1999 and continued to utilize that strategy during 2000 and early 2001. Beginning in the second quarter of 2001, we stopped using operating leases for our Ice Factory installations. Our annual lease obligation is approximately $4 million and is contained within cost of sales. These operating leases expire during 2004 and 2005 and we have the option to purchase these assets at that time. Certain of these leases have early purchase options in 2003 that we may exercise under certain circumstances. The total cost to exercise the purchase options available in 2003 is estimated to be approximately $0.8 million. The purchase cost of these assets under lease have not been included in our 2003 capital expenditure plan due to the uncertainty of the purchase.

     During 2001, we began a program to redeploy certain Ice Factories that generated margins below our targeted returns to higher margin locations and continued that program in 2002. During the three months

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ended March 31, 2003, we placed 28 new Ice Factories, net of removals, and do not expect substantial net additions in the remainder of 2003. Any capital expenditures associated with new Ice Factories are contained within our 2003 capital expenditure plan.

     As we have consolidated acquisitions into the existing company infrastructure, we have identified non-core and excess assets. As a result of dispositions of the these non-core and excess assets, we realized proceeds of approximately $1.0 million in the three months ended March 31, 2003. We are continuing to market certain excess and non-core assets that we have determined to be disposable and anticipate proceeds of at least $0.5 million in the last nine months of 2003.

     We reported a loss in the first quarter of 2003 and negative cash flows from operations due to the highly seasonal nature of our business. We have reported, and may in the future report, negative cash flows during the first quarter when the weather is generally cooler. We believe, however, that our overall treasury management of cash on hand and available borrowings under our credit facility will be adequate to meet debt service requirements, fund ongoing capital requirements, and satisfy working capital and general corporate needs. At March 31, 2003, we had a working capital deficit of approximately $17.1 million and had approximately $11.9 million of availability under our revolving credit facility.

     At March 31, 2003, we had approximately $324.1 million of total debt outstanding as follows:

•		$255.0 million of 93/4% senior notes due February 1, 2005;
•		$68.7 million outstanding under our credit facility which matures on October 31, 2004; and
•		$0.4 million of other debt, net of debt discount.

     We have an $88 million senior credit facility which consists of a $38 million line of credit and a $50 million term loan. Principal balances outstanding under the line of credit bear interest per annum, at our option, at the London Inter-Bank Offered Rate (“LIBOR”) plus 3.5% or the prime rate (as announced from time to time by JPMorgan Chase Bank) plus 1.5%. At March 31, 2003, the line of credit had a balance of $18.7 million and availability of $11.9 million. Outstanding balances are classified as a current liability because of our intention to use the line of credit to fund our working capital. No principal payments are required until the final maturity date of October 31, 2004. Principal balances outstanding under the term loan bear interest per annum, at our option, at LIBOR plus 4% or the prime rate plus 2%, with a minimum of 9.5%. At March 31, 2003, the weighted average interest rate of borrowings outstanding under the credit facility was 8.27%. Interest is payable monthly. We pay a monthly fee on the average availability under the credit facility based on an annual rate of 0.5%, a $20,000 per quarter loan servicing fee and a $360,000 annual fee on the anniversary date of the credit facility.

     For fiscal years beginning on or after January 1, 2002, there is a mandatory principal payment on the term loan equal to 65% of our Excess Cash Flow (as defined in the credit facility). This principal payment is due within 10 days of delivery of the annual audited financial statements to the lenders, which may occur no later than 90 days after a fiscal year end. In accordance with the credit facility, the principal payment can be waived if certain conditions are met and we pay the Amortization Waiver Fee (as defined in the credit facility). We obtained a waiver for the 2002 principal payment and paid the related Amortization Waiver Fee of approximately $363,000 in April 2003. The Amortization Waiver Fee was accrued as of December 31, 2002. Any balances outstanding under the term loan are due October 31, 2004.

     Covenants contained in the credit facility and the indenture governing the 9³/₄% senior notes require us to meet certain financial tests, and other restrictions limit our ability to pay dividends, borrow additional funds or to acquire or dispose of assets. All of our assets and the capital stock of all of our significant subsidiaries collateralize the credit facility. The 9³/₄% senior notes are generally unsecured obligations, and are senior in right of payment to all existing and future subordinated debt (as defined in the indenture) and pari passu to all of our senior indebtedness. The 9³/₄% senior notes are effectively subordinated to the credit facility.

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     The borrowing base under the line of credit is comprised of eligible accounts receivable and eligible equipment and in addition, from January 28 to July 15 of each calendar year, a $10 million seasonal overadvance. Outstanding standby letters of credit reduce the amount available under the line of credit. We anticipate having adequate collateral during the second quarter of 2003 to maintain a minimum availability of $5 million under the line of credit. During the second half of 2003, we expect to have additional availability resulting from higher cash flows from operations and lower capital expenditures. We are evaluating several options regarding the deployment of the excess cash flow that we expect to accumulate during these periods. These options include the purchase of our 9³/₄% senior notes on the open market, additional capital expenditures, including the purchase of Ice Factory operating leases, repayment of amounts outstanding under our senior credit facility and selective acquisitions.

     At March 31, 2003, we had $7.4 million of standby letters of credit outstanding, primarily to secure insurance obligations. Certain of our insurance policies will be renewed in the second quarter of 2003 and we believe additional amounts of collateral will be required under the terms of such renewals, thereby requiring additional utilization of letters of credit. Additionally, we may be required to provide letters of credit from time to time to secure certain other obligations, including electricity supply contracts. Letters of credit in the amount of $0.7 million have various final expiration dates from 2008 through 2012. The remaining letters of credit in the amount of $6.7 million have no final expiration dates.

     During 1999 and continuing into 2000, the pace of our acquisition activities slowed significantly and has subsequently ceased except for one small tuck-in acquisition completed in 2001. The decreased acquisition activity is generally due to the decline in the price of our common stock from the time of our initial public offering in January 1999, which has made it difficult for us to use our stock as consideration for acquisitions. In 1999, in connection with possible future acquisitions, we filed an “acquisition shelf” registration statement to register the sale of up to five million shares of common stock, of which 3,953,780 shares remain unissued as of March 31, 2003.

     We may need to raise additional funds through public or private debt or equity financing to take advantage of opportunities that may become available to us, including acquisitions. The availability of such capital will depend upon prevailing market conditions and other factors over which we have no control, as well as our financial condition and results of operations. There can be no assurance that sufficient funds will be available to finance intended acquisitions or capital expenditures.

     Due to the obligations represented by the approaching maturities of our credit facility, which becomes due in October 2004, and our 9³/₄% senior notes and our mandatorily redeemable preferred stock, both of which are due in 2005, management and our board of directors have begun to analyze and consider various financial and strategic alternatives. We are in the process of exploring our options and believe there are a number of alternatives to be explored over the course of 2003. In January 2003, we engaged Credit Suisse First Boston to assist us in evaluating the various alternatives.

Critical Accounting Policies

     Allowances for Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make the required payments on their accounts. We have attempted to reserve for these estimated losses based on our past experience with similar accounts receivable and believe our reserves to be adequate. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments on their accounts, additional allowances may be required.

     Long-Lived Assets. Property and equipment is carried at cost and is being depreciated on a straight-line basis over estimated lives of 2.5 to 40 years. Maintenance and repairs are charged to expense as incurred, while capital improvements that extend the useful lives of the underlying assets are capitalized. We

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accounted for all of our historical acquisitions using the purchase method of accounting and as a result recorded significant amounts of goodwill. Other intangible assets include the following that are amortized over their useful lives:

     Impairment of Long-Lived Assets. In accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets,” long-lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The determination of recoverability of long-lived assets and certain other identifiable intangible assets is based on an estimate of undiscounted future cash flows resulting from the use of the asset or its disposition. Measurement of an impairment loss for long-lived assets and other intangible assets that management expects to hold and use are based on the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or net realizable value. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill is evaluated using a market valuation approach based on valuations of comparable businesses.

     Inherent in the determination of such future cash flows and valuations are certain estimates and judgements, including the interpretation of current economic indicators and market values and assumptions about our strategic plans with regards to our operations. To the extent additional information arises or our strategies change, it is possible that our conclusions regarding the impairment of goodwill or other long-lived assets could change and result in a material effect on our financial position or results of operations.

     Revenue Recognition. Revenue is recognized when product (packaged ice, ice packaging bags, bottled water and ice equipment) is delivered to and accepted by customers. There is no right of return with respect to the packaged ice, bags delivered and bottled water. Revenue resulting from Ice Factory management agreements and cold storage services is recognized as earned under contract terms.

New Accounting Pronouncements

     In June 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 replaces Emerging Issues Task Force (EITF) Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” This standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This statement is effective for exit or disposal activities that are initiated after December 31, 2002. We adopted this statement on January 1, 2003 and such adoption did not have a significant effect on our consolidated financial position or results of operations.

     In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” SFAS No. 148 amended SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternate methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amended the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the effects of stock-based compensation on reported results. The provisions of SFAS No. 148 are effective for years ending after December 15, 2002 and interim periods beginning after December 15, 2002. We adopted the disclosure provisions of SFAS No. 148 upon issuance and the adoption did not have any impact on our results of operations or financial position.

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General Economic Trends and Seasonality

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

     The ice business is highly seasonal. We experience seasonal fluctuations in our net sales and profitability. We make a disproportionate amount of our sales in the second and third calendar quarters. We also typically have net income in these same periods. We believe that over 65% of our revenues will occur during the second and third calendar quarters when the weather conditions are generally warmer and demand is greater, while less than 35% of our revenues will occur during the first and fourth calendar quarters when the weather is generally cooler. As a result of seasonal revenue declines and the lack of proportional corresponding expense decreases, we will most likely experience lower profit margins and even losses during the first and fourth calendar quarters. In addition, because our operating results depend significantly on sales during our peak season, our quarterly results of operations may fluctuate significantly as a result of adverse weather during this peak selling period if the weather is unusually cool or rainy on a more national or regional basis.

Risk Factors

     Our substantial debt obligations may prevent us from funding planned activities, may require us to seek additional debt or equity financing, sell selected assets or diminish our ability to react to changes in our industry.

     We have financed many of our acquisitions through the incurrence of debt, and consequently, we have substantial debt service requirements. At March 31, 2003, our total indebtedness was $324.1 million. Our high level of debt could have important consequences to us, including the following:

•		A substantial portion of our cash flow must be dedicated to paying interest on our debt. This reduces the level of cash flow available to fund working capital, capital expenditures and acquisitions.
•		The indenture that governs the 93/4% senior notes and the credit agreement for our credit facility require us to meet certain financial tests. Additionally, there are other restrictions that limit our ability to pay dividends, borrow additional funds or to dispose of assets. These covenants and restrictions may affect our flexibility in planning for and reacting to changes in our business.
•		Our high level of debt diminishes our ability to react to changes in general economic, industry and competitive conditions.

     If we are unable to generate enough cash flow to make debt service payments, we may be required to:

•		seek additional debt or equity financing, or renegotiate our existing debt arrangements on terms which may be less favorable than our current arrangements;
•		sell selected assets; or
•		reduce or delay planned capital expenditures.

     There can be no assurance that we could accomplish any of these measures.

     In addition, we will be required to repay or refinance our credit facility, 9³/₄% senior notes and potentially our mandatorily redeemable preferred stock between October 31, 2004 and April 15, 2005. In addition, if we do not repay or refinance our credit facility by March 2004, the balances outstanding under our

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credit facility and potentially the balances outstanding under the 9³/₄% senior notes will be classified as current liabilities as of December 31, 2003. No assurances can be given that we will be able to accomplish these repayments or refinancings on acceptable terms and conditions.

     Our failure to successfully compete could adversely affect our prospects and financial results.

     Our businesses are highly competitive. We have many competitors in each of our product, service and geographic markets. Competition in our businesses is based primarily on price and service. If we fail to successfully compete against our competitors, our business will be adversely affected. Winning new customers is important to our future growth, as the overall demand for ice is widely believed to track population growth. There are low barriers to entry in the ice industry and we could be adversely affected by any expansion of capacity by our existing competitors or by new entrants in our markets. We could also be adversely affected if our larger grocery or convenience store customers decide to manufacture their own ice.

     The seasonal nature of the ice business results in lower profits, and even losses, in the first and fourth quarters of the year.

     We experience significant seasonal fluctuations in our net sales and profitability. We make a disproportionate amount of our sales in the second and third calendar quarters when the weather is generally warmer. We also typically have net income during these same periods. As a result of seasonal revenue declines and the lack of a corresponding decrease in expenses during the first and fourth quarters, we will likely experience lower profit margins and even losses during these periods. In addition, because our operating results depend significantly on sales during the second and third calendar quarters, our results of operations during these periods may fluctuate significantly if the weather is unusually cool or rainy.

     The results of our operations may be adversely affected by weather.

     Cold or rainy weather can decrease sales, while extremely hot weather may increase our expenses, each resulting in a negative impact on our operating results and cash flow. Ice consumers demand ice for a variety of reasons, but many of them buy ice in connection with outdoor-related activities, both commercial and recreational. As a result, demand for ice increases in hotter, sunnier weather, and conversely, demand decreases in colder, wetter weather. During extended periods of extremely cold and rainy weather on a national basis, our revenues and resulting profits may substantially decline. In addition, extremely hot weather does not necessarily result in greater profits. During extended periods of extremely hot weather, our profits and cash flow may decline because of an increase in expenses in response to excess demand. We may have to transport ice from one plant to another, and in some cases, purchase ice from third party sources and transport it to a specific market to meet this excess demand.

     The market value of our common stock could be further adversely affected if we continue to report operating losses.

     Since our company was formed in 1990, we have reported substantial net losses. This has been primarily due to the following:

•		interest expenses primarily associated with our historically high levels of debt;
•		substantial depreciation of property and equipment;
•		substantial amortization of goodwill and other intangible assets primarily associated with our acquisitions and market expansion and an impairment charge of $73.2 million that was recognized in connection with the adoption of SFAS No. 142 on January 1, 2002;
•		other asset impairment charges.

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     As of March 31, 2003, we had an accumulated deficit of $164.4 million and total shareholders’ deficit of $52.3 million. We cannot guarantee that we will be profitable in the future.

     Increases in the prices of electricity, certain raw materials, insurance and other required expenses could have an adverse effect on our results of operations.

     We use substantial amounts of electricity in connection with our manufacturing process. In 1999, we entered into a supply and management agreement with a third party to fix our electric costs at rates that were generally lower than market rates. On December 2, 2001, the third party filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code, thereby breaching its agreement with us. Since that time, we have been paying market rates for electricity that are higher than those under the supply agreement. The impact of this event was $1.7 million in extra electricity charges in 2002. Although our electricity expense in the three months ended March 31, 2002 was $0.2 million less than in the three months ended March 31, 2002, further volatility and increases in market rates could potentially have an adverse impact on our operations.

     Our business is sensitive to increases in the cost of fuel to operate the refrigerated trucks we use to deliver ice and to increases in the cost of polyethylene, which in turn increases the cost of our bags. Additionally, our business is also sensitive to increase in insurance costs, which includes general liability, workers compensation, health and vehicle insurance. We have already experienced increases in fuel costs, bag costs and insurance and expect additional increases in 2003. If the prices for these items and other required expenses should increase significantly, we will experience increased costs that we may not be able to pass along to our customers. There can be no assurance that significant changes in the prices of plastic bags, water, fuel, insurance or other commodities would not have a material adverse effect on our business, results of operations and cash flow.

     We may be exposed to significant environmental liabilities.

     Our ice manufacturing and storage operations could create conditions that might result in environmental accidents, and cause us to be named as defendants in lawsuits. We currently carry liability insurance that we believe is adequate to cover our losses in these situations. However, this insurance may be insufficient to pay for all or a large part of these losses. If our insurance failed to cover these losses, our profits and our cash flow would decrease.

     We may not have the ability to repurchase the 9³/₄% senior notes in the event of a change of control.

     As of March 31, 2003, the majority of our debt consisted of $255 million of 9³/₄% senior notes. If there is a change of control of Packaged Ice, such as a merger or sale by us of all or substantially all of our assets, the holders of the 9³/₄% senior notes have the right to require us to purchase the outstanding 9³/₄% senior notes at 101% of the principal amount of the notes plus any accrued and unpaid interest. We may not have the ability to raise the funds necessary to finance the repurchase of the 9³/₄% senior notes if the holders require such a repurchase. This could result in a default under other debt agreements, including our credit facility.

     Changes in government laws and regulations and could have an adverse effect on our results of operations.

     Like any food company, we are subject to various local, state and federal laws relating to many aspects of our business, including labeling, sanitation, health and safety, and manufacturing processes. We cannot predict the types of government regulations that may be enacted in the future by the various levels of government or how existing or future laws or regulations will be interpreted or enforced. The enactment of more stringent laws or regulations or a stricter interpretation of existing laws and regulations may require additional expenditures by us, some of which could be material.

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     Accidents involving our products and equipment could expose us to claims for damages.

     We are subject to a risk of product liability claims and adverse publicity if a consumer is allegedly harmed while using our products or equipment. Any such claim may result in negative publicity, loss of revenues, or higher costs associated with litigation against Packaged Ice or being named as a defendant in lawsuits asserting large claims.

     We currently carry product liability insurance that we believe is adequate to cover our losses in these situations. However, this insurance may be insufficient to pay for all or a large part of these losses. If our insurance does not pay for these losses, our results of operations and cash flow would decrease.

     Our limited patent protection may not prevent competitors from using our proprietary bagging device or developing a similar machine, which could reduce our competitive advantage.

     Other than patents that we own or licenses we have on the Ice Factory, we currently do not have patents on any of our products. We believe the patents on the bagging device are important to the Ice Factory as a whole, but there can be no assurance that any issued patent will provide us with a meaningful competitive advantage. It is also our practice to protect certain of our proprietary materials and processes by relying on trade secrets laws and non-disclosure and confidentiality agreements. There can be no assurance that confidentiality or trade secrets will be maintained or that others will not independently develop or obtain access to such materials or processes.

     We now have a competitor in the Ice Factory market, which could take some of our customers’ business.

     As the sole major company using an on-site ice production and delivery system, we had a distinct competitive advantage because the Ice Factory is preferred to traditional ice delivery by many of our high volume customers and the Ice Factory sector of our business gives us more flexibility during peak seasons than our competitors. In 2001, a competitor began testing a similar machine in certain of its markets. If our competitor or any new competitors are successful with the rollout of a competing system, it is possible that we may lose business we have gained and business we would gain as a result of the Ice Factory, which will result in decreased cash flows and results of operations.

     Acquisitions may result in the recording of goodwill and other intangibles assets, and may have a negative impact on our results of operations.

     If we begin acquiring other businesses again as part of our strategy, such acquisitions could result in the recording of goodwill and other intangibles assets. Goodwill and other intangible assets represented 43.9% of our total assets and exceeded shareholders’ deficit by $201.4 million as of March 31, 2003. Accounting principles generally accepted in the United States of America require that acquisitions initiated after June 30, 2001 be accounted for under the purchase method of accounting. Any resulting goodwill will remain on the balance sheet and not be amortized. Furthermore, the amortization of goodwill created by acquisitions prior to June 30, 2001 ceased on December 31, 2001. We are required to test these assets on an annual basis or whenever there is reason to suspect that their values have been diminished or impaired and write-downs may be necessary, which would increase our losses. The adoption of this accounting principle on January 1, 2002 resulted in an initial impairment charge of $73.2 million. The required annual test resulted in an additional impairment charge of $4.1 million in the fourth quarter of 2002 related to our non-ice operations.

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Item 3. Qualitative and Quantitative Disclosures about Market Risk

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

     On November 28, 2000, we entered into an interest rate collar agreement (the “Collar Agreement”). The Collar Agreement has a notional amount of $50 million and a term of 4 years. If the Index Rate (30-day LIBOR, as defined in the Collar Agreement) exceeds 7.75%, we will receive the difference between the Index Rate and 7.75%. If the Index Rate falls below 5.75%, we will pay the difference plus 1%. If we had been required to settle the Collar Agreement as of March 31, 2003, we would have had to pay $4.4 million plus accrued interest of $0.2 million.

     We are exposed to some market risk due to the floating interest rates under our credit facility. Principal balances outstanding under the line of credit bear interest, at our option, at the London Inter-Bank Offered Rate (“LIBOR”) plus 3.5% or the prime rate (as announced from time to time by JP Morgan Chase Bank) plus 1.5%. The term loan bears interest, at our option, at LIBOR plus 4% or the prime rate plus 2%, with a minimum of 9.5%.

     As of March 31, 2003, the credit facility had an outstanding principal balance of $68.7 million at a weighted average interest rate of 8.27% per annum. Due to our interest rate collar agreement and the fact that the term loan has a minimum interest rate of 9.5%, the effect of a change in interest rates on our interest expense depends on the level of LIBOR rates. At March 31, 2003, the 30-day LIBOR rate was 1.31%.

     The following table shows the approximate annual increase (decrease) in interest expense given the current principal balances on all of our debt if LIBOR were to increase by 1% from the initial levels indicated below:

Item 4. Controls and Procedures

     Quarterly evaluation of the company’s Disclosure Controls and Internal Controls. Within the 90 days prior to the date of this Quarterly Report on Form 10-Q, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (“Disclosure Controls”), and our internal controls and procedures for financial reporting (“Internal Controls”). This evaluation (the “Controls Evaluation”) was done under the supervision and with the participation of management, including our Chief Executive Officer

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(“CEO”) and Chief Financial Officer (“CFO”). Rules adopted by the Securities & Exchange Commission (“SEC”) require that in this section of the Quarterly Report we present the conclusions of the CEO and the CFO about the effectiveness of our Disclosure Controls and Internal Controls based on and as of the date of the Controls Evaluation.

     CEO and CFO Certifications. Appearing immediately following the Signatures section of this Quarterly Report there are two separate forms of “Certifications” of the CEO and the CFO. The first form of Certification is required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the “Section 302 Certification”). This section of the Quarterly Report which you are currently reading is the information concerning the Controls Evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.

     Disclosure Controls and Internal Controls. Disclosure Controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”), such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Internal Controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting principles.

     Limitations on the Effectiveness of Controls. The company’s management, including the CEO and CFO, does not expect that our Disclosure Controls or our Internal Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all controls issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Our Disclosure Controls and Internal Controls, do, however, provide reasonable assurance that we will obtain our desired control objectives.

     Scope of the Controls Evaluation. The CEO/CFO evaluation of our Disclosure Controls and our Internal Controls included a review of the controls’ objectives and design, the controls’ implementation by the company and the effect of the controls on the information generated for use in this Quarterly Report. In the course of the Controls Evaluation, we sought to identify data errors, controls problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken. This type of evaluation will be done on a quarterly basis so that the conclusions concerning controls effectiveness can be reported in our Quarterly Reports on Form 10-Q and Annual Report on Form 10-K. The overall goals of these various evaluations activities are to monitor our Disclosure Controls and our Internal Controls and to make modifications as necessary. Among other matters, we sought in our evaluation to determine whether there were any “significant deficiencies” or “material weaknesses” in the company’s Internal Controls, or whether the company had identified any acts of fraud involving personnel who have a significant role in the company’s Internal Controls. This information was important both for the Controls Evaluation generally and

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because items 5 and 6 in the Section 302 Certifications of the CEO and CFO require that the CEO and CFO disclose that information to our Board of Directors’ Audit Committee and to our independent auditors and to report on related matters in this section of the Quarterly Report. In the professional auditing literature, “significant deficiencies” are referred to as “reportable conditions”; these are control issues that could have a significant adverse effect on the ability to record, process, summarize and report financial data in the financial statements. A “material weakness” is defined in the auditing literature as a particularly serious reportable condition where the internal control does not reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to the financial statements and not be detected within a timely period by employees in the normal course of performing their assigned functions. We also sought to deal with other controls matters in the Controls evaluation, and in each case if a problem was identified, we considered what revision, improvement and/or correction to make in accordance with our on-going procedures.

     In accordance with SEC requirements, the CEO and CFO note that, since the date of the Controls Evaluation to the date of this Quarterly Report, there have been no significant changes in Internal Controls or in other factors that could significantly affect Internal Controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

     Conclusions. Based upon the Controls Evaluation, our CEO and CFO have concluded that, subject to the limitations noted above, our Disclosure Controls are effective to ensure that material information relating to Packaged Ice, Inc. and its consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared, and that our Internal Controls are effective to provide reasonable assurance that our financial statements are fairly presented in conformity with generally accepted accounting principles.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

     We are a party to a lawsuit in connection with an ammonia release at our Baton Rouge, Louisiana manufacturing facility in June 2001. The case, which is a consolidation of seven lawsuits, is titled Wallace Acey, Jr. et al vs. Reddy Ice Corporation and was originally reported on our Form 10-K for the fiscal year ended December 31, 2002. Since that report, there have been no material developments.

Item 2. Changes in Securities and Use of Proceeds

     Pursuant to the terms of our 10% exchangeable preferred stock issue, we must pay dividends of 10% per annum. The preferred stock allows us to pay the dividends in cash or by the issue additional shares of 10% exchangeable preferred stock and associated warrants to purchase common stock. Cash dividends are restricted under our credit facility and the indenture governing our 9³/₄% senior notes. On May 1, 2003, we paid “in kind” dividends on the outstanding shares of 10% exchangeable preferred stock, which resulted in the issuance of an additional 19,994 shares of 10% exchangeable preferred stock and warrants to purchase an aggregate of 153,796 shares of common stock at $13.00 per share.

Item 3. Defaults Upon Senior Securities

     None.

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

     None

Item 5. Other Information

     None.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

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

(b) Reports on Form 8-K:

     Packaged Ice, Inc. filed a report on Form 8-K with the Securities & Exchange Commission on January 21, 2003, which announced the appointment of Credit Suisse First Boston of New York to assist the Company in evaluating financial and strategic alternatives.

     Packaged Ice, Inc. furnished a report on Form 8-K to the Securities & Exchange Commission on May 8, 2003 to provide: (i) a copy of the Company's press release issued on May 6, 2003 announcing its financial results for the quarter ended March 31, 2003 and discussing its earnings guidance for the second quarter ending June 30, 2003 and the twelve months ending December 31, 2003 and (ii) a copy of the transcript of the Company's conference call held on May 6, 2003.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.