UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark one)

 

Commission file number 333-110442-04

 

REDDY ICE HOLDINGS, INC.

(Exact name of registrant 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)

 

Indicate by check mark whether the registrant (1) 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 ý  No o

 

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

 

The number of shares of registrant’s common stock outstanding as of November 8, 2004 was 99,175.

 

 

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED SEPTEMBER 30, 2004

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2004 (Successor)(unaudited) and December 31, 2003 (Successor)
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2004 (Successor), the three months ended September 30, 2003 (Successor) and the period from May 8, 2003 (Date of Inception) to September 30, 2003 (Successor), the period from July 1, 2003 to August 14, 2003 (Predecessor) and the period from January 1, 2003 to August 14, 2003 (Predecessor) (each unaudited)
	Condensed Consolidated Statement of Shareholders’ Equity as of September 30, 2004 (Successor) (Unaudited)
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 (Successor), the period from May 8, 2003 through September 30, 2003 (Successor) and the period from January 1, 2003 to August 14, 2003 (Predecessor) (each unaudited)
	Notes to the Condensed Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures about Market Risk
Item 4.	Controls and Procedures
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings
Item 2.	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

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(SUCCESSOR)

 

ASSETS

 

		September 30, 2004			December 31, 2003
		unaudited
		(in thousands)
CURRENT ASSETS:
Cash and cash equivalents		$	27,532		$	12,801
Accounts receivable, net		37,133			18,032
Inventories		8,989			7,846
Prepaid expenses		2,585			1,952
Assets held for sale		790			790
Total current assets		77,029			41,421
PROPERTY AND EQUIPMENT, net		232,689			233,440
GOODWILL AND OTHER INTANGIBLES, net		325,746			339,465
OTHER ASSETS		10			10
TOTAL		$	635,474		$	614,336

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

CURRENT LIABILITIES:
Current portion of long-term obligations		$	1,868		$	1,859
Line of credit		—			—
Accounts payable		17,169			11,237
Accrued expenses		14,522			20,674
Total current liabilities		33,559			33,770
LONG-TERM OBLIGATIONS		327,782			329,088
DEFERRED TAX LIABILITIES, net		60,160			60,160
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY:
Preferred Stock, 12% Cumulative, Series A, $0.01 par value – 100,000 shares authorized, 99,175 and 99,050 shares issued and outstanding at September 30, 2004 and December 31, 2003, respectively		1			1
Common stock, $0.01 par value; 300,000 shares authorized; 99,175 and 99,050 shares issued and outstanding at September 30, 2004 and December 31, 2003, respectively		1			1
Additional paid-in capital		203,415			193,568
Unearned compensation		(312		)	(437		)
Retained earnings (deficit)		7,895			(2,713		)
Accumulated other comprehensive income		2,973			898
Total shareholders’ equity		213,973			191,318
TOTAL		$	635,474		$	614,336

 

See notes to condensed consolidated financial statements.

 

2

 

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Successor			Successor			Predecessor			Successor			Successor			Predecessor
		Three Months Ended September 30, 2004			Three Months Ended September 30, 2003			July 1 to August 14, 2003			Nine Months Ended September 30, 2004			Period May 8, 2003 (Date of Inception) to September 30, 2003			January 1 to August 14, 2003
		(in thousands)
Revenues		$	106,507		$	38,641		$	47,953		$	232,416		$	38,641		$	151,269
Cost of sales		58,690			21,523			25,331			137,047			21,523			91,642
Gross profit		47,817			17,118			22,622			95,369			17,118			59,627
Operating expenses		8,728			4,110			3,936			25,825			4,110			18,598
Depreciation and amortization expense		5,824			2,377			2,819			17,102			2,377			14,528
Gain on disposition of assets		—			—			—			—			—			(11		)
Income from operations		33,265			10,631			15,867			52,442			10,631			26,512
Other income (expense), net		(12		)	—			84			(12		)	—			116
Interest expense		(6,595		)	(3,800		)	(4,160		)	(19,841		)	(3,800		)	(21,063		)
Income before income taxes		26,658			6,831			11,791			32,589			6,831			5,565
Income tax expense		10,130			—			—			12,384			—			—
Net income before preferred dividends		16,528			6,831			11,791			20,205			6,831			5,565
Preferred dividends		3,295			1,473			533			9,597			1,473			2,566
Net income available to common shareholders		$	13,233		$	5,358		$	11,258		$	10,608		$	5,358		$	2,999

 

See notes to condensed consolidated financial statements.

 

3

 

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(SUCCESSOR)

(Unaudited)

 

																					Accumulated
		Number of Shares				Par Value						Additional						Retained			Other
		Preferred		Common		Preferred			Common			Paid-In			Unearned			Earnings			Comprehensive
		Stock		Stock		Stock			Stock			Capital			Compensation			(Deficit)			Income			Total
		(in thousands)
Balance at January 1, 2004		99		99		$	1		$	1		$	193,568		$	(437	)	$	(2,713	)	$	898		$	191,318
Sale of common and preferred stock		—		—		—			—			250			—			—			—			250
Dividends on 12% cumulative preferred stock		—		—		—			—			9,597			—			(9,597		)	—			—
Amortization of unearned compensation		—		—		—			—			—			125			—			—			125
Comprehensive income:
Net income		—		—		—			—			—			—			20,205			—			20,205
Change in fair value of derivative liability		—		—		—			—			—			—			—			2,075			2,075
Total comprehensive income		—		—		—			—			—			—			—			—			22,280
Balance at September 30, 2004		99		99		$	1		$	1		$	203,415		$	(312	)	$	7,895		$	2,973		$	213,973

 

See notes to condensed consolidated financial statements.

 

4

 

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Successor			Successor			Predecessor
		Nine Months Ended September 30, 2004			May 8, 2003 (Date of Inception) to September 30, 2003			January 1 to August 14, 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income available to common shareholders		$	10,608		$	5,358		$	2,999
Adjustments to reconcile net income available to common shareholders to net cash provided by (used in) operating activities:
Preferred dividends		9,597			1,473			2,566
Depreciation and amortization		17,102			2,377			14,528
Amortization deferred debt costs and debt discount		1,805			316			23
Gain on disposition of assets		—			—			(11		)
Deferred income taxes		12,384			—			—
Amortization of unearned compensation		125			22			—
Changes in assets and liabilities:
Accounts receivable, inventory and prepaid assets		(20,840		)	8,213			(18,816		)
Accounts payable and accrued expenses		1,492			(5,440		)	(6,136		)
Net cash provided by (used in) operating activities		32,273			12,319			(4,847		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions		(12,525		)	(10,201		)	(7,848		)
Proceeds from disposition of assets		2,268			—			1,236
Acquisition of Packaged Ice, Inc., net of cash acquired		—			(124,570		)	—
Cost of acquisitions		(5,653		)	—			—
Net cash used in investing activities		(15,910		)	(134,771		)	(6,612		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of Packaged Ice, Inc. stock options		—			—			19
Proceeds from the issuance of common and preferred stock		250			187,600			—
Distributions to shareholders		—			(7,635		)	—
Proceeds from the issuance of debt		—			285,932			—
Deferred debt costs		(485		)	(12,734		)	—
Borrowings (repayments) under the line of credit, net		—			(11,691		)	11,691
Repayment of debt		(1,397		)	(305,025		)	(45		)
Net cash provided by (used in) financing activities		(1,632		)	136,447			11,665
NET INCREASE IN CASH AND EQUIVALENTS		14,731			13,995			206
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		12,801			—			6,500
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	27,532		$	13,995		$	6,706
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest		$	21,883		$	2,045		$	31,164
Borrowings under the line of credit		$	33,750		$	—		$	151,185
Repayments under the line of credit		$	(33,750	)	$	(11,691	)	$	(139,494	)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of restricted common and preferred stock		$	—		$	500		$	—
Change in fair value of derivative liability		$	(2,075	)	$	(143	)	$	(1,579	)
Long-term debt incurred to purchase property and equipment and intangible assets		$	—		$	—		$	201

 

See notes to condensed consolidated financial statements.

 

5

 

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004

 

1.  General

 

The condensed consolidated financial statements of Reddy Ice Holdings, Inc. and its wholly owned subsidiary (the “Company”) included herein are unaudited, except for the balance sheet as of December 31, 2003 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, 2003.

 

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

 

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

 

2.  Acquisitions

 

On August 15, 2003, Cube merged with and into Packaged Ice, with Packaged Ice being the surviving corporation.  Concurrent with the closing of the merger, Packaged Ice was named Reddy Ice Group, Inc.  The merger was consummated pursuant to the Agreement and Plan of Merger, dated as of May 12, 2003, by and among the Parent, Cube and Packaged Ice.  Subsequent to the merger, all of the Company’s operations were conducted through Reddy Group.  The merger was accounted for as a purchase by Cube of Packaged Ice in accordance with Statement of Financial Accounting Standards (“SFAS”) No.141, “Business Combinations.”  Total consideration was $461.0 million, including $113.0 million for common and preferred securities, $316.7 million for assumption of debt and revolving loans, $12.8 million for debt issue costs and $18.5 million in direct merger costs.  The total purchase price was allocated to the acquired assets and assumed liabilities based upon estimates of their respective fair values as of the closing date using valuations and other studies.  The excess of the aggregate purchase price over the liabilities assumed of $280.9 million was allocated to property

 

6

 

and equipment ($42.8 million), goodwill and other intangible assets ($289.0 million), assets held for sale ($0.2 million) and net deferred tax liabilities ($51.1 million).  Other intangibles identified included customer lists, which are being amortized over useful lives of 15 to 30 years, and a trade name.

 

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

 

During the nine months ended September 30, 2004, the Company completed seven acquisitions for an aggregate purchase cost of $5.7 million (referred to collectively as the “2004 Acquisitions”).  The excess of the aggregate purchase price over the net assets acquired of $2.3 million was allocated to goodwill and other intangible assets.  Other intangible assets were comprised of customer lists, which are being amortized over useful lives of 15 to 30 years.

 

The results of operations of Service Ice and Triangle Ice are included in the Company’s consolidated results of operations from October 1, 2003 and November 1, 2003, respectively.  The results of operations of the 2004 Acquisitions are included in the Company’s consolidated results of operations from the date of each acquisition, which range from March 1, 2004 to September 30, 2004.  The following unaudited pro forma information presents (i) the combined consolidated results of operations of the Successor and Predecessor for the three and nine months ended September 30, 2003 as if the acquisitions of Packaged Ice, Service Ice, Triangle Ice and the 2004 Acquisitions had occurred on January 1, 2003 and (ii) the Successor’s consolidated results of operations for the three and nine months ended September 30, 2004 as if the 2004 Acquisitions had all occurred on January 1, 2004:

 

		Successor			Combined			Successor			Combined
		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
		(in thousands)
Revenues		$	106,527		$	103,247		$	233,150		$	222,337
Net income available to common shareholders(1)		13,535			24,881			11,491			22,286

 

(1)   Net income available to common shareholders for the three and nine months ended September 30, 2004 includes a provision for income taxes of $10.3 million and $12.9 million, respectively.  No provision for income taxes has been provided for in the combined three and nine months ended September 30, 2003.

 

Certain of the 2004 Acquisitions provide for additional consideration to be paid to the sellers in the event the acquired operations meet certain performance targets in the twelve month period following the closing of the transaction.  The maximum amount payable is $0.5 million, of which $0.3 million has been accrued in accordance with SFAS No. 141.

 

7

 

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.

 

		September 30, 2004			December 31, 2003
		(in thousands)
Raw materials and supplies		$	1,436		$	6,310
Finished goods		7,553			1,536
Total		$	8,989		$	7,846

 

4.  Accrued Expenses

 

		September 30, 2004			December 31, 2003
		(in thousands)
Accrued compensation and employee benefits		$	5,545		$	8,090
Accrued interest		2,499			6,346
Accrued property and sales taxes		2,751			1,128
Accrued utilities		1,883			1,029
Derivative liability		389			2,464
Other		1,455			1,617
Total		$	14,522		$	20,674

 

5.  Line of Credit and Long-Term Obligations

 

On July 17, 2003, Cube completed the sale of $152 million of 8⁷/₈% Senior Subordinated Notes due August 1, 2011 (the “Senior Notes”).  The Senior Notes were issued in connection with a private placement offering and were subsequently registered with the SEC.  The Senior Notes were sold at 99.297% of the stated principal amount, which resulted in net proceeds of $150.9 million.  At the closing of the merger on August 15, 2003, Reddy Group assumed Cube’s obligations under the Senior Notes and the related indenture and received the net proceeds of the offering.  The net proceeds were used to consummate the merger as discussed in Notes 1 and 2, which included the repayment of the Predecessor’s $255 million aggregate principal amount of 9-3/4% senior notes due February 1, 2005 and the outstanding balance of $61.7 million under its bank credit facility.

 

Interest on the Senior Notes is payable semiannually on February 1 and August 1, with such payments having commenced on February 1, 2004.  In conjunction with issuance of the Senior Notes, $7.0 million of debt issuance costs were incurred.  The Senior Notes are unsecured senior subordinated obligations of Reddy Group and are:

 

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

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

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

 

8

 

The Senior Notes include customary covenants that restrict, among other things, the ability to incur additional debt, pay dividends or make certain other restricted payments, incur liens, merge or sell all or substantially all of the assets, or enter into various transactions with affiliates.  Prior to August 1, 2006, Reddy Group may redeem up to 35% of the principal amount of the Senior Notes at a redemption price of 108.875% of the principal amount thereof, plus accrued and unpaid interest to the date of redemption, with funds raised in specified equity offerings.  On or after August 1, 2007, Reddy Group may redeem all or a portion of the Senior Notes at a pre-determined redemption price plus any accrued interest.  The redemption price, as a percentage 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 of control and does not elect to redeem the outstanding Senior Notes as previously described, Reddy Group will be required to make an offer to repurchase the Senior Notes at a price equal to 101% of the outstanding principal amount plus accrued interest.

 

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

 

On October 27, 2004, Reddy Holdings issued $151 million of 10¹/₂% Senior Discount Notes due 2012 (the “Discount Notes”) in a private placement offering pursuant to an exemption from registration under the Securities Act of 1933.  The Discount Notes were sold at 66.333% of the stated principal amount, which resulted in net proceeds of $100.2 million.  Each Discount Note has an initial accreted value of $663.33 per $1,000 principal amount at maturity.  The accreted value of each Discount Note will increase from the date of issuance until November 1, 2008 at a rate of 10¹/₂% per annum such that the accreted value will equal the stated principal amount at maturity on November 1, 2008.  Thereafter cash interest will accrue and be payable semi-annually at a rate of 10¹/₂% per annum.

 

The Discount Notes are unsecured obligations of Reddy Holdings and are:

 

•                  not guaranteed by any of Reddy Holdings’ subsidiaries;

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

•                  equal with any of Reddy Holdings’ existing and future unsecured senior indebtedness;

•                  effectively subordinated to Reddy Holdings’ existing and future secured debt, including Reddy Holdings’ guarantee of Reddy Group’s senior credit facility; and

•                  structurally subordinated to all obligations and preferred equity of Reddy Holdings’ subsidiaries.

 

The Discount Notes include customary covenants that restrict, among other things, the ability to incur additional debt or issue certain preferred stock, pay dividends or redeem, repurchase or retire our capital stock or subordinated indebtedness, make certain investments, incur liens, enter into arrangements that restrict dividends from our subsidiaries, merge or sell all or substantially all of the assets or enter into various transactions with affiliates.  Prior to November 1, 2007, Reddy Holdings may redeem up to 35% of the principal amount of the Discount Notes at a redemption price of 110.5% of the principal amount thereof, plus accrued and unpaid interest to the date of redemption, with funds raised in equity offerings that are specified in the indenture governing the Discount Notes.  If a change of control occurs on or prior to November 1, 2007, Reddy Holdings may, at it’s option, redeem all, but not less than all, of the Discount Notes at a redemption price equal to the sum of (i) the accreted value 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 to the date of redemption.  If Reddy Holdings experiences a change of control and does not elect to make the optional redemption described in the previous sentence, Reddy Holdings will be required to make an offer to repurchase 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.

 

9

 

The Discount Notes are subject to registration with the SEC pursuant to the Registration Rights Agreement (the “Rights Agreement”) entered into at the time of issuance.  Pursuant to the Rights Agreement, Reddy Holdings will, within 150 days after the issuance date, file a registration statement with the SEC to exchange the Discount Notes for new notes of Reddy Holdings having terms substantially identical in all material respects to the Discount Notes.  Reddy Holdings must also use its commercially reasonable efforts to cause the registration statement 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 syndicate of banks, financial institutions and other entities, including Credit Suisse First Boston as Administrative Agent, Canadian Imperial Bank of Commerce and Bear Stearns Corporate Lending, Inc. (the “Credit Facility”).  The Credit Facility provides for a six-year term loan in the amount of $135 million (the “Original Term Loan”) and a five-year revolving credit facility (the “Line of Credit”) in the amount of $35 million.  Proceeds of the Original Term Loan were used to consummate the merger as discussed in Note 2.  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 the amount of $45 million, the proceeds of which were used to fund a portion of the Triangle Ice acquisition (see Note 3).  The Supplemental Term Loan has substantially the same terms as the Original Term Loan.

 

At September 30, 2004, the Company had $25.7 million of availability under the Line of Credit, net of outstanding standby letters of credit of $9.3 million.  The standby letters of credit are used primarily to secure certain insurance obligations.

 

Principal balances outstanding under the Credit Facility bear interest per annum, at Reddy Group’s option, at the sum of the base rate plus the applicable margin or LIBOR plus the applicable margin.  The base rate is defined as the greater of the prime rate (as announced from time to time by the Administrative Agent) or the federal funds rate plus 0.5%.  The applicable margin is different for revolving and term loans and varies depending on Reddy Group’s leverage ratio.  On February 20, 2004, the Credit Facility was amended to reduce the applicable margin on term loans by 0.5%.  At September 30, 2004, the weighted average interest rate of borrowings outstanding under the Credit Facility was 4.3 %.  Interest on base rate loans is payable on the last day of each quarter.  Interest on LIBOR loans is payable upon maturity of the LIBOR loan or on the last day of the quarter if the term of the LIBOR loan exceeds 90 days.  Reddy Group pays a quarterly fee on the average availability under the Line of Credit based on an annual rate of 0.5%.

 

The Credit Facility requires that beginning in 2004, Reddy Group will repay all borrowings under the Line of Credit and maintain a zero outstanding balance for a period of 30 consecutive calendar days during each year.  This requirement for 2004 was met on August 10, 2004.  The Term Loans amortize in quarterly installments 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 the sixth year in equal, quarterly installments.  Subject to certain conditions, mandatory repayments of the Line of Credit and Term Loans are required to be made with portions of the proceeds from (1) asset sales, (2) the issuance of debt securities (3) an initial public offering of stock of the Parent,  and (4) insurance and condemnation awards.  In the event of a change in control, as defined in the Credit Facility, all amounts outstanding will 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 of the Term Loans is required in an amount equal to a certain percentage of Reddy Group’s annual excess cash flow, as defined in the Credit Facility.  The percentage is based on Reddy Group’s leverage ratio at the end of such fiscal year and ranges from 25% to 75%.  In connection with the offering of the Discount Notes discussed above, Reddy Group amended the Credit Facility on October 27, 2004 to permit certain related transactions (see Note 11).  In addition to allowing those related transactions, the amendment modified the calculation of Reddy Group’s excess cash flow for 2004 such that a mandatory prepayment based on Reddy Group’s 2004 results is not expected to be required.

 

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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 Reddy Group’s assets and the capital stock of all of its significant subsidiaries.  At September 30, 2004, Reddy Group was in compliance with these covenants.

 

On November 28, 2000, the Predecessor entered into an interest rate collar agreement (the “Collar Agreement”), which remained in effect after the merger.  Under the Collar Agreement, if the Index Rate (30-day LIBOR, as defined in the Collar Agreement) exceeds 7.75%, Reddy Group will receive the difference between the Index Rate and 7.75%.  If the Index Rate falls below 5.75%, Reddy Group 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 matures on November 28, 2004.  When Reddy Group’s debt was refinanced on August 15, 2003, $0.3 million of amounts previously deferred in accumulated other comprehensive income on the balance sheet were written off, as the hedged, forecasted transaction was no longer deemed probable of occurring.  The Collar Agreement was redesignated as a hedge of the new Credit Facility, with subsequent changes in fair value deferred in other comprehensive income.

 

If Reddy Group had been required to settle the Collar Agreement as of September 30, 2004, it would have had to pay $0.4 million plus accrued interest of $0.2 million.  Reddy Group is exposed to credit risk in the event of nonperformance by the counterparty to the Collar Agreement, however it anticipates that the counterparty will fully perform its obligations under the Collar Agreement.

 

At September 30, 2004 and December 31, 2003, long-term obligations consisted of the following:

 

		September 30, 2004			December 31, 2003
		(in thousands)
87/8% Senior Notes		$	152,000		$	152,000
Less: Unamortized debt discount on 87/8% Senior Notes		(913		)	(1,013		)
Credit facility – term loans		178,200			179,550
Other		363			410
Total long-term obligations		329,650			330,947
Less: Current maturities		1,868			1,859
Long-term obligations, net		$	327,782		$	329,088

 

6.  Capital Stock

 

Common Stock.  The Parent is authorized to issue up to 300,000 shares of common stock, par value $0.01 per share.  Holders of the Parent common stock are entitled to one vote per share on all matters to be voted on by shareholders and are entitled to receive dividends, if any, as may be declared from time to time by the Board of Directors of the Parent.  Upon any liquidation or dissolution of the Parent, the holders of common stock are entitled, subject to any preferential rights of the holders of preferred stock, to receive a pro rata share of all of the assets remaining available for distribution to shareholders after payment of all liabilities.  As of September 30, 2004, 11,434 shares of common stock were reserved for issuance under the Reddy Ice Holdings, Inc. 2003 Stock Option Plan.

 

Preferred Stock.  The Parent is authorized to issue up to 200,000 shares of $0.01 par value preferred stock, consisting of 100,000 shares of Series A Cumulative Redeemable Preferred Stock (“Series A Preferred

 

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Stock”) and 100,000 shares of preferred stock that is currently undesignated.  The terms of the Series A Preferred Stock are set forth in a certificate of designation (the “Series A Preferred Stock Designation”).  The liquidation preference per share of the Series A Preferred Stock is equal to the sum of (a) $1,000 plus (b) the amount of all accumulated but unpaid dividends on such shares.  The holders of the outstanding shares of Series A Preferred Stock immediately preceding the dividend payment date shall be entitled to receive dividends, as declared by the Board of Directors, at a rate per annum equal to 12% of the liquidation amount per share.  All dividends are cumulative, whether or not earned or declared, accruing on a daily basis from the issue date and shall be payable in cash quarterly in arrears on each dividend payment date commencing on November 15, 2003.  If the Parent does not pay the cash dividends on a quarterly basis, all unpaid dividends will be added to the liquidation amount in respect of such shares on each dividend payment date.  If the Parent fails to make a liquidation payment following the occurrence of a liquidation event or default, as defined in the Series A Preferred Stock Designation, the per annum dividend rate will be increased by 2% per annum during the continuation of any such event or default. In the event of liquidation, the holders of the Series A Preferred Stock are entitled to an amount in cash equal to the liquidation amount for each share.  The Parent may redeem the Series A Preferred Stock at its option in whole at any time or in part from time to time, subject to restrictions as defined in the Series A Preferred Stock Designation.  Series A Preferred Stock holders are not entitled or permitted to vote on any matter upon which the holders of common stock are required or permitted to vote upon.  In connection with issuance of the Discount Notes on October 27, 2004, the Series A Preferred Stock was redeemed and all accrued dividends were paid (see Notes 5 and 11).

 

7.  Stock-Based Compensation

 

At June 30, 2004, the Company had one stock-based employee compensation plan, the Reddy Ice Holdings, Inc. 2003 Stock Option Plan (the “Stock Option Plan”), under which stock options are granted from time to time.  All of the Predecessor’s stock-based compensation plans were terminated and all in-the-money options were paid out in cash in connection with the merger on August 15, 2003 (see Notes 1 and 2).

 

 The Company accounts for the Stock Option Plan under the intrinsic value method prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations.  No stock-based employee compensation cost is reflected in net income available to common shareholders for the three and nine months ended September 30, 2004 as all stock options granted under the Stock Option Plan had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant.  The following table illustrates the effect on the net income available to common shareholders for the three and nine months ended September 30, 2004 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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		Three Months Ended September 30, 2004			Nine Months Ended September 30, 2004
		(in thousands)
Net income available to common shareholders, as reported		$	13,233		$	10,608
Less: Total stock-based compensation expense determined under fair value based methods for all awards		23			67
Proforma net income available to common shareholders		$	13,210		$	10,541

 

8.  Income Taxes

 

For the three and nine months ended September 30, 2004, the Company reported income before taxes. The following is a summary of the Company’s income tax provision activity for the three and nine months ended September 30, 2004:

 

		Three Months Ended September 30, 2004			Nine Months Ended September 30, 2004
		(in thousands)
Federal income tax at statutory rate		$	9,064		$	11,080
State income taxes, net of federal income tax benefits		1,066			1,304
Total provision for income taxes		$	10,130		$	12,384

 

9.  Commitments and Contingencies

 

The Company is involved in various claims, lawsuits and proceedings arising in the ordinary course of business.  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.  Other than those lawsuits described below, 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 19th 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.

 

The Company was a party to two lawsuits filed in connection with the merger.  The first lawsuit was filed on May 23, 2003 in the County Court at Law Number 1, Dallas County, Texas and was titled Cause No. CC-03-06056-A; Glenn Robbins, On Behalf of Himself and All Others Similarly Situated, and Derivatively on

 

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Behalf of Packaged Ice, Inc. vs. William P. Brick, Jimmy C. Weaver, A.J. Lewis III, Tracy L. Noll, Robert G. Miller, Steven P. Rosenberg and Richard A. Coonrod, Defendants, and Packaged Ice, Inc., a Texas corporation.  The second lawsuit was filed on May 23, 2003 in County Court at Law Number 3, Dallas County, Texas, and was titled Cause No. CC-03-06055-C, Imperial County, On Behalf of Itself and All Others Similarly Situated, and Derivatively on Behalf of Packaged Ice, Inc. vs. William P. Brick, Jimmy C. Weaver, A.J. Lewis III, Tracy L. Noll, Robert G. Miller, Steven P. Rosenberg and Richard A. Coonrod, Defendants, and Packaged Ice, Inc., a Texas corporation.  The two lawsuits were identical adversarial proceedings filed by two shareholders on their own behalf, on behalf of a purported class, and derivatively on behalf of Packaged Ice, Inc., now known as Reddy Group.  The plaintiffs alleged various breaches of fiduciary duty by the Board of Directors of Reddy Group and unjust enrichment related to the merger.  The court dismissed both lawsuits with prejudice on September 30, 2004.

 

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 installation and operations of 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 (“Segment EBITDA”).  Segment assets are not a factor in the evaluation of performance.  There were no intersegment sales during the three and nine month periods ended September 30, 2004 and 2003.

 

Segment information for the three month periods ended September 30, 2004 and 2003 and the period from July 1, 2003 to August 14, 2003 was as follows:

 

		Successor
		Three Months Ended September 30, 2004
		Ice			Non-Ice			Total
				(in thousands)
Revenues		$	101,162		$	5,345		$	106,507
Cost of sales		55,706			2,984			58,690
Gross profit		45,456			2,361			47,817
Operating expenses		8,257			471			8,728
Other income (expense), net		(12		)	—			(12		)
Segment EBITDA		$	37,187		$	1,890		$	39,077

 

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		Successor									Predecessor
		Three Months Ended September 30, 2003									July 1, 2003 through August 14, 2003
		Ice			Non-Ice			Total			Ice			Non-Ice			Total
								(in thousands)
Revenues		$	36,040		$	2,601		$	38,641		$	45,434		$	2,519		$	47,953
Cost of sales		20,065			1,458			21,523			23,902			1,429			25,331
Gross profit		15,975			1,143			17,118			21,532			1,090			22,622
Operating expenses		3,818			292			4,110			3,652			284			3,936
Other income (expense), net		—			—			—			84			—			84
Segment EBITDA		$	12,157		$	851		$	13,008		$	17,964		$	806		$	18,770

 

The reconciliation of Segment EBITDA to net income before preferred dividends for the three month periods ended September 30, 2004 and 2003 and the period from July 1, 2003 to August 14, 2003 was as follows:

 

		Successor			Successor			Predecessor
		Three Months Ended September 30, 2004			Three Months Ended September 30, 2003			July 1, 2003 to August 14, 2003
					(in thousands)
EBITDA		$	39,077		$	13,008		$	18,770
Depreciation and amortization expense		(5,824		)	(2,377		)	(2,819		)
Interest expense		(6,595		)	(3,800		)	(4,160		)
Income tax expense		(10,130		)	—			—
Net income before preferred dividends		$	16,528		$	6,831		$	11,791

 

Segment information for the nine months ended September 30, 2004, the period from May 8, 2003 (Date of Inception) to September 30, 2003 and for the period from January 1, 2003 to August 14, 2003 was as follows:

 

		Successor
		Nine Months Ended September 30, 2004
		Ice			Non-Ice			Total
				(in thousands)
Revenues		$	218,684		$	13,732		$	232,416
Cost of sales		129,286			7,761			137,047
Gross profit		89,398			5,971			95,369
Operating expenses		24,460			1,365			25,825
Other income, net		(12		)	—			(12		)
Segment EBITDA		$	64,926		$	4,606		$	69,532

 

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		Successor									Predecessor
		Period From May 8, 2003 (Date of Inception) to September 30, 2003									January 1, 2003 to August 14, 2003
		Ice			Non-Ice			Total			Ice			Non-Ice			Total
								(in thousands)
Revenues		$	36,040		$	2,601		$	38,641		$	139,618		$	11,651		$	151,269
Cost of sales		20,065			1,458			21,523			84,384			7,258			91,642
Gross profit		15,975			1,143			17,118			55,234			4,393			59,627
Operating expenses		3,818			292			4,110			17,051			1,547			18,598
Other income, net		—			—			—			108			8			116
Segment EBITDA		$	12,157		$	851		$	13,008		$	38,291		$	2,854		$	41,145

 

The reconciliation of Segment EBITDA to net income before preferred dividends for the nine months ended September 30, 2004, the period from May 8, 2003 (Date of Inception) to September 30, 2003 and for the period from January 1, 2003 to August 14, 2003 was as follows:

 

		Successor			Successor			Predecessor
		Nine Months Ended September 30, 2004			Period From May 8, 2003 (Date of Inception) to September 30, 2003			January 1, 2003 to August 14, 2003
					(in thousands)
EBITDA		$	69,532		$	13,008		$	41,145
Gain on disposition of assets		—			—			11
Depreciation and amortization expense		(17,102		)	(2,377		)	(14,528		)
Interest expense		(19,841		)	(3,800		)	(21,063		)
Income tax expense		(12,384		)	—			—
Net income before preferred dividends		$	20,205		$	6,831		$	5,565

 

11.  Subsequent Events

 

During the period from October 1, 2004 to November 9, 2004, the Company completed the acquisition of four ice companies for a total cash purchase price of approximately $10.6 million.  The combined annual revenue for the acquired businesses is approximately $7 million.

 

On October 27, 2004, Reddy Holdings issued $151 million of 10¹/₂ % Senior Discount Notes due 2012 (the “Discount Notes”) in a private placement offering pursuant to an exemption from registration under the Securities Act of 1933 (see Note 5).  Reddy Holdings used the net proceeds of the offering, together with an approximately $28.6 million dividend from Reddy Group to redeem all of Reddy Holdings’ existing series A preferred stock for approximately $99.2 million, to pay accumulated dividends on such stock as of the date of redemption in the amount of approximately $15.1 million, and to pay a dividend of approximately $10.5 million to its common stockholders.  In connection with this transaction, Reddy Group made a special transaction payment of approximately $1.2 million in the aggregate to certain members of management and certain directors.  In connection with the offering of the notes and the related transactions, Reddy Ice Group amended its credit agreement.

 

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