UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2005

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
		SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

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 o No ý (1)

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 May 13, 2005 was 100,974.

(1) Although the registrant has not been subject to such filing requirements for the past 90 days, it has filed all reports required to be filed by Section 15(d) of the Exchange Act during the preceding twelve months. Pursuant to Section 15(d) of the Exchange Act, the registrant's duty to file reports is automatically suspended as a result of having fewer than 300 holders of record of each class of its debt securities outstanding as of January 1, 2004, but the registrant agreed under the terms of certain long-term debt covenants to continue these filings.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share amounts)

	March 31,			December 31,
	2005			2004
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	2,816		$	4,478
Accounts receivable, net	19,239			21,861
Inventories	11,200			9,435
Prepaid expenses	2,588			2,651
Assets held for sale	447			790
Deferred tax assets	2,174			2,174
Total current assets	38,464			41,389
PROPERTY AND EQUIPMENT, net	234,318			233,661
GOODWILL	220,451			220,451
OTHER INTANGIBLE ASSETS, net	91,303			93,109
OTHER ASSETS	10			10
TOTAL	$	584,546		$	588,620

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Current portion of long-term obligations	$	1,867		$	1,869
Notes payable	204			355
Revolving credit facility	22,700			5,450
Accounts payable	10,845			15,509
Accrued expenses	12,119			15,998
Total current liabilities	47,735			39,181
LONG-TERM OBLIGATIONS	431,563			429,392
DEFERRED TAX LIABILITIES, net	29,812			37,114
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS’ EQUITY:
Common stock, $0.01 par value; 300,000 shares authorized; 100,974 and 99,175 shares issued and outstanding at March 31, 2005 and December 31, 2004, respectively	1			1
Additional paid-in capital	92,875			90,213
Unearned compensation	(114		)	(135		)
Accumulated deficit	(17,326		)	(7,146		)
Total stockholders’ equity	75,436			82,933
TOTAL	$	584,546		$	588,620

See notes to condensed consolidated financial statements.

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share amounts)

	Three Months Ended
	March 31,
	2005			2004
				(as restated,
				see Note 11)

Revenues	$	39,244		$	37,380
Cost of sales (excluding depreciation)	31,679			28,508
Depreciation expense related to cost of sales	4,741			4,500
Gross profit	2,824			4,372
Operating expenses	8,834			8,318
Depreciation and amortization expense	1,415			1,062
Loss on dispositions of assets	149			—
Loss from operations	(7,574		)	(5,008		)
Interest expense	9,308			6,677
Loss before income taxes	(16,882		)	(11,685		)
Income tax benefit	6,702			—
Net loss	(10,180		)	(11,685		)
Preferred dividends	—			3,104
Net loss available to common stockholders	$	(10,180	)	$	(14,789	)

Basic and diluted net loss per share:
Net loss available to common stockholders	$	(102.83	)	$	(149.38	)
Weighted average common shares outstanding	99			99

See notes to condensed consolidated financial statements.

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

(in thousands)

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

See notes to condensed consolidated financial statements.

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Three Months Ended
	March 31,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(10,180	)	$	(11,685	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense	6,156			5,562
Amortization of debt issue costs and debt discount	3,373			592
Loss on dispositions of assets	149			—
Stock-based compensation expense	284			42
Deferred taxes	(7,302		)	—
Tax benefit of stock option exercises	600			—
Change in assets and liabilities, net of the effects of acquisitions:
Accounts receivable, inventory and prepaid expenses	1,008			(338		)
Accounts payable, accrued expenses and other	(8,750		)	(6,874		)
Net cash used in operating activities	(14,662		)	(12,701		)

CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions	(5,729		)	(3,122		)
Proceeds from dispositions of property and equipment	388			298
Cost of acquisitions	—			(1,052		)
Net cash used in investing activities	(5,341		)	(3,876		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of employee stock options	1,799			—
Deferred debt costs	—			(485		)
Borrowings under the credit facility, net	17,250			8,650
Repayment of long-term obligations	(708		)	(468		)
Net cash provided by financing activities	18,341			7,697

NET DECREASE IN CASH AND CASH EQUIVALENTS	(1,662		)	(8,880		)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	4,478			12,801
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	2,816		$	3,921

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest	$	9,332		$	9,773
Borrowings under the credit facility	$	28,100		$	11,750
Repayments on the credit facility	$	(10,850	)	$	(3,100	)

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of notes payable	$	88		$	—
Change in fair value of derivative liability	$	—		$	(606	)

See notes to condensed consolidated financial statements.

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

1. General

The condensed consolidated financial statements of Reddy Ice Holdings, Inc. and its wholly owned subsidiary (the “Company”) included herein are unaudited, however the balance sheet as of December 31, 2004 has been derived 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, 2004.

Reddy Ice Holdings, Inc., a Delaware corporation (“Reddy Holdings”), and its wholly owned subsidiary, Cube Acquisition Corp. (“Cube”), a Texas corporation, were formed on behalf 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. Reddy Holdings 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”). Reddy Holdings and its wholly owned subsidiary Reddy Group are referred to collectively herein as the “Company”.

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 31 states and the District of Columbia.

2. Acquisitions

During 2004, the Company purchased 11 ice companies at various dates throughout the year. The total acquisition consideration was $16.9 million, which included direct acquisition costs of $0.5 million. 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 dates using valuations and other studies. The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition (dollars in millions):

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

The excess of the aggregate purchase price over the net assets acquired of $12.6 million was allocated to goodwill ($8.3 million) and other intangible assets ($4.3 million). 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 the 2004 acquisitions are included in the Company’s consolidated results of operations from the date of each acquisition, which ranged from March 1, 2004 to November 1, 2004. The following unaudited pro forma information presents the Company’s consolidated results of operations for the three months ended March 31, 2004 as if the 2004 acquisitions had all occurred on January 1, 2004:

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

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

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 and include overhead allocations. Cost is determined using the first-in, first-out and average cost methods.

	March 31,		December 31,
	2005		2004
	(in thousands)

Raw materials and supplies	$	8,495	$	7,584
Finished goods	2,705		1,851
Total	$	11,200	$	9,435

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

4. Accrued Expenses

	March 31,		December 31,
	2005		2004
	(in thousands)

Accrued compensation and employee benefits	$	5,557	$	6,411
Accrued interest	2,340		5,740
Accrued property, sales and other taxes	1,272		806
Accrued utilities	857		1,191
Other	2,093		1,850
Total	$	12,119	$	15,998

5. Revolving Credit Facility and Long-Term Obligations

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

February 1, 2004. The Senior Subordinated 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 in right of payment with any of Reddy Group’s existing and future senior subordinated indebtedness; and

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

The Senior Subordinated 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 Subordinated 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 Subordinated 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 Subordinated Notes as previously described, Reddy Group will be required to make an offer to repurchase the Senior Subordinated Notes at a price equal to 101% of the outstanding principal amount plus accrued interest.

The Senior Subordinated Notes are guaranteed, fully, jointly and severally, and unconditionally, on a senior subordinated basis by Reddy Holdings 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 Reddy Holdings and its wholly-owned subsidiary are not presented as Reddy Holdings 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 Subordinated Notes.

On October 27, 2004, Reddy Holdings issued $151.0 million in aggregate principal amount at maturity of 10¹/₂% Senior Discount Notes due 2012 (the “Discount Notes”) in a private placement offering. The Discount Notes were sold at 66.333% of the stated principal amount, which resulted in gross 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 in right of payment 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 its 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.

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 must, 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. The 150th day following the issuance of the Discount Notes was March 26, 2005. The Company did not file the required registration statement until April 6, 2005 and, as a result, incurred additional interest expense from March 26, 2005 to April 6, 2005 at an annual rate of 0.50%. 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 “Revolving Credit Facility”) in the amount of $35 million. On November 6, 2003, the Credit Facility was amended to provide a Supplemental Term Loan (together with the Original Term Loan, referred to as the “Term Loans”) in the amount of $45 million. The Supplemental Term Loan has substantially the same terms as the Original Term Loan.

At March 31, 2005, the Company had $6.5 million of availability under the Revolving Credit Facility, which was net of outstanding standby letters of credit of $5.8 million. In addition, the Company had $2.9 million of available cash on hand. 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 March 31, 2005, the weighted average interest rate of borrowings outstanding under the Credit Facility was 5.6%. 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 Revolving Credit Facility based on an annual rate of 0.5%.

The Credit Facility requires that, beginning in 2004, Reddy Group will repay all borrowings under the Revolving Credit Facility and maintain a zero outstanding balance for a period of 30 consecutive calendar days during each year. 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 Revolving Credit Facility 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 Reddy Holdings, 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 6). 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 was not required.

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 March 31, 2005, Reddy Group was in compliance with these covenants.

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

On March 22, 2005, Reddy Group commenced a cash tender offer for any and all of its outstanding Senior Subordinated Notes. In connection with the tender offer, Reddy Group also solicited consents to amend the indenture governing the Senior Subordinated Notes to, among other things, eliminate substantially all of the restrictive covenants and certain events of default. The offer is subject to the satisfaction of certain conditions, including there being validly tendered and not validly withdrawn at least a majority of the aggregate principal amount of the Senior Subordinated Notes outstanding and Reddy Group having available funds sufficient to pay the aggregate total consideration to the holders of tendered notes from the anticipated proceeds of the borrowings under Reddy Group’s new credit facilities and from the proposed initial public offering of Reddy Holdings’ common stock.

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

	March 31,			December 31,
	2005			2004
	(in thousands)

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

6. Capital Stock

Common Stock. Reddy Holdings is authorized to issue up to 300,000 shares of common stock, par value $0.01 per share. Holders of Reddy Holdings’ common stock are entitled to one vote per share on all matters to be voted on by stockholders and are entitled to receive dividends, if any, as may be declared from time to time by the Board of Directors of Reddy Holdings. Upon any liquidation or dissolution of Reddy Holdings, 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 stockholders after payment of all liabilities.

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

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

Preferred Stock. Reddy Holdings is authorized to issue up to 200,000 shares of $0.01 par value preferred stock. During 2003 and 2004, Reddy Holdings issued a total of 99,075 shares of Series A Cumulative Redeemable Preferred Stock (“Series A Preferred Stock”). The terms of the Series A Preferred Stock were set forth in a certificate of designation (the “Series A Preferred Stock Designation”). The liquidation preference per share of the Series A Preferred Stock was 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 were entitled to receive dividends,

	Three Months
	Ended
	March 31,
	2004
	(in thousands except per share amounts)

Net loss available to common stockholders, as reported	$	(14,789	)
Add: Employee stock-based compensation expense included in reported net loss available to common stockholders, net of tax	42
Less: Total stock-based compensation expense determined under fair value based methods for all awards, net of tax	(94		)
Pro forma net loss available to common stockholders	$	(14,841	)

Basic and diluted net loss per share:
As reported	$	(149.38	)
Pro forma		(149.91	)

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

SFAS No. 123(R) eliminates the intrinsic value measurement objective in APB Opinion 25 and generally requires companies to measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the date of the grant. The standard requires grant date fair value to be estimated using either an option-pricing model which is consistent with the terms of the award or a market observed price, if such a price exists. Such cost must be recognized over the period during which an employee is required to provide service in exchange for the award, which is usually the vesting period. The standard also requires the Company to estimate the number of instruments that will ultimately be issued, rather than accounting for forfeitures as they occur.

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

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

8. Income Taxes

The Company’s effective tax rate differs from the federal statutory income tax rate of 35% due to state income taxes and the effect of permanent differences, primarily the non-deductible portion of the interest expense recognized on the 10¹/₂% Senior Discount Notes. The Company did not report any income tax benefit for the three months ended March 31, 2004 due to uncertainty regarding the Company’s ability to utilize such a benefit in the future.

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 was a party to a lawsuit in connection with an ammonia release at its Baton Rouge, Louisiana manufacturing facility in June 2001. The case, which was a consolidation of seven lawsuits, was 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. The plaintiffs, which were certified as a settlement class, alleged injuries primarily consisting of inconvenience, watery eyes and offensive odors. The fairness of the settlement was approved by the court on January 25, 2005. Unless the fairness of the settlement is appealed by any member of the settlement class prior to the expiration of the appeal period, management believes the settlement will be finalized during the second quarter of 2005. The Company’s insurance carrier will pay the majority of the settlement and related legal fees. The Company recognized $150,000 of expense in its 2004 results related to its obligation under the settlement. Management does not believe that the final resolution of this litigation will have a material impact on the Company’s business, financial condition or results of operations.

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®, which 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 months ended March 31, 2005 and 2004.

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

	Three Months Ended								Three Months Ended
	March 31, 2005								March 31, 2004
	Ice			Non-Ice		Total			Ice			Non-Ice		Total
									(as restated, see Note 11)
	(in thousands)

Revenues	$	35,989		$	3,255	$	39,244		$	33,581		$	3,799	$	37,380
Cost of sales (excluding depreciation)	29,464			2,215		31,679			26,250			2,258		28,508
Operating expenses	8,317			517		8,834			7,840			478		8,318
Segment EBITDA	$	(1,792	)	$	523	$	(1,269	)	$	(509	)	$	1,063	$	554
Total assets	$	551,559		$	32,987	$	584,546		$	570,503		$	33,579	$	604,082

The reconciliation of Segment EBITDA to net loss for the three months ended March 31, 2005 and 2004 was as follows:

	Three Months Ended
	March 31,
	2005			2004
	(in thousands)

Segment EBITDA	$	(1,269	)	$	554
Depreciation expense related to cost of sales	(4,741		)	(4,500		)
Depreciation and amortization expense	(1,415		)	(1,062		)
Loss on dispositions of assets	(149		)	—
Interest expense	(9,308		)	(6,677		)
Income tax benefit	6,702			—
Net loss	$	(10,180	)	$	(11,685	)

11. Restatement of Condensed Consolidated Statement of Operations

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

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

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 condensed 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, 2004, previously filed with the Securities & Exchange Commission (“SEC”). As used in this section, “Reddy Group” refers to Reddy Ice Group, Inc., formerly known as Packaged Ice, Inc., and not its subsidiaries, and “Reddy Holdings” refers to Reddy Ice Holdings, Inc. and not its subsidiaries.

Uncertainty 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 stockholders and statements made in the course of presentations about our company constitute “forward-looking statements” within the meaning of such terms under the Private Securities Litigation Reform Act of 1995. 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;

• weather conditions;

• our substantial leverage and ability to service our debt;

• the restrictive covenants under our indebtedness;

• availability of capital sources;

• fluctuations in operating costs, including the prices of electricity, fuel, polyethylene and other required expenses;

• competitive practices in the industry in which we compete;

• changes in labor conditions;

• our capital expenditure requirements;

• the risks associated with acquisitions and the failure to integrate acquired businesses;

• technological changes and innovations;

• legislative or regulatory requirements; and

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

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

Our Business. We are the largest manufacturer and distributor of packaged ice in the United States and currently serve approximately 82,000 customer locations in 31 states and the District of Columbia. We operate in two business segments - ice products and non-ice products and operations. Ice products accounted for approximately 92% of our revenues in the three months ended March 31, 2005 and 90% of revenues in the three months ended March 31, 2004. Our ice products business consists of:

• the traditional manufacture and delivery of ice from a central point of production to the point of sale; and

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

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

Seasonality. Our results of operations are highly seasonal, characterized by peak demand during the warmer months of May through September, with an extended peak selling season in the southern United States. Revenues within specific markets can also be affected by weather conditions, with cool or rainy weather negatively impacting demand and extremely hot weather increasing our costs as we respond to excess customer demand for our products. Approximately 68%, 66% and 68% of our revenues occurred during the second and third calendar quarters in 2004, 2003 and 2002, respectively. The proportion of revenues in the second and third calendar quarters of 2003 was lower than in 2004 and 2002 primarily due to the timing of our 2003 acquisitions, which all occurred in the fourth quarter of 2003. As a result of seasonal revenue declines and a less than proportional decline in expenses during the first and fourth quarters, we typically experience lower profit margins resulting in losses during these periods. In addition, because a significant portion of our annual sales are generated during the second and third calendar quarters, our annual results of operations may fluctuate significantly if the weather during these periods is cool or rainy.

Predecessor and Successor. On August 15, 2003, Packaged Ice, Inc. merged with Cube Acquisition Corp., a wholly owned subsidiary of Reddy Ice Holdings, Inc. Packaged Ice was the surviving corporation and became a wholly owned subsidiary of Reddy Holdings, which was established on May 8, 2003. In connection with the merger, Packaged Ice was renamed Reddy Ice Group, Inc. Reddy Holdings and Reddy Group are collectively referred to as the ‘‘Successor’’. Packaged Ice prior to the merger is referred to as the ‘‘Predecessor’’. Reddy Holdings and Cube Acquisition conducted no operations from May 8, 2003 through August 14, 2003.

Revenues. Our revenues primarily represent sales of packaged ice, packaged ice bags for use in our Ice Factory equipment, bottled water and cold storage services. There is no right of return with respect to these products or services. A portion of our revenue also represents fees earned under management agreements for Ice Factories located outside our primary territories that are recognized as earnings under contract terms.

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

• manufacturing and distribution labor costs;

• raw materials (primarily of polyethylene-based plastic bags);

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

• utility expenses (primarily electricity used in connection with the manufacturing, storage and distribution processes); and

• Ice Factory-related costs associated with customer service representatives and machine technicians (note, however, that Ice Factories generally do not increase our plant occupancy, delivery or utility costs).

Depreciation Related to Cost of Sales and Depreciation and Amortization Expense. Depreciation and amortization are divided into two line items - depreciation expense related to cost of sales and depreciation and amortization expense. Depreciation expense related to cost of sales consists of depreciation expense for our production and distribution equipment. Depreciation and amortization expense consists of depreciation and amortization expense for our selling, general and administrative functions.

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

	Three Months Ended
	March 31,						Change from Last Year
	2005			2004			Dollars			%
				(as restated)
	(in thousands)

Consolidated Results
Revenues	$	39,244		$	37,380		$	1,864		5.0
Cost of sales (excluding depreciation)	31,679			28,508			3,171			11.1
Depreciation expense related to cost of sales	4,741			4,500			241			5.4
Gross profit	2,824			4,372			(1,548		)	(35.4	)
Operating expenses	8,834			8,318			516			6.2
Depreciation and amortization expense	1,415			1,062			353			33.2
Loss on dispositions of assets	149			—			149			—
Loss from operations	(7,574		)	(5,008		)	(2,566		)	(51.2	)
Interest expense	9,308			6,677			2,631			39.4
Loss before income taxes	(16,882		)	(11,685		)	(5,197		)	(44.5	)
Income tax benefit	6,702			—			6,702			—
Net loss	$	(10,180	)	$	(11,685	)	$	1,505		12.9

Ice Operations:
Revenues	$	35,989		$	33,581		$	2,408		7.2
Cost of sales (excluding depreciation)	29,464			26,250			3,214			12.2
Depreciation expense related to cost of sales	4,466			4,232			234			5.5
Gross profit	2,059			3,099			(1,040		)	(33.6	)
Operating expenses	8,317			7,840			477			6.1

Non-Ice Operations:
Revenues	$	3,255		$	3,799		$	(544	)	(14.3	)
Cost of sales (excluding depreciation)	2,215			2,258			(43		)	(1.9	)
Depreciation expense related to cost of sales	275			268			7			2.6
Gross profit	765			1,273			(508		)	(39.9	)
Operating expenses	517			478			39			8.2

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

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

Labor costs, including associated payroll taxes and benefit costs (including health insurance), accounted for approximately 36% and 35% of sales in the three months ended March 31, 2005 and 2004, respectively. Cost of plastic bags represented approximately 6% of sales in the three months ended March 31, 2005 and 2004. Fuel expenses represented approximately 3% of sales in the three months ended March 31, 2005 and 2004. Expenses for independent third party distribution services represented approximately 6% of sales in the three months ended March 31, 2005, as compared to 4% of sales in the same period in 2004. Electricity expense represented approximately 7% of sales in the three months ended March 31, 2005 and 2004.

Depreciation Expense Related to Cost of Sales: Depreciation expense related to cost of sales increased $0.2 million from the three months ended March 31, 2004 to the three months ended March 31, 2005 as a result of additional depreciation expense associated with production and distribution equipment placed in service during 2004 and early 2005 and the ice operations acquired in 2004, partially offset by the effect of asset dispositions.

Operating Expenses: Operating expenses increased $0.5 million from the three months ended March 31, 2004 to the three months ended March 31, 2005. This increase is primarily due to the effects of the ice operations acquired in 2004 and increases in bad debt expense, insurance costs and non-cash stock-based compensation expense, partially offset by reductions in professional services and labor costs.

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

Interest Expense: Interest expense increased $2.6 million from the three months ended March 31, 2004 to the three months ended March 31, 2005, primarily due to the non-cash interest expense associated with the senior discount notes issued on October 27, 2004.

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, (d) capital expenditures related to replacing and modernizing the capital equipment in our traditional ice plants and acquiring and installing additional Ice Factories and (e) acquisitions. Historically, we have financed our capital and working capital requirements, including our acquisitions, through a combination of cash flows from operations, borrowings under our revolving credit facilities and operating leases.

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

During the three months ended March 31, 2005, capital expenditures totaled $5.7 million. As we have consolidated acquisitions into the existing company infrastructure, we have identified non-core and excess assets which can be disposed of. From time to time, we also dispose of other assets which are no longer useful in our operations. As a result of dispositions of these non-core and excess assets, we realized proceeds of

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

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

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

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

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

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

Long-term Debt and Other Obligations

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

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

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

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

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

• $0.5 million of other debt.

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

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

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

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

The 8⁷/₈% senior subordinated 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 8⁷/₈% senior subordinated 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 equity offerings that are specified in the indenture governing the 8⁷/₈% senior subordinated notes. On or after August 1, 2007, Reddy Group may redeem all or a portion of the senior subordinated 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 subordinated notes as previously described, Reddy Group will be required to make an offer to repurchase the senior subordinated notes at a price equal to 101% of the outstanding principal amount plus accrued interest.

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

On March 22, 2005 Reddy Group commenced a cash tender offer for any and all of its outstanding 8⁷/₈% senior subordinated notes. In connection with the tender offer Reddy Group is also soliciting consents to amend the indenture governing these notes to, among other things, eliminate substantially all of the restrictive covenants and certain events of default. The offer is subject to the satisfaction of certain conditions, including there being validly tendered and not validly withdrawn at least a majority of the aggregate principal amount of these notes outstanding and our having available funds sufficient to pay the aggregate total consideration to the holders of tendered notes from the anticipated proceeds of our borrowings under our new credit facilities and from the proposed initial public offering of our common stock. On April 13, 2005, Reddy Group announced that we had received the requisite number of consents to amend the indenture as described above. On May 13, 2005, Reddy Group extended the expiration date of the tender offer and consent solicitation to June 3, 2005 and announced that the expected total purchase price for each $1,000 principal amount note tendered will be approximately $1,118.60, which included $20 per $1,000 principal amount of each note for the consent fee. As of the close of business on May 12, 2005, tenders and consents had been received with respect to approximately 99.9% of the outstanding principal amount of the senior subordinated notes.

Senior Discount Notes. On October 27, 2004, Reddy Holdings issued $151.0 million in aggregate principal amount at maturity of 10¹/₂% Senior Discount Notes due 2012 in a private placement offering. The senior discount notes were sold at 66.333% of the stated principal amount, which resulted in gross proceeds of $100.2 million. We used the net proceeds of the offering, together with a dividend of approximately $28.4 million 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 $15.0 million and to pay a dividend of approximately $10.4 million to our common stockholders. In connection with these transactions, Reddy Group made a 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 notes and the related transactions, Reddy Ice Group amended its credit agreement (see “-Senior Credit Facility” below).

Each senior discount note has an initial accreted value of $663.33 per $1,000 principal amount at maturity. The accreted value of each senior discount note increases from the date 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 senior 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 in right of payment 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 senior 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, we may redeem up to 35% of the principal amount of the senior 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 senior discount notes. From and after November 1, 2008, we may redeem any or all of the senior discount notes by paying a redemption premium which is initially 5.25% of the principal amount at maturity of the notes, and will decline annually to 0% commencing on November 1, 2010. If a change of control occurs on or prior to November 1, 2007, we may, at our option, redeem all, but not less than all, of the senior 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 we experience a change of control and do not elect to make the optional redemption described in the previous sentence, we will be required to make an offer to repurchase the senior discount notes at a price equal to 101% of their accreted value, plus accrued and unpaid interest, if any, to the date of purchase. We may also be required to make an offer to purchase the senior discount notes with proceeds of asset sales that are not reinvested in our business or used to repay other indebtedness.

The senior 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 was required to, within 150 days after the issuance date, file a registration statement with the SEC to exchange the senior discount notes for new notes of Reddy Holdings having terms substantially identical in all material respects to the senior discount notes. The 150th day following the issuance of the senior discount notes was March 26, 2005 and, as a result of not filing the registration statement with the SEC on or prior to that date, we accrued additional interest on the senior discount notes from March 26, 2005 through April 5, 2005, the date on which the registration statement was actually filed. 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.

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

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

Principal balances outstanding under the revolving credit facility bear interest per annum, at our 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 our leverage ratio. At March 31, 2005, the weighted average interest rate of borrowings outstanding under the senior credit facility was 5.6%. 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 our existing revolving credit facility based on an annual rate of 0.5%.

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

The senior credit facility requires that, beginning in 2004, we will repay all borrowings under the revolving credit facility and maintain a zero outstanding balance for a period of 30 consecutive calendar days during each year. The term loan amortizes 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 revolving credit facility 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 Reddy Holdings and (4) insurance and condemnation awards. In the event of a change in control, as defined in the credit agreement governing the senior credit facility, all amounts outstanding will become due and payable immediately. Furthermore, within 100 days after close of each fiscal year (beginning with the close of the 2004 fiscal year), a mandatory prepayment of the term loan is required based on a percentage of Reddy Group’s annual excess cash flow, as defined in the senior 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%.

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

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

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

Liquidity Outlook. Due to the seasonal nature of our business, we record the majority of our sales and profits during the months of May through September. The majority of the cash generated from those operations is received between July and November.

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

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

Beginning in the latter part of the second quarter of 2005 and continuing into the third quarter of 2005, availability under our revolving credit facility is expected to increase significantly due to the seasonality of our business and reach a maximum of $24 million to $29 million. As noted previously, we record the majority of our sales and profits during the months of May through September and the majority of the cash generated from those operations is received in August through November. During those months in 2005, we expect to repay all amounts borrowed under our revolving credit facility in the spring, fund current capital expenditures and debt service and build up cash balances. We anticipate that a significant portion of such excess cash flow will be used in early 2006 to repay amounts outstanding under the senior credit facility as required by mandatory prepayment provisions in the senior credit facility.

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.

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

Impairment of Long-Lived Assets. In accordance with Statement of Financial Accounting Standards (“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, multiples of earnings of comparable businesses and discounted cash flows.

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.

Recently Adopted Accounting Pronouncements

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

Recent Accounting Pronouncements

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

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

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

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

In November 2004, the FASB issued SFAS No. 151, ‘‘Inventory Costs—an amendment of ARB No. 43, Chapter 4’’. SFAS No. 151 seeks to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) in the determination of inventory carrying costs. The statement requires such costs to be treated as a current period expense. This statement is effective for fiscal years beginning after July 15, 2005. We are currently evaluating the effect this standard could have on our results of operations and financial position.

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, with the bulk of demand coming in the warmer spring and summer months. 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, whereas we typically experience net losses in the first and fourth quarters. We believe that over two-thirds 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 one-third of our revenues will occur during the first and fourth calendar quarters when the weather is generally cooler. This belief is consistent with historical trends. 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.

Risks Relating to Our Indebtedness

We have a substantial amount of indebtedness, which may reduce our cash flow and impede our ability to remain in compliance with debt covenants, make payments on our indebtedness and operate our business.

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

Our substantial indebtedness could have other important consequences. For example, it could:

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

• require us to dedicate a substantial portion of our cash flow to pay principal and interest on our debt;

• make us more vulnerable to, and reduce our flexibility in planning for, changes in general economic, industry and competitive conditions;

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

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

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

We could incur more indebtedness, which may increase the risks associated with our substantial leverage, including our ability to service our indebtedness.

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

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

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

Our subsidiaries may not be able to generate sufficient cash to service all of their indebtedness and may be forced to take other actions to satisfy their obligations under such indebtedness, which may not be successful.

If our subsidiaries are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on their indebtedness, or if they otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing their indebtedness (including the financial maintenance covenants in our senior credit facility), we or they could be in default under the terms of the agreements governing such indebtedness. If Reddy Group’s operating performance declines in the future, Reddy Group may need to obtain waivers from the lenders under our senior credit facility to avoid being in default under that facility. If Reddy Group breaches its covenants under its senior credit facility and seeks a waiver, it may not be able to obtain a waiver from the required lenders. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under Reddy Group’s senior credit facility could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against Reddy Group’s assets and Reddy Group could be forced into bankruptcy or liquidation.

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

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

The lenders under the our senior credit facility received a pledge of all of our equity interests of Reddy Group and its current subsidiaries. Additionally, these lenders have a lien on substantially all of our assets. As a result of these pledges and liens, if we fail to meet our payment or other obligations under our senior credit facility, those lenders are entitled to foreclose on substantially all of our assets and liquidate those assets.

Risks Relating to Our Business

The seasonal nature of the ice business results in losses and lower profit margins 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, which results in an increased demand for ice. We also earn our net income during these same periods. As a result of seasonal revenue declines and the lack of a corresponding decrease in expenses, we experience net losses and materially lower profit margins during the first and fourth calendar quarters. Variations in demand could have a material adverse effect on the timing of our cash flows and therefore our ability to service our obligations with respect to our indebtedness, including the securities. In addition, because our operating results depend significantly on sales during the second and third calendar quarters, our results of operations may fluctuate significantly if the weather during these periods is cool or rainy.

Weather conditions and weather events can decrease our sales and increase our expenses.

Cool 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 during periods of warm, sunny weather, and conversely, demand decreases during periods of cool, rainy weather. During extended periods of cool or rainy weather on a national basis, our revenues and resulting net income may decline substantially. Hot weather does not necessarily result in greater net income. During extended periods of 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, resulting in higher expenses and inconsistent service and product quality. Finally, although extreme weather events such as hurricanes can cause an increase in volume sales, those sales are not necessarily profitable due to added costs and disruptions to our normal service and distribution routes.

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

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

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

We use substantial amounts of electricity in connection with our manufacturing process, fuel to operate our refrigerated trucks for ice delivery and polyethylene, which is the primary raw material used to manufacture the bags we use to package our ice. We also carry general liability, workers compensation, health and vehicle insurance. We have already experienced increases in fuel costs, bag costs and insurance costs and may experience further increases in the future. If the prices for these items or other expenses increase beyond the amounts that we are able to pass along to our customers, our profits and our operating cash flow would decrease.

Our acquisitions may not be successfully integrated and could cause unexpected financial or operational difficulties.

In 2004, we completed 11 acquisitions. We anticipate that we may, from time to time, selectively acquire additional businesses, assets or securities of companies that we believe would provide a strategic fit with our business. Acquisitions are also accompanied by risks, such as potential exposure to unknown liabilities of acquired companies and the possible loss of key employees and customers of the acquired business. Further, acquisitions are subject to risks associated with the difficulty and expense of integrating the operations and personnel of the acquired companies, the potential disruption to our business and the diversion of management time and attention, any of which could increase the costs of operating our business, negate the expected benefits of the acquisitions or result in the loss of customers.

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

Our ice manufacturing and cold storage operations are subject to a wide range of environmental laws and regulations governing, among other things, air emissions, wastewater discharges, the use, management and disposal of hazardous and non-hazardous materials and wastes and the cleanup of contamination. Noncompliance with such laws and regulations, or incidents resulting in environmental releases, could cause us to incur substantial costs, including cleanup costs, fines and penalties, third party claims for personal injury, investments to retrofit or upgrade our facilities and programs or curtailment of our operations. For example, our ice manufacturing and cold storage operations use refrigerants such as ammonia and freon. Some of our facilities may not be in compliance with certain freon refrigerant requirements, such as leak detection and repair, recordkeeping or reporting. In addition, the market price of freon is rising as a result of phase outs under federal laws, which could significantly increase our operating costs in the future if we are not able to obtain approved substitutes. From time to time, our use of ammonia has resulted in releases that have temporarily disrupted our manufacturing operations and resulted in lawsuits or administrative penalties. For example, we are currently in the process of settling litigation resulting from an ammonia release in June 2001 at our Baton Rouge, Louisiana facility. See Part II, Item 1 – “Legal Proceedings”. Material violations of, or liabilities under, environmental laws may require us to incur substantial costs which could reduce our profits, or to divert resources from ongoing environmental programs and improvements, which could delay our efforts to integrate acquisitions and upgrade our operations, or expose us to risk of further environmental liability.

Our business could be disrupted or we could incur substantial costs because of government laws and regulations.

We are subject to various federal, state and local laws relating to many aspects of our business, including labeling, sanitation, health and safety and manufacturing processes. We cannot predict the types of government regulations that may be enacted 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 cause a disruption in our operations or require additional expenditures by us, some of which could be material. We may incur material costs and liabilities in order to comply with any such laws and regulations and such costs and liabilities may result in substantial expenses to us and could divert management’s time and attention.

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

Our success depends in part on our ability to attract, hire, train and retain qualified managerial, sales and marketing personnel. Competition for these types of personnel is high. We may be unsuccessful in attracting and retaining the personnel we require to conduct our operations successfully. Our success also depends to a significant extent on the continued service and performance of our senior management team and in particular on the continued service of William P. Brick, our Chairman and Chief Executive Officer, and

Jimmy C. Weaver, our President and Chief Operating Officer. In addition, we do not carry “key man” life insurance. Our inability to successfully attract and retain personnel or the loss of any member of our senior management team could impair our ability to execute our business plan.

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

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

We currently carry product liability insurance. However, this insurance may be insufficient to pay for all or a large part of these losses. If our insurance does not adequately cover these losses, our results of operations and cash flow would decrease and such a decrease could be material.

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

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

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. Confidentiality or trade secrets may not be maintained and others may independently develop or obtain access to such materials or processes which could adversely affect our competitive position and ability to differentiate our products and services from our competitors’ offerings.

Limitations on our ability to utilize our tax assets before they expire may negatively affect financial results.

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

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

Our acquisitions have resulted in significant amounts of goodwill and other intangible assets. Goodwill, which relates to the excess of cost over the fair value of the net assets of the businesses acquired, and intangible assets totaled approximately $311.8 million at March 31, 2005, representing approximately 53.3% of our total assets. In the future, goodwill and intangible assets may increase as a result of future acquisitions. Goodwill and intangible assets are reviewed at least annually for impairment. Impairment may result from, among other things, deterioration in the performance of acquired businesses, adverse market conditions, adverse changes in applicable laws or regulations,

including changes that restrict the activities of the acquired business, and a variety of other circumstances. The amount of any impairment must be charged to earnings. Any future determination requiring the write-off of a significant portion of the goodwill and intangible assets recorded on our balance sheet would have an adverse effect on our financial condition and results of operations.

We are controlled by our sponsors and their affiliates, whose interests in our business may be different from yours.

By reason of our sponsors’ and their affiliates’ ownership of us and their collective ability, pursuant to a stockholders agreement among our stockholders, to designate a majority of the members of the board of directors, our sponsors will control actions to be taken by us and our board of directors, including amendments to our certificate of incorporation and by-laws and approval of significant corporate transactions, including mergers and sales of substantially all of our assets. The interests of our sponsors and their affiliates will likely differ from yours in material respects.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risks

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. Our main market risk exposure category is interest rate risk.

We are exposed to some market risk due to the floating interest rates under our senior credit facility. Principal balances outstanding under the revolving credit facility 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 the administrative agent) plus 2.5%. The term loans bear interest, at our option, at LIBOR plus 2.5% or the prime rate plus 1.5%.

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

Item 4. Controls and Procedures

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

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


*PART I – FINANCIAL INFORMATION*

Item 1. Condensed Consolidated Financial Statements

Condensed Consolidated Balance Sheets (unaudited) as of March 31, 2005 and December 31, 2004

Condensed Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2005 and 2004 (restated)

Condensed Consolidated Statement of Stockholders’ Equity (unaudited) for the three months ended March 31, 2005

Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2005 and 2004

Notes to the Condensed Consolidated Financial Statements

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Item 4. Controls and Procedures

*PART II – OTHER INFORMATION*

Item 1. Legal Proceedings

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

Item 3. Defaults Upon Senior Securities

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

Item 5. Other Information

Item 6. Exhibits

SIGNATURES

INDEX TO EXHIBITS

		REDDY ICE HOLDINGS, INC.


Date: May 16, 2005	By:	/s/ WILLIAM P. BRICK
		William P. Brick
		Chief Executive Officer


Date: May 16, 2005	By:	/s/ STEVEN J. JANUSEK
		Steven J. Janusek
		Chief Financial and Accounting Officer

Exhibit No.		Description

31.1†		Rule 15d-14(a) Certification of Chief Executive Officer.
31.2†		Rule 15d-14(a) Certification of Chief Financial Officer.
32.1†		Rule 1350 Certification of Chief Executive Officer.
32.2†		Rule 1350 Certification of Chief Financial Officer.

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
QUARTERLY REPORT ON FORM 10-Q

PART I – FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

PART II – OTHER INFORMATION

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

Uncertainty of Forward Looking Statements and Information

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

Long-term Debt and Other Obligations

Recent Accounting Pronouncements

General Economic Trends and Seasonality

Risks Relating to Our Indebtedness

Risks Relating to Our Business

ITEM 3. Quantitative and Qualitative Disclosures About Market Risks

PART II - OTHER INFORMATION

SIGNATURES

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY QUARTERLY REPORT ON FORM 10-Q

Item 1. Financial Statements

(Unaudited)

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

Uncertainty of Forward Looking Statements and Information

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

Long-term Debt and Other Obligations

Recent Accounting Pronouncements

General Economic Trends and Seasonality

Risks Relating to Our Indebtedness

Risks Relating to Our Business

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
QUARTERLY REPORT ON FORM 10-Q