** **

**UNITED STATESSECURITIES 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 June 30, 2004** |
|                                                   |   |   |
| **OR**                                                 |
|                                                   |   |   |
| **o**                                                  | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition period from             to             **

 

**Commissionfile number 333-110442-04**

 

**REDDY ICE HOLDINGS, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **DELAWARE**                                                    | ** ** | **56-2381368**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer Identification No.) |
|                                                            |       |                                 |
| **3535  TRAVIS STREET, SUITE 170**                              |
| **DALLAS,  TEXAS 75204**                                        |
| (Address of  principal executive offices)                       |
|                                                            |       |                                 |
| **(214)  526-6740**                                             |
| (Registrant’s  telephone number, including area code)      |

 

 

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

 

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

 

The number of shares of registrant’s commonstock outstanding as of August 12, 2004 was 99,050.

 

DOCUMENTS INCORPORATED BY REFERENCE: None

 

 

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### **REDDY ICEHOLDINGS, INC. AND SUBSIDIARY**

### **QUARTERLY REPORTON FORM 10-Q**

**FOR THEPERIOD ENDED JUNE 30, 2004**

 

**TABLE OFCONTENTS**

 
| ***PART I – FINANCIAL  INFORMATION*** |
|--------------------------------------------|
| *** ***                               |
| *Item 1. *                            | *Condensed Consolidated  Financial Statements* | * * |
| * *                                   | * * |
|                                       | Condensed  Consolidated Balance Sheets as of June 30, 2004 (Successor)(unaudited)  and December 31, 2003 (Successor) |   |
|                                       |   |   |
|                                       | Condensed  Consolidated Statements of Operations for the three and six months ended  June 30, 2004 (Successor) and 2003 (Predecessor) (each unaudited) |   |
|                                       |   |   |
|                                       | Condensed  Consolidated Statement of Shareholders’ Equity as of June 30, 2004  (Successor)(Unaudited) |   |
|                                       |   |   |
|                                       | Condensed  Consolidated Statements of Cash Flows for the three and six months ended  June 30, 2004 (Successor) and 2003 (Predecessor) (each unaudited) |   |
|                                       |   |   |
|                                       | Notes  to the Condensed Consolidated Financial Statements |   |
|                                       |   |
| Item  2.                                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                                       |   |   |
| Item  3.                                   | Quantitative  and Qualitative Disclosures about Market Risk |   |
|                                       |   |   |
| Item 4.                                    | Controls and  Procedures |   |
|                                       | * * | * * |
| ***PART II – OTHER INFORMATION***     |
| * *                                   | * * | * * |
| Item 1.                                    | Legal Proceedings |   |
|                                       |   |   |
| Item 2.                                    | Changes in Securities,  Use of Proceeds and Issuer Purchases of Equity Securities |   |
|                                       |   |   |
| Item 3.                                    | Defaults Upon  Senior Securities |   |
|                                       |   |   |
| Item  4.                                   | Submission  of Matters to a Vote of Security Holders |   |
|                                       |   |   |
| Item 5.                                    | Other Information |   |
|                                       |   |   |
| Item 6.                                    | Exhibits and  Reports on Form 8-K |   |
|                                       |   |   |
| SIGNATURES                                 |   |
|                                            |  |  |  |  |

 

----

 

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

 

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

 

**REDDY ICEHOLDINGS, INC. AND SUBSIDIARY**

###### **CONDENSEDCONSOLIDATED BALANCE SHEETS**

###### **(SUCCESSOR)**

###### ** **

| ** **                                                                                                                                                                            | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                            | ** ** | **unaudited**           | ** ** | ** **                  | ** ** |
|                                                                                                                                                                                  |       | **(in thousands)**      |       |
| **ASSETS**                                                                                                                                                                            |       |                    |       |                        |       |
| CURRENT  ASSETS:                                                                                                                                                                      |       |                    |       |                        |       |
| Cash  and cash equivalents                                                                                                                                                            |       | $                       | 6,555      |                        | $          | 12,801 |   |
| Accounts  receivable, net                                                                                                                                                             |       | 38,830                  |       | 18,032                      |       |
| Inventories                                                                                                                                                                           |       | 9,977                   |       | 7,846                       |       |
| Prepaid  expenses                                                                                                                                                                     |       | 2,682                   |       | 1,952                       |       |
| Assets  held for sale                                                                                                                                                                 |       | 790                     |       | 790                         |       |
| Total  current assets                                                                                                                                                                 |       | 58,834                  |       | 41,421                      |       |
| PROPERTY  AND EQUIPMENT, net                                                                                                                                                          |       | 232,805                 |       | 233,440                     |       |
| GOODWILL  AND OTHER INTANGIBLES, net                                                                                                                                                  |       | 337,309                 |       | 339,465                     |       |
| OTHER  ASSETS                                                                                                                                                                         |       | 10                      |       | 10                          |       |
| TOTAL                                                                                                                                                                                 |       | $                       | 628,958    |                        | $          | 614,336 |   |
|                                                                                                                                                                                  |       |                    |       |                        |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                        |       |                    |       |                        |       |
|                                                                                                                                                                                  |       |                    |       |                        |       |
| CURRENT  LIABILITIES:                                                                                                                                                                 |       |                    |       |                        |       |
| Current  portion of long-term obligations                                                                                                                                             |       | $                       | 1,866      |                        | $          | 1,859 |   |
| Line  of credit                                                                                                                                                                       |       | 5,250                   |       | —                      |       |
| Accounts  payable                                                                                                                                                                     |       | 17,672                  |       | 11,237                      |       |
| Accrued  expenses                                                                                                                                                                     |       | 19,296                  |       | 20,674                      |       |
| Total  current liabilities                                                                                                                                                            |       | 44,084                  |       | 33,770                      |       |
| LONG-TERM  OBLIGATIONS                                                                                                                                                                |       | 328,215                 |       | 329,088                     |       |
| DEFERRED  TAX LIABILITIES, net                                                                                                                                                        |       | 60,160                  |       | 60,160                      |       |
| COMMITMENTS  AND CONTINGENCIES SHAREHOLDERS’ EQUITY:                                                                                                                             |       |                    |       |                        |       |
| Preferred  Stock, 12% Cumulative, Series A, $0.01 par value – 100,000 shares authorized,  99,050 shares issued and outstanding at June 30, 2004 and  December 31, 2003 |       | 1                       |       | 1                           |       |
| Common  stock:, $0.01 par value; 300,000 shares authorized; 99,050 shares issued and  outstanding at June 30, 2004 and December 31, 2003                                    |       | 1                       |       | 1                           |       |
| Additional  paid-in capital                                                                                                                                                           |       | 199,870                 |       | 193,568                     |       |
| Unearned  compensation                                                                                                                                                                |       | (353                    | )          | (437                        | )          |
| Accumulated  deficit                                                                                                                                                                  |       | (5,338                  | )          | (2,713                      | )          |
| Accumulated  other comprehensive income                                                                                                                                               |       | 2,318                   |       | 898                         |       |
| Total  shareholders’ equity                                                                                                                                                      |       | 196,499                 |       | 191,318                     |       |
| TOTAL                                                                                                                                                                                 |       | $                       | 628,958    |                        | $          | 614,336 |   |

 

Seenotes to condensed consolidated financial statements.

 

1

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### **REDDY ICEHOLDINGS, INC. AND SUBSIDIARY**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(Unaudited)**

 
| ** **                                          | ** ** | **Successor**                         | ** ** | **Predecessor**                     | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|---------------|------------|-----------------|------------|
| ** **                                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
| ** **                                          | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004**      | ** ** | **2003**        | ** ** |
| ** **                                          | ** ** | **(in thousands)**                    | ** ** |
|                                                |       |                                  |       |                                |       |          |       |            |       |
| Revenues                                            |       | $                                     | 88,529     |                                | $          | 70,749        |       | $               | 125,909    |   | $ | 103,316 |   |
| Cost  of sales                                      |       | 49,849                                |       | 40,520                              |       | 78,357        |       | 66,311          |       |
| Gross  profit                                       |       | 38,680                                |       | 30,229                              |       | 47,552        |       | 37,005          |       |
| Operating  expenses                                 |       | 8,779                                 |       | 7,316                               |       | 17,097        |       | 14,661          |       |
| Depreciation  and amortization expense              |       | 5,716                                 |       | 5,919                               |       | 11,278        |       | 11,710          |       |
| Gain  on disposition of assets                      |       | —                                |       | (1                                  | )          | —        |       | (11             | )          |
| Income  from operations                             |       | 24,185                                |       | 16,995                              |       | 19,177        |       | 10,645          |       |
| Other  income, net                                  |       | —                                |       | 41                                  |       | —        |       | 31              |       |
| Interest  expense                                   |       | (6,569                                | )          | (8,542                              | )          | (13,246       | )          | (16,902         | )          |
| Income  (loss) before income taxes                  |       | 17,616                                |       | 8,494                               |       | 5,931         |       | (6,226          | )          |
| Income  tax expense                                 |       | 2,254                                 |       | —                              |       | 2,254         |       | —          |       |
| Net  income (loss) before preferred dividends       |       | 15,362                                |       | 8,494                               |       | 3,677         |       | (6,226          | )          |
| Preferred  dividends                                |       | (3,198                                | )          | (1,039                              | )          | (6,302        | )          | (2,033          | )          |
| Net  income (loss) available to common shareholders |       | $                                     | 12,164     |                                | $          | 7,455         |       | $               | (2,625     | ) | $ | (8,259 | ) |

 

See notes to condensed consolidated financial statements.

 

2

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### **REDDY ICEHOLDINGS, INC. AND SUBSIDIARY**

### **CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’EQUITY**

### **(SUCCESSOR)**

**(Unaudited)**

 
| ** **                                   | ** ** | ** **           | ** ** | ** **        | ** ** | ** **           | ** ** | ** **        | ** ** | ** **           | ** ** | ** **                 | ** ** | ** **               | ** ** | **Accumulated**           | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|----------------------|------------|-------------------|------------|----------------------|------------|-------------------|------------|----------------------|------------|----------------------------|------------|--------------------------|------------|---------------------------|------------|------------|------------|
| ** **                                   | ** ** | **Number of Shares** | ** ** | **Par Value**     | ** ** | **Additional**       | ** ** | ** **        | ** ** | ** **           | ** ** | **Other**                  | ** ** | ** **               | ** ** |
| ** **                                   | ** ** | **Preferred  Stock** | ** ** | **Common  Stock** | ** ** | **Preferred  Stock** | ** ** | **Common  Stock** | ** ** | **Paid-In  Capital** | ** ** | **Unearned  Compensation** | ** ** | **Accumulated  Deficit** | ** ** | **Comprehensive  Income** | ** ** | **Total**  | ** ** |
| ** **                                   | ** ** | **(in thousands)**   | ** ** |
| Balance at December 31, 2003            |       | 99                   |       | 99                |       | $                    | 1          |              | $          | 1                    |       | $                          | 193,568    |                     | $          | (437                      | )          | $          | (2,713     | ) | $ | 898 |   | $ | 191,318 |   |
| Dividends on 12% cumulative preferred stock  |       | —               |       | —            |       | —               |       | —            |       | 6,302                |       | —                     |       | (6,302                   | )          | —                    |       | —     |       |
| Amortization of unearned compensation        |       | —               |       | —            |       | —               |       | —            |       | —               |       | 84                         |       | —                   |       | —                    |       | 84         |       |
| Comprehensive income:                        |       |                 |       |              |       |                 |       |              |       |                 |       |                       |       |                     |       |                      |       |       |       |
| Net income                                   |       | —               |       | —            |       | —               |       | —            |       | —               |       | —                     |       | 3,677                    |       | —                    |       | 3,677      |       |
| Change in fair value of derivative liability |       | —               |       | —            |       | —               |       | —            |       | —               |       | —                     |       | —                   |       | 1,420                     |       | 1,420      |       |
| Total comprehensive income                   |       | —               |       | —            |       | —               |       | —            |       | —               |       | —                     |       | —                   |       | —                    |       | 5,097      |       |
| Balance at June 30, 2004                |       | 99                   |       | 99                |       | $                    | 1          |              | $          | 1                    |       | $                          | 199,870    |                     | $          | (353                      | )          | $          | (5,338     | ) | $ | 2,318 |   | $ | 196,499 |   |

 

See notes to condensed consolidated financial statements.

 

3

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### **REDDY ICEHOLDINGS, INC. AND SUBSIDIARY**

### **CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                                                                   | ** ** | **Successor**                       | ** ** | **Predecessor** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------|------------|
| ** **                                                                                                                   | ** ** | **Six Months Ended  June 30,** | ** ** |
| ** **                                                                                                                   | ** ** | **2004**                            | ** ** | **2003**        | ** ** |
| ** **                                                                                                                   | ** ** | **(in thousands)**                  | ** ** |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                                                                       |       |                                |       |            |       |
| Net  loss available to common shareholders                                                                                   |       | $                                   | (2,625     | )               | $          | (8,259 | ) |
| Adjustments  to reconcile net loss available to common shareholders to net cash provided  by (used in) operating activities: |       |                                |       |            |       |
| Preferred  dividends                                                                                                         |       | 6,302                               |       | 2,033           |       |
| Depreciation  and amortization                                                                                               |       | 11,278                              |       | 11,710          |       |
| Amortization  of debt issue costs and debt discount                                                                          |       | 1,198                               |       | 19              |       |
| Gain  on dispositions of assets                                                                                              |       | —                              |       | (11             | )          |
| Amortization  of unearned compensation                                                                                       |       | 84                                  |       | —          |       |
| Deferred  income taxes                                                                                                       |       | 2,254                               |       | —          |       |
| Change  in assets and liabilities:                                                                                           |       |                                |       |            |       |
| Accounts  receivable, inventory and prepaid expenses                                                                         |       | (23,630                             | )          | (15,413         | )          |
| Accounts  payable, accrued expenses and other                                                                                |       | 6,103                               |       | 765             |       |
| Net  cash provided by (used in) operating activities                                                                         |       | 964                                 |       | (9,156          | )          |
|                                                                                                                         |       |                                |       |            |       |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                                                                       |       |                                |       |            |       |
| Property  and equipment additions                                                                                            |       | (7,956                              | )          | (6,057          | )          |
| Proceeds  from dispositions of property and equipment                                                                        |       | 2,183                               |       | 1,120           |       |
| Cost  of acquisitions                                                                                                        |       | (5,270                              | )          | —          |       |
| Net  cash used in investing activities                                                                                       |       | (11,043                             | )          | (4,937          | )          |
|                                                                                                                         |       |                                |       |            |       |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                                                                       |       |                                |       |            |       |
| Deferred  debt costs                                                                                                         |       | (485                                | )          | —          |       |
| Borrowings  under the credit facility, net                                                                                   |       | 5,250                               |       | 13,835          |       |
| Repayment  of long-term obligations                                                                                          |       | (932                                | )          | (41             | )          |
| Net  cash provided by financing activities                                                                                   |       | 3,833                               |       | 13,794          |       |
|                                                                                                                         |       |                                |       |            |       |
| NET  DECREASE IN CASH AND CASH EQUIVALENTS                                                                                   |       | (6,246                              | )          | (299            | )          |
| CASH  AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                                              |       | 12,801                              |       | 6,500           |       |
| CASH  AND CASH EQUIVALENTS, END OF PERIOD                                                                                    |       | $                                   | 6,555      |            | $          | 6,201 |   |
|                                                                                                                         |       |                                |       |            |       |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                                                           |       |                                |       |            |       |
| Cash  payments for interest                                                                                                  |       | $                                   | 12,309     |            | $          | 17,194 |   |
| Borrowings  under the credit facility                                                                                        |       | $                                   | 32,850     |            | $          | 109,145 |   |
| Repayments  on the credit facility                                                                                           |       | $                                   | (27,600    | )               | $          | (95,310 | ) |
|                                                                                                                         |       |                                |       |            |       |
| SUPPLEMENTAL  SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:                                                  |       |                                |       |            |       |
| Change  in fair value of derivative liability                                                                                |       | $                                   | (1,420     | )               | $          | (1,028 | ) |
| Long-term  debt incurred to purchase property and equipment and intangible assets                                            |       | $                                   | —     |            | $          | 201 |   |

 

See notes to condensed consolidated financial statements.

 

4

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**REDDY ICEHOLDINGS, INC. AND SUBSIDIARY**

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

**FOR THETHREE AND SIX MONTHS ENDED JUNE 30, 2004**

 

**1.  General**

 

The condensed consolidated financial statements ofReddy Ice Holdings, Inc. and its wholly owned subsidiary (the “Company”)included herein are unaudited, except for the balance sheet as ofDecember 31, 2003 that has been prepared from the audited financialstatements for that date.  Thesefinancial statements have been prepared by the Company pursuant to the rulesand regulations of the Securities and Exchange Commission (“SEC”).  As applicable under the SEC’s regulations,certain information and footnote disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted.  All significant intercompany balances andtransactions have been eliminated upon consolidation, and all adjustmentswhich, in the opinion of management, are necessary for a fair presentation ofthe financial position, results of operations and cash flows for the periodscovered have been made and are of a normal and recurring nature.  Accounting measurements at interim datesinherently involve greater reliance on estimates than at year end and are notnecessarily indicative of results for the full year.  The financial statements included hereinshould be read in conjunction with the consolidated financial statements andthe related notes thereto included in the Company’s annual report on Form 10-Kfor the year ended December 31, 2003.

 

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

 

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

 

**2. Acquisitions**

 

On August 15, 2003,Cube merged with and into Packaged Ice, with Packaged Ice being the survivingcorporation.  Concurrent with the closingof the merger, Packaged Ice was named Reddy Ice Group, Inc.  The merger was consummated pursuant to theAgreement and Plan of Merger, dated as of May 12, 2003, by and among theParent, Cube and Packaged Ice. Subsequent to the merger, all of the Company’s operations were conductedthrough Reddy Group.  The merger wasaccounted for as a purchase by Cube of Packaged Ice in accordance withStatement of Financial Accounting Standards (“SFAS”) No.141, “BusinessCombinations.”  Total consideration was$461.0 million, including $113.0 million for common and preferred securities,$316.7 million for assumption of debt and revolving loans, $12.8 million fordebt issue costs and $18.5 million in direct merger costs.  The total purchase price was allocated to theacquired assets and assumed liabilities based upon estimates of theirrespective fair values as of the closing date using valuations and otherstudies.  The excess of the aggregatepurchase price over the liabilities assumed of $280.9 million was allocated toproperty

 

5

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and equipment($42.8 million), goodwill and other intangible assets ($289.0 million), assetsheld for sale ($0.2 million) and net deferred tax liabilities ($51.1million).  Other intangibles identifiedincluded customer lists, which are being amortized over useful lives of 15 to30 years, and a trade name.

 

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

 

During the six monthsended June 30, 2004, the Company completed six acquisitions for anaggregate purchase price of $5.3 million (referred to collectively as the “2004Acquisitions”).  The excess of theaggregate purchase price over the net assets acquired of $2.1 million wasallocated to goodwill and other intangible assets.  Other intangible assets were comprised ofcustomer lists, which are being amortized over useful lives of 15 to 30 years.

 

The results of operationsof Service Ice and Triangle Ice are included in the Company’s consolidatedresults of operations from October 1, 2003 and November 1, 2003,respectively.  The results of operationsof the 2004 Acquisitions are included in the Company’s consolidated results ofoperations from the date of each acquisition, which range from March 1,2004 to May 6, 2004.  The followingunaudited pro forma information presents (i) the Predecessor’s consolidatedresults of operations for the three and six months ended June 30, 2003 asif the acquisitions of Packaged Ice, Service Ice, Triangle Ice and the 2004Acquisitions had occurred on January 1, 2003 and (ii) the Successor’sconsolidated results of operations for the three and six months endedJune 30, 2004 as if the 2004 Acquisitions had all occurred onJanuary 1, 2004:

 
| ** **                                          | ** ** | **Successor**                         | ** ** | **Predecessor**                     | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|---------------|------------|-----------------|------------|
| ** **                                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
| ** **                                          | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004**      | ** ** | **2003**        | ** ** |
| ** **                                          | ** ** | **(in thousands)**                    | ** ** |
| ** **                                          | ** ** | ** **                            | ** ** |
| Revenues                                            |       | $                                     | 88,656     |                                | $          | 82,360        |       | $               | 126,502    |   | $ | 118,940 |   |
| Net  income (loss) available to common shareholders |       | 12,213                                |       | 11,820                              |       | (2,923        | )          | (4,020          | )          |
|                                                     |            |                                       |            |                                     |            |               |            |                 |            |  |  |  |  |

 

Certain of the 2004Acquisitions provide for additional consideration to be paid to the sellers inthe event the acquired operations meet certain performance targets in the 12month period following the closing of the transaction.  The maximum amount payable is $0.5 million,of which $0.3 million has been accrued in accordance with SFAS No. 141.

 

6

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**3.  Inventories**

 

Inventories contain rawmaterials, supplies and finished goods. Raw materials and supplies consist of ice packaging materials, spareparts, bottled water supplies and merchandiser parts.  Finished goods consist of packaged ice andbottled water.  Inventories are valued atthe lower of cost or market basis.  Costis determined using the first-in, first-out and average cost methods.

 
| ** **                  | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                  | ** ** | **(in thousands)**      | ** ** |
| Raw  materials and supplies |       | $                       | 7,989      |                        | $          | 6,310 |   |
| Finished  goods             |       | 1,988                   |       | 1,536                       |       |
| Total                       |       | $                       | 9,977      |                        | $          | 7,846 |   |

 

**4.  Accrued Expenses**

 
| ** **                                  | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                  | ** ** | **(in thousands)**      | ** ** |
| Accrued  compensation and employee benefits |       | $                       | 6,257      |                        | $          | 8,090 |   |
| Accrued  interest                           |       | 6,085                   |       | 6,346                       |       |
| Accrued  property and sales taxes           |       | 2,306                   |       | 1,128                       |       |
| Accrued  utilities                          |       | 1,577                   |       | 1,029                       |       |
| Derivative  liability                       |       | 1,043                   |       | 2,464                       |       |
| Other                                       |       | 2,028                   |       | 1,617                       |       |
| Total                                       |       | $                       | 19,296     |                        | $          | 20,674 |   |

 

**5.  Line of Credit and Long-Term Obligations**

 

On July 17, 2003, Cube completed the sale of$152 million of 8-7/8% Senior Subordinated Notes due August 1, 2011(the “Senior Notes”).  The Senior Noteswere issued in connection with a private placement offering and weresubsequently registered with the SEC. The Senior Notes were sold at 99.297% of the stated principal amount,which resulted in net proceeds of $150.9 million.  At the closing of the merger onAugust 15, 2003, Reddy Group assumed Cube’s obligations under the SeniorNotes and the related indenture and received the net proceeds of theoffering.  The net proceeds were used toconsummate the merger as discussed in Notes 1 and 2, which included therepayment of the Predecessor’s $255 million aggregate principal amount of9-3/4% senior notes due February 1, 2005 and the outstanding balance of $61.7million under its bank credit facility.

 

Interest on the Senior Notes is payable semiannuallyon February 1 and August 1, with such payments having commenced onFebruary 1, 2004.  In conjunctionwith issuance of the Senior Notes, $7.0 million of debt issuance costswere incurred.  The Senior Notes areunsecured senior subordinated obligations of Reddy Group and are:

 

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

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

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

 

7

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The Senior Notes include customary covenants thatrestrict, among other things, the ability to incur additional debt, paydividends or make certain other restricted payments, incur liens, merge or sellall or substantially all of the assets, or enter into various transactions withaffiliates.  Prior to August 1,2006, Reddy Group may redeem up to 35% of the principal amount of the SeniorNotes at a redemption price of 108.875% of the principal amount thereof, plusaccrued and unpaid interest to the date of redemption, with funds raised inspecified equity offerings.

 

The Senior Notes****areguaranteed, fully, jointly and severally, and unconditionally, on a seniorsubordinated basis by the Parent and all of Reddy Group’s subsidiaries (the“Subsidiary Guarantors”).  There arecurrently no restrictions on the ability of the Subsidiary Guarantors totransfer funds to Reddy Group in the form of cash dividends, loans oradvances.  Condensed consolidatingfinancial statements for the Parent and its wholly-owned subsidiary are notpresented as the Parent has no significant independent assets oroperations.  Condensed consolidatingfinancial statements for Reddy Group and its subsidiaries, all of which arewholly owned, are not presented as Reddy Group has no significant independentassets or operations.  Reddy Group has nosubsidiaries that do not guarantee the Senior Notes.

 

On August 15, 2003, Reddy Group entered into a$170 million senior secured credit facility, with the lenders being a syndicateof banks, financial institutions and other entities, including Credit SuisseFirst Boston as Administrative Agent, Canadian Imperial Bank of Commerce andBear Stearns Corporate Lending, Inc. (the “Credit Facility”).  The Credit Facility provides for a six-yearterm loan in the amount of $135 million (the “Original Term Loan”) and afive-year revolving credit facility (the “Line of Credit”) in the amount of$35 million.  Proceeds of theOriginal Term Loan were used to consummate the merger as discussed in Note2.  On November 6, 2003, the CreditFacility was amended to provide a Supplemental Term Loan (together with theOriginal Term Loan, referred to as the “Term Loans”) in the amount of $45million, the proceeds of which were used to fund a portion of the Triangle Iceacquisition (see Note 3).  The SupplementalTerm Loan has substantially the same terms as the Original Term Loan.

 

At June 30, 2004, the Company had $20.4 millionof availability under the Line of Credit, net of outstanding standby letters ofcredit of $9.3 million.  The standbyletters of credit are used primarily to secure certain insurance obligations.

 

Principal balances outstanding under the CreditFacility bear interest per annum, at Reddy Group’s option, at the sum of thebase rate plus the applicable margin or LIBOR plus the applicable margin.  The base rate is defined as the greater ofthe prime rate (as announced from time to time by the Administrative Agent) orthe federal funds rate plus 0.5%.  Theapplicable margin is different for revolving and term loans and variesdepending on Reddy Group’s leverage ratio. On February 20, 2004, the Credit Facility was amended to reduce theapplicable margin on term loans by 0.5%. At June 30, 2004, the weighted average interest rate of borrowingsoutstanding under the Credit Facility was 3.9%. Interest on base rate loans is payable on the last day of eachquarter.  Interest on LIBOR loans ispayable upon maturity of the LIBOR loan or on the last day of the quarter ifthe term of the LIBOR loan exceeds 90 days. Reddy Group pays a quarterly fee on the average availability under theLine of Credit based on an annual rate of 0.5%.

 

The Credit Facility requires that beginning in 2004,Reddy Group will repay all borrowings under the Line of Credit and maintain azero outstanding balance for a period of 30 consecutive calendar days duringeach year.  This requirement for 2004 wasmet on August 10, 2004.  The TermLoans amortize in quarterly installments over a five-year period in an annualaggregate amount equal to 1% of the original balance, with any remaining unpaidbalance to be repaid in the sixth year in equal, quarterly installments.  Subject to certain conditions, mandatoryrepayments of the Line of Credit and Term Loans are required to be made withportions of the proceeds from (1) asset sales, (2) the issuance ofdebt securities (3) an initial public offering of stock of

 

8

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the Parent,  and(4) insurance and condemnation awards. Furthermore, within 100 days after close of the each fiscal year(beginning with the close of the 2004 fiscal year), a mandatory prepayment ofthe Term Loans is required in an amount equal to a certain percentage of ReddyGroup’s annual excess cash flow, as defined in the Credit Facility.  The percentage is based on Reddy Group’sleverage ratio at the end of such fiscal year and ranges from 25% to 75%.

 

The Credit Facility contains financial covenants whichinclude limitations on capital expenditures and the maintenance of certainfinancial ratios, as defined in the Credit Facility, and is collateralized bysubstantially all of Reddy Group’s assets and the capital stock of all of itssignificant subsidiaries.  AtJune 30, 2004, Reddy Group was in compliance with these covenants.

 

On November 28, 2000, the Predecessor enteredinto an interest rate collar agreement (the “Collar Agreement”), which remainedin effect after the merger.  Under theCollar Agreement, if the Index Rate (30-day LIBOR, as defined in the CollarAgreement) exceeds 7.75%, Reddy Group will receive the difference between theIndex Rate and 7.75%.  If the Index Ratefalls below 5.75%, Reddy Group will pay the difference plus 1%.  Any amounts payable or receivable are settledmonthly.  The Collar Agreement has anotional amount of $50 million and matures on November 28, 2004.  When Reddy Group’s debt was refinanced onAugust 15, 2003, $0.3 million of amounts previously deferred inaccumulated other comprehensive income on the balance sheet were written off,as the hedged, forecasted transaction was no longer deemed probable ofoccurring.  The Collar Agreement wasredesignated as a hedge of the new Credit Facility, with subsequent changes infair value deferred in other comprehensive income.

 

If Reddy Group had been required to settle the CollarAgreement as of June 30, 2004, it would have had to pay $1.0 million plusaccrued interest of $0.2 million.  ReddyGroup is exposed to credit risk in the event of nonperformance by thecounterparty to the Collar Agreement, however it anticipates that thecounterparty will fully perform its obligations under the Collar Agreement.

 

At June 30, 2004 andDecember 31, 2003, long-term obligations consisted of the following:

 
| ** **                                                    | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                    | ** ** | **(in thousands)**      | ** ** |
| 8-7/8%  Senior Notes                                          |       | $                       | 152,000    |                        | $          | 152,000 |   |
| Less:  Unamortized debt discount on 8-7/8% Senior  Notes |       | (946                    | )          | (1,013                      | )          |
| Credit  facility – term loans                            |       | 178,650                 |       | 179,550                     |       |
| Other                                                         |       | 377                     |       | 410                         |       |
| Total  long-term obligations                                  |       | 330,081                 |       | 330,947                     |       |
| Less:  Current maturities                                |       | 1,866                   |       | 1,859                       |       |
| Long-term  obligations, net                                   |       | $                       | 328,215    |                        | $          | 329,088 |   |

 

9

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**6.  Capital Stock**

 

*Common Stock.******* **The Parent is authorized to issue upto 300,000 shares of common stock, par value $0.01 per share.  Holders of the Parent common stock areentitled to one vote per share on all matters to be voted on by shareholdersand are entitled to receive dividends, if any, as may be declared from time totime by the Board of Directors of the Parent. Upon any liquidation or dissolution of the Parent, the holders of commonstock are entitled, subject to any preferential rights of the holders ofpreferred stock, to receive a pro rata share of all of the assets remainingavailable for distribution to shareholders after payment of allliabilities.  As of June 30, 2004,11,434 shares of common stock were reserved for issuance under the Reddy IceHoldings, Inc. 2003 Stock Option Plan.

 

*Preferred Stock.** ***The Parent is authorized to issue upto 200,000 shares of $0.01 par value preferred stock, consisting of 100,000shares of Series A Cumulative Redeemable Preferred Stock (“Series A PreferredStock”) and 100,000 shares of preferred stock that is currentlyundesignated.  The terms of the Series APreferred Stock are set forth in a certificate of designation (the “Series APreferred Stock Designation”).  Theliquidation preference per share of the Series A Preferred Stock is equal tothe sum of (a) $1,000 plus (b) the amount of all accumulated but unpaiddividends on such shares.  The holders ofthe outstanding shares of Series A Preferred Stock immediately preceding thedividend payment date shall be entitled to receive dividends, as declared bythe Board of Directors, at a rate per annum equal to 12% of the liquidationamount per share.  All dividends arecumulative, whether or not earned or declared, accruing on a daily basis fromthe issue date and shall be payable in cash quarterly in arrears on eachdividend payment date commencing on November 15, 2003.  If the Parent does not pay the cash dividendson a quarterly basis, all unpaid dividends will be added to the liquidationamount in respect of such shares on each dividend payment date.  If the Parent fails to make a liquidationpayment following the occurrence of a liquidation event or default, as definedin the Series A Preferred Stock Designation, the per annum dividend rate willbe increased by 2% per annum during the continuation of any such event ordefault. In the event of liquidation, the holders of the Series A PreferredStock are entitled to an amount in cash equal to the liquidation amount foreach share.  The Parent may redeem theSeries A Preferred Stock at its option in whole at any time or in part fromtime to time, subject to restrictions as defined in the Series A PreferredStock Designation.  Series A PreferredStock holders are not entitled or permitted to vote on any matter upon whichthe holders of common stock are required or permitted to vote upon.

 

**7. Stock-Based Compensation**

 

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

 

 The Company accounts for the Stock Option Planunder the intrinsic value method prescribed by APB Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related Interpretations.  No stock-based employee compensation cost isreflected in net income (loss) available to common shareholders for the threeand six months ended June 30, 2004 as all stock options granted under theStock Option Plan had an exercise price equal to or greater than the market valueof the underlying common stock on the date of grant.  The following table illustrates the effect onthe net income (loss) available to common shareholders if the Company hadapplied the fair value recognition provisions of stock-based compensation as describedin SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS148, “Accounting for Stock-Based Compensation - Transition and Disclosure.”

 

10

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| ** **                                                                                                   | ** ** | **Three Months  Ended  June 30, 2004** | ** ** | **Six Months  Ended  June 30, 2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                   | ** ** | **(in thousands)**                          | ** ** |
| Net  income (loss) available to common shareholders, as reported                                             |       | $                                           | 12,164     |                                      | $          | (2,625 | ) |
| Less:  Total stock-based compensation expense  determined under fair value based methods for all awards |       | 22                                          |       | 44                                        |       |
| Proforma  net income (loss) available to common shareholders                                                 |       | $                                           | 12,142     |                                      | $          | (2,669 | ) |

 

**8. Income Taxes**

 

For the three and six months ended June 30, 2004, theCompany reported income before taxes.  Inthe three months ended June 30, 2004, a provision for income taxes was recordedbased on the income before taxes in that period.  The increase in the valuation allowance inthe three months ended March 31, 2004 was reversed as the Company reportedincome before taxes for the six months ended June 30, 2004.  The following is a summary of the Company’sincome tax provision activity through the six months ended June 30, 2004:

 
| ** **                                              | ** ** | **Three Months  Ended  March 31,  2004** | ** ** | **Three Months  Ended  June 30,  2004** | ** ** | **Six Months  Ended  June 30,  2004** |
|---------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|
| ** **                                              | ** ** | **(in thousands)**                       |
|                                                    |       |                                     |       |                                    |       |                                  |
| Federal income  tax at statutory rate                   |       | $                                        | (3,973     | )                                       | $          | 5,989                                 |   | $ | 2,016 |
| State income  taxes, net of federal income tax benefits |       | (467                                     | )          | 705                                     |       | 238                                   |
| Increase  (decrease) in valuation allowance             |       | 4,440                                    |       | (4,440                                  | )          | —                                |
| Total provision  for income taxes                       |       | $                                        | —     |                                    | $          | 2,254                                 |   | $ | 2,254 |

 

**9. Commitments and Contingencies**

 

The Company is involvedin various claims, lawsuits and proceedings arising in the ordinary course ofbusiness.  There are uncertaintiesinherent in the ultimate outcome of such matters and it is impossible to presentlydetermine the ultimate costs that may be incurred.  Other than those lawsuits described below,management believes the resolution of such uncertainties and the incurrence ofsuch costs will not have a material adverse effect on the Company’sconsolidated financial position, results of operations or cash flows.

 

The Company is a party toa lawsuit in connection with an ammonia release at its Baton Rouge, Louisianamanufacturing facility in June 2001. The case, which is a consolidation of seven lawsuits, is titled WallaceAcey, Jr. et al vs. Reddy Ice Corporation. This lawsuit was filed August 30, 2001 in the 19th JudicialDistrict Court, Parish of East Baton Rouge, Louisiana and has been assigneddocket number 487373 Division N.  Thereare multiple plaintiffs who have primarily alleged injuries consisting ofinconvenience, watery eyes and offensive odors. The plaintiffs have not made a specific request for relief in thelawsuit.  The Company maintains insuranceto cover such events and its insurance carrier is contesting the suit and plansto vigorously defend against any claims.

 

The Company is a party totwo lawsuits filed in connection with the merger.  The first lawsuit was filed on May 23, 2003in the County Court at Law Number 1, Dallas County, Texas and is titled CauseNo. *CC-03-06056-A; Glenn Robbins, On Behalfof Himself and All Others Similarly Situated, and Derivatively on Behalf ofPackaged Ice, Inc. vs. William P. Brick, Jimmy C. Weaver, A.J. Lewis III, TracyL. Noll, Robert G. Miller, Steven P. Rosenberg and Richard A. Coonrod,Defendants, and Packaged Ice, Inc., a Texas corporation*.  The second lawsuit was filed on May 23, 2003in County Court at Law Number 3, Dallas County, Texas, and is titled Cause No.CC-03-06055-C, *Imperial County, On Behalf ofItself and All Others Similarly*

 

11

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*Situated,and Derivatively on Behalf of Packaged Ice, Inc. vs. William P. Brick, Jimmy C.Weaver, A.J. Lewis III, Tracy L. Noll, Robert G. Miller, Steven P. Rosenbergand Richard A. Coonrod, Defendants, and Packaged Ice, Inc., a Texas corporation*.  The two lawsuits are identical adversarialproceedings filed by two shareholders on their own behalf, on behalf of apurported class, and derivatively on behalf of Packaged Ice, Inc., now known asReddy Group.  The plaintiffs allegevarious breaches of fiduciary duty by the Board of Directors of Reddy Group andunjust enrichment related to the merger. The claims allege that Reddy Group failed to maximize shareholder valuein the merger transaction.  No specificamount of damages has been claimed. Reddy Group has answered both suits and filed a Motion to Consolidate,Special Exceptions, and Motion to Dismiss, or, in the alternative, Motion toStay in the Robbins action.  The Companyhas also filed a Motion to Stay and Special Exception and Motion to Dismiss inthe Imperial County action.  Theplaintiffs filed Responses in Opposition to these motions on July 16,2003.  Based on those filings, ReddyGroup removed both cases to the United States District Court for the NorthernDistrict of Texas Dallas Division on July 25, 2003.  Plaintiffsopposed removal and filed motions to remand as to both actions onAugust 21, 2003.  The Court remanded the actions to state court onFebruary 19, 2004.  The courtentered a scheduling order setting discovery and other case managementdeadlines and a trial date for May 2005.

 

These lawsuits are stillin a preliminary stage and the ultimate outcomes are impossible to determine atthis time.  An unfavorable result inexcess of the available insurance coverage could have a material adverse effecton the Company’s consolidated financial position, results of operations or cashflows.

 

**10.  Segment Information**

 

The Company has tworeportable segments: (1) ice products and (2) non-ice products andservices.  Ice products include themanufacture and distribution of packaged ice products through traditional icemanufacturing and delivery and the installation and operations of THE ICEFACTORY®.  The Ice Factory is aproprietary machine that produces, packages, stores and merchandises ice at thepoint of sale through an automated, self-contained system.  Non-ice products and services includerefrigerated warehouses and the manufacturing and distribution of bottled water.

 

The Company evaluatesperformance of each segment based on earnings before interest, taxes,depreciation, amortization, gain or loss on disposition of assets, impairmentof assets, gain on extinguishment of debt and the cumulative effect of changesin accounting principles (“Segment EBITDA”). Segment assets are not a factor in the evaluation of performance.  There were no intersegment sales during thethree and six month periods ended June 30, 2004 and 2003.

 

12

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Segment information forthe three months ended June 30, 2004 and 2003 was as follows:

 
| ** **          | ** ** | **Successor**                             | ** ** | **Predecessor**                           | ** ** |
|---------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **          | ** ** | **Three Months Ended June 30, 2004** | ** ** | **Three Months Ended June 30, 2003** | ** ** |
| ** **          | ** ** | **Ice**                                   | ** ** | **Non-Ice**                               | ** ** | **Total** | ** ** | **Ice** | ** ** | **Non-Ice** | ** ** | **Total** | ** ** |
| ** **          | ** ** | **(in thousands)**                        | ** ** |
| ** **          | ** ** | ** **                                | ** ** |
| Revenues            |       | $                                         | 83,941     |                                      | $          | 4,588 |   | $ | 88,529 |   | $ | 66,051 |   | $ | 4,698 |   | $ | 70,749 | ** ** |
| Cost  of sales      |       | 47,330                                    |       | 2,519                                     |       | 49,849 |   | 37,720 |   | 2,800 |   | 40,520 |   |
| Gross  profit       |       | 36,611                                    |       | 2,069                                     |       | 38,680 |   | 28,331 |   | 1,898 |   | 30,229 |   |
| Operating  expenses |       | 8,363                                     |       | 416                                       |       | 8,779 |   | 6,759 |   | 557 |   | 7,316 |   |
| Other  income, net  |       | —                                    |       | —                                    |       | — |   | 33 |   | 8 |   | 41 |   |
| Segment  EBITDA     |       | $                                         | 28,248     |                                      | $          | 1,653 |   | $ | 29,901 |   | $ | 21,605 |   | $ | 1,349 |   | $ | 22,954 |   |

 

Segment information forthe six months ended June 30, 2004 and 2003 was as follows:

 
| ** **          | ** ** | **Successor**                           | ** ** | **Predecessor**                         | ** ** |
|---------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **          | ** ** | **Six Months Ended June 30, 2004** | ** ** | **Six Months Ended June 30, 2003** | ** ** |
| ** **          | ** ** | **Ice**                                 | ** ** | **Non-Ice**                             | ** ** | **Total** | ** ** | **Ice** | ** ** | **Non-Ice** | ** ** | **Total** | ** ** |
| ** **          | ** ** | **(in thousands)**                      | ** ** |
| ** **          | ** ** | ** **                              | ** ** |
| Revenues            |       | $                                       | 117,522    |                                    | $          | 8,387 |   | $ | 125,909 |   | $ | 94,185 |   | $ | 9,131 |   | $ | 103,316 |   |
| Cost  of sales      |       | 73,580                                  |       | 4,777                                   |       | 78,357 |   | 60,483 |   | 5,828 |   | 66,311 |   |
| Gross  profit       |       | 43,942                                  |       | 3,610                                   |       | 47,552 |   | 33,702 |   | 3,303 |   | 37,005 |   |
| Operating  expenses |       | 16,203                                  |       | 894                                     |       | 17,097 |   | 13,398 |   | 1,263 |   | 14,661 |   |
| Other  income, net  |       | —                                  |       | —                                  |       | — |   | 23 |   | 8 |   | 31 |   |
| Segment  EBITDA     |       | $                                       | 27,739     |                                    | $          | 2,716 |   | $ | 30,455 |   | $ | 20,327 |   | $ | 2,048 |   | $ | 22,375 |   |

 

The reconciliation ofSegment EBITDA to net income (loss) before preferred dividends for the threeand six month periods ended June 30, 2004 and 2003 was as follows:

 
| ** **                                    | ** ** | **Successor**                         | ** ** | **Predecessor**                     | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|---------------|------------|-----------------|------------|
| ** **                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
| ** **                                    | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004**      | ** ** | **2003**        | ** ** |
| ** **                                    | ** ** | **(in thousands)**                    | ** ** |
| ** **                                    | ** ** | ** **                            | ** ** |
| Segment  EBITDA                               |       | $                                     | 29,901     |                                | $          | 22,954        |       | $               | 30,455     |   | $ | 22,375 |   |
| Gain  on disposition of assets                |       | —                                |       | 1                                   |       | —        |       | 11              |       |
| Depreciation  and amortization                |       | (5,716                                | )          | (5,919                              | )          | (11,278       | )          | (11,710         | )          |
| Interest  expense                             |       | (6,569                                | )          | (8,542                              | )          | (13,246       | )          | (16,902         | )          |
| Income  tax expense                           |       | (2,254                                | )          | —                              |       | (2,254        | )          | —          |       |
| Net  income (loss) before preferred dividends |       | $                                     | 15,362     |                                | $          | 8,494         |       | $               | 3,677      |   | $ | (6,226 | ) |

# ** **

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

# ** **

The following discussion and analysis of our financialcondition and results of operations should be read in conjunction with our consolidatedfinancial statements and the related notes and other information includedelsewhere in this Form 10-Q and our Annual Report on Form 10-K for the yearended December 31, 2003, previously filed with the Securities &Exchange Commission (“SEC”).

                

On August 15, 2003,Packaged Ice, Inc. merged with Cube Acquisition Corp., a wholly-ownedsubsidiary of Reddy Ice Holdings, Inc. (the “Merger”).  Packaged Ice was the surviving corporation,changed its name to Reddy Ice Group, Inc. and became a wholly-owned subsidiaryof Reddy Holdings, which was established on May 8, 2003.  The discussion below of the results ofoperations for the three and six months ended June 30, 2004 versus thethree and six months ended June 30, 2003 is based on the results ofPackaged Ice for the three and six months ended June 30, 2003 and ReddyHoldings for the three and six months ended June 30, 2004.  Reddy Holdings and Cube Acquisition conductedno operations from May 8, 2003 through August 14, 2003.  Reddy Holdings and Reddy Group arecollectively referred to as the ‘‘Successor”. Packaged Ice prior to the Merger is referred to as the“Predecessor”.  Because of purchaseaccounting, certain amounts may not be comparable between the Predecessor andSuccessor.

 

Unless otherwise noted,the words “Company”, “we”, “ours” and “us” refer to Reddy Ice Group, Inc. andits subsidiaries for periods through August 14, 2003 (the day prior to theMerger) and to Reddy Ice Holdings, Inc. and its direct and indirectsubsidiaries for periods subsequent to August 14, 2003.

 

# **Uncertainty ofForward Looking Statements and Information**

# ** **

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

 

•                  generaleconomic trends and seasonality;

•                  weatherconditions;

•                  oursubstantial leverage and ability to service our debt;

•                  therestrictive covenants under our indebtedness;

•                  availabilityof capital sources;

•                  fluctuationsin operating costs;

•                  competitivepractices in the industry in which we compete;

•                  changesin labor conditions;

•                  ourcapital expenditure requirements;

•                  therisks associated with acquisitions and the failure to integrate acquiredbusinesses;

•                  technologicalchanges and innovations;

•                  legislativeor regulatory requirements; and

•                  allthe other factors described herein under “Risk Factors.”

 

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

 

14

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**General**

 

***OurBusiness.**** *We are the largest manufacturerand distributor of packaged ice in the United States and currently serveapproximately 82,000 customer locations in 32 states and the District ofColumbia.  We operate in two businesssegments—ice products and non-ice products and operations.  Ice products accounted for approximately 93%of our revenues in the six months ended June 30, 2004 and 91% of revenuesin the six months ended June, 2003.  Dueto acquisitions of certain ice companies in the fourth quarter of 2003 and thefirst six months of 2004 (see “-Acquisitions” below), the proportion of our icesales has increased.  We expect theannual proportion of ice sales to increase from 92% in 2003 to approximately93% to 94% in 2004.  Our ice productsbusiness consists of the following two activities:

 

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

 

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

 

Our other businesssegment, non-ice products and operations, consists of refrigerated warehousingfor third parties and the manufacture and sale of bottled water.  This business segment accounted for 7% of ourrevenues in the six months ended June 30, 2004 and 9% of revenues in thesix months ended June 30, 2003.  Asnoted above, the proportion of sales due to our non-ice segment has decreaseddue to the acquisition of ice companies since the fourth quarter of 2003 (see“-Acquisitions” below).  On an annualbasis, we expect this percentage to decrease from 8% in 2003 to approximately6% to 7% in 2004.

 

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

 

***Cost of Sales****. *Ourcost of sales includes costs associated with labor, raw materials, productdelivery and utilities related to the manufacture and distribution of ourproducts.  Labor costs, includingassociated payroll taxes and benefit costs included in cost of sales, accountedfor approximately 22% and 26% of sales in the three and six months endedJune 30, 2004, versus 23% and 27% in the three and six months endedJune 30, 2003.  Raw materials, whichconsist primarily of polyethylene-based plastic bags, represented approximately7% of sales in the three and six months ended June 30, 2004 and 2003.  Product delivery expenses include labor, fueland vehicle rental expense related to products delivered by our owndistribution network, as well as fees paid to distributors who deliver ice toour customers on our behalf.  Fuelpurchased for delivery by our own distribution network representedapproximately 3% of sales in the three and six months ended June 30, 2004,versus 2% in the three and six months ended June 30, 2003.  Expenses for independent third partydistribution services represented approximately 5% and 4% of sales in the threeand six months ended June 30, 2004, versus 4% in the three and six monthsended June 30, 2003.  Utilityexpenses consist primarily of electricity used in connection with themanufacturing, storage and distribution processes and represented approximately5% of sales in the three months ended June 30, 2004 and 2003 and 6% in thesix months ended June 30, 2004 and 2003. Ice Factory revenues do not increase our plant occupancy, delivery orutility costs, however, we do incur costs associated with customer servicerepresentatives and machine technicians which are included in our cost ofsales.

 

***Operating Expenses****. *Ouroperating expenses are costs associated with selling, general andadministrative functions.  These costsinclude executive officers’ compensation, office and administrative salaries,insurance, legal and other professional services and costs associated withleasing office space.  Labor costs,including associated payroll taxes and benefit costs, included in operatingexpenses represented approximately 6% of sales in the three months endedJune 30, 2004 and 2003 and 8% in the six months ended June 30, 2004and 2003.

 

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***SeasonalityRisks. ***Our resultsof operations are highly seasonal, characterized by peak demand during thewarmer months of May through September, with an extended peak selling season inthe southern United States.  As a resultof this seasonality and the fixed costs in our business, the proportion ofrevenues earned in our ice and non-ice business segments and the ratio of coststo revenues in any given quarter are not necessarily indicative of the ratiosfor a full year.  Revenues withinspecific markets can also be affected by weather conditions, with cool or rainyweather negatively impacting demand and extremely hot weather increasing ourcosts as we respond to excess customer demand for our products.  Approximately 68%, 68% and 66% of ourrevenues occurred during the second and third calendar quarters in 2001, 2002and 2003, respectively.  We believe thatapproximately 68% of our revenues will occur during the second and third calendarquarters in 2004.  As a result of seasonalrevenue declines and a less than proportional decline in expenses during thefirst and fourth quarters, we typically experience lower profit marginsresulting in losses during these periods. In addition, because a significantportion of our annual sales are generated during the second and third calendarquarters, our annual results of operations may fluctuate significantly if theweather during these periods is cool or rainy.

 

***Acquisitions.**** *OnOctober 1, 2003, we, acquired the “Service Ice” division of L.D. Plante,Inc. (“Service Ice”) for total consideration of $3.1 million (subject tocustomary post-closing adjustments). Service Ice operated one ice manufacturing facility in Orlando, Floridaand was the largest supplier of packaged ice in Orlando with annual revenues ofapproximately $3.8 million.  OnNovember 6, 2003, we purchased all of the outstanding shares of capitalstock of Triangle Ice Co., Inc. (“Triangle Ice”) for an aggregate purchaseprice of approximately $64.3 million (subject to customary post-closingadjustments).  Triangle Ice operatesprimarily in North and South Carolina and had annual revenues of approximately$30 million.  During the six months endedJune 30, 2004, we completed six acquisitions for a total purchase price of$5.3 million.  Annual revenue associatedwith these acquisitions is approximately $5.9 million.

 

***Facilities.***  At June 30, 2004, we owned or operated56 ice manufacturing facilities, 53 distribution centers, approximately 79,000merchandisers (cold storage units installed at customer locations),approximately 3,000 Ice Factories, six refrigerated warehouses and one bottledwater plant.  We had an aggregate dailyice manufacturing capacity of approximately 16,000 tons, the equivalent of 4.5million seven pound bags of ice.

 

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***Three Months Ended June 30,2004 Compared to Three Months Ended June 30, 2003***

 
| ** **                             | ** ** | **Successor**                         | ** ** | **Predecessor**           | ** ** | ** **  | ** ** | ** ** | ** ** |
|----------------------------------------|------------|---------------------------------------|------------|---------------------------|------------|-------------|------------|------------|------------|
| ** **                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Change from Last Year** | ** ** |
| ** **                             | ** ** | **2004**                              | ** ** | **2003**                  | ** ** | **Dollars** | ** ** | **%**      | ** ** |
| ** **                             | ** ** | **(in thousands)**                    | ** ** |
| **Consolidated Results**               |       |                                  |       |                      |       |        |       |       |       |
| Revenues                               |       | $                                     | 88,529     |                      | $          | 70,749      |       | $          | 17,780     |   | 25.1 |   |
| Cost  of sales                         |       | 49,849                                |       | 40,520                    |       | 9,329       |       | 23.0       |       |
| Gross  profit                          |       | 38,680                                |       | 30,229                    |       | 8,451       |       | 28.0       |       |
| Operating  expenses                    |       | 8,779                                 |       | 7,316                     |       | 1,463       |       | 20.0       |       |
| Depreciation  and amortization expense |       | 5,716                                 |       | 5,919                     |       | (203        | )          | (3.4       | )          |
| Gain  on dispositions of assets        |       | —                                |       | (1                        | )          | 1           |       | (100.0     | )          |
| Income  from operations                |       | 24,185                                |       | 16,995                    |       | 7,190       |       | 42.3       |       |
| Other  income, net                     |       | —                                |       | 41                        |       | (41         | )          | (100.0     | )          |
| Interest  expense                      |       | (6,569                                | )          | (8,542                    | )          | (1,973      | )          | (23.1      | )          |
| Income  before income taxes            |       | $                                     | 17,616     |                      | $          | 8,494       |       | $          | 9,122      |   | $ | 107.4 |   |
|                                   |       |                                  |       |                      |       |        |       |       |       |
| **Ice Operations:**                    |       |                                  |       |                      |       |        |       |       |       |
| Revenues                               |       | $                                     | 83,941     |                      | $          | 66,051      |       | $          | 17,890     |   | 27.1 |   |
| Cost  of sales                         |       | 47,330                                |       | 37,720                    |       | 9,610       |       | 25.5       |       |
| Gross  profit                          |       | 36,611                                |       | 28,331                    |       | 8,280       |       | 29.2       |       |
| Operating  expenses                    |       | 8,363                                 |       | 6,759                     |       | 1,604       |       | 23.7       |       |
|                                   |       |                                  |       |                      |       |        |       |       |       |
| **Non-Ice Operations:**                |       |                                  |       |                      |       |        |       |       |       |
| Revenues                               |       | $                                     | 4,588      |                      | $          | 4,698       |       | $          | (110       | ) | (2.3 | ) |
| Cost  of sales                         |       | 2,519                                 |       | 2,800                     |       | (281        | )          | (10.0      | )          |
| Gross  profit                          |       | 2,069                                 |       | 1,898                     |       | 171         |       | 9.0        |       |
| Operating  expenses                    |       | 416                                   |       | 557                       |       | (141        | )          | (25.3      | )          |
|                                        |            |                                       |            |                           |            |             |            |            |            |  |  |  |  |

 

*Revenues: *Revenues increased $17.8million from the three months ended June 30, 2003 to the three monthsended June 30, 2004.  This increaseis primarily due to (i) the acquisitions of Service Ice and Triangle Ice inOctober 2003 and November 2003, respectively, and the sixacquisitions closed during the six months ended June 30, 2004 (referred tocollectively as the “2004 Acquisitions”), (ii) higher average selling pricesand increased volume sales and (iii) changes in how we do business with certainof our distributors.  The acquisitionsreferred to above provided additional revenue of approximately $13.4 million inthe three months ended June 30, 2004. Approximately $3.2 million of the total revenue increase was driven byhigher average selling prices and volume increases resulting from favorableweather conditions in the Eastern United Sates, offset by cooler and wetterthan normal weather in Texas, Oklahoma and Colorado.  Approximately $1.3 million of the increasewas due to changes in the terms under which we do business with certain of ourdistributors.  These modifications to ourdistributor business occurred primarily in the three months ended June 30,2004 and also resulted in a corresponding increase in cost of sales.

 

*Cost ofSales:*  Cost of salesincreased $9.3 million from the six months ended June 30, 2003 to the sixmonths ended June 30, 2004.  Thisincrease in cost of sales is primarily due to (i) approximately $6.7 million ofcosts in the three months ended June 30, 2004 associated with theoperations of Service Ice, Triangle Ice and the 2004 Acquisitions, (ii) a $2.6million increase in costs in our previously existing ice operations related tothe increased volume sales noted above and increased fuel, energy and bagcosts, offset by the elimination of $1.0 million of operating lease expensesassociated with our Ice Factories and (iii) additional delivery expense of $1.3million related to changes in the terms under which we do business with certainof our distributors.

 

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*OperatingExpenses: *Operatingexpenses increased $1.5 million from the three months ended June 30, 2003to the three months ended June 30, 2004. This increase is primarily due to $1.0 million of costs in the threemonths ended June 30, 2004 attributable to the operations of Service Ice,Triangle Ice and the 2004 Acquisitions. The remaining increase is primarily due to increased incentivecompensation expense and insurance costs.

 

*Depreciationand Amortization: *Depreciationand amortization decreased $0.2 million from the three months endedJune 30, 2003 to the three months ended June 30, 2004.  This decrease is primarily due to therevaluation of our property and equipment in connection with the Merger onAugust 15, 2003, offset by additional depreciation and amortizationexpense of $0.8 million associated with the acquisitions completed afterJune 30, 2003.

 

*InterestExpense:*  Interestexpense decreased $2.0 million from the three months ended June 30, 2003to the three months ended June 30, 2004. This decrease is primarily due to lower average outstanding borrowingsunder our line of credit and lower average interest rates, which resulted fromthe refinancing of our debt on August 15, 2003.

 

***Six Months Ended June 30,2004 Compared to Six Months Ended June 30, 2003***

* *
| ** **                             | ** ** | **Successor**                       | ** ** | **Predecessor**           | ** ** | ** **  | ** ** | ** ** | ** ** |
|----------------------------------------|------------|-------------------------------------|------------|---------------------------|------------|-------------|------------|------------|------------|
| ** **                             | ** ** | **Six Months Ended  June 30,** | ** ** | **Change from Last Year** | ** ** |
| ** **                             | ** ** | **2004**                            | ** ** | **2003**                  | ** ** | **Dollars** | ** ** | **%**      | ** ** |
| ** **                             | ** ** | **(in thousands)**                  | ** ** |
| **Consolidated Results**               |       |                                |       |                      |       |        |       |       |       |
| Revenues                               |       | $                                   | 125,909    |                      | $          | 103,316     |       | $          | 22,593     |   | 21.9 |   |
| Cost  of sales                         |       | 78,357                              |       | 66,311                    |       | 12,046      |       | 18.2       |       |
| Gross  profit                          |       | 47,552                              |       | 37,005                    |       | 10,547      |       | 28.5       |       |
| Operating  expenses                    |       | 17,097                              |       | 14,661                    |       | 2,436       |       | 16.6       |       |
| Depreciation  and amortization expense |       | 11,278                              |       | 11,710                    |       | (432        | )          | (3.7       | )          |
| Gain  on dispositions of assets        |       | —                              |       | (11                       | )          | 11          |       | (100.0     | )          |
| Income  from operations                |       | 19,177                              |       | 10,645                    |       | 8,532       |       | 80.2       |       |
| Other  income, net                     |       | —                              |       | 31                        |       | (31         | )          | (100.0     | )          |
| Interest  expense                      |       | (13,246                             | )          | (16,902                   | )          | (3,656      | )          | (21.6      | )          |
| Income  (loss) before income taxes     |       | $                                   | 5,931      |                      | $          | (6,226      | )          | $          | 12,157     |   | $ | 195.3 |   |
|                                   |       |                                |       |                      |       |        |       |       |       |
| **Ice Operations:**                    |       |                                |       |                      |       |        |       |       |       |
| Revenues                               |       | $                                   | 117,522    |                      | $          | 94,185      |       | $          | 23,337     |   | 19.4 |   |
| Cost  of sales                         |       | 73,580                              |       | 60,483                    |       | 13,097      |       | 15.3       |       |
| Gross  profit                          |       | 43,942                              |       | 33,702                    |       | 10,240      |       | 36.5       |       |
| Operating  expenses                    |       | 16,203                              |       | 13,398                    |       | 2,805       |       | 18.1       |       |
|                                   |       |                                |       |                      |       |        |       |       |       |
| **Non-Ice Operations:**                |       |                                |       |                      |       |        |       |       |       |
| Revenues                               |       | $                                   | 8,387      |                      | $          | 9,131       |       | $          | (744       | ) | (8.1 | ) |
| Cost  of sales                         |       | 4,777                               |       | 5,828                     |       | (1,051      | )          | (18.0      | )          |
| Gross  profit                          |       | 3,610                               |       | 3,303                     |       | 307         |       | 9.3        |       |
| Operating  expenses                    |       | 894                                 |       | 1,263                     |       | (369        | )          | (29.2      | )          |
|                                        |            |                                     |            |                           |            |             |            |            |            |  |  |  |  |

 

*Revenues: *Revenues increased $22.6million from the six months ended June 30, 2003 to the six months endedJune 30, 2004.  This increase isprimarily due to (i) the acquisitions of Service Ice, Triangle Ice the 2004 Acquisitions,(ii) higher average selling prices and increased volume sales and (iii) changesin how we do business with certain of our distributors.  The acquisitions referred to above providedadditional revenue of

 

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approximately $17.5million in the six months ended June 30, 2004.  Approximately $4.2 million of the totalrevenue increase was driven by higher average selling prices and volumeincreases resulting from favorable weather conditions in the Eastern UnitedSates during the months of May and June, offset by cooler and wetter thannormal weather in Texas, Oklahoma and Colorado during the three months endedJune 30, 2004.  Approximately $1.6million of the increase was due to changes in the terms under which we dobusiness with certain of our distributors. These modifications to our distributor business occurred primarily inthe three months ended June 30, 2004 and also resulted in a correspondingincrease in cost of sales.  Offsettingthe improved revenues in our ice business was a revenue decline of $0.7 millionin our non-ice operations.  The declinewas caused primarily by a reduction in volumes in our cold storage operationsas a result of the restructuring of a certain customer contract in the secondquarter of 2003.

 

*Cost ofSales:*  Cost of salesincreased $12.0 million from the six months ended June 30, 2003 to the sixmonths ended June 30, 2004.  Thisincrease in cost of sales is primarily due to (i) approximately $10.0 millionof costs in the six months ended June 30, 2004 associated with the ServiceIce, Triangle Ice and 2004 Acquisitions, (ii) a $3.4 million increase in costsin our previously existing ice operations related to the increased volume salesnoted above and increased fuel, energy and bag costs, which was offset by theelimination of $1.9 million of operating lease expenses associated with our IceFactories and (iii) additional delivery expense of $1.6 million related tochanges in the terms under which we do business with certain of ourdistributors.  Offsetting these increasesin costs was a $1.1 million decrease in costs of sales associated with ournon-ice operations.  The decrease incosts in our non-ice operations is due to the restructuring of a certain coldstorage customer contract in the second quarter of 2003, which resulted in areduction in cold storage volumes and the closure of a warehouse, and theelimination of certain operating lease expenses in our bottled water operationas a result of the purchase of certain leased equipment in November 2003.

 

*OperatingExpenses: *Operatingexpenses increased $2.4 million from the six months ended June 30, 2003 tothe six months ended June 30, 2004. This increase is primarily due to approximately $1.9 million of costs inthe six months ended June 30, 2004 attributable to the ice operationsacquired since June 30, 2003 and an increase in incentive compensationexpense. 

 

*Depreciationand Amortization: *Depreciationand amortization decreased $0.4 million from the six months ended June 30,2003 to the six months ended June 30, 2004.  This decrease is primarily due to therevaluation of our property and equipment in connection with the Merger onAugust 15, 2003, offset by additional depreciation and amortizationexpense of $1.6 million associated with the acquisitions completed afterJune 30, 2003.

 

*InterestExpense:*  Interestexpense decreased $3.7 million from the six months ended June 30, 2003 tothe six months ended June 30, 2004. This decrease is primarily due to lower average outstanding borrowingsunder our line of credit and lower average interest rates, which resulted fromthe refinancing of our debt on August 15, 2003.

 

**Liquidity and CapitalResources**

** **

We generate cash from thesale of packaged ice through traditional delivery methods, by which we****manufacture, package and store ice at a central facilityand transport it to our customers’ retail****locations whenneeded, and through Ice Factories, which manufacture, package and store ice inour****customers’ retail locations.  Our primary uses of cash are (a) cost ofsales, (b) operating expenses,****(c) debtservice, (d) capital expenditures related to replacing and modernizing thecapital****equipment in our traditional iceplants and acquiring and installing additional Ice Factories and (e)acquisitions. ** **Historically,we have financed our capital and working capital requirements, including ouracquisitions, through a combination ofcash flows from operations, borrowings under our revolving credit facilitiesand operating leases.

 

During the six monthsended June 30, 2004, capital expenditures totaled $8.0 million.  We estimate that our capital expenditures for2004 will approximate $16 million, which includes any capital expendituresrequired by the 2004 Acquisitions, and will primarily be used to maintain andexpand our traditional ice

 

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operations.  There can be no assurance that capitalexpenditures will not exceed this estimate. As we have consolidated acquisitions into the existing companyinfrastructure, we have identified non-core and excess assets which can bedisposed of.  From time to time, we alsodispose of other assets which are no longer useful in our operations.  As a result of dispositions of these non-coreand excess assets, we realized proceeds of approximately $2.2 million in thesix months ended June 30, 2004 and estimate that we will generate totalproceeds of approximately $2.5 million to $3.0 million in 2004.  We have increased our expectations for total2004 capital expenditures and proceeds from dispositions as a result of thebetter than forecasted results from the sale of certain excess facilities inthe three months ended June 30, 2004. However, our expectation for net capital expenditures for the full year2004 remains unchanged at $13.0 million to $13.5 million.

 

During the six months ended June 30, 2004, wecompleted the acquisition of six small ice companies for a total cash purchaseprice of approximately $5.3 million.  Wewill continue to evaluate small acquisition opportunities as they becomeavailable.  In conjunction with theseevaluations, we will consider our liquidity, availability under our revolvingline of credit, mandatory principal repayments under our debt agreements andavailability of other capital resources.

 

### **CashFlows for the Six Months Ended June 30, 2004 and 2003**

### ** **

Net cash provided byoperating activities was $1.0 million in the six months ended June 30,2004, as compared to a use of cash by operations of $9.2 million during the sixmonths ended June 30, 2003.  Theincrease from 2003 to 2004 was primarily the result of significantly improvedresults of operations.  During the sixmonths ended June 30, 2003, we reported a net loss to common shareholdersof $8.3 million, compared to net loss to common shareholders of $2.6 million inthe six months ended June 30, 2004.

 

Net cash used ininvesting activities was $11.0 million and $4.9 million in the six months endedJune 30, 2004 and 2003, respectively. The increase in cash used by investing activities from 2003 to 2004 isprimarily due to the expenditure of $5.3 million in the six months endedJune 30, 2004 for six small acquisitions of ice companies.  Additionally, there was a net increase of $0.8million in cash used for normal capital expenditures (an additional $1.9million spent for capital additions, offset by an increase in proceeds fromdispositions of property and equipment of $1.1 million).

 

Net cash provided byfinancing activities was $3.8 million and $13.8 million in the six months endedJune 30, 2004 and 2003, respectively. Net borrowings under our line of credit decreased from $13.8 million inthe six months ended June 30, 2003 to $5.3 million in the six months endedJune 30, 2004 due to the net decrease in cash flows used in operatingactivities discussed above and the higher balance of cash on hand at thebeginning of the six months ended June 30, 2004 as compared to the sixmonths ended June 30, 2003.  Cash onhand was $12.8 million and $6.5 million at December 31, 2003 and 2002,respectively.  In the six months endedJune 30, 2004, we also incurred $0.5 million of debt issuance costs inconnection with the execution of the second amendment to our credit facilityand made principal payments on our debt that were $0.9 million greater than inthe six months ended June 30, 2003.

 

### **Long-termDebt and Other Obligations**

### ** **

*Overview.*  AtJune 30, 2004, we had approximately $335.3 million of total debtoutstanding as follows:  $151.0 millionof Reddy Group’s 8-7/8% senior notes due August 1, 2011 (net of discountof $1.0 million);  $178.7 millionoutstanding term loans under Reddy Group’s senior credit facility which matureson August 15, 2009; $5.3 million outstanding on Reddy Group’s line ofcredit which matures on August 15, 2008; and $0.3 million of other debt.

 

*Senior Subordinated Notes.* On July 17, 2003, we issued $152.0million of 8-7/8% senior subordinated notes. These notes were issued in connection with a private placement offeringand were subsequently registered with the Securities & ExchangeCommission.  The 8-7/8% seniorsubordinated notes were sold at 99.297% of the stated principal amount, whichresulted in net proceeds of $150.9 million. Interest

 

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on the 8-7/8% senior subordinatednotes is payable semiannually on February 1 and August 1, with suchpayments having commenced on February 1, 2004.  The 8-7/8% senior subordinated notes areunsecured obligations of Reddy Group and are:

 

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

• equal with any of Reddy Group’sexisting and future senior subordinated indebtedness; and

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

 

The 8-7/8% senior subordinatednotes include customary covenants that restrict, among other things, theability to incur additional debt, pay dividends or make certain otherrestricted payments, incur liens, merge or sell all or substantially all of theassets or enter into various transactions with affiliates.  Prior to August 1, 2006, we may redeemup to 35% of the principal amount of the 8-7/8% senior subordinated notes at aredemption price of 108.875% of the principal amount thereof, plus accrued andunpaid interest to the date of redemption, with funds raised in equityofferings that are specified in the indenture governing the 8-7/8% seniorsubordinated notes.

 

The 8-7/8% seniorsubordinated notes are guaranteed, fully, jointly and severally, andunconditionally, on a senior subordinated basis by Reddy Holdings, and all ofReddy Group’s subsidiaries.  The terms ofthe indenture governing the 8-7/8% senior subordinated notes significantlyrestrict Reddy Group from paying dividends and otherwise transferring assets toReddy Holdings.  For example, ReddyGroup’s ability to make such payments is governed by a formula based on 50% ofits consolidated net income.  Inaddition, as a condition to making such payments based on such formula, ReddyGroup must have an EBITDA to interest expense ratio of a at least 2.0 to 1.0prior to August 1, 2006, and 2.25 to 1 thereafter, after giving effect toany such payments.  Notwithstanding suchrestrictions, the indenture permits an aggregate of $10.0 million of suchpayments to be made whether or not there is availability under the formula orthe conditions to its use are met; provided that at the time of such payment,no default shall have occurred and be continuing under that indenture.

 

*Senior Credit Facility.*  On August 15, 2003, Reddy Group enteredinto a $170 million senior credit facility, with the lenders being a syndicateof banks, financial institutions and other entities, including Credit SuisseFirst Boston as Administrative Agent, Canadian Imperial Bank of Commerce andBear Stearns Corporate Lending, Inc.  Thecredit facility provides for a six-year term loan in the amount of $135 millionand a five-year revolving credit facility in the amount of $35 million.  Proceeds of the term loan were used toconsummate the Merger as previously discussed. On October 17, 2003, the senior credit facility was amended to,among other things, allow for an additional term loan of $45 million toconsummate the Triangle Ice acquisition, which was completed onNovember 6, 2003.  The new term loancontains substantially all the same terms, conditions and financial covenantsas the original term loan.

 

At June 30, 2004, wehad $20.4 million of availability under the line of credit, net of outstandingstandby letters of credit of $9.3 million. The standby letters of credit are used primarily to secure certaininsurance obligations.  As our insurancepolicies are renewed in 2004 with our current carrier, we will be required toincrease the balances of the standby letters of credit by approximately $2.6million.  During the remainder of 2004,we will also be working with certain former insurance carriers to reduce theamount of standby letters of credit that we maintain for their benefit.  At this time, we cannot estimate what amountof reduction, if any, we will be able negotiate with those former insurancecarriers.

 

Principal balancesoutstanding under the line of credit bear interest per annum, at our option, atthe sum of the base rate plus the applicable margin or LIBOR plus theapplicable 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 federalfunds rate plus 0.5%.  The applicablemargin is different for revolving and term loans and varies depending on ourleverage ratio.  On February 20,2004, the senior credit facility was amended to reduce the applicable margin onterm loans by 0.5%.  At June 30,2004, the weighted average interest rate of borrowings outstanding under thesenior credit facility was 3.9%. Interest on base rate loans is payable on the last day of eachquarter.  Interest on LIBOR loans ispayable upon maturity of the LIBOR loan or on the last day of the quarter ifthe LIBOR loan exceeds 90 days.

 

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The terms of the seniorcredit facility prohibit Reddy Group from paying dividends and otherwisetransferring assets to Reddy Holdings, except for certain limited dividends,the proceeds of which must be used to maintain Reddy Holdings’ corporateexistence.

 

The senior creditfacility requires that beginning in 2004, we will repay all borrowings underthe line of credit and maintain a zero outstanding balance for a period of 30consecutive calendar days during each year. This requirement for 2004 was met on August 10, 2004.  The term loan amortizes in quarterlyinstallments over a five-year period in an annual aggregate amount equal to 1%of the original balance, with any remaining unpaid balance to be repaid in thesixth year in equal, quarterly installments. Subject to certain conditions, mandatory repayments of the line ofcredit and term loan are required to be made with portions of the proceeds from(1) asset sales, (2) the issuance of debt securities, (3) an initial publicoffering of stock of Reddy Holdings and (4) insurance and condemnationawards.  Furthermore, within 100 daysafter close of each fiscal year (beginning with the close of the 2004 fiscalyear), a mandatory prepayment of the term loan is required based on apercentage of Reddy Group’s annual excess cash flow, as defined in the seniorcredit facility.  The percentage is basedon Reddy Group’s leverage ratio at the end of such fiscal year and ranges from25% to 75%.  The senior credit facilitycontains financial covenants which include limitations on capital expendituresand the maintenance of certain financial ratios, as defined in the creditagreement, and is collateralized by substantially all of its assets and thecapital stock of it and all of its current subsidiaries.  At June 30, 2004, we were in compliancewith these covenants.

 

*Interest Rate Collar Agreement.*  On November 28, 2000, we entered into aninterest rate collar agreement.  If theIndex Rate (30-day LIBOR, as defined in the collar agreement) exceeds 7.75%, wewill receive the difference between the Index Rate and 7.75%.  If the Index Rate falls below 5.75%, we willpay the difference plus 1%.  Any amountspayable or receivable are settled monthly. The collar agreement has a notional amount of $50.0 million and a termof 4 years.  When our debt was refinancedon August 15, 2003, $0.3 million of amounts previously deferred in“accumulated other comprehensive income” on the balance sheet were written offas the hedged, forecasted transaction was no longer deemed probable of occurring.  The collar agreement was redesignated as ahedge of the senior credit facility, with subsequent changes in fair valuedeferred in other comprehensive income. If we had been required to settle the collar agreement as ofJune 30, 2004, we would have had to pay $1.0 million plus accrued interestof $0.2 million.  We are exposed tocredit risk in the event of nonperformance by the counterparty to the collaragreement, however, we anticipate that the counterparty will fully perform itsobligations under the collar agreement.

 

*Liquidity Outlook.* Based on our expected level of operations, we believe that cash flowfrom operations, together with available borrowings under our line of credit,will be adequate to meet our future liquidity needs for at least the nexttwelve months.  As of August 12,2004, we had approximately $25.6 million of availability under our line ofcredit and had no balance outstanding. We expect availability under the line of credit may decrease by up toapproximately $2.6 million throughout the remainder of 2004 as our outstandingstandby letters of credit increase as result of the requirements of ourinsurance policy renewals.  However, thisreduction may be more than offset by decreases in standby letters of creditthat we will be attempting to negotiate with certain former insurance carriersduring the remainder of 2004.

 

Due to the seasonalnature of our business, we record the majority of our sales and profits duringthe months of May through September.  Themajority of the cash generated from those operations is received betweenJuly and November. We have already used a portion of such cash flow torepay all amounts outstanding under the line of credit and expect to generatesufficient cash for the remainder of 2004 to fund current capital expenditures,service our debt (including principal and interest payments) and build up cashon hand.  We anticipate that asignificant portion of such cash flow will be used in early 2005 to repayamounts outstanding under the senior credit facility as required by mandatoryprepayment provisions in the senior credit facility.

 

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**Critical AccountingPolicies**

 

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

 

*Long-Lived Assets.*  Property and equipment is carried at cost andis being depreciated on a straight-line basis over estimated lives of 2.5 to 40years.  Maintenance and repairs arecharged to expense as incurred, while capital improvements that extend theuseful lives of the underlying assets are capitalized.  We accounted for all of our historicalacquisitions using the purchase method of accounting and as a result recordedsignificant amounts of goodwill.  Otherintangible assets include the following that are amortized over their usefullives:

 
| **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        |       | Interest method  over the term of the debt                  |

 

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

 

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

 

*Revenue Recognition.*  Revenue is recognized when product (packagedice, ice packaging bags, bottled water and ice equipment) is delivered to andaccepted by customers.  There is no rightof return with respect to the packaged ice, bags delivered and bottledwater.  Revenue resulting from IceFactory management agreements and cold storage services is recognized as earnedunder contract terms.

 

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

### ** **

Our results of operationsare generally affected by the economic trends in our market area, but resultsto date have not been significantly impacted by inflation.  If we experience an extended period of highinflation, which affects multiple expense items, we believe that we will beable to pass on these higher costs to our customers.  The ice business is highly seasonal.  We experience seasonal fluctuations in ournet sales and profitability.  We make adisproportionate amount of our sales in the second and third calendarquarters.  We also typically have netincome in these same periods.  We believethat over two-thirds of our revenues will occur during the second and thirdcalendar quarters when the weather conditions are generally warmer and demandis greater, while less than one-third of our revenues will occur during the firstand fourth calendar quarters when the weather is generally cooler.  As a result of seasonal revenue declines andthe lack of proportional corresponding expense decreases, we will most likelyexperience lower profit margins and even

 

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losses during thefirst and fourth calendar quarters.  Inaddition, because our operating results depend significantly on sales duringour peak season, our quarterly results of operations may fluctuatesignificantly as a result of adverse weather during this peak selling period ifthe weather is unusually cool or rainy on a more national or regional basis.

 

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

### ** **

***Our substantialleverage and debt service obligations could harm our ability to operate ourbusiness and make payments on our indebtedness.***

 

We are highly leveraged and have significant debtservice obligations.  As of June 30,2004, we had total debt of approximately $335.3 million and total shareholders’equity of $196.5 million.  Oursubstantial level of indebtedness increases the possibility that we may beunable to generate cash sufficient to repay principal amounts or interest whendue or repay other amounts due in respect of our indebtedness.

 

Our substantial debt could have other importantconsequences to you, including the following:

 

• we will berequired to use a substantial portion, if not all, of our free cash flow fromoperations to pay principal and interest on our debt, and our level of debt mayrestrict us from raising additional financing on satisfactory terms to fundworking capital, strategic acquisitions, investments, joint ventures and othergeneral corporate requirements;

 

• our interestexpense could increase if interest rates in general increase, because a substantialportion of our debt will bear interest at floating rates and we cannot assureyou that we will be able to effectively hedge against fluctuations in interestrates or that such hedging activities will not result in payments by us;

 

• oursubstantial leverage will increase our vulnerability to general economicdownturns and adverse competitive and industry conditions and could place us ata competitive disadvantage compared to those of our competitors that are lessleveraged;

 

• our debtservice obligations could limit our flexibility in planning for, or reactingto, changes in our business; and

 

• our failureto comply with the financial and other restrictive covenants in the indenturegoverning the senior subordinated notes, as well as the credit agreementgoverning our senior credit facility, which require us to maintain specifiedfinancial ratios and limit our ability to incur debt and sell assets, couldresult in an event of default that, if not cured or waived, could harm ourbusiness or prospects and could result in our bankruptcy.

 

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

 

The indenture governing the senior subordinated notesand our senior credit facility permit us, under certain circumstances, to incura significant amount of additional indebtedness. In addition, we may incuradditional indebtedness through our revolving credit facility.  If we incur additional debt, the risksassociated with our substantial leverage, including our ability to service ourdebt, would increase.

 

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

 

We cannot be certain that our earnings and theearnings of our operating subsidiaries will be sufficient to allow us to makepayments in respect of the securities and meet our other obligations.  Our ability to generate cash from ouroperations is subject to weather, general economic, financial, competitive,legislative, regulatory and other factors that are beyond our control.  As a result, we cannot assure you that ourbusiness will generate sufficient cash flow from operations in amountssufficient to enable us to make payments in respect of the

 

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securities or service our debt and to fund our otherliquidity needs.  If we do not havesufficient liquidity, we will have to take actions such as reducing or delayingstrategic acquisitions, investments and joint ventures, selling assets,restructuring or refinancing our debt or seeking additional equitycapital.  We cannot assure you that anyof these remedies could, if necessary, be effected on commercially reasonableterms, or at all.  In addition, the termsof existing or future debt instruments, including the credit agreementgoverning our senior credit facility and the indenture for the subordinatednotes, may restrict us from adopting some of these alternatives.  Therefore, because of these and other factorsbeyond our control, we may be unable to pay dividends or service our debt.

 

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

 

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

 

***RisksRelating to Our Business***

* *

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

 

We experience significantseasonal fluctuations in our net sales and profitability.  We make a disproportionate amount of oursales in the second and third calendar quarters when the weather is generallywarmer, which results in an increased demand for ice.  We also earn our net income during these sameperiods.  As a result of seasonal revenuedeclines and the lack of a corresponding decrease in expenses, we experiencenet losses and materially lower profit margins during the first and fourthcalendar quarters.  Variations in demandcould have a material adverse effect on the timing of our cash flows andtherefore our ability to service our obligations with respect to ourindebtedness, including the securities. In addition, because our operating results depend significantly on salesduring the second and third calendar quarters, our results of operations mayfluctuate significantly if the weather during these periods is cool or rainy.

 

***The results of our operations may be adversely affected byweather.***

 

Cool or rainy weather candecrease sales, while extremely hot weather may increase our expenses, eachresulting in a negative impact on our operating results and cash flow.  Ice consumers demand ice for a variety ofreasons, but many of them buy ice in connection with outdoor related activities,both commercial and recreational.  As aresult, demand for ice increases during periods of warm, sunny weather, andconversely, demand decreases during periods of cool, rainy weather.  During extended periods of cool or rainyweather on a national basis, our revenues and resulting net income maysubstantially decline.  Hot weather doesnot necessarily result in greater net income. During extended periods of hot weather, our profits and cash flow maydecline because of an increase in expenses in response to excess demand.  We may have to transport ice from one plantto another and, in some cases, purchase ice from third party sources andtransport it to a specific market to meet this excess demand, resulting inhigher expenses and inconsistent service and product quality.

 

***Increases in the prices of electricity, certain rawmaterials, insurance and other required expenses could have an adverse effecton our results of operations.***

 

We use substantialamounts of electricity in connection with our manufacturing process.  Increases in market rates for electricitycould have an adverse impact on our operations. Our business is also sensitive to increases in the cost of fuel requiredto operate the refrigerated trucks we use to deliver ice and to increases in thecost of polyethylene, which is the primary raw material used to manufacture thebags we use to package our ice.  Ourbusiness is sensitive to increases in insurance costs, including in the areasof general liability, workers

 

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compensation, health andvehicle insurance.  We have alreadyexperienced increases in fuel costs, bag costs and insurance costs and mayexperience further increases in the future. If the prices for these items or other expenses should increasesignificantly, we will incur additional costs that we may not be able to passalong to our customers.  There can be noassurance that significant changes in the prices of electricity, polyethylene,fuel, insurance or other commodities would not have a material adverse effecton our business, results of operations and cash flows.

 

***Our acquisitions may not be successfully integrated andcould cause unexpected financial difficulties.***

 

We anticipate that wemay, from time to time, selectively acquire additional businesses, assets orsecurities of companies that we believe would provide a strategic fit with ourbusiness.  Acquired businesses will needto be integrated with our existing operations. There can be no assurance that we will effectively assimilate thesecompanies into our business.  Anyacquisitions will also be accompanied by risks, such as potential exposure tounknown liabilities of acquired companies and the possible loss of keyemployees and customers of the acquired business.  Acquisitions are also subject to risks associatedwith the difficulty and expense of integrating the operations and personnel ofthe acquired companies, the potential disruption to our business and thediversion of management time and attention. In addition, as a result of future acquisitions, we may increase ourdebt level.  Our failure to adequatelymanage the risks associated with any acquisitions could have a material adverseeffect on our financial condition or results of operations.

 

We acquired Service Icein October 2003 and Triangle Ice in November 2003.  These acquisitions have been integrated intoour operations.  Although the integrationefforts are complete, these operations have only been a part of our company fora relatively short period of time and may still result in potential disruptionto our business and the diversion of management’s time and attention.  Through the first six months of 2004, we havecompleted 6 additional acquisitions. Although the size of the recently acquired operations is notsignificant, they may still be source of disruption for our business anddiversion for our management.  Materialdisruptions or diversions due to these acquisitions, particularly in the caseof Triangle Ice, could have a material adverse effect on our business.

 

***Our failure to successfully compete could adversely affectour prospects and financial results.***

 

Our businesses are highlycompetitive.  We have many competitors ineach of our geographic markets offering similar products and services.  Competition in our businesses is basedprimarily on service, quality and price. If we fail to successfully compete against our competitors in any ofthese areas, our business will be adversely affected.  There are low barriers to entry in the iceindustry and we could be adversely affected by any expansion of capacity by ourexisting competitors or by new entrants in our markets.  Retaining existing customers and obtainingnew customers is important to our future performance.  If we fail to adequately serve our existingbase of customers, our financial performance will be negatively impacted.  We could also be adversely affected if ourlarger grocery or convenience store customers decide to manufacture their ownice rather than purchase our products.

 

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

 

Our ice manufacturing andcold storage operations are subject to a wide range of environmental laws andregulations governing, among other things, air emissions, wastewaterdischarges, the use, management and disposal of hazardous and non-hazardousmaterials and wastes and the cleanup of contamination.  Noncompliance with such laws and regulations,or incidents resulting in environmental releases, could cause us to incursubstantial costs, including cleanup costs, fines and penalties, third partyclaims for personal injury, investments to retrofit or upgrade our facilitiesand programs or curtailment of our operations. For example, our ice manufacturing and cold storage operations userefrigerants such as ammonia and freon. Several of our ammonia facilities have not yet implemented certainrequired elements of risk and safety management programs mandated underapplicable laws.  Other facilities maynot be in compliance with certain freon refrigerant requirements, such as leakdetection and repair, recordkeeping or reporting.  In addition, the market price of freon isrising as a result of phase outs under federal laws, which could significantlyincrease our operating

 

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costs in the future if weare not able to obtain approved substitutes. From time to time, our use of ammonia has resulted in releases that havetemporarily disrupted our manufacturing operations and resulted in lawsuits oradministrative penalties.  We arecurrently involved in litigation resulting from an ammonia release inJune 2001 at our Baton Rouge, Louisiana facility. See Part II, Item 1 –“Legal Proceedings”.  We cannot assureyou that we will not incur material environmental costs or liabilities in thefuture or that such costs or liabilities will not have a material adverseeffect on our business, financial condition or results of operations.

 

***Government laws and regulations could have an adverse effecton our results of operations.***

 

Like any food company, weare subject to various federal, state and local laws relating to many aspectsof our business, including labeling, sanitation, health and safety andmanufacturing processes.  We cannot predictthe types of government regulations that may be enacted in the future by thevarious levels of government or how existing or future laws or regulations willbe interpreted or enforced.  Theenactment of more stringent laws or regulations or a stricter interpretation ofexisting laws and regulations may require additional expenditures by us, someof which could be material.

 

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

 

Our success depends inpart on our ability to attract, hire, train and retain qualified managerial,sales and marketing personnel. Competition for these types of personnel is high.  We may be unsuccessful in attracting andretaining the personnel we require to conduct our operations successfully and,in such an event, our business could be materially and adversely affected.  Our success also depends to a significantextent on the continued service and performance of our senior management teamand in particular on the continued service of William P. Brick, our Chairmanand Chief Executive Officer, and Jimmy C. Weaver, our President and ChiefOperating Officer.  The loss of anymember of our senior management team could impair our ability to execute ourbusiness plan and could therefore have a material adverse effect on ourbusiness, results of operations and financial condition.

 

***Accidents involving our products and equipment could exposeus to product liability claims.***

 

We are subject to a riskof product liability claims and adverse publicity if a consumer is or claims tobe harmed while using our products or equipment.  Any such claim may result in negativepublicity, loss of revenues or higher costs associated with litigation.  We currently carry product liabilityinsurance that we believe is adequate to cover our losses in thesesituations.  However, this insurance maybe insufficient to pay for all or a large part of these losses.  If our insurance does not adequately coverthese losses, our results of operations and cash flow would decrease and such adecrease could be material.

 

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

 

As the sole major icesupplier using an on-site production and delivery system at our customers’retail locations, we have enjoyed a competitive advantage over ourcompetitors.  Our proprietary Ice Factory system is preferred by certainof our high volume customers to traditional ice delivery and gives us moreflexibility during peak seasons.  In2001, a competitor began testing a machine similar to the Ice Factory incertain of its markets.  Although thecompetitor has not deployed its machine to a significant degree, if thiscompetitor or any new competitors are successful with the rollout of acompeting system, we could lose business to these companies, which would resultin decreased cash flows and results of operations.  It is also our practice to protect certain ofour proprietary materials and processes by relying on trade secrets laws andnon-disclosure and confidentiality agreements. There can be no assurance that confidentiality or trade secrets will bemaintained or that others will not independently develop or obtain access to suchmaterials or processes.

 

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***We are party to two lawsuits related to the Merger, which ifdetermined adversely to us, could result in the imposition of damages againstus and could harm our business and financial condition.***

 

We have been served withtwo complaints asserting putative class action lawsuits in Texas in connectionwith the Merger.  In addition, we may besubject to other lawsuits in connection with the Merger that have not yet beenfiled.  In the event that the currentlawsuits with respect to the Merger are not dismissed or decided in our favoror we become subject to additional suits, these lawsuits could result in theimposition of damages against us or even the rescission of the Merger andrelated transactions.  In the event thatdamages are awarded, our business and financial condition could be harmed. SeePart II, Item 1 – “Legal Proceedings”.

 

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

 

By reason of oursponsors’ and their affiliates’ ownership of us and their collective ability,pursuant to a stockholders agreement among our stockholders, to designate amajority of the members of the board of directors, our sponsors will controlactions to be taken by us and our board of directors, including amendments toour certificate of incorporation and by-laws and approval of significantcorporate transactions, including mergers and sales of substantially all of ourassets.  The interests of our sponsors andtheir affiliates may differ from those of the holders of the 8-7/8% seniorsubordinated notes in material respects.

 

### **ITEM 3.  Quantitative andQualitative Disclosures About Market Risks**

### ** **

Market risk generally represents the risk that losses may occur in thevalue of financial instruments as a result of movements in interest rates,foreign currency exchange rates and commodity prices.  Our main market risk exposure category isinterest rate risk.

 

On November 28,2000, we entered into an interest rate collar agreement (the “CollarAgreement”).  The Collar Agreement has anotional amount of $50 million and a term of 4 years.  If the Index Rate (30-day LIBOR, as definedin the Collar Agreement) exceeds 7.75%, we will receive the difference betweenthe Index Rate and 7.75%.  If the IndexRate falls below 5.75%, we will pay the difference plus 1%.  If we had been required to settle the CollarAgreement as of June 30, 2004, we would have had to pay $1.0 million plusaccrued interest of $0.2 million.

 

We are exposed to somemarket risk due to the floating interest rates under our senior creditfacility.  Principal balances outstandingunder the line of credit bear interest, at our option, at the London Inter-BankOffered Rate (“LIBOR”) plus 3.5% or the prime rate (as announced from time totime by the administrative agent) plus 1.5%. The term loans bear interest, at our option, at LIBOR plus 2.5% or theprime rate plus 1.5%.

 

As of June 30, 2004,the senior credit facility had an outstanding principal balance of $183.9million at a weighted average interest rate of 3.9% per annum.  Due to our interest rate collar agreement,the effect of a change in interest rates on our interest expense depends on thelevel of LIBOR rates.  At June 30,2004, the 30-day LIBOR rate was 1.4%.

 

The following table showsthe approximate annual increase in interest expense given the current principalbalances on all of our debt if LIBOR were to increase by 1% from the initiallevels indicated below:

 
| **Initial  LIBOR Rate**                          | ** ** | **Increase in the  LIBOR rate** | ** ** | **Estimated  Annual Impact** | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|------------------------------|------------|
|                                             |       |                            |       | **(in thousands)**           |       |
|                                             |       |                            |       |                         |       |
| Less  than or equal to 4.5%                      |       | 1                               | %          | $                            | 1,287      |   |
|                                             |       |                            |       |                         |       |
| Greater  than 4.5%, less than or equal to 5.75%  |       | 1                               | %          | $                            | 1,537      |   |
|                                             |       |                            |       |                         |       |
| Greater  than 5.75%, less than or equal to 6.75% |       | 1                               | %          | $                            | 1,787      |   |
|                                             |       |                            |       |                         |       |
| Greater  than 6.75%, less than or equal to 7.75% |       | 1                               | %          | $                            | 1,537      |   |
|                                             |       |                            |       |                         |       |
| Greater  than 7.75%                              |       | 1                               | %          | $                            | 1,287      |   |

 

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

 

Under the supervision andwith the participation of our management, including our chief executive officerand our chief financial officer, we have evaluated the effectiveness of thedesign and operation of our disclosure controls and procedures as defined inRule 13a-15(e) of the Securities Exchange Act of 1934. These controls andprocedures are designed to ensure that material information relating to theCompany and its subsidiaries is communicated to the chief executive officer andthe chief financial officer.  Based onthat evaluation, our chief executive officer and our chief financial officerconcluded that, as of June 30, 2004, our disclosure controls andprocedures are effective to ensure that information disclosed by us in reportsthat we file or submit with the Securities Exchange Commission is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms.

 

There were no changes inour internal control over financial reporting during the second quarter endedJune 30, 2004, that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

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

### ** **

**Item 1.  *Legal Proceedings***

 

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

 

We are a party to alawsuit in connection with an ammonia release at our Baton Rouge, Louisianamanufacturing facility in June 2001. The case, which is a consolidation of seven lawsuits, is titled *Wallace Acey, Jr. et al vs. Reddy Ice Corporation* and wasreported on our Form 10-K for the fiscal year ended December 31,2003.  Since that report, there have beenno material developments.

 

We are a party to twolawsuits filed in connection the Merger. The first lawsuit was filed on May 23, 2003 and is titled Cause No. *CC-03-06056-A; Glenn Robbins, On Behalf of Himselfand All Others Similarly Situated, and Derivatively on Behalf of Packaged Ice,Inc. vs. William P. Brick, Jimmy C. Weaver, A.J. Lewis III, Tracy L. Noll,Robert G. Miller, Steven P. Rosenberg and Richard A. Coonrod, Defendants, andPackaged Ice, Inc., a Texas corporation*.  The second lawsuit was filed on May 23, 2003and is titled Cause No. CC-03-06055-C, *ImperialCounty, On Behalf of Itself and All Others Similarly Situated, and Derivativelyon Behalf of Packaged Ice, Inc. vs. William P. Brick, Jimmy C. Weaver, A.J.Lewis III, Tracy L. Noll, Robert G. Miller, Steven P. Rosenberg and Richard A.Coonrod, Defendants, and Packaged Ice, Inc., a Texas corporation*.  The two lawsuits are identical adversarialproceedings filed by two shareholders on their own behalf, on behalf of apurported class, and derivatively on behalf of Packaged Ice, Inc., now known asReddy Ice Group, Inc.  The plaintiffsallege various breaches of fiduciary duty by our Board of Directors and unjustenrichment related to the Merger.  Theclaims allege that we failed to maximize shareholder value in the Mergertransaction.  These cases were reportedon our Form 10-K for the fiscal year ended December 31, 2003.  Since that report, the court has entered ascheduling order setting discovery and other case management deadlines and atrial date for May 2005.  Otherwise,there have been no material developments since that report.

 

**Item 2.  *Changes in Securities******, Use of Proceeds and Issuer Purchases of EquitySecurities***

 

None.

 

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

 

None.

 

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

 

None

 

**Item5.  *Other Information***

** **

None.

 

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**Item6.  *Exhibits and Reports onForm 8-K***

** **

**(a)  Exhibits**:

 

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

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                       |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                  |
| 31.1†       |       | William P. Brick Certification Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.  |
| 31.2†       |       | Steven J. Janusek Certification Pursuant to 18  U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |

 

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†                                                      Filedherewith.

 

**(b)  Reports on Form 8-K:**

 

We furnished a report onForm 8-K to the Securities & Exchange Commission on May 14, 2004 toprovide:  (i) a copy of our press releaseissued on May 11, 2004 to announce (a) its financial results for thequarter ended March 31, 2004 and (b) our earnings guidance for the secondquarter ending June 30, 2004 and the twelve months endingDecember 31, 2004 and (ii) a copy of the transcript of our conference callheld with investors on May 11, 2004.

 

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### **SIGNATURES**

### ** **

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

 
|                             |   | **REDDY ICE HOLDINGS, INC.**            |
|----------------------------------|--------|-----------------------------------------|
|                             |   |                                    |
|                             |   |                                    |
| Date: August 12,  2004      | By:    | /s/ WILLIAM P. BRICK                    |   |
|                             |   | William P. Brick                        |
|                             |   | Chief Executive Officer                 |
|                             |   |                                    |
| Date:  August 12, 2004 | By:    | /s/ STEVEN J. JANUSEK                   |   |
|                             |   | Steven J. Janusek                       |
|                             |   | Chief Financial and  Accounting Officer |
|                                  |        |                                         |  |  |

 

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