**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**(Mark one)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe quarterly period ended September 30, 2005**

**OR**

**o**                                 TRANSITIONREPORT 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 of registrantas specified in its charter)

| **DELAWARE**                     |   | **56-2381368**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

 

**8750 N. CENTRALEXPRESSWAY, SUITE 1800DALLAS, TEXAS  75231**

(Address of principalexecutive offices)

**(214) 526-6740**

(Registrant’s telephonenumber, including area code)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes o No x(1)

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

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o No x

Thenumber of shares of registrant’s common stock outstanding as of November 3,2005 was 21,690,042.

(1)          Althoughthe registrant has not been subject to such filing requirements for the past 90days, it has filed all reports required to be filed by Section 15(d) ofthe Exchange Act during the preceding twelve months.

 

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARYQUARTERLY REPORT ON FORM 10-QFOR THE PERIOD ENDED SEPTEMBER 30, 2005**

**TABLE OF CONTENTS**

|                   | ** ** | ** **                                                                                                                                    | **Page**   |
|-------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **        | ** ** | **PART I—FINANCIAL  INFORMATION**                                                                                                   | ** ** | ** ** |
| Item 1.           |       | Condensed Consolidated Financial  Statements                                                                                                  |       |   |
|              |       | Condensed Consolidated  Balance Sheets (unaudited) as of September 30, 2005 and  December 31, 2004                             | 2          |   |
|              |       | Condensed Consolidated  Statements of Operations (unaudited) for the three and nine months ended  September 30, 2005 and 2004 (restated) | 3          |   |
|              |       | Condensed Consolidated  Statements of Stockholders’ Equity (unaudited) for the nine months ended  September 30, 2005                | 4          |   |
|              |       | Condensed  Consolidated Statements of Cash Flows (unaudited) for the nine months  ended September 30, 2005 and 2004                 | 5          |   |
|              |       | Notes  to the Condensed Consolidated Financial Statements                                                                                     | 6          |   |
| Item  2.          |       | Management’s Discussion and  Analysis of Financial Conditions and Results of   Operations                                                | 19         |   |
| Item  3.          |       | Quantitative and Qualitative  Disclosures about Market Risk                                                                                   | 41         |   |
| Item  4.          |       | Controls and Procedures                                                                                                                       | 42         |   |
| ** **        |       | **PART II—OTHER  INFORMATION**                                                                                                      |       |   |
| Item 1.           |       | Legal Proceedings                                                                                                                             | 43         |   |
| Item  2.          |       | Unregistered Sales of Equity  Securities and Use of Proceeds                                                                                  | 43         |   |
| Item  3.          |       | Defaults Upon Senior  Securities                                                                                                              | 43         |   |
| Item  4.          |       | Submission of Matters to a  Vote of Security Holders                                                                                          | 43         |   |
| Item 5.           |       | Other Information                                                                                                                             | 43         |   |
| Item 6.           |       | Exhibits                                                                                                                                      | 43         |   |
| SIGNATURES        | 44         |                                                                                                                                          |
| INDEX TO EXHIBITS | 45         |                                                                                                                                          |

 

1

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**PART I—FINANCIAL INFORMATION**

**Item 1.**                        FinancialStatements

**REDDY ICE HOLDINGS, INC. AND SUBSIDIARYCONDENSED CONSOLIDATEDBALANCE SHEETS(Unaudited)(in thousands, except share amounts)**

| ** **                                                                                                                                                                                      | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ***ASSETS***                                                                                                                                                                                    | ** ** |                         | ** ** | ** **                  |       |   | ** ** | ** ** |   |
| CURRENT ASSETS:                                                                                                                                                                                 |       |                         |       | ** **                  |       |   |   | ** ** |   |
| Cash and cash equivalents                                                                                                                                                                       |       |                         | $          | 18,767                      | ** ** |   |   | $ | 4,478 | ** ** |   |
| Accounts receivable, net                                                                                                                                                                        |       |                         | 46,214     | ** **                  |       |   | 21,861 | ** ** |   |
| Inventories                                                                                                                                                                                     |       |                         | 9,747      | ** **                  |       |   | 9,435 | ** ** |   |
| Prepaid expenses                                                                                                                                                                                |       |                         | 2,759      | ** **                  |       |   | 2,651 | ** ** |   |
| Assets held for sale                                                                                                                                                                            |       |                         | 442        | ** **                  |       |   | 790 | ** ** |   |
| Deferred tax assets                                                                                                                                                                             |       |                         | 2,174      | ** **                  |       |   | 2,174 | ** ** |   |
| Total current assets                                                                                                                                                                            |       |                         | 80,103     | ** **                  |       |   | 41,389 | ** ** |   |
| PROPERTY AND  EQUIPMENT, net                                                                                                                                                                    |       |                         | 234,365    | ** **                  |       |   | 233,661 | ** ** |   |
| GOODWILL                                                                                                                                                                                        |       |                         | 214,965    | ** **                  |       |   | 220,451 | ** ** |   |
| OTHER INTANGIBLE  ASSETS, net                                                                                                                                                                   |       |                         | 83,673     | ** **                  |       |   | 93,109 | ** ** |   |
| OTHER ASSETS                                                                                                                                                                                    |       |                         | 639        | ** **                  |       |   | 10 | ** ** |   |
| TOTAL                                                                                                                                                                                           |       |                         | $          | 613,745                     | ** ** |   |   | $ | 588,620 | ** ** |   |
| ***LIABILITIES AND STOCKHOLDERS’  EQUITY***                                                                                                                                                | ** ** |                         | ** ** | ** **                  |       |   | ** ** | ** ** |   |
| CURRENT LIABILITIES:                                                                                                                                                                            |       |                         |       | ** **                  |       |   |   | ** ** |   |
| Current portion of long-term obligations                                                                                                                                                        |       |                         | $          | 70                          | ** ** |   |   | $ | 1,869 | ** ** |   |
| Notes payable                                                                                                                                                                                   |       |                         | 26         | ** **                  |       |   | 355 | ** ** |   |
| Revolving credit facility                                                                                                                                                                       |       |                         | —     | ** **                  |       |   | 5,450 | ** ** |   |
| Accounts payable                                                                                                                                                                                |       |                         | 20,011     | ** **                  |       |   | 15,509 | ** ** |   |
| Accrued expenses                                                                                                                                                                                |       |                         | 16,336     | ** **                  |       |   | 15,998 | ** ** |   |
| Dividends payable                                                                                                                                                                               |       |                         | 4,507      | ** **                  |       |   | — | ** ** |   |
| Total current liabilities                                                                                                                                                                       |       |                         | 40,950     | ** **                  |       |   | 39,181 | ** ** |   |
| LONG-TERM  OBLIGATIONS                                                                                                                                                                          |       |                         | 350,049    | ** **                  |       |   | 429,392 | ** ** |   |
| DEFERRED TAX  LIABILITIES, net                                                                                                                                                                  |       |                         | 31,752     | ** **                  |       |   | 37,114 | ** ** |   |
| COMMITMENTS AND  CONTINGENCIES (Note 10)                                                                                                                                                        |       |                         | —     | ** **                  |       |   | — | ** ** |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                                      |       |                         |       | ** **                  |       |   |   | ** ** |   |
| Common stock: $0.01 par value; 75,000,000 shares  authorized; 21,680,742 and 13,686,150 shares issued and outstanding at  September 30, 2005 and December 31, 2004, respectively |       |                         | 217        | ** **                  |       |   | 137 | ** ** |   |
| Additional paid-in capital                                                                                                                                                                      |       |                         | 209,752    | ** **                  |       |   | 90,077 | ** ** |   |
| Unearned compensation                                                                                                                                                                           |       |                         | (73        | )                           |       |   | (135 | ) |   |
| Accumulated deficit                                                                                                                                                                             |       |                         | (19,531    | )                           |       |   | (7,146 | ) |   |
| Accumulated other comprehensive income                                                                                                                                                          |       |                         | 629        | ** **                  |       |   | — | ** ** |   |
| Total stockholders’ equity                                                                                                                                                                 |       |                         | 190,994    | ** **                  |       |   | 82,933 | ** ** |   |
| TOTAL                                                                                                                                                                                           |       |                         | $          | 613,745                     | ** ** |   |   | $ | 588,620 | ** ** |   |

 

See notes to condensed consolidated financial statements.

2

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARYCONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS(Unaudited)(in thousands, except per share amounts)**

| ** **                                                                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2005**                                             | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                           | ** ** | ** **                                           | ** ** | **(as restated   see Note 14)** | ** ** | ** ** | ** ** | **(as restated  see Note 14)** | ** ** |
| Revenues                                                                             |       | $                                                    | 126,562    |                                                |       | $ | 106,507 |   |   | $ | 258,929 |   |   | $ | 232,416 |   |   |
| Cost of sales  (excluding depreciation)                                              |       | 69,073                                               |       |                                                | 58,690     |   |   | 153,851 |   |   | 137,047 |   |   |
| Depreciation  expense related to cost of sales                                       |       | 4,716                                                |       |                                                | 4,726      |   |   | 14,191 |   |   | 13,851 |   |   |
| Gross profit                                                                         |       | 52,773                                               |       |                                                | 43,091     |   |   | 90,887 |   |   | 81,518 |   |   |
| Operating  expenses                                                                  |       | 13,111                                               |       |                                                | 8,728      |   |   | 31,245 |   |   | 25,825 |   |   |
| Depreciation and  amortization expense                                               |       | 1,413                                                |       |                                                | 1,098      |   |   | 4,280 |   |   | 3,251 |   |   |
| Loss on  dispositions of assets                                                      |       | 804                                                  |       |                                                | —     |   |   | 991 |   |   | — |   |   |
| Impairment of  assets                                                                |       | —                                               |       |                                                | —     |   |   | 5,725 |   |   | — |   |   |
| Management  agreement termination fees and transaction bonuses and expenses (Note 6) |       | 6,171                                                |       |                                                | —     |   |   | 6,171 |   |   | — |   |   |
| Income from  operations                                                              |       | 31,274                                               |       |                                                | 33,265     |   |   | 42,475 |   |   | 52,442 |   |   |
| Other expense,  net                                                                  |       | —                                               |       |                                                | 12         |   |   | — |   |   | 12 |   |   |
| Loss on  extinguishment of debt                                                      |       | 28,189                                               |       |                                                | —     |   |   | 28,189 |   |   | — |   |   |
| Interest expense                                                                     |       | 8,389                                                |       |                                                | 6,595      |   |   | 27,526 |   |   | 19,841 |   |   |
| Income (loss)  before income taxes                                                   |       | (5,304                                               | )          |                                                | 26,658     |   |   | (13,240 | ) |   | 32,589 |   |   |
| Income tax benefit  (expense)                                                        |       | 2,211                                                |       |                                                | (10,130    | ) |   | 5,362 |   |   | (12,384 | ) |   |
| Net income (loss)                                                                    |       | (3,093                                               | )          |                                                | 16,528     |   |   | (7,878 | ) |   | 20,205 |   |   |
| Preferred  dividends                                                                 |       | —                                               |       |                                                | 3,295      |   |   | — |   |   | 9,597 |   |   |
| Net income (loss)  available to common stockholders                                  |       | $                                                    | (3,093     | )                                                   |       | $ | 13,233 |   |   | $ | (7,878 | ) |   | $ | 10,608 |   |   |
| Basic net income  (loss) per share:                                                  |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Net income (loss) available to common stockholders                              |       | $                                                    | (0.17      | )                                                   |       | $ | 0.97 |   |   | $ | (0.52 | ) |   | $ | 0.78 |   |   |
| Weighted average common shares outstanding                                           |       | 18,054                                               |       |                                                | 13,678     |   |   | 15,254 |   |   | 13,672 |   |   |
| Diluted net  income (loss) per share:                                                |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Net income (loss) available to common stockholders                              |       | $                                                    | (0.17      | )                                                   |       | $ | 0.92 |   |   | $ | (0.52 | ) |   | $ | 0.74 |   |   |
| Weighted average  common shares outstanding                                          |       | 18,054                                               |       |                                                | 14,375     |   |   | 15,254 |   |   | 14,256 |   |   |

 

See notes to condensed consolidated financial statements.

3

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARYCONDENSED CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ EQUITY(Unaudited)(in thousands)**

| ** **                                                                                                                           | ** ** | **Common Stock**      | ** ** | **Additional**     | ** ** | ** **           | ** ** | ** **                 | ** ** | **Accumulated  Other**   | ** ** | ** **                | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|--------------------|------------|----------------------|------------|----------------------------|------------|--------------------------|------------|---------------------------|------------|
| ** **                                                                                                                           | ** ** | **Number of  Shares** | ** ** | **Par Value** | ** ** | **Paid-In  Capital** | ** ** | **Unearned  Compensation** | ** ** | **Accumulated  Deficit** | ** ** | **Comprehensive  Income** | ** ** | **Total** | ** ** |
| Balance at January 1, 2005                                                                                                      |       |                       | 13,686     |               |       |                 | $          | 137                        |       |                     |       | $                         | 90,077     |   |   |   | $ | (135 | ) |   |   | $ | (7,146 | ) |   |   | $ | — |   |   |   | $ | 82,933 |   |   |
| Amortization of unearned compensation                                                                                                |       |                       | —     |               |       |                 | —     |                       |       |                     | —     |                      |       |   | 62 |   |   |   | — |   |   |   | — |   |   |   | 62 |   |   |
| Issuance of stock and compensation expense under  stock-based awards                                                                 |       |                       | 26         |               |       |                 | —     |                       |       |                     | 1,760      |                      |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,760 |   |   |
| Exercise of employee stock options                                                                                                   |       |                       | 1,057      |               |       |                 | 11         |                       |       |                     | 1,788      |                      |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,799 |   |   |
| Issuance of common stock in connection with  initial public offering and related transactions, net of issuance  costs |       |                       | 6,912      |               |       |                 | 69         |                       |       |                     | 116,127    |                      |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 116,196 |   |   |
| Cash dividends declared                                                                                                              |       |                       | —     |               |       |                 | —     |                       |       |                     | —     |                      |       |   | — |   |   |   | (4,507 | ) |   |   | — |   |   |   | (4,507 | ) |   |
| Comprehensive loss:                                                                                                                  |       |                       |       |               |       |                 |       |                       |       |                     |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                                                                             |       |                       | —     |               |       |                 | —     |                       |       |                     | —     |                      |       |   | — |   |   |   | (7,878 | ) |   |   | — |   |   |   | (7,878 | ) |   |
| Change in fair value of derivative                                                                                                   |       |                       | —     |               |       |                 | —     |                       |       |                     | —     |                      |       |   | — |   |   |   | — |   |   |   | 629 |   |   |   | 629 |   |   |
| Total comprehensive loss                                                                                                             |       |                       | —     |               |       |                 | —     |                       |       |                     | —     |                      |       |   | — |   |   |   | — |   |   |   | — |   |   |   | (7,249 | ) |   |
| Balance at  September 30, 2005                                                                                                  |       |                       | 21,681     |               |       |                 | $          | 217                        |       |                     |       | $                         | 209,752    |   |   |   | $ | (73 | ) |   |   | $ | (19,531 | ) |   |   | $ | 629 |   |   |   | $ | 190,994 |   |   |

 

See notes to condensed consolidated financial statements.

4

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**REDDY ICE HOLDINGS,INC. AND SUBSIDIARYCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)(in thousands)**

| ** **                                                                                | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                                            | ** ** | **2004** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |       |                                                |       |   |   |
| Net income (loss)                                                                         |       | $                                                   | (7,878     | ) | $ | 20,205 |   |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |       |                                                |       |   |   |
| Depreciation and  amortization                                                            |       | 18,471                                              |       | 17,102 |   |
| Amortization of  debt issue costs and debt discounts                                      |       | 10,141                                              |       | 1,805 |   |
| Loss on  dispositions of assets                                                           |       | 991                                                 |       | — |   |
| Impairment of  assets                                                                     |       | 5,725                                               |       | — |   |
| Stock-based  compensation expense                                                         |       | 1,822                                               |       | 125 |   |
| Deferred taxes                                                                            |       | (5,362                                              | )          | 12,384 |   |
| Loss on  extinguishment of debt                                                           |       | 28,189                                              |       | — |   |
| Change in assets and  liabilities, net of the effects of acquisitions:                    |       |                                                |       |   |   |
| Accounts receivable,  inventory and prepaid expenses                                      |       | (24,685                                             | )          | (20,840 | ) |
| Accounts payable,  accrued expenses and other                                             |       | 4,933                                               |       | 1,492 |   |
| Net cash provided  by operating activities                                                |       | 32,347                                              |       | 32,273 |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |       |                                                |       |   |   |
| Property and equipment  additions                                                         |       | (15,749                                             | )          | (12,525 | ) |
| Proceeds from  dispositions of property and equipment                                     |       | 1,936                                               |       | 2,268 |   |
| Cost of purchases of  leased assets                                                       |       | (2,473                                              | )          | — |   |
| Cost of acquisitions                                                                      |       | (929                                                | )          | (5,653 | ) |
| Net cash used in  investing activities                                                    |       | (17,215                                             | )          | (15,910 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |       |                                                |       |   |   |
| Proceeds from the  exercise of employee stock options                                     |       | 1,799                                               |       | — |   |
| Proceeds from the  issuance of common stock, net of issuance costs                        |       | 116,196                                             |       | 250 |   |
| Proceeds from issuance of  debt                                                           |       | 240,000                                             |       | — |   |
| Deferred debt costs                                                                       |       | (5,264                                              | )          | (485 | ) |
| Repayments under the  credit facility, net                                                |       | (5,450                                              | )          | — |   |
| Repayment of long-term  obligations                                                       |       | (348,124                                            | )          | (1,397 | ) |
| Net cash used in financing  activities                                                    |       | (843                                                | )          | (1,632 | ) |
| NET INCREASE IN CASH AND  CASH EQUIVALENTS                                                |       | 14,289                                              |       | 14,731 |   |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                           |       | 4,478                                               |       | 12,801 |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                                 |       | $                                                   | 18,767     |   | $ | 27,532 |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                         |       |                                                |       |   |   |
| Cash payments for  interest                                                               |       | $                                                   | 22,053     |   | $ | 21,883 |   |
| Borrowings under the  credit facility                                                     |       | $                                                   | 75,900     |   | $ | 33,750 |   |
| Repayments on the credit  facility                                                        |       | $                                                   | (81,350    | ) | $ | (33,750 | ) |
| SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND  FINANCING ACTIVITIES                     |       |                                                |       |   |   |
| Cash dividends declared,  not paid                                                        |       | $                                                   | 4,507      |   | $ | — |   |
| Issuance of notes payable                                                                 |       | $                                                   | 88         |   | $ | — |   |
| Increase in fair value of  derivative                                                     |       | $                                                   | 629        |   | $ | 2,075 |   |
| Accretion of preferred dividends                                                          |       | $                                                   | —     |   | $ | 9,597 |   |

 

See notes to condensed consolidated financial statements.

5

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 and 2004**

**1.   General**

The condensed consolidatedfinancial statements of Reddy Ice Holdings, Inc. and its wholly owned subsidiary(together, the “Company”) included herein are unaudited; however, the balancesheet as of December 31, 2004 has been derived from the audited financialstatements for that date. These financial statements have been prepared by theCompany pursuant to the rules and regulations of the Securities andExchange Commission (“SEC”). As applicable under the SEC’s regulations, certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted. All significantintercompany balances and transactions have been eliminated upon consolidation,and all adjustments which, in the opinion of management, are necessary for afair presentation of the financial position, results of operations and cashflows for the periods covered have been made and are of a normal and recurringnature. The financial statements included herein should be read in conjunctionwith the consolidated financial statements and the related notes theretoincluded in the Company’s annual report on Form 10-K for the yearended December 31, 2004. Operating results for the nine months ended September 30,2005 are not necessarily indicative of the results to be achieved for the fullyear.

Reddy Ice Holdings, Inc.,a Delaware corporation (“Reddy Holdings”), and its wholly owned subsidiary,Cube Acquisition Corp. (“Cube”), a Texas corporation, were formed on behalf ofTrimaran Fund Management LLC (“Trimaran”) and Bear Stearns Merchant Banking (“BearStearns”) on May 8, 2003 for the purpose of acquiring Packaged Ice, Inc.(“Packaged Ice”) and effecting certain capital transactions in connection withsuch acquisition. On August 15, 2003, Cube merged with and into PackagedIce, with Packaged Ice being the surviving corporation. As a result of themerger, Packaged Ice was delisted from the American Stock Exchange. Reddy Holdingsand Cube conducted no operations during the period from May 8, 2003through August 14, 2003. In connection with the merger, Packaged Ice wasrenamed Reddy Ice Group, Inc. (“Reddy Group”). Reddy Holdings and itswholly owned subsidiary, Reddy Group, are referred to collectively herein asthe “Company”.

On August 12, 2005,Reddy Holdings completed an initial public offering of its common stock (seeNote 6). As a result of the offering, Reddy Holdings’ common shares arepublicly traded on the New York Stock Exchange under the ticker symbol “FRZ”.

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

On August 2, 2005,the Company effected a 138 for 1 stock split and, in conjunction therewith,amended and restated the Company’s certificate of incorporation to increase thenumber of authorized shares of the Company’s common stock and preferred stock. Allcommon share and per common share amounts in these condensed consolidatedfinancial statements prior to August 2, 2005 have been retroactivelyadjusted for all periods presented to give effect to the stock split, includingreclassifying an amount equal to the increase in par value from additionalpaid-in capital to common stock.

**2.   Acquisitions**

Duringthe three months ended September 30, 2005, the Company purchased two icecompanies. Including direct acquisition costs, the total acquisitionconsideration was $0.9 million. The total purchase 

6

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 and 2004**

price was allocated to the acquired assets and assumedliabilities based upon estimates of their respective fair values as of the respectiveclosing dates using valuations and other studies. The following tablesummarizes the estimated fair values of the assets acquired and the liabilitiesassumed at the date of acquisition (dollars in millions):

| Total assets acquired      |   | $   | 0.3    |   |
|----------------------------|--------|-----|--------|--------|
| Total liabilities  assumed |   | 0.0 |   |
| Net assets acquired        |   | $   | 0.3    |   |

 

The excess of the aggregate purchase price over thenet assets acquired of $0.6 million was allocated to goodwill ($0.2 million)and other intangible assets ($0.4 million). Other intangible assets arecomprised of customer lists, which are being amortized on a straight line basisover a useful life of 15 years.

During2004, the Company purchased 11 ice companies at various dates throughout theyear for total acquisition consideration of $16.9 million. The results ofoperations of the 2004 acquisitions are included in the Company’s consolidatedresults of operations from the date of each acquisition, which ranged from March 1,2004 to November 1, 2004. The results of operations of the 2005acquisitions are included in the Company’s consolidated results of operationsfrom the date of each acquisition, which occurred on August 1, 2005 and September 30,2005. The following unaudited pro forma information presents the Company’sconsolidated results of operations (i) for the three and nine months endedSeptember 30, 2005 as if the 2005 acquisitions had all occurred on January 1,2005 and (ii) for the three and nine months ended September 30, 2004as if the 2004 and 2005 acquisitions had all occurred on January 1, 2004:

| ** **                                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                                             | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                    | ** ** | **(in thousands)**                              | ** ** |
| Pro forma  revenues                                           |       | $                                                    | 126,746    |                                                | $          | 109,793 |   | $ | 259,473 |   | $ | 239,286 |   |
| Pro forma net income  (loss) available to common stockholders |       | $                                                    | (3,112     | )                                                   | $          | 14,112 |   | $ | (7,985 | ) | $ | 11,533 |   |

 

**3.**   Inventories

Inventoriesconsists of raw materials, supplies and finished goods. Raw materials andsupplies consist of ice packaging materials, spare parts, bottled water suppliesand merchandiser parts. Finished goods consist of packaged ice and bottledwater. Inventories are valued at the lower of cost or market and includeoverhead allocations. Cost is determined using the first-in, first-out andaverage cost methods.

| ** **                  | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                  | ** ** | **(in thousands)**      | ** ** |
| Raw materials and  supplies |       |                         | $          | 8,418                       |       |   |   | $ | 7,584 |   |   |
| Finished goods              |       |                         | 1,329      |                        |       |   | 1,851 |   |   |
| Total                       |       |                         | $          | 9,747                       |       |   |   | $ | 9,435 |   |   |

 

In November 2004, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 151, “Inventory Costs—an amendment ofARB No. 43, 

7

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 and 2004**

Chapter 4”.SFAS No. 151 seeks to clarify the accounting for abnormal amounts of idlefacility expense, freight, handling costs and wasted material (spoilage) in thedetermination of inventory carrying costs. The statement requires such costs tobe treated as a current period expense. This statement is effective for fiscalyears beginning after July 15, 2005. The Company is currently evaluatingthe effect this standard could have on its results of operations and financialposition.

**4.**   Accrued Expenses

| ** **                                                                            | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                            | ** ** | **(in thousands)**      | ** ** |
| Accrued  compensation and employee benefits, including workers compensation insurance |       |                         | $          | 8,234                       |       |   |   | $ | 6,411 |   |   |
| Accrued interest                                                                      |       |                         | 890        |                        |       |   | 5,740 |   |   |
| Accrued property,  sales and other taxes                                              |       |                         | 2,316      |                        |       |   | 806 |   |   |
| Accrued utilities                                                                     |       |                         | 2,329      |                        |       |   | 1,191 |   |   |
| Other accrued  insurance                                                              |       |                         | 1,626      |                        |       |   | 1,230 |   |   |
| Other                                                                                 |       |                         | 941        |                        |       |   | 620 |   |   |
| Total                                                                                 |       |                         | $          | 16,336                      |       |   |   | $ | 15,998 |   |   |

 

**5.**   RevolvingCredit Facility and Long-Term Obligations

On August 12, 2005, Reddy Group amended andrestated its credit facility with a syndicate of banks, financial institutionsand other entities as lenders, including Credit Suisse First Boston, asAdministrative Agent, Canadian Imperial Bank of Commerce, Bear StearnsCorporate Lending, Inc. and Lehman Brothers, Inc. (the “Credit Facility”),to increase the maximum amount of the Revolving Credit Facility to $60 million(the “Revolving Credit Facility”), provide for a $240 million term loan (the “TermLoan”), reduce the applicable margins on both the Revolving Credit Facility andTerm Loan and extend the maturity of the Revolving Credit Facility to August 12,2010 and the Term Loan to August 12, 2012. Borrowings under the RevolvingCredit Facility and the Term Loan, along with proceeds from the Company’sinitial public offering (see Note 6), were used to repay the previous CreditFacility, repurchase substantially all of the Company’s existing $152.0 millionof 87¤8% Senior Subordinated Notes due August 1,2011 (the “Subordinated Notes”) and fund other related transactions. A loss onextinguishment of debt of $28.1 million was incurred in connection with thesetransactions. The loss was due to the payment of tender premiums and consentfees to the holders of the Subordinated Notes ($17.3 million), the write-off ofdeferred debt costs and original issue discount related to the SubordinatedNotes and the previous Credit Facility ($10.6 million) and other fees andexpense ($0.2 million).

At September 30, 2005, the Company had$53.3 million of availability under the Revolving Credit Facility, whichwas net of outstanding standby letters of credit of $6.7 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 0.75% or LIBOR plus 1.75%. The base rate is defined as thegreater of the prime rate (as announced from time to time by the AdministrativeAgent) or the federal funds rate plus 0.5%. At September 30, 2005, theweighted average interest rate of borrowings outstanding under the CreditFacility was 5.5%. Interest on base rate loans is payable on the last day ofeach quarter. 

8

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 and 2004**

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 quarterlyfee on the average availability under the Revolving Credit Facility based on anannual rate of 0.5%.

The Revolving Credit Facility and Term Loan do notrequire any scheduled principal payments prior to their stated maturity dates. Subjectto certain conditions, mandatory repayments of the Revolving Credit Facilityand Term Loan (and if the Term Loan is no longer outstanding, mandatorycommitment reductions of the Revolving Credit Facility) are required to be madewith portions of the proceeds from (1) asset sales, (2) the issuanceof debt securities and (3) insurance and condemnation awards, subject tovarious exceptions. In the event of a change in control, as defined in theCredit Facility, an event of default will occur under the Credit Facility. Underthe Credit Facility, Reddy Holdings may only pay dividends if Reddy Group’stotal leverage ratio for the most recently ended fiscal quarter is less than orequal to 3.75 to 1.0. In addition, the Credit Facility precludes Reddy Holdingsand Reddy Group from declaring any dividends if an event of default under theCredit Facility has occurred and is continuing. In particular, it will be anevent of default if Reddy Group’s total leverage ratio exceeds 4.0 to 1.0 orReddy Group’s interest coverage ratio is less than 3.25 to 1.0.

The Credit Facility contains financial covenants,which include the maintenance of certain financial ratios, as defined in theCredit Facility, and is collateralized by substantially all of Reddy Group’sassets and the capital stock of all of its subsidiaries. Reddy Holdingsguarantees the Credit Facility and such guarantee is secured by the capitalstock of Reddy Group. At September 30, 2005, Reddy Group was in compliancewith these covenants.

Effective September 12, 2005, Reddy Group enteredinto an interest rate hedging agreement (the “Hedge”) to fix the interest rateon a portion of its Term Loan. The Hedge has a term of three years and tenmonths and an initial notional balance of $220 million. The notional balancedecreases by $20 million on October 12 of each of the next three years,beginning on October 12, 2006. Reddy Group pays a fixed rate of 4.431% onthe notional balance outstanding and receives an amount equal to 3-monthLIBOR. Any net payable or receivable amount is settled quarterly. If ReddyGroup had been required to settle the Hedge as of September 30, 2005, itwould have received $0.6 million. The fair value of the Hedge is included inthe caption “Other Assets” in the condensed consolidated balance sheet. Changesin the fair value of the Hedge are recorded as “Other Comprehensive Income” inthe condensed consolidated statement of stockholders’ equity. Reddy Group isexposed to risk of loss in the event of non-performance by the counterparty tothe Hedge. However, it does not anticipate non-performance by the counterparty.

On October 27, 2004, Reddy Holdings issued$151.0 million in aggregate principal amount at maturity of 101¤2%Senior Discount Notes due 2012 (the “Discount Notes”) in a private placementoffering. The Discount Notes were sold at 66.333% of the stated principalamount, which resulted in gross proceeds of $100.2 million. Each DiscountNote had an initial accreted value of $663.33 per $1,000 principal amount atmaturity. The accreted value of each Discount Note will increase from the dateof issuance until November 1, 2008 at a rate of 101¤2% per annumsuch that the accreted value will equal the stated principal amount at maturityon November 1, 2008. Thereafter, cash interest will accrue and be payablesemi-annually at a rate of 101¤2%per annum.

The Discount Notesare unsecured obligations of Reddy Holdings and are:

·       notguaranteed by any of Reddy Holdings’ subsidiaries;

9

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 and 2004**

·       seniorin right of payment to all of Reddy Holdings’ future subordinated indebtedness;

·       equalin right of payment with any of Reddy Holdings’ existing and future unsecuredsenior indebtedness;

·       effectivelysubordinated to Reddy Holdings’ existing and future secured debt, includingReddy Holdings’ guarantee of Reddy Group’s senior credit facility; and

·       structurallysubordinated to all obligations and preferred equity of Reddy Holdings’ subsidiaries.

The Discount Notes include customary covenants thatrestrict, among other things, Reddy Holdings’ ability to incur additional debtor issue certain preferred stock, pay dividends or redeem, repurchase or retireits capital stock or subordinated indebtedness, make certain investments,create liens, enter into arrangements that restrict dividends from itssubsidiaries, merge or sell all or substantially all of its assets or enterinto various transactions with affiliates. Prior to November 1, 2007,Reddy Holdings may redeem up to 35% of the principal amount of the DiscountNotes at a redemption price of 110.5% of the principal amount thereof, plusaccrued and unpaid interest to the date of redemption, with funds raised inequity offerings that are specified in the indenture governing the DiscountNotes. On and after November 1, 2008, Reddy Holdings may redeem any or allof the Discount Notes by paying a redemption premium, which is initially 5.25%of the principal amount at maturity of the notes and declines annually to 0%for the period commencing on November 1, 2010 and thereafter. If a changeof control occurs prior to November 1, 2007, Reddy Holdings may, at itsoption, redeem all, but not less than all, of the Discount Notes at a redemptionprice equal to the sum of (i) the accreted value of the notes as of theredemption date, (ii) a premium equal to 125% of one year’s coupon paymentand (iii) any accrued and unpaid interest to the date of redemption. IfReddy Holdings experiences a change of control and does not elect to make theoptional redemption described in the previous sentence, Reddy Holdings will berequired to make an offer to repurchase the Discount Notes at a price equal to101% of their accreted value, plus accrued and unpaid interest, if any, to thedate of purchase. Reddy Holdings may also be required to make an offer topurchase the senior discount notes with proceeds of asset sales that are notreinvested in our business or used to repay other indebtedness.

The Discount Notes were subject to registration with theSEC pursuant to the Registration Rights Agreement (the “Rights Agreement”)entered into at the time of issuance. Pursuant to the Rights Agreement, ReddyHoldings was required, within 150 days after the issuance date, tofile a registration statement with the SEC to exchange the Discount Notesfor new notes of Reddy Holdings having terms substantially identical in allmaterial respects to the Discount Notes and to use its commercially reasonableefforts to cause the registration statement to be declared effective within240 days after the issuance date. The 150th day following theissuance of the Discount Notes was March 26, 2005. Reddy Holdings did notfile the required registration statement until April 6, 2005 and, as aresult, incurred additional interest expense from March 26, 2005 to April 6,2005 at an annual rate of 0.50%. The 240th day following theissuance of the Discount Notes was June 24, 2005 and, as a result of theregistration statement not having been declared effective by the SEC on or priorto that date, Reddy Holdings began accruing additional interest on the ReddyHoldings notes from June 24, 2005 at an annual rate of 0.50% until theregistration statement was declared effective on August 26, 2005. As of September 30,2005, $0.1 million of additional interest was accrued for payment in cash toholders of Discount Notes on November 1, 2005.

10

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 and 2004**

On July 28, 2005, Reddy Holdings obtained therequisite consents from the holders of the Discount Notes to amend thedefinition of “Consolidated Net Income” in the indenture governing the DiscountNotes in order to exclude certain one-time costs and expenses associated withReddy Holdings’ initial public offering of its common stock. (See Note 6).

On August 26, 2005,Reddy Holdings paid $0.4 million to purchase and retire Discount Notes with anaggregate principal amount at maturity of $0.5 million. A loss of $0.046million was recognized in connection with this transaction.

AtSeptember 30, 2005 and December 31, 2004, long-term obligationsconsisted of the following:

| ** **                                                               | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                               | ** ** | **(in thousands)**      | ** ** |
| Credit facility—Term  Loans                                         |       |                         | $          | 240,000                     |       |   |   | $ | 177,750 |   |   |
| 101¤2%  Senior Discount Notes                                       |       |                         | 150,500    |                        |       |   | 151,000 |   |   |
| Less: Unamortized debt  discount on 101¤2%  Senior Discount  Notes  |       |                         | (40,703    | )                           |       |   | (48,957 | ) |   |
| 87¤8% Senior Subordinated Notes                                     |       |                         | —     |                        |       |   | 152,000 |   |   |
| Less: Unamortized debt  discount on 87¤8% Senior Subordinated Notes |       |                         | —     |                        |       |   | (879 | ) |   |
| Other                                                                    |       |                         | 322        |                        |       |   | 347 |   |   |
| Total long-term  obligations                                             |       |                         | 350,119    |                        |       |   | 431,261 |   |   |
| Less: Current maturities                                                 |       |                         | 70         |                        |       |   | 1,869 |   |   |
| Long-term obligations, net                                               |       |                         | $          | 350,049                     |       |   |   | $ | 429,392 |   |   |

 

**6.**   Capital Stock

*Common Stock.**  *Reddy Holdings is authorized toissue up to 75,000,000 shares of common stock, par value $0.01 per share.Holders of Reddy Holdings’ common stock are entitled to one vote per share onall matters to be voted on by stockholders and are entitled to receivedividends, if any, as may be declared from time to time by the Board of Directorsof Reddy Holdings. Upon any liquidation or dissolution of Reddy Holdings, theholders of common stock are entitled, subject to any preferential rights of theholders of preferred stock, to receive a pro rata share of all of the assetsremaining available for distribution to stockholders after payment of allliabilities.

On February 11, 2005,Reddy Holdings filed a registration statement on Form S-1 with theSEC for a proposed initial public offering (“IPO”) of its common stock. Theregistration statement was declared effective by the SEC on August 10,2005 at a public offering price of $18.50 per share. A portion of the shareswere sold by Reddy Holdings and a portion were sold by certain of ReddyHoldings’ stockholders. The number of shares offered by Reddy Holdings and theselling stockholders was 6,911,765 and 3,288,235, respectively. The sellingstockholders also granted the underwriters a 30-day option to purchase upto 1,530,000 additional shares to cover any over-allotments. The underwriters’over-allotment option was exercised on August 11, 2005. Reddy Holdingsreceived proceeds from the offering, net of issuance costs, of $116.2 millionon August 12, 2005.

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 and 2004**

On August 11, 2005, theboard of directors of Reddy Holdings declared a dividend of $0.20788 per share,or $4.5 million in total, payable on October 17, 2005 to stockholders of recordon September 30, 2005.

On March 17, 2005,certain employees exercised stock options granted under the Reddy Ice Holdings, Inc.2003 Stock Option Plan (the “2003 Stock Option Plan”) to purchase 248,198shares of Reddy Holdings’ common stock for an aggregate purchase price ofapproximately $1.8 million. On August 12, 2005, Reddy Holdingsamended the 2003 Stock Option Plan to accelerate the schedule for vesting oftime-based options, immediately vest all outstanding performance-based options,allow unvested options to be exercised for restricted stock with identicalvesting schedules and provide for accelerated vesting of options upon thetermination of an optionholder’s employment under certain circumstances. Acharge of $0.5 million was recorded in “Operating Expenses” in the condensedconsolidated statements of operations in connection with the acceleration ofvesting schedules. On August 12, 2005, certain employees and directorsperformed a cashless exercise of stock options granted under the 2003 StockOption Plan, which resulted in the issuance of 808,818 shares of common stock,458,097 of which were restricted shares. In accordance with the 2003 StockOption Plan, as amended, restricted shares vest on the following schedule: 40%on February 28, 2006, 40% on January 16, 2007 and 20% on July 1,2007.

Also in connection withthe IPO and the related transactions, the Company incurred $6.2 million ofexpenses related to payments to Bear Stearns and affiliates of Trimaran inconnection with the termination of the management services agreement ($4.0million), transaction bonuses to certain employees ($1.8 million) and otherfees and expenses ($0.4 million). Included in the transaction bonuses is $0.5million of compensation expense related to the issuance of 25,817 shares ofcommon stock.

*Preferred Stock.**  *Reddy Holdings is authorized toissue up to 25,000,000 shares of $0.01 par value preferred stock. During 2003and 2004, Reddy Holdings issued a total of 99,075 shares of Series ACumulative Redeemable Preferred Stock (“Series A Preferred Stock”). Theterms of the Series A Preferred Stock were set forth in a certificate ofdesignation (the “Series A Preferred Stock Designation”). The liquidationpreference per share of the Series A Preferred Stock was equal to the sumof (a) $1,000 plus (b) the amount of all accumulated but unpaid dividendson such shares. The holders of the outstanding shares of Series APreferred Stock immediately preceding the dividend payment date were entitledto receive dividends, as declared by the Board of Directors, at a rate perannum equal to 12% of the liquidation amount per share. All dividends werecumulative, whether or not earned or declared, accruing on a daily basis fromthe issue date and were payable in cash quarterly in arrears on each dividendpayment date, commencing on November 15, 2003. If Reddy Holdings did notpay the cash dividends on a quarterly basis, all unpaid dividends were to beadded to the liquidation amount in respect of such shares on each dividendpayment date. Reddy Holdings had the ability to redeem the Series APreferred Stock at its option in whole at any time or in part from time totime, subject to restrictions as defined in the Series A Preferred StockDesignation. Series A Preferred Stock holders were not entitled orpermitted to vote on any matter upon which the holders of common stock arerequired or permitted to vote.

On October 27, 2004,Reddy Holdings issued $151 million in aggregate principal amount atmaturity of its 101¤2%Senior Discount Notes (see Note 5). Reddy Holdings used the net proceedsof the Discount Notes offering, together with an approximately$28.4 million dividend from Reddy Group, to redeem all of Reddy Holdings’outstanding Series A Preferred Stock (99,175 shares) for an aggregateliquidation amount of $114.2 million and to pay a dividend of$10.4 million on its common stock. In connection with 

12

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 and 2004**

theseevents, Reddy Group made a special transaction payment of approximately$1.2 million in the aggregate to certain members of management and certaindirectors.

**7.   Stock-BasedCompensation**

On August 8, 2005,the board of directors and stockholders of Reddy Holdings approved the ReddyIce Holdings, Inc. Long Term Incentive and Share Award Plan (the “2005Equity Incentive Plan”). Under the 2005 Equity Incentive Plan, up to 750,000shares of common stock may be issued to employees, directors and certain thirdparties in connection with various incentive awards, including stock options,restricted stock and restricted share units. On October 18, 2005, ReddyHoldings filed a Registration Statement on Form S-8 with the SEC tocover the reoffer and resale of up to 750,000 shares of Reddy Holdings’ commonstock that Reddy Holdings may issue in the future to participants in the 2005Equity Incentive Plan.

The 2003 Stock Option Planwas amended on August 8, 2005 (see Note 6). At September 30,2005, 56,117 shares of common stock were reserved for issuance under the 2003Stock Option Plan. The Company does not intend to make any additional grantsunder this plan. Compensation expense associated with the 2003 Stock OptionPlan was $0.3 million and $0.8 million for the three and nine months endedSeptember 30, 2005, respectively, excluding the effect of the acceleration ofvesting schedules discussed in Note 6. Such compensation expense was recordedin “Operating Expenses” in the consolidated statements of operations.

Effective January 1,2005, the Company adopted the fair value recognition provisions of SFAS No. 123,“Accounting for Stock-Based Compensation”, as amended by SFAS No. 148,“Accounting for Stock-Based Compensation—Transition and Disclosure”. Underthe provisions of SFAS No. 148, the Company selected the modifiedprospective method of adoption and therefore began recognizing stock-basedemployee compensation cost related to the 2003 Stock Option Plan beginning January 1,2005, as if the fair value-based accounting method had been used to account forall employee awards granted, modified or settled since the inception of the 2003Stock Option Plan on August 15, 2003. The Company has also recorded stock-basedcompensation expense related to the issuance of restricted common stock andpreferred stock since August 15, 2003, the date such restricted commonstock and preferred stock were granted.

Through December 31,2004, the Company accounted for the 2003 Stock Option Plan under the intrinsicvalue method prescribed by APB Opinion No. 25, “Accounting for StockIssued to Employees”, and related interpretations. No stock-based employeecompensation cost is reflected in net income available to common stockholdersfor the three and nine months ended September 30, 2004. The followingtable illustrates the effect on net income available to common stockholders andbasic and diluted earnings per share for the three and nine months ended September 30,2004 as if the Company had applied the fair

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 and 2004**

value recognitionprovisions of stock-based employee compensation as described in SFAS No. 123,as amended by SFAS 148.

| ** **                                                                                                                         | ** ** | **Three Months  Ended  September 30,  2004**            | ** ** | **Nine Months  Ended  September 30,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                                                                         | ** ** | **(in thousands, except  per share amounts)** | ** ** |
| Net income available to  common stockholders, as reported                                                                          |       |                                                              | $          | 13,233                                                |       |   |   | $ | 10,608 |   |   |
| Add: Employee  stock-based compensation expense included in reported net income available to  common stockholders, net of tax |       |                                                              | 26         |                                                  |       |   | 78 |   |   |
| Less: Total stock-based  compensation expense determined under fair value based methods for all  awards, net of tax                |       |                                                              | (218       | )                                                     |       |   | (580 | ) |   |
| Pro forma net income  available to common stockholders                                                                             |       |                                                              | $          | 13,041                                                |       |   |   | $ | 10,106 |   |   |
| Basic net income per share:                                                                                                        |       |                                                              |       |                                                  |       |   |   |   |   |
| As reported                                                                                                                        |       |                                                              | $          | 0.97                                                  |       |   |   | $ | 0.78 |   |   |
| Pro forma                                                                                                                          |       |                                                              | 0.95       |                                                  |       |   | 0.74 |   |   |
| Diluted net income per share:                                                                                                      |       |                                                              |       |                                                  |       |   |   |   |   |
| As reported                                                                                                                        |       |                                                              | $          | 0.92                                                  |       |   |   | $ | 0.74 |   |   |
| Pro forma                                                                                                                          |       |                                                              | 0.91       |                                                  |       |   | 0.71 |   |   |

 

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

SFAS No. 123(R) eliminates the intrinsicvalue measurement objective in APB Opinion 25 and generally requires companiesto measure the cost of employee services received in exchange for an award ofequity instruments based on the fair value of the award on the date of thegrant. The standard requires grant date fair value to be estimated using eitheran option-pricing model which is consistent with the terms of the awardor a market observed price, if such a price exists. Such cost must berecognized over the period during which an employee is required to provideservice in exchange for the award, which is usually the vesting period. The standardalso requires the Company to estimate the number of instruments that willultimately be issued, rather than accounting for forfeitures as they occur.

The Company is required to apply SFAS No. 123(R) toall awards granted, modified or settled on or after the first day of the nextfiscal year beginning after June 15, 2005. SFAS No. 123(R) alsorequires the use of either the “modified prospective method” or the “modifiedretrospective method.” Under the modified prospective method, compensation costis recognized for all awards granted after adoption of the standard and for theunvested portion of previously granted awards that are outstanding on that date.Under the modified retrospective method, previously issued financial statementsmust be restated to recognize the expense amounts previously calculated andreported on a pro forma basis, as if the prior standard had been adopted. Underboth methods, either the straight line or an accelerated method may be 

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 and 2004**

used to amortize thecompensation cost associated with awards with graded vesting. The standardpermits and encourages early adoption.

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

**8.**   NetIncome (Loss) Per Share

Thecomputation of net income (loss) per share is based on net income (loss), afterdeducting any preferred stock dividends, divided by the weighted average numberof shares outstanding. For the three and nine months September 30, 2005, therewere 458,097 shares of dilutive securities which are not included in thecomputation of diluted net loss per share as their effect would be anti-dilutive.

| ** **                                                                         | ** ** | **Three Months Ended  September 30,**                  | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                                                              | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Net income (loss) for basic and diluted computation:                               |       |                                                                  |       |                                                |       |   |   |   |   |
| Net income (loss)                                                                  |       | $                                                                     | (3,093     | )                                                   | $          | 16,528 |   | $ | (7,878 | ) | $ | 20,205 |   |
| Preferred dividends                                                                |       | —                                                                |       | 3,295                                               |       | — |   | 9,597 |   |
| Net income (loss) available  to common shareholders                                |       | $                                                                     | (3,093     | )                                                   | $          | 13,233 |   | $ | (7,878 | ) | $ | 10,608 |   |
| Basic net income (loss) per share:                                                 |       |                                                                  |       |                                                |       |   |   |   |   |
| Weighted average common shares outstanding                                         |       | 18,054                                                                |       | 13,678                                              |       | 15,254 |   | 13,672 |   |
| Net income (loss) available to common shareholders                                 |       | $                                                                     | (0.17      | )                                                   | $          | 0.97 |   | $ | (0.52 | ) | $ | 0.78 |   |
| Diluted net income (loss) per share:                                               |       |                                                                  |       |                                                |       |   |   |   |   |
| Weighted average common shares outstanding                                         |       | 18,054                                                                |       | 13,678                                              |       | 15,254 |   | 13,672 |   |
| Shares issuable from assumed conversion of stock  options or restricted stock |       | —                                                                |       | 697                                                 |       | — |   | 584 |   |
| Weighted average common shares outstanding, as  adjusted                           |       | 18,054                                                                |       | 14,375                                              |       | 15,254 |   | 14,256 |   |
| Net income (loss)  available to common shareholders                                |       | $                                                                     | (0.17      | )                                                   | $          | 0.92 |   | $ | (0.52 | ) | $ | 0.74 |   |

 

**9.   Income Taxes**

The Company’s effectivetax rate differs from the federal statutory income tax rate of 35% due to stateincome taxes and the effect of permanent differences, primarily thenon-deductible portion of the interest expense recognized on the 101⁄2% SeniorDiscount Notes.

**10.   Commitments and Contingencies**

The Company is involved in various claims, lawsuitsand proceedings arising in the ordinary course of business. There areuncertainties inherent in the ultimate outcome of such matters and it isimpossible to presently determine the ultimate costs that may be incurred. Managementbelieves the resolution of such uncertainties and the incurrence of such costswill not have a material adverse effect on the Company’s consolidated financialposition, results of operations or cash flows.

15

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 and 2004**

The Company is involved inlitigation in connection with an ammonia release at its Baton Rouge, Louisianamanufacturing facility in June 2001. The case, which is a consolidation ofseven lawsuits, was titled Wallace Acey, Jr., et al. vs. Reddy IceCorporation and is pending in the 19th Judicial District Court,Parish of East Baton Rouge, Louisiana. The plaintiffs, which were certified asa settlement class, have alleged injuries primarily consisting ofinconvenience, watery eyes and offensive odors. No specific amount of damageswas specified in the action. During 2004, the Company reached a settlement withthe plaintiffs. The fairness of the settlement was approved by the court on January 25,2005. Management believes the settlement will be finalized during 2005. TheCompany recognized $150,000 of expense in its 2004 results related to itsobligation under the settlement. Management does not believe that the finalresolution of this litigation will have a material impact on the Company’sbusiness, financial condition or results of operations.

**11.   Segment Information**

The Company has two reportable segments: (1) iceproducts and (2) non-ice products and services. Ice products include themanufacture and distribution of packaged ice products through traditional icemanufacturing and delivery and The Ice Factory®, which is a proprietary machinethat produces, packages, stores and merchandises ice at the point of salethrough an automated, self-contained system. Non-ice products and servicesinclude refrigerated warehouses and the manufacturing and distribution ofbottled water.

The Company evaluates the performance of each segmentbased on earnings before interest, taxes, depreciation, amortization, gain orloss on disposition of assets, impairment of assets, loss on extinguishment ofdebt and management agreement termination fees and transaction bonuses andexpenses (“Segment EBITDA”). Segment assets are not a factor in the evaluationof performance. There were no intersegment sales during the three months andnine months ended September 30, 2005 and 2004.

Segmentinformation for the three months ended September 30, 2005 and 2004 was asfollows:

| ** **                              | ** ** | **Three Months Ended  September 30, 2005** | ** ** | **Three Months Ended  September 30, 2004** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                              | ** ** | **Ice**                                                        | ** ** | **Non-Ice**                                                    | ** ** | **Total** | ** ** | **Ice** | ** ** | **Non-Ice** | ** ** | **Total** | ** ** |
| ** **                              | ** ** | **(in thousands)**                                             | ** ** |
| Revenues                                |       | $                                                              | 122,314    |                                                           | $          | 4,248 |   | $ | 126,562 |   | $ | 101,162 |   | $ | 5,345 |   | $ | 106,507 |   |
| Cost of sales  (excluding depreciation) |       | 66,303                                                         |       | 2,770                                                          |       | 69,073 |   | 55,706 |   | 2,984 |   | 58,690 |   |
| Operating  expenses                     |       | 12,581                                                         |       | 530                                                            |       | 13,111 |   | 8,257 |   | 471 |   | 8,728 |   |
| Other expense,  net                     |       | —                                                         |       | —                                                         |       | — |   | 12 |   | — |   | 12 |   |
| Segment EBITDA                          |       | $                                                              | 43,430     |                                                           | $          | 948 |   | $ | 44,378 |   | $ | 37,187 |   | $ | 1,890 |   | $ | 39,077 |   |
| Total assets                            |       | $                                                              | 588,355    |                                                           | $          | 25,390 |   | $ | 613,745 |   | $ | 601,812 |   | $ | 33,662 |   | $ | 635,474 |   |

 

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 and 2004**

Segmentinformation for the nine months ended September 30, 2005 and 2004 was asfollows:

| ** **                              | ** ** | **Nine Months Ended  September 30, 2005** | ** ** | **Nine Months Ended  September 30, 2004** | ** ** |
|-----------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                              | ** ** | **Ice**                                                       | ** ** | **Non-Ice**                                                   | ** ** | **Total** | ** ** | **Ice** | ** ** | **Non-Ice** | ** ** | **Total** | ** ** |
| ** **                              | ** ** | **(in thousands)**                                            | ** ** |
| Revenues                                |       | $                                                             | 247,890    |                                                          | $          | 11,039 |   | $ | 258,929 |   | $ | 218,684 |   | $ | 13,732 |   | $ | 232,416 |   |
| Cost of sales  (excluding depreciation) |       | 146,675                                                       |       | 7,176                                                         |       | 153,851 |   | 129,286 |   | 7,761 |   | 137,047 |   |
| Operating  expenses                     |       | 29,745                                                        |       | 1,500                                                         |       | 31,245 |   | 24,460 |   | 1,365 |   | 25,825 |   |
| Other expense,  net                     |       | —                                                        |       | —                                                        |       | — |   | 12 |   | — |   | 12 |   |
| Segment EBITDA                          |       | $                                                             | 71,470     |                                                          | $          | 2,363 |   | $ | 73,833 |   | $ | 64,926 |   | $ | 4,606 |   | $ | 69,532 |   |
| Total assets                            |       | $                                                             | 588,355    |                                                          | $          | 25,390 |   | $ | 613,745 |   | $ | 601,812 |   | $ | 33,662 |   | $ | 635,474 |   |

 

Thereconciliation of total Segment EBITDA to net income (loss) for the three andnine month periods ended September 30, 2005 and 2004 was as follows:

| ** **                                                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2005**                                             | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                  | ** ** | **(in thousands)**                              | ** ** |
| Segment EBITDA                                                              |       | $                                                    | 44,378     |                                                | $          | 39,077 |   | $ | 73,833 |   | $ | 69,532 |   |
| Loss on  dispositions of assets                                             |       | (804                                                 | )          | —                                              |       | (991 | ) | — |   |
| Depreciation expense  related to cost of sales                              |       | (4,716                                               | )          | (4,726                                              | )          | (14,191 | ) | (13,851 | ) |
| Depreciation and  amortization expense                                      |       | (1,413                                               | )          | (1,098                                              | )          | (4,280 | ) | (3,251 | ) |
| Impairment of  assets                                                       |       | —                                               |       | —                                              |       | (5,725 | ) | — |   |
| Management  agreement termination fees and transaction bonuses and expenses |       | (6,171                                               | )          | —                                              |       | (6,171 | ) | — |   |
| Loss on extinguishment  of debt                                             |       | (28,189                                              | )          | —                                              |       | (28,189 | ) | — |   |
| Interest expense                                                            |       | (8,389                                               | )          | (6,595                                              | )          | (27,526 | ) | (19,841 | ) |
| Income tax  benefit (expense)                                               |       | 2,211                                                |       | (10,130                                             | )          | 5,362 |   | (12,384 | ) |
| Net income (loss)                                                           |       | $                                                    | (3,093     | )                                                   | $          | 16,528 |   | $ | (7,878 | ) | $ | 20,205 |   |

 

**12.**   Impairment ofAssets

Due to the significantreduction in cold storage sales volumes related to a particular customer, theCompany evaluated the goodwill recorded in the cold storage portion of itsnon-ice business segment in accordance with SFAS No. 142, “Goodwill and OtherIntangibles” as of June 30, 2005. The goodwill was valued using a marketvaluation approach based on valuations of comparable businesses, multiples ofearnings of comparable businesses and discounted cash flows. As a result ofsuch evaluation, the Company recorded a non-cash goodwill impairment charge of$5.7 million during the three months ended June 30, 2005.

**13.   Subsequent Event**

On November 3, 2005, 9,300 unrestricted common shareswere granted to certain employees under the 2005 Equity Incentive Plan (seeNote 7). On that same date, 682,000 restricted stock units (“RSUs”) 

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 and 2004**

were granted to certainemployees and each of the independent directors of Reddy Holdings. Each RSU providesfor the grant of one share of unrestricted common stock on the date that thevesting terms of each RSU is satisfied.

Fifty percent of each awardof RSUs (the “time-vested RSUs”) will vest in four equal annual installmentsbeginning on August 12, 2006 and continuing on August 12 of each of thefollowing three years, provided the recipient remains employed with the Companythrough such vesting dates. The remaining fifty percent of each award of RSUs (the“performance-vested RSUs”) will vest in four equal annual installmentsbeginning on August 12, 2006 and continuing on August 12 of each of the followingthree years, provided the recipient remains employed with the Company throughsuch vesting dates and the applicable performance condition for the applicablevesting period is met. The performance condition for each vesting period willbe based on the Company’s earned distributable cash per share (as defined inthe related restricted share unit agreement) for such vesting period. Eachvesting period will begin on July 1 and end on June 30 of the subsequentyear. All RSUs will immediately vest in full, and shares will be distributed,at the time of a Change in Control (as defined in the 2005 Equity IncentivePlan). If in any performance period the performance condition for a subsequentperformance period is achieved, performance-vested RSUs will be entitled todividend equivalent rights in the subsequent performance period equal to thedividends which would be payable on the shares of common stock represented bythe RSUs subject to vesting in that period. Payments of such dividend equivalents will be made in cash to theholders of RSUs at the time of actual dividend payments and will not be subjectto vesting.  Time-vested RSUs will not beentitled to dividend equivalent rights.

**14.   Restatementof Condensed Consolidated Statement of Operations**

In the process of preparing its consolidated financialstatements for the year ended December 31, 2004, and in responding tocomments from the SEC on the Company’s Registration Statement on Form S-1relating to the Company’s IPO (see Note 6), the Company determined thatits presentation of “cost of sales” and “gross profit”, as previously reported,was not consistent with accounting principles generally accepted in the UnitedStates of America.

Historically, the Company did not include depreciationexpense related to cost of sales as a component of cost of sales and thereforehad excluded it from gross profit calculations. Consistent with presentationsof other companies in related industries, the Company added the caption “depreciationexpense related to cost of sales” above “gross profit” in its consolidatedstatements of operations. In addition, the Company renamed the caption “cost ofsales” to “cost of sales (excluding depreciation)” to clarify that depreciationexpense attributable to cost of sales is not included in that caption. TheCompany restated the accompanying condensed consolidated statements of operationsfor the three and nine months ended September 30, 2004 to reclassify$4.7 million and $13.9 million, respectively, from “depreciation andamortization expense” to “depreciation expense related to cost of sales”, whichhad the effect of reducing gross profit, but did not have any effect on incomefrom operations or net income. This restatement did not affect the Company’shistorical consolidated balance sheets or consolidated statements of cashflows.

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**Item 2.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

The following discussionand analysis of our financial condition and results of operations should beread in conjunction with our condensed consolidated financial statements andthe related notes and other information included elsewhere in this Form 10-Qand our Annual Report on Form 10-K for the year ended December 31,2004, previously filed with the Securities and Exchange Commission (“SEC”). Asused in this section, “Reddy Group” refers to Reddy Ice Group, Inc.,formerly known as Packaged Ice, Inc., and not its subsidiaries, and “ReddyHoldings” refers to Reddy Ice Holdings, Inc. and not its subsidiaries.

**Uncertaintyof Forward Looking Statements and Information**

Other thanstatements of historical facts, statements made in this Form 10-Qconstitute “forward-looking statements” within the meaning of such termunder the Private Securities Litigation Reform Act of 1995. We believe theexpectations reflected in such forward-looking statements are accurate. However,we cannot assure you that such expectations will occur. These forward-lookingstatements involve known and unknown risks, uncertainties and other factorsthat may cause our actual results, performance or achievements to be materiallydifferent from future results expressed or implied by the forward-lookingstatements. Factors you should consider that could cause these differences are:

·       generaleconomic trends and seasonality;

·       weatherconditions;

·       oursubstantial leverage and ability to service our debt;

·       therestrictive covenants under our indebtedness;

·       availabilityof capital sources;

·       theability of our subsidiaries to make distributions to us in amounts sufficientto make required interest and principal payments on our outstandingindebtedness and future dividend payments to our stockholders;

·       limitationson our ability to pursue growth opportunities as a result of our dividendpolicy;

·       fluctuationsin operating costs, including the prices of electricity, fuel, polyethylene andother required expenses;

·       competitivepractices in the industry in which we compete;

·       changesin labor conditions;

·       ourcapital expenditure requirements;

·       therisks associated with acquisitions and the failure to integrate acquired businesses;

·       technologicalchanges and innovations;

·       legislativeor regulatory requirements; and

·       allthe other factors described herein under “Risks Relating to Our Indebtedness”and “Risks Relating to Our Business”.

You should not unduly relyon 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 releaseany revisions to these forward-looking statements to reflect events orcircumstances occurring after the date of this report or to 

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reflectthe occurrence of unanticipated events. Important factors that could cause ouractual results to differ materially from our expectations are discussedelsewhere in this report.

**General**

***Our Business.******  ***We are thelargest manufacturer and distributor of packaged ice in the United States andcurrently serve approximately 82,000 customer locations in 31 states and theDistrict of Columbia. We operate in two business segments—ice products andnon-ice products and operations. Ice products accounted for approximately 96%of our revenues in the nine months ended September 30, 2005 and 94% ofrevenues in the nine months ended September 30, 2004. Our ice productsbusiness consists of:

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

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

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

***Seasonality.******  ***Our results ofoperations are highly seasonal, characterized by peak demand during the warmermonths of May through September, with an extended peak selling season inthe southern United States. As a result of this seasonality and the fixed costsin our business, the proportion of revenues earned in our ice and non-icebusiness segments and the ratio of costs to revenues in any given quarter arenot necessarily indicative of the ratios for the 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. Approximately68%, 66% and 68% of our revenues occurred during the second and third calendarquarters in 2004, 2003 and 2002, respectively. The proportion of revenues inthe second and third calendar quarters of 2003 was lower than in 2004 and 2002primarily due to the timing of our 2003 acquisitions, which all occurred in thefourth quarter of 2003. This ratio is expected to increase to 69% to 70% in2005 due to the results of the three months ended September 30, 2005. As aresult of seasonal revenue declines and a less than proportional decline inexpenses during the first and fourth quarters, we typically experience lowerprofit margins, resulting in losses during these periods. In addition, becausea significant portion of our annual sales are generated during the second andthird calendar quarters, our annual results of operations may fluctuatesignificantly if the weather during these periods is cool or rainy.

***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 rightof return with respect to these products or services. A portion of our revenuesalso represents fees earned under management agreements for Ice Factorieslocated outside our primary territories that are recognized as earned undercontract terms.

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

·       manufacturingand distribution labor costs;

·       rawmaterials (primarily of polyethylene-based plastic bags);

·       productdelivery expenses, including fuel and vehicle rental expense related toproducts delivered by our own distribution network, as well as fees paid todistributors who deliver ice to our customers on our behalf;

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·       utilityexpenses (primarily electricity used in connection with the manufacturing, storageand distribution processes); and

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

***DepreciationExpense Related to Cost of Sales and Depreciation and Amortization Expense.******  ***Depreciationand amortization are divided into two line items—depreciation expense relatedto cost of sales and depreciation and amortization expense. Depreciationexpense related to cost of sales consists of depreciation expense for ourproduction and distribution equipment. Depreciation and amortization expenseconsists of depreciation and amortization expense for our selling, general andadministrative functions.

***Operating Expenses.******  ***Our operatingexpenses are costs associated with selling, general and administrativefunctions. These costs include executive officers’ compensation, office andadministrative salaries, insurance, legal and other professional services andcosts associated with leasing office space. Labor costs, including associatedpayroll taxes and benefit costs but excluding non-cash stock-basedcompensation expense, included in operating expenses represented approximately6% and 5% of revenues in the three months ended September 30, 2005 and2004, respectively, and 7% and 6% of revenues in the nine months ended September 30,2005 and 2004, respectively.

***Facilities.******  ***At September 30,2005, we owned or operated 58 ice manufacturing facilities, 53 distributioncenters, approximately 79,000 merchandisers (cold storage units installed atcustomer locations), approximately 3,000 Ice Factories, five refrigeratedwarehouses and one bottled water plant. As of the same date, we had an aggregatedaily ice manufacturing capacity of over 16,000 tons, the equivalent of over4.5 million seven-pound bags of ice.

***Restatement ofStatements of Operations.******  ***In the processof preparing our consolidated financial statements for the year ended December 31,2004, and in responding to comments from the SEC on our Registration Statementon Form S-1 relating to our initial public offering of common stock,we determined that our presentation of “cost of sales” and “gross profit”, aspreviously reported, was not consistent with accounting principles generallyaccepted in the United States of America.

Historically, we have not included depreciationexpense related to cost of sales as a component of cost of sales and thereforehad excluded it from gross profit calculations. Consistent with presentationsof other companies in related industries, we added the caption “depreciationexpense related to cost of sales” above “gross profit” in our consolidatedstatements of operations. In addition, we renamed the caption “cost of sales”to “cost of sales (excluding depreciation)” to clarify that depreciationexpense attributable to cost of sales is not included in that caption. We haverestated the accompanying condensed consolidated statements of operations forthe three and nine months ended September 30, 2004 to reclassify$4.7 million and $13.9 million, respectively, from “depreciation andamortization expense” to “depreciation expense related to cost of sales”, whichhad the effect of reducing gross profit, but did not have any effect on incomefrom operations or net income. This restatement did not affect our historicalconsolidated balance sheets or consolidated statements of cash flows.

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Management’sdiscussion and analysis of financial condition and results of operations whichfollows gives effect to the restatement.

| ** **                                                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Change from Last Year** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                  | ** ** | **2005**                                             | ** ** | **2004**                                 | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                                                  | ** ** | **(in thousands)**                              | ** ** |
| ***Consolidated  Results***                                                 |       |                                                 |       |                                     |       |   |   |   |   |
| Revenues                                                                    |       | $                                                    | 126,562    |                                     | $          | 106,507 |   | $ | 20,055 |   | 18.8 |   |
| Cost of sales  (excluding depreciation)                                     |       | 69,073                                               |       | 58,690                                   |       | 10,383 |   | 17.7 |   |
| Depreciation expense  related to cost of sales                              |       | 4,716                                                |       | 4,726                                    |       | (10 | ) | (0.2 | ) |
| Gross profit                                                                |       | 52,773                                               |       | 43,091                                   |       | 9,682 |   | 22.5 |   |
| Operating expenses                                                          |       | 13,111                                               |       | 8,728                                    |       | 4,383 |   | 50.2 |   |
| Depreciation and  amortization expense                                      |       | 1,413                                                |       | 1,098                                    |       | 315 |   | 28.7 |   |
| Loss on  dispositions of assets                                             |       | 804                                                  |       | —                                   |       | 804 |   | — |   |
| Management  agreement termination fees and transaction bonuses and expenses |       | 6,171                                                |       | —                                   |       | 6,171 |   | — |   |
| Income from operations                                                      |       | 31,274                                               |       | 33,265                                   |       | (1,991 | ) | (6.0 | ) |
| Other expense,  net                                                         |       | —                                               |       | 12                                       |       | (12 | ) | (100.0 | ) |
| Loss on extinguishment  of debt                                             |       | 28,189                                               |       | —                                   |       | 28,189 |   | — |   |
| Interest expense                                                            |       | 8,389                                                |       | 6,595                                    |       | 1,794 |   | 27.2 |   |
| Income before income  taxes                                                 |       | (5,304                                               | )          | 26,658                                   |       | (31,962 | ) | (119.9 | ) |
| Income tax  benefit (expense)                                               |       | 2,211                                                |       | (10,130                                  | )          | 12,341 |   | (121.8 | ) |
| Net income                                                                  |       | $                                                    | (3,093     | )                                        | $          | 16,528 |   | $ | (19,621 | ) | (118.7 | ) |
| ***Ice  Operations:***                                                      | ** ** | ** **                                           | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                    |       | $                                                    | 122,314    |                                     | $          | 101,162 |   | $ | 21,152 |   | 20.9 |   |
| Cost of sales  (excluding depreciation)                                     |       | 66,303                                               |       | 55,706                                   |       | 10,597 |   | 19.0 |   |
| Depreciation expense  related to cost of sales                              |       | 4,445                                                |       | 4,455                                    |       | (10 | ) | (0.2 | ) |
| Gross profit                                                                |       | $                                                    | 51,566     |                                     | $          | 41,001 |   | $ | 10,565 |   | 25.8 |   |
| Operating  expenses                                                         |       | $                                                    | 12,581     |                                     | $          | 8,257 |   | $ | 4,324 |   | 52.4 |   |
| ***Non-Ice  Operations:***                                                  | ** ** | ** **                                           | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                    |       | $                                                    | 4,248      |                                     | $          | 5,345 |   | $ | (1,097 | ) | (20.5 | ) |
| Cost of sales  (excluding depreciation)                                     |       | 2,770                                                |       | 2,984                                    |       | (214 | ) | (7.2 | ) |
| Depreciation expense  related to cost of sales                              |       | 271                                                  |       | 271                                      |       | — |   | — |   |
| Gross profit                                                                |       | $                                                    | 1,207      |                                     | $          | 2,090 |   | $ | (883 | ) | (42.2 | ) |
| Operating expenses                                                          |       | $                                                    | 530        |                                     | $          | 471 |   | $ | 59 |   | 12.5 |   |

 

*Revenues:**  *Revenuesincreased $20.1 million from the three months ended September 30,2004 to the three months ended September 30, 2005. This increase isprimarily due to increased volume sales driven by more favorable weather acrossmost of our markets this year as compared to last year and the increased demandresulting from the impact of Hurricanes Katrina and Rita, higher averagepricing, the effects of the acquisitions of five ice companies from July 1,2004 to November 1, 2004 and two acquisitions in the three months ended September 30,2005 (approximately $2.9 million) and the effects of package sizinginitiatives. Partially offsetting these increases in revenues was a$1.1 million decrease in non-ice revenue, primarily due to volume decreasesin our cold storage business.

*Costof Sales (Excluding Depreciation):**  *Cost ofsales (excluding depreciation) increased $10.4 million from the three monthsended September 30, 2004 to the three months ended September 30, 2005.This increase in cost of sales (excluding depreciation) is primarily due toincreases in volume sales resulting from favorable weather conditions in thecurrent period, increases in bag and fuel costs of approximately 

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$2 million driven by increasedenergy prices, and an additional $1.7 million of costs in the three monthsended September 30, 2005 associated with the ice operations acquiredduring 2004 and 2005.

Labor costs, including associated payroll taxes andbenefit costs (including health insurance), accounted for approximately 20% and21% of revenues in the three months ended September 30, 2005 and 2004, respectively.Cost of plastic bags represented approximately 7% and 6% of revenues in thethree months ended September 30, 2005 and 2004, respectively. Fuelexpenses represented approximately 3% of revenues in the three months ended September 30,2005 and 2004. Expenses for independent third party distribution servicesrepresented approximately 5% of revenues in the three months ended September 30,2005 and 2004. Electricity expense represented approximately 5% of revenues inthe three months ended September 30, 2005 and 2004.

*DepreciationExpense Related to Cost of Sales:**  *Depreciationexpense related to cost of sales decreased $0.01 million from the threemonths ended September 30, 2004 to the three months ended September 30,2005 as a result of the effect of asset dispositions, offset by additionaldepreciation expense associated with new production and distribution equipmentplaced in service during late 2004 and 2005 and the ice operations acquired in2004 and 2005.

*OperatingExpenses:**  *Operating expenses increased$4.4 million from the three months ended September 30, 2004 to thethree months ended September 30, 2005. This increase is primarily due toincreased levels of incentive compensation ($2.5 million), the effects of iceoperations acquired in late 2004 (approximately $0.2 million), increasesin non-cash stock-based compensation expense of $0.7 million and an$1.0 million increase in other costs, primarily professional services,insurance and bad debt.

*Depreciationand Amortization:**  *Depreciation and amortizationincreased $0.3 million from the three months ended September 30, 2004to the three months ended September 30, 2005. This increase is primarilydue to additional amortization expense associated with the intangible assetsrecorded in connection with the acquisitions completed in 2004.

*ManagementAgreement Termination Fees and Transaction Bonuses and Expenses:**  *Inconnection with our initial public offering and the related transactions in August 2005,we recorded expenses of $6.2 million. These charges were related to payments toour majority owners to terminate the management services agreement ($4.0million), transaction bonuses to certain employees ($1.8 million) and other feesand expenses ($0.4 million).

*Losson extinguishment of debt:**  *In connection with the our initialpublic offering in the three months ended September 30, 2005, we redeemedsubstantially all of our 87¤8% senior subordinated notes in connection witha tender offer and consent solicitation and repaid all balances outstandingunder our credit facility. We incurred a loss of $28.1 million in connectionwith these repayments, due to tender premiums and consent fees paid to holdersof the 87¤8%senior subordinated notes ($17.3 million), the write-off of deferred debt costsand original issue discount related to the 87¤8% seniorsubordinated notes and the credit facility ($10.6 million) and other fees andexpenses ($0.2 million). Additionally, during the three months ended September 30,2005, we paid $0.4 million to purchase and retire 101⁄2% Senior Discount Notesdue 2012 (the “Discount Notes”) with an aggregate principal amount at maturityof $0.5 million. A loss of $0.046 million was recognized in connection withthis transaction.

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*Interest Expense:**  *Interestexpense increased $1.8 million from the three months ended September 30,2004 to the three months ended September 30, 2005, due to$3.0 million of non-cash interest expense associated with the DiscountNotes issued on October 27, 2004, higher average outstanding balances underour credit facility, the effects of higher interest rates on our variable ratedebt, offset by the effect of the redemption of the 87¤8%senior subordinated notes on August 15, 2005.

| ** **                                                             | ** ** | **Nine Months Ended  September 30,** | ** ** | **Change from Last Year** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                             | ** ** | **2005**                                            | ** ** | **2004**                                 | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                                             | ** ** | **(in thousands)**                             | ** ** |
| ***Consolidated  Results***                                            |       |                                                |       |                                     |       |   |   |   |   |
| Revenues                                                               |       | $                                                   | 258,929    |                                     | $          | 232,416 |   | $ | 26,513 |   | 11.4 |   |
| Cost of sales  (excluding depreciation)                                |       | 153,851                                             |       | 137,047                                  |       | 16,804 |   | 12.3 |   |
| Depreciation expense  related to cost of sales                         |       | 14,191                                              |       | 13,851                                   |       | 340 |   | 2.5 |   |
| Gross profit                                                           |       | 90,887                                              |       | 81,518                                   |       | 9,369 |   | 11.5 |   |
| Operating  expenses                                                    |       | 31,245                                              |       | 25,825                                   |       | 5,420 |   | 21.0 |   |
| Depreciation and  amortization expense                                 |       | 4,280                                               |       | 3,251                                    |       | 1,029 |   | 31.7 |   |
| Loss on  dispositions of assets                                        |       | 991                                                 |       | —                                   |       | 991 |   | — |   |
| Impairment of  assets                                                  |       | 5,725                                               |       | —                                   |       | 5,725 |   | — |   |
| Management  termination fees and transaction bonuses and expenses |       | 6,171                                               |       | —                                   |       | 6,171 |   | — |   |
| Income from operations                                                 |       | 42,475                                              |       | 52,442                                   |       | (9,967 | ) | (19.0 | ) |
| Other expense,  net                                                    |       | —                                              |       | 12                                       |       | (12 | ) | (100.0 | ) |
| Loss on extinguishment  of debt                                        |       | 28,189                                              |       | —                                   |       | 28,189 |   | — |   |
| Interest expense                                                       |       | 27,526                                              |       | 19,841                                   |       | 7,685 |   | 38.7 |   |
| Income before income  taxes                                            |       | (13,240                                             | )          | 32,589                                   |       | (45,829 | ) | (140.6 | ) |
| Income tax  benefit (expense)                                          |       | 5,362                                               |       | (12,384                                  | )          | 17,746 |   | 143.3 |   |
| Net income                                                             |       | $                                                   | (7,878     | )                                        | $          | 20,205 |   | (28,083 | ) | (139.0 | ) |
|                                                                        |            |                                                     |            |                                          |            |  |  |  |  |  |  |  |

 

| ** **                                     | ** ** | **Nine Months Ended  September 30,** | ** ** | **Change from Last Year** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                     | ** ** | **2005**                                            | ** ** | **2004**                                 | ** ** | **    Dollars    ** | ** ** | **    %    ** | ** ** |
| ** **                                     | ** ** | **(in thousands)**                             | ** ** |
| ***Ice  Operations:***                         | ** ** | ** **                                          | ** ** | ** **                               | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Revenues                                       |       | $                                                   | 247,890    |                                     | $          | 218,684 |   |   | $ | 29,206 | ** ** |   |   | 13.4 | ** ** |   |
| Cost of sales  (excluding depreciation)        |       | 146,675                                             |       | 129,286                                  |       |   | 17,389 | ** ** |   |   | 13.5 | ** ** |   |
| Depreciation expense  related to cost of sales |       | 13,373                                              |       | 13,043                                   |       |   | 330 | ** ** |   |   | 2.5 | ** ** |   |
| Gross profit                                   |       | $                                                   | 87,842     |                                     | $          | 76,355 |   |   | $ | 11,487 | ** ** |   |   | 15.0 | ** ** |   |
| Operating  expenses                            |       | $                                                   | 29,745     |                                     | $          | 24,460 |   |   | $ | 5,285 | ** ** |   |   | 21.6 | ** ** |   |
| ***Non-Ice Operations:***                      | ** ** | ** **                                          | ** ** | ** **                               | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Revenues                                       |       | $                                                   | 11,039     |                                     | $          | 13,732 |   |   | $ | (2,693 | ) |   |   | (19.6 | ) |   |
| Cost of sales  (excluding depreciation)        |       | 7,176                                               |       | 7,761                                    |       |   | (585 | ) |   |   | (7.5 | ) |   |
| Depreciation expense  related to cost of sales |       | 818                                                 |       | 808                                      |       |   | 10 |   |   |   | 1.2 |   |   |
| Gross profit                                   |       | $                                                   | 3,045      |                                     | $          | 5,163 |   |   | $ | (2,118 | ) |   |   | (41.0 | ) |   |
| Operating expenses                             |       | $                                                   | 1,500      |                                     | $          | 1,365 |   |   | $ | 135 |   |   |   | 9.9 |   |   |

 

*Revenues:**  *Revenuesincreased $26.5 million from the nine months ended September 30, 2004to the nine months ended September 30, 2005. This increase was primarilydue to increased volume sales, primarily in the third quarter of 2005, due tomore favorable weather in most of our markets and increased demand resultingfrom the impact of Hurricanes Katrina and Rita, the effects of package sizinginitiatives, higher average pricing, the effects of the acquisitions of 11 icecompanies made from March 1, 2004 to 

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November 1,2004 and in the 3 months ended September 30, 2005 (approximately$5.7 million) and changes in terms under which we do business with themajority of our distributors (approximately $2.6 million). Themodifications to our distributor business occurred mostly in the second quarterof 2004 and resulted in a corresponding increase in cost of sales (excludingdepreciation). Partially offsetting these increases in revenues was a$2.7 million decrease in non-ice revenue, primarily due to volume decreasesin our cold storage business.

*Cost of Sales (ExcludingDepreciation):**  *Cost of sales (excludingdepreciation) increased $16.8 million from the nine months ended September 30,2004 to the nine months ended September 30, 2005. This increase in cost ofsales (excluding depreciation) was primarily due to the increased volume salesreferred to above, approximately $3.6 million of additional costsassociated with the ice operations acquired during 2004 and 2005, a$2.6 million increase in distribution costs related to changes in termsunder which we do business with the majority of our distributors, a$0.3 million increase in health insurance costs and a $3.6 millionincrease in other costs such as fuel, bags and electricity due to marketincreases in energy prices. Partially offsetting these increases was a$0.6 million reduction of costs in our non-ice operations, primarily laborcosts in our cold storage operations related to decreased sales volumes. Thecompany has put initiatives in place related to health insurance and otherinsurance lines which, by year end 2005, are expected to offset a portion, ifnot all, of the negative insurance impact noted above, which occurred duringthe first quarter of 2005.

Labor costs, includingassociated payroll taxes and benefit costs (including health insurance), accountedfor approximately 23% and 24% of revenues in the nine months ended September 30,2005 and 2004, respectively. Cost of plastic bags represented approximately 7%and 6% of revenues in the nine months ended September 30, 2005 and 2004,respectively. Fuel expenses represented approximately 3% of revenues in thenine months ended September 30, 2005 and 2004. Expenses for independentthird party distribution services represented approximately 6% of revenues inthe nine months ended September 30, 2005, as compared to 5% of revenues inthe same period in 2004. Electricity expense represented approximately 5% ofrevenues in the nine months ended September 30, 2005 and 2004.

*Depreciation ExpenseRelated to Cost of Sales:**  *Depreciation expense related to costof sales increased $0.3 million from the nine months ended September 30,2004 to the nine months ended September 30, 2005 as a result of additionaldepreciation expense associated with new production and distribution equipmentplaced in service during 2004 and early 2005 and the ice operations acquired in2004, partially offset by the effect of asset dispositions.

*Operating Expenses:**  *Operatingexpenses increased $5.4 million from the nine months ended September 30,2004 to the nine months ended September 30, 2005. This increase wasprimarily due to increased levels of incentive compensation ($1.8 million), theeffects of the ice operations acquired in 2004 (approximately$0.5 million), an increase in non-cash stock-based compensationexpense of $1.2 million, and $1.9 million of increases in other costs,insurance costs, professional services and bad debt costs.

*Depreciation and Amortization:**  *Depreciationand amortization increased $1.0 million from the nine months ended September 30,2004 to the nine months ended September 30, 2005. This increase wasprimarily due to additional amortization expense associated with the intangibleassets recorded in connection with the acquisitions completed in 2004.

*Impairment of Assets:**  *Due tothe significant reduction in cold storage sales volumes related to a particularcustomer, we evaluated the goodwill recorded in the cold storage portion of ournon-ice business segment in accordance with SFAS No. 142, “Goodwill andOther Intangibles” as of June 30, 2005. As a result of such evaluation, werecorded a non-cash impairment charge of $5.7 million during the threemonths ended June 30, 2005.

*Management Agreement TerminationFees and Transaction Bonuses and Expenses:**  *Inconnection with our initial public offering and the related transactions in August 2005,we recorded expenses of $6.2 

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million. Thesecharges were related to payments to our majority owners to terminate themanagement services agreement ($4.0 million), transaction bonuses tocertain employees ($1.8 million) and other fees and expenses ($0.4 million).

*Loss on Extinguishment ofDebt:**  *In connection with the our initial publicoffering in the three months ended September 30, 2005, we redeemedsubstantially all of our 87¤8% senior subordinated notes in connection witha tender offer and consent solicitation and repaid all balances outstandingunder our credit facility. We incurred a loss of $28.1 million in connectionwith these repayments due to tender premiums and consent fees paid to theholders of the 87¤8% senior subordinated notes ($17.3 million),the write-off of deferred debt costs and original issue discount related to the87¤8%senior subordinated notes and the credit facility ($10.6 million) and otherfees and expenses ($0.2 million). Additionally, during the three months ended September 30,2005, we paid $0.4 million to purchase and retire 101⁄2% Senior Discount Noteswith an aggregate principal amount at maturity of $0.5 million. A loss of$0.046 million was recognized in connection with this transaction.

*Interest Expense:**  *Interestexpense increased $7.7 million from the nine months ended September 30,2004 to the nine months ended September 30, 2005, due to $8.6 millionof non-cash interest expense associated with the Discount Notes issued on October 27,2004, higher average outstanding balances under our credit facility and theeffects of higher interest rates on our variable rate debt, offset by theeffect of the redemption of the 87¤8%senior subordinated notes on August 15, 2005.

**Subsequent Event**

On November 3, 2005, 9,300unrestricted common shares were granted to certain employees under the ReddyIce Holdings, Inc. Long Term Incentive and Share Award Plan (the “2005 EquityIncentive Plan”). On that same date, 682,000 restricted stock units (“RSUs”)were granted to certain employees and each of the independent directors ofReddy Holdings. Each RSU provides for the grant of one share of unrestrictedcommon stock on the date that the vesting terms of each RSU is satisfied.

Fifty percent of each awardof RSUs (the “time-vested RSUs”) will vest in four equal annual installmentsbeginning on August 12, 2006 and continuing on August 12 of each of thefollowing three years, provided the recipient remains employed with the Companythrough such vesting dates. The remaining fifty percent of each award of RSUs (the“performance-vested RSUs”) will vest in four equal annual installmentsbeginning on August 12, 2006 and continuing on August 12 of each of thefollowing three years, provided the recipient remains employed with the Companythrough such vesting dates and the applicable performance condition for theapplicable vesting period is met. The performance condition for each vestingperiod will be based on the Company’s earned distributable cash per share (asdefined in the related restricted share unit agreement) for such vestingperiod. Each vesting period will begin on July 1 and end on June 30 of thesubsequent year. All RSUs will immediately vest in full, and shares will bedistributed, at the time of a Change in Control (as defined in the 2005 EquityIncentive Plan).  If in any performanceperiod the performance condition for a subsequent performance period isachieved, performance-vested RSUs will be entitled to dividend equivalentrights in the subsequent performance period equal to the dividends which wouldbe payable on the shares of common stock represented by the RSUs subject tovesting in that period.  Payments of suchdividend equivalents will be made in cash to the holders of RSUs at the time ofactual dividend payments and will not be subject to vesting.  Time-vested RSUs will not be entitled todividend equivalent rights.

**Liquidityand Capital Resources**

In connection with ourIPO, and effective upon its consummation, Reddy Group amended and restated itscredit facility. The credit facility consists of a $240.0 million term loanfacility and a $60.0 million revolving credit facility. The amended andrestated credit facility permits, among other things, greater availability forthe payment of dividends under the restricted payments covenant. The netproceeds of the IPO of approximately $116.2 million and borrowings of $240.0million under the term loan facility 

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and$16.0 million under the revolving credit facility were used to repay borrowingsand accrued interest under the Company’s existing credit facilities of $184.5million and repurchase Reddy Group’s $152.0 million aggregate principal amountof 87¤8% senior subordinatednotes due 2011, at a price equal to 111.36% of the principal amount tendered.

Our board of directorsadopted a dividend policy that became effective upon the closing of our IPO. Ourdividend policy reflects an intention to distribute as regular quarterlydividends to our stockholders a substantial portion of the cash generated byour business in excess of our expected cash needs and other possible uses. Theseexpected cash needs include operating expenses and working capitalrequirements, cash interest and principal payments on our indebtedness, capitalexpenditures, incremental costs associated with being a public company and cashincome taxes. The Company’s board of directors has adopted a dividend policyreflecting an intention to distribute a substantial portion of the cashgenerated by its business in excess of operating expenses and working capital requirements,interest and principal payments on its indebtedness, capital expenditures,incremental costs associated with being a public company and taxes as regularquarterly dividends to its stockholders. The Company expects to continue to payquarterly dividends at an annual rate of $1.53 per share through at least September 30,2006. While the Company intends to pay regular quarterly dividends pursuant toits dividend policy, all subsequent dividends may be declared by the Company’sboard of directors at its discretion. On August 12, 2005 our board of directorsdeclared a partial quarterly dividend for the period from August 12, 2005to September 30, 2005 in the amount of $0.20788 per share, reflecting anannual dividend rate of $1.53 per share, or an aggregate of approximately $4.5million, which was paid on October 17, 2005 to stockholders of record asof September 30, 2005.

We generate cash from thesale of packaged ice through traditional delivery methods, by which we******manufacture, package and store iceat a central facility and transport it to our customers’ retail******locations when needed, and throughIce Factories, which manufacture, package and store ice in our******customers’ retail locations. Ourprimary uses of cash are (a) cost of sales, (b) operating expenses, (c) dividendson our common stock, (d) debt service, (e) capital expendituresrelated to replacing and modernizing the capital******equipmentin our traditional ice plants and acquiring and installing additional IceFactories and (f) acquisitions. Historically, we have financed our capitaland working capital requirements, including our acquisitions, through a combination of cash flows fromoperations, borrowings under our revolving credit facilities and operatingleases.

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

During the nine monthsended September 30, 2005, capital expenditures totaled $15.7 million. Aswe have consolidated acquisitions into the existing company infrastructure, wehave identified non-core and excess assets which can be disposed of. From timeto time, we also dispose of other assets which are no longer useful in our operations.As a result of dispositions of these non-core and excess assets, we realizedproceeds of approximately $1.9 million in the nine months ended September 30,2005. Our net capital expenditures in the nine months ended September 30,2005 were $13.8 million.

In 2004, we completed theacquisition of 11 small ice companies for a total cash purchase price of approximately$16.9 million. Through the nine months ended September 30, 2005, we havecompleted the acquisition of two ice companies and purchased certain leasedreal estate assets for a total cash purchase price of approximately $3.4million. We will continue to evaluate acquisition opportunities as they become 

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available.In conjunction with these evaluations, we will consider our liquidity,availability under Reddy Group’s senior credit facility, mandatory principalpayments under our debt agreements and the availability of other capitalresources.

**CashFlows for the Nine Months Ended September 30, 2005 and 2004**

Netcash provided by operating activities was $32.3 million in the nine monthsended September 30, 2005 and 2004. Cash provided by operations wasup approximately $6.2 million due to increased revenues and the related incomeon those sales. Offsetting this increase was $6.2 million of expensesassociated with certain transactions related to our initial public offering,primarily the termination of a monitoring and management services agreement andtransaction bonuses paid to certain employees.

Net cash used in investingactivities was $17.2 million and $15.9 million in the nine monthsended September 30, 2005 and 2004, respectively. The increase in net cashused in investing activities from 2004 to 2005 was due to an increase inproperty and equipment additions of $3.2 million, primarily related to thetiming of our budgeted capital expenditures in 2005 as compared with 2004, anda decrease of $0.3 million in proceeds from dispositions, partially offsetby a $2.3 million reduction in the cost of acquisitions and leasepurchases. In the nine months ended September 30, 2004, we completed sevenacquisitions for $5.7 million. In the nine months ended September 30,2005, we completed two acquisitions of ice companies and purchased certainleased real estate for $3.4 million.

Net cash used by financingactivities was $0.8 million and $1.6 million in the nine months ended September 30, 2005 and 2004,respectively. The decrease was primarily due to the receipt of $9.6 million of excess cash proceeds from ourinitial public offering and $1.8 million of proceeds from stock optionexercises in the current year, partially offset by increased principal repayments of $11.0 million on our revolving creditfacility and term loans.

**Long-termDebt and Other Obligations**

*Overview.**  *At September 30, 2005, we had approximately$350.1 million of total debt outstanding as follows:

·       $240.0million of outstanding term loans under Reddy Group’s senior credit facilitywhich matures on August 12, 2012;

·       $109.8million of Reddy Holdings’ 101⁄2% senior discount notes due 2012 (net ofunamortized discount of $40.7 million);

·       $0.3million of other debt.

***Senior Credit Facility.******  ***On August 12, 2005,Reddy Group amended and restated its credit facility with a syndicate of banks,financial institutions and other entities as lenders, including Credit SuisseFirst Boston, as Administrative Agent, Canadian Imperial Bank of Commerce, BearStearns Corporate Lending, Inc. and Lehman Brothers, Inc. (the “CreditFacility”), primarily to increase the maximum amount of the Revolving CreditFacility to $60 million (the “Revolving Credit Facility”), provide for a single$240 million term loan (the “Term Loan”), reduce the applicable margins on boththe Revolving Credit Facility and Term Loan and extend the maturities of theRevolving Credit Facility to August 12, 2010 and the Term Loan toAugust 12, 2012. Borrowings under the Revolving Credit Facility and TermLoan, along with proceeds from the Company’s initial public offering (see Note6 to our condensed consolidated financial statements), were used to repay ReddyGroup’s previous Credit Facility, repurchase substantially all of the Company’sexisting $152.0 million of 87¤8%Senior Subordinated Notes due August 1, 2011 and fund other related transactions.

At September 30, 2005, the Company had$53.3 million of availability under the Revolving Credit Facility, whichwas net of outstanding standby letters of credit of $6.7 million. The standbyletters of credit are used primarily to secure certain insurance obligations.

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Principal balances outstanding under the CreditFacility bear interest per annum, at Reddy Group’s option, at the sum of thebase rate plus 0.75% or LIBOR plus 1.75%. The base rate is defined as thegreater of the prime rate (as announced from time to time by the AdministrativeAgent) or the federal funds rate plus 0.5%. At September 30, 2005, theweighted average interest rate of borrowings outstanding under the CreditFacility was 5.5%. Interest on base rate loans is payable on the last day ofeach quarter. Interest on LIBOR loans is payable upon maturity of the LIBORloan or on the last day of the quarter if the term of the LIBOR loan exceeds90 days. Reddy Group pays a quarterly fee on the average availabilityunder the Revolving Credit Facility based on an annual rate of 0.5%.

The Revolving Credit Facility and Term Loan do notrequire any scheduled principal payments prior to their stated maturity dates. Subjectto certain conditions, mandatory repayments of the Revolving Credit Facilityand Term Loan (and if the Term Loan is no longer outstanding, mandatorycommitment reductions of the Revolving Credit Facility) are required to be madewith portions of the proceeds from (1) asset sales, (2) the issuanceof debt securities and (3) insurance and condemnation awards, subject tovarious exceptions. In the event of a change in control, as defined in theCredit Facility. Under the Credit Facility, Reddy Holdings may only paydividends if Reddy Group’s total leverage ratio for the most recently endedfiscal quarter is less than or equal to 3.75 to 1.0. In addition, the CreditFacility precludes Reddy Holdings and Reddy Group from declaring any dividendsif an event of default under the Credit Facility has occurred and is continuing.In particular, it will be an event of default if Reddy Group’s total leverageratio exceeds 4.0 to 1.0 or Reddy Group’s interest coverage ratio is less than3.25 to 1.0.

The Credit Facility contains financial covenants,which include the maintenance of certain financial ratios, as defined in theCredit Facility, and is collateralized by substantially all of Reddy Group’sassets and the capital stock of all of its subsidiaries. Reddy Holdingsguarantees the Credit Facility and such guarantee is secured by the capitalstock of Reddy Group. At September 30, 2005, Reddy Group was in compliancewith these covenants.

Effective September 12, 2005, Reddy Group enteredinto an interest rate hedging agreement (the “Hedge”) to fix the interest rateon a portion of its Term Loan. The Hedge has a term of three years, ten monthsand an initial notional balance of $220 million. The notional balance decreasesby $20 million on October 12 of each of the next three years, beginning onOctober 12, 2006. Reddy Group pays a fixed rate of 4.431% on the notionalamount and receives an amount equal to 3-month LIBOR. Any net payable orreceivable amount is settled quarterly. If Reddy Group had been required tosettle the Hedge as of September 30, 2005, it would have received $0.6 million.Reddy Group is exposed to risk of loss in the event of non-performance by thecounterparty to the Hedge. However it does not anticipate non-performance bythe counterparty.

***Senior DiscountNotes.****  *On October 27,2004, Reddy Holdings issued $151.0 million in aggregate principal amountat maturity of 101⁄2% Senior Discount Notes due 2012 in a private placementoffering. The senior discount notes were sold at 66.333% of the statedprincipal amount, which resulted in gross proceeds of $100.2 million. We usedthe net proceeds of the offering, together with a dividend of approximately$28.4 million from Reddy Group, to redeem all of Reddy Holdings’ existingseries A preferred stock for approximately $99.2 million, to payaccumulated dividends on such stock as of the date of redemption in the amountof approximately $15.0 million and to pay a dividend of approximately$10.4 million to our common stockholders. In connection with these transactions,Reddy Group made a special transaction payment of approximately$1.2 million in the aggregate to certain members of management and certaindirectors. In connection with the offering of notes and the related transactions,Reddy Ice Group amended its credit agreement (see “—Senior Credit Facility”above).

Each senior discountnote had an initial accreted value of $663.33 per $1,000 principal amount atmaturity. The accreted value of each senior discount note increases from thedate of issuance until November 1, 2008 at a rate of 101⁄2% per annum suchthat the accreted value will equal the stated principal 

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amountat maturity on November 1, 2008. Thereafter cash interest will accrue andbe payable semi-annually at a rate of 101⁄2% per annum. The senior discount notesare unsecured obligations of Reddy Holdings and are:

·       not guaranteed by any ofReddy Holdings’ subsidiaries;

·       senior in right of paymentto all of Reddy Holdings’ future subordinated indebtedness;

·       equal in right of paymentwith any of Reddy Holdings’ existing and future unsecured senior indebtedness;

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

·       structurally subordinatedto all obligations and preferred equity of Reddy Holdings’ subsidiaries.

The senior discount notes include customary covenantsthat restrict, among other things, Reddy Holdings’ ability to incur additionaldebt or issue certain preferred stock, pay dividends or redeem, repurchase orretire our capital stock or subordinated indebtedness, make certaininvestments, create liens, enter into arrangements that restrict dividends fromour subsidiaries, merge or sell all or substantially all of its assets or enterinto various transactions with affiliates. Prior to November 1, 2007, wemay redeem up to 35% of the principal amount of the senior discount notes at aredemption price of 110.5% of the principal amount thereof, plus accrued andunpaid interest to the date of redemption, with funds raised in equityofferings that are specified in the indenture governing the senior discountnotes. On and after November 1, 2008, we may redeem any or all of thesenior discount notes by paying a redemption premium, which is initially 5.25%of the principal amount at maturity of the notes, and declines annually to 0%for the period commencing on November 1, 2010 and thereafter. If a changeof control occurs prior to November 1, 2007, we may, at our option, redeemall, but not less than all, of the senior discount notes at a redemption priceequal to the sum of (i) the accreted value of the notes as of theredemption date, (ii) a premium equal to 125% of one year’s coupon paymentand (iii) any accrued and unpaid interest to the date of redemption. If weexperience a change of control and do not elect to make the optional redemptiondescribed in the previous sentence, we will be required to make an offer torepurchase the senior discount notes at a price equal to 101% of their accretedvalue, plus accrued and unpaid interest, if any, to the date of purchase. Wemay also be required to make an offer to purchase the senior discount noteswith proceeds of asset sales that are not reinvested in our business or used torepay other indebtedness.

The senior discount notes were subject to registrationwith the SEC pursuant to the Registration Rights Agreement (the “RightsAgreement”) entered into at the time of issuance. Pursuant to the RightsAgreement, Reddy Holdings was required, within 150 days after the issuancedate, to file a registration statement with the SEC to exchange the seniordiscount notes for new notes of Reddy Holdings having terms substantiallyidentical in all material respects to the senior discount notes and to use itscommercially reasonable efforts to cause the registration statement to be declaredeffective within 240 days after the issuance date. The 150thday following the issuance of the senior discount notes was March 26, 2005.Reddy Holdings did not file the required registration statement until April 6,2005 and, as a result, incurred additional interest expense from March 26,2005 to April 6, 2005 at an annual rate of 0.50%. The 240th dayfollowing the issuance of the Reddy Holdings notes was June 24, 2005 and,as a result of the registration statement not having been declared effective bythe SEC on or prior to that date, Reddy Holdings began accruing additionalinterest on the Reddy Holdings notes from June 24, 2005. Such additional interestaccrued at an annual rate of 0.50% for the first 90 days following suchdate, and accrued by an additional 0.50% thereafter until such registrationstatement was declared effective on August 26, 2005. As of September 30,2005, $0.1 million of additional interest was accrued for payment in cash tothe holders of Discount Notes on November 1, 2005.

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On July 28, 2005, the Company obtained therequisite consents from the holders of the senior discount notes to amend thedefinition of “Consolidated Net Income” in the indenture governing the seniordiscount notes in order to exclude certain one-time costs and expensesassociated with the Company’s initial public offering of its common stock (seeNote 6 to our condensed consolidated financial statements).

On August 26, 2005,Reddy Holdings paid $0.4 million to purchase and retire senior discount noteswith an aggregate principal amount at maturity of $0.5 million. A loss of$0.046 million was recognized in connection with this transaction.

**Debt and CapitalLeases**

Thetable below summarizes the future payments due under our significantcontractual obligations as of September 30, 2005:

| ** **                     | ** ** | **Total**              | ** ** | **Less than  one year** | ** ** | **2006 to  2007** | ** ** | **2008 to  2009** | ** ** | **2010 and  thereafter** | ** ** |
|--------------------------------|------------|------------------------|------------|-----------------------------------|------------|------------------------|------------|------------------------|------------|-------------------------------|------------|
| ** **                     | ** ** | **(in millions)** | ** ** |
| Long-term debt(1)              |       | $                      | 513.7      |                              |       | $                      | 3.8        |                   |       |                          | $          | 29.5 |   |   |   | $ | 47.4 |   |   |   | $ | 433.0 |   |   |
| Operating leases               |       | 27.7                   |       |                              | 2.3        |                   |       |                   | 14.0       |                          |       |   | 6.9 |   |   |   | 4.5 |   |   |
| Purchase  obligations(2)       |       | 26.0                   |       |                              | 1.5        |                   |       |                   | 7.5        |                          |       |   | 7.5 |   |   |   | 9.5 |   |   |
| Total contractual  obligations |       | $                      | 567.4      |                              |       | $                      | 7.6        |                   |       |                          | $          | 51.0 |   |   |   | $ | 61.8 |   |   |   | $ | 447.0 |   |   |

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(1)   Includesestimated cash interest to be paid over the remaining terms of the debt.

(2)   Consists of our obligation to purchase 2,000 merchandisers and$0.75 million of spare parts per year from a certain vendor under a supplyagreement that expires May 31, 2012.

**Critical Accounting Policies**

*Allowancesfor Doubtful Accounts.**  *Wemaintain allowances for doubtful accounts for estimated losses resulting fromthe inability of our customers to make the required payments on their accounts.We have attempted to reserve for these estimated losses based on our pastexperience with similar accounts receivable and believe our reserves to beadequate. If the financial condition of our customers were to deteriorate,resulting in an impairment of their ability to make payments on their accounts,additional allowances may be required.

*Long-Lived Assets.**  *Property and equipment is carried at cost and isbeing depreciated on a straight-line basis over estimated lives of 2.5 to 36years. Maintenance and repairs are charged to expense as incurred, whilecapital improvements that extend the useful lives of the underlying assets arecapitalized. We accounted for all of our historical acquisitions using thepurchase method of accounting and as a result recorded significant amounts ofgoodwill. Other intangible assets include the following that are amortized overtheir useful lives:

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

 

*Impairment of Long-LivedAssets.**  *Inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,“Accounting for Impairment or Disposal of Long-Lived Assets,” long-lived assetsand certain identifiable intangible assets to be held and used are reviewed forimpairment on an annual basis or whenever events or changes in circumstancesindicate that the carrying amount of such assets may not be 

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recoverable. Thedetermination of recoverability of long-lived assets and certain otheridentifiable intangible assets are based on an estimate of undiscounted futurecash flows resulting from the use of the asset or its disposition. Measurementof an impairment loss for long-lived assets and other intangible assets that managementexpects to hold and use are based on the fair value of the asset. Long-livedassets to be disposed of are reported at the lower of carrying amount or netrealizable value. In accordance with SFAS No. 142, “Goodwill and OtherIntangible Assets,” goodwill is evaluated using a market valuation approachbased on valuations of comparable businesses, multiples of earnings ofcomparable businesses and discounted cash flows. As a result of the significant reduction in cold storage sales volumesrelated to a particular customer, goodwill in the cold storage portion of ournon-ice business segment was evaluated in accordance with SFAS No. 142,which resulted in an non-cash impairment charge of $5.7 million during thethree months ended June 30, 2005.

Inherent in the determinationof such future cash flows and valuations are certain estimates and judgments,including the interpretation of current economic indicators and market valuesand assumptions about our strategic plans with regards to our operations. Tothe extent additional information arises or our strategies change, it is possiblethat our conclusions regarding the impairment of goodwill or other long-livedassets could change and result in a material effect on our financial positionor results of operations.

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

**RecentlyAdopted Accounting Pronouncements**

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

**RecentAccounting Pronouncements**

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

SFASNo. 123(R) eliminates the intrinsic value measurement objective inAPB Opinion 25 and generally requires companies to measure the cost of employeeservices received in exchange for an award of equity instruments based on thefair value of the award on the date of the grant. The standard requires grantdate fair value to be estimated using either an option-pricing model which isconsistent with the terms of the award or a market observed price, if such aprice exists. Such cost must be recognized over the period during which anemployee is required to provide service in exchange for the award, which isusually the vesting period. The standard also requires us to estimate the numberof instruments that will ultimately be issued, rather than accounting forforfeitures as they occur.

We are required to apply SFAS No. 123(R) toall awards granted, modified or settled on or after the first day of our nextfiscal year beginning after June 15, 2005. We are also required to useeither the “modified prospective method” or the “modified retrospectivemethod.” Under the modified prospective method, compensation cost is recognizedfor all awards granted after adoption of the standard and for the unvestedportion of previously granted awards that are outstanding on that date. Underthe modified retrospective method, previously issued financial statements mustbe restated to recognize the expense 

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amountspreviously calculated and reported on a pro forma basis, as if the priorstandard had been adopted. Under both methods, either the straight line or anaccelerated method may be used to amortize the compensation cost associatedwith awards with graded vesting. The standard permits and encourages earlyadoption.

We plan to adopt SFASNo. 123(R) on January 1, 2006 using the modified prospectivemethod. We do not believe that the adoption of this standard will have amaterial effect on our results of operations or financial position.

In November 2004, theFASB issued SFAS No. 151, “Inventory Costs—an amendment of ARB No. 43,Chapter 4”. SFAS No. 151 seeks to clarify the accounting for abnormalamounts of idle facility expense, freight, handling costs and wasted material(spoilage) in the determination of inventory carrying costs. The statement requiressuch costs to be treated as a current period expense. This statement iseffective for fiscal years beginning after July 15, 2005. We are currentlyevaluating the effect this standard could have on our results of operations andfinancial position.

**GeneralEconomic 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 anextended period of high inflation, which affects multiple expense items, webelieve that we will be able to pass on these higher costs to our customers.

The ice business is highlyseasonal, with the bulk of demand coming in the warmer spring and summermonths. We experience seasonal fluctuations in our net sales and profitability.We make a disproportionate amount of our sales in the second and third calendarquarters. We also typically have net income in these same periods, whereas wetypically experience net losses in the first and fourth calendar quarters. Weincurred a loss in the third quarter of 2005 as a direct result of costsincurred in connection with the initial public offering of our common stock andthe related transactions. We believe that over two-thirds of our revenues willoccur during the second and third calendar quarters when the weather conditionsare generally warmer and demand is greater, while less than one-third of ourrevenues will occur during the first and fourth calendar quarters when theweather is generally cooler. This belief is consistent with historical trends.As a result of seasonal revenue declines and the lack of proportionalcorresponding expense decreases, we will most likely experience lower profitmargins and even losses during the first and fourth calendar quarters. Inaddition, because our operating results depend significantly on sales duringour peak season, our quarterly results of operations may fluctuate significantlyas a result of adverse weather during this peak selling period if the weatheris unusually cool or rainy on a more national or regional basis.

**RisksRelating to Our Business**

***The seasonal natureof the ice business results in losses and lower profit margins in the first andfourth quarters of the year.***

We experience significantseasonal fluctuations in our net sales and profitability. We make a disproportionateamount of our sales in the second and third calendar quarters when the weatheris generally warmer, which results in an increased demand for ice. We also earnour net income during these same periods. 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 demand could have a material adverse effect onthe timing of our cash flows and therefore limit our ability to timely serviceour obligations with respect to our indebtedness and to pay dividends. Inaddition, because our operating results depend significantly on sales duringthe second and third calendar quarters, our results of operations may fluctuatesignificantly if the weather during these periods is cool or rainy.

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***Weather conditionsand weather events can decrease our sales and increase our expenses.***

Cool or rainy weather can decrease sales, whileextremely hot weather may increase our expenses, each resulting in a negativeimpact on our operating results and cash flow. Ice consumers demand ice for avariety of reasons, but many of them buy ice in connection with outdoor relatedactivities, both commercial and recreational. As a result, demand for iceincreases during periods of warm, sunny weather, and conversely, demand decreasesduring periods of cool, rainy weather. During extended periods of cool or rainyweather on a national basis, our revenues and resulting net income maysubstantially decline. Also, hot weather does not necessarily result in greaternet income. During extended periods of hot weather, our profits and cash flowmay decline because of an increase in expenses in response to excess demand. Wemay have to transport ice from one plant to another and, in some cases,purchase ice from third party sources and transport it to a specific market tomeet this excess demand, resulting in higher expenses and inconsistent serviceand product quality. Finally, although extreme weather events such as hurricanescan cause an increase in volume sales, those sales are not necessarilyprofitable due to added costs and disruptions to our normal service anddistribution routes. In addition, extreme weather events such as hurricanes directlyimpacting a region, like Florida, in which we have a concentration of ourmanufacturing facilities may result in a stoppage of or disruption of ourproduction due to damage to our facilities, or a loss of electrical supply or increasedcosts as a result of fuel price increases or reduced fuel availability.

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

Our businesses are highly competitive. We have manycompetitors in each of our geographic markets offering similar products andservices. Competition in our businesses is based primarily on service, qualityand price. We could lose market share if we fail to successfully competeagainst our competitors in any of these areas, if our existing competitorsexpand their capacity, if new entrants successfully penetrate our markets, ifwe fail to adequately serve our existing base of customers, or if our largergrocery or convenience store customers decide to manufacture their own icerather than purchase our products.

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

We use substantial amounts of electricity inconnection with our manufacturing process, fuel to operate the refrigeratedtrucks for ice delivery and polyethylene, which is the primary raw materialused to manufacture the bags we use to package our ice. We also carry generalliability, workers compensation, health and vehicle 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 orother expenses increase beyond the amounts that we are able to pass along toour customers, our profits and our operating cash flow would decrease.

***Our acquisitions may not be successfully integratedand could cause unexpected financial or operational difficulties.***

In the nine months ended September 30, 2005 andin the twelve months ended December 31, 2004, we completed 2 and 11acquisitions, respectively. We anticipate that we may, from time to time,selectively acquire additional businesses, assets or securities of companiesthat we believe would provide a strategic fit with our business. Acquisitionsare also accompanied by risks, such as potential exposure to unknownliabilities of acquired companies and the possible loss of key employees andcustomers of the acquired business. Further, acquisitions are subject to risksassociated with the difficulty and expense of integrating the operations andpersonnel of the acquired companies, the potential disruption to our businessand the diversion of management time and attention, any of which could increasethe costs of operating our business, negate the expected benefits of theacquisitions or result in the loss of customers.

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

Our ice manufacturing and cold storage operations aresubject to a wide range of environmental laws and regulations governing, amongother things, air emissions, wastewater discharges, the use, management anddisposal of hazardous and non-hazardous materials and wastes and the cleanup ofcontamination. Noncompliance with such laws and regulations, or incidentsresulting in environmental releases, could cause us to incur substantial costs,including cleanup costs, fines and penalties, third party claims for personalinjury, investments to retrofit or upgrade our facilities and programs orcurtailment of our operations. For example, our ice manufacturing and coldstorage operations use refrigerants such as ammonia and freon. Some of ourfacilities may not be in compliance with certain freon refrigerantrequirements, such as leak detection and repair, recordkeeping or reporting. Inaddition, the market price of freon is rising as a result of phase outs underfederal laws, which could significantly increase our operating costs in thefuture if we are not able to obtain approved substitutes. From time to time,our use of ammonia has resulted in releases that have temporarily disrupted ourmanufacturing operations and resulted in lawsuits or administrative penalties. Forexample, we are currently in the process of settling litigation resulting froman ammonia release in June 2001 at our Baton Rouge, Louisiana facility. SeePart II, Item 1—“Legal Proceedings”. Material violations of, orliabilities under, environmental laws may require us to incur substantial costswhich could reduce our profits, or to divert resources from ongoingenvironmental programs and improvements, which could delay our efforts tointegrate acquisitions and upgrade our operations, or expose us to risk of furtherenvironmental liability.

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

We are subject to various federal, state and locallaws relating to many aspects of our business, including labeling, sanitation,health and safety and manufacturing processes. We cannot predict the types ofgovernment regulations that may be enacted in the future by the various levelsof government or how existing or future laws or regulations will be interpretedor enforced. The enactment of more stringent laws or regulations or a stricterinterpretation of existing laws and regulations may cause a disruption in ouroperations or require additional expenditures by us, some of which could bematerial. We may incur material costs and liabilities in order to comply withany such laws and regulations and such costs and liabilities may result insubstantial expenses to us and could divert management’s time and attention.

***If we are unable to retain senior executives andattract and retain other qualified employees, our business might be adverselyaffected.***

Our success depends in part on our ability to attract,hire, train and retain qualified managerial, sales and marketing personnel.Competition for these types of personnel is high. We may be unsuccessful inattracting and retaining the personnel we require to conduct our operationssuccessfully. Our success also depends to a significant extent on the continuedservice and performance of our senior management team and in particular on thecontinued service of William P. Brick, our Chairman and Chief ExecutiveOfficer, and Jimmy C. Weaver, our President and Chief Operating Officer. Inaddition, we do not carry “key man” life insurance. Our inability to successfullyattract and retain personnel or the loss of any member of our senior managementteam could impair our ability to execute our business plan.

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

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

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

***We may lose customers’ business to competitors as aresult of our limited intellectual property protection, including on The IceFactory®.***

As the sole major ice supplier using an on-siteproduction and delivery system at our customers’ retail locations, we haveenjoyed a competitive advantage over our competitors. Our proprietary IceFactory system is preferred by certain of our high volume customers to traditionalice delivery and gives us more flexibility during peak seasons. Competitorssometimes test machines similar to The Ice Factory®. If any of our competitorsare successful with the rollout of a competing system, we could lose businessto these companies, which would result in decreased cash flows and results ofoperations.

It is also our practice to protect certain of ourproprietary materials and processes by relying on trade secrets laws andnon-disclosure and confidentiality agreements. Confidentiality or trade secretsmay not be maintained and others may independently develop or obtain access tosuch materials or processes which could adversely affect our competitiveposition and ability to differentiate our products and services from ourcompetitors’ offerings.

***Limitations on our ability to utilize our tax assetsbefore they expire may negatively affect financial results and the ability topay dividends to you.***

As of December 31, 2004, we had net operatingloss carry-forwards for U.S. federal income tax purposes of approximately$109 million, of which approximately $86 million was attributable toPackaged Ice, Inc., which was acquired by Reddy Holdings on August 15,2003 (the “Predecessor”). There are annual limitations on the utilization ofthe net operating loss carry-forwards generated by the Predecessor due tochanges in ownership on and prior to August 15, 2003. We cannot assure youthat we will be able to utilize our tax assets. Further, since at the closingof our initial public offering our existing equity investors ceased to own amajority of our common stock, new limitations apply to the approximately$23 million of net operating loss carry-forwards that were notgenerated by the Predecessor and additional limitations apply to the netoperating loss carry-forwards generated by the Predecessor. If we are notable to utilize our tax assets in the manner or in the timeframe we anticipate,our future after-tax cash flow available for payment of dividends on our commonstock will be reduced.

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

Our acquisitions have resulted in significant amountsof goodwill and other intangible assets. Goodwill, which relates to the excessof cost over the fair value of the net assets of the businesses acquired, andintangible assets totaled approximately $298.5 million at September 30,2005, representing approximately 48.6% of our total assets. In the future,goodwill and intangible assets may increase as a result of future acquisitions.Goodwill and intangible assets are reviewed at least annually for impairment.Impairment may result from, among other things, deterioration in theperformance of acquired businesses, adverse market conditions, adverse changesin applicable laws or regulations, including changes that restrict theactivities of the acquired business, and a variety of other circumstances. Theamount of this and any future impairment must be charged to earnings. Anyfuture determination requiring the write-off of a significant portion of thegoodwill and intangible assets recorded on our balance sheet would have anadverse effect on the value of our business.

As a result of the significant reduction in coldstorage sales volumes related to a particular customer, goodwill in the coldstorage portion of our non-ice business segment was evaluated in accordancewith SFAS No. 142, which resulted in a non-cash impairment charge of$5.7 million during the three months ended June 30, 2005.

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***We are subject to additional regulations as a resultof being a public company, which will result in a greater burden on ourmanagement resources and increased costs.***

As a public companywith listed equity securities, we are required to comply with new laws,regulations and requirements, certain additional provisions of theSarbanes-Oxley Act of 2002, related Securities and Exchange Commission (“SEC”)regulations and requirements of the New York Stock Exchange that we did notneed to comply with as a private company. Preparing to comply and complyingwith new statutes, regulations and requirements will occupy a significantamount of the time of our board of directors, management and our officers, willincrease our costs and expenses and may divert management’s attention fromother business concerns. We will need to:

·       createor expand the roles and duties of our board of directors, our board committeesand management;

·       institutea more comprehensive compliance function;

·       establishnew internal policies, such as those relating to disclosure controls andprocedures and insider trading;

·       involveand retain to a greater degree outside counsel and accountants in the aboveactivities; and

·       enhanceour investor relations function.

***Our status as a public company may increase ourinsurance costs and make it more difficult for us to attract and retainqualified officers and directors.***

We expect that being a public company will make itmore expensive for us to obtain director and officer liability insurance due topotentially greater personal liability faced by public company officers anddirectors. We may be required to accept reduced coverage or incur substantiallyhigher costs to obtain coverage. These factors could also make it moredifficult for us to attract and retain qualified members of our management andboard of directors, particularly to serve on our audit committee, and qualifiedexecutive officers.

***We will be exposed to risks relating to evaluations ofour internal controls over financial reporting as required by Section 404of the Sarbanes-Oxley Act of 2002, which could cause the market price of ourcommon stock to decline.***

We are in the process of evaluating our internalcontrols systems to allow management to report on, and our independent auditorsto attest to, our internal controls over financial reporting. We will beperforming the system and process evaluation and testing (and any necessaryremediation) required to comply with the management certification and auditorattestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002.While we anticipate being able to fully implement the requirements relating tointernal controls and all other aspects of Section 404 by our December 31,2006 deadline, we cannot be certain as to the timing of completion of ourevaluation, testing and remediation actions or the impact of the same on ouroperations. If we are not able to implement the requirements of Section 404in a timely manner or with adequate compliance, we might be subject tosanctions or investigation by regulatory authorities, such as the SEC or theNew York Stock Exchange. Any such action could increase expenses, divertmanagement’s attention or lower investors’ confidence in our company, which could cause the market price of ourcommon stock to decline. In addition, our controls and procedures may notcomply with all of the relevant rules and regulations of the SEC and theNew York Stock Exchange. If we fail to develop and maintain effective controlsand procedures, we may be unable to provide financial information in a timelyand reliable manner.

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***We have a substantial amount of indebtedness, whichmay reduce our cash flow and impede our ability to pay dividends on our commonstock, remain in compliance with debt covenants, make payments on our indebtednessand operate our business.***

We are highly leveraged and have significant debtservice obligations. As of September 30, 2005, we had total debt ofapproximately $350.1 million and total stockholders’ equity of$190.9 million.

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

·       makeit more difficult for us to comply with the terms of our outstanding debt;

·       requireus to dedicate a substantial portion of our cash flow to pay principal andinterest on our debt, thus making it more difficult for us to pay dividends onour common stock;

·       makeus more vulnerable to, and reduce our flexibility in planning for, changes ingeneral economic, industry and competitive conditions;

·       limitour ability to borrow additional amounts for working capital, capitalexpenditures, acquisitions, debt service requirements, execution of ourstrategy, or other purposes; and

·       placeus at a disadvantage compared to our competitors with less debt.

Any of the above listed factors could make us morevulnerable to defaults and place us at a competitive disadvantage, thereforemaking an investment in our common stock less attractive when compared to otherinvestments. Further, if we do not have sufficient earnings to service ourdebt, we would need to refinance all or part of our existing debt, sell assets,borrow more money or sell securities, none of which we can guarantee we will beable to do on commercially reasonable terms or at all.

***We could incur more indebtedness, which may increasethe risks associated with our substantial leverage, including our ability to serviceour indebtedness and pay dividends on our common stock.***

The indenture governing Reddy Holdings’ 101⁄2% seniordiscount notes and our credit facilities permit us, under certaincircumstances, to incur a significant amount of additional indebtedness. Forexample, our credit facilities allow us to incur up to an additional $80.0million of incremental term loans under our credit facilities, subject tocertain conditions. In addition, we may incur additional indebtedness throughour revolving credit facility. If we incur additional debt, the risksassociated with our substantial leverage, including our ability to service ourdebt and pay dividends on our common stock, would increase. This, in turn,could negatively affect the market price of our common stock.

***The terms of our credit facilities and the indenturegoverning the Reddy Holdings’ Senior Discount Notes may restrict our currentand future operations, particularly our ability to respond to changes in ourbusiness or to take certain actions.***

Our credit facilities and the indenture governing theReddy Holdings’ senior discount notes contain, and any future indebtedness ofours would likely contain, a number of financial and other restrictivecovenants that impose significant operating and financial restrictions on us,including restrictions that may limit our ability to engage in acts that may bein our best long-term interests.

The operating andfinancial restrictions and covenants in our existing and future debt agreementsmay adversely affect our ability to finance future operations or capital needsor to engage in other business activities. A breach of any of the restrictivecovenants in our credit facilities could result in a default under suchfacilities. If any such default occurs, the lenders may elect to declare allobligations under our credit facilities to be immediately due and payable,enforce their security interest or require us to apply all of our availablecash to repay these borrowings, any of which would result in an event ofdefault under the senior discount notes. If the debt under our credit facilitiesor the senior discount notes were to be accelerated, 

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ourbusiness operations would be interrupted, which would adversely affect themarket price of our common stock.

**Risks Relating to Our Common Stock**

***If our share price is volatile, we may be the targetof securities litigation, which is costly and time-consuming to defend.***

In the past, following periods of market volatility inthe price of a company’s securities, security holders have often institutedclass action litigation. If the market value of our common stock experiencesadverse fluctuations and we become involved in this type**oflitigation, regardless of the outcome, we could incur substantial legal costsand our management’s attention could be diverted from the operation of ourbusiness, causing our business to suffer.

***We are a holding company with no operations, andunless we receive dividends, distributions, advances, transfers of funds orother payments from our subsidiaries, we will be unable to pay dividends on ourcommon stock and meet our debt service and other obligations.***

We are a holding company and conduct all of ouroperations through our subsidiaries. We do not have, apart from our ownershipof Reddy Group, any independent operations. As a result, we will rely ondividends and other payments or distributions from Reddy Group and our othersubsidiaries to pay dividends on our common stock and meet our debt service andother obligations. The ability of Reddy Group and our other subsidiaries to paydividends or make other payments or distributions to us will depend on ouroperating results and may be restricted by, among other things, the covenantsthat are contained in our credit facilities and the covenants of any future outstandingindebtedness we or our subsidiaries incur.

In addition, because we are a holding company, yourclaims as stockholders will be structurally subordinated to all existing andfuture liabilities and obligations (whether or not for borrowed money) of oursubsidiaries, including obligations under our credit facilities. Therefore, inthe event of our bankruptcy, liquidation or reorganization, our assets andthose of our subsidiaries will be able to satisfy the claims of ourstockholders only after all of our and our subsidiaries’ liabilities andobligations have been paid in full.

***Our sponsors may have significant influence on ourcompany, including control over decisions that require the approval ofequityholders, whether or not such decisions are believed by the otherequityholders to be in their own best interests.***

After the consummation of our initial public offering,affiliates of Trimaran Fund Management, L.L.C., or Trimaran, and Bear StearnsMerchant Banking, or BSMB, which we refer to collectively as our sponsors,continue to beneficially own approximately 40% of our common stock.Accordingly, in the event that our sponsors decide to act in concert, so longas our sponsors continue to own a significant percentage of our common stockthey would have the collective ability to significantly influence or effectivelycontrol the outcomes of various matters requiring stockholder approval,including the nomination and election of directors, the determination of ourcorporate and management policies and the determination of the terms of and outcomeof any corporate transaction or other matter submitted to our stockholders forapproval, including potential mergers or acquisitions, asset sales and othersignificant corporate transactions.

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***Provisions of our charter documents and the DelawareGeneral Corporation Law may inhibit a takeover, which could negatively affectour stock price.***

Provisions of ourcharter documents and the General Corporation Law of Delaware, the state inwhich we are incorporated, could discourage potential acquisition proposals ormake it more difficult for a third party to acquire control of our company,even if doing so might be beneficial to our stockholders. Our amended andrestated certificate of incorporation and by-laws provide for variousprocedural and other requirements that could make it more difficult forstockholders to effect certain corporate actions. For example, our amended andrestated certificate of incorporation authorizes our board of directors to determinethe rights, preferences, privileges and restrictions of unissued series ofpreferred stock without any vote or action by our stockholders. Our board ofdirectors could therefore authorize and issue shares of preferred stock withvoting or conversion rights that could dilute the voting power or diminish other rights of holders ofour common stock. Additional provisions are included in our amended andrestated certificate of incorporation and by-laws which could make it moredifficult for stockholders to effect certain corporate actions, including:

·       thesole power of a majority of the board of directors to fix the number ofdirectors and to fill any vacancy on the board of directors;

·       requirementsfor advance notification of stockholder nominations and proposals; and

·       theinability of stockholders to act by written consent and restrictions on theability of stockholders to call special meetings.

These provisions maydiscourage acquisition proposals and may make it more difficult or expensivefor a third party to acquire a majority of our outstanding voting stock or maydelay, prevent or deter a merger, acquisition, tender offer or proxy contest,which may negatively affect our stock price.

**RisksRelating to Our Dividend Policy**

***The payment of dividends is at the sole discretion ofour board of directors and the reduction or elimination of dividends wouldnegatively affect the market price of our common stock.***

We are not obligated to pay dividends on our commonstock. The payment of dividends is at the sole discretion of our board ofdirectors and our board of directors may decide to eliminate or reduce anydividends paid on our common stock. Any reduction or elimination of dividendscould cause the market price of our common stock to decline and could furthercause your shares of common stock to become less liquid, which may result inlosses by you.

***Even if our board of directors desires to declare andpay dividends, we might not have cash in the future to pay dividends in theintended amounts or at all.***

Our ability to paydividends, and our board of directors’ determination to keep our dividendpolicy, will depend on numerous factors, including the following:

·       thestate of our business, competition and changes in our industry;

·       changesin the factors, assumptions and other considerations made by our board ofdirectors in reviewing and adopting our dividend policy;

·       ourfuture results of operations, financial condition, liquidity needs and capitalresources;

·       ourvarious expected cash needs, including cash interest and principal payments onour indebtedness, capital expenditures, incremental costs associated with beinga public company and taxes; and

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·       potentialsources of liquidity, including borrowing under our revolving credit facilityor possible asset sales.

Over time, our capital andother cash needs will invariably be subject to uncertainties, which couldaffect whether we pay dividends and the level of any dividends we may pay inthe future. In addition, to the extent that we would seek to raise additionalcash from additional debt incurrence or equity security issuances, we cannotassure you that such financing will be available on reasonable terms or at all.Each of the factors listed above could negatively affect our ability to paydividends in accordance with our dividend policy or at all.

***Our ability to pay dividends is restricted byagreements governing our debt, including our credit facilities and the ReddyHoldings indenture, and by Delaware law.***

Our credit facilities and the Reddy Holdings indenturerestrict our ability to pay dividends.

Additionally, under the Delaware General CorporationLaw, or DGCL, our board of directors may not authorize payment of a dividendunless it is paid either out of our surplus, as calculated in accordance withthe DGCL or, if we do not have a surplus, out of our net profits for the fiscalyear in which the dividend is declared and/or the preceding fiscal year.

If, as a result of these restrictions, we are requiredto reduce or eliminate the payment of dividends, a decline in the market priceor liquidity, or both, of our common stock could result. This may in turnresult in losses by you.

***Our dividend policy may limit our ability to pursuegrowth opportunities, which may harm our competitive position and cause themarket price of our common stock to decline.***

If we**continuepaying dividends, we may not retain a sufficient amount of cash to consummateacquisitions, and may need to seek financing to fund a material expansion ofour business, including any significant acquisitions or to pursue growthopportunities requiring capital expenditures significantly beyond our currentexpectations. The risks relating to funding any dividends, or other cash needsas a result of paying dividends, are summarized in the preceding risk factors. Ifwe are unable to take timely advantage of growth opportunities, our future financialcondition and competitive position may be harmed, which in turn may adverselyaffect the market price of our common stock.

**Item 3.**                        Quantitativeand Qualitative Disclosures About Market Risks

Market risk generally represents the risk that lossesmay occur in the value of financial instruments as a result of movements ininterest rates, foreign currency exchange rates and commodity prices. Our mainmarket risk exposure category is interest rate risk.

We are exposed to some market risk due to the floatinginterest rates under our senior credit facility. The term loan and principalbalances outstanding under the revolving credit facility bear interest, at our option,at the London Inter-Bank Offered Rate (“LIBOR”) plus 1.75% or the prime rate(as announced from time to time by the administrative agent) plus 0.75%.

Effective September 12, 2005, we entered into aninterest rate hedging agreement (the “Hedge”) to fix the interest rate on aportion of the term loan outstanding under the senior credit facility. TheHedge has a term of three years, ten months and an initial notional balance of$220 million. The notional balance decreases by $20 million on each October 12during 2006-2008. We pay a fixed rate of 4.431% on the notional amountand receive an amount equal to 3-month LIBOR. Any net payable orreceivable amount is settled quarterly. If we had been required to settle theHedge as of September 30, 2005, we would have received $0.6 million. ReddyGroup is exposed to risk of loss in the event of non-performance by thecounterparty to the Hedge. However, we do not anticipate non-performance by thecounterparty.

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As of September 30,2005, the senior credit facility had an outstanding principal balance of$240.0 million at a weighted average interest rate of 5.5% per annum. At September 30,2005, the 3-month LIBOR rate was 4.0% and the prime rate was 6.75%. IfLIBOR and the prime rate were to increase by 1% from September 30, 2005 levels,the annual increase in interest expense, given our principal balances at September 30,2005 and the effect of the Hedge, would be approximately $0.2 million.

**Item 4.**                        Controlsand Procedures

Under the supervision and with the participation ofour management, including our chief executive officer and our chief financialofficer, we have evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures as defined in Rule 13a-15(e) ofthe Securities Exchange Act of 1934. These controls and procedures are designedto ensure that material information relating to the Company and itssubsidiaries is communicated to the chief executive officer and the chieffinancial officer. Based on that evaluation, our chief executive officer andour chief financial officer concluded that, as of September 30, 2005, ourdisclosure controls and procedures are effective to ensure that informationdisclosed by us in reports that we file or submit with the SEC is recorded,processed, summarized and reported within the time periods specified in SEC rules andforms.

There were no changes in our internal control overfinancial reporting during the quarter ended September 30, 2005, that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

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**PART II—OTHER INFORMATION**

**Item 1.**                        LegalProceedings

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

We are involved inlitigation in connection with an ammonia release at its Baton Rouge, Louisianamanufacturing facility in June 2001. The case, which is a consolidation ofseven lawsuits, was titled Wallace Acey, Jr., et al. vs. Reddy IceCorporation, is pending in the 19th Judicial District Court, Parishof East Baton Rouge, Louisiana. The plaintiffs, which were certified as asettlement class, have alleged injuries primarily consisting of inconvenience,watery eyes and offensive odors. No specific amount of damages was specified inthe action. During 2004, we reached a settlement with the plaintiffs. Thefairness of the settlement was approved by the court on January 25, 2005. Webelieve the settlement will be finalized during 2005. We recognized $150,000 ofexpense in our 2004 results related to our obligation under the settlement. Wedo not believe that the final resolution of this litigation will have a materialimpact on our business, financial condition or results of operations.

**Item 2.**                        UnregisteredSales of Equity Securities and Use of Proceeds

On August 12,2005, in connection with the IPO by Reddy Ice Holdings, Inc., certainemployees of Reddy Ice exercised options to purchase 1,329,648 shares ofcommon stock at an average exercise price of approximately $7.25 per share(based on the initial public offering price of $18.50 per share) on a cashlessbasis; which resulted in the issuance of 808,818 shares of common stock.

**Item 3.**                        Defaultsupon Senior Securities

None.

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

On August 1, 2005, by written consent, ourstockholders adopted our Amended and Restated Certificate of Incorporation.

On August 8, 2005, bywritten consent, a majority of our stockholders adopted the amendment to the ReddyIce Holdings, Inc. 2003 Stock Option Plan and the 2005 Equity Incentive Plan.

**Item 5.**                        OtherInformation

None.

**Item 6.**                        Exhibits

See Index to Exhibits on page 45.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                                          | **REDDY ICE HOLDINGS, INC.** |
|------------------------------------------|------------------------------|
| Date:   November 3,  2005 | By:                          | /s/ WILLIAM P. BRICK |
|                                     |                         | William P. Brick |
|                                     |                         | Chief Executive Officer |
| Date:   November 3,  2005 | By:                          | /s/ STEVEN J. JANUSEK |
|                                     |                         | Steven J. Janusek |
|                                     |                         | Chief Financial and Accounting Officer |

 

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**INDEX TO EXHIBITS**
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                              |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1              |       | Agreement and Plan of Merger Among CAC Holdings  Corp., Cube Acquisition Corp. and Packaged Ice, Inc. (n/k/a Reddy Ice  Group, Inc.), dated as of May 12, 2003. (Exhibit 2.1)(1)                                                                                         |
| 2.2              |       | Stock Purchase Agreement  by and among Reddy Ice Corporation, Triangle Ice Co., Inc., and the  Shareholders of Triangle Ice Co., Inc., dated November 5, 2003.  (Exhibit 2.2)(3)                                                                                         |
| 3.1              |       | Amended and Restated  Certificate of Incorporation of Reddy Ice Holdings, Inc., dated  August 2, 2005. (Exhibit 3.3)(12)                                                                                                                                                      |
| 3.2              |       | Amended and Restated  By-Laws of Reddy Ice Holdings, Inc. (Exhibit 3.2)(14)                                                                                                                                                                                                        |
| 4.1              |       | Reddy Ice  Holdings, Inc. Shareholders Agreement, dated August 14, 2003.  (Exhibit 9.1)(3)                                                                                                                                                                                    |
| 4.2              |       | Indenture of 87¤8%  Senior Subordinated Notes due 2011 among Cube Acquisition Corp. (n/k/a  Reddy Ice Group, Inc.), CAC Holdings Corp. (n/k/a Reddy Ice  Holdings, Inc.) and U.S. Bank National Association, dated as of  July 31, 2003. (Exhibit 4.3)(3) |
| 4.3              |       | Form of Supplemental  Indenture of 87¤8%  Senior Subordinated Notes due 2011 among Cube Acquisition Corp. (n/k/a Reddy  Ice Group, Inc.), CAC Holdings Corp. (n/k/a Reddy Ice Holdings, Inc.)  and U.S. Bank National Association. (Exhibit 4.4)(3)                 |
| 4.4              |       | Indenture of 101¤2%  Senior Discount Notes due 2012 between Reddy Ice Holdings, Inc. and U.S.  Bank National Association, dated October 27, 2004. (Exhibit 4.2)(6)                                                                                                       |
| 4.5              |       | Supplemental Indenture  of 87¤8%  Senior Subordinated Notes due 2011 among Reddy Ice Group, Inc., Reddy  Ice Holdings, Inc., the Subsidiary Guarantors and U.S. Bank National  Association, dated as of July 25, 2005. (Exhibit 4.5)(14)                            |
| 4.6              |       | Supplemental Indenture  of 101¤2%  Senior Discount Notes due 2012 between Reddy Ice Holdings, Inc. and U.S.  Bank National Association, dated as of July 28, 2005.  (Exhibit 4.6)(14)                                                                                    |
| 10.1             |       | Reddy Ice  Holdings, Inc. 2003 Stock Option Plan, dated August 15, 2003.  (Exhibit 10.1)(3)                                                                                                                                                                                   |
| 10.2             |       | Form of  Indemnification Agreement between Officers of Reddy Ice Holdings, Inc.  and Reddy Ice Holdings, Inc., effective August 14, 2003.  (Exhibit 10.2)(3)                                                                                                        |
| 10.3             |       | Form of  Indemnification Agreement between Officers of Packaged Ice, Inc. and  Packaged Ice, Inc. (n/k/a Reddy Ice Group, Inc.), effective  August 14, 2003. (Exhibit 10.3)(3)                                                                                 |
| 10.4             |       | Form of  Indemnification Agreement between Directors of Reddy Ice Holdings, Inc.  and Reddy Ice Holdings, Inc., effective August 14, 2003.  (Exhibit 10.4)(3)                                                                                                       |
| 10.5             |       | Form of  Indemnification Agreement between Directors of Packaged Ice, Inc. and  Packaged Ice, Inc. (n/k/a Reddy Ice Group, Inc.), effective  August 14, 2003. (Exhibit 10.5)(3)                                                                                |
| 10.6             |       | Monitoring and  Management Services Agreement, dated August 15, 2003.  (Exhibit 10.6)(3)                                                                                                                                                                                           |
| 10.7             |       | Dealer Manager and  Consent Solicitation Agreement among Packaged Ice, Inc. (n/k/a Reddy Ice  Group, Inc.), Credit Suisse First Boston LLC, Bear, Stearns &  Co. Inc. and CIBC World Markets Corp., dated July 2, 2003.  (Exhibit 10.2)(2)                      |
| 10.8             |       | Investor Subscription  Agreement, dated as of May 12, 2003. (Exhibit 10.8)(3)                                                                                                                                                                                                      |
| 10.9             |       | Amendment No. 1 to  the Investor Subscription Agreement, dated as of August 14, 2003.  (Exhibit 10.9)(3)                                                                                                                                                                      |
| 10.10            |       | Manager’s Subscription  Agreement, dated as of August 14, 2003. (Exhibit 10.10)(3)                                                                                                                                                                                            |

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| 10.11      |   | Form of Reddy Ice  Holdings, Inc. Stock Option Agreement, dated August 14, 2003.  (Exhibit 10.11)(3)                                                                                                                                                                                                                               |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.12      |   | Form of Amendment  No. 1 to Reddy Ice Holdings, Inc. Stock Option Agreement of  August 14, 2003, dated as of November 7, 2003.  (Exhibit 10.12)(3)                                                                                                                                                                       |
| 10.13      |   | Employment Agreement of  William P. Brick, dated August 14, 2003. (Exhibit 10.13)(3)                                                                                                                                                                                                                                                         |
| 10.14      |   | Employment Agreement of  Jimmy C. Weaver, dated August 14, 2003. (Exhibit 10.14)(3)                                                                                                                                                                                                                                                          |
| 10.15      |   | Employment Agreement of  Steven J. Janusek, dated August 14, 2003. (Exhibit 10.15)(3)                                                                                                                                                                                                                                                        |
| 10.16      |   | Employment Agreement of  Ben D. Key, dated August 14, 2003. (Exhibit 10.16)(3)                                                                                                                                                                                                                                                               |
| 10.17      |   | Employment Agreement of  Tommy L. Dann, dated August 14, 2003. (Exhibit 10.17)(3)                                                                                                                                                                                                                                                            |
| 10.18      |   | Employment Agreement of  Graham D. Davis, dated August 14, 2003. (Exhibit 10.18)(3)                                                                                                                                                                                                                                                          |
| 10.19      |   | Employment Agreement of  Joseph A. Geloso, dated August 14, 2003. (Exhibit 10.19)(3)                                                                                                                                                                                                                                                         |
| 10.20      |   | Employment Agreement of  Mark A. Steffek, dated August 14, 2003. (Exhibit 10.20)(3)                                                                                                                                                                                                                                                          |
| 10.21      |   | Employment Agreement of  Raymond D. Booth, dated August 14, 2003. (Exhibit 10.21)(3)                                                                                                                                                                                                                                                         |
| 10.22      |   | Triangle Subscription  Agreement, dated as of November 3, 2003. (Exhibit 10.22)(3)                                                                                                                                                                                                                                                           |
| 10.23      |   | Purchase Agreement among  Reddy Ice Holdings, Inc., Credit Suisse First Boston LLC, CIBC World  Markets Corp. and Bear, Stearns & Co. Inc., dated October 27,  2004. (Exhibit 10.1)(6)                                                                                                                                         |
| 10.24      |   | Registration Rights  Agreement among Reddy Ice Holdings, Inc., Credit Suisse First Boston  LLC, CIBC World Markets Corp. and Bear, Stearns & Co. Inc., dated  October 27, 2004. (Exhibit 10.2)(6)                                                                                                                              |
| 10.25      |   | Amended and Restated  Credit Agreement among Reddy Ice Group, Inc., Various Financial  Institutions and Other Persons from Time to Time Parties thereto, Credit  Suisse, Cayman Islands Branch, Bear Stearns Corporate Lending Inc., Lehman  Brothers Inc. and CIBC World Markets Corp. dated as of August 9, 2005.  (Exhibit 10.1)(13) |
| 10.26      |   | Amended and Restated  Parent Guaranty and Pledge Agreement, between Reddy Ice Holdings, Inc.  and Credit Suisse dated as of August 12, 2005. (Exhibit 10.26)(14)                                                                                                                                                                        |
| 10.27      |   | Dealer Manager and  Consent Solicitation Agreement between Reddy Ice Group, Inc. and Credit  Suisse First Boston LLC dated as of March 22, 2005.  (Exhibit 10.25)(8)                                                                                                                                                                    |
| 10.28      |   | Amendment to Reddy Ice  Holdings, Inc. 2003 Stock Option Plan. (Exhibit 10.28)(14)                                                                                                                                                                                                                                                           |
| 10.29      |   | Reddy Ice  Holdings, Inc. 2005 Long Term Incentive and Share Award Plan. (Exhibit 10.29)(14)                                                                                                                                                                                                                                                 |
| 10.30      |   | Form of Restricted Share  Unit Agreement for certain members of Senior Management.

(Exhibit 10.1)(15)                                                                                                                                                                                                                                            |
| 10.31      |   | Form of Restricted Share Unit Agreement

(Exhibit 10.2)(15)                                                                                                                                                                                                                                                                                       |
| 24.1       |   | Powers of Attorney.  (Exhibit 24.1)(9)                                                                                                                                                                                                                                                                                                            |
| 31.1† |   | Rule 15d-14(a) Certification  of Chief Executive Officer.                                                                                                                                                                                                                                                                                    |
| 31.2† |   | Rule 15d-14(a) Certification  of Chief Financial Officer.                                                                                                                                                                                                                                                                                    |
| 32.1† |   | Rule 1350  Certification of Chief Executive Officer.                                                                                                                                                                                                                                                                                              |
| 32.2† |   | Rule 1350  Certification of Chief Financial Officer.                                                                                                                                                                                                                                                                                              |

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†                    Filedherewith.

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(1)          Filed as an Exhibit toPackaged Ice, Inc.’s Form 8-K filed with the Commission on May 14,2003 and incorporated herein by reference.

(2)          Filed as an Exhibit toPackaged Ice, Inc.’s Form 10-Q filed with the Commission on June 30,2003 and incorporated herein by reference.

(3)          Filed as an Exhibit toour Form S-4 filed with the Commission on November 13, 2003 andincorporated herein by reference.

(4)          Filed as an Exhibit toour Form 8-K filed with the Commission on March 3, 2004 andincorporated herein by reference.

(5)          Filed as an Exhibit toour Form 10-K filed with the Commission on March 22, 2004 andincorporated herein by reference.

(6)          Filed as an Exhibit toour Form 8-K filed with the Commission on October 27, 2004 andincorporated herein by reference.

(7)          Filed as an Exhibit toour Form S-1 filed with the Commission on February 11, 2005 andincorporated herein by reference.

(8)          Filed as an Exhibit toour Form 10-K filed with the Commission on March 31, 2005 andincorporated herein by reference.

(9)          Filed as an Exhibit toour Form S-4 filed with the Commission on April 6, 2005 andincorporated by reference herein.

(10)   Filed as an Exhibit to ourAmendment No. 1 to Form S-4 filed with the Commission on June 8,2005 and incorporated by reference herein.

(11)   Filed as an Exhibit to ourAmendment No. 2 to Form S-4 filed with the Commission on June 21,2005 and incorporated by reference herein.

(12)   Filed as an Exhibit to ourAmendment No. 4 to Form S-1 filed with the Commission on August 4,2005 and incorporated by reference herein.

(13)   Filed as an Exhibit to ourForm 8-K filed with the Commission on August 15, 2005 andincorporated by reference herein.

(14)   Filed as an Exhibit to ourAmendment No. 3 to our Form S-4 filed with the Commission on August 24,2005 and incorporated by reference herein.

(15) Filed as an Exhibit to our Form 8-K filed withthe Commission on November 3, 2005 and incorporated by reference herein.

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