** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark one)**

| **ý**                                                                                                                                                         |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------|
|                                                                                                                                                               |
| **For the  quarterly period ended September 30, 2004**                                                                                                        |
|                                                                                                                                                               |
| **OR**                                                                                                                                                             |
|                                                                                                                                                               |
| **o**                                                                                                                                                              |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                               |
| **For the  transition period from             to            ** |

 

**Commissionfile number 333-110442-04**

 

**REDDY ICE HOLDINGS, INC.**

(Exact name ofregistrant as specified in its charter)

 
| **DELAWARE**                                                     | ** ** | **56-2381368**                       |
|------------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization)  |       | (I.R.S. Employer Identification No.) |
|                                                             |
| **8750 N.  CENTRAL EXPRESSWAY, SUITE 1800  DALLAS, TEXAS 75231** |
| (Address of  principal executive offices)                        |
| ** **                                                       |
| **(214)  526-6740**                                              |
| (Registrant’s  telephone number, including area code)       |

 

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

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule12b-2).  Yes o  No ý

 

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

 

 

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**REDDY ICEHOLDINGS, INC. AND SUBSIDIARY**

**QUARTERLYREPORT ON FORM 10-Q**

**FOR THEPERIOD ENDED SEPTEMBER 30, 2004**

 

**TABLE OFCONTENTS**

 
| ***PART I – FINANCIAL  INFORMATION*** | * *                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| * *                                   | * *                                                                                                                                                                                                                                                                                                                                                                                                                                                      | * * |
| *Item 1.*                                  | *Condensed Consolidated Financial  Statements*                                                                                                                                                                                                                                                                                                                                                                                                                | * * |
| * *                                   | * *                                                                                                                                                                                                                                                                                                                                                                                                                                                      | * * |
|                                       | Condensed  Consolidated Balance Sheets as of September 30, 2004  (Successor)(unaudited) and December 31, 2003 (Successor)                                                                                                                                                                                                                                                                                                                           |   |
|                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
|                                       | Condensed  Consolidated Statements of Operations for the three and nine months ended September 30,  2004 (Successor), the three months ended September 30, 2003 (Successor)  and the period from May 8, 2003 (Date of Inception) to September 30,  2003 (Successor), the period from July 1, 2003 to August 14, 2003  (Predecessor) and the period from January 1, 2003 to August 14,  2003 (Predecessor) (each unaudited) |   |
|                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
|                                       | Condensed  Consolidated Statement of Shareholders’ Equity as of September 30, 2004  (Successor) (Unaudited)                                                                                                                                                                                                                                                                                                                                         |   |
|                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
|                                       | Condensed  Consolidated Statements of Cash Flows for the nine months ended September 30,  2004 (Successor), the period from May 8, 2003 through September 30, 2003  (Successor) and the period from January 1, 2003 to August 14, 2003  (Predecessor) (each unaudited)                                                                                                                                                                    |   |
|                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
|                                       | Notes to  the Condensed Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                     |   |
|                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
| Item 2.                                    | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                                                                                                                                                                                                                                                                                                                                   |   |
|                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
| Item  3.                                   | Quantitative  and Qualitative Disclosures about Market Risk                                                                                                                                                                                                                                                                                                                                                                                                   |   |
|                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
| Item 4.                                    | Controls and  Procedures                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |
|                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
| ***PART II – OTHER INFORMATION***     | * *                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| * *                                   | * *                                                                                                                                                                                                                                                                                                                                                                                                                                                      | * * |
| Item 1.                                    | Legal Proceedings                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |
|                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
| Item  2.                                   | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                                                                                                                                                                                                                                                                                                  |   |
|                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
| Item 3.                                    | Defaults Upon  Senior Securities                                                                                                                                                                                                                                                                                                                                                                                                                              |   |
|                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
| Item  4.                                   | Submission  of Matters to a Vote of Security Holders                                                                                                                                                                                                                                                                                                                                                                                                          |   |
|                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
| Item 5.                                    | Other Information                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |
|                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
| Item  6.                                   | Exhibits                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |
|                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
| SIGNATURES                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| INDEX TO EXHIBITS                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

1

----

 

**PART I - FINANCIAL INFORMATION**

 

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

 

**REDDY ICEHOLDINGS, INC. AND SUBSIDIARY**

###### **CONDENSED CONSOLIDATED BALANCESHEETS**

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

###### ** **

**ASSETS**

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

 

**LIABILITIES AND SHAREHOLDERS’ EQUITY**

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

 

See notes tocondensed consolidated financial statements.

 

2

----

 

**REDDY ICEHOLDINGS, INC. AND SUBSIDIARY**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

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

 

See notes tocondensed consolidated financial statements.

 

3

----

 

**REDDY ICEHOLDINGS, INC. AND SUBSIDIARY**

**CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY**

**(SUCCESSOR)**

**(Unaudited)**

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

 

See notes to condensed consolidated financial statements.

 

4

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**REDDY ICEHOLDINGS, INC. AND SUBSIDIARY**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

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

 

See notes tocondensed consolidated financial statements.

 

5

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARYNOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004**

 

**1.  General**

 

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

 

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

 

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

 

**2. Acquisitions**

 

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

 

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

 

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

 

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

 

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

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

 

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

 

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

 

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**3.  Inventories**

 

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

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

 

**4.  Accrued Expenses**

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

 

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

 

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

 

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

 

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

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

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

 

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The Senior Notes include customary covenants thatrestrict, among other things, the ability to incur additional debt, paydividends or make certain other restricted payments, incur liens, merge or sellall or substantially all of the assets, or enter into various transactions withaffiliates.  Prior to August 1,2006, Reddy Group may redeem up to 35% of the principal amount of the SeniorNotes at a redemption price of 108.875% of the principal amount thereof, plusaccrued and unpaid interest to the date of redemption, with funds raised inspecified equity offerings.  On or afterAugust 1, 2007, Reddy Group may redeem all or a portion of the Senior Notes ata pre-determined redemption price plus any accrued interest.  The redemption price, as a percentage of theoutstanding principal amount, is 104.438% in 2007, 102.219% in 2008 and100.000% in 2009 and subsequent years. If Reddy Group experiences a change of control and does not elect toredeem the outstanding Senior Notes as previously described, Reddy Group willbe required to make an offer to repurchase the Senior Notes at a price equal to101% of the outstanding principal amount plus accrued interest.

 

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

 

On October 27,2004, Reddy Holdings issued $151 million of 101/2% SeniorDiscount Notes due 2012 (the “Discount Notes”) in a private placement offeringpursuant to an exemption from registration under the Securities Act of1933.  The Discount Notes were sold at66.333% of the stated principal amount, which resulted in net proceeds of$100.2 million.  Each Discount Note hasan initial accreted value of $663.33 per $1,000 principal amount atmaturity.  The accreted value of eachDiscount Note will increase from the date of issuance until November 1, 2008 ata rate of 101/2% per annum such that the accreted valuewill equal the stated principal amount at maturity on November 1, 2008.  Thereafter cash interest will accrue and bepayable semi-annually at a rate of 101/2% per annum.

 

The Discount Notes areunsecured obligations of Reddy Holdings and are:

 

•                  not guaranteedby any of Reddy Holdings’ subsidiaries;

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

•                  equal with anyof Reddy Holdings’ existing and future unsecured senior 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 Notesinclude customary covenants that restrict, among other things, the ability toincur additional debt or issue certain preferred stock, pay dividends orredeem, repurchase or retire our capital stock or subordinated indebtedness,make certain investments, incur liens, enter into arrangements that restrict dividendsfrom our subsidiaries, merge or sell all or substantially all of the assets orenter into various transactions with affiliates.  Prior to November 1, 2007, ReddyHoldings may redeem up to 35% of the principal amount of the Discount Notes ata redemption 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 DiscountNotes.  If a change of control occurs onor prior to November 1, 2007, Reddy Holdings may, at it’s option, redeemall, but not less than all, of the Discount Notes at a redemption price equalto the sum of (i) the accreted value of the notes as of the redemption date,(ii) a premium equal to 125% of one year’s coupon payment and (iii) any accruedand unpaid interest to the date of redemption. If Reddy Holdings experiences a change of control and does not elect tomake the optional redemption described in the previous sentence, Reddy Holdingswill be required to make an offer to repurchase the Discount Notes at a priceequal to 101% of their accreted value, plus accrued and unpaid interest, ifany, to the date of purchase.

 

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The Discount Notes are subject to registration withthe SEC pursuant to the Registration Rights Agreement (the “Rights Agreement”)entered into at the time of issuance. Pursuant to the Rights Agreement, Reddy Holdings will, within 150 daysafter the issuance date, file a registration statement with the SEC to exchangethe Discount Notes for new notes of Reddy Holdings having terms substantiallyidentical in all material respects to the Discount Notes.  Reddy Holdings must also use its commerciallyreasonable efforts to cause the registration statement to be declared effectivewithin 240 days after the issuance date.

 

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

 

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

 

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

 

The Credit Facility requires that beginning in 2004,Reddy Group will repay all borrowings under the Line of Credit and maintain azero outstanding balance for a period of 30 consecutive calendar days duringeach year.  This requirement for 2004 wasmet on August 10, 2004.  The TermLoans amortize in quarterly installments over a five-year period in an annualaggregate amount equal to 1% of the original balance, with any remaining unpaidbalance to be repaid in the sixth year in equal, quarterly installments.  Subject to certain conditions, mandatoryrepayments of the Line of Credit and Term Loans are required to be made withportions of the proceeds from (1) asset sales, (2) the issuance ofdebt securities (3) an initial public offering of stock of theParent,  and (4) insurance andcondemnation awards.  In the event of achange in control, as defined in the Credit Facility, all amounts outstandingwill become due and payable immediately. Furthermore, within 100 days after close of the each fiscal year(beginning with the close of the 2004 fiscal year), a mandatory prepayment ofthe Term Loans is required in an amount equal to a certain percentage of ReddyGroup’s annual excess cash flow, as defined in the Credit Facility.  The percentage is based on Reddy Group’sleverage ratio at the end of such fiscal year and ranges from 25% to 75%.  In connection with the offering of theDiscount Notes discussed above, Reddy Group amended the Credit Facility on October 27,2004 to permit certain related transactions (see Note 11).  In addition to allowing those relatedtransactions, the amendment modified the calculation of Reddy Group’s excesscash flow for 2004 such that a mandatory prepayment based on Reddy Group’s 2004results is not expected to be required.

 

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

 

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

 

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

 

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

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

 

**6.  Capital Stock**

 

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

 

*PreferredStock.** ***The Parent is authorized to issue up to200,000 shares of $0.01 par value preferred stock, consisting of 100,000 sharesof Series A Cumulative Redeemable Preferred Stock (“Series A Preferred

 

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

 

**7. Stock-Based Compensation**

 

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

 

 The Company accounts for the Stock Option Planunder the intrinsic value method prescribed by APB Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related Interpretations.  No stock-based employee compensation cost isreflected in net income available to common shareholders for the three and ninemonths ended September 30, 2004 as all stock options granted under theStock Option Plan had an exercise price equal to or greater than the marketvalue of the underlying common stock on the date of grant.  The following table illustrates the effect onthe net income available to common shareholders for the three and nine monthsended September 30, 2004 if the Company had applied the fair valuerecognition provisions of stock-based compensation as described in SFAS No.123, “Accounting for Stock-Based Compensation,” as amended by SFAS 148, “Accountingfor Stock-Based Compensation  —Transition and Disclosure.”

 

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| ** **                                                                                             | ** ** | **Three Months  Ended  September 30,  2004** | ** ** | **Nine Months  Ended  September 30,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                             | ** ** | **(in thousands)**                                | ** ** |
|                                                                                                   |       |                                              |       |                                             |       |
| Net  income available to common shareholders, as reported                                              |       | $                                                 | 13,233     |                                             | $          | 10,608 |   |
| Less: Total stock-based compensation expense  determined under fair value based methods for all awards |       | 23                                                |       | 67                                               |       |
| Proforma  net income available to common shareholders                                                  |       | $                                                 | 13,210     |                                             | $          | 10,541 |   |

 

**8.  IncomeTaxes**

 

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

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

 

**9. Commitments and Contingencies**

 

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

 

The Company is a party toa lawsuit in connection with an ammonia release at its Baton Rouge, Louisianamanufacturing facility in June 2001. The case, which is a consolidation of seven lawsuits, is titled WallaceAcey, Jr. et al vs. Reddy Ice Corporation. This lawsuit was filed August 30, 2001 in the 19th JudicialDistrict Court, Parish of East Baton Rouge, Louisiana and has been assigneddocket number 487373 Division N.  Thereare multiple plaintiffs who have primarily alleged injuries consisting ofinconvenience, watery eyes and offensive odors. The plaintiffs have not made a specific request for relief in thelawsuit.  The Company maintains insuranceto cover such events and its insurance carrier is contesting the suit and plansto vigorously defend against any claims. This lawsuit is still in a preliminary stage and the ultimate outcome isimpossible to determine at this time.  Anunfavorable result in excess of the available insurance coverage could have amaterial adverse effect on the Company’s consolidated financial position,results of operations or cash flows.

 

The Company was a partyto two lawsuits filed in connection with the merger.  The first lawsuit was filed on May 23, 2003in the County Court at Law Number 1, Dallas County, Texas and was titled CauseNo. *CC-03-06056-A; Glenn Robbins, On Behalfof Himself and All Others Similarly Situated, and Derivatively on*

 

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

 

**10.  Segment Information**

 

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

 

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

 

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

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

 

14

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

 

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

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

 

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

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

 

15

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

 

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

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

 

**11.  Subsequent Events**

 

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

 

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

 

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# **Item 2.**  *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations*

 

The following discussion and analysis of our financialcondition and results of operations should be read in conjunction with ourcondensed consolidated financial statements and the related notes and otherinformation included elsewhere in this Form 10-Q and our Annual Report on Form10-K for the year ended December 31, 2003, previously filed with theSecurities & Exchange Commission (“SEC”).

 

On August 15, 2003,Packaged Ice, Inc. merged with Cube Acquisition Corp., a wholly-ownedsubsidiary of Reddy Ice Holdings, Inc. (the “Merger”).  Packaged Ice was the surviving corporation,changed its name to Reddy Ice Group, Inc. and became a wholly-owned subsidiaryof Reddy Holdings, which was established on May 8, 2003.  The discussion below of the results ofoperations for the three and nine months ended September 30, 2004 versusthe three and nine months ended September 30, 2003 is based on the resultsof Packaged Ice for the period from July 1, 2003 to August 14, 2003and the period from January 1, 2003 to August 14, 2003 and ReddyHoldings for the three months ended September 30, 2003, the period fromMay 8, 2003 (Date of Inception) to September 30, 2003 and the three andnine months ended September 30, 2004. Reddy Holdings and Cube Acquisition conducted no operations from May 8,2003 through August 14, 2003.  ReddyHoldings and Reddy Group are collectively referred to as the ‘‘Successor”.  Packaged Ice prior to the Merger is referredto as the “Predecessor”.  Because ofpurchase accounting, certain amounts may not be comparable between thePredecessor and Successor.

 

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

 

# **Uncertainty of Forward Looking Statements and Information**

 

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

 

•                  generaleconomic trends and seasonality;

•                  weatherconditions;

•                  oursubstantial leverage and ability to service our debt;

•                  therestrictive covenants under our indebtedness;

•                  availabilityof capital sources;

•                  fluctuationsin operating costs;

•                  competitivepractices in the industry in which we compete;

•                  changesin labor conditions;

•                  ourcapital expenditure requirements;

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

•                  technologicalchanges and innovations;

•                  legislativeor regulatory requirements; and

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

 

You should not undulyrely on these forward-looking statements as they speak only as of the date ofthis report.  Except as required by law,we are not obligated to publicly release any revisions to these forward lookingstatements to reflect events or circumstances occurring after the date of thisreport or to reflect the

 

17

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occurrence ofunanticipated events.  Important factorsthat could cause our actual results to differ materially from our expectationsare discussed elsewhere in this report.

 

**General**

 

***OurBusiness.**** *We are the largest manufacturerand distributor of packaged ice in the United States and currently serveapproximately 82,000 customer locations in 32 states and the District ofColumbia.  We operate in two businesssegments—ice products and non-ice products and operations.  Ice products accounted for approximately 94%of our revenues in the nine months ended September 30, 2004 and 93% ofrevenues in the nine months ended September 30, 2003.  Due to acquisitions of certain ice companiesin the fourth quarter of 2003 and the first nine months of 2004 (see “-Acquisitions”below), the proportion of our ice sales has increased.  We expect the annual proportion of ice salesto increase from 92% in 2003 to approximately 93% to 95% in 2004.  Our ice products business consists of thefollowing two activities:

 

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

 

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

 

Our other businesssegment, non-ice products and operations, consists of refrigerated warehousingfor third parties and the manufacture and sale of bottled water.  This business segment accounted for 6% and 7%of our revenues in the nine months ended September 30, 2004 and 2003,respectively.  As noted above, theproportion of sales due to our non-ice segment has decreased due to theacquisition of ice companies since the fourth quarter of 2003 (see “-Acquisitions”below).  On an annual basis, we expectthis percentage to decrease from 8% in 2003 to approximately 5% to 7% in 2004.

 

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

 

***Cost of Sales****. *Ourcost of sales includes costs associated with labor, raw materials, productdelivery and utilities related to the manufacture and distribution of our products.  Labor costs, including associated payrolltaxes and benefit costs included in cost of sales, accounted for approximately21% of sales in the three months ended September 30, 2004 and 2003 and 24%of sales in the nine months ended September 30, 2004 and 2003.  Raw materials, which consist primarily ofpolyethylene-based plastic bags, represented approximately 7% of sales in thethree and nine months ended September 30, 2004 and 2003.  Product delivery expenses include labor, fueland vehicle rental expense related to products delivered by our owndistribution network, as well as fees paid to distributors who deliver ice toour customers on our behalf.  Fuelpurchased for delivery by our own distribution network representedapproximately 3% of sales in the three and nine months ended September 30,2004, versus 2% in the three and nine months ended September 30,2003.  Expenses for independent thirdparty distribution services represented approximately 5% of sales in the threeand nine months ended September 30, 2004 and 4% of sales in three and ninemonths ended September 30, 2003. Utility expenses consist primarily of electricity used in connectionwith the manufacturing, storage and distribution processes and representedapproximately 5% of sales in the three and nine months ended September 30,2004 and 6% in the three and nine months ended September 30, 2003.  Ice Factory revenues do not increase ourplant occupancy, delivery or utility costs, however, we do incur costsassociated with customer service representatives and machine technicians whichare included in our cost of sales.

 

***Operating Expenses****. *Ouroperating expenses are costs associated with selling, general andadministrative functions.  These costsinclude executive officers’ compensation, office and administrative salaries,insurance, legal and other professional services and costs associated withleasing office space.  Labor costs,including associated payroll taxes and benefit costs, included in operatingexpenses represented

 

18

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approximately 5% and 6%of sales in the three months ended September 30, 2004 and 2003,respectively, and 6% and 7% in the nine months ended September 30, 2004and 2003, respectively.

 

***SeasonalityRisks. ***Our resultsof operations are highly seasonal, characterized by peak demand during thewarmer months of May through September, with an extended peak selling season inthe southern United States.  As a resultof this seasonality and the fixed costs in our business, the proportion ofrevenues earned in our ice and non-ice business segments and the ratio of coststo revenues in any given quarter are not necessarily indicative of the ratiosfor a full year.  Revenues within specificmarkets can also be affected by weather conditions, with cool or rainy weathernegatively impacting demand and extremely hot weather increasing our costs aswe respond to excess customer demand for our products.  Approximately 68%, 68% and 66% of our revenuesoccurred during the second and third calendar quarters in 2001, 2002 and 2003,respectively.  The proportion of revenuesin the second and third calendar quarters of 2003 was lower than in 2001 and2002 due to the acquisitions of ice companies in the fourth quarter of 2003(see “-Acquisitions” below).  We believethat approximately 68% of our revenues will occur during the second and thirdcalendar quarters in 2004.  As a resultof seasonal revenue declines and a less than proportional decline in expensesduring the first and fourth quarters, we typically experience lower profitmargins resulting in losses during these periods. In addition, because asignificant 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.

 

***Acquisitions.**** *On October 1,2003, we, acquired the “Service Ice” division of L.D. Plante, Inc. (“ServiceIce”) for total consideration of $3.1 million (subject to customary post-closingadjustments).  Service Ice operated oneice manufacturing facility in Orlando, Florida and was the largest supplier ofpackaged ice in Orlando with annual revenues of approximately $3.8 million.  On November 6, 2003, we purchased all ofthe outstanding shares of capital stock of Triangle Ice Co., Inc. (“TriangleIce”) for an aggregate purchase price of approximately $64.3 million (subjectto customary post-closing adjustments). Triangle Ice operates primarily in North and South Carolina and hadannual revenues of approximately $30 million. During the nine months ended September 30, 2004, we completed sevenacquisitions for a total cost of $5.7 million. Annual revenue associated with these acquisitions is approximately $6million.  From October 1, 2004through November 9, 2004, we have completed 4 additional acquisitions fora total cost of $10.6 million.  Annualrevenue associated with acquisitions in the fourth quarter of 2004 isapproximately $7 million.

 

***Facilities.*** At September 30, 2004, we owned oroperated 59 ice manufacturing facilities, 57 distribution centers,approximately 79,000 merchandisers (cold storage units installed at customerlocations), approximately 3,000 Ice Factories, six refrigerated warehouses andone bottled water plant.  We had anaggregate daily ice manufacturing capacity of approximately 16,000 tons, theequivalent of 4.5 million seven pound bags of ice.

 

19

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**ThreeMonths Ended September 30, 2004 Compared to Combined Three Months EndedSeptember 30, 2003**

 
| ** **                            | ** ** | **Successor**      | ** ** | **Successor**                                | ** ** | **Predecessor** | ** ** | ** **         | ** ** | ** **                 | ** ** | ** ** | ** ** |
|---------------------------------------|------------|--------------------|------------|----------------------------------------------|------------|-----------------|------------|--------------------|------------|----------------------------|------------|------------|------------|
| ** **                            | ** ** | ** **         | ** ** | ** **                                   | ** ** | ** **      | ** ** | **Combined**       | ** ** | ** **                 | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **Three  Months**  | ** ** | ** **                                   | ** ** | ** **      | ** ** | **Three  Months**  | ** ** | ** **                 | ** ** | ** ** |       |
| ** **                            | ** ** | **Ended**          | ** ** | **January  1 to**                            | ** ** | **July 1  to**  | ** ** | **Ended**          | ** ** | ** **                 | ** ** | ** ** |       |
| ** **                            | ** ** | **September  30,** | ** ** | **September  30,**                           | ** ** | **August  14,** | ** ** | **September  30,** | ** ** | **Change  from Last Year** |       |
| ** **                            | ** ** | **2004**           | ** ** | **2003**                                     | ** ** | **2003**        | ** ** | **2003**           | ** ** | **Dollars**                | ** ** | **%**      |       |
|                                  |       |               |       | **(in thousands, except per share amounts)** |       |            |       |
|                                  |       |               |       |                                         |       |            |       |               |       |                       |       |       |       |
| **Consolidated Results**              |       |               |       |                                         |       |            |       |               |       |                       |       |       |       |
| Revenues                              |       | $                  | 106,507    |                                         | $          | 38,641          |       | $                  | 47,953     |                       | $          | 86,594     |       | $ | 19,913 |   | $ | 23.0 |   |
| Cost of sales                         |       | 58,690             |       | 21,523                                       |       | 25,331          |       | 46,854             |       | 11,836                     |       | 25.3       |       |
| Gross profit                          |       | 47,817             |       | 17,118                                       |       | 22,622          |       | 39,740             |       | 8,077                      |       | 20.3       |       |
| Operating expenses                    |       | 8,728              |       | 4,110                                        |       | 3,936           |       | 8,046              |       | 682                        |       | 8.5        |       |
| Depreciation and amortization expense |       | 5,824              |       | 2,377                                        |       | 2,819           |       | 5,196              |       | 628                        |       | 12.1       |       |
| Income from operations                |       | 33,265             |       | 10,631                                       |       | 15,867          |       | 26,498             |       | 6,767                      |       | 25.5       |       |
| Other income (expense), net           |       | (12                | )          | —                                       |       | 84              |       | 84                 |       | (96                        | )          | (114.3     | )          |
| Interest expense                      |       | (6,595             | )          | (3,800                                       | )          | (4,160          | )          | (7,960             | )          | (1,365                     | )          | 17.1       |       |
| Income before taxes                   |       | $                  | 26,658     |                                         | $          | 6,831           |       | $                  | 11,791     |                       | $          | 18,622     |       | $ | 8,036 |   | 43.2 |   |
|                                  |       |               |       |                                         |       |            |       |               |       |                       |       |       |       |
| **Ice Operations:**                   |       |               |       |                                         |       |            |       |               |       |                       |       |       |       |
| Revenues                              |       | $                  | 101,162    |                                         | $          | 36,040          |       | $                  | 45,434     |                       | $          | 81,474     |       | $ | 19,688 |   | $ | 24.2 |   |
| Cost of sales                         |       | 55,706             |       | 20,065                                       |       | 23,902          |       | 43,967             |       | 11,739                     |       | 26.7       |       |
| Gross profit                          |       | 45,456             |       | 15,975                                       |       | 21,532          |       | 37,507             |       | 7,949                      |       | 21.2       |       |
| Operating expenses                    |       | 8,257              |       | 3,818                                        |       | 3,652           |       | 7,470              |       | 787                        |       | 10.5       |       |
|                                  |       |               |       |                                         |       |            |       |               |       |                       |       |       |       |
| **Non-Ice Operations:**               |       |               |       |                                         |       |            |       |               |       |                       |       |       |       |
| Revenues                              |       | $                  | 5,345      |                                         | $          | 2,601           |       | $                  | 2,519      |                       | $          | 5,120      |       | $ | 225 |   | $ | 4.4 |   |
| Cost of sales                         |       | 2,984              |       | 1,458                                        |       | 1,429           |       | 2,887              |       | 97                         |       | 3.4        |       |
| Gross profit                          |       | 2,361              |       | 1,143                                        |       | 1,090           |       | 2,233              |       | 128                        |       | 5.7        |       |
| Operating expenses                    |       | 471                |       | 292                                          |       | 284             |       | 576                |       | (105                       | )          | (18.2      | )          |

 

*Revenues: *Revenues increased $19.9 million from the threemonths ended September 30, 2003 to the three months ended September 30,2004.  This increase is primarily due to(i) the acquisitions of Service Ice and Triangle Ice in October 2003 andNovember 2003, respectively, and the seven acquisitions closed during the ninemonths ended September 30, 2004 (referred to collectively as the “2004Acquisitions”), (ii) slightly higher average selling prices which werepartially offset by decreased volume sales and (iii) changes in how we dobusiness with certain of our distributors. The acquisitions referred to above provided additional revenue ofapproximately $16.1 million in the three months ended September 30, 2004.  Approximately $1.4 million of the totalrevenue increase was driven by slightly higher average selling prices andvolume decreases resulting from cooler and wetter than normal weather in Texas,Oklahoma and Colorado.  Volume decreasesin those markets we partially offset by increased volume sales related to thehurricanes which came ashore in Florida during the quarter .  Approximately $2.4 million of the increasewas due to changes in the terms under which we do business with certain of ourdistributors.  These modifications to ourdistributor business occurred primarily during the second quarter of 2004 andalso resulted in a corresponding increase in cost of sales.

 

*Cost of Sales:*  Cost of sales increased $11.8 million fromthe three months ended September 30, 2003 to the three months ended September30, 2004.  This increase in cost of salesis primarily due to (i) approximately $8.0 million of costs in the three monthsended September 30, 2004 associated with the operations of Service Ice,Triangle Ice and the 2004 Acquisitions, (ii) a $1.9 million increase in costsin our previously existing ice operations primarily related to increased fuel,energy, bag costs and the cost of purchased ice and transportation related toour efforts to serve the Florida market in the wake of the hurricanes that madelandfall during the quarter, partially offset by the elimination of $0.5million of operating lease expenses associated with our Ice Factories and (iii)additional delivery expense of $2.4 million related to changes in the termsunder which we do business with certain of our distributors.

 

20

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*Operating Expenses: *Operating expensesincreased $0.7 million from the three months ended September 30, 2003 tothe three months ended September 30, 2004. This increase is primarily due to $1.0 million of costs in the threemonths ended September 30, 2004 attributable to the operations of  Service Ice, Triangle Ice and the 2004Acquisitions, offset by a decrease in incentive compensation expense.

 

*Depreciation and Amortization: *Depreciation andamortization increased $0.6 million from the three months ended September 30,2003 to the three months ended September 30, 2004.  This increase is primarily due to additionaldepreciation and amortization expense of $0.9 million associated with theacquisitions completed after September 30, 2003, offset by reduced depreciationand amortization expense related to revaluation of our property, equipment andintangible assets in connection with the Merger on August 15, 2003.

 

*Interest Expense:*  Interest expense decreased $1.4 million fromthe three months ended September 30, 2003 to the three months endedSeptember 30, 2004.  This decrease isprimarily due to lower average outstanding borrowings under our line of creditand lower average interest rates, which resulted from the refinancing of ourdebt on August 15, 2003.

 

***Nine Months Ended September 30,2004 Compared to Combined Nine Months Ended September 30, 2003***

 
| ** **                            | ** ** | **Successor**      | ** ** | **Successor**                                | ** ** | **Predecessor**   | ** ** | ** **         | ** ** | ** **                 | ** ** | ** ** | ** ** |
|---------------------------------------|------------|--------------------|------------|----------------------------------------------|------------|-------------------|------------|--------------------|------------|----------------------------|------------|------------|------------|
| ** **                            | ** ** | ** **         | ** ** | **May 8,  2003**                             | ** ** | ** **        | ** ** | **Combined**       | ** ** | ** **                 | ** ** | ** ** | ** ** |
|                                  |       | **Nine  Months**   | ** ** | **(Date of**                                 | ** ** | ** **        | ** ** | **Nine  Months**   | ** ** | ** **                 | ** ** | ** ** |       |
|                                  |       | **Ended**          | ** ** | **Inception  to)**                           | ** ** | **January  1 to** | ** ** | **Ended**          | ** ** | ** **                 | ** ** | ** ** |       |
|                                  |       | **September  30,** | ** ** | **September  30,**                           | ** ** | **August  14,**   | ** ** | **September  30,** | ** ** | **Change  from Last Year** |       |
|                                  |       | **2004**           | ** ** | **2003**                                     | ** ** | **2003**          | ** ** | **2003**           | ** ** | **Dollars**                | ** ** | **%**      |       |
|                                  |       |               |       | **(in thousands, except per share amounts)** |       |              |       |
|                                  |       |               |       |                                         |       |              |       |               |       |                       |       |       |       |
| **Consolidated Results**              |       |               |       |                                         |       |              |       |               |       |                       |       |       |       |
| Revenues                              |       | $                  | 232,416    |                                         | $          | 38,641            |       | $                  | 151,269    |                       | $          | 189,910    |       | $ | 42,506 |   | $ | 22.4 |   |
| Cost of sales                         |       | 137,047            |       | 21,523                                       |       | 91,642            |       | 113,165            |       | 23,882                     |       | 21.1       |       |
| Gross profit                          |       | 95,369             |       | 17,118                                       |       | 59,627            |       | 76,745             |       | 18,624                     |       | 24.3       |       |
| Operating expenses                    |       | 25,825             |       | 4,110                                        |       | 18,598            |       | 22,708             |       | 3,117                      |       | 13.7       |       |
| Depreciation and amortization expense |       | 17,102             |       | 2,377                                        |       | 14,528            |       | 16,905             |       | 197                        |       | 1.2        |       |
| Loss (gain) on disposition of assets  |       | —             |       | —                                       |       | (11               | )          | (11                | )          | 11                         |       | 100.0      |       |
| Income from operations                |       | 52,442             |       | 10,631                                       |       | 26,512            |       | 37,143             |       | 15,299                     |       | 41.2       |       |
| Other income, net                     |       | (12                | )          | —                                       |       | 116               |       | 116                |       | (128                       | )          | 110.3      |       |
| Interest expense                      |       | (19,841            | )          | (3,800                                       | )          | (21,063           | )          | (24,863            | )          | (5,022                     | )          | (20.2      | )          |
| Income before taxes                   |       | $                  | 32,589     |                                         | $          | 6,831             |       | $                  | 5,565      |                       | $          | 12,396     |       | $ | 20,193 |   | 162.9 |   |
|                                  |       |               |       |                                         |       |              |       |               |       |                       |       |       |       |
| **Ice Operations:**                   |       |               |       |                                         |       |              |       |               |       |                       |       |       |       |
| Revenues                              |       | $                  | 218,684    |                                         | $          | 36,040            |       | $                  | 139,618    |                       | $          | 175,658    |       | $ | 43,026 |   | $ | 24.5 |   |
| Cost of sales                         |       | 129,286            |       | 20,065                                       |       | 84,384            |       | 104,449            |       | 24,837                     |       | 23.8       |       |
| Gross profit                          |       | 89,398             |       | 15,975                                       |       | 55,234            |       | 71,209             |       | 18,189                     |       | 25.5       |       |
| Operating expenses                    |       | 24,460             |       | 3,818                                        |       | 17,051            |       | 20,869             |       | 3,591                      |       | 17.2       |       |
|                                  |       |               |       |                                         |       |              |       |               |       |                       |       |       |       |
| **Non-Ice  Operations:**              |       |               |       |                                         |       |              |       |               |       |                       |       |       |       |
| Revenues                              |       | $                  | 13,732     |                                         | $          | 2,601             |       | $                  | 11,651     |                       | $          | 14,252     |       | $ | (520 | ) | $ | (3.6 | ) |
| Cost of sales                         |       | 7,761              |       | 1,458                                        |       | 7,258             |       | 8,716              |       | (955                       | )          | (11.0      | )          |
| Gross profit                          |       | 5,971              |       | 1,143                                        |       | 4,393             |       | 5,536              |       | 435                        |       | 7.9        |       |
| Operating expenses                    |       | 1,365              |       | 292                                          |       | 1,547             |       | 1,839              |       | (474                       | )          | (25.8      | )          |

 

*Revenues: *Revenues increased $42.5 million from the ninemonths ended September 30, 2003 to the nine months ended September 30,2004.  This increase is primarily due to(i) the acquisitions of Service Ice, Triangle Ice and the 2004 Acquisitions,(ii) higher average selling prices and increased volume sales and (iii) changesin how we do business with certain of our distributors.  The acquisitions referred to above providedadditional revenue of approximately $33.6 million in the nine months endedSeptember 30, 2004.

 

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Approximately $5.4 million of the total revenue increase was driven byslightly higher average selling prices and small volume increases resultingfrom favorable weather conditions in the Eastern United Sates during the monthsof May and June and the effects of the hurricanes in the southeastern UnitedStates in September 2004, offset by cooler and wetter than normal weather inTexas, Oklahoma and Colorado during the second and third quarters of 2004.  Approximately $4.0 million of the increase wasdue to changes in the terms under which we do business with certain of ourdistributors.  These modifications to ourdistributor business occurred primarily in the second quarter of 2004 and alsoresulted in a corresponding increase in cost of sales.  Offsetting the improved revenues in our icebusiness was a revenue decline of $0.5 million in our non-ice operations.  The decline was caused primarily by areduction in volumes in our cold storage operations as a result of therestructuring of a certain customer contract in the second quarter of 2003 anddecreased customer volumes in our remaining cold storage warehouses, offset byincreased volume sales in our bottled water operation.

 

*Cost of Sales:*  Cost of sales increased $23.9 million fromthe nine months ended September 30, 2003 to the nine months ended September 30,2004.  This increase in cost of sales isprimarily due to (i) approximately $18.0 million of costs in the nine monthsended September 30, 2004 associated with the Service Ice, Triangle Ice and the2004 Acquisitions, (ii) a $5.4 million increase in costs in our previouslyexisting ice operations related to the increased volume sales noted above andincreased fuel, energy and bag costs, which was offset by the elimination of$2.5 million of operating lease expenses associated with our Ice Factories and(iii) additional delivery expense of $4.0 million related to changes in theterms under which we do business with certain of our distributors.  Offsetting these increases in costs was a$1.0 million decrease in costs of sales associated with our non-iceoperations.  The decrease in costs in ournon-ice operations is due to (i) the restructuring of a certain cold storagecustomer contract in the second quarter of 2003, which resulted in a reductionin cold storage volumes and the closure of a warehouse, (ii) expensereductions, primarily labor, as a result of decreased volumes at our remainingcold storage warehouses and (iii) the elimination of certain operating leaseexpenses in our bottled water operation as a result of the purchase of certainleased equipment in November 2003.  Thesedecreases in non-ice costs of sales is partially offset by increased costs inour bottled water operation resulting from increased sales volumes.

 

*Operating Expenses: *Operating expensesincreased $3.1 million from the nine months ended September 30, 2003 tothe nine months ended September 30, 2004. This increase is primarily due to approximately $2.9 million of costs inthe nine months ended September 30, 2004 attributable to the ice operationsacquired since September 30, 2003.

 

*Depreciation and Amortization: *Depreciation andamortization increased $0.2 million from the nine months ended September 30,2003 to the nine months ended September 30, 2004.  This increase is primarily due to additionaldepreciation and amortization expense of $2.4 million associated with theacquisitions completed after September 30, 2003, offset by reduced depreciationand amortization expense related to the revaluation of our property, equipmentand intangibles assets in connection with the Merger on August 15, 2003.

 

*Interest Expense:*  Interest expense decreased $5.0 million fromthe nine months ended September 30, 2003 to the nine months endedSeptember 30, 2004.  This decreaseis primarily due to lower average outstanding borrowings under our line ofcredit and lower average interest rates, which resulted from the refinancing ofour debt on August 15, 2003.

 

**Liquidity and Capital Resources**

 

We generate cash from the sale of packaged ice through traditionaldelivery methods, by which we****manufacture,package and store ice at a central facility and transport it to our customers’retail****locations when needed, and through IceFactories, which manufacture, package and store ice in our****customers’retail locations. Our primary uses of cash are (a) cost of sales, (b) operatingexpenses,****(c) debt service, (d) capitalexpenditures related to replacing and modernizing the capital****equipment in our traditional ice plants and acquiring andinstalling additional Ice Factories and (e) acquisitions. ** **Historically, we have financed ourcapital and working

 

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capital requirements, including our acquisitions, through a combination of cash flows fromoperations, borrowings under our revolving credit facilities and operatingleases.

 

During the nine months ended September 30, 2004, capital expenditurestotaled $12.5 million.  We estimate thatour capital expenditures for 2004 will approximate $16 million, which includesany capital expenditures required by the 2004 Acquisitions, and will primarilybe used to maintain and expand our traditional ice operations.  There can be no assurance that capitalexpenditures will not exceed this estimate. As we have consolidated acquisitions into the existing companyinfrastructure, we have identified non-core and excess assets which can bedisposed of.  From time to time, we alsodispose of other assets which are no longer useful in our operations.  As a result of dispositions of these non-coreand excess assets, we realized proceeds of approximately $2.3 million in thenine months ended September 30, 2004 and estimate that we will generate totalproceeds of approximately $2.5 million to $3.0 million in 2004.  We continue to expect that our net capitalexpenditures for the full year 2004 will approximate $13.0 million to $13.5million.

 

From January1, 2004 through November 9, 2004, we have completed the acquisition of 11 smallice companies for a total cash purchase price of approximately $16.3 million(seven of which occurred in the nine months ended September 30, 2004 for atotal purchase price of $5.7 million).  We will continue to evaluate acquisitionopportunities as they become available. In conjunction with these evaluations, we will consider our liquidity,availability under our revolving line of credit, mandatory principal repaymentsunder our debt agreements and availability of other capital resources.

 

### **Cash Flows for the Nine Months Ended September 30,2004 and 2003**

 

Net cash provided by operating activities was $32.3 million and $7.5million in the nine months ended September 30, 2004 and 2003,respectively.  The increase from 2003 to2004 was primarily the result of significantly improved results ofoperations.  During the nine months endedSeptember 30, 2003, we reported income before taxes of $12.4 million, comparedto income before taxes of $32.6 million in the nine months ended September 30,2004 (all income taxes recorded in 2004 were non-cash).  The increase in income before taxes wasdriven by acquisitions and reduced interest expense related to lower averageinterest rates.

 

Net cash used in investing activities was $15.9 million and $141.4million in the nine months ended September 30, 2004 and 2003, respectively.  The decrease in cash used by investingactivities from 2003 to 2004 is primarily due to the expenditure of $125million in the nine months ended September 30, 2003 for the acquisition ofPackaged Ice, Inc.  Also contributing tothe decrease in cash used in investing activities was a $6.5 million decreasein capital expenditures, net of proceeds from dispositions, primarily relatedto the buyout of our Ice Factory operating leases in September 2003, offset by$5.6 million spent in 2004 for acquisitions of ice companies.

 

Net cash used by financing activities was $1.6 million in the ninemonths ended September 30, 2004. In the nine months ended September 30,2003, financing activities provided cash of $148.1 million, primarily as aresult of the refinancing of Packaged Ice’s debt in connection with the Merger.

 

### **Long-term Debt and Other Obligations**

 

*Overview.*  At September 30, 2004, we had approximately$329.7 million of total debt outstanding as follows:

 

•                  $151.1 millionof Reddy Group’s 87/8 % senior notes due August 1, 2011(net of discount of $0.9 million);

**•**                  $178.2 millionoutstanding term loans under Reddy Group’s senior credit facility which matureson August 15, 2009; and

•                  $0.4 million ofother debt.

 

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*SeniorSubordinated Notes*. On July 17, 2003, we issued $152.0 million of 87/8 % senior subordinated notes.  These notes were issued in connection with aprivate placement offering and were subsequently registered with the Securities& Exchange Commission (the “SEC”). The 87/8 % senior subordinated noteswere sold at 99.297% of the stated principal amount, which resulted in netproceeds of $150.9 million.  Interest onthe 87/8 % senior subordinated notes ispayable semiannually on February 1 and August 1, with such payments havingcommenced on February 1, 2004.  The 87/8 % senior subordinated notes are unsecured obligations ofReddy Group and are:

 

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

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

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

 

The 87/8 % senior subordinated notes includecustomary covenants that restrict, among other things, the ability to incuradditional debt, pay dividends or make certain other restricted payments, incurliens, merge or sell all or substantially all of the assets or enter intovarious transactions with affiliates. Prior to August 1, 2006, Reddy Group may redeem up to 35% of theprincipal amount of the 87/8 % senior subordinated notesat a redemption price of 108.875% of the principal amount thereof, plus accruedand unpaid interest to the date of redemption, with funds raised in equityofferings that are specified in the indenture governing the 87/8% senior subordinated notes.  On or afterAugust 1, 2007, Reddy Group may redeem all or a portion of the Senior Notes ata pre-determined redemption price plus any accrued interest.  The redemption price, as a percentage of theoutstanding principal amount, is 104.438% in 2007, 102.219% in 2008 and100.000% in 2009 and subsequent years. If Reddy Group experiences a change of control and does not elect toredeem the outstanding Senior Notes as previously described, Reddy Group willbe required to make an offer to repurchase the Senior Notes at a price equal to101% of the outstanding principal amount plus accrued interest.

 

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

 

*SeniorDiscount Notes.*  OnOctober 27, 2004, Reddy Holdings issued $151 million of 101⁄2% Senior DiscountNotes due 2012 in a private placement offering pursuant to an exemption fromregistration under the Securities Act of 1933. The senior discount notes were sold at 66.333% of the stated principalamount, which resulted in net proceeds of $100.2 million.  Reddy Ice Holdings used the net proceeds ofthe offering, together with an approximately $28.6 million dividend fromReddy Group to redeem all of Reddy Holdings’ existing series A preferredstock  for approximately$99.2 million, to pay accumulated dividends on such stock as of the dateof redemption in the amount of approximately $15.1 million and to pay adividend of approximately $10.5 million to its common stockholders.  The dividend paid by Reddy Group to ReddyHoldings was considered a “restricted payment” under the terms of the indenturegoverning the 87/8 % senior subordinated notes and wasmade in accordance with the limitations and conditions contained within the indenture(see “-Senior Subordinated Notes” above). In connection with these transactions, Reddy Group made a specialtransaction payment of approximately $1.2 million in the aggregate tocertain members of management and certain directors.  In connection with the offering of notes andthe related transactions, Reddy Ice Group amended its credit agreement (see “-SeniorCredit Facility” below).

 

Each senior discount note has an initial accreted value of $663.33 per$1,000 principal amount at maturity.  Theaccreted value of each senior discount note increases from the date of issuanceuntil November 1, 2008 at a rate of 101⁄2% per annum such that the accreted valuewill equal the stated principal amount at maturity on November 1, 2008.**** Thereafter cashinterest will accrue and be payable semi-annually at a rate of 101⁄2% perannum.  The senior discount notes areunsecured obligations of Reddy Holdings and are:

 

•                  not guaranteedby any of Reddy Holdings’ subsidiaries;

 

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

•                  equal with anyof Reddy Holdings’ existing and future unsecured senior 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 senior discount notes include customary covenants that restrict, amongother things, the ability to incur additional debt or issue certain preferredstock, pay dividends or redeem, repurchase or retire our capital stock orsubordinated indebtedness, make certain investments, incur liens, enter intoarrangements that restrict dividends from our subsidiaries, merge or sell allor substantially all of the assets or enter into various transactions withaffiliates.  Prior to November 1, 2007,we may redeem up to 35% of the principal amount of the senior discount notes ata redemption 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.  If a change of control occurs onor prior to November 1, 2007, we may, at our option, redeem all, but not lessthan all, of the senior discount notes at a redemption price equal to the sumof (i) the accreted value of the notes as of the redemption date, (ii) apremium equal to 125% of one year’s coupon payment and (iii) any accrued andunpaid interest to the date of redemption. If we experience a change of control and do not elect to make theoptional redemption described in the previous sentence, we will be required tomake an offer to repurchase the senior discount notes at a price equal to 101%of their accreted value, plus accrued and unpaid interest, if any, to the dateof purchase.

 

The seniordiscount notes are subject to registration with the SEC pursuant to theRegistration Rights Agreement (the “Rights Agreement”) entered into at the timeof issuance.  Pursuant to the RightsAgreement, Reddy Holdings will, within 150 days after the issuance date, file aregistration statement with the SEC to exchange the senior discount notes fornew notes of Reddy Holdings having terms substantially identical in allmaterial respects to the Senior Notes. Reddy Holdings must also use its commercially reasonable efforts tocause the registration statement to be declared effective within 240 days afterthe issuance date.

 

*Senior Credit Facility.*  On August 15, 2003, Reddy Group entered intoa $170 million senior credit facility, with the lenders being a syndicate ofbanks, financial institutions and other entities, including Credit Suisse FirstBoston as Administrative Agent, Canadian Imperial Bank of Commerce and BearStearns Corporate Lending, Inc.  Thecredit facility provides for a six-year term loan in the amount of $135 millionand a five-year revolving credit facility in the amount of $35 million.  Proceeds of the term loan were used toconsummate the Merger as previously discussed. On October 17, 2003, the senior credit facility was amended to, amongother things, allow for an additional term loan of $45 million to consummatethe Triangle Ice acquisition, which was completed on November 6, 2003.  The new term loan contains substantially allthe same terms, conditions and financial covenants as the original term loan.

 

At September 30, 2004, we had $25.7 million of availability under theline of credit, net of outstanding standby letters of credit of $9.3million.  The standby letters of creditare used primarily to secure certain insurance obligations.  As our insurance policies were renewed in2004 with our current carrier, we are required to increase the balances of thestandby letters of credit by approximately $2.6 million between October 2004and March 2005.  During the remainder of2004, we will also be working with certain former insurance carriers to reducethe amount of standby letters of credit that we maintain for theirbenefit.  In October 2004, we receivedpermission to reduce one such standby letter of credit by $4.9 million.  At this time, we cannot estimate whatadditional amount of reductions, if any, we will be able negotiate with thoseformer insurance carriers.

 

Principal balances outstanding under the line of credit bear interestper annum, at our option, at the sum of the base rate plus the applicablemargin or LIBOR plus the applicable margin. 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%. The applicable margin is different for revolving and term loans andvaries depending on our leverage ratio. On February 20, 2004, the senior credit facility was amended to reducethe applicable margin on term loans by 0.5%. At September 30, 2004, the weighted average interest rate of borrowingsoutstanding under the senior credit facility was 4.3%.  Interest on base rate loans is payable on thelast day of

 

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each quarter.  Interest on LIBORloans is payable upon maturity of the LIBOR loan or on the last day of thequarter if the LIBOR loan exceeds 90 days.

 

The senior credit facility requires that beginning in 2004, we willrepay all borrowings under the line of credit and maintain a zero outstandingbalance for a period of 30 consecutive calendar days during each year.  This requirement for 2004 was met on August10, 2004.  The term loan amortizes inquarterly installments over a five-year period in an annual aggregate amountequal to 1% of the original balance, with any remaining unpaid balance to berepaid in the sixth year in equal, quarterly installments.  Subject to certain conditions, mandatoryrepayments of the line of credit and term loan are required to be made withportions of the proceeds from (1) asset sales, (2) the issuance of debtsecurities, (3) an initial public offering of stock of Reddy Holdings and (4)insurance and condemnation awards.  Inthe event of a change in control, as defined in the Credit Facility, allamounts outstanding will become due and payable immediately.  Furthermore, within 100 days after close ofeach fiscal year (beginning with the close of the 2004 fiscal year), amandatory prepayment of the term loan is required based on a percentage ofReddy Group’s annual excess cash flow, as defined in the senior creditfacility.  The percentage is based onReddy Group’s leverage ratio at the end of such fiscal year and ranges from 25%to 75%.

 

The terms of the senior credit facility prohibit Reddy Group frompaying dividends and otherwise transferring assets to Reddy Holdings, exceptfor certain limited dividends, the proceeds of which must be used to maintainReddy Holdings’ corporate existence.

 

In connection withthe offering of the senior discount notes and related transactions discussedabove, the senior credit facility was amended on October 27, 2004 to permitsuch related transactions.  In additionto allowing those related transactions, the amendment modified the calculationof Reddy Group’s excess cash flow for 2004 such that a mandatory prepaymentbased on Reddy Group’s 2004 results is not expected to be required.

 

The senior credit facility also contains financial covenants whichinclude limitations on capital expenditures and the maintenance of certainfinancial ratios, as defined in the credit agreement, and is collateralized bysubstantially all of its assets and the capital stock of it and all of itscurrent subsidiaries.  At September 30,2004, we were in compliance with these covenants.

 

*Interest Rate Collar Agreement.*  On November 28, 2000, we entered into aninterest rate collar agreement.  If theIndex Rate (30-day LIBOR, as defined in the collar agreement) exceeds 7.75%, wewill receive the difference between the Index Rate and 7.75%.  If the Index Rate falls below 5.75%, we willpay the difference plus 1%.  Any amountspayable or receivable are settled monthly. The collar agreement has a notional amount of $50.0 million and a termof 4 years.  When our debt was refinancedon August 15, 2003, $0.3 million of amounts previously deferred in “accumulatedother comprehensive income” on the balance sheet were written off as thehedged, forecasted transaction was no longer deemed probable of occurring.  The collar agreement was redesignated as ahedge of the senior credit facility, with subsequent changes in fair valuedeferred in other comprehensive income. If we had been required to settle the collar agreement as of September30, 2004, we would have had to pay $0.4 million plus accrued interest of $0.2million.  The collar agreement expires onNovember 28, 2004.  Upon expiration ofthe collar agreement, all amounts previously deferred in other comprehensiveincome will be recognized.  We anticipatethat such recognition will result in non-cash interest income of approximately$3.4 in the fourth quarter of 2004.  Weare exposed to credit risk in the event of nonperformance by the counterpartyto the collar agreement, however, we anticipate that the counterparty willfully perform its obligations under the collar agreement.

 

*Liquidity Outlook.*  Due to the seasonal nature of our business,we record the majority of our sales and profits during the months of Maythrough September.  The majority of thecash generated from those operations is received between July andNovember.  We have already used asignificant portion of such cash flow to repay a portion of amounts outstandingunder the line of credit, fund acquisitions, redeem our preferred stock and paya dividend to our common shareholders.

 

Based on our expected level of operations, we believe that cash flowsfrom operations, together with available borrowings under our line of credit,will be adequate to meet our future liquidity needs for at least the

 

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next twelve months.  As ofNovember 9, 2004, we had approximately $20.8 million of availability under ourline of credit, which reflected an outstanding balance under our line of creditof $8.5 million and standby letters of credit of $5.7 million.  We expect availability under the line ofcredit will increase during the remainder of 2004 as we use cash generated fromoperations to pay down the revolver.  Weanticipate that the majority, if not all, of the outstanding balance on the revolverwill be repaid in late December 2004 or early January 2005.  Offsetting this increase in availability willbe an increase of $1.3 million in the balance of our outstanding standbyletters of credit related to the requirements of our insurance policyrenewals.  However, this reduction may bepartially offset by decreases in standby letters of credit that we will beattempting to negotiate with certain former insurance carriers during theremainder of 2004.  Due to theseasonality or our business, we anticipate drawing on the line of credit tofund our operations from late January 2005 through early May 2005.  Based on our anticipated levels ofoperations, capital expenditures, debt service requirements, and other cashrequirements, we believe that our availability under the line of credit willremain above $10 million through the spring of 2005.  Due to the seasonality of our business, Marchthrough early May is the low point for availability.  From late May through the rest of the year,availability increases as we generate significant amounts of cash fromoperations and repay balances outstanding under the revolver.

 

**Critical Accounting Policies**

 

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

 

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

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

 

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

 

Inherent in the determination of such future cashflows and valuations are certain estimates and judgements, including theinterpretation of current economic indicators and market values and assumptionsabout our strategic plans with regards to our operations.  To the extent additional information arisesor our

 

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strategies change, it ispossible that our conclusions regarding the impairment of goodwill or otherlong-lived assets could change and result in a material effect on our financialposition or results of operations.

 

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

 

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

 

Our results of operations are generally affected bythe economic trends in our market area, but results to date have not beensignificantly impacted by inflation.  Ifwe experience an extended period of high inflation, which affects multipleexpense items, we believe that we will be able to pass on these higher costs toour customers.  The ice business ishighly seasonal.  We experience seasonalfluctuations in our net sales and profitability.  We make a disproportionate amount of oursales in the second and third calendar quarters.  We also typically have net income in thesesame periods.  We believe that overtwo-thirds of our revenues will occur during the second and third calendarquarters when the weather conditions are generally warmer and demand isgreater, while less than one-third of our revenues will occur during the firstand fourth calendar quarters when the weather is generally cooler.  As a result of seasonal revenue declines andthe lack of proportional corresponding expense decreases, we will most likelyexperience lower profit margins and even losses during the first and fourthcalendar quarters.  In addition, becauseour operating results depend significantly on sales during our peak season, ourquarterly results of operations may fluctuate significantly as a result ofadverse weather during this peak selling period if the weather is unusuallycool or rainy on a more national or regional basis.

 

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

 

***Our substantial leverage and debt serviceobligations could harm our ability to operate our business and make payments onour indebtedness.***

 

We are highlyleveraged and have significant debt service obligations.  As of September 30, 2004, we had total debtof approximately $329.7 million and total shareholders’ equity of $214.0million.  On October 27, 2004, we issued$151 million of 101⁄2% Senior Discount Notes due 2012 in a private placementoffering (see “Long-Term Debt and Other Obligations - Senior Discount Notes”).  Our substantial level of indebtednessincreases the possibility that we may be unable to generate cash sufficient torepay principal amounts or interest when due or repay other amounts due inrespect of our indebtedness.

 

Oursubstantial debt could have other important consequences to you, including thefollowing:

 

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

•                  Our interestexpense could increase if interest rates in general increase, because asubstantial portion of our debt will bear interest at floating rates and we maynot be able to effectively hedge against fluctuations in interest rates or thatsuch hedging activities may result in payments by us;

•                  Our substantialleverage will increase our vulnerability to general economic downturns andadverse competitive and industry conditions and could place us at a competitivedisadvantage compared to those of our competitors that are less leveraged;

•                  Our debt serviceobligations could limit our flexibility in planning for, or reacting to,changes in our business; and

•                  Our failure tocomply with the financial and other restrictive covenants in the indenturesgoverning the discount notes and senior subordinated notes, as well as thecredit agreement governing our senior credit facility, which require us tomaintain specified financial ratios and limit our ability to incur debt

 

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and sellassets, could result in an event of default that, if not cured or waived, couldharm our business or prospects and could result in our bankruptcy.

 

***We could incur more indebtedness, which mayincrease the risks associated with our substantial leverage, including ourability to service our indebtedness.***

 

The indenturesgoverning our senior subordinated notes and senior discount notes and oursenior credit facility permit us, under certain circumstances, to incur asignificant amount of additional indebtedness. In addition, we may incuradditional indebtedness through our revolving credit facility.  If we incur additional debt, the risksassociated with our substantial leverage, including our ability to service ourdebt, would increase.

 

***Our ability to service our indebtednessrequires a significant amount of cash, and our ability to generate cash dependson many factors beyond our control.***

 

We cannot becertain that our earnings and the earnings of our operating subsidiaries willbe sufficient to allow us to make payments in respect of the securities andmeet our other obligations.  Our abilityto generate cash from our operations is subject to weather, general economic,financial, competitive, legislative, regulatory and other factors that arebeyond our control.  As a result, ourbusiness may not generate sufficient cash flow from operations in amountssufficient to enable us to make payments in respect of the securities orservice our debt and to fund our other liquidity needs.  If we do not have sufficient liquidity, wewill have to take actions such as reducing or delaying strategic acquisitions,investments and joint ventures, selling assets, restructuring or refinancingour debt or seeking additional equity capital. These remedies, if necessary, may not be effected on commerciallyreasonable terms, or at all.  In addition,the terms of existing or future debt instruments, including the creditagreement governing our senior credit facility and the indentures for thediscount notes and senior subordinated notes, may restrict us from adoptingsome of these alternatives.  Therefore,because of these and other factors beyond our control, we may be unable toservice our debt.

 

***Our subsidiaries may not be able to generatesufficient cash to service all of their indebtedness and may be forced to takeother actions to satisfy their obligations under such indebtedness, which maynot be successful.***

 

If oursubsidiaries are unable to generate sufficient cash flow and are otherwiseunable to obtain funds necessary to meet required payments of principal,premium, if any, and interest on their indebtedness, or if they otherwise failto comply with the various covenants, including financial and operatingcovenants, in the instruments governing their indebtedness (including thefinancial maintenance covenants in Reddy Group’s senior credit facility), we orthey could be in default under the terms of the agreements governing suchindebtedness. If Reddy Group’s operating performance declines in the future,Reddy Group may need to obtain waivers from the lenders under its senior creditfacility to avoid being in default under that facility. If Reddy Group breachesits covenants under its senior credit facility and seeks a waiver, it may notbe able to obtain a waiver from the required lenders. In the event of suchdefault, the holders of such indebtedness could elect to declare all the fundsborrowed thereunder to be due and payable, together with accrued and unpaidinterest, the lenders under Reddy Group’s senior credit facility could elect toterminate their commitments thereunder, cease making further loans andinstitute foreclosure proceedings against Reddy Group’s assets, and Reddy Groupcould be forced into bankruptcy or liquidation.

 

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***If we fail to meet our payment or otherobligations under our senior credit facility, the lenders under the seniorcredit facility could foreclose on, and acquire control of, substantially allof our assets.***

 

The lendersunder the our senior credit facility received a pledge of all of our equityinterests of Reddy Group and its current subsidiaries.  Additionally, these lenders have a lien onsubstantially all of our assets.  As aresult of these pledges and liens, if we fail to meet our payment or otherobligations under our senior credit facility, those lenders are entitled toforeclose on substantially all of our assets and liquidate those assets.

 

***The indentures governing our discount notesand the senior subordinated notes and the credit agreement governing our seniorcredit facility impose significant operating and financial restrictions on usand, in the event of a default, all of these borrowings become immediately dueand payable.***

 

The agreementsthat govern the terms of our existing debt contain covenants that limit orprohibit our and our subsidiaries’ ability to:

 

•                  incur orguarantee additional indebtedness or issue certain preferred stock;

•                  pay dividends onour and our subsidiaries’ capital stock or redeem, repurchase or retire our andour subsidiaries’ capital stock or subordinated indebtedness;

•                  make certaininvestments;

•                  create liens onour assets;

•                  enter intoarrangements that restrict dividends from our subsidiaries;

•                  engage intransactions with affiliates;

•                  sell assets,including capital stock of our subsidiaries; and

•                  merge or consolidatewith other companies or transfer all or substantially all of our assets.

 

In addition,the credit agreement governing the Reddy Group senior credit facility includesother restrictive covenants and prohibits Reddy Group from prepaying most ofits other debt and from making distributions to Reddy Holdings while loansunder its senior credit facility are outstanding. The senior credit facilityalso requires Reddy Group to achieve and maintain compliance with specifiedfinancial ratios, which ratios will become more restrictive over time. ReddyGroup’s ability to comply with these ratios will be affected by events beyondour and its control.

 

Therestrictions contained in the agreements that govern the terms of our debtcould:

 

•                  limit ourability to plan for or react to market conditions or meet capital needs orotherwise restrict our activities or business plans;

•                  adversely affectour ability to finance our operations, to enter into strategic acquisitions,investments or other capital needs or to engage in other business activitiesthat would be in our interest; and

•                  limit our accessto the cash generated by our subsidiaries.

 

Each of theforegoing limitations could impair our ability to make payments on our debt.

 

A breach ofany of the restrictive covenants in the Reddy Group senior credit facility orReddy Group’s inability to comply with the required financial ratios couldresult in a default under the senior credit facility. If any such defaultoccurs, the lenders under the Reddy Group senior credit facility may elect todeclare all outstanding borrowings, together with accrued interest and otherfees, to be immediately due and payable, enforce their security interest,require us to apply all of our available cash to repay these borrowings (evenif the lenders have not declared a default) or prevent us from making paymentson the notes. The lenders will also have the right in these circumstances toterminate any commitments they have to provide further borrowings. If we areunable to repay outstanding borrowings when due, the lenders under the ReddyGroup senior credit facility will have the right to proceed against thecollateral granted to them to secure the debt owed to them. If the debt underthe Reddy Group senior credit facility were to be accelerated, our assets maynot be sufficient to repay such debt in full or to repay our other debt.

 

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***Reddy Holdings is a holding company and therefore depends on itssubsidiaries to pay interest on the discount notes and its other obligations.***

 

Reddy Holdingshas no direct operations and no significant assets other than the stock of itssubsidiary, Reddy Group, which is pledged to secure Reddy Holdings’ obligationsunder Reddy Group’s existing senior credit facility. None of its subsidiarieswill guarantee its obligations under the discount notes. Because Reddy Holdingsconducts its operations through its operating subsidiaries, Reddy Holdingsdepends on the earnings of, and dividends, distributions and other paymentsfrom those entities to generate the funds necessary to meet its financialobligations, including payments of principal, interest and other amounts on thediscount notes.

 

***The terms of Reddy Group’s indebtedness currently prohibit it frompaying dividends to Reddy Holdings to satisfy its obligations under thediscount notes and applicable corporate law may restrict the ability to paydividends or otherwise redeem the discount notes. Reddy Holdings will berequired to make cash interest payments on the discount notes prior to thematurity of Reddy Group’s senior credit facility.***

 

The terms ofReddy Group’s senior credit facility fully prohibit Reddy Group from payingdividends and otherwise transferring assets except for certain limiteddividends, the proceeds of which must be used to maintain Reddy Holdings’corporate existence. Reddy Holdings will be required to make cash interestpayments on the discount notes prior to the maturity of Reddy Group’s seniorcredit facility. Further, the terms of the indenture governing the seniorsubordinated notes significantly restrict Reddy Group from paying dividends andotherwise transferring assets to Reddy Holdings. For example, Reddy Group’sability to make such payments under its indenture is governed by a formulabased on 50% of its consolidated net income. In addition, as a condition tomaking such payments based on such formula, Reddy Group must have an EBITDA tointerest expense ratio of at least 2.0 to 1 prior to August 1, 2006, and 2.25to 1 thereafter, after giving effect to any such payments, and must not be indefault under that indenture. Notwithstanding such restrictions, the indenturepermits an aggregate of $10.0 million of such payments to be made whether ornot there is availability under the formula or the conditions to its use aremet, provided that at the time of such payment, no default shall have occurredand be continuing under that indenture. On October 27, 2004, Reddy Group made a$28.6 million dividend to Reddy Holdings. As a result, Reddy Group has used themajority of its current availability to make payments under these provisions ofthe indenture. Therefore, we currently anticipate that, in order to pay theprincipal amount at maturity of the discount notes or to repurchase thediscount notes upon a change of control as defined in the indenture governingthe discount notes, we will be required to adopt one or more alternatives, suchas refinancing all of our indebtedness, selling our equity securities or theequity securities or assets of Reddy Group or seeking capital contributions orloans from our affiliates. None of our affiliates is required to make anycapital contributions, loans or other payments to us with respect to ourobligations on the discount notes. The foregoing actions may not be effected onsatisfactory terms, if at all. The foregoing actions may not enable us torefinance our indebtedness or pay the principal amount of the discount notesand such actions may not be permitted by the terms of the indenture governingthe discount notes or any other debt or stock instruments of us or oursubsidiaries then in effect. If we were unable to obtain the required consentsor repay the indebtedness, we would remain effectively prohibited fromrepurchasing, redeeming or repaying the discount notes.

 

***Risks Relating to Our Business***

 

***Our failure tosuccessfully compete could adversely affect our prospects and financialresults.***

 

Our businesses are highly competitive. We have many competitors in each of our geographic markets offeringsimilar products and services. Competition in our businesses is based primarily on service, quality andprice.  If we fail to successfullycompete against our competitors in any of these areas, our business will beadversely affected.  There are lowbarriers to entry in the ice industry and we could be adversely affected by anyexpansion of capacity by our existing competitors or by new entrants in ourmarkets.  Retaining existing customersand obtaining new customers is important to our future performance.  If we fail to adequately serve our existingbase of customers, our financial performance will be negatively impacted.  We could also be adversely affected if ourlarger grocery or convenience store customers decide to manufacture their ownice rather than purchase our products.

 

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

 

We experience significant seasonal fluctuations in our net sales andprofitability.  We make adisproportionate amount of our sales in the second and third calendar quarterswhen the weather is generally warmer, which results in an increased demand forice.  We also earn our net income duringthese same periods.  As a result ofseasonal revenue declines and the lack of a corresponding decrease in expenses,we experience net losses and materially lower profit margins during the firstand fourth calendar quarters.  Variationsin demand could have a material adverse effect on the timing of our cash flowsand therefore our ability to service our obligations with respect to ourindebtedness, including the securities. In addition, because our operating results depend significantly on salesduring the second and third calendar quarters, our results of operations mayfluctuate significantly if the weather during these periods is cool or rainy.

 

***The results of ouroperations may be adversely affected by weather.***

 

Cool or rainy weather can decrease sales, while extremely hot weathermay increase our expenses, each resulting in a negative impact on our operatingresults and cash flow.  Ice consumersdemand ice for a variety of reasons, but many of them buy ice in connectionwith outdoor related activities, both commercial and recreational.  As a result, demand for ice increases duringperiods of warm, sunny weather, and conversely, demand decreases during periodsof cool, rainy weather.  During extendedperiods of cool or rainy weather on a national basis, our revenues andresulting net income may substantially decline. Hot weather does not necessarily result in greater net income.  During extended periods of hot weather, ourprofits and cash flow may decline because of an increase in expenses inresponse to excess demand.  We may haveto transport ice from one plant to another and, in some cases, purchase icefrom third party sources and transport it to a specific market to meet thisexcess demand, resulting in higher expenses and inconsistent service andproduct quality.

 

***Increases in theprices of electricity, certain raw materials, insurance and other requiredexpenses could have an adverse effect on our results of operations.***

 

We use substantial amounts of electricity in connection with ourmanufacturing process.  Increases inmarket rates for electricity could have an adverse impact on ouroperations.  Our business is alsosensitive to increases in the cost of fuel required to operate the refrigeratedtrucks we use to deliver ice and to increases in the cost of polyethylene,which is the primary raw material used to manufacture the bags we use topackage our ice.  Our business issensitive to increases in insurance costs, including in the areas of generalliability, workers compensation, health and vehicle insurance.  We have already experienced increases in fuelcosts, bag costs and insurance costs and may experience further increases inthe future.  If the prices for theseitems or other expenses should increase significantly, we will incur additionalcosts that we may not be able to pass along to our customers.  Significant changes in the prices ofelectricity, polyethylene, fuel, insurance or other commodities may have amaterial adverse effect on our business, results of operations or cash flows.

 

***Our acquisitions maynot be successfully integrated and could cause unexpected financialdifficulties.***

 

We acquired Service Ice in October 2003 and Triangle Ice in November2003.  From January 1, 2004 throughNovember 9, 2004, we have completed 11 additional acquisitions. We anticipatethat we may, from time to time, selectively acquire additional businesses,assets or securities of companies that we believe would provide a strategic fitwith our business.  Acquired businesseswill need to be integrated with our existing operations.  We may not effectively assimilate thesecompanies into our business.  Anyacquisitions will also be accompanied by risks, such as potential exposure tounknown liabilities of acquired companies and the possible loss of keyemployees and customers of the acquired business.  Acquisitions are also subject to 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.  In addition, as a result of futureacquisitions, we may increase our debt level. Our failure to adequately manage the risks associated with anyacquisitions could have a material adverse effect on our financial condition orresults of operations.

 

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***We could incursubstantial costs as a result of violations of or liabilities underenvironmental laws.***

 

Our ice manufacturing and cold storage operations are subject to a widerange of environmental laws and regulations governing, among other things, airemissions, wastewater discharges, the use, management and disposal of hazardousand non-hazardous materials and wastes and the cleanup of contamination.  Noncompliance with such laws and regulations,or incidents resulting in environmental releases, could cause us to incursubstantial costs, including cleanup costs, fines and penalties, third partyclaims for personal injury, investments to retrofit or upgrade our facilitiesand programs or curtailment of our operations. For example, our ice manufacturing and cold storage operations userefrigerants such as ammonia and freon. Some of our facilities may not be in compliance with certain freonrefrigerant requirements, such as leak detection and repair, recordkeeping orreporting.  In addition, the market priceof freon is rising as a result of phase outs under federal laws, which couldsignificantly increase our operating costs in the future if we are not able toobtain approved substitutes.  From timeto time, our use of ammonia has resulted in releases that have temporarilydisrupted our manufacturing operations and resulted in lawsuits oradministrative penalties.  We arecurrently involved in litigation resulting from an ammonia release in June 2001at our Baton Rouge, Louisiana facility. See Part II, Item 1 – “LegalProceedings”.  We may incur materialenvironmental costs or liabilities in the future and such costs or liabilitiesmay have a material adverse effect on our business, financial condition orresults of operations.

 

***Government laws andregulations could have an adverse effect on our results of operations.***

 

Like any food company, we are subject to various federal, state andlocal laws relating to many aspects of our business, including labeling,sanitation, health and safety and manufacturing processes.  We cannot predict the types of governmentregulations that may be enacted in the future by the various levels ofgovernment or how existing or future laws or regulations will be interpreted orenforced.  The enactment of morestringent laws or regulations or a stricter interpretation of existing laws andregulations may cause a disruption in our operations or require additionalexpenditures by us, some of which could be material. We may incur materialcosts and liabilities in order to comply with any such laws and regulations andsuch costs and liabilities may have a material adverse effect on our business,financial condition or results of operations.

 

***If we are unable toretain senior executives and attract and retain other qualified employees, ourbusiness might be adversely affected.***

 

Our success depends in part on our ability to attract, hire, train andretain qualified managerial, sales and marketing personnel.  Competition for these types of personnel ishigh.  We may be unsuccessful inattracting and retaining the personnel we require to conduct our operationssuccessfully and, in such an event, our business could be materially andadversely affected.  Our success alsodepends to a significant extent on the continued service and performance of oursenior management team and in particular on the continued service of William P.Brick, our Chairman and Chief Executive Officer, and Jimmy C. Weaver, ourPresident and Chief Operating Officer. The loss of any member of our senior management team could impair ourability to execute our business plan and could therefore have a materialadverse effect on our business, results of operations or financial condition.

 

***Accidents involvingour products and equipment could expose us to product liability claims.***

 

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

 

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***We may losecustomers’ business to competitors as a result of our limited intellectualproperty protection, including on The Ice Factory.***

 

As the sole major ice supplier using an on-site production and deliverysystem at our customers’ retail locations, we have enjoyed a competitiveadvantage over our competitors.  Our proprietary Ice Factory system ispreferred by certain of our high volume customers to traditional ice deliveryand gives us more flexibility during peak seasons.  In 2001, a competitor began testing machinessimilar to the Ice Factory in certain of its markets.  If our competitor or any new competitors aresuccessful with the rollout of a competing system, we could lose business tothese companies, which would result in decreased cash flows and results ofoperations.

 

It is also our practice to protect certain of our proprietary materialsand processes by relying on trade secrets laws and non-disclosure andconfidentiality agreements. Confidentiality or trade secrets may not be maintained and others mayindependently develop or obtain access to such materials or processes.

 

***We may not be able to utilize all of our taxassets before they expire.***

 

We had net deferred tax liabilities of $60.2 million at September 30,2004.  Included in this amount aredeferred tax assets, including net operating loss carry-forwards, ofapproximately $31.5 million, which we believe can be used to satisfy future taxpayments.  There is an annual limitationon the utilization of the net operating loss carry-forwards generated by thePredecessor due to the change in ownership which occurred on August 15,2003.  We have certain businessstrategies that we believe will allow us to utilize our tax assets before theyexpire; however, we may not be able to utilize our tax assets or successfullyexecute such strategies.  Further, if oursponsors cease to own a majority of our common stock, then additionallimitations on the utilization of the net operating loss carry-forwards willapply.  We may not be able to utilize ourtax assets in the manner or in the timeframe we anticipate.

 

***We have recorded a significant amount ofgoodwill and other intangible assets, and any significant reduction in goodwilland other intangible assets would have an adverse effect on our financialcondition and results of operations.***

 

Our acquisitions have resulted in significant amounts of goodwill andother intangible assets.  Goodwill, whichrelates to the excess of cost over the fair value of the net assets of thebusinesses acquired, and intangible assets, were approximately $325.7 millionat September 30, 2004, representing 51.3% of our total assets.  In the future, goodwill and other intangibleassets may increase as a result of additional acquisitions we may do.  Goodwill and other intangible assets arerecorded at fair value on the date of acquisition and are reviewed at leastannually for impairment.  Impairment mayresult from, among other things, deterioration in the performance of theacquired business, adverse market conditions, adverse changes in applicablelaws or regulations, including changes that restrict the activities of theacquired business, and a variety of other circumstances.  The amount of any impairment must be writtenoff.  Any future determination requiringthe write-off of a significant portion of the goodwill and intangible assetsrecorded on our balance sheet would have an adverse effect on our financialcondition and results of operations.

 

***We are controlled byour sponsors and their affiliates, whose interests in our business may bedifferent from our note holders.***

 

By reason of our sponsors’ and their affiliates’ ownership of us andtheir collective ability, pursuant to a stockholders agreement among ourstockholders, to designate a majority of the members of the board of directors,our sponsors will control actions to be taken by us and our board of directors,including amendments to our certificate of incorporation and by-laws andapproval of significant corporate transactions, including mergers and sales ofsubstantially all of our assets.  Theinterests of our sponsors and their affiliates may differ from those of theholders of the 87/8 % senior subordinated notes and thesenior discount notes in material respects.

 

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### **ITEM 3.  Quantitative and Qualitative DisclosuresAbout Market Risks**

 

Market risk generallyrepresents the risk that losses may occur in the value of financial instrumentsas a result of movements in interest rates, foreign currency exchange rates andcommodity prices.  Our main market riskexposure category is interest rate risk.

 

On November 28, 2000, we entered into an interest rate collar agreement(the “Collar Agreement”).  The CollarAgreement has a notional amount of $50 million and a term of 4 years.  If the Index Rate (30-day LIBOR, as definedin the Collar Agreement) exceeds 7.75%, we will receive the difference betweenthe Index Rate and 7.75%.  If the IndexRate falls below 5.75%, we will pay the difference plus 1%.  If we had been required to settle the CollarAgreement as of September 30, 2004, we would have had to pay $0.4 million plusaccrued interest of $0.2 million.

 

We are exposed to some market risk due to the floating interest ratesunder our senior credit facility. Principal balances outstanding under the line of credit bear interest,at our option, at the London Inter-Bank Offered Rate (“LIBOR”) plus 3.5% or theprime rate (as announced from time to time by the administrative agent) plus1.5%.  The term loans bear interest, atour option, at LIBOR plus 2.5% or the prime rate plus 1.5%.

 

As of September 30, 2004, the senior credit facility had an outstandingprincipal balance of $178.2 million at a weighted average interest rate of 4.3%per annum.  Due to our interest ratecollar agreement, the effect of a change in interest rates on our interestexpense depends on the level of LIBOR rates. At September 30, 2004, the 30-day LIBOR rate was 1.8%.

 

The following table shows the approximate annual increase in interestexpense given the current principal balances on all of our debt if LIBOR wereto increase by 1% from the initial levels indicated below:

 
| **Initial LIBOR Rate**                           | ** ** | **Increase in the  LIBOR rate** | ** ** | **Estimated  Annual Impact** | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|------------------------------|------------|
| ** **                                       | ** ** | ** **                      | ** ** | **(in thousands)**           | ** ** |
|                                             |       |                            |       |                         |       |
| Less than or equal to 4.5%                       |       | 1%                              |       | $                            | 1,282      |   |   |
|                                             |       |                            |       |                         |       |   |
| Greater than 4.5%, less than or equal to  5.75%  |       | 1%                              |       | $                            | 1,532      |   |   |
|                                             |       |                            |       |                         |       |   |
| Greater than 5.75%, less than or equal to  6.75% |       | 1%                              |       | $                            | 1,782      |   |   |
|                                             |       |                            |       |                         |       |   |
| Greater than 6.75%, less than or equal to  7.75% |       | 1%                              |       | $                            | 1,532      |   |   |
|                                             |       |                            |       |                         |       |   |
| Greater than 7.75%                               |       | 1%                              |       | $                            | 1,282      |   |   |

 

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

 

Under the supervision and with the participation of our management,including our chief executive officer and our chief financial officer, we haveevaluated the effectiveness of the design and operation of our disclosurecontrols and procedures as defined in Rule 13a-15(e) of the Securities ExchangeAct of 1934. These controls and procedures are designed to ensure that materialinformation relating to the Company and its subsidiaries is communicated to thechief executive officer and the chief financial officer.  Based on that evaluation, our chief executiveofficer and our chief financial officer concluded that, as of September 30,2004, our disclosure controls and procedures are effective to ensure thatinformation disclosed by us in reports that we file or submit with theSecurities Exchange Commission is recorded, processed, summarized and reportedwithin the time periods specified in Securities and Exchange Commission rulesand forms.

 

There were no changes in our internal control over financial reportingduring the third quarter ended September 30, 2004, that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

**PART II -OTHER INFORMATION**

 

**Item1.  *Legal Proceedings***

 

We are from time to time party to legal proceedings that arise in theordinary course of business.  We do notbelieve that the resolution of any such threatened or pending legal proceedingswill have a material adverse affect on our financial position, results ofoperations or liquidity.

 

We are a party to a lawsuit in connection with an ammonia release atour Baton Rouge, Louisiana manufacturing facility in September 2001.  The claim, which is a consolidation of sevenlawsuits, is titled *Wallace Acey, Jr. et alvs. Reddy Ice Corporation* and was reported on our Form 10-K for thefiscal year ended December 31, 2003. Since that report, there have been no material developments.

 

We were a party to two lawsuits filed in connection the Merger.  The first lawsuit was filed on May 23, 2003and was titled Cause No. *CC-03-06056-A;Glenn Robbins, On Behalf of Himself and All Others Similarly Situated, andDerivatively on Behalf of Packaged Ice, Inc. vs. William P. Brick, Jimmy C.Weaver, A.J. Lewis III, Tracy L. Noll, Robert G. Miller, Steven P. Rosenbergand Richard A. Coonrod, Defendants, and Packaged Ice, Inc., a Texas corporation*.  The second lawsuit was filed on May 23, 2003and was titled Cause No. CC-03-06055-C, *ImperialCounty, On Behalf of Itself and All Others Similarly Situated, and Derivativelyon Behalf of Packaged Ice, Inc. vs. William P. Brick, Jimmy C. Weaver, A.J.Lewis III, Tracy L. Noll, Robert G. Miller, Steven P. Rosenberg and Richard A.Coonrod, Defendants, and Packaged Ice, Inc., a Texas corporation*.  The two lawsuits were identical adversarialproceedings filed by two shareholders on their own behalf, on behalf of apurported class, and derivatively on behalf of Packaged Ice, Inc., now known asReddy Ice Group, Inc.  The plaintiffsalleged various breaches of fiduciary duty by our Board of Directors and unjustenrichment related to the Merger.  Theselawsuits were reported on our Form 10-K for the fiscal year endedDecember 31, 2003.  On September 30,2004, the court dismissed both lawsuits with prejudice.

 

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**Item2.  *Unregistered Sales ofEquity Securities and Use of Proceeds***

 

On August 16,2004, we sold 125 shares of common stock and 125 shares of our Series Apreferred stock to one our independent directors.  The shares were sold for cash proceeds equalto $1,000 per share or an aggregate of $250,000. These shares were issuedwithout registration under the Securities Act by reason of the exemption fromregistration afforded by the provisions of Section 4(2) thereof, and Rule 506promulgated thereunder, as a transaction by an issuer not involving any publicoffering.

 

**Item3.  *Defaults Upon SeniorSecurities***

 

None.

 

**Item4.  *Submission of Matters to aVote of Security Holders***

 

On September 22, 2004, the shareholders of Reddy Ice Holdings, Inc.unanimously elected the following individuals to the board of directors:  William P. Brick, Beth L. Bronner, Philip M.Carpenter III, Robert J. Fioretti, Andrew R. Heyer, David E. King, Douglas R.Korn, William P. Phoenix, Tracy L. Noll and Jimmy C. Weaver.

 

**Item 5.  *Other Information***

 

None.

 

**Item 6.  *Exhibits***

 

See Index toExhibits on page 39.

 

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**SIGNATURES**

 

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

 
|                     |   | **REDDY  ICE HOLDINGS, INC.**           |
|--------------------------|--------|-----------------------------------------|
|                     |   |                                    |
| Date:  November 10, 2004 | By:    | /s/ William  P. Brick                   |   |
|                     |   | William P.  Brick                       |
|                     |   | Chief  Executive Officer                |
|                     |   |                                    |
|                     |   |                                    |
| Date:  November 10, 2004 | By:    | /s/ Steven  J. Janusek                  |   |
|                     |   | Steven J.  Janusek                      |
|                     |   | Chief  Financial and Accounting Officer |
|                          |        |                                         |  |  |

 

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**INDEX TO EXHIBITS**

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

 

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†                      Filedherewith.

 

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