**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

(Mark one)

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

**Forthe quarterly period ended June 30, 2007**

**OR**

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

**Forthe transition period from *             *to              **

**Commissionfile number 001-32596**

**REDDY ICE HOLDINGS, INC.**

(Exact name of registrantas specified in its charter)

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

 

**8750 N. CENTRALEXPRESSWAY, SUITE 1800**

**DALLAS, TEXAS 75231**

(Address of principalexecutive offices)

**(214) 526-6740**

(Registrant’s telephonenumber, including area code)

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theExchange Act during the preceding 12 months (or for such shorter period thatthe registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.   Yes x   No o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check one):

| Large accelerated filer o |   | Accelerated filer x |   | Non-accelerated  filer o |
|--------------------------------|--------|--------------------------|--------|-------------------------------|

 

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

The number of shares of registrant’s common stockoutstanding as of July 24, 2007 was 21,809,395.

 

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### **REDDY ICE HOLDINGS, INC. AND SUBSIDIARY**

### **QUARTERLYREPORT ON FORM 10-Q**

**FOR THE PERIOD ENDED JUNE 30,2007**

**TABLE OF CONTENTS**

|                    | ** ** | ** **                                                                                                                   | ** ** | **Page** |
|--------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| ** **         |       | **PART I—FINANCIAL INFORMATION**                                                                                   |       |     |   |   |
| Item 1.            | * *   | Condensed  Consolidated Financial Statements                                                                                 |       |     | 2 |   |
|               |       | Condensed  Consolidated Balance Sheets as of June 30, 2007 and December 31,  2006 (unaudited)                      |       |     | 2 |   |
|               |       | Condensed  Consolidated Statements of Operations for the three and six months ended  June 30, 2007 and 2006 (unaudited) |       |     | 3 |   |
|               |       | Condensed  Consolidated Statement of Stockholders’ Equity for the six months ended  June 30, 2007 (unaudited)      |       |     | 4 |   |
|               |       | Condensed  Consolidated Statements of Cash Flows for the six months ended June 30,  2007 and 2006 (unaudited)           |       |     | 5 |   |
|               |       | Notes  to the Condensed Consolidated Financial Statements                                                                    |       |     | 6 |   |
| Item 2.            |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                  |       |     | 17 |   |
| Item 3.            |       | Quantitative  and Qualitative Disclosures about Market Risk                                                                  |       |     | 32 |   |
| Item 4.            |       | Controls and  Procedures                                                                                                     |       |     | 32 |   |
| *** ***       |       | **PART II—OTHER  INFORMATION**                                                                                     |       |     |   |   |
| Item 1.            |       | Legal Proceedings                                                                                                            |       |     | 33 |   |
| Item 1A.           |       | Risk  Factors                                                                                                                |       |     | 33 |   |
| Item 2.            |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                 |       |     | 34 |   |
| Item 3.            |       | Defaults  Upon Senior Securities                                                                                             |       |     | 34 |   |
| Item 4.            |       | Submission  of Matters to a Vote of Security Holders                                                                         |       |     | 34 |   |
| Item 5.            |       | Other Information                                                                                                            |       |     | 34 |   |
| Item 6.            |       | Exhibits                                                                                                                     |       |     | 34 |   |
| SIGNATURES         |       |                                                                                                                         | 35         |     |
| INDEX  TO EXHIBITS |       |                                                                                                                         | 36         |     |

 

1

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**PART I -FINANCIAL INFORMATION**

**Item 1.**                        FinancialStatements

**REDDY ICE HOLDINGS,INC. AND SUBSIDIARYCONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)**

**ASSETS**
|                                                                                                                                                          | ** ** | **June 30,  2007**                               | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                               | ** ** | **(in thousands,  except share data)** | ** ** |
| CURRENT ASSETS:                                                                                                                                          |       |                                                  |       |                        |       |   |   |
| Cash and cash equivalents                                                                                                                                |       | $                                                     | 11,995     |                        |       | $ | 39,434 |   |   |
| Accounts receivable, net                                                                                                                                 |       | 49,706                                                |       |                        | 25,723     |   |   |
| Inventories                                                                                                                                              |       | 13,813                                                |       |                        | 11,455     |   |   |
| Prepaid expenses and other current assets                                                                                                                |       | 3,090                                                 |       |                        | 2,719      |   |   |
| Deferred tax assets                                                                                                                                      |       | 1,879                                                 |       |                        | 1,620      |   |   |
| Total current assets                                                                                                                                     |       | 80,483                                                |       |                        | 80,951     |   |   |
| PROPERTY AND  EQUIPMENT, net                                                                                                                             |       | 240,131                                               |       |                        | 230,242    |   |   |
| GOODWILL                                                                                                                                                 |       | 223,758                                               |       |                        | 216,370    |   |   |
| OTHER  INTANGIBLES, net                                                                                                                                  |       | 82,330                                                |       |                        | 79,889     |   |   |
| OTHER ASSETS                                                                                                                                             |       | 3,020                                                 |       |                        | 2,820      |   |   |
| TOTAL                                                                                                                                                    |       | $                                                     | 629,722    |                        |       | $ | 610,272 |   |   |
| ** **                                                                                                                                               |       |                                                  |       |                        |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                            |       |                                                  |
| CURRENT LIABILITIES:                                                                                                                                     |       |                                                  |       |                        |       |   |   |
| Current portion of long-term obligations                                                                                                                 |       | $                                                     | 49         |                        |       | $ | 51 |   |   |
| Revolving credit facility                                                                                                                                |       | 21,200                                                |       |                        | —     |   |   |
| Accounts payable                                                                                                                                         |       | 21,984                                                |       |                        | 14,090     |   |   |
| Accrued expenses                                                                                                                                         |       | 18,251                                                |       |                        | 18,659     |   |   |
| Dividends payable                                                                                                                                        |       | 9,268                                                 |       |                        | 8,828      |   |   |
| Total current liabilities                                                                                                                                |       | 70,752                                                |       |                        | 41,628     |   |   |
| LONG-TERM  OBLIGATIONS                                                                                                                                   |       | 371,370                                               |       |                        | 364,844    |   |   |
| DEFERRED TAXES  AND OTHER LIABILITIES, net                                                                                                               |       | 38,187                                                |       |                        | 36,152     |   |   |
| COMMITMENTS AND  CONTINGENCIES (Note 10)                                                                                                                 |       | —                                                |       |                        | —     |   |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                               |       |                                                  |       |                        |       |   |   |
| Common stock: $0.01 par value; 75,000,000 shares  authorized; 21,809,395 shares issued and outstanding at June 30, 2007  and December 31, 2006 |       | 218                                                   |       |                        | 218        |   |   |
| Additional paid-in capital                                                                                                                               |       | 219,019                                               |       |                        | 216,802    |   |   |
| Accumulated deficit                                                                                                                                      |       | (71,506                                               | )          |                        | (51,990    | ) |   |
| Accumulated other comprehensive income                                                                                                                   |       | 1,682                                                 |       |                        | 2,618      |   |   |
| Total stockholders’ equity                                                                                                                          |       | 149,413                                               |       |                        | 167,648    |   |   |
| TOTAL                                                                                                                                                    |       | $                                                     | 629,722    |                        |       | $ | 610,272 |   |   |

Seenotes to condensed consolidated financial statements.

2

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**REDDY ICE HOLDINGS,INC. AND SUBSIDIARYCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**

| ** **                                     | ** ** | **Three Months Ended**                                      | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                     | ** ** | **June 30,**                                                     | ** ** | **June 30,**              | ** ** |
| ** **                                     | ** ** | **2007**                                                              | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                     | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Revenues                                       |       | $                                                                     | 105,985    |                           | $          | 113,576 |   | $ | 153,013 |   | $ | 158,384 |   |
| Cost of sales  (excluding depreciation)        |       | 62,417                                                                |       | 64,144                         |       | 100,488 |   | 98,557 |   |
| Depreciation  expense related to cost of sales |       | 5,163                                                                 |       | 4,947                          |       | 10,254 |   | 9,661 |   |
| Gross profit                                   |       | 38,405                                                                |       | 44,485                         |       | 42,271 |   | 50,166 |   |
| Operating  expenses                            |       | 11,221                                                                |       | 14,098                         |       | 21,922 |   | 25,187 |   |
| Depreciation and  amortization expense         |       | 1,581                                                                 |       | 1,471                          |       | 3,111 |   | 2,899 |   |
| Loss on  dispositions of assets                |       | 135                                                                   |       | 11                             |       | 258 |   | 115 |   |
| Impairment of  assets                          |       | —                                                                |       | 370                            |       | — |   | 370 |   |
| Income from  operations                        |       | 25,468                                                                |       | 28,535                         |       | 16,980 |   | 21,595 |   |
| Interest expense                               |       | 8,048                                                                 |       | 7,378                          |       | 15,581 |   | 14,332 |   |
| Interest income                                |       | (118                                                                  | )          | —                         |       | (334 | ) | — |   |
| Income before  income taxes                    |       | 17,538                                                                |       | 21,157                         |       | 1,733 |   | 7,263 |   |
| Income tax  expense                            |       | (6,917                                                                | )          | (8,444                         | )          | (1,320 | ) | (2,789 | ) |
| Net income                                     |       | $                                                                     | 10,621     |                           | $          | 12,713 |   | $ | 413 |   | $ | 4,474 |   |
| Basic net income  per share:                   |       |                                                                  |       |                           |       |   |   |   |   |
| Net income                                     |       | $                                                                     | 0.49       |                           | $          | 0.60 |   | $ | 0.02 |   | $ | 0.21 |   |
| Weighted average common shares outstanding     |       | 21,717                                                                |       | 21,360                         |       | 21,702 |   | 21,316 |   |
| Diluted net  income per share:                 |       |                                                                  |       |                           |       |   |   |   |   |
| Net income                                     |       | $                                                                     | 0.48       |                           | $          | 0.59 |   | $ | 0.02 |   | $ | 0.21 |   |
| Weighted average common shares outstanding     |       | 21,957                                                                |       | 21,663                         |       | 21,936 |   | 21,642 |   |
| Cash dividends  declared per share             |       | $                                                                     | 0.4200     |                           | $          | 0.4000 |   | $ | 0.8200 |   | $ | 0.7825 |   |

 

See notes to condensed consolidated financial statements.

3

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARYCONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY(Unaudited)**

| ** **                                                    | ** ** | **Common Stock**   | ** ** | ** ** | ** ** | ** **     | ** ** | **Accumulated** | ** ** | ** **        | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|------------|------------|----------------|------------|-----------------|------------|-------------------|------------|
| ** **                                                    | ** ** | **Number**              | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **      | ** ** | **Other**         | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **of**                  | ** ** | **Par**    | ** ** | **Paid-In**    | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **Shares**              | ** ** | **Value**  | ** ** | **Capital**    | ** ** | **Deficit**     | ** ** | **Income**        | ** ** | **Total** | ** ** |
| ** **                                                    | ** ** | **(in thousands)** | ** ** |
| Balance at January 1, 2007                               |       |                    | 21,809     |       |       | $              | 218        |            | $          | 216,802           |       |   | $ | (51,990 | ) |   |   | $ | 2,618 |   |   | $ | 167,648 |   |
| Compensation  expense related to stock-based awards           |       |                    | —     |       |       | —         |       | 2,217           |       |              | —     |   |   |   | — |   |   | 2,217 |   |
| Cash dividends  declared                                      |       |                    | —     |       |       | —         |       | —          |       |              | (18,094    | ) |   |   | — |   |   | (18,094 | ) |
| Cumulative effect  of change in accounting principle (Note 9) |       |                    | —     |       |       | —         |       | —          |       |              | (1,835     | ) |   |   | — |   |   | (1,835 | ) |
| Comprehensive loss:                                           |       |                    |       |       |       |           |       |            |       |              |       |   |   |   |   |   |   |   |   |
| Net income                                                    |       |                    | —     |       |       | —         |       | —          |       |              | 413        |   |   |   | — |   |   | 413 |   |
| Change in fair value of derivative asset                      |       |                    | —     |       |       | —         |       | —          |       |              | —     |   |   |   | (936 | ) |   | (936 | ) |
| Total comprehensive loss                                      |       |                    |       |       |       |           |       |            |       |              |       |   |   |   |   |   |   | (523 | ) |
| Balance at June 30,  2007                                |       |                    | 21,809     |       |       | $              | 218        |            | $          | 219,019           |       |   | $ | (71,506 | ) |   |   | $ | 1,682 |   |   | $ | 149,413 |   |

 

See notes to condensed consolidated financial statements.

4

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

| ** **                                                                                                                                  | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                  | ** ** | **June 30,**              | ** ** |
| ** **                                                                                                                                  | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| ** **                                                                                                                                  | ** ** | **(in thousands)**        | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                                       |       |                           |       |   |   |
| Net income                                                                                                                                  |       | $                              | 413        |   | $ | 4,474 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities (excluding working capital from  acquisitions): |       |                           |       |   |   |
| Depreciation and  amortization                                                                                                              |       | 13,365                         |       | 12,560 |   |
| Amortization of debt  issue costs and debt discounts                                                                                        |       | 7,279                          |       | 6,643 |   |
| Loss on dispositions of  assets                                                                                                             |       | 258                            |       | 115 |   |
| Impairment of assets                                                                                                                        |       | —                         |       | 370 |   |
| Stock-based compensation  expense                                                                                                           |       | 2,217                          |       | 2,548 |   |
| Deferred taxes                                                                                                                              |       | 972                            |       | 2,789 |   |
| Change in assets and liabilities, net of the effects  of acquisitions:                                                                      |       |                           |       |   |   |
| Accounts receivable,  inventory and prepaid expenses                                                                                        |       | (26,152                        | )          | (29,394 | ) |
| Accounts payable,  accrued expenses and other                                                                                               |       | (285                           | )          | 8,317 |   |
| Net cash provided by  (used in) operating activities                                                                                        |       | (1,933                         | )          | 8,422 |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                                       |       |                           |       |   |   |
| Property and equipment  additions                                                                                                           |       | (11,007                        | )          | (11,474 | ) |
| Proceeds from  dispositions of property and equipment                                                                                       |       | 766                            |       | 445 |   |
| Cost of acquisitions                                                                                                                        |       | (18,797                        | )          | (10,112 | ) |
| Collection of note  receivable                                                                                                              |       | 13                             |       | — |   |
| Net cash used in  investing activities                                                                                                      |       | (29,025                        | )          | (21,141 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                                       |       |                           |       |   |   |
| Repurchase and  retirement of common stock                                                                                                  |       | —                         |       | (1,035 | ) |
| Cash dividends paid                                                                                                                         |       | (17,654                        | )          | (16,572 | ) |
| Borrowings under the  credit facility, net                                                                                                  |       | 21,200                         |       | 9,000 |   |
| Repayment of long-term  obligations                                                                                                         |       | (27                            | )          | (34 | ) |
| Net cash provided by  (used in) financing activities                                                                                        |       | 3,519                          |       | (8,641 | ) |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                                                |       | (27,439                        | )          | (21,360 | ) |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                                                                             |       | 39,434                         |       | 33,997 |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                                                                                   |       | $                              | 11,995     |   | $ | 12,637 |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                                                                           |       |                           |       |   |   |
| Cash payments for  interest                                                                                                                 |       | $                              | 8,263      |   | $ | 7,670 |   |
| Cash receipts of  interest income                                                                                                           |       | $                              | 455        |   | $ | — |   |
| Borrowings under the  credit facility                                                                                                       |       | $                              | 42,000     |   | $ | 30,280 |   |
| Repayments on the credit  facility                                                                                                          |       | $                              | (20,800    | ) | $ | (21,280 | ) |
| Cash dividends declared,  not paid                                                                                                          |       | $                              | 9,268      |   | $ | 8,655 |   |
| Cash paid for income  taxes                                                                                                                 |       | $                              | 15         |   | $ | — |   |
| Increase (decrease) in  fair value of derivative                                                                                            |       | $                              | (936       | ) | $ | 3,598 |   |
| Additions to property and equipment included in  accounts payable                                                                           |       | $                              | 5,458      |   | $ | 531 |   |

 

See notes to condensed consolidated financial statements.

5

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 and 2006**

**1. General**

Thecondensed consolidated financial statements of Reddy Ice Holdings, Inc.included herein are unaudited; however, the balance sheet as of December 31,2006 has been derived from the audited financial statements for that date.These financial statements have been prepared by the Company pursuant to theapplicable rules and regulations of the Securities and Exchange Commission(“SEC”). Under the SEC’s regulations, certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahave been condensed or omitted. All intercompany balances and transactions havebeen eliminated upon consolidation, and all adjustments which, in the opinionof management, are necessary for a fair presentation of the financial position,results of operations and cash flows for the periods covered have been made andare of a normal and recurring nature. 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, 2006. Operating results for the six monthsended June 30, 2007 are not necessarily indicative of the results to beachieved for the full year.

ReddyIce Holdings, Inc. (“Reddy Holdings”), and its wholly-owned subsidiary,Reddy Ice Corporation (“Reddy Corp.”), referred to collectively as the “Company”,manufacture and distribute packaged ice products and bottled water and own andoperate refrigerated warehouses. The Company is the largest manufacturer ofpackaged ice products in the United States. The Company serves approximately82,000 customer locations in 31 states and the District of Columbia.

On July 2, 2007,Reddy Holdings announced that it had entered into an Agreement and Plan ofMerger, dated as of July 2, 2007 (the “Merger Agreement”), by and amongReddy Holdings, Frozen, LLC, a Delaware limited liability company, HockeyParent Inc., a Delaware corporation (together with Frozen, LLC, the “Parents”)and Hockey MergerSub, Inc., a Delaware corporation and a wholly-ownedsubsidiary of the Parents (“Merger Sub”). The Parents are entities formed byGSO Capital Partners LP (“GSO”). The Merger Agreement provides for the merger(the “Merger”) of Merger Sub with and into Reddy Holdings, with Reddy Holdingsbeing the surviving corporation in the Merger. Pursuant to the MergerAgreement, at the effective time of the Merger, each issued and outstandingshare of Reddy Holdings’ common stock, par value $0.01 per share, other thanany shares owned by Reddy Holdings, the Parents or Merger Sub, or by anystockholders who are entitled to and who properly exercise appraisal rightsunder Delaware law, will be canceled and will be automatically converted intothe right to receive $31.25 in cash, without interest.

**2. Acquisitions**

During the six monthsended June 30, 2007, the Company purchased 13 ice companies. Includingdirect acquisition costs, the total acquisition consideration was $18.8 million.The total purchase price was allocated to the acquired assets and assumedliabilities based upon estimates of their respective fair values as of therespective closing dates using valuations and other studies. The followingtable summarizes the estimated fair values of the assets acquired and theliabilities assumed at the date of acquisition (dollars in millions):

| Total assets acquired     |   | $    | 6.4 |   |
|---------------------------|--------|------|-----|--------|
| Total liabilities assumed |   | (0.5 | )   |
| Net assets acquired       |   | $    | 5.9 |   |

 

6

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 and 2006**

**2.Acquisitions (Continued)**

The excess of theaggregate purchase price over the net assets acquired of $12.9 million wasallocated to goodwill ($7.4 million) and other intangible assets ($5.5 million).Other intangible assets are comprised of customer lists and patents, which arebeing amortized on a straight line basis over useful lives of 11 to 30 years.

During 2006, the Companypurchased ten ice companies for total acquisition consideration of $12.9 million.The results of operations of the 2006 and 2007 acquisitions are included in theCompany’s consolidated results of operations from the date of each acquisition,ranging from January 6, 2006 to December 22, 2006 and from January 2,2007 to June 29, 2007.

The followingunaudited pro forma financial information presents the Company’s consolidatedresults of operations (i) for the three months and six months ended June 30,2007 as if the 2007 acquisitions had all occurred on January 1, 2007 and (ii) forthe three months and six months ended June 30, 2006 as if the 2007 and2006 acquisitions had all occurred on January 1, 2006:

| ** **                              | ** ** | **Three Months Ended  June 30,**    | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                           | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                              | ** ** | **(in thousands, except per share  amounts)** | ** ** |
| Pro forma revenues                      |       | $                                                  | 107,077    |                                          | $          | 119,225 |   | $ | 154,910 |   | $ | 166,331 |   |
| Pro forma net  income                   |       | 10,750                                             |       | 13,570                                        |       | 337 |   | 4,731 |   |
| Pro forma basic  net income per share   |       | 0.50                                               |       | 0.64                                          |       | 0.02 |   | 0.22 |   |
| Pro forma diluted net  income per share |       | 0.49                                               |       | 0.63                                          |       | 0.02 |   | 0.22 |   |
|                                         |            |                                                    |            |                                               |            |  |  |  |  |  |  |  |  |

 

**3. Inventories**

Inventoriesconsist of raw materials, supplies and finished goods. Raw materials andsupplies consist of ice packaging materials, spare parts, bottled watersupplies and merchandiser parts. Finished goods consist of packaged ice andbottled water. Inventories are valued at the lower of cost or market andinclude overhead allocations. Cost is determined using the first-in, first-outand average cost methods.

|                            | ** ** | **June 30,   2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------|------------|-------------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **(in thousands)**       | ** ** |
| Raw materials and supplies |       | $                             | 10,644     |                        |       | $ | 8,664 |   |   |
| Finished goods             |       | 3,169                         |       |                        | 2,791      |   |   |
| Total                      |       | $                             | 13,813     |                        |       | $ | 11,455 |   |   |

 

7

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 and 2006**

**4. Accrued Expenses**

|                                                                                                                | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                     | ** ** | **(in thousands)** | ** ** |
| Accrued  compensation and employee benefits, including payroll taxes and workers’  compensation insurance |       | $                       | 5,073      |                        |       | $ | 9,951 |   |   |
| Accrued interest                                                                                               |       | 3,838                   |       |                        | 3,850      |   |   |
| Unrecognized tax  benefits                                                                                     |       | 2,686                   |       |                        | —     |   |   |
| Accrued utilities                                                                                              |       | 2,096                   |       |                        | 1,433      |   |   |
| Accrued property,  sales and other taxes                                                                       |       | 1,893                   |       |                        | 440        |   |   |
| Other accrued  insurance                                                                                       |       | 1,440                   |       |                        | 1,872      |   |   |
| Other                                                                                                          |       | 1,225                   |       |                        | 1,113      |   |   |
| Total                                                                                                          |       | $                       | 18,251     |                        |       | $ | 18,659 |   |   |

 

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

*10**1**¤**2**%* Senior Discount Notes.*  *On October 27, 2004, ReddyHoldings issued $151 million at maturity of 101¤2*%* Senior Discount Notes due 2012 (the “Discount Notes”) in aprivate placement offering. The Discount Notes were subsequently registeredwith the SEC, effective August 26, 2005. Each Discount Note had an initialaccreted value of $663.33 per $1,000 principal amount at maturity. The accretedvalue of each Discount Note will increase from the date of issuance until November 1,2008 at a rate of 101¤2%per annum such that the accreted value will equal the stated principal amountat maturity on November 1, 2008. Thereafter, cash interest will accrue andbe payable semi-annually at a rate of 101¤2% per annum.

The Discount Notes are unsecured obligations of ReddyHoldings and are:

     notguaranteed by any of Reddy Holdings’ subsidiaries;

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

     equalin right of payment with Reddy Holdings’ existing and future unsecured seniorindebtedness;

     effectivelysubordinated to Reddy Holdings’ existing and future secured debt, includingdebt under the Company’s credit facilities that is guaranteed by ReddyHoldings; and

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

The Discount Notes includecustomary covenants that restrict, among other things, Reddy Holdings’ abilityto incur additional debt or issue certain preferred stock, pay dividends orredeem, repurchase or retire its capital stock or subordinated indebtedness,make certain investments, create liens, enter into arrangements that restrictdividends from its subsidiaries, merge or sell all or substantially all of itsassets or enter into various transactions with affiliates. Prior to November 1,2007, Reddy Holdings may redeem up to 35% of the principal amount of theDiscount Notes at a redemption price of 110.5% of the accreted value thereof,plus accrued and unpaid interest to the date of redemption, with funds raisedin equity offerings that are specified in the indenture governing the DiscountNotes. From and after November 1, 2008, Reddy Holdings may redeem anyor all of the Discount Notes by paying a redemption premium, which is initially5.25% of the principal amount at maturity of the notes and declines annually to0% for the period commencing on November 1, 2010 and thereafter. If achange of control occurs prior to November 1, 2007, Reddy Holdings may, atits option, redeem all, but not less than all, of the Discount Notes at aredemption price equal to the sum of (i) the accreted value of the notesas of the redemption date, (ii) a premium equal to 125% of one year’scoupon payment and (iii) any accrued and unpaid interest 

8

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 and 2006**

**5.Revolving Credit Facility and Long-Term Obligations (Continued)**

to thedate of redemption. If Reddy Holdings experiences a change of control and doesnot elect to make the optional redemption described in the previous sentence,Reddy Holdings will be required to make an offer to repurchase the DiscountNotes at a price equal to 101% of their accreted value, plus accrued and unpaidinterest, if any, to the date of purchase. Reddy Holdings may also be requiredto make an offer to purchase the senior discount notes with proceeds of assetsales that are not reinvested in the Company’s business or used to repay otherindebtedness.

*Senior Credit Facilities.**  *On August 12, 2005, the Company amended andrestated its credit facilities with a syndicate of banks, financialinstitutions and other entities as lenders, including Credit Suisse, CaymanIslands Branch, as Administrative Agent, CIBC World Markets Corp., BearStearns Corporate Lending Inc. and Lehman Commercial Paper, Inc. (the“Credit Facilities”). The Credit Facilities provide for a $60 millionrevolving credit facility (the “Revolving Credit Facility”) and a $240 millionterm loan (the “Term Loan”). The Revolving Credit Facility and Term Loan matureon August 12, 2010 and August 12, 2012, respectively.

At June 30, 2007, theCompany had $31.9 million of availability under the Revolving CreditFacility, which was net of an outstanding balance of $21.2 million andstandby letters of credit of $6.9 million. The standby letters of creditare used primarily to secure certain insurance obligations.

Principal balancesoutstanding under the Credit Facilities bear interest per annum, at theCompany’s option, at the sum of the base rate plus 0.75% or LIBOR plus 1.75%.The base rate is defined as the greater of the prime rate (as announced fromtime to time by the Administrative Agent) or the federal funds rate plus 0.5%.At June 30, 2007, the weighted average interest rate of borrowingsoutstanding under the Credit Facility was 7.2%. Interest on base rate loans ispayable on the last day of each quarter. Interest on LIBOR loans is payableupon maturity of the LIBOR loan or on the last day of the quarter if the termof the LIBOR loan exceeds 90 days. The Company also pays a quarterly feeon the average availability under the Revolving Credit Facility at an annualrate of 0.5%. The terms of the Credit Facilities prohibit Reddy Corp. 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.

The Revolving CreditFacility and Term Loan do not require any scheduled principal payments prior totheir stated maturity dates. Subject to certain conditions, mandatory repaymentsof the Revolving Credit Facility and Term Loan (and if the Term Loan is nolonger outstanding, mandatory commitment reductions of the Revolving CreditFacility) are required to be made with portions of the proceeds from (1) assetsales, (2) the issuance of debt securities and (3) insurance andcondemnation awards, subject to various exceptions. In the event of a change incontrol, as defined in the Credit Facilities, an event of default will occurunder the Credit Facilities. Under the Credit Facilities, Reddy Corp. may onlypay dividends to Reddy Holdings if Reddy Corp.’s leverage ratio for the mostrecently ended fiscal quarter is less than or equal to 3.75 to 1.0. In addition,the Credit Facilities preclude Reddy Corp. from declaring any dividends if anevent of default under the Credit Facilities has occurred and is continuing. Inparticular, it 

will bean event of default if Reddy Corp.’s leverage ratio exceeds 4.0 to 1.0 orReddy Corp.’s interest coverage ratio is less than 3.25 to 1.0.

9

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 and 2006**

**5.Revolving Credit Facility and Long-Term Obligations (Continued)**

The Credit Facilitiescontain financial covenants, which include the maintenance of certain financialratios, as defined in the Credit Facilities, and are collateralized bysubstantially all of the Company’s assets and the capital stock of itssubsidiaries. Reddy Holdings guarantees the Credit Facilities and suchguarantee is secured by the capital stock of Reddy Corp. At June 30, 2007,Reddy Corp. was in compliance with these covenants.

On January 1, 2007,Reddy Corp. merged with its parent, Reddy Ice Group, Inc., with ReddyCorp. being the surviving entity. The Credit Facilities were amended on thatdate to allow the merger and to provide for the assumption of the CreditFacilities by Reddy Corp.

*Interest Rate HedgingAgreement.**  *EffectiveSeptember 12, 2005, the Company entered into an interest rate hedgingagreement (the “Hedge”) to fix the interest rate on a portion of its Term Loan.The Hedge has a term of three years and ten months and an initial notionalbalance of $220 million. The notional balance decreases by $20 millionon October 12 of each of the next three years, beginning onOctober 12, 2006. The Company pays a fixed rate of 4.431% on the notionalbalance outstanding and receives an amount equal to 3-month LIBOR. Anynet payable or receivable amount is settled quarterly. If the Company had beenrequired to settle the Hedge as of June 30, 2007, it would have received$2.8 million. In accordance with hedge accounting rules, the fair value ofthe Hedge is included in the caption “Other Assets” in the consolidated balancesheet. Changes in the fair value of the Hedge are recorded as “OtherComprehensive Income” in the consolidated statement of stockholders’ equity. Nogain or loss was recognized in any periods presented in the consolidatedstatement of operations. In the event that the Merger is completed (see Note 1),the existing Credit Facilities will be repaid. Management is currently evaluating whether the Hedge will be terminatedor redesignated as a hedge of the anticipated future cash flows of the variablerate debt that is anticipated to be incurred in connection with the Merger.  In the event the Credit Facilities are repaidand the Hedge is terminated, the amount reported in “Other ComprehensiveIncome” will be reclassified to a gain or loss in the consolidated statement ofoperations.  As of June 30, 2006,such a reclassification would result in a gain of $1.7 million, net oftax. The Company is exposed to risk of loss in the event of non-performance bythe counterparty to the Hedge; however, it does not anticipate non-performanceby the counterparty.

AtJune 30, 2007 and December 31, 2006, long-term obligations consistedof the following:

| ** **                                                          | ** ** | **June 30,   2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                          | ** ** | **(in thousands)**       | ** ** |
| Credit facility—Term Loan                                      |       | $240,000                 |       | $240,000                    |       |
| 101⁄2% Senior  Discount Notes                                    |       | 150,500                  |       | 150,500                     |       |
| Less: Unamortized  debt discount on 101⁄2% Senior Discount Notes |       | (19,156                  | )          | (25,706                     | )          |
| Other                                                               |       | 75                       |       | 101                         |       |
| Total long-term  obligations                                        |       | 371,419                  |       | 364,895                     |       |
| Less: Current  maturities                                           |       | 49                       |       | 51                          |       |
| Long-term  obligations, net                                         |       | $371,370                 |       | $364,844                    |       |

 

10

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 and 2006**

**6. Capital Stock**

*CommonStock.**  *ReddyHoldings is authorized to issue up to 75,000,000 shares of common stock, parvalue $0.01 per share. Holders of Reddy Holdings’ common stock are entitled toone vote per share on all matters to be voted on by stockholders and areentitled to receive dividends, if any, as may be declared from time to time bythe Board of Directors of Reddy Holdings. Upon any liquidation or dissolutionof Reddy Holdings, the holders of common stock are entitled, subject to anypreferential rights of the holders of preferred stock, to receive a pro ratashare of all of the assets remaining available for distribution to stockholdersafter payment of all liabilities.

Since August 1, 2005,the board of directors of Reddy Holdings has declared the following dividendson the Company’s common stock:

| ** **              | ** ** | ** **              | ** ** | **Dividend**          | ** ** | **Dividend**  | ** ** | **Total**         |
|-------------------------|------------|-------------------------|------------|-----------------------|------------|---------------|------------|-------------------|
| **Declaration  Date**   | ** ** | **Record Date**         | ** ** | **Payable Date**      | ** ** | **Per share** | ** ** | **Dividend**      |
| August 11, 2005    |       | September 30, 2005 |       | October 17, 2005 |       | $0.20788      |       | $4.5 million |
| December 15, 2005  |       | December 30, 2005  |       | January 17, 2006 |       | $0.3825       |       | $8.3 million |
| March 15, 2006     |       | March 31, 2006     |       | April 17, 2006   |       | $0.3825       |       | $8.3 million |
| June 15, 2006      |       | June 30, 2006      |       | July 17, 2006    |       | $0.4000       |       | $8.7 million |
| September 15, 2006 |       | September 29, 2006 |       | October 16, 2006 |       | $0.4000       |       | $8.8 million |
| December 15, 2006  |       | December 29, 2006  |       | January 16, 2007 |       | $0.4000       |       | $8.8 million |
| March 15, 2007     |       | March 30, 2007     |       | April 16, 2007   |       | $0.4000       |       | $8.8 million |
| June 15, 2007      |       | June 29, 2007      |       | July 16, 2007    |       | $0.4200       |       | $9.3 million |

* *

*Preferred Stock.**  *Reddy Holdings is authorized toissue up to 25,000,000 shares of $0.01 par value preferred stock, all of whichis currently undesignated and unissued.

**7. Employee Benefit Plans**

*2005Equity Incentive Plan.**  *OnAugust 8, 2005, the board of directors and stockholders of Reddy Holdingsapproved the 2005 Equity Incentive Plan. Under the 2005 Equity Incentive Plan,up to 750,000 shares of common stock may be issued to employees, directors andcertain third parties in connection with various incentive awards, includingstock options, restricted shares and restricted share units. On October 18,2005, Reddy Holdings filed a Registration Statement on Form S-8 withthe SEC to cover the reoffer and resale of up to 750,000 shares of ReddyHoldings’ common stock that Reddy Holdings may issue in the future toparticipants in the 2005 Equity Incentive Plan. On May 17, 2007, theCompany’s stockholders approved amendments to the 2005 Equity Incentive Planthat, among other things, increased the maximum number of shares of common stockavailable for issuance to 1,250,000.

During 2007, restricted share units (“RSUs”) have beengranted to certain employees and the independent directors of Reddy Holdings inthe following amounts: 4,625 RSUs on February 19, 2007, and 10,000 RSUs onApril 10, 2007. Each RSU provides for the grant of one share ofunrestricted common stock on the date that the vesting terms of each RSU issatisfied.

Generally, fifty percent of each award of RSUs (the “Time-vestedRSUs”) will vest in four equal annual installments beginning on August 12,2006 and continuing on August 12 of each of the following three years,provided the recipient remains employed with the Company through such vestingdates. The 

11

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 and 2006**

**7.Employee Benefit Plans (Continued)**

remaining fifty percent ofeach award of RSUs (the “Performance-vested RSUs”) will vest in four equalannual installments beginning on August 12, 2006 and continuing on August 12of each of the following three years, provided the recipient remains employedwith the Company through such vesting dates and the applicable performancecondition for the applicable vesting period is met. The performance conditionfor each vesting period will be based on the Company’s earned distributablecash per share (as defined in the related restricted share unit agreement) forsuch vesting period. Each vesting period will begin on July 1 and end on June 30of the subsequent year. All RSUs will immediately vest in full, and shares willbe distributed, at the time of a Change in Control (as defined in the 2005Equity Incentive Plan). If in any performance period the performance conditionfor a subsequent performance period is achieved, Performance-vested RSUs willbe entitled to dividend equivalent rights in the subsequent performance periodequal to the dividends which would be payable on the shares of common stockrepresented by the RSUs subject to vesting in that period. Payments of suchdividend equivalents will be made in cash to the holders of RSUs at the time ofactual dividend payments and will not be subject to vesting. Time-vested RSUswill not be entitled to dividend equivalent rights.

Based on the Company’s financial results for thevesting period ended June 30, 2006, the performance condition for thePerformance-vested RSUs eligible for vesting on August 12, 2006 was met. Atotal of 172,375 Time-vested RSUs and Performance-vested RSUs vested on August 12,2006. Furthermore, the performance targets for the remaining three vestingperiods were met as of June 30, 2006. Therefore, the holders of unvestedPerformance-based RSUs were entitled to dividend equivalent payments for theperiod from July 1, 2006 to June 30, 2007. Dividend equivalentpayments of $0.1 million were accrued during the three months ended June 30,2007 and paid in July 2007.

Based on the Company’s financial results for thevesting period ended June 30, 2007, the performance condition for thePerformance-vested RSUs eligible for vesting on August 12, 2007 was met. Approximately180,000 Time-vested RSUs and Performance-vested RSUs are expected to vest on August 12,2007. The performance targets for the remaining two vesting periods were notmet as of June 30, 2007. Therefore, the holders of unvestedPerformance-based RSUs are not entitled to any dividend equivalent paymentsafter June 30, 2007.

Compensation expense associated with the 2005 EquityIncentive Plan was $0.9 million and $1.7 million during the three andsix months ended June 30, 2007, respectively. Expense for the three andsix months ended June 30, 2006 was $1.0 and $2.0 million,respectively. Such compensation expense was recorded in “Operating Expenses” inthe consolidated statements of operations. Approximately twenty-five percent ofthe Time-vested RSUs are being expensed during each twelve-month period ending August 12in 2006 to 2009. Performance-vested RSUs are being expensed on the same basisas the first two annual installments met the performance condition and it ismanagement’s belief that the performance condition for each subsequent periodwill also be met.

As of June 30, 2007, 545,250 shares were reservedfor issuance and 523,075 shares were available for grant under the 2005 EquityIncentive Plan.

*2003 Stock Option Plan.**  *During 2003, the board of directorsapproved the Reddy Ice Holdings, Inc. 2003 Stock Option Plan (the “2003Stock Option Plan”) that reserved for issuance 1,555,150 shares of commonstock, subject to adjustment under certain circumstances. This plan providesfor the granting of 

12

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 and 2006**

**7.Employee Benefit Plans (Continued)**

incentive awards inthe form of stock options to directors, officers and employees of the Companyor any of its subsidiaries and affiliates at the discretion of the CompensationCommittee of the Board of Directors. On August 12, 2005, all outstandingoptions under the 2003 Stock Option Plan were exercised in exchange forrestricted shares. At June 30, 2007, 57,883 shares of common stock wereavailable for grant under the 2003 Stock Option Plan. On July 23, 2007,the Board of Directors terminated the 2003 Stock Option Plan. Compensationexpense associated with the 2003 Stock Option Plan was $0.3 million duringthe three months ended June 30, 2007 and 2006 and $0.5 million duringthe six months ended June 30, 2007 and 2006. Such compensation expense wasrecorded in “Operating Expenses” in the consolidated statements of operations.

**8. Earnings Per Share**

The computation of netincome per share is based on net income divided by the weighted average numberof shares outstanding. All shares outstanding for the three and six monthsended June 30, 2007 and June 30, 2006 were included in thecomputation of diluted earnings per share.

| ** **                                                                              | ** ** | **Three Months Ended   June 30,**                 | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                              | ** ** | **2007**                                                              | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                              | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Earnings for basic and  diluted computation:                                            |       |                                                                  |       |                                          |       |   |   |   |   |
| Net income                                                                              |       | $                                                                     | 10,621     |                                          | $          | 12,713 |   | $ | 413 |   | $ | 4,474 |   |
| Basic earnings  per share:                                                              |       |                                                                  |       |                                          |       |   |   |   |   |
| Weighted average common shares outstanding                                              |       | 21,717                                                                |       | 21,360                                        |       | 21,702 |   | 21,316 |   |
| Net income                                                                              |       | $                                                                     | 0.49       |                                          | $          | 0.60 |   | $ | 0.02 |   | $ | 0.21 |   |
| Diluted earnings  per share:                                                            |       |                                                                  |       |                                          |       |   |   |   |   |
| Weighted average common shares outstanding                                              |       | 21,717                                                                |       | 21,360                                        |       | 21,702 |   | 21,316 |   |
| Shares issuable from assumed conversion of  restricted stock and restricted stock units |       | 240                                                                   |       | 303                                           |       | 234 |   | 326 |   |
| Weighted average common shares outstanding, as  adjusted                                |       | 21,957                                                                |       | 21,663                                        |       | 21,936 |   | 21,642 |   |
| Net income                                                                              |       | $                                                                     | 0.48       |                                          | $          | 0.59 |   | $ | 0.02 |   | $ | 0.21 |   |

 

13

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 and 2006**

**9. Income Taxes**

The Company’s effective tax rate differs from thefederal statutory income tax rate of 35% due to state income taxes and theeffect of permanent differences, primarily the non-deductible portion of theinterest expense recognized on the 101⁄2% Senior Discount Notes. The effectiverate for the six months ended June 30, 2007 includes the effect of theinternal merger and consolidation of certain wholly-owned subsidiarieseffective January 1, 2007, which resulted in the write-down of certain netstate deferred tax assets.

In connection with the vesting of restricted stock on January 16,2007, the Company realized an excess tax benefit of $3.8 million during thethree months ended March 31, 2007. Because the Company is not currentlymaking cash payments for income taxes due to its net operating loss (“NOL”)carryforwards, such excess benefit has not been recognized in the Company’sfinancial statements and is being reported as a “suspended NOL carryforward” inthe footnotes to the consolidated financial statements in accordance with SFAS No. 123(R).In connection with the vesting of restricted stock on February 28, 2006,the Company realized an excess tax benefit of $3.6 million during the threemonths ended March 31, 2006.

In June 2006, the FASB issued FASB InterpretationNo. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes”. FIN 48clarifies the accounting for uncertainty in income taxes recognized in anentity’s financial statements in accordance with SFAS No. 109, “Accountingfor Income Taxes”. FIN 48 prescribes a recognition threshold and measurementattribute for financial statement recognition and measurement of a tax positiontaken or expected to be taken in a return and also provides guidance onderecognition, classification, interest and penalties, accounting for interimperiods, disclosure and transition.

FIN 48 is effective for fiscal years beginningafter December 15, 2006. The Company was required to record the impact ofadopting FIN 48 as an adjustment to the January 1, 2007 beginning balanceof retained earnings (deficit). Adoption of this standard had no impact on theconsolidated statement of operations. Upon adoption of FIN 48, the Company’sunrecognized tax benefits totaled $3.7 million. As a result of adoption, theCompany’s liability for unrecognized tax benefits increased $2.9 million. Thisalso resulted in a $1.8 million increase to the January 1, 2007 balance ofretained deficit, a $1.1 million increase in deferred tax benefits related tothe federal benefit of unrecognized tax positions and a $0.8 millionreclassification of amounts previously reserved at December 31, 2006. Ifrecognized in future periods, the net unrecognized tax benefit would reduce theCompany’s effective tax rate.

To the extent penalties and interest would be assessedon any underpayment of  income tax, suchamounts have been accrued and classified as a component of income tax expensein the financial statements. As of January 1, 2007, the Company hadaccrued $1.2 million of interest and penalties relating to unrecognized taxbenefits.

As a result of netoperating loss carryforwards, the Company’s federal statute of limitationsremains open for all years since 1990 with no years currently under examinationby the Internal Revenue Service, and U.S. state jurisdictions are generallyopen to examination for the tax year 1997 and beyond. A $2.6 million reductionin the amount of unrecognized tax benefits is possible in the next 12 months asa result of potential settlements with U.S. state taxing authorities.

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 and 2006**

**10. Commitments andContingencies**

The Company is involved in various claims, lawsuitsand proceedings arising in the ordinary course of business. There areuncertainties inherent in the ultimate outcome of such matters and it isimpossible to presently determine the ultimate costs that may be incurred.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.

On July 9, 2007, theCompany received notice that a putative derivative complaint wasfiled by an entity identifying itself as a stockholder of the Company inthe District Court of Texas, Collin County, naming the Company as a nominaldefendant and naming all of the members of the Company’s Board ofDirectors and GSO Capital Partners LP as defendants. The complaint allegesthat the Company’s board of directors breached its fiduciary duties inconnection with their approval of the proposed merger transaction. Based on thefacts known to date, management believes that the claims asserted are withoutmerit and intends to defend against the suit vigorously. This lawsuit is stillin a preliminary stage and the ultimate outcome is impossible to determine atthis time. An unfavorable result in excess of the available insurance coveragecould have a material adverse effect on the Company’s consolidated financialposition, results of operations or cash flows.

**11. Segment Information**

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

The Company evaluates the performance of each segmentbased on earnings before interest, taxes, depreciation, amortization, gain orloss on disposition of assets, impairment of assets, loss on extinguishment ofdebt and management agreement termination fees and transaction bonuses andexpenses (“Segment EBITDA”). Segment assets are not a factor in the evaluationof performance. There were no intersegment sales during the three and sixmonths ended June 30, 2007 and 2006.

Segmentinformation for the three months ended June 30, 2007 and 2006 was asfollows:

| ** **                              | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **June 30, 2007**      | ** ** | **June 30, 2006**      | ** ** |
| ** **                              | ** ** | **Ice**                          | ** ** | **Non-Ice**                      | ** ** | **Total** | ** ** | **Ice** | ** ** | **Non-Ice** | ** ** | **Total** | ** ** |
| ** **                              | ** ** | **(in thousands)**          | ** ** |
| Revenues                                |       | $                                | 103,333    |                             | $          | 2,652 |   | $ | 105,985 |   | $ | 109,848 |   | $ | 3,728 |   | $ | 113,576 |   |
| Cost of sales  (excluding depreciation) |       | 60,658                           |       | 1,759                            |       | 62,417 |   | 61,918 |   | 2,226 |   | 64,144 |   |
| Operating  expenses                     |       | 10,832                           |       | 389                              |       | 11,221 |   | 13,580 |   | 518 |   | 14,098 |   |
| Segment EBITDA                          |       | $                                | 31,843     |                             | $          | 504 |   | $ | 32,347 |   | $ | 34,350 |   | $ | 984 |   | $ | 35,334 |   |
| Total assets                            |       | $                                | 608,267    |                             | $          | 21,455 |   | $ | 629,722 |   | $ | 597,539 |   | $ | 24,868 |   | $ | 622,407 |   |

 

15

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**REDDY ICE HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 and 2006**

Segmentinformation for the six months ended June 30, 2007 and 2006 was asfollows:

| ** **                              | ** ** | **Six Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                              | ** ** | **June 30, 2007**    | ** ** | **June 30, 2006**    | ** ** |
| ** **                              | ** ** | **Ice**                        | ** ** | **Non-Ice**                    | ** ** | **Total** | ** ** | **Ice** | ** ** | **Non-Ice** | ** ** | **Total** | ** ** |
| ** **                              | ** ** | **(in thousands)**        | ** ** |
| Revenues                                |       | $                              | 148,453    |                           | $          | 4,560 |   | $ | 153,013 |   | $ | 151,586 |   | $ | 6,798 |   | $ | 158,384 |   |
| Cost of sales  (excluding depreciation) |       | 97,093                         |       | 3,395                          |       | 100,488 |   | 94,269 |   | 4,288 |   | 98,557 |   |
| Operating  expenses                     |       | 21,124                         |       | 798                            |       | 21,922 |   | 24,280 |   | 907 |   | 25,187 |   |
| Segment EBITDA                          |       | $                              | 30,236     |                           | $          | 367 |   | $ | 30,603 |   | $ | 33,037 |   | $ | 1,603 |   | $ | 34,640 |   |
| Total assets                            |       | $                              | 608,267    |                           | $          | 21,455 |   | $ | 629,722 |   | $ | 597,539 |   | $ | 24,868 |   | $ | 622,407 |   |

 

The reconciliation ofSegment EBITDA to net income for the three and six month periods ended  June 30, 2007 and 2006 was as follows:

| ** **                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                     | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                     | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                     | ** ** | **(in thousands)**          | ** ** |
| Segment EBITDA                                 |       | $                                | 32,347     |                           | $          | 35,334 |   | $ | 30,603 |   | $ | 34,640 |   |
| Loss on  dispositions of assets                |       | (135                             | )          | (11                            | )          | (258 | ) | (115 | ) |
| Depreciation  expense related to cost of sales |       | (5,163                           | )          | (4,947                         | )          | (10,254 | ) | (9,661 | ) |
| Depreciation and  amortization expense         |       | (1,581                           | )          | (1,471                         | )          | (3,111 | ) | (2,899 | ) |
| Impairment of  assets                          |       | —                           |       | (370                           | )          | — |   | (370 | ) |
| Interest expense                               |       | (8,048                           | )          | (7,378                         | )          | (15,581 | ) | (14,332 | ) |
| Interest income                                |       | 118                              |       | —                         |       | 334 |   | — |   |
| Income tax  expense                            |       | (6,917                           | )          | (8,444                         | )          | (1,320 | ) | (2,789 | ) |
| Net income                                     |       | $                                | 10,621     |                           | $          | 12,713 |   | $ | 413 |   | $ | 4,474 |   |

** **

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

The following discussion and analysis of our financialcondition and results of operations should be read in conjunction with ourcondensed consolidated financial statements and the related notes and otherinformation included elsewhere in this Form 10-Q and our AnnualReport on Form 10-K for the year ended December 31, 2006,previously filed with the SEC. Reddy Ice Holdings, Inc. (“Reddy Holdings”)acquired Packaged Ice, Inc. on August 15, 2003 and renamed it ReddyIce Group, Inc. (“Reddy Group”). On January 1, 2007, Reddy Groupmerged with its wholly-owned subsidiary, Reddy Ice Corporation (“Reddy Corp.”),with Reddy Corp. being the surviving entity.

On July 2, 2007,Reddy Holdings announced that it had entered into an Agreement and Plan ofMerger, dated as of July 2, 2007 (the “Merger Agreement”), by and amongReddy Holdings, Frozen, LLC, a Delaware limited liability company, HockeyParent Inc., a Delaware corporation (together with Frozen, LLC, the “Parents”)and Hockey MergerSub, Inc., a Delaware corporation and a wholly-ownedsubsidiary of the Parents (“Merger Sub”). The Parents are entities formed byGSO Capital Partners LP (“GSO”). The Merger Agreement provides for the merger(the “Merger”) of Merger Sub with and into Reddy Holdings, with Reddy Holdingsbeing the surviving corporation in the Merger. Pursuant to the MergerAgreement, at the effective time of the Merger, each issued and outstandingshare of Reddy Holdings common stock, par value $0.01 per share, other than anyshares owned by us, the Parents or Merger Sub, or by any stockholders who areentitled to and who properly exercise appraisal rights under Delaware law, willbe canceled and will be automatically converted into the right to receive$31.25 in cash, without interest. We will file a definitive proxy statement withthe Securities and Exchange Commission with respect to the Merger. Stockholdersare advised to read the proxy statement when it becomes available.

**Uncertainty ofForward Looking Statements and Information**

Other thanstatements of historical facts, statements made in this Form 10-Q,statements made by us in periodic press releases, oral statements made by ourmanagement to analysts and stockholders and statements made in the course ofpresentations about our company constitute “forward-looking statements”intended to qualify for the safe harbor from liability established by thePrivate Securities Litigation Reform Act of 1995. We believe the expectationsreflected in such forward-looking statements are accurate. However, we cannotassure you that such expectations will occur. These forward-looking statementsinvolve known and unknown risks, uncertainties and other factors that may causeour actual results, performance or achievements to be materially different fromfuture results expressed or implied by the forward-looking statements. Factorsyou should consider that could cause these differences are:

·       generaleconomic trends and seasonality;

·       weatherconditions;

·       theability of our subsidiaries to make distributions to us in amounts sufficientto make dividend payments to our stockholders in accordance with our dividendpolicy;

·       oursubstantial leverage and ability to service our debt and pay dividends;

·       therestrictive covenants under our indebtedness;

·       theavailability of capital sources;

·       theamount of the costs, fees, expenses and charges related to the Merger;

·       theoccurrence of any event, change or other circumstance that could give rise to afailure to satisfy any of the conditions to completion of the Merger, includingthe receipt of the required stockholder approval, or could give rise to thetermination of the Merger Agreement;

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·       theoutcome of any legal proceedings instituted against us and others in connectionwith the proposed Merger;

·       businessuncertainty and contractual restrictions during the pendency of the Merger;

·       fluctuationsin our operating costs, including in the prices of electricity, fuel,polyethylene and other required expenses;

·       competitivepractices in the industry in which we compete;

·       changesin labor conditions;

·       ourcapital expenditure requirements;

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

·       technologicalchanges and innovations;

·       costsassociated with potential product liability claims or liabilities underenvironmental laws;

·       legislativeor regulatory requirements; and

·       allthe other factors described herein under Item 1A of Part II.

You should not unduly relyon these forward-looking statements, as they speak only as of the date of thisreport. Except as required by law, we are not obligated to publicly release anyrevisions to these forward-looking statements to reflect events orcircumstances occurring after the date of this report or to reflect theoccurrence of unanticipated events. Important factors that could cause ouractual results to differ materially from our expectations are discussedelsewhere in this report.

**General**

***Overview.******  ***We are thelargest manufacturer and distributor of packaged ice in the United States andcurrently serve approximately 82,000 customer locations in 31 states and theDistrict of Columbia. We operate in two business segments—ice products andnon-ice products and operations. Ice products accounted for approximately 97%of our revenues in the six months ended June 30, 2007 and 96% of revenuesin the six months ended June 30, 2006. Our ice products business consistsof:

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

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

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

***Seasonality.******  ***The packagedice business is highly seasonal, characterized by peak demand during the warmermonths of May through September, with an extended peak selling season inthe southern United States. Approximately 69%, 69% and 68% of our annualrevenues occurred during the second and third calendar quarters in each of2006, 2005 and 2004. Approximately 66% of our annual revenues occurred duringthe second and third calendar quarters of 2003 and 68% occurred during thesecond and third calendar quarters of 2002, 2001 and 2000. The decrease in 2003was primarily due to the timing of our acquisitions, which occurred in thefourth quarter of that year. As a result of seasonal revenue declines and aless than proportional decline in expenses during the first and fourth quarters,we typically experience lower margins resulting in losses during these periods.

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***Revenues.******  ***Our revenuesprimarily represent sales of packaged ice, packaged ice bags for use in our IceFactory equipment, bottled water and cold storage services. There is no rightof return with respect to these products or services. A portion of our revenuesalso represents fees earned under management agreements for Ice Factorieslocated outside our primary territories that are recognized as earned undercontract terms.

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

·       manufacturingand distribution labor costs;

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

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

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

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

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

***Operating Expenses.******  ***Our operatingexpenses are costs associated with selling, general and administrativefunctions. These costs include executive officers’ compensation, office andadministrative salaries, insurance, legal and other professional services andcosts associated with leasing office space. Labor costs, including associatedpayroll taxes and benefit costs but excluding non-cash stock-based compensationexpense, included in operating expenses represented approximately 7% and 8% ofrevenues in the six months ended June 30, 2007 and 2006, respectively.

***Facilities.******  ***At June 30,2007, we owned or operated 64 ice manufacturing facilities, 60 distributioncenters, approximately 79,000 merchandisers (cold storage units installed atcustomer locations), approximately 3,000 Ice Factories, five refrigeratedwarehouses and one bottled water plant. As of the same date, we had anaggregate daily ice manufacturing capacity of approximately 17,000 tons.

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**Three Months Ended June 30, 2007 Compared toThree Months Ended June 30, 2006**

| ** **                                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Change from  Last Year** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                     | ** ** | **2007**                                        | ** ** | **2006**                             | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                     | ** ** | **(in thousands)**                         | ** ** |
| **Consolidated  Results**                      |       |                                            |       |                                 |       |   |   |   |   |
| Revenues                                       |       | $                                               | 105,985    |                                 | $          | 113,576 |   | $ | (7,591) |   | (6.7) |   |
| Cost of sales  (excluding depreciation)        |       | 62,417                                          |       | 64,144                               |       | (1,727) |   | (2.7) |   |
| Depreciation  expense related to cost of sales |       | 5,163                                           |       | 4,947                                |       | 216 |   | 4.4 |   |
| Gross profit                                   |       | 38,405                                          |       | 44,485                               |       | (6,080) |   | (13.7) |   |
| Operating  expenses                            |       | 11,221                                          |       | 14,098                               |       | (2,877) |   | (20.4) |   |
| Depreciation and  amortization expense         |       | 1,581                                           |       | 1,471                                |       | 110 |   | 7.5 |   |
| Loss on  dispositions of assets                |       | 135                                             |       | 11                                   |       | 124 |   | 1,127.3 |   |
| Impairment of  assets                          |       | —                                          |       | 370                                  |       | (370) |   | (100.0) |   |
| Income from  operations                        |       | 25,468                                          |       | 28,535                               |       | (3,067) |   | (10.7) |   |
| Interest expense,  net                         |       | 7,930                                           |       | 7,378                                |       | 552 |   | 7.5 |   |
| Income before  income taxes                    |       | 17,538                                          |       | 21,157                               |       | (3,619) |   | (17.1) |   |
| Income tax  expense                            |       | (6,917)                                         |       | (8,444)                              |       | 1,527 |   | 18.1 |   |
| Net income                                     |       | $                                               | 10,621     |                                 | $          | 12,713 |   | $ | (2,092) |   | (16.5) |   |
| **Ice Operations:**                            |       |                                            |       |                                 |       |   |   |   |   |
| Revenues                                       |       | $                                               | 103,333    |                                 | $          | 109,848 |   | $ | (6,515) |   | (5.9) |   |
| Cost of sales  (excluding depreciation)        |       | 60,658                                          |       | 61,918                               |       | (1,260) |   | (2.0) |   |
| Depreciation  expense related to cost of sales |       | 4,904                                           |       | 4,698                                |       | 206 |   | 4.4 |   |
| Gross profit                                   |       | 37,771                                          |       | 43,232                               |       | (5,461) |   | (12.6) |   |
| Operating  expenses                            |       | 10,832                                          |       | 13,580                               |       | (2,748) |   | (20.2) |   |
| **Non-Ice Operations:**                        |       |                                            |       |                                 |       |   |   |   |   |
| Revenues                                       |       | $                                               | 2,652      |                                 | $          | 3,728 |   | $ | (1,076) |   | (28.9) |   |
| Cost of sales  (excluding depreciation)        |       | 1,759                                           |       | 2,226                                |       | (467) |   | (21.0) |   |
| Depreciation  expense related to cost of sales |       | 259                                             |       | 249                                  |       | 10 |   | 4.0 |   |
| Gross profit                                   |       | 634                                             |       | 1,253                                |       | (619) |   | (49.4) |   |
| Operating expenses                             |       | 389                                             |       | 518                                  |       | (129) |   | (24.9) |   |

* *

*Revenues:**  *Revenues decreased $7.6 millionfrom the three months ended June 30, 2006 to the three months ended June 30,2007. This decrease is primarily due to reduced volume sales of ice related tocooler and wetter average weather conditions in many of our markets and a $1.1 millionreduction in revenues in our non-ice operations, resulting from a generaldecline in the poultry industry, which is a significant portion of the customerbase for our cold storage warehouses. Offsetting these decreases was higheraverage pricing, the effects of acquisitions and the continuing positiveeffects of package sizing initiatives, which consists primarily of converting aportion of our ice sales from seven to ten pound bags.

*Costof Sales (Excluding Depreciation):*   Cost of sales(excluding depreciation) decreased $1.7 million from the three monthsended June 30, 2006 to the three months ended June 30, 2007. Thisdecrease in cost of sales is primarily due to lower production and salesvolumes related to cooler and wetter average weather in many of our markets ascompared to 2006, although we were not able to reduce our costs proportionallyto the decrease in sales noted above, especially in the early part of thequarter due to the fixed costs associated with our business. This decrease incost of sales was partially offset by acquired ice operations and priceincreases for energy, primarily electricity in Texas.

Labor costs, including associated payroll taxes andbenefit costs (including health insurance), accounted for approximately 22% and20% of revenues in the three months ended June 30, 2007 and 2006, 

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respectively. Cost ofplastic bags represented approximately 7% of revenues in the three months endedJune 30, 2007 and 2006. Fuel expenses represented approximately 4% ofrevenues in the three months ended June 30, 2007 and 2006. Expenses forindependent third party distribution services represented approximately 6% ofrevenues in the three months ended June 30, 2007 and 2006. Electricityexpense represented approximately 5% of revenues in the three months ended June 30,2007 and 2006.

*DepreciationExpense Related to Cost of Sales:**  *Depreciation expense related tocost of sales increased $0.2 million due to additional depreciationexpense associated with production and distribution equipment placed in serviceduring 2006 and early 2007, partially offset by the effect of asset dispositionsand assets becoming fully depreciated.

*OperatingExpenses:**  *Operatingexpenses decreased $2.9 million from the three months ended June 30,2006 to the three months ended June 30, 2007. This decrease is primarilydue to a decrease of $2.1 million in incentive compensation expense and a$0.8 million decrease in professional services costs. Professionalservices for the three months ended June 30, 2006 included $0.6 millionrelated to the secondary stock offering completed in May 2006.

*Depreciationand Amortization:**  *Depreciationand amortization increased $0.1 million from the three months ended June 30,2006 to the three months ended June 30, 2007. This increase is primarilydue to additional amortization expense associated with the intangible assetsrecorded in connection with the acquisitions completed in 2006 and the sixmonths ended June 30, 2007.

*Impairmentof assets:*   During the three months endedJune 30, 2006, we reviewed two pieces of real estate in our ice businesssegment in accordance with SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets”, as aresult of a pending sale of one property and physical damage to another. As aresult of this review, we recorded an impairment charge of $0.4 million.

*InterestExpense, net:*   Net interest expense increased$0.6 million from the three months ended June 30, 2006 to the threemonths ended June 30, 2007, primarily due to scheduled increases in thenon-cash interest expense associated with our 101⁄2% senior discount notes,higher average balances on our revolving credit facility and an increase in theunhedged balance of our term loan, which is subject to market interest rates inexcess of the effective hedge rate.

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**Six Months Ended June 30, 2007 Compared to SixMonths Ended June 30, 2006**

| ** **                                     | ** ** | **Six Months Ended** | ** ** | **Change from** | ** ** |
|------------------------------------------------|------------|--------------------------------|------------|----------------------|------------|
| ** **                                     | ** ** | **June 30,**              | ** ** | **Last Year**   | ** ** |
| ** **                                     | ** ** | **2007**                       | ** ** | **2006**             | ** ** | **Dollars** | ** ** | **%** | ** ** |
| ** **                                     | ** ** | **(in thousands)**        | ** ** |
| **Consolidated Results**                       | ** ** | ** **                     | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                       |       | $                              | 153,013    |                 | $          | 158,384 |   | $ | (5,371 | ) | (3.4 | ) |
| Cost of sales (excluding  depreciation)        |       | 100,488                        |       | 98,557               |       | 1,931 |   | 2.0 |   |
| Depreciation expense  related to cost of sales |       | 10,254                         |       | 9,661                |       | 593 |   | 6.1 |   |
| Gross profit                                   |       | 42,271                         |       | 50,166               |       | (7,895 | ) | (15.7 | ) |
| Operating expenses                             |       | 21,922                         |       | 25,187               |       | (3,265 | ) | (13.0 | ) |
| Depreciation and  amortization expense         |       | 3,111                          |       | 2,899                |       | 212 |   | 7.3 |   |
| Loss on dispositions of  assets                |       | 258                            |       | 115                  |       | 143 |   | 124.3 |   |
| Impairment of assets                           |       | —                         |       | 370                  |       | (370 | ) | (100.0 | ) |
| Income from operations                         |       | 16,980                         |       | 21,595               |       | (4,615 | ) | (21.4 | ) |
| Interest expense, net                          |       | 15,247                         |       | 14,332               |       | 915 |   | 6.4 |   |
| Income before income  taxes                    |       | 1,733                          |       | 7,263                |       | (5,530 | ) | (76.1 | ) |
| Income tax expense                             |       | (1,320                         | )          | (2,789               | )          | (1,469 | ) | (52.7 | ) |
| Net income                                     |       | $                              | 413        |                 | $          | 4,474 |   | $ | (4,061 | ) | (90.8 | ) |
| **Ice Operations:**                            |       |                           |       |                 |       |   |   |   |   |
| Revenues                                       |       | $                              | 148,453    |                 | $          | 151,586 |   | $ | (3,133 | ) | (2.1 | ) |
| Cost of sales (excluding  depreciation)        |       | 97,093                         |       | 94,269               |       | 2,824 |   | 3.0 |   |
| Depreciation expense  related to cost of sales |       | 9,750                          |       | 9,162                |       | 588 |   | 6.4 |   |
| Gross profit                                   |       | 41,610                         |       | 48,155               |       | (6,545 | ) | (13.6 | ) |
| Operating expenses                             |       | 21,124                         |       | 24,280               |       | (3,156 | ) | (13.0 | ) |
| **Non-Ice Operations:**                        |       |                           |       |                 |       |   |   |   |   |
| Revenues                                       |       | $                              | 4,560      |                 | $          | 6,798 |   | $ | (2,238 | ) | (32.9 | ) |
| Cost of sales (excluding  depreciation)        |       | 3,395                          |       | 4,288                |       | (893 | ) | (20.8 | ) |
| Depreciation expense  related to cost of sales |       | 504                            |       | 499                  |       | 5 |   | 1.0 |   |
| Gross profit                                   |       | 661                            |       | 2,011                |       | (1,350 | ) | (67.1 | ) |
| Operating expenses                             |       | 798                            |       | 907                  |       | (109 | ) | (12.0 | ) |

 

*Revenues:*   Revenues decreased $5.4 million fromthe six months ended June 30, 2006 to the six months ended June 30,2007. This decrease is primarily due to reduced volume sales of icerelated to cooler and wetter average weather conditions in many of our marketsand a $2.2 million reduction in revenues in our non-ice operations, resultingfrom a general decline in the poultry industry, which is a significant portionof the customer base for our cold storage warehouses. Offsetting thesedecreases were higher average pricing, the effects of acquisitions and thecontinuing positive effects of package sizing initiatives, which consistsprimarily of converting a portion of our ice sales from seven to ten poundbags.

*Cost of Sales (ExcludingDepreciation):*   Cost of sales (excludingdepreciation) increased $1.9 million from the six months ended June 30,2006 to the six months ended June 30, 2007. This increase is costs of salesis primarily due to increased labor and other direct costs associated withhigher volume sales in the first three months of 2007, as well as the effect ofacquisitions and increases in the prices of electricity, especially in Texas.  Offsetting these increases were reductions incosts related to lower sales and production volumes in the second quarter of2007 and a $0.9 million decrease in costs of sales in our non-iceoperations related to their reduced level of operations.

Labor costs, including associatedpayroll taxes and benefit costs (including health insurance), accounted forapproximately 26% and 23% of revenues in the six months ended June 30,2007 and 2006, respectively. Cost of plastic bags represented approximately 7%of revenues in the six months ended June 30, 2007 and 2006. Fuel expensesrepresented approximately 4% of revenues in the six months ended June 30,2007 and 2006. Expenses for independent third party distribution servicesrepresented 

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approximately6% of revenues in the six months ended June 30, 2007 and 2006. Electricityexpense represented approximately 6% and 5% of revenues in the six months endedJune 30, 2007 and 2006, respectively.

*Depreciation ExpenseRelated to Cost of Sales:**  *Depreciation expense related to cost of sales increased$0.6 million due to additional depreciation expense associated with productionand distribution equipment placed in service during 2006 and early 2007,partially offset by the effect of asset dispositions and assets becoming fullydepreciated.

*Operating Expenses:*   Operatingexpenses decreased $3.3 million from the six months ended June 30,2006 to the six months ended June 30, 2007. This decrease is primarily dueto a decrease of $2.8 million in accrued incentive compensation and a $1.0million decrease in professional services costs. Included in professionalservices for the six months ended June 30, 2006 is $0.6 million related tothe secondary stock offering completed in May 2006 and $0.5 millionrelated to an acquisition which was not completed. These decreases werepartially offset by an increase of $0.7 million in labor and benefit costs.

*Depreciation andAmortization:*   Depreciation and amortizationincreased $0.2 million from the six months ended June 30, 2006 to thesix months ended June 30, 2007. This increase was primarily due toadditional amortization expense associated with the intangible assets recorded in connectionwith the acquisitions completed in 2006 in the six months ended June 30,2007.

*Impairment of assets:*   Duringthe three months ended June 30, 2006, we reviewed two pieces of realestate in our ice business segment in accordance with SFAS No. 144, “**Accounting for the Impairment or Disposal ofLong-Lived Assets**”,as a result of a pending sale of one property and physical damage to another. Asa result of this review, we recorded an impairment charge of $0.4 million.

*Interest expense, net:**  *Net interest expense increased $0.9 million from thesix months ended June 30, 2006 to the six months ended June 30, 2007,primarily due to scheduled increases in the non-cash interest expenseassociated with our 101⁄2% senior discount notes, higher average balances on ourrevolving credit facility and an increase in the unhedged balance of our termloan, which is subject to market interest rates in excess of the effectivehedge rate.

**Liquidity and Capital Resources**

We intend to fund ourongoing capital and working capital requirements as well as debt service,including our internal growth and acquisitions, through a combination of cashflows from operations and borrowings under our credit facilities.

We generate cash from thesale of packaged ice through traditional delivery methods, by which we manufacture,package and store ice at a central facility and transport it to our customers’retail locations when needed, and through Ice Factories, which manufacture,package and store ice in our customers’ retail locations. Our primary uses ofcash are (a) cost of sales, (b) operating expenses, (c) debtservice, (d) dividends on our common stock, (e) capital expendituresrelated to replacing and modernizing the capital equipment in our traditionalice plants and acquiring and installing additional Ice Factories and (f) acquisitions.Historically, we have financed our capital and working capital requirements,including our acquisitions, through a combination of cash flows fromoperations, borrowings under our revolving credit facilities and operatingleases.

Our ability to generatecash from our operations is subject to weather, general economic, financial, competitive,legislative, regulatory and other factors that are beyond our control. As aresult, we cannot assure you that our business will generate sufficient cashflow from operations in amounts sufficient to enable us to service our debt andto fund our other liquidity needs. If we do not have sufficient liquidity, wewill have to take actions such as reducing or delaying the payment of dividendsto our common stockholders, strategic acquisitions, investments and jointventures, selling assets, restructuring or refinancing our debt or seekingadditional equity capital. We cannot assure you that any of these remediescould, if necessary, be effected on commercially reasonable terms, or at all.In addition, the terms of 

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existingor future debt instruments, including the terms of the credit agreementgoverning our credit facilities and the Reddy Holdings indenture, may restrictus from adopting some of these alternatives.

During the six monthsended June 30, 2007, capital expenditures totaled $11.0 million. As wehave consolidated acquisitions into the existing company infrastructure, wehave identified non-core and excess assets which can be disposed of. From timeto time, we also dispose of other assets which are no longer useful in ouroperations. As a result of dispositions of these non-core and excess assets, werealized proceeds of approximately $0.8 million in the six months ended June 30,2007. As a result, our net capital expenditures in the six months ended June 30,2007 were $10.2 million.

In the six months ended June 30,2007, we completed the acquisitions of 13 ice companies for a total cashpurchase price of approximately $18.8 million, including direct acquisitioncosts of $0.4 million. We will continue to evaluate acquisition opportunitiesas they become available. In conjunction with these evaluations, we willconsider our liquidity, availability under our credit facilities, mandatoryprincipal repayments under our debt agreements and availability of othercapital resources.

**Cash Flows for the Six Months Ended June 30, 2007and 2006**

Net cash used by operatingactivities was $1.9 million in the six months ended June 30, 2007,compared to cash provided by operating activities of $8.4 million in the sixmonths ended June 30, 2006. The decrease was primarily due to a decreasein net income of $4.1 million, from $4.5 million to $0.4 million in the sixmonths ended June 30, 2006 to June 30, 2007, respectively. Additionally,there was an increase in cash used by changes in working capital of $5.4million related to reduced incentive compensation accruals and the timing ofpayments to vendors.

Net cash used in investingactivities was $29.0 million and $21.1 million in the six months ended June 30,2007 and 2006, respectively. The increase in net cash used in investingactivities was primarily due to an increase in acquisitions. During the sixmonths ended June 30, 2007, we completed 13 acquisitions for a total costof $18.8 million. During the same period in 2006, we completed sevenacquisitions for a total cost of $10.1 million.

Net cash provided byfinancing activities was $3.5 million in the six months ended June 30,2007, compared to cash used by financing activities of $8.6 million in the sixmonths ended June 30, 2006. The change in cash flows from financingactivities is primarily due to higher borrowings on our revolving creditfacility in 2007 to fund increased acquisition activity and the reduction incash flow from operations.

**Long-term Debt and Other Obligations**

***Overview.****  *At June 30, 2007, we had approximately $392.6million of total debt outstanding as follows:

·                    $131.3 millionof Reddy Holdings’ 101⁄2% senior discount notes due 2012 (net of unamortized discountof $19.2 million);

·                    $240.0 millionoutstanding term loan under our credit facility which matures on August 12,2012;

·                    $21.2million of outstanding balances under our revolving credit facility whichmatures on August 12, 2010; and

·                    $0.1 millionof other debt.

On October 27,2004, Reddy Holdings issued $151.0 million in aggregate principal amountat maturity of 101⁄2% senior discount notes due 2012. Each senior discount notehad an initial accreted value of $663.33 per $1,000 principal amount atmaturity. The accreted value of each senior discount note increases from thedate of issuance until November 1, 2008 at a rate of 101⁄2% per annum suchthat the accreted value will equal the stated principal amount at maturity on November 1,2008. Thereafter, cash interest will accrue and be payable semi-annually at arate of 101⁄2% per annum. The senior discount notes are unsecured obligations ofReddy Holdings and are:

                  notguaranteed by any of Reddy Holdings’ subsidiaries;

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

                  equalin right of payment with Reddy Holdings’ existing and future unsecured seniorindebtedness;

                  effectivelysubordinated to Reddy Holdings’ existing and future secured debt, includingReddy Holdings’ guarantee of our credit facilities; and

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

The senior 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 restrictdividends from our subsidiaries, merge or sell all or substantially all of theassets or enter into various transactions with affiliates. Prior to November 1,2007, we may redeem up to 35% of the principal amount of the senior discountnotes at a redemption price of 110.5% of the accreted value amount thereof,plus accrued and unpaid interest to the date of redemption, with funds raisedin equity offerings that are specified in the indenture governing the seniordiscount notes. From and after November 1, 2008, we may redeem any or allof the senior discount notes by paying a redemption premium which is initially5.25% of the principal amount at maturity of the notes, and will declineannually to zero commencing on November 1, 2010. If a change of controloccurs on or prior to November 1, 2007, we may, at our option, redeem all,but not less than all, of the senior discount notes at a redemption price equalto the sum of (i) the accreted value of the notes as of the redemptiondate, (ii) a premium equal to 125% of one year’s coupon payment and (iii) anyaccrued and unpaid interest to the date of redemption. If we experience achange of control and do not elect to make the optional redemption described inthe previous sentence, we will be required to make an offer to repurchase thesenior discount notes at a price equal to 101% of their accreted value, plusaccrued and unpaid interest, if any, to the date of purchase. We may also berequired to make an offer to purchase the senior discount notes with proceedsof asset sales that are not reinvested in our business or used to repay otherindebtedness.

Theindenture governing our senior discount notes restricts the amount ofdividends, distributions and other restricted payments we may pay. Under theindenture, we are restricted from paying dividends on our common stock unless,at the time of such payment:

·                    no default orevent of default has occurred and is continuing or would occur as a consequencethereof;

·                    theconsolidated coverage ratio set forth in the indenture governing our seniordiscount notes exceeds 2.0 to 1.0; and

·                    there issufficient capacity under the buildup amount under the indenture governing oursenior discount notes.

The consolidated coverageratio under the indenture governing our senior discount notes means the ratioof our EBITDA for the most recent four fiscal quarters to our consolidatedinterest expense for such four quarter period. “EBITDA” under the indenturegoverning our senior discount notes is defined as the sum of our consolidatednet income plus our income tax expense, our interest expense, our depreciationand amortization expense, unrealized non-cash gains or losses or non-cashcharges in respect of hedging obligations required to be taken under generallyaccepted accounting principles, unrealized foreign currency translation gainsor losses and all other non-cash charges, except to the extent representing anaccrual or reserve for a future cash expenditure). “Consolidated net income”under the indenture governing our senior discount notes is defined as netincome of Reddy Holdings and its restricted subsidiaries: plus or minus cashdividends received on investments or equity in net losses of persons other thanrestricted subsidiaries, respectively; provided that the following are notincluded in consolidated net income: (i) net income or loss ofsubsidiaries acquired in pooling of interests transactions for any period priorto the date of their acquisition, (ii) any net income of a subsidiaryrestricted in the payment of a 

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dividend(other than certain permitted restrictions, including those under our creditfacilities), (iii) gains or losses from non-ordinary course asset sales, (iv) extraordinarygains or losses, (v) the cumulative effect of changes in accountingprinciples, (vi) non-recurring fees and expenses and write offs ofdeferred financing costs related to the financing transactions in connectionwith the 2003 merger with Packaged Ice, Inc. and, (vii) any fees,charges, costs or expenses relating to our initial public offering and therelated transactions and paid in cash, to the extent deducted in thedetermination of consolidated net income. “Consolidated interest expense” underthe indenture governing our senior discount notes is defined as total interestexpense plus, to the extent not included in total interest expense, (i) interestexpense attributable to capital leases, (ii) amortization of debt discountand issuance costs, (iii) capitalized interest, (iv) non-cash interestexpense, (v) fees on letters of credit, (vi) net payments pursuant tohedging obligations, (vii) dividends accrued on certain disqualified stock(viii) interest incurred in connection with investments in discontinuedoperations, (ix) interest on guaranteed indebtedness and (x) cashcontributions to employee stock ownership plans to the extent they are used topay interest or fees on indebtedness incurred by such plans. We are generallyrequired to calculate our consolidated coverage ratio on a pro forma basis togive effect to incurrences and repayments of indebtedness as well asacquisitions and dispositions.

The buildup amount equals50% of our consolidated net income accrued during the period (treated as oneaccounting period) from July 1, 2003 to the end of the most recent fiscalquarter for which internal financial statements are available (or, if suchconsolidated net income is a deficit, minus 100% of such deficit), plus, thenet cash proceeds of the issuance of capital stock, subject to certain exceptions,and any cash capital contribution received by us from our stockholders in eachcase after August 15, 2003 plus the amount by which our indebtedness isreduced on our balance sheet as a result of the conversion or exchange of suchindebtedness for our capital stock, plus the net reduction in certainrestricted investments made by us, less the amount of certain restrictedpayments we make from time to time, including, among other things, the paymentof cash dividends.

In addition, regardless ofwhether we could make any restricted payments under the buildup amountprovision referred to above, we may (1) make dividend payments at any timein an aggregate amount of up to $15.0 million if no default has occurredand is continuing under the indenture and (2) following our initial publicoffering, pay dividends on our capital stock of up to 6.0% per year of the cashproceeds (net of underwriters’ fees, discounts, commissions or other expensespaid by us) received by us from all such public equity offerings subject tospecified conditions. Accordingly, we are able to pay approximately$7.0 million annually in dividends under this 6.0% provision. However, theamount of dividend payments permitted under this 6.0% provision willcorrespondingly reduce the amount we would otherwise have available to us underthe buildup amount for restricted payments, including dividends. At June 30,2007, Reddy Holdings had $8.3 million of cash on hand that was not subjectto any restrictions under our credit facilities.

***Credit Facilities.******  ***On August 12,2005, Reddy Group, our wholly-owned subsidiary, entered into new creditfacilities in an aggregate principal amount of $300 million with asyndicate of banks, financial institutions and other entities as lenders,including Credit Suisse, Cayman Islands Branch, as Administrative Agent, CIBCWorld Markets Corp., Bear Stearns Corporate Lending Inc. and LehmanCommercial Paper, Inc. The credit facilities provided for a seven-yearterm loan in the amount of $240 million and a five-year revolving creditfacility in the amount of $60 million. Proceeds of the term loan were usedto repay our prior senior credit facility.

On January 1, 2007,Reddy Group merged with its wholly-owned subsidiary, Reddy Ice Corporation,with Reddy Corp. being the surviving entity. The credit facilities were amendedon that date to allow the merger and to provide for the assumption of thecredit facilities by Reddy Corp.

At June 30, 2007, wehad $31.9 million of availability under the revolving credit facility, whichwas net of outstanding standby letters of credit of $6.9 million andoutstanding balances under our revolving credit facility of $21.2 million. Thestandby letters of credit are used primarily to secure certain insurance 

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obligations.In connection with the renewal of certain insurance policies in the secondquarter of 2007, our outstanding standby letters of credit will increase by approximately$1 million during the third quarter of 2007. However, later in 2007, thisadditional new collateral will be partially offset by reductions in collateralrelated to earlier policy years.

Principal balances outstandingunder our credit facilities bear interest per annum, at our option, at the sumof the base rate plus 0.75% or LIBOR plus 1.75%. The base rate is defined asthe greater of the prime rate (as announced from time to time by theAdministrative Agent) or the federal funds rate plus 0.5%. At June 30,2007, the weighted average interest rate of borrowings outstanding under thecredit facilities was 7.2%. interest on base rate loans is payable on the lastday of each quarter. Interest on LIBOR loans is payable upon maturity of theLIBOR loan or on the last day of the quarter if the LIBOR loan exceeds90 days. Reddy Corp. pays a quarterly fee on the average availability underour existing revolving credit facility based on an annual rate of 0.5% exceptas described below. The terms of the credit facilities prohibit Reddy Corp.from paying dividends and otherwise transferring assets to Reddy Holdings,except for certain limited dividends, the proceeds of which must be used tomaintain Reddy Holdings’ corporate existence.

In addition, our creditfacilities will allow us to incur up to an additional $80 million ofincremental term loans under our credit facilities, subject to certainconditions. No lenders have committed to provide the incremental term loans. Inthe event that we incur incremental term loans that mature on or before the oneyear anniversary of the final maturity of the existing term loans and that bearinterest with margins higher than the margin applicable to any term loansoutstanding under our credit facilities, the margins applicable to the existingterm loans will be increased to equal the margins applicable to the incrementalterm loans. In the event that we incur incremental term loans that mature afterthe one-year anniversary of the final maturity of the existing term loansand that bear interest with margins more than 0.25% higher than the marginsapplicable to any term loans outstanding under our credit facilities, themargins applicable to the existing term loans will be increased to equal themargins applicable to the incremental term loans, less 0.25%.

Our credit facilities donot require any scheduled principal payments prior to the stated maturitydates. Subject to certain conditions, mandatory repayments of the revolvingcredit facility and term loan (and if the term loan is no longer outstanding,mandatory commitment reductions of the revolving credit facility) are requiredto be made with portions of the proceeds from (1) asset sales, (2) theissuance of debt securities and (3) insurance and condemnation awards,subject to various exceptions. In the event of a change in control, as definedin the credit facilities, an event of default will occur under the creditfacilities. Under our credit facilities, Reddy Corp. may only pay dividends toReddy Holdings if Reddy Corp.’s total leverage ratio for the most recentlyended fiscal quarter is less than or equal to 3.75 to 1.0. In addition, ourcredit facilities preclude Reddy Corp. from declaring any dividends if an eventof default under the credit facilities has occurred and is continuing. In particular,it will be an event of default if Reddy Corp.’s leverage ratio exceeds 4.0 to1.0 or Reddy Corp.’s interest coverage ratio is less than 3.25 to 1.0.

Our credit facilities contain financial covenants, whichinclude the maintenance of certain financial ratios, as defined in the seniorcredit facility, and is collateralized by substantially all of Reddy Corp.’sassets and the capital stock of all of its subsidiaries. Reddy Holdingsguarantees Reddy Corp.’s senior credit facilities and such guarantee is securedby the capital stock of Reddy Corp. At June 30, 2007, Reddy Corp. was incompliance with these covenants.

Under the restricted payments covenant in our creditfacilities, we generally are restricted from paying dividends. However, thecovenant includes an exception for paying dividends in an amount not greaterthan our Cumulative Distributable Cash for the period (taken as one accountingperiod) from July 1, 2005 to the end of our most recently-ended fiscalquarter for which a covenant compliance certificate under our senior creditfacility has been delivered to the lenders.

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“CumulativeDistributable Cash” is defined under our senior credit facilities as:

(a)    $10,000,000, plus

(b)   “Available Cash” for the period (taken as one accounting period)from July 1, 2005 to the end of our most recently-ended fiscal quarter forwhich a covenant compliance certificate under our senior credit facility hasbeen delivered to the lenders, plus

(c)    the amount of any net cash proceeds received by Reddy Holdingsfrom issuances of shares of Reddy Holdings capital stock after the closing ofour initial public offering to the extent we have contributed such proceeds toReddy Corp., less

(d)   (i) the amount of payments made by Reddy Corp. to ReddyHoldings to fund dividend payments on, or repurchases of, Reddy Holdingscapital stock or to pay cash interest expense on, or redeem or repurchase,Reddy Holdings notes, (ii) amounts used to make restricted investments,less

(e)    to the extent occurring after the end of the most recently endedreference period and until taken into account in determining Available Cash forthe fiscal quarter in which such event has occurred, (i) cash payments foracquisitions (except to the extent funded with indebtedness or proceeds ofasset sales or casualty events) and (ii) mandatory repayment of loansunder our new credit facilities (other than under the revolving creditfacility) during a dividend suspension period.

“AvailableCash” for any fiscal quarter is defined under our senior credit facilities as:

(a)    Adjusted EBITDA for such fiscal quarter, plus,

(b)   to the extent not included in net income used to calculate for anyfiscal quarter such Adjusted EBITDA, the cash amount realized in respect ofextraordinary, non-recurring or unusual gains, and less

(c)    (i) to the extent included in net income used to calculatefor any fiscal quarter such Adjusted EBITDA, the amount of Reddy Corp.’s cashinterest expense, Reddy Corp.’s cash tax expense, the cash cost of anyextraordinary, nonrecurring or unusual losses, cash payments on account ofnon-cash losses or non-cash charges, (ii) capital expenditures (except tothe extent funded with indebtedness (other than the revolving credit facility)or proceeds of asset sales or casualty events), (iii) cash payments foracquisitions (except to the extent funded with indebtedness or proceeds ofasset sales or casualty events) and (iv) payments and prepayments of theprincipal amount of indebtedness (other than payments and prepayments of therevolving credit facility) other than to the extent funded with indebtedness(other than indebtedness under our revolving credit facility).

“AdjustedEBITDA” is defined under our senior credit facilities to be the sum of:

(a)    net income, plus

(b)   to the extent deducted in determining net income, the sum of (i) amountsattributable to depreciation and amortization, (ii) income tax expense, (iii) interestexpense, (iv) any other non-cash charges (less non-cash income) for whichno cash reserves (or receivables) have been or will be set aside (or created)including non-cash compensation expenses, (v) any loss from theextinguishment of indebtedness, (vi) any fees paid prior to the closingdate of our initial public offering in respect of the monitoring agreement, (vii) transactionadjustments (as defined in our senior credit facility and including the feesand expenses incurred in connection with our initial public offering and therelated transactions), (viii) all fees and expenses incurred in connectionwith permitted acquisitions to the extent accounted for as expenses, (ix) forthe four fiscal quarters ending after September 30, 2004, an amount equalto the sum of (x) the special transaction payments paid to certain membersof management and certain directors in connection with the issuance of thesenior discount notes not to exceed $1.3 million plus (y) an amount not toexceed $4.0 million for other expenses incurred in connection with the issuanceof the senior discount notes and the related amendment to our senior creditfacilities which was in effect at the time of the senior discount notesoffering.

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Under Reddy Corp.’s creditfacilities, Reddy Corp. may only pay dividends to us to make dividend paymentson our common stock if Reddy Corp.’s total leverage ratio for the most recentlyended fiscal quarter for which a covenant compliance certificate has been deliveredis less than or equal to 3.75 to 1.0. If at the end of any fiscal quarter,Reddy Corp.’s leverage ratio is greater than 3.75 to 1.0, and therefore ReddyCorp. is not permitted to pay dividends, Reddy Corp. will be required by ReddyCorp.’ credit facilities to apply 50% of Reddy Corp.’s Available Cash generatedduring each such quarter to make a mandatory prepayment of the loans underReddy Corp.’s credit facilities.

In addition, we and Reddy Corp. will be precluded frompaying any dividends if an event of default under Reddy Corp.’s creditfacilities has occurred and is continuing. In particular, it will be an eventof default if Reddy Corp.’s total leverage ratio exceeds 4.0 to 1.0 or ReddyCorp.’s interest coverage ratio is less than 3.25 to 1.0.

The following table presents Adjusted EBITDA on a proforma basis after giving effect to the adjustments permitted under thedescription of the definition of Adjusted EBITDA set forth above. AdjustedEBITDA is different from EBITDA that is derived solely from GAAP components.Adjusted EBITDA should not be construed as an alternative to net loss, cashflows from operations or net cash from operating or investing activities asdefined by GAAP, and it is not necessarily indicative of cash available to fundour cash needs as determined in accordance with GAAP. In addition, not allcompanies use identical calculations, and this presentation may not becomparable to similarly titled measures of other companies. A reconciliation ofnet income to EBITDA and Adjusted EBITDA follows the table.

| ** **                 | ** ** | **Twelve Months**       | ** ** |
|----------------------------|------------|------------------------------|------------|
| ** **                 | ** ** | **Ended June 30,** | ** ** |
| ** **                 | ** ** | **2007**                     | ** ** |
| ** **                 | ** ** | **(in thousands)**      | ** ** |
| Pro forma adjusted  EBITDA |       |                         | $          | 86,365 |   |   |
| Total leverage ratio       |       |                         | 3.1:1.0    |   |   |
| Interest coverage ratio    |       |                         | 5.3:1.0    |   |   |

 

The following tablesets forth a reconciliation of net loss to EBITDA and Adjusted EBITDA:

| ** **                                     | ** ** | **Twelve Months**       | ** ** |
|------------------------------------------------|------------|------------------------------|------------|
| ** **                                     | ** ** | **Ended June 30,** | ** ** |
| ** **                                     | ** ** | **2007**                     | ** ** |
| ** **                                     | ** ** | **(in thousands)**      | ** ** |
| Net income                                     |       |                         | $          | 10,600 |   |   |
| Depreciation expense  related to cost of sales |       |                         | 20,110     |   |   |
| Depreciation and  amortization expense         |       |                         | 6,091      |   |   |
| Interest expense                               |       |                         | 30,590     |   |   |
| Interest income                                |       |                         | (920       | ) |   |
| Income tax expense                             |       |                         | 8,103      |   |   |
| EBITDA                                         |       |                         | 74,574     |   |   |
| Other non-cash charges:                        |       |                         |       |   |   |
| Stock-based compensation  expense              |       |                         | 4,463      |   |   |
| Loss on dispositions of  assets                |       |                         | 1,250      |   |   |
| Impairment of assets                           |       |                         | 3,348      |   |   |
| Adjusted EBITDA                                |       |                         | $          | 83,635 |   |   |
| Acquisition adjustments  (a)                   |       |                         | $          | 2,730 |   |   |
| Pro forma adjusted EBITDA                      |       |                         | $          | 86,365 |   |   |

 

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(a)           Representsthe incremental Adjusted EBITDA of acquired businesses as if each acquisitionhad been consummated on the first day of the period presented. All acquisitionsincluded herein were consummated on or before June 30, 2007.

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***Interest Rate Hedging Agreement.******  ***Effective September 12,2005, we entered into an interest rate hedging agreement (the “Hedge”) to fixthe interest rate on a portion of our term loan facility. The Hedge has a termof three years and ten months and an initial notional balance of $220 million.The notional balance decreases by $20 million on October 12 of eachof the next three years, beginning on October 12, 2006. we pay a fixedrate of 4.431% on the notional balance outstanding and receives an amount equalto 3-month LIBOR. Any net payable or receivable amount is settledquarterly. If we had been required to settle the Hedge as of June 30,2007, we would have received $2.8 million. In accordance with hedgeaccounting rules, the fair value of the Hedge is included in the caption “OtherAssets” in the consolidated balance sheet. Changes in the fair value of theHedge are recorded as “Other Comprehensive Income” in the consolidatedstatement of stockholders’ equity. No gain or loss was recognized in anyperiods presented in the consolidated statement of operations.  In the event that the Merger is completed ,the existing credit facilities will be repaid. We are currently evaluating whether the Hedge will be terminated orredesignated as a hedge of the anticipated future cash flows of the variablerate debt that is anticipated to be incurred in connection with theMerger.  In the event the CreditFacilities and repaid and the Hedge is terminated, the amount reported in“Other Comprehensive Income” will be reclassified to a gain or loss in theconsolidated statement of operations.  Asof June 30, 2006, such a reclassification would result in a gain of$1.7 million, net of tax.We are exposed to risk of loss in the event ofnon-performance by the counterparty to the Hedge; however, we do not anticipatenon-performance by the counterparty.

***Liquidity Outlook.***   Dueto the seasonal nature of our business, we record the majority of our revenuesand profits during the months of May through September. The majority ofthe cash generated from those operations is received between July andNovember. We have used the excess cash generated from our 2006 selling seasonto fund our operations during the winter months, as well as capitalexpenditures, acquisitions and dividends to our common stockholders.

We estimate that ourcapital expenditures for 2007 will be approximately $19 million to$21 million, which will primarily be used to maintain and expand ourtraditional ice operations. There can be no assurance that our capitalexpenditures will not exceed this estimate. In the normal course of ourbusiness, we dispose of obsolete, worn-out and unneeded assets. As a result ofdispositions of excess assets, we estimate that we will generate proceeds ofapproximately $2 million to $3 million in 2007 for net capitalexpenditures of approximately $16 million to $19 million.

Based on our expectedlevel of operations, we believe that cash flows from operations, together withavailable borrowings under our revolving credit facility, will be adequate tomeet our future liquidity needs for at least the next twelve months. As of July 24,2007, we had approximately $13.7 million of cash on hand and $22.7 millionof availability under our revolving credit facility, which reflectedoutstanding standby letters of credit of $6.9 million and outstandingbalances of $30.4 million under our revolving credit facility.

From January 1, 2007through July 23, 2007, we completed 13 acquisitions with an aggregateacquisition cost of $18.8 million. We intend to pursue additional acquisitionsthroughout the remainder of 2007, although such future acquisitions are subjectto significant uncertainties as to timing, price and availability.

On April 25, 2007, weannounced that our board of directors had approved an increase in our annualdividend rate from $1.60 per share to $1.68 per share, effective for dividendsexpected to be declared for the quarter ending June 30, 2007.

As noted previously, werecord the majority of our sales and profits during the months of May throughSeptember and the majority of the cash generated from those operations isreceived in August through November. During those months in 2007, weexpect to repay all amounts borrowed under our revolving credit facility in thespring, fund dividends on our common stock, fund current capital expendituresand debt service and build up cash balances.

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**Recently Adopted Accounting Pronouncements**

In June, 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”)No. 48, “Accounting for Uncertainty in Income Taxes”. FIN 48 clarifies theaccounting for uncertainty in income taxes by prescribing the minimum recognitionthreshold a tax position is required to meet before being recognized in thefinancial statements. FIN 48 utilizes a two-step approach for evaluating taxpositions. The first step, recognition, occurs when an enterprise concludesthat a tax position, based solely on its technical merits is more likely thannot to be sustained upon examination. The second step, measurement, is onlyaddressed if the recognition criteria have been satisfied. In the measurementprocess, the tax benefit is measured at the largest amount of benefit,determined on a cumulative probability basis, that is more likely than not tobe realized upon final settlement. FIN 48’s use of the term “more likely thannot” consistent with how the term is used in SFAS No. 109 (i.e. the likelihoodof an occurrence greater than 50%). FIN 48 applies to all tax positions relatedto income taxes subject to SFAS 109. We adopted FIN 48 as of January 1,2007. As a result of adoption, we recognized a $2.9 million increase in ourliability for unrecognized tax benefits. This also resulted in a $1.8 millionincrease to our January 1, 2007 retained deficit balance and a $1.1million increase in federal deferred tax benefits related to the federalbenefit of the unrecognized tax position and a $0.8 million reclassification ofamounts previously reserved at December 31, 2006. Adoption of thisstandard had no impact on our operating results.

**New Accounting Pronouncements**

In September 2006,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 157, “Fair Value Measurements”. SFAS No. 157defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and expands disclosures about fairvalue estimates. This standard is effective for fiscal years beginning after November 15,2007. We are currently evaluating the impact that this standard may have on ourresults of operations and financial position.

In February 2007, theFASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities, including an Amendment of FASB Statement No. 115”.SFAS No. 159 permits entities to choose to measure many financialinstruments and certain other items at fair value that are not currently requiredto be measured at fair value. The objective is to improve financial reportingby providing entities with the opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently withouthaving to apply complex hedge accounting provisions. SFAS No. 159 iseffective for fiscal years beginning after November 15, 2007, althoughearlier adoption is permitted. We are currently evaluating the impact that thisstandard may have on our results of operations and financial position.

**Off-Balance Sheet Arrangements**

We have no off-balancesheet arrangements that have or are reasonably likely to have a current orfuture effect on our financial condition, changes in financial condition,revenues or expenses, results of operations, liquidity, capital expenditures orcapital resources.

**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. If we experience an extended period ofhigh inflation, which affects multiple expense items, we believe that we willbe able to pass on these higher costs to our customers.

The ice business is highlyseasonal, with the bulk of demand coming in the warmer spring and summermonths. Accordingly, we experience seasonal fluctuations in our net sales andprofitability. We make a 

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disproportionateamount of our sales in the second and third calendar quarters. We alsotypically have net income in these same periods, whereas we typicallyexperience net loss in the first and fourth calendar quarters. We believe thatover two-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. This beliefis consistent with historical trends. As a result of seasonal revenue declinesand the lack of proportional corresponding expense decreases, we will mostlikely experience lower profit margins and even losses during the first andfourth calendar quarters. In addition, because our operating results dependsignificantly on sales during our peak season, our quarterly results ofoperations may fluctuate significantly as a result of adverse weather duringthis peak selling period if the weather is unusually cool or rainy on a morenational or regional basis.

***Item 3.****                          Quantitativeand Qualitative Disclosures About 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 risk category is interest rate risk.

We are exposed to somemarket risk due to the floating interest rates under our senior creditfacilities. Principal balances outstanding under the term loan and therevolving credit facility bear interest, at our option, at the LondonInter-Bank Offered Rate (“LIBOR”) plus 1.75% or the prime rate (as announcedfrom time to time by the administrative agent) plus 0.75%.

Effective September 12,2005, we entered into an interest rate hedging agreement (the “Hedge”) to fixthe interest rate on a portion of the term loan outstanding under the seniorcredit facility. See “Liquidity and Capital Resources—Interest Rate HedgingAgreement”.

As of June 30, 2007,the senior credit facility had an outstanding principal balance of$261.2 million at a weighted average interest rate of 7.2% per annum.Including the effect of the Hedge, the weighted average interest rate was 6.5%.At June 30, 2007, the 30-day LIBOR rate was 5.3%. If LIBOR were toincrease by 1% from that level, the annual increase in interest expense, givenour principal balances at June 30, 2007 and the effect of the Hedge, wouldbe approximately $0.6 million.

***Item 4.****                          Controlsand Procedures*

The Company, under thesupervision and with the participation of its management, including the ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofthe design and operation of our “disclosure controls and procedures” (asdefined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934 (the “Exchange Act”)) as of the end of theperiod covered by this report. Based on that evaluation, the Chief ExecutiveOfficer and the Chief Financial Officer concluded that our disclosure controlsand procedures were effective as of June 30, 2007 to ensure thatinformation relating to us and our consolidated subsidiaries required to bedisclosed in our reports filed or submitted under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and that such information is accumulated and communicatedto our management, including our Chief Executive Officer and Chief FinancialOfficer, as appropriate to allow timely discussions regarding requireddisclosure. It should be noted, however, that the design of any system ofcontrols is limited in its ability to detect errors, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions, regardless of how remote. There has been no changein our internal control over financial reporting during the quarter ended June 30,2007 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

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**PART II- OTHER INFORMATION**

**Item 1.****                        *Legal Proceedings***

We are from time to timeparty to legal proceedings that arise in the ordinary course of business. We donot believe that the resolution of any such threatened or pending legalproceedings will have a material adverse affect on our financial position, resultsof operations or liquidity.

On July 9, 2007, wereceived notice that a putative derivative complaint was filed by anentity identifying itself as one of our stockholders in the District Court ofTexas, Collin County, naming us as a nominal defendant and naming all of themembers of our board of directors and GSO Capital Partners LP asdefendants. The complaint alleges that our board of directors breached itsfiduciary duties in connection with its approval of the proposed mergertransaction. Based on the facts known to date, management believes that theclaims asserted are without merit and intends to defend against the suitvigorously. This lawsuit is still in a preliminary stage and the ultimateoutcome is impossible to determine at this time. An unfavorable result inexcess of the available insurance coverage could have a material adverse effecton the our consolidated financial position, results of operations or cashflows.

**Item 1A.****                *Risk Factors***

There have been nomaterial changes in our risk factors from those disclosed in our Annual Reporton Form 10-K/A for the year ended December 31, 2006, except asdescribed below.

***We will incur substantial expenses even if the Mergeris not completed.***

The Merger may not becompleted. Whether or not the Merger is completed, we will incur substantialexpenses in pursuing the Merger. In addition, if the Merger Agreement isterminated under certain circumstances, we may be required to pay Frozen, LLC atermination fee of $21 million under the Merger Agreement or, under certaincircumstances, reimburse up to $7 million of Frozen, LLC’s expenses inconnection with the Merger. These costs may have an adverse effect on ourfinancial condition and results of operations. In addition, the terminationfees and expense reimbursement provisions of the Merger Agreement coulddiscourage other potential acquirers from seeking to enter into a businesscombination with us.

***Failure to complete the Merger could cause ourstock price to decline and otherwise harm our business.***

If the Merger is notcompleted, our stock price may decline to the extent that the current marketprice reflects a market assumption that the Merger will be completed or themarket’s perceptions of us change as a result of the reasons why the Merger wasnot consummated.

***If the conditions to the Merger are not met, the Mergerwill not occur.***

Specified conditions setforth in the Merger Agreement must be satisfied or waived to complete themerger. We cannot assure you that each of the conditions will be satisfied orwaived. If the conditions are not satisfied or waived, the Merger will notoccur or will be delayed, and we may lose some or all of the intended benefitsof the Merger.

The Merger is conditionedon the receipt of the required approval of our stockholders. If this approvalis not received, the Merger cannot be completed even if all of the otherconditions to the Merger are satisfied or waived.

If the Merger isterminated and our board of directors determines to seek another merger orbusiness combination, there can be no assurance that it will be able to find aparty willing to pay an equivalent or more attractive price than the price tobe paid in the Merger.

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***After the Merger, former Reddy Ice stockholderswill have no interest in future earnings or growth.***

The Merger is a “going-private”transaction. If the Merger is completed, we will be a wholly owned subsidiaryof Frozen, LLC and Hockey Parent Inc. In exchange for the cash considerationset forth in the Merger Agreement, former stockholders will have no remaininginterest in any of our future earnings or growth. If the Merger is completed,we will cease to be a public company and our stock will no longer be traded onthe New York Stock Exchange.

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

None.

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

None.

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

On May 17,2007, we held our annual meeting of stockholders. At the annual meeting, thefollowing matters were voted upon:

1.                Electionof six directors to hold office until the next annual meeting of stockholdersand until their respective successors are duly elected and qualified;

2.                Aproposal to approve the amended Reddy Ice Holdings, Inc. 2005 Long Term Incentiveand Share Award Plan; and

3.                Aproposal to ratify the appointment of Deloitte & Touche LLP as thecompany’s independent auditors for the fiscal year ending December 31,2007.

A total of 21,809,395 shares of the company’s commonstock, par value $0.01 per share, were entitled to vote at the meeting. Ofthese shares, 20,904,622 shares were represented in person or by proxy at themeeting and voted as follows:

Withrespect to each of the following six nominees for election to the Board ofDirectors, shares were voted as follows:

| ** **           | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|----------------------|------------|--------------------|------------|-------------------------|------------|
| William P. Brick     |       | 20,718,663         |       |                    | 185,989    |   |   |
| Theodore J. Host     |       | 20,774,718         |       |                    | 129,904    |   |   |
| Michael S. McGrath   |       | 20,568,744         |       |                    | 335,878    |   |   |
| Tracy L. Noll        |       | 20,795,695         |       |                    | 108,927    |   |   |
| Robert N. Verdecchio |       | 20,777,183         |       |                    | 127,439    |   |   |
| Jimmy C. Weaver      |       | 20,808,137         |       |                    | 96,485     |   |   |

 

With respect to theapproval of the amended Reddy Ice Holdings, Inc. 2005 Long Term Incentiveand Share Award Plan, shares were voted as follows: 17,169,298 for; 806,213votes against; and 41,119 votes withheld.

With respect to theappointment of Deloitte & Touche LLP as the company’s independentauditors for the fiscal year ending December 31, 2007, shares were votedas follows: 20,866,998 for; 12,169 votes against; and 25,453 votes withheld.

**Item5.**                        *Other Information*

None.

**Item 6.**                        *Exhibits*

See Index to Exhibits on page 36.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                          |   | **REDDY ICE HOLDINGS, INC.** |
|--------------------------|--------|------------------------------|
| Date: July 26, 2007 |   | By:                          | /s/ JIMMY C. WEAVER |
|                     |   |                         | Jimmy C. Weaver |
|                     |   |                         | Chief Executive Officer |
| Date: July 26, 2007 |   | By:                          | /s/ STEVEN J. JANUSEK |
|                     |   |                         | Steven J. Janusek |
|                     |   |                         | Chief Financial and Accounting Officer |

 

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**INDEXTO EXHIBITS**
| Exhibit No. | ** ** | ** ** | **Description** | ** **                                                                                                                                               |
|------------------|------------|------------|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
|             | 31.1† |       |            | Rules 13a-14(a) and  15d-14(a) Certification of Chief Executive Officer, pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|             | 31.2† |       |            | Rules 13a-14(a) and  15d-14(a) Certification of Chief Financial Officer, pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|             | 32.1† |       |            | Section 1350  Certification of Chief Executive Officer, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                 |
|             | 32.2† |       |            | Section 1350  Certification of Chief Financial Officer, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                 |

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†                    Filedherewith.

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