GLACIER WATER SERVICES INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
For Annual and Transition Reports Pursuant to sections 13
or 15(d) of the Securities and Exchange act of 1934

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]

For the fiscal year ended: December 31, 2000

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

For the transition period from _____to_____

Commission file number: 1-11012

Glacier Water Services, Inc.
----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)

Delaware 33-0493559
- ------------------------------ -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

2261 Cosmos Court,
Carlsbad, CA 92009
- --------------------------------------- --------------
(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code: (760) 930-2420
----------------
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class Name of Each Exchange on Which Registered

Common Stock, $.01 Par Value Per Share American Stock Exchange

Securities registered pursuant to section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K of any amendment to this
Form 10-K. [_]

As of March 12, 2001, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $26,077,161 (calculated at the average bid
and asked prices on March 12, 2001 on the American Stock Exchange multiplied by
outstanding shares held by non-affiliates). For purposes of the foregoing
calculation, the registrant has excluded from the group of stockholders deemed
to be non-affiliates any outstanding shares of common stock known by the
registrant to be held by its officers, directors and employees.

As of March 12, 2001, the registrant had 2,834,474 shares of common stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III (Items 10, 11, 12 and 13) is incorporated
by reference to portions of the registrant's definitive proxy statement for the
2001 Annual Meeting of Stockholders which will be filed with the Securities and
Exchange Commission within 120 days after the close of the 2000 fiscal year.

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This Annual Report contains "forward-looking" information, as that term is
defined by the federal securities laws, about our financial condition, results
of operations and business. You can find many of these statements by looking for
words such as "may", "will", "expect", "anticipate", "believe", "estimate", and
similar words used in this Annual Report. The forward-looking statements in this
Annual Report are intended to be subject to the safe harbor protection provided
by the federal securities laws.

These forward-looking statements are subject to numerous assumptions, risks
and uncertainties (including trade relations and completion) that may cause our
actual results to be materially different from any future results expressed or
implied in those statements.

Because the statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by the forward-
looking statements. We caution readers not to place undue reliance on these
statements, which speak only as of the date of this Annual Report.

The cautionary statements set forth above should be considered in
connection with any subsequent written or oral forward-looking statements that
we or persons acting on our behalf may issue. We do not undertake any obligation
to review or confirm analysts' expectations or estimates or to release publicly
any revisions to any forward-looking to reflect events or circumstances after
the date of this report or to reflect the occurrence of unanticipated events.

PART I

Item 1. Business

Introduction
- ------------

Glacier Water Services, Inc., a Delaware corporation ("Glacier" or the
"Company"), is the leading provider of high quality, low priced drinking water
dispensed to consumers through self-service vending machines. Since its
inception in 1983, the Company has experienced significant growth in machine
placements and has created an extensive network of water vending machines
located throughout the United States. The Company's water vending machines are
placed at supermarkets and other retail locations in order to take advantage of
the regular customer traffic at such locations.

The Company's internally developed and manufactured water vending machines
are connected to the municipal water source at each of the retail locations. The
water vending machines reduce impurities in the water through a combination of
micron filtration, reverse osmosis, carbon absorption and ultraviolet
sterilization. The Company charges significantly less than the price of water
sold off-the-shelf in retail locations or sold through home delivery services.
The Company's water vending machines are clustered in close proximity to one
another within the geographic areas served in order to provide cost-effective,
quality service. Each water vending machine is generally serviced and tested
weekly.

Historically, the Company has operated water vending machines designed
primarily for outside use in warm-weather climates. Because it is impractical to
use outdoor vending machines in cold-weather climates, the Company has developed
a new water vending machine specifically designed to be installed inside retail
locations. The "in-store" machine is smaller and has a sleeker exterior, making
it more compatible with an interior retail layout. As of December 31, 2000, the
Company had 2,271 in-store machines in operation. The in-store machines afford
the Company significant opportunities for continued expansion into new markets
and to add in-store machines at existing outside machine locations.

In addition to its growth strategy, the Company intends to maintain its
leading position in the water vending industry by: (i) providing high quality,
low priced water to consumers; (ii) developing and maintaining good

1

relationships with retail accounts; (iii) increasing brand awareness; and (iv)
maximizing operating efficiencies and asset productivity.

Business Background
- -------------------

The following table presents the number of machines installed annually since
December 31, 1995:

Total installed machines as of December 31, 1995...... 8,518
Machines added during the year:
1996................................................. 646
1997................................................. 3,280
1998................................................. 1,258
1999................................................. 114
2000................................................. (369)
-------
Total installed machines as of December 31, 2000.............. 13,447
=======

The net reduction of machines in operation as of December 31, 2000 as
compared to the prior year end was due primarily to the discontinuance of the
Company's operation in Mexico City, Mexico during the third quarter of fiscal
2000.

Total machines installed as of December 31, 2000 are distributed by state
as follows:

California............................................ 6,923
Texas ............................................. 1,622
Florida ............................................. 1,634
Arizona ............................................. 837
Nevada ............................................. 354
Other ............................................. 2,077
-------
Total ............................................. 13,447
=======

The placement of the Company's water vending machines at retail locations
is based upon a thorough review of each site. Included in the site review is an
analysis of the surrounding trade area in order to determine the neighborhood
demographics, the level of overall retail activity, the level of direct
competition and the proximity of the site to other water vending machines
operated by the Company. Further, the Company reviews each site in order to
ensure high visibility and easy access for the consumer, along with appropriate
access to the retailer's water supply and power source. Upon completion of this
review, the Company makes a determination as to the viability of the location
and whether a single machine or multiple machines are required at the time of
initial installation. With large supermarket chains, the Company generally
places machines at all of the chains' locations as part of its business
agreements. To attain optimum efficiency, multiple vending machines may be
installed at a site if the volume of sales so warrants.

Glacier's internally developed water vending machines utilize micron
filtration, reverse osmosis, carbon absorption and ultraviolet sterilization in
order to provide high quality drinking water. The design of the Company's
machines provides a high degree of reliability and serviceability through the
use of interchangeable parts and a durable fiberglass cabinet. The machines are
also designed to be easy for consumers to use, with clear and simple
instructions.

The Bottled Water Industry
- --------------------------

The bottled water market in the United States is comprised of four
segments: non-sparkling, sparkling, club soda/seltzer and imported water.
Nonsparkling water is the segment in which the Company competes and is consumed
as an alternative to tap water. Nonsparkling water is distributed through three
principal channels: packaged water sold off-the-shelf in retail locations,
packaged water delivered to homes and offices and water sold through vending
machines. Like water sold off-the-shelf or through home delivery services,
vended water is

2

processed using the reverse osmosis or deionization methods. Although equivalent
in quality, vended water is sold at a substantially lower price than off-the-
shelf and delivered water. Vended water eliminates two principal cost
components: packaging, because consumers provide their own containers, and
transportation.

Business Strategy
- -----------------

Provide High Quality, Low Priced Drinking Water. The Company intends to
maintain its leading position in the water vending industry by providing high
quality, low priced drinking water delivered to consumers through a network of
conveniently located water vending machines. In order to maintain the Company's
superior quality standards, the Company provides frequent, regular and reliable
service and support to its network of water vending machines. Generally, the
Company's service technicians visit and service each vending machine on a weekly
basis. The service technicians test the quality of the Company's processed water
in order to assure compliance with all Company, federal, state and local
standards. The Company believes that providing clean, operating water vending
machines is a significant factor in the Company's ability to continue to build
consumer confidence and usage.

The Company's drinking water competes with nonsparkling water sold in
containers inside retail outlets, with water sold in containers delivered
directly to homes and offices, and other water vending machine operators. The
principal costs associated with water sold off-the-shelf and through home
delivery are packaging and distribution, which costs are reflected in the retail
price to the consumer. Because the Company's water is processed on-site inside
its vending machines and the consumer provides the container for the Company's
product, the Company is able to avoid the packaging and distribution costs
incurred by its competitors. Accordingly, the Company passes on these savings to
consumers by generally charging a retail price of $0.25 to $0.39 per gallon,
compared with retail pricing ranging from approximately $0.69 to over $1.00 per
gallon for water sold in containers in retail outlets. Nonsparkling water sold
in containers delivered directly to consumers' homes generally sells at an
effective price in excess of $1.00 per gallon, including the cost of renting the
dispensing unit.

Develop and Maintain Relationships With Retail Accounts. The Company
arranges to place its outdoor and in-store water vending machines on the
premises of supermarkets and other retail locations. The Company provides the
machines and pays for all installation costs, while the retailer provides and
pays for the required municipally supplied water and for the electricity to
operate the machines. The Company generally pays monthly commissions to the
retailers based upon a percentage of sales. The Company believes it can continue
to capitalize on its existing relationships to place in-store water vending
machines at locations where the Company has already successfully placed its
outdoor water vending machines, as retailers become increasingly cognizant of
the growing demand for vended water.

Substantially all of the Company's arrangements with its retail trade
accounts are evidenced by written contracts which have terms that generally
range from three to five years and contain termination clauses as well as
automatic renewal clauses. During the term of these agreements, the Company
usually has the exclusive right to provide water vending machines at specified
locations. The Company aggressively competes to maintain existing retail
accounts and to establish new retail relationships. In some cases, the Company
has provided marketing incentives in order to encourage certain retailers to
promote the Company's products. The loss of any significant retail account could
have a material adverse impact upon the Company's financial position.

Increase Brand and Product Awareness. The Company believes that it will
continue to benefit from increasing consumer awareness and trial usage. To date,
the Company has used point-of-purchase signage, special introductory and
promotional pricing, and promotional activities coinciding with the installation
of new machines as its primary marketing tools. Additionally, since 1994, with
the introduction of a new logo, the Company's marketing efforts have focused on
the development and promotion of "Glacier" as a recognizable brand to the
consumer and the supermarket industry.

Maximize Operating Efficiencies. The Company creates economies of scale in
its operations and achieves a competitive advantage over other vended water
suppliers by clustering machines in close proximity to one another within the
geographic areas served, in order to provide cost-effective, frequent service.
The clustering has

3

allowed the Company over the last five years to increase the number of machines
serviced by technicians from 40 machines to 70 machines per week. The Company
continuously strives to develop technical improvements to its water vending
machines that make the machines easier to use and service. To this end, the
Company has made improvements to its water vending machines, including the
introduction of its fast-flow nozzle, which increases the speed of water flow
from the Company's water vending machines thereby cutting consumer fill-time,
and the introduction of the Company's dual-vend technology, which doubles the
number of nozzles on a machine to allow consumers to fill two water containers
simultaneously. The Company continually monitors and evaluates demand for the
Company's product at each location. This allows the Company to continue to
evaluate the productivity of each of its machines and relocate machines as
necessary to optimize their productivity on an on-going basis.

Growth Strategy
- ---------------

According to an industry source, there are approximately 72,000 grocery
stores (excluding convenience stores) in the United States. The Company
currently operates water vending machines at less than 10% of such locations.
The Company intends to continue its expansion into these locations. The
Company's growth strategy includes the following:

. Increase Penetration in Existing Domestic Markets. The Company operates
in 35 states throughout the United States through the use of both in-
store and outside water vending machines. Management believes it can
place additional outdoor machines with both existing and new retail
accounts in those states. The Company continually monitors the
performance of retail locations and periodically redeploys machines to
improve revenues and the return on assets deployed. Management also
believes there are significant opportunities to add in-store water
vending machines at its current retail chain account locations without
adversely affecting revenues generated by its outdoor machines at such
locations.

. Expand Into New Domestic Markets. The Company intends to continue
placing its in-store water vending machines inside retail locations in
cold-weather regions throughout the United States. In addition, the
Company intends to expand into new warm-weather markets using both
in-store and outdoor machines at large supermarket and drug store
chains.

. Pursue Select Acquisition Opportunities. The Company intends to
evaluate and pursue select strategic acquisition opportunities, but has
no firm commitments with respect to acquisitions at this time.

The Aqua-Vend Acquisition
- -------------------------

On March 28, 1997, the Company purchased substantially all of the assets of
the Aqua-Vend division of McKesson Water Products Company, a wholly-owned
subsidiary of McKesson Corporation, for a purchase price of approximately
$9,000,000. Prior to the acquisition, Aqua-Vend was the Company's largest
competitor, with approximately 3,000 water vending machines. In connection with
the acquisition, the Company developed a detailed integration plan, which
included the removal of approximately 600 Aqua-Vend machines and the
rationalization and relocation of Aqua-Vend machines within Glacier's network of
machines. During fiscal 1997, the Company substantially completed the Aqua-Vend
integration activities and incurred non-recurring expenses of $3,062,000 related
to these activities.

Competition
- -----------

The bottled water market is highly competitive. The Company competes in the
non-sparkling segment of the bottled water market with companies that deliver
water to homes and offices, sell bottled water off-the-shelf and other water
vending machine operators. Many of the Company's competitors have significantly
greater resources than the Company. Since the Company's primary competitive
advantage over water delivery services and off-the-shelf bottled water is price,
a substantial decline in the price of either delivered or off-the-shelf bottled
water could adversely affect the demand for water dispensed from the Company's
water vending machines.

4

The Company's competitors within the water vending market are primarily
smaller, independent operators. Although the Company believes that there are
significant barriers to entry to new and existing competitors in the water
vending market due to, among other things, the substantial capital outlay
required to purchase the number of machines needed to achieve competitive
operating efficiencies, a competitor with significant financial resources may be
able to compete with the Company. There can be no assurance that any competitors
will not be able to raise the capital required to effectively compete with the
Company.

Seasonality
- -----------

The Company's revenues are subject to seasonal fluctuations with decreased
revenues during rainy or cold weather months and increased revenues during hot
weather months.

Intellectual Property
- ---------------------

The tradename and trademarks "Glacier Water" and "Glacier Water & Penguin
Design" used by the Company contain the word "Glacier" which is commonly used
and has been registered in connection with other marks and designs by a number
of other entities for water and related services. The mark "Glacier Water", by
itself, is considered by the United States Patent and Trademark Officer (the
"PTO") to be generic in relation to water and related services. One party
claiming to sell bottled water in a limited area near Incline Village, Nevada,
informed the Company that it objected to the Company's use of the mark "Glacier
Water". However, the PTO has cancelled this party's registration. Accordingly,
the Company believes that no party can claim exclusive rights in "Glacier
Water", and the Company may only claim rights to stylized forms of the mark or
the mark with design elements. Notwithstanding the foregoing, no assurance can
be given that other entities might not assert superior or exclusive rights in
the marks and seek to obtain damages from and injunctive relief against the
Company. Thus, there can be no assurance that the Company's use of the tradename
and trademarks "Glacier Water" and "Glacier Water & Penguin Design" will not
violate the proprietary rights of others, which could result in a material
adverse effect on the Company. The Company does not hold any patents.

Government Regulation
- ---------------------

The water vending industry is subject to various federal, state and local
laws and regulations, which require the Company, among other things, to obtain
licenses for its business and water vending machines, to pay annual license and
inspection fees, to comply with certain detailed design and quality standards
regarding the vending machines and the vended water, and to continuously control
the quality of the vended water. The Company's vending machines are subject to
routine and random regulatory quality inspections. Although the Company believes
it is operating in substantial compliance with these laws and regulations, such
laws and regulations and their interpretations and enforcement are subject to
change. There can be no assurance that additional or more stringent requirements
will not be imposed on the Company's operations in the future. Failure to comply
with such current or future laws and regulations could result in fines against
the Company, a temporary shutdown of the Company's operations, the loss of
certification to sell its product or, even in the absence of governmental
action, a reduction in the Company's profit margin based on increases in
licensing or inspection fees payable by the Company or other additional
compliance costs.

Insurance
- ---------

The Company carries general and product liability insurance. Its combined
coverage is $26,000,000 per occurrence and $27,000,000 in the aggregate, which
the Company believes to be adequate. Although the Company is not aware of any
actions having ever been filed and believes that the technology contained in its
machines makes any contamination of the products dispensed by its machines
unlikely, any significant damage awards against the Company in excess of the
Company's insurance coverage could result in a material loss to the Company.

5

Employees
- ---------

As of December 31, 2000, the Company had 276 employees, including 34 in
administration and 242 in operations. The Company"s employees are not
represented by a labor union and the Company has experienced no work stoppages.
The Company believes that its employee relations are good.

Item 2. Properties

The Company"s principal facility, a 30,000-square-foot building in
Carlsbad, California containing its executive offices and assembly shop, is
under lease through May 2001. The Company is currently negotiating an extension
to this lease. The Company also leases various other facilities containing its
area service centers. These leases range in square footage from 1,200 to 13,400
square feet, and expire on various dates from April 2001 through April 2003.

Item 3. Legal Proceedings

The Company is not currently a party to any material legal proceeding.

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

No matters were submitted to a vote of the security holders of the Company
during the fourth quarter of 2000.

Part II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

The Common Stock of Glacier is traded on the American Stock Exchange under
the symbol "HOO". The following table sets forth the range of high and low sales
prices on the American Stock Exchange for the Common Stock for the periods
indicated.

High Low
------ -----

Fiscal Year 1999
---------------
First Quarter $26.75 $20.00
Second Quarter 20.94 19.50
Third Quarter 19.88 16.75
Fourth Quarter 16.88 15.13

Fiscal Year 2000
----------------
First Quarter $17.50 $16.13
Second Quarter 16.13 11.63
Third Quarter 11.88 11.63
Fourth Quarter 11.63 7.75

The Company did not pay dividends on its Common Stock in 2000 and 1999 and
does not presently intend to pay any dividends in the foreseeable future. The
Company had approximately 35 stockholders of record as of December 31, 2000.

6

Item 6. Selected Consolidated Financial Data

The following sets forth selected financial data as of and for the periods
presented. Effective January 1, 1997, the Company prospectively changed its
fiscal year from twelve calendar months to a 52- or 53-week year ending the
Sunday closest to December 31. As a result of this change, the Company"s fiscal
year 1997, which ended on January 4, 1998, contained 369 days. Fiscal 1998,
1999, and 2000, which ended on January 3, 1999, January 2, 2000, and December
31, 2000, respectively, contained 364 days. This data should be read in
conjunction with the Consolidated Financial Statements and the accompanying
Notes thereto and other financial information appearing elsewhere in this Annual
Report.

(in thousands except share and per share data) Fiscal Year Ended
--------------------------------------------------------
December 31, January 2, January 3, January 4, December 31,
2000 2000 1999 1998 1996
----------- ---------- ---------- ---------- ------------

Revenues................................................ $ 59,176 $ 56,774 $ 56,321 $ 57,294 $ 46,091
Operating costs and expenses:
Operating expenses.................................. 38,482 36,984 36,727 35,569 28,088
Selling, general and administrative expenses........ 8,838 9,143 9,879 7,200 5,749
Depreciation and amortization................... 12,066 10,740 10,212 8,852 6,769
Non-recurring and other charges..................... 1,400 - 971 3,062 -
----------- ---------- ---------- ---------- ------------
Total operating costs and expenses............ 60,786 56,867 57,789 54,683 40,606
----------- ---------- ---------- ---------- ------------

Income (loss) from operations........................... (1,610) (93) (1,468) 2,611 5,485

Other (income) expenses:
Interest expense.................................. 7,016 7,859 7,446 1,988 767
Investment (income) loss.......................... 1,570 1,342 (4,259) - -
----------- ---------- ---------- ---------- ------------
Total other expense..................................... 8,586 9,201 3,187 1,988 767
----------- ---------- ---------- ---------- ------------

Income (loss) before income taxes and extraordinary
gain.................................................... (10,196) (9,294) (4,655) 623 4,718

Income tax provision (benefit).......................... - (2,059) (1,383) 193 1,415
----------- ---------- ---------- ---------- ------------

Income (loss) before extraordinary gain................. (10,196) (7,235) (3,272) 430 3,303

Extraordinary gain on early retirement of debt.......... 4,198 2,617 - - -
----------- ---------- ---------- ---------- ------------

Net income (loss)....................................... $ (5,998) $ (4,618) $ (3,272) $ 430 $ 3,303
=========== ========== ========== ========== ============

Basic earnings (loss) per share:
Income (loss) before extraordinary gain................. $ (3.59) $ (2.54) $ (1.05) $ .13 $ .99
Extraordinary gain..................................... 1.48 .92 - - -
----------- ---------- ---------- ---------- ------------

Net income (loss)....................................... $ (2.11) $ (1.62) $ (1.05) $ .13 $ .99
=========== ========== ========== ========== ============

Diluted earnings (loss) per share:
Income (loss) before extraordinary gain................. $ (3.59) $ (2.54) $ (1.05) $ .13 $ .98
Extraordinary gain..................................... 1.48 .92 - - -
----------- ---------- ---------- ---------- ------------

Net income (loss)....................................... $ (2.11) $ (1.62) $ (1.05) $ .13 $ .98
=========== ========== ========== ========== ============

Weighted average shares used for basic earnings per
share................................................... 2,836,965 2,850,253 3,119,696 3,219,082 3,334,504
Dilutive common stock options........................... - - - 113,808 39,978
----------- ---------- ---------- ---------- ------------

Weighted average shares used for diluted earnings per
share................................................... 2,836,965 2,850,253 3,119,696 3,332,890 3,374,482
=========== ========== ========== ========== ============

7

Selected Balance Sheet Data
- ---------------------------

Dec 31, January 2, January 3, January 4, Dec 31,
2000 2000 1999 1998 1996
---- ---- ---- ---- ----
(in thousands)

Cash and cash equivalents................................ $ 1,428 $ 4,205 $ 109 $ 13 $ 11
Investments, available-for-sale.......................... $ 3,195 $ 9,826 $ 31,037 $ 315 $ --
Property and equipment, net of accumulated
depreciation......................................... $55,366 $58,936 $ 54,939 $48,523 $38,007
Total assets............................................. $74,616 $89,409 $100,515 $59,473 $46,067
Long-term debt and line of credit, including
current portion...................................... $69,755 $79,748 $ 85,000 $28,732 $15,820
Stockholders' equity..................................... $ 232 $ 4,673 $ 9,284 $24,623 $23,986
Working capital.......................................... $ 4,416 $11,360 $ 32,501 $ 1,975 $ (183)

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

This discussion should be read in conjunction with the information
contained in the Consolidated Financial Statements and the accompanying Notes
thereto of the Company appearing elsewhere in this Annual Report. The following
table sets forth for the periods indicated, the percentage of revenues
represented by certain items included in the Consolidated Statements of
Operations.

Fiscal Year Ended
---------------------------
December 31, January 2, January 3,
2000 2000 1999
---- ---- ----

Revenues.................................................................. 100.0% 100.0% 100.0%
Costs and expenses:
Operating expenses................................................... 65.0% 65.2% 65.3%
Selling, general and administrative expenses......................... 14.9% 16.1% 17.5%
Depreciation and amortization........................................ 20.4% 18.9% 18.1%
Non-recurring and other charges...................................... 2.4% -% 1.7%
----- ----- -----
Total costs and expenses.......................................... 102.7% 100.2% 102.6%
----- ----- -----

Loss from operations..................................................... (2.7)% (0.2)% (2.6)%

Other (income) expenses:
Interest expense..................................................... 11.9% 13.8% 13.3%
Investment (income) loss............................................. 2.6% 2.4% (7.6)%
----- ----- -----
Total other expenses.............................................. 14.5% 16.2% 5.7%
----- ----- -----

Loss before income taxes and extraordinary gain.......................... (17.2)% (16.4)% (8.3)%
Income tax provision (benefit)........................................... -% (3.7)% (2.5)%
Extraordinary gain....................................................... 7.1% 4.6% -%
----- ----- -----
Net loss................................................................. (10.1)% (8.1)% (5.8)%
===== ===== =====

8

Results of Operations
- ---------------------

Overview
- --------

Since its inception in 1983, the Company has experienced significant growth
in machine placements and has created an extensive network of water vending
machines located throughout the United States. The Company"s water vending
machines are placed at supermarkets and other retail locations in order to take
advantage of the regular customer traffic at such locations.

On March 28, 1997, the Company purchased substantially all of the assets of
the Aqua-Vend division of McKesson Water Products Company, a wholly owned
subsidiary of McKesson Corporation. The assets purchased included approximately
3,000 water vending machines. In connection with the acquisition, the Company
developed a detailed integration plan, which included the removal of
approximately 600 Aqua-Vend machines from service, the upgrading and
modification of the majority of the remaining Aqua-Vend machines and the
rationalization and relocation of Aqua-Vend machines within Glacier"s network of
machines. The revenues and operating costs associated with these machines from
March 29, 1997 are included in the Company"s results of operations. During
fiscal 1997, the Company substantially completed the Aqua-Vend integration
activities and incurred non-recurring expenses of $3,062,000 related to these
activities.

Revenues
- --------

Revenues for fiscal year 2000 increased 4.2% to $59,176,000 from
$56,774,000 in fiscal year 1999. The increase in revenues in 2000 was the result
of the increased average number of in-store machines in operation throughout the
year compared to 1999. As of December 31, 2000, the Company had 13,447 machines
in operation compared to 13,816 machines at January 2, 2000. As of December 31,
2000, the company had 2,271 in-store machines and 11,176 outside machines in
operation in thirty-five states compared to 2,071 in-store and 11,745 outside
machines at January 2, 2000. During fiscal 2000, the Company ceased its
operation in Mexico City, Mexico and returned approximately 500 machines to the
United States for future deployment. The Company continually monitors the
performance of retail locations and periodically redeploys machines to improve
revenues and the return on assets deployed, as evidenced by the discontinuance
of the operation in Mexico City during the third quarter of fiscal 2000.
Revenues for the fiscal year 1999 increased 0.8% to $56,774,000 from $56,321,000
in fiscal 1998. The increase in revenues in 1999 was the result of more machines
in operation throughout the year compared to fiscal 1998. The Company has
installed a net 1,249 new in-store machines since the beginning of 1999 as a
result of its expansion into new markets.

Costs and Expenses
- ------------------

Operating expenses for the year ended December 31, 2000 increased to
$38,482,000 or 65.0% of revenues from $36,984,000 or 65.1% of revenues for
fiscal year 1999. The increase in total dollar operating costs was primarily due
to the additional service costs associated with the continued expansion of the
new markets within the geographic areas served by the Company and an increase in
total dollar commission expense associated with the higher revenues. As the
Company continues to increase the number of machines in existing markets and
these machines mature, the Company will continue to leverage the costs
associated with servicing the machines. The Company strives to locate machines
in close proximity to one another within the geographic area served, thereby
creating clusters of machines in order to provide cost effective, frequent
service. Operating expenses for fiscal year 1999 increased to $36,984,000 or
65.1% of revenues, compared to $36,727,000, or 65.2% of revenues in 1998. The
slight increase in total dollar operating costs in 1999 was due primarily to the
additional service costs associated with establishing a presence in new markets.

Selling, general and administrative expenses ("SG&A") for fiscal year 2000
decreased $305,000 to $8,838,000 or 14.9% of revenues, compared to $9,143,000 or
16.1% of revenues in 1999 and $9,879,000 or 17.5% of revenues in 1998. This
decrease in selling, general and administrative expenses in fiscal year 2000
compared to 1999, was primarily associated with a reduction in legal expenses
incurred by the Company in 1999 in connection with an alleged patent
infringement which has been dismissed, offset by an increase in 2000 of taxes

9

and license expense associated with operating in additional states. The decrease
in selling, general and administrative expenses in fiscal year 1999 compared to
1998 was primarily associated with a reduction in media advertising expenditures
and a reduction in legal expenses incurred in connection with an alleged patent
infringement which has been dismissed.

In the third quarter of 2000, the Company discontinued operations in
Mexico. As a result, the Company incurred non-recurring charges totaling
$1,400,000 associated with the closure of its Mexico operation. The
non-recurring charges primarily consisted of write-down of leasehold
improvements, loss on disposal of assets, severance and other costs related to
the discontinuance of the operation in Mexico. As part of the shut-down, the
Company returned approximately 500 machines to the United States for future
re-deployment. There were no additional charges associated with the
discontinuance of the operation in Mexico during the fourth quarter of 2000.
These machines continue to be depreciated.

Depreciation and amortization expense for fiscal year 2000 increased to
$12,066,000, compared to $10,740,000 in 1999 and $10,212,000 in 1998. The
increase in each year is the result of having more machines being depreciated
throughout the years compared to the prior years and the result of placing new
in-store machines into operation. The Company currently has sufficient machines
in storage available for deployment in fiscal 2001. Machines that have been
previously installed and are in storage awaiting deployment are currently being
depreciated.

In the fourth quarter of 1998, the Company incurred a charge of $971,000
for certain costs associated with the removal of approximately 1,450 machines at
under-performing locations. These machines were primarily located at small
independent retailers. The Company has relocated these machines to large
supermarket and drug store chains where it believes that it will achieve better
returns.

Interest expense for fiscal year 2000 decreased to $7,016,000 compared
to $7,859,000 in 1999. The decrease in interest expense was primarily associated
with the reduction in long-term subordinated debt as a result of having
repurchased 578,900 shares of the Trust Preferred Securities (discussed below)
during the year, partially offset by increased borrowings under the line of
credit. Interest expense for fiscal year 1999 increased to $7,859,000 compared
to $7,446,000 in 1998. The increase in interest expense in 1999 compared to 1998
was due to having interest due on the subordinated debt for the entire year
which was not the case in 1998.

The Company had net losses of $1,570,000 on investments in 2000
compared to $1,342,000 of net loss on investments in fiscal year 1999 and
$4,259,000 of net investment income in fiscal year 1998. A significant portion
of the net loss on investments in fiscal 2000 occurred in the fourth quarter
with the disposition of three investments with net losses of $2,623,000, which
is partially offset by investment income of $1,033,000. Investments were managed
by Kayne Anderson Capital Advisors, L.P. during fiscal 2000 and Kayne Anderson
Capital Advisors, L.P. and Camden Asset Management, L.P. during fiscal 1998 and
1999.

In fiscal 1999 and 1998, the Company recorded tax benefits of $2,059,000
and $1,383,000, respectively. No tax benefit was recorded in fiscal 2000 due to
the continuing losses incurred in fiscal 2000.

On August 13, 1999, the Company announced that the Company"s Board of
Directors authorized the Company to purchase up to 250,000, or approximately
7.4% of the then 3,400,000 shares outstanding, of the 9.0625% Glacier Water
Trust Preferred Securities (AMEX: HOO_pa), (the "Trust Preferred Securities")
issued by Glacier Water Trust I, a wholly owned subsidiary of the Company (the
"Trust"), in the open market as part of the Company"s stock repurchase plan.
Subsequently, the Company"s Board of Directors have increased the authorized
number of the Trust Preferred Securities subject to repurchase to 1,250,000
shares. As of December 31, 2000, the Company had repurchased 921,000 shares of
the Trust Preferred Securities. During fiscal 2000, the Company repurchased
578,900 shares of the Trust Preferred Securities for a net extraordinary gain of
$4,198,000, or $1.48 per share, compared to a net extraordinary gain of
$2,617,000 or $0.92 per share during fiscal 1999. The Company may continue to
make such purchases from time to time in open market transactions or block
trades in an effort to reduce long-term debt and future interest expense. As of
December 31, 2000, there were 2,479,000 shares of the Trust Preferred Securities
outstanding.

10

For fiscal year 2000, the Company incurred a loss before extraordinary gain
on the early retirement of debt of $10,196,000, or $3.59 per basic and diluted
share compared to a loss of $7,235,000, or $2.54 per basic and diluted share in
1999. For fiscal year 2000, the Company incurred a net loss of $5,998,000, or
$2.11 per basic and diluted share compared to a net loss of $4,618,000 or $1.62
per basic and diluted share in 1999 and $3,272,000, or $1.05 per basic and
diluted share in 1998.

Liquidity and Capital Resources
- -------------------------------

The Company"s primary sources of liquidity and capital resources in fiscal
year 2000 were cash and investments, cash flows from operations and funds
available under the Company"s Credit Facility. On June 23, 2000, the Company
entered into a new credit facility with TOKAI Bank of California which provides
for borrowings of up to $10,000,000 and requires quarterly interest payments at
the bank"s prime rate (9.50% per annum at December 31, 2000) or LIBOR plus 1.90%
(8.76% per annum at December 31, 2000). As of December 31, 2000, the Company had
approximately $2.3 million of funds available under the credit facility. On
March 19, 2001, the Company and the bank amended the credit facility to, among
other things, extend the maturity date to June 1, 2002.

For fiscal year 2000, net cash provided by operations was approximately
$3,572,000 and the Company made capital investments in vending machines and
other equipment of approximately $6,744,000. Net cash used in financing
activities was approximately $5,218,000, which included the repurchase of the
Trust Preferred Securities of approximately $9,600,000, offset by the net
borrowing on the credit line of $4,354,000. As of December 31, 2000, the Company
had working capital of $4,416,000. Because the Company does not have significant
trade accounts receivable and product inventories, working capital will vary
from time to time depending on the timing of payables, other accrued
liabilities, and payments of prepaid marketing incentives. The Company"s
stockholders" equity as of December 31, 2000 was $232,000, which amount is below
the American Stock Exchange"s minimum stockholders" equity requirement of
$4,000,000.

On January 27, 1998, the Trust issued 105,154 of its common securities to
the Company and completed a public offering of 3,400,000 shares of the Trust
Preferred Securities with a liquidation amount of $25 per security. Concurrent
with the issuance of the Trust Preferred Securities, the Trust invested the
proceeds therefrom in an aggregate principal amount of $85,000,000 of 9.0625%
Junior Subordinated Debentures (the "Subordinated Debentures") issued by the
Company. The Trust exists for the sole purpose of issuing Trust Securities and
purchasing Subordinated Debentures. With the proceeds from the issuance of the
Subordinated Debentures, the Company repaid in full all amounts outstanding
under its then existing credit facility and terminated that agreement.

Distributions on the Trust Preferred Securities are payable monthly in
arrears by the Trust. The Company may cause the Trust to defer the payment of
distributions for a period not to exceed 60 consecutive months. During any such
deferral period, distributions will accrue and compound quarterly, and the
Company may not declare or pay distributions on its common or preferred stock or
debt securities that rank equal or junior to the Subordinated Debentures. To
date, the Company is current on all distributions.

The Subordinated Debentures are unsecured obligations of the Company and
are subordinate and junior in right of payment to other indebtedness of the
Company. The Trust Preferred Securities are subject to mandatory redemption upon
the repayment of the Subordinated Debentures at a redemption price equal to the
aggregate liquidation amount of the Trust Preferred Securities plus any
accumulated and unpaid distributions. The Subordinated Debentures mature on
January 31, 2028, but may be redeemed at the option of the Company at any time
after January 31, 2003. The Company effectively provides a full and
unconditional guarantee of the Trust"s obligations under the Trust Preferred
Securities. Issuance costs of approximately $4,100,000 related to the Trust
Preferred Securities are deferred and will be amortized over the period until
the mandatory redemption of the securities in January 2028.

11

The Company believes that its cash and investments on hand, cash flow from
operations and availability under its Credit Facility, will be sufficient to
meet its anticipated operating and capital requirements, including its
investment in vending machines, as well as distributions related to the Trust
Preferred Securities, for at least the next twelve months. Because the Company
believes it has sufficient machines in storage available for deployment in
fiscal 2001, the Company does not anticipate the need to manufacture vending
machines during fiscal 2001.

Seasonality

The Company's revenues are subject to seasonal fluctuations with decreased
revenues during rainy or cold weather months and increased revenues during hot
weather months.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The Company's primary market risk exposure is interest rate risk. At
December 31, 2000, the Company held a portfolio of marketable securities
consisting entirely of debt instruments available-for-sale with an estimated
fair value equal to $3,195,000. The Company held no convertible debt securities
or equity securities available-for-sale as of December 31, 2000. See Note 1 to
the Company's Consolidated Financial Statements. The Company's exposure to
interest rate risk relates primarily to the opportunity cost of fixed rate
obligations. The Company's entire portfolio is invested by Kayne Anderson
Capital Advisors, L.P., primarily in fixed rate corporate bonds and mortgage
backed securities.

Item 8. Consolidated Financial Statements and Supplementary Data

The Company's Consolidated Financial Statements together with accompanying
Notes and the Report of Arthur Andersen LLP, Independent Public Accountants are
set forth on pages 14 through 32 after Part IV of this report.

Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure

The Company has had no changes in or disagreements with its accountants on
its accounting and financial disclosure.

Part III

Item 10. Directors and Executive Officers of the Registrant

There is incorporated herein by reference the information required by this
Item in the Company's definitive proxy statement for the 2001 Annual Meeting of
Stockholders which will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the fiscal year ended December 31, 2000.

Item 11. Executive Compensation

There is incorporated herein by reference the information required by this
Item in the Company's definitive proxy statement for the 2001 Annual Meeting of
Stockholders which will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the year ended December 31, 2000.

Item 12. Security Ownership of Certain Beneficial Owners and Management

There is incorporated herein by reference the information required by this
Item in the Company's definitive proxy statement for the 2001 Annual Meeting of
Stockholders which will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the fiscal year ended December 31, 2000.

12

Item 13. Certain Relationships and Related Transactions

There is incorporated herein by reference the information required by this
Item in the Company's definitive proxy statement for the 2001 Annual Meeting of
Stockholders which will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the fiscal year ended December 31, 2000.

Part IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) Documents Filed with Report
---------------------------

1. Consolidated Financial Statements
---------------------------------

The consolidated financial statements listed on the accompanying Index
to Consolidated Financial Statements are filed as part of this report.
The financial statement schedules have been omitted as they are either
not required or not applicable.

2. Exhibits
--------

The exhibits listed on the accompanying Index to Exhibits are filed as
part of this report.

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

There were no reports on Form 8-K filed during the last quarter of the
fiscal year ended December 31, 2000.

Index
-----

Page
Number
------
Consolidated Financial Statements
- ---------------------------------

Report of Independent Public Accountants ........................................... 14
Consolidated Balance Sheets at December 31, 2000 and January 2, 2000 ............... 15
Consolidated Statements of Operations for the fiscal years ended December 31, 2000,
January 2, 2000, and January 3, 1999 ............................................. 16
Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended
December 31, 2000, January 2, 2000, and January 3, 1999 .......................... 17
Consolidated Statements of Stockholders' Equity for the fiscal years ended
December 31, 2000, January 2, 2000, and January 3, 1999 .......................... 18
Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2000,
January 2, 2000, and January 3, 1999 ............................................. 19
Notes to Consolidated Financial Statements ......................................... 21

13

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Glacier Water Services, Inc.:

We have audited the accompanying consolidated balance sheets of Glacier
Water Services, Inc. (a Delaware corporation) and subsidiaries as of December
31, 2000 and January 2, 2000, and the related consolidated statements of
operations, comprehensive income (loss), stockholders' equity and cash flows for
each of the three fiscal years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Glacier Water Services, Inc.
and subsidiaries as of December 31, 2000 and January 2, 2000, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.

ARTHUR ANDERSEN LLP

San Diego, California
February 2, 2001, except
with respect to the matter
discussed in Note 3 as to
which the date is March 19, 2001.

14

GLACIER WATER SERVICES, INC.
CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)

ASSETS
------

December 31, January 2,
2000 2000
---- ----

Current assets:
Cash and cash equivalents.................................................... $ 1,428 $ 4,205
Investments, available-for-sale.............................................. 3,195 9,826
Accounts receivable.......................................................... 765 589
Inventories.................................................................. 2,587 3,249
Prepaid expenses and other................................................... 1,070 1,779
------- -------
Total current assets....................................................... 9,045 19,648
Property and equipment, net of accumulated depreciation......................... 55,366 58,936
Other assets.................................................................... 10,205 10,825
------- --------
Total assets.................................................................... $74,616 $ 89,409
======= ========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

Current liabilities:
Accounts payable............................................................. $ 839 $ 1,272
Accrued commissions.......................................................... 2,286 2,238
Accrued liabilities.......................................................... 1,504 1,478
Line of credit............................................................... -- 3,300
------- --------
Total current liabilities................................................. 4,629 8,288
------- --------

Long-term debt and line of credit............................................... 69,755 76,448
------- --------

Commitments and Contingencies (Note 4)

Stockholders' equity:
Preferred stock, $.01 par value, 100,000 shares
authorized, no shares issued and outstanding............................ -- --
Common stock, $.01 par value, 10,000,000 shares authorized,
2,834,474 and 2,834,174 shares issued and outstanding at
December 31, 2000 and January 2, 2000, respectively........................ 35 34
Additional paid-in capital................................................... 16,188 16,119
Retained earnings (deficit).................................................. (1,227) 4,771
Treasury stock, at cost, 603,726 and 598,026 shares at
December 31, 2000 and January 2, 2000, respectively....................... (14,852) (14,795)
Accumulated other comprehensive income (loss)................................ 88 (1,456)
------- --------
Total stockholders' equity............................................... 232 4,673
------- --------
Total liabilities and stockholders' equity...................................... $74,616 $ 89,409
======= ========

The accompanying notes are an integral part of these consolidated statements.

15

GLACIER WATER SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share amounts)

Fiscal Year Ended
-----------------------------------------
December 31, January 2, January 3,
2000 2000 1999
------------ ------------- ------------

Revenues............................................................................. $ 59,176 $ 56,774 $ 56,321
Operating costs and expenses:
Operating expenses............................................................... 38,482 36,984 36,727
Selling, general and administrative expenses..................................... 8,838 9,143 9,879
Depreciation and amortization.................................................... 12,066 10,740 10,212
Non-recurring and other charges.................................................. 1,400 -- 971
----------- ----------- -----------
Total operating costs and expenses......................................... 60,786 56,867 57,789
----------- ----------- -----------

Loss from operations................................................................. (1,610) (93) (1,468)
----------- ----------- -----------

Other (income) expenses:
Interest expense................................................................. 7,016 7,859 7,446
Investment (income) loss......................................................... 1,570 1,342 (4,259)
Total other expenses....................................................... 8,586 9,201 3,187
----------- ----------- -----------

Loss before income taxes and extraordinary gain...................................... (10,196) (9,294) (4,655)

Income tax benefit................................................................... -- (2,059) (1,383)
----------- ----------- -----------

Loss before extraordinary gain....................................................... (10,196) (7,235) (3,272)
Extraordinary gain on early retirement of debt....................................... 4,198 2,617 --
----------- ----------- -----------
Net loss............................................................................. $ (5,998) $ (4,618) $ (3,272)
=========== =========== ===========

Basic and diluted earnings (loss) per share:
Loss before extraordinary gain....................................................... $ (3.59) $ (2.54) $ (1.05)
Extraordinary gain................................................................... 1.48 .92 --
----------- ----------- -----------
Net loss............................................................................. $ (2.11) $ (1.62) $ (1.05)
=========== =========== ===========
Weighted average shares used in calculation.......................................... 2,836,965 2,850,253 3,119,696
=========== =========== ===========

The accompanying notes are an integral part of these consolidated statements.

16

GLACIER WATER SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands)

Fiscal Year Ended
------------------------------------------
December 31, January 2, January 3,
2000 2000 1999
---- ---- ----

Net loss.............................................................. $ (5,998) $ (4,618) $ (3,272)
Unrealized gain (loss) on securities:.................................
Unrealized holding gain (loss) arising during the period......... 4,106 5,504 (5,464)
Less: reclassification adjustment for net realized losses
(gains) included in net income (loss)......................... 2,562 2,407 (911)
-------- -------- --------
Net unrealized gain (loss)............................................ 1,544 3,097 (4,553)
-------- -------- --------
Comprehensive loss.................................................... $ (4,454) $ (1,521) $ (7,825)
======== ======== ========

The accompanying notes are an integral part of these consolidated statements.

17

GLACIER WATER SERVICES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(dollars in thousands, except shares)

Accumulated
Common Stock Additional Retained Other
------------ Paid-In Earnings Treasury Comprehensive
Shares Amount Capital (Deficit) Stock Gain (Loss) Total
------ ------ ------- --------- ----- ----------- -----

Balance, January 4, 1998............. 3,226,175 $ 34 $ 15,548 $ 12,661 $ (3,620) $ -- $ 24,623

Exercise of Stock Options............ 21,550 -- 415 -- -- -- 415

Purchase of Treasury Stock........... (287,750) -- -- -- (7,929) -- (7,929)

Net Unrealized Loss on Investments... -- -- -- -- -- (4,553) (4,553)

Net Loss............................. -- -- -- (3,272) -- -- (3,272)
----------- ----------- ---------- ---------- --------- ----------- ----------

Balance, January 3, 1999............. 2,959,975 34 15,963 9,389 (11,549) (4,553) 9,284

Exercise of Stock Options............ 11,875 -- 156 -- -- -- 156

Purchase of Treasury Stock........... (137,676) -- -- -- (3,246) -- (3,246)

Net Unrealized Gain on Investments... -- -- -- -- -- 3,097 3,097

Net Loss............................. -- -- -- (4,618) -- -- (4,618)
----------- ----------- ---------- ---------- --------- ----------- ----------

Balance, January 2, 2000............. 2,834,174 34 16,119 4,771 (14,795) (1,456) 4,673

Exercise of Stock Options............ 6,000 1 69 -- -- -- 70

Purchase of Treasury Stock........... (5,700) -- -- -- (57) -- (57)

Net Unrealized Gain on Investments... -- -- -- -- -- 1,544 1,544

Net Loss............................. -- -- -- (5,998) -- -- (5,998)
----------- ----------- ---------- ---------- --------- ----------- ----------

Balance, December 31, 2000........... 2,834,474 $ 35 $ 16,188 $ (1,227) $ (14,852) $ 88 $ 232
=========== =========== ========== ========== ========= =========== ==========

The accompanying notes are an integral part of these consolidated statements.

18

GLACIER WATER SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

Fiscal Year Ended
-------------------------------------------
December 31, January 2, January 3,
2000 2000 1999
---- ---- ----

Cash flows from operating activities:
Net loss $ (5,998) $ (4,618) $ (3,272)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 12,066 10,740 10,212
Loss on disposal of assets 908 103 310
Extraordinary gain on early retirement of debt (4,198) (2,617) --
Deferred tax provision (benefit) -- (2,059) (1,167)
Realized loss (gain) on sales of investments 2,562 2,407 (911)
Change in operating assets and liabilities:
Accounts receivable (176) 759 (881)
Inventories 662 (359) 117
Prepaid expenses and other 709 (391) (224)
Payments for prepaid marketing incentives (2,936) (4,461) (1,213)
Other assets 332 (250) (570)
Accounts payable, accrued liabilities and accrued commissions (359) 717 1,280
---------- ---------- ----------
Total adjustments 9,570 4,589 6,953
---------- ---------- ----------
Net cash provided by (used in) operating activities 3,572 (29) 3,681
---------- ---------- ----------

Cash flows from investing activities:
Purchase of vending equipment (6,270) (12,115) (14,244)
Purchase of property and equipment (474) (341) (225)
Purchase of investments (931) (48,001) (74,163)
Proceeds from sale and maturities of investments 6,544 69,900 39,693
---------- ---------- ----------
Net cash (used in) provided by investing activities (1,131) 9,443 (48,939)
---------- ---------- ----------

Cash flows from financing activities:
Issuance of long-term debt, net of fees -- -- 81,600
Early retirement of long-term debt (9,585) (5,528) --
Proceeds from line of credit 22,537 15,090 950
Principal payments on line of credit (18,183) (11,790) (29,682)
Proceeds from issuance of stock 70 156 415
Purchase of treasury stock (57) (3,246) (7,929)
---------- ---------- ----------
Net cash (used in) provided by financing activities (5,218) (5,318) 45,354
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents (2,777) 4,096 96
Cash and cash equivalents, beginning of year 4,205 109 13
---------- ---------- ----------
Cash and cash equivalents, end of year $ 1,428 $ 4,205 $ 109
========== ========== ==========

19

GLACIER WATER SERVICES, INC.

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

(dollars in thousands)

December 31, January 2, January 3,
2000 2000 1999
---- ---- ----

Cash paid for interest............................................ $ 6,819 $ 7,828 $ 6,804
======== ======= =======

Cash paid for income taxes........................................ $ 5 $ 5 $ 13
======== ======= =======

The accompanying notes are an integral part of these consolidated statements.

20

GLACIER WATER SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Business

The Company is primarily engaged in the operation of self-service
vending machines that dispense drinking water to consumers. The machines
are placed at supermarkets and other retail outlets under commission
arrangements with the retailers. The Company's revenues are subject to
seasonal fluctuations, with decreased revenues during rainy or cold weather
months and increased revenues during hot weather months. The Company's
machines are primarily located throughout the sunbelt and midwest regions
of the United States. As of December 31, 2000, the Company operated
machines in thirty-five states with approximately 51% of the Company's
machines located in California. During fiscal year 2000, the Company
discontinued operations in Mexico and returned approximately 500 machines
to the United States for future re-deployment.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts
of Glacier Water Services, Inc. and its wholly-owned subsidiaries. All
significant inter-company accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make certain
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and the disclosure of contingent assets
and liabilities. Actual results could differ from those estimates.

Fiscal Year

The Company utilizes a fiscal year of 52 or 53 weeks ending on the
Sunday closest to December 31. Fiscal years ended December 31, 2000,
January 2, 2000 and January 3, 1999 each contained 364 days.

Other Comprehensive Income (Loss)

In accordance with FASB Statement No. 130, Reporting Comprehensive
Income, the Company displays comprehensive income (loss) and its components
in a financial statement that is displayed with the same prominence as
other financial statements.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. As of December 31,
2000, cash equivalents primarily consist of cash held in money market
accounts.

21

GLACIER WATER SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Investments

Investments are accounted for in accordance with FASB Statement No.
115, Accounting for Certain Investments in Debt and Equity Securities,
which requires that the Company determine the appropriate classification of
investments at the time of purchase based on management's intent and
re-evaluate such designation as of each balance sheet date. The Company
considers all investments as available for use in its current operations,
and therefore classifies them as short-term, available-for-sale
investments. Available-for-sale investments are stated at fair value, with
net unrealized gains or losses, if any, reported as a separate component of
stockholders' equity. Realized gains or losses from the sale of
investments, interest income and dividends are included in investment
income (loss) in the accompanying statements of operations. Management
reviews the carrying values of its investments and writes such investments
down to estimated fair value by a charge to operations when such review
results in management's determination that an investment's impairment is
considered to be other than temporary. The cost of securities sold is based
on the specific identification method.

At December 31, 2000, investments available-for-sale consisted of the
following (in thousands):

Gross Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----

Corporate securities $2,523 $ 117 $ -- $ 2,640
Mortgage backed security 584 -- (29) 555
--- ----- ------- -------
Total investments available for sale $3,107 $ 117 $ (29) $ 3,195
====== ===== ======= =======

The Company's primary market risk exposure is interest rate risk. At
December 31, 2000, the Company held a portfolio of marketable securities
with an estimated fair value equal to $3,195,000. The entire $3,195,000
consisted of debt investments available-for-sale and the Company held no
convertible debt securities or equity securities available-for-sale as of
December 31, 2000. The Company's exposure to interest rate risk relates
primarily to the opportunity cost of fixed rate obligations.

Proceeds from sales or maturities of marketable securities for the year
ended December 31, 2000 were $6,544,000. Gross realized gains on such sales
for the year ended December 31, 2000 were $590,000. Gross realized losses
for the year ended December 31, 2000 were $3,152,000. Realized losses were
recognized principally during the fourth quarter of 2000 in connection with
the disposition of certain investments. Corporate debt securities have
maturity dates of February and October 2003. The mortgage backed security
has a maturity date of December 2021. Kayne Anderson Capital Advisors, L.P.
currently manages the Company's investment portfolio (See Note 10).

At January 2, 2000, investments available for sale consisted of the
following (in thousands):

Gross Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----

Corporate securities $ 7,196 $ 117 $ (1,336) $ 5,977
Convertible securities 318 - (11) 307
Mortgage backed securities 721 56 - 777
-------- -------- --------- -------
Total debt securities 8,235 173 (1,347) 7,061
Equity securities 3,047 248 (530) 2,765
-------- -------- --------- -------
Total investments available for sale $ 11,282 $ 421 $ (1,877) $ 9,826
======== ======== ========= =======

22

GLACIER WATER SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

At January 2, 2000, the Company held a portfolio of marketable
securities with an estimated fair value equal to $9,826,000. Of that
amount, the estimated fair value of the Company's total debt investments
available-for-sale was $7,061,000, including $307,000 in convertible debt
securities, and the estimated fair value of the Company's total equity
securities available-for-sale was $2,765,000.

Proceeds from sales or maturities of marketable securities for the year
ended January 2, 2000 were $69,900,000. Gross realized gains on such sales
for the year ended January 2, 2000 were $986,000. Gross realized losses for
the year ended January 2, 2000 were $3,393,000. During 1999, the Company
recognized a write down of $2,100,000 in investments it believed to be
permanently impaired. This amount is included in the realized losses on
investments for the year ended January 2, 2000. The Company has since
divested of these securities.

Inventories

Inventories consist of raw materials, repair parts and any vending
machines in the process of assembly, and are stated at the lower of cost
(moving weighted average) or market. Costs associated with the assembly of
vending machines are accumulated until finished machines are ready for
installation at a retail location, at which time the costs are transferred
to property and equipment.

Prepaid Commissions

Prepaid commissions represent payments made to certain retailers based
on a percentage of estimated monthly or quarterly vending machine revenues.
Prepaid commissions at December 31, 2000 and January 2, 2000 were $115,000
and $65,000, respectively. Commission expense for the years ended December
31, 2000, January 2, 2000 and January 3, 1999 was $27,038,000, $25,991,000,
and $26,202,000, respectively.

Property and Equipment and Depreciation

Property and equipment are recorded at cost and consist of the
following (in thousands):

December 31, January 2,
2000 2000
---- ----

Vending equipment....................................... $ 99,765 $ 94,829
Equipment, furniture and fixtures....................... 2,817 2,571
Leasehold improvements.................................. 608 604
------- --------
103,190 98,004
Less: Accumulated depreciation and amortization...... (47,824) (39,068)
-------- --------
$ 55,366 $ 58,936
======== ========

Depreciation is provided using the straight-line method over the
estimated useful lives of the assets as follows:

Vending equipment 10 years
Equipment, furniture and fixtures 5 to 10 years
Leasehold improvements Life of Lease

The Company's vending equipment is depreciated to a 20% salvage value.
Costs associated with installing vending equipment are capitalized and
depreciated over five years.

23

GLACIER WATER SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

All maintenance, repair and refurbishment costs are charged to
operations as incurred. Additions and major improvements are capitalized.

Long-Lived Assets

The Company evaluates and assesses its long-lived assets for impairment
under the guidelines of Statement of FASB Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of. The Company periodically reevaluates the original assumptions
and rationale utilized in the establishment of the carrying value and
estimated lives of these assets.

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable,
other current assets and accounts payable and accrued and other current
liabilities approximate fair value because of the short-term nature of
those instruments. Based on borrowing rates currently available to the
Company for credit arrangements with similar terms, the carrying amount of
the line of credit approximates fair value. The fair value of the Company's
long-term debt at December 31, 2000 and January 2, 2000 was approximately
$43,375,100 and $34,396,100, respectively. The carrying value of the
Company's long-term debt at December 31, 2000 and January 2, 2000 was
approximately $76,447,500 and $61,975,000, respectively.

Revenues

The Company recognizes revenue as water is vended to customers.

Income Taxes

Income taxes are accounted for using the liability method in accordance
with FASB Statement No. 109, Accounting for Income Taxes.

Recent Accounting Pronouncements

In accordance with FASB Statement No. 133 (SFAS 133), Accounting for
Derivative Instruments and Hedging Activities, the Company accounts for
derivative instruments, including certain derivative instruments embedded
in other contracts, by recognizing those items as assets or liabilities in
the statement of financial position and measures them at fair value.

In March 2000, FASB issued Interpretation No. 44 (FIN 44), Accounting
for Certain Transactions Involving Stock Compensations. This interpretation
clarifies the application of APB Opinion No. 25 for certain issues related
to stock based compensation, including the definition of employee for the
purposes of applying APB 25, the criteria for determining whether a plan
qualifies as a non-compensatory plan, the accounting consequences of
modifications to the terms of a previously fixed stock option award, and
the accounting for an exchange of stock compensation awards in a business
combination. The Company applied the interpretations set forth in FIN 44
for the recognition of certain stock based compensation during fiscal 2000.
The application had no material impact on the Company's financial position
or results of operation.

Earnings (Loss) Per Share

The Company computes and presents earnings (loss) per share in
accordance with FASB Statement No. 128, Earnings Per Share. Basic earnings
per share is computed based upon the weighted average number of common
shares outstanding during the period. Dilutive earnings per share is based
upon the weighted average number of common shares outstanding and
potentially dilutive securities during the period.

24

GLACIER WATER SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Potentially dilutive securities include options granted under the
Company's stock option plans using the treasury stock method. For 1998,
1999, and 2000, potentially dilutive securities were not used to calculate
diluted loss per share because of their anti-dilutive effect.

2. Supplementary Balance Sheet Information

Other Assets

Other assets consist of the following (in thousands): December 31, January 2,
2000 2000
---- ----

Prepaid marketing incentives, net of accumulated amortization of
$5,263 as of December 31, 2000 and $5,093 as of January 2, 2000... $ 6,938 $ 6,607
Deferred financing cost, net of accumulated amortization of
$119 as of December 31, 2000 and $77 as of January 2, 2000........ 2,885 3,593
Other................................................................ 382 625
------- -------
$10,205 $10,825
======= =======

Prepaid marketing incentives consist of fees paid to retailers for
future benefits associated with the ongoing placement of the Company's
vending equipment at those locations. These fees are amortized over the
life of the contract, generally ranging from three to five years.

Deferred financing costs of $4,100,000 million were incurred in
connection with the Trust Preferred Securities discussed in Note 3 and are
amortized over the period until the mandatory redemption of the securities
in January 2028.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands): December 31, January 2,
2000 2000
---- ----

Accrued compensation and related taxes......................... $ 434 $ 574
Accrued income and other taxes................................. 352 229
Accrued interest............................................... 393 380
Other accrued liabilities...................................... 325 295
------ ------
$1,504 $1,478
====== ======

3. Long-Term Debt and Line of Credit

Company Obligated Mandatorily Redeemable Preferred Securities of a
Subsidiary Trust Holding Solely Subordinated Debt Securities of the Company

On January 27, 1998, Glacier Water Trust I (the "Trust"), a newly created
Delaware business trust and a wholly-owned subsidiary of the Company, issued
105,154 common securities to the Company and completed a public offering of 3.4
million of 9.0625% Cumulative Trust Preferred Securities with a liquidation
amount of $25 per security (the "Trust Preferred Securities" and together with
the common securities the "Trust Securities"). The Trust exists for the sole
purpose of issuing Trust Securities. Concurrent with the issuance of such
securities, the Trust invested the proceeds therefrom in an aggregate principal
amount of $85.0 million of 9.0625% Junior Subordinated Debentures (the
"Subordinated Debentures") issued by the Company.

Distributions on the Trust Preferred Securities are payable monthly in arrears
by the Trust. The Company may cause the Trust to defer the payment of
distributions for a period not to exceed 60 consecutive months. During any such
deferral period, distributions will accrue and compound quarterly, and the
Company may not declare or

25

GLACIER WATER SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

pay distributions on its common or preferred stock or debt securities that rank
equal or junior to the Subordinated Debentures.

The Subordinated Debentures are unsecured obligations of the Company and
are subordinate and junior in right of payment to certain other indebtedness of
the Company. The Trust Preferred Securities are subject to mandatory redemption
upon the repayment of the Subordinated Debentures at a redemption price equal to
the aggregate liquidation amount of the Securities plus any accumulated and
unpaid distributions. The Subordinated Debentures mature on January 31, 2028,
but may be redeemed at the option of the Company at any time after January 31,
2003. The Company effectively provides a full and unconditional guarantee of the
Trust"s obligations under the Trust Securities.

On August 13, 1999, the Company's Board of Directors authorized the Company
to purchase up to 250,000, or approximately 7.4% of the then 3,400,000 shares
outstanding, of the Trust Preferred Securities in the open market as part of the
Company's stock repurchase plan. Subsequently, the Company's Board of Directors
increased the authorized number of the Trust Preferred Securities subject to
repurchase to 1,250,000 shares. As of December 31, 2000, the Company had
repurchased 921,000 shares of the Trust Preferred Securities. During fiscal
2000, the Company repurchased 578,900 shares of the Trust Preferred Securities
resulting in a net extraordinary gain of $4,198,000, compared to a net
extraordinary gain of $2,617,000 during fiscal 1999 from the repurchase of
342,100 shares of the Trust Preferred Securities. The Company may continue to
make such purchases from time to time in open market transactions or block
trades. As of December 31, 2000, there were 2,479,000 shares of the Trust
Preferred Securities outstanding, which had a carrying value of $61,975,000.

Line of Credit

On June 23, 2000, the Company entered into a new credit facility with Tokai
Bank of California which provides for borrowings of up to $10,000,000 and
requires quarterly interest payments at the bank's prime rate (9.50% per annum
at December 31, 2000) or LIBOR plus 1.90% (8.76% per annum at December 31,
2000). The credit facility contains certain covenants including liquidity and
debt coverage requirements. Borrowings under this agreement are secured by
substantially all of the assets of the Company. As of December 31, 2000, the
Company had approximately $2,325,000 of funds available under the credit
facility. On March 19, 2001, the Company and the bank amended the credit
facility to, among other things, extend the maturity date to June 1, 2002.

4. Commitments and Contingencies

Leases

The Company leases certain vehicles, warehouse and office facilities
under non-cancelable operating leases that expire on various dates through 2004.

Future minimum lease payments under non-cancelable operating leases
with initial terms of one or more years are as follows (in thousands):

2001 ................................... $ 1,361
2002 ................................... 761
2003 ................................... 508
2004 ................................... 153
2005 ................................... --
Therafter ................................... --
---------
Total minimum lease payments................. $ 2,783
=========

26

GLACIER WATER SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Total lease expense for the years ended December 31, 2000, January 2,
2000, and January 3, 1999, was $2,034,000, $2,158,000 and $1,926,000,
respectively.

Contingencies

The Company is involved in various legal proceedings and claims
arising in the ordinary course of business, none of which, in the opinion of
management, is expected to have a material adverse effect on the Company"s
consolidated financial position or results of operations.

5. Income Taxes

Significant components of the benefit for income taxes are as follows (in
thousands):

Fiscal Year Ended
------------------------------------------
December 31, January 2, January 3,
2000 2000 1999
---- ---- ----

Federal Income Taxes:
Current ...................................................... $ 267 $ -- $ ( 216)
Deferred ..................................................... (267) (1,863) (941)
------- ------- -------
Total Federal Income Taxes ............................ -- (1,863) (1,157)
------- ------- ------
State and Local Income Taxes:
Current ...................................................... 47 -- -
Deferred ..................................................... (47) (196) (226)
------- -------- ------
Total State and Local Income Taxes .................... -- (196) (226)
------- ------- ------
Total Income Tax Benefit ..................................... $ -- $(2,059) $(1,383)
======= ======= ======

Deferred tax liabilities and assets result from the following (in thousands):

December 31, January 2,
2000 2000
---- ------

Deferred tax liabilities:
Property and equipment .............................................................. $ 8,421 $ 7,500
------- -------
Total deferred tax liabilities ......................................................... 8,421 7,500
------- ------
Deferred tax assets:
Alternative minimum tax credit .................................................... (1,482) (917)
Net operating loss ................................................................ (7,989) (5,314)
Manufacturer's investment credit .................................................. (591) (591)
Accruals and reserves ............................................................. (263) (778)
Valuation allowance ............................................................... 2,118 --
------- -------
Total deferred tax assets, net ......................................................... (8,207) (7,600)
------ -------
Net deferred tax liabilities (assets) .................................................. $ 214 $ (100)
======= =======

A valuation allowance has been recorded against the deferred tax assets due
to uncertainties surrounding their realization. The net deferred tax liability
and asset in the amounts of $214,000 and $100,000 as of December 31, 2000 and
January 2, 2000, are included in accrued liabilities and other assets,
respectively.

27

GLACIER WATER SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company's effective income tax rate differs from the federal statutory rate
as follows:

Fiscal Year Ended
-------------------------------------------
December 31, January 2, January 3,
2000 2000 1999
---- ---- ----

Federal statutory rate........................................ (34.0)% (34.0)% (34.0)%
State and local taxes, net of federal benefit................. (2.0)% (2.0)% (2.0)%
Foreign Taxes................................................. -- % -- % 4.0 %
Manufacturer's investment credit generated and other.......... -- % (1.0)% 2.0 %
Increase in valuation allowance............................... 36.0 % -- % -- %
------ ------- -----
Effective rate................................................ -- % (37.0)% (30.0)%
====== ====== =====

At December 31, 2000, the Company had federal and California income tax net
operating loss carry forwards of $19.8 million and $7.2 million, respectively,
which will begin to expire in 2012 and 2003 for federal and state income tax
purposes, respectively.

6. Stockholders' Equity

Preferred Stock

The Company's Certificate of Incorporation authorizes the issuance of
100,000 shares of preferred stock, par value $.01 per share. The rights,
preferences and privileges of the authorized shares (none of which have been
issued) may be established by the Board of Directors without further action by
the holders of the Company's common stock.

Treasury Stock

The Board of Directors has authorized the purchase of up to 750,000 shares
of the Company's common stock in the open market. As of December 31, 2000,
603,726 shares had been repurchased under this program, and the Company was
authorized to repurchase an additional 146,274 shares, approximately 5.2% of the
Company's total shares outstanding.

7. Stock Option Plans

The Company has options outstanding under two stock option plans, the
1992 Stock Option Plan, which was terminated in 1994, and the 1994 Stock
Compensation Program. The Company accounts for these plans under APB Opinion No.
25, under which no compensation cost has been recognized, since the exercise
price of the option was not less than the market price of the stock on the date
of grant.

The Company has reserved 950,000 shares of common stock under the 1994
Stock Compensation Program which provides for the issuance of incentive and
non-qualified stock options to key employees, including directors and
consultants. Incentive stock options are granted at no less than the fair market
value on the date of the grant. Non-qualified options may be granted at prices
determined by the Board of Directors, but at no less than 85% of the fair market
value on the date of the grant. Options generally have a term of 10 years and
become exercisable at a rate of 25% per annum. The Program also allows directors
to receive stock options in lieu of their annual directors' fees. Options
granted under this provision ("Deferral Options") have a term of five years and
become exercisable one year following the date of grant.

The Company had reserved 360,000 shares of common stock for issuance under
the 1992 Stock Option Plan, which provided for the issuance of incentive and
non-qualified stock options to key employees, including directors

28

GLACIER WATER SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

and consultants. The 1992 Stock Option Plan was terminated in 1994 with a
balance of 42,250 shares of common stock available for grant which were
transferred to the 1994 Stock Compensation Program.

A summary of the status of the Company's stock option plans and activity is
as follows:

Wtd. Avg.
Exercise
Shares Price
-------- ---------

Balance at January 4, 1998....................... 431,856 $18.57
Granted.......................................... 231,282 $31.11
Exercised........................................ (21,550) $15.19
-------- ------
Balance at January 3, 1999....................... 641,588 $23.21
Granted.......................................... 77,537 $24.53
Exercised........................................ (11,875) $13.12
Canceled......................................... (80,870) $30.56
-------- ------
Balance as of January 2, 2000.................... 626,380 $22.64
Granted.......................................... 266,885 $13.03
Exercised........................................ (6,000) $11.50
Canceled......................................... (123,306) $23.62
-------- ------
Balance as of December 31, 2000.................. 763,959 $19.16
Exercisable at December 31, 2000................. 348,978 $18.82

Weighted average fair value of options granted... $ 5.61

There are 90,500 options outstanding under the 1992 plan at December 31,
2000, all of which are exercisable, and have exercise prices between $8.25 and
$13.63, with a weighted average exercise price of $11.75 and a weighted average
remaining contractual life of 2.5 years.

There are 673,459 options outstanding under the 1994 plan at December 31, 2000
with exercise prices between $11.50 and $31.25, with a weighted average exercise
price of $20.15 and a weighted average remaining contractual life of 6.1 years.
258,478 of these options are exercisable, and their weighted average exercise
price is $21.29.

The following pro forma disclosures represent what the Company's net loss
and loss per share would have been had the Company recorded compensation cost
for these plans in accordance with the provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation ("Statement No. 123"):

Fiscal Year Ended
---------------------------------------
December 31, January 2, January 3,
2000 2000 1999
---- ---- ----

Pro forma net loss (in thousands) ......................... $ (6,489) $(5,086) $ (3,700)
Pro forma basic loss per share.............................. $ (2.29) $ (1.78) $ (1.19)
Pro forma diluted loss per share............................ $ (2.29) $ (1.78) $ (1.19)

Because the method of accounting required under FASB Statement No. 123 has
not been applied to options granted prior to January 1, 1995, the resulting pro
forma compensation cost may not be representative of that to be expected in
future years.

29

GLACIER WATER SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in fiscal 2000, 1999, and 1998, respectively,
average risk-free interest rates of 5.0%, 5.1% and 5.8%; no expected dividend
yield; expected lives of eight years for regular options and 5 years for
Deferral Options in all years; expected volatility of approximately 28% for
fiscal 2000 and 27% for fiscal 1999 and 1998.

8. Significant Customers

The following table sets forth the customers which represent ten percent or
more of the Company's total revenues in fiscal 2000, after the effect of any
consolidations that occurred as the result of any acquisitions or mergers by the
reailers:

Fiscal Year Ended
-----------------------------------------
December 31, January 2, January 3,
2000 2000 1999
---- ---- ----
Company A 11.70% 9.01% 8.97%
Company B 10.58% 10.01% 10.32%
Company C 10.99% 9.65% --%

9. Non Recurring and Other Charges

In the third quarter of 2000, the Company incurred non-recurring charges
totaling $1,400,000 associated with the closure of its Mexico operation. The
non-recurring charges primarily consisted of a write-down of leasehold
improvements, loss on disposal of assets, severance and other costs related to
the discontinuance of operations in Mexico. Approximately 500 machines were
returned to the United States for future re-deployment. As of December 31, 2000,
$69,000 remains as unpaid accrued liabilities in the accompanying consolidated
balance sheet.

In the fourth quarter of 1998, the Company incurred charges totaling
$971,000 for certain costs associated with the removal of approximately 1,450
machines at under-performing locations. These under-performing machines were
primarily located at small independent retailers. The Company relocated these
machines to large supermarket and drug store chains where it believes that it
will achieve better returns.

10. Related Party Transactions

Kayne Anderson Capital Advisors, L.P., a subsidiary of Kayne Anderson
Rudnick Investment Management, LLC, currently manages the Company's investment
portfolio. The Chairman of the Board and other board members are employed as
senior executives of Kayne Anderson Rudnick Investment Management, LLC. The
Chairman of the Board, other board members employed as senior executives of
Kayne Anderson Rudnick Investment Management, LLC and Kayne Anderson Rudnick
Investment Management, LLC are shareholders of the Company. The Company incurred
costs of $44,000, $69,000 and $103,000 in fiscal 2000, 1999 and 1998,
respectively, to Kayne Anderson Rudnick Investment Management, LLC in connection
with investment management fees. The Company incurred costs of $11,000 and
$46,000 for consulting services provided by LEK Consulting during fiscal 1999
and 1998, respectively and did not use LEK consulting during fiscal 2000. A
director of the Company was the President of the North American practice of LEK
Consulting Group during fiscal 1999. He is no longer employed by LEK Consulting.

11. Segment Reporting

In fiscal 1997, the FASB issued Statement No. 131 (SFAS 131), Disclosures
About Segments Of An Enterprise and Related Information. SFAS 131 requires that
a public business enterprise report financial and

30

GLACIER WATER SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

descriptive information about its reportable segments. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. Glacier
operates in a single business segment providing high quality, low priced
drinking water dispensed to consumers through self-service vending machines.

SFAS 131 also requires that a public business enterprise report geographic
information relative to revenue and long-lived assets. Glacier began operations
in Mexico during fiscal 1998. In the third quarter of fiscal 2000, the Company
discontinued its operations in Mexico City and returned approximately 500
machines to the United States for future re-deployment. During fiscal 2000, the
operations in Mexico incurred operating losses of approximately $814,000. The
geographic revenues for the fiscal years and long-lived assets are as follows:

Revenues
Fiscal Year Ended Long-Lived Assets as of
-------------------------- --------------------------
December 31, January 2, December 31, January 2,
2000 2000 2000 2000
---- ---- ---- ----
(in thousands)

United States........................... $58,850 $56,579 $55,366 $56,295
Mexico.................................. 326 195 -- 2,641
------- ------- ------- -------
Total................................... $59,176 $56,774 $55,366 $58,936
======= ======= ======= =======

31

GLACIER WATER SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

12. Quarterly Financial Data (Unaudited)

First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
(in thousands, except shares and per share amounts)

Year Ended December 31, 2000:
Net revenues $ 12,785 $ 15,939 $ 17,214 $ 13,238
Income (loss) from operations (833) 231 (485) (523)
Loss before extraordinary gain (2,376) (1,252) (1,900) (4,668)
Gain on early extinguishment of debt 1,073 460 318 2,347
Net income (loss) (1,303) (792) (1,582) (2,321)

Basic and diluted loss per share:
Loss before extraordinary gain (.84) (.44) (.67) (1.64)
Extraordinary gain .38 .16 .11 .83
Net loss (.46) (.28) (.56) (.82)
Weighted average shares 2,834,174 2,843,965 2,840,174 2,838,545

Year Ended January 2, 2000:
Net revenues $ 12,623 $ 14,232 $ 15,706 $ 14,213
Income (loss) from operations (401) (223) 903 (372)
Loss before extraordinary gain (2,593) (1,713) (772) (2,157)
Gain on early extinguishment of debt - - 336 2,281
Net income (loss) (2,593) (1,713) (436) 124

Basic earnings (loss) per share:
Loss before extraordinary gain (.87) (.61) (.27) (.76)
Extraordinary gain - - .12 .80
Net income (loss) (.87) (.61) (.15) .04
Weighted average shares 2,987,879 2,827,301 2,833,000 2,834,174

Diluted earnings (loss) per share:
Loss before extraordinary gain (.87) (.61) (.27) (.76)
Extraordinary gain - - .12 .80
Net income (loss) (.87) (.61) (.15) .04
Weighted average shares 2,987,879 2,827,301 2,833,000 2,858,303

Year Ended January 3, 1999:
Net revenues $ 12,814 $ 14,433 $ 16,916 $ 12,158
Income (loss) from operations 25 (42) 1,045 (2,496)
Net income (loss) (486) (391) 292 (2,687)

Basic earnings (loss) per share: (.15) (.12) .10 (.90)
Weighted average shares 3,211,988 3,201,389 2,893,759 2,987,879

Diluted earnings (loss) per share (.15) (.12) .10 (.90)
Weighted average shares and potential shares 3,211,988 3,201,389 3,011,765 2,987,879

INDEX TO EXHIBITS

Exhibit
No.
- -------
3.1 Certificate of Incorporation of Registrant (i.)
3.2 Bylaws of Registrant (i.)
4.1 Specimen Stock Certificate of Registrant (i.)
4.2 Junior Subordinated Indenture between Glacier Water Services, Inc. and
Wilmington Trust Company, as Indenture Trustees, dated January 28,
1997 (viv.)
4.3 Officers' Certificate and Company Order executed by Glacier Water
Services, Inc., dated January 27, 1998
4.4 Certificate of Trust of Glacier Water Trust I, dated November 13, 1997
(viii.)
4.5 Trust Agreement of Glacier Water Trust I, dated November 13, 1997
(viii.)
4.5.1 Amended and Restated Trust Agreement of Glacier Water Trust I, dated
January 27, 1998 (viv.)
4.6 Trust Preferred Certificate of Glacier Water Trust I (viv.)
4.7 Common Securities Certificate of Glacier Water Trust I (viv.)
4.8 Guarantee Agreement between Glacier Water Services, Inc. and
Wilmington Trust Company, as Trustee, dated January 27, 1998 (viv.)
4.9 Agreement as to Expenses and Liabilities between Glacier Water
Services, Inc. and Glacier Water Trust I, dated January 27, 1998
(viv.)
4.10 Junior Subordinated Deferrable Interest Debenture of Glacier Water
Services, Inc. (viv.)
10.1 Amended and Restated 1992 Stock Incentive Plan (ii.)
10.2 Vending Machine Agreement between the Vons Companies, Inc. and BWVI
(i.)
10.3 Location Agreement between Ralph"s Grocery Company, Cala Co., and GW
Services, Inc. (v.)
10.4 Form of Indemnification Agreement with Officers and Directors (i.)
10.5 1994 Stock Compensation Plan (iii.)
10.5.1 Amendment No. 1 to 1994 Stock Compensation Plan (iv.)
10.5.2 Amendment No. 2 to 1994 Stock Compensation Plan (v.)
10.5.3 Amendment No. 3 to 1994 Stock Compensation Plan (v.)
10.5.4 Amendment No. 4 to 1994 Stock Compensation Plan (vi.)
10.5.5 Amendment No. 5 to 1994 Stock Compensation Plan (vii.)
21.1 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP Independent Public Accountants

(i.) Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 33-45360) amendments thereto.
(ii.) Incorporated by reference to the Company's Registration Statement on
Form S-8 (File Number 33-61942) filed April 30, 1993.
(iii.) Incorporated by reference to the Company's Registration Statement on
Form S-8 (File Number 33-80016) filed June 8, 1994.
(iv.) Incorporated by reference to the Company's Proxy Statement for the
Annual Meeting held on June 2, 1993.
(v.) Incorporated by reference to the Company's Proxy Statement for the
Annual Meeting held on June 6, 1995.
(vi.) Incorporated by reference to the Company's Proxy Statement for the
Annual Meeting held on June 3, 1997.
(vii.) Incorporated by reference to the Company's Proxy Statement for the
Annual Meeting held on June 9, 1998.
(viii.) Incorporated by reference to the Company's Registration Statement on
Form S-2 (File Number 333-40335) filed January 22, 1998.
(viv.) Incorporated by reference to the Company"s Annual Report on Form 10-K
for the fiscal year ended January 4, 1998.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

GLACIER WATER SERVICES, INC.

By /s/ W. David Walters
-------------------------

W. David Walters
Senior Vice President,
Chief Financial Officer

Date: March 15, 2001

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 22, 2001.

Signature Title
- --------- -----

Principal Executive Officer:

/s/ W. David Walters Senior Vice President, Chief Financial Officer
- -------------------------
W. David Walters

/s/ Richard A. Kayne Chairman of the Board and Director
- -------------------------
Richard A. Kayne

/s/ Peter B. Foreman Director
- -------------------------
Peter B. Foreman

/s/ Peter H. Neuwirth Director
- -------------------------
Peter H. Neuwirth

/s/ Scott H. Shlecter Director
- -------------------------
Scott H. Shlecter

/s/ Robert V. Sinnott Director
- -------------------------
Robert V. Sinnott

/s/ Jerry R. Welch Director
- -------------------------
Jerry R. Welch

34