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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 30, 2001
[X] 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.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 33-0493559
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2651 La Mirada Drive, #100
Vista, CA 92083
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (760) 560-1111
----------------------
Securities registered pursuant of 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.
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 February 21, 2002, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $34,013,688 (calculated at the average bid
and asked prices on February 21, 2002 on the American Stock Exchange multiplied
by outstanding shares held by non-affiliates). For purposes of the foregoing
calculation, the registrant has excluded form 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 February 21, 2002, 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 2001 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 competition) 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 action 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 statements 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
"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 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 had
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 30, 2001, the Company had 11,182 outside machines and 2,214 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
relationships with retail accounts; (iii) increasing brand awareness; and (iv)
maximizing operating efficiencies and asset productivity.
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Business Background
- -------------------
The following table presents the number of machines installed annually since
December 31, 1996:
Total installed machines as of December 31, 1996.................... 9,164
Net machines added (reduced) during the year
1997........................................................... 3,280
1998........................................................... 1,258
1999........................................................... 114
2000........................................................... (369)
2001........................................................... (51)
------
Total installed machines as of December 30, 2001............... 13,396
======
The net reduction of machines in operation in fiscal year 2000 was due
primarily to the discontinuance of the Company's operation in Mexico City,
Mexico during the third quarter of fiscal 2000. The reduction in machines in
fiscal year 2001 was due primarily to the fact that the Company removed machines
from under-performing locations to increase efficiencies and obtain higher
returns on machines deployed.
Total machines installed as of December 30, 2001 are distributed by state
as follows:
California..................................................... 6,857
Texas.......................................................... 1,698
Florida........................................................ 1,560
Arizona........................................................ 788
Nevada......................................................... 359
Other.......................................................... 2,134
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Total.......................................................... 13,396
======
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 most 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. Non-
sparkling water is the segment in which the company competes and is consumed as
an alternative to tap water. Non-sparkling 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 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
3
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 non-sparkling 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
the 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 $0.49 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. Non-sparkling 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. As retailers become increasingly
cognizant of the growing demand for vended water, 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
outdoor water vending machines.
Most 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 Company has long-term contracts with three retailers
whose volume accounted for 12.3%, 12.2%, and 12.0% of fiscal 2001 revenues. 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 allowed the Company over the last five years to increase the
number of machines serviced weekly by technicians. 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 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 15% 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. The Company continually monitors the
performance of retail locations and periodically redeploys
4
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 continues to
evaluate and pursue select strategic acquisition opportunities. On
February 8, 2002, Glacier acquired substantially all of the assets
of the Pure Fill Corporation and its wholly owned subsidiaries,
National Water Services, Pure Fill Finance Corporation and Pure Fill
Container Corporation for $6,200,000, subject to certain working
capital adjustments related primarily to the accounts receivable and
accounts payable balances assumed by Glacier, of which $640,000 is
payable in installments over four years. Prior to the acquisition,
Pure Fill operated water vending machines in certain markets also
serviced by Glacier. The results of operations related to the Pure
Fill acquisition will be included in the financial statements of
Glacier Water subsequent to the acquisition.
Competition
- -----------
The bottled water market is highly competitive. The Company competes in
the non-sparkling segment of the bottled market with companies that deliver
water to homes and offices, companies that 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.
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 for 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.
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. 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 the 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
5
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 contaminations 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.
Employees
- ---------
As of December 30, 2001, the Company had 283 employees, including 30 in
administration and 253 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 leases approximately 25,000 square feet of executive offices
and warehouse space in Vista, California for its corporate offices with a lease
that expires in May 2006. The Company also leases various other facilities
for area service centers. These leases range in size from 1,200 to 13,400 square
feet and expire on various dates from September 2002 through October 2005.
Item 3. Legal Proceedings
The Company is not currently a party to any material legal proceeding.
Item 4. Submission of matters to Vote of Security Holders
No matters were submitted to vote of the security holders of the Company
during the fourth quarter of 2001.
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 for the range of high and low
closing prices on the American Stock Exchange for the Common Stock for the
periods indicated.
High Low
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
Fiscal Year 2001
----------------
First Quarter $ 9.30 $ 7.75
Second Quarter 9.40 7.55
Third Quarter 9.25 8.45
Fourth Quarter 8.55 7.60
The Company did not pay dividends on its Common Stock in 2001 and 2000 and
does not presently intend to pay any dividends on its Common Stock in the
foreseeable future. The Company had approximately 31 stockholders of record as
of December 30, 2001.
6
During the quarter ended July 1, 2001, the Company issued 16,000 shares of
Glacier Water Cumulative Redeemable Convertible Preferred Stock (the "Preferred
Stock"), which resulted in an increase to stockholders' equity of $1,600,000,
excluding related issuance costs. Holders of the Preferred Stock are entitled
to receive, when declared by the Board of Directors, a cumulative, preferential
dividend ("Dividend") at the rate of 8% per annum of the original purchase price
of each share of Preferred Stock. If any dividends are declared on the Common
Stock, they will also be paid on the Preferred Stock on an as-converted basis.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the Preferred Stock will be entitled
to be paid out of the assets of the Company available for distribution, before
any payment shall be made to holders of the common stock or any other class or
series of stock of the Company ranking junior to the Preferred Stock, an amount
equal to $100.00 per share plus any accrued but unpaid Dividends ("Liquidation
Amount"). After payment of the Liquidation Amount, all of the remaining assets
of the Company available for distribution shall be distributed ratably among
holders of all preferred and common stock of the Company. The Preferred Stock
may be redeemed, at the election of the Company, for redemption prices equal to
103%, 102%, 101%, and 100% of the Liquidation Amount on or after the third,
fourth, fifth, and sixth anniversary, respectively. In addition, the Preferred
Stock may be redeemed, at the election of the Company, at 100% of the
Liquidation Amount if the closing price of the Company's common stock remains at
or above $19.00 for 10 consecutive trading days. The Preferred Stock is
convertible into shares of common stock computed by dividing the Liquidation
Amount, with respect to the number of shares of Preferred Stock to be converted,
by $9.50.
For the year ended December 30, 2001, the Company accrued and declared
dividends associated with the Cumulative Redeemable Convertible Preferred Stock
of $66,000.
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Item 6. Selected Consolidated Financial Data
The following sets forth selected financial data as of and for the periods
presented. The Company's fiscal year ends on the Sunday closest to December 31.
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
----------------------------------------------------------------
Dec 30, Dec 31, Jan 2, Jan 3, Jan 4,
2001 2000 2000 1999 1998
---- ---- ---- ---- ----
Revenues..................................................... $ 60,345 $ 59,176 $ 56,774 $ 56,321 $ 57,294
Operating costs and expenses:
Operating expenses........................................ 38,444 38,482 36,984 36,727 35,569
Selling, general and administrative expenses.............. 9,275 8,838 9,143 9,879 7,200
Depreciation and amortization............................. 12,358 12,066 10,740 10,212 8,852
Non-recurring and other charges........................... -- 1,400 -- 971 3,062
---------- ---------- ---------- ---------- ----------
Total operating costs and expenses..................... 60,077 60,786 56,867 57,789 54,683
---------- ---------- ---------- ---------- ----------
Income (loss) from operations................................ 268 (1,610) (93) (1,468) 2,611
Other (income) expenses:
Interest expense.......................................... 5,993 7,016 7,859 7,446 1,988
Investment (income) loss.................................. (227) 1,570 1,342 (4,259) --
---------- ---------- ---------- ---------- ----------
Total other expense.......................................... 5,766 8,586 9,201 3,187 1,988
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and extraordinary gain..... (5,498) (10,196) (9,294) (4,655) 623
Income tax provision (benefit)............................... -- -- (2,059) (1,383) 193
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary gain...................... (5,498) (10,196) (7,235) (3,272) 430
Extraordinary gain on early retirement of debt............... 4 4,198 2,617 -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)............................................ (5,494) (5,998) (4,618) (3,272) 430
---------- ---------- ---------- ---------- ----------
Preferred dividends.......................................... 66 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) applicable to common stockholders.......... $ (5,560) $ (5,998) $ (4,618) $ (3,272) $ 430
========== ========== ========== ========== ==========
Basic earnings (loss) per share:
Income (loss) before extraordinary gain...................... $ (1.96) $ (3.59) $ (2.54) $ (1.05) $ (.13)
Extraordinary gain........................................... -- 1.48 .92 -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)............................................ $ (1.96) $ (2.11) $ (1.62) $ (1.05) $ (.13)
========== ========== ========== ========== ==========
Diluted earnings (loss) per share:
Income (loss) before extraordinary gain...................... $ (1.96) $ (3.59) $ (2.54) $ (1.05) $ (.13)
Extraordinary gain........................................... -- 1.48 .92 -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)............................................ $ (1.96) $ (2.11) $ (1.62) $ (1.05) $ (.13)
========== ========== ========== ========== ==========
Weighted average shares used for basic earnings per share.... 2,834,474 2,836,965 2,850,253 3,119,696 3,219,082
Dilutive common stock options................................ -- -- -- -- 113,808
---------- ---------- ---------- ---------- ----------
Weighted average shares used for diluted earnings per share.. 2,834,474 2,836,965 2,850,253 3,119,696 3,332,890
---------- ---------- ========== ========== ==========
8
Selected Balance Sheet Data
Fiscal Year Ended
---------------------------------------------------
Dec 30, Dec 31, Jan 2, Jan 3, Jan 4
2001 2000 2000 1999 1998
---- ---- ---- ---- ----
(in thousands)
Cash and cash equivalents................................ $ 1,536 $ 1,428 $ 4,205 $ 109 $ 13
Investments, available-for-sale.......................... $ 1,204 $ 3,195 $ 9,826 $ 31,037 $ 315
Property and equipment, net of accumulated
depreciation........................................... $48,286 $55,366 $58,936 $ 54,939 $48,523
Total Assets............................................. $63,140 $74,616 $89,409 $100,515 $59,473
Long-term debt and line of credit, including
current portion........................................ $61,965 $69,755 $79,748 $ 85,000 $28,732
Stockholders' equity (deficit)........................... $(3,866) $ 232 $ 4,673 $ 9,284 $24,623
Working capital.......................................... $ 2,099 $ 4,304 $11,360 $ 32,501 $ 1,975
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 percentages of revenues
represented by certain items included in the Consolidated Statements of
Operations.
Fiscal Year Ended
---------------------------------------------------
December 30, December 31, January 2,
2001 2000 2000
----- ------ ------
Revenues.............................................................. 100.0% 100.0% 100.0%
Costs and expenses:
Operating Expenses................................................. 63.7% 65.0% 65.2%
Selling, general and administrative expenses....................... 15.4% 14.9% 16.1%
Depreciation and amortization...................................... 20.5% 20.4% 18.9%
Non-recurring and other charges.................................... --% 2.4% --%
----- ------ ------
Total costs and expenses...................................... 99.6% 102.7% 100.2%
----- ------ ------
Income (loss) from operations......................................... .4% (2.7)% (0.2)%
Other (income) expenses:
Interest expense................................................... 9.9% 11.9% 13.8%
Investment (income) loss........................................... (.4)% 2.6% 2.4%
----- ------ ------
Total other expenses.......................................... 9.5% 14.5% 16.2%
----- ------ ------
Income (loss) before income taxes and extraordinary gain (9.1)% (17.2)% (16.4)%
Income tax provision (benefit)........................................ --% --% (3.7)%
Extraordinary gain.................................................... --% 7.1% 4.6%
----- ------ ------
Net loss.............................................................. (9.1)% (10.1)% (8.1)%
===== ====== ======
Results of Operations
- ---------------------
Overview
- --------
Since its inception in 1983, the Company 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.
Over the past three years, the Company has expanded into new markets. Such
expansions required the Company to commit costs in support of the infrastructure
necessary to support these new markets. Future expansion of vending machines
into new markets will be limited in order to allow the Company to concentrate
its efforts on installing machines at new locations within existing markets
where it currently operates. This strategy should build synergies and enhance
the Company's ability to leverage its fixed costs in the new markets. The
Company continually looks for ways to reduce operating costs in all areas. The
Company continually explores opportunities to implement technology to improve
efficiency of servicing the vending machines to lower operating cost. The
Company continues to monitor
9
selling, general and administrative expenses and reduce costs where possible.
Further, in an effort to improve net results, the Company has utilized its net
cash provided by operations and proceeds from the sale of investments to retire
early, at a discount, a portion of the long-term debt. This early retirement of
a portion of the long-term debt reduces the Company's interest expense and
improves its net results.
Revenues
- --------
Revenues for fiscal year 2001 increased 2.0% to $60,345,000 from
$59,176,000 in fiscal year 2000. This increase was the result of the higher
average revenues per machine realized during fiscal 2001 compared to 2000. As
of December 30, 2001, the Company had 13,396 machines in operation compared to
13,447 machines at December 31, 2000. As of December 30, 2001, the Company had
2,214 in-store machines and 11,182 outside machines in operation in 35 states.
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,
Mexico during the third quarter of fiscal 2000. Revenues for the fiscal year
2000 increased 4.2% to $59,176,000 from $56,774,000 in fiscal 1999. The
increase in revenues in 2000 was the result of increased average number of in-
store machines in operation throughout the year compared to 1999.
The Company began operations in Mexico during fiscal 1998. The Company
recognized revenues from the Mexico operation of approximately $326,000 and
$195,000 for the years ended December 31, 2000 and January 2, 2000,
respectively. At its peak, the Company operated 434 machines in Mexico, of
which approximately 120 were located in water stores. However, these revenues
were overshadowed by larger operating costs (see Costs and Expenses), which
resulted in net operating losses of approximately $814,000, not including the
$1,400,000 non-recurring charge, and $970,000 for the years ended December 31,
2000 and January 2, 2000, respectively. Accordingly, during the third quarter
of 2000, to improve the Company's operating results, the operations in Mexico
ceased and approximately 500 machines were returned to the United States for
future deployment.
Costs and Expenses
- ------------------
Operating expenses for the year ended December 30, 2001 decreased slightly
to $38,444,000 from $38,482,000 for fiscal year 2000. 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. As the Company continues to increase the number of
machines in existing markets and these machines mature, the Company continues to
leverage the costs associated with servicing the machines. The decrease in
total operating expenses was primarily due to cost containment efforts offset by
an increase in workers compensation costs and the cost to refurbish machines.
The lower operating costs combined with the higher revenues resulted in
operating costs as a percent of revenues of 63.7% for fiscal 2001 compared to
65.0% for the prior year. Operating expenses for fiscal year 2000 increased to
$38,482,000 or 65.0% of revenues, compared to $36,984,000 or 65.2% of revenues
in 1999. The increase in total dollar operating costs in 2000 was due primarily
to the additional service costs associated with the expansion into new markets
within the geographic areas served by the Company and an increase in total
dollar commission expense associated with the higher revenues.
The Mexico operation incurred operating expenses of approximately $569,000
and $317,000 for the years ended December 31, 2000 and January 3, 2000,
respectively. The operating costs in Mexico represented the cost to service
vending machines and rent, utilities and personnel associated with the water
stores.
In the third quarter of 2000, the Company approved a plan to discontinue
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 consisted of leasehold improvement write-offs of $545,000
related to the water stores and warehouse; impairment losses on the disposal of
equipment and fixtures located in Mexico of $338,000; severance costs of
$83,000 related to the involuntary termination of 35 employees; lease
termination costs of $42,000, building closures of $192,000, fees paid to
advisors regarding actions to be taken in the restructuring of $117,000, and
other direct costs associated with the exit plan of $83,000. By the end of the
third quarter of 2000, the closure of the Mexico operations was substantially
complete. There were no additional charges associated with the discontinuance
of the operation in Mexico.
The Company calculated the impairment loss on assets to be disposed of, in
accordance with Statement of Financial Accounting Standards (SFAS) N0. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, by measuring the amount by which the carrying value exceeded the
fair value less cost to sell the assets. Fair value was determined based upon
the best information available for prices of similar assets, which could be
bought or sold in a current transaction between unrelated parties. Further, in
accordance with Emerging
10
Issues Task Force (EITF) Issue 94-03, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring), the Company accrued exit costs, which were
identifiable and estimable.
Selling, general and administrative expenses ("SG&A") for fiscal 2001
increased $437,000 to $9,275,000 or 15.4% of revenues, compared to $8,838,000 or
14.9% of revenues in fiscal 2000 and $9,143,000 or 16.1% of revenues in 1999.
This increase in SG&A expenses in fiscal 2001 compared to 2000 was primarily due
to a reduction associated with the discontinuance of the Mexico operation during
fiscal 2000, offset by an increase due to certain overhead costs previously
allocated as part of the manufacturing process. As a result of the suspension
of the Company's manufacturing activity in June 2000, these costs are currently
included in SG&A. Also included are severance costs associated with the
termination of employment of certain executives during the first quarter of
2001. The decrease in SG&A expenses in fiscal 2000 compared to fiscal 1999 was
primarily associated with a reduction in legal expenses incurred by the Company
in fiscal 1999 in connection with an alleged patent infringement which was
dismissed, offset by an increase in fiscal 2000 taxes and license expenses
associated with operating in additional states. Mexico incurred SG&A expenses
of $396,00 and $693,000 for the years ended December 31, 2000 and January 2,
2000, respectively.
Depreciation and amortization expense for fiscal year 2001 increased to
$12,358,000, compared to $12,066,000 in fiscal 2000 and $10,740,000 in fiscal
1999. The increase in each year is a 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 2002.
Machines that have been previously installed and are in storage awaiting
deployment are currently being depreciated.
Interest expense for fiscal year 2001 decreased to $5,993,000 compared to
$7,016,000 in fiscal 2000. The decrease was primarily associated with the
extinguishment of borrowings under the line of credit. Interest expense for
fiscal 1999 was $7,859,000. The decrease in interest expense in fiscal 2000
compared to fiscal 1999 was due to 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.
As of December 30, 2001, the Company's investment portfolio, which included
non-investment grade securities, consisted of corporate debt securities and a
mortgage backed security with carrying values of $1,023,000 and $181,000,
respectively. For the year ended December 30, 2001, the Company had a net gain
on investments of $227,000 compared to a net loss on investments of $1,570,000
for the year ended December 31, 2000. The net gain on investments for fiscal
2001 consisted of management fees of $13,000, investment earnings of $274,000
and net realized loss on the sale of investments of $34,000. For fiscal year
2000, the net loss on investments consisted of management fees of $44,000,
investment earnings of $1,036,000 and net realized losses on the sale of
investments of $2,562,000. Net realized losses related to the sale of two
corporate debt securities and one corporate equity security during the fourth
quarter of fiscal 2000 totaling $2,623,000, which was offset by realized gains
during fiscal 2000 totaling $61,000. For the year ended January 2, 2000, the
net loss on investments of $1,342,000 consisted of management fees of $196,000,
investment earnings of $1,261,000 and net realized losses on the sale of
investments of $2,407,000. Net realized losses primarily consisted of a
$2,100,000 write down of two investments, a corporate debt security and a
corporate equity security, believed to be other than temporarily impaired.
Investments were managed by Kayne Anderson Capital Advisors, L.P. during fiscal
years 2001 and 2000, and Kayne Anderson Capital Advisors, L.P. and Camden Asset
Management, L.P. during fiscal 1999.
Due to the continuing losses incurred by the Company, no tax benefit was
recorded in fiscal years 2001 and 2000. The Company recorded a tax benefit of
$2,059,000 in fiscal 1999.
The Company's Board of Directors has authorized the purchase of up to
1,250,000 shares 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"). As of December 30, 2001,
the Company had repurchased 921,400 shares of the Trust Preferred Securities
including 400 shares repurchased in fiscal 2001 for a net extraordinary gain of
$4,115 compared to a net extraordinary gain of $4,198,000 for fiscal 2000. As
of December 30, 2001, the Company has used $15,118,000 in cash to repurchase
$23,035,000 face value of the Trust Preferred Securities less $1,098,000 of
deferred financing costs. At an average cost of $16.41 per share, the Company
believes that this was an excellent use of the Company's cash considering it
resulted in reducing debt levels and thereby lowered interest expense in excess
of $2,000,000 per year for the remainder of the debt's outstanding maturity.
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 30, 2001, there were 2,478,600 shares of the
Trust Preferred Securities outstanding (other than shares held by the Company).
11
For fiscal year 2001, the Company incurred a loss before extraordinary gain
on the early retirement of debt of $5,498,000, or $1.96 per basic and diluted
share compared to a loss of $10,196,000, or $3.59 per basic and diluted share in
2000. For fiscal year 2001, the Company incurred a net loss of $5,494,000, or
$1.96 per basic and diluted share compared to the net loss of $5,998,000 or
$2.11 per basic and diluted share in 2000 and $4,618,000, or $1.62 per basic and
diluted share in 1999.
Liquidity and Capital Resources
- -------------------------------
The Company's primary sources of liquidity and capital resources in fiscal
2001 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 credit facility with Tokai Bank of California (currently known as United
California Bank), which provided for borrowings of up to $10,000,000 and
required quarterly interest payments at the bank's prime rate or LIBOR plus
1.90%. During the fourth quarter of fiscal 2001, the Company paid off the
outstanding balance on the credit facility and terminated the facility. On
February 19, 2002, the Company, in connection with the acquisition of the Pure
Fill Corporation, entered into a new Credit Facility with City National Bank,
which provided for borrowings of up to $10,000,000. The credit facility provides
a five-year, $6,000,000 term loan, which requires monthly interest and principal
payments at the bank's prime rate plus 1.5% (6.25% per annum as of February 19,
2002) and a two-year, $4,000,000 revolving credit facility, which requires equal
monthly interest payments at the bank's prime rate plus 1% (5.75% per annum as
of February 19, 2002). Glacier borrowed $6,000,000 on the term loan in
connection with the acquisition of the Pure Fill assets.
For fiscal 2001, net cash provided by operations was approximately
$7,192,000 and the Company made capital investments in vending machines and
other equipment of approximately $2,789,000. Net cash used in financing
activities was approximately $6,120,000, which included the repurchase of the
Trust Preferred Securities of approximately $5,000 and the net repayments on the
credit line of $7,675,000, partially offset by the issuance of the Preferred
Stock of $1,594,000. As of December 30, 2001, the Company had working capital
of $2,099,000. 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' deficit as of
December 30, 2001 was $3,866,000, which amount is below the American Stock
Exchange's minimum stockholders' equity requirement of $4,000,000.
During the quarter ended July 1, 2001, the Company issued 16,000 shares of
Glacier Water Cumulative Redeemable Convertible Preferred Stock (the "Preferred
Stock"), which resulted in an increase to stockholders' equity of $1,600,000,
excluding related issuance costs. Holders of the Preferred Stock are entitled
to receive, when declared by the Board of Directors, a cumulative, preferential
dividend ("Dividend") at the rate of 8% per annum of the original purchase price
of each share of Preferred Stock. If any dividends are declared on the Common
Stock, dividends will also be paid on the Preferred Stock on an as-converted
basis. For the year ended December 30, 2001, the Company accrued and declared
dividends associated with the Cumulative Redeemable Convertible Preferred Stock
of $66,000.
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.
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, 2008, 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. Through
12
December 31, 2001, the Company has repurchased 921,400 shares of the Trust
Preferred Securities, effectively retiring $23,035,000 of Subordinated
Debentures.
The Company believes that its cash, investments on hand, cash flow from
operations and the availability under its credit facility will be sufficient to
meet its anticipated amounts due under its credit facility, operating and
capital requirements as well as distributions related to the Trust Preferred
Securities and dividends on its Preferred Stock, for at least the next twelve
months.
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 30, 2001, the Company held a portfolio of marketable securities
consisting entirely of debt instruments available-for-sale with an estimated
fair value equal to $1,204,000. The Company held no convertible debt securities
or equity securities available-for-sale as of December 30, 2001. 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 15 through 30 after part IV of this report.
Item 9. Changes in Disagreements With Accountants on Accounting and Financial
Disclosure
Not applicable.
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 2002 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 30, 2001.
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 2002 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 30, 2001.
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 2002 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 30, 2001.
13
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 2002 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 30, 2001.
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 30, 2001.
Index
-----
Page
Number
------
Consolidated Financial Statements
- ---------------------------------
Report of Independent Public Accountants 15
Consolidated Balance Sheets at December 30, 2001 and December 31, 2000 16
Consolidated Statements of Operations for the fiscal years ended
December 30, 2001, December 31, 2000, and January 2, 2000 17
Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended
December 30, 2001, December 31, 2000, and January 2, 2000 17
Consolidated Statements of Stockholders' Equity (Deficit) for the fiscal years ended
December 30, 2001, December 31, 2000, and January 2, 2000 18
Consolidated Statements of Cash Flows for the fiscal years ended
December 30, 2001, December 31, 2000, and January 2, 2000 19
Notes to Consolidated Financial Statements 20
14
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
30, 2001 and December 31, 2000, and the related consolidated statements of
operations, comprehensive income (loss), stockholders' equity (deficit) and cash
flows for each of the three fiscal years in the period ended December 30, 2001.
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 30, 2001 and December 31, 2000, and the results
of its operations and its cash flows for each of the three fiscal years in the
period ended December 30, 2001, in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
San Diego, California
February 19, 2002
15
GLACIER WATER SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
ASSETS
------
December 30, December 31,
2001 2000
---- ----
Current Assets:
Cash and cash equivalents............................................................ $ 1,536 $ 1,428
Investments, available-for-sale...................................................... 1,204 3,195
Accounts receivable.................................................................. 721 758
Inventories.......................................................................... 2,629 2,587
Prepaid expenses and other........................................................... 1,050 1,070
-------- --------
Total current assets.......................................................... 7,140 9,038
Property and equipment, net of accumulated depreciation..................................... 48,286 55,366
Other assets................................................................................ 7,714 10,212
-------- --------
Total assets................................................................................ $ 63,140 $ 74,616
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current Liabilities:
Accounts payable..................................................................... $ 991 $ 839
Accrued commissions.................................................................. 2,126 2,286
Accrued liabilities.................................................................. 1,924 1,609
-------- --------
Total current liabilities..................................................... 5,041 4,734
-------- --------
Long-term debt.............................................................................. 61,965 61,975
Line of credit.............................................................................. -- 7,675
-------- --------
Commitments and Contingencies
Stockholders' Equity (Deficit):
Preferred stock, $.01 par value; 8% cumulative redeemable convertible;
100,000 shares authorized, 16,000 and no shares issued and outstanding at
December 30, 2001 and December 31, 2000, respectively........................ -- --
Common stock, $.01 par value, 10,000,000 shares authorized,
2,834,474 shares issued and outstanding....................................... 35 35
Additional paid-in capital........................................................... 17,782 16,188
Retained earnings (deficit).......................................................... (6,787) (1,227)
Treasury stock, at cost, 603,726 shares.............................................. (14,852) (14,852)
Accumulated other comprehensive income (loss)........................................ (44) 88
-------- --------
Total stockholders'equity (deficit)........................................... (3,866) 232
-------- --------
Total liabilities and stockholders' equity (deficit)........................................ $ 63,140 $ 74,616
======== ========
The accompanying notes are an integral part of these consolidated statements.
16
GLACIER WATER SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share data)
Fiscal Year Ended
--------------------------------------------------
December 30, December 31, January 2,
2001 2000 2000
---- ---- ----
Revenues................................................................ $ 60,345 $ 59,176 $ 56,774
Operating costs and expenses:
Operating expenses.................................................. 38,444 38,482 36,984
Selling, general and administrative expenses........................ 9,275 8,838 9,143
Depreciation and amortization....................................... 12,358 12,066 10,740
Non-recurring and other charges..................................... -- 1,400 --
---------- ---------- ----------
Total operating costs and expenses............................... 60,077 60,786 56,867
---------- ---------- ----------
Income (loss) from operations........................................... 268 (1,610) (93)
---------- ---------- ----------
Other (income) expenses:
Interest expense.................................................... 5,993 7,016 7,859
Investment (income) loss............................................ (227) 1,570 1,342
---------- ---------- ----------
Total other expenses.............................................. 5,766 8,586 9,201
---------- ---------- ----------
Loss before income taxes and extraordinary gain......................... (5,498) (10,196) (9,294)
Income tax benefit...................................................... -- -- (2,059)
---------- ---------- ----------
Loss before extraordinary gain.......................................... (5,498) (10,196) (7,235)
Extraordinary gain on early retirement of debt.......................... 4 4,198 2,617
---------- ---------- ----------
Net loss................................................................ (5,494) (5,998) (4,618)
Preferred dividends..................................................... 66 -- --
---------- ---------- ----------
Net loss applicable to common stockholders.............................. $ (5,560) $ (5,998) $ (4,618)
========== ========== ==========
Basic and diluted earnings (loss) per share:
Loss before extraordinary gain.......................................... $ (1.96) $ (3.59) $ (2.54)
Extraordinary gain...................................................... -- 1.48 .92
---------- ---------- ----------
Net loss................................................................ $ (1.96) $ (2.11) $ (1.62)
========== ========== ==========
Weighted average shares used in calculation............................. 2,834,474 2,836,965 2,850,253
========== ========== ==========
GLACIER WATER SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands)
Fiscal Year Ended
--------------------------------------------
December 30, December 31, January 2,
2001 2000 2000
---- ---- ----
Net loss..................................................................... $ (5,494) $ (5,998) $ (4,618)
Unrealized gain (loss) on securities:
Unrealized holding gain (loss) arising during the period.................... (166) 4,106 5,504
Less: reclassification adjustment for net realized losses (gains)
included in net income (loss).............................................. (34) 2,562 2,407
-------- -------- --------
Net unrealized gain (loss)................................................... (132) 1,544 3,097
-------- -------- --------
Comprehensive loss........................................................... $ (5,626) $ (4,454) $ (1,521)
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
17
GLACIER WATER SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(dollars in thousands, except shares)
Accumulated
Preferred Stock Common Stock Additional Retained Other
--------------- ---------------- Paid In Earnings Treasury Comprehensive
Shares Amount Shares Amount Capital (Deficit) Stock Income (Loss) Total
------ ------ ------ ------ ------- --------- ----- ------------- -----
Balance, January 3, 1999 - $ - 2,959,975 $ 34 $15,963 $ 9,389 $(11,549) $(4,553) $ 9,284
Exercise of Stock Option - - 11,875 - 156 - - - 156
Purchase of Treasury Stock - - (137,676) - - - (3,246) - (3,246)
Net Unrealized Gain on - - - - - - - 3,097 3,097
Investments
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 - - - - - - - 1,544 1,544
Investments
Net Loss - - - - - (5,998) - - (5,998)
------ ---- --------- ------- ------- ------- -------- ------- -------
Balance, December 31, 2000 - - 2,834,474 35 16,188 (1,227) (14,852) 88 232
Issuance of Preferred Stock 16,000 - - - 1,594 - - - 1,594
Net Unrealized Loss on - - - - - - - (132) (132)
Investments
Dividends on Preferred Stock - - - - - (66) - - (66)
Net Loss - - - - - (5,494) - - (5,494)
------ ---- --------- ------- ------- ------- -------- ------- -------
Balance, December 30, 2001 16,000 $ - 2,834,474 $ 35 $17,782 $(6,787) $(14,852) $ (44) $(3,866)
====== ==== ========= ======= ======= ======= ======== ======= =======
The accompanying notes are an integral part of these consolidated statements.
18
GLACIER WATER SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(dollars in thousands)
Fiscal Year Ended
--------------------------------------
December 30, December 31, January 2,
2001 2000 2000
---- ---- ----
Cash flows from operating activities:
Net Loss $ (5,494) $ (5,998) $ (4,618)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 12,358 12,066 10,740
Loss on disposal of assets 125 908 103
Extraordinary gain on early retirement of debt (4) (4,198) (2,617)
Deferred tax provision (benefit) -- -- (2,059)
Realized loss on sales of investments 34 2,562 2,407
Change in operating assets and liabilities:
Accounts receivable 37 (169) 759
Inventories (42) 662 (359)
Prepaid expenses and other 20 709 (391)
Payments for prepaid marketing incentives (243) (2,936) (4,461)
Other assets 126 325 (250)
Accounts payable, accrued liabilities and accrued commissions 275 (254) 717
-------- -------- --------
Total adjustments 12,686 9,675 4,589
-------- -------- --------
Net cash provided by (used in) operating activities 7,192 3,677 (29)
-------- -------- --------
Cash flows from investing activities:
Purchase of vending equipment (2,448) (6,270) (12,115)
Purchase of property and equipment (341) (474) (341)
Purchase of investments -- (931) (48,001)
Proceeds from sale of investments 1,617 6,275 69,288
Proceeds from maturities of investments 208 269 612
-------- -------- --------
Net cash (used in) provided by investing activities (964) (1,131) 9,443
-------- -------- --------
Cash flows from financing activities:
Dividends paid (34) -- --
Early retirement of long-term debt (5) (9,585) (5,528)
Proceeds from line of credit 8,700 22,432 15,090
Principal payments on line of credit and long term debt (16,375) (18,183) (11,790)
Proceeds from issuance of stock 1,594 70 156
Purchase of treasury stock -- (57) (3,246)
-------- -------- --------
Net cash used in financing activities (6,120) (5,323) (5,318)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 108 (2,777) 4,096
Cash and cash equivalents, beginning of year 1,428 4,205 109
-------- -------- --------
Cash and cash equivalents, end of year $ 1,536 $ 1,428 $ 4,205
======== ======== ========
Supplemental disclosure of cash flow information
Cash paid for interest $ 5,941 $ 6,819 $ 7,828
======== ======== ========
Cash paid for income taxes $ 7 $ 5 $ 5
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
19
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Business
Glacier Water Services, Inc., a Delaware corporation ("Glacier" or
"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
30, 2001, the Company operated machines in 35 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 accounting
principles generally accepted in the United States 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.
Reclassification
Certain prior year amounts have been reclassified to conform to the
current presentation.
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 30, 2001, December
31, 2000 and January 2, 2000 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 30,
2001, cash equivalents primarily consist of cash held in money market accounts.
Investments
Investments are accounted for in accordance with the Financial
Accounting Standards Board ("FASB") Statement No. 115, 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
20
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
determination that an investment's impairment is considered to be other than
temporary. As of December 30, 2001, management believes its unrealized losses
of $44,000 to be temporary. The cost of securities sold is based on the
specific identification method.
At December 30, 2001, investments available-for-sale consisted of the
following (in thousands):
Gross Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Corporate securities $ 906 $ 117 $ -- $ 1,023
Mortgage-backed security 342 -- (161) 181
------- ------- ------- -------
Total investments available for sale $ 1,248 $ 117 $ (161) $ 1,204
======= ======= ======= =======
The Company's primary market risk exposure is interest rate risk. The
Company's exposure to interest rate risk relates primarily to the opportunity
cost associated with fixed-rate obligations. At December 30, 2001, the Company
held a portfolio of marketable securities, which included non-investment grade
debt securities, with an estimated fair value equal to $1,204,000, which
consisted of corporate debt securities and a mortgage-backed security with
carrying values of $1,023,000 and $181,000, respectively.
Proceeds from sales or maturities of marketable securities for the year
ended December 30, 2001 were $1,825,000. There were no realized gains on such
sales and maturities for the year ended December 30, 2001 and gross realized
losses for the year ended December 30, 2001 were $34,000. The mortgage-backed
security has a maturity date of December 2021. Kayne Anderson Capital Advisors,
L.P. manages the Company's investment portfolio (See Note 10).
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 securities 584 -- (29) 555
--------- ------- ------- -------
Total investments available for sale $ 3,107 $ 117 $ (29) $ 3,195
========= ======= ======= =======
At December 31, 2000, the Company held a portfolio of marketable
securities, which included non-investment grade debt 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 at December 31, 2000.
Proceeds from sales or maturities of marketable securities for the year
ended December 31, 2000 were $6,554,000. 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. Gross realized losses were
recognized principally during the fourth quarter of fiscal 2000 in connection
with the disposition of two corporate debt securities resulting in losses of
$3,088,000.
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. Periodically these parts are used to assemble
vending machines. 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. As
of December 30, 2001 and December 31, 2000, there were no vending machines in
the process of assembly.
Property and Equipment and Depreciation
Property and equipment are recorded at cost and consist of the following
(in thousands):
21
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 30, December 31,
2001 2000
---- ----
Vending equipment $100,842 $ 99,765
Equipment, furniture and fixtures 2,926 2,817
Leasehold improvements 63 608
-------- --------
103,831 103,190
Less: Accumulated depreciation and amortization (55,545) (47,824)
-------- --------
$ 48,286 $ 55,366
======== ========
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.
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 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 the fair value because of the short-term nature of those
instruments. The fair value of the Company's long-term debt at December 30,
2001 and December 31, 2000 was approximately $47,341,000 and $34,396,000
respectively. The carrying value of the Company's long-term debt at December
30, 2001 and December 31, 2000 was approximately $61,965,000 and $61,975,000,
respectively.
Revenues
The Company recognizes revenue as water is vended to customers.
Commission Expense
Included in operating expenses are commission payments made to certain
retailers based on a percentage of vending machines revenue. Commission expense
for the years ended December 30, 2001, December 31, 2000 and January 2, 2000 was
$27,602,000, $27,038,000, and $25,991,000, respectively. Prepaid commissions
represent payments made to certain retailers based on a percentage of estimated
monthly or quarterly vending machine revenues. Prepaid commissions at December
30, 2001 and December 31, 2000 were $65,000 and $115,000, respectively.
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 June 2001, the Financial Accounting Standards Board ("FASB") issued two
new pronouncements: Statement of Financial Accounting Standards ("SFAS") No.
141, Business Combinations, and SFAS no. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001 and that the use of
pooling-of-interests method is no longer permitted. SFAS
22
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
No. 142 requires that upon adoption, amortization of goodwill will cease and
instead, the carrying value of goodwill will be evaluated for impairment at
least annually using a fair value test. Identifiable intangible assets will
continue to be amortized over their useful lives and reviewed at least annually
for impairment using a method appropriate to the nature of the intangible asset.
The Company implemented SFAS No. 141 on July 1, 2001 and is required to
implement SFAS No. 142 at the beginning of its next fiscal year, January 1,
2002. The Company does not expect the adoption of these statements to have a
material impact on its consolidated financial position or results of operations.
In August 2001, the FSAB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of, and the accounting and reporting provisions of
APB Opinion No. 30, Reporting the Results of Operations - Reporting the Effects
of Disposal of a Business Segment of a Business, and Extraordinary, Unusual and
Infrequent Occurring Events and Transactions, for the disposal of a segment of a
business (as previously defined in that Opinion). The provisions of SFAS No.
144 are effective for financial statements issued for fiscal years beginning
after December 15, 2001. The Company does not expect the adoption of SFAS No.
144 to have a material impact on its consolidated financial position or results
of operations.
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 are
computed based upon the weighted average number of common shares outstanding
during the period. Dilutive earnings per share are based upon the weighted
average number of common shares outstanding and potentially dilutive securities
during the period. In computing the net loss per share, the Company's net loss
is adjusted for the preferred dividends to reflect the loss applicable to common
stock.
Potentially dilutive securities include shares issuable in connection with
the convertible preferred stock and options granted under the Company's stock
option plans using the treasury stock method. For fiscal 1999, 2000, and 2001,
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 30, December 31,
2001 2000
---- ----
Prepaid marketing incentives, net of accumulated amortization of
$6,788 as of December 30, 2001 and $5,263 as of December 31, 2000........... $4,650 $ 6,938
Deferred financing cost, net of accumulated amortization of
$197 as of December 30, 2001 and $119 as of December 31, 2000............... 2,833 2,888
Other......................................................................... 231 386
------ -------
$7,714 $10,212
====== =======
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. For the years ended
December 30, 2001, December 31, 2000 and January 2, 2000, $2,553,000, $2,624,000
and $2,282,000, respectively, is included in depreciation and amortization.
Deferred financing costs of $4,100,000 were incurred in connection with the
Trust Preferred Securities discussed in Note 3 and are amortized over the period
ending January 2028, the date of the mandatory redemption of the securities.
23
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Accrued Liabilities
December 30, December 31,
2001 2000
---- ----
Accrued compensation and related taxes........... $ 462 $ 434
Accrued income and other taxes................... 349 352
Accrued interest................................. 247 393
Other accrued liabilities........................ 866 430
------ ------
$1,924 $1,609
====== ======
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 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 the 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 30, 2001, the Company had
repurchased 921,400 shares of the Trust Preferred Securities. During fiscal
2001, the Company repurchased 400 shares of the Trust Preferred Securities
resulting in a net extraordinary gain of $4,115, compared to a net extraordinary
gain of $4,198,000 during fiscal 2000 from the repurchase of 578,000 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. There were
2,478,600 shares and 2,479,000 shares of the Trust Preferred Securities
outstanding (other than shares held by the Company) as of December 30, 2001 and
December 30, 2000, respectively, which had a carrying value of $61,965,000 and
$61,975,000, respectively.
Line of Credit
On June 23, 2000, the Company entered into a credit facility with Tokai
Bank of California (currently known as United California Bank), which provided
borrowings of up to $10,000,000 and required quarterly interest payments at the
bank's prime rate. Borrowings under this agreement were secured by
substantially all of the assets of the Company. During the fourth quarter of
fiscal 2001, the Company paid off the outstanding balance and terminated the
credit facility. On February 19, 2002, the Company, in connection with the
acquisition of the Pure Fill Corporation,
24
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
entered into a new Credit Facility with City National Bank, which provides for
borrowings of up to $10,000,000. The credit facility provides a five-year,
$6,000,000 term loan, which requires monthly principal and interest payments at
the bank's prime rate plus 1.5% (6.25% per annum as of February 19, 2002) and a
two-year, $4,000,000 revolving credit facility, which requires monthly interest
payments at the bank's prime rate plus 1% (5.75% per annum as of February 19,
2002). See Note 12 for information concerning a credit facility entered into
in 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 2006.
Future minimum lease payments under non-cancelable operating leases with
initial terms of one or more years are as follows (in thousands):
2002................................... $1,403
2003................................... 896
2004................................... 508
2005................................... 240
2006................................... 83
Thereafter............................. --
------
Total minimum lease payments........... $3,130
======
Total lease expense for the years ended December 30, 2001, December 31,
2000 and January 2, 2000, was $1,874,000, $2,034,000, and $2,158,000,
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 30, December 31, January 2,
2001 2000 2000
---- ---- ----
Federal Income Taxes:
Current.................................... $ -- $ 267 $ --
Deferred................................... -- (267) (1,863)
----------------- ----------------- -------
Total Federal Income Taxes.............. -- -- (1,863)
----------------- ----------------- -------
State and Local Income Taxes
Current.................................... -- 47 --
Deferred................................... -- (47) (196)
----------------- ----------------- -------
Total State and Local Income Taxes...... -- -- (196)
----------------- ----------------- -------
Total Income Tax Benefit.......................... $ -- $ -- $(2,059)
================= ================= =======
25
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Deferred tax liabilities and assets result from the following (in
thousands):
December 30, December 31,
2001 2000
---- -------
Deferred tax liabilities:
Property and equipment................................................... $ 9,196 $ 8,421
------- -------
Total deferred tax liabilities.................................................. 9,196 8,421
------- -------
Deferred tax assets:
Alternative minimum tax credit........................................... (1,449) (1,482)
Net operating loss....................................................... (8,949) (7,989)
Manufacturer's investment credit......................................... (645) (591)
Accruals and reserves.................................................... (2,208) (263)
Valuation allowance...................................................... 4,269 2,118
------- -------
Total deferred tax assets, net.................................................. (8,982) (8,207)
------- -------
Net deferred tax liabilities.................................................... $ 214 $ 214
======= =======
A valuation allowance has been recorded against the deferred tax
assets due to uncertainties surrounding their realization. The net deferred
tax liability in the amount of $214,000 as of December 30, 2001 and
December 31, 2000, is included in accrued liabilities.
The Company's effective income tax rate differs from the federal
statutory rate as follows:
Fiscal Year Ended
---------------------------------------------------
December 30, December 31, January 2,
2001 2000 2000
---- ---- ---
Federal statutory rate......................................... (34.0)% (34.0)% (34.0)%
State and local taxes, net of federal benefit.................. (4.0)% (2.0)% (2.0)%
Manufacturer's investment credit generated and other........... (1.0)% --% (1.0)%
Increase in valuation allowance................................ 39.0% 36.0% --%
------ ------ ------
Effective rate................................................. --% --% (37.0)%
====== ====== ======
At December 30, 2001, the Company had federal and California income
tax net operating loss carry forwards of $23,100,000 and $9,700,000,
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 may be established by
the Board of Directors without further action by the holders of the
Company's common stock.
During the quarter ended July 1, 2001, the Company issued 16,000
shares of Cumulative Redeemable Convertible Preferred Stock (the "Preferred
Stock"), which resulted in an increase to stockholders' equity of
$1,594,000. Holders of the Preferred Stock are entitled to receive, when
declared by the Board of Directors, a cumulative, preferential dividend
("Dividend") at the rate of 8% per annum of the original purchase price of
each share of Preferred Stock. If any dividends are declared on the Common
Stock, dividends will also be paid on the Preferred Stock on an as-
converted basis.
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company, the holders of the Preferred Stock will be
entitled to be paid out of the assets of the Company available for
distribution, before any payment shall be made to holders of the common
stock or any other class or series of stock of the Company ranking junior
to the Preferred Stock, an amount equal to $100.00 per share plus any
accrued but unpaid Dividends ("Liquidation Amount"). After payment of the
Liquidation Amount, all of the remaining assets of the Company available
for distribution shall be distributed ratably among holders of all
preferred and common stock of the Company.
26
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Preferred Stock may be redeemed at the election of the Company, for
redemption prices equal to 103%, 102%, 101%, and 100% of the Liquidation
Amount on or after the third, fourth, fifth, and sixth anniversary,
respectively. In addition, the Preferred Stock may be redeemed, at the
election of the Company, at 100% of the Liquidation Amount if the closing
price of the Company's common stock remains at or above $19.00 for 10
consecutive trading days. The Preferred Stock is convertible into shares of
common stock computed by dividing the Liquidation Amount, with respect to
the number of shares of Preferred Stock to be converted, by $9.50.
For the year ended December 30, 2001, the Company accrued and declared
dividends associated with the Cumulative Redeemable Convertible Preferred
Stock of $66,000.
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 30,
2001, 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. Options
granted under this provision ("Deferral Options") have a term of five years
and become exercisable one year following the date of the 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 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 was transferred to the 1994 Stock Compensation Program.
A summary of the status of the Company's stock option plans and
activity is as follows:
Weighted Avg.
Shares Exercise Price
------ --------------
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 at January 2, 2000............................................ 626,380 $22.64
Granted............................................................... 266,885 $13.03
Exercised............................................................. (6,000) $11.50
Canceled.............................................................. (123,306) $23.62
-------- ------
Balance at December 31, 2000.......................................... 763,959 $19.16
Granted............................................................... 428,665 $ 7.98
Exercised............................................................. -- $ --
Canceled.............................................................. (237,890) $21.35
-------- ------
Balance as of December 30, 2001....................................... 954,734 $13.60
Exercisable at December 30, 2001...................................... 368,403 $16.28
Weighted average fair value of options granted........................ $ 3.95
27
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
There are 60,500 options outstanding under the 1992 plan at December
30, 2001, all of which are exercisable, and have exercise prices between
$8.25 and $13.63, with a weighted average exercise price of $11.59 and a
weighted average remaining contractual life of 1.4 years.
There are 894,234 options outstanding under the 1994 plan at December
30, 2001 with exercise prices between $7.55 and $31.25, with a weighted
average exercise price of $13.74 and a weighted average remaining
contractual life of 6.2 years. At December 30, 2001 307,903 of these
options are exercisable, and their weighted average exercise price is
$17.21.
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 30, December 31, January 2,
2001 2000 2000
---- ---- ----
Pro forma net loss (in thousands)........................... $(7,380) $(6,489) $(5,086)
Pro forma basic loss per share.............................. $ (2.60) $ (2.29) $ (1.78)
Pro forma diluted loss per share............................ $ (2.60) $ (2.29) $ (1.78)
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.
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 2001, 2000, and 1999,
respectively: average risk-free interest rates of 4.8%, 5.0%, and 5.1%, no
expected dividend yield; expected lives of eight years for regular options
and five years for Deferral Options in all years; expected volatility of
approximately 43% for fiscal year 2001 and 28% for fiscal 2000 and 27% for
fiscal 1999.
8. Significant Customers
The following table sets forth the customers which represent ten
percent or more of the Company's total revenues in fiscal years 2001, 2000
and 1999, after the effect of any consolidations that occurred as a result
of any acquisition or mergers by the retailers:
Fiscal Year Ended
------------------------------------------
December 30, December 31, January 2,
2001 2000 2000
---- ---- ----
Company A 12.22% 11.70% 9.01%
Company B 12.32% 10.58% 10.01%
Company C 12.04% 10.99% 9.65%
9. Non-Recurring and Other Charges
In the third quarter of fiscal 2000, the Company approved a plan to
discontinue 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 consisted of leasehold
improvement write-offs of $545,000 related to the water stores and
warehouse; impairment losses on the disposal of equipment and fixtures
located in Mexico of $338,000; severance costs of $83,000 related to the
involuntary termination of 35 employees; lease termination costs of
$42,000; building closures of $192,000; fees paid to advisors regarding
actions to be taken in the restructuring of $117,000; and other direct
costs associated with the exit plan of $83,000. By the end of the third
quarter of 2000, the closure of the Mexico operations was substantially
complete. There were no additional charges associated with the
discontinuance of the operation in Mexico, and as of December 30, 2001 and
December 31, 2000, $0 and $69,000 was unpaid and included in accrued
liabilities in the accompanying consolidated balance sheet.
28
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
10. Related Party Transactions
Kayne Anderson Capital Advisors, L.P. currently manages the Company's
investment portfolio. Two board members are employed as senior executives
of Kayne Anderson Capital Advisors, L.P. and are shareholders of the
Company. The Company incurred costs of $13,000, $44,000, and $69,000 in
fiscal 2001, 2000, and 1999, respectively, to Kayne Anderson Capital
Advisors, L.P. in connection with investment management fees. In connection
with the acquisition of the Pure Fill assets, funds managed by Kayne
Anderson Capital Advisors, L.P. provided temporary funding of $6,300,000 to
the Company until February 22, 2002. The Company paid to funds managed by
Kayne Anderson Capital Advisors, L.P. interest of $12,000 at an interest
rate consistent with the rates charged by City National Bank (see Note 12).
The Company incurred costs of $11,000 for consulting services provided
by LEK Consulting during fiscal 1999 and did not use LEK consulting during
fiscal 2000 and 2001. 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
Glacier operates in a single business segment providing high quality,
low priced drinking water dispensed to consumers through self-service
vending machines.
Glacier conducted operations in Mexico beginning in 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 year and long-lived assets are as follows:
Revenues
Fiscal Year Ended Long-Lived Assets as of
---------------------------- -----------------------------
December 30, December 31, December 30, December 31,
2001 2000 2001 2000
---- ---- ---- ----
(in thousands)
United States............................... $ 60,345 $ 58,850 $ 48,286 $ 55,366
Mexico...................................... -- 326 -- --
--------- ---------- --------- ---------
Total....................................... $ 60,345 $ 59,176 $ 48,286 $ 55,366
========= ========== ========= =========
12. Subsequent Events
On February 8, 2002, Glacier acquired substantially all of the assets
of the Pure Fill Corporation and its wholly owned subsidiaries, National
Water Services, Pure Fill Finance Corporation and Pure Fill Container
Corporation for $6,200,000 subject to certain working capital adjustments
related primarily to the accounts receivable and accounts payable balances
assumed by Glacier, of which $640,000 is payable in installments over four
years. Prior to the acquisition, Pure Fill operated water vending machines
in certain markets also serviced by Glacier. The results of operations
related to the Pure Fill acquisition will be included in the consolidated
financial statements of Glacier Water subsequent to the acquisition.
In connection with the Pure Fill acquisition, the Company entered into
a new $10,000,000 credit facility with City National Bank on February 19,
2002. The credit facility requires monthly interest payments at the bank's
prime rate plus 1.00% (5.75% per annum at February 19, 2002) on the
$4,000,000 revolving credit portion and monthly principal and interest
payments at the bank's prime rate plus 1.50% (6.25% per annum at February
19, 2002) on the $6,000,000 term loan portion. The City National Bank
credit facility contains certain financial covenants and Glacier pledged
certain assets in connection with this facility. In connection with the
acquisition of the Pure Fill asset, funds managed by Kayne Anderson Capital
Advisors, L.P. provided temporary funding of $6,300,000 to the Company
until February 22, 2002. The Company paid to Kayne Anderson Capital
Advisors, L.P. interest of $12,000 at an interest rate consistent with the
rates charged by City National Bank. Glacier borrowed $6,000,000 on the
term loan to repay the temporary funding by the funds managed by Kayne
Anderson Capital Advisors, L.P.
29
13. Quarterly Financial Data (Unaudited)
First Quarter Second Quarter Third Quarter Fourth Quarter
------------ ------------- ------------- --------------
(in thousands, except shares and per share amounts)
Year Ended December 30, 2001:
Net revenues $ 13,440 $ 15,473 $ 17,248 $ 14,184
Income (loss) from operations (574) 465 1,446 (1,069)
Income (loss) before extraordinary gain (2,021) (990) 21 (2,508)
Gain on early extinguishment of debt 4 -- -- --
Net income (loss) (2,017) (990) 21 (2,508)
Basic and diluted (loss) per share:
Loss before extraordinary gain (.71) (.35) -- (.88)
Extraordinary gain -- -- -- --
Net income (loss) (.71) (.35) -- (.88)
Weighted average shares 2,834,474 2,834,474 2,834,474 2,834,474
Year Ended December 31, 2000:
Net revenues $ 12,785 $ 15,939 $ 17,214 $ 13,238
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 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
During the third quarter of fiscal 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. Refer
to Note 9, Non-Recurring and Other Charges, for more detail.
During the second quarter of fiscal 1999, the Company deemed a corporate
debt equity investment as permanently impaired and reduced the carrying value by
$500,000.
In the first quarter of fiscal 1999, the Company deemed a corporate debt
investment as permanently impaired and reduced the carrying value by $1,600,000.
30
INDEX TO EXHIBITS
Exhibit No.
- -----------
3.1 Certificate of Incorporation Registrant (i.)
3.2 Bylaws of Registrant (i.)
3.3 Certificate of Designation, Preferences and Rights of Redeemable
Convertible Preferred Stock of Glacier Water Services, Inc. dated
June 18, 2001
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 (xii.)
4.3 Officers' Certificate of Company Order executed by Glacier Water
Services, Inc., dated January 27, 1998 (xii.)
4.4 Certificate of Trust of Glacier Water Trust I, dated November 13,
1997 (xi.)
4.5 Trust Agreement of Glacier Water Trust I, dated November 13, 1997
(xi.)
4.5.1 Amended and Restated Trust Agreement of Glacier Water Trust I,
dated January 27, 1998 (xii.)
4.6 Trust Preferred Certificate of Glacier Water Trust I (xii.)
4.7 Common Securities Certificate of Glacier Water Trust I (xii.)
4.8 Guarantee Agreement between Glacier Water Services, Inc. and
Wilmington Trust Company, as Trustee, dated January 27, 1998
(xii.)
4.9 Agreement as to Expenses and Liabilities between Glacier Water
Services, Inc. and Glacier Water Trust I, dated January 27, 1998
(xii.)
4.10 Junior Subordinated Deferrable Interest Debenture of Glacier
Water Services, Inc. (xii.)
10.1 Amended and Restated 1992 Stock Incentive Plan (ii.)
10.2 Form of Indemnification Agreement with Officers and Directors
(i.)
10.3 1994 Stock Compensation Plan (iii.)
10.3.1 Amendment No. 1 to 1994 Stock Compensation Plan (v.) dated June
6, 1996
10.3.2 Amendment No. 2 to 1994 Stock Compensation Plan (v.) dated
September 17, 1996
10.3.3 Amendment No. 3 to 1994 Stock Compensation Plan (vi.) dated June
3, 1997
10.3.4 Amendment No. 4 to 1994 Stock Compensation Plan (vii.) dated June
9, 1998
10.3.5 Amendment No. 5 to 1994 Stock Compensation Plan (viii.) dated
June 2, 1999
10.3.6 Amendment No. 6 to 1994 Stock Compensation Plan (ix.) dated June
6, 2000
10.3.7 Amendment No. 7 to 1994 Stock Compensation Plan (x.) dated June
5, 2001
10.4 City National Bank Loan Agreements dated February 19, 2002
21.1 Subsidiaries of Glacier Water Services, Inc.
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 Proxy Statement for
the Annual Meeting held on June 2, 1999.
(ix.) Incorporated by reference by the Company's Proxy Statement for
the Annual Meeting held on June 6, 2000.
31
(x.) Incorporated by reference to the Company's Proxy Statement for the
Annual Meeting held on June 5, 2001.
(xi.) Incorporated by reference to the Company's Proxy Registration
Statement on Form S-2 (File Number 333-40335) filed January 22, 1998 .
(xii.) 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/ Brian H. McInerney
President and Chief Executive Officer
By:_____________________________________________
/s/ W. David Walters
Senior Vice President, Chief Financial Officer
Date: March 12, 2002
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 12, 2002.
Signature Title
- --------- -----
Principal Executive Officer:
_____________________________________________ President and Chief Executive Officer
/s/ Brian H. McInerney
_____________________________________________ Chairman of the Board and Director
/s/ Charles Norris
_____________________________________________ Director
/s/ Richard A. Kayne
_____________________________________________ Director
/s/ Peter H. Neuwirth
_____________________________________________ Director
/s/ Scott H. Shlecter
_____________________________________________ Director
/s/ Robert V. Sinnott
32