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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

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. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)

The aggregate market value of the voting stock held by non-affiliates of the registrant was $17,378,878 (calculated at the closing price on the American Stock Exchange as of the last business day of the registrant’s most recently completed second quarter multiplied by outstanding shares held by non-affiliates).  For purposes of the foregoing calculation, the registrant has excluded from the group of stockholders deemed to be non-affiliates any outstanding shares of common stock known by the registrant to be held by its officers, directors and employees.

As of February 1, 2003, the registrant had 2,851,141 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 2003 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission within 120 days after the close of the 2002 fiscal year.

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          The statements incorporated by reference or included in this Annual Report about the results of our operations or financial condition contain “forward-looking” information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  The forward-looking statements in this report or incorporated by reference are intended to be subject to the safe harbor protection provided by the federal securities laws.

          Forward-looking statements often, although not always, may be found by looking for words or phrases such as “may”, “will”, “intend(s)”, “expect(s/ed)”, “anticipate(s/ed)”, “will likely”, “will continue”, “estimate(s/ed)”, “outlook” and similar words used in this report.

          Forward-looking statements are subject to numerous estimates, assumptions, risk 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 these statements.  We caution readers not to place undue reliance on these statements because they are subject to risks and uncertainties.

          The cautionary statements set forth above should be considered in connection with any subsequent written or oral forward–looking statements that we, or persons acting on our behalf, may issue.  We do not undertake any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking 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

Business Background

          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 disinfection.  The Company charges significantly less than the price of water sold off-the-shelf in retail locations or sold through home delivery services.  The Company’s water vending machines are clustered in close proximity to one another within the geographic areas served in order to provide cost-effective, quality service.  Each water vending machine is generally serviced and tested weekly.

          Historically, the Company has operated water vending machines designed primarily for outside use in warm weather climates.  Because it is impractical to use outdoor vending machines in cold-weather climates, the Company  has developed a water vending machine specifically designed to be installed inside retail locations.  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.  As of December 29, 2002, the Company had 11,307 outside machines and 2,678 in-store machines in operation.

          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.

          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

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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.

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.  Although generally 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.  Generally, the Company’s service technicians visit and service each vending machine on a weekly basis.  The quality of the Company’s processed water is tested by independent laboratories certified by the Environmental Protection Agency (EPA) in order to ensure the quality and safety of the water.  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 water 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 generally 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.    The Company has long-term contracts with three retailers whose volume accounted for 12.5%, 10.9%, and 10.7% of fiscal 2002 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, 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

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within the geographic areas served, in order to provide cost-effective, frequent service.  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 its machines and relocate machines as necessary to optimize their productivity on an on-going basis.

Growth Strategy

          According to a recent study by an industry source, there are approximately 150,000 grocery stores, supermarkets, drug stores and convenience stores in the United States.  The Company currently operates water vending machines at approximately 11,000 such locations.  The Company intends to continue its expansion into these locations.  The Company’s growth strategy includes the following:

Competition

          The bottled water market is highly competitive.  The Company competes in the non-sparkling segment of the bottled water market with companies that deliver water to homes and offices, 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 dry or 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 to “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

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be given that other entities might not assert superior or exclusive rights to 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.

          As part of the Pure Fill acquisition, Glacier acquired several patents for water dispensing machines as well as container designs.  The Company also acquired several trademarks, including the “Pure Fill” trademark.  

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 water vending machines are subject to routine and random regulatory quality inspections.  Although the Company believes it is operating in substantial compliance with these laws and regulations, such laws and regulations and their interpretations and enforcement are subject to change.  There can be no assurance that additional or more stringent requirements will not be imposed on the Company’s operations in the future.  Failure to comply with such current or future laws and regulations could result in fines against the Company, a temporary shutdown of the Company’s operations, the loss of certification to sell its product or, even in the absence of governmental action, a reduction in the Company’s profit margin based on increases in licensing or inspection fees payable by the Company or other additional compliance costs. 

Insurance

          The Company carries general and product liability insurance.  Its combined coverage is $26,000,000 per occurrence and $27,000,000 in the aggregate, which the Company believes to be adequate. 

Employees

          As of December 29, 2002, the Company had 301 employees, including 66 in warehousing, administration and sales and 235 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 10,900 square feet and expire on various dates from March 2003 through September 2007.  The lease which expires in March 2003 is for a 2,040 square foot facility that the Company has decided not to renew.

Item 3.  Legal Proceedings

          Glacier is the defendant in an action brought by the Environmental Law Foundation in December 2002 in California Superior Court.  The complaint in this action claims that some of Glacier’s machines failed to remove chemical byproducts of the chlorination process found in the source municipal water to the maximum level specified in a California statute and accordingly alleges that Glacier is engaging in unlawful and fraudulent business practices and false advertising.  The complaint does not allege any claims based on the safety of Glacier’s water.  The complaint seeks injunctive relief and repayment of unspecified amounts to customers.  Glacier has been notified by the City of Los Angeles that it is considering bringing a similar action.  Glacier intends to vigorously defend against all such claims and does not believe that it will have any material liability in connection with any such action.

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

          No matters were submitted to a vote of the security holders of the Company during the fourth quarter of 2002.

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Part II

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

          The Common Stock of Glacier (“Common Stock”) is traded on the American Stock Exchange under the symbol “HOO”.  The following table sets forth the range of high and low closing prices on the American Stock Exchange for the Common Stock for the periods indicated.

          The Company did not pay dividends on its Common Stock in 2002 or 2001 and does not presently intend to pay any dividends on its Common Stock in the foreseeable future.  The Company had 32 stockholders of record as of December 29, 2002. 

          On November 22, 2002, the Company announced its intention to give its common stockholders the opportunity to exchange their shares of Glacier Water Common Stock for Trust Preferred Securities issued by Glacier Water Trust I (“Trust Preferred Securities”).  The Exchange Offer commenced on February 26, 2003.  Pursuant to this Exchange Offer, each share of the Common Stock may be exchanged for eight-tenths of a Trust Preferred Security.  Each Trust Preferred Security has a liquidation value of $25.00 per share.  Holders of the Common Stock have until April 11, 2003 to tender their shares for exchange, at which time, the offer expires.  The Trust Preferred Securities to be delivered in exchange for the Common Stock were issued as part of an original issuance of 3,400,000 Trust Preferred Securities, which were sold in an underwritten public offering in January 1998 at $25.00 per Trust Preferred Security.  The maximum number of shares of Common Stock which may be exchanged is 1,151,750.

          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 (deficit) 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 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 Stock 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 anniversaries, 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 29, 2002, the Company recorded dividends associated with the Preferred Stock of $128,000.

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Item 6.  Selected 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 31st.  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.

Statements of Operations Data

Selected Balance Sheet Data

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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.

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.

          Currently operating in 37 states, the Company continually looks for opportunities to expand its presence in existing markets as well as new high potential 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 its operating costs.  The Company continues to monitor selling, general and administrative expenses and reduce costs where possible. 

          The Company continually looks for acquisition opportunities that will strengthen the Company and improve its operating results.  On February 8, 2002, Glacier acquired substantially all of the assets of Pure Fill (see “Acquisition”).  Immediately after the acquisition, Glacier integrated the Pure Fill assets into the Glacier operations.

Revenues

          Revenues for fiscal year 2002 increased 17.7% to $71,029,000 from $60,345,000 in fiscal year 2001.  Revenues increased 15.9% due to volume increases, driven primarily by the acquisition of the Pure Fill assets, and 1.8% due to increases in the average price per gallon of water sold during fiscal 2002 compared to 2001.  As of December 29, 2002, the Company had approximately 14,000 machines in operation compared to 13,400 machines at December 30, 2001.  As of December 29, 2002, the Company had 2,678 in-store machines and 11,307 outside machines in operation in 37 states.  Revenues for the fiscal year 2001 increased 2.0% to $60,345,000 from $59,176,000 in fiscal 2000.  The

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revenues in 2001 increased 3.0% due to volume increases offset by a 1.0% decrease in the average price per gallon of water sold during 2001 as compared to 2000 and the loss of the revenues associated with the discontinued Mexico operation during 2000.

          The Company began operations in Mexico during fiscal 1998.  During the third quarter of 2000, to improve the operating results, the Company ceased operations in Mexico and approximately 500 machines were returned to the United States for future deployment.  The Company recognized revenues from the Mexico operation of approximately $326,000 for the year ended December 31, 2000.  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 $825,000, not including the non-recurring charge of $1,400,000 for the year ended December 31, 2000. 

Costs and Expenses

          Operating expenses for the year ended December 29, 2002 increased to $44,698,000 from $38,444,000 for fiscal year 2001.  The increase in total operating expenses was primarily due to higher servicing costs due to the increased revenues.   Due to the immediate integration of the additional Pure Fill routes into the Glacier operations, the precise amount of the increase in operating expenses and selling, general and administrative (“SG&A”) expenses attributable to the Pure Fill assets is not determinable.  Operating costs, excluding depreciation and amortization, as a percent of revenues was 62.9% for fiscal 2002 compared to 63.7% for the prior year.  The Company strives to locate machines in close proximity to one another within the geographic area served, thereby creating clusters of machines in order to provide cost-effective, frequent service.

          Operating expenses, excluding depreciation and amortization, for fiscal year 2001 decreased $38,000 to $38,444,000 or 63.7% of revenues, compared to $38,482,000 or 65.0% of revenues in 2000.  The decrease in total dollar operating costs in 2001 was due primarily to the closure of the Mexico operations during the third quarter of fiscal 2000 offset by an increases in various costs of servicing the machines.  The Mexico operation incurred operating expenses of approximately $569,000 for the year ended December 31, 2000.  The operating costs in Mexico represented the cost to service vending machines and rent, utilities and personnel associated with the water stores.

          Depreciation and amortization expense for fiscal year 2002 increased to $12,368,000, compared to $12,358,000 in fiscal 2001.  The increase in depreciation and amortization expense was due primarily to the added Pure Fill assets offset by other fixed assets becoming fully depreciated.  The Pure Fill assets generated approximately $538,000 of depreciation and amortization expenses for fiscal 2002.  Depreciation and amortization expense for fiscal 2000 was $12,066,000, which included $185,000 related to the Mexico operations.  The Company currently has sufficient machines in storage available for deployment in fiscal 2003.  Machines that have been previously installed and are in storage awaiting redeployment are currently being depreciated. 

          SG&A expenses for fiscal 2002 increased $502,000 to $9,777,000 or 13.8% of revenues, compared to $9,275,000 or 15.4% of revenues in fiscal 2001.  This increase in SG&A expenses in fiscal 2002 compared to 2001 was primarily due to the addition of the Pure Fill operations.  SG&A expenses for fiscal 2000 were $8,838,000 or 14.9% of revenues.  The increase in SG&A expenses in fiscal 2001 compared to fiscal 2000 was primarily due to an increase due to certain overhead costs previously allocated as part of the manufacturing process and severance costs associated with the termination of employment of certain executives during the first quarter of 2001 offset by a reduction associated with the discontinuance of the Mexico operation during fiscal 2000.   As a result of the suspension of the Company’s manufacturing activity in June 2000, these overhead costs are currently included in SG&A expenses.

          Costs associated with the restructuring of existing Glacier operations and costs necessary to integrate the assets of Glacier and Pure Fill that are expected to benefit future operations are expensed as integration and restructuring costs after management has completed and approved the plans and associated costs.  Integration costs totaled $1,364,000 for the year ended December 29, 2002, and have been recognized as integration and restructuring costs in the consolidated statement of operations.  Integration costs were principally for the removal and replacement, transportation and disposal of vending equipment.  

          In the third quarter of 2000, the Company incurred restructuring costs totaling $1,400,000 associated with the closure of its Mexico operations.  The restructuring costs 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

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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. 

          As a result of the above, income from operations for fiscal year 2002 increased to $2,822,000 compared to $268,000 for fiscal year 2001 and a loss of $1,610,000 for the year ended December 31, 2000.

          Interest expense for fiscal year 2002 decreased to $5,968,000 compared to $5,993,000 in fiscal 2001.  The decrease was primarily associated with lower interest rates in 2002 offset by higher outstanding amounts on the credit facility in fiscal year 2002 compared to fiscal year 2001.  The average outstanding borrowings on the credit facility during 2002 was approximately $4,700,000 compared to an approximate $4,100,000 during 2001 with a weighted average interest rate of 6.4% for 2002 compared to 7.3% for 2001.  The increase in the average outstanding amount on the credit facility was due to the Pure Fill acquisition.  Interest expense for fiscal 2000 was $7,016,000. The decrease in interest expense in fiscal 2001 compared to fiscal 2000 was primarily associated with the extinguishment of borrowings under the line of credit during 2001. 

          As of December 29, 2002, the Company’s investment portfolio totaled $603,000, which included non-investment grade securities comprised of corporate debt securities and a mortgage backed security with carrying values of $540,000 and $63,000, respectively.  For the year ended December 29, 2002, the Company had a net realized loss on investments of $20,000 compared to a net realized gain on investments of $227,000 for the year ended December 30, 2001.   The net realized loss on investments for fiscal 2002 consisted of net realized loss on the sale of investments of $133,000 and management fees of $7,000 offset by investment earnings of $120,000.  For fiscal year 2001, the net realized gain on investments consisted of investment earnings of $274,000 offset by management fees of $13,000 and net realized losses on the sale of investments of $34,000.  For the year ended December 31, 2000, the net realized loss on investments of $1,570,000 consisted of investment earnings of $1,036,000 offset by management fees of $44,000 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.   During fiscal years 2000 through 2002, investments were managed by Kayne Anderson Capital Advisors, L.P., a related party.

          As a result of changes in the U.S. federal tax laws during fiscal year 2002 relating to operating loss carry-backs, the Company recorded an income tax benefit of $379,000 reflecting the carry-back of additional net operating losses to recover previously paid U.S. federal income taxes.  This income tax refund was received prior to the end of fiscal 2002.  A change in estimate of the deferred tax asset valuation allowance, resulted in an additional $214,000 income tax benefit being recorded at December 29, 2002.  Due to the uncertainty of the utilization of the net operating loss in future periods,  no tax benefit was recorded for fiscal years 2001 and 2000. 

          The Company’s Board of Directors has authorized the purchase of up to 1,250,000 shares of the 9.0625% Trust Preferred Securities issued by Glacier Water Trust I, a wholly owned subsidiary of the Company (the “Trust”).  As of December 29, 2002, the Company had repurchased 921,400 shares of the Trust Preferred Securities at an average cost of $16.40 per share.  The Company did not repurchase any shares of the Trust Preferred Securities during fiscal year 2002.  The Company repurchased 400 shares in fiscal 2001 for a net extraordinary gain of $4,000 compared to a net extraordinary gain of $4,198,000 in fiscal 2000.  As of December 29, 2002, 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.  The Company may continue to make such purchases from time to time in open market transactions or block trades.  As of December 29, 2002, there were 2,478,600 shares of the Trust Preferred Securities outstanding (other than shares held by the Company).

          For fiscal year 2002, the Company incurred a loss applicable to common stockholders of $2,701,000, or $.95 per basic and diluted common share compared to a loss of $5,560,000, or $1.96 per basic and diluted common share in 2001 and $5,998,000 or $2.11 per basic and diluted common share in 2000. 

Liquidity and Capital Resources

          The Company’s primary sources of liquidity and capital resources in fiscal 2002 were cash and investments, cash flows from operations and funds available under the Company’s credit facility.    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 required monthly interest payments at the bank’s prime rate plus 1.00% (5.25% per annum at December 29, 2002) on the $4,000,000 revolving credit portion of the facility and equal monthly principal payments plus monthly interest payments at the bank’s prime rate plus 1.50% (5.75% per annum at December 29, 2002) on the

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$6,000,000 term loan portion of the facility.  The credit facility contains certain customary financial covenants, which restrict indebtedness and capital expenditures, with which the Company was in compliance at December 29, 2002, and the Company pledged certain assets such as repair parts inventory and equipment as collateral for its obligations under the new credit facility.  As of December 29, 2002, the Company had $4,000,000 available under the credit facility.

          On February 1, 2003, the Company restructured a portion of the credit facility with City National Bank.  The Company replaced the term loan portion of the credit facility with a new revolving note with an original maximum borrowing of $4,800,000.  The term loan was canceled and replaced by the new revolving note.  The credit availability on the new revolving note reduces by $300,000 every three months beginning May 1, 2003 until its maturity in February 2007.  The new revolving note requires monthly interest payments at the Bank’s prime rate plus 1.50% (5.75% per annum at February 1, 2003).  The new revolving note and the original $4,000,000 revolving credit portion of the credit facility (which remains in effect) require a quarterly unused facility fee of 0.50% and 0.25%, respectively.

          For fiscal 2002, net cash provided by operations was approximately $8,871,000 and the Company made capital investments in vending machines and other equipment of approximately $3,196,000 and purchased Pure Fill for $5,424,000, net of cash.  Net cash provided by financing activities was approximately $4,940,000.  As of December 29, 2002, the Company had working capital of $6,209,000.  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 contract rights.  The Company’s stockholders’ deficit as of December 29, 2002 was $6,266,000, which amount continues to be below the American Stock Exchange’s listing guidelines.  Accordingly, it is possible that the American Stock Exchange could take action to delist the Company’s stock.

          During the quarter ended July 1, 2001, the Company issued 16,000 shares of Preferred Stock, which resulted in an increase to stockholders’ equity (deficit) 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 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 29, 2002, the Company recorded dividends associated with the Preferred Stock of $128,000.

          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 $25.00 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, 2028, but may be redeemed at the option of the Company at any time after January 31, 2003.  The Company effectively provides a full and unconditional guarantee of the Trust’s obligations under the Trust Preferred Securities.  Issuance costs of approximately $4,100,000 related to the Trust Preferred Securities are deferred and amortized over the period until the mandatory redemption of the securities in January 2028.  Through December 29, 2002, the Company has repurchased 921,400 shares of the Trust Preferred Securities, effectively retiring temporarily $23,035,000 of Subordinated Debentures.  These Trust Preferred Securities, however, may be delivered in the Exchange Offer described in Item 5 above, at which time they will again be treated as outstanding.  If the participation in the Exchange Offer is for the maximum number of shares, the Company would incur additional annual interest expense of $2,088,000.

          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.

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Critical Accounting Policies

          The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  The Company bases these estimates and assumptions upon historical experience and existing, known circumstances.  Actual results could differ from these estimates.  Specifically, management must make estimates in the following areas:

Revenue Recognition

          The Company recognizes revenue from the sale of its product at the point of purchase, which occurs when the customer vends the water and pays for the product.  Due to the fact that the Company has approximately 14,000 vending machines, it is impractical to visit all machines at the end of each reporting period.  Consequently, the Company estimates the revenue from the last time each machine was visited until the end of the reporting period, based on the most current daily volume of each machine.  For the years ended December 29, 2002 and December 30, 2001, the Company recorded approximately $1,446,000 of such estimated revenues, which represents an average of approximately 8 days per machine.  The Securities and Exchange Commission’s Staff Accounting Bulletin (SAB), No. 101, Revenue Recognition in Financial Statements, provides guidance on the application of existing generally accepted accounting principles to selected revenue recognition issues.  The Company believes that its revenue recognition policy is consistent with the guidance and is in accordance with generally accepted accounting principles.

Allowance for Doubtful Accounts

          The Company records account receivable for revenues generated by inside machine.  Such revenues are collected by the retailers and remitted to the Company.  The Company provides a reserve against receivables for estimated losses that may result from a retailer’s inability to pay.  The Company determines the amount of the reserve by analyzing uncollected accounts, aged receivables, historical losses and the retailer’s credit worthiness.  Amounts later determined and specifically identified to be uncollectible are charged or written off against this reserve.  Should a retailer’s account become past due, the Company works with the retailer to resolve the past due amounts including replacing non-coin operated machines with coin operated machines and placing the account on hold or other actions as necessary to resolve the past due amounts.  Trade accounts receivable totaled $1,683,000 and the allowance for doubtful accounts was $94,000 at December 29, 2002.  This allowance is consistent with historical amounts reserved by the Company.

Repair Parts Inventory

          Repair parts inventory is stated at the lower of cost (moving weighted average) or market (replacement).  Management reviews the parts inventory on a regular basis for excess, obsolete and impaired inventory based on estimated future usage.  The likelihood of any material inventory write-down is dependent on future machine repairs or new machine developments.  Repair parts inventory was valued at $2,616,000 at December 29, 2002.

Valuation of Goodwill

          In 2002, Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets, became effective and as a result, goodwill was no longer subject to amortization.  In lieu of amortization, the Company is required to perform an annual review for impairment.  Goodwill is considered to be impaired if it is determined that its carrying value exceeds its fair value.  In addition to the annual review, an interim review is required if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying value.  Assessing the impairment of goodwill requires the Company to make assumptions and judgments regarding the fair value of the net assets of the Company.  The Company has completed its annual evaluation for the impairment of goodwill as of December 29, 2002 and has determined that no impairment existed as of that date.  The net book value of goodwill totaled $4,129,000.

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Depreciable Useful Lives

          Property and equipment is recorded at cost and is depreciated using the straight-line method over the estimated useful lives of the asset.  Vending equipment is estimated to have a useful life of 7 to 10 years and is generally depreciated to a 20% salvage value.  The salvage value is an estimate of the replacement value of the components expected to be recovered upon disposal of the machine.  When an original component is replaced, the replacement cost is expensed which results in a charge to income in an amount which approximates the depreciable cost of the components.  Costs associated with installing vending equipment are capitalized and depreciated over five years, which is the normal contractual period with the retailers.  Other equipment, furniture and fixtures have an estimated useful life of five to ten years.  Leasehold improvements are given an estimated useful life of the shorter of its estimated life or the term of the lease.  All maintenance, repair and refurbishment costs are charged to operations as incurred.  Additions and major improvements are capitalized.  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. 

Valuation of Long-Lived Assets

          The Company periodically assesses long-lived assets for impairment, which requires the use of assumptions and judgments regarding the carrying value of these assets.  The assets are considered to be impaired if it is determined that the carrying value may not be recoverable based upon an assessment of the following events or changes in circumstances:

          The Company evaluates and assesses its long-lived assets for impairment under the guidelines of FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.  If the assets are considered to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets.  In addition, the Company bases the useful lives and related amortization or depreciation expense on its estimate of the period that the assets will generate revenues or otherwise be used.  At December 29, 2002, the net book value of identifiable intangible assets that are subject to amortization totaled $527,000 and the net book value of property and equipment total $43,520,000. 

Litigation

          From time to time, claims are made against the Company in the ordinary course of business.  With the assistance from legal counsel, estimated amounts for such claims that are probable and can reasonably be estimated are recorded as liabilities in the consolidated balance sheets.  The likelihood of a material change in these estimated reserves would be dependent on new claims as they arise and the favorable or unfavorable outcome of the particular litigation.  On December 23, 2002, the Company reported that an action had been brought against the Company by the Environmental Law Foundation alleging unlawful and fraudulent business practices and false advertising.  As of December 29, 2002, the Company does not believe that this claim or any other litigation will have a material impact on the results of operations or financial condition of the Company.

Valuation of Deferred Income Taxes

          Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.  The likelihood of a material change in our expected realization of these assets depends on future taxable income, our ability to deduct tax loss carryforwards against future taxable income, the effectiveness of our tax planning and strategies among the various tax jurisdictions in which the Company operates, changes in the deductibility of interest paid on our subordinated debt and any significant changes in the tax treatment received on the Company’s business combinations.  As of December 29, 2002, the Company had federal and California net operating loss carryforwards of $26,897,000 and $9,548,000, respectively, which will begin to expire in 2012 and 2003 for federal and state income tax purposes, respectively.

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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. The Company’s outstanding bank debt is tied to the bank’s prime lending rate and as such, the Company is at risk due to increases in market rates.  A ten percent change in the bank’s lending rate would have the potential of increasing the interest on the expected average outstanding borrowings of the bank debt and impacting the future earning of the Company by less than $27,000 annually.  The Company’s exposure to interest rate risk relates primarily to the opportunity cost of fixed rate obligations associated with the Trust Preferred Securities.  The Company believes that the fixed rate represents the Company’s long-term market rate.  Therefore, there is no significant opportunity cost associated with the fixed rate.  At December 29, 2002, the Company held a portfolio of marketable securities consisting entirely of debt instruments available-for-sale with an estimated fair value equal to $603,000.  As of December 29, 2002, the Company held no convertible debt securities or equity securities available-for-sale.  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.  Financial Statements and Supplementary Data

          The Company’s consolidated financial statements, together with accompanying Notes and the Independent Auditors’ Report, KPMG LLP, and the Report of Independent Public Accountants, Arthur Andersen LLP, are set forth on pages 17 through 37 after Part IV of this report.

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

          On July 1, 2002, the Company filed Form 8-K reporting the termination of the engagement of its former auditor, Arthur Andersen LLP.

          On July 15, 2002, the Company filed Form 8-K reporting the engagement of KPMG LLP as the independent auditors for the fiscal year ended December 29, 2002.

Part III

Item 10.  Directors and Executive Officers of the Registrant

          The information required by this Item is incorporated herein by reference to the Company’s definitive proxy statement for the 2003 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 29, 2002.

Item 11.  Executive Compensation

          The information required by this Item is incorporated herein by reference to the Company’s definitive proxy statement for the 2003 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 29, 2002.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

          The information required by this Item is incorporated herein by reference to the Company’s definitive proxy statement for the 2003 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 29, 2002.

Item 13.  Certain Relationships and Related Transactions

          The information required by this Item is incorporated herein by reference to the Company’s definitive proxy statement for the 2003 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 29, 2002.

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Item 14.  Controls and Procedures

          Within 90 days prior to the filing date of this report, the Company’s Chief Executive Officer and Chief Financial Officer reviewed and evaluated our disclosure controls and procedures.  “Disclosure controls and procedures” means our controls and other procedures that are designed to ensure that information that is required to be disclosed in our periodic reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in these periodic reports is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures adequately and effectively meet the requirements described in the preceding sentence.  In addition, there were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of this evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.  However, the design of any system of control is based in part upon certain assumptions about the likelihood of future events and there is no certainty that any design will succeed in achieving its stated goal under all potential future considerations, regardless of how remote.

Part IV

Item 15.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

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Index

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INDEPENDENT AUDITORS’ REPORT

Board of Directors and Shareholders
Glacier Water Services, Inc.:

We have audited the 2002 consolidated financial statements of Glacier Water Services, Inc. and subsidiaries as listed in the accompanying index.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audit.  The 2001 and 2000 financial statements of Glacier Water Services, Inc., as listed in the accompanying index, were audited by other auditors who have ceased operations.  Those auditors expressed an unqualified opinion on those financial statements in their report dated February 19, 2002.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America.  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 2002 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Glacier Water Services, Inc. and subsidiaries as of December 29, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. 

/s/ KPMG LLP

San Diego, California
February 13, 2003

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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 their operations and their 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.

/s/ ARTHUR ANDERSEN LLP

San Diego, California
February 19, 2002

NOTE: THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP (“ANDERSEN”) IN CONNECTION WITH GLACIER’S FORM 10-K FILING FOR THE FISCAL YEAR ENDED DECEMBER 30, 2001.  THE INCLUSION OF THIS PREVIOUSLY ISSUED ANDERSEN REPORT IS PURSUANT TO THE “TEMPORARY FINAL RULE AND FINAL RULE REQUIREMENTS FOR ARTHUR ANDERSEN LLP AUDITING CLIENTS,” ISSUED BY THE U.S. SECURITIES AND EXCHANGE COMMISSION IN MARCH 2002. NOTE THAT THIS PREVIOUSLY ISSUED ANDERSEN REPORT INCLUDES REFERENCES TO CERTAIN FISCAL YEARS, WHICH ARE NOT REQUIRED TO BE PRESENTED IN THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 29, 2002. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH THIS FILING ON FORM 10-K.  SEE EXHIBIT 23.2 FOR FURTHER DISCUSSION.

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GLACIER WATER SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

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

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GLACIER WATER SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)

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

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

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GLACIER WATER SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands, except share data)