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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ 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: January 4, 1998
Commission file number: 1-11012
GLACIER WATER SERVICES, INC.
----------------------------
(Exact name of registrant as specified in its charter)
Delaware 33-0493559
- --------------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2261 Cosmos Court,
Carlsbad, CA 92009
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (760) 930-2420
--------------------
Securities registered pursuant to Section 12(b)
of the Act:
Title of each class Name of each exchange on
which registered
Common Stock, $.01 Par Value Per Share American Stock Exchange
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K of any amendment to this
Form 10-K. [ ]
As of March 6, 1998, the aggregate market value of the voting stock held by non-
affiliates of the registrant was $49,624,000 (calculated at the closing price on
the American Stock Exchange multiplied by outstanding shares held by non-
affiliates). For purposes of the foregoing calculation, certain persons who
have filed reports on Schedule 13D with the SEC with respect to their beneficial
ownership of more than 5% of the registrant's outstanding common stock and
directors and officers have been excluded from the group of stockholders deemed
to be non-affiliates of the registrants.
As of March 6, 1998, the registrants had 3,201,825 shares of common stock
outstanding.
The total number of pages in this Form 10-K is 32; the Index to Exhibits is
located on page 31.
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
1998 Annual Meeting of Stockholders which will be filed with the Securities and
Exchange Commission within 120 days after the close of the 1997 fiscal year.
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Statements in this Annual Report that are not purely historical are forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. These forward looking statements with respect to the
financial condition and results of operations of the Company involve risks and
uncertainties including, but not limited to, trade relations, dependence on
certain locations and competition, as described in Part I below, that could
cause actual results to differ materially from those projected.
PART I
ITEM 1. BUSINESS
INTRODUCTION
- ------------
Glacier Water Services, Inc. ("Glacier" or the "Company") is the
leading provider of high quality, low priced drinking water dispensed to
consumers through self-service vending machines. Since its inception in 1983,
the Company has created a network of over 12,000 water vending machines
throughout the sunbelt and midwest regions of 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 its retail
locations. The vending machines reduce impurities in the water through a
combination of micron filtration, reverse osmosis, carbon absorption and
ultraviolet sterilization. The Company generally charges $.25 to $.35 per
gallon, which is significantly lower 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 assure cost-effective, quality service.
Each water vending machines is serviced and tested weekly.
The Company has experienced significant growth. The number of water
vending machines in operation has increased from 3,666 machines as of December
31, 1992 to 12,444 machines as of January 4, 1998. During fiscal year 1997, the
Company's growth was primarily a result of the acquisition of the Company's
largest competitor, Aqua-Vend, a division of McKesson Water Products Company.
Historically, the Company has operated water vending machines designed
primarily for outside use in fair-weather climates. Because it is impractical
to use outdoor vending machines in cold-weather climates, the Company 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,
thereby making it more compatible with an interior retail layout. The Company
believes that the in-store machines afford the Company significant opportunities
to expand within its existing locations, as well as into new market areas in
cold-weather states.
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.
1
BUSINESS BACKGROUND
- -------------------
The following table presents the number of machines installed annually since
December 31, 1992:
Total installed machines as of December 31, 1992........................................... 3,666
Machines added during the year:
1993.......................................................................... 1,114
1994.......................................................................... 1,945
1995.......................................................................... 1,793
1996.......................................................................... 646
1997.......................................................................... 3,280
------
Total installed machines as of January 4, 1998...................................... 12,444
======
Total machines installed as of January 4, 1998 are distributed by state as
follows:
California.................................................................... 7,185
Texas......................................................................... 1,789
Florida....................................................................... 1,741
Arizona....................................................................... 870
Nevada........................................................................ 300
Other......................................................................... 559
------
12,444
======
The placement of the Company's 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 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 chains of supermarkets, the Company generally
places machines at all of the chains' locations as part of its business
agreements. To attain optimum efficiency, multiple vending machines may be
installed at a site if the volume of sales so warrants.
Glacier's internally developed water vending machines utilize micron
filtration, reverse osmosis, carbon adsorption 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: nonsparkling, sparkling, club soda/seltzer and imported water.
Nonsparkling water is the segment in which the Company competes and is consumed
as an alternative to tap water. Nonsparkling water is distributed through three
principal channels: packaged water sold off-the-shelf in retail locations,
packaged water delivered to homes and offices and water sold through vending
machines. Like water sold off-the-shelf or through home delivery services,
vended water is 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.
2
BUSINESS STRATEGY
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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 the consumer through a network
of conveniently located water vending machines. In order to maintain the
Company's superior quality standards, the Company provides frequent, regular and
reliable service and support to its network of water vending machines. 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 usage.
The Company's drinking water competes with nonsparkling water sold in
containers inside retail outlets and with water sold in containers delivered
directly to homes and offices. The principal costs associated with water sold
off-the-shelf and through 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 in its vending machines and the consumer provides the
container for the Company's product, the Company is able to avoid the packaging
and distribution costs incurred by these competitors. Accordingly, the Company
passes on these savings to consumers by charging a retail price of $0.25 to
$0.35 per gallon, compared with retail pricing ranging from approximately $0.69
to over a dollar per gallon for water sold in containers in retail outlets.
Nonsparkling water sold in containers delivered directly to consumers' homes
generally sells at an effective price in excess of $1.00 per gallon, including
the cost of renting the dispensing unit.
Develop and Maintain Relationships With Retail Accounts. The Company
arranges to place its outdoor and in-store water vending machines on the
premises of supermarkets and other retail locations. The Company provides the
machines and pays for all installation costs, while the retailer provides and
pays for the required municipally supplied water and for the electricity to
operate the machines. The Company generally pays monthly commissions to the
retailers based upon a percentage of sales, typically ranging from 25% to 60%.
The Company believes it can continue to capitalize on its existing relationships
to place in-store water vending machines at locations where the Company has
already successfully placed its outdoor water vending machines, as retailers
become increasingly cognizant of the growing demand for vended water.
Substantially all of the Company's arrangements with its retail trade
accounts are evidenced by written contracts, some of which contain termination
clauses as well as automatic renewal clauses. The terms of these agreements
range from 30 days to five years, during which time the Company 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 provides
marketing incentives in order to encourage certain retailers to promote the
Company's products.
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. The Company is considering the testing
of media advertising in markets with high population densities and where many
Glacier Water vending machines are installed.
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 assure cost-effective, frequent
service. The clustering has allowed the Company over the last five years to
increase the number of machines serviced by technicians from 40 machines to 70
machines per week. The Company continuously strives to develop technical
improvements to its water vending machines that make the machines easier to use
and easier to service. To this end, the Company has made improvements to its
water vending machines including the introduction of its fast-flow nozzle, which
3
increases the speed of water flow from the Company's water vending machines
thereby cutting consumer fill-time, and the introduction of the Company's dual-
vend technology which doubles the number of nozzles on a machine to allow
consumers to fill two water containers simultaneously. The Company continually
monitors and evaluates demand for the Company's product at each location. This
allows the Company to continue to evaluate the productivity of each of its
machines and relocate machines as necessary to optimize their productivity.
GROWTH STRATEGY
- ---------------
According to an industry source, there are approximately 72,000
grocery stores (excluding convenience stores) in the United States. The Company
currently operates water vending machines at less than 10% of such locations.
The Company intends to continue its expansion into these locations as well as
into select international markets. The Company's growth strategy includes the
following:
. Increase Penetration of Existing Domestic Markets. The Company primarily
operates in nine sunbelt states through the use of its outdoor water
vending machine. Management believes it can place additional outdoor
machines with both existing and new retail accounts in those states.
Management also believes there are significant opportunities to add in-
store water vending machines at its current retail account locations
without adversely affecting revenues generated by its outdoor machines at
such locations.
. Expand Into New Domestic Markets. The Company intends to place 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.
. Expand Into Select International Markets. The Company intends to capitalize
on the demand for bottled water outside of the United States by expanding
into select international markets. The Company currently is in the process
of establishing operations in Mexico as its initial entry into the
international market.
. Pursue Select Acquisition Opportunities. The Company intends to evaluate
and pursue select strategic acquisition opportunities, but has no firm
commitments with respect to acquisitions at this time.
THE AQUA-VEND ACQUISITION
- -------------------------
On March 28, 1997, the Company purchased substantially all of the
assets of the Aqua-Vend division of McKesson Water Products Company, a wholly-
owned subsidiary of McKesson Corporation, for a purchase price of approximately
$ 9.0 million, subject to certain post-closing adjustments. Prior to the
acquisition, Aqua-Vend was the Company's largest competitor, with approximately
3,000 water vending machines. In connection with the acquisition, the Company
developed a detailed integration plan, which included the removal of
approximately 600 Aqua-Vend machines and the rationalization and relocation of
Aqua-Vend machines within Glacier's network of machines.
COMPETITION
- -----------
The bottled water market is highly competitive. The Company competes
in the nonsparkling segment of the bottled water market with companies that
deliver water to homes and offices, with off-the-shelf marketers and with other
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 marketers 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 to new and existing competitors in the
water vending market due to, among other things, the substantial capital outlay
required to purchase the number of machines needed to achieve competitive
operating efficiencies, a competitor with significant financial resources
4
may be able to compete with the Company. There can be no assurance that any
competitors will not be able to raise the capital required to effectively
compete with the Company.
SEASONALITY
- -----------
The Company's revenues are subject to seasonal fluctuations with
decreased revenues during rainy or cold weather months and increased revenues
during hot weather months.
INTELLECTUAL PROPERTY
- ---------------------
The tradename and trademarks "Glacier Water" and "Glacier Water &
Penguin Design" used by the Company contain the word "Glacier" which is commonly
used and has been registered in connection with other marks and designs by a
number of other entities for water and related services. The mark "Glacier
Water," by itself, is considered by the United States Patent and Trademark
Officer (the "PTO") to be generic in relation to water and related services.
One party claiming to sell bottled water in a limited area near Incline Village,
Nevada, informed the Company that it objected to the Company's use of the mark
"Glacier Water." However, the PTO has cancelled this party's registration.
Accordingly, the Company believes that no party can claim exclusive rights in
"Glacier Water," and the Company may only claim rights to stylized forms of the
mark or the mark with design elements. Notwithstanding the foregoing, no
assurance can be given that other entities might not assert superior or
exclusive rights in the marks and seek to obtain damages from and injunctive
relief against the Company. Thus, there can by 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 if such party
challenged the use of such name and marks, could have 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 vending machines, to pay annual license and
inspection fees, to comply with certain detailed design and quality standards
regarding the vending machines and the vended water, and to continuously control
the quality of the vended water. The Company's vending machines are subject to
routine and random regulatory quality inspections. Although the Company
believes it is operating in substantial compliance with these laws and
regulations, such laws and regulations and their interpretations and enforcement
are subject to change. There can be no assurance that additional or more
stringent requirements will not be imposed on the Company's operations in the
future. Failure to comply with such current or future laws and regulations
could result in fines against the Company, a temporary shutdown of the Company's
operations, the loss of certification to sell its product or, even in the
absence of governmental action, a reduction in the Company's profit margin based
on increases in licensing or inspection fees payable by the Company or other
additional compliance costs.
INSURANCE
- ---------
The Company carries general and product liability insurance. Its
combined coverage is $26,000,000 per occurrence and $27,000,000 in the
aggregate, which amounts 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 unlikely any contamination of the
products dispensed by its machines, 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 January 4, 1998, the Company had 342 employees, including 52 in
administration and 290 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.
5
ITEM 2. PROPERTIES
The Company's principal facility, a 30,000-square-foot building in
Carlsbad, California containing its executive offices and assembly shop is under
lease through May 1999. The Company also leases various other facilities
containing its area service centers. These leases range in square footage from
2,100 to 13,400 square feet, and expire on various dates from April 1998 through
September 2002.
ITEM 3. LEGAL PROCEEDINGS
In response to an allegation by Pure Fill Corporation and Dennis
DiSanto that certain features of the Company's water vending machines violate
their patents, on October 28, 1997, the Company filed a lawsuit in the United
States District Court for the Southern District of California against Pure Fill
Corporation and Dennis DiSanto, as named defendants, seeking a declaration that
the patents held by them are invalid under United States patent law and that the
Company's water vending machines do not infringe any valid claim of the patents.
On November 17, 1997, the defendants filed an answer to the complaint and
counterclaim alleging that the Company is infringing its patents. Although the
Company believes, based on advice of patent counsel, that this litigation will
not have a material adverse effect on the Company's business, financial
condition or operating results, there can be no assurance that the lawsuit
ultimately will be resolved in favor of the Company, or that the Company will
not have to make modifications to its machines.
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 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of Glacier is traded on the American Stock Exchange
under the symbol "HOO." The following table sets forth the range of high and
low sales prices on the American Stock Exchange for the Common Stock for the
periods indicated.
High Low
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Fiscal Year 1997
----------------
First Quarter $27.00 $22.00
Second Quarter 25.88 22.38
Third Quarter 30.13 25.75
Fourth Quarter 31.25 26.25
Fiscal Year 1996
----------------
First Quarter $19.50 $16.50
Second Quarter 20.00 18.13
Third Quarter 23.00 19.00
Fourth Quarter 23.25 19.63
The Company did not pay dividends on its Common Stock in 1997 and 1996
and presently intends to continue this policy. The Company had approximately 47
stockholders of record as of January 4, 1998.
6
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following sets forth selected financial data as of and for the
periods presented. Effective January 1, 1997, the Company prospectively changed
its fiscal year from twelve calendar months to a 52- or 53-week year ending the
Sunday closest to December 31. As a result of this change, the Company's fiscal
year 1997, which ended on January 4, 1998, contained 369 days. 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 Form 10-K. The earnings per share amounts prior to the 1997 fiscal year
ended January 4, 1998 have been restated as required to comply with Statement of
Accounting Standards No. 128, Earnings Per Share ("Statement No. 128"). For
further discussion of earnings per share and the impact of Statement No. 128,
see the notes to the consolidated financial statements beginning on page 21.
FISCAL YEAR ENDED
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JANUARY 4, DECEMBER 31,
------------ --------------------------------------------------------
1998 1996 1995 1994 1993
---------- ---------- ------------- ------------ ------------
(in thousands, except shares and per share amounts)
Consolidated Statements of Income Data:
Revenues.................................... $ 57,294 $ 46,091 $ 42,409 $ 36,557 $ 30,636
Costs and expenses:
Operating expenses........................ 35,569 28,088 25,933 23,504 20,065
General and administrative expenses....... 7,200 5,749 5,467 4,831 4,504
Depreciation and amortization............. 8,852 6,769 5,756 3,662 2,692
Non-recurring charges..................... 3,062 -- -- -- --
---------- ---------- ---------- ---------- ----------
Total costs and expenses................ 54,683 40,606 37,156 31,997 27,261
---------- ---------- ---------- ---------- ----------
Income from operations...................... 2,611 5,485 5,253 4,560 3,375
Other expenses:
Interest expense, net..................... 1,988 767 739 277 46
---------- ---------- ---------- ---------- ----------
Income before provision for income taxes.... 623 4,718 4,514 4,283 3,329
Provision for income taxes.................. 193 1,415 1,805 1,578 1,282
---------- ---------- ---------- ---------- ----------
Net income.................................. $ 430 $ 3,303 $ 2,709 $ 2,705 $ 2,047
========== ========== ========== ========== ==========
Basic earnings per share.................... $ .13 $ .99 $ .81 $ .83 $ .63
========== ========== ========== ========== ==========
Weighted average common shares outstanding.. 3,219,082 3,334,504 3,334,851 3,255,078 3,236,986
========== ========== ========== ========== ==========
Diluted earnings per share.................. $ .13 $ .98 $ .80 $ .80 $ .62
========== ========== ========== ========== ==========
Weighted average common and potential
common shares outstanding................ 3,332,890 3,374,482 3,405,104 3,367,151 3,299,130
========== ========== ========== ========== ==========
SELECTED BALANCE SHEET DATA
- ---------------------------
JANUARY 4, DECEMBER 31,
---------- ---------------------------------------------------------
1998 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(in thousands)
Total assets............................ $59,473 $46,067 $40,638 $34,042 $23,415
Long-term debt, including current $28,732 $15,820 $11,087 $ 8,199 $ 1,510
portion................................
Stockholders' equity.................... $24,623 $23,986 $24,087 $20,376 $17,265
7
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 Form 10-K. The following
table sets forth for the periods indicated, the percentage of revenues
represented by certain items included in the Consolidated Statements of Income.
FISCAL YEAR ENDED
-----------------------------
JANUARY 4, DECEMBER 31,
----------- ---------------
1998 1996 1995
----------- ------ ------
Revenues................................ 100.0% 100.0% 100.0%
Costs and expenses:
Operating expenses................. 62.1% 60.9% 61.2%
General and administrative
expenses......................... 12.6% 12.5% 12.9%
Depreciation and amortization...... 15.4% 14.7% 13.6%
Non-recurring charges.............. 5.3% -- --
----- ----- -----
Total costs and expenses...... 95.4% 88.1% 87.7%
----- ----- -----
Income from operations.................. 4.6% 11.9% 12.3%
Interest expense, net................... 3.5% 1.7% 1.7%
----- ----- -----
Income before income taxes.............. 1.1% 10.2% 10.6%
===== ===== =====
RESULTS OF OPERATIONS
- ---------------------
OVERVIEW
In order to more closely align its fiscal reporting to its business
cycle, effective January 1, 1997 the Company prospectively changed its fiscal
year from twelve calendar months ending December 31, to a 52- or 53-week fiscal
year ending on the Sunday closet to December 31. As a result of this change,
the Company's fiscal 1997 quarters each contained 13 calendar weeks, and the
fiscal year which ended January 4, 1998 contained 369 days. Results of
operations for the period from January 1, 1997 to January 5, 1997 have not been
reported separately, as then are not material to the fiscal year ended January
4, 1998.
On March 28, 1997, the Company purchased substantially all of the
assets of the Aqua-Vend division of McKesson Water Products Company, a wholly
owned subsidiary of McKesson Corporation. The assets purchased included
approximately 3,000 water vending machines. In connection with the acquisition,
the Company developed a detailed integration plan, which included the removal of
approximately 600 Aqua-Vend machines from service, the upgrading and
modification of the majority of the remaining Aqua-Vend machines and the
rationalization and relocation of Aqua-Vend machines within Glacier's network of
machines. The revenues and operating costs associated with these machines from
March 29, 1997 are included in the Company's results of operations. During
fiscal 1997, the Company substantially completed the Aqua-Vend integration
activities and incurred non-recurring expenses of $3,062,000 related to these
activities.
During fiscal 1997, the Company installed 390 new outside machines and
418 in-store machines, as well as acquiring a net of 2,472 Aqua-Vend machines,
to finish the year with a total of 12,444 machines in operation, compared with
9,164 at December 31, 1996. Included in the total at January 4, 1998 are 538
in-store machines, compared with 120 at December 31, 1996.
8
REVENUES
- --------
Revenues for fiscal year 1997 increased 24.3% to $57,294,000 from
$46,091,000 in fiscal year 1996. 1996 revenues increased 8.7%, from $42,409,000
in fiscal year 1995. The increases in both years are primarily the result of
the increased number of machines in operation. The increase in revenues in
1997, however, did not keep pace with the 35.8% increase in the number of
machines in operation since December 31, 1996 due primarily to cooler than usual
weather in California in the third quarter, and unusually cold and rainy weather
caused by the El Nino weather conditions in the fourth quarter. Because
California is the Company's largest and most important market the softer third
and fourth quarter revenues had a significant impact on the Company's revenues
overall.
COSTS AND EXPENSES
- ------------------
Operating expenses for fiscal year 1997 increased to $35,569,000 or
62.1% of revenues, compared to $28,088,000, or 60.9% of revenues in 1996, and
$25,933,000 or 61.2% of revenues in 1995. The total dollar increases in both
years are due to the additional commissions and service costs associated with
the additional machines on location. The increase in operating expenses as a
percentage of revenues in 1997 is primarily the result of softer revenues during
the third and fourth quarters. The increase is also due in part to
inefficiencies in servicing and other short term increases in service costs
experienced as the Company focused its efforts on completing the integration of
Aqua-Vend. These increased costs related to Aqua-Vend are in addition to the
specific costs associated with the Company's identified integration projects
that are reported separately as non-recurring charges.
General and administrative expenses ("G&A") for fiscal year 1997
increased to $7,200,000 or 12.6% of revenues, compared to $5,749,000, or 12.5%
of revenues in 1996 and $5,467,000, or 12.9% of revenues in 1995. The increase
in total dollars is due to an increase in the Company's activities supporting
and promoting the in-store machines program, as well as additional
administrative expenses incurred as a result of the Aqua-Vend acquisition. The
slight increase in G&A as a percentage of revenues in 1997 resulted primarily
from the effect of softer sales in the third and fourth quarters, discussed
above.
Depreciation and amortization expense for fiscal year 1997 increased
to $8,852,000, compared to $6,769,000 in 1996 and $5,756,000 in 1995. The
increases in each year are the result of the installation of additional
machines.
The Company had expected to incur a total of approximately $3.5
million in non-recurring expenses in 1997 related to the integration of Aqua-
Vend's operations with Glacier's. Specifically, the integration plan included
costs to close certain Glacier locations and write-off obsolete assets, to
upgrade the Aqua-Vend machines to Glacier's servicing and operability standards,
to rationalize and relocate equipment between Aqua-Vend and Glacier locations
and to change the signage on Aqua-Vend machines to that used by Glacier. The
actual total cost incurred in connection with the completion of these activities
in 1997 was $3,062,000.
Interest expense for fiscal year 1997 increased to $1,988,000,
compared to $767,000 in 1996 and $739,000 in 1995. The increases are due to the
higher outstanding balances on the Company's bank line of credit during each
year. In 1997, the acquisition of Aqua-Vend and the Company's investment in new
machines were financed through additional borrowing on the line of credit.
The Company's effective tax rate in fiscal year 1997 was 31%, compared
to effective rates of 30% in 1996 and 40% in 1995. The lower effective tax
rates in 1997 and 1996 resulted from the Company's realization of the effect of
certain income tax credits.
As a result of the foregoing, net income for fiscal year 1997 declined
to $430,000, or $.13 per basic and diluted share, from $3,303,000, or $.99 per
basic share and $.98 per diluted share in 1996. Net income in 1996 increased
from $2,709,000, or $.81 basic share and $.80 per diluted share in 1995.
9
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary sources of liquidity and capital resources in
fiscal year 1997 were cash flows from operations and funds available under the
Company's Credit Facility. The Credit Facility, which was repaid in full and
terminated on January 27, 1998, provided for borrowings of up to $35.0 million
and required monthly interest payments at the bank's prime rate (8.5% per annum
at January 4, 1998) or LIBOR plus 1.75% (7.7% per annum at January 4, 1998).
For fiscal year 1997, net cash provided by operations was
approximately $6.4 million, the Company made capital investments in vending
machines and other equipment of approximately $10.0 million and invested
approximately $9.4 million in the purchase of Aqua-Vend. During 1997, the
Company invested approximately $315,000 in short-term investments. As of
January 4, 1998, the Company had working capital of $2.0 million. 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.
At January 4, 1998, approximately $28.7 million of borrowings were
outstanding and $6.3 million was available under the Credit Facility. The
purchase price of the Aqua-Vend assets was funded by additional borrowings under
the Company's Credit Facility.
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 in 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"). 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. The Trust
exists for the sole purpose of issuing Trust Securities and purchasing
Subordinated Debentures. With the proceeds from the issuance of the Subordinated
Debentures, the Company repaid in full all amounts outstanding under its bank
credit agreement and terminated the agreement.
The Company believes that its cash flow from operations and the
proceeds from the issuance of the Subordinated Debentures, after prepayment of
its Credit Facility, will be sufficient to meet its anticipated operating and
capital requirements, including its investment in vending machines, as well as
distributions related to the Trust Securities, 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 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 16 through 30 after Part IV of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has had no changes in or disagreements with its
accountants on its accounting and financial disclosure.
10
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 1998 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
January 4, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
Name Position Age
---- -------- ---
Jerry R. Welch Chairman of the Board, Chief Executive Officer 47
and Director
Jerry A. Gordon President, Chief Operating Officer and Director 52
Glen A. Skumlien Executive Vice President, Operations 48
S. Dane Seibert Senior Vice President, Marketing 49
John T. Vuagniaux Senior Vice President, Operations 49
Gerald E. Compas Vice President, Sales 54
Brenda K. Foster Vice President, Controller and Secretary 31
Dana B. Gilbert Vice President, National Accounts 49
Roger J. Gilchrist Vice President, Eastern Operations 49
Luz E. Gonzales Vice President, Human Resources 45
Brian T. Nakagawa Vice President, Technology & Information Systems 44
Raymond J. Schweitzer Vice President, International Operations 50
The executive officers are elected by and serve at the discretion of
the Board of Directors until their successors are duly chosen and qualified.
JERRY R. WELCH
Mr. Welch has been a director of the Company since October 1991, has
been the Chairman of the Board since April 1993 and was appointed Chief
Executive Officer in September 1994. He also served as Chairman of the Board
from January 1992 through September 1992. From October 1991 until his
resignation in September 1992, Mr. Welch served as the Company's Chief Executive
Officer. Mr. Welch currently serves as a Senior Vice President of Kayne
Anderson Investment Management and has served in such a capacity since January
1993. Mr. Welch is also the Chairman of the Board and Chief Executive Officer
of The Right Start, Inc. Kayne Anderson Investment Management holds an equity
ownership position in The Right Start, Inc.
JERRY A. GORDON
Mr. Gordon has served as the President and Chief Operating Officer of
Glacier Water Services, Inc. since September 1994, and as a Director of the
Company since June 1997. Mr. Gordon joined the Company in June 1993 as Vice
President of Marketing. From 1992 to 1993, Mr. Gordon was a business consultant
specializing in management operations in start-up companies.
GLEN A. SKUMLIEN
Mr. Skumlien has served as Executive Vice President, Operations since
September 1994. From November 1991 to September 1994, Mr. Skumlien served as
Vice President-Operations.
11
S. DANE SEIBERT
Mr. Seibert has served as Senior Vice President of Marketing since
joining the Company in March 1995. From 1990 until joining the Company Mr.
Seibert was Corporate Vice President - International Marketing for Miller/Zell
Inc.
JOHN T. VUAGNIAUX
Mr. Vuagniaux has served as Senior Vice President, Operations since
November 1996, after joining the Company in January 1995 as Vice President,
Service Support. From April 1994 to January 1995, Mr. Vuagniaux was owner of
Logistics Solutions, a consulting firm specializing in logistics and operations
management. From January 1992 to April 1994, Mr. Vuagniaux was Director of
Distribution for Blockbuster Entertainment Corporation.
GERALD E. COMPAS
Mr. Compas has served as Vice President, Sales since March 1997. From
June 1991 to March 1997, Mr. Compas served as the Director of Sales and
Marketing for the Aqua-Vend division of McKesson Water Products Company.
BRENDA K. FOSTER
Ms. Foster has served as Vice President, Controller since February
1996, after joining the Company as Controller in September 1995. Ms. Foster is
a Certified Public Accountant, and worked as an auditor for Ernst & Young LLP
from 1988 to 1995.
DANA B. GILBERT
Mr. Gilbert has served as Vice President, National Accounts since
February 1996. Mr. Gilbert joined the Company in January 1992 as a Sales
Manager. From January 1994 to February 1996, Mr. Gilbert served as Regional
Sales Manager for the Western Division.
ROGER J. GILCHRIST
Mr. Gilchrist has served as Vice President, Eastern Operations since
February 1996. Mr. Gilchrist joined the Company in April 1988 as a District
Manager. In May 1993, Mr. Gilchrist assumed the position of Regional Sales
Manager for the Eastern Division.
LUZ E. GONZALES
Mrs. Gonzales joined the Company in February 1995 as Vice President of
Human Resources. From 1981 to February 1995, Mrs. Gonzales was Corporate
Director of Human Resources for Southwest Water Company, a water service
company.
BRIAN T. NAKAGAWA
Mr. Nakagawa has served as Vice President, Technology and Information
Systems since February 1996, after joining the Company as Director of Technology
and Information Systems in June 1995. Prior to joining the Company Mr. Nakagawa
was the owner of New Frontier Technologies, an information systems consulting
company.
12
Raymond J. Schweitzer
Mr. Schweitzer has served as the Company's Vice President, International
Operations since December 1997. From March 1993 to December 1997, Mr.
Schweitzer served as the Vice President, International Sales and Marketing for
Shelcor, Inc., an international toy manufacturer.
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 1998 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 January 4, 1998.
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 1998 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 January 4, 1998.
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 1998 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 January 4, 1998.
13
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 on page 31
are filed as part of this report.
(b) Reports on Form 8-K
-------------------
A report on Form 8-K was filed on November 6, 1997, in connection with
the Company's determination to change its fiscal year end to the
fifty-two or fifty-three week period ending on the Sunday closest to
December 31.
14
Index
-----
Page
Number
------
Consolidated Financial Statements
- ---------------------------------
Report of Independent Public Accountants..................................................... 16
Consolidated Balance Sheets at January 4, 1998 and December 31, 1996......................... 17
Consolidated Statements of Income for the fiscal years ended January 4, 1998,
December 31, 1996, and December 31, 1995.................................................. 18
Consolidated Statements of Stockholders' Equity for the fiscal years ended January 4, 1998,
December 31, 1996, and December 31, 1995.................................................. 19
Consolidated Statements of Cash Flows for the fiscal years ended January 4, 1998,
December 31, 1996, and December 31, 1995.................................................. 20
Notes to Consolidated Financial Statements................................................... 21
15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Glacier Water Services, Inc.
We have audited the accompanying consolidated balance sheets of Glacier
Water Services, Inc. (a Delaware corporation) and subsidiaries as of January 4,
1998 and December 31, 1996, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three fiscal years in the
period ended January 4, 1998. 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 generally accepted auditing
standards. 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 January 4, 1998 and December 31, 1996, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended January 4, 1998, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
San Diego, California
February 6, 1998
16
GLACIER WATER SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
------
January 4, December 31,
1998 1996
--------- ----------
Current assets:
Cash..................................................................... $ 13 $ 11
Short-term investments, at fair value.................................... 315 --
Accounts receivable...................................................... 467 311
Inventories.............................................................. 3,007 1,693
Prepaid commissions and other............................................ 1,164 1,084
--------- ----------
Total current assets................................................. 4,966 3,099
Property and equipment, net of accumulated depreciation...................... 48,523 38,007
Other assets................................................................. 5,984 4,961
--------- ----------
Total assets................................................................. $ 59,473 $ 46,067
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable......................................................... $ 602 $ 640
Accrued commissions...................................................... 1,515 988
Accrued liabilities...................................................... 874 1,654
--------- ----------
Total current liabilities............................................ 2,991 3,282
Long-term debt............................................................... 28,732 15,820
Deferred income taxes........................................................ 3,127 2,979
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 100,000 shares
authorized, no shares issued and outstanding......................... -- --
Common stock, $.01 par value, 10,000,000 shares authorized,
3,226,175 and 3,208,575 shares issued and outstanding at
January 4, 1998 and December 31, 1996, respectively.................. 34 34
Additional paid-in capital............................................... 15,548 15,284
Retained earnings........................................................ 12,661 12,231
Treasury stock, at cost, 172,600 and 170,500 shares at January 4, 1998
and December 31, 1996, respectively............................... (3,620) (3,563)
--------- ----------
Total stockholders' equity........................................... 24,623 23,986
--------- ----------
Total liabilities and stockholders' equity................................... $ 59,473 $ 46,067
========= ==========
The accompanying notes are an integral part of these consolidated statements.
17
GLACIER WATER SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED
---------------------------------
JANUARY 4, DECEMBER 31,
---------- ---------------------
1998 1996 1995
--------- --------- --------
Revenues................................ $57,294 $46,091 $42,409
Costs and expenses:
Operating expenses................. 35,569 28,088 25,933
General and administrative
expenses......................... 7,200 5,749 5,467
Depreciation and amortization...... 8,852 6,769 5,756
Non-recurring charges.............. 3,062 -- --
------- ------- -------
Total costs and expenses....... 54,683 40,606 37,156
------- ------- -------
Income from operations.................. 2,611 5,485 5,253
Interest expense, net................... 1,988 767 739
------- ------- -------
Income before provision for
income taxes.......................... 623 4,718 4,514
Provision for income taxes.............. 193 1,415 1,805
------- ------- -------
Net income.............................. $ 430 $ 3,303 $ 2,709
======= ======= =======
Basic earnings per share................ $ .13 $ .99 $ .81
======= ======= =======
Diluted earnings per share.............. $ .13 $ .98 $ .80
======= ======= =======
The accompanying notes are an integral part of these consolidated statements.
18
GLACIER WATER SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL
------------ PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
---------- ------------ ---------- -------- --------- ---------
Balance, December 31, 1994... 3,294,094 $33 $14,124 $ 6,219 $ $20,376
--
Exercise of Stock Options.... 73,731 1 1,001 -- -- 1,002
Net Income................... -- -- -- 2,709 -- 2,709
--------- --- ------- ------- ------- -------
Balance, December 31, 1995... 3,367,825 34 15,125 8,928 -- 24,087
Exercise of Stock Options.... 11,250 -- 159 -- -- 159
Purchase of Treasury Stock... (170,500) -- -- -- (3,563) (3,563)
Net Income................... -- -- -- 3,303 -- 3,303
--------- --- ------- ------- ------- -------
Balance, December 31, 1996... 3,208,575 34 15,284 12,231 (3,563) 23,986
Exercise of Stock Options.... 19,700 -- 264 -- -- 264
Purchase of Treasury Stock... (2,100) -- -- -- (57) (57)
Net Income................... -- -- -- 430 -- 430
--------- --- ------- ------- ------- -------
Balance, January 4, 1998..... 3,226,175 $34 $15,548 $12,661 $(3,620) $24,623
========= === ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated statements.
19
GLACIER WATER SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEAR ENDED
-------------------------------------
JANUARY 4, DECEMBER 31,
------------- ---------------------
1998 1996 1995
------------- --------- ---------
Cash flows from operating activities:
Net income $ 430 $ 3,303 $ 2,709
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 8,852 6,769 5,756
Loss (gain) on disposal of assets (3) 74 13
Deferred tax provision (benefit) 148 (120) 682
Change in operating assets and liabilities:
Accounts receivable (158) 303 105
Inventories (1,106) (117) (440)
Prepaid commissions and other 175 (196) 99
Payments for prepaid marketing incentives (1,262) (2,966) (750)
Other assets (261) (124) (201)
Accounts payable, accrued liabilities and (444) 896 (455)
accrued commissions
-------- -------- --------
Total adjustments 5,941 4,519 4,809
-------- -------- --------
Net cash provided by operating activities 6,371 7,822 7,518
-------- -------- --------
Cash flows from investing activities:
Net investment in vending equipment (9,647) (8,693) (10,742)
Purchase of property and equipment (304) (476) (182)
Proceeds from sales of property and equipment 132 -- --
Purchase of Aqua-Vend (9,355) -- --
Purchase of short-term investments (315) -- --
-------- -------- --------
Net cash used in investing activities (19,489) (9,169) (10,924)
-------- -------- --------
Cash flows from financing activities:
Proceeds from long-term debt 30,485 19,778 15,588
Principal payments on long-term debt (17,572) (15,045) (12,700)
Proceeds from issuance of stock 264 159 474
Purchase of treasury stock (57) (3,563) --
-------- -------- --------
Net cash provided by financing activities 13,120 1,329 3,362
-------- -------- --------
Net increase (decrease) in cash 2 (18) (44)
Cash, beginning of year 11 29 73
-------- -------- --------
Cash, end of year $ 13 $ 11 $ 29
======== ======== ========
SUPPLEMENTAL INFORMATION
Cash paid for interest $ 2,074 $ 748 $ 735
======== ======== ========
Cash paid for income taxes $ 400 $ 1,010 $ 580
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
20
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Company is primarily engaged in the operation of self-service vending
machines that dispense drinking water to consumers. The machines are placed at
supermarkets and other retail outlets under commission arrangements with the
retailers. The Company's revenues are subject to seasonal fluctuations, with
decreased revenues during rainy or cold weather months and increased revenues
during hot weather months. The Company's machines are located throughout the
sunbelt and midwest regions of the United States. As of January 4, 1998,
approximately 58% of the Company's machines are located in California.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Glacier Water Services, Inc. and its wholly-owned subsidiaries. All significant
inter-company accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make certain estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, and the disclosure of contingent assets and liabilities.
Actual results could differ from those estimates.
Change in Fiscal Year
In order to more closely align its fiscal reporting to its business cycle,
effective January 1, 1997, the Company prospectively changed its financial
reporting year from a fiscal year of twelve calendar months ending December 31
to a fiscal year of 52 or 53 weeks ending on the Sunday closest to December 31.
As a result of this change, the Company's fiscal 1997 quarters each contained 13
weeks, and fiscal year which ended January 4, 1998 contained 369 days. Results
of operations for the period from January 1, 1997 to January 5, 1997 are not
significant to the fiscal year ended January 4, 1998, and have not been reported
separately.
Investments
Investments are accounted for in accordance with FASB Statement No. 115,
Accounting for Certain Investments in Debt and Equity Securities, which requires
that the Company determine the appropriate classification of investments at the
time of purchase and reevaluate such designation as of each balance sheet date.
At January 4, 1998, the Company considered all investments as available for use
in its current operations, and therefore classified them as short-term,
available-for-sale investments. Available-for-sale investments are stated at
fair value, with unrealized gains and losses, if any, net of tax, reported as a
separate component of stockholders' equity. Interest, dividends, realized gains
and losses and declines in value judged to be other-than-temporary are included
in interest expense, net. The cost of securities sold is based on the specific
identification method.
21
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Inventories
Inventories consist of raw materials, repair parts and vending machines in
process of assembly, and are stated at the lower of cost (moving weighted
average) or market. Costs associated with the assembly of vending machines are
accumulated until finished machines are ready for installation at a retail
location, at which time the costs are transferred to property and equipment.
At January 4, 1998, and December 31, 1996, inventories consist primarily of
raw materials and spare parts.
Prepaid Commissions
Prepaid commissions represent payments made to certain retailers based on a
percentage of estimated monthly or quarterly vending machine revenues. Prepaid
commissions at January 4, 1998, and December 31, 1996, were $254,000 and
$490,000, respectively. Commission expense for the years ended January 4, 1998,
December 31, 1996, and December 31, 1995 was $27,219,000, $21,678,000 and
$19,643,000, respectively.
Property and Equipment and Depreciation
Property and equipment are recorded at cost and consist of the
following (in thousands):
January 4, December 31,
1998 1996
----------- -------------
Vending equipment....................... $ 69,547 $ 52,686
Equipment, furniture and fixtures....... 1,948 1,617
Leasehold improvements.................. 578 520
-------- --------
72,073 54,823
Less: Accumulated depreciation and
amortization........................... (23,550) (16,816)
-------- --------
$ 48,523 $ 38,007
======== ========
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.
22
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
Income taxes have been provided for using the liability method in
accordance with FASB Statement No. 109, Accounting for Income Taxes.
Net Income Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share ("Statement No. 128"). Statement No. 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share includes the dilutive effect of such
securities. All earnings per share amounts for all periods have been presented,
and where appropriate, restated to conform to the requirements of Statement No.
128.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
presentation.
2. ACQUISITION
On March 28, 1997, the Company purchased substantially all of the assets of
the Aqua-Vend division of McKesson Water Products Company, a wholly-owned
subsidiary of McKesson Corporation, for $9.0 million in cash plus certain direct
costs, including sales tax on assets purchased. The transaction was accounted
for under the purchase method, and the purchase price and related direct costs
were allocated based on the estimated fair value of assets acquired and
liabilities assumed, as follows (in thousands):
Inventories..................... $ 208
Prepaid expenses................ 255
Vending equipment............... 7,565
Other fixed assets.............. 145
Prepaid marketing incentives.... 1,225
Other non-current assets........ 110
Sales tax liability............. (153)
------
$9,355
======
The unaudited consolidated pro forma results of operations for the fiscal
years ended January 4, 1998 and December 31, 1996 presented below assume that
the transaction occurred as of the beginning of the respective periods (in
thousands, except per share amounts):
Fiscal Year Ended
-------------------------------
January 4, December 31,
----------- -------------
1998 1996
----------- -------------
Net revenues.................................... $60,452 $62,673
Income from operations.......................... 1,865 4,069
Net loss........................................ (215) (2,992) /(1)/
Net loss per common share - basic and diluted... $ (.07) $ (.90) /(1)/
23
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
/(1)/ Includes a $7.0 million charge for the reduction in carrying value of
equipment. Excluding this charge, pro forma net income for the year ended
December 31, 1996 would be $1,698,000 and pro forma net income per share
would be $.51 on a basic basis and $.50 on a diluted basis.
3. SUPPLEMENTARY BALANCE SHEET INFORMATION
Short-Term Investments
At January 4, 1998, short-term investments consisted of high-yield
corporate bonds and convertible corporate bonds. Cost of these investments
approximated fair value at January 4, 1998; accordingly, no unrealized gain
or loss is included in stockholders' equity. There were no sales of
available-for-sale investments during the year ended January 4, 1998.
Accounts Receivable
Included in accounts receivable at December 31, 1996 is a $100,000
note receivable from Jerry A. Gordon, the Company's President and Chief
Operating Officer. The note, issued during 1996, was non-interest bearing,
and was repaid in full subsequent to December 31, 1996.
Other Assets
Other assets consist of the following (in thousands): January 4, December 31,
1998 1996
------ ------
Prepaid marketing incentives, net of accumulated amortization
of $2,429 in fiscal 1997 and $3,167 in fiscal 1996........... $5,181 $4,606
Other......................................................... 803 355
------ ------
$5,984 $4,961
====== ======
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.
Accrued Liabilities
Accrued liabilities consist of the following (in thousands): January 4, December 31,
1998 1996
---------- -----------
Accrued compensation and related taxes.......................... $ 471 $ 789
Accrued income and other taxes.................................. 228 639
Other accrued liabilities....................................... 175 226
----- ------
$ 874 $1,654
===== ======
4. LONG-TERM DEBT
Long-term debt at January 4, 1998, and December 31, 1996, represents
borrowings under the Company's bank credit agreement.
24
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The credit agreement provides for long-term borrowings of up to $35.0
million. Borrowings bear interest at the bank's prime rate (8.5% at January 4,
1998) or LIBOR plus 1.75% (7.7% at January 4, 1998), and the entire principal
balance is due July 1, 2003. As of January 4, 1998, the Company had
approximately $6.3 million of funds available under the agreement. Borrowings
under the agreement are secured by substantially all of the assets of the
Company.
On January 27, 1998, the Company repaid the outstanding balance and all
accrued interest on the line of credit and terminated the credit agreement. See
Note 12 - Subsequent Events.
5. LEASES
The Company leases certain vehicles, warehouse and office facilities
under non-cancelable operating leases which expire on various dates through
2002.
Future minimum lease payments under non-cancelable operating leases with
initial terms of one or more years are as follows (in thousands):
1998........................... $1,185
1999........................... 874
2000........................... 419
2001........................... 253
2002........................... 122
------
Total minimum lease payments... $2,853
======
Total lease expense for the years ended January 4, 1998, December 31, 1996,
and December 31, 1995, was $1,503,000, $1,284,000, and $1,109,000, respectively.
6. INCOME TAXES
Significant components of the provision (benefit) for income taxes are as
follows (in thousands):
Fiscal Year Ended
-----------------------------------------
January 4, December 31,
---------- -----------------------
1998 1996 1995
---- ---- ----
Federal Income Taxes:
Current.............................. $ 14 $1,418 $ 934
Deferred............................. 82 (75) 460
------ ------ ------
96 1,343 1,394
State and Local Income Taxes:
Current.............................. 31 117 189
Deferred............................. 66 (45) 222
------ ------ ------
97 72 411
------ ------ ------
Total $ 193 $1,415 $1,805
====== ====== ======
25
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax liabilities and assets result from the following (in thousands):
January 4, December 31,
1998 1996
----------- ------------
Deferred tax liabilities:
Property and equipment.................. $ 6,036 $ 4,801
------- -------
Total deferred tax liabilities.......... 6,036 4,801
------- -------
Deferred tax assets:
Alternative minimum tax credit.......... (1,369) (1,183)
Net operating loss...................... (612) --
Manufacturer's investment credit........ (577) (492)
State deferred tax adjustment........... (56) (16)
Accruals and reserves................... (295) (131)
------- -------
Total deferred tax assets............... (2,909) (1,822)
------- -------
Net deferred tax liabilities............ $ 3,127 $ 2,979
======= =======
The Company's effective income tax rate differs from the federal statutory rate
as follows:
Fiscal Year Ended
-----------------------------
January 4, December 31,
------------ --------------
1998 1996 1995
---- ---- ----
Federal statutory rate........................... 34.0% 34.0% 34.0%
State and local taxes, net of federal benefit.... 6.0% 6.7% 6.0%
Manufacturer's investment credit generated....... (9.0%) (10.7%) --
---- ----- -----
Effective rate................................... 31.0% 30.0% 40.0%
==== ===== =====
During 1997, the Internal Revenue Service completed its examination
for the Company's fiscal year ended December 31, 1992. The IRS has proposed
adjustments that the Company is in the process of appealing. Management does
not believe that the results of such appeal will have a material impact on the
Company's financial statements.
7. STOCKHOLDERS' EQUITY
Preferred Stock
The Company's Certificate of Incorporation authorizes the issuance of
100,000 shares of preferred stock, par value $.01 per share. The rights,
preferences and privileges of the authorized shares (none of which have been
issued) may be established by the Board of Directors without further action by
the holders of the Company's common stock.
Treasury Stock
In December 1995, the Board of Directors authorized the purchase of up
to 250,000 shares of the Company's common stock in the open market. In December
1996, the Board of Directors authorized the additional purchase of up to 250,000
shares of the Company's common stock. As of January 4, 1998, 172,600 shares had
been repur-
26
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
chased under this program, and the Company was authorized to repurchase an
additional 327,400 shares, approximately 10.1% of the Company's total shares
outstanding.
8. STOCK OPTION PLANS
The Company has shares 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. The following pro forma
disclosures represent what the Company's net income (loss) and earnings (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
--------------------------------
January 4, December 31,
---------- ------------------
1998 1996 1995
---- ---- ----
Pro forma net income (loss) (in thousands).............. $ ( 57) $2,984 $2,568
Pro forma basic earnings (loss) per share............... $ (.02) $ .89 $ .77
Pro forma diluted earnings (loss) per share............. $ (.02) $ .88 $ .75
Because the method of accounting required under 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 Company has reserved 275,000 shares of common stock under the 1994
Stock Compensation Program, as amended, for issuance under a stock option plan
that provides for the issuance of incentive and non-qualified stock options to
key employees, including directors and consultants. Incentive stock options are
granted at no less than the fair market value on the date of the grant. Non-
qualified options may be granted at prices determined by the Board of Directors,
but at no less than 85% of the fair market value on the date of the grant.
Options generally have a term of 10 years and become exercisable at a rate of
25% per annum. The Program also allows directors to receive stock options in
lieu of their annual directors' fees. Options granted under this provision
(Deferral Options) have a term of five years and become exercisable one year
following the date of grant.
The Company had reserved 360,000 shares of common stock under the 1992
Stock Option Plan for issuance under a stock option plan that 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 become
exercisable at a rate of 25% per annum. The 1992 Stock Compensation Plan was
terminated in 1994 with a balance of 42,250 shares of common stock available for
grant which were transferred to the 1994 Stock Compensation Program.
27
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the status of the Company's two stock option plans at
January 4, 1998 and activity during the year then ended follows:
Wtd. Avg.
Exercise
Shares Price
-------- -------
Balance at December 31, 1996............................ 344,654 $15.88
Granted................................................. 106,902 $25.71
Exercised............................................... (19,700) $10.09
------- ------
Balance at January 4, 1998.............................. 431,856 $18.57
Exercisable at January 4, 1998.......................... 235,704 $15.40
Weighted average fair value of options granted.......... $12.44
The 117,250 shares outstanding under the 1992 plan at January 4, 1998
have exercise prices between $8.25 and $13.63, with a weighted average exercise
price of $11.62 and a weighted average remaining contractual life of 5.4 years.
110,375 of these options are exercisable; their weighted average exercise price
is $11.50.
The 314,606 shares outstanding under the 1994 plan at January 4, 1998
have exercise prices between $15.25 and $30.00, with a weighted average exercise
price of $21.16 and a weighted average remaining contractual life of 6.9 years.
125,329 of these options are exercisable; their weighted average exercise price
is $18.84.
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 1997, 1996 and 1995, respectively: average
risk-free interest rates of 6.5%, 5.8% and 7.2%; no expected dividend yield;
expected lives of 8 years for regular options and 5 years for Deferral Options
in all years; expected volatility of approximately 30% all years.
9. EARNINGS PER SHARE
The following table sets forth the calculation of basic and diluted
earnings per share:
Fiscal Year Ended
---------------------------------------
January 4, December 31,
----------- -------------------------
1998 1996 1995
---- ---- ----
Numerator:
Net income.............................. $ 430,000 $3,303,000 $2,709,000
---------- ---------- ----------
Numerator - basic and diluted........... $ 430,000 $3,303,000 $2,709,000
========== ========== ==========
Denominator:
Weighted-average shares................. 3,219,082 3,334,504 3,334,851
Effect of dilutive securities -
employee stock options.................. 113,808 39,978 70,253
---------- ---------- ----------
Weighted-average common and
potential common shares................. 3,332,890 3,374,482 3,405,104
========== ========== ==========
Basic earnings per share................ $ .13 $ .99 $ .81
========== ========== ==========
Diluted earnings per share.............. $ .13 $ .98 $ .80
========== ========== ==========
28
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. SIGNIFICANT CUSTOMERS
The following table sets forth the percentage of the Company's total
revenues that were derived from major customers:
Fiscal Year Ended
--------------------------
January 4, December 31,
---------- -------------
1998 1996 1995
---- ---- ----
Company A 11.9% 10.2% 5.8%
Company B 8.5% 9.0% 9.8%
11. CONTINGENCIES
The Company is involved in a legal proceeding resulting from
allegations by a third party that the Company is infringing on certain patents.
Based on advice of patent counsel, management does not believe that the final
disposition of this case will have a material impact on the financial position
or results of operations of the Company.
12. SUBSEQUENT EVENTS
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 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 Securities are subject to mandatory redemption upon
the repayment of the Subordinated Debentures at a redemption price equal to the
aggregate liquidation amount of the Securities plus any accumulated and unpaid
distributions. The Subordinated Debentures mature on January 31, 2028, but may
be redeemed at the option of the Company at any time after January 31, 2003.
The Company effectively provides a full and unconditional guarantee of the
Trust's obligations under the Trust Securities.
Issuance costs of approximately $3.9 million related to the Trust
Securities are deferred and will be amortized over the period until the
mandatory redemption of the securities in January 2028.
29
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Bank Credit Agreement
With the proceeds from the issuance of the Subordinated Debentures,
the Company repaid in full all amounts outstanding under its bank credit
agreement and terminated the agreement.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Quarter Second Quarter Third Quarter Fourth Quarter
-------------- -------------- ------------- --------------
(in thousands, except shares and per share amounts)
Year Ended January 4, 1998:
Net revenues $ 11,176 $ 16,038 $ 17,138 $ 12,942
Income from operations 142 1,164 573 732
Net income (loss) (111) 398 32 111
Basic earnings (loss) per share (.03) .12 .01 .03
Weighted average shares 3,208,580 3,214,150 3,226,758 3,226,706
Diluted earnings (loss) per share (.03) .12 .01 .03
Weighted average shares and
potential shares 3,208,580 3,310,010 3,351,034 3,354,263
Year Ended December 31, 1996:
Net revenues $ 10,015 $ 12,036 $ 13,709 $ 10,331
Income from operations 800 1,518 2,283 884
Net income (loss) 360 799 1,556 588
Basic earnings (loss) per share .11 .24 .46 .18
Weighted average shares 3,367,627 3,348,778 3,349,341 3,273,200
Diluted earnings (loss) per share .11 .24 .46 .18
Weighted average shares and
potential shares 3,406,797 3,389,589 3,398,650 3,327,953
30
INDEX TO EXHIBITS
Exhibit
No.
- -------
3.1 Certificate of Incorporation of Registrant (i.)
3.2 Bylaws of Registrant (i.)
4.1 Specimen Stock Certificate of Registrant (i.)
4.2 Junior Subordinated Indenture between Glacier Water Services, Inc. and Wilmington
Trust Company, as Indenture Trustees, dated January 28, 1997
4.3 Officers' Certificate and Company Order executed by Glacier Water Services, Inc.,
dated January 27, 1998
4.4 Certificate of Trust of Glacier Water Trust I, dated November 13, 1997 (vi.)
4.5 Trust Agreement of Glacier Water Trust I, dated November 13, 1997 (vi.)
4.5.1 Amended and Restated Trust Agreement of Glacier Water Trust I, dated January 27, 1998
4.6 Trust Preferred Certificate of Glacier Water Trust I
4.7 Common Securities Certificate of Glacier Water Trust I
4.8 Guarantee Agreement between Glacier Water Services, Inc. and Wilmington Trust Company,
as Trustee, dated January 27, 1998
4.9 Agreement as to Expenses and Liabilities between Glacier Water Services, Inc.
and Glacier Water Trust I, dated January 27, 1998
4.10 Junior Subordinated Deferrable Interest Debenture of Glacier Water Services, Inc.
10.1 Amended and Restated 1992 Stock Incentive Plan (ii.)
10.2 Vending Machine Agreement between the Vons Companies, Inc. and BWVI(i.)
10.3 Location Agreement between Ralph's Grocery Company, Cala Co., and GW Services, Inc. (v.)
10.4 Form of Indemnification Agreement with Officers and Directors (i.)
10.5 1994 Stock Compensation Plan (iii.)
10.5.1 Amendment No. 1 to 1994 Stock Compensation Plan (iv.)
10.5.2 Amendment No. 2 to 1994 Stock Compensation Plan (v.)
10.5.3 Amendment No. 3 to 1994 Stock Compensation Plan (v.)
21.1 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP Independent Public Accountants
27 Financial Data Schedule for the Fiscal Year Ended January 4, 1998.
- --------------------
(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 Annual Report on Form 10-K for the
year ended December 31, 1994 dated March 15, 1995.
(v.) Incorporated by reference to the Company's Annual Report on From 10-K for the
year ended December 31, 1996 dated March 31, 1997.
(vi.) Incorporated by reference to the Company's Registration Statement on
Form S-2 (File Number 333-40335) filed January 22, 1998.
31
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/ Jerry A. Gordon
--------------------------------------
Jerry A. Gordon
President, Chief Operating Officer and
Director
By /s/ Brenda K. Foster
--------------------------------------
Brenda K. Foster
Vice President, Controller
Date: April 2, 1998
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 April 2, 1998.
Signature Title
- --------- -----
Principal Executive Officer:
/s/ Jerry A. Gordon President, Chief Operating Officer and
- ---------------------------- Director
Jerry A. Gordon
/s/ Jerry R. Welch Chairman of the Board, Chief Executive
- ---------------------------- Officer and Director
Jerry R. Welch
/s/ Douglas C. Boyd Director
- ----------------------------
Douglas C. Boyd
/s/ Peter B. Foreman Director
- ----------------------------
Peter B. Foreman
/s/ Richard A. Kayne Director
- ----------------------------
Richard A. Kayne
/s/ Scott H. Shlecter Director
- ----------------------------
Scott H. Shlecter
/s/ Robert V. Sinnott Director
- ----------------------------
Robert V. Sinnott
/s/ Brenda K. Foster Vice President, Controller
- ----------------------------
Brenda K. Foster
32