Back to GetFilings.com
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13
OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended: January 3, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____to_____
Commission file number: 1-11012
GLACIER WATER SERVICES, INC.
----------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 33-0493559
--------------------------------- -----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2261 Cosmos Court,
Carlsbad, CA 92009
--------------------------------- ----------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (760) 930-2420
----------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $.01 Par Value Per Share American Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K of any amendment to this
Form 10-K. [ ]
As of March 16, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $28,551,646 (calculated at the average bid
and asked prices on March 16, 1999 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 16, 1999, the registrant had 2,890,070 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
1999 Annual Meeting of Stockholders which will be filed with the Securities and
Exchange Commission within 120 days after the close of the 1998 fiscal year.
===============================================================================
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., a Delaware Corporation ("Glacier" or the
"Company"), is the leading provider of high quality, low priced drinking water
dispensed to consumers through self-service vending machines. Since its
inception in 1983, the Company has created a network of over 13,700 water
vending machines throughout the sunbelt and midwest regions of the United States
and Mexico. 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 machine 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 13,702 machines as of January 3, 1999. 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
1998.......................................................................... 1,258
------
Total installed machines as of January 3, 1999...................................... 13,702
======
Total machines installed as of January 3, 1999 are distributed by state as follows:
California.................................................................... 7,550
Texas......................................................................... 1,947
Florida....................................................................... 1,882
Arizona....................................................................... 917
Nevada........................................................................ 325
Other......................................................................... 1,081
------
13,702
======
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 absorption and ultraviolet sterilization in
order to provide high quality drinking water. The design of the Company's
machines provides a high degree of reliability and serviceability through the
use of interchangeable parts and a durable fiberglass cabinet. The machines are
also designed to be easy for consumers to use, with clear and simple
instructions.
The Bottled Water Industry
- --------------------------
The bottled water market in the United States is comprised of four
segments: 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
- -----------------
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.
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
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
3
to allow consumers to fill two water containers simultaneously. The Company
continually monitors and evaluates demand for the Company's product at each
location. This allows the Company to continue to evaluate the productivity of
each of its machines and relocate machines as necessary to optimize their
productivity on an on-going basis.
Growth Strategy
- ---------------
According to an industry source, there are approximately 72,000
grocery stores (excluding convenience stores) in the United States. The Company
currently operates water vending machines at less than 10% of such locations.
The Company intends to continue its expansion into these locations 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 machines. 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 chain 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 at
large supermarket and drug store chains.
. 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 has established operations
in Mexico as an entry into the international market. As of January 3, 1999
the Company has 144 water vending machines in operation in Mexico City.
. 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. 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 non-sparkling segment of the bottled water market with companies that
deliver water to homes and offices, off-the-shelf marketers and 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 be no assurance that the Company's
use of the tradename and trademarks "Glacier Water" and "Glacier Water & Penguin
Design" will not violate the proprietary rights of others, which could result in
a material adverse effect on the Company. The Company does not hold any
patents.
Government Regulation
- ---------------------
The water vending industry is subject to various federal, state and
local laws and regulations, which require the Company, among other things, to
obtain licenses for its business and 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 any contamination of the products
dispensed by its machines unlikely, any significant damage awards against the
Company in excess of the Company's insurance coverage could result in a material
loss to the Company.
Employees
- ---------
As of January 3, 1999, the Company had 372 employees, including 47 in
administration and 325 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 1999 through
April 2003.
Item 3. Legal Proceedings
In response to allegations by Pure Fill and Dennis DiSanto that
certain models of the Company's water vending machines infringe their patents,
on October 28, 1997, the Company filed a lawsuit known as Glacier Water
Services, Inc. v. Pure Fill Corporation, et. al., Civil Action No. 97 CV 1934 J
(LSP) in the United States District Court for the Southern District of
California, seeking a declaration that certain patents held by defendants are
invalid under United States patent laws and that the Company's water vending
machines do not infringe any valid claim of those patents. On November 17,
1997, the defendants filed an answer to the complaint and counterclaim alleging
that the Company is infringing their patents. The patent claims involve four
separate patents held by defendant. On October 29, 1998, the defendants
stipulated that the Company's water vending machines do not infringe one of the
patents (the '590 patent) and, on March 1, 1999, the court granted the Company's
motion for partial summary judgment, and ruled that the Company's water vending
machines do not infringe on one of Pure Fill's other patents (the '717 patent).
The court has not yet decided whether the Company's water vending machines
infringe on Pure Fill's other two patents (the '272 patent and the '380 patent)
or whether Pure Fill's patents are valid. On July 22, 1998 Pure Fill
Corporation filed another action, known as Pure Fill Corporation v. Glacier
Water Services, Inc., Civil Action No. 98 CV 1836 J (LSP), being heard in the
United States District Court for the Southern District of California asserting
claims based on two other patents held by Pure Fill. The Company filed a
counterclaim including claims for attorneys' fees by reason of Pure Fill's bad
faith initiation and maintenance of this second patent suit and an affirmative
declaration of unenforceability relating to one of defendants' patents reviewed
in the first patent suit. The court is currently considering Pure Fill's
motions to dismiss the Company's counterclaims. Although the Company and its
patent counsel believe it is unlikely that this litigation will have a material
adverse effect on the Company, there can be no assurance that the lawsuits will
be resolved in favor of the Company.
On October 28, 1998, Pure Fill Corporation commenced an action against
the Company in the California Superior Court for the County of Stanislaus, known
as Pure Fill Corporation v. Glacier Water Services, Inc., Case No. 182981,
alleging causes of action against the Company for antitrust, violation of the
California Unfair Practices Act, unfair competition, and tortious interference
with prospective business advantage. Plaintiff alleges that the Company sold
vended water below its cost, provided secret rebates, payments and commissions,
engaged in discriminatory pricing practices and conspired with various
supermarket retailers to monopolize the market in violation of state antitrust
and unfair competition laws. Plaintiff seeks unspecified damages and injunctive
relief. On February 2, 1999, the Company filed a demurrer to twelve of the
fourteen causes of action. On March 26, 1999, the court sustained the Company's
demurrers against eight causes of action, but granted Pure Fill 30 days to amend
its complaint. To date, discovery has not been completed, and no trial date has
been set. The Company denies all of the allegations and intends vigorously to
protect its rights in this lawsuit. However, there can be no assurance that the
lawsuit will be resolved in favor of the Company.
On October 13, 1998, Aqua Natural Purefect Water, Inc. ("Aqua
Natural") commenced an action against the Company, and others, in Harris County,
Texas, known as Aqua Natural Purefect Water, Inc. v. The Kroger Company et al.,
Case No. 98-48829, alleging civil conspiracy to defraud, conversion, tortious
interference with existing and prospective contracts, and intentional infliction
of emotional distress. Aqua Natural alleges that the Company interfered with an
existing contract and business relationship between Kroger and Aqua Natural and
that during the changeover of water vending systems, the Company and its agents
damaged Aqua Natural's equipment. Aqua Natural seeks unspecified damages and
attorney's fees. The Company has not yet been served with the Complaint, and
discovery has not commenced. The Company denies all of the allegations and
intends to vigorously protect its rights in this lawsuit. However, there can be
no assurance that the lawsuit will be resolved in favor of the Company.
6
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 1998.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock of Glacier is traded on the American Stock Exchange
under the symbol "HOO". The following table sets forth the range of high and
low sales prices on the American Stock Exchange for the Common Stock for the
periods indicated.
High Low
------ ------
Fiscal Year 1998
----------------
First Quarter $31.75 $29.00
Second Quarter 32.00 28.88
Third Quarter 29.88 27.38
Fourth Quarter 27.25 24.50
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
The Company did not pay dividends on its Common Stock in 1998 and 1997
and presently intends to continue this policy. The Company had approximately 47
stockholders of record as of January 3, 1999.
Item 6. Selected Consolidated Financial Data
The following sets forth selected financial data as of and for the
periods presented. Effective January 1, 1997, the Company prospectively changed
its fiscal year from twelve calendar months to a 52- or 53-week year ending the
Sunday closest to December 31. As a result of this change, the Company's fiscal
year 1997, which ended on January 4, 1998, contained 369 days. Fiscal 1998,
which ended on January 3, 1999, contained 364 days. This data should be read in
conjunction with the Consolidated Financial Statements and the accompanying
Notes thereto and other financial information appearing elsewhere in this Form
10-K.
7
Fiscal Year Ended
-----------------------------------------------------------------
December 31,
January 3, January 4, ---------------------------------------
1999 1998 1996 1995 1994
--- ---- ---- ---- ----
(in thousands, except shares and per share amounts)
Consolidated Statements of Income Data:
Revenues..................................... $ 56,321 $ 57,294 $ 46,091 $ 42,409 $ 36,557
Costs and expenses:
Operating expenses......................... 36,727 35,569 28,088 25,933 23,504
General and administrative expenses........ 9,879 7,200 5,749 5,467 4,831
Depreciation and amortiation............... 10,212 8,852 6,769 5,756 3,662
Non-recurring and other charges............ 971 3,062 -- -- --
---------- ---------- ---------- ---------- ----------
Total costs and expenses................. 57,789 54,683 40,606 37,156 31,997
---------- ---------- ---------- ---------- ----------
Income (loss) from operations................ (1,468) 2,611 5,485 5,253 4,560
Other (income) expenses:
Interest expense........................... 7,446 1,988 767 739 277
Investment income.......................... (4,259) -- -- -- --
---------- ---------- ---------- ---------- ----------
Total other expenses..................... 3,187 1,988 767 739 277
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes............ (4,655) 623 4,718 4,514 4,283
Provision (benefit) for income taxes......... (1,383) 193 1,415 1,805 1,578
---------- ---------- ---------- ---------- ----------
Net income (loss)............................ $ (3,272) $ 430 $ 3,303 $ 2,709 $ 2,705
========== ========== ========== ========== ==========
Basic earnings (loss) per share.............. $(1.05) $.13 $.99 $.81 $.83
========== ========== ========== ========== ==========
Weighted average common shares outstanding... 3,119,696 3,219,082 3,334,504 3,334,851 3,255,078
========== ========== ========== ========== ==========
Diluted earnings (loss) per share............ $(1.05) $.13 $.98 $.80 $.80
========== ========== ========== ========== ==========
Weighted average common and potential common
shares outstanding.......................... 3,119,696 3,332,890 3,374,482 3,405,104 3,367,151
========== ========== ========== ========== ==========
Selected Balance Sheet Data
- ---------------------------
December 31,
January 3, January 4, ---------------------------------------
1999 1998 1996 1995 1994
---------- ---------- ----------- ---------- -----------
(in thousands)
Investments, available for sale................... $ 31,037 $ 315 $ -- $ -- $ --
Fixed assets...................................... $ 54,939 $ 48,523 $38,007 $33,272 $26,423
Total assets...................................... $100,515 $ 59,473 $46,067 $40,638 $34,042
Long-term debt, including current portion......... $ 85,000 $ 28,732 $15,820 $11,087 $ 8,199
Stockholders' equity.............................. $ 9,284 $ 24,623 $23,986 $24,087 $20,376
Working capital.................................. $ 32,501 $ 1,975 $ (183) $ 1,366 $ 61
8
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 3, January 4, December 31,
1999 1998 1996
---- ---- ----
Revenues................................ 100.0 % 100.0% 100.0%
Costs and expenses:
Operating expenses.................... 65.3 % 62.1% 60.9%
General and administrative expenses... 17.5 % 12.6% 12.5%
Depreciation and amortization......... 18.1 % 15.4% 14.7%
Non-recurring and other charges....... 1.7 % 5.3% --
----- ----- -----
Total costs and expenses............ 102.6 % 95.4% 88.1%
----- ----- -----
Income (loss) from operations........... (2.6)% 4.6% 11.9%
Other (income) expenses:
Interest expense...................... 13.3 % 3.5% 1.7%
Investment income..................... (7.6)% 0.0% 0.0%
----- ----- -----
Total other expenses................ 5.7 % 3.5% 1.7%
----- ----- -----
Income (loss) before income taxes....... (8.3)% 1.1% 10.2%
===== ===== =====
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 closest 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 they 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.
As of January 3, 1999, the Company had 13,702 machines in operation compared
to 12,444 machines at January 4, 1998. Included in the total at January 3, 1999
were 12,641 outside machines and 1,061 in-store machines. 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
9
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.
Revenues
- --------
Revenues for fiscal year 1998 decreased 1.7% to $56,321,000 from
$57,294,000 in fiscal year 1997. 1997 revenues increased 24.3%, from
$46,091,000 in fiscal year 1996. The slight decrease in revenues in 1998 was due
to the negative impact of cooler weather in the beginning of the year as a
result of the El Nino weather conditions and the negative impact as a result of
a study done by Los Angeles County and media reports in early September that
called into question the safety and purity of vended water in southern
California. Although no Glacier machines were found to be in violation of any
health or safety standards and the state health department has assured consumers
that the study uncovered no significant public health risk, these reports
severely impacted sales. The increase in 1997 was 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.
Costs and Expenses
- ------------------
Operating expenses for fiscal year 1998 increased to $36,727,000 or
65.3% of revenues, compared to $35,569,000, or 62.1% of revenues in 1997, and
$28,088,000 or 60.9% of revenues in 1996. The increase in total dollar
operating costs in 1998 was due primarily to additional service costs associated
with the additional machines in operation during 1998 offset by slightly lower
commissions. The increase in operating expenses as a percentage of revenues in
1998 was primarily due to softer revenues and the inefficiencies caused by
entering new markets, both in the United States and Mexico. As these new
markets mature and the number of locations increase, the Company will be able to
leverage the costs associated with servicing the machines. The increase in
total dollar operating costs in 1997 was due to additional commissions and
service costs associated with additional machines in operation in 1997 compared
to 1996. 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 was 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 1998
increased to $9,879,000 or 17.5% of revenues, compared to $7,200,000, or 12.6%
of revenues in 1997 and $5,749,000, or 12.5% of revenues in 1996. The increase
in G&A as a percentage of revenues in 1998 resulted primarily from the effect of
softer sales combined with an expenditure of over $800,000 related to an
unsuccessful media advertising test conducted in San Diego and Phoenix during
the spring and summer, and $120,000 in public relations costs related to the Los
Angeles County study of the water vending machines. The Company also incurred
over $675,000 for legal expenses in connection with an alleged patent
infringement. The increase in 1997 in total dollars was 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.
Depreciation and amortization expense for fiscal year 1998 increased
to $10,212,000, compared to $8,852,000 in 1997 and $6,769,000 in 1996. The
increases in each year are the result of the installation of additional
machines.
In the fourth quarter of 1998, the Company incurred a charge of
$971,000 for certain costs associated with the removal of approximately 1,450
machines at under-performing locations. These under-performing machines were
primarily located at small independent retailers and the Company intends to
relocate these machines to large supermarket and drug store chains where it
believes that it will achieve better returns.
10
The Company incurred a total of $3,062,000 in non-recurring expenses
in 1997 related to the integration of Aqua-Vend's operations with Glacier's
operations. 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.
Interest expense for fiscal year 1998 increased to $7,446,000,
compared to $1,988,000 in 1997 and $767,000 in 1996. The increase in 1998 was
due to the interest on the $85,000,000 subordinated debt issued in January
1998. The increase in 1997 compared to 1996 was due to higher outstanding
balances on the Company's credit facility during 1997. In 1997, the acquisition
of Aqua-Vend and the Company investment in new machines were financed through
cash flows from operations and additional borrowings on the Company's credit
facility. The Company had $4,259,000 of investment income in fiscal year 1998.
This income was derived from investments managed by Kayne Anderson Investment
Management and Camden Asset Management, L.P. The Company had no material
investment income in 1997 and 1996.
The Company's effective tax rate in fiscal year 1998 was 30%, compared
to effective rates of 31% in 1997 and 30% in 1996.
For fiscal year 1998, the Company incurred a loss of $3,272,000, or
$1.05 per basic and diluted share, compared to a net income of $430,000, or $.13
per basic and diluted share in 1997. Net income in 1996 was $3,303,000, or $.99
per basic share and $.98 per diluted share.
Liquidity and Capital Resources
- -------------------------------
The Company's primary sources of liquidity and capital resources in
fiscal year 1998 were cash and investments, funds provided by the issuance of
$85 million subordinated debt, 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). On January 27, 1999, the Company entered into a new $8.0 million credit
facility with Tokai Bank of California. The credit facility requires quarterly
interest payments at the bank's prime rate (7.75% per annum at January 27, 1999)
or LIBOR plus 1.60% (6.63% per annum at January 27, 1999). See Note 12 -
Subsequent Events.
For fiscal year 1998, net cash provided by operations was
approximately $3.7 million and the Company made capital investments in vending
machines and other equipment of approximately $14.4 million. During 1998, the
Company invested approximately $74.2 million in short-term investments. As of
January 3, 1999, the Company had working capital of $32.5 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.
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 shares 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 credit
facility and terminated the agreement.
Distributions on the Trust Preferred Securities are payable monthly in
arrears by the Trust. The Company may cause the Trust to defer the payment of
distributions for a period not to exceed 60 consecutive months. During any such
deferral period, distributions will accrue and compound quarterly, and the
Company may not
11
declare or pay distributions on its common or preferred stock or debt securities
that rank equal or junior to the Subordinated Debentures.
The Subordinated Debentures are unsecured obligations of the Company
and are subordinate and junior in right of payment to certain other indebtedness
of the Company. The Trust Preferred Securities are subject to mandatory
redemption upon the repayment of the Subordinated Debentures at 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 $4.1 million related to
the Trust Preferred Securities are deferred and will be amortized over the
period until the mandatory redemption of the securities in January 2028.
As of January 3, 1999, one of the Company's corporate debt security
investments has declined in value by approximately $1,990,000. The issuer of
this security is experiencing financial difficulty and is in bankruptcy
proceedings. Additionally, the debt instrument is currently in default. It is
unknown whether or not the Company will ultimately realize its investment but
based on the facts and circumstances, management believes that the investment is
not permanently impaired. This amount is included in the cumulative unrealized
loss on investments as of January 3, 1999.
The Company believes that its cash and investments on hand, cash flow
from operations and availability under its new Credit Facility, will be
sufficient to meet its anticipated operating and capital requirements, including
its investment in vending machines, as well as distributions related to the
Trust Preferred Securities, for at least the next twelve months.
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 exposures are interest rate risk and
equity price risk. At January 3, 1999, the Company held a portfolio of
marketable securities with an estimated fair value equal to $31,037,000. Of
that amount, the estimated fair value of the Company's total debt investments
available for sale was $17,502,000, including $4,443,000 in convertible debt
securities, and the estimated fair value of the Company's total equity
securities available for sale was $13,535,000, including $11,189,000 in
convertible preferred securities. See Note 1 to the Company's Consolidated
Financial Statements. The Company's exposure to interest rate risk relates
primarily to the opportunity cost of fixed rate obligations. The Company's
exposure to equity price risk relates primarily to the risk that the market
price of a security may fluctuate or drop over time.
The Company's investment guidelines include investing approximately
$15.5 million of its portfolio with a professional asset management firm whose
investment approach consists of investing in hedged transactions. Each hedged
position in the Company's portfolio is created by purchasing a convertible debt
or equity security and selling short the underlying common stock against it.
The purpose of entering into these hedged transactions is to minimize the impact
of interest rate fluctuations and equity price risk on the Company's invested
portfolio. The remainder of the Company's investment portfolio is invested by
Kayne Anderson Investment Management, primarily in fixed rate corporate bonds
and mortgage backed securities.
12
The table below presents principal cash flows and related weighted
average interest rates by expected maturity dates for the Company's derivative
investments:
Cash Flow (in thousands)
--------------------------------------------------------------------
Security 1999 2000 2001 2002 2003 Thereafter Total
- -------- ---- ---- ---- ---- ---- ---------- -------
Convertible Debt
Principal $ 0 $ 0 $ 0 $ 0 $ 500 $4,150 $4,650
Interest 259 259 259 259 246 336 1,618
Weighted average
interest rate 5.6% 5.6% 5.6% 5.6% 5.6% 5.6% 5.6%
Convertible Preferred Stock
Principal $ 0 $ 0 $1,093 $ 398 $ 0 $ 0 $1,491
Interest 1,092 1,092 1,075 1,006 1,000 (2) (2)
Weighted average
interest rate 7.0% 7.0% 7.0% 7.1% 7.1% 7.1%
(1) Dividends paid-in-kind have been included (based on their cash value) in
the calculations for the convertible preferred stock.
(2) Beyond 2003, interest payments on convertible preferred stock generally
continue so long as the Company continues to hold the security.
Item 8. Y2K
Glacier has undertaken a comprehensive "year 2000" assessment. Under
this assessment, the Company has reviewed all of its critical software and
hardware to determine what remediation, if any, is necessary for the proper
functioning of these systems in the year 2000 and beyond. The Company has
worked with its outside vendors to ensure that they will continue to support the
products that they supply to Glacier including the performance by the vendors of
any required year 2000 remediation. Glacier has updated for year 2000 purposes
certain software and hardware systems that it uses internally. The Company
continues to consider year 2000 issues for all new products and services as well
as those in development or included in business acquisitions.
State of Readiness. The Company has performed a review of its
computer applications related to their continuing functionality for the year
2000 and beyond. Based on this review, the Company does not believe that it has
material exposure with respect to the year 2000 issue in regards to its computer
applications. The Company is in the process of upgrading its accounting
software. Such upgrade will be completed by the end of June 1999. This system
is certified as fully Y2K compliant. All critical computer hardware, including
servers, hubs, routers, telecommunications equipment, personal computers, laptop
computers and hand-held computers have been tested to be Y2K compliant. The
historical costs to the Company for its Y2K preparation have been nominal and
any future costs are not expected to be material.
Glacier Water's primary source of revenue is from the operation of
water vending machines, which require electricity from the local electric
company and water from the local water supply. The majority of the machines are
located in front of retail supermarkets and drug stores and are operational 24-
hours a day, 7-days a week. The remaining machines are placed inside the retail
location and require the store to be open in order for customers to vend water.
The machines are Y2K compliant in that they do not have any electronic or
mechanical parts that keep track of the date or time. The Company believes that
its worst case scenario for the change to year 2000 would be a disruption of the
municipal water/power supply to the vending machines. Such a disruption could
have a material impact on the Company and its results of operation.
13
Item 9. 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 18 through 36 after Part IV of this report.
Item 10. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
The Company has had no changes in or disagreements with its accountants on
its accounting and financial disclosure.
Part III
Item 11. 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 1999 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 3, 1999.
Executive Officers of the Registrant
------------------------------------
Name Position Age
---- -------- ---
Jerry R. Welch Chairman of the Board, Chief Executive 48
Officer and Director
Jerry A. Gordon President, Chief Operating Officer and 53
Director
Glen A. Skumlien Executive Vice President, Operations 49
S. Dane Seibert Senior Vice President, Marketing 50
John T. Vuagniaux Senior Vice President, Operations 50
W. David Walters Chief Financial Officer, Vice President
Finance & Secretary 50
Gerald E. Compas Vice President, Sales 55
Dana B. Gilbert Vice President, National Accounts 50
Roger J. Gilchrist Vice President, Eastern Operations 50
Luz E. Gonzales Vice President, Human Resources 46
Brian T. Nakagawa Vice President, Technology & Information
Systems 45
Raymond J. Schweitzer Vice President, International Operations 51
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., a retailer of products for infants and young children. Kayne Anderson
Investment Management holds a majority equity ownership position in the Company.
14
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.
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 Blockbluster Entertainment Corporation.
W. David Walters
Mr. Walters joined the Company in January, 1999 as Chief Financial Officer
and Vice President, Finance. From 1997 to 1999, Mr. Walters was the Vice
President Finance and Controller for the Penn Traffic Company. From 1996 to
1997, Mr. Walters was the Vice President, Controler for Bruno's Inc. Prior to
that, Mr. Walters was the Chief Financial Officer for ABCO Markets, Inc. from
1992 to 1996.
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.
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.
15
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.
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 12. Executive Compensation
There is incorporated herein by reference the information required by this
Item in the Company's definitive proxy statement for the 1999 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 3, 1999.
Item 13. 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 1999 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 3, 1999.
Item 14. 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 1999 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 3, 1999.
Part IV
Item 15. 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 37
are filed as part of this report.
(b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed during the last quarter of the
fiscal year ended January 3, 1999.
16
Index
-----
Page
Number
------
Consolidated Financial Statements
- ---------------------------------
Report of Independent Public Accountants.............................................. 18
Consolidated Balance Sheets at January 3, 1999 and January 4, 1998.................... 19
Consolidated Statements of Operations for the fiscal years ended
January 3, 1999, January 4, 1998, and December 31, 1996............................ 20
Consolidated Statements of Comprehensive Income (Loss) for the fiscal
years ended January 3, 1999, January 4, 1998, and December 31, 1996................ 20
Consolidated Statements of Stockholders' Equity for the fiscal years
ended January 3, 1999, January 4, 1998, and December 31, 1996...................... 21
Consolidated Statements of Cash Flows for the fiscal years ended
January 3, 1999, January 4, 1998, and December 31, 1996............................ 22
Notes to Consolidated Financial Statements............................................ 24
17
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
January 3, 1999 and January 4, 1998, and the related consolidated statements of
operations, comprehensive income (loss), stockholders' equity and cash flows for
each of the three fiscal years in the period ended January 3, 1999. 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 3, 1999 and January 4, 1998, and
the results of their operations and their cash flows for each of the three
fiscal years in the period ended January 3, 1999, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
San Diego, California
February 3, 1999
18
GLACIER WATER SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
------
January 3, January 4,
1999 1998
----------- ---------
Current assets:
Cash.................................... $ 109 $ 13
Investments, available for sale......... 31,037 315
Accounts receivable..................... 1,348 467
Inventories............................. 2,890 3,007
Prepaid expenses and other.............. 1,388 1,164
-------- -------
Total current assets.................. 36,772 4,966
Property and equipment, net of
accumulated depreciation.................. 54,939 48,523
Other assets.............................. 8,804 5,984
-------- -------
Total assets.............................. $100,515 $59,473
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable........................ $ 656 $ 602
Accrued commissions..................... 1,469 1,515
Accrued liabilities..................... 2,146 874
-------- -------
Total current liabilities............. 4,271 2,991
Long-term debt............................ 85,000 28,732
Deferred income taxes..................... 1,960 3,127
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,
2,959,975 and 3,226,175 shares
issued and outstanding at
January 3, 1999 and January 4,
1998, respectively.................... 34 34
Additional paid-in capital............. 15,963 15,548
Retained earnings...................... 9,389 12,661
Treasury stock, at cost, 460,350 and
172,600 shares at January 3, 1999
and January 4, 1998, respectively..... (11,549) (3,620)
Cumulative unrealized (loss) on (4,553) --
investments........................... -------- -------
Total stockholders' equity........... 9,284 24,623
-------- -------
Total liabilities and stockholders'
equity.................................. $100,515 $59,473
======== =======
The accompanying notes are an integral part of these consolidated statements.
19
GLACIER WATER SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Fiscal Year Ended
---------------------------------------
January 3, January 4, December 31,
1999 1998 1996
---- ---- ----
Revenues............................... $56,321 $57,294 $46,091
Costs and expenses:
Operating expenses.................. 36,727 35,569 28,088
General and administrative expenses. 9,879 7,200 5,749
Depreciation and amortization....... 10,212 8,852 6,769
Non-recurring and other charges..... 971 3,062 --
------- ------- -------
Total costs and expenses.......... 57,789 54,683 40,606
------- ------- -------
Income (loss) from operations.......... (1,468) 2,611 5,485
Other (income) expenses:
Interest expense.................... 7,446 1,988 767
Investment income................... (4,259) -- --
------- ------- -------
Total other expenses.............. 3,187 1,988 767
------- ------- -------
Income (loss) before income taxes....... (4,655) 623 4,718
Provision (benefit) for income taxes... (1,383) 193 1,415
------- ------- -------
Net income (loss)...................... $(3,272) $ 430 $ 3,303
======= ======= =======
Basic earnings (loss) per share........ $ (1.05) $ .13 $ .99
======= ======= =======
Diluted earnings (loss) per share...... $ (1.05) $ .13 $ .98
======= ======= =======
Glacier Water Services, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
Fiscal Year Ended
---------------------------------------
January 3, January 4, December 31,
1999 1998 1996
---- ---- ----
Net income (loss) $(3,272) $430 $3,303
Unrealized (loss) on securities,
net of tax:
Unrealized holding (loss) arising
during the period (3,997) -- --
Less: reclassification adjustment
for gains included in net (loss) (556) -- --
------- ---- ------
Net unrealized (loss) (4,553) -- --
------- ---- ------
Comprehensive income (loss) $(7,825) $430 $3,303
======= ==== ======
The accompanying notes are an integral part of these consolidated statements.
20
GLACIER WATER SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
Common Stock Additional Cumulative
------------- Paid-In Retained Treasury Unrealized
Shares Amount Capital Earnings Stock (Loss) Total
------ ------ ------- -------- ----- ----- -----
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
Exercise of Stock Options............... 21,550 -- 415 -- -- -- 415
Purchase of Treasury Stock.............. (287,750) -- -- -- (7,929) -- (7,929)
Net Unrealized (Loss) on Investments..... -- -- -- -- -- (4,553) (4,553)
Net (Loss).............................. -- -- -- (3,272) -- -- (3,272)
--------- ---------- ------- ------- --------- -------- -------
Balance, January 3, 1999................ 2,959,975 $34 $15,963 $ 9,389 $(11,549) $(4,553) $ 9,284
========= ========== ======= ======= ========= ======== =======
The accompanying notes are an intergal part of these consolidated statements.
21
GLACIER WATER SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Year Ended
--------------------------------------
January 3, January 4, December 31,
1999 1998 1996
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ (3,272) $ 430 $ 3,303
Adjustments to reconcile net income
(loss) to net cash provided by
Operating activities:
Depreciation and amortization 10,212 8,852 6,769
Loss (gain) on disposal of assets 310 (3) 74
Deferred tax provision (benefit) (1,167) 148 (120)
Realized gain on sales of
investments (911) -- --
Change in operating assets and
liabilities:
Accounts receivable (881) (158) 303
Inventories 117 (1,106) (117)
Prepaid commissions and other (224) 175 (196)
Payments for prepaid marketing
incentives (1,213) (1,262) (2,966)
Other assets (570) (261) (124)
Accounts payable, accrued
liabilities and accrued commissions 1,280 (444) 896
-------- -------- --------
Total adjustments 6,953 5,941 4,519
-------- -------- --------
Net cash provided by operating 3,681 6,371 7,822
activities -------- -------- --------
Cash flows from investing activities:
Net investment in vending equipment (14,244) (9,647) (8,693)
Purchase of property and equipment (225) (304) (476)
Proceeds from sales of property and -- 132 --
equipment
Purchase of Aqua-Vend -- (9,355) --
Purchase of investments (74,163) (315) --
Proceeds from sale and maturities of
investments 39,693 -- --
-------- -------- --------
Net cash used in investing
activities (48,939) (19,489) (9,169)
-------- -------- --------
Cash flows from financing activities:
Issuance of long term debt, net of 81,600 -- --
fees
Proceeds from long-term debt 950 30,485 19,778
Principal payments on long-term debt (29,682) (17,572) (15,045)
Proceeds from issuance of stock 415 264 159
Purchase of treasury stock (7,929) (57) (3,563)
-------- -------- --------
Net cash provided by financing
activities 45,354 13,120 1,329
-------- -------- --------
Net increase (decrease) in cash 96 2 (18)
Cash, beginning of year 13 11 29
-------- -------- --------
Cash, end of year $ 109 $ 13 $ 11
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
22
GLACIER WATER SERVICES, INC.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
(in thousands)
Cash paid for interest $6,804 $2,074 $ 748
====== ====== ======
Cash paid for income taxes $ 13 $ 400 $1,010
====== ====== ======
The accompanying notes are an integral part of these consolidated statements.
23
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 3, 1999, approximately 55% of the Company's machines were 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. Fiscal year ended January 3, 1999
contained 364 days.
Other Comprehensive Income (Loss)
Effective January 5, 1998, the Company adopted FASB Statement No. 130,
Reporting Comprehensive Income, which established standards for reporting and
displaying comprehensive income (loss) and its components in a financial
statement that is displayed with the same prominence as other financial
statements. As a result, the Company is presenting Consolidated Statements of
Comprehensive Income (Loss) for fiscal 1998, 1997 and 1996.
Investments
Investments are accounted for in accordance with FASB Statement No.
115, Accounting for Certain Investments in Debt and Equity Securities, which
requires that the Company determine the appropriate classification of
investments at the time of purchase based on management's intent and
reevaluate such designation as of each balance sheet date. At January 3,
1999, the Company considered all investments as
24
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 net unrealized gains or losses, if
any, net of tax, reported as a separate component of stockholders' equity.
Realized gains or losses from the sale of investments, interest income and
dividends are included in investment income in the accompanying statements of
operations. The cost of securities sold is based on the specific
identification method.
At January 4, 1998, investments in the amount of $315,000 consisted of
corporate securities, and cost approximated fair value. At January 3, 1999,
investments available for sale consisted of the following (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----------
Corporate securities $14,424 $159 $(2,722) $11,861
Convertible securities 4,259 197 (13) 4,443
Mortgage backed securities 2,337 -- (1,139) 1,198
------- ------- ------- -------
Total debt securities 21,020 356 (3,874) 17,502
Equity securities 14,570 37 (1,072) 13,535
------- ------- ------- -------
Total investments available
for sale $35,590 $393 $(4,946) $31,037
======= ======= ======= =======
The Company's primary market risk exposures are interest rate risk and
equity price risk. At January 3, 1999, the Company held a portfolio of
marketable securities with an estimated fair value equal to $31,037,000. Of
that amount, the estimated fair value of the Company's total debt investments
available for sale was $17,502,000, including $4,443,000 in convertible debt
securities, and the estimated fair value of the Company's total equity
securities available for sale was $13,535,000, including $11,189,000 in
convertible preferred securities. The Company's exposure to interest rate risk
relates primarily to the opportunity cost of fixed rate obligations. The
Company's exposure to equity price risk relates primarily to the risk that the
market price of a security may fluctuate or drop over time.
Proceeds from sales or maturities of marketable securities for the
year ended January 3, 1999 were $39,693,000. Gross realized gains on such
sales for the year ended January 3, 1999 were $2,849,000. Gross realized
losses for the year ended January 3, 1999 were $1,938,000. Corporate
securities have maturity dates from January 2001 to March 2006. Corporate debt
securities have maturity dates from February 2001 to May 2008. Mortgage backed
securities have maturity dates from April 2017 to December 2021. The Company's
investment guidelines include investing approximately $15.5 million of its
portfolio with a professional asset management firm whose investment approach
consists of investing in hedged transactions. Each position in the portfolio
is created by purchasing a convertible debt or equity security and selling
short the underlying common stock against it. The gross unrealized gains and
losses reflected in the above table are primarily the result of this investment
approach.
As of January 3, 1999, one of the Company's corporate debt security
investments has declined in value by approximately $1,990,000. The issuer of
this security is experiencing financial difficulty and is in bankruptcy
proceedings. Additionally, the debt instrument is currently in default. It is
unknown whether or not the Company will ultimately realize its investment but
based on the facts and circumstances, management
25
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
believes that the investment is not permanently impaired. This amount is
included in the cumulative unrealized loss on investments as of January 3,
1999.
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.
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 3, 1999, and January 4, 1998, were $345,000 and
$254,000, respectively. Commission expense for the years ended January 3,
1999, January 4, 1998, and December 31, 1996 was $26,202,000, $27,219,000 and
$21,678,000, respectively.
Property and Equipment and Depreciation
Property and equipment are recorded at cost and consist of the
following (in thousands):
January 3, January 4,
1999 1998
----------- -----------
Vending equipment....................... $ 83,706 $ 69,547
Equipment, furniture and fixtures....... 2,156 1,948
Leasehold improvements.................. 589 578
-------- --------
86,451 72,073
Less: Accumulated depreciation and (31,512) (23,550)
amortization........................... -------- --------
$ 54,939 $ 48,523
======== ========
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.
26
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-Lived Assets
The Company evaluates and assesses its long-lived assets for
impairment under the guidelines of Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. The Company periodically reevaluates the original
assumptions and rationale utilized in the establishment of the carrying value
and estimated lives of these assets.
Income Taxes
Income taxes have been provided for using the liability method in
accordance with FASB Statement No. 109, Accounting for Income Taxes.
Earnings (Loss) Per Share
The Company computes and presents earnings (loss) per share in
accordance with FASB Statement No. 128, Earnings Per Share. Basic earnings per
share is computed based upon the weighted average number of common shares
outstanding during the period. Diluted earnings per share is based upon the
weighted average number of common shares outstanding and diluted common stock
equivalents during the period. Common stock equivalents include options
granted under the Company's stock options plans using the treasury stock
method. For 1998, common stock equivalents were not used to calculate diluted
earnings per share because of their anti-dilutive effect.
The following table sets forth the calculation of basic and diluted
earnings (loss) per share:
Fiscal Year Ended
------------------------------------------
January 3, January 4, December 31,
1999 1998 1996
---- ---- ----
Numerator:
Net income (loss).................... $(3,272,000) $ 430,000 $3,303,000
----------- ---------- ----------
Numerator - basic and diluted........ (3,272,000) $ 430,000 $3,303,000
=========== ========== ==========
Denominator:
Weighted-average shares.............. 3,119,696 3,219,082 3,334,504
Effect of dilutive securities -
employee stock options.............. 0 113,808 39,978
----------- ---------- ----------
Weighted-average common and potential
common shares....................... 3,119,696 3,332,890 3,374,482
=========== ========== ==========
Basic earnings (loss) per share...... $ (1.05) $ .13 $ .99
=========== ========== ==========
Diluted earnings (loss) per share.... $ (1.05) $ .13 $ .98
=========== ========== ==========
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):
27
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 December
4, 1998 31, 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)
(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
Other Assets
Other assets consist of the following (in thousands):
January 3, January 4,
1999 1998
---- ----
Prepaid marketing incentives, net of
accumulated amortization of $3,803
in fiscal 1998 and $2,429 in fiscal
1997..................................... $4,395 $5,181
Deferred financing cost, net of
accumulated amortization of $105 in
fiscal 1998 and $13 in fiscal 1997....... 4,047 234
Other..................................... 362 569
------ ------
$8,804 $5,984
====== ======
Prepaid marketing incentives consist of fees paid to retailers for
future benefits associated with the ongoing placement of the Company's vending
equipment at those locations. These fees are amortized over the life of the
contract, generally ranging from three to five years.
Deferred financing costs of $4.1 million were incurred in connection
with the Trust Preferred Securities discussed in note 4 and will be amortized
over the period until the mandatory redemption of the securities in January
2028.
28
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
January 3, January 4,
1999 1998
---- ----
Accrued compensation and related taxes.......... $ 545 $471
Accrued income and other taxes.................. 158 57
Accrued interest................................ 402 --
Accrued site costs.............................. 499 --
Other accrued liabilities....................... 542 346
------ ----
$2,146 $874
====== ====
4. Long-Term Debt
Company Obligated Mandatorily Redeemable Preferred Securities of a
Subsidiary Trust Holding Solely Subordinated Debt Securities of the Company
On January 27, 1998, Glacier Water Trust I (the "Trust"), a newly created
Delaware business trust and a wholly-owned subsidiary of the Company, issued
105,154 common securities to the Company and completed a public offering of 3.4
million of 9.0625% Cumulative Trust Preferred Securities with a liquidation
amount of $25 per security (the "Trust Preferred Securities" and together with
the common securities the "Trust Securities"). The Trust exists for the sole
purpose of issuing Trust Securities. Concurrent with the issuance of such
securities, the Trust invested the proceeds therefrom in an aggregate principal
amount of $85.0 million of 9.0625% Junior Subordinated Debentures (the
"Subordinated Debentures") issued by the Company.
Distributions on the Trust Preferred Securities are payable monthly in arrears
by the Trust. The Company may cause the Trust to defer the payment of
distributions for a period not to exceed 60 consecutive months. During any such
deferral period, distributions will accrue and compound quarterly, and the
Company may not declare or pay distributions on its common or preferred stock or
debt securities that rank equal or junior to the Subordinated Debentures.
The Subordinated Debentures are unsecured obligations of the Company and are
subordinate and junior in right of payment to certain other indebtedness of the
Company. The Trust Preferred Securities are subject to mandatory redemption
upon the repayment of the Subordinated Debentures at 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.
Long-term debt at January 4, 1998, represents borrowings under the Company's
bank credit agreement. The credit agreement provided for long-term borrowings
of up to $35.0 million. Borrowings bore 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 was 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 were 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.
29
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Leases
The Company leases certain vehicles, warehouse and office facilities
under non-cancelable operating leases which expire on various dates through
2003.
Future minimum lease payments under non-cancelable operating leases
with initial terms of one or more years are as follows (in thousands):
1999........................... $1,674
2000........................... 1,198
2001........................... 569
2002........................... 241
2003........................... 28
------
Total minimum lease payments... $3,710
======
Total lease expense for the years ended January 3, 1999, January 4,
1998, and December 31, 1996, was $1,926,000, $1,503,000, and $1,284,000,
respectively.
6. Income Taxes
Significant components of the provision (benefit) for income taxes are
as follows (in thousands):
Fiscal Year Ended
---------------------------------------
January 3, January 4, December 31,
1999 1998 1996
---- ---- ----
Federal Income Taxes:
Current........................ $ (216) $ 14 $1,418
Deferred....................... (941) 82 (75)
------- ------ ------
(1,157) 96 1,343
State and Local Income Taxes:
Current........................ -- 31 117
Deferred....................... (226) 66 (45)
---- ------ ------
(226) 97 72
---- ------ ------
Total $(1,383) $ 193 $1,415
======= ====== ======
30
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred tax liabilities and assets result from the following (in thousands):
January 3, January 4,
1999 1998
---- ----
Deferred tax liabilities:
Property and equipment................. $ 6,994 $ 6,036
------- -------
Total deferred tax liabilities........... 6,994 6,036
------- -------
Deferred tax assets:
Alternative minimum tax credit........ (943) (1,369)
Net operating loss................... (2,656) (612)
Manufacturer's investment credit...... (591) (577)
State deferred tax adjustment......... (25) (56)
Accruals and reserves................. (819) (295)
------- -------
Total deferred tax assets............... (5,034) (2,909)
------- -------
Net deferred tax liabilities............ $ 1,960 $ 3,127
======= =======
The Company's effective income tax rate differs from the federal statutory rate
as follows:
Fiscal Year Ended
-----------------------------------------
January 3, January 4, December 31,
1999 1998 1996
---- ---- ----
Federal statutory rate................ (34.0)% 34.0% 34.0%
State and local taxes, net of federal
benefit............................... (2.0)% 6.0% 6.7%
Foreign Taxes......................... 4.0 % -- --
Manufacturer's investment credit
generated and other................... 2.0% (9.0%) (10.7%)
----- ---- -----
Effective rate........................ (30.0)% 31.0% 30.0%
===== ===== =====
At January 3, 1999, the company had Federal and California income tax
net operating loss carry forwards of $7.2 million and $1.3 million,
respectively, which will begin to expire in 2012 and 2003 for federal and state
income tax purposes, respectively.
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
The Board of Directors has authorized the purchase of up to 750,000
shares of the Company's common stock in the open market. As of January 3, 1999,
460,350 shares had been repurchased under this program, and the Company was
authorized to repurchase an additional 289,650 shares, approximately 9.8% of the
Company's total shares outstanding.
31
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Stock Option Plans
The Company has options outstanding under two stock option plans, the
1992 Stock Option Plan, which was terminated in 1994, and the 1994 Stock
Compensation Program. The Company accounts for these plans under APB Opinion
No. 25, under which no compensation cost has been recognized.
The Company has reserved 705,000 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 provided for the
issuance of incentive and non-qualified stock options to key employees,
including directors and consultants. 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.
A summary of the status of the Company's stock option plans and
activity is as follows:
Wtd. Avg.
Exercise
Shares Price
-------- ---------
Balance at December 31 1995................... 305,354 $15.08
Granted....................................... 76,300 $19.45
Exercised..................................... (11,250) $ 9.88
Canceled...................................... (25,750) $19.63
------- ------
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
Granted....................................... 231,282 $31.11
Exercised..................................... (21,550) $15.19
------- ------
Balance at January 3, 1999.................... 641,588 $23.21
Exercisable at January 3, 1999................ 307,806 $17.20
Weighted average fair value of options granted $10.27
There are 108,000 options outstanding under the 1992 plan at January
3, 1999, all of which are exercisable, and have exercise prices between $8.25
and $13.63, with a weighted average exercise price of $11.78 and a weighted
average remaining contractual life of 4.4 years.
There are 533,588 options outstanding under the 1994 plan at January
3, 1999 with exercise prices between $15.25 and $31.25, with a weighted average
exercise price of $25.52 and a weighted average remaining
32
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
contractual life of 7.2 years. 199,806 of these options are exercisable, and
their weighted average exercise price is $20.14.
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 January December
3, 1999 4, 1998 31, 1996
-------- -------- --------
Pro forma net income (loss) (in thousands)... $(3,700) $( 57) $2,984
Pro forma basic earnings (loss) per share.... $ (1.19) $(.02) $ .89
Pro forma diluted earnings (loss) per share.. $ (1.19) $(.02) $ .88
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 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 1998, 1997, and 1996, respectively:
average risk-free interest rates of 5.8%, 6.5% and 5.8%; 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 28% for all years.
9. 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 3, January 4, December 31,
1999 1998 1996
---- ---- ----
Company A 9.0% 9.6% 10.2%
10. Contingencies
The Company is involved in a legal proceeding resulting from
allegations by Pure Fill Corporation 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 adverse impact on the
financial position or results of operations of the Company. During fiscal 1998,
the Company incurred approximately $675,000 in connection with this litigation.
On October 28, 1998, Pure Fill Corporation commenced an action against
the Company alleging causes of action against the Company for antitrust,
violation of the California Unfair Practices Act, unfair competition, and
tortious interference with prospective business advantage. Plaintiff alleges
that the Company sold vended water below its cost, provided secret rebates,
payments and commissions, engaged in discriminatory pricing practices and
conspired with various supermarket retailers to monopolize the market in
violation of state antitrust and unfair competition laws. Plaintiff seeks
unspecified damages and injunctive relief. On February 2, 1999, the
33
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company filed a demurrer to twelve of the fourteen causes of action. On March
26, 1999, the court sustained the Company's demurrers against eight causes of
action, but granted Pure Fill 30 days to amend its complaint. To date, discovery
has not been completed, and no trial date has been set. The Company denies all
of the allegations and intends vigorously to protect its rights in this lawsuit.
Based on the advice of legal counsel, management does not believe that the final
disposition of this case will have a material adverse impact on the financial
position or results of operations of the Company.
11. Non Recurring and Other Charges
In the fourth quarter of 1998, the Company incurred a charge of
$971,000 for certain costs associated with the removal of approximately 1,450
machines at under-performing locations. These under-performing machines were
primarily located at small independent retailers and the Company intends to
relocate these machines to large supermarket and drug store chains where it
believes that it will achieve better returns.
The Company incurred a total of $3,062,000 in non-recurring expenses
in 1997 related to the integration of Aqua-Vend's operations with Glacier's
operations. 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.
12. Related Party Transactions
Kayne Anderson Investment Management currently manages a significant
portion of the Company's investment portfolio. The Chairman of the Board and
Chief Executive Officer and other board members are also employed as senior
executives of Kayne Anderson Investment Management. During fiscal 1998 the
Company incurred costs of $103,000 to Kayne Anderson Investment Management in
connection with investment management fees. The Company did not incur any costs
prior to 1998 in connection with investment management fees. Also, a director
of the Company, is President of the North American practice of LEK Consulting
Group. During fiscal 1998, the Company incurred costs of $46,000 for consulting
services provided by LEK Consulting.
13. Recent Accounting Pronouncements
In fiscal 1997, the FASB issued Statement No. 131 (SFAS 131),
Disclosures About Segments Of An Enterprise and Related Information. SFAS 131
requires that a public business enterprise report financial and descriptive
information about its reportable segments. Operating segments are components of
an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Glacier operates in a single
business segment providing high quality, low priced drinking water dispensed to
consumers through self-service vending machines and therefore, has no segment
information to disclose.
34
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SFAS 131 also requires that a public business enterprise report
geographic information relative to revenue and long-lived assets. Glacier began
operations in Mexico during fiscal 1998. The geographic revenues for the year
and long-lived assets as of January 3, 1999, respectively are as follows:
Long-Lived
(in thousands) Revenues Assets
-------- ----------
United States $56,304 $53,996
Mexico 17 943
------- -------
Total $56,321 $54,939
======= =======
In 1998, the FASB issued Statement No. 133 (SFAS 133), Accounting for
Derivative Instruments and Hedging Activities. SFAS 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, by requiring that an entity recognize those items
as assets or liabilities in the statement of financial position and measure them
at fair value. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company will adopt SFAS 133 in fiscal 1999
and does not expect that it will have a material impact on the financial
position or operating results of the Company.
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, Reporting on the Cost of Start-up Activities.
SOP 98-5 requires costs of start-up activities and organizational costs to be
expensed as incurred. Accordingly, the Company expensed $128,000 in 1998
relative to its start-up activities in Mexico. The Company did not have
significant capitalized costs as of fiscal 1997 or 1996, and, therefore, a
cumulative adjustment was not required.
14. Subsequent Events
On January 27, 1999, the Company entered into a new $8.0 million unsecured
credit facility with Tokai Bank of California. The credit facility requires
quarterly interest payments at the Banks prime rate (7.75% per annum at January
27, 1999) or LIBOR plus 1.60% (6.63% per annum at January 27, 1999).
35
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Quarterly Financial Data (Unaudited)
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
(in thousands, except shares and per share amounts)
Year Ended January 3, 1999:
Net revenues $ 12,814 $ 14,433 $ 16,916 $ 12,158
Income (loss) from operations 25 (42) 1,045 (2,496)
Net income (loss) (486) (391) 292 (2,687)
Basic earnings (loss) per share (.15) (.12) .10 (.90)
Weighted average shares 3,211,988 3,201,389 2,893,759 2,987,879
Diluted earnings (loss) per share (.15) (.12) .10 (.90)
Weighted average shares and
potential shares 3,211,988 3,201,389 3,011,765 2,987,879
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 360 799 1,556 588
Basic earnings 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
36
INDEX TO EXHIBITS
Exhibit
No.
---
3.1 Certificate of Incorporation of Registrant (i.)
3.2 Bylaws of Registrant (i.)
4.1 Specimen Stock Certificate of Registrant (i.)
4.2 Junior Subordinated Indenture between Glacier Water Services, Inc. and
Wilmington Trust Company, as Indenture Trustees, dated January 28,
1997 (viv.)
4.3 Officers' Certificate and Company Order executed by Glacier Water
Services, Inc., dated January 27, 1998
4.4 Certificate of Trust of Glacier Water Trust I, dated November
13, 1997 (viii.)
4.5 Trust Agreement of Glacier Water Trust I, dated November 13, 1997
(viii.)
4.5.1 Amended and Restated Trust Agreement of Glacier Water Trust I, dated
January 27, 1998 (viv.)
4.6 Trust Preferred Certificate of Glacier Water Trust I (viv.)
4.7 Common Securities Certificate of Glacier Water Trust I (viv.)
4.8 Guarantee Agreement between Glacier Water Services, Inc. and
Wilmington Trust Company, as Trustee, dated January 27, 1998 (viv.)
4.9 Agreement as to Expenses and Liabilities between Glacier Water
Services, Inc. and Glacier Water Trust I, dated January 27, 1998
(viv.)
4.10 Junior Subordinated Deferrable Interest Debenture of Glacier Water
Services, Inc. (viv.)
10.1 Amended and Restated 1992 Stock Incentive Plan (ii.)
10.2 Vending Machine Agreement between the Vons Companies, Inc. and BWVI
(i.)
10.3 Location Agreement between Ralph's Grocery Company, Cala Co., and GW
Services, Inc. (v.)
10.4 Form of Indemnification Agreement with Officers and Directors (i.)
10.5 1994 Stock Compensation Plan (iii.)
10.5.1 Amendment No. 1 to 1994 Stock Compensation Plan (iv.)
10.5.2 Amendment No. 2 to 1994 Stock Compensation Plan (v.)
10.5.3 Amendment No. 3 to 1994 Stock Compensation Plan (v.)
10.5.4 Amendment No. 4 to 1994 Stock Compensation Plan (vi.)
10.5.5 Amendment No. 5 to 1994 Stock Compensation Plan (vii.)
21.1 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP Independent Public Accountants
27 Financial Data Schedule for the Fiscal Year Ended January 3, 1999
- --------------------
(i.) Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 33-45360) amendments thereto.
(ii.) Incorporated by reference to the Company's Registration Statement
on Form S-8 (File Number 33-61942) filed April 30, 1993.
(iii.) Incorporated by reference to the Company's Registration Statement on
Form S-8 (File Number 33-80016) filed June 8, 1994.
(iv.) Incorporated by reference to the Company's Proxy Statement for the
Annual Meeting held on June 2, 1993.
(v.) Incorporated by reference to the Company's Proxy Statement for the
Annual Meeting held on June 6, 1995.
(vi.) Incorporated by reference to the Company's Proxy Statement for the
Annual Meeting held on June 3, 1997.
(vii.) Incorporated by reference to the Company's Proxy Statement for the
Annual Meeting held on June 9, 1998.
(viii.) Incorporated by reference to the Company's Registration Statement on
Form S-2 (File Number 333-40335) filed January 22, 1998.
(viv.) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended January 4, 1998.
37
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/ W. David Walters
---------------------------------
W. David Walters
Chief Financial Officer, Vice
President, Finance
Date: March 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 26, 1999.
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
38
[CAPTION]