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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13
OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended: December 28, 2003
[ ] 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.)
2651 La Mirada Drive, #100
Vista, CA 92081
---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (760) 560-1111
--------------
Securities registered pursuant of Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $.01 Par Value Per Share American Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) YES [ ] NO [x]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $16,026,007 (calculated at the closing price on the American
Stock Exchange as of the last business day of the registrant's most recently
completed second quarter multiplied by outstanding shares held by
non-affiliates). For purposes of the foregoing calculation, the registrant has
excluded from the group of stockholders deemed to be non-affiliates any
outstanding shares of common stock known by the registrant to be held by its
officers, directors and employees.
As of February 1, 2004 the registrant had 2,119,591 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11, 12, 13 and 14) is
incorporated by reference to portions of the registrant's definitive proxy
statement for the 2004 Annual Meeting of Stockholders, which will be filed with
the Securities and Exchange Commission within 120 days after the close of the
2003 fiscal year.
1
The statements incorporated by reference or included in this Annual
Report about the results of our operations or financial condition contain
"forward-looking" information within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. The forward-looking statements in this report or
incorporated by reference are intended to be subject to the safe harbor
protection provided by the federal securities laws.
Forward-looking statements often, although not always, may be found by
looking for words or phrases such as "may", "will", "intend(s)", "expect(s/ed)",
"anticipate(s/ed)", "will likely", "will continue", "estimate(s/ed)", "outlook"
and similar words used in this report.
Forward-looking statements are subject to numerous estimates,
assumptions, risk and uncertainties (including trade relations and competition)
that may cause our actual results to be materially different from any future
results expressed or implied in these statements. We caution readers not to
place undue reliance on these statements because they are subject to risks and
uncertainties.
The cautionary statements set forth above should be considered in
connection with any subsequent written or oral forward-looking statements that
we, or persons acting on our behalf, may issue. We do not undertake any
obligation to review or confirm analysts' expectations or estimates or to
release publicly any revisions to any forward-looking statements to reflect
events or circumstances after the date of this report or to reflect the
occurrence of unanticipated events.
PART I
Item 1. Business
Business Background
Glacier Water Services, Inc., a Delaware corporation ("Glacier" or
"Company"), is the leading provider of high quality, low priced drinking water
dispensed to consumers through self-service vending machines. Since its
inception in 1983, the Company has created an extensive network of water vending
machines located throughout the United States. The Company's water vending
machines are placed at supermarkets and other retail locations in order to take
advantage of the regular customer traffic at such locations.
The Company's water vending machines are connected to the municipal
water source at each of the retail locations. The water vending machines reduce
impurities in the water through a combination of micron filtration, reverse
osmosis, carbon absorption and ultraviolet disinfection. The Company charges
significantly less than the price of water sold off-the-shelf in retail
locations or sold through home delivery services. The Company's water vending
machines are clustered in close proximity to one another within the geographic
areas served in order to provide cost-effective, quality service. The majority
of the water vending machines are serviced weekly.
Historically, the Company has operated water vending machines designed
primarily for outside use in warm weather climates. Since 1995, the Company has
utilized water vending machines specifically designed to be installed inside
retail locations. The in-store machines afford the Company significant
opportunities for continued expansion into new cold weather markets and to add
in-store machines at existing outside machine locations. As of December 28,
2003, the Company had approximately 11,600 outside machines and 3,900 in-store
machines in operation.
The Company intends to maintain its leading position in the water
vending industry by: (i) providing high quality, low priced water to consumers;
(ii) developing and maintaining good relationships with retail accounts; (iii)
increasing brand awareness; and (iv) maximizing operating efficiencies and asset
productivity.
The placement of the Company's water vending machines at retail
locations is based upon a thorough review of each site. Included in the site
review is an analysis of the surrounding trade area in order to determine the
neighborhood demographics, the level of overall retail activity, the level of
direct competition and the proximity of the site to other water vending machines
operated by the Company. Further, the Company reviews each site in order to
ensure high visibility and easy access for the consumer, along with appropriate
access to the retailer's water supply and power source. Upon completion of this
review, the Company makes a determination as to the viability of the location
and whether a single machine or multiple machines are required at the time of
initial installation. With large supermarket chains, the Company generally
places machines at most of the chains' locations as part of its business
agreements. To attain optimum efficiency, multiple vending machines may be
installed at a site if the volume of sales so warrants.
2
The Bottled Water Industry
The bottled water market in the United States is estimated at $8
billion in wholesale sales or approximately six billion gallons. Bottled 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 reverse
osmosis. Although generally equivalent in quality, vended water is sold at a
substantially lower price than off-the-shelf and delivered water. Vended water
eliminates two principal cost components: packaging, because consumers provide
their own containers, and transportation.
Business Strategy
Provide High-Quality, Low-Priced Drinking Water. The Company intends to
maintain its leading position in the water vending industry by providing
high-quality, low-priced drinking water delivered to consumers through a network
of conveniently located water vending machines. Generally, the Company's service
technicians visit and service each vending machine on a weekly basis. The
Company believes that providing clean, operating water vending machines is a
significant factor in the Company's ability to continue to build consumer
confidence and usage.
The Company's drinking water competes with bottled water sold in
containers inside retail outlets, with water sold in containers delivered
directly to homes and offices, and other water vending machine operators. The
principal costs associated with water sold off-the-shelf and through home
delivery are packaging and distribution, which costs are reflected in the retail
price to the consumer. Because the Company's water is processed on-site inside
the water vending machines and the consumer provides the container for the
Company's product, the Company is able to avoid the packaging and distribution
costs incurred by its competitors whose bottled water is sold in containers
inside retail outlets or delivered directly to homes and offices. Accordingly,
the Company passes on these savings to consumers by generally charging a retail
price of $0.25 to $0.49 per gallon, compared with retail pricing generally
ranging from approximately $0.69 to over $1.29 per gallon for water sold in
containers in retail outlets. Bottled 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 pays commissions to the retailers, generally
based upon a percentage of sales. As retailers become increasingly cognizant of
the growing demand for vended water, the Company believes it can continue to
capitalize on its existing relationships to place in-store water vending
machines at locations where the Company has already successfully placed outdoor
water vending machines.
Most of the Company's arrangements with its retail trade accounts are
evidenced by written contracts which have terms that generally range from three
to five years and contain termination clauses as well as automatic renewal
clauses. During the term of these agreements, the Company usually has the
exclusive right to provide water vending machines at specified locations. The
Company aggressively competes to maintain existing retail accounts and to
establish new retail relationships. The Company has long-term contracts with
three retailers whose volume accounted for 12.1%, 11.4%, and 10.8% of fiscal
2003 revenues. The loss of any significant retail account could have a material
adverse impact upon the Company's financial position.
Increase Brand and Product Awareness. The Company believes that it will
continue to benefit from increasing consumer awareness and trial usage. To date,
the Company has used point-of-purchase signage, special introductory and
promotional pricing, and promotional activities coinciding with the installation
of new machines as its primary marketing tools. Additionally, the Company's
marketing efforts have focused on the development and promotion of "Glacier" as
a recognizable brand to the consumer and the supermarket industry.
Maximize Operating Efficiencies. The Company creates economies of scale
in its operations and achieves a competitive advantage over other vended water
suppliers by clustering machines in close proximity to one another within the
geographic areas served, in order to provide cost-effective, frequent service.
The Company continuously strives to develop technical improvements to its water
vending machines that make the machines easier to use and service. The Company
continually monitors and evaluates demand for the Company's product at each
location. This allows the Company to continue to evaluate the productivity of
its machines and relocate machines as necessary to optimize their productivity
on an on-going basis.
3
Growth Strategy
According to a recent study by an industry source, there are
approximately 200,000 grocery stores, supermarkets, drug stores and convenience
stores in the United States. The Company currently operates water vending
machines at approximately 13,000 such locations. The Company intends to continue
its expansion efforts into new locations. The Company's growth strategy includes
the following:
Increase Penetration in Existing Domestic Markets. The Company operates
in 39 states throughout the United States through the use of both
in-store and outside water vending machines. Management believes it can
place additional outdoor machines with both existing and new retail
accounts. 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. The Company continually monitors
the performance of retail locations and periodically redeploys machines
to improve revenues and the return on assets deployed.
Expand Into New Domestic Markets. The Company intends to continue
placing its in-store water vending machines inside retail locations in
cold-weather regions throughout the United States. In addition, the
Company intends to expand into new warm-weather markets using both
in-store and outdoor machines at large supermarket, drug store, and
convenience store chains.
Pursue Select Acquisition Opportunities. The Company continues to
evaluate and pursue select strategic acquisition opportunities. On
February 8, 2002, Glacier acquired substantially all of the assets of
the Pure Fill Corporation and its wholly owned subsidiaries, National
Water Services, Pure Fill Finance Corporation and Pure Fill Container
Corporation, collectively "Pure Fill". The Pure Fill acquisition
increased the Company's presence in California, Texas and Florida. On
October 7, 2003, Glacier acquired Water Island, Inc. The Water Island
acquisition increased the Company's presence in the Midwest.
Competition
The bottled water market is highly competitive. The Company competes in
the bottled water market with companies that deliver water to homes and offices,
companies that sell bottled water off-the-shelf and other water vending machine
operators. Many of the Company's competitors have significantly greater
resources than the Company. Since the Company's primary competitive advantage
over water delivery services and off-the-shelf bottled water is price, a
substantial decline in the price of either delivered or off-the-shelf bottled
water could adversely affect the demand for water dispensed from the Company's
water vending machines. The Company's competitors within the water vending
market are primarily small to medium size independent operators. Although the
Company believes that there are barriers to entry for new and existing
competitors in the water vending market due to, among other things, the
substantial capital outlay required to purchase the number of machines needed to
achieve competitive operating efficiencies, a competitor with financial
resources may be able to compete with the Company.
Seasonality
The Company's revenues are subject to seasonal fluctuations, with
decreased revenues during rainy or cold weather months and increased revenues
during dry or hot weather months.
Intellectual Property
The tradename and trademarks "Glacier Water" and "Glacier Water &
Penguin Design" used by the Company contain the word "Glacier", which is
commonly used and has been registered in connection with other marks and designs
by a number of other entities for water and related services. The mark "Glacier
Water", by itself, is considered by the United States Patent and Trademark
Officer (the "PTO") to be generic in relation to water and related services. The
Company believes that no party can claim exclusive rights to "Glacier Water",
and the Company may only claim rights to stylized forms of the mark or the mark
with design elements. Notwithstanding the foregoing, no assurance can be given
that other entities might not assert superior or exclusive rights to the marks
and seek to obtain damages from the injunctive relief against the Company. Thus,
there can be no assurance that the Company's use of the tradename and trademarks
"Glacier Water" and "Glacier Water & Penguin Design" will not violate the
proprietary rights of others, which could result in a material adverse effect on
the Company.
4
As part of the Pure Fill acquisition, Glacier acquired several patents
for water dispensing machines as well as container designs. The Company also
acquired several trademarks, including the "Pure Fill" trademark.
Government Regulation
The water vending industry is subject to various federal, state and
local laws and regulations, which require the Company, among other things, to
obtain licenses for its business and water vending machines, to pay annual
license and inspection fees, to comply with certain detailed design and quality
standards regarding the vending machines and the vended water, and to
continuously control the quality of the vended water. The Company's water
vending machines are subject to routine and random regulatory quality
inspections. Although the Company believes it is operating in substantial
compliance with these laws and regulations, such laws and regulations and their
interpretations and enforcement are subject to change. There can be no assurance
that additional or more stringent requirements will not be imposed on the
Company's operations in the future. Failure to comply with such current or
future laws and regulations could result in fines against the Company, a
temporary shutdown of the Company's operations, the loss of certification to
sell its product or, even in the absence of governmental action, a reduction in
the Company's profit margin based on increases in licensing or inspection fees
payable by the Company or other additional compliance costs.
Insurance
The Company carries general and product liability insurance. Its
combined coverage is $26,000,000 per occurrence and $27,000,000 in the
aggregate, which the Company believes to be adequate.
Employees
As of December 28, 2003, the Company had 331 employees, including 72 in
warehousing, administration and sales and 259 in operations. The Company's
employees are not represented by a labor union and the Company has experienced
no work stoppages. The Company believes that its employee relations are good.
Item 2. Properties
The Company leases approximately 25,000 square feet of executive
offices and warehouse space in Vista, California for its corporate offices with
a lease that expires in May 2006. The Company also leases various other
facilities for area service centers. These leases range in size from
approximately 1,100 to 20,200 square feet and expire on various dates from
February 2004 through June 2008.
Item 3. Legal Proceedings
The Company is not currently a party to any material legal proceeding.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders of the
Company during the fourth quarter of 2003.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock of Glacier ("Common Stock") is traded on the American
Stock Exchange under the symbol "HOO". The following table sets forth the range
of high and low sales prices on the American Stock Exchange for the Common Stock
for the periods indicated.
2002 High Low 2003 High Low
---- ---- --- ---- ---- ---
First Quarter $ 13.42 $ 7.55 First Quarter $ 17.80 $ 13.81
Second Quarter 13.20 11.90 Second Quarter 17.78 14.10
Third Quarter 14.25 12.90 Third Quarter 20.25 15.45
Fourth Quarter 18.20 13.00 Fourth Quarter 21.90 19.35
5
The Company did not pay dividends on its Common Stock in 2003 or 2002
and does not presently intend to pay any dividends on its Common Stock in the
foreseeable future. The Company had 30 stockholders of record as of December 28,
2003.
On November 22, 2002, the Company announced its intention to give its
common stockholders the opportunity to exchange their shares of Glacier Water
Common Stock for Trust Preferred Securities ("Trust Preferred Securities")
issued by Glacier Water Trust I, a wholly owned subsidiary of the Company, and
guaranteed by the Company (the "Trust"), ("Exchange Offer"). Pursuant to the
Exchange Offer, which commenced on February 26, 2003 and expired on April 11,
2003, a total of 983,880 shares of Common Stock were exchanged for a total of
787,105 Trust Preferred Securities at a ratio of one share of Common Stock for
eight-tenths of a Trust Preferred Security. The Trust Preferred Securities
delivered in exchange for the Common Stock were issued as part of an original
issuance of 3,400,000 Trust Preferred Securities, which were sold in an
underwritten public offering in January 1998 at $25.00 per Trust Preferred
Security.
During the quarter ended July 1, 2001, the Company issued 16,000 shares
of Glacier Water Cumulative Redeemable Convertible Preferred Stock (the
"Preferred Stock"), which resulted in an increase to stockholders' equity
(deficit) of $1,600,000, excluding related issuance costs. On September 30,
2003, the holder of the 16,000 outstanding shares of the Cumulative Redeemable
Convertible Preferred Stock elected to convert these shares into 168,421 shares
of the Company's Common Stock.
For the year ended December 28, 2003, the Company recorded dividends
associated with the Preferred Stock of $96,000 as compared to $128,000 for the
year ended December 29, 2002.
Item 6. Selected Financial Data
The following sets forth selected financial data as of and for the
periods presented. The Company's fiscal year ends on the Sunday closest to
December 31st. This data should be read in conjunction with the Consolidated
Financial Statements and the accompanying Notes thereto and other financial
information appearing elsewhere in this Annual Report.
6
Statements of Operations Data
(in thousands, except share and per share data) Fiscal Year Ended
Dec. 28, Dec. 29, Dec. 30, Dec. 31, Jan. 2,
2003 2002 2001 2000 2000
---- ---- ---- ---- ----
Revenues $ 72,316 $ 71,029 $ 60,345 $ 59,176 $ 56,774
Operating costs and expenses:
Operating expenses 44,222 44,698 38,444 38,482 36,984
Depreciation and amortization 12,612 12,368 12,358 12,066 10,740
----------- ----------- ----------- ----------- -----------
Cost of goods sold 56,834 57,066 50,802 50,548 47,724
Selling, general and administrative expenses 9,956 9,777 9,275 8,838 9,143
Integration and restructuring costs -- 1,364 -- 1,400 --
----------- ----------- ----------- ----------- -----------
Total operating costs and expenses 66,790 68,207 60,077 60,786 56,867
----------- ----------- ----------- ----------- -----------
Income (loss) from operations 5,526 2,822 268 (1,610) (93)
Other (income) expenses:
Interest expense 7,016 5,968 5,993 7,016 7,859
Investment (income) expense (90) 20 (227) 1,570 1,342
Gain on early retirement of debt 1 -- -- (4) (4,198) (2,617)
----------- ----------- ------------ ------------ ------------
Total other expenses 6,926 5,988 5,762 4,388 6,584
----------- ----------- ----------- ----------- -----------
Loss before income taxes (1,400) (3,166) (5,494) (5,998) (6,677)
Income tax benefit -- (593) -- -- (2,059)
----------- ------------ ----------- ----------- ------------
Net loss (1,400) (2,573) (5,494) (5,998) (4,618)
Preferred dividends 96 128 66 -- --
----------- ----------- ----------- ----------- -----------
Net loss applicable to common stockholders $ (1,496) $ (2,701) $ (5,560) $ (5,998) $ (4,618)
============ ============ ============ ============ ============
Basic and diluted loss per common share:
Loss applicable to common stockholders $ (0.68) $ (0.95) $ (1.96) $ (2.11) $ (1.62)
============ ============ ============ ============ ============
Weighted average shares used in calculation 2,185,761 2,843,217 2,834,474 2,836,965 2,850,253
Selected Balance Sheet Data
(in thousands)
As of
--------------------------------------------------------------
Dec. 28, Dec. 29, Dec. 30, Dec. 31, Jan. 2,
2003 2002 2001 2000 2000
Cash, cash equivalents, and investments,
available-for-sale $ 1,924 $ 7,911 $ 2,740 $ 4,623 $ 14,031
Total assets $ 65,730 $ 66,724 $ 63,140 $ 74,616 $ 89,409
Long-term debt, notes payable and capital lease,
including current portion $ 85,571 $ 67,485 $ 61,965 $ 69,755 $ 79,748
Stockholders' equity (deficit) $ (24,759) $ (6,266) $ (3,866) $ 232 $ 4,673
(1) In accordance with Statement of Financial Accounting Standards No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections, the Company has reclassified the gain on the
early retirement of debt from previous presentations as an extraordinary charge.
7
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion should be read in conjunction with the information
contained in the Consolidated Financial Statements and the accompanying Notes
thereto of the Company appearing elsewhere in this Annual Report. The following
table sets forth for the periods indicated, the percentages of revenues
represented by certain items included in the Consolidated Statements of
Operations.
Fiscal Year Ended
-------------------------------------------
December 28, December 29, December 30,
2003 2002 2001
-------------- ------------- --------------
Revenues 100.0% 100.0% 100.0%
Operating costs and expenses:
Operating expenses 61.2 62.9 63.7
Depreciation and amortization 17.4 17.4 20.5
-------------- ------------- --------------
Cost of goods sold 78.6 80.3 84.2
Selling, general and administrative expenses 13.8 13.8 15.4
Integration and restructuring costs -- 1.9 --
-------------- ------------- --------------
Total costs and expenses 92.4 96.0 99.6
-------------- ------------- --------------
Income from operations 7.6 4.0 0.4
Other expenses:
Interest expense 9.6 8.4 9.9
Investment (income) expense (0.1) -- (0.4)
Extraordinary gain on early retirement of
debt -- -- --
-------------- ------------- --------------
Total other expenses 9.5 8.4 9.5
-------------- ------------- --------------
Loss before income taxes (1.9) (4.4) (9.1)
Income tax benefit -- (0.8) --
-------------- ------------- --------------
Net loss (1.9)% (3.6)% (9.1)%
============== ============= ==============
Results of Operations
Overview
Since its inception in 1983, the Company has created an extensive
network of water vending machines located throughout the United States. The
Company's water vending machines are placed at supermarkets and other retail
locations in order to take advantage of the regular customer traffic at such
locations.
Currently operating in 39 states, the Company continually looks for
opportunities to expand its presence in existing markets as well as new high
potential markets. The Company also looks for ways to reduce operating costs in
all areas. The Company explores opportunities to implement technology to improve
efficiency of servicing the vending machines to lower its operating costs. The
Company continues to monitor selling, general and administrative expenses and
reduce costs where possible.
The Company looks for acquisition opportunities that will strengthen
the Company and improve its operating results. On February 8, 2002, Glacier
acquired substantially all of the assets of Pure Fill. Immediately after the
acquisition, Glacier integrated the Pure Fill assets into the Glacier
operations. On October 7, 2003, Glacier acquired Water Island, Inc., a privately
held water vending company headquartered in Indianapolis, Indiana. Immediately
after the acquisition, Glacier integrated Water Island into the Glacier
operations (see "Note 2").
Revenues
Revenues for fiscal year 2003 increased 1.8% to $72,316,000 from
$71,029,000 in fiscal year 2002. The impact of unusually heavy rainfall and
cooler temperatures across the United States during 2003 was offset by a
half-cent increase in the average price per gallon sold and the additional
revenues as a result of the Water Island acquisition in the fourth quarter of
2003. As of December 28, 2003, the Company had approximately 15,500 machines in
operation, compared to 14,000 machines at December 29, 2002. Revenues for the
fiscal year 2002 increased 17.7% to $71,029,000 from $60,345,000 in fiscal 2001.
The revenue increase in 2002 was due to a 15.9% increase in volume, driven
primarily by the acquisition of the Pure Fill assets in 2002, as well as
increases in the average price per gallon sold during 2002 compared to 2001.
9
Costs and Expenses
Operating expenses, excluding depreciation and amortization, for the
fiscal year ended December 28, 2003 decreased slightly to $44,222,000 from
$44,698,000 for fiscal year 2002. Due to the immediate integration of Water
Island into the Glacier operations during the fourth quarter 2003, the precise
amount of the operating expenses and selling, general and administrative
("SG&A") expenses attributable to Water Island is not determinable. Operating
costs, excluding depreciation and amortization, as a percent of revenues was
61.2% for fiscal 2003 compared to 62.9% for the prior year. The Company strives
to locate machines in close proximity to one another within the geographic area
served, thereby creating clusters of machines in order to provide
cost-effective, frequent service. The integration of the Water Island
acquisition provides opportunities to continue leveraging service costs in the
Midwest.
Operating expenses, excluding depreciation and amortization, for the
fiscal year ended December 29, 2002 increased to $44,698,000 from $38,444,000
for fiscal year 2001. The increase in total operating expenses was primarily due
to higher servicing costs due to the increased revenues. Due to the immediate
integration of the additional Pure Fill routes into the Glacier operations, the
precise amount of the operating expenses and SG&A expenses in 2002 attributable
to the Pure Fill assets is not determinable. Operating costs, excluding
depreciation and amortization, as a percent of revenues was 62.9% for fiscal
2002 compared to 63.7% for the prior year.
Depreciation and amortization expense for fiscal year ended December
28, 2003 increased to $12,612,000, compared to $12,368,000 for the same period
last year. The increase in depreciation and amortization expense was due
primarily to the addition of Water Island in the fourth quarter of 2003 and the
additional depreciation expense of approximately $445,000 related to a change in
the estimated useful life and salvage value of the Company's vending equipment,
and was offset partially by other fixed assets becoming fully depreciated. The
Water Island assets generated approximately $380,000 of depreciation and
amortization expense for fiscal 2003. The Company currently has sufficient
machines in storage available for deployment in fiscal 2004. Machines that have
been previously installed and are in storage awaiting redeployment are currently
being depreciated.
Depreciation and amortization expense for the fiscal year ended
December 29, 2002 was $12,368,000 compared to $12,358,000 for the prior year.
The increase in depreciation and amortization expense was due primarily to the
additional Pure Fill assets, and was offset partially by other fixed assets
becoming fully depreciated. The Pure Fill assets generated approximately
$538,000 of depreciation and amortization expenses in fiscal 2002.
Depreciation and amortization expense includes the amortization of
intangible assets and prepaid contract rights of approximately $2,296,000,
$2,587,000, and $2,553,000 for years ended December 28, 2003, December 29, 2002,
and December 30, 2001, respectively.
SG&A expenses for fiscal 2003 increased $179,000 to $9,956,000, or
13.8% of revenues, compared to $9,777,000, or 13.8% of revenues, in fiscal 2002.
The increase in SG&A expenses in fiscal 2003 compared to 2002 was primarily due
to the payment of approximately $405,000 in legal expenses incurred in
connection with an action brought against Glacier by the Environmental Law
Foundation ("ELF"), and was partially offset by reductions in various other SG&A
expenses. ELF claimed that some of the Company's machines failed to remove
chemical byproducts of the chlorination process found in municipal water to the
maximum level specified in California law and as a result, allegedly engaged in
unlawful and fraudulent business practices and false advertising. The claim was
resolved by the payment made in November 2003 of approximately $405,000 (much of
which was paid to the City of Los Angeles with the agreement of ELF) and
Glacier's agreement to conduct increased testing of machines. No admission of
any violation of law was made by the Company. SG&A expenses for fiscal 2001 were
$9,275,000 or 15.4% of revenues. The increase in SG&A expenses in fiscal 2002
compared to fiscal 2001 was primarily due to the addition of the Pure Fill
operations.
Costs during the year ended December 29, 2002 associated with the
restructuring of existing Glacier operations and costs necessary to integrate
the assets of Glacier and Pure Fill that were expected to benefit future
operations were expensed as integration and restructuring costs after management
had completed and approved the plans and associated costs. Integration costs
totaled $1,364,000 for the year ended December 29, 2002, and were recognized as
integration and restructuring costs in the consolidated statement of operations.
Integration costs were principally for the removal and replacement,
transportation and disposal of vending equipment.
9
As a result of the above, income from operations increased to
$5,526,000 for the year ended December 28, 2003, compared to $2,822,000 for the
year ended December 29, 2002 and $268,000 for the year ended December 30, 2001.
Interest expense for fiscal year 2003 increased to $7,016,000, compared
to $5,968,000 in fiscal 2002. The increase was primarily due to additional
interest of approximately $1,260,000 associated with the increase in long-term
debt outstanding as a result of the Exchange Offer. Interest expense for fiscal
2001 was $5,993,000.
The Company had no investments at December 28, 2003 compared to an
investment portfolio which totaled $603,000 at December 29, 2002, which included
non-investment grade securities comprised of corporate debt securities and a
mortgage backed security with carrying values of $540,000 and $63,000,
respectively. For the year ended December 28, 2003, the Company had a net
realized gain on investments of $90,000, compared to a net realized loss on
investments of $20,000 for the year ended December 29, 2002 and a net realized
gain on investments of $227,000 for the year ended December 30, 2001. The
investment income for fiscal 2003 consisted of net realized gain on the sale of
investments of $23,000 and investment earnings of $70,000, partially offset by
management fees of $3,000. For fiscal year 2002, the investment expense
consisted of net realized loss on the sale of investments of $133,000 and
management fees of $7,000, offset by investment earnings of $120,000. For fiscal
year 2001, the investment income consisted of investment earnings of $274,000
offset by management fees of $13,000 and net realized losses on the sale of
investments of $34,000. During fiscal years 2001 through 2003, investments were
managed by Kayne Anderson Capital Advisors, L.P., a related party.
As a result of changes in the U.S. federal tax laws during fiscal year
2002 relating to operating loss carry-backs, the Company recorded an income tax
benefit of $379,000 reflecting the carry-back of additional net operating losses
to recover previously paid U.S. federal income taxes. This income tax refund was
received prior to the end of fiscal 2002. A change in estimate of the deferred
tax asset valuation allowance, resulted in an additional $214,000 income tax
benefit being recorded at December 29, 2002. Due to the uncertainty of the
utilization of the net operating loss in future periods, no tax benefit was
recorded for fiscal years 2003 and 2001.
Between August 1999 and January 2001, the Company repurchased 921,400
shares of the 9.0625% Trust Preferred Securities issued by Glacier Water Trust
I. On November 22, 2002, the Company announced its intention to give its common
stockholders the opportunity to exchange their shares of Glacier Water Common
Stock for Trust Preferred Securities (the "Exchange Offer"). Pursuant to the
Exchange Offer, which commenced on February 26, 2003 and expired on April 11,
2003, a total of 983,880 shares of Common Stock were exchanged for a total of
787,105 Trust Preferred Securities at a ratio of one share of Common Stock for
eight-tenths of a Trust Preferred Security. Each Trust Preferred Security has a
liquidation value of $25.00 per share. The Exchange Offer increased long-term
debt by approximately $19,678,000, the total liquidation value of the 787,105
Trust Preferred Securities. The Company will incur additional annual interest of
approximately $1,783,000 in connection with the 787,105 Trust Preferred
Securities. On a proforma basis, as if the transaction had occurred on January
1, 2003, the additional interest expense associated with newly reissued Trust
Preferred Securities would have increased stockholders' deficit and net loss
applicable to common stockholders by approximately $500,000 and basic and
diluted loss per share by $0.23, for the year ended December 28, 2003. As of
December 28, 2003, there were 3,265,705 Trust Preferred Securities outstanding
(other than 134,295 shares held by the Company), which had a carrying value of
$81,643,000 and have a maturity date of January 31, 2028. All Trust Preferred
Securities, other than those held by the Company, are included in long-term
debt.
For fiscal year 2003, the Company incurred a loss applicable to common
stockholders of $1,496,000, or $0.68 per basic and diluted common share,
compared to a loss of $2,701,000, or $0.95 per basic and diluted common share,
in 2002 and $5,560,000 or $1.96 per basic and diluted common share, in 2001.
Liquidity and Capital Resources
The Company's primary sources of liquidity and capital resources are
cash and investments, cash flows from operations, and funds available under the
Company's credit facility. In connection with the Pure Fill acquisition, the
Company entered into a $10,000,000 credit facility with City National Bank on
February 19, 2002. The $10,000,000 credit facility originally consisted of a
$4,000,000 revolving credit portion and a $6,000,000 term portion. On February
1, 2003, the Company replaced the term portion, which had an outstanding balance
of $4,800,000 as of that date. The term portion was canceled and replaced with a
new $4,800,000 revolving note. The credit availability on the new revolving note
was to be reduced by $300,000 every three months beginning May 1, 2003 until its
maturity in February 2007. The new revolving note required monthly interest
payments at the Bank's prime rate plus 1.50%. The original $4,000,000 revolving
credit portion of the credit facility (which remained in effect) required
monthly interest payments at the Bank's prime rate plus 1.00%. The new revolving
note and the original $4,000,000 revolving credit portion of the credit facility
required a quarterly unused facility fee of 0.50% per annum and 0.25% per annum,
respectively. On February 21, 2003, the Company repaid the new revolving note.
10
On October 7, 2003, the Company restructured its credit facility with
City National Bank in connection with the acquisition of Water Island. The two
existing revolving notes, under which no borrowings were outstanding, were
replaced with a new $12,000,000 revolving credit facility, which has a maturity
date of February 1, 2009. The credit availability on the new revolving credit
facility is reduced by $400,000 every three months beginning February 7, 2004
until its maturity in February 2009. The new credit facility requires monthly
interest payments at the City National Bank's prime rate plus 1.00% (5.00% per
annum at December 28, 2003). The new credit facility requires a quarterly unused
facility fee of 0.50% per annum, and contains certain customary financial
covenants which restrict indebtedness and capital expenditures. The Company
pledged certain assets such as repair parts and equipment as collateral for its
obligations under the new credit facility. The Company was in compliance at
December 28, 2003 with all such covenants. Availability under the new
$12,000,000 revolving credit facility was $10,500,000 as of December 28, 2003.
For fiscal 2003, net cash provided by operations was approximately
$10,430,000. The Company made capital investments in vending machines and other
equipment of approximately $5,013,000 and purchased Water Island for
approximately $5,366,000, net of cash. Net cash used in financing activities was
approximately $5,992,000. As of December 28, 2003, the Company had working
capital of $895,000. Because the Company does not have significant trade
accounts receivable and product inventories, working capital will vary from time
to time depending on the timing of payables, other accrued liabilities, and
payments of prepaid contract rights. The Company's stockholders' deficit as of
December 28, 2003 was $24,759,000, which amount continues to be below the
American Stock Exchange's listing guidelines. Although no actions have been
taken to date, it is possible that the American Stock Exchange could delist the
Company's stock.
Distributions on the Trust Preferred Securities are payable monthly in
arrears by the Trust. The Company may cause the Trust to defer the payment of
distributions for a period not to exceed 60 consecutive months. During any such
deferral period, distributions will accrue and compound quarterly, and the
Company may not declare or pay distributions on its common or preferred stock or
debt securities that rank equal or junior to the Subordinated Debentures. To
date, the Company is current on all distributions.
The Subordinated Debentures are unsecured obligations of the Company
and are subordinate and junior in right of payment to other indebtedness of the
Company. The Trust Preferred Securities are subject to mandatory redemption upon
the repayment of the Subordinated Debentures at a redemption price equal to the
aggregate liquidation amount of the Trust Preferred Securities plus any
accumulated and unpaid distributions. The Subordinated Debentures mature on
January 31, 2028, but may be redeemed at the option of the Company at any time
since January 31, 2003. The Company effectively provides a full and
unconditional guarantee of the Trust's obligations under the Trust Preferred
Securities. Issuance costs of approximately $4,100,000 related to the Trust
Preferred Securities are deferred and are being amortized over the period until
the mandatory redemption of the securities in January 2028. Through December 29,
2002, the Company had repurchased 921,400 shares of the Trust Preferred
Securities, or $23,035,000 of Subordinated Debentures. Pursuant to an Exchange
Offer, which commenced on February 26, 2003 and expired on April 11, 2003,
983,880 shares of Common Stock were exchanged for a total of 787,105 Trust
Preferred Securities at a ratio of one share of Common Stock for eight-tenths of
a Trust Preferred Security. Each Trust Preferred Security has a liquidation
value of $25.00 per share. The Exchange Offer increased long-term debt by
approximately $19,678,000, the total liquidation value of the 787,105 Trust
Preferred Securities. As of December 28, 2003, there were 3,265,705 Trust
Preferred Securities outstanding (other than those held by the Company), which
had a carrying value of $81,643,000 and have a maturity date of January 31,
2028. All Trust Preferred Securities, other than 134,295 shares held by the
Company, are included in long-term debt.
During the quarter ended July 1, 2001, the Company issued 16,000 shares
of Cumulative Redeemable Preferred Stock, which resulted in a decrease to
stockholders' deficit of $1,600,000, excluding related issuance costs. Holders
of the Cumulative Redeemable Preferred Stock were entitled to receive, when
declared by the Board of Directors, a cumulative, preferential dividend at the
rate of 8% per annum of the original purchase price of each share of Cumulative
Redeemable Preferred Stock. If any dividends were declared on the Common Stock,
dividends would also be paid on the Preferred Stock on an as-converted basis.
For the year ended December 28, 2003, the Company recorded dividends associated
with the Cumulative Redeemable Preferred Stock of $96,000 compared to $128,000
and $66,000 for the years ended December 29, 2002 and December 31, 2001,
respectively. On September 30, 2003, the holder of the 16,000 outstanding shares
of the Cumulative Redeemable Convertible Preferred Stock elected to convert
these shares into 168,421 shares of the Common Stock.
11
The Company believes that its cash, investments on hand, cash flow from
operations and the availability under its credit facility will be sufficient to
meet its anticipated amounts due under its credit facility, operating and
capital requirements, as well as distributions related to the Trust Preferred
Securities, for at least the next twelve months.
Contractual Commitments
The Company is obligated to make payments under specific contractual
obligations and commitments. The Company has no minimum annual purchase
requirements under any agreement with any of its vendors. A summary of these
contractual obligations and commitments is as follows:
2004 2005 2006 2007 2008 Thereafter Total
--------- ---------- ---------- ---------- ---------- ---------- ---------
Operating leases $1,095 $817 $612 $337 $80 $-- $2,941
Capital leases 244 262 661 -- -- -- 1,167
Notes payable 761 460 40 -- -- 1,500 2,761
Long-term debt -- -- -- -- -- 81,643 81,643
--------- ---------- ---------- ---------- ---------- ---------- ---------
Total $2,100 $1,539 $1,313 $337 $80 $83,143 $88,512
========= ========== ========== ========== ========== ========== =========
The Company is also obligated to make commission payments to retailers
based on a percentage of vending machine revenues. The Company is unable to
determine the amount of these payments due to the fact that they are based on
future revenues.
Off-Balance Sheet Arrangements
The Company does not utilize "special purpose entities" for any
transactions. The Company's only "off-balance sheet" obligations are for
operating leases that are disclosed in the notes to the financial statements.
New Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 149 is generally effective for contracts entered
into or modified after September 30, 2003, and for hedging relationships
designated after September 30, 2003. The adoption of SFAS No. 149 has not had a
material impact on the consolidated financial statement.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. SFAS No. 150 is to be implemented by
reporting the cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of the statement and
still existing at the beginning of the interim period of adoption. The adoption
of SFAS No. 150 has not had a material impact on the consolidated financial
statements.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN No.
45), Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, which clarifies
disclosure and recognition/measurement requirements related to certain
guarantees. The disclosure requirements are effective for financial statements
issued after December 15, 2002 and the recognition/measurement requirements are
effective on a prospective basis for guarantees issued or modified after
December 31, 2002. The application of this interpretation did not have a
material impact on the consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51, ("FIN 46"). This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interest in variable interest entities created after
January 31, 2003, and to variable interests in variable interests entities
obtained after January 31, 2003. The Interpretation requires certain disclosures
in financial statements issued after January 31, 2003 if it is reasonably
possible that the Company will consolidate or disclose information about
variable interest entities when the Interpretation becomes effective. The
application of this interpretation did not have a material effect on the
consolidated financial statements.
12
In December 2003, FASB issued Interpretation No. 46R, Consolidation of
Variable Interest Entities, which supercedes FIN46. The application of the
revised interpretation is required in the financial statements of companies that
have interests in special purpose entities for periods after December 15, 2003.
The application of this interpretation did not have a material effect on the
consolidated financial statements.
Impact of Inflation
The primary inflationary factors affecting the Company's operation
include labor and fuel costs. The Company does not believe that inflation has
materially affected earnings during the past three years. Substantial increases
in costs and expenses particularly in labor, fuel and other operating expenses,
could have a significant impact on the Company's operating results to the extent
that such increases cannot be passed on through retail price increases for
vended water sold to consumers.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The Company bases these estimates and
assumptions upon historical experience and existing, known circumstances. Actual
results could differ from these estimates. Specifically, management must make
estimates in the following areas:
Revenue Recognition
The Company recognizes revenue from the sale of its product at the
point of purchase, which occurs when the customer vends the water and pays for
the product. Due to the fact that the Company has approximately 15,500 vending
machines, it is impractical to visit all machines at the end of each reporting
period. Consequently, the Company estimates the revenue from the last time each
machine was serviced until the end of the reporting period, based on the most
current daily volume of each machine. For the years ended December 28, 2003,
December 29, 2002 and December 30, 2001, the Company recorded approximately
$2,284,000, $1,446,000 and $1,446,000, respectively, of such estimated revenues,
which represents an average of approximately 13 days, 9 days and 9 days,
respectively, per machine. The Securities and Exchange Commission's Staff
Accounting Bulletin (SAB) No. 104, Revenue Recognition, corrected copy, provides
guidance on the application of existing generally accepted accounting principles
to selected revenue recognition issues. The Company believes that its revenue
recognition policy is consistent with the guidance and is in accordance with
generally accepted accounting principles.
Allowance for Doubtful Accounts
The Company records accounts receivable for revenues generated by
inside machines. Such revenues are collected by the retailers and remitted to
the Company. The Company provides a reserve against receivables for estimated
losses that may result from a retailer's inability to pay. The Company
determines the amount of the reserve by analyzing uncollected accounts, aged
receivables, historical losses and the retailer's credit worthiness. Amounts
later determined and specifically identified to be uncollectible are charged or
written off against this reserve. Should a retailer's account become past due,
the Company works with the retailer to resolve the past due amounts including
replacing non-coin operated machines with coin operated machines and placing the
account on hold or other actions as necessary to resolve the past due amounts.
Accounts receivable totaled $2,269,000 and the allowance for doubtful accounts
was $151,000 at December 28, 2003. This allowance is consistent with historical
amounts reserved by the Company.
Repair Parts
Repair parts are stated at cost (moving weighted average). Management
reviews the parts on a regular basis for excess, obsolete and impaired items
based on estimated future usage. The likelihood of any material write-down is
dependent on future machine repairs or new machine developments. Repair parts
were valued at $1,718,000 at December 28, 2003.
13
Valuation of Goodwill
In 2002, Statement of Financial Accounting Standard (SFAS) No. 142,
Goodwill and Other Intangible Assets, became effective and as a result, goodwill
was no longer subject to amortization. In lieu of amortization, the Company is
required to perform an annual review for impairment. Goodwill is considered to
be impaired if it is determined that its carrying value exceeds its fair value.
In addition to the annual review, an interim review is required if an event
occurs or circumstances change that would more likely than not reduce the fair
value below its carrying value. Assessing the impairment of goodwill requires
the Company to make assumptions and judgments regarding the fair value of the
net assets of the Company. The Company has completed its annual evaluation for
the impairment of goodwill as of December 28, 2003 and has determined that no
impairment existed as of that date. The net book value of goodwill totaled
$6,996,000 as of December 28, 2003.
Depreciable Useful Lives
Property and equipment is recorded at cost and is depreciated using the
straight-line method over the estimated useful lives of the asset. During the
quarter ended December 28, 2003, the Company revised the estimated useful life
and salvage value assigned to vending equipment. The revisions were based on
actual historical performance of the vending machines, which demonstrated that
the average machine is in service for periods longer than the ten year estimated
useful life previously assigned to vending machines, and that the salvage value
at the end of service is lower than the estimates historically assigned. As a
result, the Company changed the estimated useful life of its vending machines to
13 years and reduced the salvage value to 10% from 20% of cost. As a result of
these changes, the Company incurred approximately $445,000 of additional
depreciation expense in the quarter ended December 28, 2003. When an original
component is replaced, the replacement cost is expensed, which results in a
charge to income in an amount which approximates the depreciable cost of the
components. Costs associated with installing vending equipment are capitalized
and depreciated over five years, which is the normal contractual period with the
retailers. Other equipment, furniture and fixtures have an estimated useful life
of three to ten years. Leasehold improvements are given an estimated useful life
of the shorter of its estimated life or the term of the lease. All maintenance,
repair and refurbishment costs are charged to operations as incurred. Additions
and major improvements are capitalized. Costs associated with the assembly of
vending machines are accumulated until finished machines are ready for
installation at a retail location, at which time the costs are transferred to
property and equipment.
Valuation of Long-Lived Assets
The Company periodically assesses long-lived assets for impairment,
which requires the use of assumptions and judgments regarding the carrying value
of these assets. The assets are considered to be impaired if it is determined
that the carrying value may not be recoverable based upon an assessment of the
following events or changes in circumstances:
-- the asset's ability to continue to generate income from operations and
positive cash flow in future periods;
-- loss of legal ownership of the asset;
-- significant changes in the strategic business objectives and
utilization of the asset;
-- the impact of significant negative industry or economic trends; and/or
-- any volatility or significant decline in the Company's stock price and
market capitalization compared to its net book value
The Company evaluates and assesses its long-lived assets for impairment
under the guidelines of SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets. If the assets are considered to be impaired, the
impairment recognized is the amount by which the carrying value of the assets
exceeds the fair value of the assets. In addition, the Company bases the useful
lives and related amortization or depreciation expense on its estimate of the
period that the assets will generate revenues or otherwise be used. At December
28, 2003, the net book value of identifiable intangible assets that are subject
to amortization totaled $714,000 and the net book value of property and
equipment total $45,455,000.
14
Litigation
From time to time, claims are made against the Company in the ordinary
course of business. With the assistance from legal counsel, estimated amounts
for such claims that are probable and can reasonably be estimated are recorded
as liabilities in the consolidated balance sheets. The likelihood of a material
change in these estimated accruals would be dependent on new claims as they
arise and the favorable or unfavorable outcome of the particular litigation. As
of December 28, 2003, the Company was not a party to any legal proceeding that
is likely to reasonably have a material impact on the results of operations or
financial condition of the Company.
Valuation of Deferred Income Taxes
Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. The likelihood of a
material change in our expected realization of these assets depends on future
taxable income, our ability to deduct tax loss carryforwards against future
taxable income, the effectiveness of our tax planning and strategies among the
various tax jurisdictions in which the Company operates, changes in the
deductibility of interest paid on our subordinated debt and any significant
changes in the tax treatment received on the Company's business combinations. As
of December 28, 2003, the Company had federal and California net operating loss
carryforwards of $30,559,000 and $10,766,000, respectively, which will begin to
expire in 2013 and 2004 for federal and state income tax purposes, respectively.
Seasonality
The Company's revenues are subject to seasonal fluctuations with
decreased revenues during rainy or cold weather months and increased revenues
during hot and dry weather months.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's primary market risk exposure is interest rate risk. The
Company's outstanding bank debt is tied to the bank's prime lending rate and as
such, the Company is at risk due to increases in market rates. A 10% change in
the bank's lending rate would have the potential of increasing the interest on
the expected average outstanding borrowings of the bank debt and impacting the
future earning of the Company by less than $35,000 annually. The Company's
exposure to interest rate risk relates primarily to the opportunity cost of
fixed-rate obligations associated with the Trust Preferred Securities. The
Company believes that the fixed rate represents the Company's long-term market
rate. Therefore, there is no significant opportunity cost associated with the
fixed rate. At December 28, 2003, the Company held no marketable securities
available-for-sale.
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements, together with
accompanying Notes and the Independent Auditors' Report, KPMG LLP, and the
Report of Independent Public Accountants, Arthur Andersen LLP, are set forth on
pages 20 through 39 after Part IV of this report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
On July 1, 2002, the Company filed Form 8-K reporting the termination
of the engagement of its former auditor, Arthur Andersen LLP.
On July 16, 2002, the Company filed Form 8-K reporting the engagement
of KPMG LLP as the independent auditors for the fiscal year ended December 29,
2002.
Item 9A. Controls and Procedures
Since December 28, 2003, the Company carried out an evaluation, under the
supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures, as such term is defined in Rule 13a-15(e) promulgated under the
Securities and Exchange Act of 1934, as amended. Based on that evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that the
disclosure controls and procedures were effective as of December 28, 2003 to
ensure that information required to be disclosed in reports that are filed or
submitted under the Securities and Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. There has been no change in our internal
controls over financial reporting since the date of such evaluation that has
materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting.
15
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item is incorporated herein by
reference to the Company's definitive proxy statement for the 2004 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission no later than 120 days after December 28, 2003.
Item 11. Executive Compensation
The information required by this Item is incorporated herein by
reference to the Company's definitive proxy statement for the 2004 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission no later than 120 days after December 28, 2003.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated herein by
reference to the Company's definitive proxy statement for the 2004 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission no later than 120 days after December 28, 2003.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated herein by
reference to the Company's definitive proxy statement for the 2004 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission no later than 120 days after December 28, 2003.
Item 14. Principal Accountant Fees and Services
The information required by this Item is incorporated herein by reference
to the Company's definitive proxy statement for the 2004 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission no
later than 120 days after December 28, 2003.
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 due to the absence of
conditions under which they are required or because the required
information is included in the consolidated financial statements or
notes thereto.
2. Exhibits
The exhibits listed on the accompanying Index to Exhibits are
filed as part of this report.
(b) Reports on Form 8-K
On October 3, 2003, the Company filed a current report on Form
8-K reporting under Item 5, the conversion of 16,000 shares of
Cumulative Redeemable Convertible Preferred Stock to 168,421 shares
of Common Stock.
On October 8, 2003, the Company filed a current report on Form
8-K reporting the acquisition of Water Island, Inc. under Items 2 and
7.
On November 17, 2003, the Company filed a current report on Form
8-K reporting earnings under Item 12.
16
Index
Page
Consolidated Financial Statements Number
Independent Auditors' Report, KPMG LLP 18
Report of Independent Public Accountants, Arthur Andersen LLP 19
Consolidated Balance Sheets at December 28, 2003 and
December 29, 2002 20
Consolidated Statements of Operations for the fiscal years ended
December 28, 2003, December 29, 2002, and December 30, 2001 21
Consolidated Statements of Comprehensive Loss for the fiscal years
ended December 28, 2003, December 29, 2002, and December 30, 2001 21
Consolidated Statements of Stockholders' Deficit for the fiscal
years ended December 28, 2003, December 29, 2002, and
December 30, 2001 22
Consolidated Statements of Cash Flows for the fiscal years ended
December 28, 2003, December 29, 2002, and December 30, 2001 23
Notes to Consolidated Financial Statements 25
17
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Glacier Water Services, Inc.:
We have audited the accompanying consolidated balance sheets of Glacier Water
Services, Inc. and subsidiaries as of December 28, 2003 and December 29, 2002
and the related consolidated statements of operations, comprehensive loss,
stockholders' deficit and cash flows for each of the years in the two-year
period ended December 28, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. The 2001
financial statements of Glacier Water Services, Inc., as listed in the
accompanying index, were audited by other auditors who have ceased operations.
Those auditors expressed an unqualified opinion on those financial statements in
their report dated February 19, 2002.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 2003 and 2002 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Glacier Water Services, Inc. and subsidiaries as of December 28, 2003 and
December 29, 2002 and the results of their operations and their cash flows for
each of the years in the two-year period ended December 28, 2003 in conformity
with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
San Diego, California
February 13, 2004
18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Glacier Water Services, Inc.:
We have audited the accompanying consolidated balance sheets of Glacier
Water Services, Inc. (a Delaware corporation) and subsidiaries as of December
30, 2001 and December 31, 2000, and the related consolidated statements of
operations, comprehensive income (loss), stockholders' equity (deficit) and cash
flows for each of the three fiscal years in the period ended December 30, 2001.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Glacier Water
Services, Inc. and subsidiaries as of December 30, 2001 and December 31, 2000,
and the results of their operations and their cash flows for each of the three
fiscal years in the period ended December 30, 2001, in conformity with
accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
San Diego, California
February 19, 2002
NOTE: THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP ("ANDERSEN") IN CONNECTION WITH GLACIER'S FORM 10-K FILING FOR THE FISCAL
YEAR ENDED DECEMBER 30, 2001. THE INCLUSION OF THIS PREVIOUSLY ISSUED ANDERSEN
REPORT IS PURSUANT TO THE "TEMPORARY FINAL RULE AND FINAL RULE REQUIREMENTS FOR
ARTHUR ANDERSEN LLP AUDITING CLIENTS," ISSUED BY THE U.S. SECURITIES AND
EXCHANGE COMMISSION IN MARCH 2002. NOTE THAT THIS PREVIOUSLY ISSUED ANDERSEN
REPORT INCLUDES REFERENCES TO CERTAIN FISCAL YEARS, WHICH ARE NOT REQUIRED TO BE
PRESENTED IN THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR
THE YEARS ENDED DECEMBER 29, 2002. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY
ARTHUR ANDERSEN LLP IN CONNECTION WITH THIS FILING ON FORM 10-K. SEE EXHIBIT
23.2 FOR FURTHER DISCUSSION.
19
GLACIER WATER SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
December 28, December 29,
2003 2002
------------- ------------
Current assets:
Cash and cash equivalents $1,924 $7,308
Investments, available-for-sale -- 603
Accounts receivable, net of allowance for doubtful accounts of
$151 and $94 as of
December 28, 2003 and December 29, 2002, respectively 2,118 1,593
Repair parts 1,718 1,600
Prepaid expenses and other 1,058 954
------------- ------------
Total current assets 6,818 12,058
Property and equipment, net 45,455 44,536
Goodwill 6,966 4,129
Intangible assets, net 714 527
Other assets 5,777 5,474
------------- ------------
Total assets $65,730 $66,724
============= ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $1,143 $981
Accrued commissions 1,713 2,265
Accrued liabilities 2,062 2,259
Current portion of obligations under capital lease 244 --
Current portion of long-term notes payable 761 1,360
------------- ------------
Total current liabilities 5,923 6,865
Long-term debt 81,643 61,965
Long-term notes payable 2,000 4,160
Long-term portion of obligations under capital lease 923 --
------------- ------------
Total liabilities 90,489 72,990
------------- ------------
Commitments and contingencies -- --
Stockholders' deficit:
Preferred stock, $0.01 par value; liquidation preference $100 per
share; 8% cumulative redeemable convertible; 100,000 shares
authorized, 0 and 16,000 shares issued and outstanding at
December 28, 2003 and December 29, 2002, respectively -- --
Common stock, $0.01 par value, 10,000,000 shares authorized,
2,118,841 and 2,851,141 shares issued and outstanding at
December 28, 2003 and December 29, 2002, respectively 37 35
Additional paid-in capital 18,460 17,776
Retained deficit (10,694) (9,294)
Treasury stock, at cost, 1,587,606 and 603,726 shares at December
28, 2003 and December 29, 2002, respectively (32,562) (14,852)
Accumulated other comprehensive income -- 69
------------- ------------
Total stockholders' deficit (24,759) (6,266)
------------- ------------
Total liabilities and stockholders' deficit $65,730 $66,724
============= ============
The accompanying notes are an integral part of these consolidated statements.
20
GLACIER WATER SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
Fiscal Year Ended
-------------------------------------------
December 28, December 29, December 30,
2003 2002 2001
-------------- -------------- -------------
Revenues $72,316 $71,029 $60,345
Operating costs and expenses:
Operating expenses 44,222 44,698 38,444
Depreciation and amortization 12,612 12,368 12,358
-------------- -------------- -------------
Cost of goods sold 56,834 57,066 50,802
Selling, general and administrative expenses 9,956 9,777 9,275
Integration and restructuring costs -- 1,364 --
-------------- -------------- -------------
Total operating costs and expenses 66,790 68,207 60,077
-------------- -------------- -------------
Income from operations 5,526 2,822 268
-------------- -------------- -------------
Other (income) expenses:
Interest expense 7,016 5,968 5,993
Investment (income) expense (90) 20 (227)
Gain on early retirement of debt -- -- (4)
-------------- -------------- -------------
Total other expense 6,926 5,988 5,762
-------------- -------------- -------------
Loss before income taxes (1,400) (3,166) (5,494)
Income tax benefit -- (593) --
-------------- -------------- -------------
Net loss (1,400) (2,573) (5,494)
Preferred stock dividends 96 128 66
-------------- -------------- -------------
Net loss applicable to common stockholders $(1,496) $(2,701) $(5,560)
============== ============== =============
Basic and diluted loss per share:
Net loss applicable to common stockholders $(0.68) $(0.95) $(1.96)
============== ============== =============
Weighted average shares used in calculation 2,185,761 2,843,217 2,834,474
============== ============== =============
GLACIER WATER SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Fiscal Year Ended
--------------------------------------------
December 28, December 29, December 30,
2003 2002 2001
-------------- -------------- --------------
Net loss $(1,400) $(2,573) $(5,494)
-------------- -------------- --------------
Unrealized (loss) gain on securities:
Unrealized holding (loss) gain arising during the period (92) 246 (166)
Less: reclassification adjustment for net realized
(gains) losses included in net loss (23) 133 (34)
-------------- -------------- --------------
Net unrealized (loss) gain (69) 113 (132)
-------------- -------------- --------------
Comprehensive loss $(1,469) $(2,460) $(5,626)
============== ============== ==============
The accompanying notes are an integral part of these consolidated statements.
21
GLACIER WATER SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(in thousands, except share data)
Accumulated
Additional Other
Preferred Stock Common Stock Paid-In Retained Treasury Comprehensive
Shares Amount Shares Amount Capital Deficit Stock Income (Loss) Total
---------- ------ ----------- ------ ---------- ---------- ---------- -------- ----------
Balance, December 31,
2000 -- $-- 2,834,474 $35 $16,188 $(1,227) $(14,852) $88 $232
Issuance of preferred
stock 16,000 -- -- -- 1,594 -- -- -- 1,594
Net unrealized loss on
investments -- -- -- -- -- -- -- (132) (132)
Dividends on preferred
stock -- -- -- -- (66) -- -- -- (66)
Net loss -- -- -- -- -- (5,494) -- -- (5,494)
---------- ------ ----------- ------ ---------- ---------- ---------- -------- ----------
Balance, December 30,
2001 16,000 -- 2,834,474 35 17,716 (6,721) (14,852) (44) (3,866)
Exercise of stock
options -- -- 16,667 -- 188 -- -- -- 188
Net unrealized gain on
investments -- -- -- -- -- -- -- 113 113
Dividends on preferred
stock -- -- -- -- (128) -- -- -- (128)
Net loss -- -- -- -- -- (2,573) -- -- (2,573)
---------- ------ ----------- ------ ---------- ---------- ---------- -------- ----------
Balance, December 29,
2002 16,000 -- 2,851,141 35 17,776 (9,294) (14,852) 69 (6,266)
Exercise of stock
options -- -- 83,159 -- 782 -- -- -- 782
Conversion of common
stock to trust
preferred securities -- -- (983,880) -- -- -- (17,710) -- (17,710)
Net unrealized loss on
investments -- -- -- -- -- -- -- (69) (69)
Dividends on preferred
stock -- -- -- -- (96) -- -- -- (96)
Exchange of preferred
stock for common stock (16,000) -- 168,421 2 (2) -- -- -- --
Net loss -- -- -- -- -- (1,400) -- -- (1,400)
---------- ------ ----------- ------ ---------- ---------- ---------- -------- ----------
Balance, December 28,
2003 -- $-- 2,118,841 $37 $18,460 $(10,694) $(32,562) $-- $(24,759)
========== ====== =========== ====== ========== ========== ========== ======== ==========
The accompanying notes are an integral part of these consolidated statements.
22
GLACIER WATER SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
Fiscal Year Ended
-----------------------------------
Dec. 28, Dec. 29, Dec. 30,
2003 2002 2001
----------- ----------- -----------
Cash flows from operating activities:
Net loss $(1,400) $(2,573) $(5,494)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 12,612 12,368 12,358
Loss on disposal of assets 48 91 125
Gain on early retirement of debt -- -- (4)
Realized (gain) loss on sales of investments (23) 133 34
Change in operating assets and liabilities excluding
the impact of acquisitions in 2003 and 2002:
Accounts receivable 87 (629) 37
Repair parts 111 84 (42)
Prepaid expenses and other (168) (140) (223)
Other assets (120) 98 126
Accounts payable, accrued liabilities and accrued
commissions (717) (561) 275
----------- ----------- -----------
Net cash provided by operating activities 10,430 8,871 7,192
----------- ----------- -----------
Cash flows from investing activities:
Investment in property and equipment (5,013) (3,196) (2,789)
Cash paid in acquisitions, net of cash acquired (5,366) (5,424) --
Proceeds from sale of investments -- 483 1,617
Proceeds from maturities of investments 557 98 208
----------- ----------- -----------
Net cash used in investing activities (9,822) (8,039) (964)
----------- ----------- -----------
Cash flows from financing activities:
Dividends paid (128) (128) (34)
Early retirement of long-term debt -- -- (5)
Proceeds from borrowing on line of credit -- -- 8,700
Principal payments on line of credit and long-term notes
payable (8,188) (1,120) (16,375)
Proceeds from long-term notes payable 1,600 6,000 --
Principal payments under capital lease obligations (58) -- --
Proceeds from issuance of stock 782 188 1,594
----------- ----------- -----------
Net cash (used in) provided by financing activities (5,992) 4,940 (6,120)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (5,384) 5,772 108
Cash and cash equivalents, beginning of year 7,308 1,536 1,428
----------- ----------- -----------
Cash and cash equivalents, end of year $1,924 $7,308 $1,536
=========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
23
GLACIER WATER SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (continued)
(in thousands)
Supplemental disclosure of cash flow information:
Fiscal Year Ended
Dec. 28, Dec. 29, Dec. 30,
2003 2002 2001
----------- ----------- -----------
Cash paid for interest $6,885 $5,776 $5,941
=========== =========== ===========
Cash paid (received) for income taxes $10 $(374) $7
=========== =========== ===========
Non-cash investing and financing activities:
Business acquisitions:
Dec. 28, Dec. 29, Dec. 30,
2003 2002 2001
----------- ----------- -----------
Assets acquired:
Cash $425 $-- $--
Accounts receivable 612 244 --
Repair parts 229 71 --
Prepaid expenses and other 152 -- --
Property and equipment 5,061 1,920 --
Intangible assets 433 723 --
Goodwill 2,837 4,129 --
----------- -----------
Assets acquired 9,749 7,087 --
Liabilities assumed:
Accounts payable and accrued liabilities (3,681) (1,023) --
Notes payable (702) (640) --
----------- -----------
Cash paid in acquisitions, net of cash
acquired $ 5,366 $ 5,424 $--
=========== =========== ===========
Equipment acquired under capital lease $ 1,225 $-- $--
=========== =========== ===========
Conversion of common stock to Trust Preferred
Securities $17,710 $-- $--
=========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
24
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company and a Summary of Significant Accounting Policies
Business
Glacier Water Services, Inc., a Delaware corporation ("Glacier" or
"Company"), is primarily engaged in the operation of self-service vending
machines that dispense drinking water to consumers. The machines are placed at
supermarkets and other retail outlets under commission arrangements with the
retailers. The Company's revenues are subject to seasonal fluctuations, with
decreased revenues during rainy or cold weather months and increased revenues
during dry or hot weather months. The Company's machines are primarily located
throughout the sunbelt and Midwest regions of the United States. On February 8,
2002, Glacier acquired substantially all of the assets of the Pure Fill
Corporation and its wholly owned subsidiaries, National Water Services, Pure
Fill Finance Corporation and Pure Fill Container Corporation (collectively, Pure
Fill). On October 7, 2003, Glacier acquired Water Island, Inc. The transactions
were accounted for as purchases, and accordingly, the results of operations have
been included in the consolidated statements of operations from the date of
acquisitions. As of December 28, 2003, the Company operated approximately 15,500
machines in 39 states.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Glacier Water Services, Inc. and its wholly-owned subsidiaries. All
significant inter-company accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires that
management make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates. These estimates and assumptions include, but are not
limited to assessing the following: the recoverability of account receivable,
repair parts, property and equipment, goodwill, deferred tax assets, the ability
to estimate cash in machines, and any others.
Fiscal Year
The Company utilizes a fiscal year of 52 or 53 weeks ending on the
Sunday closest to December 31st. Fiscal years ended December 28, 2003, December
29, 2002 and December 30, 2001 each contained 364 days.
Other Comprehensive Loss
In accordance with the Financial Accounting Standards Board ("FASB")
Statement No. 130, Reporting Comprehensive Income, the Company displays
comprehensive loss and its components in a financial statement that is displayed
with the same prominence as other financial statements. The impact of any
fluctuations in the unrealized gains or losses on investments available-for-sale
are a component of comprehensive loss for each year presented.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. As of December 28,
2003, cash equivalents primarily consist of cash held in money market accounts
and/or certificates of deposit. The Company's policy is to place its cash with
high credit quality financial institutions in order to limit the amount of
credit exposure.
Investments
Investments are accounted for in accordance with FASB Statement No.
115, Accounting for Certain Investments in Debt and Equity Securities, which
requires that the Company determine the appropriate classification of
investments at the time of purchase based on management's intent and re-evaluate
such designation as of each balance sheet date. The Company considers all
investments as available for use in its current operations, and therefore,
classifies them as short-term, available-for-sale investments.
Available-for-sale investments are stated at fair value,
25
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
with net unrealized gains or losses, if any, reported as a separate component of
stockholders' deficit. Realized gains or losses from the sale of investments,
interest income, and dividends are included in investment (income) expense in
the accompanying statements of operations. Management reviews the carrying
values of its investments and writes such investments down to estimated fair
value by a charge to operations when such review results in management's
determination that an investment's impairment is considered to be other than
temporary. The cost of securities sold is based on the specific identification
method. The Company held no investments available-for-sale at December 28, 2003.
The Company's primary market risk exposure is interest rate risk. The
Company's exposure to interest rate risk relates primarily to the opportunity
cost associated with fixed-rate obligations. Proceeds from sales or maturities
of marketable securities for the year ended December 28, 2003 were $557,000.
There were realized gains of $117,000 on such sales and maturities for the year
ended December 28, 2003 and gross realized losses for the year ended December
28, 2003 were $94,000.
At December 29, 2002 investments available for sale consisted of the
following (in thousands):
Gross Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
Corporate securities $ 423 $ 117 $ -- $ 540
Mortgage backed securities 111 -- (48) 63
-------- -------- -------- --------
Total investments available-for-sale $ 534 $ 117 $ (48) $ 603
======== ======== ======== ========
At December 29, 2002, the Company held a portfolio of marketable
securities with an estimated fair value equal to $603,000, which consisted of
non-investment grade corporate debt securities and a mortgage-backed security
with carrying values of $540,000 and $63,000, respectively.
Proceeds from sales or maturities of investments available-for-sale for
the year ended December 29, 2002 were $581,000. There were no realized gains on
such sales and maturities for the year ended December 29, 2002 and gross
realized losses for the year ended December 30, 2001 were $133,000. Kayne
Anderson Capital Advisors, L.P. managed the Company's investment portfolio (See
Note 12).
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
other current assets and all current liabilities approximate the fair value
because of the short-term nature of those instruments. The Company's long-term
debt at December 28, 2003, consists of the Trust Preferred Securities, and the
long-term notes payable consists of amounts due in connection with the Pure Fill
and Water Island acquisitions and outstanding amounts under the Company's credit
facility (see Note 4). The market value of the Trust Preferred Securities at
December 28, 2003 and December 29, 2002 was approximately $82,622,000 and
$47,589,000, respectively. The carrying value of the Company's Trust Preferred
Securities at December 28, 2003 and December 29, 2002 was approximately
$81,643,000 and $61,965,000, respectively. The carrying value of the Company's
long-term notes payable, including any current portion, was approximately
$2,761,000 and $5,520,000 at December 28, 2003 and December 29, 2002,
respectively. The carrying value of the long-term notes payable approximates the
fair value since their terms are equivalent to those generally available in the
market place.
Repair Parts
Repair parts consist of machine parts used to maintain vending machines
in operation and are stated at cost (moving weighted average). Repair parts
consist of operating components that are used to replace or refurbish components
installed in vending machines, thereby maintaining the overall life of the
vending machine at its estimated useful life.
Long-Lived Assets
The Company evaluates and assesses its long-lived assets for impairment
under the guidelines of FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Statement of Financial Standards No. 144,
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, "Reporting
26
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
the Results of Operations-Reporting the Effects of a Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business (as previously
defined in that opinion). The Company periodically reevaluates the original
assumptions and rationale utilized in the establishment of the carrying value
and estimated lives of these assets The adoption of SFAS No. 144 did not have an
impact on our financial position or results of operations..
Property and Equipment and Depreciation
Property and equipment are recorded at cost and consist of the
following (in thousands):
December 28, December 29,
2003 2002
----------- -----------
Vending equipment $ 117,310 $ 105,578
Equipment, furniture and fixtures 4,228 2,284
Leasehold improvements 89 69
Capital lease assets 1,225 --
----------- -----------
122,852 107,931
Less: Accumulated depreciation and amortization (77,397) (63,395)
------------ ------------
$ 45,455 $ 44,536
=========== ===========
Depreciation is provided using the straight-line method over the
estimated useful lives of the assets as follows:
Vending equipment 13 years during fiscal year 2003 and 10
years during 2002 and 2001
Equipment, furniture and fixtures 3 to 10 years
Leasehold improvements Shorter of life or lease
The Company's vending equipment is depreciated using a 10% and 20%
estimated salvage value during fiscal year 2003 and 2002, respectively. The
salvage value is an estimate of the value expected to be recovered upon disposal
of the vending machine. During the quarter ended December 28, 2003, the Company
revised the estimated useful life and salvage value assigned to vending
equipment. The revisions were based on actual historical performance of the
vending machines, which demonstrated that the average machine is in service for
periods longer than the ten year estimated useful life previously assigned to
vending machines, and that the salvage value at the end of service is lower than
the estimates historically assigned. As a result, and in accordance with APB20,
Accounting Changes, the Company changed the estimated useful life of its vending
machines to 13 years and reduced the salvage value to 10% of cost, effective
September 29, 2003. As a result of these changes in estimates, the Company
incurred approximately $445,000, or $0.20 per basic and diluted loss per common
share, of additional depreciation expense for the year ended December 28, 2003.
Costs associated with installing vending equipment are capitalized and
depreciated over five years, which is the normal contractual period with the
retailers. All maintenance, repair and refurbishment costs are charged to
operations as incurred. Additions and major improvements are capitalized.
Certain long-term repair parts are classified as vending equipment and are
depreciated over a 3, 5, or 10 year estimated useful life. Costs associated with
the assembly of vending machines are accumulated until finished machines are
ready for installation at a retail location, at which time the costs are
transferred to property and equipment. As of December 28, 2003 and December 29,
2002, there were no vending machines in the process of assembly.
Other Assets
Included in other assets are prepaid contract rights, which 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. At
December 28, 2003, prepaid contract rights in the amount of $726,000 was
included in other assets as compared to $2,532,000 at December 29, 2002. For the
years ended December 28, 2003, December 29, 2002 and December 30, 2001,
$2,050,000, $2,391,000 and $2,553,000, respectively, is included in depreciation
and amortization.
27
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Also included in other assets are deferred financing costs of
$4,100,000 which were incurred in connection with the Trust Preferred Securities
discussed in Note 4 and are amortized over the period ending January 2028, the
date of the mandatory redemption of the securities. Additional deferred
financing costs of $2,180,000 associated with the Exchange Offer discussed in
Note 4 are also included in other assets and are also amortized over the period
ending January 2028.
Revenue Recognition
The Company recognizes revenue from the sale of its product at the
point of purchase, which occurs when the customer vends the water and pays for
the product. Due to the fact that the Company has approximately 15,500 vending
machines, it is impractical to visit all machines at the end of each reporting
period. Consequently, the Company estimates the revenue from the last time each
machine was serviced until the end of the reporting period, based on the most
current daily volume of each machine. For the years ended December 28, 2003,
December 29, 2002 and December 30, 2001, the Company recorded approximately
$2,284,000, $1,446,000 and $1,446,000, respectively, of such estimated revenues,
which represents an average of approximately 13 days, 9 days and 9 days,
respectively, per machine.
Segment and Geographic Reporting
Glacier operates in a single business segment providing high quality,
low priced drinking water dispensed to consumers through self-service vending
machines and containers sold to retailers for re-sale. The Company's operations
are within the United States. All revenues are generated from the United States
and all long-lived assets are maintained in the United States.
Commission Expense
Included in operating expenses are commission payments made to certain
retailers based on a percentage of vending machine revenue. Commission expense
for the years ended December 28, 2003, December 29, 2002 and December 30, 2001
was $30,482,000, $32,180,000, and $27,602,000, respectively.
Income Taxes
Deferred tax liabilities and assets reflect the net tax effects, using
enacted tax rates in effect for the year in which the differences are expected
to reverse of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized.
Stock Based Compensation
The Company has employee stock-based compensation plans, which are
described more fully in Note 8. The Company measures compensation expense for
the employee stock-based compensation awards using the intrinsic value method
and provides pro forma disclosures of net loss and loss per share as if a fair
value method had been applied. Therefore, compensation cost for employee stock
awards is measured as the excess, if any, of the fair value of the common stock
at the grant date over the amount an employee must pay to acquire the stock and
is amortized over the related service periods using the straight-line method.
Compensation expense previously recorded for unvested employee stock-based
compensation awards that are forfeited upon employee termination is reversed in
the period of forfeiture.
The following pro forma disclosures represent what the Company's net
loss and loss per common 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 ("FASB Statement No.
123") for fiscal years 2003, 2002, and 2001:
28
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Fiscal Year Ended
--------------------------------------------
December 28, December 29, December 30,
2003 2002 2001
-------------- -------------- --------------
Net loss applicable to common stockholders,
as reported $ (1,496) $ (2,701) $ (5,560)
Deduct: Total Stock-based employee compensation
expense determined under the fair value method
for all awards $ 846 $ 832 $ 1,166
-------------- -------------- --------------
Proforma net loss applicable to common
stockholders $(2,342) $(3,533) $(6,726)
============== ============== ==============
Basic and diluted loss per common share:
As reported $(0.68) $(0.95) $(1.96)
============== ============== ==============
Proforma $(1.07) $(1.24) $(2.37)
============== ============== ==============
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 2003, 2002, and 2001, respectively:
average risk-free interest rates of 1.1%, 1.7%, and 4.8%, no expected dividend
yield; expected lives of eight years for regular options and five years for
Deferral Options in all years; expected volatility of approximately 30% for
fiscal year 2003 and 31% for fiscal 2002 and 43% for fiscal 2001.
Recent Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 149 is generally effective for contracts entered
into or modified after September 30, 2003, and for hedging relationships
designated after September 30, 2003. The adoption of SFAS No. 149 has not had a
material impact on the consolidated financial statement.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. SFAS No. 150 is to be implemented by
reporting the cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of the statement and
still existing at the beginning of the interim period of adoption. The adoption
of SFAS No. 150 has not had a material impact on the consolidated financial
statements.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN No.
45), Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, which clarifies
disclosure and recognition/measurement requirements related to certain
guarantees. The disclosure requirements are effective for financial statements
issued after December 15, 2002 and the recognition/measurement requirements are
effective on a prospective basis for guarantees issued or modified after
December 31, 2002. The application of this interpretation did not have a
material impact on the consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51 ("FIN46"). This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interests entities
obtained after January 31, 2003. The Interpretation requires certain disclosures
in financial statements issued after January 31, 2003 if it is reasonably
possible that the Company will consolidate or disclose information about
variable interest entities when the Interpretation becomes effective. The
application of this interpretation did not have a material effect on the
consolidated financial statements.
29
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In December 2003, FASB issued Interpretation No. 46R, Consolidation of
Variable Interest Entities, which supercedes FIN46. The application of the
revised interpretation is required in the financial statements of companies that
have interests in special purpose entities for periods after December 15, 2003.
The application of this interpretation did not have a material effect on the
consolidated financial statements.
Loss Per Common Share
Basic earnings per share are computed based upon the weighted average
number of common shares outstanding during the period. Diluted earnings per
share are based upon the weighted average number of common shares outstanding
and potentially dilutive securities during the period. In computing the net loss
per share, the Company's net loss is adjusted for preferred dividends to reflect
the loss applicable to common stock.
Potentially dilutive securities include shares issuable in connection
with the convertible preferred stock and options granted under the Company's
stock option plans using the treasury stock method. For fiscal years 2003, 2002,
and 2001, 905,930, 947,794 and 954,734 potentially dilutive securities,
respectively, were not used to calculate diluted loss per share because of their
anti-dilutive effect.
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
2. Acquisitions
On February 8, 2002, Glacier acquired substantially all of the assets
of the Pure Fill Corporation and its wholly owned subsidiaries, National Water
Services, Pure Fill Finance Corporation and Pure Fill Container Corporation,
(collectively, "Pure Fill") for a purchase price of $6,064,000, including
$640,000 which is payable in equal quarterly installments over four years. The
Company incurred transaction costs of $450,000. This acquisition was consummated
principally to expand the Company's water vending operations and customer base.
The transaction was accounted for as a purchase, and accordingly, the results of
operations have been included in the consolidated statement of operations from
the date of acquisition. The allocation of fair values of assets and liabilities
was based upon a third party appraisal. The excess of purchase price over
acquired net assets was $4,129,000 and is classified as goodwill.
Intangible assets of $213,000, $230,000 and $280,000 were assigned to
registered trademarks and patents, contracts, and a non-compete agreement,
respectively (collectively, "Pure Fill Intangible Assets"). The Pure Fill
Intangible Assets are subject to amortization and have a weighted average useful
life of approximately 4 years. For the years ended December 28, 2003 and
December 29, 2002, the Company recorded amortization of $214,000 and $195,000,
respectively, related to the Pure Fill Intangible Assets.
On October 7, 2003, Glacier acquired Water Island, Inc. ("Water
Island") for a purchase price of $6,068,000, including $702,000 which is payable
in installments over two years. The Company incurred transaction costs of
$300,000, of which $144,000 remained accrued at December 28, 2003. This
acquisition was consummated principally to expand the Company's water vending
operations and customer base. The transaction was accounted for as a purchase,
and accordingly, the results of operations have been included in the
consolidated statement of operations from the date of acquisition. The
allocation of fair values of assets and liabilities was based upon a third party
appraisal. The excess of purchase price over acquired net assets was $2,837,000
and is classified as goodwill.
Intangible assets of $333,000 and $100,000 were assigned to contracts
and non-compete agreements respectively (collectively, "Water Island Intangible
Assets"). The Water Island Intangible Assets are subject to amortization and
have a weighted average useful life of approximately 3 years. For the year ended
December 28, 2003, the Company recorded amortization of $33,000 related to the
Water Island Intangible Assets.
The Company estimates that amortization expense related to Pure Fill
intangible assets and Water Island intangible assets to be $240,000, $230,000,
$202,000, $27,000 and $15,000 for the fiscal years 2004 thru 2008.
30
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following unaudited pro forma information assumes that the
acquisition of Pure Fill occurred on January 1, 2001 and the acquisition of
Water Island occurred on December 31, 2002. The unaudited pro forma results have
been prepared for comparative purposes only and do not purport to be indicative
of the results of operations which would have actually resulted had the
combination been in effect on December 30, 2002, December 31, 2001, and January
1, 2001, or of future results of operations.
The unaudited pro forma results for the fiscal year ended December 28,
2003, December 29, 2002, and December 30, 2001 are as follows (in thousands,
except share data):
Fiscal Year Ended
-----------------
Dec. 28, Dec. 29, Dec. 30,
2003 2002 2001
-------- -------- --------
Revenues $80,342 $81,868 $71,324
Net loss $(1,477) $(2,289) $(5,911)
Net loss applicable to common shares $(1,573) $(2,417) $(5,977)
Basic and diluted loss per share:
Net loss applicable to common stockholders $ (0.72) $ (0.85) $ (2.10)
Weighted average shares used in per share calculation 2,185,761 2,843,217 2,843,474
3. Supplementary Balance Sheet Information
Other Assets
Other assets consist of the following (in thousands):
December 28, December 29,
2003 2002
------------ ------------
Prepaid contract rights, net of accumulated amortization of
$8,613 and $8,097 as of December 28, 2003 and
December 29, 2002, respectively $ 726 $ 2,532
Deferred financing cost, net of accumulated amortization of
$273 and $224 as of December 29, 2003 and
December 29, 2002, respectively 4,936 2,805
Other 115 137
------------ ------------
$5,777 $5,474
============ ============
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
December 28, December 29,
2003 2002
------------ ------------
Accrued compensation, benefits and related taxes $1,357 $1,406
Deferred tax liability and other taxes 85 253
Accrued interest 284 260
Other accrued liabilities 336 340
------------ ------------
$2,062 $2,259
============ ============
4. Long-Term Debt, Line of Credit and Notes Payable
Company Obligated Mandatorily Redeemable Preferred Securities
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 3,400,000 of 9.0625% Cumulative Trust Preferred Securities with a liquidation
amount of $25.00 per
31
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 and purchasing Subordinated Debentures. Concurrent with
the issuance of such securities, the Trust invested the proceeds therefrom in an
aggregate principal amount of $85,000,000 of 9.0625% Junior Subordinated
Debentures (the "Subordinated Debentures") issued by the Company.
Distributions on the Trust Preferred Securities are payable monthly in
arrears by the Trust. The Company may cause the Trust to defer the payment of
distributions for a period not to exceed 60 consecutive months. During any such
deferral period, distributions will accrue and compound quarterly, and the
Company may not declare or pay distributions on its common or preferred stock or
debt securities that rank equal or junior to the Subordinated Debentures. To
date, the Company is current on all distributions.
The Subordinated Debentures are unsecured obligations of the Company
and are subordinate and junior in right of payment to certain other indebtedness
of the Company. The Trust Preferred Securities are subject to mandatory
redemption upon the repayment of the Subordinated Debentures at the redemption
price equal to the aggregate liquidation amount of the Securities plus any
accumulated and unpaid distributions. The Subordinated Debentures mature on
January 31, 2028, but may be redeemed at the option of the Company at any time
since January 31, 2003. The Company effectively provides a full and
unconditional guarantee of the Trust's obligations under the Trust Securities.
The Company's Board of Directors authorized the purchase of up to
1,250,000 of the Trust Preferred Securities. As of December 29, 2002, the
Company had repurchased 921,400 of the Trust Preferred Securities at an average
cost of $16.40 per share. The Company did not repurchase any shares of Trust
Preferred Securities during fiscal years 2003 or 2002. The Company repurchased
400 shares in fiscal 2001 for a net extraordinary gain of $4,000. As of December
29, 2002, the Company had used $15,118,000 in cash to repurchase $23,035,000
face value of the Trust Preferred Securities less $1,098,000 of deferred
financing costs. The Company may continue to make such purchases from time to
time in open market transactions or block trades.
Pursuant to an Exchange Offer, which commenced on February 26, 2003 and
expired on April 11, 2003, a total of 983,880 shares of Common Stock were
exchanged for a total of 787,105 Trust Preferred Securities at a ratio of one
share of Common Stock for eight-tenths of a Trust Preferred Security. The
Exchange Offer increased long-term debt by approximately $19,678,000, which
represents the total liquidation value of the 787,105 Trust Preferred
Securities. As of December 28, 2003 there were 3,265,705 Trust Preferred
Securities outstanding (other than the Trust Preferred Securities held by the
Company), which have a carrying value of $81,643,000 and have a maturity date of
January 31, 2028. All Trust Preferred Securities, other than those held by the
Company, are included in long-term debt.
Line of Credit and Notes Payable
In connection with the Pure Fill acquisition, the Company entered into
a $10,000,000 credit facility with City National Bank on February 19, 2002. The
$10,000,000 credit facility consisted of a $4,000,000 revolving credit portion
and a $6,000,000 term portion. On February 1, 2003, the Company restructured the
term portion, which had an outstanding balance of $4,800,000 as of that date.
The term portion was canceled and replaced with a new $4,800,000 revolving note.
The credit availability on the new revolving note was reduced by $300,000 every
three months beginning May 1, 2003 until its maturity in February 2007. The new
revolving note required monthly interest payments at the Bank's prime rate plus
1.50%. The original $4,000,000 revolving credit portion of the credit facility
(which remained in effect) required monthly interest payments at the Bank's
prime rate plus 1.00%. The new revolving note and the original $4,000,000
revolving credit portion of the credit facility required a quarterly unused
facility fee of 0.50% per annum and 0.25% per annum, respectively. On February
21, 2003, the Company repaid the new revolving note.
On October 7, 2003, the Company restructured its credit facility with
City National Bank. The two existing revolving notes, under which no borrowings
were outstanding, were replaced with a new $12,000,000 revolving credit
facility, which has a maturity date of February 1, 2009. The credit availability
on the new revolving credit facility is reduced by $400,000 every three months
beginning February 7, 2004 until its maturity in February 2009. The new
revolving credit facility requires monthly interest payments at the City
National Bank's prime rate plus 1.00% (5.00%
32
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
per annum at December 28, 2003). The new revolving credit facility requires a
quarterly unused facility fee of 0.50% per annum. The new credit facility
contains certain customary financial covenants which restrict indebtedness and
capital expenditures. The Company pledged certain assets such as repair parts
and equipment as collateral for its obligations under the new credit facility.
The Company was in compliance at December 28, 2003 with all such covenants. At
December 28, 2003, there was $1,500,000 outstanding on the new credit facility
and is included in long-term notes payable. Availability under the new
$12,000,000 revolving credit facility was $10,500,000 as of December 28, 2003.
As of December 28, 2003, there is $1,261,000 outstanding under notes
payable associated with the Pure Fill and Water Island acquisitions. The Pure
Fill note was payable over 4 years in equal quarterly payments and as of
December 28, 2003, had an outstanding balance of $360,000. As of December 28,
2003 the Water Island note had a balance of $901,000 and is payable periodically
over two years, with $601,000 due by October 2004 and the remaining $300,000 due
on the anniversary date of the acquisition in October 2005. Amounts due after
December 28, 2004 under the Company's credit facility and notes payable are
included in long-term notes payable. Both the Pure Fill and the Water Island
notes payable accrue interest at the prime rate published in the Wall Street
Journal (4.0% and 4.25% per annum at December 28, 2003 and December 29, 2002,
respectively).
5. Commitments and Contingencies
Leases
The Company leases certain vehicles, warehouse and office facilities
under non-cancelable operating leases that expire on various dates through 2008.
The Company also leases certain equipment under a capital lease, which expires
in November 2006.
Future minimum lease payments under non-cancelable operating and
capital leases with initial terms of one or more years are as follows (in
thousands):
Fiscal year Operating Capital
----------- --------- -------
2004 $ 1,095 $ 318
2005 817 318
2006 612 696
2007 337 --
2008 80 --
Thereafter -- --
--------- ---------
Total minimum lease payments $ 2,941 1,332
========= ---------
Less amount representing interest (165)
---------
Present value of minimum lease payments 1,167
Less current portion (244)
---------
Long-term obligation under capital lease 923
=========
Total lease expense for the years ended December 28, 2003, December 29,
2002, and December 30, 2001, was $1,445,000, $1,688,000, and $1,874,000,
respectively.
Contingencies
The Company is involved in various legal proceedings and claims arising
in the ordinary course of business, none of which, in the opinion of management,
is expected to have a material effect on the Company's consolidated financial
position or results of operations.
33
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. Income Taxes
Significant components of the provision (benefit) for income taxes are as
follows (in thousands):
Fiscal Year Ended
------------------------------------------------
December 28, December 29, December 30,
2003 2002 2001
------------- ------------- --------------
Federal income taxes:
Current $-- $(379) $--
Deferred -- (214) --
------------- ------------- --------------
Total federal income taxes -- (593) --
------------- ------------- --------------
State and local income taxes:
Current -- -- --
Deferred -- -- --
------------- ------------- --------------
Total state and local income taxes -- -- --
------------- ------------- --------------
Total income tax provision (benefit) $-- $(593) $--
============= ============= ==============
The $379,000 current income tax benefit in fiscal year 2002 was a result of
an income tax refund received as a result of changes in the U.S Federal tax laws
relating to operating loss carrybacks which allowed the Company to recover
previously paid U.S. federal income taxes.
Deferred tax liabilities and assets result from the following (in thousands):
December 28, December 29,
2003 2002
------------- -------------
Deferred tax liabilities:
Property and equipment $9,354 $8,433
------------- -------------
Deferred tax assets:
Alternative minimum tax credit (1,156) (1,156)
Net operating loss (12,422) (10,460)
Manufacturer's investment credit (568) (759)
Accruals and reserves (225) (1,202)
Other, net (92) (46)
------------- -------------
Total gross deferred tax assets (14,463) (13,623)
Valuation allowance 5,109 5,190
------------- -------------
Total deferred tax assets, net (9,354) (8,433)
------------- -------------
Net deferred tax liabilities $-- $--
============= =============
The Company's effective income tax rate differs from the federal statutory
rate as follows:
Fiscal Year Ended
--------------------------------------------
December 28, December 29, December 30,
2003 2002 2001
-------------- ------------- -------------
Federal statutory rate (34.0)% (34.0)% (34.0)%
State and local taxes, net of federal benefit (0.3)% (4.3)% (4.0)%
Benefit of alternative minimum tax net
operating loss carryback --% (6.7)% --%
Other, net --% (2.8)% (1.0)%
Change in valuation allowance (34.3)% 29.1% 39.0%
-------------- ------------- -------------
Effective rate --% (18.7)% --%
============== ============= =============
The realization of deferred tax assets is dependent upon the Company's
ability to generate taxable income in future years. Based on risk factors and
net operating loss carryforwards, realization cannot be assured. Management
believes it is not more likely than not that the deferred tax asset will be
realized and therefore, has recorded a valuation allowance for the total balance
as of December 28, 2003.
34
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
At December 28, 2003, the Company had federal and California income tax
net operating loss carryforwards of $30,559,000 and $10,766,000, respectively,
which will begin to expire in 2012 and 2003 for U.S. 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 $0.01 per share. The rights,
preferences and privileges of the authorized shares may be established by the
Board of Directors without further action by the holders of the Company's common
stock.
During the quarter ended July 1, 2001, the Company issued 16,000 shares
of Cumulative Redeemable Convertible Preferred Stock (the "Preferred Stock"),
which resulted in an increase to stockholders' equity of $1,600,000 excluding
related issuance costs. Holders of the Preferred Stock are entitled to receive,
when declared by the Board of Directors, a cumulative, preferential dividend
("Dividend") at the rate of 8% per annum of the original purchase price of each
share of Preferred Stock. If any dividends are declared on the Common Stock,
dividends will also be paid on the Preferred Stock on an as-converted basis.
On September 30, 2003, the holder of the 16,000 outstanding shares of
the Cumulative Redeemable Convertible Preferred Stock elected to convert these
shares into 168,421 shares of the Company's Common Stock.
For the year ended December 28, 2003, December 29, 2002 and December
30, 2001, the Company recorded dividends associated with the Cumulative
Redeemable Convertible Preferred Stock of $96,000, $128,000 and $66,000,
respectively.
Treasury Stock
The Board of Directors has authorized the purchase of up to 750,000
shares of the Company's common stock in the open market. As of December 29,
2002, 603,726 shares had been repurchased under this program. Pursuant to the
Exchange Offer which was competed on April 11, 2003, 983,880 shares of Common
stock were exchanged for 787,105 Trust Preferred Securities. No shares were
acquired in 2003 other than pursuant to the Exchange Offer. As of December 28,
2003, there were 1,587,606 shares of Common Stock held in treasury. As of
December 28, 2003, the Company is authorized to repurchase an additional 146,274
shares, approximately 6.9% of the Company's total shares outstanding.
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 Program"). The Company accounts for these plans under
APB Opinion No. 25, under which no compensation cost has been recognized, since
the exercise price of the option was not less than the market price of the stock
on the date of grant.
The Company has reserved 1,400,000 shares of common stock under the
Program, which provides for the issuance of incentive and non-qualified stock
options to key employees, including directors and consultants. Incentive stock
options are granted at no less than the fair market value on the date of the
grant. Non-qualified options may be granted at prices determined by the Board of
Directors, but at no less than 85% of the fair market value on the date of the
grant. Options generally have a term of 10 years and become exercisable at a
rate of 25% per annum. Supplemental Options ("Supplemental Options") granted to
directors for their services in lieu of cash fees have a term of five years and
become exercisable one year following the date of the grant.
The Company had reserved 360,000 shares of common stock for issuance
under the 1992 Stock Option Plan, which provided for the issuance of incentive
and non-qualified stock options to key employees, including directors and
consultants. The 1992 Stock Option Plan was terminated in 1994 with a balance of
42,250 shares of common stock available for grant which was transferred to the
1994 Stock Compensation Program.
35
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A summary of the status of the Company's stock option plans and
activity is as follows:
Weighted Average
Shares Exercise Price
------ --------------
Balance at December 31, 2000 763,959 $19.16
Granted 428,665 $ 7.98
Exercised -- $ --
Canceled (237,890) $21.35
--------- ------
Balance as of December 30, 2001 954,734 $13.60
Granted 99,300 $12.16
Exercised (16,667) $11.30
Canceled (89,573) $21.55
--------- ------
Balance as of December 29, 2002 947,794 $12.78
Granted 87,900 $15.89
Exercised (83,159) $ 9.41
Canceled (46,605) $28.44
--------- ------
Outstanding at December 28, 2003 905,930 $12.57
Weighted average fair value of options granted $ 6.00
There are 950 options outstanding under the 1992 Stock Option Plan at
December 28, 2003, all of which are exercisable, and have exercise prices of
$13.63, with a remaining contractual life of two weeks.
There are 904,980 options outstanding under the 1994 Stock Option Plan
at December 28, 2003 with exercise prices between $7.55 and $31.25, with a
weighted average exercise price of $12.57 and a weighted average remaining
contractual life of five years. At December 28, 2003, 640,700 of these options
are exercisable, and their weighted average exercise price is $12.19.
9. 401(k) Savings Plan
The Company has a 401(k) Savings Plan (the "Plan") which allows
eligible employees to contribute a percentage of their pre-tax compensation
(subject to annual limitations of the lesser of 60% of eligible compensation or
$12,000 in calendar year 2003), with the Company making discretionary matching
contributions as determined each year by the Plan administrator. Employees vest
immediately in their contributions and vest in the Company discretionary
matching contributions over a five-year period of service. The Company's
discretionary matching contributions were approximately $75,000 and $65,000 for
fiscal years 2003 and 2002, respectively, with no contributions made in fiscal
year 2001.
10. Significant Customers
The following table sets forth the customers which represent ten
percent or more of the Company's total revenues in fiscal years 2003, 2002 and
2001, after the effect of any consolidations that occurred as a result of any
acquisition or mergers by the retailers:
Fiscal Year Ended
----------------------------------------------------
December 28, December 29, December 30,
2003 2002 2001
---- ---- ----
Company A 12.07% 12.54% 12.32%
Company B 11.40% 10.93% 12.02%
Company C 10.81% 10.73% 12.31%
11. Integration and Restructuring Costs
On February 8, 2002, Glacier acquired substantially all of the assets of
the Pure Fill Corporation and its wholly owned subsidiaries, National Water
Services, Pure Fill Finance Corporation and Pure Fill Container Corporation.
Costs
36
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
necessary to integrate the assets of Glacier and Pure Fill that were expected to
benefit future operations were expensed as integration costs after management
had completed and approved the plans and associated costs. As a result of
integrating Pure Fill assets into Glacier Water's operations, integration and
restructuring costs totaled $1,364,000 for the year ended December 29, 2002, and
have been recognized as integration and restructuring costs in the consolidated
statement of operations. Integration and restructuring costs were principally
for the removal and replacement, transportation and disposal of vending
equipment. There were no such costs incurred in connection with the Water Island
acquisition.
12. Related Party Transactions
Although the Company has no investments as of December 28, 2003, the
Company has used Kayne Anderson Capital Advisors, L.P. to manage the Company's
investments during fiscal 2003 and 2002. Three board members are employed as
senior executives of Kayne Anderson Capital Advisors, L.P. and are shareholders
of the Company. The Company incurred costs of $3,000, $7,000, and $13,000 in
fiscal 2003, 2002, and 2001, respectively, to Kayne Anderson Capital Advisors,
L.P. in connection with investment management fees. In connection with the
acquisition of the Pure Fill assets, funds managed by Kayne Anderson Capital
Advisors, L.P. provided temporary funding of $6,300,000 to the Company until
February 22, 2002. The Company paid to funds managed by Kayne Anderson Capital
Advisors, L.P. interest of $12,000 at an interest rate consistent with the rates
charged by City National Bank (see Note 4).
37
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. Quarterly Financial Data (Unaudited)
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- -------------- --------------
(in thousands, except shares and per share amounts)
Year Ended December 28, 2003:
Net revenues $16,533 $17,789 $20,447 $17,547
Income from operations 538 1,189 3,029 770
Net income (loss)applicable to
common stockholders (968) (659) 1,160 (1,029)
Basic earnings (loss) per share:
Net income (loss) applicable to
common stockholders $(0.34) $ (0.32) $ 0.61 $ (0.53)
Weighted average shares 2,857,293 2,039,842 1,913,550 1,932,359
Diluted earnings (loss) per
share:
Net income (loss) applicable to
common stockholders $(0.34) $ (0.32) $ 0.51 $ (0.53)
Weighted average shares 2,857,293 2,039,842 2,267,351 1,932,359
Year Ended December 29, 2002:
Net revenues $15,409 $18,440 $20,720 $16,460
Income (loss) from operations (1,007) 914 2,558 357
Net income (loss) applicable to
common stockholders (2,147) (614) 1,041 (981)
Basic earnings (loss) per share:
Net income (loss) applicable to
common stockholders $(0.76) $ (0.22) $ 0.37 $ (0.34)
Weighted average shares 2,834,474 2,834,474 2,848,184 2,849,344
Diluted earnings (loss) per
share:
Net income (loss) applicable to
common stockholders $(0.76) $ (0.22) $ 0.34 $ (0.34)
Weighted average shares 2,834,474 2,834,474 3,066,719 2,849,344
On February 8, 2002, Glacier acquired substantially all of the assets
of the Pure Fill Corporation and its wholly owned subsidiaries, National Water
Services, Pure Fill Finance Corporation and Pure Fill Container Corporation. As
a result of the purchase, the Company incurred non-recurring costs of $475,000
and $889,000 during the second and third quarters of fiscal year 2002,
respectively, for a total of $1,364,000 associated with the integration of Pure
Fill operations. Refer to Note 11, Integration and Restructuring Costs, for more
detail.
38
INDEX TO EXHIBITS
Exhibit No.
- -----------
3.1 Certificate of Incorporation Registrant (i.).
3.2 Bylaws of Registrant (i.).
3.3 Certificate of Designation, Preferences and Rights of Redeemable
Convertible Preferred Stock of Glacier Water Services, Inc. dated June
18, 2001 (xi.).
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
(xi.).
4.3 Officers' Certificate of Company Order executed by Glacier Water
Services, Inc., dated January 27, 1998 (xi.).
4.4 Certificate of Trust of Glacier Water Trust I, dated November 13, 1997
(x.).
4.5 Trust Agreement of Glacier Water Trust I, dated November 13, 1997
(x.).
4.5.1 Amended and Restated Trust Agreement of Glacier Water Trust I, dated
January 27, 1998 (xi.).
4.6 Trust Preferred Certificate of Glacier Water Trust I (xi.).
4.7 Common Securities Certificate of Glacier Water Trust I (xi.).
4.8 Guarantee Agreement between Glacier Water Services, Inc. and
Wilmington Trust Company, as Trustee, dated January 27, 1998 (xi.).
4.9 Agreement as to Expenses and Liabilities between Glacier Water
Services, Inc. and Glacier Water Trust I, dated January 27, 1998
(xi.).
4.10 Junior Subordinated Deferrable Interest Debenture of Glacier Water
Services, Inc. (xi.).
10.1 Amended and Restated 1992 Stock Incentive Plan (ii.).
10.2 Form of Indemnification Agreement with Officers and Directors (i.).
10.3 1994 Stock Compensation Plan (iii.).
10.3.1 Amendment No. 1 to 1994 Stock Compensation Plan (iv.) dated April 27,
1995.
10.3.2 Amendment No. 2 to 1994 Stock Compensation Plan dated September 17,
1996.
10.3.3 Amendment No. 3 to 1994 Stock Compensation Plan (v.) dated February
10, 1997.
10.3.4 Amendment No. 4 to 1994 Stock Compensation Plan (vi.) dated April 14,
1998.
10.3.5 Amendment No. 6 to 1994 Stock Compensation Plan (vii.) dated March 21,
2000.
10.3.6 Amendment No. 7 to 1994 Stock Compensation Plan (viii.) dated March
15, 2001.
10.3.7 Amendment No. 8 to 1994 Stock Compensation Plan dated May 1, 2002.
10.3.8 Amendment No. 9 to 1994 Stock Compensation Plan (ix.) dated July
11, 2002.
10.4 City National Bank Loan Agreements (xii) dated February 19, 2002.
10.4.1 City National Bank Loan Agreements (xiii) dated February 1, 2003.
14 Standards of Business Conduct and Ethics Policy
21.1 Subsidiaries of the Glacier Water Services, Inc.
23.1 Consent of KPMG LLP, Independent Auditors.
23.2 Consent of Arthur Andersen LLP, Independent Public Accountants.
31.1 Certification of Brian H. McInerney, Chief Executive Officer, under
Section 302 of the Sarbanes-Oxley Act.
31.2 Certification of W. David Walters, Chief Financial Officer, under
Section 302 of the Sarbanes-Oxley Act.
32.1 Certification of Brian H. McInerney, Chief Executive Officer, under
Section 906 of the Sarbanes-Oxley Act.
32.2 Certification of W. David Walters, Chief Financial Officer, under
Section 906 of the Sarbanes-Oxley Act.
(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.
39
(iv.) Incorporated by reference to the Company's Proxy Statement for the
Annual Meeting held on June 6, 1995.
(v.) Incorporated by reference to the Company's Proxy Statement for the
Annual Meeting held on June 3, 1997.
(vi.) Incorporated by reference to the Company's Proxy Statement for the
Annual Meeting held on June 9, 1998.
(vii.) Incorporated by reference to the Company's Proxy Statement for the
Annual Meeting held on June 6, 2000.
(viii.) Incorporated by reference to the Company's Proxy Statement for the
Annual Meeting held on June 5, 2001.
(ix.) Incorporated by reference to the Company's Proxy Statement for the
Annual Meeting held on July 11, 2002.
(x.) Incorporated by reference to the Company's Proxy Registration
Statement on Form S-2 (File Number 333-40335) filed January 22, 1998.
(xi.) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended January 4, 1998.
(xii.) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 30, 2001.
(xiii.) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 29, 2002.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GLACIER WATER SERVICES, INC.
By: /s/
-------------------------------------------------
Brian H. McInerney
President and Chief Executive Officer
By: /s/
-------------------------------------------------
W. David Walters
Senior Vice President and Chief Financial Officer
Date: March 22, 2004
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 February 13, 2003.
Signature Title
Principal Executive Officer:
/s/ President and Chief Executive Officer
- ------------------------------------
Brian H. McInerney
/s/ Chairman of the Board and Director
- ------------------------------------
Charles A. Norris
/s/ Director
- ------------------------------------
William A. Armstrong
/s/ Director
- ------------------------------------
William G. Bell
/s/ Director
- ------------------------------------
Richard A. Kayne
/s/ Director
- ------------------------------------
Peter H. Neuwirth
/s/ Director
- ------------------------------------
Scott H. Shlecter
/s/ Director
- ------------------------------------
Robert V. Sinnott
/s/ Director
- ------------------------------------
Heidi E. Yodowitz
41