SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 28, 2004
[ ] 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
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GLACIER WATER SERVICES, INC.
----------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 33-0493559
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2651 La Mirada Drive, Suite 100, Vista, California 92081
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(760) 560-1111
--------------
(Registrant's telephone number, including area code)
N/A
---
(Former name, former address and former fiscal year,
if changed since last report)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [ ] NO [X]
Indicate the number of shares outstanding of each of issuer's class of
common stock as of the latest practicable date: 2,119,691 shares of common
stock, $.01 par value, outstanding at May 01, 2004.
1
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
GLACIER WATER SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 28, December 28,
2004 2003 *
---- ----
ASSETS (unaudited)
------
Current assets:
Cash and cash equivalents $ 2,052 $ 1,924
Accounts receivable, net of allowance for
doubtful accounts of $124 and $151 as of March
28, 2004 and December 28, 2003, respectively 2,238 2,118
Repair parts 1,696 1,718
Prepaid expenses and other 991 1,058
----------- -----------
Total current assets 6,977 6,818
Property and equipment, net 44,646 45,455
Goodwill 6,868 6,966
Intangible assets, net 647 714
Investment in Glacier Water Trust I 2,629 2,629
Investment in Glacier Water Trust I Preferred
Securities 3,357 3,357
Other assets 5,628 5,777
----------- -----------
Total assets $ 70,752 $ 71,716
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable $ 1,519 $ 1,143
Accrued commissions 1,818 1,713
Accrued liabilities 1,790 2,062
Current portion of obligations under capital
lease 249 244
Current portion of long-term notes payable 628 761
----------- -----------
Total current liabilities 6,004 5,923
Long-term debt 87,629 87,629
Long-term portion of obligations under capital lease 859 923
Long-term notes payable 2,210 2,000
----------- -----------
Total liabilities 96,702 96,475
Commitments and contingencies -- --
Stockholders' deficit:
Common stock, $.01 par value; 10,000,000 shares
authorized, 2,119,691 and 2,118,841 shares
issued and outstanding as of March 28, 2004 and
December 28, 2003, respectively 37 37
Additional paid-in capital 18,470 18,460
Retained deficit (11,895) (10,694)
Treasury stock, at cost, 1,587,606 shares as of
March 28, 2004 and December 28, 2003 (32,562) (32,562)
----------- -----------
Total stockholders' deficit (25,950) (24,759)
----------- -----------
Total liabilities and stockholders' deficit $ 70,752 $ 71,716
=========== ===========
*Amounts derived from audited information
The accompanying notes are an integral part of these consolidated
financial statements.
2
GLACIER WATER SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)
Three Months Ended
------------------
March 28, March 30,
2004 2003
---- ----
Revenues $ 17,546 $ 16,533
Operating costs and expenses:
Operating expenses 11,676 10,670
Depreciation and amortization 2,510 2,961
----------- -----------
Cost of goods sold 14,186 13,631
Selling, general and administrative expenses 2,631 2,364
----------- -----------
Total operating costs and expenses 16,817 15,995
----------- -----------
Income from operations 729 538
Other expenses:
Interest expense 1,930 1,450
Investment expense -- 24
----------- -----------
Total other expense 1,930 1,474
----------- -----------
Loss before income taxes (1,201) (936)
Income tax benefit -- --
----------- -----------
Net loss (1,201) (936)
Preferred stock dividends -- 32
----------- -----------
Net loss applicable to common stockholders $ (1,201) $ (968)
=========== ===========
Basic and diluted loss per common share:
Net loss applicable to common stockholders $ (0.57) $ (0.34)
=========== ===========
Weighted average shares used in
calculation 2,119,483 2,857,293
GLACIER WATER SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
Three Months Ended
------------------
March 28, March 30,
2004 2003
---- ----
Net loss $ (1,201) $ (936)
----------- -----------
Unrealized gain on securities:
Unrealized holding gain arising during the period -- 77
Less: reclassification adjustment for net
realized losses included in net loss -- 50
----------- -----------
Net unrealized gain -- 27
----------- -----------
Comprehensive loss $ (1,201) $ (909)
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
3
GLACIER WATER SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
------------------
March 28, March 30,
2004 2003
---- ----
Cash flow from operating activities:
Net loss $ (1,201) $ (936)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 2,510 2,961
Loss on disposal of assets 15 4
Net realized loss on sales of investments -- 50
Change in operating assets and
liabilities:
Accounts receivable (120) (133)
Repair parts 22 (26)
Prepaid expenses and other 67 74
Other assets 72 32
Accounts payable, accrued commissions and
accrued liabilities 209 (928)
----------- -----------
Net cash provided by operating
activities 1,574 1,098
----------- -----------
Cash flows from investing activities:
Investment in property and equipment (1,474) (861)
Proceeds from maturities of investments -- 12
----------- -----------
Net cash used in investing
activities (1,474) (849)
----------- -----------
Cash flows from financing activities:
Dividends paid -- (32)
Principal payments on line of credit and
long-term notes payable (540) (5,040)
Proceeds from line of credit and long-term notes
payable 617 --
Principal payments under capital lease
obligations (59) --
Proceeds from issuance of stock from exercise of
stock options 10 235
----------- -----------
Net cash provided by (used in)
financing activities 28 (4,837)
----------- -----------
Net increase (decrease) in cash and cash equivalent 128 (4,588)
Cash and cash equivalents, beginning of period 1,924 7,308
----------- -----------
Cash and cash equivalents, end of period $ 2,052 $ 2,720
=========== ===========
GLACIER WATER SERVICES, INC.
(in thousands)
(unaudited)
Three Months Ended
------------------
March 28, March 30,
2004 2003
---- ----
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,881 $ 1,467
=========== ===========
Cash paid for income taxes $ 3 $ --
=========== ===========
Non-cash financing activities:
Repurchase of treasury stock through the exchange
of Trust Preferred Securities previously
purchased by the Company $ -- $ (17,710)
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
4
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 28, 2004
(unaudited)
1. Basis of Presentation
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. In the opinion of the
Company's management, the accompanying consolidated financial statements reflect
all subsidiaries on a consolidated basis and all adjustments (consisting only of
normal consolidating and eliminating entries and recurring accruals) necessary
for a fair presentation of the consolidated financial position of the Company
and its subsidiaries and the consolidated results of their operations and their
cash flows for the three-month periods ended March 28, 2004 and March 30, 2003.
Although the Company believes that the disclosures in these financial statements
are adequate to make the information presented not misleading, certain
information, including footnote information, normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States has been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. Results of operations for
the three-month period ended March 28, 2004 are not necessarily indicative of
results to be expected for the full year. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 28, 2003.
2. Stock Option Plans
In December 2002, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 148, Accounting for Stock-Based Compensation - Transition
and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for fiscal years ended after December 15, 2002. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002 and are contained herein.
The Company has only adopted the disclosure provisions of SFAS No. 148.
The Company has options outstanding under the 1994 Stock Compensation
Program. The Company accounts for this plan under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, under which no compensation cost has been recognized, since the
exercise prices of the options granted were not less than the market prices of
the stock on the date of grant.
The following unaudited 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 this plan in accordance with the provisions of
SFAS No. 123:
Three Months Ended
------------------
March 28, March 30,
2004 2003
---- ----
(in thousands)
Net loss applicable to common stockholders, as
reported $ (1,201) $ (968)
----------- -----------
Deduct: Total stock-based employee compensation
expense determined under the fair value method
for all awards 175 181
----------- -----------
Pro forma net loss applicable to common stockholders $ (1,376) $ (1,149)
=========== ===========
Basic and Diluted loss per common share:
As reported $ (0.57) $ (0.34)
=========== ===========
Pro forma $ (0.65) $ (0.40)
=========== ===========
5
The fair value of the stock options were estimated at the date of grant
using the "Black-Scholes" method for option pricing and the following weighted
average assumptions were used for grants made during the three months ended,
March 28, 2004 and March 30, 2003, respectively:
Three Months Ended
------------------
March 28, March 30,
2004 2003
---- ----
Risk free interest rate 1% 1%
Dividend yield 0% 0%
Expected volatility of the company's stock 30% 31%
Weighted average expected life (in years) 8.4 8.7
3. Earnings per share
Basic net earnings per common share is computed based on the weighted
average number of common shares outstanding during the period. Diluted net
earnings per common share is computed based on the weighted average number of
common shares outstanding during the period increased by the effect of dilutive
stock options and warrants, using the treasury stock method. The computations
for basic and diluted earnings per share are as follows:
Three Months Ended
------------------
March 28, March 30,
2004 2003
---- ----
(in thousands,
except share data)
Numerator for basic earnings per share - net loss
applicable to common shareholders $ (1,201) $ (968)
----------- -----------
Denominator - shares:
Weighted average common shares for basic earnings
per share 2,119,483 2,857,293
Effect of dilutive securities -- --
----------- -----------
Dilutive potential shares for diluted earnings per
share 2,119,483 2,857,293
=========== ===========
Loss per share:
Basic and dilutive loss applicable to common
shareholders $ (0.57) $ (0.34)
=========== ===========
Potentially dilutive securities not included above
since they are antidilutive $ 255,543 $ 295,553
=========== ===========
4. Acquisitions
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
$202,000, of which $30,000 remained accrued at March 28, 2004. 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 $2,736,000 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 an average useful life of approximately 3 and 5 years. For the three months
ended March 28, 2004, the Company recorded amortization of approximately $33,000
related to the Water Island Intangible Assets.
The following unaudited pro forma information assumes that the
acquisition of Water Island occurred on December 30, 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 March 28, 2004 and March 30,
2003, or of future results of operations.
The unaudited pro forma results for the three months ended March 28,
2004 and March 30, 2003, are as follows (in thousands, except share data):
6
Three Months Ended
------------------
March 28, March 30,
2004 2003
---- ----
(in thousands)
Revenues $ 17,546 $ 19,021
----------- -----------
Net loss $ (1,201) $ (812)
----------- -----------
Pro forma net loss applicable to common stockholders $ (1,201) $ (844)
=========== ===========
Basic and Diluted loss per common share:
Net loss applicable to common stockholders $ (0.57) $ (0.30)
=========== ===========
Weighted average shares used in per common
share calculation 2,119,483 2,857,293
5. Long-Term Debt, Line of Credit and Notes Payable
Junior Subordinated Debentures
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 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 $87,629,000 of 9.0625% Junior
Subordinated Debentures (the "Subordinated Debentures") issued by the Company.
As of March 28, 2004, the Company owns 105,154 common securities of the Trust
with a carrying value of $2,629,000.
The Trust is considered a variable interest entity under FIN 46R. Prior
to FIN 46R, variable interest entities were generally consolidated by an
enterprise when the enterprise had a controlling financial interest through
ownership of a majority of voting interest in the entity. Under FIN 46R, a
variable interest entity should be consolidated by its primary beneficiary.
Because the Company is not the primary beneficiary of the Trust, the financial
statements of the Trust are no longer included in the consolidated financial
statement of the Company. FIN 46R may be adopted either by recording a
cumulative effect adjustment as of the date of the adoption, or restating prior
period financial statements. The Company opted to restate prior period financial
statements. As a result of the de-consolidation, the Company recorded its
ownership of 105,154 shares of common securities of the Trust and its ownership
of 134,295 shares of Glacier Water Trust I Preferred Securities as long-term
assets and recorded the Junior Subordinated Debentures at a face value of
$87,629,000.
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 Subordinated Debentures have a carrying value of
approximately $87,629,000 and mature on January 31, 2028, but may be redeemed at
the option of the Company at any time since January 31, 2003. Upon the repayment
of the Subordinated Debentures, the Trust Preferred Securities are subject to
mandatory redemption at the redemption price equal to the aggregate liquidation
amount of the Securities plus any accumulated and unpaid distributions. The
Company effectively provides a full and unconditional guarantee of the Trust's
obligations under the Trust Securities. The Company may cause the Trust to defer
the payment of distributions for a period not to exceed 60 consecutive months.
Distributions on the Trust Preferred Securities are payable monthly in arrears
by the Trust. 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 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 2002, 2003 or 2004. 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 then
outstanding shares of Common Stock were exchanged for a total of 787,105 Trust
Preferred Securities then held by the Company, at a ratio of one share of Common
Stock for eight-tenths of a Trust Preferred Security. As of March 28, 2004, the
Company owns 134,295 Trust Preferred Securities, which have a carrying amount of
$3,357,000.
7
Line of Credit and Notes Payable
On October 7, 2003, the Company restructured its credit facility with
City National Bank. The new $12,000,000 revolving credit facility has a maturity
date of February 1, 2009. The credit availability of this facility is reduced by
$400,000 every three months beginning February 7, 2004 until its maturity in
February 2009. The revolving credit facility initially required monthly interest
payments at the City National Bank's prime rate plus 1.00%. On March 26, 2004,
the City National Bank revised the interest rate of the revolving credit
facility to City National Bank's prime rate (4.00% per annum at March 28, 2004).
The revolving credit facility requires a quarterly unused facility fee of 0.50%
per annum. The 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 credit facility. The Company was in compliance at March
28, 2004 with all such covenants. As of March 28, 2004, there was $1,750,000
outstanding on the new credit facility, which is included in long-term notes
payable. Availability under the $12,000,000 revolving credit facility was
$9,850,000 as of March 28, 2004.
As of March 28, 2004, there was $1,088,000 outstanding under notes
payable associated with previous acquisitions. In connection with the 2002 Pure
Fill acquisition the company issued a note that was payable over 4 years in
equal quarterly payments. As of March 28, 2004, the Pure Fill note had an
outstanding balance of $320,000. The Water Island acquisition occurred in 2003
and the Company issued a note that was payable periodically over two years. As
of March 28, 2004, the note had a balance of $768,000, with $468,000 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 March 28, 2004 and March 30, 2003, respectively).
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This report contains "forward-looking" information, as that term is
defined by the federal securities laws, about our financial condition, results
of operations and business. You can find many of these statements by looking for
words such as "may", "will", "expect", "anticipate", "believe", "estimate", and
similar words used in this report. The forward-looking statements in this report
are intended to be subject to the safe harbor protection provided by the federal
securities laws.
These forward-looking statements are subject to numerous assumptions,
risks and uncertainties (including trade relations and competition) that may
cause our actual results to be materially different from any future results
expressed or implied in those statements.
Because the statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by the
forward-looking statements. We caution readers not to place undue reliance on
these statements, which speak only as of the date of this report.
The cautionary statements set forth above should be considered in
connection with any subsequent written or oral forward-looking statements that
we or persons 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.
8
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 October 7, 2003, Glacier
acquired 100% of the outstanding common stock of 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 4").
Revenues
- ---------
Revenues for the quarter ended March 28, 2004, increased $1,013,000, or
6.1%, to $17,546,000 from $16,533,000 for the same period last year. The
increase in revenues was due primarily to the additional revenues as a result of
the Water Island acquisition in the fourth quarter of 2003, offset partially by
the impact of the retail grocery strike in California which was resolved on
February 26, 2004. As of March 28, 2004, the Company had approximately 15,300
machines in operation, compared to 14,000 machines as of March 30, 2003.
Costs and Expenses
- ------------------
Operating expenses, excluding depreciation and amortization, for the
quarter ended March 28, 2004 increased to $11,676,000, or 66.5% of revenues,
compared to $10,670,000, or 64.5% of revenues, for the same period last year.
The increase in operating expenses for the three-month period ended March 28,
2004 was due primarily to servicing the additional locations acquired from Water
Island.
Depreciation and amortization expense was $2,510,000 for the quarter
ended March 28, 2004, compared to $2,961,000 for the same period last year.
Depreciation and amortization expense includes the amortization of intangible
assets and prepaid contract rights of approximately $253,000 and $611,000 for
the three-month period ended March 28, 2004 and March 30, 2003, respectively.
The decrease in depreciation and amortization expense was due primarily to some
assets becoming fully depreciated or amortized, offset partially by the addition
of the Water Island assets, which were acquired in the fourth quarter of 2003,
and new capital expenditures in the current year. The Water Island assets
generated approximately $260,000 of depreciation and amortization expense for
the quarter ended March 28, 2004. 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.
SG&A expenses for the quarter ended March 28, 2004 increased to
$2,631,000 compared to $2,364,000 of revenues for the same period last year. The
increase in SG&A expenses for the three-month period was primarily the result of
the additional costs associated with the Water Island operations compared to
last year.
Interest expense for the quarter ended March 28, 2004 increased to
$1,930,000, compared to $1,450,000 for the same period last year. The increase
in interest was due primarily to the additional interest expense of $446,000, as
a result of the increase in long-term debt outstanding due to the Exchange Offer
(see Note 5).
For the quarter ended March 28, 2004, the Company had no investment
income, compared to net investment expense totaling $24,000 for the same period
last year.
As a result of the foregoing, the Company had a loss applicable to
common stockholders of $1,201,000 for the three-month period ended March 28,
2004 compared to a loss applicable to common stockholders of $968,000 for the
same period last year.
9
Liquidity and Capital Resources
- -------------------------------
The Company's primary sources of liquidity and capital resources are
cash and cash equivalents, cash flows from operations and funds available under
the Company's credit facility. On October 7, 2003, the Company restructured its
credit facility with City National Bank. The new $12,000,000 revolving credit
facility has a maturity date of February 1, 2009. The credit availability of
this facility is reduced by $400,000 every three months beginning February 7,
2004 until its maturity in February 2009. The revolving credit facility required
monthly interest payments at the City National Bank's prime rate plus 1.00%. On
March 26, 2004, the City National Bank revised the interest rate of the
revolving credit facility to City National Bank's prime rate (4.00% per annum at
March 28, 2004). The revolving credit facility requires a quarterly unused
facility fee of 0.50% per annum. The 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 credit facility. The Company was in
compliance at March 28, 2004 with all such covenants. As of March 28, 2004,
there was $1,750,000 outstanding on the new credit facility, which is included
in long-term notes payable. Availability under the revolving credit facility was
$9,850,000 as of March 28, 2004.
As of March 28, 2004, the Company had cash and cash equivalents of
$2,052,000 and net working capital of $973,000. Net cash provided by operating
activities was $1,574,000; net cash used in investing activities was $1,474,000;
and net cash provided by financing activities was $28,000 for the three-month
period ended March 28, 2004. The Company's stockholders' deficit as of March 28,
2004 was $25,950,000, 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.
The Company believes that its cash and cash equivalents, 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.
Exchange Offer
- --------------
Pursuant to an Exchange Offer, which commenced on February 26, 2003 and
expired on April 11, 2003, a total of 983,880 then outstanding shares of Common
Stock were exchanged for a total of 787,105 Trust Preferred Securities then held
by the Company, at a ratio of one share of Common Stock for eight-tenths of a
Trust Preferred Security.
Acquisitions
- ------------
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
$202,000, of which $30,000 remained accrued at March 28, 2004. 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 $2,736,000 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 an average useful life of approximately 3 and 5 years. For the
quarter ended March 28, 2004, the Company recorded amortization of approximately
$33,000 related to the Water Island Intangible Assets.
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.
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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 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 primary beneficiary of a
variable interest entity is the entity that absorbs a majority of the variable
interest entity's expected losses, receives a majority of the variable interest
entity's expected residual returns, or both, as a result of ownership,
controlling interest, contractual relationship or other business relationship
with a variable interest entity. Prior to the implementation of FIN 46, variable
interest entities were generally consolidated by an enterprise when the
enterprise had a controlling financial interest through ownership of a majority
of voting interests in the entity. 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.
The Company adopted FIN 46, as revised ("FIN 46R"), which required the
Company to de-consolidate its investment in Glacier Water Trust I. The
application of this interpretation resulted in the Company reflecting its
ownership of the Trust and its ownership of 134,295 shares of Trust Preferred
Securities as long-term assets and increasing long-term debt by the same amount
of $5,986,000.
ITEM 3 - QUANTITATIVE AND QUALITIVE DISCLOSURE 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 $25,000 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 March 28, 2004, the Company held no marketable securities
available-for-sale.
ITEM 4 - CONTROLS AND PROCEDURES
Since March 28, 2004, 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 March 28, 2004 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.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
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 March 28, 2004, 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.
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
--------
31.1 Certification of Brian H. McInerney, Chief Executive Officer,
under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of W. David Walters, Chief Financial Officer,
under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Brian H. McInerney, Chief Executive Officer,
under Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of W. David Walters, Chief Financial Officer,
under Section 906 of the Sarbanes-Oxley Act of 2002.
b. Reports on Form 8-K
-------------------
On March 23, 2004, the Company filed a current report on Form
8-K reporting under Item 12, the issuance of a press release
disclosing the earnings for the year ended December 28, 2003.
SIGNATURES
Pursuant to the requirements 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.
Date: May 07, 2004 By: /s/ Brian H. McInerney
----------------------
Brian H. McInerney
President and Chief Executive Officer
Date: May 07, 2004 By: /s/ W. David Walters
--------------------
W. David Walters
Senior Vice President and
Chief Financial Officer
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