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: September 26, 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 (I.R.S. Employer Identification No.)
incorporation or organization)
1385 Park Center Drive, 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: 2,158,281 shares of common
stock, $.01 par value, outstanding at October 15, 2004.
1
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
GLACIER WATER SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 26, December 28,
2004 2003 *
--------------- -------------
ASSETS (unaudited)
------
Current assets:
Cash and cash equivalents $ 3,589 $ 1,924
Accounts receivable, net of allowance for doubtful accounts of $163 and
$151 as of September 26, 2004 and December 28, 2003, respectively .......... 2,589 2,118
Repair parts .................................................................. 2,403 1,718
Prepaid expenses and other .................................................... 674 1,058
--------------- -------------
Total current assets ....................................................... 9,255 6,818
Property and equipment, net ...................................................... 48,179 45,455
Goodwill ......................................................................... 6,869 6,966
Intangible assets, net ........................................................... 532 714
Investment in Glacier Water Trust I .............................................. 2,629 2,629
Investment in Glacier Water Trust I Preferred Securities ......................... 3,357 3,357
Other assets ..................................................................... 5,429 5,777
--------------- -------------
Total assets ..................................................................... $ 76,250 $ 71,716
=============== =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable .............................................................. $ 2,340 $ 1,143
Accrued commissions ........................................................... 2,298 1,713
Accrued liabilities ........................................................... 1,714 2,062
Current portion of obligations under capital lease ............................ 257 244
Current portion of long-term notes payable .................................... 601 761
--------------- -------------
Total current liabilities .................................................. 7,210 5,923
Long-term debt ................................................................... 87,629 87,629
Long-term portion of obligations under capital lease ............................. 728 923
Long-term notes payable .......................................................... 5,380 2,000
--------------- -------------
Total liabilities ................................................................ 100,947 96,475
Stockholders' deficit:
Common stock, $.01 par value; 10,000,000 shares authorized, 2,158,281 and
2,118,841 shares issued and outstanding as of September 26, 2004 and
December 28, 2003,
respectively ................................................................ 38 37
Additional paid-in capital .................................................... 18,917 18,460
Retained deficit .............................................................. (11,090) (10,694)
Treasury stock, at cost, 1,587,606 shares as of September 26, 2004 and
December 28, 2003 ........................................................... (32,562) (32,562)
---------------- --------------
Total stockholders' deficit ................................................ (24,697) (24,759)
---------------- --------------
Total liabilities and stockholders' deficit ...................................... $ 76,250 $ 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 and per share data)
(unaudited)
Three Months Ended Nine Months Ended
----------------------------- ------------------------------
September 26, September 28, September 26, September 28,
2004 2003 2004 2003
----------- ------------ ----------- -----------
Revenues ................................................... $ 21,332 $ 20,447 $ 58,123 $ 54,770
Operating costs and expenses:
Operating expenses .................................... 13,080 12,223 36,913 33,869
Depreciation and amortization ......................... 2,733 3,004 7,834 8,882
----------- ----------- ----------- -----------
Cost of goods sold ............................... 15,813 15,227 44,747 42,751
Selling, general and administrative expenses .......... 2,624 2,191 8,028 7,263
----------- ----------- ----------- -----------
Total operating costs and expenses ............... 18,437 17,418 52,775 50,014
----------- ----------- ----------- -----------
Income from operations ..................................... 2,895 3,029 5,348 4,756
Other expenses:
Interest expense ...................................... 1,909 1,855 5,744 5,093
Investment (income) expense ........................... -- (18) -- 34
----------- ------------ ----------- -----------
Total other expense ............................. 1,909 1,837 5,744 5,127
----------- ----------- ----------- -----------
Income (loss) before income taxes .......................... 986 1,192 (396) (371)
Income tax benefit ......................................... -- -- -- --
----------- ----------- ----------- -----------
Net income (loss) .......................................... 986 1,192 (396) (371)
Preferred stock dividends .................................. -- 32 -- 96
---------- ----------- ---------- -----------
Net income (loss) applicable to common stockholders ........ $ 986 $ 1,160 $ (396) $ (467)
=========== =========== ============ ============
Basic income (loss) per common share:
Net income (loss) applicable to common stockholders ... $ 0.46 $ 0.61 $ (0.19) $ (0.21)
=========== =========== =========== ===========
Weighted average shares used in calculation ..... 2,145,848 1,913,550 2,128,374 2,270,228
Diluted income (loss) per common share:
Net income (loss) applicable to common stockholders ... $ 0.38 $ 0.51 $ (0.19) $ (0.21)
=========== =========== =========== ===========
Weighted average shares used in calculation ..... 2,581,257 2,267,351 2,128,374 2,270,228
GLACIER WATER SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
Three Months Ended Nine Months Ended
---------------------------- ---------------------------
September 26, September 28, September 26, September 28,
2004 2003 2004 2003
------------ ------------ ----------- -----------
Net income (loss) .......................................... $ 986 $ 1,192 $ (396) $ (371)
----------- ----------- ----------- -----------
Unrealized gain on securities:
Unrealized holding gain arising during the period ........ -- -- -- 142
Less: reclassification adjustment for net realized losses
included in net loss ............................... -- -- -- 94
----------- ----------- ----------- -----------
Net unrealized gain ........................................ -- -- -- 48
----------- ----------- ----------- -----------
Comprehensive income (loss) ................................ $ 986 $ 1,192 $ (396) $ (323)
=========== ========== =========== ===========
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)
Nine Months Ended
----------------------------------
September 26, September 28,
2004 2003
-------- -------
Cash flow from operating activities:
Net loss .................................................................... $ (396) $ (371)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization ........................................... 7,834 8,882
Loss on disposal of assets .............................................. 261 22
Net realized loss on sales of investments ............................... -- 94
Change in operating assets and liabilities:
Accounts receivable ..................................................... (471) (75)
Repair parts ............................................................ (685) (30)
Prepaid expenses and other .............................................. 384 (203)
Other assets ............................................................ (171) (217)
Accounts payable, accrued commissions and accrued liabilities ........... 1,434 479
-------- --------
Net cash provided by operating activities .................. 8,190 8,581
-------- --------
Cash flows from investing activities:
Investment in vending equipment ............................................. (10,021) (3,881)
Proceeds from maturities of investments ..................................... -- 17
-------- --------
Net cash used in investing activities ...................... (10,021) (3,864)
-------- --------
Cash flows from financing activities:
Dividends paid .............................................................. -- (96)
Principal payments on line of credit and long-term notes payable ............ (1,998) (5,120)
Proceeds from line of credit and long-term notes payable .................... 5,218 --
Payments under capital lease obligations .................................... (182) --
Proceeds from issuance of stock from exercise of stock options .............. 458 453
-------- --------
Net cash provided by (used in) financing activities ....... 3,496 (4,763)
-------- --------
Net increase (decrease) in cash and cash equivalent ............................ 1,665 (46)
Cash and cash equivalents, beginning of period ................................. 1,924 7,308
-------- --------
Cash and cash equivalents, end of period ....................................... $ 3,589 $ 7,262
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
4
GLACIER WATER SERVICES, INC.
(in thousands)
(unaudited)
Nine Months Ended
-----------------
September 26, September 28,
2004 2003
------- --------
Supplemental disclosure of cash flow information:
Cash paid for interest .................................................. $ 5,651 $ 5,018
======= ========
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.
5
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 26, 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 adjustments 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- and nine-month periods
ended September 26, 2004 and September 28, 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 United States generally accepted accounting principles has been condensed
or omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. Results of operations for the three- and nine-month periods ended
September 26, 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 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 income (loss) and income (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:
6
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 26, 2004
(unaudited)
Three Months Ended Nine Months Ended
------------------------------ -----------------------------
September 26, September 28, September 26, September 28,
2004 2003 2004 2003
-------------- ------------ ------------ -------------
(in thousands, except per share data )
Net income (loss) applicable to common stockholders,
as reported ................................................... $ 986 $ 1,160 $ (396) $ (467)
-------------- ------------ ------------ -----------
Deduct: Total stock-based employee compensation
expense determined under the fair value method for
all awards .................................................... (55) (198) (284) (648)
--------------- ------------- ------------ -----------
Pro forma net income (loss) applicable to common stockholders $ 931 $ 962 $ (680) $ (1,115)
============== ============ ============ ===========
Basic income (loss) per common share:
As reported ................................................... $ 0.46 $ 0.61 $ (0.19) $ (0.21)
============== ============ ============ ===========
Pro forma ..................................................... $ 0.43 $ 0.50 $ (0.32) $ (0.49)
============== ============ ============ ===========
Diluted income (loss) per common share:
As reported ................................................... $ 0.38 $ 0.51 $ (0.19) $ (0.21)
============== ============ ============ ===========
Pro forma ..................................................... $ 0.36 $ 0.42 $ (0.32) $ (0.49)
============== ============ ============ ===========
The fair value of the stock options was 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- and nine-month
periods ended September 28, 2003. The Company's Stock Option Program expired in
March 2004 and no options were issued during the three- and nine-month periods
ended September 26, 2004.
Three Months Ended Nine Months Ended
September 28, 2003 September 28, 2003
------------------ ------------------
Risk free interest rate 0.93% 1.04%
Dividend yield 0% 0%
Expected volatility of the company's stock 28.8% 25.1%
Weighted average expected life (in years) 10.0 9.2
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:
7
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 26, September 28, September 26, September 28,
2004 2003 2004 2003
-------------- ------------ ------------ ---------
(in thousands except share and per share data)
Numerator for basic earnings per share - net income (loss)
applicable to common shareholders ............................ $ 986 $ 1,160 $ (396) $ (467)
-------------- ------------ ------------ ----------
Denominator - shares:
Weighted average common shares for basic
earnings per share .................................... 2,145,848 1,913,550 2,128,374 2,270,228
Effect of dilutive securities ........................... 435,409 353,801 -- --
-------------- ------------ ------------ ---------
Dilutive potential shares for diluted earnings per share ..... 2,581,257 2,267,351 2,128,374 2,270,228
============== ============ ============ =========
Income (loss) per share:
Basic income (loss) applicable to
common shareholders ..................................... $ 0.46 $ 0.61 $ (0.19) $ (0.21)
============== ============ ============ =========
Dilutive income (loss) applicable to
common shareholders ..................................... $ 0.38 $ 0.51 $ (0.19) $ (0.21)
============== ============ ============ =========
Potentially dilutive securities not included above since
they are antidilutive ........................................ -- -- 406,832 612,673
============== ============ ============ =========
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 none remained accrued at September 26, 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 $2,739,000 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 month
period ended September 26, 2004, the Company recorded amortization related to
the Water Island Intangible Assets of approximately $33,000.
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 as of December 30, 2002, or of future results of
operations.
The table below presents the actual results for the three- and nine-month
periods ended September 26, 2004 and the unaudited pro forma results for the
three- and nine-month periods ended September 28, 2003 respectively:
8
Three Months Ended Nine Months Ended
------------------------------ -----------------------------
September 26, September 28, September 26, September 28,
2004 2003 2004 2003
------------- ------------ ------------ -----------
Proforma Proforma
(in thousands, except share and per share data)
Revenues ...................................................... $ 21,332 $ 23,454 $ 58,123 $ 62,795
------------- ------------ ------------ -----------
Net income (loss) ............................................. $ 986 $ 1,157 $ (396) $ (448)
------------- ------------ ------------- -----------
Pro forma net loss applicable to common stockholders .......... $ 986 $ 1,125 $ (396) $ (544)
============= ============ ============= ===========
Basic income (loss) per common share:
Net income (loss) applicable to common stockholders ...... $ 0.46 $ 0.59 $ (0.19) $ (0.24)
============= ============ ============ ===========
Weighted average shares used in per common
share calculation ................................... 2,145,848 1,913,550 2,128,374 2,270,228
Diluted income (loss) per common share:
Net income (loss) applicable to common stockholders ...... $ 0.38 $ 0.50 (0.19) (0.24)
============= ============ ============ ==========
Weighted average shares used in per common
share calculation ................................... 2,581,257 2,267,351 2,128,374 2,270,228
5. LONG-TERM DEBT AND LINE OF CREDIT
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, which are guaranteed
by the Company, 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 September 26, 2004, the
Company owned 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 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 statements 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 has 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 has recorded the
Junior Subordinated Debentures at a face value of $87,629,000.
9
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 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 acquired by the Company in exchange 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 September 26, 2004, the Company owned 134,295 Trust Preferred
Securities, which have a carrying amount of $3,357,000.
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 (4.75% per annum at September 26,
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
September 26, 2004 with all such covenants. As of September 26, 2004, there was
$5,000,000 outstanding on the new credit facility, which is included in
long-term notes payable. Availability under the $12,000,000 revolving credit
facility was $5,800,000 as of September 26, 2004.
As of September 26, 2004, there was $981,000 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 September 26, 2004, the Pure Fill note had an
outstanding balance of $240,000. The Water Island acquisition occurred in 2003
and the Company issued a note that was payable periodically over two years. As
of September 26, 2004, the note had a balance of $741,000, with $441,000 due by
October 2004 and the remaining $300,000 due on the anniversary date of the
acquisition in October 2005. Amounts due after September 26, 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 (4.75% and 4.0% per annum
at September 26, 2004 and September 28, 2003, respectively).
10
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.
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 of the financial statements).
During the nine-month period ended September 26, 2004, the Company
initiated a major initiative to upgrade its outside water vending machines. The
upgrade results in the next generation machine ("G-2") with a new modern
appearance and increased functionality such as dollar bill validators,
multi-vend capability, a replaceable stainless steel vend chamber and
replaceable Lexan panels. The Company plans to complete the upgrade of
approximately 11,000 outside machines over the next 12 months. The Company
expects that it will expend a total of approximately $22,000,000 in connection
with this major upgrade initiative. The initiative is such that the Company has
the ability to time these expenditures with the availability of its cash flows
from operations and availability under its credit facility. As of September 26,
2004, the Company had upgraded approximately 3,300 machines.
12
Revenues
Revenues for the quarter ended September 26, 2004 increased $885,000, or
4.3%, to $21,332,000 from $20,447,000 for the same period last year. Revenues
for the nine-month period ended September 26, 2004 increased $3,353,000, or
6.1%, to $58,123,000 from $54,770,000 for the same period last year. As of
September 26, 2004, the Company had approximately 15,200 machines in operation,
compared to 14,000 machines as of September 28, 2003. The increase in revenues
for the three- and nine-month periods was due primarily to additional revenues
as a result of the Water Island acquisition in the fourth quarter of 2003,
offset partially by the impact of the cooler than normal summer in California
and the negative impact of hurricanes Charley, Frances, Ivan, and Jeanne, which
temporarily shut down several hundred of the Company's machines. All machines
have since been put back into service. The Company is unable to calculate the
exact impact the hurricanes had on current year revenues.
Costs and Expenses
Operating expenses, excluding depreciation and amortization, for the
quarter ended September 26, 2004 increased to $13,080,000, or 61.3% of revenues,
compared to $12,223,000, or 59.8% of revenues, for the same period last year.
Operating expenses, excluding depreciation and amortization, for the nine-month
period ended September 26, 2004 increased to $36,913,000, or 63.5% of revenues,
compared to $33,869,000, or 61.8% of revenues, for the same period last year.
The increase in operating expenses for the three- and nine-month periods ended
September 26, 2004 was due primarily to the increased costs to service the
additional locations acquired from Water Island during the fourth quarter last
year. The Company's operating costs are not completely linear or variable to
sales and as such, significant fluctuations in revenues impacts the operating
costs as a percentage of revenues.
Depreciation and amortization expense was $2,733,000 for the quarter ended
September 26, 2004, compared to $3,004,000 for the same period last year.
Depreciation and amortization expense includes the amortization of intangible
assets and prepaid contract rights of approximately $271,000 and $524,000 for
the three-month period ended September 26, 2004 and September 28, 2003,
respectively. Depreciation and amortization expense was $7,834,000 for the
nine-month period ended September 26, 2004, compared to $8,882,000 for the same
period last year. Depreciation and amortization expense includes the
amortization of intangible assets and prepaid contract rights of approximately
$810,000 and $1,710,000 for the nine-month period ended September 26, 2004 and
September 28, 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 $193,000 of
depreciation and amortization expense for the quarter and $771,000 for the
nine-month period ended September 26, 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 September 26, 2004 increased to
$2,624,000, or 12.3% of revenues, compared to $2,191,000, or 10.7% of revenues,
for the same period last year. SG&A expenses for the nine-month period ended
September 26, 2004 increased to $8,028,000, or 13.8% of revenues, compared to
$7,263,000, or 13.3% of revenues, for the same period last year. The increase in
SG&A expenses for both the three- and nine-month periods ended September 26,
2004 was the result of additional costs associated with the Water Island
operations offset by a $263,000 reduction in legal expenses primarily associated
with the settlement of certain claims against the Company last year.
13
Interest expense for the quarter ended September 26, 2004 increased $54,000
to $1,909,000, compared to $1,855,000 for the same period last year. The
increase in interest expense was primarily due to additional interest associated
with higher outstanding borrowing on the credit facility compared to last year.
Interest expense for the nine-month period ended September 26, 2004 increased
$651,000 to $5,744,000, compared to $5,093,000 for the same period last year.
The increase in interest expense was attributed to $500,000 of additional
interest associated with the Exchange Offer (see Note 5 of the financial
statements) and $151,000 of additional interest associated with higher
outstanding borrowing on the credit facility compared to last year.
For the quarter ended September 26, 2004, the Company had no investment
income, compared to net investment income totaling $18,000 for the same period
last year. For the nine-month period ended September 26, 2004, the Company had
no investment income, compared to net investment expense totaling $34,000 for
the same period last year.
As a result of the foregoing, the Company had income applicable to common
stockholders of $986,000 for the three-month period ended September 26, 2004
compared to $1,160,000 for the same period last year. For the nine-month period
ended September 26, 2004, the Company had a loss applicable to common
stockholders of $396,000 compared to a loss applicable to common stockholders of
$467,000 for the same period last year.
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 (4.75% per annum at
September 26, 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 as of September 26, 2004 with all such covenants. As of September 26,
2004, there was $5,000,000 outstanding on the new credit facility, which is
included in long-term notes payable. Availability under the revolving credit
facility was $5,800,000 as of September 26, 2004.
As of September 26, 2004, the Company had cash and cash equivalents of
$3,589,000 and net working capital of $2,045,000. Net cash provided by operating
activities was $8,190,000; net cash used in investing activities was
$10,021,000; and net cash provided by financing activities was $3,495,000 for
the nine-month period ended September 26, 2004. The Company's stockholders'
deficit as of September 26, 2004 was $24,697,000, 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.
14
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 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 none remained
accrued at September 26, 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 $2,739,000 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- and
nine-month periods ended September 26, 2004, the Company recorded amortization
of $33,000 and $99,000 related to the Water Island Intangible Assets.
Recent Accounting Pronouncements
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 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.
FASB Statement No. 132 (revised), Employers' Disclosures about Pensions and
Other Postretirement Benefits ("FASB 132"). FASB 132 (revised), revises
employers' disclosures about pension plans and other postretirement benefit
plans. It does not change the measurement or recognition of those plans. FASB
132 (revised) will retain and revise the disclosure requirements contained in
the original FASB 132. It also requires additional disclosures about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and other postretirement benefit plans. FASB 132 generally is
effective for fiscal years ending after December 15, 2003. The application of
FASB 132 did not have a material effect on the consolidated financial
statements.
15
ITEM 3 - QUANTITATIVE AND QUALITIVE DISCLOSURE ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk. The
principal objectives of our asset/liability management activities are to
minimize debt and maximize net investment income, while maintaining acceptable
levels of interest rate risk and facilitating our funding needs. Our net
investment income and interest expense are subject to the risk of interest rate
fluctuations. 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 annual interest on the outstanding borrowings of the bank debt
and impacting the future earnings 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 of the Trust Preferred
Securities approximates the Company's long-term market rate. As of September 26,
2004, the Company held no marketable securities available-for-sale.
ITEM 4 - CONTROLS AND PROCEDURES
Since September 26, 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 September 26, 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 during the latest fiscal quarter 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 September 26, 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.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECUITY HOLDERS
There were no matters submitted to a vote of the security holders during
the quarter ended September 26, 2004.
16
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 August 6, 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
quarter ended June 27, 2004.
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: October 27, 2004 By: /s/ Brian H. McInerney
------------------------------------------
Brian H. McInerney
President and Chief Executive Officer
Date: October 27, 2004 By: /s/ W. David Walters
------------------------------------------
W. David Walters
Senior Vice President and
Chief Financial Officer
17