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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: January 2, 2005
[ ] 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.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 33-0493559
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1385 Park Center Drive
Vista, CA 92081
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (760) 560-1111
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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. [X]
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 $18,118,824 (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 March 1, 2005 the registrant had 2,173,518 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 2005 Annual Meeting of Stockholders, which will be filed with
the Securities and Exchange Commission within 120 days after the close of the
2004 fiscal year.
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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
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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 January 2, 2005,
the Company had approximately 11,400 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
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The bottled water market in the United States is estimated at $11 billion
in wholesale sales or approximately 6.5 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 volume of three retail chains accounted
for 12.7%, 11.6%, and 11.2% of the Company's fiscal 2004 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
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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 12,700 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
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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. The loss of any significant
retail account to a competitor could have a material adverse impact on the
Company's financial position.
Seasonality
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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
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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. As part of the
Water Island acquisition, Glacier acquired the "Water Island" trademark.
Government Regulation
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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 January 2, 2005, the Company had 348 employees, including 66 in
warehousing, administration and sales and 282 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 46,000 square feet of executive offices
and warehouse space in Vista, California for its corporate offices with a lease
that expires in March 2010. The Company also leases various other facilities for
area service centers. These leases range in size from approximately 1,200 to
20,200 square feet and expire on various dates from February 2005 through March
2010.
Item 3. 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 January 2, 2005, the Company was not a party to any legal proceeding that is
likely to reasonably have a material impact on the results of operations,
financial condition or liquidity of the Company.
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 2004.
5
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.
High Low High Low
2003 ---- --- 2004 ---- ---
---- ----
First Quarter $ 17.80 $ 13.81 First Quarter $ 22.00 $ 19.74
Second Quarter 17.78 14.10 Second Quarter 20.95 17.65
Third Quarter 20.25 15.45 Third Quarter 21.80 18.06
Fourth Quarter 21.90 19.35 Fourth Quarter 28.75 20.75
The Company did not pay dividends on its Common Stock in 2004 or 2003 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 January 2,
2005.
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.
The Company did not pay any dividends associated with the Preferred Stock
during the year ended January 2, 2005 as compared to $96,000 for the year ended
December 28, 2003.
Item 6. Selected Financial Data
The following sets forth selected financial data as of and for the periods
presented. The Company utilizes a fiscal year of 52 or 53 weeks ending on the
Sunday closest to December 31st. The fiscal year ended January 2, 2005 consisted
of 53 weeks or 371 days. The fiscal years ended December 28, 2003 and December
29, 2002 each contained 52 weeks or 364 days. This data should be read in
conjunction with the Consolidated Financial Statements and the accompanying
Notes thereto and other financial information appearing elsewhere in this Annual
Report.
6
Statements of Operations Data
(in thousands, except share and per share data) Fiscal Year Ended
----------------------------------------------------------
Jan. 2, Dec. 28, Dec. 29, Dec. 30, Dec. 31,
2005 2003 2002 2001 2000
---- ---- ---- ---- ----
Revenues..................................................... $ 76,261 $ 72,316 $ 71,029 $ 60,345 $ 59,176
Operating costs and expenses:
Operating expenses........................................ 48,614 44,222 44,698 38,444 38,482
Depreciation and amortization............................. 11,533 12,612 12,368 12,358 12,066
---------- ---------- ---------- ---------- ----------
Cost of goods sold.................................... 60,147 56,834 57,066 50,802 50,548
Selling, general and administrative expenses.............. 10,611 9,956 9,777 9,275 8,838
Integration and restructuring costs....................... -- -- 1,364 -- 1,400
---------- ---------- ---------- ---------- ----------
Total operating costs and expenses.................... 70,758 66,790 68,207 60,077 60,786
---------- ---------- ---------- ---------- ----------
Income (loss) from operations................................ 5,503 5,526 2,822 268 (1,610)
Other (income) expenses:
Interest expense.......................................... 7,860 7,016 5,968 5,993 7,016
Investment (income) expense, net.......................... -- (90) 20 (227) 1,570
Gain on early retirement of debt (1)...................... -- -- -- (4) (4,198)
---------- ---------- ---------- ---------- ----------
Total other expenses.................................. 7,860 6,926 5,988 5,762 4,388
---------- ---------- ---------- ---------- ----------
Loss before income taxes..................................... (2,357) (1,400) (3,166) (5,494) (5,998)
Income tax benefit........................................... -- -- (593) -- --
---------- ---------- ---------- ---------- ----------
Net loss..................................................... (2,357) (1,400) (2,573) (5,494) (5,998)
Preferred dividends.......................................... -- 96 128 66 --
---------- ---------- ---------- ---------- ----------
Net loss applicable to common stockholders................... $ (2,357) $ (1,496) $ (2,701) $ (5,560) $ (5,998)
========== ========== ========== ========== ==========
Basic and diluted loss per common share:
Loss applicable to common stockholders..................... $ (1.10) $ (0.68) $ (0.95) $ (1.96) $ (2.11)
========== ========== ========== ========== ==========
Weighted average shares used in calculation............... 2,136,508 2,185,761 2,843,217 2,834,474 2,836,965
Selected Balance Sheet Data
(in thousands) As of
----------------------------------------------------------
Jan. 2, Dec. 28, Dec. 29, Dec. 30, Dec. 31,
2005 2003 2002 2001 2000
---- ---- ---- ---- ----
Cash, cash equivalents, and investments,
available-for-sale.......................................... $ 2,256 $ 1,924 $ 7,911 $ 2,740 $ 4,623
Total assets (2)............................................. $ 79,500 $ 71,716 $ 72,710 $ 69,126 $ 80,602
Long-term debt, notes payable and capital lease,
including current portion (2)............................... $ 99,052 $ 91,557 $ 73,471 $ 67,951 $ 75,741
Stockholders' equity (deficit)............................... $ (26,627) $ (24,759) $ (6,266) $ (3,866) $ 232
(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.
(2) In accordance with interpretation No. 46, Consolidation of Variable
Interest Entities, as revised ("FIN 46R"), the Company has reflected its
ownership of Trust Securities and increased total assets and long-term debt by
the same amount of $5,986,000 (see "Note 4" to the consolidated financial
statements).
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
------------------------------
Jan. 2, Dec. 28, Dec. 29,
2005 2003 2002
---- ---- ----
Revenues........................................ 100.0% 100.0% 100.0%
Operating costs and expenses:
Operating expenses......................... 63.7 61.2 62.9
Depreciation and amortization.............. 15.1 17.4 17.4
------- ------- -------
Cost of goods sold..................... 78.8 78.6 80.3
Selling, general and administrative
expenses.................................. 13.9 13.8 13.8
Integration and restructuring costs........ -- -- 1.9
------- ------- -------
Total costs and expenses............... 92.7 92.4 96.0
------- ------- -------
Income from operations.......................... 7.3 7.6 4.0
Other expenses:
Interest expense........................... 10.3 9.6 8.4
Investment income.......................... -- (0.1) --
------- ------- -------
Total other expenses................... 10.3 9.5 8.4
------- ------- -------
Loss before income taxes........................ (3.0) (1.9) (4.4)
Income tax benefit.............................. -- -- (0.8)
------- ------- -------
Net loss........................................ (3.0)% (1.9)% (3.6)%
======== ======== ========
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").
During the year ended January 2, 2005, 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 fiscal 2005. 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 January 2, 2005, the Company had upgraded
approximately 5,100 machines at a total expenditure of approximately
$10,000,000.
8
Revenues
- --------
Revenues for fiscal year 2004 increased 5.5% to $76,261,000 from
$72,316,000 in fiscal year 2003. The increase in revenues for the twelve month
period was driven primarily by additional revenues as a result of the Water
Island acquisition in the fourth quarter of 2003 and the fact that Fiscal Year
2004 was a 53 week year as compared to 52 weeks for the prior year, offset
partially by the impact of the unusually heavy rainfall and cooler temperatures
across the United States, the impact of the grocery strike in California during
the first quarter of 2004, and the negative impact of hurricanes Charley,
Frances, Ivan, and Jeanne which temporarily shut down several hundred of the
Company's machines during the third and fourth quarters of 2004. 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. The Company recorded
revenues of approximately $1,116,000 associated with the 53rd week. As of
January 2, 2005, the Company had approximately 15,300 machines in operation,
compared to 15,500 machines at December 28, 2003. Revenues for the fiscal year
2003 increased 1.8% to $72,316,000 from $71,029,000 in fiscal 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.
Costs and Expenses
- ------------------
Operating expenses, excluding depreciation and amortization, for the fiscal
year ended January 2, 2005 increased to $48,614,000 from $44,222,000 for fiscal
year 2003. This increase was due to the integration of Water Island into the
Glacier operations during the fourth quarter 2003. Due to the immediate
integration of the Water Island operations with the Glacier operations, 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
63.7% for fiscal 2004 compared to 61.2% for the prior year. A large portion of
the Company's operating costs are somewhat fixed, and therefore are not
completely linear or variable to sales; accordingly, significant fluctuations in
revenues affect operating costs as a percentage of revenues. 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 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 in 2003 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.
Depreciation and amortization expense for the fiscal year ended January 2,
2005 decreased to $11,533,000, compared to $12,612,000 for the same period the
prior year. 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 $1,045,000 of depreciation and
amortization expense for the period ended January 2, 2005 compared to
approximately $380,000 for the fourth quarter of 2003. The Company currently has
sufficient machines in storage available for deployment in fiscal 2005. Machines
that have been previously installed and are in storage awaiting redeployment are
currently being depreciated.
Depreciation and amortization expense for fiscal year ended December 28,
2003 increased to $12,612,000, compared to $12,368,000 for the prior 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 some assets becoming fully depreciated.
Depreciation and amortization expense includes the amortization of
intangible assets and prepaid contract rights of approximately $1,891,000,
$2,296,000, and $2,587,000 for years ended January 2, 2005, December 28, 2003,
and December 29, 2002, respectively. The decrease in amortization expense each
year compared to the previous year was due primarily to some intangible assets
and prepaid contract rights becoming fully amortized.
9
SG&A expenses for fiscal 2004 increased $655,000 to $10,611,000, or 13.9%
of revenues, compared to $9,956,000, or 13.8% of revenues, in fiscal 2003. The
increase in SG&A expenses in fiscal 2004 compared to 2003 was primarily due to
the addition of the Water Island operations. SG&A expenses for fiscal 2002 were
$9,777,000 or 13.8% of revenues. The increase in SG&A expenses in fiscal 2003
compared to fiscal 2002 was primarily due to the payment of approximately
$405,000 in settlement of an action brought against Glacier by the Environmental
Law Foundation, and was partially offset by reductions in various other SG&A
expenses.
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. There were no restructuring
costs recorded associated with the Water Island acquisition.
As a result of the above, income from operations decreased slightly to
$5,503,000 for the year ended January 2, 2005, compared to $5,526,000 for the
year ended December 28, 2003, which was up from $2,822,000 for the year ended
December 29, 2002.
Interest expense for fiscal year 2004 increased to $7,860,000, compared to
$7,016,000 in fiscal 2003. The increase was primarily due to additional interest
of approximately $514,000 associated with the increase in long-term debt
outstanding as a result of the Exchange Offer and additional interest of
approximately $290,000 associated with higher outstanding borrowing on the
credit facility and approximately $40,000 of additional interest associated with
capital lease obligations. Interest expense for fiscal 2002 was $5,968,000.
The Company had no investments at January 2, 2005 or at December 28, 2003.
For the year ended January 2, 2005, the Company had no investment income,
compared to net investment income of $90,000 for the year ended December 28,
2003 and net realized loss on investments of $20,000 for the year ended December
29, 2002. For fiscal year 2003, the investment income 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. During fiscal years 2002 through 2004, investments were managed by
Kayne Anderson Capital Advisors, L.P., a related party.
Due to the uncertainty of the utilization of the net operating loss in
future periods, no tax benefit was recorded for fiscal years 2004 and 2003. 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.
For fiscal year 2004, the Company incurred a loss applicable to common
stockholders of $2,357,000, or $1.10 per basic and diluted common share,
compared to a loss of $1,496,000, or $0.68 per basic and diluted common share,
in 2003 and $2,701,000, or $0.95 per basic and diluted common share, in 2002.
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 had a maturity
date of February 1, 2009. The credit availability on the new revolving credit
facility was reduced by $400,000 every three months beginning February 7, 2004
until its maturity in February 2009. The credit facility required monthly
interest payments at the City National Bank's prime rate plus 1.00%. The new
credit facility required a quarterly unused facility fee of 0.50% per annum, and
contained certain customary financial covenants which restricted indebtedness
and capital expenditures. On March 26, 2004, the City National Bank reduced the
interest rate on the revolving credit facility to City National Bank's prime
rate. All other terms on the credit facility remained the same.
On December 1, 2004, City National Bank increased the availability on the
credit facility to $25,000,000. The revised credit facility requires monthly
interest payments at the City National Bank's prime rate (5.25% per annum at
January 2, 2005). The revolving credit facility requires a quarterly unused
facility fee of 0.50% per annum and continues to contain 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
January 2, 2005 with all such covenants. The credit availability on the revised
revolving credit facility is reduced by $1,500,000 every three months beginning
January 1, 2006 until its maturity in February 2009. As of January 2, 2005,
there was $10,000,000 outstanding on the credit facility, which is included in
long-term notes payable. Availability under the $25,000,000 revolving credit
facility was $15,000,000 as of January 2, 2005.
For fiscal 2004, net cash provided by operations was approximately
$9,066,000. The Company made capital investments in vending machines and other
equipment of approximately $16,830,000, up from $5,013,000 in the previous year,
which was associated primarily with the upgrade of the outside coin machines and
$5,366,000 cash paid to acquire Water Island (net of cash acquired). Net cash
provided by financing activities was approximately $8,096,000. As of January 2,
2005, the Company had working capital of $400,000. Because the Company does not
have significant 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
January 2, 2005 was $26,627,000, 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.
During the year ended January 2, 2005, 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 fiscal 2005. 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 January 2, 2005, the Company had upgraded
approximately 5,100 machines at a total expenditure of approximately
$10,000,000.
The Subordinated Debentures are unsecured obligations of the Company to the
trust and are subordinate and junior in right of payment to other indebtedness
of the Company. The Trust relies on payments on the Subordinated Debentures to
make distributions on the Trust Preferred Securities. 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 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 Trust
Preferred Securities (equivalent to $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.
11
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 Common Trust
Securities and its ownership of 134,295 shares of Trust Preferred Securities as
long-term assets and has recorded the Junior Subordinated Debentures as
long-term debt at a face value of $87,629,000. At January 2, 2005 and December
28, 2003, there were 3,265,705 Trust Preferred Securities outstanding (other
than the 134,295 held by the Company).
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. 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. As a result, there has been no
Cumulative Redeemable Preferred Stock outstanding since September 30, 2003. The
Company recorded dividends associated with the Cumulative Redeemable Preferred
Stock of $96,000 and $128,000 for the years ended December 28, 2003 and December
29, 2002, respectively
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 amounts due under the Subordinated Debentures
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:
2005 2006 2007 2008 2009 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Operating leases $ 862 $ 777 $ 654 $ 491 $ 438 $ -- $ 3,222
Capital leases 262 661 -- -- -- -- 923
Notes payable 460 40 -- 3,000 7,000 -- 10,500
Long-term debt -- -- -- -- -- 87,629 87,629
--------- --------- --------- --------- --------- --------- ----------
Total $ 1,584 $ 1,478 $ 654 $ 3,491 $ 7,438 $ 87,629 $ 102,274
========= ========= ========= ========= ========= ========= ==========
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 future payments due to the fact that they are
based on future revenues.
Off-Balance Sheet Arrangements
- ------------------------------
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
- -----------------------------
FASB Statement No. 132 (revised), Employers' Disclosures about Pensions and
Other Postretirement Benefits. 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.
12
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 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.
In December 2003, FASB issued Interpretation No. 46R, Consolidation of
Variable Interest Entities ("FIN 46R"), 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. FIN 46R 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 Trust Securities as long-term assets and
increasing long-term debt by the same amount of $5,986,000 (see "Note 4"). The
Company chose to restate prior year's consolidated balance sheet to conform to
the current year presentation, in accordance with the transition provisions of
FIN 46R.
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123R (SFAS 123R),
"Share-Based payment", which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation" and supercedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees." SFAS 123R requires compensation costs related to share-based payment
transactions to be recognized in the financial statements. With limited
exception, the amount of compensation cost is measured based on the grant date
fair value of the equity or liability instruments used. SFAS 123R requires
liability awards to be re-measured each reporting period and compensation costs
to be recognized over the period that an employee provides service in exchange
for the award. SFAS123R is effective beginning the first interim or annual
reporting period that begins after June 15, 2005. The Company plans to adopt the
provisions of SFAS 123R prospectively during the third quarter of 2005. The
Company's Stock Option Program expired in March 2004 and no options were issued
during the year ended January 2, 2005. The Company expects that this adoption to
result in additional compensation expense in the Company's consolidated
financial statements. The Company is currently determining the effect of SFAS
123R on the Company's consolidated financial statements.
13
In November 2004, the FASB issued FASB Statement No. 151, Inventory Costs:
an amendment of ARB No. 43, which establishes standards for the accounting for
unexpected production defects and waste and the impact on capitalized inventory
costs. FASB No. 151 is effective for financial statements for fiscal years
beginning after June 15, 2005. The Company does not expect that the adoption of
FASB 151 will have a material impact on the consolidated financial statements.
In November 2004, the FASB issued FASB Statement No. 152, Accounting for
Real Estate Time-Sharing Transactions - an amendment of FASB Statements No. 66
and No. 67. The Statement amends FASB No. 66, Accounting for Sales of Real
Estate, to reference the financial accounting and reporting guidance for real
estate time-sharing transactions that is provided in AICPA Statement of Position
(SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement
also amends FASB Statement No. 67, Accounting for Costs and Initial Rental
Operations of Real Estate Projects, to state that the guidance for (a)
incidental operations and (b) costs incurred to sell real estate projects does
not apply to real estate time-sharing transactions. FASB No. 152 is effective
for financial statements for fiscal years beginning after June 15, 2005. The
Company does not expect that the adoption of FASB 152 will have a material
impact on the consolidated financial statements.
In November 2004, the FASB issued FASB Statement No. 153, Exchanges of
Nonmonetary Assets - an amendment of APB Opinion No. 29. The guidance in APB
Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. The guidance in that Opinion, however,
included certain exceptions to that principle. This Statement amends Opinion 29
to eliminate the exception for nonmonetary exchanges of similar productive
assets that do not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. FASB No. 153 is effective for
financial statements for fiscal periods beginning after June 15, 2005. The
Company does not expect that the adoption of FASB 153 will have a material
impact on the consolidated financial statements.
Impact of Inflation
- -------------------
The primary inflationary factors affecting the Company's operation include
labor and other operating expenses. The Company does not believe that inflation
has materially affected earnings during the past three years. Substantial
increases in costs and 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 15,300 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 January 2, 2005,
December 28, 2003 and December 29, 2002, the Company recorded approximately
$1,846,000, $2,284,000 and $1,446,000, respectively, of such estimated revenues,
which represents an average of approximately 11 days, 13 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.
14
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 creditworthiness. 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 $2,677,000 and the allowance for doubtful accounts was
$201,000 at January 2, 2005. 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 $2,403,000 at January 2, 2005.
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 January 2, 2005 and has determined that no
impairment existed as of that date. The net book value of goodwill totaled
$6,869,000 as of January 2, 2005.
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 triggering events for the impairment of
long-lived assets. The impairment analysis requires the use of assumptions and
judgments regarding the carrying value and estimated lives 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.
15
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 January
2, 2005, the net book value of identifiable intangible assets that are subject
to amortization totaled $475,000 and the net book value of property and
equipment total $52,370,000.
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 January 2, 2005, 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 January 2,
2005, the Company had federal and California net operating loss carryforwards of
$30,110,000 and $10,556,000, respectively, which will begin to expire in 2012
and 2005 for federal and state income tax purposes, respectively, and a full
valuation allowance against these carryforwards.
Risk
- ----
The Company's business can be affected by many important factors. Among
these, are changes in consumer tastes, national, regional and local economic and
political conditions, demographic trends, and the impact on consumer habits as a
result of new information regarding diet, nutrition and health. The Company's
performance may be adversely affected by factors such as traffic patterns,
demographics and the type, number and location of retail stores and competitors.
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. Changes in accounting policies and practices and the
financial impact of complying with The Sarbanes-Oxley Act of 2002 could have a
material adverse effect on the Company's financial condition and results of
operations. The costs and other effects of legal claims by employees,
franchisees, customers, vendors, stockholders and others, including settlement
of those claims; and the effectiveness of management strategies and decisions
could have a material adverse effect on the Company's financial condition and
results of operations.
The Company intends to grow primarily by developing additional business
opportunities through new placements in existing and new market areas.
Development involves substantial risks, including the risk of (i) the
availability of financing at acceptable rates and terms, (ii) costs associated
with the development of infrastructure in new market areas, (iii) the inability
to obtain all required governmental permits, (iv) changes in governmental rules,
regulations, and interpretations and (v) general economic and business
conditions. Although we intend to manage our development to reduce such risks,
we cannot assure you that present or future development will perform in
accordance with our expectations. Our inability to expand in accordance with our
plans or to manage our growth could have a material adverse effect on our
results of operations and financial condition.
Because our business is regional, with a substantial portion of the
Company's customer base located in the states of California, Texas and Florida,
the economic conditions, state and local government regulations and weather
conditions affecting those states may have a material impact upon our results.
16
The Company cannot provide assurance that it will be able to successfully
expand or acquire critical market presence for our brand in new geographical
markets, as we may encounter competitors with substantially greater financial
resources. We may be unable to find attractive locations, acquire name
recognition, successfully market our products and attract new customers.
Competitive circumstances and consumer characteristics in new geographical
markets may differ substantially from those in the geographical markets in which
we have substantial experience. We cannot assure you that we will be able to
successfully integrate or profitably operate new acquisitions in new
geographical markets.
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 earnings of the Company by less than $55,000 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 January 2, 2005, 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 Report of Independent Registered Public Accounting Firm, KPMG LLP,
are set forth on pages 19 through 39 after Part IV of this report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Since January 2, 2005, 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 January 2, 2005 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 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 2005 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission no
later than 120 days after January 2, 2005.
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference
to the Company's definitive proxy statement for the 2005 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission no
later than 120 days after January 2, 2005.
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 2005 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission no
later than 120 days after January 2, 2005.
17
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 2005 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission no
later than 120 days after January 2, 2005.
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 2005 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission no
later than 120 days after January 2, 2005.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents Filed with Report
---------------------------
1. Consolidated Financial Statements
---------------------------------
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at January 2, 2005 and December 28,
2003
Consolidated Statements of Operations for the fiscal years
ended January 2, 2005, December 28, 2003, and December 29,
2002
Consolidated Statements of Comprehensive Loss for the fiscal
years ended January 2, 2005, December 28, 2003, and December
29, 2002
Consolidated Statements of Stockholders' Deficit for the fiscal
years ended January 2, 2005, December 28, 2003, and December
29, 2002
Consolidated Statements of Cash Flows for the fiscal years
ended January 2, 2005, December 28, 2003, and December 29,
2002
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
----------------------------
Report of Independent Registered Public Accounting Firm on
Supplementary Schedule
Schedule II - Valuation and Qualifying Accounts
3. Exhibits
--------
The exhibits listed on the accompanying Index to Exhibits are
filed as part of this report.
(b) Reports on Form 8-K
-------------------
On November 4, 2004, the Company filed a current report on Form
8-K reporting earnings under Item 2.02.
Index
-----
Page
Consolidated Financial Statements Number
- --------------------------------- ------
Report of Independent Registered Public Accounting Firm 19
Consolidated Balance Sheets at January 2, 2005 and
December 28, 2003 20
Consolidated Statements of Operations for the fiscal years
ended January 2, 2005, December 28, 2003, and December 29,
2002 21
Consolidated Statements of Comprehensive Loss for the
fiscal years ended January 2, 2005, December 28, 2003, and
December 29, 2002 21
Consolidated Statements of Stockholders' Deficit for the
fiscal years ended January 2, 2005, December 28, 2003, and
December 29, 2002 22
Consolidated Statements of Cash Flows for the fiscal years
ended January 2, 2005, December 28, 2003, and December 29,
2002 23
Notes to Consolidated Financial Statements 25
18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 January 2, 2005 and December 28, 2003 and
the related consolidated statements of operations, comprehensive loss,
stockholders' deficit, and cash flows for each of the years in the three-year
period ended January 2, 2005. 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.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Glacier Water
Services, Inc. and subsidiaries as of January 2, 2005 and December 28, 2003 and
the results of their operations and their cash flows for each of the years in
the three-year period ended January 2, 2005 in conformity with United States
generally accepted accounting principles.
As discussed in Note 4 to the financial statements, effective December 29, 2003,
Glacier Water Services, Inc. adopted Financial Accounting Standards Board
Interpretation No. 46 (Revised), Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51.
/s/ KPMG LLP
San Diego, California
February 23, 2005
19
GLACIER WATER SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
------
January 2, December 28,
2005 2003
---- ----
Current assets:
Cash and cash equivalents......................... $ 2,256 $ 1,924
Accounts receivable, net of allowance for doubtful
accounts of $201 and $151 as of January 2, 2005
and December 28, 2003, respectively.............. 2,476 2,118
Repair parts...................................... 2,403 1,718
Prepaid expenses and other........................ 950 1,058
----------- -----------
Total current assets.......................... 8,085 6,818
Property and equipment, net.......................... 52,370 45,455
Goodwill............................................. 6,868 6,966
Intangible assets, net of accumulated amortization of
$681 and $442 as of January 2, 2005 and December 28,
2003, respectively.................................. 475 714
Investment in Glacier Water Trust I Common Securities 2,629 2,629
Investment in Glacier Water Trust I Preferred
Securities.......................................... 3,357 3,357
Other assets......................................... 5,716 5,777
----------- -----------
Total assets......................................... $ 79,500 $ 71,716
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable.................................. $ 2,759 $ 1,143
Accrued commissions............................... 1,989 1,713
Accrued liabilities............................... 2,215 2,062
Current portion of obligations under capital lease 262 244
Current portion of long-term notes payable........ 460 761
----------- -----------
Total current liabilities..................... 7,685 5,923
Long-term debt....................................... 87,629 87,629
Long-term notes payable.............................. 10,040 2,000
Long-term portion of deferred rent................... 112 --
Long-term portion of obligations under capital lease. 661 923
----------- -----------
Total liabilities.................................... 106,127 96,475
----------- -----------
Commitments and contingencies -- --
Stockholders' deficit:
Common stock, $0.01 par value, 10,000,000 shares
authorized, 2,160,218 and 2,118,841 shares issued
and outstanding at January 2, 2005
and December 28, 2003, respectively.............. 38 37
Additional paid-in capital........................ 18,948 18,460
Retained deficit.................................. (13,051) (10,694)
Treasury stock, at cost, 1,587,606 shares at
January 2, 2005 and December 28, 2003............ (32,562) (32,562)
----------- -----------
Total stockholders' deficit................... (26,627) (24,759)
----------- -----------
Total liabilities and stockholders' deficit.......... $ 79,500 $ 71,716
=========== ===========
The accompanying notes are an integral part of these consolidated statements.
20
GLACIER WATER SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Fiscal Year Ended
--------------------------------------------------
January 2, December 28, December 29,
2005 2003 2002
---- ---- ----
Revenues ............................................................... $ 76,261 $ 72,316 $ 71,029
Operating costs and expenses:
Operating expenses .............................................. 48,614 44,222 44,698
Depreciation and amortization ................................... 11,533 12,612 12,368
----------- ----------- -----------
Cost of goods sold .......................................... 60,147 56,834 57,066
Selling, general and administrative expenses .................... 10,611 9,956 9,777
Integration and restructuring costs ............................. -- -- 1,364
----------- ----------- -----------
Total operating costs and expenses ....................... 70,758 66,790 68,207
----------- ----------- -----------
Income from operations ................................................. 5,503 5,526 2,822
----------- ----------- -----------
Other (income) expenses:
Interest expense ................................................ 7,860 7,016 5,968
Investment (income) expense ..................................... -- (90) 20
----------- ----------- -----------
Total other expense ...................................... 7,860 6,926 5,988
----------- ----------- -----------
Loss before income taxes ............................................... (2,357) (1,400) (3,166)
Income tax benefit ..................................................... -- -- (593)
----------- ----------- -----------
Net loss ............................................................... (2,357) (1,400) (2,573)
Preferred stock dividends .............................................. -- 96 128
Net loss applicable to common stockholders ............................. $ (2,357) $ (1,496) $ (2,701)
=========== =========== ===========
Basic and diluted loss per share:
Net loss applicable to common stockholders ...................... $ (1.10) $ (0.68) $ (0.95)
=========== =========== ===========
Weighted average shares used in calculation ................ 2,136,508 2,185,761 2,843,217
=========== =========== ===========
GLACIER WATER SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Fiscal Year Ended
--------------------------------------------------
January 2, December 28, December 29,
2005 2003 2002
---- ---- ----
Net loss ............................................................... $ (2,357) $ (1,400) $ (2,573)
----------- ----------- -----------
Unrealized (loss) gain on securities:
Unrealized holding (loss) gain arising during the period ............. -- (92) 246
Less: reclassification adjustment for net realized (gains) losses
included in net loss ............................................ -- (23) 133
----------- ----------- -----------
Net unrealized (loss) gain ............................................. -- (69) 113
----------- ----------- -----------
Comprehensive loss ..................................................... $ (2,357) $ (1,469) $ (2,460)
=========== =========== ===========
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 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
Exchange of common stock for
trust preferred securities -- -- (983,880) -- -- -- (17,710) -- (17,710)
Net unrealized loss on
investments -- -- -- -- -- -- -- (69) (69)
Dividends on preferred stock -- -- -- -- (96) -- -- -- (96)
Conversion of preferred stock
into 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)
Exercise of stock options -- -- 41,377 1 488 -- -- -- 489
Net loss -- -- -- -- -- (2,357) -- -- (2,357)
Balance, January 2, 2005 -- $ -- 2,160,218 $ 38 $ 18,948 $(13,051) $ (32,562) $ -- $ (26,627)
======= ====== ========= ====== ========= ======== ========= =========== ==========
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
---------------------------------------------
January 2, December 28, December 29,
2005 2003 2002
---- ---- ----
Cash flows from operating activities:
Net loss ................................................................. $ (2,357) $ (1,400) $ (2,573)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization .......................................... 11,533 12,612 12,368
Loss on disposal of assets ............................................. 259 48 91
Realized (gain) loss on sales of investments ........................... -- (23) 133
Change in operating assets and liabilities excluding the impact
of acquisitions in 2003 and 2002:
Accounts receivable ................................................ (358) 87 (629)
Repair parts ....................................................... (685) 111 84
Prepaid expenses and other ......................................... 108 48 96
Cash paid for prepaid contract rights .............................. (744) (216) (236)
Other assets ....................................................... (735) (120) 98
Accounts payable, accrued liabilities and accrued commissions ...... 2,045 (717) (561)
----------- ----------- -----------
Net cash provided by operating activities ...................... 9,066 10,430 8,871
----------- ----------- -----------
Cash flows from investing activities:
Investment in property and equipment ..................................... (16,830) (5,013) (3,196)
Cash paid in acquisitions, net of cash acquired .......................... -- (5,366) (5,424)
Proceeds from sale of investments ........................................ -- -- 483
Proceeds from maturities of investments .................................. -- 557 98
----------- ----------- -----------
Net cash used in investing activities ............................ (16,830) (9,822) (8,039)
----------- ----------- -----------
Cash flows from financing activities:
Dividends paid ........................................................... -- (128) (128)
Principal payments on line of credit and long-term notes payable ......... (3,979) (8,188) (1,120)
Proceeds from long-term notes payable .................................... 11,718 1,600 6,000
Principal payments under capital lease obligations ....................... (244) (58) --
Increase in deferred rent ................................................ 112 -- --
Proceeds from issuance of stock .......................................... 489 782 188
----------- ----------- -----------
Net cash provided by (used in) financing activities .............. 8,096 (5,992) 4,940
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ............................ 332 (5,384) 5,772
Cash and cash equivalents, beginning of year .................................... 1,924 7,308 1,536
----------- ----------- -----------
Cash and cash equivalents, end of year .......................................... $ 2,256 $ 1,924 $ 7,308
=========== =========== ===========
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
-------------------------------------------
January 2, December 28, December 29,
2005 2003 2002
---- ---- ----
Cash paid for interest ....................................................... $ 7,616 $ 6,885 $ 5,776
========= ========= =========
Cash received for income taxes ............................................... $ -- $ -- $ 374
========= ========= =========
Non-cash investing and financing activities:
Business acquisitions:
Fiscal Year Ended
-------------------------------------------
January 2, December 28, December 29,
2005 2003 2002
---- ---- ----
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 January 2, 2005, the Company operated approximately 15,300
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 United States
generally accepted accounting principles 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 and intangible assets, accrued liabilities, deferred tax
assets, and the ability to estimate cash in machines.
Fiscal Year
The Company utilizes a fiscal year of 52 or 53 weeks ending on the Sunday
closest to December 31st. Fiscal year ended January 2, 2005 consisted of 53
weeks or 371 days. The Company recorded revenues of approximately $1,116,000
associated with the 53rd week. Fiscal years December 28, 2003 and December 29,
2002 each contained 52 weeks or 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 January 2, 2005,
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.
25
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Investments
The Company held no investments available-for-sale at January 2, 2005 or at
December 28, 2003. 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 short-term 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, 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'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 years ended January 2, 2005 and December 28,
2003 were $0 and $557,000, respectively. 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.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
other current assets and all current liabilities approximate their fair value
because of the short-term nature of those instruments. The Company's long-term
debt at January 2, 2005, consists of the Trust Preferred Securities, and the
long-term notes payable which consists of amounts due in connection with the
Pure Fill and Water Island acquisitions and amounts outstanding under the
Company's credit facility (see "Note 4"). The market value of the Trust
Preferred Securities at January 2, 2005 and December 28, 2003 was approximately
$88,060,000 and $86,020,000, respectively. The carrying value of the Company's
Trust Preferred Securities was approximately $85,000,000 at January 2, 2005 and
December 28, 2003. The carrying value of the Company's long-term notes payable,
including any current portion, was approximately $10,500,000 and $2,761,000 at
January 2, 2005 and December 28, 2003, 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. The Company also
has long-term obligations under capital leases with a carrying value of $923,000
and $1,167,000 as of January 2, 2005 and December 29, 2003, respectively.
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 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 assesses
triggering events for the impairment of long-lived assets. The impairment
analysis requires the use of assumptions and judgments regarding 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.
26
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Property and Equipment and Depreciation
Property and equipment are recorded at cost and consist of the following
(in thousands):
January 2, December 28,
2005 2003
---- ----
Vending equipment............................ $ 131,503 $ 117,310
Equipment, furniture and fixtures............ 4,435 4,228
Leasehold improvements....................... 61 89
Capital lease assets......................... 1,225 1,225
----------- -----------
137,224 122,852
Less: Accumulated depreciation and
amortization................................ (84,854) (77,397)
----------- -----------
$ 52,370 $ 45,455
=========== ===========
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets as follows:
Vending equipment 13 years during fiscal 2003 and 2004
and 10 years during 2002
Equipment, furniture and fixtures 3 to 10 years
Leasehold improvements Shorter of life of asset or remaining
lease term
Capital leases Shorter of life of asset or remaining
lease term
The Company's vending equipment is depreciated using a 10% estimated
salvage value during fiscal year 2004 and 2003. 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 Accounting Principles Board (APB)
Opinion No. 20, Accounting Changes, the Company changed the estimated useful
life of its vending machines to 13 years and reduced the salvage value from 20%
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 minor 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 January 2, 2005 and
December 28, 2003, there were no new vending machines in the process of
assembly. The Company currently has sufficient machines in storage available for
deployment in fiscal 2005. Machines that have been previously installed and are
in storage awaiting redeployment are currently being depreciated.
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
January 2, 2005, prepaid contract rights in the amount of $690,000 were included
in other assets as compared to $726,000 at December 28, 2003. For the years
ended January 2, 2005, December 28, 2003 and December 29, 2002, $1,652,000,
$2,050,000 and $2,391,000, respectively, is included in depreciation and
amortization.
Also included in other assets are net deferred financing costs of
$2,741,000 which were incurred in connection with the original issue of the
Trust Preferred Securities discussed in Note 4 and are amortized using the
effective interest method over the period ending January 2028, the date of the
mandatory redemption of the securities. Additional net deferred financing costs
of $2,135,000 associated with the Exchange Offer discussed in Note 4 are also
included in other assets and are also amortized using the effective interest
method over the period ending January 2028.
27
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 15,300 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 January 2, 2005,
December 28, 2003 and December 29, 2002, the Company recorded approximately
$1,846,000, $2,284,000 and $1,446,000, respectively, of such estimated revenues,
which represents an average of approximately 11 days, 13 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 January 2, 2005, December 28, 2003 and December 29, 2002 was
$33,151,000, $30,482,000, and $32,180,000, 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 had an employee stock-based compensation plan, which is
described more fully in Note 8. The Company's Stock Option Program expired in
March 2004 and no options were issued during the year ended January 2, 2005. The
Company measured compensation expense for the employee stock-based compensation
awards using the intrinsic value method and provided 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 2004, 2003, and 2002:
28
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Fiscal Year Ended
------------------------------------------------------
January 2, December 28, December 29,
2005 2003 2002
---- ---- ----
Net loss applicable to common stockholders,
as reported.................................................. $ (2,357) $ (1,496) $ (2,701)
Deduct: Total Stock-based employee compensation expense
determined under the fair value method for
all awards................................................... $ 339 $ 846 $ 832
------------- ------------- -------------
Proforma net loss applicable to common stockholders........... $ (2,696) $ (2,342) $ (3,533)
============= ============= =============
Basic and diluted loss per common share:
As reported................................................. $ (1.10) $ (0.68) $ (0.95)
============= ============= =============
Proforma.................................................... $ (1.26) $ (1.07) $ (1.24)
============= ============= =============
The fair value of the stock options was established at the date of grant
using the "Black-Scholes" method of option pricing and the following weighted
average assumptions were used for grants made during the years ended December
28, 2003 and December 28, 2002.
December 28 December 29
2003 2002
---- ----
Risk free interest rate........................... 1.1% 1.7%
Dividend yield.................................... 0% 0%
Expected volatility of the Company's stock........ 30.0% 31.0%
Weighted average expected life (in years)......... 6.7 6.8
Recent Accounting Pronouncements
FASB Statement No. 132 (revised), Employers' Disclosures about Pensions and
Other Postretirement Benefits. 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.
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.
29
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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.
In December 2003, FASB issued Interpretation No. 46R, Consolidation of
Variable Interest Entities ("FIN 46R"), 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. FIN 46R 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 Trust Securities as long-term assets and
increasing long-term debt by the same amount of $5,986,000 (see "Note 4"). The
Company chose to restate prior year's consolidated balance sheet to conform to
the current year presentation, in accordance with the transition provisions of
FIN 46R.
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123R (SFAS 123R),
"Share-Based payment", which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation" and supercedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees." SFAS 123R requires compensation costs related to share-based payment
transactions to be recognized in the financial statements. With limited
exception, the amount of compensation cost is measured based on the grant date
fair value of the equity or liability instruments used. SFAS 123R requires
liability awards to be re-measured each reporting period and compensation costs
to be recognized over the period that an employee provides service in exchange
for the award. SFAS123R is effective beginning the first interim or annual
reporting period that begins after June 15, 2005. The Company plans to adopt the
provisions of SFAS 123R prospectively during the third quarter of 2005. The
Company's Stock Option Program expired in March 2004 and no options were issued
during the year ended January 2, 2005. The Company expects that this adoption to
result in additional compensation expense in the Company's consolidated
financial statements. The Company is currently determining the effect of SFAS
123R on the Company's consolidated financial statements.
In November 2004, the FASB issued FASB Statement No. 151, Inventory Costs:
an amendment of ARB No. 43, which establishes standards for the accounting for
unexpected production defects and waste and the impact on capitalized inventory
costs. FASB No. 151 is effective for financial statements for fiscal years
beginning after June 15, 2005. The Company does not expect that the adoption of
FASB 151 will have a material impact on the consolidated financial statements.
In November 2004, the FASB issued FASB Statement No. 152, Accounting for
Real Estate Time-Sharing Transactions - an amendment of FASB Statements No. 66
and No. 67. The Statement amends FASB No. 66, Accounting for Sales of Real
Estate, to reference the financial accounting and reporting guidance for real
estate time-sharing transactions that is provided in AICPA Statement of Position
(SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement
also amends FASB Statement No. 67, Accounting for Costs and Initial Rental
Operations of Real Estate Projects, to state that the guidance for (a)
incidental operations and (b) costs incurred to sell real estate projects does
not apply to real estate time-sharing transactions. FASB No. 152 is effective
for financial statements for fiscal years beginning after June 15, 2005. The
Company does not expect that the adoption of FASB 152 will have a material
impact on the consolidated financial statements.
30
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In November 2004, the FASB issued FASB Statement No. 153, Exchanges of
Nonmonetary Assets - an amendment of APB Opinion No. 29. The guidance in APB
Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. The guidance in that Opinion, however,
included certain exceptions to that principle. This Statement amends Opinion 29
to eliminate the exception for nonmonetary exchanges of similar productive
assets that do not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. FASB No. 153 is effective for
financial statements for fiscal periods beginning after June 15, 2005. The
Company does not expect that the adoption of FASB 153 will have a material
impact 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 2004, 2003, and
2002, 785,772, 905,930, and 947,794 potentially dilutive securities,
respectively, were not used to calculate diluted loss per share because of their
anti-dilutive effect.
January 2, December 28, December 29,
2005 2003 2002
---- ---- ----
(in thousands except share and per share data)
Numerator for basic earnings per share - net loss applicable
to common shareholders....................................... $ (2,357) $ (1,496) $ (2,701)
------------- ------------- -------------
Denominator - shares:
Weighted average common shares for basic
loss per share.......................................... 2,136,508 2,185,761 2,843,217
Effect of dilutive securities............................ -- -- --
------------- ------------- -------------
Dilutive potential shares for diluted loss per share.......... 2,136,508 2,185,761 2,843,217
============= ============= =============
Loss per share:
Basic and dilutive loss applicable to
common shareholders..................................... $ (1.10) $ (0.68) $ (0.95)
============= ============= =============
Potentially dilutive securities not included above since
they are antidilutive........................................ 785,772 905,930 947,794
============= ============= =============
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 statements 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
31
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 January 2, 2005, December 28, 2003 and December 29, 2002 the
Company recorded amortization of $108,000, $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 $202,000,
of which none remained accrued at January 2, 2005. 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 statements 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.
During 2004, the Company reversed an accrual related to estimated acquisition
cost of $98,000.
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 years
ended January 2, 2005 and December 28, 2003, the Company recorded amortization
of $131,000 and $33,000, respectively, 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 $230,000, $202,000,
$28,000, $15,000, and $0 for the fiscal years 2005 thru 2009.
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
combinations been in effect on December 30, 2002 and December 31, 2001, or of
future results of operations.
The unaudited pro forma results for the fiscal years ended December 28,
2003 and December 29, 2002 are as follows (in thousands, except share data):
December 28, December 29,
2003 2002
---- ----
Revenues $ 80,342 $ 81,868
Net loss $ (1,477) $ (2,289)
Net loss applicable to common shares $ (1,573) $ (2,417)
Basic and diluted loss per share:
Net loss applicable to common stockholders $ (0.72) $ (0.85)
Weighted average shares used in per share
calculation 2,185,761 2,843,217
32
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
3. Supplementary Balance Sheet Information
Other Assets
Other assets consist of the following (in thousands):
January 2, December 28,
2005 2003
---- ----
Prepaid contract rights, net of accumulated
amortization of $2,323 and $8,613 as of January
2, 2005 and December 28, 2003, respectively....... $ 690 $ 726
Deferred financing cost, net of accumulated
amortization of $333 and $273 as of January 2,
2005 and December 28, 2003, respectively.......... 4,876 4,936
Other.............................................. 149 115
---------- ----------
$ 5,715 $ 5,777
========== ==========
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
January 2, December 28,
2005 2003
---- ----
Accrued compensation, benefits and related
taxes............................................. $ 806 $ 1,357
Accrued property, sales, income and other
taxes............................................. 99 85
Accrued interest................................... 389 284
Other accrued liabilities.......................... 921 336
---------- ----------
$ 2,215 $ 2,062
========== ==========
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 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.
The Subordinated Debentures are unsecured obligations of the Company to the
trust and are subordinate and junior in right of payment to other indebtedness
of the Company. The Trust relies on payments on the Subordinated Debentures to
make distributions on the Trust Preferred Securities. 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 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.
33
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company's Board of Directors authorized the purchase of up to 1,250,000
of the Trust Preferred Securities. As of January 2, 2005, 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 2004, 2003 or 2002. As of January 2, 2005, 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.
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 Common Trust
Securities of the Trust and its ownership of 134,295 shares of Trust Preferred
Securities as long-term assets and has recorded the Junior Subordinated
Debentures as long-term debt at a face value of $87,629,000, and restated its
prior period consolidated balance sheet. There was no impact on prior period
consolidated statements of operations and cash flows as a result of this
restatement. At January 2, 2005 and December 28, 2003, there were 3,265,705
Trust Preferred Securities outstanding (other than the 134,295 held by the
Company).
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 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.
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 had a maturity
date of February 1, 2009. The credit availability on the new revolving credit
facility was reduced by $400,000 every three months beginning February 7, 2004
until its maturity in February 2009. The credit facility required monthly
interest payments at the City National Bank's prime rate plus 1.00%. The new
credit facility required a quarterly unused facility fee of 0.50% per annum, and
contained certain customary financial covenants which restricted indebtedness
and capital expenditures. On March 26, 2004, the City National Bank reduced the
interest rate of the revolving credit facility to City National Bank's prime
rate. All other terms on the credit facility remained the same.
On December 1, 2004, City National Bank increased the availability on the
credit facility to $25,000,000. The revised credit facility requires monthly
interest payments at the City National Bank's prime rate (5.25% per annum at
January 2, 2005). The revolving credit facility requires a quarterly unused
facility fee of 0.50% per annum and continues to contain 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
January 2, 2005 with all such covenants. The credit availability on the revised
revolving credit facility is reduced by $1,500,000 every three months beginning
January 1, 2006 until its maturity in February 2009. As of January 2, 2005,
there was $10,000,000 outstanding on the credit facility, which is included in
34
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
long-term notes payable. Availability under the $25,000,000 revolving credit
facility was $15,000,000 as of January 2, 2005.
As of January 2, 2005, there is $500,000 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 January 2, 2005,
had an outstanding balance of $200,000. As of January 2, 2005 the Water Island
note had a balance of $300,000 and is payable on the anniversary date of the
acquisition in October 2005. Amounts due after January 2, 2006 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 (5.25% and 4.0% per annum
at January 2, 2005 and December 28, 2003, 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 2009. The
lease for the corporate office located in Vista, California has terms that
include annual rate increases and as such the Company has recorded a deferred
rent liability of $112,000 as of January 2, 2005. 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
----------- --------- -------
2005............................................... 862 318
2006............................................... 777 696
2007............................................... 654 --
2008............................................... 491 --
2009............................................... 438 --
Thereafter......................................... -- --
--------
Total minimum lease payments....................... $ 3,222 1,014
======== --------
Less amount representing interest.................. (91)
--------
Present value of minimum lease payments............ 923
Less current portion............................... 262
--------
Long-term obligation under capital lease........... 661
========
Total lease expense for the years ended January 2, 2005, December 28, 2003,
and December 29, 2002, was $1,771,000, $1,445,000, and $1,688,000, 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, results of operations or liquidity.
35
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
---------------------------------
Jan. 2, Dec. 28, Dec. 29,
2005 2003 2002
---- ---- ----
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):
Jan. 2, Dec. 28,
2005 2003
---- ----
Deferred tax liabilities:
Property and equipment..................... $ 8,764 $ 9,354
---------- ----------
Deferred tax assets:
Alternative minimum tax credit............. (1,156) (1,156)
Net operating loss......................... (12,214) (12,422)
Manufacturer's investment credit........... (568) (568)
Accruals and reserves...................... (253) (225)
Other, net................................. (87) (92)
---------- ----------
Total gross deferred tax assets............... (14,278) (14,463)
Valuation allowance........................ 5,514 5,109
---------- ----------
Total deferred tax assets, net................ (8,764) (9,354)
---------- ----------
Net deferred tax liabilities.................. $ -- $ --
========== ==========
The Company's effective income tax rate differs from the federal statutory
rate as follows:
Fiscal Year Ended
--------------------------------
Jan. 2, Dec. 28, Dec. 29,
2005 2003 2002
---- ---- ----
Federal statutory rate........................ (34.0)% (34.0)% (34.0)%
State and local taxes, net of federal
benefit...................................... 0.3 % (0.3)% (4.3)%
Benefit of alternative minimum tax net
operating loss carryback..................... -- % -- % (6.7)%
Other, net.................................... 1.5 % -- % (2.8)%
Change in valuation allowance................. 32.2 % 34.3 % 29.1%
--------- --------- ---------
Effective rate................................ -- % -- % (18.7)%
========= ========= =========
36
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 net balance
as of January 2, 2005.
At January 2, 2005, the Company had federal and California income tax net
operating loss carryforwards of $30,110,000 and $10,556,000, respectively, which
will begin to expire in 2012 and 2005 for U.S. federal and state income tax
purposes, respectively.
7. Stockholders' Equity
Redeemable 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. There has been no
Cumulative Redeemable Convertible Preferred Stock outstanding since September
30, 2003.
For the years ended December 28, 2003 and December 29, 2002, the Company
recorded dividends associated with the Cumulative Redeemable Convertible
Preferred Stock of $96,000 and $128,000, 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 28, 2003,
603,726 shares had been repurchased under this program. Pursuant to the Exchange
Offer which was completed on April 11, 2003, 983,880 shares of Common stock were
exchanged for 787,105 Trust Preferred Securities. No shares were acquired in
2004. As of January 2, 2005, there were 1,587,606 shares of Common Stock held in
treasury. As of January 2, 2005, the Company is authorized to repurchase an
additional 146,274 shares, approximately 6.7% of the Company's total shares
outstanding.
8. Stock Option Plans
The Company has options outstanding under the 1994 Stock Compensation
Program ("the Program"). The Program was terminated in 2004. The Company
accounts for this plan 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 Program provided for the issuance of incentive and non-qualified stock
options to key employees, including directors and consultants. Incentive stock
options were granted at no less than the fair market value on the date of the
grant. Non-qualified options were 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.
37
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 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
----------
Balance as of December 28, 2003................ 905,930 $12.57
Exercised...................................... (41,377) $11.81
Canceled....................................... (78,781) $23.66
----------
Outstanding at January 2, 2005................. 785,772 $11.47
There are 785,772 options outstanding under the 1994 Stock Option Plan at
January 2, 2005 with exercise prices between $8.06 and $30.00, with a weighted
average exercise price of $11.47 and a weighted average remaining contractual
life of four years. At January 2, 2005, 726,820 of these options are
exercisable, and their weighted average exercise price is $11.52.
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 $13,000 in
calendar year 2004), 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 $81,000, $75,000 and
$65,000 for fiscal years 2004, 2003, and 2002, respectively.
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 2004, 2003 and 2002, after
the effect of any consolidations that occurred as a result of any acquisition or
mergers by the retailers:
Fiscal Year Ended
-------------------------------------
Jan. 2, Dec. 28, Dec. 29,
2005 2003 2002
---- ---- ----
Company A 12.66% 12.07% 12.54%
Company B 11.64% 11.40% 10.93%
Company C 11.24% 10.81% 10.73%
38
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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 January 2, 2005 or at
December 28, 2003, the Company has used Kayne Anderson Capital Advisors, L.P. to
manage the Company's investments during fiscal 2004, 2003 and 2002. One board
member is currently employed as a senior executive of Kayne Anderson Capital
Advisors, L.P. and is a shareholder of the Company. The Company incurred no
costs during fiscal 2004 and costs of $3,000, and $7,000 in fiscal 2003 and
2002, 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").
39
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 January 2, 2005:
Net revenues $ 17,546 $ 19,246 $ 21,332 $ 18,137
Income from operations 729 1,724 2,895 155
Net income (loss) applicable to
common stockholders (1,201) (182) 986 (1,960)
Basic earnings (loss) per share:
Net income (loss) applicable to
common stockholders $ (0.57) $ (0.09) $ 0.46 $ (0.91)
Weighted average shares 2,119,483 2,119,790 2,145,848 2,159,169
Diluted earnings (loss) per share:
Net income (loss) applicable to
common stockholders $ (0.57) $ (0.09) $ 0.38 $ (0.91)
Weighted average shares 2,119,483 2,119,790 2,581,257 2,159,169
Year Ended December 28, 2003:
Net revenues $ 16,533 $ 17,789 $ 20,447 $ 17,547
Income (loss) 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
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Glacier Water Services, Inc.:
Under date of February 23, 2005, we reported on the consolidated balance sheets
of Glacier Water Services, Inc. and subsidiaries as of January 2, 2005 and
December 28, 2003, and the related consolidated statements of operations,
comprehensive loss, stockholders' deficit, and cash flows for each of the years
in the three-year period ended January 2, 2005. In connection with our audits of
the aforementioned consolidated financial statements, we also audited the
related consolidated financial statement schedule. This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this consolidated financial statement
schedule based on our audits.
In our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
San Diego, California
February 23, 2005
41
GLACIER WATER SERVICES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Allowance for
Doubtful Acconts
----------------
Balance as of December 30, 2001 $ 33,000
Charged to Costs and Expenses 94,000
Deductions (33,000)
-----------
Balance as of December 29, 2002 94,000
Charged to Costs and Expenses 239,000
Deductions (182,000)
-----------
Balance as of December 28, 2003 151,000
Charged to Costs and Expenses 175,000
Deductions (125,000)
-----------
Balance as of January 2, 2005 $ 201,000
===========
42
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.
10.4.2 City National Bank Loan Agreements (xiv) dated November 4, 2004.
14 Standards of Business Conduct and Ethics Policy.
21.1 Subsidiaries of the Glacier Water Services, Inc.
23.1 Consent of Independent Registered Public Accounting Firm.
31.1 Certification of Brian H. McInerney, Chief Executive Officer,
under Rule 13a-14(a).
31.2 Certification of W. David Walters, Chief Financial Officer, under
Rule 13a-14(a).
32.1 Certification of Brian H. McInerney, Chief Executive Officer,
under Rule 13a-14(b).
32.2 Certification of W. David Walters, Chief Financial Officer, under
Rule 13a-14(b).
(i.) Incorporated by reference to the Company's Registration Statement
on Form S-1 (File No. 33-45360) amendments thereto.
(ii.) Incorporated by reference to the Company's Registration Statement
on Form S-8 (File Number 33-61942) filed April 30, 1993.
(iii.) Incorporated by reference to the Company's Registration Statement
on Form S-8 (File Number 33-80016) filed June 8, 1994.
(iv.) Incorporated by reference to the Company's Proxy Statement for
the Annual Meeting held on June 6, 1995.
43
(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.
(xiv.) Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended January 2, 2005.
44
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
-------------------------------------
Brian H. McInerney
President and Chief Executive Officer
By: /s/ W. David Walters
-------------------------------------
W. David Walters
Senior Vice President and Chief
Financial Officer
Date: March 28, 2005
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/ Brian H. McInerney President and Chief Executive Officer
- -----------------------------------
Brian H. McInerney
/s/ Charles A. Norris Chairman of the Board and Director
- -----------------------------------
Charles A. Norris
/s/ William A. Armstrong Director
- -----------------------------------
William A. Armstrong
/s/ William G. Bell Director
- -----------------------------------
William G. Bell
/s/ Richard A. Kayne Director
- -----------------------------------
Richard A. Kayne
/s/ Peter H. Neuwirth Director
- -----------------------------------
Peter H. Neuwirth
/s/ Heidi E. Yodowitz Director
- -----------------------------------
Heidi E. Yodowitz
45