SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(D) of
the Securities Exchange Act of 1934
for the Quarterly Period Ended: April 03, 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
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GLACIER WATER SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 33-0493559
- ---------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.r.s. Employer Identification No.)
Incorporation or Organization)
1385 Park Center Drive, Vista, California 92081
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(760) 560-1111
(Registrant's telephone number, including area code)
N/A (Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [ ] NO [X]
Indicate the number of shares outstanding of each of issuer's class of
common stock as of the latest practicable date: 2,195,408 shares of common
stock, $.01 par value, outstanding at April 25, 2004.
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
GLACIER WATER SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
April 3, January 2,
2005 2005 *
--------- ----------
ASSETS (unaudited)
------
Current assets:
Cash and cash equivalents ............................................. $ 4,416 $ 2,256
Accounts receivable, net of allowance for doubtful accounts of $206 and
$201 as of April 3, 2005 and January 2, 2005, respectively ......... 2,257 2,476
Repair parts .......................................................... 2,290 2,403
Prepaid expenses and other ............................................ 962 950
--------- ---------
Total current assets ............................................... 9,925 8,085
Property and equipment, net .............................................. 56,363 52,370
Goodwill ................................................................. 6,868 6,868
Intangible assets, net of accumulated amortization of $739 and $681 as of
April 3, 2005 and January 2, 2005, respectively ..................... 417 475
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 ............................................................. 5,597 5,716
--------- ---------
Total assets ............................................................. $ 85,156 $ 79,500
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ...................................................... $ 2,876 $ 2,759
Accrued commissions ................................................... 1,901 1,989
Accrued liabilities ................................................... 2,594 2,215
Current portion of deferred rent ...................................... 18 --
Current portion of obligations under capital lease .................... 266 262
Current portion of long-term notes payable ............................ 460 460
--------- ---------
Total current liabilities .......................................... 8,115 7,685
Long-term debt ........................................................... 87,629 87,629
Long-term notes payable .................................................. 17,000 10,040
Long-term portion of deferred rent ....................................... 162 112
Long-term portion of obligations under capital lease ..................... 592 661
--------- ---------
Total liabilities ........................................................ 113,498 106,127
Stockholders' deficit:
Common stock, $.01 par value;
10,000,000 shares authorized,
2,173,943 and 2,160,218 shares
issued and outstanding as of
April 3, 2005 and January 2, 2005,
respectively ........................................................ 38 38
Additional paid-in capital ............................................ 19,206 18,948
Retained deficit ...................................................... (15,024) (13,051)
Treasury stock, at cost, 1,587,606 shares as of April 3, 2005 and
January 2, 2005 ..................................................... (32,562) (32,562)
--------- ---------
Total stockholders' deficit ........................................ (28,342) (26,627)
--------- ---------
Total liabilities and stockholders' deficit .............................. $ 85,156 $ 79,500
========= =========
*Amounts derived from audited information
The accompanying notes are an integral part of these consolidated financial
statements.
2
GLACIER WATER SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
Three Months Ended
--------------------------
April 3, March 28,
2005 2004
----------- -----------
Revenues ............................................. $ 17,543 $ 17,546
Operating costs and expenses:
Operating expenses .............................. 11,434 11,676
Depreciation and amortization ................... 3,302 2,510
----------- -----------
Cost of goods sold ......................... 14,736 14,186
Selling, general and administrative expenses .... 2,700 2,631
----------- -----------
Total operating costs and expenses ......... 17,436 16,817
----------- -----------
Income from operations ............................... 107 729
Other expenses:
Interest expense ................................ 2,080 1,930
----------- -----------
Loss before income taxes ............................. (1,973) (1,201)
Income tax benefit ................................... -- --
----------- -----------
Net loss ............................................. (1,973) (1,201)
Basic and diluted loss per common share:
Net loss applicable to common stockholders ...... $ (0.91) $ (0.57)
=========== ===========
Weighted average shares used in calculation 2,172,055 2,119,483
GLACIER WATER SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
--------------------
April 3, March 28,
2005 2004
-------- -------
Net loss ................................................... $(1,973) $(1,201)
------- -------
Unrealized gain on securities:
Unrealized holding gain arising during the period ........ -- --
Less: reclassification adjustment for net realized losses
included in net loss ............................... -- --
------- -------
Net unrealized gain ........................................ -- --
------- -------
Comprehensive loss ......................................... $(1,973) $(1,201)
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
3
GLACIER WATER SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
------------------
April 3, March 28,
2005 2004
-------- -------
Cash flow from operating activities:
Net loss ............................................................ $(1,973) $(1,201)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization ................................... 3,302 2,510
Loss on disposal of assets ...................................... 15 15
Change in operating assets and liabilities:
Accounts receivable ............................................. 219 (120)
Repair parts .................................................... 113 22
Prepaid expenses and other ...................................... (11) 67
Other assets .................................................... (293) 72
Accounts payable, accrued commissions and accrued liabilities ... 408 209
------- -------
Net cash provided by operating activities .......... 1,780 1,574
------- -------
Cash flows from investing activities:
Investment in property and equipment ................................ (6,841) (1,474)
------- -------
Net cash used in investing activities .............. (6,841) (1,474)
------- -------
Cash flows from financing activities:
Principal payments on line of credit and long-term notes payable .... (40) (540)
Proceeds from long-term notes payable ............................... 7,000 617
Principal payments under capital lease obligations .................. (64) (59)
Proceeds from issuance of stock ..................................... 258 10
Increase in deferred rent ........................................... 67 --
------- -------
Net cash provided by (used in) financing activities 7,221 28
------- -------
Net increase (decrease) in cash and cash equivalent .................... 2,160 128
Cash and cash equivalents, beginning of period ......................... 2,256 1,924
------- -------
Cash and cash equivalents, end of period ............................... $ 4,416 $ 2,052
======= =======
Three Months Ended
------------------
April 3, March 28,
2005 2004
------ ------
Supplemental disclosure of cash flow information:
Cash paid for interest ....................... $2,035 $1,881
====== ======
Cash paid for income taxes ................... $ 14 $ 3
====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
4
GLACIER WATER SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 3, 2005
(UNAUDITED)
1. BASIS OF PRESENTATION
Glacier Water Services, Inc., a Delaware corporation ("Glacier" or
"Company"), is primarily engaged in the operation of self-service vending
machines that dispense drinking water to consumers. In the opinion of the
Company's management, the accompanying consolidated financial statements reflect
all adjustments necessary for a fair presentation of the consolidated financial
position of the Company and its subsidiaries and the consolidated results of
their operations and their cash flows for the three month periods ended April 3,
2005 and March 28, 2004. Although the Company believes that the disclosures in
these financial statements are adequate to make the information presented not
misleading, certain information, including footnote information, normally
included in financial statements prepared in accordance with United States
generally accepted accounting principles has been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission. Results
of operations for the three-month period ended April 3, 2005 are not necessarily
indicative of results to be expected for the full year. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year ended January 2, 2005.
2. STOCK OPTION PLANS
In December 2002, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 148, Accounting for Stock-Based Compensation - Transition
and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
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 for 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 annual
reporting period that begins after June 15, 2005. The Company plans to adopt the
provisions of SFAS 123R prospectively effective fiscal year 2006. The Company's
Stock Compensation Program expired in March 2004 and no options were granted
during the year ended January 2, 2005 or the quarter ended April 3, 2005. The
Company is currently determining the effect of SFAS 123R on the Company's
consolidated financial statements.
The Company has options outstanding under the 1994 Stock Compensation
Program. The Company accounts for this plan under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, under which no compensation cost has been recognized, since the
exercise prices of the options granted were not less than the market prices of
the stock on the date of grant.
5
The following unaudited pro forma disclosures represent what the
Company's net income (loss) and income (loss) per common share would have been
had the Company recorded compensation cost for this plan in accordance with the
provisions of SFAS No. 123:
Three Months Ended
--------------------
April 3, March 28,
2005 2004
------- --------
(in thousands, except per share data)
Net loss applicable to common stockholders,
as reported ........................................ $(1,973) $(1,201)
------- -------
Deduct: Total stock-based employee compensation
expense determined under the fair value method for
all awards ......................................... 23 175
------- -------
Pro forma net loss applicable to common stockholders $(1,996) $(1,376)
======= =======
Basic and Diluted loss per common share:
As reported ........................................ $ (0.91) $ (0.57)
======= =======
Pro forma .......................................... $ (0.92) $ (0.65)
======= =======
3. EARNINGS PER SHARE
Basic earnings per common share is computed based on the weighted
average number of common shares outstanding during the period. Diluted earnings
per common share is computed based on the weighted average number of common
shares outstanding during the period increased by the effect of dilutive stock
options and warrants, using the treasury stock method. The computations for
basic and diluted earnings per share are as follows:
Three Months Ended
---------------------------
April 3, March 28,
2005 2004
----------- -----------
(in thousands, except per sharedata )
Numerator for basic earnings per share - net loss applicable to
common shareholders ........................................... $ (1,973) $ (1,201)
----------- -----------
Denominator - shares:
Weighted average common shares for basic
earnings per share ..................................... 2,172,055 2,119,483
Effect of dilutive securities ............................ --
-----------
-----------
Dilutive potential shares for diluted earnings per share ...... 2,172,055 2,119,483
=========== ===========
Loss per share:
Basic and dilutive loss applicable to
common shareholders ...................................... $ (0.91) $ (0.57)
=========== ===========
Potentially dilutive securities not included above since
they are antidilutive ......................................... 435,048 225,543
=========== ===========
4. LONG-TERM DEBT AND LINE OF CREDIT
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
On January 27, 1998, Glacier Water Trust I (the "Trust"), a newly
created Delaware business trust and a wholly-owned subsidiary of the Company,
issued 105,154 common securities to the Company and completed a public offering
of 3,400,000 of 9.0625% Cumulative Trust Preferred Securities 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.
6
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.
The Company's Board of Directors authorized the purchase of up to
1,250,000 of the Trust Preferred Securities. As of April 3, 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 the periods ended April 3, 2005 and March 28, 2004. As of
April 3, 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, holders of a total of 983,880 shares of Common Stock
exchanged those shares for a total of 787,105 Trust Preferred Securities then
held by the Company at a ratio of one share of Common Stock for eight-tenths of
a Trust Preferred Security. 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. At
April 3, 2005 and March 28, 2004, there were 3,265,705 Trust Preferred
Securities outstanding (other than the 134,295 held by the Company).
7
LINE OF CREDIT AND NOTES PAYABLE
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 (5.75% per annum at
April 3, 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 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. The Company was
in compliance at April 3, 2005 with all such covenants. As of April 3, 2005,
there was $17,000,000 outstanding on the credit facility, which is included in
long-term notes payable. Availability under the $25,000,000 revolving credit
facility was $8,000,000 as of April 3, 2005.
As of April 3, 2005, there is $460,000 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 April 3, 2005,
had an outstanding balance of $160,000. As of April 3, 2005 the Water Island
note had a balance of $300,000 and is payable in October 2005. Amounts due after
April 3, 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
(5.75% and 4.0% per annum at April 3, 2005 and March 28, 2004, respectively).
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT CONTAINS "FORWARD-LOOKING" INFORMATION, AS THAT TERM IS
DEFINED BY THE FEDERAL SECURITIES LAWS, ABOUT OUR FINANCIAL CONDITION, RESULTS
OF OPERATIONS AND BUSINESS. YOU CAN FIND MANY OF THESE STATEMENTS BY LOOKING FOR
WORDS SUCH AS "MAY", "WILL", "EXPECT", "ANTICIPATE", "BELIEVE", "ESTIMATE", AND
SIMILAR WORDS USED IN THIS REPORT. THE FORWARD-LOOKING STATEMENTS IN THIS REPORT
ARE INTENDED TO BE SUBJECT TO THE SAFE HARBOR PROTECTION PROVIDED BY THE FEDERAL
SECURITIES LAWS.
THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO NUMEROUS ASSUMPTIONS,
RISKS AND UNCERTAINTIES (INCLUDING TRADE RELATIONS AND COMPETITION) THAT MAY
CAUSE OUR ACTUAL RESULTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS
EXPRESSED OR IMPLIED IN THOSE STATEMENTS.
BECAUSE THE STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES, ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THE
FORWARD-LOOKING STATEMENTS. WE CAUTION READERS NOT TO PLACE UNDUE RELIANCE ON
THESE STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF THIS REPORT.
THE CAUTIONARY STATEMENTS SET FORTH ABOVE SHOULD BE CONSIDERED IN
CONNECTION WITH ANY SUBSEQUENT WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS THAT
WE OR PERSONS ACTING ON OUR BEHALF MAY ISSUE. WE DO NOT UNDERTAKE ANY OBLIGATION
TO REVIEW OR CONFIRM ANALYSTS' EXPECTATIONS OR ESTIMATES OR TO RELEASE PUBLICLY
ANY REVISIONS TO ANY FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE OF THIS REPORT OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
8
RESULTS OF OPERATIONS
OVERVIEW
Since its inception in 1983, the Company has created an extensive
network of water vending machines located throughout the United States. The
Company's water vending machines, which include both outdoor and indoor
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.
During the three-month period ended April 3, 2005, the Company
continued with a major initiative to upgrade its outside water vending machines.
The upgrade results in a new 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 by the end of fiscal 2005. As of April 3,
2005, the Company has upgraded approximately 7,500 machines at a total cost of
approximately $15,000,000. 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.
REVENUES
Revenues for the quarter ended April 3, 2005 remained relatively
constant at $17,543,000 compared to $17,546,000 for the same period last year.
As of April 3, 2005, the Company had approximately 15,100 machines in operation,
compared to 15,300 machines as of March 28, 2004.
COSTS AND EXPENSES
Operating expenses, excluding depreciation and amortization, for the
quarter ended April 3, 2005 decreased 2.1% to $11,434,000, or 65.2% of revenues,
compared to $11,676,000, or 66.5% of revenues, for the same period last year.
The decrease in operating expenses for the three-month period ended April 3,
2005 was due primarily to the reduction in repair and maintenance costs
associated with maintaining the Company's vending machines. The Company's
operating costs are not completely linear or variable to sales and as such,
significant fluctuations in revenues can impact the operating costs as a
percentage of revenues.
Depreciation and amortization expense was $3,302,000 for the quarter
ended April 3, 2005, compared to $2,510,000 for the same period last year.
Depreciation and amortization expense includes the amortization of intangible
assets and prepaid contract rights of approximately $470,000 and $253,000 for
the three-month periods ended April 3, 2005 and March 28, 2004, respectively.
The increase in depreciation and amortization expense was due primarily to new
capital expenditures added since last year, primarily associated with the G-2
upgrade of the Company's outside machines, offset partially by some assets
becoming fully depreciated or amortized. 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 continue to
be depreciated.
9
SG&A expenses for the quarter ended April 3, 2005 increased slightly to
$2,700,000, or 15.4% of revenues, compared to $2,631,000, or 15.0% of revenues,
for the same period last year.
Interest expense for the quarter ended April 3, 2005 increased $150,000
to $2,080,000, compared to $1,930,000 for the same period last year. The
increase in interest expense was primarily due to additional interest associated
with higher outstanding borrowing on the credit facility in connection with the
G-2 project as compared to last year.
The Company had no investment income for the quarters ended April 3,
2005, and March 28, 2004.
As a result of the foregoing, the Company had a net loss applicable to
common stockholders of $1,973,000 for the three-month period ended April 3,
2005, compared to a loss of $1,201,000 for the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity and capital resources are
cash and cash equivalents, cash flows from operations and funds available under
the Company's credit facility. On October 7, 2003, the Company restructured its
credit facility with City National Bank. The new $12,000,000 revolving credit
facility had a maturity date of February 1, 2009. The credit availability of
this facility was reduced by $400,000 every three months beginning February 7,
2004 until its maturity in February 2009. The revolving credit facility required
monthly interest payments at the City National Bank's prime rate plus 1.00%. On
March 26, 2004, the City National Bank revised the interest rate of the
revolving credit facility to City National Bank's prime rate (5.75% per annum at
April 3, 2005). The revolving credit facility requires a quarterly unused
facility fee of 0.50% per annum. 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 (5.75% per annum at April 3, 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
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. The Company was in compliance at April 3, 2005 with all such
covenants. As of April 3, 2005, there was $17,000,000 outstanding on the credit
facility, which is included in long-term notes payable. Availability under the
$25,000,000 revolving credit facility was $8,000,000 as of April 3, 2005.
For the three months ended April 3, 2005, net cash provided by
operations was approximately $1,780,000. The Company made capital investments in
vending machines and other equipment of approximately $6,841,000, up from
$1,474,000 in the first quarter of the previous year, which was associated
primarily with the upgrade of the outside coin machines. Net cash provided by
financing activities was approximately $7,221,000, primarily as a result of
additional borrowings under the credit facility. As of April 3, 2005, the
Company had working capital of $1,810,000. 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 April 3, 2005
was $28,342,000, which amount continues to be below the American Stock
Exchange's listing guidelines. Although no actions have been taken to date, it
is possible that the American Stock Exchange could delist the Company's stock.
The Company believes that its cash and cash equivalents, cash flow from
operations and the availability under its credit facility will be sufficient to
meet its anticipated amounts due under its credit facility, operating and
capital requirements, as well as distributions related to the Trust Preferred
Securities, for at least the next twelve months.
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RECENT ACCOUNTING PRONOUNCEMENTS
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 annual reporting period
that begins after June 15, 2005. The Company plans to adopt the provisions of
SFAS 123R prospectively effective fiscal year 2006. The Company's Stock
Compensation Program expired in March 2004 and no options were granted during
the year ended January 2, 2005 or the quarter ended April 3, 2005. 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.
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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.
ITEM 3 - QUANTITATIVE AND QUALITIVE DISCLOSURE ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk. The
principal objectives of our asset/liability management activities are to
minimize debt and maximize net investment income, while maintaining acceptable
levels of interest rate risk and facilitating our funding needs. Our net
investment income and interest expense are subject to the risk of interest rate
fluctuations. The Company's outstanding bank debt is tied to the bank's prime
lending rate and as such, the Company is at risk due to increases in market
rates. A 10% change in the bank's lending rate would have the potential of
increasing the annual interest on the outstanding borrowings of the bank debt
and impacting the future earnings of the Company by less than $100,000 annually.
The Company's exposure to interest rate risk also relates to the opportunity
cost of fixed-rate obligations associated with the Trust Preferred Securities.
The Company believes that the fixed rate of the Trust Preferred Securities
approximates the Company's long-term market rate. As of April 3, 2005, the
Company held no marketable securities available-for-sale.
ITEM 4 - CONTROLS AND PROCEDURES
Since April 3, 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 April 3, 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 during the latest fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal controls
over financial reporting.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
From time to time, claims are made against the Company in the ordinary
course of business. With the assistance from legal counsel, estimated amounts
for such claims that are probable and can reasonably be estimated are recorded
as liabilities in the consolidated balance sheets. The likelihood of a material
change in these estimated accruals would be dependent on new claims as they
arise and the favorable or unfavorable outcome of the particular litigation. As
of April 3, 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.
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ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECUITY HOLDERS
There were no matters submitted to a vote of the security holders
during the quarter ended April 3, 2005.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
31.1 Certification of Brian H. McInerney, Chief Executive Officer,
under SEC Rule 13a-14(a).
31.2 Certification of W. David Walters, Chief Financial Officer,
under SEC Rule 13a-14(a).
32.1 Certification of Brian H. McInerney, Chief Executive Officer,
under SEC Rule 13a-14(b).
32.2 Certification of W. David Walters, Chief Financial Officer,
under SEC Rule 13a-14(b).
b. REPORTS ON FORM 8-K
There were no reports on form 8-K filed during the period ended April 3, 2005.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLACIER WATER SERVICES, INC.
Date: April 29, 2005 By: /S/ BRIAN H. MCINERNEY
-------------------------------------------
Brian H. McInerney
President and Chief Executive Officer
Date: April 29, 2005 By: /S/ W. DAVID WALTERS
-------------------------------------------
W. David Walters
Senior Vice President and
Chief Financial Officer
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