-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WLnW1bKoIV6jhMEpi965cRcbx1LgIwAGL0ZRPwbYThKsHBl7sxFfa8OwItChSL5I Iqwyk923XKHLwcpouYxIIA== 0000898430-02-000898.txt : 20020415 0000898430-02-000898.hdr.sgml : 20020415 ACCESSION NUMBER: 0000898430-02-000898 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20011230 FILED AS OF DATE: 20020314 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GLACIER WATER SERVICES INC CENTRAL INDEX KEY: 0000883505 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-NONSTORE RETAILERS [5960] IRS NUMBER: 330493559 STATE OF INCORPORATION: DE FISCAL YEAR END: 1226 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11012 FILM NUMBER: 02575344 BUSINESS ADDRESS: STREET 1: 2651 LA MIRADA DRIVE, SUITE 100 CITY: VISTA STATE: CA ZIP: 92083-8435 BUSINESS PHONE: 7605601111 MAIL ADDRESS: STREET 1: 2651 LA MIRADA DRIVE, SUITE 100 CITY: VISTA STATE: CA ZIP: 92083-8435 10-K 1 d10k.txt FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended: December 30, 2001 [X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission file number: 1-11012 Glacier Water Services, Inc. ---------------------------- (Exact Name of Registrant as Specified in Its Charter) Delaware 33-0493559 ---------------------------------- ----------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 2651 La Mirada Drive, #100 Vista, CA 92083 --------------------------------------- ---------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (760) 560-1111 ---------------------- Securities registered pursuant of Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Stock, $.01 Par Value Per Share American Stock Exchange Securities registered pursuant to section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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., As of February 21, 2002, the aggregate market value of the voting stock held by non-affiliates of the registrant was $34,013,688 (calculated at the average bid and asked prices on February 21, 2002 on the American Stock Exchange multiplied by outstanding shares held by non-affiliates). For purposes of the foregoing calculation, the registrant has excluded form the group of stockholders deemed to be non-affiliates any outstanding shares of common stock known by the registrant to be held by its officers, directors and employees. As of February 21, 2002, the registrant had 2,834,474 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III (Items 10, 11, 12 and 13) is incorporated by reference to portions of the registrant's definitive proxy statement for the 2001 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission within 120 days after the close of the 2001 fiscal year. ================================================================================ This Annual 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 Annual Report. The forward-looking statements in this Annual 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 Annual 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 action 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 Introduction - ------------ 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 internally developed and manufactured 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 sterilization. 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. Each water vending machine is generally serviced and tested weekly. Historically, the Company has operated water vending machines designed primarily for outside use in warm weather climates. Because it is impractical to use outdoor vending machines in cold-weather climates, the Company had developed a new water vending machine specifically designed to be installed inside retail locations. The "in-store" machine is smaller and has a sleeker exterior, making it more compatible with an interior retail layout. As of December 30, 2001, the Company had 11,182 outside machines and 2,214 in-store machines in operation. The in-store machines afford the Company significant opportunities for continued expansion into new markets and to add in-store machines at existing outside machine locations. In addition to its growth strategy, 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. 2 Business Background - ------------------- The following table presents the number of machines installed annually since December 31, 1996: Total installed machines as of December 31, 1996.................... 9,164 Net machines added (reduced) during the year 1997........................................................... 3,280 1998........................................................... 1,258 1999........................................................... 114 2000........................................................... (369) 2001........................................................... (51) ------ Total installed machines as of December 30, 2001............... 13,396 ======
The net reduction of machines in operation in fiscal year 2000 was due primarily to the discontinuance of the Company's operation in Mexico City, Mexico during the third quarter of fiscal 2000. The reduction in machines in fiscal year 2001 was due primarily to the fact that the Company removed machines from under-performing locations to increase efficiencies and obtain higher returns on machines deployed. Total machines installed as of December 30, 2001 are distributed by state as follows: California..................................................... 6,857 Texas.......................................................... 1,698 Florida........................................................ 1,560 Arizona........................................................ 788 Nevada......................................................... 359 Other.......................................................... 2,134 ------ Total.......................................................... 13,396 ======
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. Glacier's internally developed water vending machines utilize micron filtration, reverse osmosis, carbon absorption and ultraviolet sterilization in order to provide high quality drinking water. The design of the Company's machines provides a high degree of reliability and serviceability through the use of interchangeable parts and a durable fiberglass cabinet. The machines are also designed to be easy for consumers to use, with clear and simple instructions. The Bottled Water Industry - -------------------------- The bottled water market in the United States is comprised of four segments: non-sparkling, sparkling, club soda/seltzer and imported water. Non- sparkling water is the segment in which the company competes and is consumed as an alternative to tap water. Non-sparkling 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 the reverse osmosis or deionization methods. Although 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. In order to maintain the Company's superior quality standards, the Company provides frequent, regular and reliable service and support to its network of water vending 3 machines. Generally, the Company's service technicians visit and service each vending machine on a weekly basis. The service technicians test the quality of the Company's processed water in order to assure compliance with all Company, federal, state and local standards. 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 non-sparkling 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 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. 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 ranging from approximately $0.69 to over $1.00 per gallon for water sold in containers in retail outlets. Non-sparkling 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 generally pays monthly commissions to the retailers 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. In some cases, the Company has provided marketing incentives in order to encourage certain retailers to promote the Company's products. The Company has long-term contracts with three retailers whose volume accounted for 12.3%, 12.2%, and 12.0% of fiscal 2001 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, since 1994, with the introduction of a new logo, 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 clustering has allowed the Company over the last five years to increase the number of machines serviced weekly by technicians. The Company continuously strives to develop technical improvements to its water vending machines that make the machines easier to use and service. To this end, the Company has made improvements to its water vending machines, including the introduction of the Company's dual-vend technology, which doubles the number of nozzles on a machine to allow consumers to fill two water containers simultaneously. 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 each of its machines and relocate machines as necessary to optimize their productivity on an on-going basis. Growth Strategy - --------------- According to an industry source, there are approximately 72,000 grocery stores (excluding convenience stores) in the United States. The company currently operates water vending machines at less than 15% of such locations. The Company intends to continue its expansion into these locations. The Company's growth strategy includes the following: . Increase Penetration in Existing Domestic Markets. The Company operates in 35 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. The Company continually monitors the performance of retail locations and periodically redeploys 4 machines to improve revenues and the return on assets deployed. 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. . 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 and drug 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 for $6,200,000, subject to certain working capital adjustments related primarily to the accounts receivable and accounts payable balances assumed by Glacier, of which $640,000 is payable in installments over four years. Prior to the acquisition, Pure Fill operated water vending machines in certain markets also serviced by Glacier. The results of operations related to the Pure Fill acquisition will be included in the financial statements of Glacier Water subsequent to the acquisition. Competition - ----------- The bottled water market is highly competitive. The Company competes in the non-sparkling segment of the bottled 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 smaller, independent operators. Although the Company believes that there are significant 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 significant financial resources may be able to compete with the company. Seasonality - ----------- The Company's revenues are subject to seasonal fluctuations with decreased revenues during rainy or cold weather months and increased revenues during hot weather months. Intellectual Property - --------------------- The tradename and trademarks "Glacier Water" and "Glacier Water & Penguin Design" used by the Company contain the word "Glacier" which is commonly used and has been registered in connection with other marks and designs by a number of other entities for water and related services. The mark "Glacier Water", by itself, is considered by the United States Patent and Trademark Officer (the "PTO") to be generic in relation to water and related services. The Company believes that no party can claim exclusive rights in "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 in 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. The Company does not hold any patents. Government Regulation - --------------------- The water vending industry is subject to various federal, state and local laws and regulations, which require the Company, among other things, to obtain licenses for its business and water vending machines, to pay annual license and inspection fees, to comply with certain detailed design and quality standards regarding the vending machines and the vended water, and to continuously control the quality of the vended water. The Company's 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 5 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. Although the Company is not aware of any actions having ever been filed and believes that the technology contained in its machines makes any contaminations of the products dispensed by its machines unlikely, any significant damage awards against the Company in excess of the Company's insurance coverage could result in a material loss to the Company. Employees - --------- As of December 30, 2001, the Company had 283 employees, including 30 in administration and 253 in operations. The Company's employees are not represented by a labor union and the Company has experienced no work stoppages. The Company believes that its employee relations are good. Item 2. Properties The Company leases approximately 25,000 square feet of executive offices and warehouse space in Vista, California for its corporate offices with a lease that expires in May 2006. The Company also leases various other facilities for area service centers. These leases range in size from 1,200 to 13,400 square feet and expire on various dates from September 2002 through October 2005. Item 3. Legal Proceedings The Company is not currently a party to any material legal proceeding. Item 4. Submission of matters to Vote of Security Holders No matters were submitted to vote of the security holders of the Company during the fourth quarter of 2001. Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Common Stock of Glacier is traded on the American Stock Exchange under the symbol "HOO". The following table sets for the range of high and low closing prices on the American Stock Exchange for the Common Stock for the periods indicated. High Low Fiscal Year 2000 ---- --- ---------------- First Quarter $17.50 $16.13 Second Quarter 16.13 11.63 Third Quarter 11.88 11.63 Fourth Quarter 11.63 7.75 Fiscal Year 2001 ---------------- First Quarter $ 9.30 $ 7.75 Second Quarter 9.40 7.55 Third Quarter 9.25 8.45 Fourth Quarter 8.55 7.60 The Company did not pay dividends on its Common Stock in 2001 and 2000 and does not presently intend to pay any dividends on its Common Stock in the foreseeable future. The Company had approximately 31 stockholders of record as of December 30, 2001. 6 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 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, they will also be paid on the Preferred Stock on an as-converted basis. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of the Preferred Stock will be entitled to be paid out of the assets of the Company available for distribution, before any payment shall be made to holders of the common stock or any other class or series of stock of the Company ranking junior to the Preferred Stock, an amount equal to $100.00 per share plus any accrued but unpaid Dividends ("Liquidation Amount"). After payment of the Liquidation Amount, all of the remaining assets of the Company available for distribution shall be distributed ratably among holders of all preferred and common stock of the Company. The Preferred Stock may be redeemed, at the election of the Company, for redemption prices equal to 103%, 102%, 101%, and 100% of the Liquidation Amount on or after the third, fourth, fifth, and sixth anniversary, respectively. In addition, the Preferred Stock may be redeemed, at the election of the Company, at 100% of the Liquidation Amount if the closing price of the Company's common stock remains at or above $19.00 for 10 consecutive trading days. The Preferred Stock is convertible into shares of common stock computed by dividing the Liquidation Amount, with respect to the number of shares of Preferred Stock to be converted, by $9.50. For the year ended December 30, 2001, the Company accrued and declared dividends associated with the Cumulative Redeemable Convertible Preferred Stock of $66,000. 7 Item 6. Selected Consolidated Financial Data The following sets forth selected financial data as of and for the periods presented. The Company's fiscal year ends on the Sunday closest to December 31. 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.
(in thousands except share and per share data) Fiscal Year Ended ---------------------------------------------------------------- Dec 30, Dec 31, Jan 2, Jan 3, Jan 4, 2001 2000 2000 1999 1998 ---- ---- ---- ---- ---- Revenues..................................................... $ 60,345 $ 59,176 $ 56,774 $ 56,321 $ 57,294 Operating costs and expenses: Operating expenses........................................ 38,444 38,482 36,984 36,727 35,569 Selling, general and administrative expenses.............. 9,275 8,838 9,143 9,879 7,200 Depreciation and amortization............................. 12,358 12,066 10,740 10,212 8,852 Non-recurring and other charges........................... -- 1,400 -- 971 3,062 ---------- ---------- ---------- ---------- ---------- Total operating costs and expenses..................... 60,077 60,786 56,867 57,789 54,683 ---------- ---------- ---------- ---------- ---------- Income (loss) from operations................................ 268 (1,610) (93) (1,468) 2,611 Other (income) expenses: Interest expense.......................................... 5,993 7,016 7,859 7,446 1,988 Investment (income) loss.................................. (227) 1,570 1,342 (4,259) -- ---------- ---------- ---------- ---------- ---------- Total other expense.......................................... 5,766 8,586 9,201 3,187 1,988 ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes and extraordinary gain..... (5,498) (10,196) (9,294) (4,655) 623 Income tax provision (benefit)............................... -- -- (2,059) (1,383) 193 ---------- ---------- ---------- ---------- ---------- Income (loss) before extraordinary gain...................... (5,498) (10,196) (7,235) (3,272) 430 Extraordinary gain on early retirement of debt............... 4 4,198 2,617 -- -- ---------- ---------- ---------- ---------- ---------- Net income (loss)............................................ (5,494) (5,998) (4,618) (3,272) 430 ---------- ---------- ---------- ---------- ---------- Preferred dividends.......................................... 66 -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net income (loss) applicable to common stockholders.......... $ (5,560) $ (5,998) $ (4,618) $ (3,272) $ 430 ========== ========== ========== ========== ========== Basic earnings (loss) per share: Income (loss) before extraordinary gain...................... $ (1.96) $ (3.59) $ (2.54) $ (1.05) $ (.13) Extraordinary gain........................................... -- 1.48 .92 -- -- ---------- ---------- ---------- ---------- ---------- Net income (loss)............................................ $ (1.96) $ (2.11) $ (1.62) $ (1.05) $ (.13) ========== ========== ========== ========== ========== Diluted earnings (loss) per share: Income (loss) before extraordinary gain...................... $ (1.96) $ (3.59) $ (2.54) $ (1.05) $ (.13) Extraordinary gain........................................... -- 1.48 .92 -- -- ---------- ---------- ---------- ---------- ---------- Net income (loss)............................................ $ (1.96) $ (2.11) $ (1.62) $ (1.05) $ (.13) ========== ========== ========== ========== ========== Weighted average shares used for basic earnings per share.... 2,834,474 2,836,965 2,850,253 3,119,696 3,219,082 Dilutive common stock options................................ -- -- -- -- 113,808 ---------- ---------- ---------- ---------- ---------- Weighted average shares used for diluted earnings per share.. 2,834,474 2,836,965 2,850,253 3,119,696 3,332,890 ---------- ---------- ========== ========== ==========
8 Selected Balance Sheet Data
Fiscal Year Ended --------------------------------------------------- Dec 30, Dec 31, Jan 2, Jan 3, Jan 4 2001 2000 2000 1999 1998 ---- ---- ---- ---- ---- (in thousands) Cash and cash equivalents................................ $ 1,536 $ 1,428 $ 4,205 $ 109 $ 13 Investments, available-for-sale.......................... $ 1,204 $ 3,195 $ 9,826 $ 31,037 $ 315 Property and equipment, net of accumulated depreciation........................................... $48,286 $55,366 $58,936 $ 54,939 $48,523 Total Assets............................................. $63,140 $74,616 $89,409 $100,515 $59,473 Long-term debt and line of credit, including current portion........................................ $61,965 $69,755 $79,748 $ 85,000 $28,732 Stockholders' equity (deficit)........................... $(3,866) $ 232 $ 4,673 $ 9,284 $24,623 Working capital.......................................... $ 2,099 $ 4,304 $11,360 $ 32,501 $ 1,975
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion should be read in conjunction with the information contained in the Consolidated Financial Statements and the accompanying Notes thereto of the Company appearing elsewhere in this Annual Report. The following table sets forth for the periods indicated, the percentages of revenues represented by certain items included in the Consolidated Statements of Operations.
Fiscal Year Ended --------------------------------------------------- December 30, December 31, January 2, 2001 2000 2000 ----- ------ ------ Revenues.............................................................. 100.0% 100.0% 100.0% Costs and expenses: Operating Expenses................................................. 63.7% 65.0% 65.2% Selling, general and administrative expenses....................... 15.4% 14.9% 16.1% Depreciation and amortization...................................... 20.5% 20.4% 18.9% Non-recurring and other charges.................................... --% 2.4% --% ----- ------ ------ Total costs and expenses...................................... 99.6% 102.7% 100.2% ----- ------ ------ Income (loss) from operations......................................... .4% (2.7)% (0.2)% Other (income) expenses: Interest expense................................................... 9.9% 11.9% 13.8% Investment (income) loss........................................... (.4)% 2.6% 2.4% ----- ------ ------ Total other expenses.......................................... 9.5% 14.5% 16.2% ----- ------ ------ Income (loss) before income taxes and extraordinary gain (9.1)% (17.2)% (16.4)% Income tax provision (benefit)........................................ --% --% (3.7)% Extraordinary gain.................................................... --% 7.1% 4.6% ----- ------ ------ Net loss.............................................................. (9.1)% (10.1)% (8.1)% ===== ====== ======
Results of Operations - --------------------- Overview - -------- Since its inception in 1983, the Company has created an extensive network of water vending machines located throughout the United States. The Company's water vending machines are placed at supermarkets and other retail locations in order to take advantage of the regular customer traffic at such locations. Over the past three years, the Company has expanded into new markets. Such expansions required the Company to commit costs in support of the infrastructure necessary to support these new markets. Future expansion of vending machines into new markets will be limited in order to allow the Company to concentrate its efforts on installing machines at new locations within existing markets where it currently operates. This strategy should build synergies and enhance the Company's ability to leverage its fixed costs in the new markets. The Company continually looks for ways to reduce operating costs in all areas. The Company continually explores opportunities to implement technology to improve efficiency of servicing the vending machines to lower operating cost. The Company continues to monitor 9 selling, general and administrative expenses and reduce costs where possible. Further, in an effort to improve net results, the Company has utilized its net cash provided by operations and proceeds from the sale of investments to retire early, at a discount, a portion of the long-term debt. This early retirement of a portion of the long-term debt reduces the Company's interest expense and improves its net results. Revenues - -------- Revenues for fiscal year 2001 increased 2.0% to $60,345,000 from $59,176,000 in fiscal year 2000. This increase was the result of the higher average revenues per machine realized during fiscal 2001 compared to 2000. As of December 30, 2001, the Company had 13,396 machines in operation compared to 13,447 machines at December 31, 2000. As of December 30, 2001, the Company had 2,214 in-store machines and 11,182 outside machines in operation in 35 states. The Company continually monitors the performance of retail locations and periodically redeploys machines to improve revenues and the return on assets deployed, as evidenced by the discontinuance of the operation in Mexico City, Mexico during the third quarter of fiscal 2000. Revenues for the fiscal year 2000 increased 4.2% to $59,176,000 from $56,774,000 in fiscal 1999. The increase in revenues in 2000 was the result of increased average number of in- store machines in operation throughout the year compared to 1999. The Company began operations in Mexico during fiscal 1998. The Company recognized revenues from the Mexico operation of approximately $326,000 and $195,000 for the years ended December 31, 2000 and January 2, 2000, respectively. At its peak, the Company operated 434 machines in Mexico, of which approximately 120 were located in water stores. However, these revenues were overshadowed by larger operating costs (see Costs and Expenses), which resulted in net operating losses of approximately $814,000, not including the $1,400,000 non-recurring charge, and $970,000 for the years ended December 31, 2000 and January 2, 2000, respectively. Accordingly, during the third quarter of 2000, to improve the Company's operating results, the operations in Mexico ceased and approximately 500 machines were returned to the United States for future deployment. Costs and Expenses - ------------------ Operating expenses for the year ended December 30, 2001 decreased slightly to $38,444,000 from $38,482,000 for fiscal year 2000. 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. As the Company continues to increase the number of machines in existing markets and these machines mature, the Company continues to leverage the costs associated with servicing the machines. The decrease in total operating expenses was primarily due to cost containment efforts offset by an increase in workers compensation costs and the cost to refurbish machines. The lower operating costs combined with the higher revenues resulted in operating costs as a percent of revenues of 63.7% for fiscal 2001 compared to 65.0% for the prior year. Operating expenses for fiscal year 2000 increased to $38,482,000 or 65.0% of revenues, compared to $36,984,000 or 65.2% of revenues in 1999. The increase in total dollar operating costs in 2000 was due primarily to the additional service costs associated with the expansion into new markets within the geographic areas served by the Company and an increase in total dollar commission expense associated with the higher revenues. The Mexico operation incurred operating expenses of approximately $569,000 and $317,000 for the years ended December 31, 2000 and January 3, 2000, respectively. The operating costs in Mexico represented the cost to service vending machines and rent, utilities and personnel associated with the water stores. In the third quarter of 2000, the Company approved a plan to discontinue operations in Mexico. As a result, the Company incurred non-recurring charges totaling $1,400,000 associated with the closure of its Mexico operation. The non-recurring charges consisted of leasehold improvement write-offs of $545,000 related to the water stores and warehouse; impairment losses on the disposal of equipment and fixtures located in Mexico of $338,000; severance costs of $83,000 related to the involuntary termination of 35 employees; lease termination costs of $42,000, building closures of $192,000, fees paid to advisors regarding actions to be taken in the restructuring of $117,000, and other direct costs associated with the exit plan of $83,000. By the end of the third quarter of 2000, the closure of the Mexico operations was substantially complete. There were no additional charges associated with the discontinuance of the operation in Mexico. The Company calculated the impairment loss on assets to be disposed of, in accordance with Statement of Financial Accounting Standards (SFAS) N0. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, by measuring the amount by which the carrying value exceeded the fair value less cost to sell the assets. Fair value was determined based upon the best information available for prices of similar assets, which could be bought or sold in a current transaction between unrelated parties. Further, in accordance with Emerging 10 Issues Task Force (EITF) Issue 94-03, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring), the Company accrued exit costs, which were identifiable and estimable. Selling, general and administrative expenses ("SG&A") for fiscal 2001 increased $437,000 to $9,275,000 or 15.4% of revenues, compared to $8,838,000 or 14.9% of revenues in fiscal 2000 and $9,143,000 or 16.1% of revenues in 1999. This increase in SG&A expenses in fiscal 2001 compared to 2000 was primarily due to a reduction associated with the discontinuance of the Mexico operation during fiscal 2000, offset by an increase due to certain overhead costs previously allocated as part of the manufacturing process. As a result of the suspension of the Company's manufacturing activity in June 2000, these costs are currently included in SG&A. Also included are severance costs associated with the termination of employment of certain executives during the first quarter of 2001. The decrease in SG&A expenses in fiscal 2000 compared to fiscal 1999 was primarily associated with a reduction in legal expenses incurred by the Company in fiscal 1999 in connection with an alleged patent infringement which was dismissed, offset by an increase in fiscal 2000 taxes and license expenses associated with operating in additional states. Mexico incurred SG&A expenses of $396,00 and $693,000 for the years ended December 31, 2000 and January 2, 2000, respectively. Depreciation and amortization expense for fiscal year 2001 increased to $12,358,000, compared to $12,066,000 in fiscal 2000 and $10,740,000 in fiscal 1999. The increase in each year is a result of having more machines being depreciated throughout the years compared to the prior years and the result of placing new in-store machines into operation. The Company currently has sufficient machines in storage available for deployment in fiscal 2002. Machines that have been previously installed and are in storage awaiting deployment are currently being depreciated. Interest expense for fiscal year 2001 decreased to $5,993,000 compared to $7,016,000 in fiscal 2000. The decrease was primarily associated with the extinguishment of borrowings under the line of credit. Interest expense for fiscal 1999 was $7,859,000. The decrease in interest expense in fiscal 2000 compared to fiscal 1999 was due to the reduction in long-term subordinated debt as a result of having repurchased 578,900 shares of the Trust Preferred Securities (discussed below) during the year, partially offset by increased borrowings under the line of credit. As of December 30, 2001, the Company's investment portfolio, which included non-investment grade securities, consisted of corporate debt securities and a mortgage backed security with carrying values of $1,023,000 and $181,000, respectively. For the year ended December 30, 2001, the Company had a net gain on investments of $227,000 compared to a net loss on investments of $1,570,000 for the year ended December 31, 2000. The net gain on investments for fiscal 2001 consisted of management fees of $13,000, investment earnings of $274,000 and net realized loss on the sale of investments of $34,000. For fiscal year 2000, the net loss on investments consisted of management fees of $44,000, investment earnings of $1,036,000 and net realized losses on the sale of investments of $2,562,000. Net realized losses related to the sale of two corporate debt securities and one corporate equity security during the fourth quarter of fiscal 2000 totaling $2,623,000, which was offset by realized gains during fiscal 2000 totaling $61,000. For the year ended January 2, 2000, the net loss on investments of $1,342,000 consisted of management fees of $196,000, investment earnings of $1,261,000 and net realized losses on the sale of investments of $2,407,000. Net realized losses primarily consisted of a $2,100,000 write down of two investments, a corporate debt security and a corporate equity security, believed to be other than temporarily impaired. Investments were managed by Kayne Anderson Capital Advisors, L.P. during fiscal years 2001 and 2000, and Kayne Anderson Capital Advisors, L.P. and Camden Asset Management, L.P. during fiscal 1999. Due to the continuing losses incurred by the Company, no tax benefit was recorded in fiscal years 2001 and 2000. The Company recorded a tax benefit of $2,059,000 in fiscal 1999. The Company's Board of Directors has authorized the purchase of up to 1,250,000 shares of the 9.0625% Glacier Water Trust Preferred Securities (AMEX: HOO_pa), (the "Trust Preferred Securities") issued by Glacier Water Trust I, a wholly owned subsidiary of the Company (the "Trust"). As of December 30, 2001, the Company had repurchased 921,400 shares of the Trust Preferred Securities including 400 shares repurchased in fiscal 2001 for a net extraordinary gain of $4,115 compared to a net extraordinary gain of $4,198,000 for fiscal 2000. As of December 30, 2001, the Company has 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. At an average cost of $16.41 per share, the Company believes that this was an excellent use of the Company's cash considering it resulted in reducing debt levels and thereby lowered interest expense in excess of $2,000,000 per year for the remainder of the debt's outstanding maturity. The Company may continue to make such purchases from time to time in open market transactions or block trades in an effort to reduce long-term debt and future interest expense. As of December 30, 2001, there were 2,478,600 shares of the Trust Preferred Securities outstanding (other than shares held by the Company). 11 For fiscal year 2001, the Company incurred a loss before extraordinary gain on the early retirement of debt of $5,498,000, or $1.96 per basic and diluted share compared to a loss of $10,196,000, or $3.59 per basic and diluted share in 2000. For fiscal year 2001, the Company incurred a net loss of $5,494,000, or $1.96 per basic and diluted share compared to the net loss of $5,998,000 or $2.11 per basic and diluted share in 2000 and $4,618,000, or $1.62 per basic and diluted share in 1999. Liquidity and Capital Resources - ------------------------------- The Company's primary sources of liquidity and capital resources in fiscal 2001 were cash and investments, cash flows from operations and funds available under the Company's Credit Facility. On June 23, 2000, The Company entered into a credit facility with Tokai Bank of California (currently known as United California Bank), which provided for borrowings of up to $10,000,000 and required quarterly interest payments at the bank's prime rate or LIBOR plus 1.90%. During the fourth quarter of fiscal 2001, the Company paid off the outstanding balance on the credit facility and terminated the facility. On February 19, 2002, the Company, in connection with the acquisition of the Pure Fill Corporation, entered into a new Credit Facility with City National Bank, which provided for borrowings of up to $10,000,000. The credit facility provides a five-year, $6,000,000 term loan, which requires monthly interest and principal payments at the bank's prime rate plus 1.5% (6.25% per annum as of February 19, 2002) and a two-year, $4,000,000 revolving credit facility, which requires equal monthly interest payments at the bank's prime rate plus 1% (5.75% per annum as of February 19, 2002). Glacier borrowed $6,000,000 on the term loan in connection with the acquisition of the Pure Fill assets. For fiscal 2001, net cash provided by operations was approximately $7,192,000 and the Company made capital investments in vending machines and other equipment of approximately $2,789,000. Net cash used in financing activities was approximately $6,120,000, which included the repurchase of the Trust Preferred Securities of approximately $5,000 and the net repayments on the credit line of $7,675,000, partially offset by the issuance of the Preferred Stock of $1,594,000. As of December 30, 2001, the Company had working capital of $2,099,000. Because the Company does not have significant trade accounts receivable and product inventories, working capital will vary from time to time depending on the timing of payables, other accrued liabilities, and payments of prepaid marketing incentives. The Company's stockholders' deficit as of December 30, 2001 was $3,866,000, which amount is below the American Stock Exchange's minimum stockholders' equity requirement of $4,000,000. 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 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. For the year ended December 30, 2001, the Company accrued and declared dividends associated with the Cumulative Redeemable Convertible Preferred Stock of $66,000. On January 27, 1998, the Trust issued 105,154 of its common securities to the Company and completed a public offering of 3,400,000 shares of the Trust Preferred Securities with a liquidation amount of $25 per security. Concurrent with the issuance of the Trust Preferred 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 Trust exists for the sole purpose of issuing Trust Securities and purchasing Subordinated Debentures. Distributions on the Trust Preferred Securities are payable monthly in arrears by the Trust. The Company may cause the Trust to defer the payment of distributions for a period not to exceed 60 consecutive months. During any such deferral period, distributions will accrue and compound quarterly, and the Company may not declare or pay distributions on its common or preferred stock or debt securities that rank equal or junior to the Subordinated Debentures. To date, the Company is current on all distributions. The Subordinated Debentures are unsecured obligations of the Company and are subordinate and junior in right of payment to other indebtedness of the Company. The Trust Preferred securities are subject to mandatory redemption upon the repayment of the Subordinated Debentures at a redemption price equal to the aggregate liquidation amount of the Trust Preferred Securities plus any accumulated and unpaid distributions. The Subordinated Debentures mature on January 31, 2008, but may be redeemed at the option of the Company at any time after 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 will be amortized over the period until the mandatory redemption of the securities in January 2028. Through 12 December 31, 2001, the Company has repurchased 921,400 shares of the Trust Preferred Securities, effectively retiring $23,035,000 of Subordinated Debentures. The Company believes that its cash, investments on hand, cash flow from operations and the availability under its credit facility will be sufficient to meet its anticipated amounts due under its credit facility, operating and capital requirements as well as distributions related to the Trust Preferred Securities and dividends on its Preferred Stock, for at least the next twelve months. Seasonality - ----------- The Company's revenues are subject to seasonal fluctuations with decreased revenues during rainy or cold weather months and increased revenues during hot weather months. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Company's primary market risk exposure is interest rate risk. At December 30, 2001, the Company held a portfolio of marketable securities consisting entirely of debt instruments available-for-sale with an estimated fair value equal to $1,204,000. The Company held no convertible debt securities or equity securities available-for-sale as of December 30, 2001. See Note 1 to the Company's consolidated Financial Statements. The Company's exposure to interest rate risk relates primarily to the opportunity cost of fixed rate obligations. The Company's entire portfolio is invested by Kayne Anderson Capital Advisors, L.P., primarily in fixed-rate corporate bonds and mortgage- backed securities. Item 8. Consolidated Financial Statements and Supplementary Data The Company's Consolidated Financial Statements together with accompanying Notes and the Report of Arthur Andersen LLP, Independent Public Accountants are set forth on pages 15 through 30 after part IV of this report. Item 9. Changes in Disagreements With Accountants on Accounting and Financial Disclosure Not applicable. Part III Item 10. Directors and Executive Officers of the Registrant There is incorporated herein by reference the information required by this Item in the Company's definitive proxy statement for the 2002 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year ended December 30, 2001. Item 11. Executive Compensation There is incorporated herein by reference the information required by this Item in the Company's definitive proxy statement for the 2002 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 30, 2001. Item 12. Security Ownership of Certain Beneficial Owners and Management There is incorporated herein by reference the information required by this Item in the Company's definitive proxy statement for the 2002 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year ended December 30, 2001. 13 Item 13. Certain Relationships and related Transactions There is incorporated herein by reference the information required by this Item in the Company's definitive proxy statement for the 2002 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year ended December 30, 2001. Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Documents Filed with Report --------------------------- 1. Consolidated Financial Statements --------------------------------- The consolidated financial statements listed on the accompanying Index to Consolidated Financial Statements are filed as part of this report. The financial statement schedules have been omitted as they are either not required or not applicable. 2. Exhibits -------- The exhibits listed on the accompanying Index to Exhibits are filed as part of this report. (b) Reports on Form 8-K ------------------- There were no reports on Form 8-K filed during the last quarter of the fiscal year ended December 30, 2001. Index -----
Page Number ------ Consolidated Financial Statements - --------------------------------- Report of Independent Public Accountants 15 Consolidated Balance Sheets at December 30, 2001 and December 31, 2000 16 Consolidated Statements of Operations for the fiscal years ended December 30, 2001, December 31, 2000, and January 2, 2000 17 Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended December 30, 2001, December 31, 2000, and January 2, 2000 17 Consolidated Statements of Stockholders' Equity (Deficit) for the fiscal years ended December 30, 2001, December 31, 2000, and January 2, 2000 18 Consolidated Statements of Cash Flows for the fiscal years ended December 30, 2001, December 31, 2000, and January 2, 2000 19 Notes to Consolidated Financial Statements 20
14 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Glacier Water Services, Inc.: We have audited the accompanying consolidated balance sheets of Glacier Water Services, Inc. (a Delaware corporation) and subsidiaries as of December 30, 2001 and December 31, 2000, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity (deficit) and cash flows for each of the three fiscal years in the period ended December 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Glacier Water Services, Inc. and subsidiaries as of December 30, 2001 and December 31, 2000, and the results of its operations and its cash flows for each of the three fiscal years in the period ended December 30, 2001, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP San Diego, California February 19, 2002 15 GLACIER WATER SERVICES, INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share data) ASSETS ------
December 30, December 31, 2001 2000 ---- ---- Current Assets: Cash and cash equivalents............................................................ $ 1,536 $ 1,428 Investments, available-for-sale...................................................... 1,204 3,195 Accounts receivable.................................................................. 721 758 Inventories.......................................................................... 2,629 2,587 Prepaid expenses and other........................................................... 1,050 1,070 -------- -------- Total current assets.......................................................... 7,140 9,038 Property and equipment, net of accumulated depreciation..................................... 48,286 55,366 Other assets................................................................................ 7,714 10,212 -------- -------- Total assets................................................................................ $ 63,140 $ 74,616 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ---------------------------------------------- Current Liabilities: Accounts payable..................................................................... $ 991 $ 839 Accrued commissions.................................................................. 2,126 2,286 Accrued liabilities.................................................................. 1,924 1,609 -------- -------- Total current liabilities..................................................... 5,041 4,734 -------- -------- Long-term debt.............................................................................. 61,965 61,975 Line of credit.............................................................................. -- 7,675 -------- -------- Commitments and Contingencies Stockholders' Equity (Deficit): Preferred stock, $.01 par value; 8% cumulative redeemable convertible; 100,000 shares authorized, 16,000 and no shares issued and outstanding at December 30, 2001 and December 31, 2000, respectively........................ -- -- Common stock, $.01 par value, 10,000,000 shares authorized, 2,834,474 shares issued and outstanding....................................... 35 35 Additional paid-in capital........................................................... 17,782 16,188 Retained earnings (deficit).......................................................... (6,787) (1,227) Treasury stock, at cost, 603,726 shares.............................................. (14,852) (14,852) Accumulated other comprehensive income (loss)........................................ (44) 88 -------- -------- Total stockholders'equity (deficit)........................................... (3,866) 232 -------- -------- Total liabilities and stockholders' equity (deficit)........................................ $ 63,140 $ 74,616 ======== ========
The accompanying notes are an integral part of these consolidated statements. 16 GLACIER WATER SERVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands, except share data)
Fiscal Year Ended -------------------------------------------------- December 30, December 31, January 2, 2001 2000 2000 ---- ---- ---- Revenues................................................................ $ 60,345 $ 59,176 $ 56,774 Operating costs and expenses: Operating expenses.................................................. 38,444 38,482 36,984 Selling, general and administrative expenses........................ 9,275 8,838 9,143 Depreciation and amortization....................................... 12,358 12,066 10,740 Non-recurring and other charges..................................... -- 1,400 -- ---------- ---------- ---------- Total operating costs and expenses............................... 60,077 60,786 56,867 ---------- ---------- ---------- Income (loss) from operations........................................... 268 (1,610) (93) ---------- ---------- ---------- Other (income) expenses: Interest expense.................................................... 5,993 7,016 7,859 Investment (income) loss............................................ (227) 1,570 1,342 ---------- ---------- ---------- Total other expenses.............................................. 5,766 8,586 9,201 ---------- ---------- ---------- Loss before income taxes and extraordinary gain......................... (5,498) (10,196) (9,294) Income tax benefit...................................................... -- -- (2,059) ---------- ---------- ---------- Loss before extraordinary gain.......................................... (5,498) (10,196) (7,235) Extraordinary gain on early retirement of debt.......................... 4 4,198 2,617 ---------- ---------- ---------- Net loss................................................................ (5,494) (5,998) (4,618) Preferred dividends..................................................... 66 -- -- ---------- ---------- ---------- Net loss applicable to common stockholders.............................. $ (5,560) $ (5,998) $ (4,618) ========== ========== ========== Basic and diluted earnings (loss) per share: Loss before extraordinary gain.......................................... $ (1.96) $ (3.59) $ (2.54) Extraordinary gain...................................................... -- 1.48 .92 ---------- ---------- ---------- Net loss................................................................ $ (1.96) $ (2.11) $ (1.62) ========== ========== ========== Weighted average shares used in calculation............................. 2,834,474 2,836,965 2,850,253 ========== ========== ==========
GLACIER WATER SERVICES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (dollars in thousands)
Fiscal Year Ended -------------------------------------------- December 30, December 31, January 2, 2001 2000 2000 ---- ---- ---- Net loss..................................................................... $ (5,494) $ (5,998) $ (4,618) Unrealized gain (loss) on securities: Unrealized holding gain (loss) arising during the period.................... (166) 4,106 5,504 Less: reclassification adjustment for net realized losses (gains) included in net income (loss).............................................. (34) 2,562 2,407 -------- -------- -------- Net unrealized gain (loss)................................................... (132) 1,544 3,097 -------- -------- -------- Comprehensive loss........................................................... $ (5,626) $ (4,454) $ (1,521) ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. 17 GLACIER WATER SERVICES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (dollars in thousands, except shares)
Accumulated Preferred Stock Common Stock Additional Retained Other --------------- ---------------- Paid In Earnings Treasury Comprehensive Shares Amount Shares Amount Capital (Deficit) Stock Income (Loss) Total ------ ------ ------ ------ ------- --------- ----- ------------- ----- Balance, January 3, 1999 - $ - 2,959,975 $ 34 $15,963 $ 9,389 $(11,549) $(4,553) $ 9,284 Exercise of Stock Option - - 11,875 - 156 - - - 156 Purchase of Treasury Stock - - (137,676) - - - (3,246) - (3,246) Net Unrealized Gain on - - - - - - - 3,097 3,097 Investments Net Loss - - - - - (4,618) - - (4,618) ------ ---- --------- ------- ------- ------- -------- ------- ------- Balance, January 2, 2000 - - 2,834,174 34 16,119 4,771 (14,795) (1,456) 4,673 Exercise of Stock Options - - 6,000 1 69 - - - 70 Purchase of Treasury Stock - - (5,700) - - - (57) - (57) Net Unrealized Gain on - - - - - - - 1,544 1,544 Investments Net Loss - - - - - (5,998) - - (5,998) ------ ---- --------- ------- ------- ------- -------- ------- ------- Balance, December 31, 2000 - - 2,834,474 35 16,188 (1,227) (14,852) 88 232 Issuance of Preferred Stock 16,000 - - - 1,594 - - - 1,594 Net Unrealized Loss on - - - - - - - (132) (132) Investments Dividends on Preferred Stock - - - - - (66) - - (66) Net Loss - - - - - (5,494) - - (5,494) ------ ---- --------- ------- ------- ------- -------- ------- ------- Balance, December 30, 2001 16,000 $ - 2,834,474 $ 35 $17,782 $(6,787) $(14,852) $ (44) $(3,866) ====== ==== ========= ======= ======= ======= ======== ======= =======
The accompanying notes are an integral part of these consolidated statements. 18 GLACIER WATER SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOW (dollars in thousands)
Fiscal Year Ended -------------------------------------- December 30, December 31, January 2, 2001 2000 2000 ---- ---- ---- Cash flows from operating activities: Net Loss $ (5,494) $ (5,998) $ (4,618) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 12,358 12,066 10,740 Loss on disposal of assets 125 908 103 Extraordinary gain on early retirement of debt (4) (4,198) (2,617) Deferred tax provision (benefit) -- -- (2,059) Realized loss on sales of investments 34 2,562 2,407 Change in operating assets and liabilities: Accounts receivable 37 (169) 759 Inventories (42) 662 (359) Prepaid expenses and other 20 709 (391) Payments for prepaid marketing incentives (243) (2,936) (4,461) Other assets 126 325 (250) Accounts payable, accrued liabilities and accrued commissions 275 (254) 717 -------- -------- -------- Total adjustments 12,686 9,675 4,589 -------- -------- -------- Net cash provided by (used in) operating activities 7,192 3,677 (29) -------- -------- -------- Cash flows from investing activities: Purchase of vending equipment (2,448) (6,270) (12,115) Purchase of property and equipment (341) (474) (341) Purchase of investments -- (931) (48,001) Proceeds from sale of investments 1,617 6,275 69,288 Proceeds from maturities of investments 208 269 612 -------- -------- -------- Net cash (used in) provided by investing activities (964) (1,131) 9,443 -------- -------- -------- Cash flows from financing activities: Dividends paid (34) -- -- Early retirement of long-term debt (5) (9,585) (5,528) Proceeds from line of credit 8,700 22,432 15,090 Principal payments on line of credit and long term debt (16,375) (18,183) (11,790) Proceeds from issuance of stock 1,594 70 156 Purchase of treasury stock -- (57) (3,246) -------- -------- -------- Net cash used in financing activities (6,120) (5,323) (5,318) -------- -------- -------- Net increase (decrease) in cash and cash equivalents 108 (2,777) 4,096 Cash and cash equivalents, beginning of year 1,428 4,205 109 -------- -------- -------- Cash and cash equivalents, end of year $ 1,536 $ 1,428 $ 4,205 ======== ======== ======== Supplemental disclosure of cash flow information Cash paid for interest $ 5,941 $ 6,819 $ 7,828 ======== ======== ======== Cash paid for income taxes $ 7 $ 5 $ 5 ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. 19 GLACIER WATER SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. 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 hot weather months. The Company's machines are primarily located throughout the sunbelt and Midwest regions of the United States. As of December 30, 2001, the Company operated machines in 35 states with approximately 51% of the Company's machines located in California. During fiscal year 2000, the Company discontinued operations in Mexico and returned approximately 500 machines to the United States for future re-deployment. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Glacier Water Services, Inc. and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that management make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Reclassification Certain prior year amounts have been reclassified to conform to the current presentation. Fiscal Year The Company utilizes a fiscal year of 52 or 53 weeks ending on the Sunday closest to December 31. Fiscal years ended December 30, 2001, December 31, 2000 and January 2, 2000 each contained 364 days. Other Comprehensive Income (Loss) In accordance with FASB Statement No. 130, Reporting Comprehensive Income, the Company displays comprehensive income (loss) and its components in a financial statement that is displayed with the same prominence as other financial statements. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. As of December 30, 2001, cash equivalents primarily consist of cash held in money market accounts. Investments Investments are accounted for in accordance with the Financial Accounting Standards Board ("FASB") Statement No. 115, for Certain Investments in Debt and Equity Securities, which requires that the Company determine the appropriate classification of investments at the time of purchase based on management's intent and re-evaluate such designation as of each balance sheet date. The Company considers all investments as available for use in its current operations, and therefore, classifies them as short-term, available-for-sale investments. Available-for-sale investments are stated at fair value, with net unrealized gains or losses, if any, reported as a separate component of stockholders' equity. Realized gains or losses from the sale of investments, interest income, and dividends are included in investment income (loss) 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 20 GLACIER WATER SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) determination that an investment's impairment is considered to be other than temporary. As of December 30, 2001, management believes its unrealized losses of $44,000 to be temporary. The cost of securities sold is based on the specific identification method. At December 30, 2001, investments available-for-sale consisted of the following (in thousands):
Gross Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- Corporate securities $ 906 $ 117 $ -- $ 1,023 Mortgage-backed security 342 -- (161) 181 ------- ------- ------- ------- Total investments available for sale $ 1,248 $ 117 $ (161) $ 1,204 ======= ======= ======= =======
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. At December 30, 2001, the Company held a portfolio of marketable securities, which included non-investment grade debt securities, with an estimated fair value equal to $1,204,000, which consisted of corporate debt securities and a mortgage-backed security with carrying values of $1,023,000 and $181,000, respectively. Proceeds from sales or maturities of marketable securities for the year ended December 30, 2001 were $1,825,000. There were no realized gains on such sales and maturities for the year ended December 30, 2001 and gross realized losses for the year ended December 30, 2001 were $34,000. The mortgage-backed security has a maturity date of December 2021. Kayne Anderson Capital Advisors, L.P. manages the Company's investment portfolio (See Note 10). At December 31, 2000, investments available for sale consisted of the following (in thousands):
Gross Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- Corporate Securities $ 2,523 $ 117 $ -- $ 2,640 Mortgage backed securities 584 -- (29) 555 --------- ------- ------- ------- Total investments available for sale $ 3,107 $ 117 $ (29) $ 3,195 ========= ======= ======= =======
At December 31, 2000, the Company held a portfolio of marketable securities, which included non-investment grade debt securities, with an estimated fair value equal to $3,195,000. The entire $3,195,000 consisted of debt investments available-for-sale and the company held no convertible debt securities or equity securities available-for-sale at December 31, 2000. Proceeds from sales or maturities of marketable securities for the year ended December 31, 2000 were $6,554,000. Gross realized gains on such sales for the year ended December 31, 2000 were $590,000. Gross realized losses for the year ended December 31, 2000 were $3,152,000. Gross realized losses were recognized principally during the fourth quarter of fiscal 2000 in connection with the disposition of two corporate debt securities resulting in losses of $3,088,000. Inventories Inventories consist of raw materials, repair parts and any vending machines in the process of assembly, and are stated at the lower of cost (moving weighted average) or market. Periodically these parts are used to assemble vending machines. Costs associated with the assembly of vending machines are accumulated until finished machines are ready for installation at a retail location, at which time the costs are transferred to property and equipment. As of December 30, 2001 and December 31, 2000, there were no vending machines in the process of assembly. Property and Equipment and Depreciation Property and equipment are recorded at cost and consist of the following (in thousands): 21 GLACIER WATER SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 30, December 31, 2001 2000 ---- ---- Vending equipment $100,842 $ 99,765 Equipment, furniture and fixtures 2,926 2,817 Leasehold improvements 63 608 -------- -------- 103,831 103,190 Less: Accumulated depreciation and amortization (55,545) (47,824) -------- -------- $ 48,286 $ 55,366 ======== ========
Depreciation is provided using the straight-line method over the estimated useful lives of the assets as follows: Vending equipment 10 years Equipment, furniture and fixtures 5 to 10 years Leasehold improvements Life of Lease The Company's vending equipment is depreciated to a 20% salvage value. Costs associated with installing vending equipment are capitalized and depreciated over five years. All maintenance, repair and refurbishment costs are charged to operations as incurred. Additions and major improvements are capitalized. Long-Lived Assets The Company evaluates and assesses its long-lived assets for impairment under the guidelines of FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of. The Company periodically reevaluates the original assumptions and rationale utilized in the establishment of the carrying value and estimated lives of these assets. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, other current assets and accounts payable and accrued and other current liabilities approximate the fair value because of the short-term nature of those instruments. The fair value of the Company's long-term debt at December 30, 2001 and December 31, 2000 was approximately $47,341,000 and $34,396,000 respectively. The carrying value of the Company's long-term debt at December 30, 2001 and December 31, 2000 was approximately $61,965,000 and $61,975,000, respectively. Revenues The Company recognizes revenue as water is vended to customers. Commission Expense Included in operating expenses are commission payments made to certain retailers based on a percentage of vending machines revenue. Commission expense for the years ended December 30, 2001, December 31, 2000 and January 2, 2000 was $27,602,000, $27,038,000, and $25,991,000, respectively. Prepaid commissions represent payments made to certain retailers based on a percentage of estimated monthly or quarterly vending machine revenues. Prepaid commissions at December 30, 2001 and December 31, 2000 were $65,000 and $115,000, respectively. Income Taxes Income taxes are accounted for using the liability method in accordance with FASB Statement No. 109, Accounting for Income Taxes. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued two new pronouncements: Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and SFAS no. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and that the use of pooling-of-interests method is no longer permitted. SFAS 22 GLACIER WATER SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) No. 142 requires that upon adoption, amortization of goodwill will cease and instead, the carrying value of goodwill will be evaluated for impairment at least annually using a fair value test. Identifiable intangible assets will continue to be amortized over their useful lives and reviewed at least annually for impairment using a method appropriate to the nature of the intangible asset. The Company implemented SFAS No. 141 on July 1, 2001 and is required to implement SFAS No. 142 at the beginning of its next fiscal year, January 1, 2002. The Company does not expect the adoption of these statements to have a material impact on its consolidated financial position or results of operations. In August 2001, the FSAB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and 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 APB Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Business Segment of a Business, and Extraordinary, Unusual and Infrequent Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in that Opinion). The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company does not expect the adoption of SFAS No. 144 to have a material impact on its consolidated financial position or results of operations. Earnings (Loss) Per Share The Company computes and presents earnings (loss) per share in accordance with FASB Statement No. 128, Earnings Per Share. Basic earnings per share are computed based upon the weighted average number of common shares outstanding during the period. Dilutive 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 the 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 1999, 2000, and 2001, potentially dilutive securities were not used to calculate diluted loss per share because of their anti-dilutive effect. 2. Supplementary Balance Sheet Information Other Assets Other assets consist of the following (in thousands):
December 30, December 31, 2001 2000 ---- ---- Prepaid marketing incentives, net of accumulated amortization of $6,788 as of December 30, 2001 and $5,263 as of December 31, 2000........... $4,650 $ 6,938 Deferred financing cost, net of accumulated amortization of $197 as of December 30, 2001 and $119 as of December 31, 2000............... 2,833 2,888 Other......................................................................... 231 386 ------ ------- $7,714 $10,212 ====== =======
Prepaid marketing incentives 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. For the years ended December 30, 2001, December 31, 2000 and January 2, 2000, $2,553,000, $2,624,000 and $2,282,000, respectively, is included in depreciation and amortization. Deferred financing costs of $4,100,000 were incurred in connection with the Trust Preferred Securities discussed in Note 3 and are amortized over the period ending January 2028, the date of the mandatory redemption of the securities. 23 GLACIER WATER SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Accrued Liabilities
December 30, December 31, 2001 2000 ---- ---- Accrued compensation and related taxes........... $ 462 $ 434 Accrued income and other taxes................... 349 352 Accrued interest................................. 247 393 Other accrued liabilities........................ 866 430 ------ ------ $1,924 $1,609
====== ====== 3. Long-Term Debt and Line of Credit Company Obligated Mandatorily Redeemable Preferred Securities of a Subsidiary Trust Holding Solely Subordinated Debt Securities of the Company 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 3.4 million of 9.0625% Cumulative Trust Preferred Securities with a liquidation amount of $25 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. Concurrent with the issuance of such securities, the Trust invested the proceeds therefrom in an aggregate principal amount of $85.0 million of 9.0625% Junior Subordinated Debentures (the "Subordinated Debentures") issued by the Company. Distributions on the Trust Preferred Securities are payable monthly in arrears by the Trust. The Company may cause the Trust to defer the payment of distributions for a period not to exceed 60 consecutive months. During any such deferral period, distributions will accrue and compound quarterly, and the Company may not declare or pay distributions on its common or preferred stock or debt securities that rank equal or junior to the Subordinated Debentures. The Subordinated Debentures are unsecured obligations of the Company and are subordinate and junior in right of payment to certain other indebtedness of the Company. The Trust Preferred Securities are subject to mandatory redemption upon the repayment of the Subordinated Debentures at the redemption price equal to the aggregate liquidation amount of the Securities plus any accumulated and unpaid distributions. The Subordinated Debentures mature on January 31, 2028, but may be redeemed at the option of the Company at any time after January 31, 2003. The Company effectively provides a full and unconditional guarantee of the Trust's obligations under the Trust Securities. On August 13, 1999, the Company's Board of Directors authorized the Company to purchase up to 250,000, or approximately 7.4% of the then 3,400,000 shares outstanding, of the Trust Preferred Securities in the open market as part of the Company's stock repurchase plan. Subsequently, the Company's Board of Directors increased the authorized number of the Trust Preferred Securities subject to repurchase to 1,250,000 shares. As of December 30, 2001, the Company had repurchased 921,400 shares of the Trust Preferred Securities. During fiscal 2001, the Company repurchased 400 shares of the Trust Preferred Securities resulting in a net extraordinary gain of $4,115, compared to a net extraordinary gain of $4,198,000 during fiscal 2000 from the repurchase of 578,000 shares of the Trust Preferred Securities. The Company may continue to make such purchases from time to time in open market transactions or block trades. There were 2,478,600 shares and 2,479,000 shares of the Trust Preferred Securities outstanding (other than shares held by the Company) as of December 30, 2001 and December 30, 2000, respectively, which had a carrying value of $61,965,000 and $61,975,000, respectively. Line of Credit On June 23, 2000, the Company entered into a credit facility with Tokai Bank of California (currently known as United California Bank), which provided borrowings of up to $10,000,000 and required quarterly interest payments at the bank's prime rate. Borrowings under this agreement were secured by substantially all of the assets of the Company. During the fourth quarter of fiscal 2001, the Company paid off the outstanding balance and terminated the credit facility. On February 19, 2002, the Company, in connection with the acquisition of the Pure Fill Corporation, 24 GLACIER WATER SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) entered into a new Credit Facility with City National Bank, which provides for borrowings of up to $10,000,000. The credit facility provides a five-year, $6,000,000 term loan, which requires monthly principal and interest payments at the bank's prime rate plus 1.5% (6.25% per annum as of February 19, 2002) and a two-year, $4,000,000 revolving credit facility, which requires monthly interest payments at the bank's prime rate plus 1% (5.75% per annum as of February 19, 2002). See Note 12 for information concerning a credit facility entered into in 2002. 4. Commitments and Contingencies Leases The Company leases certain vehicles, warehouse and office facilities under non-cancelable operating leases that expire on various dates through 2006. Future minimum lease payments under non-cancelable operating leases with initial terms of one or more years are as follows (in thousands): 2002................................... $1,403 2003................................... 896 2004................................... 508 2005................................... 240 2006................................... 83 Thereafter............................. -- ------ Total minimum lease payments........... $3,130 ======
Total lease expense for the years ended December 30, 2001, December 31, 2000 and January 2, 2000, was $1,874,000, $2,034,000, and $2,158,000, 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 adverse effect on the Company's consolidated financial position or results of operations. 5. Income Taxes Significant components of the benefit for income taxes are as follows (in thousands):
Fiscal Year Ended ------------------------------------------------------ December 30, December 31, January 2, 2001 2000 2000 ---- ---- ---- Federal Income Taxes: Current.................................... $ -- $ 267 $ -- Deferred................................... -- (267) (1,863) ----------------- ----------------- ------- Total Federal Income Taxes.............. -- -- (1,863) ----------------- ----------------- ------- State and Local Income Taxes Current.................................... -- 47 -- Deferred................................... -- (47) (196) ----------------- ----------------- ------- Total State and Local Income Taxes...... -- -- (196) ----------------- ----------------- ------- Total Income Tax Benefit.......................... $ -- $ -- $(2,059) ================= ================= =======
25 GLACIER WATER SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Deferred tax liabilities and assets result from the following (in thousands):
December 30, December 31, 2001 2000 ---- ------- Deferred tax liabilities: Property and equipment................................................... $ 9,196 $ 8,421 ------- ------- Total deferred tax liabilities.................................................. 9,196 8,421 ------- ------- Deferred tax assets: Alternative minimum tax credit........................................... (1,449) (1,482) Net operating loss....................................................... (8,949) (7,989) Manufacturer's investment credit......................................... (645) (591) Accruals and reserves.................................................... (2,208) (263) Valuation allowance...................................................... 4,269 2,118 ------- ------- Total deferred tax assets, net.................................................. (8,982) (8,207) ------- ------- Net deferred tax liabilities.................................................... $ 214 $ 214 ======= =======
A valuation allowance has been recorded against the deferred tax assets due to uncertainties surrounding their realization. The net deferred tax liability in the amount of $214,000 as of December 30, 2001 and December 31, 2000, is included in accrued liabilities. The Company's effective income tax rate differs from the federal statutory rate as follows:
Fiscal Year Ended --------------------------------------------------- December 30, December 31, January 2, 2001 2000 2000 ---- ---- --- Federal statutory rate......................................... (34.0)% (34.0)% (34.0)% State and local taxes, net of federal benefit.................. (4.0)% (2.0)% (2.0)% Manufacturer's investment credit generated and other........... (1.0)% --% (1.0)% Increase in valuation allowance................................ 39.0% 36.0% --% ------ ------ ------ Effective rate................................................. --% --% (37.0)% ====== ====== ======
At December 30, 2001, the Company had federal and California income tax net operating loss carry forwards of $23,100,000 and $9,700,000, respectively, which will begin to expire in 2012 and 2003 for federal and state income tax purposes, respectively. 6. Stockholders' Equity Preferred Stock The Company's Certificate of Incorporation authorizes the issuance of 100,000 shares of preferred stock, par value $.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 $1,594,000. 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. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of the Preferred Stock will be entitled to be paid out of the assets of the Company available for distribution, before any payment shall be made to holders of the common stock or any other class or series of stock of the Company ranking junior to the Preferred Stock, an amount equal to $100.00 per share plus any accrued but unpaid Dividends ("Liquidation Amount"). After payment of the Liquidation Amount, all of the remaining assets of the Company available for distribution shall be distributed ratably among holders of all preferred and common stock of the Company. 26 GLACIER WATER SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The Preferred Stock may be redeemed at the election of the Company, for redemption prices equal to 103%, 102%, 101%, and 100% of the Liquidation Amount on or after the third, fourth, fifth, and sixth anniversary, respectively. In addition, the Preferred Stock may be redeemed, at the election of the Company, at 100% of the Liquidation Amount if the closing price of the Company's common stock remains at or above $19.00 for 10 consecutive trading days. The Preferred Stock is convertible into shares of common stock computed by dividing the Liquidation Amount, with respect to the number of shares of Preferred Stock to be converted, by $9.50. For the year ended December 30, 2001, the Company accrued and declared dividends associated with the Cumulative Redeemable Convertible Preferred Stock of $66,000. 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 30, 2001, 603,726 shares had been repurchased under this program, and the Company was authorized to repurchase an additional 146,274 shares, approximately 5.2% of the Company's total shares outstanding. 7. Stock Option Plans The Company has options outstanding under two stock option plans, the 1992 Stock Option Plan, which was terminated in 1994, and the 1994 Stock Compensation Program. The Company accounts for these plans under APB Opinion No. 25, under which no compensation cost has been recognized, since the exercise price of the option was not less than the market price of the stock on the date of grant. The Company has reserved 950,000 shares of common stock under the 1994 Stock Compensation Program which provides for the issuance of incentive and non-qualified stock options to key employees, including directors and consultants. Incentive stock options are granted at no less than the fair market value on the date of the grant. Non-qualified options may be granted at prices determined by the Board of Directors, but at no less than 85% of the fair market value on the date of the grant. Options generally have a term of 10 years and become exercisable at a rate of 25% per annum. Options granted under this provision ("Deferral Options") have a term of five years and become exercisable one year following the date of the grant. The Company had reserved 360,000 shares of common stock for issuance under the 1992 Stock Option Plan, which provided for the issuance of incentive and non-qualified stock options to key employees, including directors and consultants. The 1992 Stock Option Plan was terminated in 1994 with a balance of 42,250 shares of common stock available for grant which was transferred to the 1994 Stock Compensation Program. A summary of the status of the Company's stock option plans and activity is as follows:
Weighted Avg. Shares Exercise Price ------ -------------- Balance at January 3, 1999............................................ 641,588 $23.21 Granted............................................................... 77,537 $24.53 Exercised............................................................. (11,875) $13.12 Canceled.............................................................. (80,870) $30.56 -------- ------ Balance at January 2, 2000............................................ 626,380 $22.64 Granted............................................................... 266,885 $13.03 Exercised............................................................. (6,000) $11.50 Canceled.............................................................. (123,306) $23.62 -------- ------ Balance at December 31, 2000.......................................... 763,959 $19.16 Granted............................................................... 428,665 $ 7.98 Exercised............................................................. -- $ -- Canceled.............................................................. (237,890) $21.35 -------- ------ Balance as of December 30, 2001....................................... 954,734 $13.60 Exercisable at December 30, 2001...................................... 368,403 $16.28 Weighted average fair value of options granted........................ $ 3.95
27 GLACIER WATER SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) There are 60,500 options outstanding under the 1992 plan at December 30, 2001, all of which are exercisable, and have exercise prices between $8.25 and $13.63, with a weighted average exercise price of $11.59 and a weighted average remaining contractual life of 1.4 years. There are 894,234 options outstanding under the 1994 plan at December 30, 2001 with exercise prices between $7.55 and $31.25, with a weighted average exercise price of $13.74 and a weighted average remaining contractual life of 6.2 years. At December 30, 2001 307,903 of these options are exercisable, and their weighted average exercise price is $17.21. The following pro forma disclosures represent what the Company's net loss and loss per 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 ("Statement No. 123"):
Fiscal Year Ended ----------------------------------------------- December 30, December 31, January 2, 2001 2000 2000 ---- ---- ---- Pro forma net loss (in thousands)........................... $(7,380) $(6,489) $(5,086) Pro forma basic loss per share.............................. $ (2.60) $ (2.29) $ (1.78) Pro forma diluted loss per share............................ $ (2.60) $ (2.29) $ (1.78)
Because the method of accounting required under FASB Statement No. 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in fiscal 2001, 2000, and 1999, respectively: average risk-free interest rates of 4.8%, 5.0%, and 5.1%, no expected dividend yield; expected lives of eight years for regular options and five years for Deferral Options in all years; expected volatility of approximately 43% for fiscal year 2001 and 28% for fiscal 2000 and 27% for fiscal 1999. 8. Significant Customers The following table sets forth the customers which represent ten percent or more of the Company's total revenues in fiscal years 2001, 2000 and 1999, after the effect of any consolidations that occurred as a result of any acquisition or mergers by the retailers:
Fiscal Year Ended ------------------------------------------ December 30, December 31, January 2, 2001 2000 2000 ---- ---- ---- Company A 12.22% 11.70% 9.01% Company B 12.32% 10.58% 10.01% Company C 12.04% 10.99% 9.65%
9. Non-Recurring and Other Charges In the third quarter of fiscal 2000, the Company approved a plan to discontinue operations in Mexico. As a result, the Company incurred non- recurring charges totaling $1,400,000 associated with the closure of its Mexico operation. The non-recurring charges consisted of leasehold improvement write-offs of $545,000 related to the water stores and warehouse; impairment losses on the disposal of equipment and fixtures located in Mexico of $338,000; severance costs of $83,000 related to the involuntary termination of 35 employees; lease termination costs of $42,000; building closures of $192,000; fees paid to advisors regarding actions to be taken in the restructuring of $117,000; and other direct costs associated with the exit plan of $83,000. By the end of the third quarter of 2000, the closure of the Mexico operations was substantially complete. There were no additional charges associated with the discontinuance of the operation in Mexico, and as of December 30, 2001 and December 31, 2000, $0 and $69,000 was unpaid and included in accrued liabilities in the accompanying consolidated balance sheet. 28 GLACIER WATER SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 10. Related Party Transactions Kayne Anderson Capital Advisors, L.P. currently manages the Company's investment portfolio. Two board members are employed as senior executives of Kayne Anderson Capital Advisors, L.P. and are shareholders of the Company. The Company incurred costs of $13,000, $44,000, and $69,000 in fiscal 2001, 2000, and 1999, 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 12). The Company incurred costs of $11,000 for consulting services provided by LEK Consulting during fiscal 1999 and did not use LEK consulting during fiscal 2000 and 2001. A director of the Company was the President of the North American practice of LEK Consulting Group during fiscal 1999. He is no longer employed by LEK Consulting. 11. Segment Reporting Glacier operates in a single business segment providing high quality, low priced drinking water dispensed to consumers through self-service vending machines. Glacier conducted operations in Mexico beginning in fiscal 1998. In the third quarter of fiscal 2000, the Company discontinued its operations in Mexico City and returned approximately 500 machines to the United States for future re-deployment. During fiscal 2000, the operations in Mexico incurred operating losses of approximately $814,000. The geographic revenues for the fiscal year and long-lived assets are as follows:
Revenues Fiscal Year Ended Long-Lived Assets as of ---------------------------- ----------------------------- December 30, December 31, December 30, December 31, 2001 2000 2001 2000 ---- ---- ---- ---- (in thousands) United States............................... $ 60,345 $ 58,850 $ 48,286 $ 55,366 Mexico...................................... -- 326 -- -- --------- ---------- --------- --------- Total....................................... $ 60,345 $ 59,176 $ 48,286 $ 55,366 ========= ========== ========= =========
12. Subsequent Events 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 for $6,200,000 subject to certain working capital adjustments related primarily to the accounts receivable and accounts payable balances assumed by Glacier, of which $640,000 is payable in installments over four years. Prior to the acquisition, Pure Fill operated water vending machines in certain markets also serviced by Glacier. The results of operations related to the Pure Fill acquisition will be included in the consolidated financial statements of Glacier Water subsequent to the acquisition. In connection with the Pure Fill acquisition, the Company entered into a new $10,000,000 credit facility with City National Bank on February 19, 2002. The credit facility requires monthly interest payments at the bank's prime rate plus 1.00% (5.75% per annum at February 19, 2002) on the $4,000,000 revolving credit portion and monthly principal and interest payments at the bank's prime rate plus 1.50% (6.25% per annum at February 19, 2002) on the $6,000,000 term loan portion. The City National Bank credit facility contains certain financial covenants and Glacier pledged certain assets in connection with this facility. In connection with the acquisition of the Pure Fill asset, 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 Kayne Anderson Capital Advisors, L.P. interest of $12,000 at an interest rate consistent with the rates charged by City National Bank. Glacier borrowed $6,000,000 on the term loan to repay the temporary funding by the funds managed by Kayne Anderson Capital Advisors, L.P. 29 13. Quarterly Financial Data (Unaudited)
First Quarter Second Quarter Third Quarter Fourth Quarter ------------ ------------- ------------- -------------- (in thousands, except shares and per share amounts) Year Ended December 30, 2001: Net revenues $ 13,440 $ 15,473 $ 17,248 $ 14,184 Income (loss) from operations (574) 465 1,446 (1,069) Income (loss) before extraordinary gain (2,021) (990) 21 (2,508) Gain on early extinguishment of debt 4 -- -- -- Net income (loss) (2,017) (990) 21 (2,508) Basic and diluted (loss) per share: Loss before extraordinary gain (.71) (.35) -- (.88) Extraordinary gain -- -- -- -- Net income (loss) (.71) (.35) -- (.88) Weighted average shares 2,834,474 2,834,474 2,834,474 2,834,474 Year Ended December 31, 2000: Net revenues $ 12,785 $ 15,939 $ 17,214 $ 13,238 Loss from operations (833) 231 (485) (523) Loss before extraordinary gain (2,376) (1,252) (1,900) (4,668) Gain on early extinguishment of debt 1,073 460 318 2,347 Net loss (1,303) (792) (1,582) (2,321) Basic and diluted (loss) per share: Loss before extraordinary gain (.84) (.44) (.67) (1.64) Extraordinary gain .38 .16 .11 83 Net loss (.46) (.28) (.56) (.82) Weighted average shares 2,834,174 2,843,965 2,840,174 2,838,545 Year Ended January 2, 2000: Net revenues $ 12,623 $ 14,232 $ 15,706 $ 14,213 Income (loss) from operations (401) (223) 903 (372) Loss before extraordinary gain (2,593) (1,713) (772) (2,157) Gain on early extinguishment of debt - - 336 2,281 Net income (loss) (2,593) (1,713) (436) 124 Basic earnings (loss) per share: Loss before extraordinary gain (.87) (.61) (.27) (.76) Extraordinary gain - - .12 .80 Net income (loss) (.87) (.61) (.15) .04 Weighted average shares 2,987,879 2,827,301 2,833,000 2,834,174
During the third quarter of fiscal 2000, the Company discontinued operations in Mexico. As a result, the Company incurred non-recurring charges totaling $1,400,000 associated with the closure of its Mexico operation. Refer to Note 9, Non-Recurring and Other Charges, for more detail. During the second quarter of fiscal 1999, the Company deemed a corporate debt equity investment as permanently impaired and reduced the carrying value by $500,000. In the first quarter of fiscal 1999, the Company deemed a corporate debt investment as permanently impaired and reduced the carrying value by $1,600,000. 30 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 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 (xii.) 4.3 Officers' Certificate of Company Order executed by Glacier Water Services, Inc., dated January 27, 1998 (xii.) 4.4 Certificate of Trust of Glacier Water Trust I, dated November 13, 1997 (xi.) 4.5 Trust Agreement of Glacier Water Trust I, dated November 13, 1997 (xi.) 4.5.1 Amended and Restated Trust Agreement of Glacier Water Trust I, dated January 27, 1998 (xii.) 4.6 Trust Preferred Certificate of Glacier Water Trust I (xii.) 4.7 Common Securities Certificate of Glacier Water Trust I (xii.) 4.8 Guarantee Agreement between Glacier Water Services, Inc. and Wilmington Trust Company, as Trustee, dated January 27, 1998 (xii.) 4.9 Agreement as to Expenses and Liabilities between Glacier Water Services, Inc. and Glacier Water Trust I, dated January 27, 1998 (xii.) 4.10 Junior Subordinated Deferrable Interest Debenture of Glacier Water Services, Inc. (xii.) 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 (v.) dated June 6, 1996 10.3.2 Amendment No. 2 to 1994 Stock Compensation Plan (v.) dated September 17, 1996 10.3.3 Amendment No. 3 to 1994 Stock Compensation Plan (vi.) dated June 3, 1997 10.3.4 Amendment No. 4 to 1994 Stock Compensation Plan (vii.) dated June 9, 1998 10.3.5 Amendment No. 5 to 1994 Stock Compensation Plan (viii.) dated June 2, 1999 10.3.6 Amendment No. 6 to 1994 Stock Compensation Plan (ix.) dated June 6, 2000 10.3.7 Amendment No. 7 to 1994 Stock Compensation Plan (x.) dated June 5, 2001 10.4 City National Bank Loan Agreements dated February 19, 2002 21.1 Subsidiaries of Glacier Water Services, Inc. 23.1 Consent of Arthur Andersen LLP Independent Public Accountants (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 2, 1993. (v.) Incorporated by reference to the Company's Proxy Statement for the Annual Meeting held on June 6, 1995. (vi.) Incorporated by reference to the Company's Proxy Statement for the Annual Meeting held on June 3, 1997. (vii.) Incorporated by reference to the Company's Proxy Statement for the Annual Meeting held on June 9, 1998. (viii.) Incorporated by reference to the Company's Proxy Statement for the Annual Meeting held on June 2, 1999. (ix.) Incorporated by reference by the Company's Proxy Statement for the Annual Meeting held on June 6, 2000. 31 (x.) Incorporated by reference to the Company's Proxy Statement for the Annual Meeting held on June 5, 2001. (xi.) Incorporated by reference to the Company's Proxy Registration Statement on Form S-2 (File Number 333-40335) filed January 22, 1998 . (xii.) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended January 4, 1998. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GLACIER WATER SERVICES, INC. By:_____________________________________________ /s/ Brian H. McInerney President and Chief Executive Officer By:_____________________________________________ /s/ W. David Walters Senior Vice President, Chief Financial Officer Date: March 12, 2002 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 March 12, 2002.
Signature Title - --------- ----- Principal Executive Officer: _____________________________________________ President and Chief Executive Officer /s/ Brian H. McInerney _____________________________________________ Chairman of the Board and Director /s/ Charles Norris _____________________________________________ Director /s/ Richard A. Kayne _____________________________________________ Director /s/ Peter H. Neuwirth _____________________________________________ Director /s/ Scott H. Shlecter _____________________________________________ Director /s/ Robert V. Sinnott
32 EX-3.3 3 dex33.txt CERTIFICATE OF DESIGNATION Exhibit 3.3 CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK OF GLACIER WATER SERVICES, INC. JUNE 18, 2001 GLACIER WATER SERVICES, INC., a corporation organized and existing by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify that the Board of Directors has authorized ----------- the issuance of redeemable convertible preferred stock with the following voting powers, designations, preferences rights and qualifications by resolution duly adopted in accordance with the provisions of Section 151 of the DGCL to Charles Norris ("Holder"): From the 100,000 shares of Preferred Stock, $0.01 par value per share, of the Corporation authorized to be issued pursuant to Article FOURTH of the Certificate of Incorporation of the Corporation as now or hereafter amended (the "Certificate of Incorporation"), which term includes this Certificate of Designation, Preferences and Rights, the Corporation, by its Board of Directors, hereby designates a series of preferred stock and hereby fixes the voting powers, designation, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, of the shares of such series as follows: 1. Number and Designation of Shares. Of the 100,000 shares of authorized -------------------------------- preferred stock, 16,000 shall be designated and known as "Redeemable Convertible Preferred Stock" (the "Preferred Stock"). The purchase price for --------------- the original issuance of the Preferred Stock shall be $100.00 per share. 2. Dividends. --------- (a) Preferential Dividends. Holder shall be entitled to receive, ---------------------- when, as and if 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 then outstanding (adjusted appropriately for stock dividends, combinations, splits, recapitalizations and the like), payable in preference and priority to any payment of any dividend on preferred stock ranking junior to the Preferred Stock or common stock of the Corporation, par value $0.01 per share (the "Common Stock"). Provided that the Corporation has funds or assets from which it may legally pay the Dividend, the Board of Directors shall declare and the Corporation shall pay a Dividend no less frequently than the first day of each calendar quarter. (b) Participation. If, after Dividends in the full preferential ------------- amount specified above for Preferred Stock have been paid or declared and set apart in any fiscal year of the Corporation, the Corporation declares dividends or other distributions on the Common Stock (other than shares of Common Stock as contemplated by Section 5(d)), out of funds or other assets legally available therefor, then such dividends or other distributions shall be declared pro rata on the Common Stock and Preferred Stock (and any other preferred stock of the Corporation), with each share of Preferred Stock (and other preferred stock of the Corporation) being deemed for such purpose to be equal to the number of shares of Common Stock, including fractions of a share, into which such share of Preferred Stock (or other preferred stock of the Corporation) is convertible immediately prior to the close of business on the record date fixed for such dividend or distribution. (c) No Other Right to Receive Dividends. Except as set forth in ----------------------------------- Section 2(a) or (b), no right shall accrue to the Preferred Stock by reason of the fact that Dividends are not declared thereon in any period. 3. Liquidation Preference. ---------------------- (a) Amount of Preference. In the event of any voluntary or -------------------- involuntary liquidation, dissolution or winding up of the Corporation (a "Liquidation"), Holder shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, before any payment shall be made to the holders of the Common Stock or any other class or series of stock of the Corporation ranking junior to Preferred Stock in respect of distribution of assets upon Liquidation, an amount equal to $100.00 per share of Preferred Stock plus any accrued but unpaid Dividends whether or not such Dividend had previously been declared by the Board of Directors ("Liquidation Amount"). If, upon any Liquidation, the remaining assets of the Corporation available for distribution to its stockholders shall be insufficient to pay Holder, and the holders of any other shares of stock of the Corporation which rank equally with Preferred Stock in respect of distribution of assets upon Liquidation, the full amount to which they shall be entitled, Holder and the holders of any such other shares of stock shall share ratably in any distribution of the remaining assets of the Corporation in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. (b) Ratable Distribution. After the payment of the Liquidation -------------------- Amount to be paid to Holder upon the Liquidation of the Corporation, all of the remaining assets of the Corporation available for distribution to its stockholders shall be distributed ratably among the Holder and the holders of all other preferred stock of the Corporation and the Common Stock, with each share of Preferred Stock being deemed, for such purpose, to be equal to the number of shares of Common Stock, including fractions of a share, into which such share of Preferred Stock is convertible immediately prior to the close of business on the business day fixed for such distribution. (c) Merger or Sale. The merger or consolidation of the Corporation -------------- into or with another corporation which results in the exchange of outstanding shares of the Corporation for securities or other consideration issued or paid or caused to be issued or paid by such other corporation or an affiliate thereof (except if such merger or consolidation does not result in the transfer of more than 50 percent of the voting securities of the Corporation), the transfer during any 12-month period of 50 percent or more of the voting securities of the Corporation whether by way of transfer of outstanding shares of the Corporation or the issuance of new shares by the Corporation or some combination thereof, or the sale of all or substantially all the assets of the Corporation, shall be deemed to be a Liquidation for purposes of this Section 3, unless the cash, securities and/or other assets which may be distributed to the Holder upon such merger, consideration or sale, and the value thereof, are approved in writing by the Holder. The value of such property, rights or other securities shall be determined in good faith by the Board of Directors of the Corporation. 4. Redemption. ---------- (a) Redemption Rights. Except as otherwise provided herein, neither ----------------- the Corporation nor Holder shall have the right at any time to demand or compel a redemption of all, or any, shares of Preferred Stock. (b) Optional Redemption. The Preferred Stock may be redeemed on or ------------------- after the third anniversary of the issuance of the Preferred Stock, at the election of the Corporation, as a whole or from time to time in part, at the following redemption prices, expressed as a percentage of the Liquidation Amount. On and after Third Anniversary.......................103% On and after Fourth Anniversary......................102% On and after Fifth Anniversary.......................101% On and after Sixth Anniversary.......................100% (c) Special Redemption. The Preferred Stock may be redeemed, at the ------------------ election of the Corporation, as a whole or from time to time in part, at 100% of the Liquidation Amount if the closing price of Corporation's common stock on the principal exchange or over the counter market in which it is traded remains at or above $19.00, subject to adjustment as is appropriate to reflect adjustments under Section 5(d), (e) or (f), for 10 consecutive trading days, provided such redemption is effected within 30 days thereafter. (d) Approval and Notice. The election of the Corporation to redeem ------------------- any Preferred Stock shall be evidenced by a resolution of the Board of Directors of the Corporation. The Corporation shall, at least 10 days prior to the redemption date (the "Redemption Date") fixed by the Corporation, deliver written notice (the "Redemption Notice") to Holder of such redemption date, the amount of Preferred Stock to be redeemed and the redemption date. (e) Partial Redemption. If less than all of the outstanding Preferred ------------------ Stock is to be redeemed, the particular shares thereof to be redeemed shall be determined on a pro rata basis, by lot or by such other method determined by the Corporation. 5. Conversion. ---------- (a) Optional Conversion. Preferred Stock shall be convertible from ------------------- time to time, including, but not by way of limitation, during the period after Holder has received a Redemption Notice but prior to the Redemption Date set forth in the Redemption Notice, in whole or part at the election of a Holder upon 10 days written notice (the "Conversion Notice") of such election to the Corporation. Upon conversion, the Holder shall receive from the Corporation that number of shares of Common Stock computed by dividing the Liquidation Amount with respect to the number of shares of the Preferred Stock to be converted by $9.50. The minimum amount of Preferred Stock which may be converted at one time shall be 5,000 shares of Preferred Stock. The timely delivery of a Conversion Notice shall terminate the Corporation's right to redeem the Preferred Stock covered by the Conversion Notice. (b) Mechanics of Conversion. ----------------------- (i) In order to receive certificates representing shares of Common Stock, Holder shall surrender the certificate or certificates for such shares of Preferred Stock at the office of the transfer agent (or at the principal office of the Corporation if the Corporation serves as its own transfer agent), together with written notice that shall state such holder's name or the names of the nominees in which such holder wishes the certificate or certificates for shares of Common Stock to be issued. If required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by a written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or his or its attorney duly authorized in writing. The Corporation shall, as soon as practicable, issue and deliver at such office to Holder, or to his nominee, a certificate or certificates for the number of shares of Common Stock to which Holder shall be entitled, together with cash in lieu of any fraction of a share. (ii) The Corporation shall at all times during which Preferred Stock shall be outstanding, reserve and keep available out of its authorized but unissued stock, for the purpose of effecting the conversion of Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Preferred Stock. The Corporation will take any corporate action which may, in the opinion of its counsel, be necessary in order that that Corporation may validly and legally issue fully paid and nonassessable shares of Common Stock. (iii) All shares of Preferred Stock which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares, including the rights, if any, to receive dividends, notices and to vote, shall immediately cease and terminate, except only the right of the holders thereof to receive shares of Common Stock in exchange therefor. Any shares of Preferred Stock so converted shall be retired and shall not be reissued as shares of Preferred Stock. (c) Fractional Shares. No fractional shares of Common Stock or scrip ----------------- representing fractional shares shall be issued upon conversion of shares of the Preferred Stock. If more than one share of Preferred Stock shall be surrendered for conversion at one time by the same record holder, the number of full shares of Common Stock issuable upon the conversion thereof shall be computed on the basis of the aggregate number of shares of Preferred Stock so surrendered by such record holder. Instead of any fractional share of Common Stock otherwise issuable upon conversion of any shares of Preferred Stock, the Corporation shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of current per share fair market value of the Common Stock as determined in good faith by the Board of Directors on such basis as it considers appropriate. (d) Subdivision or Combination of Common Stock. If the Corporation at ------------------------------------------ any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, or if the Corporation at any time combines (by reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the number of shares of Common Stock into which each outstanding share of Preferred Stock shall be convertible shall be proportionately adjusted. (e) Reorganization, Reclassification, Consolidation, Merger or Sale. --------------------------------------------------------------- Any recapitalization, reorganization, reclassification (other than as contemplated by Section 5(d)), consolidation, merger, sale of all or substantially all of the Corporation's assets to another person or other transaction which is effected in such a manner that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as an "Organic Change." Prior to the consummation of any Organic -------------- Change, the Corporation shall make appropriate provisions (as determined in good faith by the disinterested members of the Board of Directors, whose determination shall be conclusive) to insure that Holder shall thereafter have the right to acquire and receive, in lieu of or in addition to (as the case may be) the shares of stock immediately theretofore acquirable and receivable upon the conversion of Holder's Preferred Stock, such shares of stock, securities or assets as Holder would have received in connection with such Organic Change if Holder had converted its Preferred Stock immediately prior to such Organic Change. In each such case, the Corporation shall also make appropriate provisions (as determined in good faith by the disinterested members of the Board of Directors, whose determination shall be conclusive) to insure that the provisions of this Section 5 shall thereafter be applicable to Preferred Stock and to the shares of stock, securities or assets received by Holder upon such Organic Change. The Corporation shall not effect any Organic Change unless prior to the consummation thereof, the successor corporation (if other than the Corporation) resulting from consolidation or merger or the corporation purchasing such assets assumes by written instrument (in form and substance reasonably satisfactory to Holder the obligation to deliver to Holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, Holder may be entitled to acquire. (f) Certain Events. If an event not specifically enumerated in this -------------- Section 5 occurs which has substantially the same economic effect on Common Stock as those specifically enumerated shall occur, then this Section 5 shall be construed liberally, mutatis mutandis, in order to give Preferred Stock the ---------------- benefit of the protections provided under this Section 5. The Corporation's Board of Directors shall make an appropriate adjustment in the Preferred Stock conversion price so as to protect the rights of Holder; provided that no such adjustment shall increase the Preferred Stock conversion price as otherwise determined pursuant to this Section 5 or decrease the number of shares of Common Stock issuable upon conversion of each share of Preferred Stock. (g) Notices. Promptly following any adjustment of the conversion rate ------- as provided in Section 5(d), (e), or (f) the Corporation shall give written notice thereof to Holder, setting forth in reasonable detail and certifying the calculation of such adjustment. 6. Voting. Except as otherwise required by law or provided herein, the ------ Holder shall not be entitled to vote Holder's shares of Preferred Stock. 7. Sinking Fund. There shall be no sinking fund for the payment of ------------ dividends or liquidation preferences on Preferred Stock or the redemption of any shares thereof. 8. Representations, Covenants and Warranties of the Corporation. ------------------------------------------------------------ The Corporation hereby represents, warrants and covenants to Holder as follows: (a) As of the date of issuance of the 16,000 shares of the Preferred Stock to Holder, the Corporation has not issued or agreed to issue any other shares of Preferred Stock; and (b) So long as Holder continues to hold any shares of Preferred Stock, the Corporation will not issue any other preferred stock which ranks senior to Preferred Stock as to Dividends or upon a Liquidation without the written consent of Holder. IN WITNESS WHEREOF, the Corporation has caused this Certificate to be duly executed by W. David Walters, the Chief Financial Officer of the Corporation, as of June 15, 2001. GLACIER WATER SERVICES, INC. By__________________________ Name: Title: EX-10.4 4 dex104.txt CITY NATIONAL BANK LOANS AGREEMENTS [LOGO] City National Bank Exhibit 10.4 PROMISSORY NOTE
- --------------------------------------------------------------------------------------------------------- Principal Loan Date Maturity Loan No Call / Coll Account Officer Initials $4,000,000.00 02-11-2002 02-01-2004 41983 655355 AC - --------------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations. - --------------------------------------------------------------------------------------------------------- Borrower: GW SERVICES, INC., A CALIFORNIA Lender: City National Bank, NA CORPORATION Westside Commercial Banking Center #674000 2651 LA MIRADA DRIVE, SUITE 100 400 North Roxbury Drive VISTA, CA 92083 Beverly Hills, CA 90210 ==========================================================================================================
Principal Amount: $4,000,000.00 Initial Rate: 5.750% Date of Note: February 11, 2002 PROMISE TO PAY. GW SERVICES, INC., A CALIFORNIA CORPORATION ("Borrower") promises to pay to City National Bank, NA ("Lender"), or order, in lawful money of the United States of America, the principal amount of Four Million & 00/100 Dollars ($4,000,000.00) or so much as may be outstanding, together with interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance. PAYMENT. Borrower will pay this loan in one payment of all outstanding principal plus all accrued unpaid interest on February 1, 2004. In addition, Borrower will pay regular monthly payments of all accrued unpaid interest due as of each payment date, beginning March 1, 2002, with all subsequent interest payments to be due on the same day of each month after that. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collection costs. The annual interest rate for this Note is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an index which is the City National Bank Prime Rate (the "Index"). Prime Rate shall mean the rate most recently announced by Lender at its principal office in Beverly Hills, California, as its "Prime Rate". Any change in the Prime Rate shall become effective on the same business day on which the Prime Rate shall change, without prior notice to Borrower. Lender will tell Borrower the current index rate upon Borrower's request. The interest rate change will not occur more often than each day. Borrower understands that Lender may make loans based on other rates as well. The Index currently is 4.750%. The interest rate to be applied to the unpaid principal balance of this Note will be at a rate of 1.000 percentage point over the Index, resulting in an initial rate of 5.750%. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. PREPAYMENT. Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, early payments will reduce the principal balance due. Borrower agrees not to send Lender payments marked "paid in full", "without recourse", or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender's rights under this Note, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes "payment in full" of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: City National Bank, NA; Westside Commercial Banking Center #874000; 400 North Roxbury Drive; Beverly Hills, CA 90210. INTEREST AFTER DEFAULT. Upon Borrower's failure to pay all amounts declared due pursuant to this section, including failure to pay upon final maturity, Lender, at its option, may, if permitted under applicable law, increase the variable interest rate on this Note to 6.000 percentage points over the Index. DEFAULT. Each of the following shall constitute an event of default ("Event of Default") under this Note: Payment Default. Borrower fails to make any payment when due under this Note. If not cured within Ten (10) days, written notice thereto. Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Note or in any of the related documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. Default in Favor of Third Parties. Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the related documents. False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Note or the related documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter. Insolvency. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under the bankruptcy or insolvency laws by or against Borrower. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the loan. This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the Creditor of forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any guaranty of the indebtedness evidenced by this Note. Change in Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. Adverse Change. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or PROMISSORY NOTE Loan No: 41983 (Continued) Page 2 ================================================================================ performance of this Note is impaired. Insecurity. Lender in good faith believes itself insecure. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, and then Borrower will pay that amount. ATTORNEYS' FEES; EXPENSES. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees, expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. Borrower also will pay any court costs, in addition to all other sums provided by law. GOVERNING LAW. This Note will be governed by, construed and enforced in accordance with federal law and the laws of the State of California. This Note has been accepted by Lender in the State of California. CHOICE OF VENUE. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of LOS ANGELES County, State of California. LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under this Note may be requested orally by Borrower or as provided in this paragraph. All oral requests shall be confirmed in writing on the day of the request. All communications, instructions, or directions by telephone or otherwise to Lender are to be directed to Lender's office shown above. The following persons currently are authorized to request advances and authorize payments under the line of credit until Lender receives from Borrower, at Lender's address shown above, written notice of revocation of their authority: BRIAN H. MCINERNEY; DAVE WALTERS; STEVE MURPHY; LUZ GONZALES; and BRIAN NAKAGAWA. Borrower agrees to be liable for all sums either: (A) advanced in accordance with the instructions of an authorized person or (B) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Note if: (A) Borrower or any guarantor is in default under the terms of this Note or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Note; (B) Borrower or any guarantor ceases doing business or is insolvent; (C) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Note or any other loan with Lender; (D) Borrower has applied funds provided pursuant to this Note for purposes other than those authorized by Lender; or (E) Lender in good faith believes itself insecure. SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower, and upon Borrower's heirs, personal representatives, successors and assigns, and shall inure to the benefit of Lender and its successors and assigns. NOTIFY US OF INACCURATE INFORMATION WE REPORT TO CONSUMER REPORTING AGENCIES. Please notify us if we report any inaccurate information about your account(s) to a consumer reporting agency. Your written notice describing the specific inaccuracy(ies) should be sent to us at the following address: City National Bank, 831 South Douglas Street, El Segundo, CA 90245l. GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive any applicable statute of limitations, presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Note are joint and several. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE. BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE. BORROWER: GW SERVICES, INC., A CALIFORNIA CORPORATION By: /s/ Brian H. McInerney ---------------------- BRIAN H. MCINERNEY, President/CEO of GW SERVICES, INC., A CALIFORNIA CORPORATION ================================================================================ [LOGO] CITY NATIONAL BANK PROMISSORY NOTE
- -------------------------------------------------------------------------------------------------------------------------- Principal Loan Date Maturity Loan No Call/Coll Account Officer Initials $6,000,000.00 02-11-2002 02-01-2007 41984 655355 AC - -------------------------------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations. - --------------------------------------------------------------------------------------------------------------------------
Borrower: GW SERVICES, INC., A CALIFORNIA Lender: City National Bank, NA CORPORATION Westside Commercial 2651 LA MIRADA DRIVE, SUITE 100 Banking Center #674000 VISTA, CA 92083 400 North Roxbury Drive Beverly Hills, CA 90210 ================================================================================ Principal Amount: $6,000,000.00 Initial Rate: 6.250% Date of Note: February 11, 2002 PROMISE TO PAY. GW SERVICES, Inc., A CALIFORNIA CORPORATION ("Borrower") promises to pay to City National Bank, NA ("Lender"), or order, in lawful money of the United States of America, the principal amount of Six Million & 00/100 Dollars ($6,000,000.00), together with interest on the unpaid principal balance from February 11, 2002, until paid in full. PAYMENT. Subject to any payment changes resulting from changes in the Index, Borrower will pay this loan in 59 principal payments of $100,000.00 each and one final principal and interest payment of $100,538.19. Borrower's first principal payment is due March 1, 2002, and all subsequent principal payments are due on the same day of each month after that. In addition, Borrower will pay regular monthly payments of all accrued unpaid interest due as of each payment date, beginning March 1, 2002, with all subsequent interest payments to be due on the same day of each month after that. Borrower's final payment due February 1, 2007, will be for all principal and all accrued interest not yet paid. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collection costs. The annual interest rate for this Note is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an index which is the City National Bank Prime Rate (the "Index"). Prime Rate shall mean the rate most recently announced by Lender at its principal office in Beverly Hills, California, as its "Prime Rate". Any change in the Prime Rate shall become effective on the same business day on which the Prime Rate shall change, without prior notice to Borrower. Lender will tell Borrower the current index rate upon Borrower's request. The interest rate change will not occur more often than each day. Borrower understands that Lender may make loans based on other rates as well. The Index currently is 4.750%. The interest rate to be applied to the unpaid principal balance of this Note will be at a rate of 1.500 percentage points over the Index, resulting in an initial rate of 6.250%. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. PREPAYMENT. Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments under the payment schedule. Rather, early payments will reduce the principal balance due and may result in Borrower's making fewer payments. Borrower agrees not to send Lender payments marked "paid in full", "without recourse", or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender's rights under this Note, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes "payment in full" of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: City National Bank, NA; Westside Commercial Banking Center #674000; 400 North Roxbury Drive; Beverly Hills, CA 90210. INTEREST AFTER DEFAULT. Upon Borrower's failure to pay all amounts declared due pursuant to this section, including failure to pay upon final maturity, Lender, at its option, may, if permitted under applicable law, increase the variable interest rate on this Note to 6.500 percentage points over the Index. DEFAULT. Each of the following shall constitute an event of default ("Event of Default") under this Note: Payment Default. Borrower fails to make any payment when due under this Note. If not cured within Ten (10) days, written notice thereof. Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Note or in any of the related documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. Default in Favor of Third Parties. Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligation under this Note or any of the related documents. False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Note or the related documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter. Insolvency. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the loan. This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. Events Affecting Guarantor. Any of the preceding events occurs with respect to any guarantor, endorser, surety, or accommodation party of any of the indebtedness or any guarantor, endorser, surety, or accommodation party dies or becomes incompetent, or revokes or disputes the validity of, or liability under, and guaranty of the indebtedness evidenced by this Note. PROMISSORY NOTE Loan No: 41984 (Continued) Page 2 ================================================================================ Change in Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. Adverse Change. A material adverse change occurs in Borrower's financial condition, or leader believes the prospect of payment or performance of this Note is impaired. Insecurity. Lender in good faith believes itself insecure. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, and then Borrower will pay that amount. ATTORNEY'S FEES; EXPENSES. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees, expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. Borrower also will pay any court costs, in addition to all other sums provided by law . GOVERNING LAW. This Note will be governed by, construed and enforced in accordance with federal law and the laws of the State of California. This Note has been accepted by Lender in the State of California. CHOICE OF VENUE. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of LOS ANGELES County, State of California. SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower, and upon Borrower's heirs, personal representatives, successors and assigns, and shall inure to the benefit of Lender and its successors and assigns . NOTIFY US OF INACCURATE INFORMATION WE REPORT TO CONSUMER REPORTING AGENCIES. Please notify us if we report any inaccurate information about your account(s) to a consumer reporting agency. Your written notice describing the specific inaccuracy(ies) should be sent to us at the following address: City National Bank, 831 South Douglas Street, El Segundo, CA 90245 GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive any applicable statute of limitations, presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Note are joint and several. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE. BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE . BORROWER: GW SERVICES, INC., A CALIFORNIA CORPORATION BY: /s/ Brian H. McInerney ------------------------------------------------ BRIAN H. MCINERNEY, President/CEO of GW SERVICES, INC., A CALIFORNIA CORPORATION ================================================================================ [LOGO] City National Bank COMMERCIAL SECURITY AGREEMENT
- -------------------------------------------------------------------------------------------- Principal Loan Date Maturity Loan No Call / Coll Account Officer Initials $4,000,000.00 02-11-2002 02-01-2004 41983 655355 AC - -------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations. - --------------------------------------------------------------------------------------------
Grantor: GW SERVICES, INC., A CALIFORNIA Lender: City National Bank, NA CORPORATION Westside Commercial 2651 LA MIRADA DRIVE, SUITE 100 Banking Center #674000 VISTA, CA 92083 400 North Roxbury Drive Beverly Hills, CA 90210 ================================================================================ THIS COMMERCIAL SECURITY AGREEMENT dated February 11, 2002, is made and executed between GW SERVICES, INC., A CALIFORNIA CORPORATION ("Grantor") and City National Bank, NA ("Lender"). GRANT OF SECURITY INTEREST. For valuable consideration, Grantor grants to Lender a security interest in the Collateral to secure the Indebtedness and agrees that Lender shall have the rights stated in this Agreement with respect to the Collateral, in addition to all other rights which Lender may have by law. COLLATERAL DESCRIPTION. The word "Collateral" as used in this Agreement means the following described property, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located, in which Grantor is giving to Lender a security interest for the payment of the Indebtedness and performance of all other obligations under the Note and this Agreement: All Inventory, Chattel Paper, Accounts, Equipment and General Intangibles In addition, the word "Collateral" also includes all the following, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located: (A) All accessions, attachments, accessories, tools, parts, supplies, replacements and additions to any of the collateral described herein, whether added now or later. (B) All products and produce of any of the property described in this Collateral section. (C) All accounts, general intangibles, instruments, rents, monies, payments, and all other rights, arising out of a sale, lease, or other disposition of any of the property described in this Collateral section. (D) All proceeds (including insurance proceeds) from the sale, destruction, loss, or other disposition of any of the property described in this Collateral section, and sums due from a third party who has damaged or destroyed the Collateral or from that party's insurer, whether due to judgement, settlement or other process. (E) All records and data relating to any of the property described in this Collateral section, whether in the form of a writing, photograph, microfilm, microfiche, or electronic media, together with all of Grantor's right, title, and interest in and to all computer software required to utilize, create, maintain, and process any such records or data on electronic media. Despite any other provision of this Agreement, Lender is not granted, and will not have, a nonpurchase money security interest in household goods, to the extent such a security interest would be prohibited by applicable law. In addition, if because of the type of any Property, Lender is required to give a notice of the right to cancel under Truth in lending for the Indebtedness, then Lender will not have a security interest in such Collateral unless and until such a notice is given. CROSS-COLLATERALIZATION. In addition to the notes, this agreement secures all obligations, debts and liabilities, plus interest thereon, of Grantor to Lender, or any one or more of them, as well as all claims by Lender against Grantor or any one or more of them, whether now existing or hereafter arising, whether related or unrelated to the purpose of the Note, whether voluntary or otherwise, whether due or not due, direct or indirect, determined or undetermined, absolute or contingent, liquidated or unliquidated whether Grantor may be liable individually or jointly with others, whether obligated or guarantor, surety, accommodation party or otherwise, and whether recovery upon such amounts may be or hereafter may become barred by any statute of limitations, and whether the obligations to repay such amounts may be or hereafter may become otherwise unenforceable. GRANTOR'S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COLLATERAL. With respect to the Collateral, Grantor represents and promises to Lender that: Perfection of Security Interest. Grantor agrees to execute financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's security interest in the Collateral. Upon request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Grantor will note Lender's interest upon any and all chattel paper if not delivered to Lender for possession by Lender. This is a continuing Security Agreement and will continue in effect even though all or any part of the indebtedness is paid in full and even though for a period of time Grantor may not be indebted to Lender. Notices to Lender. Grantor will promptly notify Lender in writing at Lender's address shown above (or such other addresses as Lender may designate from time to time) prior to any (1) change in Grantor's name; (2) change in Grantor's assumed business name(s); (3) change in the management of the Grantor; (4) change in the authorized signer(s); (5) change in Grantor's principal office address; (6) change in Grantor's state of organization; (7) conversion of Grantor to a new or different type of business entity; or (8) change in any other aspect of Grantor that directly or indirectly relates to any agreements between Grantor and Lender. No change in Grantor's name or state of organization will take effect until after Lender has received notice. No violation. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its certificate or articles of incorporation and bylaws do not prohibit any term or condition of this Agreement. Enforceability of Collateral. To the extent the Collateral consists of accounts, chattel paper, or general intangibles, as defined by the Uniform Commercial Code, the Collateral is enforceable in accordance with its terms, is genuine, and fully complies with all applicable laws and regulations concerning form, content and manner of preparation and execution, and all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. At the time any Account becomes subject to a security interest in favor of Lender, the Account shall be good and valid account representing an undisputed, bona fide indebtedness incurred by the account debtor, for merchandise held subject to delivery instructions or previously shipped or delivered pursuant to a contract of sale, or for services previously performed by Grantor with or for the account debtor. So long as this Agreement COMMERCIAL SECURITY AGREEMENT (Continued) Loan No: 41983 Page 2 ================================================================================ remains in effect. There shall be no setoffs or counterclaims against any of the Collateral, and no agreement shall have been made under which any deductions or discounts may be claimed concerning the Collateral except those disclosed to Lender in writing. Location of the Collateral. Except in the ordinary course of Grantor's business, Grantor agrees to keep the Collateral (or to the extent the Collateral consists of intangible property such as accounts or general intangibles, the records concerning the Collateral) at Grantor's address shown above or at such other locations as are acceptable to Lender. Upon Lender's request, Grantor will deliver to Lender in form satisfactory to Lender a schedule of real properties and Collateral locations relating to Grantor's operations, including without limitation the following: (1) all real property Grantor owns or is purchasing; (2) all real property Grantor is renting or leasing; (3) all storage facilities Grantor owns, rents, leases, or uses; and (4) all other properties where Collateral is or may be located. Removal of the Collateral. Except in the ordinary course of Grantor's business, including the sales of inventory, Grantor shall not remove the Collateral from its existing location without Lender's prior written consent. To the extent that the Collateral consists of vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certificates of title for the vehicles outside the State of California, without Lender's prior written consent. Grantor shall, whenever requested, advise Lender of the exact location of the Collateral. Transactions Involving Collateral. Except for inventory sold or accounts collected in the ordinary course of Grantor's business, or as otherwise provided for in this Agreement, Grantor shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor is not in default under this Agreement, Grantor may sell inventory, but only in the ordinary course of its business and only to buyers who qualify as a buyer in the ordinary course of business. A sale in the ordinary course of Grantor's business does not include a transfer in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security interest provided for in this Agreement, without the prior written consent of Lender. This includes security interests even if junior in right to the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this requirement shall not constitute consent by Lender to any sale or other disposition. Upon receipt, Grantor shall immediately deliver any such proceeds to Lender. Title. Grantor represents and warrants to Lender that Grantor holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except for the lien of this Agreement. No financing statement covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Agreement or to which Lender has specifically consented. Grantor shall defend Lender's rights in the Collateral against the claims and demands of all other persons. Repairs and Maintenance. Grantor agrees to keep and maintain, and to cause others to keep and maintain, the Collateral in good order, repair and condition at all times while this Agreement remains in effect. Grantor further agrees to pay when due all claims for work done on, or services rendered or material furnished in connection with the Collateral so that no lien or encumbrance may ever attach to or be filed against the Collateral. Inspection of Collateral. Lender and Lender's designated representatives and agents shall have the right at all reasonable times to examine and inspect the Collateral wherever located. Taxes, Assessments and Liens. Grantor will pay when due all taxes, assessments and liens upon the Collateral, its use or operation, upon this Agreement, upon any promissory note or notes evidencing the Indebtedness, or upon any of the other Related Documents. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized in Lender's sole opinion. If the Collateral is subjected to a lien which is not discharged within fifteen (15) days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond or other security satisfactory to Lender in an amount adequate to provide for the discharge of the lien plus any interest, costs, attorneys' fees or other charges that could accrue as a result of foreclosure or sale of the Collateral. In any contest Grantor shall defend itself and Lender and shall satisfy any final adverse judgment before enforcement against the Collateral. Grantor shall name Lender as an additional obligee under any surety bond furnished in the contest proceedings. Grantor further agrees to furnish Lender with evidence that such taxes, assessments, and governmental and other charges have been paid in full and in a timely manner. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized. Compliance with Governmental Requirements. Grantor shall comply promptly with all laws, ordinances, rules and regulations of all governmental authorities, now or hereafter in effect, applicable to the ownership, production, disposition, or use of the Collateral. Grantor may contest in good faith any such law, ordinance or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Lender's interest in the Collateral, in Lender's opinion, is not jeopardized. Hazardous Substances. Grantor represents and warrants that the Collateral never has been, and never will be so long as this Agreement remains a lien on the Collateral, used in violation of any Environmental Laws or for the generation, manufacture, storage, transportation, treatment, disposal, release or threatened release of any Hazardous Substance. The representations and warranties contained herein are based on Grantor's due diligence in investigating the Collateral for Hazardous Substances. Grantor hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any Environmental Laws, and (2) agrees to indemnify and hold harmless Lender against any and all claims and losses resulting from a breach of this provision of this Agreement. This obligation to indemnify shall survive the payment of the Indebtedness and the satisfaction of this Agreement. Maintenance of Casualty Insurance. Grantor shall procure and maintain all risks insurance, including without limitation fire, theft and liability coverage together with such other insurance as Lender may require with respect to the Collateral, in form, amounts, coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least seven (7) days' prior written notice to Lender and not including any disclaimer of the Insurer's liability for failure to give such a notice. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide Lender with such loss payable or other endorsements as Lender may require. If Grantor at any time fails to obtain or maintain any insurance as required under this Agreement Lender may (but shall not be obligated to) obtain such insurance as Lender deems appropriate, including if Lender so chooses "single interest insurance," which will cover only Lender's interest in the Collateral. Application of Insurance Proceeds. Grantor shall promptly notify Lender of any loss or damage to the Collateral*. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. All proceeds of any insurance on the Collateral, including accrued proceeds thereon, shall be held by Lender as part of the Collateral. If Lender consents to repair or replacement of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds for the reasonable *in amounts greater than Ten Thousand Dollars (10,000,000) COMMERCIAL SECURITY AGREEMENT Loan No. 41983 (Continued) Page 3 ================================================================================ cost of repair or restoration. If Lender does not consent to repair or replacement of the Collateral, Lender shall retain a sufficient amount of the proceeds to pay all of the Indebtedness, and shall pay the balance to Grantor. Any proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not committed to the repair or restoration of the Collateral shall be used to prepay the Indebtedness. Insurance Reserves. Lender may require Grantor to maintain with Lender reserves for payment of insurance premiums, which reserves shall be created by monthly payments from Grantor of a sum estimated by Lender to be sufficient to produce, at least fifteen (15) days before the premium due date, amounts at least equal to the insurance premiums to be paid. If fifteen (15) days before payment is due, the reserve funds are insufficient, Grantor shall upon demand pay any deficiency to Lender. The reserve funds shall be held by Lender as a general deposit and shall constitute a non-interest-bearing account which Lender may satisfy by payment of the insurance premiums required to be paid by Grantor as they become due. Lender does not hold the reserve funds in trust for Grantor, and Lender is not the agent of Grantor for payment of the insurance premiums required to be paid by Grantor. The responsibility for the payment of premiums shall remain Grantor's sole responsibility. Insurance Reports. Grantor, upon request of Lender, shall furnish to Lender reports on each existing policy of insurance showing such information as Lender may reasonably request including the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the property insured; (5) the then current value on the basis of which insurance has been obtained and the manner of determining that value; and (6) the expiration date of the policy. In addition, Grantor shall upon request by Lender (however not more often than annually) have an independent appraiser satisfactory to Lender determine, as applicable, the cash value or replacement cost of the Collateral. GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except as otherwise provided below with respect to accounts, Grantor may have possession of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent with the Agreement or the Related Documents, provided that Grantor's right to possession and beneficial use shall not apply to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender's security interest in such Collateral. Until otherwise notified by Lender, Grantor may collect any of the Collateral consisting of accounts. At anytime after Lender has given notice of the occurance of an event of default, Lender may exercise its rights to collect the accounts and to notify account debtors to make payments directly to Lender for application to the Indebtedness. If Lender at any time has possession of any Collateral, whether before or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if lender takes such action for that purpose as Grantor shall request or as Lender, in Lender's sole discretion, shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties, nor to protect, preserve or maintain any security interest given to secure the indebtedness. LENDER'S EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender's interest in the Collateral or if Grantor fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Grantor's failure to discharge or pay when due any amounts Grantor is required to discharge or pay under this Agreement or any Related Documents, Lender on Grantor's behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on the Collateral and paying all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the data incurred or paid by Lender to the date or repayment by Grantor. All such expenses will become a part of the Indebtedness and, at Lender's option, will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be treated as a balloon payment which will be due and payable at the Note's maturity. The Agreement also will secure payment of these amounts. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon Default. DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Payment Default. Grantor fails to make any payment when due under the indebtedness. If not cured within ten (10) days, written notice thereof. Other Defaults. Grantor fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Grantor. Default in Favor of Third Parties. Should Grantor or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Grantor's property or Grantor's or any Grantor's ability to repay the Indebtedness or perform their respective obligations under this Agreement or any of the Related Documents. False Statements. Any warranty, representation or statement made or furnished to Lender by Grantor or on Grantor's behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter. Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason. Insolvency. The dissolution or termination of Grantor's existence as a going business, the insolvency of Grantor, the appointment of a receiver for any part of Grantor's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Grantor. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Grantor or by any governmental agency against any collateral securing the Indebtedness. This includes a garnishment of any of Grantor's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Grantor as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Grantor gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. Events Affecting Guarantor. Any of the preceding events occurs with respect to Guarantor of any of the Indebtedness or Guarantor dies or becomes incompetent or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. Adverse Change. A material adverse change occurs in Grantor's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. Insecurity. Lender in good faith believes itself insecure. COMMERCIAL SECURITY AGREEMENT Loan No: 41983 (Continued) Page 4 ================================================================================ RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this Agreement, at any time thereafter, Lender shall have all the rights of a secured party under the California Uniform Commercial Code. In addition and without limitation, Lender may exercise any one or more of the following rights and remedies: Accelerate Indebtedness. Lender may declare the entire Indebtedness, including any prepayment penalty which Grantor would be required to pay, immediately due and payable, without notice of any kind to Grantor. Assemble Collateral. Lender may require Grantor to deliver to Lender all or any portion of the Collateral and any and all certificates of title and other documents relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of and remove the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after repossession. Sell the Collateral. Lender shall have full power to sell, lease, transfer, or otherwise deal with the Collateral or proceeds thereof in Lender's own name or that of Grantor. Lender may sell the Collateral at public auction or private sale. Unless the Collateral threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor, and other persons as required by law, reasonable notice of the time and place of any public sale, or the time after which any private sale or any other disposition of the Collateral is to be made. However, no notice need be provided to any person who, after Event of Default occurs, enters into and authenticates an agreement waiving that person's right to notification of sale. The requirements of reasonable notice shall be met if such notice is given at least ten (10) days before the time of the sale or disposition. All expenses relating to the disposition of the Collateral, including without limitation the expenses of retaking, holding, insuring, preparing for sale and selling the Collateral, shall become a part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. Appoint Receiver. Lender shall have the right to have a receiver appointed to take possession of all or any part of the Collateral, with the power to protect and preserve the Collateral, to operate the Collateral preceding foreclosure or sale, and to collect the Rents from the Collateral and apply the proceeds, over and above the cost of the receivership, against the Indebtedness. The receiver may serve without bond if permitted by law. Lender's right to the appointment of a receiver shall exist whether or not the apparent value of the Collateral exceeds the Indebtedness by a substantial amount. Employment by Lender shall not disqualify a person from serving as a receiver. Collect Revenues. Apply Accounts. Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may at any time in Lender's discretion transfer any Collateral into Lender's own name or that of Lender's nominee and receive the payments, rents, income, and revenues therefrom and hold the same as security for the Indebtedness or apply it to payment of the Indebtedness in such order of preference as Lender may determine. Insofar as the Collateral consists of accounts, general intangibles, insurance policies, instruments, chattel paper, choses in action, or similar property, Lender may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as Lender may determine, whether or not Indebtedness or Collateral is then due. For these purposes, Lender may, on behalf of and in the name of Grantor, receive, open and dispose of mail addressed to Grantor; change any address to which mail and payments are to be sent; and endorse notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment, or storage of any Collateral. To facilitate collection, Lender may notify account debtors and obligors on any Collateral to make payments directly to Lender. Obtain Deficiency: If Lender chooses to sell any or all of the Collateral, Lender may obtain a judgment against Grantor for any deficiency remaining on the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this Agreement. Grantor shall be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper. Other Rights and Remedies. Lender shall have all the rights and remedies of a secured creditor under the provisions of the Uniform Commercial Code, as may be amended from time to time. In addition, Lender shall have and may exercise any or all other rights and remedies it may have available at law, in equity, or otherwise. Election of Remedies. Except as may be prohibited by applicable law, all of Lender's rights and remedies, whether evidenced by this Agreement, the Related Documents, or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and exercise its remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Attorneys' Fees: Expenses. Grantor agrees to pay upon demand all of Lender's costs and expenses, including Lender's attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Grantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Grantor also shall pay all court costs and such additional fees as may be directed by the court. Caption Headings. Caption Headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Governing Law. This Agreement will be governed by, construed and enforced in accordance with federal law and the laws of the State of California. This Agreement has been accepted by Lender in the State of California. Choice of Venue. If there is a lawsuit, Grantor agrees upon Lender's request to submit to the jurisdiction of the courts of LOS ANGELES County, State of California. Preference Payments. Any monies Lender pays because of an asserted preference claim in Grantor's bankruptcy will become a part of the Indebtedness and, at lender's option, shall be payable by Grantor as provided in this Agreement. No Waiver by Lender. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender's rights or of any of Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance COMMERCIAL SECURITY AGREEMENT (Continued) Loan No: 41983 Page 5 ================================================================================ shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. Notices. Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. For notice purposes, Grantor agrees to keep Lender informed at all times of Grantor's current address. Unless otherwise provided or required by law, if there is more than one Grantor, any notice given by Lender to any Grantor is deemed to be notice given to all Grantors. Power of Attorney. Grantor hereby appoints Lender as Grantor's irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect, amend, or to continue the security interest granted in this Agreement or to demand termination of filings of other secured parties. Lender may at any time, and without further authorization from Grantor, file a carbon, photographic or other reproduction of any financing statement or of this Agreement for use as a financing statement. Grantor will reimburse Lender for all expenses for the perfection and the continuation of the perfection of Lender's security interest in the Collateral. Waiver of Co-Obligor's Rights. If more than one person is obligated for the indebtedness, Grantor irrevocably waives, disclaims and relinquishes all claims against such other person which Grantor has or would otherwise have by virtue of payment of the indebtedness or any part thereof, specifically including but not limited to all rights of indemnity, contribution or exoneration. Severability. If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of the Agreement. Successors and Assigns. Subject to any limitations stated in this Agreement on transfer of Grantor's interest, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns. If ownership of the Collateral becomes vested in a person other than Grantor, Lender, without notice to Grantor, may deal with Grantor's successors with reference to this Agreement and the indebtedness by way of forbearance or extension without releasing Grantor from the obligations of this Agreement or liability under the indebtedness. Survival of Representations and Warranties. All representations, warranties, and agreements made by Grantor in this Agreement shall survive the execution and delivery of this Agreement, shall be continuing in nature, and shall remain in full force and effect until such time as Grantor's indebtedness shall be paid in full. Time is of the Essence. Time is of the essence in the performance of this Agreement. DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code: Account. The word "Account" means a trade account, account receivable, other receivable, or other right to payment for goods sold or services rendered owing to Grantor (or to a third party grantor acceptable to Lender). Agreement. The word "Agreement" means this Commercial Security Agreement, as this Commercial Security Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Commercial Security Agreement from time to time. Borrower. The word "Borrower" means GW SERVICES, INC., A CALIFORNIA CORPORATION, and all other persons and entities signing the Note in whatever capacity. Collateral. The word "Collateral" means all of Grantor's rights, title and interest in and to all the Collateral as described in the Collateral Description section of this Agreement. Default. The word "Default" means the Default set forth in this Agreement in the section titled "Default". Environmental Laws. The words "Environmental Laws" mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et seq., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto. Event of Default. The words "Event of Default" mean any of the events of default set forth in this Agreement in the default section of this Agreement. Grantor. The word "Grantor" means GW SERVICES, INC., A CALIFORNIA CORPORATION. Guarantor. The word "Guarantor" means any guarantor, surety, or accommodation party of any or all of the indebtedness. Guaranty. The word "Guaranty" means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note. Hazardous Substances. The words "Hazardous Substances" mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words "Hazardous Substances" are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term "Hazardous Substances" also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos. Indebtedness. The word "Indebtedness" means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Grantor is responsible under this Agreement or under any of the Related Documents. Lender. The word "Lender" means City National Bank, NA, its successors and assigns. Note. The word "Note" means the Note executed by Grantor in the principal amount of $4,000,000.00 dated February 11, 2002, together COMMERCIAL SECURITY AGREEMENT Loan No: 41983 (Continued) Page 6 ================================================================================ with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement. Related Documents. The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. GRANTOR HAS READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED FEBRUARY 11, 2002. GRANTOR: GW SERVICES, INC., A CALIFORNIA CORPORATION By: /s/ Brian H. McInerney ---------------------------------------- BRIAN H. MCINERNEY, President/CEO of GW SERVICES, INC., A CALIFORNIA CORPORATION ================================================================================ [LOGO]City National Bank COMMERCIAL GUARANTY
- --------------------------------------------------------------------------------------------------------------------------- Principle Loan Date Maturity Loan No. Call/Coll Account Officer Initials 655355 AC - ---------------------------------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations. - ---------------------------------------------------------------------------------------------------------------------------- Borrower: GW SERVICES, INC., A CALIFORNIA Lender: City National Bank, NA CORPORATION Westside Commercial Banking Center #674000 2651 LA MIRADA DRIVE, SUITE 100 400 North Roxbury Drive VISTA, CA 92083 Beverly Hills, CA 90210 Guarantor: GLACIER WATER SERVICES, INC., A DELAWARE CORPORATION 2651 LA MIRADA DRIVE, SUITE 100 VISTA, CA 92083
================================================================================ AMOUNT OF GUARANTY. The principal amount of this Guaranty is Ten Million & 00/100 Dollars ($10,000,000.00). CONTINUING GUARANTY. For good and valuable consideration, GLACIER WATER SERVICES, INC., A DELAWARE CORPORATION ("Guarantor") absolutely and unconditionally guarantees and promises to pay to City National Bank, NA ("Lender") or its order, in legal tender of the United States of America, the Indebtedness (as that term is defined below) of GW SERVICES, INC., A CALIFORNIA CORPORATION ("Borrower") to Lender on the terms and conditions set forth in this Guaranty. The obligations of Guarantor under this Guaranty are continuing. MAXIMUM LIABILITY. The maximum liability of Guarantor under this Guaranty shall not exceed at any one time the sum of the principal amount of $10,000,000.00, plus all interest thereon, plus all of Lender's costs, expenses, and attorneys' fees incurred in connection with or relating to (A) the collection of the Indebtedness, (B) the collection and sale of any collateral for the Indebtedness or this Guaranty, or (C) the enforcement of this Guaranty. Attorneys' fees include, without limitation, attorneys' fees whether or not there is a lawsuit, and if there is a lawsuit, any fees and costs for trial and appeals. The above limitation on liability is not a restriction on the amount of the Indebtedness of Borrower to Lender either in the aggregate or at any one time. If Lender presently holds one or more guaranties, or hereafter receives additional guaranties from Guarantor, Lender's rights under all guaranties shall be cumulative. This Guaranty shall not (unless specifically provided below to the contrary (affect or invalidate any such other guaranties. Guarantor's liability will be Guarantor's aggregate liability under the terms of this Guaranty and any such other unterminated guaranties. INDEBTEDNESS GUARANTEED. The Indebtedness guaranteed by this Guaranty includes any and all of Borrower's indebtedness to Lender and is used in the most comprehensive sense and means and includes any and all of Borrower's liabilities, obligations and debts to Lender, now existing or hereinafter incurred or created, including, without limitation, all loans, advances, interest, costs, debts, overdraft indebtedness, credit card indebtedness, lease obligations, other obligations, and liabilities of Borrower, or any of them, and any present or future judgments against Borrower, or any of them; and whether any such Indebtedness is voluntarily or involuntarily incurred, due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined; whether Borrower may be liable individually or jointly with others, or primarily or secondarily, or as guarantor or surety; whether recovery on the Indebtedness may be or may become barred or unenforceable against Borrower for any reason whatsoever; and whether the Indebtedness arises from transactions which may be voidable on account of infancy, insanity, ultra vires, or otherwise. DURATION OF GUARANTY. This Guaranty will take effect when received by Lender without the necessity of any acceptance by Lender, or any notice to Guarantor or to Borrower, and will continue in full force until all Indebtedness incurred or contracted before receipt by lender of any notice of revocation shall have been fully and finally paid and satisfied and all of Guarantor's other obligations under this Guaranty shall have been performed in full. If Guarantor elects to revoke this Guaranty, Guarantor may only do so in writing. Guarantor's written notice of revocation must be mailed to Lender, by certified mail, at Lender's address listed above or such other place as Lender may designate in writing. Written revocation of this Guaranty will apply only to advances or new Indebtedness created after actual receipt by Lender of Guarantor's written revocation. For this purpose and without limitation, the term "new Indebtedness" does not include Indebtedness which at the time of notice of revocation is contingent, unliquidated, undetermined or, not due and which later becomes absolute, liquidated, determined or due. This Guaranty will continue to bind Guarantor for all Indebtedness incurred by Borrower or committed by Lender prior to receipt of Guarantor's written notice of revocation, including any extensions, renewals, substitutions or modifications of the Indebtedness. All renewals, extensions, substitutional and modifications of the Indebtedness granted after Guarantor's revocation, are contemplated under this Guaranty and, specifically will not be considered to be new Indebtedness. This Guaranty shall bind Guarantor's estate as to Indebtedness created both before and after Guarantor's death or incapacity, regardless of Lender's actual notice of Guarantor's death. Subject to the foregoing, Guarantor's executor or administrator or other legal representative may terminate this Guaranty in the same manner in which Guarantor might have terminated it and with the same effect. Release of any other guarantor or termination of any other guaranty of the Indebtedness shall not affect the liability of Guarantor under this Guaranty. A revocation Lender receives from any one or more Guarantors shall not affect the liability of any remaining Guarantors under this Guaranty. It is anticipated that fluctuations may occur in the aggregate amount of Indebtedness covered by this Guaranty, and Guarantor specifically acknowledges and agrees that reductions in the amount of Indebtedness, even to zero dollars ($0.00), prior to Guarantor's written revocation of this Guaranty shall not constitute a termination of this Guaranty. This Guaranty is binding upon Guarantor and Guarantor's heirs, successor and assigns so long as any of the guaranteed Indebtedness remains unpaid and even though the Indebtedness guaranteed may from time to time be zero dollars ($0.00). GUARANTOR'S AUTHORIZATION TO LENDER. Guarantor authorizes Lender, either before or after any revocation hereof, without notice or demand and without lessening Guarantor's liability under this Guaranty, from time to time: (A) prior to revocation as set forth above, to make one or more additional secured or unsecured loans to Borrower, to lease equipment or other goods to Borrower, or otherwise to extend additional credit to Borrower; (B) to alter, compromise, renew, extend, accelerate, or otherwise change one or more times the time for payment or other terms of the Indebtedness or any part of the Indebtedness, including increases and decreases of the rate of interest on the Indebtedness; extensions may be repeated and may be longer than the original loan term; (C) to take and hold security for the payment of this Guaranty or the Indebtedness, and exchange, enforce, waive, subordinate, fail or decide not to perfect, and release any such security, with or without the substitution of new collateral; (D) to release, substitute, agree not sue, or deal with any one or more of Borrower's sureties, endorsers, or other guarantors on any terms or in any manner Lender may choose; (E) to determine how, when and what application of payments and credits shall be made on the Indebtedness (F) to apply such security and direct the order or manner of sale thereof, including without limitation, any nonjudicial sale permitted by the terms of the controlling security agreement or deed of trust, as Lender in its discretion may determine; (G) to sell, transfer, assign or grant participants in all or any part of this indebtedness; and (H) to assign or transfer this COMMERCIAL GUARANTY Loan No: 41983 (Continued) Page 2 ================================================================================ Guaranty in whole or in part. GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants to Lender that (A) no representations or agreements of any kind have been made to Guarantor which would limit or qualify in any way the terms of this Guaranty; (B) this Guaranty is executed at Borrower's request and not at the request of Lender; (C) Guarantor has full power, right and authority to enter into this Guaranty; (D) the provisions of this Guaranty do not conflict with or result in a default under any agreement or other instrument binding upon Guarantor and do not result in a violation of any law, regulation, court decree or order applicable to Guarantor; (E) Guarantor has not and will not, without the prior written consent of Lender, sell, lease, assign, encumber, hypothecate, transfer, or otherwise dispose of all or substantially all of Guarantor's assets, or any interest therein; (F) upon Lender's request, Guarantor will provide to Lender financial and credit information in form acceptable to Lender, and all such financial information which currently has been, and all future financial information which will be provided to Lender is and will be true and correct in all material respects and fairly present Guarantor's financial condition as of the dates the financial information is provided; (G) no material adverse change has occurred in Guarantor's financial condition since the date of the most recent financial statements provided to Lender and no event has occurred which may materially adversely affect Guarantor's financial condition; (H) no litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Guarantor is pending or threatened; (I) Lender has made no representation to Guarantor as to the creditworthiness of Borrower; and (J) Guarantor has established adequate means of obtaining from Borrower on a continuing basis information regarding Borrower's financial condition. Guarantor agrees to keep adequately informed from such means of any facts, events, or circumstances which might in any way affect Guarantor's risks under this Guaranty, and Guarantor further agrees that, absent a request for information, Lender shall have no obligation to disclose to Guarantor any information or documents acquired by Lender in the course of its relationship with Borrower. GUARANTOR'S WAIVERS. Except as prohibited by applicable law, Guarantor waives any right to require Lender to (A) make any presentment, protest, demand, or notice of any kind, including notice of change of any terms of repayment of the Indebtedness, default by Borrower or any other guarantor or surety, any action or nonaction taken by Borrower, Lender, or any other guarantor or surety of Borrower, or the creation of new or additional Indebtedness; (B) proceed against any person, including Borrower, before proceeding against Guarantor; (C) proceed against any collateral for the Indebtedness, including Borrower's collateral, before proceeding against Guarantor; (D) apply any payments or proceeds received against the Indebtedness in any order; (E) give notice of the terms, time, and place of any sale of the collateral pursuant to the Uniform Commercial Code or any other law governing such sale; (F) disclose any information about the Indebtedness, the Borrower, the collateral, or any other guarantor or surety, or about any action or nonaction of Lender; or (G) pursue any remedy or course of action in Lender's power whatsoever. Guarantor also waives any and all rights or defenses arising by reason of (H) any disability or other defense of Borrower, any other guarantor or surety or any other person; (I) the cessation from any cause whatsoever, other than payment in full, of the Indebtedness; (J) the application of proceeds of the Indebtedness by Borrower for purposes other than the purposes understood and intended by Guarantor and Lender; (K) any act of omission or commission by Lender which directly or indirectly results in or contributes to the discharge of Borrower or any other guarantor or surety, or the Indebtedness, or the loss or release of any collateral by operation of law or otherwise; (L) any statute of limitations in any action under this Guaranty or on the Indebtedness; or (M) any modification or change in terms of the Indebtedness, whatsoever, including without limitation, the renewal, extension, acceleration, or other change in the time payment of the Indebtedness is due and any change in the interest rate, and including any such modification or change in terms after revocation of this Guaranty on Indebtedness incurred prior to such revocation. Guarantor waives all rights and any defenses arising out of an election of remedies by Lender even though that the election of remedies, such as a non- judicial foreclosure with respect to security for a guaranteed obligation, has destroyed Guarantor's rights of subrogation and reimbursement against Borrower by operation of Section 580d of the California Code of Civil Procedure or otherwise. Guarantor waives all rights and defenses that Guarantor may have because Borrower's obligation is secured by real property. This means among other things; (1) Lender may collect from Guarantor without first foreclosing on any real or personal property collateral pledged by Borrower. (2) If Lender forecloses on any real property collateral pledged by Borrower; (a) the amount of Borrower's obligation may be reduced only by the price for which the collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price. (b) Lender may collect from Guarantor even if Lender, by foreclosing on the real property collateral, has destroyed any right Guarantor may have to collect from Borrower. This is an unconditional waiver of any rights and defenses Guarantor may have because Borrower's obligation is secured by real property. These rights and defenses include, but are not limited to, any rights and defenses based upon Section 580a, 580b, 580d, or 726 of the Code of Civil Procedure. Guarantor understands and agrees that the foregoing waivers are waivers of substantive rights and defenses to which Guarantor might otherwise be entitled under state and federal law. The rights and defenses waived include; without limitation, those provided by California laws of suretyship and guaranty, anti- deficiency laws, and the Uniform Commercial Code. Guarantor acknowledges that Guarantor has provided these waivers of rights and defenses with the intention that they be fully relied upon by Lender. Until all Indebtedness is paid in full, Guarantor waives any right to enforce any remedy Lender may have against the Borrower or any other guarantor, surety, or other person, and further, Guarantor waives any right to participate in any collateral for the Indebtedness now or hereafter held by Lender. GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and agrees that each of the waivers set forth above is made with Guarantor's full knowledge of its significance and consequences and that, under the circumstances, the waivers are reasonable and not contrary to public policy or law. If any such waiver is determined to be contrary to any applicable law or public policy, such waiver shall be effective only to the extent permitted by law or public policy. SUBORDINATION OF BORROWER'S DEBTS TO GUARANTOR. Guarantor agrees that the Indebtedness of Borrower to Lender, whether now existing or hereafter created, shall be superior to any claim that Guarantor may now have or hereafter acquire against Borrower, whether or not Borrower becomes insolvent. Guarantor hereby expressly subordinates any claim Guarantor may have against Borrower, upon any account whatsoever, to any claim that Lender may now or hereafter have against Borrower. In the event of insolvency and consequent liquidation of the assets of Borrower, through bankruptcy, by an assignment for the benefits of creditors, by voluntary liquidation, or otherwise, the assets of Borrower applicable to the payment of the claims of both Lender and Guarantor shall be paid to Lender and shall be first applied by Lender to the Indebtedness of Borrower to Lender. Guarantor does hereby assign to Lender all claims which it may have or acquire against Borrower or against any assignee or trustee in bankruptcy of Borrower; provided however, that such assignment shall be effective only for the purpose of assuring to Lender full payment in legal tender of the Indebtedness. If Lender so requests, any notes or credit agreements now or hereafter evidencing any debts or obligations of Borrower to Guarantor shall be marked with a legend that the same are subject to this Guaranty and shall be delivered to Lender. Guarantor agrees, and Lender is hereby authorized, in the name of Guarantor, from time to time to execute and file financing statements and continuation statements and to execute such other documents and to take such other actions as Lender deems necessary or appropriate to perfect, preserve and enforce its rights under this Guaranty. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Guaranty: Amendments. This Guaranty, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Guaranty. No alteration of or amendment to this Guaranty shall be effective unless given in writing and COMMERCIAL GUARANTY Loan No: 41983 (Continued) Page 3 ================================================================================ signed by the party or parties sought to be charged or bound by the alteration or amendment. Attorneys' Fees; Expenses. Guarantor agrees to pay upon demand all of Lender's costs and expenses, including Lender's attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Guaranty. Lender may hire or pay someone else to help enforce this Guaranty, and Guarantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Guarantor also shall pay all court costs and such additional fees as may be directed by the court. Caption Headings. Caption headings in this Guaranty are for convenience purposes only and are not to be used to interpret or define the provisions of this Guaranty. Governing Law. This Guaranty will be governed by, construed and enforced in accordance with federal law and the laws of the State of California. This Guaranty has been accepted by Lender in the State of California. Choice of Venue. If there is a lawsuit, Guarantor agrees upon Lender's request to submit to the jurisdiction of the courts of LOS ANGELES County, State of California. Integration. Guarantor further agrees that Guarantor has read and fully understands the terms of this Guaranty; Guarantor has had the opportunity to be advised by Guarantor's attorney with respect to this Guaranty; the Guaranty fully reflects Guarantor's intentions and parol evidence is not required to interpret the terms of this Guaranty. Guarantor hereby indemnifies and holds Lender harmless from all losses, claims, damages, and costs (including Lender's attorneys' fees) suffered or incurred by Lender as a result of any breach by Guarantor of the warranties, representations and agreements of this paragraph. Interpretation. In all cases where there is more than one Borrower or Guarantor, then all words used in this Guaranty in the singular shall be deemed to have been used in the plural where the context and construction so require; and where there is more than one Borrower named in this Guaranty or when this Guaranty is executed by more than one Guarantor, the words "Borrower" and "Guarantor" respectively shall mean all and any one or more of them. The words "Guarantor," "Borrower," and "Lender" include the heirs, successors, assigns, and transferees of each of them. If a court finds that any provision of this Guaranty is not valid or should not be enforced, that fact by itself will not mean that the rest of this Guaranty will not be valid or enforced. Therefore, a court will enforce the rest of the provisions of this Guaranty even if a provision of this Guaranty may be found to be invalid or unenforceable. If any one or more of Borrower or Guarantor are corporations, partnerships, limited liability companies, or similar entities, it is not necessary for Lender to inquire into the powers of Borrower or Guarantor or of the Officers, directors, partners, managers or other agents acting or purporting to act on their behalf, and any Loan Indebtedness made or created in reliance upon professed exercise of such powers shall be guaranteed under this Guaranty. Notices. Any notice required to be given under this Guaranty shall be given in writing, and, except for revocation notices by Guarantor, shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Guaranty. All revocation notices by Guarantor shall be in writing and shall be effective upon delivery to Lender as provided in the section of this Guaranty entitled "DURATION OF GUARANTY." Any party may change its address for notices under this Guaranty by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. For notice purposes, Guarantor, agrees to keep Lender informed at all times of Guarantor's current address. Unless otherwise provided or required by law, if there is more than one Guarantor, any notice given by Lender to any Guarantor is deemed to be notice given to all Guarantors. No Waiver by Lender. Lender shall not be deemed to have waived any rights under this Guaranty unless such waiver is given in writing and signed by lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Guaranty shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Guaranty. No prior waiver by Lender, nor any course of dealing between Lender and Guarantor, shall constitute a waiver of any of Lender's rights or of any of Guarantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Guaranty, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. Successors and Assigns. Subject to any limitations stated in this Guaranty on transfer of Guarantor's interest, this Guaranty shall be binding upon and inure to the benefit of the parties, their successors and assigns. DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Guaranty. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Guaranty shall have the meanings attributed to such terms in the Uniform Commercial Code: Borrower, The word "Borrower" means GW SERVICES, INC., A CALIFORNIA CORPORATION, and all other persons and entities signing the Note in whatever capacity. Guarantor. The word "Guarantor" means each and every person or entity signing this Guaranty, including without limitation GLACIER WATER SERVICES, INC., A DELAWARE CORPORATION. Guaranty. The word "Guaranty" means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note. Indebtedness. The word "Indebtedness" means Borrower's Indebtedness to Lender as more particularly described in this Guaranty. Lender. The word "Lender" means City National Bank, NA, its successors and assigns. Related Documents. The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the indebtedness. COMMERCIAL GUARANTY Loan No:41983 (Continued) Page 4 ================================================================================ GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL GUARANTY AND GUARANTOR AGREES TO ITS TERMS. THIS COMMERCIAL GUARANTY IS DATED FEBRUARY 11, 2002. GUARANTOR: GLACIER WATER SERVICES, INC., A DELAWARE CORPORATION By: /s/ Brian H. McInerney, 2/20/02 ------------------------------ BRIAN H. MCINERNEY, Chief Executive Officer of GLACIER WATER SERVICES, INC., A DELAWARE CORPORATION ================================================================================ [LOGO] City National Bank 400 North Roxbury Drive, 2\nd\ Floor Beverly Hills, California 90210 310-888-6152 Arthur Carette Vice President February 11, 2002 Mr. Brian McInerney Glacier Water Services, Inc. 2651 La Mirada Drive, Suite 100 Vista, CA 92083 Re: Revolving Note (the "Note" or "Revolving Note") dated February 11, 2002, in the Original Principal Sum of $4,000,000 ("Note") executed by GW Services, Inc. ("Borrower") in favor of City National Bank ("CNB") and Term Note (the "Note" or "Term Note") dated February 11, 2002, in the original principal sum of $6,000,000 ("Note") executed by Borrower in favor of CNB. Dear Mr. McInerney: Reference is made to the above-mentioned Note. This letter is to confirm that the following additional terms and conditions will apply to the Note. Capitalized terms not defined in this letter have the meanings given them in the Note. This letter is hereby incorporated into the Note. In the event of any meanings given them in the Note. This letter is hereby incorporated into the Note. In the event of any inconsistency between the terms of this letter and the terms of the Note, the terms of this letter shall control. A. ADDITIONAL EVENTS OF DEFAULT. The following shall constitute additional Events of Default under the Note: 1. Glacier Water Trust I (the "Trust") makes any prepayments on the 9.0625% Cumulative Trust Preferred Securities ("Trust Securities") without CNB's prior written consent; 2. Glacier Water Services Inc. ("Glacier") makes any prepayments on the Junior Subordinated Indenture dated January 27, 1998; 3. Glacier commits an Event of Default, including but not limited to an Event of Default relating to those provisions relating to subordination, with respect to the Junior Subordinated Indenture; 4. Glacier commits an Event of Default, including but not limited to an Event of Default relating to those provisions relating to subordination, with respect to Glacier's Guaranty of the Trust obligations owed to the holders of securities issued by the Trust; 5. Borrrower makes any payments or transfers any assets to Glacier or any Glacier Subsidiary, except apart from transfers necessary to make payments due on the Junior Subordinate Indenture, provided that Borrower is not in default under the Note, without CNB's prior written consent; 6. Borrower, Glacier, or any other subsidiary of Glacier will not create, incur, assume or permit to exist any Debt except (a) Debt to CNB, and (b) trade Debt in the ordinary course of Borrower's business; 7. Failure of Borrower, Glacier and Subsidiaries of Glacier Water Services, on a consolidated basis, to maintain the following: 7.1 Earnings Before Interest, Tax, Depreciation and Amortization expense of not less than $11,000,000.00, to be calculated on a rolling four quarter basis; 7.2 A ratio of Earnings Before Interest, Tax, Depreciation and Amortization expense to Debt Service payments and Non-Financed Capital Expenditures of not less than 1.10, to be calculated on a rolling four quarter basis. 7.3 Annual Capital Expenditures of not more than $6,500,000.00, to be calculated on a rolling four quarter basis. B. DEFINITIONS. For purposes of the Note, the following terms have the following meaning: "Earnings Before Interest, Tax, Depreciation and Amortization" shall be determined on a consolidated basis for Borrower and the Subsidiaries and shall mean the sum of (a) income before takes earned over the twelve month period ending on the date of determination, plus (b) amortization of intangible assets, plus (c) interest expense, plus (d) depreciation expensed during the twelve month period ending on the date of determination, plus (e) non-recurring expenses associated with the acquisition of Pure Fill. "Debt service" shall mean (a) the aggregate amount of Current Maturity of Long Term Dept plus (b) all interest incurred on borrowed money during the twelve-month period ending on the date of determination. " Current Maturity of Long Term Dept" shall mean that portion of Borrower's consolidated long term liabilities, determined in accordance with generally accepted accounting principles consistently applied, which shall, by the terms thereof, become due and payable within one (1) year following the date of the balance sheet upon which such calculations are based, with the exception of the Revolving Note which shall not be considered Long Term Dept, however, interest relating to the Revolving Note will be considered in the interest calculation noted above (see "b"). "Non-Financed Capital Expenditures" shall mean the aggregate amount of Capital Expenditures, determined in accordance with generally accepted accounting principles consistently applied, excluding Capital Expenditures associated with the acquisition of Pure Fill, less that portion of Capital Expenditures that are financed by outside sources. "Subordinated Debt" shall mean indebtedness of Borrower or any Subsidiary, the repayment of principal and interest of which is subordinated to CNB, on terms satisfactory to CNB. "Subsidiary" shall mean any corporation, the majority of whose voting shares are at any time owned directly or indirectly by Borrower and/or by one or more Subsidiaries. If you agree to accept the terms of this letter and the Note, please sign the enclosed acknowledgement copy of this letter, as well as the enclosed Note, and return them to me on or before February 21, 2002. Sincerely, City National Bank, a national banking association By: /s/ Arthur Carette ------------------ Arthur Carette, Vice President Accepted and agreed this 19 day of February, 2002. GW Services Inc., a California corporation By: /s/ Brian H. McInerney ---------------------- Title: CEO ---------------------- EX-21.1 5 dex211.txt SUBSIDIARIES OF THE REGISTRANT Exhibit 21.1 Subsidiaries of Glacier Water Services, Inc. GW Services, Inc. GW Services, International Glacier Water Trust I EX-23.1 6 dex231.txt CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23.1 Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K into Glacier Water Services, Inc.'s previously filed Registration Statements File No. 33-61942 and File No. 33-80016. San Diego, California March 11, 2002 -----END PRIVACY-ENHANCED MESSAGE-----