-----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, UlkhQpYqkopLbnlQIzqIruGiuCyQBiyAvXMhw1w7oN4Lp9teCmlsLR1r/1+zM3Kq cqRDvzAHMDdl8VBfiAOIaQ== 0001157523-05-003030.txt : 20050404 0001157523-05-003030.hdr.sgml : 20050404 20050401210052 ACCESSION NUMBER: 0001157523-05-003030 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20050102 FILED AS OF DATE: 20050404 DATE AS OF CHANGE: 20050401 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: 05727320 BUSINESS ADDRESS: STREET 1: 1385 PARK CENTER DRIVE CITY: VISTA STATE: CA ZIP: 92081-8338 BUSINESS PHONE: 7605601111 MAIL ADDRESS: STREET 1: 1385 PARK CENTER DRIVE CITY: VISTA STATE: CA ZIP: 92081-8338 10-K 1 a4854813.txt GLACIER WATER SERVICES 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: January 2, 2005 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission file number: 1-11012 GLACIER WATER SERVICES, INC. ---------------------------- (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.) 1385 Park Center Drive Vista, CA 92081 ---------------------------------------- ------------------------- (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. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K of any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) YES [ ] NO [X] The aggregate market value of the voting stock held by non-affiliates of the registrant was $18,118,824 (calculated at the closing price on the American Stock Exchange as of the last business day of the registrant's most recently completed second quarter multiplied by outstanding shares held by non-affiliates). For purposes of the foregoing calculation, the registrant has excluded from the group of stockholders deemed to be non-affiliates any outstanding shares of common stock known by the registrant to be held by its officers, directors and employees. As of March 1, 2005 the registrant had 2,173,518 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III (Items 10, 11, 12, 13 and 14) is incorporated by reference to portions of the registrant's definitive proxy statement for the 2005 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the close of the 2004 fiscal year. ================================================================================ 1 The statements incorporated by reference or included in this Annual Report about the results of our operations or financial condition contain "forward-looking" information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements in this report or incorporated by reference are intended to be subject to the safe harbor protection provided by the federal securities laws. Forward-looking statements often, although not always, may be found by looking for words or phrases such as "may", "will", "intend(s)", "expect(s/ed)", "anticipate(s/ed)", "will likely", "will continue", "estimate(s/ed)", "outlook" and similar words used in this report. Forward-looking statements are subject to numerous estimates, assumptions, risk and uncertainties (including trade relations and competition) that may cause our actual results to be materially different from any future results expressed or implied in these statements. We caution readers not to place undue reliance on these statements because they are subject to risks and uncertainties. The cautionary statements set forth above should be considered in connection with any subsequent written or oral forward-looking statements that we, or persons acting on our behalf, may issue. We do not undertake any obligation to review or confirm analysts' expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. PART I Item 1. Business Business Background - ------------------- Glacier Water Services, Inc., a Delaware corporation ("Glacier" or "Company"), is the leading provider of high quality, low priced drinking water dispensed to consumers through self-service vending machines. Since its inception in 1983, the Company has created an extensive network of water vending machines located throughout the United States. The Company's water vending machines are placed at supermarkets and other retail locations in order to take advantage of the regular customer traffic at such locations. The Company's water vending machines are connected to the municipal water source at each of the retail locations. The water vending machines reduce impurities in the water through a combination of micron filtration, reverse osmosis, carbon absorption and ultraviolet disinfection. The Company charges significantly less than the price of water sold off-the-shelf in retail locations or sold through home delivery services. The Company's water vending machines are clustered in close proximity to one another within the geographic areas served in order to provide cost-effective, quality service. The majority of the water vending machines are serviced weekly. Historically, the Company has operated water vending machines designed primarily for outside use in warm weather climates. Since 1995, the Company has utilized water vending machines specifically designed to be installed inside retail locations. The in-store machines afford the Company significant opportunities for continued expansion into new cold weather markets and to add in-store machines at existing outside machine locations. As of January 2, 2005, the Company had approximately 11,400 outside machines and 3,900 in-store machines in operation. The Company intends to maintain its leading position in the water vending industry by: (i) providing high quality, low priced water to consumers; (ii) developing and maintaining good relationships with retail accounts; (iii) increasing brand awareness; and (iv) maximizing operating efficiencies and asset productivity. The placement of the Company's water vending machines at retail locations is based upon a thorough review of each site. Included in the site review is an analysis of the surrounding trade area in order to determine the neighborhood demographics, the level of overall retail activity, the level of direct competition and the proximity of the site to other water vending machines operated by the Company. Further, the Company reviews each site in order to ensure high visibility and easy access for the consumer, along with appropriate access to the retailer's water supply and power source. Upon completion of this review, the Company makes a determination as to the viability of the location and whether a single machine or multiple machines are required at the time of initial installation. With large supermarket chains, the Company generally places machines at most of the chains' locations as part of its business agreements. To attain optimum efficiency, multiple vending machines may be installed at a site if the volume of sales so warrants. 2 The Bottled Water Industry - -------------------------- The bottled water market in the United States is estimated at $11 billion in wholesale sales or approximately 6.5 billion gallons. Bottled water is distributed through three principal channels: packaged water sold off-the-shelf in retail locations, packaged water delivered to homes and offices, and water sold through vending machines. Like water sold off-the-shelf or through home delivery services, vended water is processed using reverse osmosis. Although generally equivalent in quality, vended water is sold at a substantially lower price than off-the-shelf and delivered water. Vended water eliminates two principal cost components: packaging, because consumers provide their own containers, and transportation. Business Strategy - ----------------- Provide High-Quality, Low-Priced Drinking Water. The Company intends to maintain its leading position in the water vending industry by providing high-quality, low-priced drinking water delivered to consumers through a network of conveniently located water vending machines. Generally, the Company's service technicians visit and service each vending machine on a weekly basis. The Company believes that providing clean, operating water vending machines is a significant factor in the Company's ability to continue to build consumer confidence and usage. The Company's drinking water competes with bottled water sold in containers inside retail outlets, with water sold in containers delivered directly to homes and offices, and other water vending machine operators. The principal costs associated with water sold off-the-shelf and through home delivery are packaging and distribution, which costs are reflected in the retail price to the consumer. Because the Company's water is processed on-site inside the water vending machines and the consumer provides the container for the Company's product, the Company is able to avoid the packaging and distribution costs incurred by its competitors whose bottled water is sold in containers inside retail outlets or delivered directly to homes and offices. Accordingly, the Company passes on these savings to consumers by generally charging a retail price of $0.25 to $0.49 per gallon, compared with retail pricing generally ranging from approximately $0.69 to over $1.29 per gallon for water sold in containers in retail outlets. Bottled water sold in containers delivered directly to consumers' homes generally sells at an effective price in excess of $1.00 per gallon, including the cost of renting the dispensing unit. Develop and Maintain Relationships With Retail Accounts. The Company arranges to place its outdoor and in-store water vending machines on the premises of supermarkets and other retail locations. The Company provides the machines and pays for all installation costs, while the retailer provides and pays for the required municipally supplied water and for the electricity to operate the machines. The Company pays commissions to the retailers, generally based upon a percentage of sales. As retailers become increasingly cognizant of the growing demand for vended water, the Company believes it can continue to capitalize on its existing relationships to place in-store water vending machines at locations where the Company has already successfully placed outdoor water vending machines. Most of the Company's arrangements with its retail trade accounts are evidenced by written contracts which have terms that generally range from three to five years and contain termination clauses as well as automatic renewal clauses. During the term of these agreements, the Company usually has the exclusive right to provide water vending machines at specified locations. The Company aggressively competes to maintain existing retail accounts and to establish new retail relationships. The volume of three retail chains accounted for 12.7%, 11.6%, and 11.2% of the Company's fiscal 2004 revenues. The loss of any significant retail account could have a material adverse impact upon the Company's financial position. Increase Brand and Product Awareness. The Company believes that it will continue to benefit from increasing consumer awareness and trial usage. To date, the Company has used point-of-purchase signage, special introductory and promotional pricing, and promotional activities coinciding with the installation of new machines as its primary marketing tools. Additionally, the Company's marketing efforts have focused on the development and promotion of "Glacier" as a recognizable brand to the consumer and the supermarket industry. Maximize Operating Efficiencies. The Company creates economies of scale in its operations and achieves a competitive advantage over other vended water suppliers by clustering machines in close proximity to one another within the geographic areas served, in order to provide cost-effective, frequent service. The Company continuously strives to develop technical improvements to its water vending machines that make the machines easier to use and service. The Company continually monitors and evaluates demand for the Company's product at each location. This allows the Company to continue to evaluate the productivity of its machines and relocate machines as necessary to optimize their productivity on an on-going basis. 3 Growth Strategy - --------------- According to a recent study by an industry source, there are approximately 200,000 grocery stores, supermarkets, drug stores and convenience stores in the United States. The Company currently operates water vending machines at approximately 12,700 such locations. The Company intends to continue its expansion efforts into new locations. The Company's growth strategy includes the following: Increase Penetration in Existing Domestic Markets. The Company operates in 39 states throughout the United States through the use of both in-store and outside water vending machines. Management believes it can place additional outdoor machines with both existing and new retail accounts. Management also believes there are significant opportunities to add in-store water vending machines at its current retail chain account locations without adversely affecting revenues generated by its outdoor machines at such locations. The Company continually monitors the performance of retail locations and periodically redeploys machines to improve revenues and the return on assets deployed. Expand Into New Domestic Markets. The Company intends to continue placing its in-store water vending machines inside retail locations in cold-weather regions throughout the United States. In addition, the Company intends to expand into new warm-weather markets using both in-store and outdoor machines at large supermarket, drug store, and convenience store chains. Pursue Select Acquisition Opportunities. The Company continues to evaluate and pursue select strategic acquisition opportunities. On February 8, 2002, Glacier acquired substantially all of the assets of the Pure Fill Corporation and its wholly owned subsidiaries, National Water Services, Pure Fill Finance Corporation and Pure Fill Container Corporation, collectively "Pure Fill". The Pure Fill acquisition increased the Company's presence in California, Texas and Florida. On October 7, 2003, Glacier acquired Water Island, Inc. The Water Island acquisition increased the Company's presence in the Midwest. Competition - ----------- The bottled water market is highly competitive. The Company competes in the bottled water market with companies that deliver water to homes and offices, companies that sell bottled water off-the-shelf and other water vending machine operators. Many of the Company's competitors have significantly greater resources than the Company. Since the Company's primary competitive advantage over water delivery services and off-the-shelf bottled water is price, a substantial decline in the price of either delivered or off-the-shelf bottled water could adversely affect the demand for water dispensed from the Company's water vending machines. The Company's competitors within the water vending market are primarily small to medium size independent operators. Although the Company believes that there are barriers to entry for new and existing competitors in the water vending market due to, among other things, the substantial capital outlay required to purchase the number of machines needed to achieve competitive operating efficiencies, a competitor with financial resources may be able to compete with the Company. The loss of any significant retail account to a competitor could have a material adverse impact on the Company's financial position. Seasonality - ----------- The Company's revenues are subject to seasonal fluctuations, with decreased revenues during rainy or cold weather months and increased revenues during dry or hot weather months. Intellectual Property - --------------------- The tradename and trademarks "Glacier Water" and "Glacier Water & Penguin Design" used by the Company contain the word "Glacier", which is commonly used and has been registered in connection with other marks and designs by a number of other entities for water and related services. The mark "Glacier Water", by itself, is considered by the United States Patent and Trademark Officer (the "PTO") to be generic in relation to water and related services. The Company believes that no party can claim exclusive rights to "Glacier Water", and the Company may only claim rights to stylized forms of the mark or the mark with design elements. Notwithstanding the foregoing, no assurance can be given that other entities might not assert superior or exclusive rights to the marks and seek to obtain damages from the injunctive relief against the Company. Thus, there can be no assurance that the Company's use of the tradename and trademarks "Glacier Water" and "Glacier Water & Penguin Design" will not violate the proprietary rights of others, which could result in a material adverse effect on the Company. 4 As part of the Pure Fill acquisition, Glacier acquired several patents for water dispensing machines as well as container designs. The Company also acquired several trademarks, including the "Pure Fill" trademark. As part of the Water Island acquisition, Glacier acquired the "Water Island" trademark. Government Regulation - --------------------- The water vending industry is subject to various federal, state and local laws and regulations, which require the Company, among other things, to obtain licenses for its business and water vending machines, to pay annual license and inspection fees, to comply with certain detailed design and quality standards regarding the vending machines and the vended water, and to continuously control the quality of the vended water. The Company's water vending machines are subject to routine and random regulatory quality inspections. Although the Company believes it is operating in substantial compliance with these laws and regulations, such laws and regulations and their interpretations and enforcement are subject to change. There can be no assurance that additional or more stringent requirements will not be imposed on the Company's operations in the future. Failure to comply with such current or future laws and regulations could result in fines against the Company, a temporary shutdown of the Company's operations, the loss of certification to sell its product or, even in the absence of governmental action, a reduction in the Company's profit margin based on increases in licensing or inspection fees payable by the Company or other additional compliance costs. Insurance - --------- The Company carries general and product liability insurance. Its combined coverage is $26,000,000 per occurrence and $27,000,000 in the aggregate, which the Company believes to be adequate. Employees - --------- As of January 2, 2005, the Company had 348 employees, including 66 in warehousing, administration and sales and 282 in operations. The Company's employees are not represented by a labor union and the Company has experienced no work stoppages. The Company believes that its employee relations are good. Item 2. Properties The Company leases approximately 46,000 square feet of executive offices and warehouse space in Vista, California for its corporate offices with a lease that expires in March 2010. The Company also leases various other facilities for area service centers. These leases range in size from approximately 1,200 to 20,200 square feet and expire on various dates from February 2005 through March 2010. Item 3. Legal Proceedings From time-to-time, claims are made against the Company in the ordinary course of business. With the assistance from legal counsel, estimated amounts for such claims that are probable and can reasonably be estimated are recorded as liabilities in the consolidated balance sheets. The likelihood of a material change in these estimated accruals would be dependent on new claims as they arise and the favorable or unfavorable outcome of the particular litigation. As of January 2, 2005, the Company was not a party to any legal proceeding that is likely to reasonably have a material impact on the results of operations, financial condition or liquidity of the Company. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of the security holders of the Company during the fourth quarter of 2004. 5 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Common Stock of Glacier ("Common Stock") is traded on the American Stock Exchange under the symbol "HOO". The following table sets forth the range of high and low sales prices on the American Stock Exchange for the Common Stock for the periods indicated. High Low High Low 2003 ---- --- 2004 ---- --- ---- ---- First Quarter $ 17.80 $ 13.81 First Quarter $ 22.00 $ 19.74 Second Quarter 17.78 14.10 Second Quarter 20.95 17.65 Third Quarter 20.25 15.45 Third Quarter 21.80 18.06 Fourth Quarter 21.90 19.35 Fourth Quarter 28.75 20.75 The Company did not pay dividends on its Common Stock in 2004 or 2003 and does not presently intend to pay any dividends on its Common Stock in the foreseeable future. The Company had 30 stockholders of record as of January 2, 2005. On November 22, 2002, the Company announced its intention to give its common stockholders the opportunity to exchange their shares of Glacier Water Common Stock for Trust Preferred Securities ("Trust Preferred Securities") issued by Glacier Water Trust I, a wholly owned subsidiary of the Company, and guaranteed by the Company (the "Trust"), ("Exchange Offer"). Pursuant to the Exchange Offer, which commenced on February 26, 2003 and expired on April 11, 2003, a total of 983,880 shares of Common Stock were exchanged for a total of 787,105 Trust Preferred Securities at a ratio of one share of Common Stock for eight-tenths of a Trust Preferred Security. The Trust Preferred Securities delivered in exchange for the Common Stock were issued as part of an original issuance of 3,400,000 Trust Preferred Securities, which were sold in an underwritten public offering in January 1998 at $25.00 per Trust Preferred Security. During the quarter ended July 1, 2001, the Company issued 16,000 shares of Glacier Water Cumulative Redeemable Convertible Preferred Stock (the "Preferred Stock"), which resulted in an increase to stockholders' equity (deficit) of $1,600,000, excluding related issuance costs. On September 30, 2003, the holder of the 16,000 outstanding shares of the Cumulative Redeemable Convertible Preferred Stock elected to convert these shares into 168,421 shares of the Company's Common Stock. The Company did not pay any dividends associated with the Preferred Stock during the year ended January 2, 2005 as compared to $96,000 for the year ended December 28, 2003. Item 6. Selected Financial Data The following sets forth selected financial data as of and for the periods presented. The Company utilizes a fiscal year of 52 or 53 weeks ending on the Sunday closest to December 31st. The fiscal year ended January 2, 2005 consisted of 53 weeks or 371 days. The fiscal years ended December 28, 2003 and December 29, 2002 each contained 52 weeks or 364 days. This data should be read in conjunction with the Consolidated Financial Statements and the accompanying Notes thereto and other financial information appearing elsewhere in this Annual Report. 6
Statements of Operations Data (in thousands, except share and per share data) Fiscal Year Ended ---------------------------------------------------------- Jan. 2, Dec. 28, Dec. 29, Dec. 30, Dec. 31, 2005 2003 2002 2001 2000 ---- ---- ---- ---- ---- Revenues..................................................... $ 76,261 $ 72,316 $ 71,029 $ 60,345 $ 59,176 Operating costs and expenses: Operating expenses........................................ 48,614 44,222 44,698 38,444 38,482 Depreciation and amortization............................. 11,533 12,612 12,368 12,358 12,066 ---------- ---------- ---------- ---------- ---------- Cost of goods sold.................................... 60,147 56,834 57,066 50,802 50,548 Selling, general and administrative expenses.............. 10,611 9,956 9,777 9,275 8,838 Integration and restructuring costs....................... -- -- 1,364 -- 1,400 ---------- ---------- ---------- ---------- ---------- Total operating costs and expenses.................... 70,758 66,790 68,207 60,077 60,786 ---------- ---------- ---------- ---------- ---------- Income (loss) from operations................................ 5,503 5,526 2,822 268 (1,610) Other (income) expenses: Interest expense.......................................... 7,860 7,016 5,968 5,993 7,016 Investment (income) expense, net.......................... -- (90) 20 (227) 1,570 Gain on early retirement of debt (1)...................... -- -- -- (4) (4,198) ---------- ---------- ---------- ---------- ---------- Total other expenses.................................. 7,860 6,926 5,988 5,762 4,388 ---------- ---------- ---------- ---------- ---------- Loss before income taxes..................................... (2,357) (1,400) (3,166) (5,494) (5,998) Income tax benefit........................................... -- -- (593) -- -- ---------- ---------- ---------- ---------- ---------- Net loss..................................................... (2,357) (1,400) (2,573) (5,494) (5,998) Preferred dividends.......................................... -- 96 128 66 -- ---------- ---------- ---------- ---------- ---------- Net loss applicable to common stockholders................... $ (2,357) $ (1,496) $ (2,701) $ (5,560) $ (5,998) ========== ========== ========== ========== ========== Basic and diluted loss per common share: Loss applicable to common stockholders..................... $ (1.10) $ (0.68) $ (0.95) $ (1.96) $ (2.11) ========== ========== ========== ========== ========== Weighted average shares used in calculation............... 2,136,508 2,185,761 2,843,217 2,834,474 2,836,965 Selected Balance Sheet Data (in thousands) As of ---------------------------------------------------------- Jan. 2, Dec. 28, Dec. 29, Dec. 30, Dec. 31, 2005 2003 2002 2001 2000 ---- ---- ---- ---- ---- Cash, cash equivalents, and investments, available-for-sale.......................................... $ 2,256 $ 1,924 $ 7,911 $ 2,740 $ 4,623 Total assets (2)............................................. $ 79,500 $ 71,716 $ 72,710 $ 69,126 $ 80,602 Long-term debt, notes payable and capital lease, including current portion (2)............................... $ 99,052 $ 91,557 $ 73,471 $ 67,951 $ 75,741 Stockholders' equity (deficit)............................... $ (26,627) $ (24,759) $ (6,266) $ (3,866) $ 232 (1) In accordance with Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, the Company has reclassified the gain on the early retirement of debt from previous presentations as an extraordinary charge. (2) In accordance with interpretation No. 46, Consolidation of Variable Interest Entities, as revised ("FIN 46R"), the Company has reflected its ownership of Trust Securities and increased total assets and long-term debt by the same amount of $5,986,000 (see "Note 4" to the consolidated financial statements).
7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion should be read in conjunction with the information contained in the Consolidated Financial Statements and the accompanying Notes thereto of the Company appearing elsewhere in this Annual Report. The following table sets forth for the periods indicated, the percentages of revenues represented by certain items included in the Consolidated Statements of Operations. Fiscal Year Ended ------------------------------ Jan. 2, Dec. 28, Dec. 29, 2005 2003 2002 ---- ---- ---- Revenues........................................ 100.0% 100.0% 100.0% Operating costs and expenses: Operating expenses......................... 63.7 61.2 62.9 Depreciation and amortization.............. 15.1 17.4 17.4 ------- ------- ------- Cost of goods sold..................... 78.8 78.6 80.3 Selling, general and administrative expenses.................................. 13.9 13.8 13.8 Integration and restructuring costs........ -- -- 1.9 ------- ------- ------- Total costs and expenses............... 92.7 92.4 96.0 ------- ------- ------- Income from operations.......................... 7.3 7.6 4.0 Other expenses: Interest expense........................... 10.3 9.6 8.4 Investment income.......................... -- (0.1) -- ------- ------- ------- Total other expenses................... 10.3 9.5 8.4 ------- ------- ------- Loss before income taxes........................ (3.0) (1.9) (4.4) Income tax benefit.............................. -- -- (0.8) ------- ------- ------- Net loss........................................ (3.0)% (1.9)% (3.6)% ======== ======== ======== Results of Operations - --------------------- Overview - -------- Since its inception in 1983, the Company has created an extensive network of water vending machines located throughout the United States. The Company's water vending machines are placed at supermarkets and other retail locations in order to take advantage of the regular customer traffic at such locations. Currently operating in 39 states, the Company continually looks for opportunities to expand its presence in existing markets as well as new high potential markets. The Company also looks for ways to reduce operating costs in all areas. The Company explores opportunities to implement technology to improve efficiency of servicing the vending machines to lower its operating costs. The Company continues to monitor selling, general and administrative expenses and reduce costs where possible. The Company looks for acquisition opportunities that will strengthen the Company and improve its operating results. On February 8, 2002, Glacier acquired substantially all of the assets of Pure Fill. Immediately after the acquisition, Glacier integrated the Pure Fill assets into the Glacier operations. On October 7, 2003, Glacier acquired Water Island, Inc., a privately held water vending company headquartered in Indianapolis, Indiana. Immediately after the acquisition, Glacier integrated Water Island into the Glacier operations (see "Note 2"). During the year ended January 2, 2005, the Company initiated a major initiative to upgrade its outside water vending machines. The upgrade results in the next generation machine ("G-2") with a new modern appearance and increased functionality such as dollar bill validators, multi-vend capability, a replaceable stainless steel vend chamber and replaceable Lexan panels. The Company plans to complete the upgrade of approximately 11,000 outside machines over fiscal 2005. The Company expects that it will expend a total of approximately $22,000,000 in connection with this major upgrade initiative. The initiative is such that the Company has the ability to time these expenditures with the availability of its cash flows from operations and availability under its credit facility. As of January 2, 2005, the Company had upgraded approximately 5,100 machines at a total expenditure of approximately $10,000,000. 8 Revenues - -------- Revenues for fiscal year 2004 increased 5.5% to $76,261,000 from $72,316,000 in fiscal year 2003. The increase in revenues for the twelve month period was driven primarily by additional revenues as a result of the Water Island acquisition in the fourth quarter of 2003 and the fact that Fiscal Year 2004 was a 53 week year as compared to 52 weeks for the prior year, offset partially by the impact of the unusually heavy rainfall and cooler temperatures across the United States, the impact of the grocery strike in California during the first quarter of 2004, and the negative impact of hurricanes Charley, Frances, Ivan, and Jeanne which temporarily shut down several hundred of the Company's machines during the third and fourth quarters of 2004. All machines have since been put back into service. The Company is unable to calculate the exact impact the hurricanes had on current year revenues. The Company recorded revenues of approximately $1,116,000 associated with the 53rd week. As of January 2, 2005, the Company had approximately 15,300 machines in operation, compared to 15,500 machines at December 28, 2003. Revenues for the fiscal year 2003 increased 1.8% to $72,316,000 from $71,029,000 in fiscal 2002. The impact of unusually heavy rainfall and cooler temperatures across the United States during 2003 was offset by a half-cent increase in the average price per gallon sold and the additional revenues as a result of the Water Island acquisition in the fourth quarter of 2003. Costs and Expenses - ------------------ Operating expenses, excluding depreciation and amortization, for the fiscal year ended January 2, 2005 increased to $48,614,000 from $44,222,000 for fiscal year 2003. This increase was due to the integration of Water Island into the Glacier operations during the fourth quarter 2003. Due to the immediate integration of the Water Island operations with the Glacier operations, the precise amount of the operating expenses and selling, general and administrative ("SG&A") expenses attributable to Water Island is not determinable. Operating costs excluding depreciation and amortization, as a percent of revenues was 63.7% for fiscal 2004 compared to 61.2% for the prior year. A large portion of the Company's operating costs are somewhat fixed, and therefore are not completely linear or variable to sales; accordingly, significant fluctuations in revenues affect operating costs as a percentage of revenues. The Company strives to locate machines in close proximity to one another within the geographic area served, thereby creating clusters of machines in order to provide cost-effective, frequent service. The integration of the Water Island acquisition provides opportunities to continue leveraging service costs in the Midwest. Operating expenses, excluding depreciation and amortization, for the fiscal year ended December 28, 2003 decreased slightly to $44,222,000 from $44,698,000 for fiscal year 2002. Due to the immediate integration of Water Island into the Glacier operations during the fourth quarter 2003, the precise amount of the operating expenses and selling, general and administrative ("SG&A") expenses attributable to Water Island in 2003 is not determinable. Operating costs, excluding depreciation and amortization, as a percent of revenues was 61.2% for fiscal 2003 compared to 62.9% for the prior year. Depreciation and amortization expense for the fiscal year ended January 2, 2005 decreased to $11,533,000, compared to $12,612,000 for the same period the prior year. The decrease in depreciation and amortization expense was due primarily to some assets becoming fully depreciated or amortized, offset partially by the addition of the Water Island assets, which were acquired in the fourth quarter of 2003, and new capital expenditures in the current year. The Water Island assets generated approximately $1,045,000 of depreciation and amortization expense for the period ended January 2, 2005 compared to approximately $380,000 for the fourth quarter of 2003. The Company currently has sufficient machines in storage available for deployment in fiscal 2005. Machines that have been previously installed and are in storage awaiting redeployment are currently being depreciated. Depreciation and amortization expense for fiscal year ended December 28, 2003 increased to $12,612,000, compared to $12,368,000 for the prior year. The increase in depreciation and amortization expense was due primarily to the addition of Water Island in the fourth quarter of 2003 and the additional depreciation expense of approximately $445,000 related to a change in the estimated useful life and salvage value of the Company's vending equipment, and was offset partially by some assets becoming fully depreciated. Depreciation and amortization expense includes the amortization of intangible assets and prepaid contract rights of approximately $1,891,000, $2,296,000, and $2,587,000 for years ended January 2, 2005, December 28, 2003, and December 29, 2002, respectively. The decrease in amortization expense each year compared to the previous year was due primarily to some intangible assets and prepaid contract rights becoming fully amortized. 9 SG&A expenses for fiscal 2004 increased $655,000 to $10,611,000, or 13.9% of revenues, compared to $9,956,000, or 13.8% of revenues, in fiscal 2003. The increase in SG&A expenses in fiscal 2004 compared to 2003 was primarily due to the addition of the Water Island operations. SG&A expenses for fiscal 2002 were $9,777,000 or 13.8% of revenues. The increase in SG&A expenses in fiscal 2003 compared to fiscal 2002 was primarily due to the payment of approximately $405,000 in settlement of an action brought against Glacier by the Environmental Law Foundation, and was partially offset by reductions in various other SG&A expenses. Costs during the year ended December 29, 2002 associated with the restructuring of existing Glacier operations and costs necessary to integrate the assets of Glacier and Pure Fill that were expected to benefit future operations were expensed as integration and restructuring costs after management had completed and approved the plans and associated costs. Integration costs totaled $1,364,000 for the year ended December 29, 2002, and were recognized as integration and restructuring costs in the consolidated statement of operations. Integration costs were principally for the removal and replacement, transportation and disposal of vending equipment. There were no restructuring costs recorded associated with the Water Island acquisition. As a result of the above, income from operations decreased slightly to $5,503,000 for the year ended January 2, 2005, compared to $5,526,000 for the year ended December 28, 2003, which was up from $2,822,000 for the year ended December 29, 2002. Interest expense for fiscal year 2004 increased to $7,860,000, compared to $7,016,000 in fiscal 2003. The increase was primarily due to additional interest of approximately $514,000 associated with the increase in long-term debt outstanding as a result of the Exchange Offer and additional interest of approximately $290,000 associated with higher outstanding borrowing on the credit facility and approximately $40,000 of additional interest associated with capital lease obligations. Interest expense for fiscal 2002 was $5,968,000. The Company had no investments at January 2, 2005 or at December 28, 2003. For the year ended January 2, 2005, the Company had no investment income, compared to net investment income of $90,000 for the year ended December 28, 2003 and net realized loss on investments of $20,000 for the year ended December 29, 2002. For fiscal year 2003, the investment income consisted of net realized gain on the sale of investments of $23,000 and investment earnings of $70,000, partially offset by management fees of $3,000. For fiscal year 2002, the investment expense consisted of net realized loss on the sale of investments of $133,000 and management fees of $7,000, offset by investment earnings of $120,000. During fiscal years 2002 through 2004, investments were managed by Kayne Anderson Capital Advisors, L.P., a related party. Due to the uncertainty of the utilization of the net operating loss in future periods, no tax benefit was recorded for fiscal years 2004 and 2003. As a result of changes in the U.S. federal tax laws during fiscal year 2002 relating to operating loss carry-backs, the Company recorded an income tax benefit of $379,000 reflecting the carry-back of additional net operating losses to recover previously paid U.S. federal income taxes. This income tax refund was received prior to the end of fiscal 2002. A change in estimate of the deferred tax asset valuation allowance, resulted in an additional $214,000 income tax benefit being recorded at December 29, 2002. For fiscal year 2004, the Company incurred a loss applicable to common stockholders of $2,357,000, or $1.10 per basic and diluted common share, compared to a loss of $1,496,000, or $0.68 per basic and diluted common share, in 2003 and $2,701,000, or $0.95 per basic and diluted common share, in 2002. Liquidity and Capital Resources - ------------------------------- The Company's primary sources of liquidity and capital resources are cash and investments, cash flows from operations, and funds available under the Company's credit facility. In connection with the Pure Fill acquisition, the Company entered into a $10,000,000 credit facility with City National Bank on February 19, 2002. The $10,000,000 credit facility originally consisted of a $4,000,000 revolving credit portion and a $6,000,000 term portion. On February 1, 2003, the Company replaced the term portion, which had an outstanding balance of $4,800,000 as of that date. The term portion was canceled and replaced with a new $4,800,000 revolving note. The credit availability on the new revolving note was to be reduced by $300,000 every three months beginning May 1, 2003 until its maturity in February 2007. The new revolving note required monthly interest payments at the Bank's prime rate plus 1.50%. The original $4,000,000 revolving credit portion of the credit facility (which remained in effect) required monthly interest payments at the Bank's prime rate plus 1.00%. The new revolving note and the original $4,000,000 revolving credit portion of the credit facility required a quarterly unused facility fee of 0.50% per annum and 0.25% per annum, respectively. On February 21, 2003, the Company repaid the new revolving note. 10 On October 7, 2003, the Company restructured its credit facility with City National Bank in connection with the acquisition of Water Island. The two existing revolving notes, under which no borrowings were outstanding, were replaced with a new $12,000,000 revolving credit facility, which had a maturity date of February 1, 2009. The credit availability on the new revolving credit facility was reduced by $400,000 every three months beginning February 7, 2004 until its maturity in February 2009. The credit facility required monthly interest payments at the City National Bank's prime rate plus 1.00%. The new credit facility required a quarterly unused facility fee of 0.50% per annum, and contained certain customary financial covenants which restricted indebtedness and capital expenditures. On March 26, 2004, the City National Bank reduced the interest rate on the revolving credit facility to City National Bank's prime rate. All other terms on the credit facility remained the same. On December 1, 2004, City National Bank increased the availability on the credit facility to $25,000,000. The revised credit facility requires monthly interest payments at the City National Bank's prime rate (5.25% per annum at January 2, 2005). The revolving credit facility requires a quarterly unused facility fee of 0.50% per annum and continues to contain certain customary financial covenants, which restrict indebtedness and capital expenditures. The Company pledged certain assets such as repair parts and equipment as collateral for its obligations under the credit facility. The Company was in compliance at January 2, 2005 with all such covenants. The credit availability on the revised revolving credit facility is reduced by $1,500,000 every three months beginning January 1, 2006 until its maturity in February 2009. As of January 2, 2005, there was $10,000,000 outstanding on the credit facility, which is included in long-term notes payable. Availability under the $25,000,000 revolving credit facility was $15,000,000 as of January 2, 2005. For fiscal 2004, net cash provided by operations was approximately $9,066,000. The Company made capital investments in vending machines and other equipment of approximately $16,830,000, up from $5,013,000 in the previous year, which was associated primarily with the upgrade of the outside coin machines and $5,366,000 cash paid to acquire Water Island (net of cash acquired). Net cash provided by financing activities was approximately $8,096,000. As of January 2, 2005, the Company had working capital of $400,000. Because the Company does not have significant product inventories, working capital will vary from time to time depending on the timing of payables, other accrued liabilities, and payments of prepaid contract rights. The Company's stockholders' deficit as of January 2, 2005 was $26,627,000, which amount continues to be below the American Stock Exchange's listing guidelines. Although no actions have been taken to date, it is possible that the American Stock Exchange could delist the Company's stock. During the year ended January 2, 2005, the Company initiated a major initiative to upgrade its outside water vending machines. The upgrade results in the next generation machine ("G-2") with a new modern appearance and increased functionality such as dollar bill validators, multi-vend capability, a replaceable stainless steel vend chamber and replaceable Lexan panels. The Company plans to complete the upgrade of approximately 11,000 outside machines over fiscal 2005. The Company expects that it will expend a total of approximately $22,000,000 in connection with this major upgrade initiative. The initiative is such that the Company has the ability to time these expenditures with the availability of its cash flows from operations and availability under its credit facility. As of January 2, 2005, the Company had upgraded approximately 5,100 machines at a total expenditure of approximately $10,000,000. The Subordinated Debentures are unsecured obligations of the Company to the trust and are subordinate and junior in right of payment to other indebtedness of the Company. The Trust relies on payments on the Subordinated Debentures to make distributions on the Trust Preferred Securities. Distributions on the Trust Preferred Securities are payable monthly in arrears by the Trust. The Company may cause the Trust to defer the payment of distributions for a period not to exceed 60 consecutive months. During any such deferral period, distributions will accrue and compound quarterly, and the Company may not declare or pay distributions on its common or preferred stock or debt securities that rank equal or junior to the Subordinated Debentures. To date, the Company is current on all distributions. The Trust Preferred Securities are subject to mandatory redemption upon the repayment of the Subordinated Debentures at a redemption price equal to the aggregate liquidation amount of the Trust Preferred Securities plus any accumulated and unpaid distributions. The Subordinated Debentures mature on January 31, 2028, but may be redeemed at the option of the Company at any time since January 31, 2003. The Company effectively provides a full and unconditional guarantee of the Trust's obligations under the Trust Preferred Securities. Issuance costs of approximately $4,100,000 related to the Trust Preferred Securities are deferred and are being amortized over the period until the mandatory redemption of the securities in January 2028. Through December 29, 2002, the Company had repurchased 921,400 Trust Preferred Securities (equivalent to $23,035,000 of Subordinated Debentures). Pursuant to an Exchange Offer, which commenced on February 26, 2003 and expired on April 11, 2003, 983,880 shares of Common Stock were exchanged for a total of 787,105 Trust Preferred Securities at a ratio of one share of Common Stock for eight-tenths of a Trust Preferred Security. Each Trust Preferred Security has a liquidation value of $25.00 per share. The Exchange Offer increased long-term debt by approximately $19,678,000, the total liquidation value of the 787,105 Trust Preferred Securities. 11 The Trust is considered a variable interest entity under FIN 46R. Prior to FIN 46R, variable interest entities were generally consolidated by an enterprise when the enterprise had a controlling financial interest through ownership of a majority voting interest in the entity. Under FIN 46R, a variable interest entity should be consolidated by its primary beneficiary. Because the Company is not the primary beneficiary of the Trust, the financial statements of the Trust are no longer included in the consolidated financial statements of the Company. FIN 46R may be adopted either by recording a cumulative effect adjustment as of the date of the adoption, or restating prior period financial statements. The Company opted to restate prior period financial statements. As a result of the de-consolidation, the Company has recorded its ownership of 105,154 Common Trust Securities and its ownership of 134,295 shares of Trust Preferred Securities as long-term assets and has recorded the Junior Subordinated Debentures as long-term debt at a face value of $87,629,000. At January 2, 2005 and December 28, 2003, there were 3,265,705 Trust Preferred Securities outstanding (other than the 134,295 held by the Company). During the quarter ended July 1, 2001, the Company issued 16,000 shares of Cumulative Redeemable Preferred Stock, which resulted in a decrease to stockholders' deficit of $1,600,000, excluding related issuance costs. Holders of the Cumulative Redeemable Preferred Stock were entitled to receive, when declared by the Board of Directors, a cumulative, preferential dividend at the rate of 8% per annum of the original purchase price of each share of Cumulative Redeemable Preferred Stock. If any dividends were declared on the Common Stock, dividends would also be paid on the Preferred Stock on an as-converted basis. On September 30, 2003, the holder of the 16,000 outstanding shares of the Cumulative Redeemable Convertible Preferred Stock elected to convert these shares into 168,421 shares of the Common Stock. As a result, there has been no Cumulative Redeemable Preferred Stock outstanding since September 30, 2003. The Company recorded dividends associated with the Cumulative Redeemable Preferred Stock of $96,000 and $128,000 for the years ended December 28, 2003 and December 29, 2002, respectively The Company believes that its cash, investments on hand, cash flow from operations and the availability under its credit facility will be sufficient to meet its anticipated amounts due under its credit facility, operating and capital requirements, as well as amounts due under the Subordinated Debentures for at least the next twelve months. Contractual Commitments - ----------------------- The Company is obligated to make payments under specific contractual obligations and commitments. The Company has no minimum annual purchase requirements under any agreement with any of its vendors. A summary of these contractual obligations and commitments is as follows:
2005 2006 2007 2008 2009 Thereafter Total ---- ---- ---- ---- ---- ---------- ----- Operating leases $ 862 $ 777 $ 654 $ 491 $ 438 $ -- $ 3,222 Capital leases 262 661 -- -- -- -- 923 Notes payable 460 40 -- 3,000 7,000 -- 10,500 Long-term debt -- -- -- -- -- 87,629 87,629 --------- --------- --------- --------- --------- --------- ---------- Total $ 1,584 $ 1,478 $ 654 $ 3,491 $ 7,438 $ 87,629 $ 102,274 ========= ========= ========= ========= ========= ========= ==========
The Company is also obligated to make commission payments to retailers based on a percentage of vending machine revenues. The Company is unable to determine the amount of these future payments due to the fact that they are based on future revenues. Off-Balance Sheet Arrangements - ------------------------------ The Company's only "off-balance sheet" obligations are for operating leases that are disclosed in the notes to the financial statements. New Accounting Pronouncements - ----------------------------- FASB Statement No. 132 (revised), Employers' Disclosures about Pensions and Other Postretirement Benefits. FASB 132 (revised), revises employers' disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans. FASB 132 (revised) will retain and revise the disclosure requirements contained in the original FASB 132. It also requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. FASB 132 generally is effective for fiscal years ending after December 15, 2003. The application of FASB 132 did not have a material effect on the consolidated financial statements. 12 In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 149 is generally effective for contracts entered into or modified after September 30, 2003, and for hedging relationships designated after September 30, 2003. The adoption of SFAS No. 149 has not had a material impact on the consolidated financial statement. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. The adoption of SFAS No. 150 has not had a material impact on the consolidated financial statements. In November 2002, the FASB issued FASB Interpretation No. 45 (FIN No. 45), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which clarifies disclosure and recognition/measurement requirements related to certain guarantees. The disclosure requirements are effective for financial statements issued after December 15, 2002 and the recognition/measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The application of this interpretation did not have a material impact on the consolidated financial statements. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 ("FIN 46"). This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The primary beneficiary of a variable interest entity is the entity that absorbs a majority of the variable interest entity's expected losses, receives a majority of the variable interest entity's expected residual returns, or both, as a result of ownership, controlling interest, contractual relationship or other business relationship with a variable interest entity. Prior to the implementation of FIN 46, variable interest entities were generally consolidated by an enterprise when the enterprise had a controlling financial interest through ownership of a majority of voting interests in the entity. The interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interests entities obtained after January 31, 2003. The Interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that the Company will consolidate or disclose information about variable interest entities when the Interpretation becomes effective. The application of this Interpretation did not have a material effect on the consolidated financial statements. In December 2003, FASB issued Interpretation No. 46R, Consolidation of Variable Interest Entities ("FIN 46R"), which supercedes FIN46. The application of the revised Interpretation is required in the financial statements of companies that have interests in special purpose entities for periods after December 15, 2003. FIN 46R required the Company to de-consolidate its investment in Glacier Water Trust I. The application of this interpretation resulted in the Company reflecting its ownership of Trust Securities as long-term assets and increasing long-term debt by the same amount of $5,986,000 (see "Note 4"). The Company chose to restate prior year's consolidated balance sheet to conform to the current year presentation, in accordance with the transition provisions of FIN 46R. In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123R (SFAS 123R), "Share-Based payment", which replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and supercedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exception, the amount of compensation cost is measured based on the grant date fair value of the equity or liability instruments used. SFAS 123R requires liability awards to be re-measured each reporting period and compensation costs to be recognized over the period that an employee provides service in exchange for the award. SFAS123R is effective beginning the first interim or annual reporting period that begins after June 15, 2005. The Company plans to adopt the provisions of SFAS 123R prospectively during the third quarter of 2005. The Company's Stock Option Program expired in March 2004 and no options were issued during the year ended January 2, 2005. The Company expects that this adoption to result in additional compensation expense in the Company's consolidated financial statements. The Company is currently determining the effect of SFAS 123R on the Company's consolidated financial statements. 13 In November 2004, the FASB issued FASB Statement No. 151, Inventory Costs: an amendment of ARB No. 43, which establishes standards for the accounting for unexpected production defects and waste and the impact on capitalized inventory costs. FASB No. 151 is effective for financial statements for fiscal years beginning after June 15, 2005. The Company does not expect that the adoption of FASB 151 will have a material impact on the consolidated financial statements. In November 2004, the FASB issued FASB Statement No. 152, Accounting for Real Estate Time-Sharing Transactions - an amendment of FASB Statements No. 66 and No. 67. The Statement amends FASB No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement also amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. FASB No. 152 is effective for financial statements for fiscal years beginning after June 15, 2005. The Company does not expect that the adoption of FASB 152 will have a material impact on the consolidated financial statements. In November 2004, the FASB issued FASB Statement No. 153, Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. FASB No. 153 is effective for financial statements for fiscal periods beginning after June 15, 2005. The Company does not expect that the adoption of FASB 153 will have a material impact on the consolidated financial statements. Impact of Inflation - ------------------- The primary inflationary factors affecting the Company's operation include labor and other operating expenses. The Company does not believe that inflation has materially affected earnings during the past three years. Substantial increases in costs and expenses could have a significant impact on the Company's operating results to the extent that such increases cannot be passed on through retail price increases for vended water sold to consumers. Critical Accounting Policies - ---------------------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases these estimates and assumptions upon historical experience and existing, known circumstances. Actual results could differ from these estimates. Specifically, management must make estimates in the following areas: Revenue Recognition The Company recognizes revenue from the sale of its product at the point of purchase, which occurs when the customer vends the water and pays for the product. Due to the fact that the Company has approximately 15,300 vending machines, it is impractical to visit all machines at the end of each reporting period. Consequently, the Company estimates the revenue from the last time each machine was serviced until the end of the reporting period, based on the most current daily volume of each machine. For the years ended January 2, 2005, December 28, 2003 and December 29, 2002, the Company recorded approximately $1,846,000, $2,284,000 and $1,446,000, respectively, of such estimated revenues, which represents an average of approximately 11 days, 13 days and 9 days, respectively, per machine. The Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, corrected copy, provides guidance on the application of existing generally accepted accounting principles to selected revenue recognition issues. The Company believes that its revenue recognition policy is consistent with the guidance and is in accordance with generally accepted accounting principles. 14 Allowance for Doubtful Accounts The Company records accounts receivable for revenues generated by inside machines. Such revenues are collected by the retailers and remitted to the Company. The Company provides a reserve against receivables for estimated losses that may result from a retailer's inability to pay. The Company determines the amount of the reserve by analyzing uncollected accounts, aged receivables, historical losses and the retailer's creditworthiness. Amounts later determined and specifically identified to be uncollectible are charged or written off against this reserve. Should a retailer's account become past due, the Company works with the retailer to resolve the past due amounts including replacing non-coin operated machines with coin operated machines and placing the account on hold or other actions as necessary to resolve the past due amounts. Accounts receivable totaled $2,677,000 and the allowance for doubtful accounts was $201,000 at January 2, 2005. This allowance is consistent with historical amounts reserved by the Company. Repair Parts Repair parts are stated at cost (moving weighted average). Management reviews the parts on a regular basis for excess, obsolete and impaired items based on estimated future usage. The likelihood of any material write-down is dependent on future machine repairs or new machine developments. Repair parts were valued at $2,403,000 at January 2, 2005. Valuation of Goodwill In 2002, Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets, became effective and as a result, goodwill was no longer subject to amortization. In lieu of amortization, the Company is required to perform an annual review for impairment. Goodwill is considered to be impaired if it is determined that its carrying value exceeds its fair value. In addition to the annual review, an interim review is required if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying value. Assessing the impairment of goodwill requires the Company to make assumptions and judgments regarding the fair value of the net assets of the Company. The Company has completed its annual evaluation for the impairment of goodwill as of January 2, 2005 and has determined that no impairment existed as of that date. The net book value of goodwill totaled $6,869,000 as of January 2, 2005. Depreciable Useful Lives Property and equipment is recorded at cost and is depreciated using the straight-line method over the estimated useful lives of the asset. During the quarter ended December 28, 2003, the Company revised the estimated useful life and salvage value assigned to vending equipment. The revisions were based on actual historical performance of the vending machines, which demonstrated that the average machine is in service for periods longer than the ten year estimated useful life previously assigned to vending machines, and that the salvage value at the end of service is lower than the estimates historically assigned. As a result, the Company changed the estimated useful life of its vending machines to 13 years and reduced the salvage value to 10% from 20% of cost. As a result of these changes, the Company incurred approximately $445,000 of additional depreciation expense in the quarter ended December 28, 2003. When an original component is replaced, the replacement cost is expensed, which results in a charge to income in an amount which approximates the depreciable cost of the components. Costs associated with installing vending equipment are capitalized and depreciated over five years, which is the normal contractual period with the retailers. Other equipment, furniture and fixtures have an estimated useful life of three to ten years. Leasehold improvements are given an estimated useful life of the shorter of its estimated life or the term of the lease. All maintenance, repair and refurbishment costs are charged to operations as incurred. Additions and major improvements are capitalized. Costs associated with the assembly of vending machines are accumulated until finished machines are ready for installation at a retail location, at which time the costs are transferred to property and equipment. Valuation of Long-Lived Assets The Company periodically assesses triggering events for the impairment of long-lived assets. The impairment analysis requires the use of assumptions and judgments regarding the carrying value and estimated lives of these assets. The assets are considered to be impaired if it is determined that the carrying value may not be recoverable based upon an assessment of the following events or changes in circumstances: - the asset's ability to continue to generate income from operations and positive cash flow in future periods; - loss of legal ownership of the asset; - significant changes in the strategic business objectives and utilization of the asset; - the impact of significant negative industry or economic trends; and/or - any volatility or significant decline in the Company's stock price and market capitalization compared to its net book value. 15 The Company evaluates and assesses its long-lived assets for impairment under the guidelines of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. If the assets are considered to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets. In addition, the Company bases the useful lives and related amortization or depreciation expense on its estimate of the period that the assets will generate revenues or otherwise be used. At January 2, 2005, the net book value of identifiable intangible assets that are subject to amortization totaled $475,000 and the net book value of property and equipment total $52,370,000. Litigation From time-to-time, claims are made against the Company in the ordinary course of business. With the assistance from legal counsel, estimated amounts for such claims that are probable and can reasonably be estimated are recorded as liabilities in the consolidated balance sheets. The likelihood of a material change in these estimated accruals would be dependent on new claims as they arise and the favorable or unfavorable outcome of the particular litigation. As of January 2, 2005, the Company was not a party to any legal proceeding that is likely to reasonably have a material impact on the results of operations or financial condition of the Company. Valuation of Deferred Income Taxes Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The likelihood of a material change in our expected realization of these assets depends on future taxable income, our ability to deduct tax loss carryforwards against future taxable income, the effectiveness of our tax planning and strategies among the various tax jurisdictions in which the Company operates, changes in the deductibility of interest paid on our subordinated debt and any significant changes in the tax treatment received on the Company's business combinations. As of January 2, 2005, the Company had federal and California net operating loss carryforwards of $30,110,000 and $10,556,000, respectively, which will begin to expire in 2012 and 2005 for federal and state income tax purposes, respectively, and a full valuation allowance against these carryforwards. Risk - ---- The Company's business can be affected by many important factors. Among these, are changes in consumer tastes, national, regional and local economic and political conditions, demographic trends, and the impact on consumer habits as a result of new information regarding diet, nutrition and health. The Company's performance may be adversely affected by factors such as traffic patterns, demographics and the type, number and location of retail stores and competitors. The Company's revenues are subject to seasonal fluctuations, with decreased revenues during rainy or cold weather months and increased revenues during dry or hot weather months. Changes in accounting policies and practices and the financial impact of complying with The Sarbanes-Oxley Act of 2002 could have a material adverse effect on the Company's financial condition and results of operations. The costs and other effects of legal claims by employees, franchisees, customers, vendors, stockholders and others, including settlement of those claims; and the effectiveness of management strategies and decisions could have a material adverse effect on the Company's financial condition and results of operations. The Company intends to grow primarily by developing additional business opportunities through new placements in existing and new market areas. Development involves substantial risks, including the risk of (i) the availability of financing at acceptable rates and terms, (ii) costs associated with the development of infrastructure in new market areas, (iii) the inability to obtain all required governmental permits, (iv) changes in governmental rules, regulations, and interpretations and (v) general economic and business conditions. Although we intend to manage our development to reduce such risks, we cannot assure you that present or future development will perform in accordance with our expectations. Our inability to expand in accordance with our plans or to manage our growth could have a material adverse effect on our results of operations and financial condition. Because our business is regional, with a substantial portion of the Company's customer base located in the states of California, Texas and Florida, the economic conditions, state and local government regulations and weather conditions affecting those states may have a material impact upon our results. 16 The Company cannot provide assurance that it will be able to successfully expand or acquire critical market presence for our brand in new geographical markets, as we may encounter competitors with substantially greater financial resources. We may be unable to find attractive locations, acquire name recognition, successfully market our products and attract new customers. Competitive circumstances and consumer characteristics in new geographical markets may differ substantially from those in the geographical markets in which we have substantial experience. We cannot assure you that we will be able to successfully integrate or profitably operate new acquisitions in new geographical markets. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Company's primary market risk exposure is interest rate risk. The Company's outstanding bank debt is tied to the bank's prime lending rate and as such, the Company is at risk due to increases in market rates. A 10% change in the bank's lending rate would have the potential of increasing the interest on the expected average outstanding borrowings of the bank debt and impacting the future earnings of the Company by less than $55,000 annually. The Company's exposure to interest rate risk relates primarily to the opportunity cost of fixed-rate obligations associated with the Trust Preferred Securities. The Company believes that the fixed rate represents the Company's long-term market rate. Therefore, there is no significant opportunity cost associated with the fixed rate. At January 2, 2005, the Company held no marketable securities available-for-sale. Item 8. Financial Statements and Supplementary Data The Company's consolidated financial statements, together with accompanying Notes and the Report of Independent Registered Public Accounting Firm, KPMG LLP, are set forth on pages 19 through 39 after Part IV of this report. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Since January 2, 2005, the Company carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures were effective as of January 2, 2005 to ensure that information required to be disclosed in reports that are filed or submitted under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There has been no change in our internal controls over financial reporting since the date of such evaluation that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. PART III Item 10. Directors and Executive Officers of the Registrant The information required by this Item is incorporated herein by reference to the Company's definitive proxy statement for the 2005 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission no later than 120 days after January 2, 2005. Item 11. Executive Compensation The information required by this Item is incorporated herein by reference to the Company's definitive proxy statement for the 2005 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission no later than 120 days after January 2, 2005. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this Item is incorporated herein by reference to the Company's definitive proxy statement for the 2005 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission no later than 120 days after January 2, 2005. 17 Item 13. Certain Relationships and Related Transactions The information required by this Item is incorporated herein by reference to the Company's definitive proxy statement for the 2005 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission no later than 120 days after January 2, 2005. Item 14. Principal Accountant Fees and Services The information required by this Item is incorporated herein by reference to the Company's definitive proxy statement for the 2005 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission no later than 120 days after January 2, 2005. PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Documents Filed with Report --------------------------- 1. Consolidated Financial Statements --------------------------------- Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets at January 2, 2005 and December 28, 2003 Consolidated Statements of Operations for the fiscal years ended January 2, 2005, December 28, 2003, and December 29, 2002 Consolidated Statements of Comprehensive Loss for the fiscal years ended January 2, 2005, December 28, 2003, and December 29, 2002 Consolidated Statements of Stockholders' Deficit for the fiscal years ended January 2, 2005, December 28, 2003, and December 29, 2002 Consolidated Statements of Cash Flows for the fiscal years ended January 2, 2005, December 28, 2003, and December 29, 2002 Notes to Consolidated Financial Statements 2. Financial Statement Schedule ---------------------------- Report of Independent Registered Public Accounting Firm on Supplementary Schedule Schedule II - Valuation and Qualifying Accounts 3. Exhibits -------- The exhibits listed on the accompanying Index to Exhibits are filed as part of this report. (b) Reports on Form 8-K ------------------- On November 4, 2004, the Company filed a current report on Form 8-K reporting earnings under Item 2.02. Index ----- Page Consolidated Financial Statements Number - --------------------------------- ------ Report of Independent Registered Public Accounting Firm 19 Consolidated Balance Sheets at January 2, 2005 and December 28, 2003 20 Consolidated Statements of Operations for the fiscal years ended January 2, 2005, December 28, 2003, and December 29, 2002 21 Consolidated Statements of Comprehensive Loss for the fiscal years ended January 2, 2005, December 28, 2003, and December 29, 2002 21 Consolidated Statements of Stockholders' Deficit for the fiscal years ended January 2, 2005, December 28, 2003, and December 29, 2002 22 Consolidated Statements of Cash Flows for the fiscal years ended January 2, 2005, December 28, 2003, and December 29, 2002 23 Notes to Consolidated Financial Statements 25 18 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Glacier Water Services, Inc.: We have audited the accompanying consolidated balance sheets of Glacier Water Services, Inc. and subsidiaries as of January 2, 2005 and December 28, 2003 and the related consolidated statements of operations, comprehensive loss, stockholders' deficit, and cash flows for each of the years in the three-year period ended January 2, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Glacier Water Services, Inc. and subsidiaries as of January 2, 2005 and December 28, 2003 and the results of their operations and their cash flows for each of the years in the three-year period ended January 2, 2005 in conformity with United States generally accepted accounting principles. As discussed in Note 4 to the financial statements, effective December 29, 2003, Glacier Water Services, Inc. adopted Financial Accounting Standards Board Interpretation No. 46 (Revised), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. /s/ KPMG LLP San Diego, California February 23, 2005 19 GLACIER WATER SERVICES, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data) ASSETS ------ January 2, December 28, 2005 2003 ---- ---- Current assets: Cash and cash equivalents......................... $ 2,256 $ 1,924 Accounts receivable, net of allowance for doubtful accounts of $201 and $151 as of January 2, 2005 and December 28, 2003, respectively.............. 2,476 2,118 Repair parts...................................... 2,403 1,718 Prepaid expenses and other........................ 950 1,058 ----------- ----------- Total current assets.......................... 8,085 6,818 Property and equipment, net.......................... 52,370 45,455 Goodwill............................................. 6,868 6,966 Intangible assets, net of accumulated amortization of $681 and $442 as of January 2, 2005 and December 28, 2003, respectively.................................. 475 714 Investment in Glacier Water Trust I Common Securities 2,629 2,629 Investment in Glacier Water Trust I Preferred Securities.......................................... 3,357 3,357 Other assets......................................... 5,716 5,777 ----------- ----------- Total assets......................................... $ 79,500 $ 71,716 =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIT ------------------------------------- Current liabilities: Accounts payable.................................. $ 2,759 $ 1,143 Accrued commissions............................... 1,989 1,713 Accrued liabilities............................... 2,215 2,062 Current portion of obligations under capital lease 262 244 Current portion of long-term notes payable........ 460 761 ----------- ----------- Total current liabilities..................... 7,685 5,923 Long-term debt....................................... 87,629 87,629 Long-term notes payable.............................. 10,040 2,000 Long-term portion of deferred rent................... 112 -- Long-term portion of obligations under capital lease. 661 923 ----------- ----------- Total liabilities.................................... 106,127 96,475 ----------- ----------- Commitments and contingencies -- -- Stockholders' deficit: Common stock, $0.01 par value, 10,000,000 shares authorized, 2,160,218 and 2,118,841 shares issued and outstanding at January 2, 2005 and December 28, 2003, respectively.............. 38 37 Additional paid-in capital........................ 18,948 18,460 Retained deficit.................................. (13,051) (10,694) Treasury stock, at cost, 1,587,606 shares at January 2, 2005 and December 28, 2003............ (32,562) (32,562) ----------- ----------- Total stockholders' deficit................... (26,627) (24,759) ----------- ----------- Total liabilities and stockholders' deficit.......... $ 79,500 $ 71,716 =========== =========== The accompanying notes are an integral part of these consolidated statements. 20 GLACIER WATER SERVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data)
Fiscal Year Ended -------------------------------------------------- January 2, December 28, December 29, 2005 2003 2002 ---- ---- ---- Revenues ............................................................... $ 76,261 $ 72,316 $ 71,029 Operating costs and expenses: Operating expenses .............................................. 48,614 44,222 44,698 Depreciation and amortization ................................... 11,533 12,612 12,368 ----------- ----------- ----------- Cost of goods sold .......................................... 60,147 56,834 57,066 Selling, general and administrative expenses .................... 10,611 9,956 9,777 Integration and restructuring costs ............................. -- -- 1,364 ----------- ----------- ----------- Total operating costs and expenses ....................... 70,758 66,790 68,207 ----------- ----------- ----------- Income from operations ................................................. 5,503 5,526 2,822 ----------- ----------- ----------- Other (income) expenses: Interest expense ................................................ 7,860 7,016 5,968 Investment (income) expense ..................................... -- (90) 20 ----------- ----------- ----------- Total other expense ...................................... 7,860 6,926 5,988 ----------- ----------- ----------- Loss before income taxes ............................................... (2,357) (1,400) (3,166) Income tax benefit ..................................................... -- -- (593) ----------- ----------- ----------- Net loss ............................................................... (2,357) (1,400) (2,573) Preferred stock dividends .............................................. -- 96 128 Net loss applicable to common stockholders ............................. $ (2,357) $ (1,496) $ (2,701) =========== =========== =========== Basic and diluted loss per share: Net loss applicable to common stockholders ...................... $ (1.10) $ (0.68) $ (0.95) =========== =========== =========== Weighted average shares used in calculation ................ 2,136,508 2,185,761 2,843,217 =========== =========== ===========
GLACIER WATER SERVICES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands)
Fiscal Year Ended -------------------------------------------------- January 2, December 28, December 29, 2005 2003 2002 ---- ---- ---- Net loss ............................................................... $ (2,357) $ (1,400) $ (2,573) ----------- ----------- ----------- Unrealized (loss) gain on securities: Unrealized holding (loss) gain arising during the period ............. -- (92) 246 Less: reclassification adjustment for net realized (gains) losses included in net loss ............................................ -- (23) 133 ----------- ----------- ----------- Net unrealized (loss) gain ............................................. -- (69) 113 ----------- ----------- ----------- Comprehensive loss ..................................................... $ (2,357) $ (1,469) $ (2,460) =========== =========== ===========
The accompanying notes are an integral part of these consolidated statements. 21 GLACIER WATER SERVICES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (in thousands, except share data)
Accumulated Additional Other Preferred Stock Common Stock Paid-In Retained Treasury Comprehensive Shares Amount Shares Amount Capital Deficit Stock Income (Loss) Total ------- ------ --------- ------ --------- -------- --------- ----------- ---------- Balance, December 30, 2001 16,000 $ -- 2,834,474 $ 35 $ 17,716 $ (6,721) $ (14,852) $ (44) $ (3,866) Exercise of stock options -- -- 16,667 -- 188 -- -- -- 188 Net unrealized gain on investments -- -- -- -- -- -- -- 113 113 Dividends on preferred stock -- -- -- -- (128) -- -- -- (128) Net loss -- -- -- -- -- (2,573) -- -- (2,573) ------- ------ --------- ------ --------- -------- --------- ----------- ---------- Balance, December 29, 2002 16,000 -- 2,851,141 35 17,776 (9,294) (14,852) 69 (6,266) Exercise of stock options -- -- 83,159 -- 782 -- -- -- 782 Exchange of common stock for trust preferred securities -- -- (983,880) -- -- -- (17,710) -- (17,710) Net unrealized loss on investments -- -- -- -- -- -- -- (69) (69) Dividends on preferred stock -- -- -- -- (96) -- -- -- (96) Conversion of preferred stock into common stock (16,000) -- 168,421 2 (2) -- -- -- -- Net loss -- -- -- -- -- (1,400) -- -- (1,400) ------- ------ --------- ------ --------- -------- --------- ----------- ---------- Balance, December 28, 2003 -- -- 2,118,841 37 18,460 (10,694) (32,562) -- (24,759) Exercise of stock options -- -- 41,377 1 488 -- -- -- 489 Net loss -- -- -- -- -- (2,357) -- -- (2,357) Balance, January 2, 2005 -- $ -- 2,160,218 $ 38 $ 18,948 $(13,051) $ (32,562) $ -- $ (26,627) ======= ====== ========= ====== ========= ======== ========= =========== ==========
The accompanying notes are an integral part of these consolidated statements. 22 GLACIER WATER SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOW (in thousands)
Fiscal Year Ended --------------------------------------------- January 2, December 28, December 29, 2005 2003 2002 ---- ---- ---- Cash flows from operating activities: Net loss ................................................................. $ (2,357) $ (1,400) $ (2,573) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization .......................................... 11,533 12,612 12,368 Loss on disposal of assets ............................................. 259 48 91 Realized (gain) loss on sales of investments ........................... -- (23) 133 Change in operating assets and liabilities excluding the impact of acquisitions in 2003 and 2002: Accounts receivable ................................................ (358) 87 (629) Repair parts ....................................................... (685) 111 84 Prepaid expenses and other ......................................... 108 48 96 Cash paid for prepaid contract rights .............................. (744) (216) (236) Other assets ....................................................... (735) (120) 98 Accounts payable, accrued liabilities and accrued commissions ...... 2,045 (717) (561) ----------- ----------- ----------- Net cash provided by operating activities ...................... 9,066 10,430 8,871 ----------- ----------- ----------- Cash flows from investing activities: Investment in property and equipment ..................................... (16,830) (5,013) (3,196) Cash paid in acquisitions, net of cash acquired .......................... -- (5,366) (5,424) Proceeds from sale of investments ........................................ -- -- 483 Proceeds from maturities of investments .................................. -- 557 98 ----------- ----------- ----------- Net cash used in investing activities ............................ (16,830) (9,822) (8,039) ----------- ----------- ----------- Cash flows from financing activities: Dividends paid ........................................................... -- (128) (128) Principal payments on line of credit and long-term notes payable ......... (3,979) (8,188) (1,120) Proceeds from long-term notes payable .................................... 11,718 1,600 6,000 Principal payments under capital lease obligations ....................... (244) (58) -- Increase in deferred rent ................................................ 112 -- -- Proceeds from issuance of stock .......................................... 489 782 188 ----------- ----------- ----------- Net cash provided by (used in) financing activities .............. 8,096 (5,992) 4,940 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents ............................ 332 (5,384) 5,772 Cash and cash equivalents, beginning of year .................................... 1,924 7,308 1,536 ----------- ----------- ----------- Cash and cash equivalents, end of year .......................................... $ 2,256 $ 1,924 $ 7,308 =========== =========== ===========
The accompanying notes are an integral part of these consolidated statements. 23 GLACIER WATER SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOW (continued) (in thousands)
Supplemental disclosure of cash flow information: Fiscal Year Ended ------------------------------------------- January 2, December 28, December 29, 2005 2003 2002 ---- ---- ---- Cash paid for interest ....................................................... $ 7,616 $ 6,885 $ 5,776 ========= ========= ========= Cash received for income taxes ............................................... $ -- $ -- $ 374 ========= ========= ========= Non-cash investing and financing activities: Business acquisitions: Fiscal Year Ended ------------------------------------------- January 2, December 28, December 29, 2005 2003 2002 ---- ---- ---- Assets acquired: Cash ......................................................... $ -- $ 425 $ -- Accounts receivable .......................................... -- 612 244 Repair parts ................................................. -- 229 71 Prepaid expenses and other ................................... -- 152 -- Property and equipment ....................................... -- 5,061 1,920 Intangible assets ............................................ -- 433 723 Goodwill ..................................................... -- 2,837 4,129 -------- -------- -------- Assets acquired ......................................... -- 9,749 7,087 Liabilities assumed: Accounts payable and accrued liabilities ..................... -- (3,681) (1,023) Notes payable ................................................ -- (702) (640) -------- -------- -------- Cash paid in acquisitions, net of cash acquired ................... $ -- $ 5,366 $ 5,424 ========= ========= ========= Equipment acquired under capital lease ................................. $ -- $ 1,225 $ -- ========= ========= ========= Conversion of common stock to Trust Preferred Securities ............... $ -- $ 17,710 $ -- ========= ========= =========
The accompanying notes are an integral part of these consolidated statements. 24 GLACIER WATER SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The Company and a Summary of Significant Accounting Policies Business Glacier Water Services, Inc., a Delaware corporation ("Glacier" or "Company"), is primarily engaged in the operation of self-service vending machines that dispense drinking water to consumers. The machines are placed at supermarkets and other retail outlets under commission arrangements with the retailers. The Company's revenues are subject to seasonal fluctuations, with decreased revenues during rainy or cold weather months and increased revenues during dry or hot weather months. The Company's machines are primarily located throughout the sunbelt and Midwest regions of the United States. On February 8, 2002, Glacier acquired substantially all of the assets of the Pure Fill Corporation and its wholly owned subsidiaries, National Water Services, Pure Fill Finance Corporation and Pure Fill Container Corporation (collectively, Pure Fill). On October 7, 2003, Glacier acquired Water Island, Inc. The transactions were accounted for as purchases, and accordingly, the results of operations have been included in the consolidated statements of operations from the date of acquisitions. As of January 2, 2005, the Company operated approximately 15,300 machines in 39 states. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Glacier Water Services, Inc. and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with United States generally accepted accounting principles requires that management make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. These estimates and assumptions include, but are not limited to assessing the following: the recoverability of account receivable, repair parts, property and equipment, goodwill and intangible assets, accrued liabilities, deferred tax assets, and the ability to estimate cash in machines. Fiscal Year The Company utilizes a fiscal year of 52 or 53 weeks ending on the Sunday closest to December 31st. Fiscal year ended January 2, 2005 consisted of 53 weeks or 371 days. The Company recorded revenues of approximately $1,116,000 associated with the 53rd week. Fiscal years December 28, 2003 and December 29, 2002 each contained 52 weeks or 364 days. Other Comprehensive Loss In accordance with the Financial Accounting Standards Board ("FASB") Statement No. 130, Reporting Comprehensive Income, the Company displays comprehensive loss and its components in a financial statement that is displayed with the same prominence as other financial statements. The impact of any fluctuations in the unrealized gains or losses on investments available-for-sale are a component of comprehensive loss for each year presented. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. As of January 2, 2005, cash equivalents primarily consist of cash held in money market accounts and/or certificates of deposit. The Company's policy is to place its cash with high credit quality financial institutions in order to limit the amount of credit exposure. 25 GLACIER WATER SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Investments The Company held no investments available-for-sale at January 2, 2005 or at December 28, 2003. Investments are accounted for in accordance with FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, which requires that the Company determine the appropriate classification of investments at the time of purchase based on management's intent and re-evaluate such designation as of each balance sheet date. The Company considers all short-term investments as available for use in its current operations, and therefore, classifies them as short-term, available-for-sale investments. Available-for-sale investments are stated at fair value, with net unrealized gains or losses, if any, reported as a separate component of stockholders' deficit. Realized gains or losses from the sale of investments, interest income, and dividends are included in investment (income) expense in the accompanying statements of operations. Management reviews the carrying values of its investments and writes such investments down to estimated fair value by a charge to operations when such review results in management's determination that an investment's impairment is considered to be other than temporary. The cost of securities sold is based on the specific identification method. The Company's primary market risk exposure is interest rate risk. The Company's exposure to interest rate risk relates primarily to the opportunity cost associated with fixed-rate obligations. Proceeds from sales or maturities of marketable securities for the years ended January 2, 2005 and December 28, 2003 were $0 and $557,000, respectively. There were realized gains of $117,000 on such sales and maturities for the year ended December 28, 2003 and gross realized losses for the year ended December 28, 2003 were $94,000. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, other current assets and all current liabilities approximate their fair value because of the short-term nature of those instruments. The Company's long-term debt at January 2, 2005, consists of the Trust Preferred Securities, and the long-term notes payable which consists of amounts due in connection with the Pure Fill and Water Island acquisitions and amounts outstanding under the Company's credit facility (see "Note 4"). The market value of the Trust Preferred Securities at January 2, 2005 and December 28, 2003 was approximately $88,060,000 and $86,020,000, respectively. The carrying value of the Company's Trust Preferred Securities was approximately $85,000,000 at January 2, 2005 and December 28, 2003. The carrying value of the Company's long-term notes payable, including any current portion, was approximately $10,500,000 and $2,761,000 at January 2, 2005 and December 28, 2003, respectively. The carrying value of the long-term notes payable approximates the fair value since their terms are equivalent to those generally available in the market place. The Company also has long-term obligations under capital leases with a carrying value of $923,000 and $1,167,000 as of January 2, 2005 and December 29, 2003, respectively. Repair Parts Repair parts consist of machine parts used to maintain vending machines in operation and are stated at cost (moving weighted average). Repair parts consist of operating components that are used to replace or refurbish components installed in vending machines, thereby maintaining the overall life of the vending machine at its estimated useful life. Long-Lived Assets The Company evaluates and assesses its long-lived assets for impairment under the guidelines of FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Statement of Financial Standards No. 144, addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of a Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that opinion). The Company periodically assesses triggering events for the impairment of long-lived assets. The impairment analysis requires the use of assumptions and judgments regarding the carrying value and estimated lives of these assets. The adoption of SFAS No. 144 did not have an impact on our financial position or results of operations. 26 GLACIER WATER SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Property and Equipment and Depreciation Property and equipment are recorded at cost and consist of the following (in thousands): January 2, December 28, 2005 2003 ---- ---- Vending equipment............................ $ 131,503 $ 117,310 Equipment, furniture and fixtures............ 4,435 4,228 Leasehold improvements....................... 61 89 Capital lease assets......................... 1,225 1,225 ----------- ----------- 137,224 122,852 Less: Accumulated depreciation and amortization................................ (84,854) (77,397) ----------- ----------- $ 52,370 $ 45,455 =========== =========== Depreciation is provided using the straight-line method over the estimated useful lives of the assets as follows: Vending equipment 13 years during fiscal 2003 and 2004 and 10 years during 2002 Equipment, furniture and fixtures 3 to 10 years Leasehold improvements Shorter of life of asset or remaining lease term Capital leases Shorter of life of asset or remaining lease term The Company's vending equipment is depreciated using a 10% estimated salvage value during fiscal year 2004 and 2003. The salvage value is an estimate of the value expected to be recovered upon disposal of the vending machine. During the quarter ended December 28, 2003, the Company revised the estimated useful life and salvage value assigned to vending equipment. The revisions were based on actual historical performance of the vending machines, which demonstrated that the average machine is in service for periods longer than the ten year estimated useful life previously assigned to vending machines, and that the salvage value at the end of service is lower than the estimates historically assigned. As a result, and in accordance with Accounting Principles Board (APB) Opinion No. 20, Accounting Changes, the Company changed the estimated useful life of its vending machines to 13 years and reduced the salvage value from 20% to 10% of cost, effective September 29, 2003. As a result of these changes in estimates, the Company incurred approximately $445,000, or $0.20 per basic and diluted loss per common share, of additional depreciation expense for the year ended December 28, 2003. Costs associated with installing vending equipment are capitalized and depreciated over five years, which is the normal contractual period with the retailers. All maintenance, repair and minor refurbishment costs are charged to operations as incurred. Additions and major improvements are capitalized. Certain long-term repair parts are classified as vending equipment and are depreciated over a 3, 5, or 10 year estimated useful life. Costs associated with the assembly of vending machines are accumulated until finished machines are ready for installation at a retail location, at which time the costs are transferred to property and equipment. As of January 2, 2005 and December 28, 2003, there were no new vending machines in the process of assembly. The Company currently has sufficient machines in storage available for deployment in fiscal 2005. Machines that have been previously installed and are in storage awaiting redeployment are currently being depreciated. Other Assets Included in other assets are prepaid contract rights, which consist of fees paid to retailers for future benefits associated with the ongoing placement of the Company's vending equipment at those locations. These fees are amortized over the life of the contract, generally ranging from three to five years. At January 2, 2005, prepaid contract rights in the amount of $690,000 were included in other assets as compared to $726,000 at December 28, 2003. For the years ended January 2, 2005, December 28, 2003 and December 29, 2002, $1,652,000, $2,050,000 and $2,391,000, respectively, is included in depreciation and amortization. Also included in other assets are net deferred financing costs of $2,741,000 which were incurred in connection with the original issue of the Trust Preferred Securities discussed in Note 4 and are amortized using the effective interest method over the period ending January 2028, the date of the mandatory redemption of the securities. Additional net deferred financing costs of $2,135,000 associated with the Exchange Offer discussed in Note 4 are also included in other assets and are also amortized using the effective interest method over the period ending January 2028. 27 GLACIER WATER SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Revenue Recognition The Company recognizes revenue from the sale of its product at the point of purchase, which occurs when the customer vends the water and pays for the product. Due to the fact that the Company has approximately 15,300 vending machines, it is impractical to visit all machines at the end of each reporting period. Consequently, the Company estimates the revenue from the last time each machine was serviced until the end of the reporting period, based on the most current daily volume of each machine. For the years ended January 2, 2005, December 28, 2003 and December 29, 2002, the Company recorded approximately $1,846,000, $2,284,000 and $1,446,000, respectively, of such estimated revenues, which represents an average of approximately 11 days, 13 days and 9 days, respectively, per machine. Segment and Geographic Reporting Glacier operates in a single business segment providing high quality, low priced drinking water dispensed to consumers through self-service vending machines and containers sold to retailers for re-sale. The Company's operations are within the United States. All revenues are generated from the United States and all long-lived assets are maintained in the United States. Commission Expense Included in operating expenses are commission payments made to certain retailers based on a percentage of vending machine revenue. Commission expense for the years ended January 2, 2005, December 28, 2003 and December 29, 2002 was $33,151,000, $30,482,000, and $32,180,000, respectively. Income Taxes Deferred tax liabilities and assets reflect the net tax effects, using enacted tax rates in effect for the year in which the differences are expected to reverse, of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. Stock-Based Compensation The Company had an employee stock-based compensation plan, which is described more fully in Note 8. The Company's Stock Option Program expired in March 2004 and no options were issued during the year ended January 2, 2005. The Company measured compensation expense for the employee stock-based compensation awards using the intrinsic value method and provided pro forma disclosures of net loss and loss per share as if a fair value method had been applied. Therefore, compensation cost for employee stock awards is measured as the excess, if any, of the fair value of the common stock at the grant date over the amount an employee must pay to acquire the stock and is amortized over the related service periods using the straight-line method. Compensation expense previously recorded for unvested employee stock-based compensation awards that are forfeited upon employee termination is reversed in the period of forfeiture. The following pro forma disclosures represent what the Company's net loss and loss per common share would have been had the Company recorded compensation cost for these plans in accordance with the provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation ("FASB Statement No. 123") for fiscal years 2004, 2003, and 2002: 28 GLACIER WATER SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Fiscal Year Ended ------------------------------------------------------ January 2, December 28, December 29, 2005 2003 2002 ---- ---- ---- Net loss applicable to common stockholders, as reported.................................................. $ (2,357) $ (1,496) $ (2,701) Deduct: Total Stock-based employee compensation expense determined under the fair value method for all awards................................................... $ 339 $ 846 $ 832 ------------- ------------- ------------- Proforma net loss applicable to common stockholders........... $ (2,696) $ (2,342) $ (3,533) ============= ============= ============= Basic and diluted loss per common share: As reported................................................. $ (1.10) $ (0.68) $ (0.95) ============= ============= ============= Proforma.................................................... $ (1.26) $ (1.07) $ (1.24) ============= ============= =============
The fair value of the stock options was established at the date of grant using the "Black-Scholes" method of option pricing and the following weighted average assumptions were used for grants made during the years ended December 28, 2003 and December 28, 2002. December 28 December 29 2003 2002 ---- ---- Risk free interest rate........................... 1.1% 1.7% Dividend yield.................................... 0% 0% Expected volatility of the Company's stock........ 30.0% 31.0% Weighted average expected life (in years)......... 6.7 6.8 Recent Accounting Pronouncements FASB Statement No. 132 (revised), Employers' Disclosures about Pensions and Other Postretirement Benefits. FASB 132 (revised), revises employers' disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans. FASB 132 (revised) will retain and revise the disclosure requirements contained in the original FASB 132. It also requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. FASB 132 generally is effective for fiscal years ending after December 15, 2003. The application of FASB 132 did not have a material effect on the consolidated financial statements. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 149 is generally effective for contracts entered into or modified after September 30, 2003, and for hedging relationships designated after September 30, 2003. The adoption of SFAS No. 149 has not had a material impact on the consolidated financial statement. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. The adoption of SFAS No. 150 has not had a material impact on the consolidated financial statements. 29 GLACIER WATER SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) In November 2002, the FASB issued FASB Interpretation No. 45 (FIN No. 45), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which clarifies disclosure and recognition/measurement requirements related to certain guarantees. The disclosure requirements are effective for financial statements issued after December 15, 2002 and the recognition/measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The application of this interpretation did not have a material impact on the consolidated financial statements. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 ("FIN 46"). This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The primary beneficiary of a variable interest entity is the entity that absorbs a majority of the variable interest entity's expected losses, receives a majority of the variable interest entity's expected residual returns, or both, as a result of ownership, controlling interest, contractual relationship or other business relationship with a variable interest entity. Prior to the implementation of FIN 46, variable interest entities were generally consolidated by an enterprise when the enterprise had a controlling financial interest through ownership of a majority of voting interests in the entity. The interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interests entities obtained after January 31, 2003. The Interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that the Company will consolidate or disclose information about variable interest entities when the Interpretation becomes effective. The application of this interpretation did not have a material effect on the consolidated financial statements. In December 2003, FASB issued Interpretation No. 46R, Consolidation of Variable Interest Entities ("FIN 46R"), which supercedes FIN46. The application of the revised Interpretation is required in the financial statements of companies that have interests in special purpose entities for periods after December 15, 2003. FIN 46R required the Company to de-consolidate its investment in Glacier Water Trust I. The application of this interpretation resulted in the Company reflecting its ownership of Trust Securities as long-term assets and increasing long-term debt by the same amount of $5,986,000 (see "Note 4"). The Company chose to restate prior year's consolidated balance sheet to conform to the current year presentation, in accordance with the transition provisions of FIN 46R. In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123R (SFAS 123R), "Share-Based payment", which replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and supercedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exception, the amount of compensation cost is measured based on the grant date fair value of the equity or liability instruments used. SFAS 123R requires liability awards to be re-measured each reporting period and compensation costs to be recognized over the period that an employee provides service in exchange for the award. SFAS123R is effective beginning the first interim or annual reporting period that begins after June 15, 2005. The Company plans to adopt the provisions of SFAS 123R prospectively during the third quarter of 2005. The Company's Stock Option Program expired in March 2004 and no options were issued during the year ended January 2, 2005. The Company expects that this adoption to result in additional compensation expense in the Company's consolidated financial statements. The Company is currently determining the effect of SFAS 123R on the Company's consolidated financial statements. In November 2004, the FASB issued FASB Statement No. 151, Inventory Costs: an amendment of ARB No. 43, which establishes standards for the accounting for unexpected production defects and waste and the impact on capitalized inventory costs. FASB No. 151 is effective for financial statements for fiscal years beginning after June 15, 2005. The Company does not expect that the adoption of FASB 151 will have a material impact on the consolidated financial statements. In November 2004, the FASB issued FASB Statement No. 152, Accounting for Real Estate Time-Sharing Transactions - an amendment of FASB Statements No. 66 and No. 67. The Statement amends FASB No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement also amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. FASB No. 152 is effective for financial statements for fiscal years beginning after June 15, 2005. The Company does not expect that the adoption of FASB 152 will have a material impact on the consolidated financial statements. 30 GLACIER WATER SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) In November 2004, the FASB issued FASB Statement No. 153, Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. FASB No. 153 is effective for financial statements for fiscal periods beginning after June 15, 2005. The Company does not expect that the adoption of FASB 153 will have a material impact on the consolidated financial statements. Loss Per Common Share Basic earnings per share are computed based upon the weighted average number of common shares outstanding during the period. Diluted earnings per share are based upon the weighted average number of common shares outstanding and potentially dilutive securities during the period. In computing the net loss per share, the Company's net loss is adjusted for preferred dividends to reflect the loss applicable to common stock. Potentially dilutive securities include shares issuable in connection with the convertible preferred stock and options granted under the Company's stock option plans using the treasury stock method. For fiscal years 2004, 2003, and 2002, 785,772, 905,930, and 947,794 potentially dilutive securities, respectively, were not used to calculate diluted loss per share because of their anti-dilutive effect.
January 2, December 28, December 29, 2005 2003 2002 ---- ---- ---- (in thousands except share and per share data) Numerator for basic earnings per share - net loss applicable to common shareholders....................................... $ (2,357) $ (1,496) $ (2,701) ------------- ------------- ------------- Denominator - shares: Weighted average common shares for basic loss per share.......................................... 2,136,508 2,185,761 2,843,217 Effect of dilutive securities............................ -- -- -- ------------- ------------- ------------- Dilutive potential shares for diluted loss per share.......... 2,136,508 2,185,761 2,843,217 ============= ============= ============= Loss per share: Basic and dilutive loss applicable to common shareholders..................................... $ (1.10) $ (0.68) $ (0.95) ============= ============= ============= Potentially dilutive securities not included above since they are antidilutive........................................ 785,772 905,930 947,794 ============= ============= =============
2. Acquisitions On February 8, 2002, Glacier acquired substantially all of the assets of the Pure Fill Corporation and its wholly owned subsidiaries, National Water Services, Pure Fill Finance Corporation and Pure Fill Container Corporation, (collectively, "Pure Fill") for a purchase price of $6,064,000, including $640,000 which is payable in equal quarterly installments over four years. The Company incurred transaction costs of $450,000. This acquisition was consummated principally to expand the Company's water vending operations and customer base. The transaction was accounted for as a purchase, and accordingly, the results of operations have been included in the consolidated statements of operations from the date of acquisition. The allocation of fair values of assets and liabilities was based upon a third party appraisal. The excess of purchase price over acquired net assets was $4,129,000 and is classified as goodwill. Intangible 31 GLACIER WATER SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) assets of $213,000, $230,000 and $280,000 were assigned to registered trademarks and patents, contracts, and a non-compete agreement, respectively (collectively, "Pure Fill Intangible Assets"). The Pure Fill Intangible Assets are subject to amortization and have a weighted average useful life of approximately 4 years. For the years ended January 2, 2005, December 28, 2003 and December 29, 2002 the Company recorded amortization of $108,000, $214,000 and $195,000, respectively, related to the Pure Fill Intangible Assets. On October 7, 2003, Glacier acquired Water Island, Inc. ("Water Island") for a purchase price of $6,068,000, including $702,000 which is payable in installments over two years. The Company incurred transaction costs of $202,000, of which none remained accrued at January 2, 2005. This acquisition was consummated principally to expand the Company's water vending operations and customer base. The transaction was accounted for as a purchase, and accordingly, the results of operations have been included in the consolidated statements of operations from the date of acquisition. The allocation of fair values of assets and liabilities was based upon a third party appraisal. The excess of purchase price over acquired net assets was $2,739,000 and is classified as goodwill. During 2004, the Company reversed an accrual related to estimated acquisition cost of $98,000. Intangible assets of $333,000 and $100,000 were assigned to contracts and non-compete agreements respectively (collectively, "Water Island Intangible Assets"). The Water Island Intangible Assets are subject to amortization and have a weighted average useful life of approximately 3 years. For the years ended January 2, 2005 and December 28, 2003, the Company recorded amortization of $131,000 and $33,000, respectively, related to the Water Island Intangible Assets. The Company estimates that amortization expense related to Pure Fill intangible assets and Water Island intangible assets to be $230,000, $202,000, $28,000, $15,000, and $0 for the fiscal years 2005 thru 2009. The following unaudited pro forma information assumes that the acquisition of Pure Fill occurred on January 1, 2001 and the acquisition of Water Island occurred on December 31, 2002. The unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which would have actually resulted had the combinations been in effect on December 30, 2002 and December 31, 2001, or of future results of operations. The unaudited pro forma results for the fiscal years ended December 28, 2003 and December 29, 2002 are as follows (in thousands, except share data): December 28, December 29, 2003 2002 ---- ---- Revenues $ 80,342 $ 81,868 Net loss $ (1,477) $ (2,289) Net loss applicable to common shares $ (1,573) $ (2,417) Basic and diluted loss per share: Net loss applicable to common stockholders $ (0.72) $ (0.85) Weighted average shares used in per share calculation 2,185,761 2,843,217 32 GLACIER WATER SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 3. Supplementary Balance Sheet Information Other Assets Other assets consist of the following (in thousands): January 2, December 28, 2005 2003 ---- ---- Prepaid contract rights, net of accumulated amortization of $2,323 and $8,613 as of January 2, 2005 and December 28, 2003, respectively....... $ 690 $ 726 Deferred financing cost, net of accumulated amortization of $333 and $273 as of January 2, 2005 and December 28, 2003, respectively.......... 4,876 4,936 Other.............................................. 149 115 ---------- ---------- $ 5,715 $ 5,777 ========== ========== Accrued Liabilities Accrued liabilities consist of the following (in thousands): January 2, December 28, 2005 2003 ---- ---- Accrued compensation, benefits and related taxes............................................. $ 806 $ 1,357 Accrued property, sales, income and other taxes............................................. 99 85 Accrued interest................................... 389 284 Other accrued liabilities.......................... 921 336 ---------- ---------- $ 2,215 $ 2,062 ========== ========== 4. Long-Term Debt, Line of Credit and Notes Payable Company Obligated Mandatorily Redeemable Preferred Securities On January 27, 1998, Glacier Water Trust I (the "Trust"), a newly created Delaware business trust and a wholly-owned subsidiary of the Company, issued 105,154 common securities to the Company and completed a public offering of 3,400,000 of 9.0625% Cumulative Trust Preferred Securities with a liquidation amount of $25.00 per security (the "Trust Preferred Securities" and together with the common securities the "Trust Securities"). The Trust exists for the sole purpose of issuing Trust Securities and purchasing Subordinated Debentures. Concurrent with the issuance of such securities, the Trust invested the proceeds therefrom in an aggregate principal amount of $85,000,000 of 9.0625% Junior Subordinated Debentures (the "Subordinated Debentures") issued by the Company. The Subordinated Debentures are unsecured obligations of the Company to the trust and are subordinate and junior in right of payment to other indebtedness of the Company. The Trust relies on payments on the Subordinated Debentures to make distributions on the Trust Preferred Securities. Distributions on the Trust Preferred Securities are payable monthly in arrears by the Trust. The Company may cause the Trust to defer the payment of distributions for a period not to exceed 60 consecutive months. During any such deferral period, distributions will accrue and compound quarterly, and the Company may not declare or pay distributions on its common or preferred stock or debt securities that rank equal or junior to the Subordinated Debentures. To date, the Company is current on all distributions. The Trust Preferred Securities are subject to mandatory redemption upon the repayment of the Subordinated Debentures at the redemption price equal to the aggregate liquidation amount of the Securities plus any accumulated and unpaid distributions. The Subordinated Debentures mature on January 31, 2028, but may be redeemed at the option of the Company at any time since January 31, 2003. The Company effectively provides a full and unconditional guarantee of the Trust's obligations under the Trust Securities. 33 GLACIER WATER SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The Company's Board of Directors authorized the purchase of up to 1,250,000 of the Trust Preferred Securities. As of January 2, 2005, the Company had repurchased 921,400 of the Trust Preferred Securities at an average cost of $16.40 per share. The Company did not repurchase any shares of Trust Preferred Securities during fiscal years 2004, 2003 or 2002. As of January 2, 2005, the Company had used $15,118,000 in cash to repurchase $23,035,000 face value of the Trust Preferred Securities less $1,098,000 of deferred financing costs. The Company may continue to make such purchases from time to time in open market transactions or block trades. Pursuant to an Exchange Offer, which commenced on February 26, 2003 and expired on April 11, 2003, a total of 983,880 shares of Common Stock were exchanged for a total of 787,105 Trust Preferred Securities at a ratio of one share of Common Stock for eight-tenths of a Trust Preferred Security. The Exchange Offer increased long-term debt by approximately $19,678,000, which represents the total liquidation value of the 787,105 Trust Preferred Securities. The Trust is considered a variable interest entity under FIN 46R. Prior to FIN 46R, variable interest entities were generally consolidated by an enterprise when the enterprise had a controlling financial interest through ownership of a majority voting interest in the entity. Under FIN 46R, a variable interest entity should be consolidated by its primary beneficiary. Because the Company is not the primary beneficiary of the Trust, the financial statements of the Trust are no longer included in the consolidated financial statements of the Company. FIN 46R may be adopted either by recording a cumulative effect adjustment as of the date of the adoption, or restating prior period financial statements. The Company opted to restate prior period financial statements. As a result of the de-consolidation, the Company has recorded its ownership of 105,154 Common Trust Securities of the Trust and its ownership of 134,295 shares of Trust Preferred Securities as long-term assets and has recorded the Junior Subordinated Debentures as long-term debt at a face value of $87,629,000, and restated its prior period consolidated balance sheet. There was no impact on prior period consolidated statements of operations and cash flows as a result of this restatement. At January 2, 2005 and December 28, 2003, there were 3,265,705 Trust Preferred Securities outstanding (other than the 134,295 held by the Company). Line of Credit and Notes Payable In connection with the Pure Fill acquisition, the Company entered into a $10,000,000 credit facility with City National Bank on February 19, 2002. The $10,000,000 credit facility originally consisted of a $4,000,000 revolving credit portion and a $6,000,000 term portion. On February 1, 2003, the Company replaced the term portion, which had an outstanding balance of $4,800,000 as of that date. The term portion was canceled and replaced with a new $4,800,000 revolving note. The credit availability on the new revolving note was to be reduced by $300,000 every three months beginning May 1, 2003 until its maturity in February 2007. The new revolving note required monthly interest payments at the Bank's prime rate plus 1.50%. The original $4,000,000 revolving credit portion of the credit facility (which remained in effect) required monthly interest payments at the Bank's prime rate plus 1.00%. The new revolving note and the original $4,000,000 revolving credit portion of the credit facility required a quarterly unused facility fee of 0.50% per annum and 0.25% per annum, respectively. On February 21, 2003, the Company repaid the new revolving note. On October 7, 2003, the Company restructured its credit facility with City National Bank in connection with the acquisition of Water Island. The two existing revolving notes, under which no borrowings were outstanding, were replaced with a new $12,000,000 revolving credit facility, which had a maturity date of February 1, 2009. The credit availability on the new revolving credit facility was reduced by $400,000 every three months beginning February 7, 2004 until its maturity in February 2009. The credit facility required monthly interest payments at the City National Bank's prime rate plus 1.00%. The new credit facility required a quarterly unused facility fee of 0.50% per annum, and contained certain customary financial covenants which restricted indebtedness and capital expenditures. On March 26, 2004, the City National Bank reduced the interest rate of the revolving credit facility to City National Bank's prime rate. All other terms on the credit facility remained the same. On December 1, 2004, City National Bank increased the availability on the credit facility to $25,000,000. The revised credit facility requires monthly interest payments at the City National Bank's prime rate (5.25% per annum at January 2, 2005). The revolving credit facility requires a quarterly unused facility fee of 0.50% per annum and continues to contain certain customary financial covenants, which restrict indebtedness and capital expenditures. The Company pledged certain assets such as repair parts and equipment as collateral for its obligations under the credit facility. The Company was in compliance at January 2, 2005 with all such covenants. The credit availability on the revised revolving credit facility is reduced by $1,500,000 every three months beginning January 1, 2006 until its maturity in February 2009. As of January 2, 2005, there was $10,000,000 outstanding on the credit facility, which is included in 34 GLACIER WATER SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) long-term notes payable. Availability under the $25,000,000 revolving credit facility was $15,000,000 as of January 2, 2005. As of January 2, 2005, there is $500,000 outstanding under notes payable associated with the Pure Fill and Water Island acquisitions. The Pure Fill note was payable over 4 years in equal quarterly payments and as of January 2, 2005, had an outstanding balance of $200,000. As of January 2, 2005 the Water Island note had a balance of $300,000 and is payable on the anniversary date of the acquisition in October 2005. Amounts due after January 2, 2006 under the Company's credit facility and notes payable are included in long-term notes payable. Both the Pure Fill and the Water Island notes payable accrue interest at the prime rate published in the Wall Street Journal (5.25% and 4.0% per annum at January 2, 2005 and December 28, 2003, respectively). 5. Commitments and Contingencies Leases The Company leases certain vehicles, warehouse and office facilities under non-cancelable operating leases that expire on various dates through 2009. The lease for the corporate office located in Vista, California has terms that include annual rate increases and as such the Company has recorded a deferred rent liability of $112,000 as of January 2, 2005. The Company also leases certain equipment under a capital lease, which expires in November 2006. Future minimum lease payments under non-cancelable operating and capital leases with initial terms of one or more years are as follows (in thousands): Fiscal year Operating Capital ----------- --------- ------- 2005............................................... 862 318 2006............................................... 777 696 2007............................................... 654 -- 2008............................................... 491 -- 2009............................................... 438 -- Thereafter......................................... -- -- -------- Total minimum lease payments....................... $ 3,222 1,014 ======== -------- Less amount representing interest.................. (91) -------- Present value of minimum lease payments............ 923 Less current portion............................... 262 -------- Long-term obligation under capital lease........... 661 ======== Total lease expense for the years ended January 2, 2005, December 28, 2003, and December 29, 2002, was $1,771,000, $1,445,000, and $1,688,000, respectively. Contingencies The Company is involved in various legal proceedings and claims arising in the ordinary course of business, none of which, in the opinion of management, is expected to have a material effect on the Company's consolidated financial position, results of operations or liquidity. 35 GLACIER WATER SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 6. Income Taxes Significant components of the provision (benefit) for income taxes are as follows (in thousands): Fiscal Year Ended --------------------------------- Jan. 2, Dec. 28, Dec. 29, 2005 2003 2002 ---- ---- ---- Federal income taxes: Current................................. $ -- $ -- $ (379) Deferred................................ -- -- (214) --------- --------- --------- Total federal income taxes.......... -- -- (593) --------- --------- --------- State and local income taxes: Current................................. -- -- -- Deferred................................ -- -- -- --------- --------- --------- Total state and local income taxes.. -- -- -- --------- --------- --------- Total income tax provision (benefit)........ $ -- $ -- $ (593) ========= ========= ========= The $379,000 current income tax benefit in fiscal year 2002 was a result of an income tax refund received as a result of changes in the U.S Federal tax laws relating to operating loss carrybacks which allowed the Company to recover previously paid U.S. federal income taxes. Deferred tax liabilities and assets result from the following (in thousands): Jan. 2, Dec. 28, 2005 2003 ---- ---- Deferred tax liabilities: Property and equipment..................... $ 8,764 $ 9,354 ---------- ---------- Deferred tax assets: Alternative minimum tax credit............. (1,156) (1,156) Net operating loss......................... (12,214) (12,422) Manufacturer's investment credit........... (568) (568) Accruals and reserves...................... (253) (225) Other, net................................. (87) (92) ---------- ---------- Total gross deferred tax assets............... (14,278) (14,463) Valuation allowance........................ 5,514 5,109 ---------- ---------- Total deferred tax assets, net................ (8,764) (9,354) ---------- ---------- Net deferred tax liabilities.................. $ -- $ -- ========== ========== The Company's effective income tax rate differs from the federal statutory rate as follows: Fiscal Year Ended -------------------------------- Jan. 2, Dec. 28, Dec. 29, 2005 2003 2002 ---- ---- ---- Federal statutory rate........................ (34.0)% (34.0)% (34.0)% State and local taxes, net of federal benefit...................................... 0.3 % (0.3)% (4.3)% Benefit of alternative minimum tax net operating loss carryback..................... -- % -- % (6.7)% Other, net.................................... 1.5 % -- % (2.8)% Change in valuation allowance................. 32.2 % 34.3 % 29.1% --------- --------- --------- Effective rate................................ -- % -- % (18.7)% ========= ========= ========= 36 GLACIER WATER SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The realization of deferred tax assets is dependent upon the Company's ability to generate taxable income in future years. Based on risk factors and net operating loss carryforwards, realization cannot be assured. Management believes it is not more likely than not that the deferred tax asset will be realized and therefore, has recorded a valuation allowance for the net balance as of January 2, 2005. At January 2, 2005, the Company had federal and California income tax net operating loss carryforwards of $30,110,000 and $10,556,000, respectively, which will begin to expire in 2012 and 2005 for U.S. federal and state income tax purposes, respectively. 7. Stockholders' Equity Redeemable Preferred Stock The Company's Certificate of Incorporation authorizes the issuance of 100,000 shares of preferred stock, par value $0.01 per share. The rights, preferences and privileges of the authorized shares may be established by the Board of Directors without further action by the holders of the Company's common stock. During the quarter ended July 1, 2001, the Company issued 16,000 shares of Cumulative Redeemable Convertible Preferred Stock (the "Preferred Stock"), which resulted in an increase to stockholders' equity of $1,600,000 excluding related issuance costs. Holders of the Preferred Stock are entitled to receive, when declared by the Board of Directors, a cumulative, preferential dividend ("Dividend") at the rate of 8% per annum of the original purchase price of each share of Preferred Stock. If any dividends are declared on the Common Stock, dividends will also be paid on the Preferred Stock on an as-converted basis. On September 30, 2003, the holder of the 16,000 outstanding shares of the Cumulative Redeemable Convertible Preferred Stock elected to convert these shares into 168,421 shares of the Company's Common Stock. There has been no Cumulative Redeemable Convertible Preferred Stock outstanding since September 30, 2003. For the years ended December 28, 2003 and December 29, 2002, the Company recorded dividends associated with the Cumulative Redeemable Convertible Preferred Stock of $96,000 and $128,000, respectively. Treasury Stock The Board of Directors has authorized the purchase of up to 750,000 shares of the Company's common stock in the open market. As of December 28, 2003, 603,726 shares had been repurchased under this program. Pursuant to the Exchange Offer which was completed on April 11, 2003, 983,880 shares of Common stock were exchanged for 787,105 Trust Preferred Securities. No shares were acquired in 2004. As of January 2, 2005, there were 1,587,606 shares of Common Stock held in treasury. As of January 2, 2005, the Company is authorized to repurchase an additional 146,274 shares, approximately 6.7% of the Company's total shares outstanding. 8. Stock Option Plans The Company has options outstanding under the 1994 Stock Compensation Program ("the Program"). The Program was terminated in 2004. The Company accounts for this plan under APB Opinion No. 25, under which no compensation cost has been recognized, since the exercise price of the option was not less than the market price of the stock on the date of grant. The Program provided for the issuance of incentive and non-qualified stock options to key employees, including directors and consultants. Incentive stock options were granted at no less than the fair market value on the date of the grant. Non-qualified options were granted at prices determined by the Board of Directors, but at no less than 85% of the fair market value on the date of the grant. Options generally have a term of 10 years and become exercisable at a rate of 25% per annum. Supplemental Options ("Supplemental Options") granted to directors for their services in lieu of cash fees have a term of five years and become exercisable one year following the date of the grant. 37 GLACIER WATER SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) A summary of the status of the Company's stock option plans and activity is as follows: Weighted Average Shares Exercise Price ------ -------------- Balance at December 30, 2001................... 954,734 $13.60 Granted........................................ 99,300 $12.16 Exercised...................................... (16,667) $11.30 Canceled....................................... (89,573) $21.55 ---------- Balance as of December 29, 2002................ 947,794 $12.78 Granted........................................ 87,900 $15.89 Exercised...................................... (83,159) $ 9.41 Canceled....................................... (46,605) $28.44 ---------- Balance as of December 28, 2003................ 905,930 $12.57 Exercised...................................... (41,377) $11.81 Canceled....................................... (78,781) $23.66 ---------- Outstanding at January 2, 2005................. 785,772 $11.47 There are 785,772 options outstanding under the 1994 Stock Option Plan at January 2, 2005 with exercise prices between $8.06 and $30.00, with a weighted average exercise price of $11.47 and a weighted average remaining contractual life of four years. At January 2, 2005, 726,820 of these options are exercisable, and their weighted average exercise price is $11.52. 9. 401(k) Savings Plan The Company has a 401(k) Savings Plan (the "Plan") which allows eligible employees to contribute a percentage of their pre-tax compensation (subject to annual limitations of the lesser of 60% of eligible compensation or $13,000 in calendar year 2004), with the Company making discretionary matching contributions as determined each year by the Plan administrator. Employees vest immediately in their contributions and vest in the Company discretionary matching contributions over a five-year period of service. The Company's discretionary matching contributions were approximately $81,000, $75,000 and $65,000 for fiscal years 2004, 2003, and 2002, respectively. 10. Significant Customers The following table sets forth the customers which represent ten percent or more of the Company's total revenues in fiscal years 2004, 2003 and 2002, after the effect of any consolidations that occurred as a result of any acquisition or mergers by the retailers: Fiscal Year Ended ------------------------------------- Jan. 2, Dec. 28, Dec. 29, 2005 2003 2002 ---- ---- ---- Company A 12.66% 12.07% 12.54% Company B 11.64% 11.40% 10.93% Company C 11.24% 10.81% 10.73% 38 GLACIER WATER SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 11. Integration and Restructuring Costs On February 8, 2002, Glacier acquired substantially all of the assets of the Pure Fill Corporation and its wholly owned subsidiaries, National Water Services, Pure Fill Finance Corporation and Pure Fill Container Corporation. Costs necessary to integrate the assets of Glacier and Pure Fill that were expected to benefit future operations were expensed as integration costs after management had completed and approved the plans and associated costs. As a result of integrating Pure Fill assets into Glacier Water's operations, integration and restructuring costs totaled $1,364,000 for the year ended December 29, 2002, and have been recognized as integration and restructuring costs in the consolidated statement of operations. Integration and restructuring costs were principally for the removal and replacement, transportation and disposal of vending equipment. There were no such costs incurred in connection with the Water Island acquisition. 12. Related Party Transactions Although the Company has no investments as of January 2, 2005 or at December 28, 2003, the Company has used Kayne Anderson Capital Advisors, L.P. to manage the Company's investments during fiscal 2004, 2003 and 2002. One board member is currently employed as a senior executive of Kayne Anderson Capital Advisors, L.P. and is a shareholder of the Company. The Company incurred no costs during fiscal 2004 and costs of $3,000, and $7,000 in fiscal 2003 and 2002, respectively, to Kayne Anderson Capital Advisors, L.P. in connection with investment management fees. In connection with the acquisition of the Pure Fill assets, funds managed by Kayne Anderson Capital Advisors, L.P. provided temporary funding of $6,300,000 to the Company until February 22, 2002. The Company paid to funds managed by Kayne Anderson Capital Advisors, L.P. interest of $12,000 at an interest rate consistent with the rates charged by City National Bank (see "Note 4"). 39 GLACIER WATER SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 13. Quarterly Financial Data (Unaudited)
First Quarter Second Quarter Third Quarter Fourth Quarter -------------- -------------- -------------- -------------- (in thousands, except shares and per share amounts) Year Ended January 2, 2005: Net revenues $ 17,546 $ 19,246 $ 21,332 $ 18,137 Income from operations 729 1,724 2,895 155 Net income (loss) applicable to common stockholders (1,201) (182) 986 (1,960) Basic earnings (loss) per share: Net income (loss) applicable to common stockholders $ (0.57) $ (0.09) $ 0.46 $ (0.91) Weighted average shares 2,119,483 2,119,790 2,145,848 2,159,169 Diluted earnings (loss) per share: Net income (loss) applicable to common stockholders $ (0.57) $ (0.09) $ 0.38 $ (0.91) Weighted average shares 2,119,483 2,119,790 2,581,257 2,159,169 Year Ended December 28, 2003: Net revenues $ 16,533 $ 17,789 $ 20,447 $ 17,547 Income (loss) from operations 538 1,189 3,029 770 Net income (loss) applicable to common stockholders (968) (659) 1,160 (1,029) Basic earnings (loss) per share: Net income (loss) applicable to common stockholders $ (0.34) $ (0.32) $ 0.61 $ (0.53) Weighted average shares 2,857,293 2,039,842 1,913,550 1,932,359 Diluted earnings (loss) per share: Net income (loss) applicable to common stockholders $ (0.34) $ (0.32) $ 0.51 $ (0.53) Weighted average shares 2,857,293 2,039,842 2,267,351 1,932,359
40 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors Glacier Water Services, Inc.: Under date of February 23, 2005, we reported on the consolidated balance sheets of Glacier Water Services, Inc. and subsidiaries as of January 2, 2005 and December 28, 2003, and the related consolidated statements of operations, comprehensive loss, stockholders' deficit, and cash flows for each of the years in the three-year period ended January 2, 2005. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this consolidated financial statement schedule based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP San Diego, California February 23, 2005 41 GLACIER WATER SERVICES, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Allowance for Doubtful Acconts ---------------- Balance as of December 30, 2001 $ 33,000 Charged to Costs and Expenses 94,000 Deductions (33,000) ----------- Balance as of December 29, 2002 94,000 Charged to Costs and Expenses 239,000 Deductions (182,000) ----------- Balance as of December 28, 2003 151,000 Charged to Costs and Expenses 175,000 Deductions (125,000) ----------- Balance as of January 2, 2005 $ 201,000 =========== 42 INDEX TO EXHIBITS Exhibit No. - ----------- 3.1 Certificate of Incorporation Registrant (i.). 3.2 Bylaws of Registrant (i.). 3.3 Certificate of Designation, Preferences and Rights of Redeemable Convertible Preferred Stock of Glacier Water Services, Inc. dated June 18, 2001 (xi.). 4.1 Specimen Stock Certificate of Registrant (i.). 4.2 Junior Subordinated Indenture between Glacier Water Services, Inc. and Wilmington Trust Company as Indenture Trustees, dated January 28, 1997 (xi.). 4.3 Officers' Certificate of Company Order executed by Glacier Water Services, Inc., dated January 27, 1998 (xi.). 4.4 Certificate of Trust of Glacier Water Trust I, dated November 13, 1997 (x.). 4.5 Trust Agreement of Glacier Water Trust I, dated November 13, 1997 (x.). 4.5.1 Amended and Restated Trust Agreement of Glacier Water Trust I, dated January 27, 1998 (xi.). 4.6 Trust Preferred Certificate of Glacier Water Trust I (xi.). 4.7 Common Securities Certificate of Glacier Water Trust I (xi.). 4.8 Guarantee Agreement between Glacier Water Services, Inc. and Wilmington Trust Company, as Trustee, dated January 27, 1998 (xi.). 4.9 Agreement as to Expenses and Liabilities between Glacier Water Services, Inc. and Glacier Water Trust I, dated January 27, 1998 (xi.). 4.10 Junior Subordinated Deferrable Interest Debenture of Glacier Water Services, Inc. (xi.). 10.1 Amended and Restated 1992 Stock Incentive Plan (ii.). 10.2 Form of Indemnification Agreement with Officers and Directors (i.). 10.3 1994 Stock Compensation Plan (iii.). 10.3.1 Amendment No. 1 to 1994 Stock Compensation Plan (iv.) dated April 27, 1995. 10.3.2 Amendment No. 2 to 1994 Stock Compensation Plan dated September 17, 1996. 10.3.3 Amendment No. 3 to 1994 Stock Compensation Plan (v.) dated February 10, 1997. 10.3.4 Amendment No. 4 to 1994 Stock Compensation Plan (vi.) dated April 14, 1998. 10.3.5 Amendment No. 6 to 1994 Stock Compensation Plan (vii.) dated March 21, 2000. 10.3.6 Amendment No. 7 to 1994 Stock Compensation Plan (viii.) dated March 15, 2001. 10.3.7 Amendment No. 8 to 1994 Stock Compensation Plan dated May 1, 2002. 10.3.8 Amendment No. 9 to 1994 Stock Compensation Plan (ix.) dated July 11, 2002. 10.4 City National Bank Loan Agreements (xii) dated February 19, 2002. 10.4.1 City National Bank Loan Agreements (xiii) dated February 1, 2003. 10.4.2 City National Bank Loan Agreements (xiv) dated November 4, 2004. 14 Standards of Business Conduct and Ethics Policy. 21.1 Subsidiaries of the Glacier Water Services, Inc. 23.1 Consent of Independent Registered Public Accounting Firm. 31.1 Certification of Brian H. McInerney, Chief Executive Officer, under Rule 13a-14(a). 31.2 Certification of W. David Walters, Chief Financial Officer, under Rule 13a-14(a). 32.1 Certification of Brian H. McInerney, Chief Executive Officer, under Rule 13a-14(b). 32.2 Certification of W. David Walters, Chief Financial Officer, under Rule 13a-14(b). (i.) Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 33-45360) amendments thereto. (ii.) Incorporated by reference to the Company's Registration Statement on Form S-8 (File Number 33-61942) filed April 30, 1993. (iii.) Incorporated by reference to the Company's Registration Statement on Form S-8 (File Number 33-80016) filed June 8, 1994. (iv.) Incorporated by reference to the Company's Proxy Statement for the Annual Meeting held on June 6, 1995. 43 (v.) Incorporated by reference to the Company's Proxy Statement for the Annual Meeting held on June 3, 1997. (vi.) Incorporated by reference to the Company's Proxy Statement for the Annual Meeting held on June 9, 1998. (vii.) Incorporated by reference to the Company's Proxy Statement for the Annual Meeting held on June 6, 2000. (viii.) Incorporated by reference to the Company's Proxy Statement for the Annual Meeting held on June 5, 2001. (ix.) Incorporated by reference to the Company's Proxy Statement for the Annual Meeting held on July 11, 2002. (x.) Incorporated by reference to the Company's Proxy Registration Statement on Form S-2 (File Number 333-40335) filed January 22, 1998. (xi.) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended January 4, 1998. (xii.) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2001. (xiii.) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2002. (xiv.) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 2005. 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GLACIER WATER SERVICES, INC. By: /s/ Brian H. McInerney ------------------------------------- Brian H. McInerney President and Chief Executive Officer By: /s/ W. David Walters ------------------------------------- W. David Walters Senior Vice President and Chief Financial Officer Date: March 28, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 13, 2003. Signature Title - --------- ----- Principal Executive Officer: /s/ Brian H. McInerney President and Chief Executive Officer - ----------------------------------- Brian H. McInerney /s/ Charles A. Norris Chairman of the Board and Director - ----------------------------------- Charles A. Norris /s/ William A. Armstrong Director - ----------------------------------- William A. Armstrong /s/ William G. Bell Director - ----------------------------------- William G. Bell /s/ Richard A. Kayne Director - ----------------------------------- Richard A. Kayne /s/ Peter H. Neuwirth Director - ----------------------------------- Peter H. Neuwirth /s/ Heidi E. Yodowitz Director - ----------------------------------- Heidi E. Yodowitz 45 EX-10.4.2 2 a4854813ex1042.txt EXHIBIT 10.4.2 City National Bank Exhibit 10.4.2 Revolving Note (INTEREST TIED TO PRIME) Note No. 655355/00003 $25,000,000.00 Westside CBS #674 Office Beverly Hills, California November 4, 2004 On February 1, 2009, the undersigned, GW Services, Inc. a California corporation ("Borrower"), promises to pay to the order of City National Bank, a national banking association ("CNB"), at its office in this city, in lawful money of the United States of America and in immediately available funds, the principal sum of Twenty Five Million Dollars ($25,000,000.00), or so much thereof as may be advanced and be outstanding, with interest thereon to be computed on each advance from the date of its disbursement at a rate computed on the basis of a 360-day year, actual days elapsed, equal to the Prime Rate of CNB, as it exists from time-to-time per year. "Prime Rate" shall mean the rate most recently announced by CNB 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. All or any portion of the principal of this Note may be borrowed, repaid and reborrowed from time to time prior to maturity, provided at the time of any borrowing no Event of Default (as herein defined) exists, and provided further that the total borrowings outstanding at any one time shall not exceed the principal amount stated above. Each borrowing and repayment hereunder shall be noted in the books and records of CNB. The excess of borrowings over repayments shall evidence the principal balance due hereon from time to time and at any time. Borrowings hereunder shall be conclusively presumed to have been made to or for the benefit of Borrower when made as noted in such books and records. The Revolving Credit Commitment shall be Twenty Five Million Dollars ($25,000,000.00) reduced by $1,500,000.00 on each January 1, April 1, July 1, and October 1 of any year beginning January 1, 2006. Interest accrued on this Note shall be payable on the first day on each month, commencing January 1, 2005. An Unused Facility Fee equal to one half of one percent (1/2%) of the average daily difference between the Revolving Credit Commitment and loans outstanding shall be payable, in arrears, on each January 1, April 1, July 1, and October 1, within ten (10) days of receipt of billing. The occurrence of any of the following with respect to any Borrower or any guarantor of this Note or any general partner of such Borrower or guarantor, shall constitute an "Event of Default" hereunder: 1. The failure to make any payment of principal or interest when due under this Note; 2. The filing of a petition by or against any of such parties under any provisions of the Bankruptcy Code; 3. The appointment of a receiver or an assignee for the benefit of creditors; 4. The commencement of dissolution or liquidation proceedings or the disqualification of any such parties which is a corporation, partnership, joint venture or any other type of entity; 5. The death or incapacity of any such parties who is an individual; 1 6. The revocation of any guaranty of this Note, or any guaranty becomes unenforceable as to any future advances under this Note; 7. Any financial statement provided by any of such parties to CNB is false or misleading; 8. Any material default in the payment or performance of any obligation, or any default under any provisions of any contract or instrument pursuant to which any such parties has incurred any obligation for borrowed money, any purchase obligation or any other liability of any kind to any person or entity, including CNB; 9. Any sale or transfer of all or a substantial or material part of the assets of any such parties other than in the ordinary course of business; or 10. Any violation, breach or default under any letter agreement, guaranty, security agreement, deed of trust or any other contract or instrument executed in connection with this Note or securing this Note. Upon the occurrence of any Event of Default, CNB, at its option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, protest or notice of dishonor all of which are expressly waived by each Borrower, and CNB shall have no obligation to make any further advances hereunder. Each Borrower agrees to pay all costs and expenses, including reasonable attorneys' fees, expended or incurred by CNB (or allocable to CNB's in-house counsel) in connection with the enforcement of this Note or the collection of any sums due hereunder and irrespective of whether suit is filed. Any principal or interest not paid when due hereunder shall thereafter bear additional interest from its due date at a rate of five percent (5.0%) per year higher than the interest rate as determined and computed above, and continuing thereafter until paid. Should more than one person or entity execute this Note as a Borrower, the obligations of each Borrower shall be joint and several. This Note and all matters relating thereto, shall be governed by the laws of the state of California. GW Services, Inc., A California Corporation By: /s/ Brian H. McInerney ---------------------- Brian H. McInerney, President/CEO 2 EX-23.1 3 a4854813ex231.txt EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors Glacier Water Services, Inc. We consent to the incorporation by reference in the Registration Statements (No. 33-94660, No. 33-80016, No. 333-112695, No. 333-43848, and No. 333-57451) on Form S-8 of Glacier Water Services, Inc. and of our reports dated February 23, 2005, with respect to the consolidated balance sheets of Glacier Water Services, Inc. and subsidiaries as of January 2, 2005 and December 28, 2003, and the related consolidated statements of operations, comprehensive loss, stockholders' deficit and cash flows for each of the years in the three-year period ended January 2, 2005, and the related financial statement schedule, which reports appear in the January 2, 2005 annual report on Form 10-K of Glacier Water Services, Inc. Our report on the consolidated financial statements refers to the adoption by Glacier Water Services, Inc. of Financial Accounting Standards Board Interpretation No. 46 (Revised), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. /s/ KPMG LLP San Diego, California March 29, 2005 EX-31.1 4 a4854813ex311.txt EXHIBIT 31.1 Exhibit 31.1 RULE 13a - 14(a) CERTIFICATION I, Brian H. McInerney, certify that: 1) I have reviewed this annual report on Form 10-K of Glacier Water Services, Inc.; 2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally acceptable accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's fourth quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weakness in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 28, 2005 By: /s/ Brian H. McInerney ---------------------- Brian H. McInerney President and Chief Executive Officer EX-31.2 5 a4854813ex312.txt EXHIBIT 31.2 Exhibit 31.2 RULE 13a - 14(a) CERTIFICATION I, W. David Walters, certify that: 1) I have reviewed this annual report on Form 10-K of Glacier Water Services, Inc.; 2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally acceptable accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's fourth quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weakness in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 28, 2005 By: /s/ W. David Walters -------------------- W. David Walters Senior Vice President and Chief Financial Officer EX-32.1 6 a4854813ex321.txt EXHIBIT 32.1 Exhibit 32.1 RULE 13a - 14(b) CERTIFICATION In connection with the Annual Report of Glacier Water Services, Inc., (the Company) on Form 10-K for the year ended January 2, 2005 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Brian H. McInerney, President and Chief Executive Officer of the Company, certify, pursuant to and for the purposes of 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition of the Company as of the dates indicated and results of operations of the Company for the periods indicated. /s/ Brian H. McInerney - ---------------------- Brian H. McInerney President and Chief Executive Officer March 28, 2005 EX-32.2 7 a4854813ex322.txt EXHIBIT 32.2 Exhibit 32.2 RULE 13a - 14(b) CERTIFICATION In connection with the Annual Report of Glacier Water Services, Inc., (the Company) on Form 10-K for the year ended January 2, 2005 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, W. David Walters, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to and for the purposes of 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition of the Company as of the dates indicated and results of operations of the Company for the periods indicated. /s/ W. David Walters - -------------------- W. David Walters Senior Vice President and Chief Financial Officer March 28, 2005 -----END PRIVACY-ENHANCED MESSAGE-----