Thirsty Debt Monster

San Diego — Gulp. Glacier-brand water, which you can get from supermarket vending machines all over the county, should be safe to drink. But I can't say it's safe to invest in the stock of the parent company, Glacier Water Services, which is based in Vista. Along with analysts who have looked at the company's financial records, I am baffled why this stock continues to trade above $20. Or trade at all. Realistically, the company should buy back the tiny amount of stock in public hands and become private.

Glacier has lost money for seven years in a row. Sales aren't growing. It is saddled with excessive debt. In abstruse legalese in its last annual report to the Securities and Exchange Commission, it admits that its prospects for future profits are slim, and it technically doesn't qualify to trade on the American Stock Exchange, although it remains there. The company is controlled by a small clique: 12 officers and directors control 76 percent of the stock.

"It's a bizarre situation -- quite strange," says David Allen of North County's Palomar Equity Research. "It would be difficult to make a case to buy the stock."

"There are so few shares traded that you couldn't take a position and readily get out of it," says Bud Leedom of San Diego's LSI Equity. "There would be no exit strategy. You would have to call the company and see if it would buy it back from you. This is not really a viable public entity."

Glacier, the largest vendor of water in the U.S., stocks 15,100 machines in 39 states. Glacier taps into local water supplies, then reduces impurities through micron filtration, reverse osmosis, carbon adsorption, and ultraviolet sterilization. It's cheap. Glacier customers pay 25 to 49 cents a gallon. Those buying snazzier water off the grocery store shelves pay 69 cents to $1.29 a gallon.

The company knows controversy. In December of 2002, the Environmental Working Group and the Environmental Law Foundation of Oakland filed suit against Glacier, saying, among many things, that one-third of the company's vending machines sold water that failed state health standards and two-thirds failed to live up to the company's claim that its filters remove 97 percent of contaminants.

Brian McInerney, Glacier's president, immediately harrumphed that the whole thing was "an absolutely fabricated controversy manufactured by people who are at best seriously misinformed or at worst deliberately trying to mislead the public."

In the end, however, the company paid $405,000 to settle the matter. Glacier fixed the contaminant problem "and stopped claiming that their machines dispensed 'chemical-free' water," says Alise Cappell, executive director of the Environmental Law Foundation.

The company is now in a program to upgrade its vending machines. This spending is one factor behind recent substantial losses. Beginning in 1998, annual per share losses were $1.05, $1.62, $2.11, $1.96, $0.95, $0.68, and $1.10. The value to shareholders of the company's assets, or book value per share, has plummeted from a positive $7.69 in 1997 to a negative $12.91 last year.

Partly to finance the machine alterations, Glacier's long-term debt jumped from $62 million in 2001 to $105 million last year. The shareholders' deficit has ballooned to $28.3 million. This picture might not seem so bleak if the company's sales were shooting upward. They aren't. Revenues only grew from $71 million in 2002 to $76 million last year. In the most recent quarter, revenues declined slightly from $17.546 million a year ago to $17.543 million.

The stock-rating service Morningstar Inc. has this report card on Glacier: Growth: D. Profitability: D. Financial Health: F. Nonetheless, the lowest the stock has sold for since early 2003 was $13.81, and the peak has been $28.75. In a written report, W.D. Crotty of The Motley Fool concedes that Glacier has a lot of machines out there. "But with sales flat to slowly rising, the concept is hardly showing any traction with consumers," says Crotty. "Add in the company's expensive upgrade to a second generation of outdoor equipment feeding the debt monster, and there's plenty to worry about." He, too, wouldn't buy the stock until the water is wrung out of it.

Both Allen and Leedom say that Glacier is at least partly a cash-flow story. In business, "cash flow" is a measure of cash coming in as income and cash going out as expenses. Cash flow doesn't consider "paper only" expenses such as depreciation. Net cash provided by operating activities the last three years has been between $8 million and $10 million annually. Depreciation charge-offs have been high. "This business is not hemorrhaging," says Leedom.

"The valuation of this company is in the cash flow," says Allen. "But how this company can translate cash flow into positive earnings numbers is the whole key." The company doesn't appear confident. In one section of its annual report to the government, it discusses past losses that could be subtracted from future profits for tax purposes -- if it ever gets into black ink. (Past losses that can be applied to current or future profits are called tax loss carryforwards and are considered an asset.) The company states that "realization of deferred tax assets is dependent upon the company's ability to generate taxable income in future years."

That can't be assured, it confesses. Now read this corporate prose carefully: "Management believes it is not more likely than not that the deferred tax asset will be realized." Huh? Not more likely than not? Isn't there a faster way to get to that conclusion? Even for a lawyer?

Chuckles Allen, "The double negative leads one to conclude the company is not necessarily looking for near-term profitability. It doesn't look as if it expects to use all its tax-loss carryforwards. The wording seems to be a tip-off of the general tone of the company." Adds Allen, "The company is saying it can afford capital upgrades on its vending machines through its operating cash flow, but one has to wonder how high borrowings can go given negative equity and the lack of profitability." Last year, Glacier didn't pay dividends on its preferred stock after paying $96,000 the previous year.

Allen mentions that Glacier might be a bit of an asset play. The market gives the stock a valuation of a little less than $50 million. That's below the total assets of $85 million and the value of property and equipment of $56.4 million. But do those assets have that much value with sales going nowhere and debt piling up?

I made five calls to this company asking for comment. I couldn't get an interview. That's typical. The company has always been reticent with the press and shareholders. "The company doesn't seem to be interested in dealing with shareholders," says Leedom. There's one exception, of course: a Los Angeles money manager, Richard A. Kayne, holds 51 percent of the stock. Management listens to him. Kayne should raise more Cain.