SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2003 Commission file number 0-18761
HANSEN NATURAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 39-1679918
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
1010 Railroad Street
Corona, California 92882
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(909) 739 - 6200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
The registrant had 10,253,203 shares of common stock outstanding as of May
2, 2003.
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
March 31, 2003
INDEX
Page No.
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2003
(Unaudited) and December 31, 2002 3
Consolidated Statements of Income for the three-months
ended March 31, 2003 and 2002 (Unaudited) 4
Consolidated Statements of Cash Flows for the three-months
ended March 31, 2003 and 2002 (Unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Qualitative and Quantitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 17
Part II. OTHER INFORMATION
Items 1-5. Not Applicable 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
Certifications 19
2
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 (Unaudited) AND DECEMBER 31, 2002
2003 2002
------------------ ------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,209,312 $ 537,920
Accounts receivable (net of allowance for doubtful accounts,
sales returns and cash discounts of $948,071 in 2003 and
$1,098,645 in 2002 and promotional allowances of
$4,205,515 in 2003 and $3,170,171 in 2002 6,667,860 5,949,402
Inventories, net 11,029,645 11,643,734
Prepaid expenses and other current assets 940,774 1,627,685
Deferred income tax asset 1,145,133 1,145,133
------------------ ------------------
Total current assets 21,992,724 20,903,874
PROPERTY AND EQUIPMENT, net 2,017,435 1,862,807
INTANGIBLE AND OTHER ASSETS:
Trademark license and trademarks (net of accumulated
amortization of $94,746 in 2003 and $84,330 in 2002) 17,352,174 17,360,455
Deposits and other assets 369,137 336,369
------------------ ------------------
17,721,311 17,696,824
------------------ ------------------
$ 41,731,470 $ 40,463,505
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 6,052,991 $ 4,732,261
Accrued liabilities 934,660 680,959
Accrued compensation 168,432 310,064
Current portion of long-term debt 227,535 230,740
------------------ ------------------
Total current liabilities 7,383,618 5,954,024
LONG-TERM DEBT, less current portion 2,593,096 3,606,040
DEFERRED INCOME TAX LIABILITY 2,532,697 2,532,697
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - $0.005 par value; 30,000,000 shares
authorized; 10,459,964 shares issued, 10,253,203
outstanding in 2003; 10,259,764 shares issued, 10,053,003
outstanding in 2002 52,300 51,299
Additional paid-in capital 12,151,807 11,934,564
Retained earnings 17,832,497 17,199,426
Common stock in treasury, at cost; 206,761 in 2003 and 2002 (814,545) (814,545)
------------------ ------------------
Total shareholders' equity 29,222,059 28,370,744
------------------ ------------------
$ 41,731,470 $ 40,463,505
================== ==================
See accompanying notes to consolidated financial statements.
3
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET INCOME
FOR THE THREE-MONTHS ENDED MARCH 31, 2003 AND 2002 (Unaudited)
Three Months Ended
March 31,
---------------------------------------
2003 2002
------------------ ------------------
GROSS SALES $ 27,695,875 $ 22,506,610
LESS: Discounts, allowances and promotional payments 5,609,527 3,914,216
------------------ ------------------
NET SALES 22,086,348 18,592,394
COST OF SALES 13,786,527 11,782,313
------------------ ------------------
GROSS PROFIT 8,299,821 6,810,081
OPERATING EXPENSES:
Selling, general and administrative 7,192,187 6,031,864
Amortization of trademark license and trademarks 10,416 12,776
------------------ ------------------
Total operating expenses 7,202,603 6,044,640
------------------ ------------------
OPERATING INCOME 1,097,218 765,441
NONOPERATING EXPENSE 33,231 75,292
------------------ ------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,063,987 690,149
PROVISION FOR INCOME TAXES 430,916 279,504
(Note 7)
------------------ ------------------
NET INCOME $ 633,071 $ 410,645
================== ==================
NET INCOME PER COMMON SHARE:
Basic $ 0.06 $ 0.04
================== ==================
Diluted $ 0.06 $ 0.04
================== ==================
NUMBER OF COMMON SHARES USED
IN PER SHARE COMPUTATIONS:
Basic 10,189,847 10,050,893
================== ==================
Diluted 10,435,953 10,339,732
================== ==================
See accompanying notes to consolidated financial statements.
4
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTHS ENDED MARCH 31, 2003 AND 2002 (Unaudited)
2003 2002
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 633,071 $ 410,645
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Amortization of trademark license and trademarks 10,416 12,776
Depreciation and other amortization 125,741 118,897
Loss on disposal of plant and equipment 11,361
Effect on cash of changes in operating assets and liabilities:
Accounts receivable (718,458) (1,791,972)
Inventories 614,089 1,782,012
Prepaid expenses and other current assets 255,995 36,865
Accounts payable 1,320,730 (195,405)
Accrued liabilities 253,701 (111,911)
Accrued compensation (141,632) (104,402)
Income taxes payable/prepaid income taxes 430,916
------------------ ------------------
Net cash provided by operating activities 2,795,930 157,505
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (311,518) (106,115)
Proceeds from sale of property and equipment 19,788
Increase in trademark license and trademarks (2,135) (18,245)
(Increase) decrease in deposits and other assets (32,768) 47,327
------------------ -------------------
Net cash used in investing activities (326,633) (77,033)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on long-term debt 174,000
Principal payments on long-term debt (1,016,149) (58,730)
Issuance of common stock 218,244 8,000
------------------ ------------------
Net cash (used in) provided by financing activities (797,905) 123,270
------------------ ------------------
NET INCREASE IN CASH 1,671,392 203,742
CASH AND CASH EQUIVALENTS, beginning of year 537,920 247,657
------------------ ------------------
CASH AND CASH EQUIVALENTS, end of year $ 2,209,312 $ 451,399
================== ==================
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest $ 34,990 $ 72,858
================== ==================
Income taxes $ - $ 276,000
================== ==================
See accompanying notes to consolidated financial statements.
5
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Reference is made to the Notes to Consolidated Financial Statements, in the
Company's Form 10-K for the year ended December 31, 2002, which is incorporated
by reference, for a summary of significant policies utilized by Hansen Natural
Corporation ("Hansen" or "Company") and its wholly-owned subsidiaries, Hansen
Beverage Company ("HBC") and Hard e Beverage Company ("HEB"). Additionally, the
Company's reporting on Form 10-Q does not include all the information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America. HBC owns all of the issued and outstanding common stock of Blue Sky
Natural Beverage Co. and Hansen Junior Juice Company. The information set forth
in these interim consolidated financial statements for the three-months ended
March 31, 2003 and 2002 is unaudited and may be subject to normal year-end
adjustments. The information contained in these interim condensed, consolidated
financial statements reflects all adjustments, which include only normal
recurring adjustments, which in the opinion of management are necessary to make
the interim consolidated financial statements not misleading. Results of
operations covered by this report may not necessarily be indicative of results
of operations for the full year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America necessarily
requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from these estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories - Inventories are valued at the lower of first-in, first-out
(FIFO) cost or market value (net realizable value).
Property and Equipment - Property and equipment are stated at cost.
Depreciation of furniture, office equipment, equipment and vehicles is based on
their estimated useful lives (three to ten years) and is calculated using the
straight-line method. Amortization of leasehold improvements is based on the
lesser of their estimated useful lives or the terms of the related leases and is
calculated using the straight-line method.
Trademark License and Trademarks - Trademark license and trademarks
represents the Company's exclusive ownership of the Hansen's(r) trademark in
connection with the manufacture, sale and distribution of beverages and water
and non-beverage products. The Company also owns in its own right, a number of
other trademarks in the United States as well as in a number of countries around
the world. The Company also owns the Blue Sky(r) trademark, which was acquired
in September 2000, and the Junior Juice(r) trademark, which was acquired in May
2001. The Company amortizes its trademark license and trademarks over 1 to 25
years. The adoption of SFAS No. 142, as described below, resulted in the
elimination of amortization of indefinite life assets, which reduced the
trademark amortization expense recognized by the Company in 2002.
6
Revenue Recognition - The Company records revenue at the time the related
products are shipped and the risk of ownership has passed. Management believes
an adequate provision against net sales has been made for estimated returns,
allowances and cash discounts based on the Company's historical experience.
Advertising and Promotional Allowances - The Company accounts for
advertising production costs by expensing such production costs the first time
the related advertising takes place. Advertising expenses included in selling,
general and administrative expenses amounted to $1.7 million and $1.1 million
for the three-months ended March 31, 2003 and 2002, respectively. In addition,
the Company supports its customers, including distributors, with promotional
allowances, a portion of which is utilized for marketing and indirect
advertising by them. Such promotional allowances amounted to $3.4 million and
$2.4 million for the three-months ended March 31, 2003 and 2002, respectively.
Stock Based Compensation - The Company accounts for its stock option plans
in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees,
("APB Opinion No. 25") and related Interpretations. Under APB Opinion No. 25, no
compensation expense is recognized because the exercise price of the Company's
employee stock options equals the market price of the underlying stock at the
date of the grant. In December 2002, the FASB issued SFAS No. 148, Accounting
for Stock-Based Compensation-Transition and Disclosure. SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-based Compensation, (SFAS No. 123) and is
effective immediately upon issuance. SFAS No. 148 provides alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation as well as amending the
disclosure requirements of Statement No. 123 to require interim and annual
disclosures about the method of accounting for stock based compensation and the
effect of the method used on reported results. The Company follows the
requirements of APB Opinion No. 25 and the disclosure only provision of SFAS No.
123, as amended by SFAS No. 148. Had compensation cost for the Company's option
plans been determined based on the fair value at the grant date for awards in
the years 2001 through 2003 consistent with the provisions of SFAS No. 123, the
Company's net income and net income per common share for the three-months ended
March 31 would have been reduced to the pro forma amounts indicated below:
Three Months Ended March 31,
2003 2002
------ ------
Net income, as reported $633,071 $410,645
Less: total stock based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects 54,810 64,712
Net income, pro forma $578,261 $345,933
Net income per common share, as reported - Basic $0.06 $0.04
Net income per common share, as reported - Diluted $0.06 $0.04
Net income per common share, pro forma - Basic $0.06 $0.03
Net income per common share, pro forma - Diluted $0.06 $0.03
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used:
7
Risk-Free
Dividend Yield Expected Volatility Interest Rate Expected Lives
---------------- --------------------- --------------- ---------------
2003 0% 15% 3.9% 8 years
2002 0% 8% 4.6% 8 years
3. NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") recently issued Statement
of Financial Accounting Standards ("SFAS") No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 143 is effective for financial
statements issued for fiscal years beginning after September 15, 2002. The
initial adoption of these Statements did not have a material impact on the
Condensed Consolidated Statements of Income.
In April 2002 the FASB issued Statement No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections, effective for fiscal years beginning after June 15, 2002. For most
companies, Statement No. 145 will require gains and losses on extinguishments of
debt to be classified as income or loss from continuing operations rather than
as extraordinary items as previously required under Statement No. 4.
Extraordinary treatment will be required for certain extinguishments as provided
in APB Opinion No. 30. Statement No. 145 also amends Statement No. 13 to require
certain modifications to capital leases be treated as a sale-leaseback and
modifies the accounting for sub-leases when the original lessee remains a
secondary obligor (or guarantor). In addition, the FASB rescinded Statement No.
44, which addressed the accounting for intangible assets of motor carriers and
made numerous technical corrections. The initial adoption of this Statement did
not have a material impact on the Condensed Consolidated Statements of Income.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities and supersedes
EITF No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring.) The Company adopted the provisions of SFAS No. 146 for exit or
disposal activities that are initiated after December 31, 2002.
In November 2002 the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN No. 45"). FIN No. 45 clarifies and
expands on existing disclosure requirements for guarantees, including loan
guarantees. It also would require that, at the inception of a guarantee, the
Company must recognize a liability for the fair value of its obligation under
that guarantee. The initial fair value recognition and measurement provisions
will be applied on a prospective basis to certain guarantees issued or modified
after December 31, 2002. The disclosure provisions are effective for financial
statements of periods ending after December 15, 2002. The initial adoption of
FIN No. 45 did not have a material impact on the Condensed Consolidated
Statements of Income.
In January 2003 the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51 ("FIN No. 46"). FIN
No. 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN No. 46 must be applied for the first
interim or annual period beginning after June 15, 2003. Since the Company has no
interests in variable interest entities, the initial adoption of FIN No. 46 did
not have a material impact on the Condensed Consolidated Statements of Income.
8
4. INVENTORIES
Inventories consist of the following at:
March 31, 2002 December 31,
(Unaudited) 2002
-------------- --------------
Raw Materials $ 4,720,129 $ 4,267,055
Finished Goods 6,955,955 8,023,118
-------------- --------------
11,676,084 12,290,173
Less inventory reserves (646,439) (646,439)
-------------- --------------
$ 11,029,645 $ 11,643,734
============== ==============
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
historical consolidated financial statements and notes thereto.
Critical Accounting Policies
The following summarize the most significant accounting and reporting
policies and practices of the Company.
Trademark License and Trademarks - Trademark license and trademarks
represent primarily the Company's ownership of the Hansen's(r) trademark in
connection with the manufacture, sale and distribution of beverages, water and
non-beverage products. The Company also owns in its own right, a number of other
trademarks in the United States as well as in a number of countries around the
world. The Company also owns the Blue Sky(r) trademark, which was acquired in
September 2000, and the Junior Juice(r) trademark, which was acquired in May
2001. During 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets. Under the provisions on SFAS No. 142, the Company
discontinued amortization on indefinite-lived trademark licenses and trademarks
while continuing to amortize remaining trademark licenses and trademarks over
one to 25 years.
Long-Lived Assets - Management regularly reviews property and equipment and
other long-lived assets, including certain identifiable intangibles, for
possible impairment. This review occurs annually, or more frequently if events
or changes in circumstances indicate the carrying amount of the asset may not be
recoverable. If there is indication of impairment of property and equipment or
amortizable intangible assets, then management prepares an estimate of future
cash flows (undiscounted and without interest charges) expected to result from
the use of the asset and its eventual disposition. If these cash flows are less
than the carrying amount of the asset, an impairment loss is recognized to write
down the asset to its estimated fair value. The fair value is estimated at the
present value of the future cash flows discounted at a rate commensurate with
management's estimates of the business risks. Annually, or earlier, if there is
indication of impairment of identified intangible assets not subject to
amortization, management compares the estimated fair value with the carrying
amount of the asset. An impairment loss is recognized to write down the
intangible asset to its fair value if it is less than the carrying amount.
Preparation of estimated expected future cash flows is inherently subjective and
is based on management's best estimate of assumptions concerning expected future
conditions. No impairments were identified as of March 31, 2003.
Management believes that the accounting estimate related to impairment of
its long lived assets, including its trademark license and trademarks, is a
"critical accounting estimate" because: (1) it is highly susceptible to change
from period to period because it requires company management to make assumptions
about cash flows and discount rates; and (2) the impact that recognizing an
impairment would have on the assets reported on our consolidated balance sheet,
as well as net income, could be material. Management's assumptions about cash
flows and discount rates require significant judgement because actual revenues
and expenses have fluctuated in the past and are expected to continue to do so.
10
In estimating future revenues, we use internal budgets. Internal budgets
are developed based on recent revenues data for existing product lines and
planned timing of future introductions of new products and their impact on our
future cash flows.
Advertising and Promotional Allowances - The Company accounts for
advertising production costs by expensing such production costs the first time
the related advertising takes place. In addition, the Company supports its
customers with promotional allowances, a portion of which is utilized for
marketing and indirect advertising by them. In certain instances, portion of the
promotional allowances payable to customers based on the levels of sales to such
customers, promotion requirements or expected use of the allowances, are
estimated by the Company. If the level of sales, promotion requirements or use
of the allowances are different from such estimates, the promotional allowances
could, to the extent based on estimates, be affected. During 2002, the Company
adopted Emerging Issues Task Force ("EITF") No. 01-9 which requires certain
sales promotions and customer allowances previously classified as selling,
general and administrative expenses to be classified as a reduction of sales or
as cost of goods sold. The Company has conformed its presentation of advertising
and promotional allowances to comply with the provisions of EITF No. 01-9.
General
The increase in gross and net sales during the first quarter of 2003 was
primarily attributable to sales of the Company's Monster energyTM drink, which
was introduced in April 2002, Hansen's Diet Red Energy, which was introduced in
October 2002 as well as increased sales of Natural Sodas in cans, Junior
Juice(R), Apple Juice and juice blends. The increase in gross and net sales was
partially offset by decreased sales of functional drinks, E2O Energy Water,
Energade(R) energy sports drink and smoothies as compared to the first quarter
of 2002.
Gross profit for the three-months ended March 31, 2003, as a percentage of
net sales, was 37.6%, which was higher than the 36.6% gross profit percentage
achieved in the three-months ended March 31, 2002. The increase in gross profit
percentage was primarily due to a change in the Company's product and customer
mix.
The Company continues to incur expenditures in connection with the
development and introduction of new products and flavors.
Results of Operations for the Three-months Ended March 31, 2003 Compared to the
Three-months Ended March 31, 2002
Gross Sales. For the three-months ended March 31, 2003, gross sales were
$27.7 million, an increase of $5.2 million or 23.1% higher than the $22.5
million gross sales for the three-months ended March 31, 2002. The increase in
gross sales during the first quarter of 2003 is primarily attributable to the
introduction of new products and increased sales of certain of our existing
products as discussed below in "Net Sales".
Net Sales. For the three-months ended March 31, 2003, net sales were $22.1
million, an increase of $3.5 million or 18.8% higher than the $18.6 million net
sales for the three-months ended March 31, 2002. The increase in net sales was
primarily attributable to sales of our Monster energyTM drink, which was
introduced in April 2002, Hansen's Diet Red Energy, which was introduced in
October 2002 as well as increased sales of Natural Sodas in cans, Junior
Juice(R), Apple Juice and juice blends. The increase in gross and net sales was
partially offset by decreased sales of functional drinks, E2O Energy Water,
Energade(R) energy sports drink and smoothies as well as an increase in
discounts, allowances and promotional payments including coupon promotions.
11
Gross Profit. Gross profit was $8.3 million for the three-months ended
March 31, 2003, an increase of $1.5 million or 21.9% higher than the gross
profit for the three-months ended March 31, 2002 of $6.8 million. Gross profit
as a percentage of net sales, increased to 37.6% for the three-months ended
March 31, 2003 from 36.6% for the three-months ended March 31, 2002. The
increase in gross profit was primarily attributable to the increase in gross
sales whereas the increase in gross profit as a percentage of net sales was
primarily attributable to a change in the Company's product and customer mix.
Total Operating Expenses. Total operating expenses were $7.2 million for
the three-months ended March 31, 2003, an increase of $1.2 million or 19.2%
higher than total operating expenses of $6.0 million for the three-months ended
March 31, 2002. Total operating expenses as a percentage of net sales increased
slightly to 32.6% for the three-months ended March 31, 2003 as compared to 32.5%
for the three-months ended March 31, 2002. The increase in total operating
expenses was primarily attributable to increased selling, general and
administrative expenses.
Selling, general and administrative expenses were $7.2 million for the
three-months ended March 31, 2003, an increase of $1.2 million or 19.2% higher
than selling, general and administrative expenses of $6.0 million for the
three-months ended March 31, 2002. The increase in selling expenses was
primarily attributable to an increase in distribution expenses and expenditures
for sponsorships and endorsements, in-store demonstrations and merchandise
displays. The increase in general and administrative expenses was primarily
attributable to increased payroll expenses primarily for sales, marketing and
administrative activities, travel and insurance expense.
Operating Income. Operating income was $1.1 million for the three-months
ended March 31, 2003, an increase of $332,000 or 43.3% higher than operating
income of $765,000 for the three-months ended March 31, 2002. Operating income
as a percentage of net sales increased to 5.0% for the three-months ended March
31, 2003 from 4.1% for the three-months ended March 31, 2002. The increase in
operating income and operating income as a percentage of net sales was
attributable to a higher increase in gross profit achieved in the three months
ended March 31, 2003 than the increase in operating expenses.
Net Nonoperating Expense. Net nonoperating expense was $33,000 for the
three-months ended March 31, 2003, a decrease of $42,000 from net non-operating
expense of $75,000 for the three-months ended March 31, 2002. The decrease in
net non-operating expense was primarily attributable to decreased interest
expense incurred on the Company's borrowings, which was primarily attributable
to the decrease in outstanding loan balances as well as lower interest rates
payable on the Company's borrowings.
Provision for Income Taxes. Provision for income taxes for the three-months
ended March 31, 2003 was $431,000 as compared to provision for income taxes of
$280,000 for the comparable period in 2002. The effective tax rate for the
three-months ended March 31, 2003 was 40.5% which was comparable to the
effective tax rate for the three-months ended March 31, 2002. The $151,000
increase in provision for income taxes was primarily attributable to the
increase in income before provision for income taxes.
12
Net Income. Net income was $633,000 for the three-months ended March 31,
2003, an increase of $222,000 or 54.2% over net income of $411,000 for the
three-months ended March 31, 2002. The increase in net income was attributable
to the increase in gross profit of $1.5 million and decrease in nonoperating
expense of $42,000 which was partially offset by the increase in operating
expenses of $1.2 million and an increase in provision for income taxes of
$151,000.
Liquidity and Capital Resources
As at March 31, 2003, the Company had working capital of $14.6 million, as
compared to working capital of $15.0 million as at December 31, 2002. The
decrease in working capital is primarily attributable to the repayment by the
Company of a portion of the Company's long-term debt and the acquisition of
property and equipment and trademarks and an increase in deposits and other
assets which was partially offset by net income earned after adjustment for
certain noncash expenses, primarily depreciation and other amortization, an
increase in deposits and other assets and receipts from the issuance of common
stock and proceeds from the sale of property and equipment.
Net cash provided by operating activities was $2.8 million for the
three-months ended March 31, 2003 as compared to net cash provided by operating
activities of $158,000 in the comparable period in 2002. For the three-months
ended March 31, 2003, cash provided by operating activities was attributable to
net income plus amortization of trademark license and trademarks, depreciation
and other amortization, as well as increases in accounts payable and accrued
liabilities and a decrease in inventories, prepaid income taxes and prepaid
expenses and other current assets which was partially offset by an increase in
accounts receivable and decreases in accrued compensation. Net cash provided by
operating activities for the three-months ended March 31, 2002 was $158,000 and
was primarily attributable to net income plus amortization of trademark license
and trademarks, depreciation and other amortization, as well as decreases in
inventories and prepaid expenses and other assets which was partially offset by
increased accounts receivable and decreases in accounts payable, accrued
liabilities and accrued compensation.
Net cash used in investing activities increased to $327,000 for the
three-months ended March 31, 2003 as compared to net cash used in investing
activities of $77,000 for the comparable period in 2002. The increase in cash
used in investing activities was primarily attributable to increased
acquisitions of property and equipment and expenditures for trademarks and an
increase in deposits and other assets which was partially offset by the sale of
property and equipment. Management, from time to time, considers the acquisition
of capital equipment, particularly, specific items of production equipment
required to produce certain of our products, merchandise display racks, vans and
promotional vehicles, coolers and other promotional equipment and businesses
compatible with the image of the Hansen's(r) brand, as well as the introduction
of new product lines.
Net cash used in financing activities was $798,000 for the three-months
ended March 31, 2003 as compared to net cash provided by financing activities of
$123,000 for the comparable period in 2002. The cash used in financing
activities was due to increased principal payments of long-term debt which was
partially offset by proceeds from the issuance of common stock. In the first
quarter ended March 31, 2002, cash was provided by financing activities through
an increase in long-term debt and proceeds from the issuance of common stock.
In 1997, HBC obtained a credit facility from Comerica Bank-California
("Comerica"), consisting of a revolving line of credit of up to $3.0 million in
aggregate at any time outstanding and a term loan of $4.0 million. The
utilization of the revolving line of credit by HBC was dependent upon certain
levels of eligible accounts receivable and inventory from time to time. Such
revolving line of credit and term loan was secured by substantially all of HBC's
assets, including accounts receivable, inventory, trademarks, trademark licenses
and certain equipment. That facility was subsequently modified from time to
time, and on September 19, 2000, HBC entered into modification agreement with
13
Comerica which amended certain provisions under the above facility in order to
finance the acquisition of the Blue Sky business, repay the term loan, and
provide additional working capital ("Modification Agreement"). Pursuant to the
Modification Agreement, the revolving line of credit was increased to $12.0
million, reducing to $6.0 million by September 2004. The revolving line of
credit remains in full force and effect through September 2005. Interest on
borrowings under the line of credit is based on bank's base (prime) rate, plus
an additional percentage of up to 0.5% or the LIBOR rate, plus an additional
percentage of up to 2.5%, depending upon certain financial ratios of HBC from
time to time. At March 31, 2003, $2,000,000 was outstanding under the credit
facility and borrowing capacity available to the Company from Comerica under the
credit facility was $7,300,000.
The terms of the Company's line of credit contain certain financial
covenants including certain financial ratios and annual net income requirements.
The line of credit contains provisions under which applicable interest rates
will be adjusted in increments based on the achievement of certain financial
ratios. The Company was in compliance with the financial covenants at March 31,
2003.
If any event of default shall occur for any reason, whether voluntary or
involuntary, Comerica may declare any or all of portions outstanding on the line
of credit immediately due and payable, exercise rights and remedies available to
secured parties under the Uniform Commercial Code, institute legal proceedings
to foreclose upon the lien and security interest granted or for the sale of any
or all collateral.
Management believes that cash available from operations, including cash
resources and the revolving line of credit, will be sufficient for its working
capital needs, including purchase commitments for raw materials, payments of tax
liabilities, debt servicing, expansion and development needs, purchases of
shares of the common stock of the Company, as well as any purchases of capital
assets or equipment during the current year.
Sales
The table set forth below discloses selected quarterly data regarding sales
for the first quarter for the past two years. Data from any one or more quarters
is not necessarily indicative of annual results or continuing trends.
Sales of beverages are expressed in unit case volume. A "unit case" means a
unit of measurement equal to 192 U.S. fluid ounces of finished beverage (24
eight-ounce servings) or concentrate sold that will yield 192 U.S. fluid ounces
of finished beverage. Unit case volume of the Company means number of unit cases
(or unit case equivalents) of beverages directly or indirectly sold by the
Company. Sales of food bars and cereals are expressed in actual cases. A case of
food bars and cereals is defined as follows:
o A fruit and grain bar and functional nutrition bar case equals ninety
1.76-ounce bars.
o A natural cereal case equals ten 13-ounce boxes measured by volume.
o An active nutrition bar case equals thirty-two 1.4-ounce bars.
The Company's quarterly results of operations reflect seasonal trends that
are primarily the result of increased demand in the warmer months of the year.
It has been our experience that beverage sales tend to be lower during the first
and fourth quarters of each fiscal year. Because the primary historical market
for Hansen's products is California, which has a year-long temperate climate,
14
the effect of seasonal fluctuations on quarterly results may have been
mitigated; however, such fluctuations may be more pronounced as the distribution
of Hansen's products expands outside of California. The Company has not had
sufficient experience with its food bars, cereal products and Hard e malt-based
products and consequently has no knowledge of the trends which may occur with
such products. Quarterly fluctuations may also be affected by other factors
including the introduction of new products, the opening of new markets where
temperature fluctuations are more pronounced, the addition of new bottlers and
distributors, changes in the mix of the sales of its finished products, soda
concentrates and food products and increased advertising and promotional
expenses.
Quarter ended March 31,
2003 2002
------------- -------------
Unit Case Volume / Case Sales (in Thousands) 4,219 3,597
Net Revenue $22,086 $18,592
Forward Looking Statements
The Private Security Litigation Reform Act of 1995 (the "Act") provides a
safe harbor for forward-looking statements made by or on behalf of the Company.
The Company and its representatives may from time to time make written or oral
forward looking statements, including statements contained in this report and
other filings with the Securities and Exchange Commission and in reports to
shareholders and announcements. Certain statements made in this report,
including certain statements made in management's discussion and analysis, may
constitute forward looking statements (within the meaning of Section 27.A of the
Securities Act 1933 as amended and Section 21.E of the Securities Exchange Act
of 1934, as amended) regarding the expectations of management with respect to
revenues, profitability, adequacy of funds from operations and the Company's
existing credit facility, among other things. All statements which address
operating performance, events or developments that management expects or
anticipates will or may occur in the future including statements related to new
products, volume growth, revenues, profitability, adequacy of funds from
operations, and/or the Company's existing credit facility, earnings per share
growth, statements expressing general optimism about future operating results
and non-historical Year 2002 information, are forward looking statements within
the meaning of the Act.
Management cautions that these statements are qualified by their terms
and/or important factors, many of which are outside the control of the Company
that could cause actual results and events to differ materially from the
statements made including, but not limited to, the following:
* Company's ability to generate sufficient cash flows to support capital
expansion plans and general operating activities;
* Changes in consumer preferences;
* Changes in demand that are weather related, particular in areas outside of
California;
* Competitive products and pricing pressures and the Company's ability to
gain or maintain share of sales in the marketplace as a result of actions
by competitors;
* The introduction of new products;
15
* Laws and regulations, and/or any changes therein, including changes in
accounting standards, taxation requirements (including tax rate changes,
new tax laws and revised tax law interpretations) and environmental laws as
well as the Federal Food Drug and Cosmetic Act, the Dietary Supplement
Health and Education Act, and regulations made thereunder or in connection
therewith, especially those that may affect the way in which the Company's
products are marketed and/or labeled, including the contents thereof, as
well as laws and regulations or rules made or enforced by the Food and Drug
Administration and/or the Bureau of Alcohol, Tobacco and Firearms and/or
Federal Trade Commission and/or certain state regulatory agencies;
* Changes in the cost and availability of raw materials and the ability to
maintain favorable supply arrangements and relationships and procure timely
and/or adequate production of all or any of the Company's products;
* The Company's ability to achieve earnings forecasts, which may be based on
projected volumes and sales of many product types and/or new products,
certain of which are more profitable than others. There can be no assurance
that the Company will achieve projected levels or mixes of product sales;
* The Company's ability to penetrate new markets;
* The marketing efforts of distributors of the Company's products, most of
which distribute products that are competitive with the products of the
Company;
* Unilateral decisions by distributors, grocery chains, specialty chain
stores, club stores and other customers to discontinue carrying all or any
of the Company's products that they are carrying at any time;
* The terms and/or availability of the Company's credit facilities and the
actions of its creditors;
* The effectiveness of the Company's advertising, marketing and promotional
programs;
* The Company's ability to make suitable arrangements for the co-packing of
any of its products including, but not limited to, its energy and
functional drinks in 8.3-ounce slim cans, smoothies in 11.5-ounce cans, E2O
Energy Water, Energade, Monster energy drinks, soy smoothies, sparkling
orangeades and lemonades in glass bottles and other products.
The foregoing list of important factors is not exhaustive.
Inflation
The Company does not believe that inflation has a significant impact on the
Company's results of operations for the periods presented.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS
The principal market risks (i.e., the risk of loss arising from adverse
changes in market rates and prices) to which the Company is exposed, are
fluctuations in commodity prices, affecting the cost of raw materials, and
changes in interest rates on the Company's long term debt. The Company is
subject to market risk with respect to the cost of commodities because its
ability to recover increased costs through higher pricing may be limited by the
competitive environment in which it operates.
At March 31, 2003, the majority of the Company's debt consisted of variable
rate debt. The amount of variable rate debt fluctuates during the year based on
the Company's cash requirements. If average interest rates were to increase one
percent for the three-months ended March 31, 2003, the net impact on the
Company's pre-tax earnings would have been approximately $25,000.
16
ITEM 4. CONTROL AND PROCEDURES
As of March 31, 2003, the Company, including the Company's Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of the design
and operation of the Company's disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities and Exchange Act of 1934.)
Based upon the evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective in ensuring that information required to be disclosed in the reports
the Company files and submits under the Exchange Act are recorded, processed,
summarized and reported as and when required. There were no significant changes
in the Company's internal controls subsequent to March 31, 2003, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
17
PART II - OTHER INFORMATION
Items 1 - 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See Exhibit Index
(b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HANSEN NATURAL CORPORATION
Registrant
Date: May 15, 2003 /s/ RODNEY C. SACKS
------------------------------
Rodney C. Sacks
Chairman of the Board of Directors
and Chief Executive Officer
Date: May 15, 2003 /s/ HILTON H. SCHLOSBERG
------------------------------
Hilton H. Schlosberg
Vice Chairman of the Board of Directors,
President and Chief Financial Officer
18
CERTIFICATIONS PURSUANT TO
RULE 13a-14
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Rodney Sacks, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hansen Natural
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures 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 quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors and material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls of in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003 /s/ RODNEY C. SACKS
------------------------------
Rodney C. Sacks
Chairman of the Board of Directors
and Chief Executive Officer
19
I, Hilton Schlosberg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hansen Natural
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures 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 quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors and material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls of in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003 /s/ HILTON H. SCHLOSBERG
------------------------------
Hilton H. Schlosberg
Vice Chairman of the Board of Directors,
President and Chief Financial Officer
20
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Hansen Natural Corporation (the
"Company") on Form 10-Q for the period ended March 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned, Rodney C. Sacks, Chairman of the Board of Directors and Chief
Executive Officer of the Company, and Hilton H. Schlosberg, Vice Chairman of the
Board of Directors, President and Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 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 and results of operations of the Company.
Date: May 15, 2003 /s/ RODNEY C. SACKS
------------------------------
Rodney C. Sacks
Chairman of the Board of Directors
and Chief Executive Officer
Date: May 15, 2003 /s/ HILTON H. SCHLOSBERG
------------------------------
Hilton H. Schlosberg
Vice Chairman of the Board of Directors,
President and Chief Financial Officer
21