UNITED STATES
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, 2004 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)
(909) 739 - 6200
(Registrant's telephone number, including area code)
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 10,464,357 shares of common stock outstanding as of
April 28, 2004.
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
March 31, 2004
INDEX
Page No.
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2004 and December 31, 2003 (Unaudited) 3
Condensed Consolidated Statements of Income for the
three- months ended March 31, 2004 and 2003 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for
the three-months ended March 31, 2004 and 2003 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Qualitative and Quantitative Disclosures about
Market Risk 24
Item 4. Controls and Procedures 24
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Items 2-5. Not Applicable 25
Item 6. Exhibits and Reports on Form 8-K
Signatures 25
2
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND DECEMBER 31, 2003 (Unaudited)
- --------------------------------------------------------------------------------
March 31, December 31,
2004 2003
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,815,121 $ 1,098,785
Accounts receivable (net of allowance for
doubtful accounts, sales returns and cash
discounts of $1,027,419 in 2004 and $875,351
in 2003 and promotional allowances of
$5,542,549 in 2004 and $4,666,770 in 2003) 9,472,723 5,372,983
Inventories, net 17,281,109 17,643,786
Prepaid expenses and other current assets 559,099 481,777
Deferred income tax asset 2,183,291 2,080,609
------------- --------------
Total current assets 32,311,343 26,677,940
PROPERTY AND EQUIPMENT, net 2,913,269 2,803,282
INTANGIBLE AND OTHER ASSETS:
Trademark license and trademarks (net of
accumulated amortization of $166,314
in 2004 and $146,218 in 2003) 18,281,155 18,293,704
Deposits and other assets 265,195 222,102
------------- ---------------
18,546,350 18,515,806
------------- ---------------
$53,770,962 $47,997,028
============= ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,419,135 $ 6,521,402
Accrued liabilities 1,761,019 1,185,342
Accrued compensation 416,685 883,459
Current portion of long-term debt 210,773 244,271
Income taxes payable 2,000,441 647,263
------------ --------------
Total current liabilities 12,808,053 9,481,737
LONG-TERM DEBT, less current portion 333,606 358,064
DEFERRED INCOME TAX LIABILITY 3,296,964 3,107,649
COMMITMENTS AND CONTINGENCIES (NOTE 6)
SHAREHOLDERS' EQUITY:
Common stock - $0.005 par value; 30,000,000
shares authorized; 10,653,865 shares
issued, 10,447,104 outstanding in 2004;
10,624,864 shares issued, 10,418,103
outstanding in 2003 53,269 53,124
Additional paid-in capital 12,780,504 12,681,169
Retained earnings 25,313,111 23,129,830
Common stock in treasury, at cost;
206,761 in 2004 and 2003 (814,545) (814,545)
-------------- --------------
Total shareholders' equity 37,332,339 35,049,578
-------------- --------------
$53,770,962 $47,997,028
============== ==============
See accompanying notes to consolidated financial statements.
3
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE-MONTHS ENDED MARCH 31, 2004 AND 2003 (Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
----------------------------
2004 2003
------------ -----------
GROSS SALES $38,740,927 $27,695,875
LESS: Discounts, allowance and
promotional payments 7,442,144 5,609,527
----------- -----------
NET SALES 31,298,783 22,086,348
COST OF SALES 17,390,962 13,786,527
----------- ------------
GROSS PROFIT 13,907,821 8,299,821
OPERATING EXPENSES:
Selling, general and administrative 10,243,238 7,192,187
Amortization of trademark license
and trademarks 20,096 10,416
----------- ------------
Total operating expenses 10,263,334 7,202,603
----------- ------------
OPERATING INCOME 3,644,487 1,097,218
NET NONOPERATING EXPENSE 10,614 33,231
----------- ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 3,633,873 1,063,987
PROVISION FOR INCOME TAXES 1,450,592 430,916
----------- ------------
NET INCOME $ 2,183,281 $ 633,071
=========== ============
NET INCOME PER COMMON SHARE:
Basic $ 0.21 $ 0.06
=========== ============
Diluted $ 0.19 $ 0.06
=========== ============
NUMBER OF COMMON SHARES USED
IN PER SHARE COMPUTATIONS:
Basic 10,434,770 10,189,847
=========== ============
Diluted 11,463,633 10,435,953
=========== ============
See accompanying notes to consolidated financial statements.
4
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTHS ENDED MARCH 31, 2004 AND 2003 (Unaudited)
- -----------------------------------------------------------------------
March 31, March 31,
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,183,281 $ 633,071
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization of trademark license
and trademarks 20,096 10,416
Depreciation and other amortization 187,581 125,741
(Gain)/Loss on disposal of property
and equipment (4,461) 11,361
Deferred income taxes 86,633
Effect on cash of changes in
operating assets and liabilities:
Accounts receivable (4,099,740) (718,458)
Inventories 362,677 614,089
Prepaid expenses and other
current assets (77,322) 255,995
Accounts payable 1,897,733 1,320,730
Accrued liabilities 575,677 253,701
Accrued compensation (466,774) (141,632)
Income taxes payable/prepaid
income taxes 1,353,178 430,916
------------ ------------
Net cash provided by
operating activities 2,018,559 2,795,930
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (308,180) (311,518)
Proceeds from sale of property and equipment 15,073 19,788
Increase in trademark license and trademarks (7,547) (2,135)
Increase in deposits and other assets (43,093) (32,768)
----------- -------------
Net cash used in investing
activities (343,747) (326,633)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (57,956) (1,016,149)
Issuance of common stock 99,480 218,244
----------- -------------
Net cash provided by (used in)
financing activities 41,524 (797,905)
----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,716,336 1,671,392
CASH AND CASH EQUIVALENTS, beginning of year 1,098,785 537,920
----------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 2,815,121 $ 2,209,312
=========== ============
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest $ 9,511 $ 34,990
=========== ============
Income taxes $ 10,781 $ -
=========== ============
See accompanying notes to consolidated financial statements.
5
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, 2003, 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"). HBC owns all of the issued and outstanding
common stock of Blue Sky Natural Beverage Co. and Hansen Junior Juice Company.
The Company's financial statements included in 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. The information set forth in these interim
condensed consolidated financial statements for the three-months ended March 31,
2004 and 2003 is unaudited and reflects all adjustments, which include only
normal recurring adjustments, which in the opinion of management are necessary
to make the interim condensed consolidated financial statements not misleading.
Results of operations for periods 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
represent the costs paid by the Company for 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 with a finite life (as discussed below) over 1 to 25
years. The adoption of Statement of Financial Accounting Standards ("SFAS") No.
142, effective January 1, 2002, resulted in the elimination of amortization of
indefinite life assets. The following provides additional information concerning
the Company's trademark licenses and trademarks as of March 31, 2004 and
December 31, 2003:
6
March 31, December 31,
2004 2003
---------- ------------
Amortizing trademark licenses and trademarks $ 1,158,971 $ 1,155,803
Accumulated amortization (166,314) (146,218)
--------- ------------
992,657 1,009,585
Non-amortizing trademark licenses and
trademarks 17,288,498 17,284,704
---------- ------------
$18,281,155 $18,293,704
=========== =============
All amortizing trademark licenses and trademarks have been assigned an
estimated finite useful life, and are amortized on a straight-line basis over
the number of years that approximate their respective useful lives ranging from
1 to 25 years (weighted average life of 19 years). The straight-line method of
amortization allocates the cost of the trademark licenses and trademarks to
earnings over the period of expected benefit. Total amortization expense during
the three-months ended March 31, 2004 and 2003 was $20,096 and $10,416,
respectively. As of March 31, 2004, future estimated amortization expense
related to amortizing trademark licenses and trademarks through the year ending
December 31, 2009 is:
2004 - Remainder $51,675
2005 53,587
2006 53,587
2007 53,587
2008 53,438
2009 53,438
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 amounted to $2.4
million and $1.9 million for the three-months ended March 31, 2004 and 2003,
respectively. Advertising expenses are included in selling, general and
administrative expenses with the exception of coupon expenses which are
accounted for as a reduction of net sales. 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 $4.9 million and $3.4 million for the
three-months ended March 31, 2004 and 2003, respectively and are included as a
reduction of net sales.
7
Stock Based Compensation - The Company accounts for its stock option plans
in accordance with Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, 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 Financial
Accounting Standards Board ("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, and was effective immediately upon
issuance. 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 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, 2004 and 2003 would have been reduced to the pro
forma amounts indicated below:
Three Months Ended March 31,
2004 2003
---- ----
Net income, as reported $ 2,183,281 $ 633,071
Less: Total stock based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects 83,597 54,810
------------ -------------
Net income, pro forma $ 2,099,684 $ 578,261
=========== =============
Net income per common share, as reported - Basic $ 0.21 $ 0.06
Net income per common share, as reported - Diluted $ 0.19 $ 0.06
Net income per common share, pro forma - Basic $ 0.20 $ 0.06
Net income per common share, pro forma - Diluted $ 0.18 $ 0.06
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:
Risk-Free
Dividend Yield Expected Volatility Interest Rate Expected Lives
-------------- ------------------- ------------- --------------
2004 0% 38% 4.0% 8 years
2003 0% 12% 3.5% 8 years
8
3. NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities. In general, a variable interest entity is a corporation, partnership,
trust or any other legal structure used for business purposes that either (a)
does not have equity investors with voting rights or (b) has equity investors
that do not provide sufficient financial resources for the entity to support its
activities. FIN 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003.
With respect to variable interest entities created before January 31, 2003, in
December 2003 the FASB issued FIN 46R which, among other things, revised the
implementation date to first fiscal years or interim periods ending after March
15, 2004, with the exception of Special Purpose Entities ("SPE"). The
consolidated requirements apply to all SPE's in the first fiscal year or interim
period ending after December 15, 2003. As the Company has determined that it
does not have any SPE's or variable interest entities to which these
interpretations apply, the Company adopted FIN46R in the first quarter of 2004
and such adoption did not have a material impact on its financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Instruments with Characteristics of Both Liabilities and Equity, as amended by
various FASB staff positions posted in October and November 2003, which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer classify a financial instrument that is within
its scope which may have previously been reported as equity, as a liability (or
an asset in some circumstances).
In November 2003, the FASB issued FASB Staff Position (FSP) No. 150-3 which
deferred the effective dates for applying certain provisions of SFAS No. 150
related to mandatorily redeemable financial instruments of certain nonpublic
entities and certain mandatorily redeemable noncontrolling interests for public
and nonpublic entities. For public companies, SFAS No. 150 is effective for
mandatorily redeemable financial instruments entered into or modified after May
31, 2003 and is effective for all other financial instruments as of the first
interim period beginning after June 15, 2003. For mandatorily redeemable
noncontrolling interests that would not have to be classified as liabilities by
a subsidiary under the exception in paragraph 9 of SFAS No. 150, but would be
classified as liabilities by the parent, the classification and measurement
provisions of SFAS No. 150 are deferred indefinitely. For other mandatorily
redeemable noncontrolling interests that were issued before November 5, 2003,
the measurement provisions of SFAS No. 150 are deferred indefinitely. For those
instruments, the measurement guidance for redeemable shares and noncontrolling
interest in other literature shall apply during the deferral period. The
adoption of SFAS No. 150 did not have a significant impact on the Company's
consolidated financial position, results of operations, or cash flow.
4. INVENTORIES
Inventories consist of the following at:
March 31, December 31,
2004 2003
-------------- -------------
Raw Materials $ 6,836,273 $ 6,979,701
Finished Goods 11,414,716 11,900,304
-------------- -------------
18,250,989 18,880,005
Less inventory reserves (969,880) (1,236,219)
-------------- -------------
$ 17,281,109 $ 17,643,786
============== =============
9
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
March 31, December 31,
2004 2003
-------------- ------------
Leasehold improvements $ 236,006 $ 230,027
Furniture and office equipment 968,887 881,741
Equipment 2,120,626 2,481,917
Vehicles 1,570,037 1,636,878
-------------- ------------
4,895,556 5,230,563
Less accumulated depreciation
and amortization (1,982,287) (2,427,281)
--------------- ------------
$ 2,913,269 $ 2,803,282
=============== ==============
6. COMMITMENTS & CONTINGENCIES
In March 2003, HBC entered into an advertising display agreement ("Monorail
Agreement") with the Las Vegas Monorail Company ("LVMC") in terms of which HBC
was granted the right, in consideration of the payment by HBC to LVMC of the sum
of $1,000,000 per year, payable quarterly, to advertise and promote its products
on a designated four car monorail vehicle as well as the right to sell certain
of its products on all monorail stations for payment of additional
consideration.
It is anticipated that the initial term will commence in the summer of
2004. The initial term of the Monorail Agreement ends on the first anniversary
of its commencement date. Not less than 120 days before the expiration of the
initial term and each renewal term, as the case may be, HBC has the right to
renew the Monorail Agreement for a further one year term up to a maximum of nine
additional one year terms and the LVMC has the right, not withstanding such
election by HBC, to terminate the Monorail Agreement at the expiration of the
then current term.
The Company is a party to various claims, complaints and other legal
actions that have arisen in the normal course of business from time to time. The
Company believes the outcome of these pending legal proceedings, in the
aggregate, will not have a material adverse effect on the operations or
financial position of the Company.
During 2002, in response to the Company's cease and desist letter to Skyy
Spirits LLC in which the Company alleged infringement by Skyy Spirits and/or its
licensee of the Company's Blue Sky(R) trademark, Skyy Spirits filed a complaint
in the United States District Court for the Northern District of California for
a declaratory order and additional relief. The Company filed a counterclaim
against Skyy Spirits and joined Miller Brewing Company in the proceedings in
which the Company has sought an injunction and claimed damages, including an
accounting for profits earned by both Skyy Spirits and Miller Brewing Company,
from the sale of the infringing beverage products and further relief. During
April 2004 the dispute was settled on terms which management believes affords
the Company adequate protection for its Blue Sky(R) trademark. In addition, Skyy
Spirits and Miller Brewing Company agreed to reimburse the Company for portion
of the legal costs incurred by the Company in that litigation.
10
During 2003, in response to a cease and desist letter from the Coca-Cola
Company and its subsidiary Odwalla, Inc. in which they complained of the use by
the Company of the Monster trademark and name, the Company filed a complaint in
the United States District Court for the Central District of California for a
declaratory order and additional relief. The Company is engaged in settlement
discussions with the Coca-Cola Company and Odwalla, Inc. If no settlement is
reached, the Company will vigorously pursue the matter. The Company believes
that it has good prospects of success.
During 2003 the Company filed a complaint in the United States District
court for the Central District of California against Rockstar, Inc. and Rockstar
Beverage Company for an injunction, damages and further relief based on false
and unlawful claims and advertising by Rockstar and unfair competition. In
April, 2004 Rockstar filed a counterclaim in which Rockstar alleges trade dress
infringement, interference with contract, unfair competition, defamation and
trade libel. The Company believes that Rockstar's counterclaims are without
merit.
Furthermore, the Company is subject to litigation from time to time in the
normal course of business. Although it is not possible to predict the outcome of
such litigation, based on the facts known to the Company and after consultation
with counsel, the Company believes that such litigation will not have a material
adverse effect on the Company's financial position or results of operations.
Except as described above, there are no material pending legal proceedings
to which the Company or any of its subsidiaries is a party or to which any of
the Company's properties is subject, other than ordinary and routine litigation
incidental to the Company's business.
11
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 Company's consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America
("GAAP".) GAAP requires the Company to make estimates and assumptions that
affect the reported amounts in our consolidated financial statements including
various allowances and reserves for accounts receivable and inventories, the
estimated lives of long-lived assets and trademarks and trademark licenses as
well as claims and contingencies arising out of litigation or other transactions
that occur in the normal course of business. The following summarize the most
significant accounting and reporting policies and practices of the Company:
Trademark License and Trademarks - Trademark license and trademarks
primarily represent the costs paid by the Company for 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. 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.
In accordance with SFAS No. 142, we evaluate our non-amortizing trademark
license and trademarks annually for impairment. We measure impairment by the
amount that the carrying value exceeds the estimated fair value of the trademark
license and trademarks. The fair value is calculated using the income approach.
Based on our annual impairment analysis performed in the fourth quarter of 2003
and our analysis of the trademark license and trademarks for the quarter ended
March 31, 2004, the estimated fair values of trademark license and trademarks
exceeded the carrying value.
Long-Lived Assets - Management regularly reviews property and equipment and
other long-lived assets, including identifiable amortizing 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, 2004.
12
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 estimate fair
value, which is based on 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
judgment because actual revenues and expenses have fluctuated in the past and
are expected to continue to do so.
In estimating future revenues, we use internal budgets. Internal budgets
are developed based on recent revenue 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, a 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, require adjustments.
Accounts Receivable - The Company evaluates the collectibility of its trade
accounts receivable based on a number of factors. In circumstances where the
Company becomes aware of a specific customer's inability to meet its financial
obligations to the Company, a specific reserve for bad debts is estimated and
recorded which reduces the recognized receivable to the estimated amount the
Company believes will ultimately be collected. In addition to specific customer
identification of potential bad debts, bad debt charges are recorded based on
the Company's historical losses and an overall assessment of past due trade
accounts receivable outstanding.
Inventories - Inventories are stated at the lower of cost to purchase
and/or manufacture the inventory or the current estimated market value of the
inventory. The Company regularly reviews its inventory quantities on hand and
records a provision for excess and obsolete inventory based primarily on the
Company's estimated forecast of product demand and/or its ability to sell the
product(s) concerned and production requirements. Demand for the Company's
products can fluctuate significantly. Factors which could affect demand for the
Company's products include unanticipated changes in consumer preferences,
general market conditions or other factors, which may result in cancellations of
advance orders or a reduction in the rate of reorders placed by customers.
Additionally, management's estimates of future product demand may be inaccurate,
which could result in an understated or overstated provision required for excess
and obsolete inventory.
13
Income Taxes - Current income tax expense is the amount of income taxes
expected to be payable for the current year. A deferred income tax asset or
liability is established for the expected future consequences of temporary
differences in the financial reporting and tax bases of assets and liabilities.
The Company considers future taxable income and ongoing, prudent and feasible
tax planning strategies, in assessing the value of its deferred tax assets. If
the Company determines that it is more likely than not that these assets will
not be realized, the Company will reduce the value of these assets to their
expected realizable value, thereby decreasing net income. Evaluating the value
of these assets is necessarily based on the Company's judgment. If the Company
subsequently determined that the deferred tax assets, which had been written
down, would be realized in the future, the value of the deferred tax assets
would be increased, thereby increasing net income in the period when that
determination was made.
Our Business
Overview
We develop, market, sell and distribute, in the main, a wide range of
branded beverages. The majority of our beverages fall within the growing
"alternative" beverage category. The principal brand names under which our
beverages are marketed are Hansen's(R), Monster Energy(TM), Blue Sky(R), Junior
Juice(R), and Lost(R). We own all of our above-listed brand names other than
Lost(R) which we produce, market, sell and distribute under an exclusive
licensing arrangement with Lost International LLC.
Our company principally generates revenues, income and cash flows by
developing, producing, marketing, selling and distributing finished beverage
products. We generally sell these products to retailers as well as distributors.
We incur significant marketing expenditures to support our brands including
advertising costs, sponsorship fees and special promotional events. We focus on
developing brand awareness and trial through sampling both in stores and at
events. Retailers and distributors receive rebates, promotions, point of sale
materials, merchandise displays and coolers. We also use in-store promotions and
in-store placement of point-of-sale materials and racks, prize promotions, price
promotions, competitions, and sponsorship of, and endorsements from, selected
public and extreme sports figures and causes. Consumers receive coupons,
discounts and promotional incentives. These marketing expenditures help to
enhance distribution and availability of our products as well as awareness and
increase consumer preference for our brands. We believe greater distribution and
availability, awareness and preference promotes long term growth of the
Company's brands.
During the first quarter of 2004, we continued to expand our existing
product lines and further develop our markets. In particular, we continue to
focus on developing and marketing beverages that fall within the category
generally described as the "alternative" beverage category, with particular
emphasis on energy type drinks.
We believe that one of the keys to success in the beverage industry is
differentiation such as making Hansen's(R) products visually distinctive from
other beverages on the shelves of retailers. We review our products and
packaging on an ongoing basis and, where practical, endeavor to make them
different, better and unique. The labels and graphics for many of our products
are redesigned from time to time to maximize their visibility and
identification, wherever they may be placed in stores and we will continue to
reevaluate labels and graphics from time to time.
14
We again achieved record sales in the first quarter of 2004. The increase
in gross and net sales in the first quarter of 2004 was primarily attributable
to increased sales by volume of our Monster EnergyTM drinks, which were
introduced in April 2002, sales of our low carbohydrate ("Lo-Carb") Monster
EnergyTM drinks, which were introduced in August 2003, and sales of our Lost(R)
Energy drinks in 16-ounce cans, which were introduced in January 2004, as well
as increased sales by volume of Natural Sodas, in particular Diet Natural Sodas.
The increase in net sales was also attributable, to a lesser extent, to
increased sales by volume of our Deuce Energy drinks, increased net sales prices
of Junior Juice brand drinks, increased sales by volume of Energade Energy
sports drinks, Diet Red and juice blends. The increase in gross and net sales
was partially offset by decreased sales by volume primarily of Hansen's(R)
energy and functional drinks in 8.3-ounce cans, Hansen's(R) children's
multi-vitamin juice drinks in aseptic packaging, smoothies in cans and bottles,
teas, lemonades and cocktails, and soy smoothies.
Gross profit for the three months ended March 31, 2004, as a percentage of
net sales, was 44.4% which was higher than the 37.6% gross profit percentage
achieved in the three months ended March 31, 2003. The increase in gross profit
percentage was primarily due to a change in the Company's product and customer
mix.
During the first quarter of 2004, sales outside of California represented
49.8% of our aggregate sales, as compared to approximately 44.4% of our
aggregate sales in the first quarter of 2003. Sales to distributors outside the
United States during the first quarter of 2004 amounted to $340,000 compared to
$240,000 in the first quarter of 2003, accounting for approximately 1% of our
net sales for each quarter respectively.
Our customers are typically retail and specialty chains, club stores, mass
merchandisers, convenience chains, full service beverage distributors and health
food distributors. In the first quarter of 2004, sales to retailers represented
23.4% of our revenues, sales to club stores and mass merchandisers represented
16.7% of our revenue, sales to full service distributors represented 44.8% of
our revenues and sales to health food distributors represented 11.8% of our
revenues.
In the first quarter of 2004, we introduced a carbonated Lost(R) Energy
drink in 16-ounce cans. The Lost(R) brand name is owned by Lost International
LLC and the drinks are produced, sold and distributed by the Company under
exclusive license from Lost International LLC. In the first quarter, we also
introduced a new Hansen's(R) sports beverage under a customer's brand name.
Sales of our dual-branded 100% juice line named "Juice Blast(R)", which was
launched in conjunction with Costco and is sold through Costco stores, were
lower in the first quarter of 2004 than in 2003 primarily due to the
discontinuance of the product by certain Costco regions. We are continuing to
work with those regions with a view to having the product reinstated in certain
of such regions in the future.
In September 2000, HBC, through its wholly owned subsidiary Blue Sky,
acquired the Blue Sky(R) Natural Soda business. The Blue Sky(R) Natural Soda
brand is the leading natural soda in the health food trade. Blue Sky offers
natural sodas, premium natural sodas with added ingredients such as Ginseng and
anti-oxidant vitamins, organic sodas and seltzer waters in 12-ounce cans and a
Blue Energy drink in 8.3-ounce cans. During the first quarter of 2004, we
continued to expand distribution of Blue Sky products into mainstream grocery
chain stores throughout the country and are planning to introduce additional new
products under the Blue Sky(R) trademark during the year.
15
In May 2001, HBC, through its wholly owned subsidiary Junior Juice,
acquired the Junior Juice(R) beverage business. The Junior Juice(R) product line
is comprised of a line of 100% juices packed in 4.23-ounce aseptic packages and
is targeted at toddlers.
During the first quarter of 2004, we entered into several new distribution
agreements for the sale of our products. We intend to continue building our
national sales force throughout the remainder of 2004 to support and grow the
sales of our products.
A chain grocery store strike in Southern California, which commenced during
the last quarter of 2003, adversely affected sales of those of our products that
are carried by the stores concerned. However, the drop in sales of such products
was partially offset by increased sales of certain of those products that are
carried by other retailers in Southern California not engaged in the strike. The
strike ended in March 2004 and the grocery stores concerned are fully staffed
and are in the process of becoming fully operational.
During 2004, we were awarded an exclusive contract by the State of
California, Department of Health Services ("DHS") Women, Infant and Children
Supplemental Nutrition Branch, to supply 100% Apple juice and 100% Apple Grape
juice in 64-ounce PET plastic bottles. Objections to the award to HBC of
contracts for both types of juices were lodged by two competitors. Both of such
objections were overruled. One of the competitors, Tree Top, subsequently
appealed to the Superior Court of California for a reversal of the award. Tree
Top's appeal was rejected by the Superior Court of California on May 11, 2004
and the award to the Company was confirmed. Both contracts are expected to
commence on July 12, 2004 and will run for a minimum period of three years.
We continue to incur expenditures in connection with the development and
introduction of new products and flavors.
16
Results of Operations
The following table sets forth key statistics for the three-months ended
March 31, 2004 and 2003.
Percentage
Three-Months ended March 31, Change
------------------------------- -----------
2004 2003 04 vs. 03
------------ ----------- -----------
Gross sales $ 38,740,927 $ 27,695,875 39.9%
Less: Discounts, allowances
and promotional payments 7,442,144 5,609,527 32.7%
------------ ----------- -----------
Net sales 31,298,783 22,086,348 41.7%
Cost of sales 17,390,962 13,786,527 26.1%
------------ ----------- -----------
Gross profit 13,907,821 8,299,821 67.6%
Gross profit margin 44.4% 37.6%
Selling, general and
administrative expenses 10,243,238 7,192,187 42.4%
Amortization of trademark license
and trademarks 20,096 10,416 92.9%
------------ ----------- -----------
Operating income 3,644,487 1,097,218 232.2%
Operating income as a percent
of net sales 11.6% 5.0%
Net nonoperating expense 10,614 33,231 (68.1%)
------------ ---------- ----------
Income before provision for
income taxes 3,633,873 1,063,987 241.5%
Provision for income taxes 1,450,592 430,916 236.6%
------------ ---------- ----------
Effective tax rate 39.9% 40.5%
Net income $ 2,183,281 $ 633,071 244.9%
============ ========= ==========
Net income as a percent
of net sales 7.0% 2.9%
Net income per common share:
Basic $ 0.21 $ 0.06 250.0%
Diluted $ 0.19 $ 0.06 216.7%
Results of Operations for the Three Months Ended March 31, 2004 Compared to the
Three Months Ended March 31, 2003
Gross Sales. For the three-months ended March 31, 2004, gross sales were
$38.7 million, an increase of $11.0 million or 39.9% higher than the $27.7
million gross sales for the three-months ended March 31, 2003. The increase in
gross sales for the three-months ended March 31, 2004 was primarily attributable
to increased sales of some of our existing products as well as the introduction
of new products as discussed in "Net Sales."
17
Net Sales. For the three-months ended March 31, 2004, net sales were $31.3
million, an increase of $9.2 million or 41.7% higher than the $22.1 million for
the three-months ended March 31, 2003. The increase in net sales for the
three-months ended March 31, 2004 was primarily attributable to increased sales
by volume of Monster EnergyTM drinks which were introduced in April 2002, sales
of Lo-Carb Monster EnergyTM drinks which were introduced in August 2003, sales
of our Lost(R) energy drinks in 16-ounce cans, which were introduced in January
2004 as well as increased sales by volume of Natural Sodas, in particular Diet
Natural Sodas. The increase in net sales was also attributable, to a lesser
extent, to increased sales by volume of our Deuce Energy drinks, increased net
sales prices of our Junior Juice(R) brand drinks, increased sales by volume of
Energade(R) Energy sports drinks, Diet Red and juice blends. The increase in net
sales was partially offset by decreased sales by volume primarily of Hansen's(R)
energy and functional drinks in 8.3-ounce cans, Hansen's(R) children's
multi-vitamin juice drinks, smoothies in cans and bottles, teas, lemonades and
juice cocktails and soy smoothies as well as an increase in total discounts,
allowances and promotional payments.
Gross Profit. Gross profit was $13.9 million for the three-months ended
March 31, 2004, an increase of $5.6 million or 67.6% higher than the gross
profit for the three-months ended March 31, 2003 of $8.3 million. Gross profit
as a percentage of net sales, increased to 44.4% for the three-months ended
March 31, 2004 from 37.6% for the three-months ended March 31, 2003. Increases
in gross sales volume contributed to an increase in gross profit while a change
in the Company's product and customer mix and the related increase in the
percentage of sales of higher margin products increased both gross profit and
gross profit as a percentage of net sales.
Total Operating Expenses. Total operating expenses were $10.3 million for
the three-months ended March 31, 2004, an increase of $3.1 million or 42.5%
higher than total operating expenses of $7.2 million for the three-months ended
March 31, 2003. Total operating expenses as a percentage of net sales increased
to 32.8% for the three-months ended March 31, 2004 as compared to 32.6% for the
three-months ended March 31, 2003. The increase in total operating expenses was
primarily attributable to increased selling, general and administrative
expenses.
Selling, general and administrative expenses were $10.2 million for the
three-months ended March 31, 2004, an increase of $3.0 million or 42.4% higher
than selling, general and administrative expenses of $7.2 million for the
three-months ended March 31, 2003. Selling expenses were $5.7 million for the
three-months ended March 31, 2004, an increase of $1.6 million or 39.2% higher
than selling expenses of $4.1 million for the three-months ended March 31, 2003.
Selling expenses as a percentage of net sales for the three-months ended March
31, 2004 were 18.4% which was consistent with selling expenses as a percentage
of net sales of 18.7% for the three-months ended March 31, 2003. The increase in
selling expenses was primarily attributable to an increase in distribution
expenses and expenditures for merchandise displays, trade development activities
with distributors and in-store demonstrations. The increase in selling expenses
was partially offset by decreased expenditures for certain advertising and other
selling activities and graphic design. General and administrative expenses were
$4.5 million for the three-months ended March 31, 2004, an increase of $1.4
million or 46.8% higher than general and administrative expenses of $3.1 million
for the three-months ended March 31, 2003. General and administrative expenses
as a percentage of net sales for the three-months ended March 31, 2004 were
14.3% which was slightly higher than general and administrative expenses as a
percentage of net sales of 13.8% for the three-months ended March 31, 2003. The
increase in general and administrative expenses was primarily attributable to
increased payroll expenses primarily for sales, marketing and administrative
activities, fees relating to legal and accounting services including services
related to establishing and protecting trademarks and travel costs.
18
Operating Income. Operating income was $3.6 million for the three-months
ended March 31, 2004, an increase of $2.5 million more than operating income of
$1.1 million for the three-months ended March 31, 2003. Operating income as a
percentage of net sales increased to 11.6% for the three-months ended March 31,
2004 from 5.0% for the three-months ended March 31, 2003. The increase in
operating income and operating income as a percentage of net sales was
attributable to a higher increase in gross profit and gross profit as a
percentage of net sales achieved in the three months ended March 31, 2004 than
the increase in operating expenses and operating expenses as a percentage of net
sales for the three months ended March 31, 2003.
Net Nonoperating Expense. Net nonoperating expense was $11,000 for the
three-months ended March 31, 2004, a decrease of $22,000 from net non-operating
expense of $33,000 for the three-months ended March 31, 2003. 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.
Provision for Income Taxes. Provision for income taxes for the three-months
ended March 31, 2004 was $1.5 million as compared to provision for income taxes
of $431,000 for the comparable period in 2003. The effective combined federal
and state tax rate for the three-months ended March 31, 2004 was 39.9%, which
was lower than the effective tax rate of 40.5% for the three-months ended March
31, 2003 due to the increase in apportionment of sales and related state taxes
to various states outside of California.
Net Income. Net income was $2.2 million for the three-months ended March
31, 2004, an increase of $1.6 million over net income of $633,000 for the
three-months ended March 31, 2003. The increase in net income was attributable
to the increase in gross profit of $5.6 million and decrease in nonoperating
expense of $22,000 which was partially offset by the increase in operating
expenses of $3.0 million and an increase in provision for income taxes of $1.0
million.
Liquidity and Capital Resources
As at March 31, 2004, the Company had working capital of $19.5 million, as
compared to working capital of $17.2 million as at December 31, 2003. The
increase in working capital is primarily attributable to net income earned after
adjustment for certain noncash expenses, primarily depreciation and other
amortization, proceeds received from the issuance of common stock and disposal
of fixed assets. Such increase was partially offset by acquisition of property
and equipment, increases in deposits and other assets, additions to trademark
license and trademarks and repayment by the Company of a portion of the
Company's long term debt.
Net cash provided by operating activities was $2.0 million for the
three-months ended March 31, 2004 as compared to net cash provided by operating
activities of $2.8 million in the comparable period in 2003. For the
three-months ended March 31, 2004, cash provided by operating activities was
attributable to net income earned after adjustments for the effect of certain
expenses, primarily depreciation and other amortization, as well as increases in
accounts payable, income taxes payable and accrued liabilities and decreases in
inventories which was partially offset by increases in accounts receivable and
other current assets and decreases in accrued compensation.
19
Net cash used in investing activities was $344,000 for the three-months
ended March 31, 2004 as compared to net cash used in investing activities of
$327,000 in the comparable period in 2003. For the three-months ended March 31,
2004, cash used in investing activities was primarily attributable to
acquisitions of property and equipment and additions to trademark license and
trademarks and an increase in deposits and other assets which was partially
offset by proceeds from 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, storage racks, 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 provided by financing activities was $42,000 for the three-months
ended March 31, 2004 as compared to net cash used in financing activities of
$798,000 for the comparable period in 2003. For the three-months ended March 31,
2004, cash provided by financing activities was primarily attributable to
proceeds received from the issuance of common stock which was partially offset
by principal payments of long-term debt.
HBC has a credit facility from Comerica Bank-California ("Comerica"),
consisting of a revolving line of credit and a term loan. 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 are secured by substantially all of HBC's assets, including
accounts receivable, inventory, trademarks, trademark licenses and certain
equipment. In accordance with the provisions of the credit facility, HBC can
borrow up to $12.0 million under its line of credit, 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 Comerica'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 the
level of certain financial ratios of HBC from time to time. At March 31, 2004,
HBC had no balances outstanding under the credit facility and borrowing capacity
available to the Company from Comerica under the credit facility was $7,800,000.
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 its financial covenants at March 31,
2004.
If any event of default shall occur for any reason, whether voluntary or
involuntary, Comerica may declare all or any portion 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.
20
Purchase obligations represent commitments made by the Company and its
subsidiaries to various suppliers for raw materials used in the manufacturing
and packaging of our products. These obligations vary in terms. Other
commitments represent our obligations under our agreement with the Las Vegas
Monorail Company. See also "ITEM 1-NOTE 6, COMMITMENTS & CONTINGENCIES." The
following represents a summary of the Company's contractual obligations and
related scheduled maturities for the years ending December 31:
Long-Term
Debt &
Capital Lease Operating Purchase Other
Obligations Leases Obligations Commitments Total
-------------- -------- ----------- ----------- ------
2004 - Remainder $ 185,948 $ 712,132 $ 5,880,096 $ 750,000 $ 7,528,176
2005 211,541 970,359 7,259,120 250,000 8,691,020
2006 146,890 1,017,128 7,259,120 8,423,138
2007 1,030,218 1,460,000 2,490,218
2008 773,997 773,997
Thereafter 1,199,730 1,199,730
------------ ---------- ----------- ----------- -------
$ 544,379 $5,703,564 $21,858,336 $1,000,000 $ 29,106,279
============ ========== =========== =========== ==========
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 three-months of the past two years. Data from any one or more
quarters or periods 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:
* A fruit and grain bar and functional nutrition bar case equals ninety
1.76-ounce bars.
* A natural cereal case equals ten 13-ounce boxes measured by volume.
* An active nutrition bar case equals thirty-two 1.4-ounce bars.
The Company's quarterly results of operations reflect seasonal trends that
management believes 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, 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.
21
(In Thousands)
Three-months ended March 31,
2004 2003
------------- -------------
Unit Case Volume / Case Sales 5,368 4,219
Net Sales $31,299 $22,086
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 27A of the
Securities Act 1933 as amended and Section 21E 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 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,
involve a number of risks, uncertainties and other factors 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;
* Decreased demand for our products resulting from changes in consumer
preferences;
* Changes in demand that are weather related, particularly in areas outside
of California;
* Competitive products and pricing pressures and the Company's ability to
gain or maintain its share of sales in the marketplace as a result of
actions by competitors;
* The introduction of new products;
* An inability to achieve volume growth through product and packaging
initiatives;
* 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, as well as changes in any other food and drug laws, especially
those that may affect the way in which the Company's products are marketed
and/or labeled and/or sold, 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;
22
* 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 facility and the
actions of its creditors;
* The effectiveness of the Company's advertising, marketing and promotional
programs;
* Changes in product category consumption;
* Unforeseen economic and political changes;
* Possible recalls of the Company's products; and
* 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 and 16-ounce cans, smoothies in
11.5-ounce cans, E2O Energy Water(R), Energade(R), Monster EnergyTM and
Lost(R) energy drinks, soy smoothies, sparkling orangeades and lemonades in
glass bottles and other products.
The foregoing list of important factors is not exhaustive.
The Company's actual results could be materially different from the results
described or anticipated by the Company's forward-looking statements due to the
inherent uncertainty of estimates, forecasts and projections and may be better
or worse than anticipated. Given these uncertainties, you should not rely on
forward-looking statements. Forward-looking statements represent the Company's
estimates and assumptions only as of the date that they were made. The Company
expressly disclaims any duty to provide updates to forward-looking statements,
and the estimates and assumptions associated with them, after the date of this
report, in order to reflect changes in circumstances or expectations or the
occurrence of unanticipated events except to the extent required by applicable
securities laws.
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
In the normal course of business, our financial position is routinely
subject to a variety of risks. The principal market risks (i.e., the risk of
loss arising from adverse changes in market rates and prices) which the Company
is exposed to are fluctuations in commodity prices affecting the cost of raw
materials and changes in interest rates of the Company's long term debt. We are
also subject to market risks with respect to the cost of commodities because our
ability to recover increased costs through higher pricing is limited by the
competitive environment in which we operate. We are also subject to other risks
associated with the business environment in which we operate, including the
collectability of accounts receivable.
23
At March 31, 2004, the majority of the Company's debt consisted of fixed
rather than 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 year ended March 31, 2004, the net
impact on the Company's pre-tax earnings would have been insignificant.
ITEM 4. CONTROL AND PROCEDURES
Under the supervision and with the participation of the Company's
management, including our Chief Executive Officer and Chief Financial Officer,
we have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
report. Based upon this evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures are adequate and effective to ensure that material information we are
required to disclose in reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in SEC rules and forms.
There have been no significant changes in internal control over financial
reporting that occurred during the fiscal period covered by this report that
have materially affected, or are reasonably likely to materially affect, the
registrant's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to various claims, complaints and other legal
actions that have arisen in the normal course of business from time to time. The
Company believes the outcome of these pending legal proceedings, in the
aggregate, will not have a material adverse effect on the operations or
financial position of the Company. See NOTE 6 to the financial statements,
"COMMITMENTS AND CONTINGENCIES."
24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibit Index
31.1 Certification by CEO pursuant to Rule 13A-14(a) or 15D-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification by CFO pursuant to Rule 13A-14(a) or 15D-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On March 4, 2004, the Company filed a current report on Form 8-K reporting
under Item 6 that the Company had issued a press release regarding a contract
awarded to the Company by the State of California Department of Health Services'
Women, Infant and Children Supplemental Nutrition Program.
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 13, 2004 /s/ RODNEY C. SACKS
Rodney C. Sacks
Chairman of the Board
of Directors and Chief
Executive Officer
Date: May 13, 2004 /s/ HILTON H. SCHLOSBERG
Hilton H. Schlosberg
Vice Chairman of the
Board of Directors,
President and Chief
Financial Officer
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