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 Commission file number 0-18761
Ended June 30, 2004
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)
(951) 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 10,833,503 shares of common stock outstanding as of July
23, 2004.
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
June 30, 2004
INDEX
Page No.
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2004 and December 31, 2003 (Unaudited) 3
Condensed Consolidated Statements of Income for
the three- and six-months ended June 30, 2004
and 2003 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the six-months ended June 30, 2004
and 2003 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results Operations 12
Item 3. Qualitative and Quantitative Disclosures about
Market Risk 25
Item 4. Controls and Procedures 26
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Items 2-5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 27
2
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND DECEMBER 31, 2003 (Unaudited)
- ---------------------------------------------------------------------
June 30, December 31,
2004 2003
----------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,473,017 $ 1,098,785
Accounts receivable (net of allowance for
doubtful accounts, sales returns and cash
discounts of $1,395,225 in 2004 and
$875,351 in 2003 and promotional allowances of
$6,714,137 in 2004 and $4,666,770 in 2003) 13,506,903 5.372.983
Inventories, net 19,614,311 17,643,786
Prepaid expenses and other current assets 542,540 481,777
Deferred income tax asset 3,660,801 2,080,609
----------------- ----------------
Total current assets 44,797,572 26,677,940
PROPERTY AND EQUIPMENT, net 3,301,863 2,803,282
INTANGIBLE AND OTHER ASSETS:
Trademark license and trademarks
(net of accumulated amortization of
$185,582 in 2004 and $146,218 in 2003) 18,267,742 18,293,704
Deposits and other assets 285,255 222,102
----------------- ----------------
18,552,997 18,515,806
----------------- -----------------
$66,652,432 $47,997,028
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $12,890,304 $ 6,521,402
Accrued liabilities 2,289,813 1,185,342
Accrued compensation 659,861 883,459
Current portion of long-term debt 327,466 244,271
Income taxes payable 3,591,544 647,263
---------------- -----------------
Total current liabilities 19,758,988 9,481,737
LONG-TERM DEBT, less current portion 325,467 358,064
DEFERRED INCOME TAX LIABILITY 3,486,279 3,107,649
COMMITMENTS AND CONTINGENCIES (NOTE 6)
SHAREHOLDERS' EQUITY:
Common stock - $0.005 par value; 30,000,000
shares authorized; 10,825,264 shares
issued, 10,618,503 outstanding in 2004;
10,624,864 shares issued, 10,418,103
outstanding in 2003 54,126 53,124
Additional paid-in capital 13,450,857 12,681,169
Retained earnings 30,391,260 23,129,830
Common stock in treasury, at cost; 206,761
in 2004 and 2003 (814,545) (814,545)
--------------- -----------------
Total shareholders' equity 43,081,698 35,049,578
--------------- -----------------
$66,652,432 $47,997,028
=============== =================
See accompanying notes to consolidated financial statements.
3
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE- AND SIX-MONTHS ENDED JUNE 30, 2004 AND 2003 (Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------- ------------- ------------ ------------
2004 2003 2004 2003
------------ ------------- ------------ ------------
GROSS SALES $58,002,967 $35,059,970 $96,743,894 $62,755,845
LESS: Discounts,
allowances and
promotional
payments 11,939,424 6,650,832 19,381,568 12,260,359
------------ ------------ ----------- ------------
NET SALES 46,063,543 28,409,138 77,362,326 50,495,486
COST OF SALES 25,304,614 16,960,573 42,695,576 30,747,100
------------ ------------ ----------- ------------
GROSS PROFIT 20,758,929 11,448,565 34,666,750 19,748,386
OPERATING EXPENSES:
Selling, general and
administrative 12,335,494 8,100,030 22,578,732 15,292,217
Amortization of
trademark license
and trademarks 19,269 10,817 39,365 21,233
------------ ----------- ----------- -----------
Total operating
expenses 12,354,763 8,110,847 22,618,097 15,313,450
------------ ------------ ----------- -----------
OPERATING INCOME 8,404,166 3,337,718 12,048,653 4,434,936
NET NONOPERATING
EXPENSE 8,434 14,723 19,048 47,954
------------ ------------ ------------ -----------
INCOME BEFORE
PROVISION FOR
INCOME TAXES 8,395,732 3,322,995 12,029,605 4,386,982
PROVISION FOR
INCOME TAXES 3,317,583 1,345,811 4,768,175 1,776,727
------------ ------------ ----------- ------------
NET INCOME $ 5,078,149 $ 1,977,184 $ 7,261,430 $ 2,610,255
============ ============ =========== ============
NET INCOME PER COMMON SHARE:
Basic $ 0.48 $ 0.19 $ 0.69 $ 0.26
=========== ============ =========== ===========
Diluted $ 0.43 $ 0.19 $ 0.63 $ 0.25
=========== ============ =========== ===========
NUMBER OF COMMON SHARES USED
IN PER SHARE COMPUTATIONS:
Basic 10,520,680 10,253,203 10,477,725 10,221,700
=========== ============ =========== ===========
Diluted 11,682,310 10,454,084 11,591,868 10,445,069
=========== ============ =========== ===========
See accompanying notes to consolidated financial statements.
4
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTHS ENDED JUNE 30, 2004 AND 2003 (Unaudited)
2004 2003
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,261,430 $ 2,610,255
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of trademark license and
trademarks 39,365 21,233
Depreciation and other amortization 356,472 267,893
(Gain)/Loss on disposal of property
and equipment (4,869) 11,361
Deferred income taxes (1,201,562)
Effect on cash of changes in operating
assets and liabilities:
Accounts receivable (8,133,920) (1,235,545)
Inventories (1,970,525) (1,486,020)
Prepaid expenses and other current
assets (60,763) 402,055
Accounts payable 6,368,902 2,760,657
Accrued liabilities 1,104,471 104,291
Accrued compensation (223,598) (31,382)
Income taxes payable/prepaid
income taxes 2,944,281 456,185
------------- ------------
Net cash provided by
operating activities 6,479,684 3,880,983
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (703,283) (872,698)
Proceeds from sale of property and equipment 15,850 19,788
Increase in trademark license and trademarks (13,403) (4,554)
Increase in deposits and other assets (63,153) 23,334
------------- -------------
Net cash used in investing activities (763,989) (834,130)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (112,153) (3,048,763)
Issuance of common stock 770,690 218,244
------------ -------------
Net cash provided by (used in) financing
activities 658,537 (2,830,519)
------------ -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,374,232 216,334
CASH AND CASH EQUIVALENTS, beginning of year 1,098,785 537,920
------------ -------------
CASH AND CASH EQUIVALENTS, end of period $ 7,473,017 $ 754,254
============= =============
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest $ 16,968 $ 55,014
============= =============
Income taxes $ 3,025,457 $ 1,320,542
============= =============
NON-CASH TRANSACTIONS
During the six-months ended June 30, 2004, the Company entered into capital
leases of $162,751 for the acquisition of promotional vehicles.
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 do 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 six-months ended June 30,
2004 and 2003 is unaudited and reflects all adjustments, which include only
normal recurring adjustments and 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 June 30, 2004 and December
31, 2003:
6
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, December 31,
2004 2003
----------------- -------------------
Amortizing trademark licenses
and trademarks $ 1,158,972 $ 1,155,803
Accumulated amortization (185,582) (146,218)
----------------- -------------------
973,390 1,009,585
Non-amortizing trademark licenses
and trademarks 17,294,352 17,284,119
----------------- -------------------
$ 18,267,742 $ 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 six-months ended June 30, 2004 and 2003 was $39,365 and $21,233,
respectively. As of June 30, 2004, future estimated amortization expense related
to amortizing trademark licenses and trademarks through the year ending December
31, 2009 is:
2004 - Remainder $32,763
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 gross 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 $5.4
million and $4.0 million for the six-months ended June 30, 2004 and 2003,
respectively. Advertising expenses are included in selling, general and
administrative expenses with the exception of certain advertising expenses such
as coupon redemptions which are accounted for as a reduction of gross 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 $13.5
million and $7.5 million for the six-months ended June 30, 2004 and 2003,
respectively and are included as a reduction of gross 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
six-months ended June 30, 2004 and 2003 would have been reduced to the pro forma
amounts indicated below:
Six Months Ended June 30,
2004 2003
---- ----
Net income, as reported $ 7,261,430 $ 2,610,255
Less: Total stock based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects 150,953 109,266
--------------- --------------
Net income, pro forma $ 7,110,477 $ 2,500,899
=============== ==============
Net income per common share, as
reported - Basic $ 0.69 $ 0.26
Net income per common share, as
reported - Diluted $ 0.63 $ 0.25
Net income per common share, pro
forma - Basic $ 0.68 $ 0.24
Net income per common share, pro
forma - Diluted $ 0.61 $ 0.24
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% 14% 3.5% 8 years
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.
8
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:
December 31,
June 30, 2004 2003
---------------------- ----------------------
Raw Materials $ 8,521,591 $ 6,979,701
Finished Goods 12,062,600 11,900,304
---------------------- ----------------------
20,584,191 18,880,005
Less inventory reserves (969,880) (1,236,219)
---------------------- ----------------------
$ 19,614,311 $ 17,643,786
====================== ======================
9
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
December 31,
June 30, 2004 2003
------------------- -----------------
Leasehold improvements $ 244,652 $ 230,027
Furniture and office equipment 1,017,139 881,741
Equipment 2,238,326 2,481,917
Vehicles 1,950,020 1,636,878
------------------ -----------------
5,450,137 5,230,563
Less accumulated depreciation
and amortization (2,148,274) (2,427,281)
------------------ -----------------
$ 3,301,863 $ 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.
The initial term of the Monorail Agreement commenced on July 15, 2004 and
will end on July 14, 2005. 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 LVMC has the right, not withstanding such election
by HBC, to terminate the Monorail Agreement at the expiration of the then
current term.
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. During June 2004, the dispute was
settled on terms which management believes affords the Company adequate
protection for its Monster EnergyTM and its stylized "M"TM trademarks.
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. The complaint is proceeding.
10
At the end of 2003 the Company was awarded exclusive three year contracts
by the State of California Department of Health Services ("DHS") under the DHS's
Woman, Infants and Children Supplement and Nutritional Program ("WIC") to supply
64-ounce shelf stable ready-to-drink ("RTD") 100% apple and 64-ounce shelf
stable RTD 100% apple grape juices. The three year agreements have a one year
extension option subject to agreement between the Company and the State of
California DHS. The start dates of the contracts were July 12, 2004 and the
Company is supplying juices pursuant thereto. Unsuccessful bidders formally
protested the Company's awards of the WIC contracts for apple juice and apple
grape juice. After hearings conducted by a Hearing Officer appointed by the
California Department of General Services, the awards to the Company were
upheld. Tree Top, Inc., the unsuccessful bidder for the apple juice contract,
filed a petition for a writ of mandate in the California Superior Court
requesting a temporary stay of implementation of the apple juice contract
pending adjudication of its petition to set aside the award of the apple juice
contract. Tree Top's application for a temporary stay and petition were both
denied by the California Superior Court. Tree Top thereafter filed before the
Court of Appeal of the State of California, Third Appellate District ("Court of
Appeal"), two successive petitions to set aside the apple juice contract award
and, with both petitions, requests for a temporary stay of implementation of the
apple juice award pending adjudication of the petitions. Both petitions and
related requests for stay were denied by the Court of Appeal. On June 21, 2004,
Tree Top filed a notice of appeal of the Superior Court decision in the Court of
Appeal. The appeal is pending, but management believes that it is unlikely to be
decided by the Court of Appeal before 2006. The Company is currently performing,
and intends to continue to perform, under the awarded contracts.
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, management believes that such litigation in the aggregate 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 and the Junior Juice(r) trademark. 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
June 30, 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 June 30, 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 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, including distributors, 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 second 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 second quarter of 2004. The increase
in gross and net sales in the second 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 apple juice and Natural Sodas, in particular
Diet Natural Sodas and sales of private label beverages. The increase in net
sales was also attributable, to a lesser extent, to sales of our Deuce Energy
drinks, a reduction in allowances to certain customers which resulted in
increased net sales of Junior Juice(r) brand drinks, increased sales by volume
of Energade(r) Energy sports drinks and juice blends. The increase in gross and
net sales was partially offset by decreased sales by volume primarily of
Hansen's(r) children's multi-vitamin juice drinks in aseptic packaging,
smoothies in cans and bottles, Diet Red Energy drinks, teas, lemonades and juice
cocktails and soy smoothies.
Gross profit for the six months ended June 30, 2004, as a percentage of net
sales, was 44.8% which was higher than the 39.1% gross profit percentage
achieved in the six months ended June 30, 2003. The increase in gross profit
percentage was primarily due to a change in the Company's product mix including
the increase in certain product lines as described above and customer mix
including an increase in sales to full service distributors.
During the six months ended June 30, 2004, sales outside of California
represented 55.2% of our aggregate sales, as compared to approximately 45.8% of
our aggregate sales in the six months ended June 20, 2003. Sales to distributors
outside the United States, during the six months ended June 30, 2004, amounted
to $948,000 compared to $684,000 in the six months ended June 30, 2003,
accounting for approximately 1% of our net sales for each quarter respectively.
Our customers are typically retail grocery and specialty chains, club
stores, mass merchandisers, convenience chains, full service beverage
distributors and health food distributors. In the six months ended June 30,
2004, sales to retailers represented 20.3% of our revenues, sales to club stores
and mass merchandisers represented 15.2% of our revenues, sales to full service
distributors represented 49.6% of our revenues and sales to health food
distributors represented 11.1% 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. During the second quarter of
2004, we introduced a private label sports drink that we developed for one of
our customers.
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 second 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.
15
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.
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 six months 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 operational.
At the end of 2003, we were awarded exclusive three year contracts by the
State of California, Department of Health Services ("DHS") under the DHS's
Women, Infant and Children Supplemental Nutrition Program ("WIC"), to supply
100% Apple juice and 100% Apple Grape juice in 64-ounce PET plastic bottles.
Unsuccessful bidders formally protested the Company's awards of the WIC
contracts for apple juice and apple grape juice. After hearings conducted by a
Hearing Officer appointed by the California Department of General Services, the
awards to the Company were upheld. Tree Top, Inc., the unsuccessful bidder for
the apple juice contract, filed a petition for a writ of mandate in the
California Superior Court requesting a temporary stay of implementation of the
apple juice contract pending adjudication of its petition to set aside the award
of the apple juice contract. Tree Top's application for a temporary stay and
petition were both denied by the California Superior Court. Tree Top thereafter
filed before the Court of Appeal of the State of California, Third Appellate
District ("Court of Appeal"), two successive petitions to set aside the apple
juice contract award and, with both petitions, requests for a temporary stay of
implementation of the apple juice award pending adjudication of the petitions.
Both petitions and related requests for stay were denied by the Court of Appeal.
On June 21, 2004, Tree Top filed a notice of appeal of the Superior Court
decision in the Court of Appeal. The appeal is pending, but management believes
that it is unlikely to be decided by the Court of Appeal before 2006. The
Company is currently performing, and intends to continue to perform, under the
awarded contracts.
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
June 30, 2004 and 2003, respectively.
Percentage
Three-Months ended June 30, Change
-------------------------------- -------------
2004 2003 04 vs. 03
------------- ------------- ------------
Gross sales $ 58,002,967 $ 35,059,970 65.4%
Less: Discounts, allowances and 11,939,424 6,650,832 79.5%
promotional payments ------------- ------------ ------------
Net sales 46,063,543 28,409,138 62.1%
Cost of sales 25,304,614 16,960,573 49.2%
------------- ------------ ------------
Gross profit 20,758,929 11,448,565 81.3%
Gross profit margin 45.1% 40.3%
Selling, general and
administrative 12,335,494 8,100,030 52.3%
expenses
Amortization of trademark
license and trademarks 19,269 10,817 78.1%
-------------- ------------- -----------
Operating income 8,404,166 3,337,718 151.8%
Operating income as a percent
of net sales 18.2% 11.7%
Net nonoperating expense 8,434 14,723 (42.7%)
-------------- ------------- -----------
Income before provision for
income taxes 8,395,732 3,322,995 152.7%
Provision for income taxes 3,317,583 1,345,811 146.5%
------------- ------------- -----------
Effective tax rate 39.5% 40.5%
Net income $ 5,078,149 $ 1,977,184 156.8%
============= ============= ===========
Net income as a percent of
net sales 11.0% 7.0%
Net income per common share:
Basic $ 0.48 $ 0.19 152.6%
Diluted $ 0.43 $ 0.19 126.3%
Results of Operations for the Three Months Ended June 30, 2004 Compared to the
Three Months Ended June 30, 2003
Gross Sales. For the three-months ended June 30, 2004, gross sales were
$58.0 million, an increase of $22.9 million or 65.4% higher than the $35.1
million gross sales for the three-months ended June 30, 2003. The increase in
gross sales for the three-months ended June 30, 2004 was primarily attributable
to increased sales volume of certain of our existing products as well as the
introduction of new products, as discussed in "Net Sales" below.
17
Net Sales. For the three-months ended June 30, 2004, net sales were $46.1
million, an increase of $17.7 million or 62.1% higher than net sales of $28.4
million for the three-months ended June 30, 2003. The increase in net sales for
the three-months ended June 30, 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 apple juice and Natural Sodas, in particular Diet Natural Sodas and
sales of private label beverages. The increase in net sales was also
attributable, to a lesser extent, to sales of our Deuce Energy drinks, a
reduction in allowances to certain customers which resulted in increased net
sales of Junior Juice(r) brand drinks, increased sales by volume of Energade(r)
Energy sports drinks and juice blends. The increase in gross and net sales was
partially offset by decreased sales by volume primarily of Hansen's(r)
children's multi-vitamin juice drinks in aseptic packaging, smoothies in cans
and bottles, Diet Red Energy drinks, 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 $20.8 million for the three-months ended
June 30, 2004, an increase of $9.3 million or 81.3% higher than the gross profit
for the three-months ended June 30, 2003 of $11.4 million. Gross profit as a
percentage of net sales, increased to 45.1% for the three-months ended June 30,
2004 from 40.3% for the three-months ended June 30, 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 $12.4 million for
the three-months ended June 30, 2004, an increase of $4.2 million or 52.3%
higher than total operating expenses of $8.1 million for the three-months ended
June 30, 2003. Total operating expenses as a percentage of net sales decreased
to 26.8% for the three-months ended June 30, 2004 as compared to 28.6% for the
three-months ended June 30, 2003. The increase in total operating expenses was
primarily attributable to increased selling, general and administrative expenses
whereas the decrease in total operating expenses as a percentage of net sales
was primarily attributable to a decrease in the percentage of selling, general
and administrative expenses as a percentage of net sales.
Selling expenses were $7.4 million for the three-months ended June 30,
2004, an increase of $2.6 million or 53.9% higher than selling expenses of $4.8
million for the three-months ended June 30, 2003. Selling expenses as a
percentage of net sales for the three-months ended June 30, 2004 were 16.0%
which was slightly lower than selling expenses as a percentage of net sales of
16.9% for the three-months ended June 30, 2003. The increase in selling expenses
was primarily attributable to an increase in distribution expenses and increased
expenditures for merchandise displays and point-of-sale materials, in-store
demonstrations, trade development activities with distributors and increased
commission and royalties. 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 $5.0 million for
the three-months ended June 30, 2004, an increase of $1.7 million or 50.0%
higher than general and administrative expenses of $3.3 million for the
three-months ended June 30, 2003. General and administrative expenses as a
percentage of net sales for the three-months ended June 30, 2004 were 10.8%
which was lower than general and administrative expenses as a percentage of net
sales of 11.6% for the three-months ended June 30, 2003. The increase in general
and administrative expenses was primarily attributable to increased payroll
expenses for sales, marketing and administrative activities, fees for legal and
accounting services including services related to the implementation and testing
required by the Sarbanes-Oxley Act of 2002 and establishing and protecting
trademarks.
18
Operating Income. Operating income was $8.4 million for the three-months
ended June 30, 2004, an increase of $5.1 million or 151.8% higher than operating
income of $3.3 million for the three-months ended June 30, 2003. Operating
income as a percentage of net sales increased to 18.2% for the three-months
ended June 30, 2004 from 11.7% for the three-months ended June 30, 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 June 30, 2004 than
the increase in operating expenses and the decrease in operating expenses as a
percentage of net sales for the three months ended June 30, 2003.
Net Nonoperating Expense. Net nonoperating expense was $8,000 for the
three-months ended June 30, 2004, a decrease of $7,000 from net non-operating
expense of $15,000 for the three-months ended June 30, 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 June 30, 2004 was $3.3 million as compared to provision for income taxes
of $1.3 million for the comparable period in 2003. The effective combined
federal and state tax rate for the three-months ended June 30, 2004 was 39.5%,
which was lower than the effective tax rate of 40.5% for the three-months ended
June 30, 2003 due to an increase in apportionment of sales and related state
taxes to various states outside of California.
Net Income. Net income was $5.1 million for the three-months ended June 30,
2004, an increase of $3.1 million or 156.8% higher than net income of $2.0
million for the three-months ended June 30, 2003. The increase in net income was
attributable to the increase in gross profit of $9.3 million and decrease in
nonoperating expense of $7,000 which was partially offset by the increase in
operating expenses of $4.2 million and an increase in provision for income taxes
of $2.0 million.
Results of Operations for the Six Months Ended June 30, 2004 Compared to the Six
Months Ended June 30, 2003
Gross Sales. For the six-months ended June 30, 2004, gross sales were $96.7
million, an increase of $34.0 million or 54.2% higher than the $62.8 million
gross sales for the six-months ended June 30, 2003. The increase in gross sales
for the six-months ended June 30, 2004 was primarily attributable to increased
sales volume of certain of our existing products as well as the introduction of
new products as discussed in "Net Sales" below.
Net Sales. For the six-months ended June 30, 2004, net sales were $77.4
million, an increase of $26.9 million or 53.2% higher than net sales of $50.5
million for the six-months ended June 30, 2003. The increase in net sales for
the six-months ended June 30, 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 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 and sales of private label sports drinks which
were introduced in March 2004. The increase in net sales was also attributable,
to a lesser extent, to increased sales by volume of apple juice and juice
blends, sales of our Deuce Energy drinks, sales of juice drinks in pouches which
were introduced in July 2003, increased sales by volume of Energade(r) Energy
sports drinks and reductions of allowances to certain customers which resulted
in increased net sales prices of our Junior Juice(r) brand drinks. The increase
in net sales was partially offset by decreased sales by volume primarily of
Hansen's(r) children's multi-vitamin juice drinks in aseptic packaging,
Hansen's(r) energy and functional drinks in 8.3-ounce cans, smoothies in cans
and bottles, Diet Red Energy drinks, teas, lemonades and juice cocktails and soy
smoothies as well as an increase in total discounts, allowances and promotional
payments.
19
Gross Profit. Gross profit was $34.7 million for the six-months ended June
30, 2004, an increase of $14.9 million or 75.5% higher than the gross profit for
the six-months ended June 30, 2003 of $19.7 million. Gross profit as a
percentage of net sales, increased to 44.8% for the six-months ended June 30,
2004 from 39.1% for the six-months ended June 30, 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 $22.6 million for
the six-months ended June 30, 2004, an increase of $7.3 million or 47.7% higher
than total operating expenses of $15.3 million for the six-months ended June 30,
2003. Total operating expenses as a percentage of net sales decreased to 29.2%
for the six-months ended June 30, 2004 as compared to 30.3% for the six-months
ended June 30, 2003. The increase in total operating expenses was primarily
attributable to increased selling, general and administrative expenses.
Selling expenses were $13.1 million for the six-months ended June 30, 2004,
an increase of $4.2 million or 47.1% higher than selling expenses of $8.9
million for the six-months ended June 30, 2003. Selling expenses as a percentage
of net sales for the six-months ended June 30, 2004 were 17.0% which was
slightly lower than selling expenses as a percentage of net sales of 17.7% for
the six-months ended June 30, 2003. The increase in selling expenses was
primarily attributable to an increase in distribution expenses and increased
expenditures for merchandise displays and point-of-sale materials, trade
development activities with distributors, in-store demonstrations and sampling
activities and increased commission and royalties. 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 $9.4 million for the six-months ended June 30, 2004, an increase
of $3.1 million or 48.4% higher than general and administrative expenses of $6.4
million for the six-months ended June 30, 2003. General and administrative
expenses as a percentage of net sales for the six-months ended June 30, 2004
were 12.2% which was slightly lower than general and administrative expenses as
a percentage of net sales of 12.6% for the six-months ended June 30, 2003. The
increase in general and administrative expenses was primarily attributable to
increased payroll expenses for sales, marketing and administrative activities,
fees for legal and accounting services including services related to the
implementation and testing required by the Sarbanes-Oxley Act of 2002 and
services related to establishing and protecting trademarks, travel and
entertainment costs as well as certain charitable contributions.
20
Operating Income. Operating income was $12.0 million for the six-months
ended June 30, 2004, an increase of $7.6 million or 171.7% higher than operating
income of $4.4 million for the six-months ended June 30, 2003. Operating income
as a percentage of net sales increased to 15.6% for the six-months ended June
30, 2004 from 8.8% for the six-months ended June 30, 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 six months ended June 30, 2004 than the
increase in operating expenses and the decrease in operating expenses as a
percentage of net sales for the six months ended June 30, 2003.
Net Nonoperating Expense. Net nonoperating expense was $19,000 for the
six-months ended June 30, 2004, a decrease of $29,000 from net non-operating
expense of $48,000 for the six-months ended June 30, 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 six-months
ended June 30, 2004 was $4.8 million as compared to provision for income taxes
of $1.8 million for the comparable period in 2003. The effective combined
federal and state tax rate for the six-months ended June 30, 2004 was 39.6%,
which was lower than the effective tax rate of 40.5% for the six-months ended
June 30, 2003 due to an increase in apportionment of sales and related state
taxes to various states outside of California.
Net Income. Net income was $7.3 million for the six-months ended June 30,
2004, an increase of $4.7 million or 178.2% higher than net income of $2.6
million for the six-months ended June 30, 2003. The increase in net income was
attributable to the increase in gross profit of $14.9 million and decrease in
nonoperating expense of $29,000 which was partially offset by the increase in
operating expenses of $7.3 million and an increase in provision for income taxes
of $3.0 million.
Liquidity and Capital Resources
As at June 30, 2004, the Company had working capital of $25.0 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 borrowings
on long-term debt 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 $6.5 million for the
six-months ended June 30, 2004 as compared to net cash provided by operating
activities of $3.9 million in the comparable period in 2003. For the six-months
ended June 30, 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 which was partially offset
by increases in accounts receivable, inventories and other current assets and
decreases in accrued compensation. The increase in accounts receivable was
attributable primarily to increased sales to full service distributors who are
not entitled to any discount for early payment. Such increase was also
attributable, to a lesser extent, to increased sales during the period.
Purchases of inventories, increases in accounts receivable and other assets,
acquisition of property and equipment, acquisition of trademark licenses and
trademarks, repayment of our line of credit and payments of accounts payable and
income taxes payable are expected to remain our principal recurring use of cash
and working capital funds.
21
Net cash used in investing activities was $927,000 for the six-months ended
June 30, 2004 as compared to net cash used in investing activities of $834,000
in the comparable period in 2003. In the six-months ended June 30, 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 $821,000 for the six-months
ended June 30, 2004 as compared to net cash used in financing activities of $2.8
million for the comparable period in 2003. For the six-months ended June 30,
2004, cash provided by financing activities was primarily attributable to
proceeds received from the issuance of common stock and borrowings on long-term
debt 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 June 30, 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 June 30,
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.
22
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 $ 284,300 $ 712,132 $ 4,715,808 $ 500,000 $ 6,212,240
2005 275,950 970,359 6,175,267 500,000 7,921,576
2006 146,890 1,017,128 6,175,267 7,339,285
2007 1,030,218 1,460,000 2,490,218
2008 773,997 773,997
Thereafter 1,199,730 1,199,730
----------- ----------- ------------ ------------ ------------
$ 707,140 $5,703,564 $18,526,342 $1,000,000 $25,937,046
=========== =========== ============ ============ ============
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 six-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.
23
(In Thousands)
Six-months ended June 30,
2004 2003
---------- ---------
Unit Case Volume / Case Sales 12,973 9,570
Net Sales $ 77,362 $ 50,495
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;
24
* 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.
25
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.
At June 30, 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 June 30, 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."
26
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: August 13, 2004 /s/ RODNEY C. SACKS
------------------------
Rodney C. Sacks
Chairman of the Board
of Directors and Chief
Executive Officer
Date: August 13, 2004 /s/ HILTON H. SCHLOSBERG
-------------------------
Hilton H. Schlosberg
Vice Chairman of the Board
of Directors, President
and Chief Financial Officer
27