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 September 30, 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)
(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 X No ___
The Registrant had 10,089,664 shares of common stock outstanding as of
October 22, 2004.
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 2004
INDEX
Page No.
Part I. FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2004 and December 31, 2003 (Unaudited) 3
Condensed Consolidated Statements of Income for the three- and
nine-months ended September 30, 2004 and 2003 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
nine-months ended September 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 of Operations 12
Item 3. Qualitative and Quantitative Disclosures about Market Risk 27
Item 4. Controls and Procedures 27
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Items 2-5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
2
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003 (Unaudited)
- --------------------------------------------------------------------------------
September 30, December 31,
2004 2003
----------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 17,279,468 $ 1,098,785
Accounts receivable (net of allowance for doubtful accounts,
sales returns and cash discounts of $1,756,854 in 2004 and
$875,351 in 2003 and promotional allowances of
$8,582,031 in 2004 and $4,666,770 in 2003) 14,319,664 5,372,983
Inventories, net 19,702,590 17,643,786
Prepaid expenses and other current assets 338,376 481,777
Deferred income tax asset 3,634,732 2,080,609
----------------- -----------------
Total current assets 55,274,830 26,677,940
PROPERTY AND EQUIPMENT, net 3,378,968 2,803,282
INTANGIBLE AND OTHER ASSETS:
Trademark license and trademarks (net of accumulated
amortization of $204,861 in 2004 and $146,218 in 2003) 18,262,629 18,293,704
Deposits and other assets 323,445 222,102
----------------- -----------------
18,586,074 18,515,806
----------------- -----------------
$ 77,239,872 $ 47,997,028
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 17,789,810 $ 6,521,402
Accrued liabilities 1,573,894 1,185,342
Accrued compensation 993,411 883,459
Current portion of long-term debt 416,400 244,271
Income taxes payable 2,932,392 647,263
----------------- -----------------
Total current liabilities 23,705,907 9,481,737
LONG-TERM DEBT, less current portion 151,518 358,064
DEFERRED INCOME TAX LIABILITY 3,689,117 3,107,649
COMMITMENTS AND CONTINGENCIES (NOTE 7)
SHAREHOLDERS' EQUITY:
Common stock - $0.005 par value; 30,000,000 shares authorized;
11,088,664 shares issued, 10,881,903 outstanding in 2004;
10,624,864 shares issued, 10,418,103 outstanding in 2003 55,443 53,124
Additional paid-in capital 14,262,524 12,681,169
Retained earnings 36,189,908 23,129,830
Common stock in treasury, at cost; 206,761 in 2004 and 2003 (814,545) (814,545)
----------------- -----------------
Total shareholders' equity 49,693,330 35,049,578
----------------- -----------------
$ 77,239,872 $ 47,997,028
================= =================
See accompanying notes to condensed consolidated financial statements.
3
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE- AND NINE-MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ --------------------------------
2004 2003 2004 2003
-------------- -------------- --------------- ---------------
GROSS SALES $ 68,123,372 $ 42,613,935 $ 164,867,266 $ 105,369,780
LESS: Discounts,
allowances and
promotional payments 15,481,895 9,322,847 34,863,463 21,583,206
-------------- -------------- --------------- ---------------
NET SALES 52,641,477 33,291,088 130,003,803 83,786,574
COST OF SALES 28,832,269 20,004,236 71,527,845 50,751,336
-------------- -------------- --------------- ---------------
GROSS PROFIT 23,809,208 13,286,852 58,475,958 33,035,238
OPERATING EXPENSES:
Selling, general and
administrative 13,865,099 9,743,117 36,443,831 25,035,334
-------------- -------------- --------------- ---------------
Amortization of trademark
license and trademarks 19,278 15,346 58,643 36,579
-------------- -------------- --------------- ---------------
Total operating expenses 13,884,377 9,758,463 36,502,474 25,071,913
-------------- -------------- --------------- ---------------
OPERATING INCOME 9,924,831 3,528,389 21,973,484 7,963,325
NET NONOPERATING
EXPENSE 8,104 9,337 27,152 57,291
-------------- -------------- --------------- ---------------
INCOME BEFORE
PROVISION FOR
INCOME TAXES 9,916,727 3,519,052 21,946,332 7,906,034
PROVISION FOR
INCOME TAXES 4,118,079 1,425,217 8,886,254 3,201,944
-------------- -------------- --------------- ---------------
NET INCOME $ 5,798,648 $ 2,093,835 $ 13,060,078 $ 4,704,090
============== ============== =============== ===============
NET INCOME PER COMMON SHARE:
Basic $ 0.54 $ 0.20 $ 1.23 $ 0.46
============== ============== =============== ===============
Diluted $ 0.49 $ 0.19 $ 1.11 $ 0.45
============== ============== =============== ===============
NUMBER OF COMMON SHARES USED
IN PER SHARE COMPUTATIONS:
Basic 10,816,157 10,253,818 10,591,359 10,233,182
============== ============== =============== ===============
Diluted 11,842,804 10,755,822 11,736,047 10,534,573
============== ============== =============== ===============
See accompanying notes to condensed consolidated financial statements.
4
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (Unaudited)
- --------------------------------------------------------------------------------
September 30, September 30,
2004 2003
------------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,060,078 $ 4,704,090
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of trademark license and trademarks 58,643 36,579
Depreciation and other amortization 550,913 416,239
Loss on disposal of property and equipment 9,706 11,361
Deferred income taxes (972,655)
Provision for allowance for doubtful accounts 216,722 23,657
Effect on cash of changes in operating assets and liabilities:
Accounts receivable (9,163,403) (4,230,311)
Inventories (2,058,804) (1,965,181)
Prepaid expenses and other current assets 143,401 327,261
Accounts payable 11,268,408 4,343,455
Accrued liabilities 388,553 463,727
Accrued compensation 109,952 399,306
Income taxes payable 2,285,129 386,440
------------------ -------------------
Net cash provided by operating activities 15,896,643 4,916,623
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (956,067) (1,300,272)
Proceeds from sale of property and equipment 24,698 19,788
Increase in trademark license and trademarks (27,568) (437,118)
(Decrease)/increase in deposits and other assets (101,343) 49,287
------------------ -------------------
Net cash used in investing activities (1,060,280) (1,668,315)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (239,354) (3,212,076)
Issuance of common stock 1,583,674 401,824
------------------ -------------------
Net cash provided by (used in) financing activities 1,344,320 (2,810,252)
------------------ -------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 16,180,683 438,056
CASH AND CASH EQUIVALENTS, beginning of year 1,098,785 537,920
------------------ -------------------
CASH AND CASH EQUIVALENTS, end of period $ 17,279,468 $ 975,976
================== ===================
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest $ 29,272 $ 67,102
================== ===================
Income taxes $ 7,573,781 $ 2,815,504
================== ===================
NON-CASH TRANSACTIONS
During the nine-months ended September 30, 2004, the Company entered into
capital leases of $204,937 for the acquisition of promotional vehicles.
See accompanying notes to condensed 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"), and other disclosures, which should be read
in conjunction with this report. 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 have been prepared
in accordance with GAAP and SEC rules and regulations applicable to interim
financial reporting. They do not include all the information and footnote
disclosures normally included in annual 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 nine-months ended September 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 September 30, 2004 and
December 31, 2003:
6
September 30, December 31,
2004 2003
--------------- --------------
Amortizing trademark licenses and trademarks $ 1,169,778 $ 1,155,803
Accumulated amortization (204,861) (146,218)
--------------- --------------
964,917 1,009,585
Non-amortizing trademark licenses and trademarks 17,297,712 17,284,119
--------------- --------------
$ 18,262,629 $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 23 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 nine-months ended September 30, 2004 and 2003 was $58,643 and $36,579,
respectively. As of September 30, 2004, future estimated amortization expense
related to amortizing trademark licenses and trademarks through the year ending
December 31, 2009 is:
2004 - Remainder $14,431
2005 55,284
2006 55,284
2007 55,284
2008 55,136
2009 55,136
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 $9.0
million and $6.6 million for the nine-months ended September 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 $25.8
million and $13.2 million for the nine-months ended September 30, 2004 and 2003,
respectively and are included as a reduction of gross sales.
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
nine-months ended September 30, 2004 and 2003 would have been reduced to the pro
forma amounts indicated below:
7
Nine Months Ended September 30,
2004 2003
------------ ------------
Net income, as reported
$13,060,078 $ 4,704,090
Less: Total stock based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 252,132 164,297
------------ ------------
Net income, pro forma $12,807,946 $ 4,539,793
============ ============
Net income per common share, as reported - Basic $ 1.23 $ 0.46
Net income per common share, as reported - Dilute $ 1.11 $ 0.45
Net income per common share, pro forma - Basic $ 1.21 $ 0.44
Net income per common share, pro forma - Diluted $ 1.09 $ 0.43
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% 43% 4.0% 8 years
2003 0% 13% 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 firstquarter 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:
September 30, December 31,
2004 2003
-------------- --------------
Raw Materials $ 8,140,024 $ 6,979,701
Finished Goods 12,389,980 11,900,304
-------------- --------------
20,530,004 18,880,005
Less inventory reserves (827,414) (1,236,219)
-------------- --------------
$ 19,702,590 $ 17,643,786
============== ==============
9
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
September 30, December 31,
2004 2003
-------------- --------------
Leasehold improvements $ 261,745 $ 230,027
Furniture and office equipment 963,737 881,741
Equipment 2,244,366 2,481,917
Vehicles 2,122,661 1,636,878
-------------- --------------
5,592,509 5,230,563
Less accumulated depreciation and amortization (2,213,541) (2,427,281)
-------------- --------------
$ 3,378,968 $ 2,803,282
============== ==============
6. EARNINGS PER SHARE
A reconciliation of the weighted average shares used in the basic and
diluted earnings per common share computations for the three and nine months
ended September 30, 2004 and 2003 is presented below:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Weighted-average shares outstanding:
Weighted-average shares outstanding -
Basic 10,816,157 10,253,818 10,591,359 10,233,182
Dilutive securities 1,026,647 502,004 1,144,688 301,391
------------- ------------- ------------- -------------
Weighted-average shares outstanding -
Diluted 11,842,804 10,755,822 11,736,047 10,534,573
============= ============= ============= =============
For the nine months ended September 30, 2003, options outstanding totaling
25,000 shares were excluded from the calculations, as their effect would have
been antidilutive. For the three months ended September 30, 2004 and 2003 and
the nine months ended September 30, 2004, no options outstanding were excluded
from the calculations.
7. 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.
10
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. During August 2004 the dispute was settled. Rock Star agreed to
withdraw and/or amend many claims made by it on and in connection with its
products. Further, all of Rock Star's counter-claims were dismissed and the
Company released from all liability in connection therewith.
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. In October 2004 the latest appeal filed by Tree Top was dismissed.
Consequently, the validity of the apple juice contract to the Company ceased to
be subject to legal challenge. The Company is currently performing under the
awarded contracts.
In September 2004 Barrington Capital Corporation through an alleged
successor in interest, Sandburg Financial Corporation (both entities with whom
the Company has never had any dealings) served a Notice of Motion ("Motion") on
the Company and each of its subsidiaries as well as on a number of other
unrelated entities and individuals. The Motion seeks to amend a default
judgement granted against a completely unconnected company, Hansen Foods, Inc.,
to add the Company and its subsidiary companies, as well as the other entities
and individuals cited, as judgement debtors. The default judgement was entered
on February 15, 1996, for $7,626,000 plus legal interest and attorneys' fees in
the sum of $211,000 arising out of a breach of contract claim that allegedly
occurred in the 1980's. Barrington Capital Corporation's/Sandburg Financial
Corporation's claim is based on the misconceived and unsubstantiated theory that
the Company and its subsidiaries are alter egos and/or successors of Hansen
Foods, Inc. The Motion is based on demonstrably false allegations, misstated
legal propositions and lacks any substantial supporting evidence. The Company
and its subsidiaries intend to vigorously oppose the Motion and believe that the
Motion is without any merit.
11
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.
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
September 30, 2004, the estimated fair values of trademark license and
trademarks exceeded the carrying value.
12
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 September 30, 2004.
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.
13
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.
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.
14
During the third 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.
We again achieved record sales in the third quarter of 2004. The increase
in gross and net sales in the third quarter of 2004 was primarily attributable
to increased sales of products with relatively higher price points, including
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. The increase in
net sales was also attributable to increased sales by volume of apple juice and
juice blends, private label beverages and smoothies in cans. The increase in net
sales was also attributable, to a lesser extent, to sales of our Deuce Energy
drinks and sales of our juices in aseptic pouches which were introduced in July
2003. 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
8.2-ounce cans, Hansen's(r) children's multi-vitamin juice drinks in aseptic
packaging, Natural Sodas, teas, lemonades and juice cocktails, Hansen's(r) E2O
Energy Water and sparkling beverages as well as an increase in total discounts,
allowances and promotional payments to support the overall increase in the level
of sales.
Gross profit for the nine months ended September 30, 2004, as a percentage
of net sales, was 45.0% which was higher than the 39.4% gross profit percentage
achieved in the nine months ended September 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 nine months ended September 30, 2004, sales outside of
California represented 55% of our aggregate sales, as compared to approximately
45% of our aggregate sales in the nine months ended September 30, 2003. Sales to
distributors outside the United States, during the nine months ended September
30, 2004, amounted to $1.6 million compared to $1.0 million in the nine months
ended September 30, 2003, accounting for approximately 1% of our net sales for
each period 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 nine months ended September
30, 2004, sales to retailers represented 21% of our revenues, sales to club
stores and mass merchandisers represented 14% of our revenues, sales to full
service distributors represented 51% of our revenues and sales to health food
distributors represented 10% of our revenues.
15
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.
During October 2004 we introduced a new Monster Energy(tm) "Assault" energy
drink in 16 oz. cans.
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 third 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 2004, we continued to expand
distribution of Blue Sky products into mainstream grocery chain stores
throughout the country and introduced a new line of tea soda products in 12 oz.
cans during the third quarter. We are planning to introduce additional new
products under the Blue Sky(r) trademark later in the year and early in 2005.
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 nine 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.
16
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. In October 2004 the latest appeal filed by Tree
Top was dismissed. Consequently, the validity of the apple juice contract to the
Company ceased to be subject to legal challenge. The Company is currently
performing under the awarded contracts. We continue to incur expenditures in
connection with the development and introduction of new products and flavors.
Results of Operations
The following table sets forth key statistics for the three-months ended
September 30, 2004 and 2003, respectively.
17
Percentage
Three-Months Ended September 30, Change
------------------------------------ ---------------
2004 2003 04 vs. 03
----------------- ----------------- ---------------
Gross sales $ 68,123,372 $ 42,613,935 59.9%
Less: Discounts, allowances and
promotional payments 15,481,895 9,322,847 66.1%
----------------- ----------------- ---------------
Net sales 52,641,477 33,291,088 58.1%
Cost of sales 28,832,269 20,004,236 44.1%
----------------- ----------------- ---------------
Gross profit 23,809,208 13,286,852 79.2%
Gross profit margin 45.2% 39.9%
Selling, general and administrative
expenses 13,865,099 9,743,117 42.3%
Amortization of trademark license and
trademarks 19,278 15,346 25.6%
----------------- ----------------- ---------------
Operating income 9,924,831 3,528,389 181.3%
Operating income as a percent of net
sales 18.9% 10.6%
Net nonoperating expense 8,104 9,337 ( 13.2%)
----------------- ----------------- ---------------
Income before provision for income
taxes 9,916,727 3,519,052 181.8%
Provision for income taxes 4,118,079 1,425,217 188.9%
----------------- ----------------- ---------------
Effective tax rate 41.5% 40.5%
Net income $ 5,798,648 $ 2,093,835 176.9%
================= ================= ===============
Net income as a percent of net sales 11.0% 6.3%
Net income per common share:
Basic $ 0.54 $ 0.20 170.0%
Diluted $ 0.49 $ 0.19 157.9%
Results of Operations for the Three Months Ended September 30, 2004 Compared to
the Three Months Ended September 30, 2003
Gross Sales. For the three-months ended September 30, 2004, gross sales
were $68.1 million, an increase of $25.5 million or 59.9% higher than the $42.6
million gross sales for the three-months ended September 30, 2003. The increase
in gross sales for the three-months ended September 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.
18
Net Sales. For the three-months ended September 30, 2004, net sales were
$52.6 million, an increase of $19.4 million or 58.1% higher than net sales of
$33.3 million for the three-months ended September 30, 2003. The increase in net
sales for the three-months ended September 30, 2004 was primarily attributable
to increased sales of products with relatively higher price points, including
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. The increase in
net sales was also attributable to increased sales by volume of apple juice and
juice blends, private label beverages and smoothies in cans. The increase in net
sales was also attributable, to a lesser extent, to sales of our Deuce Energy
drinks and sales of our juices in aseptic pouches which were introduced in July
2003. 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
8.2-ounce cans, Hansen's(r) children's multi-vitamin juice drinks in aseptic
packaging, Natural Sodas, teas, lemonades and juice cocktails, Hansen's(r) E2O
Energy Water and sparkling beverages as well as an increase in total discounts,
allowances and promotional payments to support the overall increase in the level
of sales.
Gross Profit. Gross profit was $23.8 million for the three-months ended
September 30, 2004, an increase of $10.5 million or 79.2% higher than the gross
profit for the three-months ended September 30, 2003 of $13.3 million. Gross
profit as a percentage of net sales, increased to 45.2% for the three-months
ended September 30, 2004 from 39.9% for the three-months ended September 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 $13.9 million for
the three-months ended September 30, 2004, an increase of $4.1 million or 42.3%
higher than total operating expenses of $9.8 million for the three-months ended
September 30, 2003. Total operating expenses as a percentage of net sales
decreased to 26.4% for the three-months ended September 30, 2004 as compared to
29.3% for the three-months ended September 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 $8.7 million for the three-months ended September 30,
2004, an increase of $2.7 million or 43.9% higher than selling expenses of $6.0
million for the three-months ended September 30, 2003. Selling expenses as a
percentage of net sales for the three-months ended September 30, 2004 were 16.5%
which was lower than selling expenses as a percentage of net sales of 18.1% for
the three-months ended September 30, 2003. The increase in selling expenses was
primarily attributable to an increase in distribution and storage expenses of
$982,000, increased expenditures for trade development activities with
distributors of $433,000, merchandise displays, point of sale and premium
materials of $573,000, increased advertising of $266,000 and other promotional
activities of $334,000. General and administrative expenses were $5.2 million
for the three-months ended September 30, 2004, an increase of $1.5 million or
39.6% higher than general and administrative expenses of $3.7 million for the
three-months ended September 30, 2003. General and administrative expenses as a
percentage of net sales for the three-months ended September 30, 2004 were 9.8%
which was lower than general and administrative expenses as a percentage of net
sales of 11.1% for the three-months ended September 30, 2003. The increase in
general and administrative expenses was primarily attributable to increased
payroll expenses for sales, marketing and administrative activities of $609,000,
fees for legal and accounting services including services related to the
implementation and testing required by the Sarbanes-Oxley Act of 2002 of
$301,000 as well as increased expenses of $106,000 incurred to maintain certain
fixed assets. The decrease in general and administrative expenses as a
percentage of net sales was attributable to general and administrative expenses
increasing at a lower rate than net sales for the three months ended September
30, 2004 as compared to the three months ended September 30, 2003.
19
Operating Income. Operating income was $9.9 million for the three-months
ended September 30, 2004, an increase of $6.4 million or 181.3% higher than
operating income of $3.5 million for the three-months ended September 30, 2003.
Operating income as a percentage of net sales increased to 18.9% for the
three-months ended September 30, 2004 from 10.6% for the three-months ended
September 30, 2003. The increase in operating income and operating income as a
percentage of net sales was attributable to higher gross profit as well as gross
profit increasing at a higher rate than the increase in operating expenses for
the three months ended September 30, 2004 as compared to the three months ended
September 30, 2003.
Net Nonoperating Expense. Net nonoperating expense was $8,000 for the
three-months ended September 30, 2004, a decrease of $1,000 from net
non-operating expense of $9,000 for the three-months ended September 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 September 30, 2004 was $4.1 million as compared to provision for income
taxes of $1.4 million for the comparable period in 2003. The effective combined
federal and state tax rate for the three-months ended September 30, 2004 was
41.5%, which was higher than the effective tax rate of 40.5% for the
three-months ended September 30, 2003 due to the increase in income before
provision for income taxes, to a level which resulted in an increase in the
effective federal tax rate, which was partially offset by a decrease in state
taxes due to an apportionment of sales and related state taxes to various states
outside of California.
Net Income. Net income was $5.8 million for the three-months ended
September 30, 2004, an increase of $3.7 million or 176.9% higher than net income
of $2.1 million for the three-months ended September 30, 2003. The increase in
net income was attributable to the increase in gross profit of $10.5 million and
decrease in nonoperating expense of $1,000 which was partially offset by the
increase in operating expenses of $4.1 million and an increase in provision for
income taxes of $2.7 million.
Results of Operations for the Nine Months Ended September 30, 2004 Compared to
the Nine Months Ended September 30, 2003
Gross Sales. For the nine-months ended September 30, 2004, gross sales were
$164.9 million, an increase of $59.5 million or 56.5% higher than the $105.4
million gross sales for the nine-months ended September 30, 2003. The increase
in gross sales for the nine-months ended September 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 nine-months ended September 30, 2004, net sales were
$130.0 million, an increase of $46.2 million or 55.2% higher than net sales of
$83.8 million for the nine-months ended September 30, 2003. The increase in net
sales for the nine-months ended September 30, 2004 was primarily attributable to
increased sales of products with relatively higher price points, including
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. The increase in net sales was also attributable to
increased sales by volume of apple juice and juice blends and Natural Sodas, in
particular Diet Natural Sodas, and sales of private label beverages which were
introduced in March 2004. The increase in net sales was also attributable, to a
lesser extent, to increased sales by volume of our Deuce Energy drinks,
smoothies in cans, Energade(r) Energy sports drinks, Junior Juice(r) brand
drinks and sales of juice drinks in pouches which were introduced in July 2003.
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, teas,
lemonades and juice cocktails, Diet Red Energy drinks, soy smoothies and
smoothies in bottles, Hansen's(r) E2O Energy Water and sparkling beverages as
well as an increase in total discounts, allowances and promotional payments to
support the overall increase in the level of sales.
20
Gross Profit. Gross profit was $58.5 million for the nine-months ended
September 30, 2004, an increase of $25.4 million or 77.0% higher than the gross
profit for the nine-months ended September 30, 2003 of $33.0 million. Gross
profit as a percentage of net sales, increased to 45.0% for the nine-months
ended September 30, 2004 from 39.4% for the nine-months ended September 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 $36.5 million for
the nine-months ended September 30, 2004, an increase of $11.4 million or 45.6%
higher than total operating expenses of $25.1 million for the nine-months ended
September 30, 2003. Total operating expenses as a percentage of net sales
decreased to 28.1% for the nine-months ended September 30, 2004 as compared to
29.9% for the nine-months ended September 30, 2003. The increase in total
operating expenses was primarily attributable to increased selling, general and
administrative expenses.
Selling expenses were $21.8 million for the nine-months ended September 30,
2004, an increase of $6.9 million or 45.8% higher than selling expenses of $15.0
million for the nine-months ended September 30, 2003. Selling expenses as a
percentage of net sales for the nine-months ended September 30, 2004 were 16.8%
which was slightly lower than selling expenses as a percentage of net sales of
17.9% for the nine-months ended September 30, 2003. The increase in selling
expenses was primarily attributable to an increase in distribution and storage
expenses of $2.7 million, increased expenditures for merchandise displays,
point-of-sale and premium materials of $1.7 million, trade development
activities with distributors of $1.1 million, sampling and in-store
demonstrations of $723,000, and other promotional activities of $444,000.
General and administrative expenses were $14.6 million for the nine-months ended
September 30, 2004, an increase of $4.5 million or 45.2% higher than general and
administrative expenses of $10.1 million for the nine-months ended September 30,
2003. General and administrative expenses as a percentage of net sales for the
nine-months ended September 30, 2004 were 11.2% which was slightly lower than
general and administrative expenses as a percentage of net sales of 12.0% for
the nine-months ended September 30, 2003. The increase in general and
administrative expenses was primarily attributable to increased payroll expenses
for sales, marketing and administrative activities of $2.1 million, 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 of $992,000, travel and entertainment
expenses of $386,000 as well as $199,000 incurred to maintain certain fixed
assets. The decrease in general and administrative expenses as a percentage of
net sales was attributable to net sales increasing at a higher rate than general
and administrative expenses for the nine-months ended September 30, 2004 as
compared to the nine months ended September 30, 2003.
21
Operating Income. Operating income was $22.0 million for the nine-months
ended September 30, 2004, an increase of $14.0 million or 175.9% higher than
operating income of $8.0 million for the nine-months ended September 30, 2003.
Operating income as a percentage of net sales increased to 16.9% for the
nine-months ended September 30, 2004 from 9.5% for the nine-months ended
September 30, 2003. The increase in operating income and operating income as a
percentage of net sales was attributable to a higher gross profit as well as
gross profit increasing at a higher rate than the increase in operating expenses
for the nine months ended September 30, 2004 as compared to the nine months
ended September 30, 2003.
Net Nonoperating Expense. Net nonoperating expense was $27,000 for the
nine-months ended September 30, 2004, a decrease of $30,000 from net
non-operating expense of $57,000 for the nine-months ended September 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 nine-months
ended September 30, 2004 was $8.9 million as compared to provision for income
taxes of $3.2 million for the comparable period in 2003. The effective combined
federal and state tax rate for the nine-months ended September 30, 2004 was
40.5%, which was comparable to the effective tax rate of 40.5% for the
nine-months ended September 30, 2003.
Net Income. Net income was $13.1 million for the nine-months ended
September 30, 2004, an increase of $8.4 million or 177.6% higher than net income
of $4.7 million for the nine-months ended September 30, 2003. The increase in
net income was attributable to the increase in gross profit of $25.4 million and
decrease in nonoperating expense of $30,000 which was partially offset by the
increase in operating expenses of $11.4 million and an increase in provision for
income taxes of $5.7 million.
Liquidity and Capital Resources
As at September 30, 2004, the Company had working capital of $32.0 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, (which was partially offset by deferred income tax expense) and
proceeds received from the issuance of common stock. Such increase was partially
offset by acquisition of property and equipment, repayment by the Company of a
portion of the Company's long-term debt, increases in deposits and other assets
and additions to trademark license and trademarks.
22
Net cash provided by operating activities was $15.9 million for the
nine-months ended September 30, 2004 as compared to net cash provided by
operating activities of $4.9 million in the comparable period in 2003. For the
nine-months ended September 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 and increase in deferred
tax assets and liabilities, as well as increases in accounts payable, income
taxes payable, accrued liabilities and accrued compensation and decreases in
prepaid expenses and other current assets which was partially offset by
increases in accounts receivable and inventories. The increase in accounts
receivable was attributable primarily 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.
Net cash used in investing activities was $1.1 million for the nine-months
ended September 30, 2004 as compared to net cash used in investing activities of
$1.7 million in the comparable period in 2003. In the nine-months ended
September 30, 2004, cash used in investing activities was primarily attributable
to acquisitions of property and equipment, an increase in deposits and other
assets and additions to trademark license and trademarks, 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 $1.3 million for the
nine-months ended September 30, 2004 as compared to net cash used in financing
activities of $2.8 million for the comparable period in 2003. For the
nine-months ended September 30, 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. For the
nine-months ended September 30, 2003, cash was used for principle payment of
long-term debt which was partially offset by proceeds from the issuance of
common stock.
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. 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 September 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
$6,000,000.
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 ratios and annual net
income requirements and obtained a waiver from Comerica with regards to its
capital expenditure limitations at September 30, 2004.
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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.
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 as of September 30, 2004:
Long-Term
Debt &
Capital Lease Operating Purchase Other
Obligations Leases Obligations Commitments Total
--------------- --------------- --------------- --------------- ---------------
2004 - Remainder $ 114,844 $ 240,230 $ 3,794,715 $ 250,000 $ 4,399,789
2005 304,735 970,359 7,275,654 500,000 9,050,748
2006 148,339 1,017,128 6,175,267 7,340,734
2007 1,030,218 1,460,000 2,490,218
2008 773,997 773,997
Thereafter 1,199,730 1,199,730
--------------- --------------- --------------- --------------- ---------------
$ 567,918 $ 5,231,662 $ 18,705,636 $ 750,000 $ 25,255,216
=============== =============== =============== =============== ===============
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 nine-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:
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* 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.
(In Thousands)
Nine-months ended September 30,
2004 2003
----------- -----------
Unit Case Volume / Case Sales 21,889 15,796
Net Sales $ 130,004 $ 83,787
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;
25
* 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;
* 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.
26
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.
At September 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 September 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.
27
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 7 to the financial statements,
"COMMITMENTS AND CONTINGENCIES."
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.
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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: November 15, 2004 /s/ RODNEY C. SACKS
----------------------------------
Rodney C. Sacks
Chairman of the Board of Directors
and Chief Executive Officer
Date: November 15, 2004 /s/ HILTON H. SCHLOSBERG
----------------------------------
Hilton H. Schlosberg
Vice Chairman of the Board of Directors,
President and Chief Financial Officer
29