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 June 30, 2005 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 11,051,103 shares of common stock outstanding as of July
18, 2005.
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
JUNE 30, 2005
INDEX
Page No.
--------
Part I. FINANCIAL INFORMATION
- -------
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
June 30, 2005 and December 31, 2004 3
Condensed Consolidated Statements of Income for the three-and
six-months ended June 30, 2005 and 2004 4
Condensed Consolidated Statements of Cash Flows for the
six-months ended June 30, 2005 and 2004 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Qualitative and Quantitative Disclosures about Market Risk 33
Item 4. Controls and Procedures 33
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 33
Items 2-5. Not Applicable
Item 6. Exhibits 34
Signatures 34
2
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2005 AND DECEMBER 31, 2004 (Unaudited)
- -----------------------------------------------------
June 30, December 31,
2005 2004
------------------- -----------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 33,428,058 $ 3,676,119
Short-term investments 17,300,000
Accounts receivable (net of allowance for doubtful accounts,
sales returns and cash discounts of $2,049,610 in 2005 and
$1,252,101 in 2004 and promotional allowances of
$7,374,448 in 2005 and $6,269,744 in 2004) 31,704,449 12,650,055
Inventories, net 27,801,342 22,406,054
Prepaid expenses and other current assets 501,098 638,967
Prepaid income taxes 609,899
Deferred income tax asset 4,567,804 3,708,942
------------------- -----------------
Total current assets 98,612,650 60,380,137
PROPERTY AND EQUIPMENT, net 3,310,863 2,964,064
INTANGIBLE AND OTHER ASSETS:
Trademarks (net of accumulated amortization of
$247,348 in 2005 and $219,264 in 2004) 18,323,720 18,351,804
Deposits and other assets 769,452 326,312
------------------- -----------------
Total intangible and other assets 19,093,172 18,678,116
------------------- -----------------
$ 121,016,685 $ 82,022,317
=================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 26,534,330 $ 14,542,753
Accrued liabilities 2,512,086 1,582,968
Accrued compensation 2,095,066 1,831,627
Current portion of long-term debt 670,215 437,366
Income taxes payable 346,449
------------------- -----------------
Total current liabilities 31,811,697 18,741,163
LONG-TERM DEBT, less current portion 165,297 146,486
DEFERRED INCOME TAX LIABILITY 4,973,801 4,563,439
COMMITMENTS AND CONTINGENCIES (NOTE 8) - -
SHAREHOLDERS' EQUITY:
Common stock - $0.005 par value; 30,000,000 shares authorized;
11,238,364 shares issued, 11,031,603 outstanding in 2005;
11,119,864 shares issued, 10,913,013 outstanding in 2004 -
(Pre-split, Notes 6 & 7) 56,192 55,599
Additional paid-in capital 17,217,198 15,813,541
Retained earnings 67,607,045 43,516,634
Common stock in treasury, at cost; 206,761 shares in 2005 and 2004 (814,545) (814,545)
------------------- -----------------
Total shareholders' equity 84,065,890 58,571,229
------------------- -----------------
$ 121,016,685 $ 82,022,317
=================== =================
See accompanying notes to condensed consolidated financial statements.
3
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE-AND SIX-MONTHS ENDED JUNE 30, 2005 AND 2004 (Unaudited)
- ---------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------------------------
2005 2004 2005 2004
-------------- -------------- -------------- --------------
NET SALES $ 85,440,555 $ 46,063,543 $145,454,827 $ 77,362,326
COST OF SALES 40,513,477 25,304,614 70,198,431 42,695,576
-------------- -------------- -------------- --------------
GROSS PROFIT 44,927,078 20,758,929 75,256,396 34,666,750
OPERATING EXPENSES:
Selling, general and administrative 19,558,402 12,335,494 35,149,974 22,578,732
Amortization of trademarks 13,838 19,269 28,084 39,365
-------------- -------------- -------------- --------------
Total operating expenses 19,572,240 12,354,763 35,178,058 22,618,097
-------------- -------------- -------------- --------------
OPERATING INCOME 25,354,838 8,404,166 40,078,338 12,048,653
NET NONOPERATING
INCOME (EXPENSE) 253,876 (8,434) 371,394 (19,048)
-------------- -------------- -------------- --------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 25,608,714 8,395,732 40,449,732 12,029,605
PROVISION FOR INCOME TAXES 10,363,016 3,317,583 16,359,321 4,768,175
-------------- -------------- -------------- --------------
NET INCOME $ 15,245,698 $ 5,078,149 $ 24,090,411 $ 7,261,430
============== ============== ============== ==============
NET INCOME PER COMMON SHARE:
Basic (Notes 6 & 7) $ 0.69 $ 0.24 $ 1.09 $ 0.35
============== ============== ============== ==============
Diluted (Notes 6 & 7) $ 0.63 $ 0.22 $ 0.99 $ 0.31
============== ============== ============== ==============
NUMBER OF COMMON SHARES USED IN PER SHARE COMPUTATIONS:
Basic (Notes 6 & 7) 21,951,404 21,041,360 22,030,514 20,955,450
============== ============== ============== ==============
Diluted (Notes 6 & 7) 24,385,238 23,364,620 24,320,754 23,183,736
============== ============== ============== ==============
See accompanying notes to condensed consolidated financial statements.
4
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTHS ENDED JUNE 30, 2005 AND 2004 (Unaudited) Continued
- ---------------------------------------------------------------------
June 30, June 30,
2005 2004
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $24,090,411 $7,261,430
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of trademark license and trademarks 28,084 39,365
Depreciation and other amortization 430,808 356,472
Loss/(gain) on disposal of property and equipment 151,034 (4,869)
Deferred income taxes (448,500) (1,201,562)
Provision for doubtful accounts 122,701 142,331
Effect on cash of changes in operating assets and liabilities:
Accounts receivable (19,177,095) (8,276,251)
Inventories (5,395,288) (1,970,525)
Prepaid expenses and other current assets 137,869 (60,763)
Prepaid income taxes (609,899)
Accounts payable 11,991,577 6,368,902
Accrued liabilities 929,118 1,104,471
Accrued compensation 263,439 (223,598)
Income taxes payable 362,004 2,944,281
------------------ ------------------
Net cash provided by operating activities 12,876,263 6,479,684
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (6,300,000)
Sale of short-term investments 23,600,000
Purchases of property and equipment (814,085) (703,283)
Proceeds from sale of property and equipment 178,571 15,850
Increase in trademark license and trademarks - (13,403)
Increase in deposits and other assets (20,575) (63,153)
------------------ ------------------
Net cash provided by (used in) investing activities 16,643,911 (763,989)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (464,032) (112,153)
Issuance of common stock 695,797 770,690
------------------ ------------------
Net cash provided by financing activities 231,765 658,537
------------------ ------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 29,751,939 6,374,232
CASH AND CASH EQUIVALENTS, beginning of year 3,676,119 1,098,785
------------------ ------------------
CASH AND CASH EQUIVALENTS, end of period $33,428,058 $7,473,017
================== ==================
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest $ 30,809 $ 16,968
================== ==================
Income taxes $17,055,715 $3,025,457
================== ==================
5
NON-CASH TRANSACTIONS
During the six-months ended June 30, 2005, the Company entered into capital
leases of $715,692, for the acquisition of promotional vehicles and warehouse
equipment.
During the six-months ended June 30, 2005, the Company reduced income taxes
payable and increased prepaid expenses and additional paid-in-capital by an
aggregate amount of $708,453 in connection with the exercise of certain stock
options.
See accompanying notes to condensed consolidated financial statements.
6
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, 2004, 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. ("Blue Sky") and Hansen Junior
Juice Company ("Junior Juice").
The Company's financial statements included in Form 10-Q have been prepared
in accordance with generally accepted accounting principles in the United States
of America ("GAAP") and Securities and Exchange Commission ("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 six-months ended June 30,
2005 and 2004 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
Refer to the Consolidated Financial Statements in the Company's Form 10-K
for the year ended December 31, 2004 for more complete presentation.
Cash & cash equivalents and short-term investments - The Company invests
cash available in various investments from time to time including, but not
limited to, investments of the following nature: auction rate securities,
corporate bank debt, commercial paper, certificates of deposit, U.S. treasury
bills, notes and bonds, money market funds and tax exempt securities including
municipal notes. Such investments that have a maturity dates of ninety days or
less are included in "Cash and cash equivalents" whereas those investments that
have maturity dates in excess of ninety days are included in "Short-term
investments." The Company did not have an investment in auction rate securities
at June 30, 2005. As a result, we reclassified $17.3 million from "Cash and cash
equivalents" to "Short-term investments" in our Condensed Consolidated Balance
Sheet as of December 31, 2004. This reclassification has no impact on previously
reported total current assets, total assets, working capital, or results of
operations and does not affect previously reported cash flows from operating or
financing activities.
7
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.
Trademarks - Trademarks represents the Company's exclusive ownership of the
Hansen's(r) trademark in connection with the manufacture, sale and distribution
of beverages and water and non-beverage products. The Company also owns 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 trademarks with a finite life
(as discussed below) over 5 to 20 years. Upon the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 142, the Company ceased the
amortization of indefinite life assets. The following provides additional
information concerning the Company's trademarks as of June 30, 2005 and December
31, 2004:
June 30, December 31,
2005 2004
-------------------- --------------------
Amortizing trademarks $ 1,169,248 $ 1,169,248
Accumulated amortization (247,348) (219,264)
-------------------- --------------------
921,900 949,984
Non-amortizing trademarks 17,401,820 17,401,820
-------------------- --------------------
$ 18,323,720 $ 18,351,804
==================== ====================
All amortizing 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 5 to 20 years (weighted
average life of 19 years). The straight-line method of amortization allocates
the cost of the trademarks to earnings over the period of expected benefit.
Total amortization expense during the six-months ended June 30, 2005 and 2004
was $28,084 and $39,365, respectively. As of June 30, 2005, future estimated
amortization expense related to amortizing trademarks through the year ending
December 31, 2010 is:
2005 - Remainder $27,676
2006 55,351
2007 55,351
2008 55,202
2009 55,202
2010 55,202
Revenue Recognition - The Company recognizes revenue when persuasive
evidence of an arrangement exists, delivery has occurred, the sales price is
fixed or reasonably determinable and collectibility is reasonably assured.
Management believes an adequate provision has been made for estimated returns,
allowances and cash discounts based on the Company's historical experience,
which are accounted for as a reduction of gross sales.
8
Net Sales - Net sales consists of sales recorded at the time the related
products are shipped and the risk of ownership and title have passed, less
allowances for returns, spoilage, discounts and promotional allowances recorded
in accordance with Emerging Issues Task Force ("EITF") Issue No. 01-9.
Cost of Sales - Cost of sales consists of the costs of raw materials
utilized in the manufacture of our products, co-packing fees, in-bound freight
charges as well as certain internal transfer costs, warehouse expenses incurred
prior to the manufacture of the Company's finished products and certain quality
control costs. Raw materials account for the largest portion of the cost of
sales. Raw materials include cans, bottles, other containers, ingredients and
packaging materials.
Operating Expenses - Operating expenses include selling expenses such as
distribution expenses to transport our products to our customers, expenses
including advertising, sampling and in-store demonstration costs, material costs
for merchandise displays, point-of-sale materials and premium items, sponsorship
expenses, other marketing expenses and design expenses. Operating expenses also
include general and administrative costs such as payroll costs, travel costs,
professional service fees, depreciation and other general and administrative
costs.
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 $8.1
million and $5.4 million for the six-months ended June 30, 2005 and 2004,
respectively. Advertising expenses were included in selling, general and
administrative expenses with the exception of coupon expenses, which were
included as a reduction of gross sales. In addition, the Company supports its
customers, including distributors, with promotional allowances, portion of which
are utilized for marketing and indirect advertising by them. Portion of the
promotional allowances payable to customers are based on the levels of sales to
such customers and, in certain instances, the amount of such allowances are
estimated by the Company. If actual promotional allowances when ultimately
determined differ from such estimates, promotional allowances could, to the
extent based on estimates, require adjustment. Such promotional allowances
amounted to $25.2 million and $13.5 million for the six-months ended June 30,
2005 and 2004, respectively and are included as a reduction of gross sales.
Change in Accounting for Promotional Allowances - The Financial Accounting
Standards Board's ("FASB") EITF Issue No. 01-9, Accounting for Consideration
Given by a Vendor to a Customer or a Reseller of the Vendor's Products requires
certain sales promotions and customer allowances (based on criteria within EITF
Issue No. 01-9) to be classified as a reduction of net sales or as cost of goods
sold instead of selling, general and administrative expenses. The effect of the
accounting related to EITF Issue No. 01-9 for the six-months ended June 30, 2005
was to decrease net sales and decrease selling, general and administrative
expenses by $27.8 million and for the six-months ended June 30, 2004 was to
decrease net sales by $14.5 million, increase cost of goods sold by $46,000 and
decrease selling, general and administrative expenses by $14.6 million.
9
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 consistent with
the provisions of SFAS No. 123, the Company's net income and net income per
common share for the three-months ended June 30, 2005 and 2004 would have been
reduced to the pro forma amounts indicated below. Additionally, the effect of
the stock split, which was effective August 8, 2005, has been given effect to in
the presentation below (Note 6).
Six Months Ended June 30,
----------------------------
2005 2004
------------- -----------
Net income, as reported $24,090,411 $7,261,430
Less: Total stock based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects 979,203 150,953
------------- ------------
Net income, pro forma $23,111,208 $7,110,477
============= ============
Net income per common share, as reported - Basic $ 1.09 $ 0.35
Net income per common share, as reported - Diluted $ 0.99 $ 0.31
Net income per common share, pro-forma - Basic $ 1.05 $ 0.34
Net income per common share, pro-forma - Diluted $ 0.95 $ 0.31
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
Year Dividend Yield Expected Volatility Interest Rate Expected Lives
- ---- -------------- ------------------- --------------- --------------
2005 0% 74% 4.4% 7 years
2004 0% 38% 4.0% 8 years
3. NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2004, FASB issued statement of Financial Accounting Standard
No. 151, "Inventory Costs". The new Statement amends Accounting Research
Bulletin No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material. This Statement requires that those items be recognized as
current-period charges and requires that allocation of fixed production
overheads to the cost of conversion be based on the normal capacity of the
production facilities. This statement is effective for fiscal years beginning
after June 15, 2005. The Company does not expect adoption of this statement to
have a material impact on its financial condition or results of operations.
10
In December 2004, the FASB issued Statement of Financial Accounting
Standard ("SFAS") No. 153, Exchanges of Nonmonetary Assets - An Amendment of APB
Opinion No. 29, Accounting for Nonmonetary Transactions. This statement amends
APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. The provision in
SFAS No. 153 are effective for nonmonetary asset exchanges incurred during
fiscal years beginning after June 15, 2005. The Company does not expect adoption
of this statement to have a material impact on its financial condition or
results of operations.
In December 2004, FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment. This Statement replaces FASB Statement No. 123 and supersedes APB
Opinion No. 25. SFAS No. 123(R) will require the fair value of all stock option
awards issued to employees to be recorded as an expense over the related vesting
period. The Statement also requires the recognition of compensation expense for
the fair value of any unvested stock option awards outstanding at the date of
adoption. This standard is effective for the Company as of January 1, 2006.
Management has not completed their evaluation of the effect of these new rules
on the Company's financial statements.
In May 2005, FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, which establishes, unless impracticable, retrospective application
as the required method for reporting a change in accounting principle in the
absence of explicit transition requirements specific to the newly adopted
accounting principle. The statement provides guidance for determining whether
retrospective application of a change in accounting principle is impracticable.
The statement also addresses the reporting of a correction of error by restating
previously issued financial statements. SFAS No. 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. The Company does not expect adoption of this statement to have a
material impact on its financial condition or results of operations.
4. INVENTORIES
Inventories consist of the following at:
June 30, December 31,
2005 2004
------------- -------------
Raw Materials $ 11,629,208 $ 6,449,521
Finished Goods 16,172,134 15,956,533
------------- -------------
$ 27,801,342 $ 22,406,054
============= =============
11
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
June 30, December 31,
2005 2004
------------- -------------
Leasehold improvements $ 433,768 $ 268,068
Furniture and office equipment 1,383,558 1,193,741
Equipment 1,170,921 1,488,571
Vehicles 2,011,857 2,359,264
------------- -------------
5,000,104 5,309,644
Less accumulated depreciation and amortization (1,689,241) (2,345,580)
------------- -------------
$ 3,310,863 $ 2,964,064
============= =============
6. STOCK SPLIT
On July 13, 2005, the Board of Directors approved a two-for-one stock split
to be effected in the form of a 100% stock dividend which will be paid on August
8, 2005 to shareholders of record on August 1, 2005. All per-share and certain
outstanding share information has been presented to reflect the stock split.
7. EARNINGS PER SHARE
On July 19, 2005, the Company declared a two-for-one stock split to be
effected by a 100% stock dividend. The dividend was distributed on August 8,
2005. The increased share capital after giving effect to the stock dividend has
been used to calculate the number of shares outstanding for purposes of our
presentation of 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 six months
ended June 30, 2005 and 2004 is presented below:
12
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Weighted-average shares outstanding:
Basic - Pre-Split (Note 6) 10,975,702 10,520,680 11,015,257 10,477,725
Effect of stock split 10,975,702 10,520,680 11,015,257 10,477,725
------------ ------------ ------------ ------------
Basic 21,951,404 21,041,360 22,030,514 20,955,450
Dilutive securities - Pre-Split (Note 6) 1,216,917 1,161,630 1,145,120 1,114,143
Effect of stock split 1,216,917 1,161,630 1,145,120 1,114,143
------------ ------------ ------------ ------------
Diluted 24,385,238 23,364,620 24,320,754 23,183,736
============ ============ ============ ============
For the three and six months ended June 30, 2005 and 2004, no options were
deemed to have an antidilutive effect and therefore no options outstanding were
excluded from the calculations.
8. 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 in July 2004. The
initial term of the Monorail Agreement ends on the first anniversary of its
commencement date. However due to interruptions in the operations of the
Monorail, the commencement date of the initial term was by mutual agreement
amended to January 1, 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 the LVMC has the right, notwithstanding such
election by HBC, to terminate the Monorail Agreement at the expiration of the
then current term.
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. The Company does not believe the Motion will have a
material adverse effect on the financial condition of the Company.
13
In June 2005, the Company filed a complaint in California federal court
against North American Beverage Company ("NAB") seeking an injunction, damages
and other relief arising out of NAB's infringement of the Company's Monster
EnergyTM marks through the promotion and advertising of carbonated beverages
under the mark "Flathead Lake Monster" with the word "Monster" predominantly
displayed. In response, in July 2005, Flathead Lake Monster, Inc. ("Flathead"),
a Montana corporation which allegedly licensed the mark "Flathead Lake Monster"
to NAB, filed a complaint against the Company in federal court in Montana in
which it alleges that it is the licensor of the mark "Flathead Lake Monster" and
seeks a declaration that its use of that mark for soda does not infringe the
Company's rights in its "Monster Energy" marks. Flathead's complaint also in the
alternative claims trademark infringement by the Company "to the extent a court
finds a likelihood of confusion" between the parties' marks and seeks an
injunction against the Company from using the term "Monster Energy," as well as
damages and other relief. The Company believes that its claim against NAB is
meritorious based on the bad faith manner in which NAB recently used the name
"Flathead Lake Monster" with the word "Monster" predominantly displayed. The
Company intends to vigorously oppose Flathead's complaint which it believes is
without merit.
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
likely have a material adverse effect on the Company's financial position or
results of operations.
The Company purchases various raw material items, including, but not
limited to, flavors, ingredients and containers, from a limited number of
resources. An interruption in supply from any of such resources could result in
the Company's inability to produce certain products for limited or possibly
extended period of time. The aggregate value of business conducted with
suppliers of such limited resources described above for the six-months ended
June 30, 2005 was $27.9 million.
9. OPERATING SEGMENTS
The Company has two reportable segments which follow different methods by
which certain product groupings (including package format) are managed, sold and
delivered to customers, namely: Direct Store Delivery ("DSD") products
(substantially all energy drinks) and Warehouse delivery ("Warehouse") products
(primarily juice based and soda beverages). The DSD division develops, markets
and sells products primarily through an exclusive distributor network whereas
the Warehouse division develops, markets and sells products primarily direct to
retailers. Corporate and unallocated amounts that do not relate to DSD or
Warehouse segments have been allocated to "Corporate & Unallocated". The net
revenues derived from DSD and Warehouse segments and other financial information
related thereto for the six-months ending June 30, 2005 and 2004 is as follows:
14
Six-months Ended June 30, 2005
-----------------------------------------------------------------
Corporate &
DSD Warehouse Unallocated Total
-------------- -------------- -------------- --------------
Net sales $105,847,611 $ 39,607,216 $ - $145,454,827
Contribution margin 44,252,608 2,887,951 47,140,559
Corporate & unallocated expenses (7,062,221) (7,062,221)
Operating income 40,078,338
Net nonoperating income (expense) (12,806) (6,299) 390,499 371,394
Income before provision for
income taxes 40,449,732
Depreciation & amortization 170,824 15,210 244,774 430,808
Trademark amortization - 22,030 6,054 28,084
Six-months Ended June 30, 2004
-----------------------------------------------------------------
Corporate &
DSD Warehouse Unallocated Total
-------------- -------------- -------------- --------------
Net sales $ 45,212,490 $ 32,149,581 $ 255 $ 77,362,326
Contribution margin 14,495,334 2,478,395 16,973,729
Corporate & unallocated expenses (4,925,076) (4,925,076)
Operating income 12,048,653
Net nonoperating income (expense) (8,129) (8,797) (2,122) (19,048)
Income before provision for
income taxes 12,029,605
Depreciation & amortization 140,495 23,990 191,987 356,472
Trademark amortization - 22,030 17,335 39,365
The accounting policies of the segments are the same as those described in
Note 2, "Summary of Significant Accounting Policies." All revenue is derived
from sales to external customers. Expenses that pertain to each segment are
allocated to the segment concerned. Expenses related to general support and
administrative functions are not allocated and are presented under "Corporate &
Unallocated." Such corporate and unallocated expenses were $7.1 million for the
six-months ended June 30, 2005 and included $3.8 million of payroll costs and
$1.2 million of professional service expenses including accounting and legal
costs. Corporate and unallocated expenses were $4.9 million for the six-months
ended June 30, 2004 and included $2.5 million of payroll costs and $1.1 million
of professional service expenses including accounting and legal costs. Certain
items, including operating assets and income taxes, are not allocated to
individual segments and therefore are not presented above.
One customer made up approximately 18% and 11% of the Company's net
revenues for the six-months ended June 30, 2005 and 2004, respectively. Such
customer is a customer of the DSD segment.
15
The net revenues derived from DSD and Warehouse segments and other
financial information related thereto for the three-months ending June 30, 2005
and 2004 is as follows:
Three-months Ended June 30, 2005
-----------------------------------------------------------------
Corporate &
DSD Warehouse Unallocated Total
-------------- -------------- -------------- --------------
Net sales $ 64,318,370 $ 21,122,185 $ - $ 85,440,555
Contribution margin 27,577,482 1,333,041 28,910,523
Corporate & unallocated expenses (3,555,685) (3,555,685)
Operating income 23,354,838
Net nonoperating income (expense) (8,040) (2,698) 264,624 253,876
Income before provision for
income taxes 25,608,714
Depreciation & amortization 107,951 7,706 131,598 247,255
Trademark amortization - 11,015 2,823 13,838
Three-months Ended June 30, 2004
-----------------------------------------------------------------
Corporate &
DSD Warehouse Unallocated Total
-------------- -------------- -------------- --------------
Net sales $ 28,613,967 $ 17,449,320 $ 256 $ 46,063,543
Contribution margin 9,795,689 1,176,048 10,971,737
Corporate & unallocated expenses (2,567,571) (2,567,571)
Operating income 8,404,166
Net nonoperating income (expense) (3,364) (4,027) (1,043) (8,434)
Income before provision for
income taxes 8,395,732
Depreciation & amortization 78,047 11,995 78,849 168,891
Trademark amortization - 11,015 8,254 19,269
Corporate and unallocated expenses were $3.6 million for the three-months
ended June 30, 2005 and included $1.9 million of payroll costs and $617,000 of
professional service expenses including accounting and legal costs. Corporate
and unallocated expenses were $2.6 million for the three-months ended June 30,
2004 and included $1.3 million of payroll costs and $614,000 of professional
service expenses including accounting and legal costs. Certain items, including
operating assets and income taxes, are not allocated to individual segments and
therefore are not presented above.
16
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.
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), Lost(r) and Rumba(tm). 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. Greater distribution and
availability, awareness and preference promotes long term growth.
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.
During the second quarter of 2005, 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.
In 2004, we introduced a carbonated Lost(r) Energy drink in 16-ounce cans,
a carbonated Monster Energy(tm) "Assault"(tm) energy drink in 16-ounce cans, a
new line of Blue Sky natural tea sodas in 12-ounce cans, Hansen's Energy Drinks
in 16-ounce cans, Rumba(tm) Energy Juice in 15.5-once cans and also introduced a
new line of lo-carb smoothies in 11.5-ounce cans. In the first quarter of 2005
we introduced Joker(tm) Energy Drinks in 16-ounce cans as well as light juices
and new juice blends. In the second quarter of 2005, we introduced Monster
EnergyTM and Lo-Carb Monster EnergyTM in 23.5-ounce cans and Monster EnergyTM,
Lo-Carb Monster EnergyTM and Monster EnergyTM "Assault" in 8.3-ounce cans. In
the third quarter of 2005, the Company will be introducing a Monster EnergyTM
"Khaos" energy drink in 16-ounce cans, a Lost(r) Five.0 energy drink and Lost(r)
Perfect 10 energy drink in 16-ounce cans as well as a diet Grapefruit soda in
12-ounce cans.
17
During the second quarter of 2005, we entered into several new distribution
agreements for the sale of certain products in the ordinary course. We intend to
continue building our national distributor network and sales force throughout
the remainder of 2005 to support and grow the sales of our products.
We again achieved record sales in the second quarter of 2005. The increase
in net sales for the three-months ended June 30, 2005 was primarily attributable
to increased sales of products with relatively higher price points, including
increased sales by volume of our Monster EnergyTM drinks, which includes our low
carbohydrate ("Lo-Carb") Monster EnergyTM drinks, as well as sales of our
Monster EnergyTM "Assault"TM energy drinks which were introduced in September
2004, increases in sales by volume, primarily of Hansen's(r) and Junior Juice(r)
children's juice drinks in aseptic packaging and Hansen's(r) apple juice and
juice blends. The increase in net sales was also attributable, to a lesser
extent, to sales of Lost(r) Energy drinks which were introduced in January 2004
and JokerTM energy drinks in 16-ounce cans which were introduced in January 2005
and RumbaTM energy juice, which was introduced in December 2004. The increase in
net sales was partially offset by lower sales by volume of Hansen's(r) energy
and functional drinks including Deuce energy in 16-ounce cans, private label
isotonic beverages, E2O Energy Water(r) drinks and smoothies in cans. The
increase in net sales was also partially offset by an increase in total
discounts, allowances and promotional payments. Net sales was also offset by
increased spending on specific promotions, particularly for apple juice and
juice blends in accordance with the WIC program, that began in July 2004.
Gross profit for the three months ended June 30, 2005, as a percentage of
net sales, was 52.6% which was higher than the 45.1% gross profit as a
percentage of net sales for the three months ended June 30, 2004. Additionally,
for the six months ended June 30, 2005, gross profit as a percentage of net
sales, was 51.7% which was higher than the 44.8% gross profit percentage
achieved in the six months ended June 30, 2004. The increase in gross profit
percentage was primarily due to a change in the Company's product mix due
primarily to increased sales of certain product lines with higher gross margins.
During the three months ended June 30, 2005, sales shipped outside of
California were 62.0% of our aggregate gross sales, as compared to 59.7% of our
aggregate gross sales for the comparable period in 2004. During the six months
ended June 30, 2005, sales shipped outside of California, represented 60.2% of
our aggregate gross sales, as compared to approximately 55.2% of our aggregate
sales in the six months ended June 30, 2004. During the three months ended June
30, 2005, sales to distributors outside the United States amounted to $1.6
million, as compared to $0.6 million for the three months ended June 30, 2004,
which was less than 2% of gross sales for each period respectively. Sales to
distributors outside the United States, during the six months ended June 30,
2005, amounted to $2.3 million compared to $0.9 million in the six months ended
June 30, 2004, accounting for less than 2% and 1% of our gross sales for each
period respectively.
18
Our customers are typically retail grocery and specialty chains,
wholesalers, club stores, drug, mass merchandisers, convenience chains, full
service beverage distributors, health food distributors and food service
customers. Sales to our various customer types are reflected below. The
allocations below reflect changes made by the Company to the categories
historically reported.
Three Months Six Months
Ended Ended
June 30, June 30,
-------------- --------------
2005 2004 2005 2004
------ ------ ------ ------
Retail Grocery, specialty chains and wholesalers 18% 21% 20% 23%
Club stores, drug & mass merchandisers 11% 14% 11% 15%
Full service distributors 65% 53% 63% 50%
Health food distributors 4% 7% 4% 8%
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 and in 2004 introduced a new line of Blue
Sky natural tea sodas in 12-ounce cans. In the first quarter of 2005 we
introduced a new line of Blue Sky Lite natural sodas.
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.
A chain grocery store strike in Southern California, which commenced during
the last quarter of 2003 and terminated in the first quarter of 2004, adversely
affected sales of those of our products that were carried by the stores
concerned during the comparable quarter of 2004. However, the drop in sales of
such products was partially offset by increased sales of certain of those
products that were carried by other retailers in Southern California.
On July 12, 2004, we commenced exclusive contracts with the State of
California, Department of Health Services Women, Infant and Children
Supplemental Nutrition Branch ("WIC"), to supply 100% Apple juice and 100%
blended juice in 64-ounce PET plastic bottles.
We continue to incur expenditures in connection with the development and
introduction of new products and flavors.
19
Results of Operations
The following table sets forth key statistics for the three- and six-months
ended June 30, 2005 and 2004, respectively.
Three-Months Ended Percentage Six-Months Ended Percentage
June 30, Change June 30, Change
--------------------------------- ------------ --------------------------------- -------------
2005 2004 05 vs. 04 2005 2004 05 vs. 04
---------------- ---------------- ------------ ---------------- ---------------- -------------
Gross sales, net of
discounts & returns * $102,499,664 $ 57,120,726 79.4% $175,461,754 $ 95,209,244 84.3%
Less: Allowances and
promotional
payments ** 17,059,109 11,057,183 54.3% 30,006,927 17,846,918 68.1%
---------------- ---------------- ------------ ---------------- ---------------- -------------
Net sales 85,440,555 46,063,543 85.5% 145,454,827 77,362,326 88.0%
Cost of sales 40,513,477 25,304,614 60.1% 70,198,431 42,695,576 64.4%
---------------- ---------------- ------------ ---------------- ---------------- -------------
Gross profit 44,927,078 20,758,929 116.4% 75,256,396 34,666,750 117.1%
Gross profit margin 52.6% 45.1% 51.7% 44.8%
Selling, general and
administrative
expenses 19,558,402 12,335,494 58.6% 35,149,974 22,578,732 55.7%
Amortization of
trademark 13,838 19,269 (28.2%) 28,084 39,365 (28.7%)
---------------- ---------------- ------------ ---------------- ---------------- -------------
Operating income 25,354,838 8,404,166 201.7% 40,078,338 12,048,653 232.6%
Operating income as a
percent of net sales 29.7% 18.2% 27.6% 15.6%
Net nonoperating
income (expense) 253,876 (8,434) (3,110.1%) 371,394 (19,048) (2,049.8%)
---------------- ---------------- ------------ ---------------- ---------------- -------------
Income before
provision for income
taxes 25,608,714 8,395,732 205.0% 40,449,732 12,029,605 236.3%
Provision for income
taxes 10,363,016 3,317,583 212.4% 16,359,321 4,768,175 243.1%
---------------- ---------------- ------------ ---------------- ---------------- -------------
Effective tax rate 40.5% 39.5% 40.4% 39.6%
Net income $ 15,245,698 $ 5,078,149 200.2% $ 24,090,411 $ 7,261,430 231.8%
================ ================ ============ ================ ================ =============
Net income as a
percent of net sales 17.8% 11.0% 16.6% 9.4%
Net income per common share (post-split):
Basic (Notes 6 & 7) $ 0.69 $ 0.24 $ 1.09 $ 0.35
Diluted (Notes 6 & 7) $ 0.63 $ 0.22 $ 0.99 $ 0.31
Case Sales (in thousands) (in 192-ounce case equivalents)
12,368 7,605 62.6% 21,663 12,973 67.0%
* Gross sales, although used internally by management as an indicator of
operating performance, should not be considered as an alternative to net sales,
which is determined in accordance with GAAP, and should not be used alone as an
indicator of operating performance in place of net sales. Additionally, gross
sales may not be comparable to similarly titled measures used by other companies
as gross sales has been defined by the Company's internal reporting
requirements. However, gross sales is used by management to monitor operating
performance including sales performance of particular products, salesperson
performance, product growth or declines and overall Company performance. The use
of gross sales allows evaluation of sales performance before the effect of any
promotional items, which can mask from certain performance issues. Management
believes the presentation of gross sales allows a more comprehensive
presentation of the Company's operating performance. Gross sales may not be
realized in the form of cash receipts as promotional payment and allowances may
be deducted from payments received from customers.
20
** Although the expenditures described in this line item are determined in
accordance with GAAP and meet GAAP requirements, the disclosure thereof does not
conform with GAAP presentation requirements. Additionally, the presentation of
allowances and promotional payments may not be comparable to similar items
presented by other companies. The presentation of allowances and promotional
payments facilitates an evaluation of the impact thereof on the determination of
net sales and illustrates the spending levels incurred to secure such sales.
Allowances and promotional payments constitute a material portion of the
marketing activities of the Company.
Results of Operations for the Three Months Ended June 30, 2005 Compared to the
Three Months Ended June 30, 2004
Gross Sales*. For the three-months ended June 30, 2005, gross sales were
$102.5 million, an increase of approximately $45.4 million or 79.4% higher than
the $57.1 million gross sales for the three-months ended June 30, 2004. The
increase in gross sales for the three-months ended June 30, 2005 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 three-months ended June 30, 2005, net sales were $85.4
million, an increase of approximately $39.4 million or 85.5% higher than net
sales of $46.1 million for the three-months ended June 30, 2004. Net sales case
volumes increased from 7.6 million cases for the three-months ended June 30,
2004 to 12.4 million cases for the three-months ended June 30, 2005, an increase
of 4.8 million cases or 62.6%. The overall average net sales price per case also
increased to $6.91 per case for the three-months ended June 30, 2005 from $6.06
for the three-months ended June 30, 2004, an increase of 14.0%. The increase in
the average net sales prices was due to an increase in the proportion of case
sales derived from higher priced products as described below.
The increase in net sales for the three-months ended June 30, 2005 was
primarily attributable to increased sales of products with relatively higher
price points, including increased sales by volume of our Monster EnergyTM
drinks, which includes our low carbohydrate ("Lo-Carb") Monster EnergyTM drinks,
as well as sales of our Monster EnergyTM "Assault"TM energy drinks which were
introduced in September 2004, increases in sales by volume, primarily of
Hansen's(r) and Junior Juice(r) children's juice drinks in aseptic packaging and
Hansen's(r) apple juice and juice blends. The increase in net sales was also
attributable, to a lesser extent, to sales of Lost(r) Energy drinks which were
introduced in January 2004 and JokerTM energy drinks in 16-ounce cans which were
introduced in January 2005 and RumbaTM energy juice, which was introduced in
December 2004. The increase in net sales was partially offset by lower sales by
volume of Hansen's(r) energy and functional drinks including Deuce energy in
16-ounce cans, private label isotonic beverages, E2O Energy Water(r) drinks and
smoothies in cans. The increase in net sales was also partially offset by an
increase in total discounts, allowances and promotional payments including
increased spending on specific promotions, particularly for apple juice and
juice blends in accordance with the WIC program, that began in July 2004.
Overall, allowances and promotional payments increased 54.3%, or $6.0 million
from $11.1 million for the three-months ended June 30, 2004 to $17.1 million for
the three-months ended June 30, 2005.
21
Gross Profit. Gross profit was $44.9 million for the three-months ended
June 30, 2005, an increase of approximately $24.2 million or 116.4% higher than
the gross profit for the three-months ended June 30, 2004 of $20.8 million.
Gross profit as a percentage of net sales, increased to 52.6% for the
three-months ended June 30, 2005 from 45.1% for the three-months ended June 30,
2004. 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.
Gross profit may not be comparable to those of other entities since some
entities include all costs associated with their distribution process in cost of
sales whereas others exclude certain costs including them instead in another
line item such as selling, general and administrative expenses.
Total Operating Expenses. Total operating expenses were $19.6 million for
the three-months ended June 30, 2005, an increase of approximately $7.2 million
or 58.4% higher than total operating expenses of $12.4 million for the
three-months ended June 30, 2004. Total operating expenses as a percentage of
net sales decreased to 22.9% for the three-months ended June 30, 2005 as
compared to 26.8% for the three-months ended June 30, 2004. 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 $12.7 million for the three-months ended June 30,
2005, an increase of approximately $5.3 million or 71.8% higher than selling
expenses of $7.4 million for the three-months ended June 30, 2004. Selling
expenses as a percentage of net sales for the three-months ended June 30, 2005
were 14.8% which was lower than selling expenses as a percentage of net sales of
16.0% for the three-months ended June 30, 2004. The increase in selling expenses
was primarily attributable to an increase in distribution and warehouse
expenses, which increased by $2.3 million, increased expenditures for
merchandise displays, point-of-sale materials and premiums, which increased by
$0.8 million and increased expenditures for trade development activities with
distributors, which increased by $0.4 million. The increase in selling expense
was partially offset by a decrease in expenditures for in-store demonstrations,
which decreased by $0.2 million.
General and administrative expenses were $6.9 million for the three-months
ended June 30, 2005, an increase of approximately $1.9 million or 38.9% higher
than general and administrative expenses of $5.0 million for the three-months
ended June 30, 2004. General and administrative expenses as a percentage of net
sales for the three-months ended June 30, 2005 were 8.0% which was lower than
general and administrative expenses as a percentage of net sales of 10.8% for
the three-months ended June 30, 2004. The increase in general and administrative
expenses was primarily attributable to increased payroll expenses for
administrative and support activities, which increased by $0.6 million, expenses
incurred to maintain certain fixed assets, expenses related to the termination
of certain distributor agreements, travel and entertainment expenses and
insurance costs, which increased by $1.0 million in total. 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 June 30, 2005 as compared to the three
months ended June 30, 2004.
Operating Income. Operating income was $25.4 million for the three-months
ended June 30, 2005, an increase of approximately $17.0 million or 201.7% higher
than operating income of $8.4 million for the three-months ended June 30, 2004.
Operating income as a percentage of net sales increased to 29.7% for the
three-months ended June 30, 2005 from 18.2% for the three-months ended June 30,
2004. 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 June 30, 2005 as compared to the three months ended June 30,
2004.
22
Net Nonoperating Income/Expense. Net nonoperating income was $0.3 million
for the three-months ended June 30, 2005, an increase of approximately $0.3
million from net non-operating expense of $8,000 for the three-months ended June
30, 2004. The increase in net-operating income and decrease in net non-operating
expense was primarily attributable to increased interest revenue earned on the
Company's invested cash balances, which have increased significantly over the
past year, as well as 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, 2005 was $10.4 million as compared to provision for income taxes
of $3.3 million for the comparable period in 2004. The effective combined
federal and state tax rate for the three-months ended June 30, 2005 was 40.5%,
which was higher than the effective tax rate of 39.5% for the three-months ended
June 30, 2004 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 the apportionment
of sales and related state taxes to various states outside of California.
Net Income. Net income was $15.2 million for the three-months ended June
30, 2005, an increase of $10.2 million or 200.2% higher than net income of $5.1
million for the three-months ended June 30, 2004. The increase in net income was
attributable to the increase in gross profit of approximately $24.2 million and
increase in nonoperating income of approximately $0.3 million which was
partially offset by the increase in operating expenses of approximately $7.2
million and an increase in provision for income taxes of approximately $7.0
million.
Results of Operations for the Six Months Ended June 30, 2005 Compared to the Six
Months Ended June 30, 2004
Gross Sales*. For the six-months ended June 30, 2005, gross sales were
$175.5 million, an increase of approximately $80.3 million or 84.3% higher than
the $95.2 million gross sales for the six-months ended June 30, 2004. The
increase in gross sales for the six-months ended June 30, 2005 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, 2005, net sales were $145.5
million, an increase of approximately $68.1 million or 88.0% higher than net
sales of $77.4 million for the six-months ended June 30, 2004. Net sales case
volumes increased from 13.0 million cases for the six-months ended June 30, 2004
to 21.7 million cases for the six-months ended June 30, 2005, an increase of 8.7
million cases or 67.0%. The overall average net sales price per case also
increased to $6.71 per case for the six-months ended June 30, 2005 from $5.96
for the six-months ended June 30, 2004, an increase of 12.6%. The increase in
the average net sales prices was due to an increase in the proportion of case
sales derived from higher priced products as described below.
23
The increase in net sales for the six-months ended June 30, 2005 was
primarily attributable to increased sales of products with relatively higher
price points, including increased sales by volume of our Monster EnergyTM
drinks, which includes our low carbohydrate ("Lo-Carb") Monster EnergyTM drinks,
as well as sales of our Monster EnergyTM "Assault"TM energy drinks which were
introduced in September 2004, increases in sales by volume, primarily of
Hansen's(r) apple juice and juice blends and Hansen's(r) and Junior Juice(r)
children's juice drinks in aseptic packaging. The increase in net sales was also
attributable, to a lesser extent, to sales of JokerTM energy drinks in 16-ounce
cans which were introduced in January 2005, Lost(r) Energy drinks which were
introduced in January 2004 and RumbaTM energy juice, which was introduced in
December 2004. The increase in net sales was partially offset by lower sales by
volume of Hansen's(r) energy and functional drinks including Deuce energy in
16-ounce cans, Natural sodas, E2O Energy Water(r) drinks and smoothies in cans.
The increase in net sales was also partially offset by an increase in total
discounts, allowances and promotional payments including increased spending on
specific promotions, particularly for apple juice and juice blends in accordance
with the WIC program, that began in July 2004. Overall, allowances and
promotional payments increased 68.1%, or $12.2 million from $17.8 million for
the six-months ended June 30, 2004 to $30.0 million for the six-months ended
June 30, 2005.
Gross Profit. Gross profit was $75.3 million for the six-months ended June
30, 2005, an increase of approximately $40.6 million or 117.1% higher than the
gross profit for the six-months ended June 30, 2004 of $34.7 million. Gross
profit as a percentage of net sales increased to 51.7% for the six-months ended
June 30, 2005 from 44.8% for the six-months ended June 30, 2004. 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.
Gross profit may not be comparable to those of other entities since some
entities include all costs associated with their distribution process in cost of
sales whereas others exclude certain costs including them instead in another
line item such as selling, general and administrative expenses.
Total Operating Expenses. Total operating expenses were $35.2 million for
the six-months ended June 30, 2005, an increase of approximately $12.6 million
or 55.5% higher than total operating expenses of $22.6 million for the
six-months ended June 30, 2004. Total operating expenses as a percentage of net
sales decreased to 24.2% for the six-months ended June 30, 2005 as compared to
29.2% for the six-months ended June 30, 2004. 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 $21.7 million for the six-months ended June 30, 2005,
an increase of approximately $8.5 million or 64.9% higher than selling expenses
of $13.1 million for the six-months ended June 30, 2004. Selling expenses as a
percentage of net sales for the six-months ended June 30, 2005 were 14.9% which
was lower than selling expenses as a percentage of net sales of 17.0% for the
six-months ended June 30, 2004. The increase in selling expenses was primarily
attributable to an increase in distribution and warehouse expenses, which
increased by $3.9 million, increased expenditures for trade development
activities with distributors, which increased by $1.0 million and increased
expenditures for merchandise displays, point-of-sale materials and premiums,
which increased by $1.1 million.
General and administrative expenses were $13.5 million for the six-months
ended June 30, 2005, an increase of approximately $4.0 million or 42.8% higher
than general and administrative expenses of $9.4 million for the six-months
ended June 30, 2004. General and administrative expenses as a percentage of net
sales for the six-months ended June 30, 2005 were 9.3% which was lower than
general and administrative expenses as a percentage of net sales of 12.2% for
the six-months ended June 30, 2004. The increase in general and administrative
expenses was primarily attributable to increased payroll expenses for
administrative and support activities, which increased by $2.4 million, expenses
incurred to maintain certain fixed assets, expenses related to the termination
of certain distributor agreements, travel and entertainment expenses, insurance
costs and computer related supplies, which increased by $1.7 million in total.
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 six months ended June 30, 2005 as compared to the
three months ended June 30, 2004.
24
Operating Income. Operating income was $40.1 million for the six-months
ended June 30, 2005, an increase of approximately $28.0 million or 232.6% higher
than operating income of $12.0 million for the six-months ended June 30, 2004.
Operating income as a percentage of net sales increased to 27.6% for the
six-months ended June 30, 2005 from 15.6% for the six-months ended June 30,
2004. 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 six
months ended June 30, 2005 as compared to the six months ended June 30, 2004.
Net Nonoperating Income/Expense. Net nonoperating income was $0.4 million
for the six-months ended June 30, 2005, an increase of approximately $0.4
million from net non-operating expense of $19,000 for the six-months ended June
30, 2004. The increase in net non-operating income and decrease in net
non-operating expense was primarily attributable to increased interest revenue
earned on the Company's invested cash balances, which have increased
significantly over the past year, as well as 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, 2005 was $16.4 million as compared to provision for income taxes
of $4.8 million for the comparable period in 2004. The effective combined
federal and state tax rate for the six-months ended June 30, 2005 was 40.4%,
which was higher than the effective tax rate of 39.6% for the six-months ended
June 30, 2004 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 the apportionment
of sales and related state taxes to various states outside of California.
Net Income. Net income was $24.1 million for the six-months ended June 30,
2005, an increase of $16.8 million or 231.8% higher than net income of
approximately $7.3 million for the six-months ended June 30, 2004. The increase
in net income was attributable to the increase in gross profit of $40.6 million
and increase in nonoperating income of approximately $0.4 million which was
partially offset by the increase in operating expenses of approximately $12.6
million and an increase in provision for income taxes of approximately $11.6
million.
Liquidity and Capital Resources
Cash flows from operating activities - Net cash provided by operating
activities was $12.9 million for the six-months ended June 30, 2005 as compared
to $6.5 million in the comparable period in 2004. For the six-months ended June
30, 2005, cash provided by operating activities was primarily attributable to
net income earned including adjustments for certain non-cash expenses. In 2005,
cash provided by operating activities was reduced due to increases in accounts
receivable which was attributable to increased sales volumes as well as
increased sales to certain classes of customers who have different payment terms
and increases in inventories required to sustain the increased volume in sales.
Increases in inventory levels are the direct result of increases in purchasing,
which have also directly contributed to the increased balances of accounts
payable and accrued liabilities.
25
Purchases of inventories, increases in accounts receivable and other
assets, acquisition of property and equipment, acquisition of 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.
Cash flows from investing activities - Net cash provided by in investing
activities was $16.6 million for the six-months ended June 30, 2005 as compared
to net cash used in investing activities of $764,000 in the comparable period in
2004. For both periods, cash used in investing activities was primarily
attributable to acquisitions of fixed assets consisting of computer and office
equipment used for sales and administrative activities and promotional vehicles
and other equipment to support the marketing and promotional activities of the
Company. For the six-months ended June 30, 2005, cash provided by investing
activities included purchases and sales of short-term investments, the
sale-leaseback of certain promotional vehicles and the sale of certain
production equipment that was no longer operational. Management expects that it
will continue to use portion of its cash in excess of its requirements for
operations to purchase short-term investments. 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.
Cash flows from financing activities - Net cash provided by financing
activities was $232,000 for the six-months ended June 30, 2005 as compared to
net cash provided by financing activities of $659,000 for the comparable period
in 2004. For the six-months ended June 30, 2005, 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.
The increase in payments on long-term debt as compared to the comparable period
in 2004 related to lease payments made on vehicle leases entered into over the
past year.
Debt and other obligations - 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 and
certain equipment. The revolving line of credit remains in full force and effect
through June 2006. Interest on borrowings under the line of credit is based on
bank's base (prime) rate, less up to 1.5% or the LIBOR rate, plus an additional
percentage of up to 1.75%, depending upon certain financial ratios of HBC from
time to time. At June 30, 2005, HBC had no balances outstanding under the credit
facility.
26
The terms of the Company's line of credit contain certain financial
covenants including certain financial ratios. The Company was in compliance with
its covenants at June 30, 2005.
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.
Commitments - 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 7, COMMITMENTS &
CONTINGENCIES." The following represents a summary of the Company's contractual
obligations and related scheduled maturities as of June 30, 2005:
Payments due by period
--------------------------------------------------------------------------------
Total Less than 1 1-3 3-5 More than
year years years 5 years
-------------- ------------ -------------- -------------- --------------
Contractual Obligations $ 681,857 $ 681,857 $ - $ - $ -
Long-Term Debt Obligations 213,276 63,463 149,813
Capital Lease Obligations 622,236 606,752 15,484
Operating Lease Obligations 4,541,034 1,008,199 2,675,885 856,950
Purchase Obligations 14,229,185 3,073,621 11,155,564
-------------- ------------ -------------- -------------- --------------
$ 20,287,588 $ 5,433,892 $ 13,996,746 $ 856,950 $ -
============== ============ ============== ============== ==============
Management believes that cash available from operations, including cash
resources and the revolving line of credit, will be sufficient for our working
capital needs, including purchase commitments for raw materials and inventory,
increases in accounts receivable, payments of tax liabilities, debt servicing,
expansion and development needs, purchases of shares of our common stock, as
well as any purchases of capital assets or equipment through June 30, 2006.
Based on the Company's current plans, at this time the Company estimates that
capital expenditures are likely to be less than $5 million during 2005. However,
future business opportunities may cause a change in this estimate.
Sales
The table set forth below discloses selected quarterly data regarding sales
for the first three-months of the past two years. Data from any one or more
quarters or periods is not necessarily indicative of annual results or
continuing trends.
Sales of beverages are expressed in unit case volume. A "unit case" means a
unit of measurement equal to 192 U.S. fluid ounces of finished beverage (24
eight-ounce servings) or concentrate sold that will yield 192 U.S. fluid ounces
of finished beverage. Unit case volume of the Company means number of unit cases
(or unit case equivalents) of beverages directly or indirectly sold by the
Company. Sales of food bars are expressed in actual cases. A case of food bars
is defined as ninety 1.76-ounce bars.
27
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's experience with its energy drink products, although of
short duration, suggests that they are less seasonal than traditional beverages.
As the percentage of the Company's sales that are represented by such products
increases, seasonal fluctuations will be further mitigated. 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 and changes in and/or increased advertising
and promotional expenses.
(In thousands) Three-months ended June 30, Six-months ended June 30,
------------------------------ ----------------------------
2005 2004 2005 2004
---------- ---------- ----------- ----------
Net Sales $ 85,441 $ 46,064 $ 145,455 $ 77,362
Case Sales 12,368 7,605 21,663 12,973
See ITEM 2, "Our Business" for additional information related to the
increase in sales.
Critical Accounting Policies
The Company's consolidated financial statements are prepared in accordance
with 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 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:
Trademarks - Trademarks primarily represent the Company's exclusive
ownership of the Hansen's(r) trademark in connection with the manufacture, sale
and distribution of beverages and water and non-beverage products. The Company
also owns in its own right, a number of other trademarks in the United States as
well as in a number of countries around the world. The Company also owns the
Blue Sky(r) trademark, which was acquired in September 2000, and the Junior
Juice(r) trademark, which was acquired in May 2001. 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
trademarks while continuing to amortize remaining trademarks over five to twenty
years.
In accordance with SFAS No. 142, we evaluate our trademarks annually for
impairment or earlier if there is an indication of impairment. If there is an
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. The
fair value is calculated using the income approach. However, preparation of
estimated expected future cash flows is inherently subjective and is based on
management's best estimate of assumptions concerning expected future conditions.
Based on management's annual impairment analysis performed for the fourth
quarter of 2004, the estimated fair values of trademarks exceeded the carrying
value.
28
Long-Lived Assets - Management regularly reviews property and equipment and
other long-lived assets, including certain identifiable intangibles, for
possible impairment. This review occurs annually, or more frequently if events
or changes in circumstances indicate the carrying amount of the asset may not be
recoverable. If there is indication of impairment of property and equipment or
amortizable intangible assets, then management prepares an estimate of future
cash flows (undiscounted and without interest charges) expected to result from
the use of the asset and its eventual disposition. If these cash flows are less
than the carrying amount of the asset, an impairment loss is recognized to write
down the asset to its estimated fair value. The fair value is estimated at the
present value of the future cash flows discounted at a rate commensurate with
management's estimates of the business risks. No impairments were identified as
of June 30, 2005.
Management believes that the accounting estimate related to impairment of
its long lived assets, including its trademarks, is a "critical accounting
estimate" because: (1) it is highly susceptible to change from period to period
because it requires company management to make assumptions about cash flows and
discount rates; and (2) the impact that recognizing an impairment would have on
the assets reported on our consolidated balance sheet, as well as net income,
could be material. Management's assumptions about cash flows and discount rates
require significant 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 and future marketing plans for
existing product lines and planned timing of future introductions of new
products and their impact on our future cash flows.
Revenue Recognition - The Company recognizes revenue when persuasive
evidence of an arrangement exists, delivery has occurred, the sales price is
fixed or reasonably determinable and collectibility is reasonably assured.
Management believes an adequate provision against net sales has been made for
estimated returns, allowances and cash discounts based on the Company's
historical experience.
Net Sales - Net sales consists of sales recorded at the time the related
products are shipped and the risk of ownership and title have passed, less
allowances for returns, spoilage, discounts and promotional allowances recorded
in accordance with EITF Issue No. 01-9.
Cost of Sales - Cost of sales consists of the costs of raw materials
utilized in the manufacture of our products, co-packing fees, in-bound freight
charges as well as certain internal transfer costs, warehouse expenses incurred
prior to the manufacture of the Company's finished products and certain quality
control costs. Raw materials account for the largest portion of the cost of
sales. Raw materials include cans, bottles, other containers, ingredients and
packaging materials.
Operating Expenses - Operating expenses include selling expenses such as
distribution expenses to transport our products to our customers, expenses
including advertising, sampling and in-store demonstration costs, material costs
for merchandise displays, point-of-sale materials and premium items, sponsorship
expenses, other marketing expenses and design expenses. Operating expenses also
include general and administrative costs such as payroll costs, travel costs,
professional service fees, depreciation and other general and administrative
costs.
29
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, portion of which
are utilized for marketing and indirect advertising by them. Portion of the
promotional allowances payable to customers are based on the levels of sales to
such customers and, in certain instances, the amount of such allowances are
estimated by the Company. If actual promotional allowances when ultimately
determined differ from such estimates, promotional allowances could, to the
extent based on estimates, require adjustment. During 2002, the Company adopted
EITF Issue No. 01-9, which requires certain sales promotions and customer
allowances previously classified as selling, general and administrative expenses
to be classified as a reduction of sales or as cost of goods sold. The Company
presents advertising and promotional allowances in accordance with the
provisions of EITF Issue No. 01-9.
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 recent past loss history 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 and/or
continued weakening of economic conditions. 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.
30
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. Without limiting the foregoing, the words "believes,"
"thinks," "anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements.
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;
* 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;
31
* 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,
Lost(r) energy drinks and Joker TM energy drinks in 8.3-ounce and/or
16-ounce and/or 23.5-ounce cans, RumbaTM energy juice in 16-ounce cans,
juices in 64-ounce PET plastic bottles and aseptic packaging, soy
smoothies, sparkling orangeades and lemonades and apple cider in glass
bottles and other products.
The foregoing list of important factors is not exhaustive.
Our actual results could be materially different from the results described
or anticipated by our 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 our estimates and assumptions
only as of the date that they were made. We expressly disclaim 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.
32
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 and the
limited availability of certain raw materials such as sucralose. 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
collectibility of accounts receivable.
At June 30, 2005, 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, 2005, the net
impact on the Company's pre-tax earnings would have been insignificant. There
have been no significant changes to the Company's exposure to market risks.
ITEM 4. CONTROL AND PROCEDURES
Evaluation of Disclosure Controls 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 7 to the financial statements,
"COMMITMENTS AND CONTINGENCIES."
33
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibit Index
21 Subsidiaries of Hansen Natural Corporation
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
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 9, 2005 /s/ RODNEY C. SACKS
----------------------------------
Rodney C. Sacks
Chairman of the Board of Directors
and Chief Executive Officer
Date: August 9, 2005 /s/ HILTON H. SCHLOSBERG
---------------------------------
Hilton H. Schlosberg
Vice Chairman of the Board of Directors,
President and Chief Financial Officer
34