UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2005 Commission file number 0-18761
HANSEN NATURAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 39-1679918
(State or 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 ___
Indicate by check mark whether Registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act.)
Yes ___ No X
The Registrant had 22,174,206 shares of common stock outstanding as of
October 27, 2005.
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 2005
INDEX
-----
Page No.
-------
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
September 30, 2005 and December 31, 2004 3
Condensed Consolidated Statements of Income for the three and
nine-months ended September 30, 2005 and 2004 4
Condensed Consolidated Statements of Cash Flows for the
nine-months ended September 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 16
Item 3. Qualitative and Quantitative Disclosures about Market Risk 33
Item 4. Controls and Procedures 33
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 34
Items 2-5. Not Applicable
Item 6. Exhibits 34
Signatures 34
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2005 AND DECEMBER 31, 2004 (Unaudited)
- --------------------------------------------------------------------------------
September 30, December 31,
2005 2004
------------------- -----------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 41,282,143 $ 3,676,119
Short-term investments 8,651,544 17,300,000
Accounts receivable (net of reserve for allowance for doubtful accounts,
sales returns and cash discounts of $1,284,999 in 2005 and
$1,252,101 in 2004 and reserve for promotional allowances of
$8,853,753 in 2005 and $6,269,744 in 2004) 34,418,030 12,650,055
Inventories, net 28,856,129 22,406,054
Prepaid expenses and other current assets 645,273 638,967
Prepaid income taxes 3,513,671
Deferred income tax asset 5,107,676 3,708,942
------------------- -----------------
Total current assets 122,474,466 60,380,137
PROPERTY AND EQUIPMENT, net 3,719,187 2,964,064
INTANGIBLE AND OTHER ASSETS:
Trademarks (net of accumulated amortization of
$263,356 in 2005 and $219,264 in 2004) 18,411,080 18,351,804
Deposits and other assets 736,479 326,312
------------------- -----------------
Total intangible and other assets 19,147,559 18,678,116
------------------- -----------------
$ 145,341,212 $ 82,022,317
=================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 29,036,921 $ 14,542,753
Accrued liabilities 2,680,959 1,582,968
Accrued compensation 2,372,357 1,831,627
Current portion of long-term debt 717,792 437,366
Income taxes payable 346,449
------------------- -----------------
Total current liabilities 34,808,029 18,741,163
LONG-TERM DEBT, less current portion 13,143 146,486
DEFERRED INCOME TAX LIABILITY 5,264,649 4,563,439
COMMITMENTS AND CONTINGENCIES (NOTE 8) - -
SHAREHOLDERS' EQUITY:
Common stock - $0.005 par value; 30,000,000 shares authorized;
22,575,146 shares issued, 22,161,624 outstanding in 2005;
11,119,864 shares issued, 10,913,013 outstanding in 2004-
(Notes 6 & 7) 112,876 55,599
Additional paid-in capital 18,160,907 15,813,541
Retained earnings 87,796,153 43,516,634
Common stock in treasury, at cost; 413,522 shares in 2005
and 206,761 shares in 2004 (814,545) (814,545)
------------------- -----------------
Total shareholders' equity 105,255,391 58,571,229
------------------- -----------------
$ 145,341,212 $ 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 NINE-MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- -----------------------------------
2005 2004 2005 2004
----------------- ---------------- ---------------- ----------------
NET SALES $ 105,421,454 $ 52,641,477 $ 250,876,281 $ 130,003,803
COST OF SALES 50,077,785 28,832,269 120,276,216 71,527,845
----------------- ---------------- ---------------- ----------------
GROSS PROFIT 55,343,669 23,809,208 130,600,065 58,475,958
OPERATING EXPENSES:
Selling, general and
administrative 21,752,406 13,865,099 56,902,380 36,443,831
Amortization of trademark 16,008 19,278 44,092 58,643
----------------- ---------------- ---------------- ----------------
Total operating expenses 21,768,414 13,884,377 56,946,472 36,502,474
----------------- ---------------- ---------------- ----------------
OPERATING INCOME 33,575,255 9,924,831 73,653,593 21,973,484
NET NONOPERATING
INCOME (EXPENSE) 323,452 (8,104) 694,846 (27,152)
----------------- ---------------- ---------------- ----------------
INCOME BEFORE
PROVISION FOR
INCOME TAXES 33,898,707 9,916,727 74,348,439 21,946,332
----------------- ---------------- ---------------- ----------------
PROVISION FOR
INCOME TAXES 13,653,339 4,118,079 30,012,660 8,886,254
----------------- ---------------- ---------------- ----------------
NET INCOME $ 20,245,368 $ 5,798,648 $ 44,335,779 $ 13,060,078
================= ================ ================ ================
NET INCOME PER COMMON SHARE:
Basic $ 0.92 $ 0.27 $ 2.01 $ 0.62
================= ================ ================ ================
Diluted $ 0.83 $ 0.24 $ 1.84 $ 0.56
================= ================ ================ ================
NUMBER OF COMMON SHARES USED
IN PER SHARE COMPUTATIONS:
Basic 22,119,949 21,632,314 22,008,204 21,182,718
================= ================ ================ ================
Diluted 24,334,342 23,685,608 24,127,346 23,472,094
================= ================ ================ ================
See accompanying notes to condensed consolidated financial statements.
4
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (Unaudited)
- --------------------------------------------------------------------------------
September 30, September 30,
2005 2004
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 44,335,779 $ 13,060,078
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of trademark license and trademarks 44,092 58,643
Depreciation and other amortization 703,589 550,913
Loss/(gain) on disposal of property and equipment 152,001 9,706
Deferred income taxes (697,524) (972,655)
Provision for doubtful accounts 211,641 216,722
Effect on cash of changes in operating assets and liabilities:
Accounts receivable (21,979,616) (9,163,403)
Inventories (6,450,075) (2,058,804)
Prepaid expenses and other current assets (6,306) 143,401
Prepaid income taxes (3,513,671) -
Accounts payable 14,494,168 11,268,408
Accrued liabilities 1,097,991 388,553
Accrued compensation 540,730 109,952
Income taxes payable 965,189 2,285,129
------------------ ------------------
Net cash provided by operating activities 29,897,988 15,896,643
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (15,942,566) -
Sale of short-term investments 24,591,022 -
Purchases of property and equipment (1,258,305) (956,067)
Proceeds from sale of property and equipment 178,571 24,698
Increase in trademark license and trademarks (103,368) (27,568)
Increase in deposits and other assets (13,307) (101,343)
------------------ ------------------
Net cash provided by (used in) investing activities 7,452,047 (1,060,280)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (780,756) (239,354)
Issuance of common stock 1,036,745 1,583,674
------------------ ------------------
Net cash provided by financing activities 255,989 1,344,320
------------------ ------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 37,606,024 16,180,683
CASH AND CASH EQUIVALENTS, beginning of year 3,676,119 1,098,785
------------------ ------------------
CASH AND CASH EQUIVALENTS, end of period $ 41,282,143 $ 17,279,468
================== ==================
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest $ 44,738 $ 29,272
================== ==================
Income taxes $ 33,258,667 $ 7,573,781
================== ==================
5
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (Unaudited) Continued
- --------------------------------------------------------------------------------
NON-CASH TRANSACTIONS
During the nine-months ended September 30, 2005, the Company entered into
capital leases of $927,838, for the acquisition of promotional vehicles and
warehouse equipment.
During the nine-months ended September 30, 2005, the Company reduced income
taxes payable and increased prepaid expenses and additional paid-in-capital by
an aggregate amount of $1,311,638 in connection with the exercise of certain
stock options.
On August 8, 2005, the Company distributed a stock dividend to shareholders
of record on August 1, 2005. The stock dividend increased common stock and
decreased retained earnings by $56,260.
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 this 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 nine-months ended
September 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 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 any investments in auction rate
securities at September 30, 2005 but did hold such investments at December 31,
2004. 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.
Inventories - Inventories are valued at the lower of first-in, first-out
(FIFO) cost or market value (net realizable value).
7
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 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 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 September 30, 2005 and
December 31, 2004:
Septembe 30, December 31,
2005 2004
-------------------- --------------------
Amortizing trademarks $ 1,272,616 $ 1,169,248
Accumulated amortization (263,356) (219,264)
-------------------- --------------------
1,009,260 949,984
Non-amortizing trademarks 17,401,820 17,401,820
-------------------- --------------------
$ 18,411,080 $ 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 18 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 nine-months ended September 30, 2005 and
2004 was $44,092 and $58,643, respectively. As of September 30, 2005, future
estimated amortization expense related to amortizing trademarks through the year
ending December 31, 2010 is:
2005 - Remainder $ 17,318
2006 69,271
2007 69,271
2008 69,122
2009 69,122
2010 69,122
Revenue Recognition - The Company recognizes revenue when persuasive
evidence of an arrangement exists, delivery has occurred, the sales price is
fixed or 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 and warehousing
expenses after manufacture, 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, including but not
limited to production costs, amounted to $5.0 million and $3.3 million for the
three-months ended September 30, 2005 and 2004, respectively and $12.7 million
and $8.5 million for the nine-months ended September 30, 2005 and 2004,
respectively. Advertising expenses are included in selling, general and
administrative expenses. 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. The aggregate amount of
promotional allowances amounted to $18.8 million and $12.4 million for the
three-months ended September 30, 2005 and 2004, respectively and $44.0 million
and $25.8 million for the nine-months ended September 30, 2005 and 2004,
respectively and are included as a reduction of gross sales. Other allowances
amounted to $2.2 million and $2.1 million for the three months ended September
30, 2005 and 2004 respectively and $7.0 million and $6.5 million for the nine
months ended September 30, 2005 and 2004 respectively and are also 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 nine-months ended September
30, 2005 was to decrease net sales and decrease selling, general and
administrative expenses by $47.6 million and for the nine-months ended September
30, 2004 was to decrease net sales by $27.5 million, increase cost of goods sold
by $47,000 and decrease selling, general and administrative expenses by $27.6
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- and nine-months ended September 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).
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2005 2004 2005 2004
--------------- --------------- --------------- --------------
Net income, as reported $ 20,245,368 $ 5,798,648 $ 44,335,779 $ 13,060,078
Less: Total stock based
employee compensation
expense determined
under fair value based
method for all awards,
net of related tax effects 710,906 101,078 1,690,109 252,132
--------------- --------------- --------------- --------------
Net income, pro forma $ 19,534,462 $ 5,697,570 $ 42,645,670 $ 12,807,946
=============== ============== =============== ==============
Net income per common share, as reported -
Basic $ 0.92 $ 0.27 $ 2.01 $ 0.62
Diluted $ 0.83 $ 0.24 $ 1.84 $ 0.56
Net income per common share, pro-forma -
Basic $ 0.88 $ 0.26 $ 1.94 $ 0.60
Diluted $ 0.80 $ 0.24 $ 1.77 $ 0.55
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% 67% 4.4% 7 years
2004 0% 43% 4.0% 8 years
10
3. NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") 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.
In December 2004, the FASB issued 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, the 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 but expects the effect to be material.
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:
September 30, December 31,
2005 2004
------------- -------------
Raw Materials $ 9,788,427 $ 6,449,521
Finished Goods 19,067,702 15,956,533
------------- -------------
$ 28,856,129 $ 22,406,054
============= =============
11
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
September 30, December 31,
2005 2004
------------- -------------
Leasehold improvements $ 537,514 $ 268,068
Furniture and office equipment 1,661,289 1,193,741
Equipment 1,192,603 1,488,571
Vehicles 2,233,685 2,359,264
------------- -------------
5,625,091 5,309,644
Less accumulated depreciation and amortization (1,905,904) (2,345,580)
------------- -------------
$ 3,719,187 $ 2,964,064
============= =============
6. STOCK SPLIT
On August 8, 2005, the common stock of the Company was split on a
two-for-one basis through a 100% stock dividend. All per-share and outstanding
share information has been presented to reflect the stock split.
7. EARNINGS PER SHARE
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 (Note 6).
A reconciliation of the weighted average shares used in the basic and
diluted earnings per common share computations for the three and nine months
ended September 30, 2005 and 2004 is presented below:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Weighted-average shares outstanding:
Basic 22,119,949 21,632,314 22,008,204 21,182,718
Dilutive securities 2,214,393 2,053,294 2,119,142 2,289,376
------------ ------------ ------------ ------------
Diluted 24,334,342 23,685,608 24,127,346 23,472,094
============ ============ ============ ============
For the three and nine months ended September 30, 2005, options outstanding
totaling 6,000 and 107,500 shares respectively were excluded from the
calculations, as their effect would have been anti-dilutive. For the three and
nine months ended September 30, 2004, 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.
12
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. The Company is currently in the process of renewing the
Monorail Agreement.
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.
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.
13
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 periods of time. The aggregate value of business conducted with
suppliers of such limited resources described above for the nine-months ended
September 30, 2005 was $25.5 million.
9. OPERATING SEGMENTS
The Company has two reportable segments which follow the 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
non-carbonated (primarily juice based) and carbonated (primarily 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 three-months ended September 30,
2005 and 2004 is as follows:
Three-months Ended September 30, 2005
-----------------------------------------------------------------
Corporate &
DSD Warehouse Unallocated Total
-------------- -------------- -------------- --------------
Net sales $ 85,006,983 $ 20,414,471 $ - $105,421,454
Contribution margin 36,569,978 1,020,860 37,590,838
Corporate & unallocated expenses (4,015,583) (4,015,583)
Operating income 33,575,255
Net nonoperating income (expense) (11,687) (1,880) 337,019 323,452
Income before provision for
income taxes 33,898,707
Depreciation & amortization 110,651 7,597 154,533 272,781
Trademark amortization - 11,015 4,993 16,008
Three-months Ended September 30, 2004
-----------------------------------------------------------------
Corporate &
DSD Warehouse Unallocated Total
-------------- -------------- -------------- --------------
Net sales $ 32,688,358 $ 19,953,375 $ (256) $ 52,641,477
Contribution margin 11,049,354 1,437,312 12,486,666
Corporate & unallocated expenses (2,561,835) (2,561,835)
Operating income 9,924,831
Net nonoperating income (expense) (7,041) (3,727) 2,664 (8,104)
Income before provision for
income taxes 9,916,727
Depreciation & amortization 95,566 12,397 86,478 194,441
Trademark amortization - 11,027 8,251 19,278
14
The accounting policies of 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."
Corporate and unallocated expenses were $4.0 million for the three-months
ended September 30, 2005 and included $2.1 million of payroll costs and $632,000
of professional service expenses including accounting and legal costs. Corporate
and unallocated expenses were $2.6 million for the three-months ended September
30, 2004 and included $1.3 million of payroll costs and $640,000 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.
One customer made up approximately 18% and 13% of the Company's net
revenues for the three-months ended September 30, 2005 and 2004, respectively.
Such customer is a customer of the DSD segment.
The net revenues derived from DSD and Warehouse segments and other
financial information related thereto for the nine-months ended September 30,
2005 and 2004 is as follows:
Nine-months Ended September 30, 2005
-----------------------------------------------------------------
Corporate &
DSD Warehouse Unallocated Total
-------------- -------------- -------------- --------------
Net sales $190,854,594 $ 60,021,687 $ - $250,876,281
Contribution margin 80,822,585 3,908,811 84,731,396
Corporate & unallocated expenses (11,077,803) (11,077,803)
Operating income 73,653,593
Net nonoperating income (expense) (24,494) (8,179) 727,519 694,846
Income before provision for
income taxes 74,348,439
Depreciation & amortization 281,475 22,807 399,307 703,589
Trademark amortization - 33,045 11,047 44,092
Nine-months Ended September 30, 2004
-----------------------------------------------------------------
Corporate &
DSD Warehouse Unallocated Total
-------------- -------------- -------------- --------------
Net sales $ 77,900,848 $ 52,102,955 $ - $130,003,803
Contribution margin 25,544,689 3,915,706 29,460,395
Corporate & unallocated expenses (7,486,911) (7,486,911)
Operating income 21,973,484
Net nonoperating income (expense) (15,171) (12,524) 543 (27,152)
Income before provision for
income taxes 21,946,332
Depreciation & amortization 236,061 36,386 278,466 550,913
Trademark amortization - 33,057 25,586 58,643
15
Corporate and unallocated expenses were $11.1 million for the nine-months
ended September 30, 2005 and included $5.9 million of payroll costs and $1.8
million of professional service expenses including accounting and legal costs.
Corporate and unallocated expenses were $7.5 million for the nine-months ended
September 30, 2004 and included $3.8 million of payroll costs and $1.7 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 12% of the Company's net
revenues for the nine-months ended September 30, 2005 and 2004, respectively.
Such customer is a customer of the DSD segment.
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), Rumba(tm) and Joker(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.
We principally generate 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, athlete and event 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, events 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 the Company's 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.
16
During the third 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 second quarter of 2005, we introduced a pomegranate juice blend in 64-ounce
bottles. In the third quarter of 2005, the Company introduced 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, a diet Grapefruit soda in 12-ounce
cans and Blue Sky(r) Real Sugar sodas in 12-ounce cans.
During the third 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 third quarter of 2005. The increase
in net sales for the three-months ended September 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, and our
Monster EnergyTM "Assault"TM energy drinks which were introduced in September
2004, increased sales by volume of our Lost(r) energy drinks, which were
introduced in January 2004, sales of Monster EnergyTM "Khaos" energy drinks,
which were introduced in August 2005 and increases in sales by volume, primarily
of Hansen's(r) apple juice and juice blends. 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 and RumbaTM energy juice, which was
introduced in December 2004 as well as increased sales by volume of Hansen's(r)
children's juice drinks in aseptic packaging. The increase in net sales was
partially offset by lower sales by volume of smoothies in cans, Natural Sodas
and Hansen's(r) energy and functional drinks including Deuce energy in 16-ounce
cans.
A substantial portion of our sales are derived from our Monster EnergyTM
brand energy drinks. Any decrease in sales of our Monster EnergyTM brand energy
drinks could significantly adversely affect our future revenues and net income.
Gross profit for the three months ended September 30, 2005, as a percentage
of net sales, was 52.5% which was higher than the 45.2% gross profit as a
percentage of net sales for the three months ended September 30, 2004.
Additionally, for the nine months ended September 30, 2005, gross profit as a
percentage of net sales, was 52.1% which was higher than the 45.0% gross profit
percentage achieved in the nine months ended September 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.
17
During the three months ended September 30, 2005, sales shipped outside of
California represented 63.8% of our aggregate gross sales, as compared to 56.6%
of our aggregate gross sales for the comparable period in 2004. During the nine
months ended September 30, 2005, sales shipped outside of California,
represented 61.7% of our aggregate gross sales, as compared to approximately
56.4% of our aggregate sales in the nine months ended September 30, 2004. During
the three months ended September 30, 2005, sales to distributors outside the
United States amounted to $1.8 million, as compared to $0.7 million for the
three months ended September 30, 2004, which was less than 2% of gross sales for
each period respectively. Sales to distributors outside the United States,
during the nine months ended September 30, 2005, amounted to $4.1 million
compared to $1.6 million in the nine months ended September 30, 2004, accounting
for less than 2% of our gross sales for each period respectively.
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 Nine Months
Ended Ended
September 30, September 30,
-------------- --------------
2005 2004 2005 2004
------ ------ ------ ------
Retail Grocery, specialty chains and wholesalers 15% 24% 18% 23%
Club stores, drug & mass merchandisers 11% 14% 11% 15%
Full service distributors 69% 52% 65% 51%
Health food distributors 3% 5% 4% 7%
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 and during the third
quarter of 2005 we introduced a new line of Blue Sky Real Sugar 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.
18
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.
Results of Operations
The following table sets forth key statistics for the three- and
nine-months ended September 30, 2005 and 2004, respectively.
Three-Months Ended Percentage Nine-Months Ended Percentage
September 30, Change September 30, Change
--------------------------------- ------------ --------------------------------- -------------
2005 2004 05 vs. 04 2005 2004 05 vs. 04
---------------- ---------------- ------------ ---------------- ---------------- -------------
Gross sales, net of
discounts & returns * $126,384,787 $ 67,128,607 88.3% $301,846,541 $162,337,851 85.9%
Less: Promotional and
other allowances** 20,963,333 14,487,130 44.7% 50,970,260 32,334,048 57.6%
---------------- ---------------- ------------ ---------------- ---------------- -------------
Net sales 105,421,454 52,641,477 100.3% 250,876,281 130,003,803 93.0%
Cost of sales 50,077,785 28,832,269 73.7% 120,276,216 71,527,845 68.2%
---------------- ---------------- ------------ ---------------- ---------------- -------------
Gross profit 55,343,669 23,809,208 132.4% 130,600,065 58,475,958 123.3%
Gross profit margin 52.5% 45.2% 52.1% 45.0%
Selling, general and
administrative
expenses 21,752,406 13,865,099 56.9% 56,902,380 36,443,831 56.1%
Amortization of
trademark 16,008 19,278 (17.0%) 44,092 58,643 (24.8%)
---------------- ---------------- ------------ ---------------- ---------------- -------------
Operating income 33,575,255 9,924,831 238.3% 73,653,593 21,973,484 235.2%
Operating income as a
percent of net sales 31.8% 18.9% 29.4% 16.9%
Net nonoperating
income (expense) 323,452 (8,104) (4,091.3%) 694,846 (27,152) (2,659.1%)
---------------- ---------------- ------------ ---------------- ---------------- -------------
Income before
provision for income
taxes 33,898,707 9,916,727 241.8% 74,348,439 21,946,332 238.8%
Provision for income
taxes 13,653,339 4,118,079 231.5% 30,012,660 8,886,254 237.7%
---------------- ---------------- ------------ ---------------- ---------------- -------------
Effective tax rate 40.3% 41.5% 40.4% 40.5%
Net income $ 20,245,368 $ 5,798,648 249.1% $ 44,335,779 $ 13,060,078 239.5%
================ ================ ============ ================ ================ =============
Net income as a
percent of net sales 19.2% 11.0% 17.7% 10.0%
Net income per common share (post-split):
Basic $ 0.92 $ 0.27 $ 2.01 $ 0.62
Diluted $ 0.83 $ 0.24 $ 1.84 $ 0.56
Case Sales (in thousands) (in 192-ounce case equivalents)
13,983 8,913 56.9% 35,646 21,889 62.8%
19
* 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 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.
** 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
promotional and other allowances may not be comparable to similar items
presented by other companies. The presentation of promotional and other
allowances facilitates an evaluation of the impact thereof on the determination
of net sales and illustrates the spending levels incurred to secure such sales.
Promotional and other allowances constitute a material portion of the marketing
activities of the Company.
Results of Operations for the Three Months Ended September 30, 2005 Compared to
the Three Months Ended September 30, 2004
Gross Sales* . For the three-months ended September 30, 2005, gross sales
were $126.4 million, an increase of approximately $59.3 million or 88.3% higher
than the $67.1 million gross sales for the three-months ended September 30,
2004. The increase in gross sales for the three-months ended September 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. The percentage increase in gross sales was lower than the
percentage increase in net sales. This was due to a decrease in promotional and
other allowances as a percentage of gross sales, which decreased from 21.6% to
16.6%, although the actual amount of promotional and other allowances increased
from $14.5 million to $21.3 million.
Net Sales. For the three-months ended September 30, 2005, net sales were
$105.4 million, an increase of approximately $52.8 million or 100.3% higher than
net sales of $52.6 million for the three-months ended September 30, 2004. Net
sales case volumes increased from 8.9 million cases for the three-months ended
September 30, 2004 to 14.0 million cases for the three-months ended September
30, 2005, an increase of 5.1 million cases or 56.9%. The overall average net
sales price per case also increased to $7.54 per case for the three-months ended
September 30, 2005 from $5.91 for the three-months ended September 30, 2004, an
increase of 27.7%. The increase in the average net sales prices per case 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 September 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,
and our Monster EnergyTM "Assault"TM energy drinks which were introduced in
September 2004, increased sales by volume of our Lost(r) energy drinks, which
were introduced in January 2004, sales of Monster EnergyTM "Khaos" energy
drinks, which were introduced in August 2005 and increases in sales by volume,
primarily of Hansen's(r) apple juice and juice blends. 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 and RumbaTM energy juice,
which was introduced in December 2004 as well as increased sales by volume of
Hansen's(r) children's juice drinks in aseptic packaging. The increase in net
sales was partially offset by lower sales by volume of smoothies in cans,
Natural Sodas and Hansen's(r) energy and functional drinks including Deuce
energy in 16-ounce cans.
20
Net sales for the for the DSD segment were $85.0 million for the
three-months ended September 30, 2005, an increase of approximately $52.3
million or 160.1% higher than net sales of $32.7 million for the three-months
ended September 30, 2004. The increase in net sales for the DSD segment was
primarily attributable to the increase in sales of Monster EnergyTM brand energy
drinks and our Lost(r) energy drinks. Net sales for the Warehouse segment were
$20.4 million for the three-months ended September 30, 2005, an increase of
approximately $0.5 million or 2.3% higher than net sales of $20.0 million for
the three-months ended September 30, 2004. The increase in net sales for the
Warehouse segment was primarily attributable to the increased sales of
Hansen's(r) apple juice and juice blends.
Gross Profit. Gross profit was $55.3 million for the three-months ended
September 30, 2005, an increase of approximately $31.5 million or 132.4% higher
than the gross profit for the three-months ended September 30, 2004 of $23.8
million. Gross profit as a percentage of net sales, increased to 52.5% for the
three-months ended September 30, 2005 from 45.2% for the three-months ended
September 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 and instead include such costs within
another line item such as selling, general and administrative expenses.
Distribution expenses, which include out-bound freight and warehousing
expenses after manufacture, were $6.5 million and $3.7 million respectively for
the three-months ended September 30, 2005 and 2004 respectively and have been
included in operating expenses.
Total Operating Expenses. Total operating expenses were $21.8 million for
the three-months ended September 30, 2005, an increase of approximately $7.9
million or 56.8% higher than total operating expenses of $13.9 million for the
three-months ended September 30, 2004. Total operating expenses as a percentage
of net sales decreased to 20.6% for the three-months ended September 30, 2005 as
compared to 26.4% for the three-months ended September 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 $14.5 million for the three-months ended September
30, 2005, an increase of approximately $5.8 million or 66.2% higher than selling
expenses of $8.7 million for the three-months ended September 30, 2004. Selling
expenses as a percentage of net sales for the three-months ended September 30,
2005 were 13.7%, which was lower than selling expenses as a percentage of net
sales of 16.5% for the three-months ended September 30, 2004. The increase in
selling expenses was primarily attributable to an increase in distribution and
warehouse expenses after manufacture, which increased by $2.8 million, increased
expenditures for trade development activities with distributors, which increased
by $1.1 million and increased expenditures for sponsorships and endorsements of
$0.8 million. The decrease in selling expenses as a percentage of net sales was
attributable to selling expenses increasing at a lower rate than net sales for
the three months ended September 30, 2005 as compared to the three months ended
September 30, 2004.
21
General and administrative expenses were $7.3 million for the three-months
ended September 30, 2005, an increase of approximately $2.1 million or 41.3%
higher than general and administrative expenses of $5.2 million for the
three-months ended September 30, 2004. General and administrative expenses as a
percentage of net sales for the three-months ended September 30, 2005 were 6.9%
which was lower than general and administrative expenses as a percentage of net
sales of 9.8% for the three-months ended September 30, 2004. The increase in
general and administrative expenses was primarily attributable to increased
payroll expenses for administrative and support activities, which increased by
$1.0 million, expenses related to the termination of certain distributor
agreements, travel and entertainment expenses and insurance costs, which
increased by $0.6 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 September 30, 2005 as compared to the three months ended September
30, 2004.
Contribution Margin. Contribution margin for the DSD segment was $36.6
million for the three-months ended September 30, 2005, an increase of
approximately $25.5 million or 231.0% higher than contribution margin of $11.0
million for the three-months ended September 30, 2004. The increase in
contribution margin for the DSD segment was primarily attributable to the
increase in net sales of Monster EnergyTM brand energy drinks and our Lost(r)
energy drinks. Contribution margin for the Warehouse segment was $1.0 million
for the three-months ended September 30, 2005, a decrease of approximately $0.4
million or 29.0% lower than contribution margin of $1.4 million for the
three-months ended September 30, 2004. The decrease in the contribution margin
for the Warehouse segment was primarily attributable to increased costs of raw
materials and production.
Operating Income. Operating income was $33.6 million for the three-months
ended September 30, 2005, an increase of approximately $23.7 million or 238.3%
higher than operating income of $9.9 million for the three-months ended
September 30, 2004. Operating income as a percentage of net sales increased to
31.8% for the three-months ended September 30, 2005 from 18.9% for the
three-months ended September 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 September 30, 2005 as compared to
the three months ended September 30, 2004.
Net Nonoperating Income/Expense. Net nonoperating income was $0.3 million
for the three-months ended September 30, 2005, an increase of approximately $0.3
million from net non-operating expense of $8,000 for the three-months ended
September 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 September 30, 2005 was $13.7 million as compared to provision for income
taxes of $4.1 million for the comparable period in 2004. The effective combined
federal and state tax rate for the three-months ended September 30, 2005 was
40.3%, which was lower than the effective tax rate of 41.5% for the three-months
ended September 30, 2004 due to the apportionment of sales and related state
taxes to various states outside of California which have different state tax
rates.
22
Net Income. Net income was $20.2 million for the three-months ended
September 30, 2005, an increase of $14.4 million or 249.1% higher than net
income of $5.8 million for the three-months ended September 30, 2004. The
increase in net income was attributable to the increase in gross profit of
approximately $31.5 million and increase in nonoperating income of approximately
$0.3 million which was partially offset by the increase in operating expenses of
approximately $7.9 million and an increase in provision for income taxes of
approximately $9.5 million.
Results of Operations for the Nine Months Ended September 30, 2005 Compared to
the Nine Months Ended September 30, 2004
Gross Sales*. For the nine-months ended September 30, 2005, gross sales
were $301.8 million, an increase of approximately $139.5 million or 85.9% higher
than the $162.3 million gross sales for the nine-months ended September 30,
2004. The increase in gross sales for the nine-months ended September 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. The percentage increase in gross sales was lower than the
percentage increase in net sales. This was due to a decrease in promotional and
other allowances as a percentage of gross sales, which decreased from 19.9% to
16.9%, although the actual amount of promotional and other allowances increased
from $32.3 million to $51.0 million.
Net Sales. For the nine-months ended September 30, 2005, net sales were
$250.9 million, an increase of approximately $120.9 million or 93.0% higher than
net sales of $130.0 million for the nine-months ended September 30, 2004. Net
sales case volumes increased from 21.9 million cases for the nine-months ended
September 30, 2004 to 35.6 million cases for the nine-months ended September 30,
2005, an increase of 13.8 million cases or 62.8%. The overall average net sales
price per case also increased to $7.04 per case for the nine-months ended
September 30, 2005 from $5.94 for the nine-months ended September 30, 2004, an
increase of 18.5%. The increase in the average net sales prices per case 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 nine-months ended September 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,
and our Monster EnergyTM "Assault"TM energy drinks which were introduced in
September 2004 and increased sales of Lost(r) energy drinks, which were
introduced in January 2004 and increases in sales by volume, primarily of
Hansen's(r) apple juice and juice blends. 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, sales of Monster EnergyTM "Khaos"
energy drinks, which were introduced in August 2005, increased sales by volume
of Hansen's(r) children's juice drinks in aseptic packaging and sales of 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 and
smoothies in cans.
23
Net sales for the for the DSD segment were $190.9 million for the
nine-months ended September 30, 2005, an increase of approximately $113.0
million or 145.0% higher than net sales of $77.9 million for the nine-months
ended September 30, 2004. The increase in net sales for the DSD segment was
primarily attributable to the increase in sales of Monster EnergyTM brand energy
drinks and our Lost(r) energy drinks. Net sales for the Warehouse segment were
$60.0 million for the nine-months ended September 30, 2005, an increase of
approximately $7.9 million or 15.2% higher than net sales of $52.1 million for
the nine-months ended September 30, 2004. The increase in net sales of the
Warehouse segment was primarily attributable to increased sales of Hansen's(r)
apple juice and juice blends.
Gross Profit. Gross profit was $130.6 million for the nine-months ended
September 30, 2005, an increase of approximately $72.1 million or 123.3% higher
than the gross profit for the nine-months ended September 30, 2004 of $58.5
million. Gross profit as a percentage of net sales increased to 52.1% for the
nine-months ended September 30, 2005 from 45.0% for the nine-months ended
September 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 and instead include such costs within
another line item such as selling, general and administrative expenses.
Distribution expenses, which include out-bound freight and warehousing
expenses after manufacture, were $15.9 million and $9.1 million respectively for
the nine-months ended September 30, 2005 and 2004 respectively and have been
included in operating expenses.
Total Operating Expenses. Total operating expenses were $56.9 million for
the nine-months ended September 30, 2005, an increase of approximately $20.4
million or 56.0% higher than total operating expenses of $36.5 million for the
nine-months ended September 30, 2004. Total operating expenses as a percentage
of net sales decreased to 22.7% for the nine-months ended September 30, 2005 as
compared to 28.1% for the nine-months ended September 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 $36.1 million for the nine-months ended September 30,
2005, an increase of approximately $14.3 million or 65.4% higher than selling
expenses of $21.8 million for the nine-months ended September 30, 2004. Selling
expenses as a percentage of net sales for the nine-months ended September 30,
2005 were 14.4% which was lower than selling expenses as a percentage of net
sales of 16.8% for the nine-months ended September 30, 2004. The increase in
selling expenses was primarily attributable to an increase in distribution and
warehouse expenses after manufacture, which increased by $6.7 million, increased
expenditures for trade development activities with distributors, which increased
by $3.1 million, increased expenditures for merchandise displays, point-of-sale
materials and premiums, which increased by $1.5 million and increased
expenditures for sponsorships and endorsements, which increased by $1.3 million.
The decrease in selling expenses as a percentage of net sales was attributable
to selling expenses increasing at a lower rate than net sales for the nine
months ended September 30, 2005 as compared to the nine months ended September
30, 2004.
24
General and administrative expenses were $20.8 million for the nine-months
ended September 30, 2005, an increase of approximately $6.2 million or 42.3%
higher than general and administrative expenses of $14.6 million for the
nine-months ended September 30, 2004. General and administrative expenses as a
percentage of net sales for the nine-months ended September 30, 2005 were 8.3%
which was lower than general and administrative expenses as a percentage of net
sales of 11.2% for the nine-months ended September 30, 2004. The increase in
general and administrative expenses was primarily attributable to increased
payroll expenses for administrative and support activities, which increased by
$2.8 million, expenses related to the termination of certain distributor
agreements, travel and entertainment expenses and insurance costs which
increased by $2.0 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 nine
months ended September 30, 2005 as compared to the nine months ended September
30, 2004.
Contribution Margin. Contribution margin for the DSD segment was $80.8
million for the nine-months ended September 30, 2005, an increase of
approximately $55.3 million or 216.4% higher than contribution margin of $25.5
million for the nine-months ended September 30, 2004. The increase in
contribution margin for the DSD division was primarily attributable to the
increase in net sales of the Monster EnergyTM brand energy drinks and our
Lost(r) energy drinks. Contribution margin for the Warehouse segment was $3.9
million for the nine-months ended September 30, 2005 as well as for the
nine-months ended September 30, 2004. The relative steady contribution margin
for the Warehouse segment was primarily attributable in increased net sales of
Hansen's(r) apple juice and juice blends which was offset primarily by increased
costs of raw materials and production costs.
Operating Income. Operating income was $73.7 million for the nine-months
ended September 30, 2005, an increase of approximately $51.7 million or 235.2%
higher than operating income of $22.0 million for the nine-months ended
September 30, 2004. Operating income as a percentage of net sales increased to
29.4% for the nine-months ended September 30, 2005 from 16.9% for the
nine-months ended September 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 nine months ended September 30, 2005 as compared to
the nine months ended September 30, 2004.
Net Nonoperating Income/Expense. Net nonoperating income was $0.7 million
for the nine-months ended September 30, 2005, an increase of approximately $0.7
million from net non-operating expense of $27,000 for the nine-months ended
September 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 nine-months
ended September 30, 2005 was $30.0 million as compared to provision for income
taxes of $8.9 million for the comparable period in 2004. The effective combined
federal and state tax rate for the nine-months ended September 30, 2005 was
40.4%, which was slightly lower than the effective tax rate of 40.5% for the
nine-months ended September 30, 2004 due to the apportionment of sales and
related state taxes to various states outside of California which have different
state tax rates.
25
Net Income. Net income was $44.3 million for the nine-months ended
September 30, 2005, an increase of $31.3 million or 239.5% higher than net
income of $13.1 million for the nine-months ended September 30, 2004. The
increase in net income was attributable to the increase in gross profit of
approximately $72.1 million and increase in nonoperating income of approximately
$0.7 million which was partially offset by the increase in operating expenses of
approximately $20.4 million and an increase in provision for income taxes of
approximately $21.1 million.
Liquidity and Capital Resources
Cash flows from operating activities - Net cash provided by operating
activities was $29.9 million for the nine-months ended September 30, 2005 as
compared to $15.9 million in the comparable period in 2004. For the nine-months
ended September 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, increases in inventories required to sustain the
increased volume in sales and increases in prepaid income taxes. 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.
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 investing
activities was $7.5 million for the nine-months ended September 30, 2005 as
compared to net cash used in investing activities of $1.1 million in the
comparable period in 2004. For the nine-months ended September 30, 2005, cash
provided by investing activities was primarily attributable to purchases and
sales of short-term investments, and to a minor extent, the sale-leaseback of
certain vans and promotional vehicles and the sale of certain production
equipment that was no longer operational. For both periods, cash used in
investing activities included the acquisitions of fixed assets consisting of
computer and office equipment used for sales and administrative activities, vans
and promotional vehicles and other equipment to support the marketing and
promotional activities of the Company. Management expects that it will continue
to use portion of its cash in excess of its requirements for operations, to
purchase short-term investments and for other corporate purposes. 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 Company's brands, as well as the introduction of new product
lines.
Cash flows from financing activities - Net cash provided by financing
activities was $256,000 for the nine-months ended September 30, 2005 as compared
to net cash provided by financing activities of $1.3 million for the comparable
period in 2004. For the nine-months ended September 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.
26
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 2007. 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 September 30, 2005, HBC had no balances outstanding under the
credit facility.
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 September 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.
Contractual obligations represent our obligations under our agreement with
the Las Vegas Monorail Company and other commitments. 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
September 30, 2005:
Payments due by period
- -----------------------------------------------------------------------------------------------------------
Less than 1 1-3 3-5 More than
Obligations Total year years years 5 years
- -------------------------- -------------- ------------ -------------- -------------- --------------
Contractual $ 1,859,263 $ 1,859,263 $ - $ - $ -
Long-Term Debt 144,850 144,850 -
Capital Lease 586,085 572,942 13,143
Operating Lease 5,414,279 1,270,981 3,254,434 888,864
Purchase 13,381,147 7,857,199 5,523,948
-------------- ------------ -------------- -------------- --------------
$ 21,385,624 $ 11,705,235 $ 8,791,525 $ 888,864 $ -
============== ============ ============== ============== ==============
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 at least September
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
through September 2006. However, future business opportunities may cause a
change in this estimate.
27
Sales
The table set forth below discloses selected quarterly data regarding sales
for the three- and nine-months ended September 30, 2005 and 2004, respectively,
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.
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
continues to increase, 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, except
(for average price per
case) Three-months ended September 30, Nine-months ended September 30,
------------------------------ -------------------------------
2005 2004 2005 2004
-------------- -------------- -------------- ---------------
Net Sales $ 105,421 $ 52,641 $ 250,876 $ 130,004
Case Sales 13,983 8,913 35,646 21,889
Average price per case $ 7.54 $ 5.91 $ 7.04 $ 5.94
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:
28
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 third quarter
of 2005, the estimated fair values of trademarks exceeded the carrying value.
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 September 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.
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.
29
Net Sales - Net sales consist 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 and warehousing
expenses after manufacture, 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.
Distribution expenses, which include out-bound freight and warehousing
expenses after manufacture, were $6.5 million and $3.7 million for the
three-months ended September 30, 2005 and 2004 respectively and $15.9 million
for the nine-months ended September 30, 2005 as compared to $9.1 million for the
nine-months ended September 30, 2004.
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.
30
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.
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.
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;
* The Company's ability to sustain the current level of sales of our Monster
EnergyTM brand energy drinks;
31
* Laws and regulations, and/or any changes therein, including changes in
accounting standards, taxation requirements (including tax rate changes,
new tax laws and revised tax law interpretations) and environmental laws as
well as the Federal Food Drug and Cosmetic Act, the Dietary Supplement
Health and Education Act, and regulations made thereunder or in connection
therewith, as well as changes in any other food and drug laws, especially
those that may affect the way in which the Company's products are marketed
and/or labeled and/or sold, including the contents thereof, as well as laws
and regulations or rules made or enforced by the Food and Drug
Administration and/or the Bureau of Alcohol, Tobacco and Firearms, and/or
Federal Trade Commission, and/or certain state regulatory agencies;
* Changes in the cost and availability of raw materials and the ability to
maintain favorable supply arrangements and relationships and procure timely
and/or adequate production of all or any of the Company's products;
* The Company's ability to achieve earnings forecasts, which may be based on
projected volumes and sales of many product types and/or new products,
certain of which are more profitable than others. There can be no assurance
that the Company will achieve projected levels or mixes of product sales;
* The Company's ability to penetrate new markets;
* The marketing efforts of distributors of the Company's products, most of
which distribute products that are competitive with the products of the
Company;
* Unilateral decisions by distributors, convenience chains, 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 JokerTM 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, sparkling
orangeades and lemonades and apple cider in glass bottles and other
products.
The foregoing list of important factors and other risks detailed from time
to time in the Company's reports filed with the Securities and Exchange
Commission are 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.
32
Inflation
The Company does not believe that inflation has a significant impact on the
Company's results of operations for the periods presented.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS
In the normal course of business, our financial position is routinely
subject to a variety of risks. The principal market risks (i.e., the risk of
loss arising from adverse changes in market rates and prices) which the Company
is exposed to are fluctuations in energy and fuel prices as well as 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 September 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 September 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 information we are required to disclose in reports that
we file or submit under the Securities Exchange Act of 1934 is (1) recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms and (2) is accumulated and communicated to the Company's
management, including its principal executive and principal financial officers
as appropriate to allow timely decisions regarding required disclosures.
There have been no 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.
33
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 8 to the financial statements,
"COMMITMENTS AND CONTINGENCIES."
ITEM 6. EXHIBITS
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 Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HANSEN NATURAL CORPORATION
Registrant
Date: November 9, 2005 /s/ RODNEY C. SACKS
--------------------
Rodney C. Sacks
Chairman of the Board of Directors
and Chief Executive Officer
34