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, 1998 Commission file number 0-18761
HANSEN NATURAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 39-1679918
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
2380 Railroad Street, Suite 101,
Corona, California 91720
(Address of principal executive offices) (Zip Code)
(909) 739 - 6200
Registrant's telephone number, including area code:
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
The registrant had 9,911,905 shares of common stock
outstanding as of November 1, 1998
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
September 30, 1998
INDEX
Page No.
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 3
Consolidated Statements of Operations for the
three and nine months ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. OTHER INFORMATION
Items 1-5. Not Applicable 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 20
2
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
- - ---------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
1998 1997
------------ ------------
ASSETS
........................................................................................
CURRENT ASSETS:
Cash ....................................................................................... $ 4,284,121 $ 395,231
Accounts receivable (net of allowance for doubtful
accounts, sales returns and cash discounts of $350,800
in 1998 and $315,629 in 1997 and promotional allowances
of $1,897,438 in 1998 and $1,067,749 in 1997) ........................................... 2,503,872 1,541,731
Inventories ................................................................................ 4,207,624 3,915,983
Prepaid expenses and other current assets .................................................. 526,186 214,468
------------ ------------
Total current assets .................................................................... 11,521,803 6,067,413
PROPERTY AND EQUIPMENT, net ................................................................ 608,539 412,496
INTANGIBLE AND OTHER ASSETS:
Trademark license and trademarks (net of accumulated amortization
of $2,612,278 in 1998 and $2,390,878 in 1997) ........................................... 10,074,583 10,208,116
Note receivable from director .............................................................. 30,961 60,252
Deposits and other assets .................................................................. 198,533 185,082
Total intangible and other assets ....................................................... 10,304,077 10,453,450
------------ ------------
$ 22,434,419 $ 16,933,359
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ........................................................................... $ 3,252,039 $ 2,195,200
Accrued liabilities ........................................................................ 518,300 444,807
Accrued compensation ....................................................................... 568,375 322,114
Current portion of long-term debt .......................................................... 1,593,161 520,835
Income taxes payable ....................................................................... 1,614,590 81,800
------------ ------------
Total current liabilities ............................................................... 7,546,465 3,564,756
LONG-TERM DEBT, less current portion ....................................................... 1,957,386 3,407,824
SHAREHOLDERS' EQUITY:
Common stock - $.005 par value; 30,000,000
shares authorized 9,909,051 and
9,130,869 shares issued
and outstanding in 1998 and 1997, respectively ........................................... 49,545 45,654
Additional paid-in capital ................................................................. 10,930,381 10,858,315
Retained earnings (accumulated deficit) .................................................... 2,017,883 (875,949)
Foreign currency translation adjustment .................................................... (67,241) (67,241)
------------ ------------
Total shareholders' equity .............................................................. 12,930,568 9,960,779
------------ ------------
$ 22,434,419 $ 16,933,359
============ ============
3
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
- - ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
----------- ----------- ----------- -----------
1998 1997 1998 1997
----------- ----------- ----------- -----------
........................................................
NET SALES .................................................. $16,589,368 $13,438,895 $41,804,753 $32,054,709
COST OF SALES .............................................. 8,703,684 7,924,398 21,326,455 18,952,135
----------- ----------- ----------- -----------
GROSS PROFIT ............................................... 7,885,684 5,514,497 20,478,298 13,102,574
OPERATING EXPENSES:
Selling, general and administrative ........................ 5,975,153 4,725,864 15,537,504 11,122,820
Amortization of trademark license and trademarks ........... 73,800 73,500 221,400 220,500
Other expenses ............................................. 29,719 36,704 59,719 183,839
----------- ----------- ----------- -----------
Total operating expenses .......................... 6,078,672 4,836,068 15,818,623 11,527,159
----------- ----------- ----------- -----------
OPERATING INCOME ........................................... 1,807,012 678,429 4,659,675 1,575,415
NET INTEREST AND FINANCING EXPENSE ......................... 50,640 177,420 262,297 450,487
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES .................................. 1,756,372 501,009 4,397,378 1,124,928
PROVISION FOR INCOME TAXES ................................. 624,000 1,544,123 40,200
----------- ----------- ----------- -----------
NET INCOME ................................................. $ 1,132,372 $ 501,009 $ 2,853,255 $ 1,084,728
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE:
Basic ............................................. $ 0.12 $ 0.05 $ 0.31 $ 0.12
=========== =========== =========== ===========
Diluted ........................................... $ 0.11 $ 0.05 $ 0.28 $ 0.12
=========== =========== =========== ===========
NUMBER OF COMMON SHARES USED
IN PER SHARE COMPUTATIONS:
Basic ............................................. 9,356,804 9,214,962 9,210,360 9,195,639
=========== =========== =========== ===========
Diluted ........................................... 10,549,988 9,219,049 10,302,057 9,219,049
=========== =========== =========== ===========
4
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (Unaudited)
- - ---------------------------------------------------------------------------------------------------------------------------------
1998 1997
----------- -----------
..................................................................................
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................................... $ 2,853,255 $ 1,084,728
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Amortization of trademark license and trademarks .................................. 221,400 220,500
Depreciation and other amortization ............................................... 161,759 188,021
Loss on disposal of plant and equipment ........................................... 37,044
Compensation expense related to issuance of stock options ......................... 40,577
Effect on cash of changes in operating assets and liabilities:
Accounts receivable ............................................................. (962,141) (1,155,877)
Inventories ..................................................................... (291,641) (321,567)
Prepaid expenses and other current assets ....................................... (311,718) (113,556)
Accounts payable ................................................................ 1,056,839 634,392
Accrued liabilities ............................................................. 73,493 221,062
Accrued compensation ............................................................ 246,261 36,206
Income taxes payable ............................................................ 1,532,790 81,800
----------- -----------
Net cash provided by operating activities ..................................... 4,620,874 912,753
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................................................... (357,802) (182,537)
Proceeds from sale of property and equipment ......................................... 21,320
Increase in trademark license and trademarks ......................................... (87,867) (80,556)
Decrease in note receivable from director ............................................ 29,291 2,276
Increase in deposits and other assets ................................................ (13,451) (82,526)
----------- -----------
Net cash used in investing activities ......................................... (429,829) (322,023)
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in short-term borrowings .................................................... (177,135)
Increase in long-term debt ........................................................... 14,546
Principal payments on long-term debt ................................................. (378,112) (51,573)
Issuance of common stock ............................................................. 75,957
----------- -----------
Net cash used in financing activities ......................................... (302,155) (214,162)
EFFECT OF EXCHANGE RATE CHANGES ON CASH .............................................. -- (48,930)
----------- -----------
NET INCREASE IN CASH ................................................................. 3,888,890 327,638
CASH, beginning of period ............................................................ 395,231 186,931
=========== ===========
CASH, end of period .................................................................. $ 4,284,121 $ 514,569
=========== ===========
SUPPLEMENTAL INFORMATION:
Cash paid during the year for:
Interest .......................................................................... $ 286,447 $ 276,754
=========== ===========
Income taxes ...................................................................... $ 2,400 $ 2,400
=========== ===========
5
HANSEN NATURAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
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, 1997, which is
incorporated by reference, for a summary of significant policies
utilized by Hansen Natural Corporation ("Hansen" or "Company") and its
subsidiaries, Hansen Beverage Company ("HBC") and CVI Ventures, Inc.
The information set forth in these interim financial statements is
unaudited and may be subject to normal year-end adjustments. The
information reflects all adjustments, which include only normal
recurring adjustments, which in the opinion of management are necessary
to make the financial statements not misleading. Results of operations
covered by this report may not necessarily be indicative of results of
operations for the full fiscal year.
Revenue Recognition - The Company records revenue at the time the
related products are shipped. Adequate provision against net sales has
been made for estimated returns, allowances and cash discounts.
Advertising Costs - The Company accounts for advertising production
costs by expensing such production costs the first time the related
advertising takes place. Advertising expenses included in selling and
general expenses amount to $2,982,029 and $2,099,731 for the nine
months ended September 30, 1998 and 1997, respectively. In addition,
the Company supports its customers (including distributors) with
promotional allowances, portion of which are utilized for indirect
advertising by them. Promotional allowances amounted to $4,709,596 and
$3,047,103 for the nine months ended September 30, 1998 and 1997,
respectively.
Income taxes - The terms SRLY (Separate Return Loss Limitation) and
non-SRLY (non-Separate Return Loss Limitation) refer to two types of
net operating loss carryforwards as they relate to Section 382 of the
Internal Revenue Code. The SRLY net operating loss carryforwards, as
reported in the Company's Form 10-K, were acquired in 1990 in
connection with the acquisition of the Company's subsidiary, CVI
Ventures, Inc. Such net opertating loss carryforwards are subject to
annual limitations. Non-SRLY net operating loss carryforwards are
attributable to taxable losses incurred by the Company in prior years
and are not subject to annual limitations.
Reclassifications - Certain reclassifications were made in the 1997
consolidated financial statements to conform to the 1998 presentation.
6
HANSEN NATURAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
2. ACCOUNTING PRICIPLES
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
Earnings Per Share, which is effective for financial statements issued
for periods ending after December 15, 1997. It replaces the
presentation of primary earnings per share with the presentation of
basic earnings per share. It also requires the presentation of diluted
earnings per share for entities with complex capital structures.
Diluted earnings per share takes into account the potential dilution
that could occur if securities or other contracts to issue common
stock, such as options, were exercised or converted into common stock.
The Company adopted SFAS No. 128 effective with the financial reports
of December 31, 1997. Basic and diluted earnings per share for the
third quarter and year-to-date 1997 have been restated to reflect the
requirements of this statement.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income and SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a
full set of general-purpose financial statements. SFAS no. 131
establishes standards of reporting by publicly held business
enterprises and disclosure of information about operating segments in
annual financial statements and to a lesser extent, in interim
financial reports issued to shareholders. SFAS No. 130 and 131 are
effective for fiscal years beginning after December 15, 1997. As both
SFAS No. 130 and 131 deal with financial statement disclosure, the
Company does not anticipate that the adoption of these new standards
will have a material impact on its financial statements.
3. INVENTORIES
Inventories consist of the following at:
September 30, December 31,
1998 1997
------------ ------------
Raw materials $ 2,097,149 $ 388,877
Finished goods 2,110,475 3,527,106
============ ============
$ 4,207,624 $ 3,915,983
============ ============
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- - --------------------------------------------------------------------------------
General
During the nine-months ended September 30, 1998, the Company continued
to make progress towards achieving its goal of expanding the Hansen's(R) brand
product range and expanding the distribution of such products into new markets
outside of California. Sales of the Company's four functional drinks, comprising
a citrus flavored energy drink, a ginger flavored d .stress(TM) drink, an orange
flavored anti.ox(TM) drink and a guarana flavored stamina(TM) drink, were higher
in the third quarter than in the second quarter. Sales of the company's first
Healthy Start(TM) 100% juice namely, DYNAJUICE(TM), (an orange and pineapple
blend with 15 vitamins and minerals) and the company's apple strawberry and
apple grape 100% juice blends during the third quarter were satisfactory. After
the end of the third quarter, the Company introduced "power(TM)", its newest
functional drink in an 8.2-ounce slim can and three new Healthy Start(TM) juices
namely, ANTIOXJUICE(TM), IMMUNEJUICE(TM), and INTELLIJUICE(TM). Power is a black
cherry flavored drink that contains Creatine, Glutamine and Red Panax Ginseng,
as well as key B Vitamins. ANTIOXJUICE(TM) is a carrot and tropical juice blend
with Grape Seed extract, Vitamins A, C and E and Selenium. IMMUNEJUICE(TM) is an
aronia and cranberry juice blend with Echinacea and Zinc, and INTELLIJUICE(TM)
is an orange and tomato juice blend with Gingko Biloba, Hawthorn Berry and
Ginseng. The Healthy Start(TM) line was originally launched in 46-ounce PET
multi-serve packs and will be extended to a 64-ounce size for the full line,
following testing of DYNAJUICE(TM) in that size package. The Company expects to
formally introduce its new line of Premium Natural Sodas by January 1999, and
its new line of Premium Functional Smoothies along with additional functional
drinks in 8.2-ounce slim cans later in 1999. Other new product development
includes a new line of premium functional iced teas in proprietary glass bottles
later in 1999. The Company continues to incur expenditures in connection with
the development and introduction of new products and flavors.
The increase in net sales and profitability in the third quarter of
1998, was primarily attributable to increased sales of the Company's functional
energy drink and sales of the Company's three additional functional drinks in
8.2-ounce slim cans. The increase in sales was, to a lesser extent, attributable
to the Company's Healthy Start(TM) line and apple juice blends.
8
Results of Operations for the Three-months Ended September 30, 1998 Compared to
the Three-months Ended September 30, 1997
Net Sales. For the three-months ended September 30, 1998, net sales
were approximately $16.6 million, an increase of $3.2 million or 23.4% over the
$13.4 million net sales for the three-months ended September 30, 1997. The
increase in net sales was primarily attributable to increased sales of the
Company's energy functional drink and sales of the Company's three additional
functional drinks, in 8.2-ounce slim cans. The increase in sales was, to a
lesser extent, attributable to the Company's Healthy Start(TM) line and apple
juice blends, and increased sales of Smoothies in bottles, iced teas, lemonades
and juice cocktails and apple juice. The increase in sales of functional drinks
was attributable in part to the fact that the Company only launched its
functional energy drink in April 1997 as well as to the fact that during the
comparable period in 1997, the Company did not have any sales of its three
additional functional drinks which were introduced in the first quarter of 1998.
A portion of the sales of functional drinks during the third quarter of 1998
were attributable to opening orders from distributors prior to their launching
such products in their respective territories. Consequently, sales of functional
drinks during the third quarter of 1998 may not be indicative of sales that will
be achieved from those products in subsequent periods. The increase in net sales
was partially offset by decreased sales of Smoothies in cans and soda. The
decrease in sales of Smoothies in cans was primarily attributable to a large
introductory order received during the third quarter of 1997, which was not
repeated in the third quarter of 1998 and also to the fact that only a portion
of the stores of the customer concerned continue to stock those products.
Gross Profit. Gross profit was $7.9 million for the three-months ended
September 30, 1998, an increase of $2.4 million or 43.0% over the $5.5 million
gross profit for the three-months ended September 30, 1997. Gross profit as a
percentage of net sales increased to 47.5% for the three-months ended September
30, 1998 from 41.0% for the three-months ended September 30, 1997. The increase
in gross profit was primarily attributable to increased net sales and higher
margins achieved. The increase in gross profit as a percentage of net sales was
primarily attributable to higher margins achieved as a result of a change in the
Company's product mix.
Total Operating Expenses. Total operating expenses were $6.1 million
for the three-months ended September 30, 1998, an increase of $1.2 million or
25.7% over total operating expenses of $4.8 million for the three-months ended
September 30, 1997. Total operating expenses as a percentage of net sales
increased to 36.6% for the three-months ended September 30, 1998 from 36.0% for
the three-months ended September 30, 1997. The increase in total operating
expenses was primarily attributable to increased selling, general and
administrative expenses which was partially offset by a decrease in other
expenses. The increase in total operating expenses as a percentage of net sales
was primarily attributable to an increase in selling, general and administrative
expenses and a comparatively smaller increase in net sales from the comparable
period in 1997.
9
Selling, general and administrative expenses were $6.0 million for the
three-months ended September 30, 1998, an increase of $1.2 million or 26.4% over
selling, general and administrative expenses of $4.7 million for the
three-months ended September 30, 1997. Selling, general and administrative
expenses as a percentage of net sales increased to 36.0% for the three-months
ended September 30, 1998 from 35.2% for the three-months ended September 30,
1997. The increase in selling expenses was primarily attributable to increases
in promotional expenditures and allowances, costs of promotional materials,
expenditures for sampling and product demonstrations primarily in connection
with the introduction of new products, advertising and distribution costs. The
costs that were incurred by the Company in sampling DYNAJUICE(TM) in club stores
during its introductory phase were unusually high. The increase in general and
administrative expenses was primarily attributable to increased payroll and
other costs in connection with the Company's expansion activities into
additional states and operating activities to support the increase in net sales.
Other expenses were approximately $30,000 for the three-months ended
September 30, 1998 compared to $37,000 for the three-months ended September 30,
1997. The decrease in other expenses was primarily attributable to the
expiration of certain consulting agreements entered into in connection with the
acquisition of the Hansen business. This decrease was partially offset by
residual expenses incurred in connection with the liquidation of the Company's
United Kingdom subsidiary.
Operating Income. Operating income was $1.8 million for the
three-months ended September 30, 1998, an increase of $1.1 million or 166.4%
over operating income of $678,000 for the three-months ended September 30, 1997.
Operating income as a percentage of net sales increased to 10.9% for the
three-months ended September 30, 1998 from 5.0% in the comparable period in
1997. The increase in operating income was attributable to a $2.4 million
increase in gross profit that was partially offset by an increase of $1.2
million in operating expenses.
Net Interest and Financing Expense. Net interest and financing expense
was $51,000 for the three-months ended September 30, 1998, a decrease of
$127,000 from net interest and financing expense of $177,000 for the
three-months ended September 30, 1997. The decrease in net interest and
financing expense was primarily attributable to the fact that during the
three-months ended September 30, 1998, no amounts were outstanding on the
Company's revolving line of credit, and the principal amounts outstanding on the
Company's term loan were lower than during the comparable period in 1997.
Interest income of $31,000 for the three-months ended September 30, 1998, as
compared to $1,000 interest income during the comparable period in 1997, is
included in net interest and financing expense. The increase in interest income
was attributable to increased cash invested in interest-bearing certificates of
deposit.
10
Provision for Income Taxes. Provision for income taxes was $624,000 for
the three-months ended September 30, 1998, compared to a nil provision for
income taxes for the comparable period in 1997. During the comparable
nine-months ended September 30, 1997, the provision for income taxes was reduced
by a reduction in the valuation allowance that was applied against certain tax
benefits. During the first and second quarters of 1998, the provision for income
taxes was reduced, but to a lesser extent than in 1997, as the valuation
allowance was fully utilized during the first and second quarters of 1998.
Consequently, no reduction in the valuation allowance was available in the third
quarter of 1998.
Net Income. Net income was $1.1 million for the three-months ended
September 30, 1998, compared to net income of $501,000 for the three-months
ended September 30, 1997. The $631,000 increase in net income consists of an
increase in operating income of $1.1 million and a decrease of $127,000 in net
interest and financing expense that was partially offset by a $624,000 increase
in provision for income taxes.
11
Results of Operations for the Nine-months Ended September 30, 1998 Compared to
the Nine-months Ended September 30, 1997
Net Sales. For the nine-months ended September 30, 1998, net sales were
approximately $41.8 million, an increase of $9.8 million or 30.4% over the $32.1
million net sales for the nine-months ended September 30, 1997. The increase in
net sales was primarily attributable to increased sales of the Company's energy
functional drink and sales of the Company's three additional functional drinks,
in 8.2-ounce slim cans. The increase in sales was, to a lesser extent,
attributable to the Company's Healthy Start(TM) line and apple juice blends, and
increased sales of iced teas, lemonades and juice cocktails. The increase in
sales of functional drinks was attributable in part to the fact that the Company
only launched its energy drink in April 1997 as well as to the fact that during
the comparable period in 1997, the Company did not have any sales of its three
additional functional drinks which were introduced in the first quarter of 1998.
A portion of the sales of functional drinks during the nine-months ended
September 30, 1998 were attributable to opening orders from distributors prior
to their launching such products in their respective territories. Consequently,
sales of functional drinks during the nine-months ended September 30, 1998 may
not be indicative of sales that will be achieved for those products in
subsequent periods. Sales of Smoothies in cans and bottles were about the same
as in 1997. A large introductory order that was received by the Company during
the third quarter 1997 for Smoothies in cans was not repeated in 1998 and only a
portion of the stores of the customer concerned continue to stock those
products. The increase in net sales was partially offset by decreased sales of
apple juice and soda.
Gross Profit. Gross profit was $20.5 million for the nine-months ended
September 30, 1998, an increase of $7.4 million or 56.3% over the $13.1 million
gross profit for the nine-months ended September 30, 1997. Gross profit as a
percentage of net sales increased to 49.0% for the nine-months ended September
30, 1998 from 40.9% for the nine-months ended September 30, 1997. The increase
in gross profit was primarily attributable to increased net sales and higher
margins achieved. The increase in gross profit as a percentage of net sales was
primarily attributable to higher margins achieved as a result of a change in the
Company's product mix.
Total Operating Expenses. Total operating expenses were $15.8 million
for the nine-months ended September 30, 1998, an increase of $4.3 million or
37.2% over total operating expenses of $11.5 million for the nine-months ended
September 30, 1997. Total operating expenses as a percentage of net sales
increased to 37.8% for the nine-months ended September 30, 1998 from 36.0% for
the nine-months ended September 30, 1997. The increase in total operating
expenses was primarily attributable to increased selling general and
administrative expenses that was partially offset by a decrease in other
expenses. The increase in total operating expenses as a percentage of net sales
was primarily attributable to the increase in operating expenses and a
comparatively smaller increase in net sales from the comparable period in 1997.
12
Selling, general and administrative expenses were $15.5 million for the
nine-months ended September 30, 1998, an increase of $4.4 million or 39.7% over
selling, general and administrative expenses of $11.1 million for the
nine-months ended September 30, 1997. Selling, general and administrative
expenses as a percentage of net sales increased to 37.2% for the nine-months
ended September 30, 1998 from 34.7% for the comparable period in 1997. The
increase in selling expenses was primarily attributable to increases in
promotional expenditures and allowances, costs of promotional materials,
expenditures for sampling and product demonstrations primarily in connection
with the introduction of new products, advertising and distribution costs. The
costs that were incurred by the Company in sampling DYNAJUICE(TM) in club stores
during its introductory phase were unusually high. The increase in general and
administrative expenses was primarily attributable to increased payroll and
other costs in connection with the Company's expansion activities into
additional states and operating activities to support the increase in net sales.
Other expenses were approximately $60,000 for the nine months ended
September 30, 1998 compared to $184,000 for the nine-months ended September 30,
1997. The decrease in other expenses was primarily attributable to the
expiration of certain consulting agreements entered into in connection with the
acquisition of the Hansen business. This decrease was partially offset by a
consulting agreement entered into with the former president of HBC in June 1997
and by residual expenses incurred in connection with the liquidation of the
Company's United Kingdom subsidiary.
Operating Income. Operating income was $4.7 million for the nine-months
ended September 30, 1998, an increase of $3.1 million or 195.8% over operating
income of $1.6 million for the nine-months ended September 30, 1997. Operating
income as a percentage of net sales increased to 11.1% for the nine-months ended
September 30, 1998 from 4.9% in the comparable period in 1997. The increase in
operating income was attributable to a $7.4 million increase in gross profit
that was partially offset by an increase of $4.3 million in operating expenses.
13
Net Interest and Financing Expense. Net interest and financing expense
was $262,000 for the nine-months ended September 30, 1998, a decrease of
$188,000 from net interest and financing expense of $450,000 for the nine-months
ended September 30, 1997. The decrease in net interest and financing expense was
attributable to the fact that during the nine-months ended September 30, 1998,
no amounts were outstanding on the Company's revolving line of credit and the
principal amounts outstanding on the Company's term loan were lower than during
the comparable period in 1997. Interest income of $39,000 for the nine-months
ended September 30, 1998, as compared to $2,000 interest income during the
comparable period in 1997, is included in net interest and financing expense.
The increase in interest income was attributable to increased cash invested in
interest-bearing certificates of deposit.
Provision for Income Taxes. Provision for income taxes was $1.5 million
for the nine-months ended September 30, 1998 compared to provision for income
taxes of $40,000 for the comparable period in 1997. During the comparable
nine-months ended September 30, 1997, the provision for income taxes was reduced
by a reduction in the valuation allowance that was applied against certain tax
benefits. During the first and second quarters of 1998, the provision for income
taxes was reduced, but to a lesser extent than in 1997, as the valuation
allowance was fully utilized during the first and second quarters of 1998.
Consequently, no reduction in the valuation allowance was available in the third
quarter of 1998.
Net Income. Net income was $2.9 million for the nine-months ended
September 30, 1998 compared to net income of $1.1 million for the nine-months
ended September 30, 1997. The $1.8 million increase in net income consists of an
increase in operating income of $3.0 million and a decrease of $188,000 in net
interest and financing expense that was partially offset by a $1.5 million
increase in provision for income taxes.
14
Liquidity and Capital Resources
At September 30, 1998, the Company had working capital of $3,975,000
compared to working capital of $2,503,000 at December 31, 1997. Net cash
provided by operating activities increased to $4,621,000 for the nine months
ended September 30, 1998 as compared to $913,000 for the comparable period in
1997. The increase in working capital and net cash provided by operating
activities was primarily attributable to net income earned after adjustments for
certain noncash expenses, primarily amortization of trademark license and
trademarks, depreciation and other amortization, during the nine-months ended
September 30, 1998. The increase in working capital was partially offset by the
reclassification of a portion of long-term debt to current portion of long-term
debt.
Management believes that cash generated from operations and the
Company's cash resources and amounts available under HBC's revolving line of
credit, will be sufficient to meet its operating cash requirements in the
foreseeable future, including purchase commitments for raw materials, debt
servicing, expansion and development needs as well as any purchases of capital
assets or equipment.
Net cash used in investing activities increased to $430,000 for the
nine-months ended September 30, 1998 as compared to $322,000 for the comparable
period in 1997. The increase in net cash used in investing activities was
primarily attributable to purchases of property (including vans and promotional
vehicles) and equipment to support the Company's expansion and development
plans. Although the Company has no current plans to incur any material capital
expenditures, management, from time to time, considers the acquisition of
capital equipment, particularly coolers, merchandise display racks, vans and
promotional vehicles, and businesses compatible with the image of the
Hansen's(R) brand as well as the introduction of new product lines. The Company
may require additional capital resources in the event of any such transaction,
depending upon the cash requirements relating thereto. Any such transaction will
also be subject to the terms and restrictions of HBC's credit facilities.
Net cash used in financing activities increased to $302,000 for the
nine-months ended September 30, 1998 as compared to $214,000 for the comparable
period in 1997. The increase in net cash used in financing activities was
attributable to the fact that during the nine-months ended September 30, 1998,
principal payments of $378,000 were made in reduction of HBC's term loan and
$76,000 was received by the Company from the issuance of its common stock as
compared to principal payments of $51,000 and $177,000 made on the term loan and
revolving line of credit, respectively, during the comparable period in 1997. As
of September 30, 1998, $3,551,000 was outstanding under the term loan.
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HBC's revolving line of credit has been renewed by its bank until May
1, 2000. The effective borrowing rate under the revolving line of credit is
prime plus 1/4%. HBC has not borrowed any amounts under its revolving line of
credit during 1998. HBC anticipates that the revolving line of credit will be
renewed when it expires on May 1, 2000; however, there can be no assurance that
it will in fact be renewed or, if renewed, that the terms of such renewal will
not be disadvantageous to HBC and its business.
Year 2000 Compliance
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries or be modified in some fashion to
distinguish Twenty-First Century dates from Twentieth Century dates. This
problem could force computers to either shut-down or provide incorrect data.
Incomplete or untimely resolution of Year 2000 issues by the Company, by
critically important suppliers, co-packers or customers of the Company could
have a material adverse impact on the Company's business, operations or
financial condition in the future.
The Company's Year 2000 compliance efforts are ongoing and its overall
plan, as well as the consideration of contingency plans, will continue to
evolve, as new information becomes available. While the Company anticipates no
major interruption of its business activities, this will be dependent in part,
upon the ability of third parties to be Year 2000 compliant. Although the
Company has implemented the actions described below to address third party
issues it has no direct ability to influence compliance actions by such third
parties or to verify their representations that they are Year 2000 compliant.
The Company's most significant potential risk is the temporary inability of
certain key suppliers to supply raw materials and/or key co-packers to pack some
of the Company's products in certain locations and/or certain of the Company's
major customers to order and pay on a timely basis, should their systems not be
Year 2000 compliant by January 1, 2000.
The Company is in the process of investigating its information
technology ("IT") systems as well as its non-information technology ("NIT")
systems. Based upon such investigation, the Company believes that the majority
of its IT and NIT systems are Year 2000 compliant. However, certain systems such
as the telephone system still require remediation. The Company currently
estimates that it will complete the required remediation, including testing, of
all of its IT and NIT systems, by the end of the first half of 1999. To-date,
the expenses incurred by the Company in order to become Year 2000 compliant,
including computer software costs, have been approximately $60,000 and the
current estimated cost to complete remediation is expected to be approximately
$30,000. Such costs, other than software, have been and will continue to be
expensed as incurred. Remediation and testing activities are well underway with
approximately 75% of the Company's systems already compliant. This percentage is
expected to increase to approximately 85% by year-end and to be fully compliant
by the end of the second quarter of 1999.
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An assessment of Year 2000 compliance issues by third parties with whom
the Company has relationships such as critically important suppliers,
co-packers, customers, banking institutions, payroll processors and others is
ongoing. The Company has inquired and continues to inquire of the aforementioned
third parties as to their readiness with respect to Year 2000 compliance issues
and has to-date received indications from certain of them that their systems are
compliant or in the process of remediation. The Company will continue to monitor
these third parties to determine the possible impact of their non-compliance or
otherwise on the business of the Company and the actions the Company can take,
if any, in the event of non-compliance by any of these third parties. The
Company believes there are multiple vendors of many of the goods and services it
receives from its suppliers and thus Year 2000 compliance issue risks with
respect to any particular supplier is mitigated by this factor. However, certain
flavors and ingredients used by the Company are unique to certain suppliers and
the Company does not have and may not be able to secure alternative suppliers
therefor or, alternatively, alternative suppliers that are able to supply
flavors or ingredients of the same or similar quality and/or with the same and
similar taste. The Company also is dependent on customers for sales and for
cashflow. Interruptions in customers' operations due to Year 2000 issues could
result in decreased revenue, increased inventory and cash flow reductions.
Contingency plans for Year 2000 related interruptions will be developed
during 1999 where necessary and possible and will include, but not be limited
to, the development of emergency back-up and recovery procedures, remediation of
existing systems parallel with the installation of new systems, replacing
electronic applications with manual processes, identification and securing of
alternative suppliers and increasing raw material and finished goods inventory
levels and alternative sales strategies. All plans are expected to be completed
by the end of 1999.
The Company's plans, which continue to evolve, including estimated
costs and dates for completion of Year 2000 remediation, are based in important
part on numerous assumptions about future events. Certain of these assumptions,
involving key matters such as the availability of certain resources, third party
remediation plans and other factors, involve inherent uncertainties or are not
within the Company's control. Given the numerous and significant uncertainties
involved, there can be no assurance that these estimates will be achieved and
actual results could differ materially. Specific factors that might cause
material differences include, but are not limited to, the ability to identify
and correct all relevant computer codes and imbedded chips, unanticipated
difficulties or delays in the implementation of project plans and the ability of
third parties to remediate their respective systems.
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Forward Looking Statements
The Private Security Litigation Reform Act of 1995 (the "Act") provides
a safe harbor for forward looking statements made by or on behalf of the
Company. The Company and it's representatives may from time to time make written
or oral forward looking statements, including statements contained in this
report and other filings with the Securities and Exchange Commission and in
reports to shareholders and announcements. Certain statements made in this
report, including certain statements made in management's discussion and
analysis, may constitute forward looking statements (within the meaning of
Section 27.A of the Securities Act 1933 as amended and Section 21.E 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 Year 2000 information, are
forward looking statements within the meaning of the Act. Management cautions
that these statements are qualified by their terms and/or important factors,
many of which are outside the control of the Company 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;
-Changes in consumer preferences;
- Changes in demand that are weather related, particular in areas outside
of California;
- Competitive products and pricing pressures and the Company's ability to
gain or maintain share of sales in the marketplace as a result of actions
by competitors;
- The introduction of new products;
- 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, especially those that may affect the way in which the Company's
products are marketed as well as laws and regulations or rules made or
enforced by the Food and Drug Administration;
- 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;
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- The marketing efforts of distributors of the Company's products, most of
which distribute products that are competitive with the products of the
Company;
- Unilateral decisions by distributors, grocery chains, specialty chain
stores, club stores and other customers to discontinue carrying all or any
of the Company's products that they are carrying at any time;
- The terms and/or availability of the Company's credit facilities and the
actions of it's creditors; The effectiveness of the Company's advertising,
marketing and promotional programs; Adverse weather conditions, which could
reduce demand for the Company's products The Company's customers',
co-packers' and suppliers' ability to replace, modify or upgrade computer
programs in ways that adequately address Year 2000 issues; and
- The Company's project plans, which continue to evolve, including
estimated costs and dates for completion of Year 2000 remediation, are
based in important part on numerous assumptions about future events.
Certain of these assumptions, involving key matters such as the
availability of certain resources, third party remediation plans and other
factors, involve inherent uncertainties or are not within the Company's
control. Given the numerous and significant uncertainties involved, there
can be no assurance that these estimates will be achieved and actual
results could differ materially. Specific factors that might cause material
differences include, but are not limited to, the inability to identify and
correct all relevant computer codes and imbedded chips, unanticipated
difficulties or delays in the implementation of project plans and the
ability of third parties to remediate their respective systems.
The foregoing list of important factors is not exhaustive.
Inflation
The Company does not believe that inflation has a significant impact on
the Company's results of operations for the periods presented.
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PART II - OTHER INFORMATION
Items 1 - 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See Exhibit Index
(b) Reports on Form 8-K - None
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 13, 1998 /s/
Rodney C. Sacks
Chairman of the Board and
Chief Executive Officer
Date: November 13, 1998 /s/
Hilton H. Schlosberg
Vice Chairman of the Board,
President, Chief Operating Officer,
Chief Financial Officer and Secretary
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