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 March 31, 2005 Commission file number 0-18761
HANSEN NATURAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 39-1679918
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1010 Railroad Street
Corona, California 92882
(Address of principal executive offices) (Zip Code)
(951) 739 - 6200
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No ___
The Registrant had 11,005,103 shares of common stock outstanding as of
April 25, 2005.
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
MARCH 31, 2005
INDEX
Page No.
Part I. FINANCIAL INFORMATION
- -------
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2005 and December 31, 2004 (Unaudited) 3
Condensed Consolidated Statements of Income for the three-
months ended March 31, 2005 and 2004 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
three-months ended March 31, 2005 and 2004 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Qualitative and Quantitative Disclosures about Market Risk 24
Item 4. Controls and Procedures 24
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Items 2-5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
2
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2005 AND DECEMBER 31, 2004 (Unaudited)
- --------------------------------------------------------------------------------
March 31, December 31,
2005 2004
------------------ -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 30,574,477 $ 20,976,119
Accounts receivable (net of allowance for doubtful accounts,
sales returns and cash discounts of $1,652,951 in 2005 and
$1,252,101 in 2004 and promotional allowances of
$6,310,183 in 2005 and $6,269,744 in 2004) 20,167,901 12,650,055
Inventories, net 23,451,416 22,406,054
Prepaid expenses and other current assets 527,082 638,967
Deferred income tax asset 3,234,002 3,708,942
------------------ -----------------
Total current assets 77,954,878 60,380,137
PROPERTY AND EQUIPMENT, net 2,798,547 2,964,064
INTANGIBLE AND OTHER ASSETS:
Trademark license and trademarks (net of accumulated
amortization of $233,510 in 2005 and $219,264 in 2004) 18,337,558 18,351,804
Deposits and other assets 736,977 326,312
------------------ -----------------
Total intangible and other assets 19,074,535 18,678,116
------------------ -----------------
$ 99,827,960 $ 82,022,317
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 18,687,590 $ 14,542,753
Accrued liabilities 1,680,784 1,582,968
Accrued compensation 1,254,561 1,831,627
Current portion of long-term debt 355,009 437,366
Income taxes payable 5,017,170 346,449
------------------ -----------------
Total current liabilities 26,995,952 18,741,163
LONG-TERM DEBT, less current portion 168,076 146,486
DEFERRED INCOME TAX LIABILITY 4,754,507 4,563,439
COMMITMENTS AND CONTINGENCIES (NOTE 7) - -
SHAREHOLDERS' EQUITY:
Common stock - $0.005 par value; 30,000,000 shares authorized;
11,119,864 shares issued, 10,994,603 outstanding in 2005;
10,624,864 shares issued, 10,418,103 outstanding in 2004 56,007 55,599
Additional paid-in capital 16,307,454 15,813,541
Retained earnings 52,361,347 43,516,634
Common stock in treasury, at cost; 206,761 in 2005 and 2004 (814,545) (814,545)
------------------ -----------------
Total shareholders' equity 67,910,263 58,571,229
------------------ -----------------
$ 99,827,960 $ 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-MONTHS ENDED MARCH 31, 2005 AND 2004 (Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
-------------------------------------
2005 2004
---------------- ----------------
GROSS SALES $ 73,728,442 $ 38,740,927
LESS: Discounts, allowance and promotional payments 13,714,170 7,442,144
--------------- ----------------
NET SALES 60,014,272 31,298,783
COST OF SALES 29,684,954 17,390,962
--------------- ----------------
GROSS PROFIT 30,329,318 13,907,821
OPERATING EXPENSES:
Selling, general and administrative 15,591,572 10,243,238
Amortization of trademark license and trademarks 14,246 20,096
--------------- ----------------
Total operating expenses 15,605,818 10,263,334
--------------- ----------------
OPERATING INCOME 14,723,500 3,644,487
NET NONOPERATING (INCOME) EXPENSE (117,518) 10,614
--------------- ----------------
INCOME BEFORE PROVISION FOR INCOME TAXES 14,841,018 3,633,873
PROVISION FOR INCOME TAXES 5,996,305 1,450,592
--------------- ----------------
NET INCOME $ 8,844,713 $ 2,183,281
=============== ================
NET INCOME PER COMMON SHARE:
Basic $ 0.81 $ 0.21
=============== ================
Diluted $ 0.73 $ 0.19
=============== ================
NUMBER OF COMMON SHARES USED
IN PER SHARE COMPUTATIONS:
Basic 10,935,709 10,434,770
=============== ================
Diluted 12,060,833 11,463,633
=============== ================
See accompanying notes to condensed consolidated financial statements.
4
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTHS ENDED MARCH 31, 2005 AND 2004 (Unaudited)
- --------------------------------------------------------------------------------
March 31, March 31,
2005 2004
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,844,713 $ 2,183,281
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of trademark license and trademarks 14,246 20,096
Depreciation and other amortization 183,553 187,581
Loss/(Gain) on disposal of property and equipment 650 (4,461)
Deferred income taxes 666,008 86,633
Provision for doubtful accounts 45,742
Effect on cash of changes in operating assets and liabilities:
Accounts receivable (7,563,588) (4,099,740)
Inventories (1,045,362) 362,677
Prepaid expenses and other current assets 111,885 (77,322)
Accounts payable 4,144,836 1,897,733
Accrued liabilities 97,816 575,677
Accrued compensation (577,066) (466,774)
Income taxes payable 4,670,721 1,353,178
------------------ ------------------
Net cash provided by operating activities 9,594,154 2,018,559
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (364,256) (308,180)
Proceeds from sale of property and equipment 78,339 15,073
Increase in trademark license and trademarks (7,547)
Decrease/(increase) in deposits and other assets 38,225 (43,093)
------------------ ------------------
Net cash used in investing activities (247,692) (343,747)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (242,425) (57,956)
Issuance of common stock 494,321 99,480
------------------ ------------------
Net cash provided by financing activities 251,896 41,524
------------------ ------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,598,358 1,716,336
CASH AND CASH EQUIVALENTS, beginning of year 20,976,119 1,098,785
------------------ ------------------
CASH AND CASH EQUIVALENTS, end of period $30,574,477 $ 2,815,121
================== ==================
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest $ 12,641 $ 9,511
================== ==================
Income taxes $ 659,576 $ 10,781
================== ==================
NON-CASH TRANSACTIONS
During the three-months ended March 31, 2005, the Company entered into
capital leases of $181,659, for the acquisition of promotional vehicles and
warehouse equipment.
See accompanying notes to condensed consolidated financial statements.
5
1. BASIS OF PRESENTATION
Reference is made to the Notes to Consolidated Financial Statements, in the
Company's Form 10-K for the year ended December 31, 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. and Hansen Junior Juice Company.
The Company's financial statements included in Form 10-Q have been prepared
in accordance with GAAP and SEC rules and regulations applicable to interim
financial reporting. They do not include all the information and footnote
disclosures normally included in annual financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America. The information set forth in these interim condensed consolidated
financial statements for the three-months ended March 31, 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.
Inventories - Inventories are valued at the lower of first-in, first-out
(FIFO) cost or market value (net realizable value).
Property and Equipment - Property and equipment are stated at cost.
Depreciation of furniture, office equipment, equipment and vehicles is based on
their estimated useful lives (three to ten years) and is calculated using the
straight-line method. Amortization of leasehold improvements is based on the
lesser of their estimated useful lives or the terms of the related leases and is
calculated using the straight-line method.
Trademark License and Trademarks - Trademark license and trademarks
represents the Company's exclusive ownership of the Hansen's(r) trademark in
connection with the manufacture, sale and distribution of beverages and water
and non-beverage products. The Company also owns a number of other trademarks in
the United States as well as in a number of countries around the world. The
Company also owns the Blue Sky(r) trademark, which was acquired in September
2000, and the Junior Juice(r) trademark, which was acquired in May 2001. The
Company amortizes its trademark license and trademarks with a finite life (as
discussed below) over 1 to 25 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 trademark licenses and trademarks as of March 31, 2005 and
December 31, 2004:
6
March 31, December 31,
2005 2004
------------ -------------
Amortizing trademark licenses and trademarks $ 1,169,248 $ 1,169,248
Accumulated amortization (233,510) (219,264)
------------ -------------
935,738 949,984
Non-amortizing trademark licenses and trademarks 17,401,820 17,401,820
------------ -------------
$18,337,558 $ 18,351,804
============ =============
All amortizing trademark licenses and trademarks have been assigned an
estimated finite useful life, and are amortized on a straight-line basis over
the number of years that approximate their respective useful lives ranging from
1 to 25 years (weighted average life of 23 years). The straight-line method of
amortization allocates the cost of the trademark licenses and trademarks to
earnings over the period of expected benefit. Total amortization expense during
the three-months ended March 31, 2005 and 2004 was $14,246 and $20,096,
respectively. As of March 31, 2005, future estimated amortization expense
related to amortizing trademark licenses and trademarks through the year ending
December 31, 2010 is:
2005 - Remainder $41,513
2006 55,351
2007 55,351
2008 55,202
2009 55,202
2010 55,202
Revenue Recognition - The Company records revenue at the time the related
products are shipped and title has passed. 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.
Advertising and Promotional Allowances - The Company accounts for
advertising production costs by expensing such production costs the first time
the related advertising takes place. Advertising expenses amounted to $3.5
million and $2.4 million for the three-months ended March 31, 2005 and 2004,
respectively. Advertising expenses were included in selling, general and
administrative expenses with the exception of coupon expenses, which were
included as a reduction of gross sales. In addition, the Company supports its
customers, including distributors, with promotional allowances, portion of which
are utilized for marketing and indirect advertising by them. Portion of the
promotional allowances payable to customers are based on the levels of sales to
such customers and, in certain instances, the amount of such allowances are
estimated by the Company. If actual promotional allowances when ultimately
determined differ from such estimates, promotional allowances could, to the
extent based on estimates, require adjustment. Such promotional allowances
amounted to $10.8 million and $4.9 million for the three-months ended March 31,
2005 and 2004, respectively and are included as a reduction of gross sales.
7
Stock Based Compensation - The Company accounts for its stock option plans
in accordance with Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. Under APB
Opinion No. 25, no compensation expense is recognized because the exercise price
of the Company's employee stock options equals the market price of the
underlying stock at the date of the grant. In December 2002, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure. SFAS No. 148 amends SFAS No.
123, Accounting for Stock-based Compensation, and was effective immediately upon
issuance. The Company follows the requirements of APB Opinion No. 25 and the
disclosure-only provision of SFAS No. 123, as amended by SFAS No. 148. Had
compensation cost for the Company's option plans been determined based on the
fair value at the grant date for awards consistent with the provisions of SFAS
No. 123, the Company's net income and net income per common share for the
three-months ended March 31, 2005 and 2004 would have been reduced to the pro
forma amounts indicated below:
Three Months Ended March 31,
2005 2004
---- ----
Net income, as reported $ 8,844,713 $ 2,183,281
Less: Total stock based employee compensation
expense determined under fair value based
method of all awards, net of related tax
effects 319,278 83,597
Net income, pro forma $ 8,525,435 $ 2,099,684
Net income per common share, as reported - Basic $ 0.81 $ 0.21
Net income per common share, as reported - Diluted $ 0.73 $ 0.19
Net income per common share, pro forma - Basic $ 0.78 $ 0.20
Net income per common share, pro forma - Diluted $ 0.71 $ 0.18
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:
Dividend Expected Risk-Free Expected
Yield Volatility Interest Rate Lives
-------------- ------------------- ------------- --------------
2005 0% 74% 4.4% 7 years
2004 0% 38% 4.0% 8 years
3. NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2004, FASB issued statement of Financial Accounting Standard
No. 151, "Inventory Costs". The new Statement amends Accounting Research
Bulletin No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material. This Statement requires that those items be recognized as
current-period charges and requires that allocation of fixed production
overheads to the cost of conversion be based on the normal capacity of the
production facilities. This statement is effective for fiscal years beginning
after June 15, 2005. The Company does not expect adoption of this statement to
have a material impact on its financial condition or results of operations.
8
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 is currently evaluating the effect, if any, of adopting SFAS No. 153.
In December 2004, FASB issued Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment. This Statement replaces FASB
Statement No. 123 and supersedes APB Opinion No. 25. Statement 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.
4. INVENTORIES
Inventories consist of the following at:
March 31, December 31,
2005 2004
------------ ------------
Raw Materials $ 9,782,458 $ 7,204,741
Finished Goods 14,590,890 16,157,000
------------ ------------
24,373,348 23,361,741
Less inventory reserves (921,932) (955,687)
------------ ------------
$ 23,451,416 $ 22,406,054
============ ============
9
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
March 31, December 31,
2005 2004
------------ ------------
Leasehold improvements $ 338,832 $ 268,068
Furniture and office equipment 1,327,810 1,193,741
Equipment 1,596,667 1,488,571
Vehicles 1,262,355 2,359,264
------------ ------------
4,525,664 5,309,644
Less accumulated depreciation and amortization (1,727,117) (2,345,580)
------------- ------------
$ 2,798,547 $ 2,964,064
============= ============
6. EARNINGS PER SHARE
A reconciliation of the weighted average shares used in the basic and
diluted earnings per common share computations for the three months ended March
31, 2005 and 2004 is presented below:
Three Months Ended
March 31,
--------------------------------
2005 2004
--------------- ---------------
Weighted-average shares outstanding:
Weighted-average shares outstanding -
Basic 10,935,709 10,434,770
Dilutive securities 1,125,124 1,028,863
--------------- ---------------
Weighted-average shares outstanding -
Diluted 12,060,833 11,463,633
=============== ===============
For the three months ended March 31, 2005, options outstanding totaling
435,000 shares were excluded from the calculations, as their effect would have
been antidilutive. For the three months ended March 31, 2004, no options
outstanding were excluded from the calculations.
7. COMMITMENTS & CONTINGENCIES
In March 2003, HBC entered into an advertising display agreement ("Monorail
Agreement") with the Las Vegas Monorail Company ("LVMC") in terms of which HBC
was granted the right, in consideration of the payment by HBC to LVMC of the sum
of $1,000,000 per year, payable quarterly, to advertise and promote its products
on a designated four car monorail vehicle as well as the right to sell certain
of its products on all monorail stations for payment of additional
consideration.
10
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, it is likely that the commencement date of the initial term will by
agreement be amended to January 1, 2005. Not less than 120 days before the
expiration of the initial term and each renewal term, as the case may be, HBC
has the right to renew the Monorail Agreement for a further one year term up to
a maximum of nine additional one year terms and the LVMC has the right,
notwithstanding such election by HBC, to terminate the Monorail Agreement at the
expiration of the then current term.
In September 2004 Barrington Capital Corporation through an alleged
successor in interest, Sandburg Financial Corporation (both entities with whom
the Company has never had any dealings) served a Notice of Motion ("Motion") on
the Company and each of its subsidiaries as well as on a number of other
unrelated entities and individuals. The Motion seeks to amend a default
judgement granted against a completely unconnected company, Hansen Foods, Inc.,
to add the Company and its subsidiary companies, as well as the other entities
and individuals cited, as judgement debtors. The default judgement was entered
on February 15, 1996, for $7,626,000 plus legal interest and attorneys' fees in
the sum of $211,000 arising out of a breach of contract claim that allegedly
occurred in the 1980's. Barrington Capital Corporation's/Sandburg Financial
Corporation's claim is based on the misconceived and unsubstantiated theory that
the Company and its subsidiaries are alter egos and/or successors of Hansen
Foods, Inc. The Motion is based on demonstrably false allegations, misstated
legal propositions and lacks any substantial supporting evidence. The Company
and its subsidiaries intend to vigorously oppose the Motion and believe that the
Motion is without any merit. The Company does not believe the Motion will have a
material adverse effect on the financial condition of the Company.
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.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
historical consolidated financial statements and notes thereto.
Critical Accounting Policies
The Company's consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America
("GAAP"). GAAP requires the Company to make estimates and assumptions that
affect the reported amounts in our consolidated financial statements including
various allowances and reserves for accounts receivable and inventories, the
estimated lives of long-lived assets and trademarks and trademark licenses as
well as claims and contingencies arising out of litigation or other transactions
that occur in the normal course of business. The following summarize the most
significant accounting and reporting policies and practices of the Company:
Trademark License and Trademarks - Trademark license and trademarks
primarily represent the 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 trademark licenses and
trademarks while continuing to amortize remaining trademark licenses and
trademarks over one to 25 years.
In accordance with SFAS No. 142, we evaluate our trademark license and
trademarks annually for impairment or earlier if there is an indication of
impairment. If there is an indication of impairment of identified intangible
assets not subject to amortization, management compares the estimated fair value
with the carrying amount of the asset. An impairment loss is recognized to write
down the intangible asset to its fair value if it is less than the carrying
amount. The fair value is calculated using the income approach. However,
preparation of estimated expected future cash flows is inherently subjective and
is based on management's best estimate of assumptions concerning expected future
conditions. Based on management's annual impairment analysis performed for the
fourth quarter of 2004, the estimated fair values of trademark license and
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 March 31, 2005.
12
Management believes that the accounting estimate related to impairment of
its long lived assets, including its trademark license and trademarks, is a
"critical accounting estimate" because: (1) it is highly susceptible to change
from period to period because it requires company management to make assumptions
about cash flows and discount rates; and (2) the impact that recognizing an
impairment would have on the assets reported on our consolidated balance sheet,
as well as net income, could be material. Management's assumptions about cash
flows and discount rates require significant judgment because actual revenues
and expenses have fluctuated in the past and are expected to continue to do so.
In estimating future revenues, we use internal budgets. Internal budgets
are developed based on recent revenue data and future marketing plans for
existing product lines and planned timing of future introductions of new
products and their impact on our future cash flows.
Revenue Recognition - The Company records revenue at the time the related
products are shipped and the risk of ownership and title has passed. 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.
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
Emerging Issues Task Force ("EITF") 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 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.
13
Income Taxes - Current income tax expense is the amount of income taxes
expected to be payable for the current year. A deferred income tax asset or
liability is established for the expected future consequences of temporary
differences in the financial reporting and tax bases of assets and liabilities.
The Company considers future taxable income and ongoing, prudent and feasible
tax planning strategies in assessing the value of its deferred tax assets. If
the Company determines that it is more likely than not that these assets will
not be realized, the Company will reduce the value of these assets to their
expected realizable value, thereby decreasing net income. Evaluating the value
of these assets is necessarily based on the Company's judgment. If the Company
subsequently determined that the deferred tax assets, which had been written
down, would be realized in the future, the value of the deferred tax assets
would be increased, thereby increasing net income in the period when that
determination was made.
Our Business
Overview
We develop, market, sell and distribute, in the main, a wide range of
branded beverages. The majority of our beverages fall within the growing
"alternative" beverage category. The principal brand names under which our
beverages are marketed are Hansen's(r), Monster Energy(tm), Blue Sky(r), Junior
Juice(r), Lost(r) and Rumba(tm). We own all of our above-listed brand names
other than Lost(r) which we produce, market, sell and distribute under an
exclusive licensing arrangement with Lost International LLC.
Our company principally generates revenues, income and cash flows by
developing, producing, marketing, selling and distributing finished beverage
products. We generally sell these products to retailers as well as distributors.
We incur significant marketing expenditures to support our brands including
advertising costs, sponsorship fees and special promotional events. We focus on
developing brand awareness and trial through sampling both in stores and at
events. Retailers and distributors receive rebates, promotions, point of sale
materials, merchandise displays and coolers. We also use in-store promotions and
in-store placement of point-of-sale materials and racks, prize promotions, price
promotions, competitions, and sponsorship of, and endorsements from selected
public and extreme sports figures and causes. Consumers receive coupons,
discounts and promotional incentives. These marketing expenditures help to
enhance distribution and availability of our products as well as awareness and
increase consumer preference for our brands. Greater distribution and
availability, awareness and preference promotes long term growth.
During the first 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.
14
We believe that one of the keys to success in the beverage industry is
differentiation, such as making Hansen's(r) products visually distinctive from
other beverages on the shelves of retailers. We review our products and
packaging on an ongoing basis and, where practical, endeavor to make them
different, better and unique. The labels and graphics for many of our products
are redesigned from time to time to maximize their visibility and
identification, wherever they may be placed in stores, and we will continue to
reevaluate labels and graphics from time to time.
We again achieved record sales in the first quarter of 2005. The increase
in gross and net sales in the first quarter of 2005 was primarily attributable
to increased sales of products with relatively higher price points, including
increased sales by volume of our Monster EnergyTM drinks and our low
carbohydrate ("Lo-Carb") Monster EnergyTM drinks, as well as sales of our
Monster EnergyTM "Assault" TM energy drinks which were introduced in September
2004 and Lost(r) Energy drinks which were introduced in January 2004, as well as
sales of JokerTM energy drinks in 16-ounce cans which were introduced in January
2005, and increases in sales, primarily of Hansen's(r) apple juice and juice
blends, as well as Hansen's(r) children's multi-vitamin juice drinks in aseptic
packaging. The increase in net sales was also attributable, to a lesser extent,
to sales of our RumbaTM energy juice, which was introduced in December 2004. The
increase in gross and net sales was partially offset by lower sales of Natural
Sodas, Hansen's(r) energy and functional drinks, Energade(r) energy sports
drinks, E2O Energy Water(r) drinks and smoothies in cans. The increase in sales
was also offset by an increase in total discounts, allowances and promotional
payments to support the overall increase in the level of sales.
Gross profit for the three months ended March 31, 2005, as a percentage of
net sales, was 50.5% which was higher than the 44.4% gross profit percentage
achieved in the three months ended March 31, 2004. The increase in gross profit
percentage was primarily due to a change in the Company's product mix due
primarily to increased sales of certain product lines with higher gross margins.
During the three months ended March 31, 2005, sales shipped outside of
California, represented 57.8% of our aggregate gross sales, as compared to
approximately 51.3% of our aggregate sales in the three months ended March 31,
2004. Sales to distributors outside the United States, during the three months
ended March 31, 2005, amounted to $678,000 compared to $340,000 in the three
months ended March 31, 2004, accounting for approximately 1% of our net 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. In the three months ended March 31, 2005, sales to retail grocery and
specialty chains and wholesalers represented 23% of our revenues, sales to club
stores, drug and mass merchandisers represented 11% of our revenues, sales to
full service distributors represented 60% of our revenues, and sales to health
food distributors represented 4% of our revenues. In the three months ended
March 31, 2004, sales to retail grocery and specialty chains and wholesalers
represented 26% of our revenues, sales to club stores, drug and mass
merchandisers represented 17% of our revenues, sales to full service
distributors represented 45% of our revenues, and sales to health food
distributors represented 8% of our revenues. The above allocations reflect
changes made by the Company to the categories historically reported.
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.
15
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.
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.
During the first 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.
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.
During 2004, we concluded exclusive contracts with the State of California,
Department of Health Services Women, Infant and Children Supplemental Nutrition
Branch, to supply 100% Apple juice and 100% blended juice in 64-ounce PET
plastic bottles. The contracts commenced on July 12, 2004.
We continue to incur expenditures in connection with the development and
introduction of new products and flavors.
16
Results of Operations
The following table sets forth key statistics for the three-months ended
March 31, 2005 and 2004, respectively.
Percentage
Three-Months Ended March 31, Change
---------------------------------------------- ---------------
2005 2004 05 vs. 04
--------------------- --------------------- ---------------
Gross sales $ 73,728,442 $ 38,740,927 90.3%
Less: Discounts, allowances and
promotional payments 13,714,170 7,442,144 84.3%
--------------------- --------------------- ---------------
Net sales 60,014,272 31,298,783 91.7%
Cost of sales 29,684,954 17,390,962 70.7%
--------------------- --------------------- ---------------
Gross profit 30,329,318 13,907,821 118.1%
Gross profit margin 50.5% 44.4%
Selling, general and administrative
expenses 15,591,572 10,243,238 52.2%
Amortization of trademark license and
trademarks 14,246 20,096 (29.1%)
--------------------- --------------------- ---------------
Operating income 14,723,500 3,644,487 304.0%
Operating income as a percent of net
sales 24.5% 11.6%
Net nonoperating (income) expense (117,518) 10,614 (1,207.2%)
--------------------- --------------------- ---------------
Income before provision for income
taxes 14,841,018 3,633,873 308.4%
Provision for income taxes 5,996,305 1,450,592 313.4%
--------------------- --------------------- ---------------
Effective tax rate 40.4% 39.9%
Net income $ 8,844,713 $ 2,183,281 305.1%
===================== ===================== ===============
Net income as a percent of net sales 14.7% 7.0%
Net income per common share:
Basic $ 0.81 $ 0.21 285.7%
Diluted $ 0.73 $ 0.19 284.2%
Results of Operations for the Three Months Ended March 31, 2005 Compared to the
Three Months Ended March 31, 2004
Gross Sales. For the three-months ended March 31, 2004, gross sales were
$73.7 million, an increase of $35.0 million or 90.3% higher than the $38.7
million gross sales for the three-months ended March 31, 2004. The increase in
gross sales for the three-months ended March 31, 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.
17
Net Sales. For the three-months ended March 31, 2005, net sales were $60.0
million, an increase of $28.7 million or 91.7% higher than net sales of $31.3
million for the three-months ended March 31, 2004. The increase in net sales for
the three-months ended March 31, 2005 was primarily attributable to increased
sales of products with relatively higher price points, including increased sales
by volume of our Monster EnergyTM drinks, and our low carbohydrate ("Lo-Carb")
Monster EnergyTM drinks, as well as sales of our Monster EnergyTM "Assault"TM
energy drinks which were introduced in September 2004, and Lost(r) Energy drinks
which were introduced in January 2004, as well as sales of JokerTM energy drinks
in 16-ounce cans which were introduced in January 2005, and increases in sales,
primarily of Hansen's(r) apple juice and juice blends, as well as Hansen's(r)
children's multi-vitamin juice drinks in aseptic packaging. The increase in net
sales was also attributable, to a lesser extent, to sales of RumbaTM energy
juice, which was introduced in December 2004. The increase in gross and net
sales was partially offset by lower sales of Natural Sodas, Hansen's(r) energy
and functional drinks, Energade(r) energy sports drinks, E2O Energy Water(r)
drinks and smoothies in cans. The increase in sales was also offset by an
increase in total discounts, allowances and promotional payments to support the
overall increase in the level of sales.
Gross Profit. Gross profit was $30.3 million for the three-months ended
March 31, 2005, an increase of $16.4 million or 118.1% higher than the gross
profit for the three-months ended March 31, 2004 of $13.9 million. Gross profit
as a percentage of net sales, increased to 50.5% for the three-months ended
March 31, 2005 from 44.4% for the three-months ended March 31, 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.
Total Operating Expenses. Total operating expenses were $15.6 million for
the three-months ended March 31, 2005, an increase of $5.3 million or 52.1%
higher than total operating expenses of $10.3 million for the three-months ended
March 31, 2004. Total operating expenses as a percentage of net sales decreased
to 26.0% for the three-months ended March 31, 2005 as compared to 32.8% for the
three-months ended March 31, 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 $9.0 million for the three-months ended March 31,
2005, an increase of $3.2 million or 56.1% higher than selling expenses of $5.8
million for the three-months ended March 31, 2004. Selling expenses as a
percentage of net sales for the three-months ended March 31, 2005 were 15.0%
which was lower than selling expenses as a percentage of net sales of 18.4% for
the three-months ended March 31, 2004. The increase in selling expenses was
primarily attributable to an increase in distribution and warehouse expenses,
which increased by $1.6 million, increased expenditures for trade development
activities with distributors, which increased by $0.7 million and increased
expenditures for merchandise displays, point-of-sale materials and premiums,
which increased by $0.4 million.
General and administrative expenses were $6.6 million for the three-months
ended March 31, 2005, an increase of $2.1 million or 47.2% higher than general
and administrative expenses of $4.5 million for the three-months ended March 31,
2004. General and administrative expenses as a percentage of net sales for the
three-months ended March 31, 2005 were 11.0% which was lower than general and
administrative expenses as a percentage of net sales of 14.3% for the
three-months ended March 31, 2004. The increase in general and administrative
expenses was primarily attributable to increased payroll expenses for
administrative and support activities, which increased by $1.2 million, expenses
incurred to maintain certain fixed assets, expenses related to the termination
of certain distributor agreements, travel expenses, insurance costs and fees for
legal and accounting services including services related to the implementation
and testing required by the Sarbanes-Oxley Act of 2002, 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 March 31,
2005 as compared to the three months ended March 31, 2004.
18
Operating Income. Operating income was $14.7 million for the three-months
ended March 31, 2005, an increase of $11.1 million or 304.0% higher than
operating income of $3.6 million for the three-months ended March 31, 2004.
Operating income as a percentage of net sales increased to 24.5% for the
three-months ended March 31, 2005 from 11.6% for the three-months ended March
31, 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 March 31, 2005 as compared to the three months ended March
31, 2004.
Net Nonoperating Income/Expense. Net nonoperating income was $118,000 for
the three-months ended March 31, 2005, an increase of $128,000 from net
non-operating expense of $11,000 for the three-months ended March 31, 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 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 March 31, 2005 was $6.0 million as compared to provision for income taxes
of $1.5 million for the comparable period in 2004. The effective combined
federal and state tax rate for the three-months ended March 31, 2005 was 40.4%,
which was higher than the effective tax rate of 39.9% for the three-months ended
March 31, 2004 due to the increase in income before provision for income taxes,
to a level which resulted in an increase in the effective federal tax rate,
which was partially offset by a decrease in state taxes due to the apportionment
of sales and related state taxes to various states outside of California.
Net Income. Net income was $8.8 million for the three-months ended March
31, 2005, an increase of $6.7 million or 305.1% higher than net income of $2.2
million for the three-months ended March 31, 2004. The increase in net income
was attributable to the increase in gross profit of $16.4 million and increase
in nonoperating income of $128,000 which was partially offset by the increase in
operating expenses of $5.3 million and an increase in provision for income taxes
of $4.5 million.
Liquidity and Capital Resources
As at March 31, 2005, the Company had working capital of $51.0 million, as
compared to working capital of $41.6 million as at December 31, 2004. Net cash
provided by operating activities was $9.6 million for the three-months ended
March 31, 2005 as compared to net cash provided by operating activities of $2.0
million in the comparable period in 2004. For the three-months ended March 31,
2005, cash provided by operating activities was attributable to net income
earned after adjustments for the effect of certain non-cash expenses, primarily
depreciation and other amortization as well as increases in accounts payable,
income taxes payable, accrued liabilities and decreases in prepaid expenses and
other current assets which was partially offset by increases in accounts
receivable, inventories and deferred tax assets and decrease in accrued
compensation. The increase in accounts receivable was attributable primarily to
increased sales during the period. Purchases of inventories, increases in
accounts receivable and other assets, acquisition of property and equipment,
acquisition of trademark licenses and trademarks, repayment of our line of
credit and payments of accounts payable and income taxes payable are expected to
remain our principal recurring use of cash and working capital funds.
19
Net cash used in investing activities was $248,000 for the three-months
ended March 31, 2005 as compared to net cash used in investing activities of
$344,000 in the comparable period in 2004. In the three-months ended March 31,
2005, cash used in investing activities was primarily attributable to
acquisitions of property and equipment which was partially offset by proceeds
from the sale of property and equipment and a decrease in deposits and other
assets. Management, from time to time, considers the acquisition of capital
equipment, particularly, specific items of production equipment required to
produce certain of our products, storage racks, merchandise display racks, vans
and promotional vehicles, coolers and other promotional equipment and businesses
compatible with the image of the Hansen's(r) brand, as well as the introduction
of new product lines.
Net cash provided by financing activities was $252,000 for the three-months
ended March 31, 2005 as compared to net cash used in financing activities of
$42,000 for the comparable period in 2004. For the three-months ended March 31,
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.
HBC has a credit facility from Comerica Bank-California ("Comerica"),
consisting of a revolving line of credit and a term loan. The utilization of the
revolving line of credit by HBC was dependent upon certain levels of eligible
accounts receivable and inventory from time to time. Such revolving line of
credit and term loan are secured by substantially all of HBC's assets, including
accounts receivable, inventory, trademarks, trademark licenses and certain
equipment. The revolving line of credit remains in full force and effect through
June 2006. Interest on borrowings under the line of credit is based on bank's
base (prime) rate, less up to 1.5% or the LIBOR rate, plus an additional
percentage of up to 1.75%, depending upon certain financial ratios of HBC from
time to time. At March 31, 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 March 31, 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.
20
Purchase obligations represent commitments made by the Company and its
subsidiaries to various suppliers for raw materials used in the manufacturing
and packaging of our products. These obligations vary in terms.
Other commitments represent our obligations under our agreement with the
Las Vegas Monorail Company. See also "ITEM 1-NOTE 7, COMMITMENTS &
CONTINGENCIES." The following represents a summary of the Company's contractual
obligations and related scheduled maturities as of March 31, 2005:
Payments due by period
---------------------------------------------------------------------------
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
- ----------------------------- -------------- ------------- -------------- ------------- -------------
Contractual Obligations $ 1,042,000 $ 1,042,000 $ - $ - $ -
- ----------------------------- -------------- ------------- -------------- ------------- -------------
Long-Term Debt Obligations 231,846 83,707 148,139
- ----------------------------- -------------- ------------- -------------- ------------- -------------
Capital Lease Obligations 291,239 271,302 19,937
- ----------------------------- -------------- ------------- -------------- ------------- -------------
Operating Lease Obligations 4,784,837 994,336 2,762,161 1,028,340
- ----------------------------- -------------- ------------- -------------- ------------- -------------
Purchase Obligations 15,373,100 5,759,073 9,614,027
- ----------------------------- -------------- ------------- -------------- ------------- -------------
$ 21,723,022 $ 8,150,418 $ 12,544,264 $ 1,028,340 $ -
============== ============= ============== ============= =============
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 March 31, 2006.
Based on the Company's current plans, at this time the Company estimates that
capital expenditures are likely to be less than $5 million during 2005. However,
future business opportunities may cause a change in this estimate.
Sales
The table set forth below discloses selected quarterly data regarding sales
for the first three-months of the past two years. Data from any one or more
quarters or periods is not necessarily indicative of annual results or
continuing trends.
Sales of beverages are expressed in unit case volume. A "unit case" means a
unit of measurement equal to 192 U.S. fluid ounces of finished beverage (24
eight-ounce servings) or concentrate sold that will yield 192 U.S. fluid ounces
of finished beverage. Unit case volume of the Company means number of unit cases
(or unit case equivalents) of beverages directly or indirectly sold by the
Company. Sales of food bars are expressed in actual cases. A case of food bars
is defined as ninety 1.76-ounce bars.
21
The Company's quarterly results of operations reflect seasonal trends that
management believes are primarily the result of increased demand in the warmer
months of the year. It has been our experience that beverage sales tend to be
lower during the first and fourth quarters of each fiscal year. Because the
primary historical market for Hansen's products is California which has a
year-long temperate climate, the effect of seasonal fluctuations on quarterly
results may have been mitigated; however such fluctuations may be more
pronounced as the distribution of Hansen's products expands outside of
California. The Company's experience with its energy drink products, although of
short duration, suggests that they are less seasonal than traditional beverages.
As the percentage of the Company's sales that are represented by such products
increases, seasonal fluctuations will be further mitigated. Quarterly
fluctuations may also be affected by other factors including the introduction of
new products, the opening of new markets where temperature fluctuations are more
pronounced, the addition of new bottlers and distributors, changes in the mix of
the sales of its finished products, soda concentrates and food products and
increased advertising and promotional expenses.
(In Thousands)
Three-months ended March 31,
2005 2004
---------- ----------
Case Sales 9,295 5,368
Net Sales $60,014 $ 31,299
See ITEM 2, "Our Business" for additional information related to the
increase in sales.
Forward Looking Statements
The Private Security Litigation Reform Act of 1995 (the "Act") provides a
safe harbor for forward-looking statements made by or on behalf of the Company.
The Company and its representatives may from time to time make written or oral
forward looking statements, including statements contained in this report and
other filings with the Securities and Exchange Commission and in reports to
shareholders and announcements. Certain statements made in this report,
including certain statements made in management's discussion and analysis, may
constitute forward looking statements (within the meaning of Section 27A of the
Securities Act 1933 as amended and Section 21E of the Securities Exchange Act of
1934, as amended) regarding the expectations of management with respect to
revenues, profitability, adequacy of funds from operations and the Company's
existing credit facility, among other things. All statements which address
operating performance, events or developments that management expects or
anticipates will or may occur in the future including statements related to new
products, volume growth, revenues, profitability, adequacy of funds from
operations, and/or the Company's existing credit facility, earnings per share
growth, statements expressing general optimism about future operating results
and non-historical information, are forward looking statements within the
meaning of the Act.
Management cautions that these statements are qualified by their terms
and/or important factors, many of which are outside the control of the Company,
involve a number of risks, uncertainties and other factors that could cause
actual results and events to differ materially from the statements made
including, but not limited to, the following:
* Company's ability to generate sufficient cash flows to support capital
expansion plans and general operating activities;
* Decreased demand for our products resulting from changes in consumer
preferences;
* Changes in demand that are weather related, particularly in areas outside
of California;
* Competitive products and pricing pressures and the Company's ability to
gain or maintain its share of sales in the marketplace as a result of
actions by competitors;
22
* The introduction of new products;
* An inability to achieve volume growth through product and packaging
initiatives;
* Laws and regulations, and/or any changes therein, including changes in
accounting standards, taxation requirements (including tax rate changes,
new tax laws and revised tax law interpretations) and environmental laws as
well as the Federal Food Drug and Cosmetic Act, the Dietary Supplement
Health and Education Act, and regulations made thereunder or in connection
therewith, as well as changes in any other food and drug laws, especially
those that may affect the way in which the Company's products are marketed
and/or labeled and/or sold, including the contents thereof, as well as laws
and regulations or rules made or enforced by the Food and Drug
Administration and/or the Bureau of Alcohol, Tobacco and Firearms, and/or
Federal Trade Commission, and/or certain state regulatory agencies;
* Changes in the cost and availability of raw materials and the ability to
maintain favorable supply arrangements and relationships and procure timely
and/or adequate production of all or any of the Company's products;
* The Company's ability to achieve earnings forecasts, which may be based on
projected volumes and sales of many product types and/or new products,
certain of which are more profitable than others. There can be no assurance
that the Company will achieve projected levels or mixes of product sales;
* The Company's ability to penetrate new markets;
* The marketing efforts of distributors of the Company's products, most of
which distribute products that are competitive with the products of the
Company;
* Unilateral decisions by distributors, grocery chains, specialty chain
stores, club stores and other customers to discontinue carrying all or any
of the Company's products that they are carrying at any time;
* The terms and/or availability of the Company's credit facility and the
actions of its creditors;
* The effectiveness of the Company's advertising, marketing and promotional
programs;
* Changes in product category consumption;
* Unforeseen economic and political changes;
* Possible recalls of the Company's products; and
* The Company's ability to make suitable arrangements for the co-packing of
any of its products including, but not limited to, its energy and
functional drinks in 8.3-ounce slim cans and 16-ounce cans, smoothies in
11.5-ounce cans, E2O Energy Water(r), Energade(r), Monster EnergyTM and
Lost(r) energy drinks, RumbaTM energy juice, juices in 64-ounce PET plastic
bottles and aseptic packaging, soy smoothies, sparkling orangeades and
lemonades and apple cider in glass bottles and other products.
The foregoing list of important factors is not exhaustive.
Our actual results could be materially different from the results described
or anticipated by our forward-looking statements due to the inherent uncertainty
of estimates, forecasts and projections and may be better or worse than
anticipated. Given these uncertainties, you should not rely on forward-looking
statements. Forward-looking statements represent our estimates and assumptions
only as of the date that they were made. We expressly disclaim any duty to
provide updates to forward-looking statements, and the estimates and assumptions
associated with them, after the date of this report, in order to reflect changes
in circumstances or expectations or the occurrence of unanticipated events
except to the extent required by applicable securities laws.
23
Inflation
The Company does not believe that inflation has a significant impact on the
Company's results of operations for the periods presented.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS
In the normal course of business, our financial position is routinely
subject to a variety of risks. The principal market risks (i.e., the risk of
loss arising from adverse changes in market rates and prices) which the Company
is exposed to are fluctuations in commodity prices affecting the cost of raw
materials and changes in interest rates of the Company's long term debt 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
collectability of accounts receivable.
At March 31, 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 March 31, 2005, the net
impact on the Company's pre-tax earnings would have been insignificant.
ITEM 4. CONTROL AND PROCEDURES
Evaluation of Disclosure Controls and Procedures - Under the supervision
and with the participation of the Company's management, including our Chief
Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. Based upon this
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures are adequate and
effective to ensure that material information we are required to disclose in
reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms.
There have been no significant changes in internal control over financial
reporting that occurred during the fiscal period covered by this report that
have materially affected, or are reasonably likely to materially affect, the
registrant's internal control over financial reporting.
24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to various claims, complaints and other legal
actions that have arisen in the normal course of business from time to time. The
Company believes the outcome of these pending legal proceedings, in the
aggregate, will not have a material adverse effect on the operations or
financial position of the Company. See NOTE 7 to the financial statements,
"COMMITMENTS AND CONTINGENCIES."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibit Index
31.1 Certification by CEO pursuant to Rule 13A-14(a) or 15D-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification by CFO pursuant to Rule 13A-14(a) or 15D-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None.
25
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HANSEN NATURAL CORPORATION
Registrant
Date: May 10, 2005 /s/ RODNEY C. SACKS
-------------------
Rodney C. Sacks
Chairman of the Board of Directors
and Chief Executive Officer
Date: May 10, 2005 /s/ HILTON H. SCHLOSBERG
------------------------
Hilton H. Schlosberg
Vice Chairman of the Board of Directors,
President and Chief Financial Officer
26
EXHIBIT 31.2
CERTIFICATION 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
I, Hilton Schlosberg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hansen Natural
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and we have:
a. designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b. designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c. evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d. disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a. all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 10, 2005 /s/ HILTON H. SCHLOSBERG
------------------------
Hilton H. Schlosberg
Vice Chairman of the Board of Directors,
President, Chief Operating Officer,
Chief Financial Officer and Secretary
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Hansen Natural Corporation (the
"Company") on Form 10-Q for the quarter ended March 31, 2005 as filed with the
Securities and Exchange Commission (the "Report"), the undersigned, Rodney C.
Sacks, Chairman of the Board of Directors and Chief Executive Officer of the
Company, certifies, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: May 10, 2005 /s/ RODNEY C. SACKS
-------------------
Rodney C. Sacks
Chairman of the Board of Directors
and Chief Executive Officer
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Hansen Natural Corporation (the
"Company") on Form 10-Q for the quarter ended March 31, 2005 as filed with the
Securities and Exchange Commission (the "Report"), the undersigned, Hilton H.
Schlosberg, Vice Chairman of the Board of Directors, President, Chief Operating
Officer, Chief Financial Officer and Secretary of the Company, certifies,
pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: May 10, 2005 /s/ HILTON H. SCHLOSBERG
------------------------
Hilton H. Schlosberg
Vice Chairman of the Board of Directors,
President, Chief Operating Officer,
Chief Financial Officer and Secretary
EXHIBIT 31.1
CERTIFICATION 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
I, Rodney Sacks, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hansen Natural
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and we have:
a. designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b. designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c. evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d. disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a. all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 10, 2005 /s/ RODNEY C. SACKS
-------------------
Rodney C. Sacks
Chairman of the Board of Directors
and Chief Executive Officer