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, 1999 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 92880-5471 (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 10,002,084 shares of common stock outstanding as of November 1, 1999 1
HANSEN NATURAL CORPORATION AND SUBSIDIARIES September 30, 1999 INDEX Page No. Part I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 3 Consolidated Statements of Operations for the three and nine-months ended September 30, 1999 and 1998 4 Consolidated Statements of Cash Flows for the nine-months ended September 30, 1999 and 1998 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Part II. OTHER INFORMATION Items 1-5 Not Applicable 18 Item 6. Exhibits and Reports on Form 8-K 18 Signatures 18 2
HANSEN NATURAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 (Unaudited) <TABLE> - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> September 30, December 31, 1999 1998 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 2,825,772 $ 3,806,089 Accounts receivable (net of allowance for doubtful accounts, sales returns and cash discounts of $415,520 in 1999 and $378,641 in 1998 and promotional allowances of $2,218,635 in 1999 and $1,608,123 in 1998) 4,421,682 1,827,544 Inventories, net 7,826,073 5,211,077 Prepaid expenses and other current assets 590,069 244,318 ------------------ ------------------- 15,663,596 11,089,028 PROPERTY AND EQUIPMENT, net 591,169 601,523 INTANGIBLE AND OTHER ASSETS: Trademark license and trademarks (net of accumulated amortization of $2,912,362 in 1999 and $2,687,462 in 1998) 10,738,663 10,003,417 Note receivable from director 20,861 Deposits and other assets 643,739 211,903 ------------------ ------------------- 11,382,402 10,236,181 ------------------ ------------------- $ 27,637,167 $ 21,926,732 ================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 6,295,852 $ 1,870,253 Accrued liabilities 485,770 403,864 Accrued compensation 313,249 476,001 Current portion of long-term debt 1,167,792 2,072,818 Income taxes payable 122,342 1,269,185 ------------------ ------------------- 8,385,005 6,092,121 LONG-TERM DEBT, less current portion 766,317 1,334,967 DEFERRED INCOME TAX LIABILITY 756,986 557,461 SHAREHOLDERS' EQUITY: Common stock - $.005 par value; 30,000,000 shares authorized; 10,002,084 and 9,911,905 shares issued and outstanding in 1999 and 1998, respectively 50,010 49,560 Additional paid-in capital 11,235,096 11,207,765 Retained earnings 6,443,753 2,684,858 ------------------ ------------------- Total shareholders' equity 17,728,859 13,942,183 ------------------ ------------------- $ 27,637,167 $ 21,926,732 ================== =================== </TABLE> 3
HANSEN NATURAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE-MONTHS AND NINE-MONTHS ENDED SEPTEMBER 30,1999 AND 1998(Unaudited) <TABLE> - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Three Months Ended Nine Months Ended September 30, September 30, -------------------------------------- ------------------------------------- 1999 1998 1999 1998 ----------------- ------------------ ----------------- ----------------- NET SALES $ 20,491,265 $ 16,589,368 $ 54,862,616 $ 41,804,753 COST OF SALES 11,060,928 8,703,684 29,044,061 21,326,455 ----------------- ------------------ ----------------- ----------------- GROSS PROFIT 9,430,337 7,885,684 25,818,555 20,478,298 OPERATING EXPENSES: Selling, general and administrative 7,121,372 5,975,153 19,373,804 15,537,504 Amortization of trademark license and trademarks 76,604 73,800 224,900 221,400 Other expenses 29,719 30,000 59,719 ----------------- ------------------ ----------------- ----------------- Total operating expenses 7,197,976 6,078,672 19,628,704 15,818,623 ----------------- ------------------ ----------------- ----------------- OPERATING INCOME 2,232,361 1,807,012 6,189,851 4,659,675 NONOPERATING EXPENSE (INCOME) Interest and financing expense 34,651 82,347 137,763 301,055 Interest income (40,758) (31,707) (90,781) (38,758) --------------- ---------------- --------------- --------------- Net nonoperating expense (income) (6,107) 50,640 46,982 262,297 INCOME BEFORE PROVISION FOR INCOME TAXES 2,238,468 1,756,372 6,142,869 4,397,378 PROVISION FOR INCOME TAXES 901,700 624,000 2,457,000 1,544,123 ----------------- ------------------ ----------------- ----------------- NET INCOME $ 1,336,768 $ 1,132,372 $ 3,685,869 $ 2,853,255 ================= ================== ================= ================= NET INCOME PER COMMON SHARE: Basic $ 0.13 $ 0.12 $ 0.37 $ 0.31 ================= ================== ================= ================= Diluted $ 0.13 $ 0.11 $ 0.35 $ 0.28 ================= ================== ================= ================= NUMBER OF COMMON SHARES USED IN PER SHARE COMPUTATIONS: Basic 9,975,976 9,356,804 9,950,566 9,210,360 ================= ================== ================= ================= Diluted 10,625,105 10,549,988 10,544,156 10,302,057 ================= ================== ================= ================= </TABLE> 4
HANSEN NATURAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (Unaudited) <TABLE> - -------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,685,869 $ 2,853,255 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of trademark license and trademarks 224,900 221,400 Depreciation and other amortization 139,939 161,759 Compensation expense related to issuance of stock options 73,026 40,577 Deferred income taxes 199,525 Effect on cash of changes in operating assets and liabilities: Accounts receivable (2,594,138) (962,141) Inventories (2,614,996) (291,641) Prepaid expenses and other current assets (345,751) (311,718) Accounts payable 4,425,599 1,056,839 Accrued liabilities 81,906 73,493 Accrued compensation (162,752) 246,261 Income taxes payable (1,146,843) 1,532,790 ----------------- ----------------- Net cash provided by operating activities 1,966,284 4,620,874 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (129,585) (357,802) Increase in trademark license and trademarks (960,146) (87,867) Decrease in note receivable from director 20,861 29,291 Increase in deposits and other assets (431,836) (13,451) ----------------- ----------------- Net cash used in investing activities (1,500,706) (429,829) CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt (1,904,926) (378,112) Increase in long-term debt 431,250 Issuance of common stock 27,781 75,957 ----------------- ----------------- Net cash used in financing activities (1,445,895) (302,155) ----------------- ----------------- NET (DECREASE) INCREASE IN CASH (980,317) 3,888,890 CASH, beginning of period 3,806,089 395,231 ----------------- ----------------- CASH, end of period $ 2,825,772 $ 4,284,121 ================= ================= SUPPLEMENTAL INFORMATION Cash paid during the year for: Interest $ 152,701 $ 286,447 ================= ================= Income taxes $ 3,370,000 $ 2,400 ================= ================= </TABLE> NONCASH TRANSACTIONS: During the nine-month period ended September 30, 1999, the Company issued 67,876 shares of common stock to employees in connection with a net exercise of options to purchase 92,800 shares of common stock. 5
HANSEN NATURAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 1999 AND YEAR-ENDED DECEMBER 31, 1998 - ---------------------------------------------------------------------------- 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, 1998, 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. 2. INVENTORIES Inventories consist of the following at: September 30, 1999 December 31, 1998 --------------------- ------------------ Raw materials $2,934,538 $1,815,040 Finished goods 5,054,584 3,664,270 --------------------- ------------------ 7,989,122 5,479,310 Less inventory reserves (163,049) (268,233) --------------------- ------------------ $7,826,073 $5,211,077 ===================== ================== 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- General During the quarter ended September 30, 1999 the Company continued to make progress towards achieving its goal of expanding both the Hansen's(R) brand product range and distribution of such products into new markets outside of California. During the quarter ended September 30, 1999, the Company introduced two new lines of children's multi-vitamin juice products in 8.5-ounce aseptic packages. During the quarter ended September 30, 1999, net sales increased by 23.5% to $20.5 million over the comparable period in 1998. The increase in net sales was primarily attributable to sales of the Company's new children's multi-vitamin juice products as well as the Company's Signature Soda line, which was introduced in the first quarter of 1999, and increased sales of Hansen's energy and other functional drinks in 8.2-ounce slim cans. The increase in net sales was also attributable to sales of two flavors of Hansen's Smoothies in 64-ounce P.E.T. plastic bottles, which package was introduced in the fourth quarter 1998, increased sales of the Healthy Start(TM) juice line, and to a lesser extent, increased sales of Smoothies in cans, apple juice lines, and spring water. The increase in net sales was partially offset by decreased sales of teas, lemonades and juice cocktails and Smoothies in 13.5-ounce bottles. Sales of Natural Sodas in cans were level with the comparable quarter of 1998. The Company is currently in the process of introducing its new line of premium functional Smoothies in cans and anticipates introducing such products in bottles at the end of the year. The Company continues to incur expenditures in connection with the development and introduction of new products and flavors. 7
Results of Operations for the Three-Months Ended September 30, 1999 Compared to the Three-Months Ended September 30, 1998 Net Sales. For the three-months ended September 30, 1999, net sales were $20.5 million, an increase of $3.9 million or 23.5% over the $16.6 million net sales for the three-months ended September 30, 1998. The increase in net sales was primarily attributable to sales of the Company's new children's multi-vitamin juice products as well as the Company's Signature Soda line, which was introduced in the first quarter of 1999, and increased sales of Hansen's energy and other functional drinks in 8.2-ounce slim cans. The increase in net sales was also attributable to sales of two flavors of Hansen's Smoothies in 64-ounce P.E.T. plastic bottles, which package was introduced in the fourth quarter 1998, increased sales of the Healthy Start(TM) juice line, and, to a lesser extent, increased sales of Smoothies in cans, apple juice lines, and spring water. The increase in net sales was partially offset by decreased sales of teas, lemonades and juice cocktails and Smoothies in 13.5-ounce bottles. Sales of Natural Sodas in cans were level with the comparable quarter of 1998. Gross Profit. Gross profit was $9.4 million for the three-months ended September 30, 1999, an increase of $1.5 million or 19.6% over the $7.9 million gross profit for the three-months ended September 30, 1998. Gross profit as a percentage of net sales decreased to 46.0% for the three-months ended September 30, 1999 from 47.5% for the three-months ended September 30, 1998. The increase in gross profit was primarily attributable to increased net sales. The decrease in gross profit as a percentage of net sales was primarily attributable to lower margins achieved as a result of a change in the Company's product mix. Total Operating Expenses. Total operating expenses were $7.2 million for the three-months ended September 30, 1999, an increase of $1.1 million or 18.4% over total operating expenses of $6.1 million for the three-months ended September 30, 1998. Total operating expenses as a percentage of net sales decreased to 35.1% for the three-months ended September 30, 1999 from 36.6% for the three-months ended September 30, 1998. The increase in total operating expenses was primarily attributable to increased selling, general and administrative expenses. The decrease in total operating expenses as a percentage of net sales was primarily attributable to the increase in net sales and the comparatively smaller increase in selling, general and administrative expenses from the comparable period in 1998 and a decrease in other expenses. Selling, general and administrative expenses were $7.1 million for the three-months ended September 30, 1999, an increase of $1.1 million or 19.2% over selling, general and administrative expenses of $6.0 million for the three-months ended September 30, 1998. Selling, general and administrative expenses as a percentage of net sales decreased to 34.8% for the three-months ended September 30, 1999 from 36.0% for the three-months ended September 30, 1998. The increase in selling expenses was primarily attributable to increases in distribution (freight) expenses, advertising, promotional expenditures, particularly coupons, point of sale materials, samples and merchandise displays. The increase in selling expenses was partially offset by a decrease in promotional allowances, slotting expenses, and a slight decrease in in-store demonstrations. 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. 8
Amortization expense was $76,600 for the three-months ended September 30, 1999 and $73,800 for the three-months ended September 30, 1998. There were no other expenses for the three-months ended September 30, 1999 as compared to $30,000 for the three-months ended September 30, 1998. Operating Income. Operating income was $2,232,000 for the three-months ended September 30, 1999, an increase of $425,000 or 23.5% over operating income of $1,807,000 for the three- months ended September 30, 1998. Operating income as a percentage of net sales was 10.9% for the three-months ended September 30, 1999, which was about the same as in the comparable period in 1998. The increase in operating income was attributable to the $1.5 million increase in gross profit which was partially offset by the increase of $1.1 million in operating expenses. Net Nonoperating Expense (Income). Net nonoperating income was $6,000 for the three-months ended September 30, 1999, as compared to net nonoperating expense of $51,000 for the three-months ended September 30, 1998. Interest income was $41,000 for the three-months ended September 30, 1999, as compared to interest income of $32,000 during the comparable period in 1998. The increase in interest income is attributable to an increase in cash invested in interest bearing securities. Interest and financing expense was $35,000 for the three-months ended September 30, 1999 as compared to $82,000 for the comparable period in 1998. The decrease in interest and financing expense was attributable to the fact that the principal amounts outstanding on the Company's term loan were lower in 1999 than during the comparable period in 1998. Provision for Income Taxes. Provision for income taxes was $902,000, for the three-months ended September 30, 1999, an increase of $278,000 over the provision for income taxes of $624,000 for the comparable period in 1998. The effective tax rate for the three-months ended September 30, 1999 was 40.3% as compared to 35.5% for the comparable period in 1998. The increase in provision for income taxes was attributable to the increase in income before provision for income taxes and the increase in the effective tax rate for the three-months ended September 30, 1999. Certain net operating loss carryforwards resulted in a lower effective tax in 1998. Such net operating loss carryforwards were not available in 1999. Net Income. Net income was $1,336,000 for the three-months ended September 30, 1999, compared to net income of $1,132,000 for the three-months ended September 30, 1998. The $204,000 increase in net income consists of an increase in operating income of $425,000 and a decrease of $57,000 in net interest and financing expense which was partially offset by a $278,000 increase in provision for income taxes. 9
Results of Operations for the Nine-months Ended September 30, 1999 Compared to The Nine-months Ended September 30, 1998 Net Sales. For the nine-months ended September 30, 1999, net sales were approximately $54.9 million, an increase of $13.1 million or 31.2% over the $41.8 million net sales for the nine-months ended September 30, 1998. The increase in net sales was primarily attributable to sales of the Company's new Signature Soda line, which was introduced in the first quarter of 1999, sales of Healthy Start(TM) juice line, which was introduced during the second quarter of 1998, sales of two flavors of Smoothies in 64-ounce P.E.T. plastic bottles, which package was introduced in the fourth quarter of 1998, increased sales of the Hansen's energy and other functional drinks in 8.2-ounce slim cans, sales of the Company's new children's multi-vitamin juice products, which were introduced during the third quarter of 1999, increased sales of Smoothies in cans and apple juice product lines, and, to a lesser extent, sales of the Company's new Gold Standard Premium functional tea line which was introduced in the second quarter of 1999. The increase in net sales was partially offset by decreased sales of Smoothies in 13.5-ounce bottles, and teas, lemonades and juice cocktails. Gross Profit. Gross profit was $25.8 million for the nine-months ended September 30, 1999, an increase of $5.3 million or 26.1% over the $20.5 million gross profit for the nine-months ended September 30, 1998. Gross profit as a percentage of net sales decreased to 47.1% for the nine-months ended September 30, 1999 from 49.0% for the nine-months ended September 30, 1998. The increase in gross profit was primarily attributable to increased net sales. The decrease in gross profit as a percentage of net sales was primarily attributable to lower margins achieved as a result of a change in the Company's product mix. Total Operating Expenses. Total operating expenses were $19.6 million for the nine-months ended September 30, 1999, an increase of $3.8 million or 24.1% over total operating expenses of $15.8 million for the nine-months ended September 30, 1998. Total operating expenses as a percentage of net sales decreased to 35.8% for the nine-months ended September 30, 1999 from 37.8% for the nine-months ended September 30, 1998. The increase in total operating expenses was primarily attributable to increased selling, general and administrative expenses. The decrease in total operating expenses as a percentage of net sales was primarily attributable to the increase in net sales and the comparatively smaller increase in selling, general and administrative expenses from the comparable period in 1998. Selling, general and administrative expenses were $19.4 million for the nine-months ended September 30, 1999, an increase of $3.8 million or 24.7% over selling, general and administrative expenses of $15.5 million for the nine-months ended September 30, 1998. Selling, general and administrative expenses as a percentage of net sales decreased to 35.3% for the nine-months ended September 30, 1999 from 37.2% for the comparable period in 1998. The increase in selling expenses was primarily attributable to increases in distribution (freight) expenses, advertising, promotional allowances and expenditures, particularly in-store demonstrations and coupons, sampling, and point of sale materials. The increase in selling expenses was partially offset by a decrease in expenditures incurred for slotting and merchandise displays. 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. 10
Amortization expense was $225,000 for the nine-months ended September 30, 1999 and $221,400 for the nine-months ended September 30, 1998. Other expenses were $30,000 for the nine-months ended September 30, 1999 and $60,000 for the nine-months ended September 30, 1998. Operating Income. Operating income was $6,190,000 for the nine-months ended September 30, 1999, an increase of $1,530,000 or 32.8% over operating income of $4,660,000 for the nine-months ended September 30, 1998. Operating income as a percentage of net sales increased to 11.3% for the nine-months ended September 30, 1999 from 11.1% in the comparable period in 1998. The increase in operating income was attributable to a $5.3 million increase in gross profit which was partially offset by an increase of $3.8 million in operating expenses. Net Nonoperating Expense (Income). Net nonoperating expense was $47,000 for the nine-months ended September 30, 1999, a decrease of $215,000 from net nonoperating expense of $262,000 for the nine-months ended September 30, 1998. Interest and financing expense was $138,000 for the nine-months ended September 30, 1999 as compared to $301,000 for the comparable period in 1998. The decrease in interest and financing expense was attributable to a reduction in financing fees that were fully amortized in 1998 and to the fact that the principal amounts outstanding on the Company's term loan were lower in 1999 than during the comparable period in 1998. Interest income was $91,000 for the nine-months ended September 30, 1999, as compared to interest income of $39,000 during the comparable period in 1998. The increase in interest income is attributable to an increase in cash invested in interest bearing securities. Provision for Income Taxes. Provision for income taxes was $2,457,000 for the nine-months ended September 30, 1999, an increase of $913,000 over the provision for income taxes of $1,544,000 for the comparable period in 1998. The effective tax rate for the nine-months ended September 30, 1999 was 40.0% as compared to 35.1% for the comparable period in 1998. The increase in provision for income taxes was attributable to the increase in income before provision for income taxes and the increase in the effective tax rate for the nine-months ended September 30, 1999. Certain net operating loss carryforwards resulted in a lower effective tax in 1998. Such net operating loss carryforwards were not available in 1999. Net Income. Net income was $3,686,000 for the nine-months ended September 30, 1999 compared to net income of $2,853,000 for the nine-months ended September 30, 1998. The $833,000 increase in net income consists of an increase in operating income of $1,530,000 and a decrease of $215,000 in net interest and financing expenses which was partially offset by a $913,000 increase in provision for income taxes. 11
Liquidity and Capital Resources As of September 30, 1999, the Company had working capital of $7,279,000 compared to working capital of $4,997,000 as of December 31, 1998. The increase in working capital was primarily attributable to net income earned after adjustments for certain noncash expenses, primarily amortization of trademark license and trademarks, depreciation and other amortization, and deferred income taxes. The increase in working capital was partially offset by repayments made in reduction of HBC's term loan, increases in trademark licenses and trademarks, increases in deposits and other assets, and acquisitions of property and equipment. Net cash provided by operating activities decreased to $1,966,000 for the nine-months ended September 30, 1999 as compared to net cash provided by operating activities of $4,621,000 for the comparable period in 1998. The decrease in net cash provided by operating activities was primarily attributable to increases in inventories and accounts receivable to support the increase in net sales and a decrease in income taxes payable, which were partially offset by an increase in accounts payable. Net cash used in investing activities was $1,501,000 for the nine-months ended September 30, 1999 as compared to net cash used in investing activities of $430,000 for the comparable period in 1998. Net cash used in investing activities was primarily attributable to an increase in trademark license and trademarks, an increase in deposits and other assets, and purchases of property and equipment. Increase in trademark license and trademarks includes $775,000 in respect of the cost of acquisition of the exclusive ownership of the Hansen's trademark and trade names which were previously held in trust for the benefit of HBC and The Fruit Juice Company of California, Inc. Deposits and other assets include certain graphic design expenses which are amortized over a number of years. Net cash used in financing activities was $1,446,000 for the nine-months ended September 30, 1999 as compared to net cash used in financing activities of $302,000 for the comparable period in 1998. The increase in net cash used in financing activities was primarily attributable to principal payments made in reduction of HBC's term loan partially offset by portion of the cost of acquisition of the exclusive ownership of the Hansen's trademark and trade names, as described above. As of September 30, 1999, $1,499,000 was outstanding under the term loan, as compared to $3,400,000 outstanding on December 31, 1998. Effective June 14, 1999, the Company's bank reduced the annual interest rate on the term loan from the bank's base rate ("prime") plus 1 1/2% to prime plus 1/2%. 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 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. 12
The acquisition of increased inventories and increases in accounts receivable, acquisition of property and equipment, increases in trademark licenses and trademarks, repayment of the Company's long-term debt, repurchase of the Company's common stock, as well as HBC's acquisition and development plans are, and for the foreseeable future are, expected to remain HBC's principle recurring use of cash and working capital funds. 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 displays, vans and promotional vehicles, trademarks, and businesses compatible with the image of the Hansen's(R) brand as well as the development and 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. 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. 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 communication and voice mail system still require remediation. To date, the expenses incurred by the Company in order to become Year 2000 compliant, including computer software costs, have been approximately $100,000 and the 13
current estimated cost to complete remediation is expected not to exceed $20,000. Such costs, other than software, have been and will continue to be expensed as incurred. Remediation and testing activities are well underway with approximately 95% of the Company's systems already compliant. The Company estimates that it will complete the required remediation, including testing of all its IT and NIT systems, and be fully compliant, by the end of 1999. 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 such 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 therefore, 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. 14
European Monetary Union Within Europe, The European Economic and Monetary Union (the "EMU") introduced a new currency, the euro, on January 1, 1999. The new currency is in response to the EMU's policy of economic convergence to harmonize trade policy, eliminate business costs associated with currency exchange and to promote the free flow of capital, goods and services. On January 1, 1999, the participating countries adopted the euro as their local currency, initially available for currency trading on currency exchanges and noncash transactions such as banking. The existing local currencies, or legacy currencies, will remain legal tender through January 1, 2002. Beginning on January 1, 2002, euro-denominated bills and coins will be used for cash transactions. For a period of up to six-months from this date, both legacy currencies and the euro will be legal tender. On or before July 1, 2002, the participating countries will withdraw all legacy currencies and exclusively use the euro. The Company's transactions are recorded in U.S. Dollars and the Company does not currently anticipate future transactions being recorded in the euro. Based on the lack of transactions recorded in the euro, the Company does not believe that the euro will have a material effect on the financial position, results of operations or cash flows of the Company. In addition, the Company has not incurred and does not expect to incur any significant costs from the continued implementation of the euro, including any currency risk, which could materially affect the Company's business, financial condition or results of operations. The Company has not experienced any significant operational disruptions to date and does not currently expect the continued implementation of the euro to cause any significant operational disruptions. 15
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: o Company's ability to generate sufficient cash flows to support capital expansion plans and general operating activities; o Changes in consumer preferences; o Changes in demand that are weather related, particular in areas outside of California; o 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; o The introduction of new products; o 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; o 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; o 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; o The Company's ability to penetrate new markets; 16
o The marketing efforts of distributors of the Company's products, most of which distribute products that are competitive with the products of the Company; o 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; o The terms and/or availability of the Company's credit facilities and the actions of it's creditors; o The effectiveness of the Company's advertising, marketing and promotional programs; o Adverse weather conditions, which could reduce demand for the Company's products; o 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 o 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. 17
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 12, 1999 /s/ Rodney C. Sacks Chairman of the Board and Chief Executive Officer Date: November 12, 1999 /s/ Hilton H. Schlosberg Vice Chairman of the Board, President, Chief Operating Officer, Chief Financial Officer and Secretary 18
EXHIBIT INDEX Exhibit 10 (lll) Assignment and Agreement dated as of September 22, 1999 by The Fresh Juice Company of California, Inc. and Hansen Beverage Company. Exhibit 10 (mmm) Settlement Agreement dated as of September 1999 by and between and among Rodney C. Sacks, as sole Trustee of The Hansen's Trust and Hansen Beverage Company The Fresh Juice Company of California, Inc. Exhibit 10 (nnn) Trademark Assignment dated as of September 24, 1999 by and between The Fresh Juice Company of California, Inc. (Assignor) and Rodney C. Sacks as sole Trustee of The Hansen's Trust (Assignee). Exhibit 10 (ooo) Settlement Agreement dated as of September 3, 1999 by and between The Fresh Juice Company of California, Inc., The Fresh Smoothie Company, LLC, Barry Lublin, Hansen's Juice Creations, LLC, Harvey Laderman and Hansen Beverage Company and Rodney C. Sacks, as Trustee of The Hansen's Trust. Exhibit 10 (ppp) Royalty Agreement dated as of April 26, 1996 by and between Hansen's Juices, Inc. and Hansen's Juice Creations, Limited Liability Company. Exhibit 10 (qqq) Royalty Agreement dated as of April 26, 1996 by and between Gary Hansen, Anthony Kane and Burton S. Rosky, as trustees of Hansen's Trust and Hansen's Juice Creations, a limited liability company. Exhibit 10 (rrr) Letter Agreement dated May 14, 1996. Exhibit 10 (sss) Amendment to Royalty Agreement as of May 9, 1997 by and between The Fresh Juice Company of California and Hansen's Juice Creations, Limited Liability Company. Exhibit 10 (ttt) Assignment of License Agreements dated as of February 1999 by Hansen's Juice Creations, LLC (Assignor) to Fresh Smoothie, LLC (Assignee)