UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2004
Commission file number 1-14170
NATIONAL BEVERAGE CORP.
(954) 581-0922
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 ( ) No (X)
The number of shares of registrant’s common stock outstanding as of March 8, 2004 was 18,288,528.
NATIONAL BEVERAGE CORP.QUARTERLY REPORT ON FORM 10-QINDEX
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL BEVERAGE CORP. AND SUBSIDIARIES
See accompanying Notes to Condensed Consolidated Financial Statements.
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1. BASIS OF PRESENTATION
National Beverage Corp. develops, manufactures, markets and distributes a complete portfolio of quality non-alcoholic beverage products throughout the United States. Incorporated in Delaware in 1985, National Beverage Corp. is a holding company for various operating subsidiaries. When used in this report, the terms “we,” “us,” “our,” “Company” and “National Beverage” mean National Beverage Corp. and its subsidiaries.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. The financial statements do not include all information and notes required by generally accepted accounting principles for complete financial statements. Except for the matters disclosed herein, there has been no material change in the information disclosed in the notes to consolidated financial statements for the fiscal year ended May 3, 2003. In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Results for the interim periods presented are not necessarily indicative of results which might be expected for the entire fiscal year.
2. STOCK-BASED COMPENSATION
As provided by SFAS 123, we use the intrinsic value method to account for stock based compensation awarded to employees, which generally does not recognize any compensation expense with respect to such awards unless the exercise price of options granted is less than the market price on the date of grant. Had the fair value method been used, net income and earnings per share for the nine-month periods ended January 31, 2004 and January 25, 2003 would have been reduced on a pro forma basis by less than $100,000 and $.01 per share for each period.
During the nine months ended January 31, 2004, options for 53,910 shares were exercised at a weighted average exercise price of $2.21. At January 31, 2004, options to purchase 878,716 shares at a weighted average exercise price of $4.42 were outstanding and stock-based awards to purchase 1,187,424 shares of common stock were available for grant.
3. INVENTORIES
Inventories are stated at the lower of first-in, first-out cost or market. Inventories at January 31, 2004 are comprised of finished goods of $16,928,000 and raw materials of $14,885,000. Inventories at May 3, 2003 are comprised of finished goods of $16,288,000 and raw materials of $12,407,000.
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4. PROPERTY
Property consists of the following:
Depreciation expense was $2,162,000 and $6,427,000 for the three and nine month periods ended January 31, 2004, respectively, and $2,103,000 and $6,431,000 for the three and nine month periods ended January 25, 2003, respectively.
5. DEBT
A subsidiary maintains unsecured revolving credit facilities with banks aggregating $45 million (the “Credit Facilities”). The Credit Facilities expire through February 1, 2006 and bear interest at 1/2% below the banks’ reference rate or 1% above LIBOR, at the subsidiary’s election. At January 31, 2004, approximately $42 million was available under the Credit Facilities and there were no borrowings outstanding. Another subsidiary has a term loan agreement with a bank that has an outstanding balance of $600,000 at January 31, 2004 and is repayable in quarterly installments through July 31, 2004.
Debt agreements require subsidiaries to maintain certain financial ratios and contain other restrictions, none of which are expected to have a material impact on our operations or financial position. At January 31, 2004, retained earnings of approximately $28 million were restricted from distribution and we were in compliance with all loan covenants.
6. COMMON STOCK
In January 1998, the Board of Directors authorized the purchase of up to 800,000 shares of National Beverage common stock. During the nine months ended January 31, 2004, the Company purchased 18,000 shares and aggregate shares purchased since January 1998 was 502,060. Such shares are classified as treasury stock.
On February 27, 2004, the Company announced a 100% stock dividend payable on March 22, 2004 to shareholders of record on March 8, 2004. The pro forma effect of the stock dividend on net income per share and average common shares outstanding is reported on the statement of income.
On March 5, 2004, the Company announced a special “one-time” cash dividend of $1.00 per share on approximately 36.6 million outstanding shares (subsequent to the payment of the 100% stock dividend). The cash dividend will be paid on or before April 30, 2004 to shareholders of record on March 26, 2004.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
National Beverage Corp. develops, manufactures, markets and distributes a complete portfolio of quality non-alcoholic beverage products throughout the United States. Our lines of multi-flavored soft drinks, including those of our flagship brands, Shasta® and Faygo®, emphasize distinctive flavor variety. In addition, we offer an assortment of premium beverages geared toward the health-conscious consumer, including Everfresh®, Home Juice®, and Mr. Pure®100% juice and juice-based products; and LaCROIX®, Mt. Shasta™, Crystal Bay® and ClearFruit® flavored and spring water products. We also produce specialty products, including Shasta Shortz®, a line of beverages geared toward children, Ohana® fruit-flavored drinks and St. Nick’s® holiday soft drinks. Substantially all of our brands are produced in 14 manufacturing facilities that are strategically located in major metropolitan markets throughout the continental United States. To a lesser extent, we develop and produce soft drinks for retail grocery chains, warehouse clubs, mass-merchandisers and wholesalers (“allied brands”) as well as soft drinks for other beverage companies.
Our strategy emphasizes the growth of our branded products by offering a beverage portfolio of proprietary flavors; by supporting the franchise value of regional brands; by developing and acquiring innovative products tailored toward healthy lifestyles; and by appealing to the “quality-price” sensitivity factor of the family consumer. We believe that the “regional share dynamics” of our brands possess consumer loyalty within local markets and generate more aggressive retailer sponsored promotional activities.
Over the last several years, we have focused on increasing penetration of our brands in the convenience channel through Company-owned and independent distributors. The convenience channel is composed of convenience stores, gas stations and other smaller “up-and-down-the-street” accounts. Because of the higher retail prices and margins that typically prevail, we have undertaken specific measures to expand distribution in this channel. These include development of products specifically targeted to this market, such as ClearFruit, Everfresh, Mr. Pure, Ritz® and Crystal Bay. Additionally, we have created proprietary and specialized packaging for these products with distinctive graphics. We intend to continue our focus on enhancing growth in the convenience channel through both specialized packaging and innovative product development.
Beverage industry sales are seasonal with the highest volume typically realized during the summer months. Additionally, our operating results are subject to numerous factors, including fluctuations in the costs of raw materials, changes in consumer preference for beverage products and competitive pricing in the marketplace.
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RESULTS OF OPERATIONS
Three Months Ended January 31, 2004 (third quarter of fiscal 2004) compared to Three Months Ended January 25, 2003 (third quarter of fiscal 2003)
Net sales for the three months ended January 31, 2004 increased approximately 6% to $107.0 million compared to the third quarter of fiscal 2003. This increase was primarily the result of volume growth of our branded soft drinks and favorable changes in product mix.
Gross profit approximated 32.9% of net sales for the third quarter of fiscal 2004 and 32.8% of net sales for the third quarter of fiscal 2003. This improvement was due to the volume increase of higher-margin branded business partially offset by increases in certain manufacturing costs.
Selling, general and administrative expenses were $33.1 million or 31.0% of net sales for the third quarter of fiscal 2004, compared to $31.3 million or 31.2% of net sales for last year. The dollar increase is due to higher distribution and selling costs related to the volume growth and higher marketing costs related to new product introductions.
Interest expense declined during the third quarter of fiscal 2004 compared to the prior year due to reductions in average debt outstanding and interest rates. Other income, which is comprised primarily of interest income, decreased due to lower investment yields and increased investments in tax-exempt securities.
The Company’s effective rate for income taxes, based upon estimated annual income tax rates, approximated 36.9% of income before taxes for the third quarter of fiscal 2004 and 38.2% for fiscal 2003. The difference between the effective rate and the federal statutory rate of 35% was primarily due to the effects of state income taxes and non-deductible expenses.
Net income was $1,356,000 for the third quarter of fiscal 2004, compared to $1,089,000 for the third quarter of fiscal 2003.
Nine Months Ended January 31, 2004 (first nine months of fiscal 2004) compared to Nine Months Ended January 25, 2003 (first nine months of fiscal 2003)
Net sales for the nine months ended January 31, 2004 increased 3% to $382.1 million compared to the first nine months of fiscal 2003. This increase was primarily the result of volume growth of our branded soft drinks, which was partially offset by a decline in allied branded volume.
Gross profit approximated 33.0% of net sales for the first nine months of fiscal 2004 and 32.8% of net sales for the first nine months of fiscal 2003. This improvement was due to the volume increase of higher-margin branded business partially offset by increases in certain raw material and manufacturing costs.
Selling, general and administrative expenses were $104.2 million or 27.3% of net sales for the first nine months of fiscal 2004, compared to $101.0 million or 27.3% of net sales for last year. The dollar increase is due to higher distribution and selling costs related to the volume growth and higher marketing costs related to new product introductions.
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Interest expense declined during the first nine months of fiscal 2004 compared to the prior year due to reductions in average debt outstanding and interest rates. Other income, which is comprised primarily of interest income, decreased due to lower investment yields and increased investments in tax-exempt securities.
The Company’s effective rate for income taxes, based upon estimated annual income tax rates, approximated 37.9% of income before taxes for the first nine months of fiscal 2004 and 38.2% for fiscal 2003. The difference between the effective rate and the federal statutory rate of 35% was primarily due to the effects of state income taxes and non-deductible expenses.
Net income was $13,827,000 for the first nine months of fiscal 2004, compared to $12,983,000 for the first nine months of fiscal 2003.
LIQUIDITY AND FINANCIAL CONDITION
Capital Resources
Our sources of capital are cash flow from operations and borrowings under existing credit facilities. We maintain unsecured revolving credit facilities aggregating $45 million of which approximately $42 million was available for future borrowings at January 31, 2004. We believe that existing capital resources are sufficient to meet our capital requirements and those of the parent company for the foreseeable future.
Cash Flows
During the first nine months of fiscal 2004, we generated cash of $12.3 million from operating activities, which was partially offset by $5.7 million expended for investing activities and $986,000 expended for financing activities. Cash provided by operating activities decreased $12.7 million primarily due to an increase in working capital requirements. Cash used in investing activities decreased $589,000 due to a reduction in net property additions, while cash used in financing activities decreased $8.0 million reflecting lower debt repayments.
Financial Position
During the first nine months of fiscal 2004, our working capital increased $15.6 million to $95.4 million from $79.8 million, primarily due to cash generated from operations. The decrease in prepaid and other is due to changes in income tax refund receivables. The decrease in accounts payable is due to the timing of payments and seasonal changes in volume. At January 31, 2004, the current ratio was 3.0 to 1 compared to 2.4 to 1 at May 3, 2003.
Liquidity
We periodically evaluate capital projects designed to expand capacity and improve efficiency at our manufacturing facilities. We presently have no material commitments for capital expenditures and expect that fiscal 2004 capital expenditures will be slightly higher than fiscal 2003.
On March 5, 2004, the Company announced a special “one-time” cash dividend of $1.00 per share on approximately 36.6 million outstanding shares. The cash dividend will be paid on or before April 30, 2004 to shareholders of record on March 26, 2004. See Note 6 of Notes to Condensed Consolidated Financial Statements.
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FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q (this “Form 10-Q”), including statements under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the following: general economic and business conditions; pricing of competitive products; success in acquiring other beverage businesses; success of new product and flavor introductions; fluctuations in the costs of raw materials; our ability to increase prices; continued retailer support for our products; changes in consumer preferences; success of implementing business strategies; changes in business strategy or development plans; government regulations; regional weather conditions; and other factors referenced in this Form 10-Q. We disclaim an obligation to update any such factors or to publicly announce the results of any revisions to any forward-looking statements contained herein to reflect future events or developments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes to the disclosures made on this matter in the Company’s Annual Report on Form 10-K for the fiscal year ended May 3, 2003.
ITEM 4. CONTROLS AND PROCEDURES
National Beverage’s Chief Executive Officer and Principal Financial Officer have concluded that disclosure controls and procedures are effective at providing reasonable assurance that all material information required to be included in this report is reported in a timely manner, based on their evaluation of these controls and procedures within 90 days of this report. There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
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PART II — OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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SIGNATURE
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.
Date: March 16, 2004
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