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 October 30, 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 December 9, 2004 was 36,890,856.
1
NATIONAL BEVERAGE CORP.QUARTERLY REPORT ON FORM 10-QINDEX
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL BEVERAGE CORP. AND SUBSIDIARIES
See accompanying Notes to Condensed Consolidated Financial Statements.
3
4
5
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 accounting principles generally accepted in the United States (“GAAP”) and rules and regulations of the Securities and Exchange Commission for interim financial information. The financial statements do not include all information and notes required by GAAP for complete financial statements. In our opinion, all adjustments (consisting of normal recurring adjustments) 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.
These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended May 1, 2004.
2. STOCK-BASED COMPENSATION
As provided by SFAS 123 as amended, 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 basic and diluted earnings per share for the three-month and six-month periods ended October 30, 2004 and November 1, 2003 would have been reduced on a pro forma basis by less than $100,000 and $.01 per share for each period.
During the six months ended October 30, 2004, options for 13,750 shares were granted at a weighted average exercise price of $4.59 and options for 28,200 shares were exercised at a weighted average exercise price of $2.05. At October 30, 2004, options to purchase 1,013,858 shares at a weighted average exercise price of $2.85 were outstanding and stock-based awards to purchase 2,949,622 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 October 30, 2004 are comprised of finished goods of $17,484,000 and raw materials of $13,688,000. Inventories at May 1, 2004 are comprised of finished goods of $16,349,000 and raw materials of $13,405,000.
6
4. PROPERTY
Property consists of the following:
Depreciation expense was $2,386,000 and $4,774,000 for the three-month and six-month periods ended October 30, 2004, respectively, and $2,140,000 and $4,265,000 for the three-month and six-month periods ended November 1, 2003, respectively.
5. DEBT
A subsidiary maintains unsecured revolving credit facilities aggregating $45 million (the “Credit Facilities”) with banks. The Credit Facilities expire through February 1, 2006 and bear interest at ½% below the banks’ reference rate or 1% above LIBOR, at the subsidiary’s election. At October 30, 2004, there was no outstanding debt under the Credit Facilities and approximately $42 million was available for future borrowings.
The Credit Facilities require the subsidiary 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. Significant loan covenants and financial ratios include: fixed charge coverage, consolidated net worth ratio and limitations on incurrence of debt. At October 30, 2004, we were in compliance with all loan covenants and financial ratios and retained earnings of approximately $25 million were restricted from distribution.
6. COMMON STOCK
In January 1998, the Board of Directors authorized the purchase of up to 800,000 shares of National Beverage common stock. There were no shares purchased during the six months ended October 30, 2004 and aggregate shares purchased since January 1998 was 502,060. Such shares are classified as treasury stock.
On March 22, 2004, the Company distributed a 100% stock dividend to shareholders of record on March 8, 2004. Average shares outstanding and per share data presented in these financial statements have been adjusted retroactively for the effects of the stock dividend.
7. CHANGES IN ACCOUNTING STANDARDS
Management has reviewed the current changes in accounting standards and does not expect any of these changes to have a material impact on our financial statements.
7
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
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 to 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 Rip It™, an energy drink geared toward young consumers, 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 products by offering a branded beverage portfolio of proprietary flavors; by supporting the franchise value of regional brands and expanding those brands with new packaging and broader demographic emphasis; by developing and acquiring innovative products tailored toward healthy lifestyles; and by appealing to the “quality-price” expectations of the family consumer. We believe that the “regional share dynamics” of our brands perpetuate consumer loyalty within local regional markets, resulting in 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 as well as food brokers and wholesalers. 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, Crystal Bay, and Rip It. 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.
8
RESULTS OF OPERATIONS
Three Months Ended October 30, 2004 (second quarter of fiscal 2005) compared to Three Months Ended November 1, 2003 (second quarter of fiscal 2004)
Net sales for the three months ended October 30, 2004 decreased 3.5% to $124.9 million compared to the second quarter of fiscal 2004. We continue to emphasize our strategy of expanding our branded portfolio of beverage products to higher margin channels of distribution. While our branded case sales increased during the period, our net sales decline is attributable to a reduction in our allied branded business and the generally soft retail environment.
Gross profit approximated 31.6% of net sales for the second quarter of fiscal 2005 and 32.7% of net sales for the second quarter of fiscal 2004. This decline was due to the effect of the sales decrease and an increase in raw material costs. Cost of goods sold per unit increased approximately 1%, primarily driven by increases in aluminum, fuel and resin.
Selling, general and administrative expenses were $32.9 million or 26.4% of net sales for the second quarter of fiscal 2005, compared to $36.0 million or 27.8% of net sales for last year. The decline was due to a reduction in selling costs of $936,000 related to decreased volume and lower marketing costs of $1.5 million.
Interest expense declined during the second quarter of fiscal 2005 compared to the prior year due to reductions in average debt outstanding. Other income, which is comprised primarily of interest income, decreased due to a decline in average investments outstanding as a result of the $38.4 million cash dividend paid on April 30, 2004.
The Company’s effective rate for income taxes, based upon estimated annual income tax rates, approximated 37.9% of income before taxes for the second quarter of fiscal 2005 and 38.1% for fiscal 2004. The difference between the effective rate and the federal statutory rate of 35% was primarily due to the effects of state income taxes, nondeductible expenses and nontaxable interest income.
Net income was $4,120,000 for the second quarter of fiscal 2005, compared to $4,021,000 for the second quarter of fiscal 2004.
Six Months Ended October 30, 2004 (first six months of fiscal 2005) compared to Six Months Ended November 1, 2003 (first six months of fiscal 2004)
Net sales for the six months ended October 30, 2004 decreased 1.3% to $271.4 million compared to the first six months of fiscal 2004. Included in net sales for the first six months of fiscal 2005 and the quarter ended July 31, 2004 is $1.8 million received from a customer relative to recovery of pricing and promotional allowances due under a contractual settlement for previously shipped product. The decline for the six month period was primarily due to a decrease in allied branded business, partially offset by an increase in branded case sales.
Gross profit approximated 32.4% of net sales for the first six months of fiscal 2005 and 33.1% of net sales for the first six months of fiscal 2004. This decline was due to the effect of the sales decrease and an increase in raw material costs, partially offset by the $1.8 million customer payment
9
noted above. Cost of goods sold per unit increased 2.4%, primarily driven by increases in aluminum, fuel and resin.
Selling, general and administrative expenses were $67.1 million or 24.7% of net sales for the first six months of fiscal 2005, compared to $71.1 million or 25.8% of net sales for last year. The decline was due to a reduction in selling costs of $1.4 million related to decreased volume and lower marketing costs of $2.0 million.
Interest expense declined during the first six months of fiscal 2005 compared to the prior year due to reductions in average debt outstanding. Other income, which is comprised primarily of interest income, decreased due to a decline in average investments outstanding as a result of the $38.4 million cash dividend paid on April 30, 2004.
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 six months of fiscal 2005 and 38.0% for fiscal 2004. The difference between the effective rate and the federal statutory rate of 35% was primarily due to the effects of state income taxes, nondeductible expenses and nontaxable interest income.
Net income was $12,976,000 for the first six months of fiscal 2005, compared to $12,471,000 for the first six months of fiscal 2004.
LIQUIDITY AND FINANCIAL CONDITION
Capital Resources
Our current sources of capital consist of 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 October 30, 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 six months of fiscal 2005, we generated cash of $19.9 million from operating activities, which was partially offset by $6.4 million expended for investing activities. Cash provided by operating activities increased $12.2 million primarily due to an increase in earnings and a decrease in working capital requirements. Cash used in investing activities increased $1.9 million due to an increase in property additions.
Financial Position
During the first six months of fiscal 2005, our working capital increased $12.0 million to $76.9 million primarily due to cash generated from operations. Trade receivables and accounts payable decreased due to lower sales volume related to seasonality. Prepaid and other decreased due to changes in income tax refunds receivable. At October 30, 2004, the current ratio was 2.5 to 1 compared to 2.1 to 1 at May 1, 2004.
Liquidity
We continually evaluate capital projects designed to expand capacity and improve efficiency at our manufacturing facilities. During the latter part of fiscal 2004, management initiated capital
10
expenditure programs intended to improve plant efficiency and, as a result, the Company expects that fiscal 2005 capital expenditures will be higher than fiscal 2004.
ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results.
We offer various sales incentive arrangements to our customers, which require customer performance or achievement of certain volume targets. These incentives are accrued based on expected amounts to be paid. The recognition of expense for these incentives involves the use of judgment related to performance and volume estimates, which estimates are made based on historical experience and other factors. Actual expenses may vary from reported amounts.
FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q (this “Form 10-Q”) 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 1, 2004.
ITEM 4. CONTROLS AND PROCEDURES
As of October 30, 2004, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Principal Financial Officer (“PFO”). Based on that evaluation, our CEO and PFO concluded that our disclosure controls and procedures as of October 30, 2004 were effective in timely alerting them to material information required to be included in this report. There has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that
11
has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the company’s Annual Meeting of Shareholders held October 1, 2004, Mr. S. Lee Kling and Mr. Joseph P. Klock, Jr. were re-elected to the Board of Directors for a three-year term. Of the 36,432,064 shares voted, 35,621,714 shares were voted for the election of Mr. S. Lee Kling (810,350 shares were withheld) and 35,556,466 shares were voted for the election of Mr. Joseph P. Klock, Jr. (875,598 shares were withheld). In addition, the proposal to amend the Company’s Special Stock Option Plan to increase by 500,000 shares the number of shares issuable thereunder was approved as follows: 33,168,241 shares voted for; 1,733,151 shares voted against; and 14,866 shares abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(b) Reports on Form 8-K:
On September 15, 2004, the Company filed a Form 8-K Current Report regarding a press release issued September 14, 2004, announcing the Company’s financial results for the first quarter ended July 31, 2004.
12
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: December 14, 2004
13