01—Abstract
Summary
Summary of the 10-K filed March 31, 1999. Cited figures are marked; the original filing is the authoritative source.
This is the fiscal 1998 Form 10-K of Hansen Natural Corporation (Nasdaq Small-Cap: HANS), filed March 31, 1999.
Hansen later became Monster Beverage Corp (MNST); the filing itself does not use the Monster name, so this analysis covers the company as it was in 1998. Hansen markets 'alternative' beverages under the Hansen's Natural brand, led by its carbonated 'functional' energy drinks in 8.2-ounce slim cans, along with natural sodas, juices, and Smoothies. Results improved sharply in 1998.
Net sales rose 25.1% to $53.9 milliona, gross margin expanded from 41.4% to 49.3% on product mix and cost reductions, operating income nearly tripled to $6.0 million, and net income reached $3.6 million ($0.34 diluted EPS) versus $1.3 million ($0.13) in 1997. Operating cash flow was $4.4 million, cash ended at $3.8 million, and shareholders' equity grew to $13.9 million. Investors should weigh that growth against concentration and governance risks.
One customer accounted for 27%b of 1998 sales, and management warned that some functional-drink sales came from distributor opening orders that may not recur. Selling expenses rose 34% as the company pushed into new markets, and sales outside California grew to 34% of the total.
The company is small (68 employees, roughly $22 millionc in total assets), has never paid a dividend, and is controlled by its two co-founders, Rodney Sacks and Hilton Schlosberg, who together beneficially own about 79% of the shares. Debt is modest: long-term debt is $3.4 million under a Comerica term loan, with $2.1 million due in 1999, and the revolving credit line was undrawn at year-end.
02—Key points
Key Highlights
- Net sales grew 25.1% to $53.9M in 1998 (from $43.1M), driven by the energy functional drink and three new functional drinks launched in Q1 1998.
- Gross margin improved to 49.3% from 41.4%, reflecting a richer product mix and cost savings in raw materials and packaging.
- Operating income rose to $6.0M from $1.9M; net income rose to $3.6M ($0.34 diluted EPS) from $1.3M ($0.13).
- Operating cash flow was $4.4M (vs. $1.3M in 1997); year-end cash was $3.8M, working capital $5.0M, and total assets $21.9M.
- Customer concentration is high: one customer represented 27% of 1998 sales, and a decision to reduce purchases would have a material adverse effect.
- Ownership is concentrated: Sacks and Schlosberg each hold roughly 39-40% of shares, with officers and directors at about 44.7% in aggregate. The company has never paid dividends.
- Risks flagged include competition from much larger beverage companies, limited copacking capacity for 8.2-ounce slim cans, and Year 2000 remediation expected to finish by Q3 1999.
03—Questions
Frequently Asked Questions
How profitable was Hansen in 1998 compared with 1997?
Net income was $3.56M, or $0.34 per diluted share, versus $1.25M, or $0.13 per diluted share, in 1997. Operating income reached $5.96M, up from $1.88M, as gross profit grew 49% to $26.5M while operating expenses rose 29% to $20.6M. The 1998 provision for income taxes was $2.07M, including $0.56M of deferred taxes, which signals the company had moved into taxable profitability after using prior net operating loss carryforwards.
Is the 1998 growth likely to repeat?
Management said some functional-drink sales reflected opening orders from distributors ahead of launches in their territories, so 1998 sales may not be indicative of future periods. Sales of natural sodas and apple juice declined, and the 1997 Smoothie increase was not repeated. The company plans further product launches in 1999, including Signature Sodas in glass bottles, premium functional Smoothies, and premium functional iced teas, but these are unproven.
What are the biggest risks to the business?
The main risks are: (1) dependence on a single customer representing 27% of sales; (2) reliance on a limited number of copackers and suppliers, with few alternative copacking facilities for 8.2-ounce slim cans or shrink-sleeve labeling; (3) intense competition from Coca-Cola, PepsiCo, Red Bull, Snapple, and others with far greater resources; (4) a weather-dependent seasonal pattern that may become more pronounced outside California; and (5) a pending arbitration against The Fresh Juice Company and a related trademark dispute, plus an appeal in the ERLY note case.
How is the balance sheet and debt position?
Total assets were $21.9M and shareholders' equity was $13.9M at December 31, 1998. Total debt was $3.4M: a Comerica term loan with $2.07M classified as current, to be repaid in 1999, and the remainder due in 2000-2001. The company was in compliance with its loan covenants and reported no borrowings under its $3M revolving line, which matures May 1, 2000. Management said cash from operations and existing credit facilities would be sufficient for 1999 needs.
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