01—Abstract
Summary
Summary of the 10-K filed March 29, 2002. Cited figures are marked; the original filing is the authoritative source.
This 10-K covers fiscal 2001 for Hansen Natural Corporation (NASDAQ SmallCap: HANS), a Corona, California alternative-beverage company that later became Monster Beverage Corporation (MNST).
Net sales rose 15.7% to a record $92.3 milliona, driven by natural sodas, Blue Sky natural sodas, apple juice, Junior Juice (acquired May 2001), and new Energade and E2O Energy Water launches. Unit case volume grew about 28% to 15.1 million cases. Profitability weakened, however.
Gross margin fell to 44.2% from 46.5% on an unfavorable product and customer mix, operating expenses rose 16.9% (mainly selling, general and administrative costs), operating income fell to $5.6 millionb from $6.9 million, and net income declined to $3.0 million, or $0.29 diluted EPS, from $3.9 million, or $0.38. The balance sheet is modest and manageable. Total assets were $38.6 million, shareholders' equity was $25.3 million, and total debt was $6.2 million, mostly a $5.0 million Comerica revolving line of credit.
Working capital was $13.0 million, and operating cash flow improved to $5.2 millionc as receivables were collected. Management notes that one customer accounted for 18% of 2001 sales, and that the Medicine Man premium tea line and the Healthy Start/Silver Foxes juice lines were disappointing and are being reevaluated or discontinued. Insiders, led by CEO Rodney Sacks and CFO Hilton Schlosberg, control about 44% of shares, and the company has never paid dividends.
Investors should watch two accounting changes. EITF 01-9 will reclassify certain promotional allowances from SG&A as a reduction of net sales beginning in Q1 2002, which will lower reported revenue and may not affect profit.
SFAS 142 will eliminate trademark amortization, which should lift reported earnings going forward. Risks include reliance on co-packers with limited capacity for newer products, a single-source energy can supplier, the high concentration of sales in California, and ongoing litigation with Sobe.
02—Key points
Key Highlights
- Record net sales of $92.3 million in 2001, up 15.7% from $79.7 million, with unit case volume up roughly 28% to 15.1 million cases
- Gross margin declined to 44.2% from 46.5% due to unfavorable product and customer mix shifts
- Net income fell 23% to $3.0 million; diluted EPS was $0.29 versus $0.38 in 2000
- Operating expenses rose 16.9% to $35.3 million, driven by selling, promotion, freight, and payroll costs
- Balance sheet remains modest: total assets of $38.6 million, equity of $25.3 million, and total debt of $6.2 million mostly on a $5.0 million revolving credit line
- Operating cash flow improved to $5.2 million from a $1.1 million outflow in 2000, aided by lower receivables
- Concentration risk: one customer represented 18% of 2001 sales, and several product lines (Medicine Man, Healthy Start/Silver Foxes) underperformed and are being discontinued or reevaluated
03—Questions
Frequently Asked Questions
Why did profit decline even though sales grew strongly?
Sales grew 15.7%, but gross margin fell about 230 basis points to 44.2% because of a shift toward lower-margin products and customers. Operating expenses grew faster than sales, rising 16.9%, mainly from higher promotional spending, freight, commissions, and payroll. Together, these pushed operating income down to $5.6 million from $6.9 million, and net income to $3.0 million.
How financially stable is the company?
The company is small but financially stable. It had working capital of $13.0 million, a current ratio of about 3.3x, and total debt of $6.2 million against $25.3 million of equity. It was in compliance with its credit facility covenants at year-end. The main debt is a revolving line of credit due in 2005, and the company has no plans to pay dividends.
What accounting changes could affect future reported results?
Two changes matter. First, under EITF 01-9, starting in Q1 2002, certain promotional allowances currently recorded in SG&A will be netted against net sales, which lowers reported revenue but not profit. Second, SFAS 142 eliminates trademark amortization, which was about $0.5 million in 2001 and should boost reported operating income. The company also disclosed that it is evaluating the EITF 01-9 impact in detail.
What are the main risks highlighted in the filing?
Key risks include dependence on one major customer (18% of sales) and on Costco-related sales, limited U.S. co-packing capacity for energy and functional drinks, single-source supply for energy drink cans, and a Hard e alcohol product subject to regulation. Sales are also highly seasonal and concentrated in California, and the company faces intense competition from much larger beverage companies such as Coca-Cola and PepsiCo. It is also in litigation with Sobe over patent and trademark claims.
Who controls the company and what is the stock's trading profile?
Co-founders Rodney Sacks and Hilton Schlosberg, through direct holdings and Brandon Limited Partnerships, control about 44% of the shares, which gives management strong influence. The stock traded roughly between $2.93 and $4.25 bid during 2001 on NASDAQ SmallCap, and non-affiliate market value was about $22.8 million as of March 2002. Shares outstanding were about 10.05 million, so the company is a thinly traded microcap.
04—Continue