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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1999
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___ to ___
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)
Registrant's telephone number, including area code: (909) 739 - 6200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Not Applicable Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Title of class
Common Stock, $.005 par value per share
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant was approximately $23,336,957 computed by reference to the sale
price for such stock on the Nasdaq Small-Cap Market on March 2, 2000.
The number of shares of the Registrant's common stock, $.005 par value
per share (being the only class of common stock of the Registrant), outstanding
on March 2, 2000 was 10,014,198 shares.
HANSEN NATURAL CORPORATION
FORM 10-K
TABLE OF CONTENTS
Item Number Page Number
PART I
1. Business 3
2. Properties 15
3. Legal Proceedings 15
4. Submission of Matters to a Vote of Security Holders 16
PART II
5. Market for the Registrant's Common Equity and Related
Shareholder Matters 16
6. Selected Consolidated Financial Data 18
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
8. Financial Statements and Supplementary Data 28
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 28
PART III
10. Directors and Executive Officers of the Registrant 29
11. Executive Compensation 30
12. Security Ownership of Certain Beneficial Owners and Management 35
13. Certain Relationships and Related Transactions 37
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 38
Signatures 39
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PART I
ITEM 1. BUSINESS
Background of the Company and Subsidiaries
Hansen Natural Corporation ("Hansen" or the "Company"), which was
incorporated in Delaware on April 25, 1990, maintains its principal place of
business at 2380 Railroad Street, Suite 101, Corona, California 92880-5471, and
its telephone number is (909) 739-6200.
The Company is a holding company and carries on no operating business
except through its direct wholly-owned subsidiary, Hansen Beverage Company
("HBC") which was incorporated in Delaware on June 8, 1992. HBC conducts all of
the Company's operating business and generates all of the Company's operating
revenues. References herein to "Hansen" or the "Company" when used to describe
the operating business of the Company are references to the business of HBC
unless otherwise indicated. The Company also owns all of the issued and
outstanding common stock of Hard Energy Company ("HEC"), formerly known as CVI
Ventures, Inc., which was incorporated in Delaware on April 30, 1990. Although
HEC is currently inactive, the Company plans to commence the marketing and sale
of certain beverage products through HEC during 2000. In addition, HBC formerly
owned all of the issued and outstanding ordinary shares of its subsidiary
located in the United Kingdom, Hansen Beverage Company (UK) Limited, which
ceased operating activities at the end of 1997 and was finally dissolved in July
1999.
Background of the Hansen Business
In the 1930's, Hubert Hansen and his three sons started a business to
sell fresh non-pasteurized juices in Los Angeles, California. This business
eventually became Hansen's Juices, Inc., now known as The Fresh Juice Company of
California, Inc. ("FJC"). In 1977, Tim Hansen, one of the grandsons of Hubert
Hansen, perceived a demand for pasteurized natural juices and juice blends that
are shelf stable and formed Hansen Foods, Inc. ("HFI"), which was also based in
the Los Angeles area. HFI expanded its product line from juices to include
Hansen's(R) Natural Sodas. California CoPackers Corporation (d/b/a/ Hansen
Beverage Company) ("CCC") acquired certain assets of HFI including the right to
market the Hansen's(R) brand name, in January 1990. On July 27, 1992, the
Company, through HBC, acquired the Hansen's(R) brand natural soda and apple
juice business (the "Hansen Business") from CCC. Under the Company's ownership,
the Hansen Business has been significantly expanded to include a wide range of
beverages within the growing "alternative" beverage category.
Products
Hansen is engaged in the business of marketing, selling and
distributing so-called "alternative" beverage category natural sodas, fruit
juices, fruit juice Smoothies, "functional drinks", non-carbonated
ready-to-drink iced teas, lemonades and juice cocktails, children's
multi-vitamin juice drinks and still water under the Hansen's(R) brand name.
The alternative beverage category combines non-carbonated ready-to-drink
iced teas, lemonades, juice cocktails, single serve juices, ready-to-drink iced
coffees, sports drinks and single-serve still water with "new age" beverages,
including sodas that are considered natural, sparkling juices and flavored
sparkling waters. The alternative beverage category is the fastest growing
segment of the beverage marketplace. (Source: Beverage Marketing Corporation).
Sales for the alternative beverage category of the market are estimated to have
reached approximately $8.6 billion at wholesale in 1999 with a growth rate of
approximately 13.3% over the prior year. (Source: Beverage Marketing
Corporation).
Hansen's(R) Natural Sodas are classified as "new age" beverages and
have been a leading natural soda brand in Southern California for the past 22
years. In 1999, Hansen's(R) Natural Sodas had the highest sales among comparable
carbonated new age category beverages measured by unit volume in the Southern
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California market (Source: Information Resources, Inc.'s Analyzer Reports for
Southern California). Hansen's(R) Natural Sodas are currently available in
twelve regular flavors consisting of Mandarin Lime, Key Lime, Grapefruit,
Raspberry, Creamy Root Beer, Vanilla Cola, Cherry Vanilla Creme, Orange Mango,
Kiwi Strawberry, Tropical Passion, Black Cherry and Tangerine. Hansen has two
low calorie sodas in Wildberry and Cola flavors. Hansen's(R) Natural Sodas
contain no preservatives, sodium, caffeine or artificial coloring and are made
with high quality natural flavors, citric acid and high fructose corn syrup, or
in the case of low calorie sodas, with aspartame. Hansen's(R) Natural Sodas are
currently packaged in 12-ounce aluminum cans.
In January 1999, Hansen's introduced its new premium line of Signature
Sodas in unique proprietary 14-ounce glass bottles. Signature Sodas are
currently available in five flavors consisting of Orange Creme, Vanilla Creme,
Ginger Beer, Sarsaparilla and Black Cherry. The Company plans to introduce
additional flavors of Signature Sodas during 2000. Signature Sodas are being
marketed through the Company's existing distributor network.
During April 1997, the Company introduced a lightly carbonated citrus
flavored Hansen's(R) energy drink in an 8.2-ounce slim can. The Company's energy
drink contains Taurine, Ginseng, Ginkgo Biloba, Guarana, Caffeine and key B
vitamins. The Company's energy drink falls within the category that has
generally been described as the "functional" beverage category, namely,
beverages that provide a real or perceived benefit in addition to simply
delivering refreshment. Management believes that the "functional" beverage
category has good growth potential. During the first quarter of 1998, the
Company extended its functional product line by introducing three additional
functional drinks in 8.2-ounce slim cans namely, a ginger flavored d-stress(R)
drink, an orange flavored antioox(R) drink (since renamed bo well(TM)), and a
guarana berry flavored stamina(R) drink. Each of these drinks contain different
combinations of vitamins, nutrients, herbs and supplements. The d-stress(R)
drink contains Kava Kava, St. John's Wort, L-Tyrosine,Chamomile and key B
vitamins. The bowell(TM) drink contains Grape Seed Extract, Selenium, Echinacea,
Vitamins A, C and E as well as key B vitamins. The stamina(R) drink contains
Co-Enzyme Q-10, L-Carnitine, Bee-Pollen, Royal Jelly, Schizandra Berrry,
Guarana, Caffiene and key B vitamins. During the fourth quarter of 1998, the
Company introduced its power functional drink in an 8.2-ounce slim can. The
Company is in the process of changing the colors of the power can and the flavor
from black cherry to grape. power contains Creatine, Glutamine, Red Panax
Ginseng, Caffeine, as well as key B vitamins. The Company is currently
introducing slim down, it's sixth functional drink. slim down is a berry
flavored drink that contains Pyruvate, Garcinia Cambogia, L-Carnitine, Chromium
Polynicotinate, Co-Enzyme Q-10, calcium, vitamin C and key B vitamins and has no
calories.
The Company has concentrated on marketing its carbonated functional
drinks and Smoothies in glass bottles through its distributor network, which
continued to expand during 1999. The Company intends to leverage its existing
distributor network to facilitate sales of its premium Signature Sodas in glass
bottles, as well as other new single serve products in glass bottles that it has
introduced and plans to introduce in 2000, and which are described more fully
below.
The Company's fruit juice product line currently includes Hansen's(R)
Natural Old Fashioned Apple Juice which is packaged in 64 and 128-ounce
polyethylene terephthalale ("P.E.T.") plastic bottles, Apple Strawberry and
Apple Grape juice blends in 64-ounce P.E.T. plastic bottles. These juice blends
were introduced in the second quarter of 1998. All of these Hansen's(R) juice
products contain 100% juice as well as 100% of the recommended daily intake for
adults of Vitamin C and from 1999 also contain added calcium. Hansen's(R) juice
products compete in the shelf-stable juice category.
In March 1995, the Company expanded its juice product line by
introducing a line of fruit juice Smoothies. The Company's fruit juice Smoothies
contain approximately 35% juice (save for the Company's Smoothies in 12-ounce
glass bottles which contain approximately 25% juice) and have a smooth texture
that is thick but lighter than a nectar. The Company's fruit juice Smoothies
provide 100% of the recommended daily intake for adults of Vitamins A, C & E
(the antioxidant triad) and represented Hansen's entry into what is commonly
referred to as the "functional" beverage category. The Company's fruit juice
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Smoothies are packaged in 11.5-ounce aluminum cans and in new unique proprietary
12-ounce glass bottles designed by the Company, as well as in 64-ounce P.E.T
plastic bottles. In 1999, the new 12-ounce glass bottles replaced the 13.5-ounce
glass bottles previously used by the Company. Hansen's(R) fruit juice Smoothies
are available in eleven flavors: Strawberry Banana, Peach Berry, Mango
Pineapple, Guava Strawberry, Pineapple Coconut, Apricot Nectar, Tropical
Passion, Whipped Orange and Cranberry Twist. The product line also includes a
Cranberry Raspberry lite Smoothie as well as an Energy Smoothie which has a
unique formula. The Energy Smoothie product contains Ginseng and Taurine, two
popular energy supplements, as well as Vitamins B2, B6, B12, Niacin, Vitamin C
and Glucose. The Company is currently introducing its two newest Smoothie
flavors, Whipped Orange and Cranberry Twist. The Company intends to extend its
Smoothie line in 64-ounce P.E.T. plastic bottles from two flavors to six
flavors, during the first half of 2000.
During the second half of 1999, the Company introduced a new line of
premium functional Smoothies in 11.5-ounce cans Energy, Power, Protein and Vita.
Each of these products contains different combinations of vitamins, nutrients,
herbs and supplements. Energy has a tropical fruit flavor and contains Ginseng,
Taurine, Vitamins A, C, and E and key B vitamins. Power has a berry flavor and
contains Astralagus, Bee Pollen, Calcium, Vitamins A, C, and E and key B
vitamins. Protein has a banana citrus flavor and contains Protein (including soy
protein), Calcium and Vitamins A, C, and E. Vita has an orange carrot flavor and
contains Echinacea, Zinc, Selenium, Calcium and a blend of important
Multi-vitamins. During the fourth quarter of 1999, the Company introduced
certain of such premium functional Smoothies as line extensions to its Smoothie
line, in 12-ounce glass bottles.
.
During the second quarter of 1998, the Company launched its first
Healthy Start product, Dyna Juice(R), a shelf stable 100% juice blend with 15
vitamins and minerals added. Dyna Juice(R) was renamed VITAMAX-JUICE during the
fourth quarter of 1998 to more directly communicate its attributes to consumers.
During the fourth quarter of 1998, the Company expanded its Healthy Start
product line with three new Healthy Start 100% juices namely, ANTIOXJUICE(R),
IMMUNEJUICE(TM), and INTELLIJUICE(R). ANTIOXJUICE(R) is a carrot and tropical
juice blend with Grape Seed extract, Vitamins A, C and E and Selenium.
IMMUNEJUICE(TM) is an aronia and cranberry juice blend with Echinacea and Zinc,
and INTELLIJUICE(R) is an orange and tomato juice blend with Gingko Biloba,
Hawthorn Berry and Ginseng. The Healthy Start line was originally launched in
46-ounce P.E.T. plastic bottles and at the end of 1998 the Company expanded this
line into 64-ounce P.E.T. plastic bottles as well. Early in 2000 the Company
entered into a licensing agreement with the Silver Foxes Network for the
licensing to the Company of the Silver Foxes(TM) brand and trademark, which is
positioned towards consumers in the 50+ age group, for and in connection with
certain of the Company's products. The Company has determined to use that
trademark for and in connection with its Healthy Start 100% juice line. The
Company has redesigned the labels for its Silver Foxes(TM)/Healthy Start 100%
juice line and anticipates launching that new renamed line, which will be
targeted at the 50+ age group, within the next few months.
In the first quarter of 2000, the Company introduced its Healthy Start
100% juice line in single- serve glass bottles, which will be marketed through
its distributor network.
Hansen's(R) ready-to-drink iced teas and lemonades were introduced
in 1993. Hansen's(R) ready-to-drink iced teas are currently available in five
flavors: Original with Lemon, Tropical Peach, Wildberry, Tangerine and Low
Calorie Blueberry Raspberry and its lemonades are currently available in one
flavor: Original Old Fashioned Lemonade. Hansen's(R) juice cocktails were
introduced in 1994 and are currently available in four flavors: Kiwi Strawberry
Melon, Tangerine Pineapple with Passion Fruit, California Paradise Punch and
Mango Magic. Hansen's ready-to-drink iced teas, lemonades and juice cocktails
are currently packaged in 16-ounce non-returnable wide-mouth glass bottles.
Hansen's(R) ready-to-drink iced teas are made with decaffeinated tea.
The Company's other non-carbonated products are made with high quality juices.
Hansen's(R) non-carbonated products (other than its 100% juice products) are
also made with natural flavors, high fructose corn syrup and in the case of the
low calorie iced tea with aspartame, citric acid and other ingredients.
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After offering a ready-to-drink green tea in a 20 ounce glass bottle,
the Company resolved to introduce a full line of specialty teas in 20 ounce
glass bottles, which it named its "Gold Standard" line. The line was introduced
in the 20 ounce glass bottles that were being used by the Company at the time,
while the Company proceeded with the design and manufacture of a new unique
proprietary 20 ounce glass bottle for the line, which was introduced at the end
of 1999. Following continuing demand for its green tea product, the Company is
currently in the process of introducing additional green tea flavors, including
two diet green tea flavors, as well as six juice cocktails, in this package. All
of the products in the Gold Standard line contain different combinations of
nutrients, herbs and supplements, but at lower levels than in the Company's
functional drinks.
In the third quarter of 1999, the Company introduced two new lines of
children's multi-vitamin juice drinks in 8.45-ounce aseptic packages. Each drink
contains eleven essential vitamins and six essential minerals. Each line was
introduced in three flavors. The Company intends to introduce additional flavors
for each line in 2000. One of the lines is a co-branded 100% juice line named
"Juice Blast(TM)" that was launched in conjunction with Costco Wholesale
Corporation ("Costco") under the "Kirkland Signature(TM)/Hansen's(R) Natural"
brand name and is sold nationally through Costco stores. The other line is a 10%
juice line named "Juice Slam(TM)" that is available to all of our customers.
Hansen's(R) still water products were introduced in 1993. Hansen's(R)
still water products are primarily sold in .5-liter plastic bottles.
In 2000, the Company plans to introduce additional flavors of its
existing products as well as a new line of soy based drinks and, in addition, a
new line of premium "functional" iced teas in unique proprietary glass bottles,
which latter line was previously scheduled to be introduced late in 1999.
In 2000, the Company plans to introduce two new lines of nutritional
food bars under the Hansen's(R) brand name. The first will be a line of snack
bars made from grains and fruit and the second will be a line of functional
bars. In addition, the Company plans to test market a new line of premium G.M.O.
free cereals under the Hansen's(R) brand name.
The Company continues to evaluate and, where considered appropriate,
introduce additional flavors and other types of beverages to compliment its
existing product lines. The Company will also evaluate, and where considered
appropriate, introduce functional foods/snack foods that utilize similar
channels of distribution and/or are complimentary to the Company's existing
products and/or to which the Hansen's(R) brand name is able to add value.
Manufacture, Production and Distribution
The concentrates for Hansen's(R) Natural Soda and Signature Soda
products are blended at independent production facilities. In each case, the
concentrate is delivered by independent trucking companies to Hansen's various
copackers, each of which adds filtered water, high fructose corn syrup or cane
sugar or, in the case of the low calorie sodas aspartame, citric acid and
carbonation and packages the products in approved containers. Hansen's most
significant copacking arrangement is with Southwest Canning and Packaging, Inc.
("Southwest") pursuant to a contract under which Southwest packages Hansen's(R)
Natural Sodas. This arrangement continues indefinitely and is subject to
termination on 60 days written notice from either party.
The Company purchases juices, concentrates, flavors, vitamins,
minerals, nutrients, herbs, supplements and other ingredients for its juice
products, ready-to-drink iced tea, lemonade and juice cocktail products; Gold
Standard specialty tea and juice cocktail line, fruit juice Smoothie products;
functional drinks, Healthy Start juice line and children's multi-vitamin juice
drinks from various producers and manufacturers. Such materials are then
delivered to the Company's various copackers for manufacture and packaging of
the finished products.
6
All of the Company's beverage products are copacked by various
copackers situated throughout the United States and Canada under separate
arrangements, each of which continue on a month-to-month basis, except for the
arrangement with Southwest which is described above.
In the Western states, the Company's Natural Sodas, juice products,
iced tea, lemonade, and juice cocktail products and Gold Standard Specialty tea
and juice cocktail line, fruit juice Smoothie products in cans and P.E.T
bottles, Healthy Start juice line in P.E.T. bottles and children's multi-vitamin
juice drinks are primarily sold to major grocery chain stores and in certain
limited instances to mass merchandisers through food brokers; to club stores,
specialty chain stores and mass merchandisers in these states, directly by
Hansen and to the health food trade through specialty health food distributors.
In Colorado, a licensed distributor is responsible for sales of certain of the
above products. The Company's fruit juice Smoothie products in glass bottles,
carbonated functional drinks in 8.2-ounce slim cans, Signature Sodas and Healthy
Start juices in glass bottles are distributed almost exclusively by bottlers
and/or distributors that do not distribute other products of the Company.
Management has secured limited additional copacking arrangements
outside the West to enable the Company to produce certain of its products closer
to the markets where they are sold and thereby reduce freight costs. As volumes
in markets outside California grow, the Company will secure additional copacking
arrangements to further reduce freight costs.
During 1998, the Company entered into an arrangement with one of its
copackers, pursuant to which certain modifications were made to that copacker's
equipment to enable it to produce certain products on behalf of the Company. In
consideration thereof, the Company agreed to pack a minimum number of cases of
products over a four-year period. Should the Company fail to pack the agreed
minimum number of cases of products over such period, the Company will be liable
to reimburse the copacker for a proportionate share of the cost thereof based on
such shortfall. Based on the volume levels achieved by the Company in the past
and its expected volume levels, the Company does not believe that it will incur
any liability in connection with the above arrangement. However, such co-packer
has experienced difficulties in producing the Company's functional drinks in
8.2-ounce slim cans and Smoothies in 11.5-ounce cans. The co-packer has on some
occasions attributed certain of such difficulties to defective equipment and/or
supplies of cans and ends and/or to other causes for which they are allegedly
not responsible. During 1999, the Company, without admission of defects in any
cans or ends supplied, agreed to arrange for another can company to supply cans
and ends for the 11.5-ounce cans. Such new can manufacturer commenced to supply
11.5-ounce cans and ends in October 1999. As there is only one manufacturer of
8.2-ounce slim cans and ends in the United States, such an arrangement was not
available for that package.
The Company has continued to work with the copacker who has, however,
continued to experience difficulties with the 8.2-ounce slim cans, despite the
fact that other copackers used by the Company were able to effectively run and
produce commercially acceptable finished products with the same cans. The
subject copacker has indicated that it is considering whether it will be willing
to continue to pack the Company's functional drinks in 8.2-ounce slim cans or
Smoothies in 11.5-ounce cans, and if so, on what terms. The Company is currently
in discussions with that copacker. There are a number of other lines in the
United States with available capacity to pack the Company's Smoothies in
11.5-ounce cans. However, there are only two other lines in the United States
that are capable, at the present time, of packing the Company's functional
drinks in 8.2-ounce slim cans. The Company believes that in the short term such
lines will have sufficient available capacity to meet the Company's anticipated
volumes. However, the Company may incur higher packing fees and freight costs as
a result. The Company is currently engaged in discussions with prospective
copackers and its can supplier, with a view to arriving at an arrangement with
respect to certain modifications to be made to the lines of such prospective
copackers to enable them to run and produce the Company's Smoothies in
11.5-ounce cans and functional drinks in 8.2-ounce slim cans.
During March 1999, the Company entered into an arrangement with its
glass supplier pursuant to which its glass supplier agreed to install a shrink
sleeve labeling machine at its plant to facilitate the pre-labeling of the
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Company's glass bottles at the point of manufacture. In consideration thereof,
the Company agreed to have a minimum quantity of labels applied to its glass
bottles over a four-year period. Should the Company fail to have the agreed
minimum quantity of labels applied over such period, the Company will be liable
to compensate its supplier for a proportionate share of the cost thereof based
on such shortfall. Based on the Company's estimated volume levels, the Company
does not believe that it will incur any liability in connection with this
arrangement.
The Company's ability to estimate demand is imprecise, particularly
with new products, and may be less precise during periods of rapid growth,
particularly in new markets. If the Company materially underestimates demand for
its products or is unable to secure sufficient ingredients or raw materials
including but not limited to glass, cans or labels, or copacking arrangements,
it might not be able to satisfy demand on a short-term basis.
Although the Company's arrangements for production of its products are
generally of short duration or are terminable upon request, management believes
that (subject to what is stated above) a short disruption would not
significantly affect the Company's revenues since alternative co-packing
facilities in the United States with adequate capacity can be obtained for most
of its products at commercially reasonable rates, if necessary or desirable,
within a reasonably short time period. However, as stated above, there are
limited copacking facilities in the United States with adequate capacity for
products in 8.2-ounce slim cans. There are also limited shrink sleeve labeling
facilities available in the United States with adequate capacity for the
Company's Signature Soda line and Healthy Start line in glass bottles. A
disruption in production of any of such products could significantly affect the
Company's revenues from such products as alternative copacking facilities in the
United States with adequate capacity may not be available for such products at
commercially reasonable rates, if necessary or desirable, within a reasonably
short time period. The Company is taking steps to secure the availability of
alternative copacking facilities in the United States or Canada with adequate
capacity for the production of such products, to minimize the risk of any
disruption in production.
The Company itself is primarily responsible for marketing its products
(other than its fruit juice Smoothies in glass bottles, functional drinks in
8.2-ounce slim cans and Signature Sodas and Healthy Start juices in glass
bottles) in the United States. The Company has entered into distribution
agreements with distributors to distribute Smoothies in glass bottles and/or
functional drinks in 8.2-ounce slim cans and/or Signature Sodas in more than 40
states (Healthy Start in glass bottles is being introduced currently through
distributors). However, in many of such states, distribution is only on a
limited scale. Certain of the Company's products are also marketed in Canada
and, on a more limited basis, in other countries outside of the United States,
including the United Kingdom, Mexico, Philippines, Guam, the Caribbean, and
South Africa. During 1999, sales by the Company to distributors outside the
United States amounted to approximately $800,000.
The Company intends to aggressively expand the distribution of its
products into new markets, both within the United States and abroad.
In the first quarter of 2000, the Company introduced its new slim down
functional drink and Healthy Start juice line in glass bottles. Presentations
are currently being made to the Company's existing distributor network to
endeavor to secure their agreement to distribute such products.
The Company is continuing to expand distribution of its products by
seeking to enter into agreements with regional bottlers or other direct store
delivery distributors having established sales, marketing and distribution
organizations. Hansen's licensed bottlers and distributors are affiliated with
and manufacture and/or distribute other soda and non-carbonated brands and other
beverage products. In many cases, such products are directly competitive with
the Company's products. The Company's strategy of licensing regional bottlers to
produce Hansen's(R) Natural Sodas from concentrate provided by the Company, has
not fulfilled management's expectations, partly because bottlers have preferred
to focus on alternative beverage products having higher margins than sodas. At
the end of 1997, management awarded the Company's distributor in Colorado the
right to market and distribute its Natural Sodas in that state in place of its
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licensed bottler. The Company continues to utilize such bottler to manufacture
Hansen's(R) Natural Sodas on its behalf.
Management continues to evaluate various alternatives to expand the
distribution of its products into selected new markets. The Company plans to
expand the distribution of its Natural Sodas and Smoothies in cans into Oregon
and Washington states during 2000, by itself retaining responsibility for
securing sales and providing marketing support. To this end the Company has
appointed a regional sales manager for the northwestern states.
In 1999, the Company continued to expand its national sales
organization to support and grow the sales primarily of Smoothies in bottles and
functional drinks in 8.2-ounce slim cans and to introduce its Signature sodas
and intends to continue to build that organization during 2000.
During September 1997, the Company's main distribution warehouse was
relocated to Corona, California and in March 1998, the corporate offices of the
Company relocated to the same facility. Although the Company agreed to sublease
a portion of the warehouse facility to the independent contractor which manages
the warehouse facility on its behalf and the repacking and distribution of the
Company's products therefrom, the sublease could not be implemented as the
entire warehouse facility is being utilized for the Company's products due to
higher inventory levels which were attributable to increased sales and
additional products being marketed and distributed by the Company. In light of
its agreement with the independent contractor concerned, it is not necessary for
the Company to employ additional personnel to manage the warehouse facility, or
for the repacking or distribution of its products. The Company also utilizes
public warehouses. Due primarily to increased sales and additional products
marketed by the Company in 1999 it became necessary for the Company to secure
additional warehousing. To cater for increased sales in 2000 and beyond and new
products that the Company plans to introduce in the future and increase
efficiency by consolidating it's warehousing and distribution into one facility,
the Company has entered into an agreement to lease a new substantially larger
facility in Corona from August 2000 in place of its existing main facility. The
corporate offices of the Company will also relocate to the same facility. See
also "ITEM 2 PROPERTIES."
Source and Availability of Raw Materials
The Company purchases beverage flavors, concentrates and supplements
from independent suppliers located in the United States and Mexico and juices
from independent suppliers in the United States and abroad.
Suppliers regard flavors as proprietary to them. Consequently, Hansen
does not currently have the list of ingredients or formulae for its flavors and
certain of its concentrates readily available to it and may be unable to obtain
these flavors or concentrates from alternative suppliers on short notice. The
Company has identified alternative suppliers of many of the supplements
contained in its carbonated functional drinks, Smoothies, Healthy Start and Gold
Standard lines. However, industry wide shortages of certain supplements have
been and could, from time to time in the future be experienced, which could
interfere with production of certain of the Company's products.
Management is continuing with its attempts to develop back-up sources
of supply for its flavors and concentrates from other suppliers as well as to
conclude arrangements with suppliers which would enable it to obtain access to
certain concentrate formulae in certain circumstances. The Company has been
partially successful in these endeavors. By working with suppliers rather than
on its own, Hansen is able to develop new products at low cost as well as to
diversify its supplier network.
Hansen's goal is to ensure that all raw materials used in the
manufacture and packaging of the Company's products, including natural sodas,
Signature sodas, functional drinks and non-carbonated drinks and juices,
including, but not limited to, concentrates and juices, high fructose corn
syrup, cane sugar, citric acid, caps, cans, glass bottles, P.E.T. plastic
bottles, aseptic packaging and labels, are readily available from two or more
9
sources and is continuing its efforts to achieve this goal, although each of
such raw materials are, in practice, usually obtained from single sources.
However, the cans for the Company's functional drinks are only manufactured by
one company in the United States.
In connection with the development of new products and flavors, the
Company contracts with independent suppliers who bear a large portion of the
expense of product development, thereby enabling the Company to develop new
products and flavors at relatively low cost. The Company has historically
developed and successfully introduced new products and flavors and packaging for
its products and currently anticipates developing and introducing additional new
beverage products and flavors.
Competition
The soda, juice, and non-carbonated beverage businesses are highly
competitive. The principal areas of competition are pricing, packaging,
development of new products and flavors and marketing campaigns. The Company's
products compete with traditional soft drinks (cola and non-cola), and
alternative beverages, including new age beverages and ready-to-drink iced teas,
lemonades and juice cocktails as well as juices and juice drinks and nectars
produced by a relatively large number of manufacturers, most of which have
substantially greater financial and marketing resources than Hansen.
The Company's functional energy drink competes directly with Red Bull,
Red Devil, Lipovitan, Met-rx, Hype, XTC and many other brands and its other
functional drinks compete directly with Elix, Lipovitan, Met-rx, Think, Sobe
Essentials and other brands. The "functional" beverage category is in its
infancy and increased competition is anticipated within a relatively short
period of time. A number of companies who market and distribute iced teas and
juice cocktails in larger volume packages, such as 16- and 20-ounce glass
bottles, including Sobe, Snapple Elements and Arizona, have recently added or
are in the process of adding vitamins, herbs and/or nutrients to their products
with a view to marketing their products as "functional" beverages or as having
functional benefits. However, many of those products are believed to contain low
levels of supplements and principally deliver refreshment. In addition, many of
the competitive products are positioned differently to the Company's functional
drinks and Super Smoothies. The Company's Gold Standard line is positioned more
closely against those products
For its natural sodas, smoothies, carbonated functional drinks and
Signature sodas as well as other products, Hansen competes not only for consumer
acceptance, but also for maximum marketing efforts by multi-brand licensed
bottlers, brokers and distributors, many of which have a principal affiliation
with competing companies and brands. The Company's products compete with all
liquid refreshments and with products of much larger and substantially better
financed competitors, including the products of numerous nationally known
producers such as The Coca Cola Company, PepsiCo, Inc., Dr. Pepper/Seven-Up
Companies, Inc., Cadbury Schweppes, The Quaker Oats Company, Triarc Group of
Companies (which includes the RC Soda, Snapple, Mistic and Stewards brands),
Nestle Beverage Company and Ocean Spray. More specifically, the Company's
products compete with other alternative beverages, including new age beverages,
such as Snapple, Mistic, Arizona, Clearly Canadian, Sobe, Stewart's, Everfresh,
Nantucket Nectar, Kerns Nectar, Mistic Rain Forest Nectar, VeryFine, V8 Splash,
Calistoga, Blue Sky, Red Bull, Met-rx and Crystal Geyser brands. Due to the
rapid growth of the alternative beverage segment of the beverage marketplace,
certain large companies such as The Coca Cola Company and PepsiCo, Inc. have
introduced products in that market segment which compete directly with the
Company's products such as Nestea, Fruitopia, Lipton and Ocean Spray. The
Company's products also compete with private label brands such as those carried
by chain and club stores. Important factors affecting Hansen's ability to
compete successfully include taste and flavor of products, trade and consumer
promotion, rapid and effective development of new, unique, cutting edge
products, attractive and different packaging, brand and product advertising and
pricing. Hansen must also compete for distributors who will concentrate on
marketing the Company's products over those of Hansen's competitors, provide
stable and reliable distribution and secure adequate shelf space in retail
outlets. Competitive pressures in the alternative and functional beverage
10
categories could cause the Company's products to lose market share or experience
price erosion, which could have a material adverse effect on Hansen's business.
The Company's fruit juice Smoothies compete with Kern's nectars in the
western states and Libby's in the eastern states and Whipper Snapple, Mistic
Rain Forest Nectar, and Nantucket Nectar nationally and also with single serve
juice products produced by many competitors. Such competitive products are
packaged in glass and P.E.T. bottles ranging from 10- to 20 ounces in size and
in 11.5-ounce aluminum cans. The juice content of such competitive products
ranges from 1% to 100%.
The Company's apple and other juice products compete directly with Tree
Top, Mott's, Martinelli's, Welsh's, Ocean Spray, Minute Maid, Langers, Wildland,
Apple and Eve, Seneca, Northland and also with other brands of apple juice and
juice blends, especially store brands. The Company's Healthy Start line competes
with Langer's, V8 Splash, Knudsen, Nantucket Nectar, Wildland and other juice
products. The Company's still water products compete directly with Evian,
Crystal Geyser, Naya, Palomar Mountain, Sahara, Arrowhead, Aquafina, Dannon, and
other brands of still water especially store brands.
Marketing
Hansen's marketing strategy is to focus on consumers who seek beverages
which are perceived to be natural and healthy. To attract these consumers, the
Company emphasizes the natural ingredients and the absence of preservatives,
sodium, artificial coloring and caffeine in the Company's product lines (other
than the Company's functional energy, stamina(R) and power drinks which do
contain caffeine) and the addition to all of its products, other than its
Natural sodas and Signature sodas, of one or more vitamins, minerals,
supplements, nutrients or herbs. This message is reinforced in the product
packaging, the majority of which was redesigned in 1999. The regular wholesale
price of Hansen's(R) Natural Sodas in cans is slightly higher than mainstream
soft drinks such as Coca-Cola and Pepsi, although generally lower than the
prices of the products of many competitors in the new age category. In its
marketing, Hansen emphasizes its high quality "natural" image and the fact that
its soda products contain no preservatives, sodium, caffeine or artificial
coloring. The regular wholesale price of the Company's iced teas, lemonades and
juice cocktails, including it's Gold Standard line, is slightly lower than that
of competitive non-carbonated beverages marketed under the Snapple, Sobe,
Arizona, Mistic, Lipton, Nestea, Fruitopia, Ocean Spray and Nantucket Nectar
brands. In its marketing, Hansen emphasizes the high quality natural and healthy
image of its products. The regular wholesale price of the Company's fruit juice
Smoothie products is similar to that of Kern's nectars. Without abandoning its
natural and healthy image, the Company launched a lightly carbonated energy
drink in 8.2-ounce slim cans, containing two popular energy supplements, Ginseng
and Taurine, to appeal to the young and active segment of the beverage market
that desires an energy boost from its beverage selection. Hansen's(R) energy
drink also contains Vitamins B2, B6, B12, Niacin, Vitamin C, Ginkgo Biloba,
Guarana, Caffeine and Glucose. The Company has since launched five additional
lightly carbonated functional drinks. The first, a stamina(R) drink contains
Coenzyme Q-10, L-Carnitine, Bee Pollen, Royal Jelly, Schizandra Berry and
Vitamins B5, B6, B12, Niacin, Vitamin C, Guarana Berry and Caffeine; the second,
a d-stress(R) drink contains Kava Kava, St John's Wort, L-Tyrosine, Chamomile as
well as Vitamins B5, B6, B12, Niacin and Vitamin C; the third, an antioox(R)
drink (since renamed bowell(TM)) contains Grape Seed Extract, Selenium,
Echinacea, Vitamins A, C and E as well as Vitamins B5, B6, B12 and Niacin; the
fourth, a power drink contains Creatine, Glutamine, Red Panax Ginseng as well as
key B Vitamins and the fifth, a slim down drink contains Pyruvate, Garcinia
Cambogia, L-Carnitine, Coenzyme Q-10, Chromium Polynicotinate and calcium, as
well as Vitamins B5, B6, B12, C and Niacin. The vitamins, minerals, nutrients,
supplements and herbs ("supplements") contained in each of the functional drinks
are intended to provide specific but different functional benefits to the
consumers of each of such products.
To cater for consumers who regularly purchase juices in multi-serve
sizes and perceive the inclusion of supplements therein to be of added value,
the Company launched its Healthy Start line of 100% juices in 1998. Although
marketed in larger multi-serve packages that are appropriate for grocery chain
11
stores, club stores, specialty chains and health food stores, the positioning of
these products is similar to the Company's lightly carbonated functional drinks
in 8.2-ounce slim cans. To distinguish these products from those of competitors,
each label clearly indicates the function of the product, in addition to listing
the supplements contained therein. As stated above, following the conclusion of
a licensing agreement by the Company with the Silver Foxes Network, the Company
is currently having the labels for its Silver Foxes(TM)/Healthy Start 100% juice
line redesigned. The new re-named line, which will be targeted at the 50+ age
group, will be launched within the next few months. The Company is in the
process of introducing its Healthy Start 100% line in single serve 12 ounce
glass bottles, through its distributor network.
According to Roche Vitamins, very few American children meet all of the
recommendations of the Food Guide Pyramid. In 1999 the Company introduced a new
line of children's multi-vitamin juice drinks in 8.45- ounce aseptic packaging.
These products are positioned to assist parents improve the daily intake by
their children of essential vitamins and minerals.
The Company's sales and marketing strategy is to focus its efforts on
developing brand awareness and trial through sampling both in stores and at
events. The Company intends to continue to place increased emphasis on product
sampling and participating in direct promotions. The Company proposes to
continue to use its refrigerated truck and other promotional vehicles at events
at which the Company's products, including its fruit juice smoothies and natural
sodas, will be distributed to consumers for sampling. Hansen utilizes
"push-pull" tactics to achieve maximum shelf and display space exposure in sales
outlets and maximum demand from consumers for its products including
advertising, in store promotions and point of sale materials, prize promotions,
price promotions, competitions, endorsements from selected public figures such
as baseball star Sammy Sosa in 2000, couponing, sampling and sponsorship of
selected sports figures as well as sporting events such as marathons, 10k runs,
bicycle races, volleyball tournaments and other health- and sports-related
activities, including extreme sports, and also participates in product
demonstrations, food tasting and other related events. Posters, print, radio and
television advertising together with price promotions and couponing are also
used extensively to promote the Hansen's(R) brand.
While the Company retains responsibility for the marketing of the Juice
Slam(TM) line of children's multi-vitamin juice drinks, Costco has undertaken
sole responsibility for the marketing of the co-branded Juice Blast(TM) line.
Management increased expenditures for its sales and marketing programs
by approximately 21% in 1999 compared to 1998.
The Company intends to support its planned expansion of distribution
and sale of its Smoothie products in bottles, functional drinks in 8.2-ounce
cans, Signature Sodas and Healthy Start juices in glass bottles, through the
in-store placement of point-of-sale materials, use of glide racks, suction cup
racks and a proprietary rolling rack for its functional drinks and by attending
and sponsoring many sporting events, including extreme sports and selected
sports figures and through endorsements from selected public figures such as
Sammy Sosa, and by developing local marketing programs in conjunction with its
distributors in their respective markets. By enlisting its distributors as
participants in its marketing and advertising programs, Hansen intends to create
an environment conducive to the growth of both the Hansen's(R) brand and the
businesses of its distributors.
In January 1994, the Company entered into an agreement with a barter
company for the exchange of certain inventory for future advertising and
marketing credits. The Company assigned a value of $490,000 to these credits
based on the net realizable value of the inventory exchanged. As of December 31,
1999, unused advertising and marketing credits totaled $203,000. Although such
credits remain available for use by the Company through January 2002, management
was unable to estimate their remaining net realizable value at December 31,
1997. Accordingly, in the year ended December 31, 1997, the Company fully
reserved against and expensed such advertising and marketing credits.
12
Management continues to believe that one of the keys to success in the
beverage industry is differentiation; making Hansen's(R) products clearly
distinctive from other beverages on the shelves of retailers. The Company
reviews its products and packaging on an ongoing basis and, where practical,
endeavors to make them different, better and unique. The labels for the
Company's juice products were redesigned recently. The graphics for the
Company's Natural Soda and Smoothie products were completely redesigned in 1999
in an endeavor to develop a new system to maximize visibility and identification
thereof, wherever they may be placed in stores.
Customers
Retail and specialty chains, and club stores represented 58% of
Hansen's sales in the year ended December 31, 1999 and 59% in the year ended
December 31, 1998, while the percentage of sales to distributors (primarily of
Hansens(R) Smoothies in bottles, functional drinks in 8.2-ounce slim cans and
Signature Sodas) increased slightly from 32% in the year ended December 31, 1998
to 33% in the year ended December 31, 1999.
Hansen's major customers in 1999 included Costco, Trader Joes, Sam's
Club, Lucky, Vons, Ralph's, Wal-Mart and Albertson's. One customer accounted for
approximately 25% and 27% of the Company's sales for the years ended December
31, 1999 and 1998, respectively. Two customers accounted for approximately 29%
and 11%, respectively, of the Company's sales for the year ended December 31,
1997. A decision by these major customers to decrease the amount purchased from
the Company or to cease carrying the Company's products could have a material
adverse effect on the Company's financial condition and results of operations.
Seasonality
Hansen normally experiences greater sales and profitability during its
second and third fiscal quarters (April through September). The consumption of
beverage products fluctuates in part due to temperature changes with the
greatest consumption occurring during the warm months. During months where
temperatures are abnormally warm or cold, consumption goes up or down
accordingly. Similarly, consumption is affected in those regions where
temperature and other weather conditions undergo dramatic changes with the
seasons. Management anticipates that the sale of the Company's products may
become increasingly subject to seasonal fluctuations as more sales occur outside
of California in areas where weather conditions are intemperate. Sales of the
Company's juice products, its Healthy Start line, functional drinks and
children's multi-vitamin juice drinks will be less affected by such factors.
However, as the Company has not had sufficient experience with such products, it
is unable to predict the likely sales trend of such products with any degree of
accuracy.
Trademark
The Hansen's(R) trademark is crucial to the Company's business. This
trademark is registered in the U.S. Patent and Trademark Office and in various
countries throughout the world. The Hansen's(R) trademark is owned by a trust
(the "Trust") which was created by an agreement between HBC and FJC's
predecessor (the "Agreement of Trust"). The Trust licensed to HBC in perpetuity
on an exclusive world-wide royalty-free basis the right to use the Hansen's(R)
trademark in connection with the manufacture, sale and distribution of
carbonated beverages and waters and shelf stable fruit juices and drinks
containing fruit juices. In addition, the Trust licensed to HBC, in perpetuity,
on an exclusive world-wide basis, the right to use the Hansen's(R) trademark in
connection with the manufacture, sale and distribution of certain non-carbonated
beverages and water in consideration of royalty payments. A similar license
agreement exists between the Trust and HBC with regard to non-beverage products.
Royalty expenses incurred in respect of such non-carbonated beverages and water
during 1999 amounted to $12,000. No royalties are payable on sodas, juices,
lemonades, juice cocktails, fruit juice Smoothies, "functional" drinks, Healthy
Start or Signature Soda lines or on the children's multi-vitamin juice drinks.
13
HBC, FJC's predecessor and the Trust also entered into a Royalty
Sharing Agreement pursuant to which royalties payable by third parties procured
by FJC or its predecessor or HBC are initially shared between the Trust and HBC
and, after a specified amount of royalties have been received, are shared
equally between HBC and FJC. Under the terms of the Agreement of Trust, FJC
receives royalty income paid to the Trust in excess of Trust expenses and a
reserve therefor. Management believes that such royalty payments as a percentage
of sales are comparatively low.
HBC entered into an Assignment and Agreement with Fresh Juice Company
of California, Inc. (FJC) effective September 22, 1999, pursuant to which HBC
acquired exclusive ownership of the Hansen's(R) trademark and trade names. Under
the Assignment and Agreement, among other matters, HBC acquired all FJC's rights
as grantor and beneficiary of the Trust, all FJC's rights as licensee under
certain license agreement pursuant to which FJC has the right to manufacture,
sell and distribute fresh juice products under the Hansen's(R) trademark and all
FJC's rights under the Royalty Sharing Agreement referred to above, as well as
certain additional rights, for a total consideration of $775,010, payable over 3
years. FJC is permitted to continue to manufacture, sell and distribute fresh
juice products under the Hansen's(R) trademark for a period of 5 years.
Consequently, HBC now has full ownership of the Hansen's(R) trademark and its
obligation to pay royalties to, and to share royalties with, FJC has been
terminated.
The Company has applied to register a number of trademarks in the
United States including, but not limited to, THE REAL DEAL(TM), Juice Blast(TM),
Juice Slam(TM), Immunejuice(TM), Defense(TM), bothin(TM), Powerpack(TM),
Medicine Man(TM), bowell(TM)
The Company owns in its own right the trademarks, LIQUIDFRUIT(R),
Imported from Nature(R), California's Natural Choice(R), California's Choice(R),
Dyna Juice(R), Equator(R), Be well(R), antioox(R), d-stress(R), stamina(R), Aqua
Blast(R), Antioxjuice(R) and Intellijuice(R) in the United States and the
"Smoothie" trademark in a number of countries around the world.
During 1999, the United States Patent and Trademark Office issued a
Notice of Allowance to the Company for an invention related to a shelf structure
(rolling rack) and, more particularly, a shelf structure for a walk-in cooler.
Such shelf structure is utilized by the Company to secure shelf space for and to
merchandise its functionals drinks in 8.2-ounce slim cans in refrigerated Visi
coolers and walk-in coolers in retail stores.
Government Regulation
The production and marketing of beverages are subject to the rules and
regulations of the United States Food and Drug Administration (the "FDA") and
other federal, state and local health agencies. The FDA also regulates the
labeling of containers including, without limitation, statements concerning
product ingredients.
Employees
As of March 1, 2000, Hansen employed a total of 81 employees, 65 of
whom are employed on a full-time basis. Of Hansen's 81 employees, 29 are
employed in administrative and quality control capacities and 52 are employed in
sales and marketing capacities.
The Company operates with three separate divisions namely, carbonated,
non-carbonated and distributor divisions, under existing management at the
direction of Messrs. Rodney Sacks and Hilton Schlosberg. The Company intends to
create a fourth separate division to manage the new nutritional food bars and
cereals that the Company plans to introduce in 2000 and any functional
foods/snack foods that may be introduced by the Company in the future.
14
Compliance with Environmental Laws
The operation of Hansen's business is not materially affected by
compliance with federal, state or local environmental laws and regulations. In
California, Hansen is required to collect deposits from its customers and to
remit such deposits to the State of California Department of Conservation based
upon the number of cans and bottles of its carbonated products sold. In certain
other states and Canada where Hansens(R) products are sold, the Company is also
required to collect deposits from its customers and to remit such deposits to
the respective conservation agencies based upon the number of cans and bottles
of certain products sold.
ITEM 2. PROPERTIES
Hansen's corporate offices and main warehouse are located in a single
building at 2380 Railroad Street, Suite 101, Corona, California 92880. This
facility is leased by HBC for a period of eighty-nine (89) months commencing
from September 19, 1997. The gross area of the facility is approximately 66,700
square feet. HBC also utilizes public warehouses. On February 23, 2000, the
Company entered into a new lease agreement for a 113,600 square foot facility at
1010 Railroad Street in Corona, California, commencing on August 1, 2000. The
term of the lease is ten years with increases in the monthly rental payments
during the third, sixth and eighth years. Upon commencement of the new lease,
the lease for the existing premises will terminate by mutual consent.
ITEM 3. LEGAL PROCEEDINGS
The second stage of the trial in HBC's action against ERLY Industries,
Inc. ("ERLY") in the Superior Court for the State of California, was held in
July 1997 for the sole purpose of determining the amount of HBC's damages, if
any, resulting from ERLY's breach of certain rights of first refusal provisions
contained in HBC's subordinated secured promissory note in the principal amount
of $4 million in favor of ERLY (the "ERLY Note"). In November 1997, the court
held that HBC had not suffered any damages as a result of ERLY's breach of the
ERLY Note. HBC has filed an appeal against that judgment. A motion was made by
ERLY for the costs of such action to be awarded in its favor, which was
dismissed by the court. ERLY has filed a cross appeal on that issue. The full
amount due under the ERLY Note was paid in November 1997 with the proceeds of a
term loan obtained by the Company from Comerica Bank - California ("Comerica").
During 1998, ERLY filed for bankruptcy and the appeal was consequently stayed by
law. The Company has filed a claim against ERLY. Although the trustee initially
rejected the claim, discussions are currently taking place in an endeavor to
agree on a figure for the principal amount of the Company's unsecured claim to
avoid the necessity for HBC to pursue the appeal. The ultimate outcome of this
matter cannot presently be predicted.
Towards the end of 1998, HBC, together with the Trustee of the Hansen
Trust, commenced arbitration proceedings before the American Arbitration
Association in Los Angeles, California, against FJC, the former Trustees of the
Trust, and a company called Hansen's Juice Creations LLC ("Creations"), in which
HBC and the Trustee claimed, among other matters: (i) that certain acts of the
former Trustees of the Trust constituted breach of trust; (ii) a certain license
agreement purportedly entered into between the former Trustees of the Trust and
Creations (the "Purported Agreement") was, in whole or in part, void or
terminable by the Trust; and (iii) certain acts of Creations constituted
infringement of the Hansen's(R) trademark and certain acts of FJC constituted
contributory infringement of the Hansen's(R) trademarks. HBC and the Trustee
sought damages and injunctive relief against FJC and Creations. Such proceedings
were settled in September 1999. Pursuant to written settlement agreements among
the various parties to such proceedings, the Purported Agreement was terminated
by mutual consent, the right of the successor to Creations to use the
Hansen's(R) trademark on limited, but clearly defined, fresh juice products, was
clarified and agreed upon, and certain other matters relating to and concerning
the use of the Hansen's(R) trademark, were resolved.
15
The Company is subject to claims and contingencies related to lawsuits
and other matters arising out of the normal course of business. The ultimate
liability associated with such claims and contingencies, if any, is not likely
to have a material adverse effect on the financial condition of the Company.
Except as described above, there are no material pending legal
proceedings to which the Company or any of its subsidiaries is a party or to
which any of the properties is subject, other than ordinary and routine
litigation incidental to the Company's business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held on September
24, 1999. At the meeting, the following individuals were elected as directors of
the Company and received the number of votes set opposite their respective
names:
Votes For
Rodney C. Sacks 8,756,925
Hilton H. Schlosberg 8,756,925
Benjamin M. Polk 8,756,875
Norman C. Epstein 8,756,925
Harold C. Taber, Jr. 8,756,875
Mark S. Vidergauz 8,757,025
In addition, at the meeting the stockholders of the Company ratified
the appointment of Deloitte & Touche LLP as independent auditors of the Company
for the year ending December 31, 1999, by a vote of 8,668,015 for, 3,590 against
and 9,462 abstaining. The stockholders also adopted an amendment to the
Company's Employee Stock Option Plan ("Plan") increasing the number of shares of
common stock issuable upon the exercise of stock options granted under the Plan
from 2,000,000 shares to 3,000,000 shares, by a vote of 5,593,881 for, 296,311
against and 118,913 abstaining.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Principal Market
The Company's Common Stock began trading in the over-the-counter market
on November 8, 1990 and is quoted on the Nasdaq Small-Cap Market under the
symbol "HANS". As of March 2, 2000 there were 10,014,198 shares of the Company's
Common Stock outstanding held by approximately 674 holders of record.
16
Stock Price and Dividend Information
The following table sets forth high and low bid closing quotations for the
Common Stock, on a quarterly basis from January 1, 1997 to December 31, 1999:
Common Stock
------------------------------------------------------------
High Bid Low Bid
------------------------------ -----------------------------
Year Ended December 31, 1999
First Quarter $ 5 5/8 $ 3 7/16
Second Quarter $ 5 1/2 $ 3 5/8
Third Quarter $ 5 5/8 $ 4 5/16
Fourth Quarter $ 5 1/8 $ 3 7/8
Year Ended December 31, 1998
First Quarter $ 2 9/16 $ 1 15/32
Second Quarter $ 4 3/4 $ 2 3/8
Third Quarter $ 6 13/16 $ 3 3/4
Fourth Quarter $ 6 17/32 $ 2 15/16
Year Ended December 31, 1997
First Quarter $ 1 3/8 $ 1
Second Quarter $ 1 7/16 $ 31/32
Third Quarter $ 1 15/16 $ 1 3/8
Fourth Quarter $ 2 11/16 $ 1 9/16
The quotations for the Common Stock set forth above represent bid
quotations between dealers, do not include retail markups, mark-downs or
commissions and, bid quotations, may not necessarily represent actual
transactions and "real time" sale prices. The source of the bid information is
the Nasdaq Stock Market, Inc.
Hansen has not paid dividends to its stockholders since its inception
and does not anticipate paying dividends in the foreseeable future.
17
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data set forth below with
respect to each of the years ended December 31, 1995 through 1999 and the
balance sheet data as of December 31, for the dates indicated, are derived from
the consolidated financial statements audited by Deloitte and Touche LLP,
independent certified public accountants, and should be read in conjunction with
those financial statements and notes thereto included elsewhere in this and in
the 1996, 1997 and 1998 Forms 10-K and in the 1995 Form 10-KSB.
(in thousands, except per
share information)
1999 1998 1997 1996 1995
- ----------------- ----------- ------------ ----------- ------------ ------------
Net sales $72,303 $53,866 $43,057 $35,565 $33,991
Net income (loss) $ 4,478 $ 3,563 $ 1,250 $ 357 $(1,350)
Net income (loss)
per common share
Basic $ 0.45 $ 0.38 $ 0.14 $ 0.04 $ (0.15)
Diluted $ 0.43 $ 0.34 $ 0.13 $ 0.04 -
Total assets $28,709 $22,557 $16,933 $16,109 $17,521
Long-term debt $ 903 $ 1,335 $ 3,408 $ - $ 4,032
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
During 1999 the Company continued to expand its existing product lines
and further develop its markets. In particular, the Company continues to focus
on developing and marketing beverages that fall within the category generally
described as the "functional" beverage category.
In January 1999, the Company launched its new premium line of Signature
Sodas in unique proprietary 14-ounce glass bottles.
The Company is currently introducing slim down, its sixth functional
drink in 8.2-ounce slim cans. slim down is a berry flavored drink that contains
Pyruvate, Garcinia Cambogia, L-Carnitine, Chromium Polynicotinate, Co-Enzyme
Q-10, Calcium, vitamin C and key B vitamins and has no calories.
During 1999, the Company replaced the 13.5-ounce glass bottles used by
it for its Smoothie products with a new unique proprietary 12-ounce glass bottle
and further introduced two of its Smoothie products in 64-ounce P.E.T. plastic
bottles. The Company is currently introducing its two newest Smoothie flavors,
Whipped Orange and Cranberry Twist in 11.5-ounce cans. The Company is also in
the process of extending its Smoothie line in 64-ounce P.E.T. plastic bottles
from two flavors to six flavors.
During the second half of 1999, the Company introduced a new line of
premium functional Smoothies in 11.5-ounce cans Energy, Power, Protein and Vita.
Each of these products contain different combinations of vitamins, nutrients,
herbs and supplements. At the end of 1999, the Company introduced certain of
18
such premium functional Smoothies as line extensions to its Smoothie line in
12-ounce glass bottles.
Earlier this year, the Company entered into a license agreement with
the Silver Foxes Network for the licensing to the Company of the Silver
Foxes(TM) brand and trademark, which is positioned towards consumers in the 50+
age group, for and in connection with certain of the Company's products. The
Company has determined to use that trademark for and in connection with its
Healthy Start 100% juice line. The Company is currently having the labels for
its Silver Foxes(TM)/Healthy Start 100% juice line redesigned and anticipates
launching that new re-named line, which will be targeted at the 50+ age group,
within the next few months.
In the first quarter of 2000, the Company plans to introduce its
Healthy Start 100% juice line in single serve glass bottles, which will be
marketed through its distributor network.
In the third quarter of 1999, the Company introduced two new lines of
children's multi-vitamin juice drinks in 8.45-ounce aseptic packaging. Each line
was introduced in three flavors. The Company intends to introduce additional
flavors for each line in 2000. One line is a co-brand 100% juice line named
"Juice Blast(TM)" that was launched in conjunction with Costco under the
"Kirkland Signature(TM)/Hansen's(R) Natural" co-brand name and is sold
nationally through Costco stores. The other line is a 10% juice line named
"Juice Slam(TM)" that is available to all of our customers.
During 1999, the Company expanded its Green Tea line with four new
specialty teas in proprietary 20-ounce glass bottles, which it named its "Gold
Standard" line. The Company is currently in the process of introducing
additional Green Tea flavors including two diet green tea flavors as well as six
juice cocktails, all under the "Gold Standard" name.
In 2000, the Company plans to introduce additional flavors of its
existing products as well as a new line of soy based drinks and, in addition, a
new line of premium "functional" iced teas in unique proprietary glass bottles.
In 2000, the Company also plans to introduce two new lines of
nutritional food bars and to test market a new line of premium G.M.O. free
cereals under the Hansen's(R) brand name. The one new line of nutritional food
bars will be a line of snack bars made from grains and fruit and the other will
be a line of functional bars.
The increase in net sales and profitability for the year ended December
31, 1999, was primarily attributable to increased sales of the Company's
functional drinks in 8.2-ounce slim cans and to the Company's Healthy Start line
as well as the introduction of the Company's Signature Sodas and children's
multi-vitamin juice drinks in aseptic packaging.
Net sales of iced teas, lemonades and juice cocktails in 1999 were
comparable to the sales of such products in 1998.
Net sales of the Company's Smoothie products were higher in 1999
than in 1998 due primarily to sales of Smoothies in 64-ounce plastic bottles,
which were introduced during 1999.
Net sales of Natural Sodas were significantly higher in 1999 as
compared to 1998. The primary increase is attributable to the introduction of
the Company's Signature Soda line in 14-ounce glass bottles. Net sales of apple
juice were higher in 1999 than in 1998.
The mix of products sold by the Company continued to change in 1999.
The change in product mix resulted in a decrease in the gross profit margin as a
percentage of net sales to 46.4% for the year ended December 31, 1999 as
compared to 49.3% for the year ended December 31, 1998.
19
During 1999, sales outside of California represented 39% of the
aggregate sales of the Company, as compared to approximately 34% of the
aggregate sales of the Company in 1998. Sales to distributors outside the United
States during 1999 amounted to $800,000 compared to $500,000 in 1998.
During 1999, the Company entered into several new distribution
agreements for the sale of its products, both within and outside the United
States. As discussed under "ITEM 1 BUSINESS - Manufacture, Production and
Distribution", it is anticipated that the Company will continue building its
national sales organization in 2000 to support and grow the sales of its
products.
The Company continues to incur expenditures in connection with the
development and introduction of new products and flavors.
Results of Operations for the Year Ended December 31, 1999 Compared to the Year
Ended December 31, 1998.
Net Sales. For the year ended December 31, 1999, net sales were
approximately $72.3 million, an increase of $18.4 million or 34.2% over the
$53.9 million net sales for the year ended December 31, 1998. The increase in
net sales was primarily attributable to increased sales of the Company's energy
and other functional drinks in 8.2-ounce slim cans, the introduction of the
Company's new children's multi-vitamin juice drinks in the third quarter of
1999, as well as the Company's Signature Soda line, which was introduced in the
first quarter of 1999, increased sales of the Company's Healthy Start product
line and sales of Smoothies in 64-ounce P.E.T. bottles. To a lesser extent, the
increase in net sales was also attributable to increased sales of juice blends,
Smoothies in cans, apple juice, soda in cans and sales of Super Smoothies, which
were introduced in the second half of 1999. Net sales of iced teas, lemonades
and juice cocktails in 1999 were comparable to the sales of such products in
1998. The increase in net sales was partially offset by the discontinuance of
Equator(R) and other marginal products.
Gross Profit. Gross profit was $33.5 million for the year ended
December 31, 1999, an increase of $7.0 million or 26.4% over the $26.5 million
gross profit for the year ended December 31, 1998. Gross profit as a percentage
of net sales decreased to 46.4% for the year ended December 31, 1999 from 49.3%
for the year ended December 31, 1998. The increase in gross profit was primarily
attributable to increased net sales. The decrease in gross profit as a
percentage of net sales is 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 $26.0 million
for the year ended December 31, 1999 an increase of $5.4 million or 26.5% over
total operating expenses of $20.6 million for the year ended December 31, 1998.
Total operating expenses as a percentage of net sales decreased to 36.0% for the
year ended December 31, 1999, from 38.2% for the year ended December 31, 1998.
The increase in total operating expenses was primarily attributable to increased
selling, general and administrative expenses and other operating 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.
Selling, general and administrative expenses were $25.3 million for the
year ended December 31, 1999 an increase of $5.1 million or 25.3% higher than
selling, general and administrative expenses of $20.2 million for the year ended
December 31, 1998. Selling, general and administrative expenses as a percentage
of net sales decreased to 35.0% for the year ended December 31, 1999 from 37.5%
for the year ended December 31, 1998. Selling expenses were $17.8 million for
the year ended December 31, 1999 an increase of $3.7 million or 26.2% higher
than selling expenses of $14.1 million for the year ended December 31, 1998.
Selling expenses as a percentage of net sales decreased to 24.6% for the year
ended December 31, 1999 from 26.2% for the year ended December 31, 1998. The
increase in selling expenses was primarily attributable to increased
distribution (freight) expenses, advertising costs and promotional expenditures,
particularly in-store demonstrations and coupon expenses. The increase in
selling expenses was partially offset by a decrease in expenditures for
merchandise displays and point of sale materials. General and administrative
20
expenses were $7.5 million for the year ended December 31, 1999, an increase of
$1.4 million or 23.4% higher than general and administrative expense of $6.1
million for the year ended December 31, 1998. General and administrative
expenses as a percentage of net sales decreased to 10.4% for the year ended
December 31, 1999, from 11.4% for the year ended December 31, 1998. The increase
in general and administrative expenses was primarily attributable to increased
payroll costs and certain other expenses incurred in connection with the
Company's product development and expansion activities into additional states.
Amortization of trademark license and trademarks was $308,000 for the
year ended December 31, 1999, an increase of $12,000 over amortization of
trademark license and trademarks of $296,000 for the year ended December 31,
1998.
Other operating expenses were $380,000 for the year ended December 31,
1999, an increase of $320,000 over other operating expenses of $60,000 for the
year ended December 31, 1998. The increase in other operating expenses was
primarily attributable to expenses incurred in connection with a proposed
business combination that was not completed. The increase in other expenses was
partially offset by the expiration of a consulting agreement with a director of
the Company.
Operating Income. Operating income was $7.5 million for the year ended
December 31, 1999, compared to $6.0 million for the year ended December 31,
1998. The $1.5 million increase in operating income was primarily attributable
to increased gross profits, which was partially offset by increased operating
expenses.
Net Nonoperating Expense. Net nonoperating expense was $52,000 for the
year ended December 31, 1999, which was $278,000 lower than net nonoperating
expense of $330,000 for the year ended December 31, 1998. Net nonoperating
expense consists of interest and financing expense interest income and for 1998,
other nonoperating expense. Interest and financing expense for the year ended
December 31, 1999 was $171,000 as compared to $387,000 for the year ended
December 31, 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 1998. See also "Liquidity and Capital Resources"
below. Interest income for the year ended December 31, 1999 was $118,000, which
was $46,000 higher than interest income of $72,000 for the year ended December
31, 1998. The increase in interest income was primarily attributable to interest
earned on excess cash invested.
Provision for Income Taxes. Provision for income taxes for the year
ended December 31, 1999 was $3.0 million as compared to provision for income
taxes of $2.1 million for the year ended December 31, 1998. The effective
combined federal and state tax rate for 1999 was 39.9% as compared to 36.7% for
1998. The increase in provision for income taxes was primarily attributable to
increased operating income and the increase in the effective tax rate for 1999.
Certain net operating loss carryforwards resulted in a lower effective tax rate
in 1998. Such net operating loss carryforwards were not available in 1999.
Net Income. Net income was $4.5 million for the year ended December 31,
1999, compared to $3.6 million for the year ended December 31, 1998. The
$915,000 increase in net income was attributable to increased operating income
of $1.5 million and decreased nonoperating expense of $278,000, which was offset
by increased provision for income taxes of $904,000.
Results of Operations for the Year Ended December 31, 1998 Compared to the Year
Ended December 31, 1997.
Net Sales. For the year ended December 31, 1998, net sales were
approximately $53.9 million, an increase of $10.8 million or 25.1% over the
$43.1 million net sales for the year ended December 31, 1997. The increase in
21
net sales was primarily attributable to increased sales of the Company's energy
functional drink and sales of the Company's three additional functional drinks
in 8.2-ounce slim cans introduced in the first quarter of 1998. The increase in
sales of functional drinks was attributable in part to the fact that the Company
launched its energy functional drink in April 1997 and also that during 1997,
the Company did not have any sales of its three additional functional drinks
which were introduced in the first quarter of 1998. A portion of the sales of
functional drinks during 1998 were attributable to opening orders from
distributors prior to their launching such products in their respective
territories. Consequently, sales of functional drinks during 1998 may not be
indicative of sales that will be achieved from those products in subsequent
periods. The increase in net sales was also, to a lesser extent, attributable to
the Company's Healthy Start line and apple juice blends which were also launched
in 1998, and increased sales of Smoothies in bottles, iced teas, lemonades and
juice cocktails. The increase in net sales was partially offset by decreased
sales of soda, Smoothies in cans, and the discontinuance of Equator(R) and other
marginal products. The decrease in sales of Smoothies in cans was primarily
attributable to a large introductory order received during the third quarter of
1997, which was not repeated in 1998 and also to the fact that only a portion of
the stores of the customer concerned continue to stock those products.
Gross Profit. Gross profit was $26.5 million for the year ended
December 31, 1998, an increase of $8.7 million or 48.8% over the $17.8 million
gross profit for the year ended December 31, 1997. Gross profit as a percentage
of net sales increased to 49.3% for the year ended December 31, 1998 from 41.4%
for the year ended December 31, 1997. The increase in gross profit was primarily
attributable to increased net sales as well as cost reductions achieved in
certain raw materials and packaging. The increase in gross profit as a
percentage of net sales was primarily attributable to higher margins achieved as
a result of a change in the Company's product mix.
Total Operating Expenses. Total operating expenses were $20.6 million
for the year ended December 31, 1998, an increase of $4.6 million or 29.0%
higher than total operating expenses of $16.0 million for the year ended
December 31, 1997. Total operating expenses as a percentage of net sales
increased to 38.2% for the year ended December 31, 1998, from 37.0% for the year
ended December 31, 1997. The increase in total operating expenses was primarily
attributable to increased selling, general and administrative expenses incurred
as a result of the Company's increased sales volume which was partially offset
by decreased other expenses.
Selling, general and administrative expenses were $20.2 million for the
year ended December 31, 1998, an increase of $4.7 million or 30.8% higher than
selling, general and administrative expenses of $15.5 million for the year ended
December 31, 1997. Selling, general and administrative expenses as a percentage
of net sales increased to 37.5% for the year ended December 31, 1998 from 35.9%
for the year ended December 31, 1997. Selling expenses were $14.1 million for
the year ended December 31, 1998, an increase of $3.6 million or 33.9% higher
than selling expenses of $10.5 million for the year ended December 31, 1997.
Selling expenses as a percentage of net sales increased to 26.2% for the year
ended December 31, 1998 from 24.4% for the year ended December 31, 1997. The
increase in selling expenses was primarily attributable to increased costs of
promotional allowances and materials primarily to support the expansion of
distribution into new markets and to support the placement and sales of the
Company's functional drinks in 8.2-ounce slim cans and Smoothies in bottles and,
to a lesser extent, increased distribution costs. General and administrative
expenses were $6.1 million for the year ended December 31, 1998, an increase of
$1.2 million or 24.2% higher than general and administrative expenses of $4.9
million for the year ended December 31, 1997. General and administrative expense
as a percent of net sales was 11.4% both for the years ended December 31, 1998
and 1997, respectively. The increase in general and administrative expenses was
primarily attributable to increased payroll costs and certain other expenses
incurred in connection with the Company's product development and expansion
activities into additional states.
Amortization of trademark license and trademarks was $296,000 for the
year ended December 31, 1998, a decrease of $5,000 from amortization of
trademark license and trademarks of $301,000 for the year ended December 31,
1997.
22
Other expenses were $60,000 for the year ended December 31, 1998, a
decrease of $139,000 or 69.8% below other expenses of $199,000 for the year
ended December 31, 1997. This decrease was primarily attributable to the
expiration of certain consulting agreements in 1997, which were entered into in
connection with the purchase of the Hansen Business. This decrease was partially
offset by a new consulting agreement entered into in 1997 with the former
president of HBC.
Operating Income. Operating income was $6.0 million for the year ended
December 31, 1998, compared to $1.9 million for the year ended December 31,
1997. The $4.1 million increase in operating income was primarily attributable
to increased gross profits which was partially offset by increased operating
expenses.
Net Nonoperating Expense. Net nonoperating expense was $330,000 for the
year ended December 31, 1998, which was $262,000 lower than net nonoperating
expense of $592,000 for the year ended December 31, 1997. Net nonoperating
expense consists of interest and financing expense, interest income and other
expense. Interest and financing expense for the year ended December 31, 1998 was
$387,000 as compared to $525,000 for the year ended December 31, 1997. The
decrease in interest and financing expense was attributable to lower financing
fees; less interest incurred on the term loan (refer to "Liquidity and Capital
Resources" below); and lower average short-term borrowings during the year ended
December 31, 1998 than during 1997. Interest income for the year ended December
31, 1998 was $72,000 as compared to interest income of $3,000 for the year ended
December 31, 1997. The increase in interest income was primarily attributable to
interest earned on excess cash invested. Other expense of $15,000 for 1998
consists of certain expenses incurred in connection with the discontinuance of
operations in the United Kingdom. Other expense for 1997 consisted of a $70,000
loss incurred on the disposal of certain assets, arising primarily from the
closure of the route distribution system
Provision for Income Taxes. Provision for income taxes for the year
ended December 31, 1998 was $2.1 million as compared to provision for income
taxes of $40,200 for the year ended December 31, 1997. The increase in provision
for income taxes was primarily attributable to increased operating income, and
to a lesser extent, decreased net nonoperating expense and a reduction in the
valuation allowance attributable to prior years net operating losses.
Net Income. Net income was $3.6 million for the year ended December 31,
1998, compared to $1.3 million for the year ended December 31, 1997. The $2.3
million increase in net income was attributable to increased operating income of
$4.1 million and decreased nonoperating expense of $262,000, which was offset by
increased provision for income taxes of $2.0 million.
Liquidity and Capital Resources
As of December 31, 1999, the Company had working capital of $8,997,000
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 compensation
expense related to the issuance of stock options. The increase in working
capital was partially offset by increases in trademark license and trademarks,
the reclassification of a portion of long-term debt to current portion of
long-term debt and, to a lesser extent, increases in deposits and other assets
and acquisitions of property and equipment, and reclassification of a portion of
the deferred tax liability to income taxes payable.
During 1999, the Company's cash reserves were used for working capital
including the acquisition of increased inventories and increases in accounts
receivable and the acquisition of trademark licenses and trademarks, increases
in deposits and other assets, and the acquisition of property and equipment and
to reduce long term debt. The acquisition of increased inventories, increases in
accounts receivable, increases in deposits and other assets, acquisition of
property and equipment, acquisition of trademark licenses and trademarks, and
23
repayment of the Company's term loan, are expected to remain the Company's
principal recurring use of cash and working capital funds.
Net cash used in investing activities for the year ended December 31,
1999 was $1.5 million as compared to net cash used in investment activities of
$515,000 in 1998. The increase in net cash used in investing activities was
primarily attributable to increases in deposits and other assets. This increase
was partially offset by a decrease in purchases of property and equipment
(including vans and promotional vehicles). Management, from time to time,
considers the acquisition of capital equipment, particularly, merchandise
display racks, vans and promotional vehicles, coolers and other promotional
equipment and businesses compatible with the image of the Hansen's(R) brand as
well as the introduction of new product lines. In May 1999, the Board of
Directors of the Company approved the repurchase by the Company of up to
1,000,000 shares of its outstanding common stock in the market or in privately
negotiated transactions. Prior to December 31, 1999, the Company did not
repurchase any shares of its outstanding common stock. However, in March 2000,
the Company began to implement such repurchase program. Such purchases will be
financed through available cash, the Company's line of credit or funds generated
from operations. The Company may require additional capital resources in the
event of the acquisition by it of any businesses, depending upon the cash
requirements relating thereto. Any such transaction and the repurchase of its
shares of common stock will also be subject to the terms and restrictions of
HBC's credit facilities.
Net cash used in financing activities increased to $1.6 million for the
year ended December 31, 1999 from $445,000 in 1998. The increase in net cash
used in financing activities is primarily attributable to principal payments of
$2.1 million made on long-term debt in the year ended December 31, 1999 as
compared to principal payments of $521,000 made in the year ended December 31,
1998. Additionally, cash generated by the issuance of common stock decreased to
$28,000 in 1999 from $76,000 in 1998. The increase in net cash used in financing
activities was also attributable to a liability of $431,000 incurred in
connection with the acquisition of the Hansen's(R) trademark.
In 1997, a credit facility was granted to HBC by Comerica, consisting
of a revolving line of credit of up to $3 million in aggregate at any time
outstanding and a term loan of $4 million. The utilization of the revolving line
of credit by HBC is dependent upon certain levels of eligible accounts
receivable and inventory from time to time. Such revolving line of credit and
term loan are secured by substantially all of HBC's assets, including accounts
receivable, inventory, trademarks, trademark licenses and certain equipment. HBC
entered into a modification agreement with Comerica as of December 1, 1998 which
provides for the original revolving line of credit agreement to be and remain in
full force and effect until May 1, 2000 and for the rate of interest payable by
HBC on advances under the revolving line of credit to be reduced from 1% above
the bank's base (prime) rate to 2 1/2% over the bank's Libor rate or 1/4 of 1
percent above the bank's base (prime) rate, at the option of HBC. As of both
December 31, 1999 and 1998, no amounts were outstanding under the revolving line
of credit. 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.
The initial use of proceeds under the term loan was to pay the
principal balance due by the Company under a note payable to ERLY (refer to
"ITEM 3. LEGAL PROCEEDINGS"). As of December 31, 1999, $1,332,000 was
outstanding under the term loan. The term loan is repayable over a period of 60
months from November 1997.
The credit facility imposes quarterly and annual financial covenants
requiring the Company to maintain certain financial ratios and achieve certain
levels of annual income. The credit facility also contains certain non-financial
covenants. At both December 31, 1999 and 1998, the Company was in compliance
with all covenants.
Management believes that cash available from operations, including cash
resources and revolving line of credit, will be sufficient for its working
capital needs, including purchase commitments for raw materials, payments of tax
24
liabilities, debt servicing, expansion and development needs, repayments under
the term loan during 2000, purchases of shares of common stock of the Company,
as well as any purchases of capital assets or equipment through December 31,
2000.
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 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.
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which the Company is required to adopt
effective in its fiscal year 2001. SFAS No. 133 will require the Company to
record all derivatives on the balance sheet at fair value. The Company does not
currently engage in hedging activities, but will continue to evaluate the
effects of adopting SFAS No. 133. The Company will adopt SFAS No. 133 in its
fiscal year 2001.
The Company has adopted the American Institute of Certified Public
Accountants Statement of Position (SOP) 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use, during 1999. There was
no material impact on the consolidated financial statements as a result.
Year 2000 - Compliance
Prior to January 1, 2000, the Company reviewed the readiness of its
computer systems and business practices for handling Year 2000 issues. These
issues involve systems that are date sensitive and may not be able to properly
process the transition from year 1999 to year 2000 and beyond, resulting in
miscalculations and software failures. Year 2000 compliance updates were
completed in the fourth quarter of 1999 and the Company's information technology
("IT") and non-information technology ("NIT") computer systems completed the
transition to the year 2000 without any material issues or problems. The Company
estimates expenditures of approximately $120,000 were incurred to enable the
Company to become Year 2000 compliant. No additional expenditures are currently
anticipated. The Company has been in contact with critical suppliers,
co-packers, customers, and other third parties to determine the extent to which
they may be vulnerable to Year 2000 issues. The Company cannot currently predict
any future effect of third parties' Year 2000 issues. However, the Company has
25
not been made aware of any matter which would materially impact the Company's
business from third parties.
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 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;
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 ability to make suitable arrangements for the co-packing of
its functional drinks in 8.2-ounce slim cans and Smoothies in 11.5-ounce
cans; and
26
o The Company's and the Company's customers', co-packers' and suppliers'
ability to replace, modify or upgrade computer programs in ways that
adequately address Year 2000 issues. Given the numerous and significant
uncertainties involved, there can be no assurance regarding their ability
to identify and correct all relevant computer codes and imbedded chips and
other unanticipated difficulties or the ability of third parties to
remediate their respective systems.
The foregoing list of important factors is not exhaustive.
Sales
The table set forth below discloses selected quarterly data regarding
sales for the past five years. Data from any one or more quarters are not
necessarily indicative of annual results or continuing trends.
Sales are expressed in actual cases and case equivalents. A case
equivalent is equal to the amount of soda concentrate sold that will yield
twenty-four 12-ounce (354 ml) cans measured by volume. Actual cases of soda
equal twenty-four 12-ounce cans or 11-ounce (325 ml) bottles, thirty 12-ounce
cans, or twelve 23-ounce (680 ml) bottles or twenty-four 14-ounce (414 ml)
bottles measured by volume. A case of apple juice and juice blends equals twelve
32-ounce bottles, six 64-ounce glass bottles, eight 64-ounce P.E.T. bottles,
four 128-ounce P.E.T. bottles, twenty-four 8.45-ounce (250 ml) tetra-pak boxes
or the equivalent volume. A case of non-carbonated iced teas, lemonades and
juice cocktails equals twenty-four 16-ounce (473 ml) or fifteen 20-ounce (591
ml) bottles measured by volume. A case of still water equals twenty-four
0.5-liter, twelve 1.0-liter and twelve 1.5-liter plastic bottles measured by
volume. A case of fruit juice Smoothies equals twenty-four 11.5-ounce (340 ml)
cans or twenty-four 16-ounce or 13.5-ounce (400 ml) or 12-ounce bottles or eight
64-ounce P.E.T. bottles measured by volume. A case of "functional" drinks equals
twenty-four 8.2-ounce (243 ml) cans measured by volume. A case of Health Start
equals twelve 46-ounce (1.36 L) or eight 64-ounce P.E.T. bottles, measured by
volume.
The Company's quarterly results of operations reflect seasonal trends
that are primarily the result of increased demand in the warmer months of the
year. It has been Hansen's experience that beverage sales tend to be lower
during the first and fourth quarters of each fiscal year. Because the primary
historical market for Hansen's products is California, which has a year-long
temperate climate, the effect of seasonal fluctuations on quarterly results may
have been mitigated; however, such fluctuations may be more pronounced as the
distribution of Hansen's products expands outside of California. Quarterly
fluctuations may also be affected by other factors including the introduction of
new products including Hansen's(R) functional drinks, the opening of new markets
where temperature fluctuations are more pronounced, the addition of new bottlers
and distributors, changes in the mix of the sales of its finished products and
soda concentrates and increased advertising and promotional expenses. See also
"ITEM 1. BUSINESS Seasonality."
27
Case Sales (in Thousands)
1999 1998 1997 1996 1995
-------- --------- -------- --------- ---------
Quarter 1 1,372 1,237 861 940 834
Quarter 2 1,716 1,566 1,383 1,340 1,282
Quarter 3 2,074 1,845 1,648 1,341 1,580
Quarter 4 1,779 1,241 1,234 876 902
-------- --------- -------- --------- ---------
Totals 6,941 5,889 5,126 4,497 4,598
======== ========= ======== ========= =========
Sales Revenues (in Thousands)
1999 1998 1997 1996 1995
-------- --------- -------- --------- ---------
Quarter 1 $15,229 $ 11,265 $ 7,120 $ 7,365 $ 5,434
Quarter 2 19,142 13,950 11,496 10,394 9,560
Quarter 3 20,491 16,589 13,439 10,817 12,109
Quarter 4 17,441 12,062 11,002 6,989 6,888
-------- --------- -------- --------- ---------
Totals $72,303 $ 53,866 $ 43,057 $ 35,565 $ 33,991
======== ========= ======== ========= =========
Inflation
The Company does not believe that inflation had a significant impact on
the Company's results of operations for the periods presented.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required to be furnished in response to this item is
submitted hereinafter following the signature page hereto at pages F-1 through
F-22.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
General
Directors of the Company are elected annually by the holders of the
common stock and executive officers are elected annually by the Board of
Directors, to serve until the next annual meeting of stockholders or the Board
of Directors, as the case may be, or until their successors are elected and
qualified. It is presently anticipated that the next annual meeting of
stockholders will be held in September 2000.
Set forth below are the names, ages and principal occupations for the
last five years of the directors and/or executive officers of the Company:
Rodney C. Sacks (50) - Chairman of the Board of Directors of the
Company, Chief Executive Officer and director of the Company from November 1990
to the present. Member of the Executive Committee of the Board of Directors of
the Company since October 1992. Chairman and a director of HBC from June 1992 to
the present. Mr. Sacks resigned from his position as Chief Financial Officer of
the Company in July 1996, which office he had held from November 1990 to July
1996.
Hilton H. Schlosberg (47) - Vice Chairman of the Board of Directors of
the Company, President, Chief Operating Officer, Secretary, and a director of
the Company from November 1990 to the present. Chief Financial Officer of the
Company since July 1996. Member of the Executive Committee of the Board of
Directors of the Company since October 1992. Member of the Audit Committee of
the Board of Directors of the Company since September 1997. Vice Chairman of the
Board of Directors, Secretary and a director of HBC from July 1992 to the
present. Director and/or Deputy Chairman of AAF Industries PLC, a United Kingdom
publicly quoted industrial group, from June 1990 until April 1995.
Benjamin M. Polk (49) - Director of the Company from November 1990 to
the present. Assistant Secretary of HBC since October 1992 and a director of HBC
since July 1992. Member of the Audit Committee of the Board of Directors of the
Company since September 1997. Member of the Compensation Committee of the Board
of Directors of the Company from April 1991 until September 1997. Partner with
Whitman Breed Abbott & Morgan LLP (New York, New York) where Mr. Polk has
practiced law with that firm and its predecessor, Whitman & Ransom, from August
1976 to the present. 1
Norman C. Epstein (59) - Director of the Company and member of the
Compensation Committee of the Board of Directors of the Company since June 1992.
Member and Chairman of the Audit Committee of the Board of Directors of the
Company since September 1997. Director of HBC since July 1992. Director of
Integrated Asset Management Limited, a company listed on the London Stock
Exchange since June 1998. Managing Director of Cheval Acceptances, a mortgage
finance company based in London, England. Partner with Moore Stephens, an
international accounting firm, from 1974 to December 1996 (senior partner
beginning 1989 and the managing partner of Moore Stephens, New York from 1993
until 1995).
Harold C. Taber, Jr. (60) - Director of the Company since July 1992.
Consultant to the Company from July 1, 1997 to June 30, 1999. Consultant to The
Joseph Company from September 1997 to March 1999. President and Chief Executive
Officer and a director of HBC from July 1992 to June 1997. On June 30, 1997, Mr.
Taber resigned from his employment as well as director, President and Chief
Executive Officer of HBC. In addition, effective June 30, 1997, Mr. Taber
resigned as a member of the Executive Committee on which he served since October
1992.
Mark S. Vidergauz (46) - Director of the Company and member of the
Compensation Committee of the Board of Directors of the Company since June 1998.
Managing director at the Los Angeles office of ING Barings LLC, a diversified
financial services institution headquartered in the Netherlands. Prior to
29
joining ING Barings LLC in April 1995, Mr. Vidergauz was a managing director at
Wedbush Morgan Securities, an investment banking firm in Los Angeles, from 1991
to 1995. Prior to joining Wedbush, Mr. Vidergauz was a corporate finance
attorney in the Los Angeles office of O'Melveny & Meyers.
1 Mr. Polk and his law firm, Whitman Breed Abbott & Morgan LLP, serve as counsel
to the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than ten percent of a registered
class of the Company's equity securities, to file by specific dates with the SEC
initial reports of ownership and reports of changes in ownership of equity
securities of the Company. Officers, directors and greater than ten percent
stockholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms that they file. The Company is required to report in
this annual report on Form 10-K any failure of its directors and executive
officers and greater than ten percent stockholders to file by the relevant due
date any of these reports during the most recent fiscal year or prior fiscal
years.
To the Company's knowledge, based solely on review of copies of such
reports furnished to the Company during the fiscal year ended December 31, 1999,
all Section 16(a) filing requirements applicable to the Company's officers,
directors and greater than ten percent stockholders were in compliance, except
as follows: Rodney C. Sacks and Hilton H. Schlosberg, both officers and
directors of the Company, were late in filing their annual statements of changes
in beneficial ownership with respect to employee stock options granted to them
during 1999; and Mark S. Vidergauz, a director of the Company, was late in
filing his report of beneficial ownership with respect to stock options granted
to him in June 1998.
ITEM 11. EXECUTIVE COMPENSATION
The following tables set forth certain information regarding the total
remuneration earned and grants of options/SARs made to the chief executive
officer and each of the four most highly compensated executive officers of the
Company and its subsidiaries who earned total cash compensation in excess of
$100,000 during the year ended December 31, 1999. These amounts reflect total
cash compensation paid by the Company and its subsidiaries to these individuals
during the fiscal years December 31, 1997 through 1999.
30
SUMMARY COMPENSATION TABLE
- ----------------------------------------- --------------------------------------------- --------------------
Long Term
ANNUAL COMPENSATION Compensation(4)
Awards(5)
- ----------------------------- ----------- --------------------------------------------- --------------------
Other Securities
Annual underlying
Name and Principal Positions Bonus(2) Compensation ($) Options/SARs (#)
Year Salary(1)($) ($)
- ----------------------------- ----------- --------------- ----------- ----------------- --------------------
Rodney C. Sacks 1999 180,000 25,000 6,088 (3) 100,000
Chairman, CEO 1998 160,000 34,000 1,927,431 (6) 75,000
and Director 1997 160,000 - 12,302 (3) -
- ----------------------------- ----------- --------------- ----------- ----------------- --------------------
Hilton H. Schlosberg 1999 180,000 25,000 6,088 (3) 100,000
Vice-Chairman, CFO 1998 160,000 34,000 1,689,972 (7) 75,000
President, Secretary and 1997 158,030 - 5,572 (3) -
Director
- ----------------------------- ----------- --------------- ----------- ----------------- --------------------
Mark J. Hall 1999 150,000 40,000 7,551 (3) -
Sr. Vice President 1998 136,250 65,000 180,982 (8) 30,000
Distributor Division 1997 116,250 40,000 6,327 (3) 120,000
- ----------------------------- ----------- --------------- ----------- ----------------- --------------------
Kirk S. Blower 1999 110,000 16,800 7,099 (3) 12,500
Sr. Vice President 1998 111,250 16,800 363,440 (9) -
Juice Division 1997 102,850 10,000 7,468 (3) -
- ----------------------------- ----------- --------------- ----------- ----------------- --------------------
Thomas J. Kelly 1999 98,000 18,000 60,499 (10) 10,000
Secretary and Controller 1998 93,000 18,000 - 60,000
of HBC 1997 91,000 12,500 - -
- ----------------------------- ----------- --------------- ----------- ----------------- --------------------
(1) SALARY - Pursuant to his employment agreement, Mr. Sacks is entitled to an
annual base salary of $180,000. For 1998 and 1997, Mr. Sacks agreed to a
temporary reduction of his annual base salary to $160,000. Pursuant to his
employment agreement, Mr. Schlosberg is entitled to an annual base salary of
$180,000. For 1998, Mr. Schlosberg agreed to a temporary reduction of his annual
base salary to $160,000. For 1997, Mr. Schlosberg agreed to a temporary
reduction of his annual base salary to $158,030.
(2) BONUS - Payments made in 2000, 1999 and 1998 for bonuses accrued in 1999,
1998 and 1997.
(3) OTHER ANNUAL COMPENSATION - The cash value of perquisites of the named
persons did not total $50,000 or 10% of payments of salary and bonus for the
years shown.
(4) LTIP PAYOUTS - None paid. No plan in place.
(5) RESTRICTED STOCK AWARDS - The Company does not have a plan for restricted
stock awards.
(6) Includes $1,921,625 representing the dollar value of the difference between
the price paid for common stock of the Company through the exercise of stock
options and the fair market value of the common stock on the date of exercise;
and $5,806 for automobile expense reimbursement.
(7) Includes $1,684,125 representing the dollar value of the difference between
the price paid for common stock of the Company through the exercise of stock
options and the fair market value of the common stock on the date of exercise;
and $5,847 for automobile expense reimbursement.
(8) Includes $179,660 representing the dollar value of the difference between
the price paid for common stock of the Company through the exercise of stock
options and the fair market value of the common stock on the date of exercise;
and $1,322 for automobile expense reimbursement.
(9) Includes $362,040 representing the dollar value of the difference between
the price paid for common stock of the Company through the exercise of stock
options and the fair market value of the common stock on the date of exercise;
and $1,400 for automobile expense reimbursement.
(10) Includes $60,499 representing the dollar value of the difference between
the price paid for common stock of the Company through the exercise of stock
options and the fair market value of the common stock on the date of exercise.
ALL OTHER COMPENSATION - none paid
31
OPTION/SAR GRANTS FOR THE YEAR ENDED DECEMBER 31, 1999
- ---------------------------------------------------------------------------------------------- ---------------------------------
Potential realizable value at
INDIVIDUAL GRANTS assumed annual rates of stock
price appreciate for option term
- ---------------------------------------------------------------------------------------------- ---------------------------------
Number of Percent of total
Securities Options/SARs Exercise or
underlying granted to base price
Options/SARs employees in 1999 ($/Share) Expiration
Name granted (#) Date 5% 10%
- --------------------------- ------------------ ------------------ ------------- -------------- ------------- ----------------
Rodney C. Sacks 100,000(1) 23.6% $4.25 02/02/2009 267,280 677,340
- --------------------------- ------------------ ------------------ ------------- -------------- ------------- ----------------
Hilton H. Schlosberg 100,000(1) 23.6% $4.25 02/02/2009 267,280 677,340
- --------------------------- ------------------ ------------------ ------------- -------------- ------------- ----------------
Kirk S. Blower 12,500(2) 2.9% $4.25 02/02/2005 18,068 40,989
- --------------------------- ------------------ ------------------ ------------- -------------- ------------- ----------------
Thomas J. Kelly 10,000(2) 2.4% $4.25 02/02/2005 14,454 32,791
- --------------------------- ------------------ ------------------ ------------- -------------- ------------- ----------------
(1) 9,500 options to purchase the Company's common stock are exercisable on
February 2, 1999; 23,500 are exercisable on February 2, 2000; 23,500 are
exercisable on February 2, 2001; 23,500 are exercisable on February 2, 2002;
and, 20,000 are exercisable on February 2, 2003.
(2) Options to purchase the Company's common stock become exercisable in equal
annual increments over 5 years beginning February 2, 2000.
AGGREGATED OPTION/SAR EXERCISES DURING THE YEAR ENDED DECEMBER 31 1999 AND OPTION/SAR VALUES AT DECEMBER 31, 1999
- ------------------------------- --------------------- --------------------- --------------------- ------------------------
Number of Value of unexercised
underlying in-the-money
unexercised options/SARs at
options/SARs at December 31, 1999
December 31, 1999 ($)
(#)
--------------------- ------------------------
Shares acquired on Value Exercisable/ Exercisable/
Name exercise (#) Realized ($) Unexercisable Unexercisable
- ------------------------------- --------------------- --------------------- --------------------- ------------------------
Rodney C. Sacks - - 47,000 / 90,500(1) 102,711 / 5,702
- ------------------------------- --------------------- --------------------- --------------------- ------------------------
Hilton H. Schlosberg - - 47,000 / 90,500(1) 102,711 / 5,702
- ------------------------------- --------------------- --------------------- --------------------- ------------------------
Mark J. Hall - - 34,000 / 82,000(2) 105,302 /261,446
- ------------------------------- --------------------- --------------------- --------------------- ------------------------
Kirk J. Blower - - 0 / 12,500(3) 0 / 788
- ------------------------------- --------------------- --------------------- --------------------- ------------------------
Thomas J. Kelly 15,473 $ 60,499 44,527 / 10,000(4) 121,247 / 630
- ------------------------------- --------------------- --------------------- --------------------- ------------------------
(1) Includes options to purchase 37,500 shares of common stock at $1.59 per
share of which all are exercisable at December 31, 1999, granted pursuant to a
Stock Option Agreement dated January 30, 1998 between the Company and Messrs.
Sacks and Schlosberg, respectively; and options to purchase 100,000 shares of
common stock at $4.25 per share of which 9,500 are exercisable at December 31,
1999, granted pursuant to Stock Option Agreements dated February 2, 1999 between
the Company and Messrs. Sacks and Schlosberg, respectively.
(2) Includes options to purchase 96,000 shares of common stock at $1.06 per
share of which 24,000 are exercisable at December 31, 1999, granted pursuant to
a Stock Option Agreement dated February 10, 1997 between the Company and Mr.
Hall; options to purchase 20,000 shares of common stock at $1.59 per share of
which 10,000 are exercisable at December 31, 1999, granted pursuant to a Stock
Option Agreement dated January 30, 1998 between the Company and Mr. Hall.
(3)Includes options to purchase 12,500 share of common stock at $4.25 per share
of which none are exercisable at December 31, 1999, granted pursuant to a Stock
Option Agreement dated February 2, 1999 between the Company and Mr. Blower.
32
(4)Includes options to purchase 44,527 shares of common stock at $1.59 per share
of which all are exercisable at December 31, 1999, granted pursuant to a Stock
Option Agreement dated January 30, 1998 between the Company and Mr. Kelly; and
options to purchase 10,000 shares of common stock at $4.25 per share of which
none are exercisable at December 31, 1999, granted pursuant to a Stock Option
Agreement dated February 2, 1999 between the Company and Mr. Kelly.
Performance Graph
The following graph shows a five-year comparison of cumulative total returns.(1)
TOTAL SHAREHOLDER RETURNS
ANNUAL RETURN PERCENTAGE
For the years ended December 31,
Company Name/Index 1995 1996 1997 1998 1999
- ---------------------- ------- ------- ------- ------- -------
HANSEN NAT CORP (63.36) 54.59 70.62 196.63 (19.78)
S&P SMALLCAP 600 INDEX 29.96 21.32 25.58 (1.31) 12.40
PEER GROUP (25.39) 49.88 34.05 (43.03) 9.99
INDEXED RETURNS
For the years ended December 31,
Base
Period
Company Name/Index 1994 1995 1996 1997 1998 1999
- ---------------------- ------- ------- ------- ------- ------- -------
HANSEN NAT CORP 100 36.64 56.64 96.64 286.67 229.97
S&P SMALLCAP 600 INDEX 100 129.96 157.67 198.01 195.42 219.66
PEER GROUP 100 74.61 111.83 149.91 85.41 93.94
(1) Annual return assumes reinvestment of dividends. Cumulative total return
assumes an initial investment of $100 on December 31, 1994. The Company's
self-selected peer group is comprised of Saratoga Beverage Group, Cott
Corporation, National Beverage Corporation, Clearly Canadian Beverage Company,
Triarc Companies, Inc., Leading Brands, Inc. and Northland Cranberries, all of
which traded during the entire five-year period.
33
Employment Agreements
The Company entered into an employment agreement dated as of January 1,
1999, with Rodney C. Sacks pursuant to which Mr. Sacks renders services to the
Company as its Chairman and Chief Executive Officer for an annual base salary of
$180,000, for the twelve-month period ending December 31, 1999, increasing by a
minimum of 8% for each subsequent twelve-month period during the employment
period, plus an annual bonus in an amount determined at the discretion of the
Board of Directors and certain fringe benefits. The employment period commenced
on January 1, 1999 and ends on December 31, 2003.
The Company also entered into an employment agreement dated as of
January 1, 1999, with Hilton H. Schlosberg pursuant to which Mr. Schlosberg
renders services to the Company as its Vice Chairman, President and Chief
Financial Officer, for an annual base salary of $180,000, for the twelve-month
period ending December 31, 1999, increasing by a minimum of 8% for each
subsequent twelve-month period during the employment period, plus an annual
bonus in an amount determined at the discretion of the Board of Directors and
certain fringe benefits. The employment period commenced on January 1, 1999 and
ends on December 31, 2003.
Effective June 30, 1997, Mr. Taber elected to retire and terminated
his employment agreement with HBC and entered into a Severance and Consulting
Agreement with the Company and HBC (the "Consulting Agreement") pursuant to
which, among other matters, HBC agreed to retain Mr. Taber as a consultant for a
period of two years at a fixed monthly fee of $5,000 and Mr. Taber's Stock
Option Agreement with the Company dated as of June 30, 1995 was terminated and
replaced with a new Stock Option Agreement with the Company dated as of June 20,
1997 (the "Replacement Stock Option Agreement"). Under the terms of the
Replacement Stock Option Agreement, Mr. Taber was granted options to purchase
100,000 shares of common stock exercisable until June 30, 1999 at $1.38 per
share. Such options were duly exercised by Mr. Taber during 1998. Mr. Taber
remains a director of the Company. In addition, Mr. Taber agreed to repay
amounts owed by him to HBC under a certain promissory note by offsetting amounts
owed under the note against accrued and unpaid base pay payable under Mr.
Taber's employment agreement and amounts payable under the Consulting Agreement,
beginning January 1, 1998. Such promissory note was paid in full by Mr. Taber
during 1999.
The preceding descriptions of the employment agreements for Messrs.
Sacks and Schlosberg and the Consulting Agreement and Replacement Stock Option
Agreement with Mr. Taber are qualified in their entirety by reference to such
agreements which have been filed or incorporated by reference as exhibits to
this report.
Directors' Compensation
The Company's current policy is to pay outside directors (non-executive
officers) who are not contractually entitled to be nominated to serve as
directors, annual fees of $7,000 plus $500 for each meeting attended of the
Board of Directors or any committee thereof. Norman E. Epstein, Benjamin M. Polk
and Mark S. Vidergauz earned directors fees of $8,000 for the one-year period
ended December 31, 1999. Harold C. Taber, Jr. earned outside directors fees of
$4,500 for the six-month period ended December 31, 1999.
Employee Stock Option Plan
The Company has a stock option plan (the "Plan") that provides for the
grant of options to purchase up to 3,000,000 shares of the common stock of the
Company to certain key employees of the Company and its subsidiaries. Options
granted under the Plan may either be incentive stock options qualified under
Section 422 of the Internal Revenue Code of 1986, as amended, or non-qualified
options. Such options are exercisable at fair market value on the date of grant
for a period of up to ten years. Under the Plan, shares subject to options may
be purchased for cash, for shares of common stock valued at fair market value on
the date of purchase or in consideration of the cancellation of options valued
at the difference between the exercise price thereof and the fair market value
of the common stock on the date of exercise. The Plan is administered by the
34
Compensation Committee of the Board of Directors of the Company, comprised of
directors who have not received grants of options under the Plan. Grants under
the Plan are made pursuant to individual agreements between the Company and each
grantee that specifies the terms of the grant, including the exercise price,
exercise period, vesting and other terms thereof.
Outside Directors Stock Option Plan
The Company has an option plan for its outside directors (the
"Directors Plan") that provides for the grant of options to purchase up to an
aggregate of 100,000 shares of common stock of the Company to directors of the
Company who are not and have not been employed by or acted as consultants to the
Company and its subsidiaries or affiliates and who are not and have not been
nominated to the Board of Directors of the Company pursuant to a contractual
arrangement. On the date of the annual meeting of stockholders at which an
eligible director is initially elected, each eligible director is entitled to
receive a one-time grant of an option to purchase 6,000 shares (12,000 shares if
the director is serving on a committee of the Board) of the Company's Common
Stock exercisable at the closing price for a share of common stock on the date
of grant. Options become exercisable one-third each on the first, second and
third anniversary of the date of grant; provided, however, that options granted
as of February 14, 1995 are exercisable 66 2/3% on the date of grant and 100% on
July 8, 1995; provided further, that all options held by an eligible director
become fully and immediately exercisable upon a change in control of the
Company. Options granted under the Directors Plan that are not exercised
generally expire ten years after the date of grant. Option grants may be made
under the Directors Plan for ten years from the effective date of the Directors
Plan. The Directors Plan is a "formula plan" so that a non-employee director's
participation in the Directors Plan does not affect his status as a
"disinterested person" (as defined in Rule 16b-3 under the Securities Exchange
Act of 1934).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) The following table sets forth information, as of March 2,
2000, of the only persons known to the Company who
beneficially own more than 5% of the outstanding common stock
of the Company:
Title Name and Address of Amount and Nature of Percent
Of Class Beneficial Owner Beneficial Ownership of Class
- --------------- ----------------------- --------------------------- ------------
Common Stock Brandon Limited
Partnership No. 1 (1) 654,822 6.5%
Brandon Limited
Partnership No. 2 (2) 2,831,667 28.3%
Rodney C. Sacks (3) 3,944,489 (4) 39.1%
Hilton H. Schlosberg (5) 3,905,586 (6) 38.7%
(1) The mailing address of Brandon No. 1 is P.O. Box 30749, Seven Mile Beach,
Grand Cayman, British West Indies. The general partners of Brandon No. 1 are
Rodney C. Sacks and Hilton H. Schlosberg.
(2) The mailing address of Brandon No. 2 is P.O. Box 30749, Seven Mile Beach,
Grand Cayman, British West Indies. The general partners of Brandon No. 2 are
Rodney C. Sacks and Hilton H. Schlosberg.
(3) The mailing address of Mr. Sacks is 2380 Railroad Street, Suite 101, Corona,
California 92880.
(4) Includes 387,500 shares of common stock owned by Mr. Sacks; 654,822 shares
beneficially held by Brandon No. 1 because Mr. Sacks is one of Brandon No. 1's
general partners; and 2,831,667 shares beneficially held by Brandon No. 2
because Mr. Sacks is one of Brandon No. 2's general partners. Also includes
options to purchase 37,500 shares of common stock exercisable at $1.59 per share
granted pursuant to a Stock Option Agreement dated January 30, 1998; and options
presently exercisable to purchase 33,000 shares of common stock, out of options
35
to purchase a total of 100,000 shares, exercisable at $4.25 per share, granted
pursuant to a Stock Option Agreement dated February 2, 1999 between the Company
and Mr. Sacks.
Mr. Sacks disclaims beneficial ownership of all shares deemed beneficially owned
by him hereunder except (i) 387,500 shares of common stock; (ii) the 70,500
shares presently exercisable under Stock Option Agreements; (iii) 243,546 shares
held by Brandon No. 1 allocable to the limited partnership interests in Brandon
No. 1 held by Mr. Sacks, his children and a trust for the benefit of his
children; and (iv) 250,000 shares held by Brandon No. 2 allocable to the limited
partnership interests in Brandon No. 2 held by Mr. Sacks, his children and a
trust for the benefit of his children.
(5) The mailing address of Mr. Schlosberg is 2380 Railroad Street, Suite 101,
Corona, California 92880.
(6) Includes 348,597 shares of common stock owned by Mr. Schlosberg, of which
2,000 shares are owned jointly by Mr. Schlosberg and his wife, 654,822 shares
beneficially held by Brandon No. 1 because Mr. Schlosberg is one of Brandon No.
1's general partners; and 2,831,667 shares beneficially held by Brandon No. 2
because Mr. Schlosberg is one of Brandon No. 2's general partners. Also includes
options to purchase 37,500 shares of common stock exercisable at $1.59 per share
granted pursuant to a Stock Option Agreement dated January 30, 1998 between the
Company and Mr. Schlosberg; and options presently exercisable to purchase 33,000
shares of common stock, out of options to purchase a total of 100,000 shares,
exercisable at $4.25 per share, granted pursuant to a Stock Option Agreement
dated February 2, 1999 between the Company and Mr. Schlosberg.
Mr. Schlosberg disclaims beneficial ownership of all shares deemed beneficially
owned by him hereunder except (i) 348,597 shares of common stock, (ii) the
70,500 shares presently exercisable under Stock Option Agreements; (iii) 247,911
shares held by Brandon No. 1 allocable to the limited partnership interests in
Brandon No 1 held by Mr. Schlosberg and his children; and (iv) 250,000 shares
held by Brandon No. 2 allocable to the limited partnership interests in Brandon
No. 2 held by Mr. Schlosberg and his children.
(b) The following table sets forth information as to the ownership
of shares of Common Stock, as of March 2, 2000, held by
persons who are directors of the Company, naming them, and as
to directors and officers of the Company as a group, without
naming them:
Title of Class Name Amount Owned Percent of Class
- ----------------- --------------------- -------------------- ----------------
Common Stock Rodney C. Sacks 3,944,489(1) 39.1%
Hilton H. Schlosberg 3,905,586(2) 38.7%
Harold C. Taber, Jr. 107,419(3) 1.1%
Benjamin M. Polk 25,600(4) * %
Norman C. Epstein 13,149(5) * %
Mark S. Vidergauz 4,000(6) * %
Officers and Directors as a group (6 members:
4,513,754 shares or 44.4% in aggregate)
* Less than 1%
(1) Includes 387,500 shares of common stock owned by Mr. Sacks; 654,822 shares
beneficially held by Brandon No. 1 because Mr. Sacks is one of Brandon No. 1's
general partners; and 2,831,667 shares beneficially held by Brandon No. 2
because Mr. Sacks is one of Brandon No. 2's general partners. Also includes
options to purchase 37,500 shares of common stock exercisable at $1.59 per share
granted pursuant to a Stock Option Agreement dated January 30, 1998; and options
presently exercisable to purchase 33,000 shares of common stock, out of options
to purchase a total of 100,000 shares, exercisable at $4.25 per share, granted
pursuant to a Stock Option Agreement dated February 2, 1999 between the Company
and Mr. Sacks.
Mr. Sacks disclaims beneficial ownership of all shares deemed beneficially owned
by him hereunder except (i) 387,500 shares of common stock; (ii) the 70,500
shares presently exercisable under Stock Option Agreements; (iii) 243,546 share
held by Brandon No. 1 allocable to the limited partnership interests in Brandon
No. 1 held by Mr. Sacks, his children and a trust for the benefit of his
children; and (iv) 250,000 shares held by Brandon No. 2 allocable to the limited
partnership interests in Brandon No. 2 held by Mr. Sacks, his children and a
trust for the benefit of his children.
36
(2) Includes 348,597 shares of common stock owned by Mr. Schlosberg of which
2,000 shares are owned jointly by Mrs. Schlosberg and his wife; 654,822 shares
beneficially held by Brandon No. 1 because Mr. Schlosberg is one of Brandon No.
1's general partners; and 2,831,667 shares beneficially held by Brandon No. 2
because Mr. Schlosberg is one of Brandon No. 2's general partners. Also includes
options to purchase 37,500 shares of common stock exercisable at $1.59 per share
granted pursuant to a Stock Option Agreement dated January 30, 1998 between the
Company and Mr. Schlosberg; and options presently exercisable to purchase 33,000
shares of common stock, out of options to purchase a total of 100,000 shares,
exercisable at $4.25 per share, granted pursuant to a Stock Option Agreement
dated February 2, 1999 between the Company and Mr. Schlosberg.
Mr. Schlosberg disclaims beneficial ownership of all shares deemed beneficially
owned by him hereunder except (i) 348,597 shares of common stock, (ii) the
70,500 shares presently exercisable under Stock Option Agreements; (iii) 247,911
shares held by Brandon No. 1 allocable to the limited partnership interests in
Brandon No 1 held by Mr. Schlosberg and his children; and (iv) 250,000 shares
held by Brandon No. 2 allocable to the limited partnership interests in Brandon
No. 2 held by Mr. Schlosberg and his children.
(3) Includes 71,137 shares of common stock owned by Mr. Taber; and 36,281.7
shares of common stock owned by the Taber Family Trust of which Mr. Taber and
his wife are trustees.
(4) Includes 13,600 shares of the Company's common stock jointly owned by Mr.
Polk and his wife. Also include options to purchase 12,000 shares of common
stock exercisable at $1.38 per share, granted under a Stock Option Agreement
with the Company dated as of June 30, 1995 pursuant to the Directors Plan.
(5) Includes 13,149 shares of common stock owned by Mr. Epstein.
(6) Includes options presently exercisable to purchase 4,000 shares of common
stock, out of options to purchase a total of 12,000 shares, exercisable at $3.72
per share, granted under a Stock Option Agreement with the Company dated as of
June 18, 1998 pursuant to the Directors Plan.
There are no arrangements known to the Company the operation of which may
at a subsequent date result in a change of control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Benjamin M. Polk is a partner in the law firm of Whitman Breed Abbott &
Morgan LLP, a law firm retained by the Company since 1992 and in the current
fiscal year.
Rodney C. Sacks is current acting as the sole Trustee of a trust formed
pursuant to an Agreement of Trust dated July 27, 1992 for the purpose of holding
the Hansen's (R) trademark. The Company and HBC have agreed to indemnify Mr.
Sacks and hold him harmless from any claims, loss or liability arising out of
his acting as Trustee.
During 1999 the Company purchased promotional items from IFM Group, Inc.
("IFM"). Rodney C. Sacks, together with members of his family, own approximately
27% of the issued shares in IFM. Hilton H. Schlosberg, together with members of
his family, own approximately 43% of the issued shares in IFM. Purchases from
IFM of promotional items in 1999, 1998 and 1997 were $121,289, $151,393 and
$20,092, respectively. The Company continues to purchase promotional items from
IFM in 2000.
The preceding descriptions of agreements are qualified in their entirety by
reference to such agreements which have been filed as exhibits to this Report.
37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. Exhibits
See the Index to Exhibits included hereinafter.
2. Index to Financial Statements filed as part of this Report:
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Comprehensive Income for the years
ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1999, 1998 and 1997 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 F-7
Notes to Consolidated Financial Statements for the years ended
December 31, 1999, 1998 and 1997 F-9
(b) Financial Statement Schedules
Valuation and Qualifying Accounts for the years ended
December 31,1999, 1998 and 1997 F-22
(c) Reports on Form 8-K
None
38
SIGNATURES
Pursuant to the requirements of Sections 13 and 15(d) 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
By: /s/ RODNEY C. SACKS Date: March 30, 2000
-------------------------
Rodney C. Sacks
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
/s/ RODNEY C. SACKS Chairman of the Board of Directors March 30, 2000
- ------------------------ and Chief Executive Officer
Rodney C. Sacks (Principal Executive Officer)
/s/ HILTON H. SCHLOSBERG
- ------------------------ Vice Chairman of the Board of March 30, 2000
Hilton H. Schlosberg Directors, President, Chief
Operating Officer, Principal
Financial and Accounting Officer
and Secretary
/s/BENJAMIN M. POLK Director March 30, 2000
- ------------------------
Benjamin M. Polk
/s/ NORMAN C. EPSTEIN Director March 30, 2000
- ------------------------
Norman C. Epstein
/s/ HAROLD C. TABER, JR. Director March 30, 2000
- ------------------------
Harold C. Taber, Jr.
/s/ MARK S. VIDERGAUZ Director March 30, 2000
- ------------------------
Mark S. Vidergauz
39
INDEX TO EXHIBITS
The following designated exhibits, as indicated below, are either filed
herewith or have heretofore been filed with the Securities and Exchange
Commission under the Securities Act of 1933 or the Securities Exchange Act of
1934 as indicated by footnote.
- ----------------- -------------------------------------------------------------------------------------------
Exhibit No. Document Description
- ----------------- -------------------------------------------------------------------------------------------
3(a) Certificate of Incorporation 1
- ----------------- -------------------------------------------------------------------------------------------
3(b) Amendment to Certificate of Incorporation dated October 21, 1992. 2
- ----------------- -------------------------------------------------------------------------------------------
3(c) By-Laws 2
- ----------------- -------------------------------------------------------------------------------------------
10(c) Asset Purchase Agreement dated June 8, 1992 ("Asset Purchase Agreement"), by and among
Unipac Corporation ("Unipac"), Hansen Beverage Company ("Hansen"), California CoPackers
Corporation ("CoPackers"), South Pacific Beverages, Ltd. ("SPB"), Harold C. Taber, Jr.
("Taber"), Raimana Martin ("R. Martin"), Charles Martin ("C. Martin"), and Marcus I.
Bender ("Bender"), and with respect to certain provisions, ERLY Industries, Inc.
("ERLY"), Bender Consulting Incorporated ("Bender Consulting") and Black Pearl
International, Ltd. ("Blank Pear"). 2
- ----------------- -------------------------------------------------------------------------------------------
10(d) First Amendment to Asset Purchase Agreement dated as of July 10, 1992. 2
- ----------------- -------------------------------------------------------------------------------------------
10(e) Second Amendment to Asset Purchase Agreement dated as of July 16, 1992. 2
- ----------------- -------------------------------------------------------------------------------------------
10(f) Third Amendment to Asset Purchase Agreement dated as of July 17, 1992. 2
- ----------------- -------------------------------------------------------------------------------------------
10(g) Fourth Amendment to Asset Purchase Agreement dated as of July 24, 1992. 2
- ----------------- -------------------------------------------------------------------------------------------
10(h) Subordinated Secured Promissory Note of Hansen in favor of ERLY dated July 27, 1992 in
the principal amount of $4,000,000. 2
- ----------------- -------------------------------------------------------------------------------------------
10(i) Security Agreement dated July 27, 1992 by and between Hansen and ERLY. 2
- ----------------- -------------------------------------------------------------------------------------------
10(j) Stock Option Agreement by and between SPB and Unipac dated July 27, 1992 for an option
price of $4.75 per share. 2
- ----------------- -------------------------------------------------------------------------------------------
10(k) Stock Option Agreement by and between Taber and Unipac dated July 27, 1992 for an option
price of $4.75 per share. 2
- ----------------- -------------------------------------------------------------------------------------------
10(l) Stock Option Agreement by and between CoPackers and Unipac dated July 27, 1992 for an
option price of $4.75 per share. 2
- ----------------- -------------------------------------------------------------------------------------------
10(n) Stock Option Agreement by and between SPB and Unipac dated July 27, 1992 for an option
price of $2.50 per share. 2
- ----------------- -------------------------------------------------------------------------------------------
10(o) Stock Option Agreement by and between CoPackers and Unipac dated July 27, 1992 for an
option price of $2.50 per share. 2
- ----------------- -------------------------------------------------------------------------------------------
10(p) Assignment Agreement re: Trademarks by and between Hansen's Juices, Inc. ("FJC"), and
Hansen, dated July 27, 1992. 8
- ----------------- -------------------------------------------------------------------------------------------
10(q) Assignment of Trademarks dated July 27, 1992 by FJC to Gary Hansen, Anthony Kane and
Burton S. Rosky, as trustees under that certain trust agreement dated July 27, 1992 (the
"Trust"). 8
- ----------------- -------------------------------------------------------------------------------------------
10(r) Assignment of License by CoPackers to Hansen dated as of July 27, 1992. 8
- ----------------- -------------------------------------------------------------------------------------------
10(s) Employment Agreement between Hansen and Taber dated as of July 27, 1992. 3
- ----------------- -------------------------------------------------------------------------------------------
10(t) Consulting Agreement by and between Hansen and Black Pearl dated July 27, 1992. 3
- ----------------- -------------------------------------------------------------------------------------------
10(u) Consulting Agreement by and between Hansen and C. Martin dated July 27, 1992. 3
- ----------------- -------------------------------------------------------------------------------------------
10(w) Registration Rights Agreement by and among Unipac, SPB, CoPackers, Taber, Wedbush Morgan
Securities ("Wedbush"), Rodney C. Sacks, and Hilton H. Schlosberg, dated July 27, 1992. 3
- ----------------- -------------------------------------------------------------------------------------------
10(z) Soda Side Letter Agreement dated June 8, 1992 by and among Unipac, Hansen, SPB, Black
Pearl, Tahiti Beverages, S.A.R.L., R. Martin and C. Martin. 4
- ----------------- -------------------------------------------------------------------------------------------
10(bb) Hansen/Taber Agreement dated July 27, 1992 by and among Hansen and Taber. 8
- ----------------- -------------------------------------------------------------------------------------------
10(cc) Other Beverage License Agreement dated July 27, 1992 by and between Hansen and the Trust.8
- ----------------- -------------------------------------------------------------------------------------------
40
10(dd) Non-Beverage License Agreement dated July 27, 1992 by and between Hansen and the Trust. 8
- ----------------- -------------------------------------------------------------------------------------------
10(ee) Agreement of Trust dated July 27, 1992 by and among FJC and Hansen and Gary Hansen,
Anthony Kane and Burton S. Rosky. 8
- ----------------- -------------------------------------------------------------------------------------------
10(ff) Carbonated Beverage License Agreement dated July 27, 1992 by and between Hansen and the
Trust. 8
- ----------------- -------------------------------------------------------------------------------------------
10(gg) Royalty Sharing Agreement dated July 27, 1992 by and between Hansen and the Trust. 8
- ----------------- -------------------------------------------------------------------------------------------
10(hh) Fresh Juices License Agreement dated as of July 27, 1992 by and between Hansen and the
Trust. 8
- ----------------- -------------------------------------------------------------------------------------------
10(ii) Incentive Stock Option Agreement dated July 27, 1992 by and between Unipac and Taber at
the option price of $2.00 per share. 2
- ----------------- -------------------------------------------------------------------------------------------
10(jj) CoPacking Agreement dated November 24, 1992 by and between Tropicana Products Sales, Inc.
and Hansen. 4
- ----------------- -------------------------------------------------------------------------------------------
10(kk) Office Lease, dated December 16, 1992 by and between Lest C. Smull as Trustee, and his
Successors under Declaration of Trust for the Smull family, dated December 7, 1984 , and
Hansen. 5
- ----------------- -------------------------------------------------------------------------------------------
10(ll) Stock Option Agreement dated as of June 15, 1992 by and between Unipac and Rodney C.
Sacks. 5
- ----------------- -------------------------------------------------------------------------------------------
10(mm) Stock Option Agreement dated as of June 15, 1992 by and between Unipac and Hilton H.
Schlosberg. 5
- ----------------- -------------------------------------------------------------------------------------------
10(nn) Stock Option Agreement dated as of February 14, 1995 between Hansen Natural Corporation
and Benjamin M. Polk. 7
- ----------------- -------------------------------------------------------------------------------------------
10(oo) Stock Option Agreement dated as of February 14, 1995 between Hansen Natural Corporation
and Norman C. Epstein. 7
- ----------------- -------------------------------------------------------------------------------------------
10(pp) Employment Agreement dated as of January 1, 1994 between Hansen Natural Corporation and
Hilton H. Schlosberg. 6
- ----------------- -------------------------------------------------------------------------------------------
10(qq) Employment Agreement dated as of January 1, 1994 between Hansen Natural Corporation and
Rodney C. Sacks. 6
- ----------------- -------------------------------------------------------------------------------------------
10(rr) Stock Option Agreement dated as of July 3, 1995 between Hansen Natural Corporation and
Rodney C. Sacks. 8
- ----------------- -------------------------------------------------------------------------------------------
10(ss) Stock Option Agreement dated as of July 3, 1995 between Hansen Natural Corporation and
Hilton H. Schlosberg. 8
- ----------------- -------------------------------------------------------------------------------------------
10(tt) Stock Option Agreement dated as of June 30, 1995 between Hansen Natural Corporation and
Harold C. Taber, Jr. 8
- ----------------- -------------------------------------------------------------------------------------------
10(uu) Standard Industrial Lease Agreement dated as of April 25, 1997 between Hansen Beverage
Company and 27 Railroad Partnership L.P. 9
- ----------------- -------------------------------------------------------------------------------------------
10(vv) Sublease Agreement dated as of April 25, 1997 between Hansen Beverage Company and U.S.
Continental Packaging, Inc. 9
- ----------------- -------------------------------------------------------------------------------------------
10(ww) Packaging Agreement dated April 14, 1997 between Hansen Beverage Company and U.S.
Continental Packaging, Inc. 10
- ----------------- -------------------------------------------------------------------------------------------
10(xx) Revolving Credit Loan and Security Agreement dated May 15, 1997 between Comerica Bank -
California and Hansen Beverage Company. 10
- ----------------- -------------------------------------------------------------------------------------------
10(yy) Severance and Consulting Agreement dated as of June 20, 1997 by and among Hansen Beverage
Company, Hansen Natural Corporation and Harold C. Taber, Jr. 10
- ----------------- -------------------------------------------------------------------------------------------
10(zz) Stock Option Agreement dated as of June 20, 1997 by and between Hansen Natural
Corporation and Harold C. Taber, Jr. 10
- ----------------- -------------------------------------------------------------------------------------------
10 (aaa) Variable Rate Installment Note dated October 14, 1997 between Comerica Bank - California
and Hansen Beverage Company. 10
- ----------------- -------------------------------------------------------------------------------------------
10 (bbb) Stock Option Agreement dated as of January 30, 1998 by and between Hansen Natural
Corporation and Rodney C. Sacks11
- ----------------- -------------------------------------------------------------------------------------------
10 (ccc) Stock Option Agreement dated as of January 30, 1998 by and between Hansen Natural
Corporation and Hilton S. Schlosberg11
- ----------------- -------------------------------------------------------------------------------------------
41
10 (ddd) Warrant Agreement made as of April 23, 1998 by and between Hansen Natural Corporation
and Rick Dees12
- ----------------- -------------------------------------------------------------------------------------------
10 (eee) Modification to Revolving Credit Loan and Security Agreement as of December 31, 1998 by
and between Hansen Beverage Company and Comerica Bank - California13
- ----------------- -------------------------------------------------------------------------------------------
10 (fff) Employment Agreement as of January 1, 1999 by and between Hansen Natural Corporation and
Rodney C. Sacks13
- ----------------- -------------------------------------------------------------------------------------------
10 (ggg) Employment Agreement as of January 1, 1999 by and between Hansen Natural Corporation and
Hilton S. Schlosberg13
- ----------------- -------------------------------------------------------------------------------------------
10 (hhh) Stock Option Agreement dated as of February 2, 1999 by and between Hansen Natural
Corporation and Rodney C. Sacks13
- ----------------- -------------------------------------------------------------------------------------------
10 (iii) Stock Option Agreement dated as of February 2, 1999 by and between Hansen Natural
Corporation and Hilton S. Schlosberg13
- ----------------- -------------------------------------------------------------------------------------------
10 (jjj) Stock Repurchase Agreement dated as of August 3, 1998, by and between Hansen Natural
Corporation and Rodney C. Sacks14
- ----------------- -------------------------------------------------------------------------------------------
10 (kkk) Stock Repurchase Agreement dated as of August 3, 1998, by and between Hansen Natural
Corporation and Hilton H. Schlosberg14
- ----------------- -------------------------------------------------------------------------------------------
10 (lll) Assignment and Agreement dated as of September 22, 1999 by the Fresh Juice Company of
Califorrnia, Inc. and Hansen Beverage Company. 15
- ----------------- -------------------------------------------------------------------------------------------
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. 15
- ----------------- -------------------------------------------------------------------------------------------
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). 15
- ----------------- -------------------------------------------------------------------------------------------
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. 15
- ----------------- -------------------------------------------------------------------------------------------
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. 15
- ----------------- -------------------------------------------------------------------------------------------
10 (qqq) Royalty Agreement dated as of April 26, 1999 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. 15
- ----------------- -------------------------------------------------------------------------------------------
10 (rrr) Letter Agreement dated May 14, 1996. 15
- ----------------- -------------------------------------------------------------------------------------------
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. 15
- ----------------- -------------------------------------------------------------------------------------------
10 (ttt) Assignment of License Agreements dated as of February 1999 by Hansen's Juice Creations,
LLC (Assignor) to Fresh Smoothie, LLC (Assignee). 15
- ----------------- -------------------------------------------------------------------------------------------
10 (uuu) Amendment to Revolving Credit Loan and Security Agreement between Comerica Bank -
California and Hansen Beverage Company dated March 28, 2000.
- ----------------- -------------------------------------------------------------------------------------------
10 (vvv) Endorsement and Spokeman Arrangement dated as of February 18, 2000 by and between Hansen
Beverage Company and Sammy Sosa.
- ----------------- -------------------------------------------------------------------------------------------
10 (www) Standard Industrial Lease Agreement dated as of February 23, 2000 between Hansen Beverage
Company and 43 Railroad Partnership L.P.
- ----------------- -------------------------------------------------------------------------------------------
21 Subsidiaries 5
- ----------------- -------------------------------------------------------------------------------------------
23 Independent Auditors' Consent
- ----------------- -------------------------------------------------------------------------------------------
27 Financial Data Schedule
- ----------------- -------------------------------------------------------------------------------------------
1 Filed previously as an exhibit to the Registration Statement on Form S-3
(no. 33-35796) (the "Registration Statement").
42
2 Filed previously as an exhibit to the Company's proxy statement dated
October 21, 1992.
3 Filed previously as an exhibit to Form 8-K dated July 27, 1992.
4 Filed previously as an exhibit to Post-Effective Amendment No. 8 to the
Registration Statement.
5 Filed previously as an exhibit to Form 10-KSB for the year ended December
31, 1992.
6 Filed previously as an exhibit to Form 10-KSB for the year ended December
31, 1993.
7 Filed previously as an exhibit to Form 10-KSB for the year ended December
31, 1994.
8 Filed previously as an exhibit to Form 10-K for the year ended December 31,
1995.
9 Filed previously as an exhibit to Form 10-Q for the period ended June 30,
1997.
10 Filed previously as an exhibit to Form 10-Q for the period ended September
30, 1997.
11 Filed previously as an exhibit to Form 10-Q for the period ended March 31,
1998.
12 Filed previously as an exhibit to Form 10-Q for the period ended June 30,
1998.
13 Filed previously as an exhibit to Form 10-K for the year ended December 31,
1998.
14 Filed previously as an exhibit to Form 10-Q for the period ended June 30,
1999.
15 Filed previously as an exhibit to Form 10-Q for the year ended September
30, 1999.
43
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Comprehensive Income for the years ended
December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 F-7
Notes to Consolidated Financial Statements for the years ended
December 31, 1999, 1998 and 1997 F-9
Valuation and Qualifying Accounts for the years ended
December 31, 1999, 1998 and 1997 F-22
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Hansen Natural Corporation
Corona, California
We have audited the accompanying consolidated balance sheets of Hansen Natural
Corporation and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, comprehensive income, shareholders' equity
and cash flows for the years ended December 31, 1999, 1998 and 1997. Our audits
also included the financial statement schedule listed in Item 14. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Hansen Natural Corporation and
subsidiaries as of December 31, 1999 and 1998, and the consolidated results of
its operations and cash flows for the years ended December 31, 1999, 1998 and
1997 in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ DELOITTE AND TOUCHE LLP
Costa Mesa, California
March 22, 2000
F-2
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,009,155 $ 3,806,089
Accounts receivable (net of allowance for doubtful
accounts, sales returns and cash discounts of $415,305
in 1999 and $378,641 in 1998 and promotional allowances
of $1,651,604 in 1999 and $1,608,123 in 1998) 3,751,258 1,827,544
Inventories, net (Note 3) 9,894,414 5,211,077
Prepaid expenses and other current assets (Note 4) 553,689 244,318
Deferred income tax asset (Note 9) 743,364 630,070
-------------------- --------------------
16,951,880 11,719,098
PROPERTY AND EQUIPMENT, net (Note 5) 504,191 601,523
INTANGIBLE AND OTHER ASSETS:
Trademark license and trademarks (net of accumulated amortization
of $2,995,285 in 1999 and $2,687,462 in 1998) 10,768,493 10,003,417
Note receivable from director 20,861
Deposits and other assets 484,388 211,903
-------------------- --------------------
11,252,881 10,236,181
-------------------- --------------------
$ 28,708,952 $ 22,556,802
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,936,873 $ 1,870,253
Accrued liabilities 345,794 403,864
Accrued compensation 462,285 476,001
Current portion of long-term debt (Note 7) 863,501 2,072,818
Income taxes payable (Note 9) 346,636 1,269,185
-------------------- --------------------
Total current liabilities 7,955,089 6,092,121
LONG-TERM DEBT, less current portion (Note 7) 902,716 1,334,967
DEFERRED INCOME TAX LIABILITY (Note 9) 1,225,271 1,187,531
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY: (Note 10)
Common stock - $.005 par value; 30,000,000 shares
authorized; 10,010,084 and 9,911,905 shares issued
and outstanding in 1999 and 1998, respectively 50,050 49,560
Additional paid-in capital 11,340,074 11,207,765
Retained earnings 7,235,752 2,684,858
-------------------- --------------------
Total shareholders' equity 18,625,876 13,942,183
-------------------- --------------------
$ 28,708,952 $ 22,556,802
==================== ====================
See accompanying notes to consolidated financial statements.
F-3
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
NET SALES $ 72,303,186 $ 53,866,294 $ 43,057,064
COST OF SALES 38,776,532 27,332,028 25,222,881
------------------ ------------------ ------------------
GROSS PROFIT 33,526,654 26,534,266 17,834,183
OPERATING EXPENSES:
Selling, general and administrative 25,337,374 20,217,818 15,452,188
Amortization of trademark license and trademarks 307,823 296,584 301,238
Other operating expenses 380,378 60,000 198,848
------------------ ------------------ ------------------
Total operating expenses 26,025,575 20,574,402 15,952,274
------------------ ------------------ ------------------
OPERATING INCOME 7,501,079 5,959,864 1,881,909
NONOPERATING EXPENSE (INCOME):
Interest and financing expense 170,506 387,446 525,294
Interest income (118,413) (72,352) (3,481)
Other nonoperating expense 14,719 69,745
------------------ ------------------ ------------------
Net nonoperating expense 52,093 329,813 591,558
------------------ ------------------ ------------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 7,448,986 5,630,051 1,290,351
PROVISION FOR INCOME TAXES (Note 9) 2,971,118 2,066,922 40,200
------------------ ------------------ ------------------
NET INCOME $ 4,477,868 $ 3,563,129 $ 1,250,151
================== ================== ==================
NET INCOME PER COMMON SHARE:
Basic $ 0.45 $ 0.38 $ 0.14
================== ================== ==================
Diluted $ 0.43 $ 0.34 $ 0.13
================== ================== ==================
NUMBER OF COMMON SHARES USED
IN PER SHARE COMPUTATIONS:
Basic 9,964,778 9,386,688 9,125,630
================== ================== ==================
Diluted 10,510,604 10,430,727 9,288,642
================== ================== ==================
See accompanying notes to consolidated financial statements.
F-4
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
NET INCOME, as reported $ 4,477,868 $ 3,563,129 $ 1,250,151
Foreign currency translation adjustment (127,823)
================== ================== ==================
COMPREHENSIVE INCOME $ 4,477,868 $ 3,563,129 $ 1,122,328
================== ================== ==================
See accompanying notes to consolidated financial statements.
F-5
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Retained Foreign
Additional earnings currency Total
Common stock paid-in (accumulated translation shareholders'
-----------------------------
Shares Amount capital deficit) adjustment equity
------------- -------------- --------------- ----------------- -------------- -----------------
Balance,
January 1, 1997 9,122,868 $ 45,614 $10,847,355 $ (2,126,100) $ 60,582 $ 8,827,451
Issuance of common stock 8,001 40 10,960 11,000
Foreign currency translation
adjustment (127,823) (127,823)
Net income 1,250,151 1,250,151
------------- -------------- --------------- ----------------- -------------- -----------------
Balance,
December 31, 1997 9,130,869 $ 45,654 $10,858,315 $ (875,949) $(67,241) $ 9,960,779
Issuance of common stock 781,036 3,906 72,051 75,957
Compensation expense related to
issuance of nonqualified
stock options (Note 10) 64,919 64,919
Reduction of tax liability in
connection with the exercise
of certain stock options 277,399 277,399
Net income 3,563,129 3,563,129
------------- -------------- --------------- ----------------- -------------- -----------------
Balance,
December 31, 1998 9,911,905 $ 49,560 $11,207,765 $ 2,752,099 $ (67,241) $ 13,942,183
Issuance of common stock 98,179 490 38,331 38,821
Compensation expense related to
issuance of nonqualified
stock options (Note 10) 73,026 73,026
Reduction of tax liability in
connection with the exercise
of certain stock options 93,978 93,978
Net income 4,477,868 4,477,868
------------- -------------- --------------- ----------------- -------------- -----------------
Balance,
December 31, 1999 10,010,084 $ 50,050 $11,340,074 $ 7,302,993 $ (67,241) $ 18,625,876
============= ============== =============== ================= ============== =================
See accompanying notes to consolidated financial statements.
F-6
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,477,868 $ 3,563,129 $ 1,250,151
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of trademark license and trademarks 307,824 296,584 301,238
Depreciation and other amortization 258,343 246,494 270,114
Loss on disposal of plant and equipment 15,569 317 69,745
Compensation expense related to issuance of stock options 73,026 64,919
Deferred income taxes (75,554) 557,461
Effect on cash of changes in operating assets and liabilities:
Accounts receivable (1,912,674) (285,813) (589,521)
Inventories (4,683,337) (1,295,094) (804,859)
Prepaid expenses and other current assets (309,371) (29,850) 117,401
Accounts payable 4,066,620 (324,947) 56,150
Accrued liabilities (58,070) (84,943) 360,177
Accrued compensation (13,716) 153,887 250,142
Income taxes payable (828,571) 1,508,784 37,800
---------------- ---------------- ----------------
Net cash provided by operating activities 1,317,957 4,370,928 1,318,538
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (258,543) (435,838) (186,570)
Proceeds from sale of property and equipment 81,963 37,945
Increase in trademark license and trademarks (1,072,900) (91,885) (50,209)
Decrease in note receivable from director 20,861 39,391 1,918
(Increase)decrease in deposits and other assets (272,485) (26,821) 218,271
---------------- ---------------- ----------------
Net cash (used in) provided by investing activities (1,501,104) (515,153) 21,355
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in short-term borrowings (893,429)
Increase in long-term debt 431,250 14,546
Principal payments on long-term debt (2,072,818) (520,874) (135,887)
Issuance of common stock 27,781 75,957 11,000
---------------- ---------------- ----------------
Net cash used in financing activities (1,613,787) (444,917) (1,003,770)
EFFECT OF EXCHANGE RATE CHANGES ON CASH - - (127,823)
---------------- ---------------- ----------------
NET (DECREASE) INCREASE IN CASH (1,796,934) 3,410,858 208,300
CASH AND CASH EQUIVALENTS, beginning of year 3,806,089 395,231 186,931
---------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS, end of year $ 2,009,155 $ 3,806,089 $ 395,231
================ ================ ================
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest $ 184,891 $ 372,256 $ 375,821
================ ================ ================
Income taxes $ 3,908,586 $ 2,400 $ 2,400
================ ================ ================
See accompanying notes to consolidated financial statements.
F-7
NONCASH TRANSACTIONS:
During 1999, the Company reduced its tax liability and increased additional paid
in capital in the amount of $93,978 in connection with the exercise of
certain stock options.
During 1999, the Company issued 72,866 shares of common stock to employees in
connection with a net exercise of options to purchase 93,273 shares of
common stock.
During 1999, the Company issued 8,000 shares of common stock to an employee in
connection with the execution of a note receivable in the amount of
$11,040.
During 1998, the Company reduced its tax liability and increased additional paid
in capital in the amount of $277,399 in connection with the exercise of
certain stock options.
During 1998, the Company issued 554,732 shares of common stock to two officers
in connection with a net exercise of options to purchase 725,000 shares of
common stock.
During 1998, the Company issued 138,900 shares of common stock to employees in
connection with the net exercise of options to purchase 99,167 shares of
common stock.
During 1998, the Company issued 71,137 shares of common stock to a non-employee
in connection with a net exercise of options to purchase 100,000 shares of
common stock.
See accompanying notes to consolidated financial statements.
F-8
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Hansen Natural Corporation (the "Company" or "Hansen") was
incorporated in Delaware on April 25, 1990. The Company is a holding
company and carries on no operating business except through its direct
wholly-owned subsidiary, Hansen Beverage Company ("HBC") which was
incorporated in Delaware on June 8, 1992. HBC conducts all of the Company's
operating business and generates all of the Company's operating revenues.
References herein to "Hansen" or the "Company" when used to describe the
operating business of the Company are references to the business of HBC
unless otherwise indicated. The Company also owns all of the issued and
outstanding common stock of Hard Energy Company ("HEC") formerly known as
CVI Ventures, Inc., which was incorporated in Delaware on April 30, 1990.
Although HEC is currently inactive, the Company plans to commence the
marketing and sale of certain beverage products through HEC during 2000. In
addition, HBC formerly owned all of the issued and outstanding ordinary
shares of its subsidiary located in the United Kingdom, Hansen Beverage
Company (UK) Limited ("HBC (UK)"), which ceased operating activities at the
end of 1997 and was finally dissolved in July 1999.
Nature of Operations - Hansen is engaged in the business of marketing,
selling and distributing so-called "alternative" beverage category natural
sodas, fruit juices, fruit juice Smoothies, "functional drinks",
non-carbonated ready-to-drink iced teas, lemonades and juice cocktails,
children's multi-vitamin juice products and still water primarily under the
Hansen's(R) brand name primarily in certain Western states as well as other
states, and on a limited basis, in other countries outside the United
States.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Hansen and its wholly owned
subsidiaries, HBC and HEC and, up until December 31, 1997, HBC's wholly
owned subsidiary HBC (UK), since their respective dates of incorporation.
All intercompany balances and transactions have been eliminated in
consolidation (Note 2).
Reclassifications - Certain reclassifications have been made in the
consolidated financial statements to conform to the 1999 presentation.
Translation of Foreign Currencies - Assets and liabilities of the Company's
United Kingdom subsidiary for the year 1997 are translated into U.S.
dollars at year-end rates of exchange, and income and expenses are
translated at average rates during the respective years. The functional
currency of the subsidiary is the pound sterling; therefore, translation
gains or losses are recorded as a separate component of shareholders'
equity (Note 2).
Cash and Cash Equivalents - The Company considers certificates of deposit
with original maturities of three months or less to be cash equivalents.
Inventories - Inventories are valued at the lower of first-in, first-out
(FIFO) cost or market value (net realizable value).
Property and Equipment - Property and equipment are stated at cost.
Depreciation of furniture, fixtures, equipment and vehicles is based on
their estimated useful lives (three to five years) and is calculated using
the straight-line method. Amortization of leasehold improvements is based
on the lesser of their estimated useful lives or the terms of the related
leases and is calculated using the straight-line method.
F-9
Trademark License and Trademarks - Trademark license represents the
Company's exclusive world-wide right to use the Hansen's(R) trademark in
connection with the manufacture, sale and distribution of carbonated
beverages and waters, shelf stable fruit juices and drinks containing fruit
juices on a royalty free basis and other non-carbonated beverages and water
and non-beverage products in consideration of royalty payments. In
September 1999, HBC entered into an Assignment and Agreement with the Fresh
Juice Company of California, Inc. ("FJC"), pursuant to which HBC acquired
exclusive ownership of the Hansen's(R) trademark and trade names. The
Company also owns in its own right, a number of other trademarks in the
United States as well as in a number of countries around the world. The
Company amortizes trademark license and trademarks over 40 years.
Long-Lived Assets - The Company accounts for the impairment and disposition
of long-lived assets in accordance with Statement of Financial Accounting
Standard ("SFAS") No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. In accordance with SFAS
No. 121, long-lived assets to be held are reviewed for events or changes in
circumstances that indicate that their carrying value may not be
recoverable. The Company periodically reviews the carrying value of
long-lived assets to determine whether or not impairment to such value has
occurred. As of December 31, 1999, management does not believe that the
Company's long-lived assets have been impaired.
Revenue Recognition - The Company records revenue at the time the related
products are shipped. Management believes an adequate provision against net
sales has been made for estimated returns, allowances and cash discounts.
Advertising - The Company accounts for advertising production costs by
expensing such production costs the first time the related advertising
takes place. Advertising expenses included in selling and general expenses
amount to $5.7 million in 1999, $4.3 million in 1998 and $2.9 million in
1997. In addition, the Company supports its customers (including
distributors) with promotional allowances, a portion of which are utilized
for indirect advertising by them. Promotional allowances amounted to $6.3
million in 1999, $5.6 million in 1998 and $4.0 million in 1997.
Net Income Per Common Share - In accordance with SFAS No. 128, Earnings per
Share, net income per common share, on a basic and diluted basis, is
presented for all periods. Basic net income per share is computed by
dividing net income by the weighted average number of common shares
outstanding. Diluted net income per share is computed by dividing net
income by the weighted average number of common and dilutive common
equivalent shares outstanding, if dilutive. Weighted average common
equivalent shares include stock options using the treasury stock method.
Concentration Risk - Certain of the Company's products utilize components
from a limited number of sources. A disruption in production of such
components could significantly affect the Company's revenues from those
products, as alternative sources of such components may not be available at
commercially reasonable rates or within a reasonably short time period. The
Company is taking steps to secure the availability of alternative sources
for such components, to minimize the risk of any disruption in production.
Credit Risk - The Company sells its products nationally, primarily to
retailers and beverage distributors. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. The
Company maintains reserves for potential credit losses, and such losses
have been within management's expectations.
Fair Value of Financial Instruments - SFAS No. 107, Disclosures about Fair
Value of Financial Instruments, requires management to disclose the
estimated fair value of certain assets and liabilities defined by SFAS No.
107 as financial instruments. At December 31, 1999,
F-10
management believes that the carrying amount of cash, accounts receivable
and accounts payable approximate fair value because of the short maturity
of these financial instruments. Long-term debt bears interest at a rate
comparable to the prime rate; therefore, management believes the carrying
amount for the outstanding borrowings at December 31, 1999, approximates
fair value.
Use of Estimates - The preparation of the consolidated financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
New Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, which the Company is required to adopt effective in
its fiscal year 2000. SFAS No. 133 will require the Company to record all
derivatives on the balance sheet at fair value. The Company does not
currently engage in hedging activities, but will continue to evaluate the
effects of adopting SFAS No. 133. The Company will adopt SFAS No. 133 in
its fiscal year 2001.
The Company has adopted the American Institute of Certified Public
Accountants Statement of Position (SOP) 98-1, Accounting for the Costs of
Computer Software Development or Obtained for Internal Use, during 1999.
There was no material impact on the consolidated financial statements as a
result.
2. REORGANIZATION OF UNITED KINGDOM OPERATIONS
Sales in the United Kingdom were lower than anticipated during 1997. In
consequence, the Company's foreign subsidiary, HBC (UK) ceased operating
activities at the end of 1997 and was finally dissolved in July 1999.
Beginning in 1998, the Company dealt with its distributor in the United
Kingdom from its corporate offices in California from which it exports its
products to such distributor.
3. INVENTORIES
Inventories consist of the following at December 31:
1999 1998
---- ----
Raw materials $ 3,615,269 $1,815,040
Finished goods 6,442,193 3,664,270
-------------- -------------
10,057,462 5,479,310
Less inventory reserves (163,048) (268,233)
-------------- -------------
$ 9,894,414 $5,211,077
============== =============
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
In January 1994, the Company entered into an agreement with a barter
company for the exchange of certain inventory for future advertising and
marketing credits. The Company assigned a value of $490,000 to these
credits based on the net realizable value of the inventory exchanged. As of
December 31, 1999, unused advertising and marketing credits totaled
$203,000. Although such credits remain available for use by the Company
through January 2002, management was unable to estimate their remaining net
realizable value at December 31, 1997. Accordingly, in the year ended
December 31, 1997, the Company fully reserved against and expensed such
advertising and marketing credits.
F-11
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
1999 1998
---- ----
Leasehold improvements $ 61,277 $ 55,305
Furniture and office equipment 546,105 523,650
Equipment and vehicles 768,576 826,599
------------ ------------
1,375,958 1,405,554
Less accumulated depreciation (871,767) (804,031)
------------ ------------
$ 504,191 $ 601,523
============ ============
6. SHORT-TERM BORROWINGS
In 1997, a credit facility was granted to the HBC by Comerica
Bank-California ("Comerica") consisting of a revolving line of credit of up
to $3 million in aggregate at any time outstanding and a term loan of $4
million. The utilization of the revolving line of credit by HBC is
dependent upon certain levels of eligible accounts receivable and inventory
from time to time. Such revolving line of credit and term loan are secured
by substantially all of HBC's assets, including accounts receivable,
inventory, trademarks, trademark licenses and certain equipment. HBC
entered into a modification agreement with Comerica as of December 1, 1998
which provides for the original revolving line of credit agreement to be
and remain in full force and effect until May 1, 2000 and for the rate of
interest payable by HBC on advances under the revolving line of credit to
be reduced from 1% above the banks base (prime) rate to 2 1/2% over the
bank's Libor rate or 1/4 of 1 percent above the bank's base (prime) rate,
at the option of HBC. As of both December 31, 1999 and 1998, no amounts
were outstanding under the revolving line of credit.
7. LONG-TERM DEBT
As discussed in Note 6 above, HBC obtained a credit facility from Comerica
consisting of a term loan of up to $4 million or such lesser amount as was
necessary, to retire a subordinated secured promissory note executed by HBC
in favor of ERLY Industries, Inc. ("ERLY") in the principal sum of $4
million (the "ERLY Note"). The full amount due under the ERLY Note was paid
during November 1997. The term loan will be repayable by October 2001 and
requires variable monthly payments of principal and interest which escalate
over time. The interest rate payable on the term loan is 1.5% above the
bank's base rate (8.5% as of December 31, 1999).
The term loan contains quarterly and annual financial covenants requiring
the Company to maintain certain financial ratios and maintain certain
levels of net worth. The term loan also contains certain non-financial
covenants. At both December 31, 1999 and 1998, the Company was in
compliance with all covenants.
F-12
Long-term debt consists of the following at December 31: 1999 1998
---- ----
Note payable to Comerica, collateralized by substantially all of HBC's
assets, payable in variable amounts of principle and interest which
escalate over time, at an effective interest rate of 10% and 9.25% as of
December 31, 1999 and 1998, respectively, payable by October 2001
$1,331,881 $3,399,996
Note payable related to the acquisition of the Hansen trademark and
trade name payable in three equal annual installments of $143,750, due
between August 2, 2000 and August 2, 2002 431,250
Other 3,086
------------------ ------------------
1,766,217 3,407,785
Less: current portion of long-term debt (863,501) (2,072,818)
------------------ ------------------
$902,716 $1,334,967
================== ==================
Long-term debt is payable as follows:
Year ending December 31:
2000 $ 863,501
2001 758,967
2002 143,749
------------------
$1,766,217
==================
Interest expense amounted to $168,131, $368,896, and $488,388 for the years
ended December 31, 1999, 1998 and 1997.
8. COMMITMENTS AND CONTINGENCIES
Operating Leases - The Company's warehouse facility and corporate offices
are leased for a period of 89 months commencing on September 19, 1997, when
the Company first occupied the warehouse facilities. On March 1, 1998, the
corporate offices of the Company were relocated to such premises in Corona,
California. The facility lease and certain equipment under non-cancelable
operating leases expire through 2005. Rent expenses related to the Corona
facility and other non-cancelable equipment leases amounted to $391,000,
$369,000 and $157,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Future minimum rental payments at December 31, 1999 under such leases
referred to above are as follows:
Year ending December 31:
2000 $ 361,284
2001 367,205
2002 369,700
2003 377,084
2004 381,816
Thereafter 31,818
-----------
$1,888,907
===========
On February 23, 2000, the Company agreed to lease a new facility commencing
from August 1, 2000 for a term of ten (10) years and which will replace the
current lease (Note 15).
F-13
Employment and Consulting Agreements - The Company entered into an
employment agreement with Rodney C. Sacks dated as of January 1, 1999,
pursuant to which Mr. Sacks renders services to the Company as its Chairman
and Chief Executive Officer, and entered into an employment agreement with
Hilton H. Schlosberg dated as of January 1, 1999, pursuant to which Mr.
Schlosberg renders services to the Company as its Vice Chairman, President
and Chief Financial Officer for an annual base salary of $180,000 each, and
increasing by a minimum of 8% for each subsequent twelve-month period
during the employment period, plus an annual bonus in an amount determined
at the discretion of the Board of Directors of the Company and certain
fringe benefits for the period commencing January 1, 1999 and ending
December 31, 2003. After such date, such agreements provide for automatic
annual renewals unless written notice is delivered to each of them by June
30, 2003, or any subsequent June 30 thereafter.
Effective June 30, 1997, Mr. Harold C. Taber, Jr., former President and
Chief Executive Officer of HBC, elected to retire and terminated his
employment agreement with HBC and entered into a Severance and Consulting
Agreement with the Company and HBC (the "Consulting Agreement") pursuant to
which, among other matters, HBC agreed to retain Mr. Taber as a consultant
for a period of two years at a fixed monthly fee of $5,000. In terms of the
Consulting Agreement, Mr. Taber's existing Stock Option Agreement dated as
of June 30, 1995, was terminated and substituted with a new Stock Option
Agreement dated as of June 20, 1997 (the "Replacement Stock Option
Agreement") between the parties. Under the terms of the Replacement Stock
Option Agreement, Mr. Taber was granted options to purchase 100,000 shares
of the Company's common stock, outside the Company's stock option plans
(Note 10), exercisable until June 30, 1999, at $1.38 per share. Such
options were duly exercised by Mr. Taber during 1998. Mr. Taber remains a
director of the Company. In addition, other than with respect to certain
restrictive covenants, Mr. Taber agreed to repay amounts owed by him to HBC
under a certain promissory note by offsetting amounts owed under the note
against accrued and unpaid base pay payable under Mr. Taber's employment
agreement and amounts payable under the Consulting Agreement, beginning
January 1, 1998. Such promissory note was paid in full by Mr. Taber during
1999.
Endorsement Arrangement - Effective February 22, 2000, the Company entered
into an Endorsement and Promotion Arrangement ("Endorsement Arrangement")
with a nationally recognized sports figure for the endorsement and
promotion of certain Hansen's products. The Endorsement Arrangement calls
for payments up to an aggregate of $700,000 over a period of two years,
subject to the due performance by the sports figure of his endorsement and
promotion obligations in terms of that arrangement. The Endorsement
Arrangement provides for additional compensation to be paid to the sports
figure in the event that sales of Hansen's(R) energy drinks exceed certain
specified thresholds. The Company has the right to terminate the
Endorsement Arrangement in the event that the endorsement and promotion
obligations undertaken by the sports figure concerned are not met or
predetermined sales levels of Hansen's(R) energy drinks are not achieved.
Supplier Arrangements - During 1998, the Company entered into an
arrangement with one of its co-packers, pursuant to which certain
modifications were made to that co-packer's equipment to enable it to
produce certain products on behalf of the Company. In consideration
thereof, the Company agreed to pack a minimum number of cases of products
over a four-year period. Should the Company fail to pack the agreed minimum
number of cases of products over such period, the Company will be liable to
reimburse the co-packer for a proportionate share of the cost thereof based
on such shortfall. Based on the volume levels achieved by the Company in
the past and its expected volume levels, the Company does not believe that
it will incur any liability in connection with the above arrangement.
However, such co-packer has experienced difficulties in producing the
products covered by such arrangement and has been informed by such
co-packer that they may terminate the co-packing arrangement. Management
believes that, in the event of the co-packers terminating the arrangement,
the Company is not liable for any damages or claims to the co-packer as a
result of not achieving the minimum volume levels, or to the extent that
the Company may have any liability, that the Company would be indemnified
by a third party supplier.
F-14
During March 1999, the Company entered into an arrangement with its glass
supplier pursuant to which its glass supplier agreed to install a shrink
sleeve-labeling machine at its plant to facilitate the pre-labeling of its
glass bottles at the point of manufacture. In consideration thereof, the
Company agreed to have a minimum quantity of such labels applied to its
glass bottles over a four-year period. Should the Company fail to have the
agreed minimum quantity of labels applied over such period, the Company
will be liable to compensate its supplier for a proportionate share of the
cost thereof based on such shortfall. Based on volumes levels achieved by
the Company in the past and its expected volume levels, the Company does
not believe that it will incur any liability in connection with this
arrangement.
Purchase Commitments - As of December 31, 1999, the Company had open
purchase commitments for certain raw materials of approximately $2,721,080.
Litigation - The Company is subject to claims and contingencies related to
lawsuits and other matters arising out of the normal course of business.
The ultimate liability associated with such claims and contingencies, if
any, is not likely to have a material adverse effect on the financial
condition of the Company.
9. INCOME TAXES
The Company accounts for income taxes under the provision of SFAS No. 109,
Accounting for Income Taxes. This statement requires the recognition of
deferred tax assets and liabilities for the future consequences of events
that have been recognized in the Company's financial statements or tax
returns. Measurement of the deferred items is based on enacted tax laws. In
the event the future consequences of differences between financial
reporting bases and tax bases of the Company's assets and liabilities
result in a deferred tax asset, SFAS No. 109 requires an evaluation of the
probability of being able to realize the future benefits indicated by such
asset. A valuation allowance related to a deferred tax asset is recorded
when it is more likely than not that some portion or all of the deferred
tax asset will not be realized.
Components of the income tax provision are as follows:
Year Ended December 31,
1999 1998 1997
---- ---- ----
Current income taxes:
Federal $2,409,512 $1,180,688 $ -
State 637,160 328,773 40,200
------------------ ------------------ ---------------
$3,046,672 $1,509,461 $ 40,200
================== ================== ===============
Deferred income taxes:
Federal $ (97,681) $ 675,528 $ (89,215)
State 22,127 159,813 (38,435)
Less change in valuation allowance - (277,880) 127,650
------------------ ------------------ ---------------
(75,554) 557,461 -
------------------ ------------------ ---------------
$2,971,118 $2,066,922 $ 40,200
================== ================== ===============
F-15
The differences between the income tax provision that would result from
applying the 34% federal statutory rate to income before provision for
income taxes and the reported provision for income taxes are as follows:
Year Ended December 31,
1999 1998 1997
---- ---- ----
Income tax provision using the statutory
rate $2,532,655 $1,914,217 $ 438,719
State taxes, net of federal tax benefit 434,604 295,272 40,200
Change in utilization of certain net
operating losses 106,718
Permanent differences 3,859 6,318
Effect of foreign corporation (520,678)
Other 22,277 (45,691)
Change in valuation allowance (277,880) 127,650
---------------- ---------------- ---------------
$2,971,118 $2,066,922 $ 40,200
================ ================ ===============
Major components of the Company's deferred taxes at December 31 are as
follows:
Year Ending December 31,
1999 1998 1997
---- ---- ----
Net operating loss carryforwards -
Non-Separate Return Loss Year Limitation ("SRLY") $ $ $ 653,290
Net operating loss carryforwards - SRLY 101,160
Net operating loss carryforwards - state 107,021
Reserves for returns 111,681 79,311 61,730
Reserves for bad debts 45,192 56,657 28,860
Reserves for obsolescence 69,850 114,911 161,967
Reserves for marketing's development fund 159,327
Capitalization of inventory costs 72,670 34,272 25,980
State franchise tax 267,189 141,000 (31,383)
Accrued compensation 17,456 203,919 139,474
Stock-based compensation 59,096
Amortization of trademark license (1,412,994) (1,161,652) (920,997)
Amortization of graphic design 124,664
Depreciation 3,962 (25,879) (49,223)
--------------- --------------- --------------
(481,907) (557,461) 277,879
Less valuation allowance - - (277,879)
--------------- --------------- --------------
$ (481,907) $ (557,461) $ -
=============== =============== ==============
During the year, the Company was subject to an audit by the Internal
Revenue Service ("IRS Audit") for the years ending December 31, 1998, 1997
and 1996. Based on the results of the IRS Audit, certain deductions taken
in certain years were postponed until later years. The effect thereof on
the Company's provision for income taxes for the year ended December 31,
1999 was immaterial.
10. STOCK OPTIONS AND WARRANTS
The Company has two stock option plans, the Employee Stock Option Plan
("the Plan") and the Outside Directors Stock Option Plan ("Directors
Plan").
F-16
The Plan provided for the granting of options to purchase not more than
2,000,000 shares of Hansen common stock to key employees of the Company and
its subsidiaries. During 1999, the Company amended the Plan to provide for
an additional 1,000,000 shares to be granted under the Plan. Stock options
are exercisable at such time and in such amounts as determined by the
Compensation Committee of the Board of Directors of the Company up to a
ten-year period after their date of grant, and no options may be granted
after July 1, 2001. The option price will not be less than the fair market
value at the date of grant. As of December 31, 1999, options to purchase
2,070,800 shares of Hansen common stock had been granted under the Plan,
net of options that have expired, and options to purchase 929,200 shares of
Hansen common stock remained available for grant under the Plan (Note 15).
The Directors' Plan provides for the grant of options to purchase up to
100,000 shares of common stock of the Company to directors of the Company
who are not and have not been employed by or acted as consultants to the
Company and its subsidiaries or affiliates and who are not and have not
been nominated to the Board of Directors of the Company pursuant to a
contractual arrangement. On the date of the annual meeting of shareholders,
at which an eligible director is initially elected, each eligible director
is entitled to receive a one-time grant of an option to purchase 6,000
shares (12,000 shares if the director is serving on a committee of the
Board) of the Company's common stock, exercisable one-third each on the
first, second and third anniversary of the date of grant; provided,
however, that options granted as of February 14, 1995, are exercisable 66
2/3% on the date of grant and 100% on July 8, 1995; provided, further, that
all options held by an eligible director become fully and immediately
exercisable upon a change in control of the Company. Options granted under
the Directors Plan that are not exercised generally expire ten years after
the date of grant. Option grants may be made under the Directors Plan for
ten years from the effective date of the Directors Plan. The Directors Plan
is a "formula" plan so that a non-employee director's participation in the
Directors Plan does not affect his status as a "disinterested person" (as
defined in Rule 16b-3 under the Securities Exchange Act of 1934). As of
December 31, 1999, options to purchase 36,000 shares of Hansen common stock
had been granted under the Directors Plan and options to purchase 64,000
shares of Hansen common stock remain available for grant.
Information regarding the Plan and the Directors Plan is as follows:
1999 1998 1997
---- ---- ----
Weighted Weighted Weighted
Average average average
Exercise exercise exercise
Shares Price Shares price Shares price
------------ ------------ ------------ ------------ ------------ ------------
Options outstanding,
beginning of year 833,900 $1.49 1,475,500 $1.34 1,332,000 $1.37
Options granted 424,000 $4.38 297,500 $2.04 370,500 $1.10
Options exercised (93,573) $1.35 (919,900) $1.49 - -
Options canceled or
expired (71,000) $1.82 (19,200) $1.11 (227,000) $1.11
------------ --------- ----------- -------- ----------- --------
Options outstanding,
end of year 1,093,327 $2.60 833,900 $1.49 1,475,500 $1.34
=========== ============ ===========
Option price range $0.75 to $0.72 to $0.72 to
end of year $5.25 $4.50 $1.79
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Accordingly, no compensation cost
has been recognized for the stock option plans. The impact of stock options
granted prior to 1996 has been excluded from the pro forma calculation;
accordingly, the 1999, 1998 and 1997 pro forma adjustments are not
indicative of future period pro forma adjustments, when the calculation may
apply to all applicable stock options. Had compensation cost for the
Company's option plans been
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determined based on the fair value at the grant date for awards in the
years 1997 through 1999 consistent with the provisions of SFAS No. 123, the
Company's net income and net income per common share would have been
reduced to the pro forma amounts indicated below:
1999 1998 1997
---- ---- ----
Net income, as reported $4,477,868 $3,563,129 $1,250,151
Net income, pro forma $4,176,799 $3,383,375 $1,121,473
Net income per common share,
as reported
Basic $.45 $.38 $.14
Diluted $.43 $.34 $.13
Net income per common share,
pro forma
Basic $.42 $.36 $.12
Diluted $.40 $.32 $.12
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in:
Risk-Free
Dividend Yield Expected Volatility Interest Rate Expected Lives
-------------- ------------------- ------------- --------------
1999 0% 60% 4.8% 5 years
1998 0% 72% 5.2% 4 years
1997 0% 43% 6.0% 3 years
The Company has granted warrants to various non-employees to purchase
shares of Hansen common stock. Such warrants vest in various increments
over an eighteen-month to three-year period.
Information regarding non-employee stock options is as follows:
1999 1998 1997
---- ---- ----
Weighted Weighted Weighted
Average average average
Exercise exercise exercise
Shares Price Shares price Shares price
------------ ----------- ---------- ----------- ------------ -----------
Options outstanding,
Beginning of year 225,000 $2.29 145,000 $ 1.42 812,500 $ 3.57
Options granted - 180,000 $ 2.48 100,000 $ 1.38
Options exercised (30,000) $1.50 (100,000) $ 1.38 -
Options canceled or expired (58,000) $2.50 - (767,500) $ 3.69
------------ ---------- ---------- ----------- ------------ -----------
Options outstanding,
end of year 137,000 $2.37 225,000 $ 2.29 145,000 $ 1.42
============ ========== ===========
Option price range, $1.50 to $ 1.50 to $1.38 to
end of year $3.75 $ 3.75 $1.50
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The following table summarizes information about fixed-price stock options
and warrants outstanding at December 31, 1999:
Options Outstanding Options Exercisable
------------------------------------------------------- ---------------------------------
Weighted
Number average Weighted average Number Weighted
outstanding at remaining exercise exercisable at average
Range of exercise prices December 31, 1999 contractual life price December 31, 1999 exercise
Price
------------------------- ------------------ ----------------- ------------------ ------------------ --------------
$.75 to $1.38 322,400 3 $1.02 102,400 $1.01
$1.50 to $1.59 286,427 3 $1.58 264,027 $1.59
$1.72 to $2.50 150,500 3 $2.25 115,666 $2.35
$3.72 to $4.31 321,000 7 $4.22 33,000 $4.03
$4.44 to $5.25 150,000 5 $4.64 5,000 $4.50
------------------ ------------------
$.75 to $5.25 1,230,327 520,093
================== ==================
11. EMPLOYEE BENEFIT PLAN
Employees of Hansen Natural Corporation may participate in the Hansen
Natural Corporation 401(k) Plan, a defined contribution plan, which
qualifies under Section 401(k) of the Internal Revenue Code.
Participating employees may contribute up to 15% of their pretax salary
up to statutory limits. The Company contributes 25% of the employee
contribution, up to 8% of the participants' earnings. Matching
contributions were $37,274, $29,438, and $20,390 in 1999, 1998 and
1997, respectively.
12. MAJOR CUSTOMERS AND SEGMENTATION
One customer accounted for approximately 25% and 27% of the Company's
sales for the years ended December 31, 1999 and 1998, respectively. Two
customers accounted for approximately 29% and 11%, respectively, of the
Company's sales for the year ended December 31, 1997. A decision by any
of these major customers to decrease the amount purchased from the
Company or to cease carrying the Company's products could have a
material adverse effect on the Company's financial condition and
consolidated results of operations.
The Company has determined that it has only one operating segment but
manages its business by distribution channel through a warehouse and
distributor function. The percentages of the Company's sales
represented by each of those functions over the past three years is set
out in the table below.
1999 1998 1997
---- ---- ----
Warehouse 67% 67% 80%
Distributor 32% 32% 19%
Export 1% 1% 1%
13. LEGAL PROCEEDINGS
The second stage of the trial in HBC's action against ERLY Industries,
Inc. ("ERLY") in the Superior Court for the State of California, was
held in July 1997 for the sole purpose of determining the amount of
HBC's damages, if any, resulting from ERLY's breach of certain rights
of first refusal provisions contained the "ERLY Note". In November
1997, the court held that HBC had not suffered any damages as a result
of ERLY's breach of the ERLY Note. HBC has filed an appeal against that
judgment. A motion was made by ERLY for the costs of such action to be
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awarded in its favor, which was dismissed by the court. ERLY has filed
a cross appeal on that issue. The full amount due under the ERLY Note
was paid in November 1997 with the proceeds of a term loan obtained by
the Company from Comerica Bank - California ("Comerica"). During 1998,
ERLY filed for bankruptcy and the appeal was consequently stayed by
law. The Company has filed a claim against ERLY. Although the trustee
initially rejected the claim, discussions are currently taking place in
an endeavor to agree on a figure for the principal amount of the
Company's unsecured claim to avoid the necessity for HBC to pursue the
appeal. The ultimate outcome of this matter cannot presently be
predicted.
Towards the end of 1998, HBC, together with the Trustee of the Hansen
Trust, commenced arbitration proceedings before the American
Arbitration Association in Los Angeles, California, against FJC, the
former Trustees of the Trust, and a company called Hansen's Juice
Creations LLC ("Creations"), in which HBC and the Trustee claimed,
among other matters: (i) that certain acts of the former Trustees of
the Trust constituted breach of trust; (ii) a certain license agreement
purportedly entered into between the former Trustees of the Trust and
Creations (the "Purported Agreement") was, in whole or in part, void or
terminable by the Trust; and (iii) certain acts of Creations
constituted infringement of the Hansen's(R) trademark and certain acts
of FJC constituted contributory infringement of the Hansen's(R)
trademarks. HBC and the Trustee sought damages and injunctive relief
against FJC and Creations. Such proceedings were settled in September
1999. Pursuant to written settlement agreements among the various
parties to such proceedings, the Purported Agreement was terminated by
mutual consent, the right of the successor to Creations to use the
Hansen's(R) trademark on limited, but clearly defined, fresh juice
products, was clarified and agreed upon, and certain other matters
relating to and concerning the use of the Hansen's(R) trademark, were
resolved.
The Company is subject to claims and contingencies related to lawsuits
and other matters arising out of the normal course of business. The
ultimate liability associated with such claims and contingencies, if
any, is not likely to have a material adverse effect on the financial
condition of the Company.
Except as described above, there are no material pending legal
proceedings to which the Company or any of its subsidiaries is a party
or to which any of the properties is subject, other than ordinary
routine litigation incidental to the Company's business.
14. RELATED PARTY
A director of the Company is a partner in a law firm that serves as
counsel to the Company. Expenses incurred to such firm in connection
with services rendered to the Company during 1999, 1998 and 1997 were
$414,932, $173,673 and $186,033, respectively.
A director of the Company was a consultant to the Company from July,
1997 to June, 1999. Expenses incurred to such director in connection
with consulting services rendered to the Company during 1999, 1998 and
1997 were $30,000, $60,000 and $30,000 respectively.
Two directors of the Company are principal owners of a company that
provides promotional materials to the Company. Expenses incurred to
such company in connection with promotional materials purchased in
1999, 1998 and 1997 were $121,289, $151,393 and $20,092, respectively.
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15. SUBSEQUENT EVENT
Subsequent to year-end, the Company granted options to certain
employees to purchase 57,000 shares of Hansen common stock under the
Plan at exercise prices ranging from $4.14 to $4.50 per share.
On February 23, 2000, the Company entered into a new lease agreement
for a 113,600 square foot facility in Corona, California, commencing on
August 1, 2000. The term of the lease is ten (10) years with increases
in the monthly rental payments during the third, sixth and eighth
years. Upon commencement of the new lease, the lease for the existing
premises will terminate by mutual consent.
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HANSEN NATURAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
Balance at Charged to
beginning of costs and Balance at end
Description period expenses Deductions of period
- ------------------------- ----------------- ----------------- ------------------ -----------------
Allowance for doubtful accounts, sales returns and cash discounts:
1999 $ 378,641 1,478,889 (1,442,225) $ 415,305
1998 $ 315,629 1,432,404 (1,369,392) $ 378,641
1997 $ 234,749 1,090,929 (1,010,049) $ 315,629
Promotional allowances:
1999 $1,608,123 6,337,903 (6,294,422) $1,651,604
1998 $1,067,749 5,584,000 (5,043,626) $1,608,123
1997 $ 926,045 4,034,845 (3,893,141) $1,067,749
Inventory reserves:
1999 $ 268,233 151,091 ( 256,276) $ 163,048
1998 $ 383,227 4,027 ( 119,021) $ 268,233
1997 $ 120,543 253,514 9,170 $ 383,227
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