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
For the fiscal year ended December 31, 2002
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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.)
1010 Railroad Street, Corona, California 92882
(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, $0.005 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. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant was approximately $22,963,281 computed by reference to the sale price
for such stock on the NASDAQ Small-Cap Market on March 3, 2003.
The number of shares of the Registrant's common stock, $0.005 par value per
share (being the only class of common stock of the Registrant), outstanding on
March 3, 2003 was 10,223,203 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
7a. Qualitative and Quantitative Disclosures about Market Risks 30
8. Financial Statements and Supplementary Data 30
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 30
PART III
10. Directors and Executive Officers of the Registrant 30
11. Executive Compensation 32
12. Security Ownership of Certain Beneficial Owners and Management 36
13. Certain Relationships and Related Transactions 38
14. Controls and Procedures 39
PART IV
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 39
Signatures and Certifications 40
2
PART I
ITEM 1. BUSINESS
Overview
Hansen Natural Corporation was incorporated in Delaware on April 25, 1990.
Its principal place of business is at 1010 Railroad Street, Corona, California
92882 and its telephone number is (909) 739-6200. When this report uses the
words "Hansen", "HBC", "the Company", "we", "us", and "our", these words refer
to Hansen Natural Corporation and our subsidiaries other than Hard e Beverage
Company ("HEB"), unless the context otherwise requires.
We are a holding company and carry on no operating business except through
our direct wholly owned subsidiaries, Hansen Beverage Company ("HBC") which was
incorporated in Delaware on June 8, 1992 and HEB which was incorporated in
Delaware on April 30, 1990. HBC generates substantially all of our operating
revenues.
Corporate History
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., which subsequently became known as The
Fresh Juice Company of California, Inc. ("FJC"). FJC retained the right to
market and sell fresh non-pasteurized juices under the Hansen trademark. 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"). HFI expanded its product line from juices to include
Hansen's(R) Natural Sodas. California Co-Packers 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, HBC
acquired the Hansen's(R) brand natural soda and apple juice business from CCC.
Under our ownership, the Hansen beverage business has significantly expanded and
currently includes a wide range of beverages within the growing "alternative"
beverage category. As will appear more fully from the section headed
"Intellectual Property" below, in September 1999 we acquired all of FJC's rights
to manufacture, sell and distribute fresh non-pasteurized juice products under
the Hansen's(R) trademark together with certain additional rights. In 2000, HBC,
through its wholly-owned subsidiary, Blue Sky Natural Beverage Co. ("Blue Sky"),
which was incorporated in Delaware on September 8, 2000, acquired the natural
soda business previously conducted by Blue Sky Natural Beverage Co., a New
Mexico corporation ("BSNBC"), under the Blue Sky(R) trademark. In 2001, HBC,
through its wholly-owned subsidiary Hansen Junior Juice Company, ("Junior
Juice"), which was incorporated in Delaware on May 7, 2001, acquired the Junior
Juice business previously conducted by Pasco Juices, Inc. ("Pasco") under the
Junior Juice(R) trademark.
Industry Overview
The alternative beverage category combines non-carbonated ready-to-drink
iced teas, lemonades, juice cocktails, single serve juices, ready-to-drink iced
coffees, energy drinks, sports drinks, soy drinks and single-serve still water
(flavored and unflavored) 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 according to Beverage Marketing Corporation. Sales in 2002 for the
alternative beverage category of the market are estimated at approximately $13.2
billion at wholesale, representing a growth rate of approximately 13% over the
estimated wholesale sales in 2001 of $11.7 billion. (Source: Beverage Marketing
Corporation).
3
Products
We market, sell and distribute "alternative" beverage category natural
sodas, fruit juices, energy drinks and energy sports drinks, fruit juice and soy
smoothies, "functional drinks", sparkling lemonades and orangeades,
non-carbonated ready-to-drink iced teas, lemonades, juice cocktails, children's
multi-vitamin juice drinks and non-carbonated lightly flavored energy waters
under the Hansen's(R) brand name. We also market, sell and distribute energy
drinks under the Monster(TM) brand name. In addition, we market nutrition bars
and cereals under the Hansen's(R) brand name. We also market, sell and
distribute, natural sodas, premium natural sodas with supplements, organic
natural sodas, seltzer waters and energy drinks under the Blue Sky(R) brand
name. Our fruit juices for toddlers are marketed under the Junior Juice(R) brand
name. Our malt-based drinks are marketed under the Hard e(TM) brand name.
Natural Sodas. Hansen's natural sodas have been a leading natural soda
brand in Southern California for the past 25 years. In 2002, according to
Information Resources, Inc.'s Analyzer Reports for California, our natural sodas
recorded the highest sales among comparable carbonated new age category
beverages measured by unit volume in the California market. Our natural sodas
are currently available in thirteen 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, ginger ale
and tangerine. In early 2001, we introduced a new line of diet sodas using
Splenda(R) sweetener as the primary sweetener. We initially introduced this line
in four flavors: peach, black cherry, tangerine lime, and kiwi strawberry and
have since added a fifth flavor, ginger ale. Our 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 diet sodas, with Splenda(R) and Acesulfame-K. We package our natural
sodas in 12-ounce aluminum cans. In 2002, we introduced a line of natural mixers
in 8-ounce aluminum cans comprising club soda, tonic water and ginger ale.
In January 1999, we introduced a premium line of Signature Sodas in unique
proprietary 14-ounce glass bottles. This line was marketed under the Hansen's(R)
brand name, primarily through our distributor network, in six flavors. In early
2003 we repositioned this line into lower cost 12-ounce glass packaging and
intend to market our repositioned Signature Soda line at lower price points
directly to our retail customers such as grocery chains, club stores, specialty
retail chains and mass merchandisers and to the health food sector through
specialty health food distributors ( hereinafter together referred to as our "
direct retail customers " ). Signature Soda is available in 12-ounce glass
bottles in five flavors: orange creme, vanilla creme, ginger beer, sarsaparilla
and black cherry.
In September 2000, we acquired the Blue Sky Natural Soda business from
BSNBC. Our Blue Sky product line comprises natural sodas, premium sodas, organic
natural sodas, seltzer water and energy drinks. Blue Sky(R) natural sodas are
available in thirteen regular flavors consisting of lemon lime, grapefruit,
cola, root beer, raspberry, cherry vanilla creme, truly orange, Jamaican ginger
ale, black cherry, orange creme, Dr. Becker, grape and private reserve cream
soda. We also offer a Blue Sky(R) product line of premium line of natural sodas,
which contain supplements such as ginseng. This line is currently available in
six flavors consisting of ginseng creme, ginseng cola, ginseng root beer,
ginseng very berry creme, ginseng ginger ale, and ginseng cranberry-raspberry.
During 1999, Blue Sky(R) introduced a line of organic natural sodas, which are
currently available in six flavors consisting of prime lime cream, new century
cola, orange divine, ginger gale, black cherry cherish, and root beer. We also
market a seltzer water under the Blue Sky(R) label in three flavors: natural,
lime and lemon. In 2002, we introduced a lightly carbonated Blue Sky(R) energy
drink in an 8.3-ounce slim can. The Blue Sky(R) products contain no
preservatives, sodium or caffeine (other than in the case of the energy drink)
or artificial coloring and are made with high quality natural flavors. Blue
Sky(R) natural sodas and seltzer waters are currently packaged in 12-ounce
aluminum cans and are marketed primarily to our direct retail customers.
In 2001, we introduced a new line of sparkling lemonades (regular and pink)
and orangeades in unique proprietary 1-liter glass bottles and towards the end
of 2002, we introduced diet versions of our regular sparkling lemonades and
orangeades, also in 1-liter glass bottles. The sparkling lemonades and
orangeades contain real juice and pulp. In 2003, we plan to extend this line
into unique proprietary 12-ounce glass bottles. This product line will be
marketed to our direct retail customers.
4
Hansen's Energy Drinks. In 1997, we introduced a lightly carbonated citrus
flavored Hansen's(R) energy drink. Our energy drink competes in the "functional"
beverage category, namely, beverages that provide a real or perceived benefit in
addition to simply delivering refreshment. We currently offer our energy drink
in three versions: original citrus, tropical and wild berry. We also offer
additional functional drinks including a ginger flavored d-stress(R) drink, an
orange flavored b-well(TM) drink, and a guarana berry flavored stamina(R) drink,
a grape flavor power drink, and a berry-flavored slim down drink that contains
no calories. Each of our energy and functional drinks contain different
combinations of vitamins, minerals, nutrients, herbs and supplements
("supplements"). Our energy drinks and functional drinks are sold in 8.3-ounce
cans and bottles. In 2001, we introduced Energade(R), a non-carbonated Energy
sports drink in 23.5-ounce cans in two flavors, citrus and orange, and
subsequently introduced a third flavor, red rocker. We also introduced E2O
Energy Water(TM), a non-carbonated lightly flavored water, in 24-ounce blue
polyethylene terephthalate ("P.E.T.") plastic bottles, in four flavors,
tangerine, apple, berry and lemon. In 2002, we expanded our E2O Energy Water
line with four additional flavors in clear P.E.T. plastic bottles, mango melon,
kiwi strawberry, grapefruit and green tea. Our Energade(R) and E2O Energy
Water(TM) drinks also contain different combinations and levels of supplements.
At the end of 2002, we introduced a lightly carbonated diet energy drink in
8.3-ounce cans under the Hansen's(R) Diet Red brand name. Our Diet Red energy
drink is sweetened with Splenda and Acesulfame-K. We market our energy, Diet Red
energy, Energade and E2O Energy Water drinks in clear bottles through our full
service distributor network. We market our E2O Energy Water drinks in blue
bottles to our direct retail customers.
Monster Energy Drinks. In 2002, we launched a new lightly carbonated energy
drink under the Monster(TM) brand name, in a 16-ounce can, which is almost
double the size of our regular energy drinks in 8.3-ounce cans and the vast
majority of competitive energy drinks currently on the market. Our Monster(TM)
brand energy drink contains different types and levels of supplements than our
Hansen's(R) energy drinks and is marketed through our full service distributor
network.
Juice Products and Smoothies. Our fruit juice product line includes
Hansen's(R) Natural Old Fashioned Apple Juice which is packaged in 64-ounce
P.E.T. plastic bottles and 128-ounce polypropylene bottles and Apple Strawberry,
Apple Grape and Apple Cranberry juice blends in 64-ounce P.E.T. plastic bottles.
These Hansen's(R) juice products contain 100% juice as well as 100% (120% in the
case of Apple Juice) of the recommended daily intake for adults of Vitamin C.
Certain of these products also contain added calcium. We also market a Cranberry
juice cocktail and an Orange-Carrot juice blend in 64-ounce P.E.T. plastic
bottles. These products do not contain 100% juice. Hansen's(R) juice products
compete in the shelf-stable juice category. In 2002, we extended our fruit juice
and juice blend product line by introducing certain of these products in
10-ounce P.E.T. plastic bottles.
In March 1995, we introduced a line of fruit juice smoothie drinks in
11.5-ounce aluminum cans. Certain flavors were subsequently offered in glass and
P.E.T. plastic bottles. Hansen's fruit juice smoothies have a smooth texture
that is thick but lighter than a nectar. Hansen's smoothies in 11.5-ounce
aluminum cans contain approximately 35% juice while the juice levels of Hansen's
smoothies in glass and P.E.T. plastic bottles is 25%. Our fruit juice smoothies
provide 100% of the recommended daily intake for adults of Vitamins A, C & E and
represented Hansen's entry into what is commonly referred to as the "functional"
beverage category. Hansen's(R) fruit juice smoothies are available in 15
flavors: strawberry banana, peach berry, mango pineapple, guava strawberry,
pineapple coconut, apricot nectar, tropical passion, whipped orange, cranberry
twist, a cranberry raspberry lite as well as the blast line comprising Island
Blast, Colada Blast, Power Berry Blast, Vita Blast and Banana Blast.
In 2001, we introduced a new line of soy smoothies in 1-liter and 11-ounce
aseptic packaging in five flavors: berry splash, tropical breeze, orange dream,
lemon chiffon and peach passion. The soy smoothies contain soy protein and fruit
juices. In 2002 we introduced a 100% sparkling apple cider in a magnum 1.5-liter
glass bottle.
The above juice and smoothie products are being marketed to our direct
retail customers.
5
Healthy Start Product Line. During the second quarter of 1998, we launched
our first Healthy Start(TM) 100% juice product. We subsequently expanded the
line and entered into a licensing agreement with the Silver Foxes network in
connection therewith. We also launched a Healthy Start 100% juice line in single
serve glass bottles. Sales were disappointing and we have discontinued the
entire line.
Iced Teas, Lemonades and Juice Cocktails. We introduced Hansen's(R)
ready-to-drink iced teas and lemonades in 1993. Hansen's(R) ready-to-drink iced
teas are currently available in three flavors: Original with Lemon, Tropical
Peach and Wildberry. 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 three flavors: kiwi strawberry melon, tangerine
pineapple with passion fruit, and California paradise punch. We introduced a
variety 12 pack of iced teas during the first half of 2001, which experienced
limited success. We are continuing to market this package. Hansen's(R)
ready-to-drink iced teas, lemonades and juice cocktails were packaged in
16-ounce wide-mouth glass bottles. At the end of 2002, we converted this line
from 16-ounce glass bottles to 16-ounce polypropylene bottles.
Hansen's(R) ready-to-drink iced teas are made with decaffeinated tea.
Hansen's(R) juice products and smoothies are made with high quality juices and
products that contain less than 100% fruit juice are also made with natural
flavors, high fructose corn syrup, citric acid and other ingredients.
In 1999, we introduced a line of specialty teas in 20-ounce glass bottles,
which we named our "Gold Standard" line. We subsequently introduced two
additional green tea flavors as well as two diet green flavors and six juice
cocktails. We are discontinuing certain of the specialty teas and all of the
juice cocktails but are continuing to market three regular green tea flavors and
the diet peach green tea flavor. Our Gold Standard line contains supplements,
but at lower levels than in our functional drinks. We continue to package our
Gold Standard Line in unique 20-ounce glass bottles. Additionally, in 2002 we
introduced two of our iced tea products, namely green tea and original with
lemon in 14-ounce aseptic packages.
Medicine Man Product Line. During 2001, we launched a premium line of
alternative healthy iced teas and drinks under the "Medicine Man(R)" label in
proprietary glass bottles. Response from customers and consumers to the Medicine
Man(R) line was disappointing and, in consequence, we have discontinued this
line.
Juices for Children. In the third quarter of 1999, we 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 and currently has three flavors. We introduce new flavors
in place of existing flavors from time to time. One of these two lines is a
dual-branded 100% juice line named "Juice Blast(R)" that was launched in
conjunction with Costco Wholesale Corporation ("Costco") and is sold nationally
through Costco stores. The other line was a 10% juice line named "Juice
Slam(TM)" that was available to all of our customers. During 2000, we
repositioned that line as a 100% juice line under the Juice Slam(TM) name and
are currently marketing that line to grocery store chain customers, the health
food trade, and other customers. In 2002, we changed the size of the Juice
Blast(R) package to 6.75-ounces.
In May 2001, we acquired the Junior Juice(R) beverage business. The Junior
Juice(R) product line is comprised of seven flavors of 100% juice in 4.23-ounce
aseptic packages and is targeted at toddlers. Six flavors of the Junior Juice(R)
line have calcium added and all flavors have vitamin C added. The current
flavors in the Junior Juice(R) line are apple, apple berry, orange twist, apple
grape, mixed fruit, fruit punch, and white grape.
Nutrition Bars. In 2000, we introduced a new line of nutrition food bars
under the Hansen's(R) brand name. This line is made from grains and fruit. In
addition, we introduced a new line of premium G.M.O. free (free from genetically
modified organisms) cereals under the Hansen's(R) brand name. During the first
half of 2001, we introduced a line of functional food bars and towards the end
of the year introduced a line of active nutrition bars, which are specially
formulated for adults who are older than 50 years of age. Sales of the bars and
cereals have been disappointing and we are presently evaluating whether to
persist with or discontinue all or certain of these products.
6
Hard e Product Line. During the third quarter of 2000, we introduced a
malt-based drink under the name Hard e, which contains up to five-percent
alcohol. The Hard e product is not marketed under the Hansen's(R) name. Sales
from this product line are limited.
Bottled Water. Hansen's(R) still water products were introduced in 1993.
Hansen's(R) still water products are primarily sold in 0.5-liter plastic bottles
to the food service trade.
Other Products
We continue to evaluate and, where considered appropriate, introduce
additional flavors and other types of beverages to complement our existing
product lines. We will also evaluate, and where considered appropriate,
introduce functional foods/snack foods that utilize similar channels of
distribution and/or are complementary to our existing products and/or to which
the Hansen's(R) brand name is able to add value.
Manufacture and Distribution
We do not directly manufacture our products but instead outsource the
manufacture to third party bottlers and packers.
We purchase concentrates, juices, flavors, vitamins, minerals, nutrients,
herbs, supplements, caps, labels, trays, boxes and other ingredients for our
beverage products which are delivered to our various third party bottlers and
packers. Depending on the product being produced by them, the third party
bottlers or packers add filtered water and/or high fructose corn syrup or cane
sugar or Splenda brand sweetener, Acesulfame-K and/or citric acid or other
ingredients and supplements for the manufacture and packaging of the finished
products into approved containers. In the case of sodas and other carbonated
beverages, the bottler/packer adds carbonation to the products as part of the
production process.
We are generally responsible for arranging for the purchase of and delivery
to our third party bottlers and packers of the containers in which our beverage
products are packaged.
The ingredients for our nutrition food bars, functional food bars and
active nutrition bars are purchased by our co-packers from various suppliers for
manufacturing and packaging of the finished bars. Our cereal products are
manufactured for us by an overseas supplier who supplies all of the ingredients.
All of our beverage products are manufactured by various third party
bottlers and packers situated throughout the United States and Canada under
separate arrangements with each of such parties. The majority of our
co-packaging arrangements are on a month to month basis except for our agreement
with Southwest Canning and Packaging, Inc. ("Southwest") pursuant to a contract
under which Southwest packages Hansen's(R) natural sodas and our agreement with
Hi-Country - Corona, Inc. ("Hi-Country") pursuant to which Hi-Country packages
Hansen's(R) apple juice in P.E.T. plastic bottles, smoothies in 11.5-ounce cans
and energy drinks in 8.3 and 16-ounce cans. The Southwest contract continues
indefinitely and is subject to termination upon 60 days written notice from
either party. The Hi-Country contract continues until 2007, but we are not
obliged to manufacture all of our requirements or any minimum volumes at
Hi-Country. In addition, upon termination of the Hi-Country contract for
whatever reason, we are entitled to remove all equipment that we purchased and
was installed at Hi-Country to enable them to manufacture our products.
Hard e malt-based drinks are manufactured for HEB by Reflo, Inc. ("Reflo"),
pursuant to a manufacturing and distribution agreement dated as of March 23,
2000 ("Reflo Agreement"). Either party may elect to terminate the Reflo
Agreement at any time on 90 days notice. Under the terms of the Reflo Agreement,
Reflo administers the sales and distribution of such products throughout the
United States, excluding Arizona, California, Nevada and Oregon where HEB is
itself responsible for the sales and distribution of such products. Hard e is
currently being distributed in 7 states. However, in many of such states,
distribution is on an extremely limited scale.
7
In many instances, specific items of equipment are purchased by us and are
installed at the facilities of our packers to enable them to produce certain of
our products on their lines. In general, such equipment remains our property and
is to be returned to us upon termination of the packing arrangements with such
packers.
We pack certain of our products outside of the West Coast to enable us to
produce products closer to the markets where they are sold and thereby reduce
freight costs. As volumes in markets outside of California grow, we continue to
secure additional packing arrangements closer to such markets to further reduce
freight costs.
Our 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 we materially underestimate demand for our products or are
unable to secure sufficient ingredients or raw materials including, but not
limited to, glass, P.E.T./plastic bottles, cans or labels, or packing
arrangements, we might not be able to satisfy demand on a short-term basis.
Although our arrangements for production of our products are generally of
short duration or are terminable upon request, we believe a short disruption or
delay would not significantly affect our revenues since alternative packing
facilities in the United States with adequate capacity can usually be obtained
for many of our products at commercially reasonable rates and/or within a
reasonably short time period. However, there are limited packing facilities in
the United States with adequate capacity and/or suitable equipment for many of
our newer products, including our energy drinks and functional drinks in
8.3-ounce cans, Gold Standard line, aseptic juice products, Energade(R),
sparkling apple cider in 1.5-liter magnum glass bottles, soy smoothies,
Monster(TM) energy in 16-ounce cans and sparkling lemonades and orangeade lines.
There are also limited shrink sleeve labeling facilities available in the United
States with adequate capacity for our energy drinks in glass bottles and E2O
Energy Water. A disruption or delay in production of any of such products could
significantly affect our revenues from such products as alternative co-packing
facilities in the United States with adequate capacity may not be available for
such products either at commercially reasonable rates, and/or within a
reasonably short time period, if at all. In addition, with regard to the Hard e
product, while there are many co-packing facilities in the United States with
adequate capacity that could produce such product, due to regulatory issues it
may not be feasible for such product to be packed at alternative packaging
facilities on short notice. Consequently, a disruption in production of such
products could affect our revenues. We continue to seek alternative and/or
additional co-packing facilities in the United States or Canada with adequate
capacity for the production of its various products to minimize the risk of any
disruption in production.
We have entered into distribution agreements with distributors to
distribute Hansen's(R) energy drinks, Monster(TM) energy drinks, Diet Red energy
drinks, Energade(R) sports drinks and E2O Energy Water in 49 states. In many
states however, distribution is only on a limited scale. Certain of our products
are sold in Canada. We also sell a limited range of our products to distributors
outside of the United States, including the United Kingdom, Mexico, Japan, Guam,
the Caribbean and the United Arab Emirates.
We continually seek to expand distribution of our products by entering into
agreements with regional bottlers or other direct store delivery distributors
having established sales, marketing and distribution organizations. Many of our
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 compete directly with our products.
We are continuing to take steps to reduce our inventory levels in an
endeavor to lower our warehouse and distribution costs.
8
During 2002, we continued to expand distribution of our natural sodas and
smoothies outside of our traditional California base. We expanded our national
sales force to support and grow sales, primarily of Hansen's(R) energy drinks,
Monster(TM) energy drinks, Diet Red energy drinks, Energade(R) energy sports
drinks and E2O Energy Water and we intend to build such sales force in 2003. In
2002, we appointed Mr. Mike Schott as the Vice President of National Sales,
Single Serve Products, with responsibility for the aforesaid products.
Our Blue Sky(R) products are sold primarily to the health food trade
through specialty health food distributors.
Our principal warehouse and distribution center and corporate offices
relocated to our current facility in October 2000. We are continuing to take
steps to reduce our inventory levels in an endeavor to lower our warehouse and
distribution costs. See also "ITEM 2 - PROPERTIES."
Raw Materials and Suppliers
The principal raw materials used by us comprise aluminum cans, glass
bottles and P.E.T. plastic bottles as well as juices, high fructose corn syrup
and sucralose, the costs of which are subject to fluctuations. Due to the
consolidations that have taken place in the glass industry over the past few
years, the prices of glass bottles continue to increase. The price of plastic
bottles and aluminum cans is expected to increase in the future. This will
continue to exert pressure on our gross margins.
Generally, raw materials utilized by us in our business are readily
available from numerous sources. However, certain raw materials are manufactured
by only one company. Sucralose, which is used alone or in combination with
Acesulfame-K in the Company's low-calorie products, is currently purchased by us
from a single manufacturer. Cans for our energy and functional drinks (8.3
ounces) are only manufactured by one company in the United States.
With regard to fruit juice and juice-drink products, the industry is
subject to the variability of weather conditions, which may result in higher
prices and/or lower consumer demand for juices.
We purchase beverage flavors, concentrates, juices, supplements,
high-fructose corn syrup, cane sugar, sucrose, sucralose and other sweeteners,
from independent suppliers located in the United States and abroad, nutrition
food bars and other ingredients from independent suppliers in the United States
and abroad, and cereals from an independent supplier located abroad.
Generally, flavor suppliers hold the proprietary rights to their flavors.
Consequently, we do not currently have the list of ingredients or formulae for
our flavors and certain of our concentrates readily available to us and we may
be unable to obtain these flavors or concentrates from alternative suppliers on
short notice. We have identified alternative suppliers of many of the
supplements contained in many of our beverages and bars. However, industry-wide
shortages of certain fruits and/or fruit juices and/or supplements and/or
sweeteners have been and could, from time to time in the future, be experienced,
which could interfere with and/or delay production of certain of our products.
We continually endeavor to develop back-up sources of supply for certain of
our flavors and concentrates from other suppliers as well as to conclude
arrangements with suppliers which would enable us to obtain access to certain
concentrates or product formulae in certain circumstances. We have been
partially successful in these endeavors. Additionally, in a limited number of
cases, contractual restrictions and/or the necessity to obtain regulatory
approvals and licenses may limit our ability to enter into agreements with
alternative suppliers and manufacturers and/or distributors.
In connection with the development of new products and flavors, independent
suppliers bear a large portion of the expense of product development, thereby
enabling us to develop new products and flavors at relatively low cost. We have
historically developed and successfully introduced new products and flavors and
packaging for our products and intend to continue developing and introducing
additional new beverages and flavors.
9
Competition
The beverage industry is highly competitive. The principal areas of
competition are pricing, packaging, development of new products and flavors and
marketing campaigns. Our products compete with a wide range of drinks produced
by a relatively large number of manufacturers, most of which have substantially
greater financial, marketing and distribution resources than we do.
Important factors affecting our ability to compete successfully include
taste and flavor of products, trade and consumer promotions, rapid and effective
development of new, unique cutting edge products, attractive and different
packaging, branded product advertising and pricing. We also compete for
distributors who will concentrate on marketing our products over those of our
competitors, provide stable and reliable distribution and secure adequate shelf
space in retail outlets. Competitive pressures in the alternative, energy and
functional beverage categories as well as in the cereal, nutrition food bar and
flavored malt beverage categories could cause our products to be unable to gain
or to lose market share or we could experience price erosion, which could have a
material adverse affect on our business and results.
Over the past two years we have experienced substantial competition from
new entrants in the energy drink category. 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
added supplements to their products with a view to marketing their products as
"functional" or "energy" beverages or as having functional benefits. Many of
those products are believed to contain lower levels of supplements and
principally deliver refreshment. In addition, many competitive products are
positioned differently than our energy or functional drinks. Our smoothies and
Gold Standard lines are positioned more closely against those products.
We compete 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. Our
products compete with all liquid refreshments and with products of much larger
and substantially better financed competitors, including the products of
numerous nationally and internationally known producers such as The Coca Cola
Company, PepsiCo, Inc., Cadbury Schwepps, which includes Dr. Pepper/Seven-up, RC
Cola, Snapple, Mistic and Stewart's brands, Nestle Beverage Company, Anheuser
Busch and Ocean Spray. More specifically, our products compete with other
alternative beverages, including new age beverages, such as Snapple, Elements,
Mistic, Arizona, Clearly Canadian, Sobe, Stewart's, Everfresh, Nantucket
Nectars, Vitamin Water, Fuse, VeryFine, V8 Splash, Calistoga, Propel Fitness
Water, AquaFina, Dasani, Reebok, 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 our products such as
Nestea, Fruitopia, Lipton, Propel, AquaFina, Dasani, Adrenaline Rush, Amp, KMX
and Dole. Our products also compete with private label brands such as those
carried by grocery store chains and club stores.
Our fruit juice smoothies compete directly with Kern's, Jumex, Jugos del
Valle and Libby's nectars, V8 Splash Smoothies, as well as with single serve
juice products produced by many competitors. Such competitive products are
packaged in glass and P.E.T. bottles ranging from 8- to 48 ounces in size and in
11.5-ounce aluminum cans. The juice content of such competitive products ranges
from 1% to 100%.
Our apple and other juice products compete directly with Tree Top, Mott's,
Martinelli's, Welch's, Ocean Spray, Tropicana, Minute Maid, Langers, Apple and
Eve, Seneca, Northland and also with other brands of apple juice and juice
blends, especially store brands.
10
Our energy drinks, including Hansen's(R) Diet Red and Monster(TM) energy in
8.3- and 16-ounce cans, compete directly with Red Bull, Adrenaline Rush, Amp,
180, KMX, Venom, Extreme Energy Shot, Rockstar, Red Devil, Lipovitan, MET-Rx,
Hype, XTC, and many other brands and our other functional drinks compete
directly with Elix, Lipovitan, MET-Rx, Think, and other brands.
Our E2O Energy WaterTM and still water products compete directly with
Vitamin Water, Reebok, Propel, Dasani, Evian, Crystal Geyser, Naya, Palomar
Mountain, Sahara, Arrowhead, Dannon, and other brands of still water especially
store brands.
The nutrition food bar and cereal categories as well as flavored malt-based
drink categories are also highly competitive. Principal areas of competition are
pricing, packaging, development of new products and flavors and marketing
campaigns. Our cereals compete with traditional cereals of companies such as
Kellogg's, General Mills, Kashi and Nature Valley, and our nutrition food bars
compete with products of other independent bar companies such as Power Bar,
Balance Bar, Gatorade, Kashi, Cliff Bar, MET-Rx, and numerous other bars.
Our Hard e product competes directly with wine coolers, such as Seagram's
and Bartles and James and flavored low alcohol beverages such as Mike's Hard
Lemonade, Hooper's Hooch, Doc Otis Hard Lemonade, Smirnoff Ice, Skyy Blue/Blue
Skyy, Zima and Rick's Spiked Lemonade and other flavored malt and alcohol based
drinks. Many of these products are produced by large national and international
manufacturers, most of which have substantially greater financial, marketing and
distribution resources than Hansen. Such companies include Anheuser Busch,
Miller Brewing Company, Coors, Gallo Winery, and Diageo plc.
Sales and Marketing
We focus on consumers who seek products that are perceived to be natural
and healthy and emphasize the natural ingredients and the absence of
preservatives, sodium, artificial coloring and caffeine in our beverages (other
than our energy drinks) and the addition to most of our products, of one or more
supplements. We reinforce this message in our product packaging. Our marketing
strategy with respect to our nutrition food bars and cereals is similarly to
focus on consumers who seek bars and cereals that are perceived to be natural
and healthy. We emphasize the natural ingredients and the absence of
preservatives and, in the case of the cereals, the fact that they are G.M.O.
free. Our marketing strategy with respect to our Hard e product is to focus on
adult consumers who seek an alcohol-based beverage that is good tasting,
fashionable and meets consumers' needs.
Our sales and marketing strategy is to focus our efforts on developing
brand awareness and trial through sampling both in stores and at events in
respect of all our beverage, food and alcoholic beverage products. We use our
branded vehicles and other promotional vehicles at events at which we distribute
our products to consumers for sampling. We utilize "push-pull" tactics to
achieve maximum shelf and display space exposure in sales outlets and maximum
demand from consumers for our products including advertising, in store
promotions and in store placement of point of sale materials and racks, prize
promotions, price promotions, competitions, endorsements from selected public
figures, coupons, sampling and sponsorship of selected causes such as breast
cancer research as well as sports figures and sporting events such as the
Hansen's Energy Pro Pipeline Surfing competition, marathons, 10k runs, bicycle
races, volleyball tournaments and other health and sports related activities,
including extreme sports, particularly supercross, freestyle motor cross,
surfing, skateboarding, wakeboarding, skiing, snowboarding, BMX, Mountain
Biking, etc. and also participate in product demonstrations, food tasting and
other related events. Posters, print, radio and television advertising together
with price promotions and coupons are also used extensively to promote the
Hansen's(R) brand.
Management continues to believe that one of the keys to success in the
beverage industry is differentiation; such as making Hansen's(R) products
clearly distinctive from other beverages on the shelves of retailers. We review
our products and packaging on an ongoing basis and, where practical, endeavor to
make them different, better and unique. The labels and graphics for many of our
products were redesigned in an endeavor to develop a new system to maximize
their visibility and identification, wherever they may be placed in stores and
we will continue to reevaluate the same from time to time.
11
Where appropriate we partner with retailers to assist our marketing
efforts. For example, while we retain 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 Juice Blast(R) line.
We increased expenditures for our sales and marketing programs by
approximately 26% in 2002 compared to 2001. As of February 28, 2003, we employed
63 employees in sales and marketing activities.
Customers
Our customers are typically retail and specialty chains, club stores, mass
merchandisers, full service beverage distributors and health food distributors.
In 2002, sales to retailers represented 56% of our revenue, sales to full
service distributors represented 26% of our revenue, and sales to health food
distributors represented 11% of our revenue.
Our major customers include Costco, Trader Joe's, Sam's Club, Vons,
Ralph's, Wal-Mart, Safeway and Albertson's. One customer, Costco (which
purchases different products of Hansen's regionally and one product nationally),
accounted for approximately 18% of our sales in 2002. A decision by that
customer or any other major customer to decrease amounts purchased from the
Company or to cease carrying our products could have a material negative effect
on our financial condition and consolidated results of operations.
Seasonality
Sales of ready-to-drink beverages are somewhat seasonal, with the second
and third calendar quarters accounting for the highest sales volumes. The volume
of sales in the beverage business may be affected by weather conditions. Sales
of our beverage products may become increasingly subject to seasonal
fluctuations as more sales occur outside of California. Certain beverages are
more seasonal than others i.e. E2O Energy Water and natural sodas as compared to
apple juice and children's multi-vitamin juices.
Intellectual Property
We own numerous trademarks that are very important to our business.
Depending upon the jurisdiction, trademarks are valid as long as they are in use
and/or their registrations are properly maintained and they have not been found
to have become generic. Registrations of trademarks can generally be renewed as
long as the trademarks are in use. We also own the copyright in and to numerous
statements made and content appearing on the packaging of our products.
The Hansen's(R) trademark is crucial to our 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 us and was acquired
from a trust (the "Trust") which was created by an agreement between HBC and the
predecessor company of Fresh Juice Company of California ("FJC") (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. There was a similar license agreement between the Trust and
HBC with regard to non-beverage products. No royalties were payable on sodas,
Energy drinks, juices, lemonades, juice cocktails, fruit juice Smoothies, the
Signature Soda line or on the children's multi-vitamin juice drinks. As
explained below, no royalty expenses were incurred during 2002, 2001 or 2000.
12
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.
Effective September 22, 1999, we entered into an Assignment and Agreement
with FJC pursuant to which we acquired exclusive ownership of the Hansen's(R)
trademark and trade names. Under the Assignment and Agreement, among other
matters, we 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 three years. FJC is permitted to
continue to manufacture, sell and distribute fresh juice products under the
Hansen's(R) trademark for a period of five years. Consequently, we now have full
ownership of the Hansen's(R) trademark and our obligation to pay royalties to,
and to share royalties with, FJC has been terminated. As of December 31, 2002,
the total consideration had been paid to FJC and no further amounts are payable
to FJC.
We have applied to register a number of trademarks in the United States
including, but not limited to, Hard e(TM), A New Kind a Buzz(TM), Monster(TM),
Monster Energy (TM), Unleash the Beast (TM), Blue energy(TM) and Energy
hydration system(TM).
We own in our own right, a number of trademarks including, but not limited
to, Hansen's(R), Hansen's energy(R), Energade(R), Hansen's E2O Energy Water(R),
Hansen's slim-down(R), THE REAL DEAL(R), LIQUIDFRUIT(R), Imported from
Nature(R), California's Natural Choice(R), California's Choice(R), Medicine
Man(R), Dyna Juice(R), Equator(R), Hansen's power(R), bewell(R), anti-ox(R),
d-stress(R), stamina(R), Aqua Blast(R), Antioxjuice(R) Intellijuice(R),
Defense(R), Immunejuice(R), Hansen's Natural Multi-Vitamin Juice Slam(R) and
Juice Blast(R) in the United States and the Hansen's(R) and "Smoothie(R)"
trademarks in a number of countries around the world.
In September 2000, in connection with the acquisition of the Blue Sky
Natural Beverage business, we, through our wholly owned subsidiary Blue Sky,
acquired the Blue Sky trademark, which is registered in the United States and
Canada.
In May 2001, in connection with the acquisition of the Junior Juice
Beverage business, we, through our wholly owned subsidiary Junior Juice,
acquired the Junior Juice(R) trademark, which is registered in the United
States.
On April 4, 2000, the United States Patent and Trademark Office issued a
patent to us 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 us to secure shelf space for and to merchandise our energy and
functional drinks in 8.3-ounce slim cans in refrigerated Visi coolers and
walk-in coolers in retail stores.
Government Regulation
The production, distribution and sale in the United States of many of our
products is subject to the Federal Food, Drug and Cosmetic Act; the Dietary
Supplement Health and Education Act of 1994; the Occupational Safety and Health
Act; various environmental statutes; and various other federal, state and local
statutes and regulations applicable to the production, transportation, sale,
safety, advertising, labeling and ingredients of such products.
In connection with Hard e, the production and marketing of alcoholic
beverages is subject to the rules and regulations of the Bureau of Alcohol,
Tobacco and Firearms and in each state, is also subject to the rules and
regulations of state regulatory agencies. The Bureau of Alcohol, Tobacco and
Firearms and state regulatory agencies also regulate the labeling of containers
containing alcoholic beverages including, without limitation, statements
concerning product name and ingredients as well as advertising and marketing, in
connection therewith.
13
A California law requires that a specific warning appear on any product
that contains a component listed by the State as having been found to cause
cancer or birth defects. The law exposes all food and beverage producers to the
possibility of having to provide warnings on their products because the law
recognizes no generally applicable quantitative thresholds below which a warning
is not required. Consequently, even trace amounts of listed components can
expose affected products to the prospect of warning labels. Products containing
listed substances that occur naturally in the product or that are contributed to
the product solely by a municipal water supply are generally exempt from the
warning requirement. While none of our beverage products are currently required
to display warnings under this law, we cannot predict whether an important
component of any of our products might be added to the California list in the
future. We also are unable to predict whether or to what extent a warning under
this law would have an impact on costs or sales of our products.
Bottlers of our beverage products presently offer non-refillable,
recyclable containers in all areas of the United States and Canada. Some of
these bottlers also offer refillable containers, which are also recyclable.
Measures have been enacted in various localities and states that require that a
deposit be charged for certain non-refillable beverage containers. The precise
requirements imposed by these measures vary. Other deposit, recycling or product
stewardship proposals have been introduced in states and localities and in
Congress, and we anticipate that similar legislation or regulations may be
proposed in the future at the local, state and federal levels, both in the
United States and elsewhere.
Our facilities in the United States are subject to federal, state and local
environmental laws and regulations. Compliance with these provisions has not
had, and we do not expect such compliance to have, any material adverse effect
upon our capital expenditures, net income or competitive position.
Employees
As of February 28, 2003, we employed a total of 111 employees, 109 persons
on a full-time basis. Of our 111 employees, we employ 48 in administrative and
quality control capacities and 63 persons in sales and marketing capacities.
Compliance with Environmental Laws
In California, we are required to collect deposits from our customers and
to remit such deposits to the State of California Department of Conservation
based upon the number of cans and bottles of certain carbonated and
non-carbonated products sold. In certain other states and Canada where
Hansen's(R) products are sold, we are also required to collect deposits from our
customers and to remit such deposits to the respective conservation agencies
based upon the number of cans and bottles of certain carbonated and
non-carbonated products, sold in such states.
Available Information
Our Internet address is www.hansens.com. Information contained on our
website is not part of this annual report on Form 10-K. Our annual report on
Form 10-K and quarterly reports on Form 10-Q will, in the future, be made
available free of charge on www.hansens.com, as soon as reasonably practicable
after we electronically file such material with, or furnish it to, the SEC. In
addition, you may request a copy of these filings (excluding exhibits) at no
cost by writing or telephoning us at the following address or telephone number:
14
Hansen Beverage Company
1010 Railroad Street
Corona, CA 92882
(909) 739-6200
(800) HANSENS
ITEM 2. PROPERTIES
Our corporate offices and main warehouse are located at 1010 Railroad
Street, Corona, California 92882. We lease this facility under a lease that
expires in October 2010. The area of the facility is approximately 113,600
square feet. Additionally, in January 2003 we entered into a lease for
additional warehouse space in Corona, California. The area of this facility is
approximately 38,400 square feet. This lease will expire in March 2005 but is
terminable with notice prior to the expiration date. We also rent additional
warehouse space on a short-term basis from time to time in public warehouses
situated throughout the United States and Canada.
ITEM 3. LEGAL PROCEEDINGS
In March 2001, we filed a complaint in the United States District Court for
the Central District of California against South Beach Beverage Company LLC
("Sobe"), for patent infringement, violation of trademark rights, false
advertising, unfair competition, trespass to chattels and tortious interference
with business relations arising from Sobe's unlawful conduct and unauthorized
use of our property and our patent in respect of our rolling rack shelf
structure, Sobe's improper business practices, interference with our right to
conduct business, injunctive relief and unspecified monetary damages. On January
3, 2002, we filed a motion to supplement our complaint. In our motion, we sought
to add two of Sobe's affiliates, PepsiCo, Inc. and the Pepsi Bottling Company
Group Inc. as co-defendants. At about the same time, Sobe filed a motion to
enforce an alleged settlement. In its motion, Sobe alleges that the parties
reached a binding settlement and that the case should be dismissed. We contend
that the proposed agreement was never finalized or signed and is consequently
not binding on us. Both motions have been under submission since February 2002
and we are currently awaiting the decision of the court.
In December 2002, a non-profit organization describing itself as Citizens
for Responsible Business Inc., filed a complaint against us together with more
than a hundred additional defendants comprising retailers, distributors,
manufacturers and suppliers, in the Superior Court of San Francisco. In that
complaint, the plaintiff seeks preliminary and permanent injunctive relief
enjoining the Company and all other defendants from selling food products
advertised as "ginseng" or "siberian ginseng" that are not derived from plants
classified within the genus "panax", for restitution and disgourgement of monies
obtained from the sale of products advertised as "ginseng" or "siberian ginseng"
which were not derived from plants classified within the genus "panax" or were
derived from eleuthero plants, attorneys fees and other relief. We are defending
such complaint and have been advised by our counsel that we have good and
meritorious defenses to the complaint. In any event, as siberian ginseng is not
a material ingredient in any of our products and is used in only a limited
number of our products, it is not expected that ceasing to advertise our
products as containing this ingredient, if necessary, will have an adverse
effect on the sales of our products.
During 2002, in response to our cease and desist letter to Skyy Spirits in
which we alleged infringement by Skyy Spirits and/or its licensee of our Blue
Sky(R) trademark, Skyy Spirits filed a complaint in the United States District
Court for the Northern District of California for a declaratory order and
additional relief. We filed a counterclaim against Skyy Spirits and joined
Miller Brewing Company in the proceedings in which we have sought an injunction
and claimed damages, including an accounting for profits earned by both Skyy
Spirits and Miller Brewing Company, from the sale of the infringing beverage
products and further relief.
15
Furthermore, we are subject to litigation from time to time in the normal
course of business. Although it is not possible to predict the outcome of such
litigation, based on the facts known to us and after consultation with counsel,
we believe that such litigation will not have a material adverse effect on our
financial position or results of operations.
Except as described above, there are no material pending legal proceedings
to which we or any of our subsidiaries is a party or to which any of our
properties is subject, other than ordinary and routine litigation incidental to
our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held on October 18,
2002. At the meeting, the following individuals were elected as directors of the
Company and received the number of votes set opposite their respective names:
Director Votes For
-------------------- ---------
Rodney C. Sacks 8,987,406
Hilton H. Schlosberg 8,987,406
Benjamin M. Polk 8,987,406
Norman C. Epstein 8,987,306
Harold C. Taber, Jr. 8,987,306
Mark S. Vidergauz 8,987,306
In addition, at the meeting our stockholders ratified the appointment of
Deloitte & Touche LLP as independent auditors of the Company for the year ended
December 31, 2002, by a vote of 8,938,146 for, 8,287 against and 3,040
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 3, 2003, there were 10,223,203 shares of the Company's
Common Stock outstanding held by approximately 624 holders of record.
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, 2000 to December 31, 2002:
16
Common Stock
High Bid Low Bid
-------------------- -------------------
Year Ended December 31, 2002
First Quarter $ 4.49 $ 3.82
Second Quarter $ 4.40 $ 3.73
Third Quarter $ 4.41 $ 3.00
Fourth Quarter $ 4.65 $ 3.58
Year Ended December 31, 2001
First Quarter $ 4.31 $ 3.25
Second Quarter $ 3.68 $ 2.93
Third Quarter $ 3.98 $ 3.20
Fourth Quarter $ 4.25 $ 3.30
Year Ended December 31, 2000
First Quarter $ 4.63 $ 4.00
Second Quarter $ 4.50 $ 3.41
Third Quarter $ 5.91 $ 4.13
Fourth Quarter $ 5.38 $ 3.25
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.
We have not paid dividends to our stockholders since our inception and do
not anticipate paying dividends in the foreseeable future.
Equity Compensation Plan Information
The following table sets forth information as of December 31, 2002 with
respect to shares of our common stock that may be issued under our equity
compensation plans.
Number of securities
Number of securities Weighted-average remaining available for
to be issued upon exercise price of future issuance under equity
exercise of outstanding compensation plans (excluding
outstanding options, options, warrants securities reflected in
warrants and rights and rights column (a))
Plan category (a) (b) (c)
- ----------------------------------------------------------------------------------------------------------------
1,501,900 $3.29 1,497,500
Equity compensation plans approved
by security holders
Equity compensation plans not
approved by security holders - - -
----------------------------------------------------------------------------
Total 1,501,900 $3.29 1,497,500
============================================================================
17
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statements of operations data set forth below with respect
to each of the years ended December 31, 1998 through 2002 and the balance sheet
data as of December 31, for the years indicated, are derived from our
consolidated financial statements audited by Deloitte & Touche LLP, independent
auditors, and should be read in conjunction with those financial statements and
notes thereto included elsewhere in this and in the 1998, 1999, 2000 and 2001
Forms 10-K.
(in thousands, except per
share information) 2002 2001 2000 1999 1998
- --------------------------- ---------- --------- --------- --------- ---------
Gross Sales $115,490 $99,693 $86,072 $77,793 $58,479
Net sales $ 92,046 $80,658 $71,706 $66,184 $48,628
Net income $ 3,029 $ 3,019 $ 3,915 $ 4,478 $ 3,563
Net income per
Common share
Basic $ 0.30 $ 0.30 $ 0.39 $ 0.45 $ 0.38
Diluted $ 0.29 $ 0.29 $ 0.38 $ 0.43 $ 0.34
Total assets $ 40,102 $38,561 $38,958 $28,709 $22,557
Long-term debt $ 3,606 $ 5,851 $ 9,732 $ 903 $ 1,335
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion together with the financial
statements and the related notes included elsewhere in this Form 10-K. This
discussion contains forward-looking statements that are based on management's
current expectations, estimates and projections about our business and
operations. Our actual results may differ materially from those currently
anticipated and expressed in such forward-looking statements.
General
During 2002, we continued to expand our existing product lines and further
develop our markets. In particular, we continue to focus on developing and
marketing beverages that fall within the category generally described as the
"alternative" beverage category, with particular emphasis on energy type drinks.
We achieved record sales in 2002. The increase in gross and net sales in
2002 was primarily attributable to sales of our Monster (TM) energy drink, which
was introduced in April 2002, as well as increased sales of Natural Sodas, E2O
Energy WaterTM, which was introduced in June 2001, Energade(R) energy sports
drinks which were introduced in July 2001, apple juice, and Soy Smoothies, which
were introduced in December 2001. We also benefited to a lesser extent from
increased sales of the children's multi-vitamin juice drinks and Junior
Juice(R), which trademark was acquired in May 2001. The increase in gross and
net sales was partially offset by decreased sales of Signature Soda, Smoothies,
Hard e, functional drinks and teas, lemonades and cocktails.
During 2002, sales outside of California represented 42% of our aggregate
sales, as compared to approximately 39% of our aggregate sales in 2001. Sales to
distributors outside the United States during 2002 amounted to $1,242,000
compared to $1,233,000 in 2001.
18
In 2002, we introduced a diet ginger ale, natural mixers, Monster(TM)
energy, E2O Energy Water in 24-ounce clear P.E.T. plastic bottles, a 100%
sparkling Apple Cider, a Diet Red energy drink, a Blue Sky(R) energy drink and
diet sparkling Lemonades and Orangeades. We also introduced a line of diet
Natural Sodas in 12-ounce cans at the end of 2000/beginning of 2001 and an
additional flavor, Ginger Ale, to our regular natural soda line in 2001. In
addition, in 2001, we also introduced our original energy drink in 8.3-ounce
glass bottles, two additional energy drinks in 8.3-ounce slim-cans, sparkling
lemonades and orangeades in 1-liter glass bottles, Medicine Man(R) in glass
bottles, Energade(R) in 23.5-ounce cans, E2O Energy Water in 24-ounce blue
P.E.T. plastic bottles, Soy Smoothies in 1-liter and 11-ounce aseptic packaging,
additional juice blends in 64-ounce P.E.T. bottles, fruit juice Smoothies in
16-ounce P.E.T. bottles, functional nutrition bars and active nutrition bars. In
2002, we discontinued our smoothie line in 64-ounce P.E.T. bottles and converted
our smoothie products in 12-ounce glass bottles to 16-ounce P.E.T. plastic
bottles. We also discontinued our entire Healthy Start/Silver Foxes 100% juice
line in glass and P.E.T. plastic bottles and the Medicine Man(R) line. At the
beginning of 2003, we repackaged our Signature Soda line into new lower cost
glass packaging.
Sales of our dual-branded 100% juice line named "Juice Blast(R)", which was
launched in conjunction with Costco and is sold nationally through Costco
stores, were slightly higher in 2002 than in 2001. We have, in conjunction with
Costco, introduced new flavors in place of certain of the existing flavors and
will continue to introduce new flavors in an effort to ensure that the variety
pack remains fresh and different for consumers.
In September 2000, HBC, through its wholly owned subsidiary Blue Sky,
acquired the Blue Sky(R) Natural Soda business. The Blue Sky(R) Natural Soda
brand is the leading natural soda in the health food trade. Blue Sky offers
natural sodas, premium natural sodas with added ingredients such as Ginseng and
anti-oxidant vitamins, organic sodas and seltzer waters in 12-ounce cans.
In May 2001, HBC, through its wholly owned subsidiary Junior Juice,
acquired the Junior Juice(R) beverage business. The Junior Juice(R) product line
is comprised of a line of 100% juices packed in 4.23-ounce aseptic packages and
is targeted at toddlers.
During 2002, we entered into several new distribution agreements for the
sale of our products, both within and outside the United States. As discussed
under "ITEM 1 BUSINESS - MANUFACTURE and DISTRIBUTION", we anticipate that we
will continue building our national sales force in 2003 to support and grow the
sales of our products.
Further, during 2002, we, through our wholly owned subsidiary, HEB,
continued to market a malt-based beverage called Hard e, which contains up to 5%
alcohol. The Hard e product is not marketed under the Hansen's(R) name.
We continue to incur expenditures in connection with the development and
introduction of new products and flavors.
Results of Operations for the Year Ended December 31, 2002 Compared to the Year
Ended December 31, 2001
Gross Sales. For the year ended December 31, 2002, gross sales were $115.5
million, an increase of $15.8 million or 15.8% higher than gross sales of $80.7
million for the year ended December 31, 2001. The increase in gross sales is
primarily attributable to the introduction of new products and increased sales
of certain of our existing products as discussed below in "Net Sales".
Net Sales. For the year ended December 31, 2002, net sales were $92.0
million, an increase of $11.3 million or 14.1% higher than net sales of $80.7
million for the year ended December 31, 2001. The increase in net sales was
primarily attributable to sales of our Monster (TM) energy drink, which was
introduced in April 2002, as well as increased sales of Natural Sodas, E2O
Energy Water, which was introduced in June 2001, Energade(R) energy sports
19
drinks, which were introduced in July 2001, apple juice, and Soy Smoothies,
which were introduced in December 2001. We also benefited to a lesser extent
from increased sales of the children's multi-vitamin juice drinks, Junior
Juice(R), which was acquired in May 2001, and smoothies in P.E.T. plastic
bottles. The increase in net sales was partially offset by decreased sales of
Signature Soda, Hard e, functional drinks, teas, lemonades and cocktails and
smoothies in cans as well as an increase in discounts, allowances and
promotional payments, notably higher coupon costs.
Gross Profit. Gross profit was $33.2 million for the year ended December
31, 2002, an increase of $4.3 million or 15.2% over the $28.9 million gross
profit for the year ended December 31, 2001. Gross profit as a percentage of net
sales was 36.1% for the year ended December 31, 2002 which was slightly higher
than gross profit as a percentage of net sales of 35.8% for the year ended
December 31, 2001. The increase in gross profit was primarily attributable to
increased net sales. Although a greater percentage of our sales comprised
products having higher gross margins than the prior year, the increase in profit
margins was reduced by higher promotional payments and allowances to promote our
products notably higher coupon costs.
Total Operating Expenses. Total operating expenses were $28.0 million for
the year ended December 31, 2002, an increase of $4.7 million or 19.9% over
total operating expenses of $23.3 million for the year ended December 31, 2001.
Total operating expenses as a percentage of net sales increased to 30.4 % for
the year ended December 31, 2002, from 28.9% for the year ended December 31,
2001. The increase in total operating expenses was primarily attributable to
increased selling, general and administrative expenses. The increase in total
operating expenses as a percentage of net sales was primarily attributable to
the comparatively larger increase in selling, general and administrative
expenses than the increase in net sales.
Selling, General and Administrative. Selling, general and administrative
expenses were $27.9 million for the year ended December 31, 2002, an increase of
$5.1 million or 22.3% over selling, general and administrative expenses of $22.8
million for the year ended December 31, 2001. Selling, general and
administrative expenses as a percentage of net sales increased to 30.3% for the
year ended December 31, 2002 from 28.3% for the year ended December 31, 2001.
Selling expenses were $16.1 million for the year ended December 31, 2002, an
increase of $3.7 million or 29.9% over selling expenses of $12.4 million for the
year ended December 31, 2001. Selling expenses as a percentage of net sales
increased to 17.4% for the year ended December 31, 2002 from 15.3% for the year
ended December 31, 2001. The increase in selling expenses was primarily
attributable to increased distribution (freight) and storage expenses,
advertising, point-of-sale materials and merchandise displays, in-store
demonstrations and graphic design. The increase in selling expenses was
partially offset by a decrease in expenditures for premiums. General and
administrative expenses were $11.8 million for the year ended December 31, 2002,
an increase of $1.4 million or 13.3% over general and administrative expenses of
$10.4 million for the year ended December 31, 2001. General and administrative
expenses as a percentage of net sales were 12.9% for the year ended December 31,
2002 which was comparable to the year ended December 31, 2001. The increase in
general and administrative expenses was primarily attributable to an increase in
payroll costs, charitable contributions, fees paid for legal and accounting
services and increased travel expenses as well as other general and
administrative expenses. The decrease in general and administrative expenses as
a percentage of net sales was primarily attributable to the increase in net
sales and the comparatively lower increase in payroll costs.
Amortization of Trademark License and Trademarks. Amortization of trademark
license and trademarks was $55,000 for the year ended December 31, 2002, a
decrease of $452,000 from amortization of trademark license and trademarks of
$507,000 for the year ended December 31, 2001. The decrease in amortization of
trademark license and trademarks was due to the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 142 in the first quarter of 2002
(Note 2 of the financial statements) which eliminated amortization on
indefinite-lived intangible assets.
20
Operating Income. Operating income was $5.3 million for the year ended
December 31, 2002, compared to $5.6 million for the year ended December 31,
2001. The $258,000 decrease in operating income was primarily attributable to
increased operating expenses, which was partially offset by increased gross
profit.
Net Non-operating Expense. Net non-operating expense was $228,000 for the
year ended December 31, 2002, which was $291,000 lower than net non-operating
expense of $519,000 for the year ended December 31, 2001. Net non-operating
expense consists of interest and financing expense and interest income. Interest
and financing expense for the year ended December 31, 2002 was $231,000, as
compared to $528,000 for the year ended December 31, 2001. The decrease in
interest and financing expense was primarily attributable to decreased interest
expense incurred on our borrowings which was primarily attributable to the
decrease in outstanding loan balances and lower interest rates. Interest income
for the year ended December 31, 2002 was $3,000, as compared to interest income
of $9,000 for the year ended December 31, 2001. The decrease in interest income
was primarily attributable to a reduction in the cash available for investment
during the year ended December 31, 2002.
Provision for Income Taxes. Provision for income taxes for the year ended
December 31, 2002 was $2.0 million which was comparable to the provision for
income taxes of $2.0 million for the year ended December 31, 2001. The effective
combined federal and state tax rate for 2002 was 40.2%, which was comparable to
the effective tax rate of 40.0% for 2001.
Net Income. Net income was $3.0 million for the year ended December 31,
2002, which was comparable to net income for the year ended December 31, 2001.
The $4.3 million increase in gross profit and decrease in nonoperating expense
of $291,000 for the year ended December 31, 2002 was offset by increased
operating expenses of $4.7 million.
Results of Operations for the Year Ended December 31, 2001 Compared to the Year
Ended December 31, 2000
Gross Sales. For the year ended December 31, 2001, gross sales were $99.7
million, an increase of $13.6 million or 15.8% higher than gross sales of $86.1
million for the year ended December 31, 2000. The increase in gross sales is
primarily attributable to the introduction of new products and increased sales
of certain of our existing products as discussed below in "Net Sales".
Net Sales. For the year ended December 31, 2001, net sales were $80.7
million, an increase of $9.0 million or 12.5% higher than gross sales of $71.7
million for the year ended December 31, 2000. The increase in net sales was
primarily attributable to increased sales of natural sodas, Blue Sky(R) soda,
which was acquired in September 2000, apple juice and sales of Junior Juice,
which was acquired in May 2001. The increase in sales was attributable to a
lesser extent to sales of Energade(R), which was introduced in July 2001 and E2O
Energy Water, which was introduced in June 2001. The increase in net sales was
partially offset by decreased sales of smoothies in glass and P.E.T. bottles,
Signature Sodas, children's multi-vitamin juice drinks, and teas, lemonade and
juice cocktails as well as increased discounts, allowances and promotional
payments.
Gross Profit. Gross profit was $28.9 million for the year ended December
31, 2001, a decrease of $64,000 or 0.2% from the $29.0 million gross profit for
the year ended December 31, 2000. Gross profit as a percentage of net sales
decreased to 35.8% for the year ended December 31, 2001 from 40.3% for the year
ended December 31, 2000. The decrease in gross profit was primarily attributable
to increases in discounts, allowances and promotional payments as well as
increased cost of goods sold which was almost wholly offset by increased net
sales. The decrease in gross profit as a percentage of net sales is primarily
attributable to slightly lower margins achieved as a result of a change in our
product and customer mix.
Total Operating Expenses. Total operating expenses were $23.3 million for
the year ended December 31, 2001, an increase of $1.3 million or 5.8% over total
operating expenses of $22.0 million for the year ended December 31, 2000. Total
21
operating expenses as a percentage of net sales decreased to 28.9% for the year
ended December 31, 2001, from 30.7% for the year ended December 31, 2000. The
increase in total operating expenses was primarily attributable to increased
selling, general and administrative 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 lower increase in selling, general and
administrative expenses.
Selling, General and Administrative expenses. Selling, general and
administrative expenses were $22.8 million for the year ended December 31, 2001,
an increase of $1.1 million or 5.3% over selling, general and administrative
expenses of $21.7 million for the year ended December 31, 2000. Selling, general
and administrative expenses as a percentage of net sales decreased to 28.3% for
the year ended December 31, 2001 from 30.2% for the year ended December 31,
2000. Selling expenses were $12.4 million for the year ended December 31, 2001,
a decrease of $244,000 or 1.9% over selling expenses of $12.6 million for the
year ended December 31, 2000. Selling expenses as a percentage of net sales
decreased to 15.3% for the year ended December 31, 2001 from 17.6% for the year
ended December 31, 2000. The decrease in selling expenses was primarily
attributable to a decrease in expenditures for advertising, merchandise
displays, point of sale and in-store demonstrations which was largely offset by
an increase in distribution (freight) expenses, commissions, expenditures for
graphic design and premiums as well as fees paid for slotting. General and
administrative expenses were $10.4 million for the year ended December 31, 2001,
an increase of $1.4 million or 15.4% over general and administrative expenses of
$9.1 million for the year ended December 31, 2000. General and administrative
expenses as a percentage of net sales were 12.9% for the year ended December 31,
2001 as compared to 12.6% for the year ended December 31, 2000. The increase in
general and administrative expenses was partially attributable to an increase in
payroll costs, which was partially offset by a decrease in other general and
administrative costs. The increase in payroll costs was partially attributable
to noncash compensation expense related to the exercise of stock options of
$231,000.
Amortization of Trademark License and Trademarks. Amortization of trademark
license and trademarks was $507,000 for the year ended December 31, 2001, an
increase of $136,000 over amortization of trademark license and trademarks of
$371,000 for the year ended December 31, 2000. The increase in amortization of
trademark license and trademarks was primarily attributable to the amortization
of the Blue Sky trademark for a full year since the trademark was acquired in
September 2000. To a lesser extent, the increase in amortization of trademark
license and trademarks was due to the acquisition of the Junior Juice trademark
in May 2001.
Operating Income. Operating income was $5.6 million for the year ended
December 31, 2001, compared to $6.9 million for the year ended December 31,
2000. The $1.3 million decrease in operating income was primarily attributable
to increased operating expenses, which was partially offset by increased gross
profit.
Net Non-operating Expense. Net non-operating expense was $519,000 for the
year ended December 31, 2001, which was $150,000 higher than net non-operating
expense of $369,000 for the year ended December 31, 2000. Net non-operating
expense consists of interest and financing expense and interest income. Interest
and financing expense for the year ended December 31, 2001 was $528,000, as
compared to $382,000 for the year ended December 31, 2000. The increase in
interest and financing expense was primarily attributable to the increase in
long-term debt, primarily related to the acquisition of the Blue Sky business in
2000. See also "Liquidity and Capital Resources" below. Interest income for the
year ended December 31, 2001 was $9,000, as compared to interest income of
$13,000 for the year ended December 31, 2000. The decrease in interest income
was primarily attributable to a reduction in the cash available for investment
during the year ended December 31, 2001.
Provision for Income Taxes. Provision for income taxes for the year ended
December 31, 2001 was $2.0 million as compared to provision for income taxes of
$2.6 million for the year ended December 31, 2000. The effective combined
federal and state tax rate for 2001 was 40.0% as compared to 40.1% for 2000. The
decrease in the provision for income taxes was primarily attributable to
decreased operating income.
22
Net Income. Net income was $3.0 million for the year ended December 31,
2001, compared to $3.9 million for the year ended December 31, 2000. The
$896,000 decrease in net income was attributable to decreased operating income
of $1.3 million and increased non-operating expense of $150,000, which was
partially offset by decreased provision for income taxes of $603,000.
Liquidity and Capital Resources
As of December 31, 2002, the Company had working capital of $14,950,000
compared to working capital of $12,978,000 as of December 31, 2001. The increase
in working capital was primarily attributable to net income earned after
adjustments for certain non-cash expenses, primarily amortization of trademark
license and trademarks, depreciation and other amortization, a decrease in
deposits and other assets and an increase in deferred income taxes which was
partially offset by payments made in reduction of long-term debt and increased
expenditures for the acquisition of property, trademark license and trademarks.
Net cash provided by operating activities for the year ended December 31,
2002 was $2,727,000, compared to cash provided by operating activities of
$5,203,000 during 2001. The decrease in cash provided by operating activities
was primarily attributable to increases in accounts receivable, which was
partially offset by decreases in amortization of trademark license and
trademarks, decreases in inventory, and an increase in accounts payable.
Purchases of inventories, increases in accounts receivable, and other assets,
acquisition of property and equipment, acquisition of trademark licenses and
trademarks, and repayment of our line of credit and accounts payable are
expected to remain our principal recurring use of cash and working capital
funds.
Net cash used in investing activities for the year ended December 31, 2002
was $92,000 as compared to net cash used in investment activities of $682,000 in
2001. The decrease in net cash used in investing activities was primarily
attributable to lower levels of purchases of property and equipment and
trademark acquisitions, which was partially offset by increased expenditures for
deposits and other assets in 2002. Management, from time to time, considers the
acquisition of capital equipment, particularly, specific items of production
equipment required to produce certain of our products, 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.
Net cash used in financing activities was $2.3 million for the year ending
December 31, 2002, as compared to net cash used in financing activities of $4.4
million in 2001. The decrease in net cash used in financing activities as
compared to the prior year was primarily attributable to decreased principal
payments of long-term debt, which was marginally offset by decreased proceeds
from the issuance of common stock during 2002.
In 1997, HBC obtained a credit facility from Comerica Bank-California
("Comerica"), consisting of a revolving line of credit of up to $3.0 million in
aggregate at any time outstanding and a term loan of $4.0 million. The
utilization of the revolving line of credit by HBC was dependent upon certain
levels of eligible accounts receivable and inventory from time to time. Such
revolving line of credit and term loan was secured by substantially all of HBC's
assets, including accounts receivable, inventory, trademarks, trademark licenses
and certain equipment. That facility was subsequently modified from time to
time, and on September 19, 2000, HBC entered into modification agreement with
Comerica which amended certain provisions under the above facility in order to
finance the acquisition of the Blue Sky business, repay the term loan, and
provide additional working capital ("Modification Agreement"). Pursuant to the
Modification Agreement, the revolving line of credit was increased to $12.0
million, reducing to $6.0 million by September 2004. The revolving line of
credit remains in full force and effect through September 2005. Interest on
borrowings under the line of credit is based on bank's base (prime) rate, plus
an additional percentage of up to 0.5% or the LIBOR rate, plus an additional
percentage of up to 2.5%, depending upon certain financial ratios of HBC from
time to time. At December 31, 2002, $2,969,000 was outstanding under the credit
facility and borrowing capacity available to the Company from Comerica under the
credit facility was $6,331,000.
23
The following represents a summary of the Company's contractual obligations
and related scheduled maturities as of December 31, 2002:
Long Term
Debt &
Capital Lease Operating
Obligations Lease Total
--------------- --------------- ---------------
Year ending December 31:
2003 $ 230,740 $ 653,727 $ 884,467
2004 264,234 656,536 920,770
2005 3,195,314 658,179 3,853,493
2006 146,492 680,708 827,200
2007 660,468 660,468
Thereafter 1,879,017 1,879,017
--------------- --------------- ---------------
$ 3,836,780 $ 5,188,635 $ 9,025,415
=============== =============== ===============
The terms of the Company's line of credit contain certain financial
covenants including certain financial ratios and annual net income requirements.
The line of credit contains provisions under which applicable interest rates
will be adjusted in increments based on the achievement of certain financial
ratios. The Company was in compliance with the financial covenants at December
31, 2002.
If any event of default shall occur for any reason, whether voluntary or
involuntary, Comerica may declare any or all of portions outstanding on the line
of credit immediately due and payable, exercise rights and remedies available to
secured parties under the Uniform Commercial Code, institute legal proceedings
to foreclose upon the lien and security interest granted or for the sale of any
or all collateral.
Management believes that cash available from operations, including cash
resources and the revolving line of credit, will be sufficient for our working
capital needs, including purchase commitments for raw materials, payments of tax
liabilities, debt servicing, expansion and development needs, purchases of
shares of our common stock, as well as any purchases of capital assets or
equipment through December 31, 2003.
Critical Accounting Policies
The following summarize the most significant accounting and reporting
policies and practices of the Company.
Trademark License and Trademarks - Trademark license and trademarks
represent primarily the Company's ownership of the Hansen's(R) trademark in
connection with the manufacture, sale and distribution of beverages, water and
non-beverage products. 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 also owns the Blue Sky(R) trademark, which was acquired in
September 2000, and the Junior Juice(R) trademark, which was acquired in May
2001. During 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets. Under the provisions on SFAS No. 142, the Company
discontinued amortization on indefinite-lived trademark licenses and trademarks
while continuing to amortize remaining trademark licenses and trademarks over
one to 25 years.
Long-Lived Assets - Management regularly reviews property and equipment and
other long-lived assets, including certain identifiable intangibles, for
possible impairment. This review occurs annually, or more frequently if events
or changes in circumstances indicate the carrying amount of the asset may not be
recoverable. If there is indication of impairment of property and equipment or
amortizable intangible assets, then management prepares an estimate of future
cash flows (undiscounted and without interest charges) expected to result from
24
the use of the asset and its eventual disposition. If these cash flows are less
than the carrying amount of the asset, an impairment loss is recognized to write
down the asset to its estimated fair value. The fair value is estimated at the
present value of the future cash flows discounted at a rate commensurate with
management's estimates of the business risks. Annually, or earlier, if there is
indication of impairment of identified intangible assets not subject to
amortization, management compares the estimated fair value with the carrying
amount of the asset. An impairment loss is recognized to write down the
intangible asset to its fair value if it is less than the carrying amount.
Preparation of estimated expected future cash flows is inherently subjective and
is based on management's best estimate of assumptions concerning expected future
conditions. No impairments were identified as of December 31, 2002.
Management believes that the accounting estimate related to impairment of
its long lived assets, including its trademark license and trademarks, is a
"critical accounting estimate" because: (1) it is highly susceptible to change
from period to period because it requires company management to make assumptions
about cash flows and discount rates; and (2) the impact that recognizing an
impairment would have on the assets reported on our consolidated balance sheet,
as well as net income, could be material. Management's assumptions about cash
flows and discount rates require significant judgement because actual revenues
and expenses have fluctuated in the past and are expected to continue to do so.
In estimating future revenues, we use internal budgets. Internal budgets
are developed based on recent revenues data for existing product lines and
planned timing of future introductions of new products and their impact on our
future cash flows.
Advertising and Promotional Allowances - The Company accounts for
advertising production costs by expensing such production costs the first time
the related advertising takes place. In addition, the Company supports its
customers with promotional allowances, a portion of which is utilized for
marketing and indirect advertising by them. In certain instances, portion of the
promotional allowances payable to customers based on the levels of sales to such
customers, promotion requirements or expected use of the allowances, are
estimated by the Company. If the level of sales, promotion requirements or use
of the allowances are different from such estimates, the promotional allowances
could, to the extent based on estimates, be affected. During 2002, the Company
adopted Emerging Issues Task Force ("EITF") No. 01-9 which requires certain
sales promotions and customer allowances previously classified as selling,
general and administrative expenses to be classified as a reduction of sales or
as cost of goods sold. The Company has conformed its presentation of advertising
and promotional allowances to comply with the provisions of EITF No. 01-9.
Newly Issued Accounting Pronouncements
During 2000 and 2001, the EITF addressed various issues related to the
income statement classification of certain promotional payments, including
consideration from a vendor to a reseller or another party that purchases the
vendor's products. EITF No. 01-9, Accounting for Consideration Given by a Vendor
to a Customer or Reseller of the Vendor's Products, was issued in November 2001
and codified earlier pronouncements. The consensus requires certain sales
promotions and customer allowances previously classified as selling, general and
administrative expenses to be classified as a reduction of net sales or as cost
of goods sold. The Company adopted EITF No. 01-9 on January 1, 2002. The effect
of the change in accounting related to the adoption of EITF No. 01-9 for the
year ended December 31, 2002 was to decrease net sales by $14,846,875, increase
cost of goods sold by $220,394 and decrease selling, general and administrative
expenses by $15,067,269. For the year ended December 31, 2001 net sales
decreased by $11,621,396, cost of goods sold increased by $341,332 and selling,
general and administrative expenses decreased by $11,962,728. For the year ended
December 31, 2000, $8,026,724 has been classified as a reduction of net sales
and $133,390 as an increase in cost of goods sold, both of which were previously
reported as selling, general and administrative expense respectively.
Effective January 1, 2002, the Company adopted the provisions of SFAS No.
142, Goodwill and Other Intangible Assets. This statement discontinued the
amortization of goodwill and indefinite-lived intangible assets, subject to
periodic impairment testing. Upon adoption of SFAS No. 142, the Company
25
evaluated the useful lives of its various trademark licenses and trademarks and
concluded that certain of the trademark licenses and trademarks have indefinite
lives. Unamortized trademark licenses and trademarks ceased to be amortized
effective January 1, 2002 and will be subject to periodic impairment analysis.
Had the non-amortization provision of SFAS No. 142 been adopted as of January 1,
2000, net income and net income per share for the years ended December 31, 2002,
2001, and 2000 would have been adjusted as follows:
For the years ended December 31,
2002 2001 2000
---------------- ---------------- ----------------
Net income, as reported $3,029,195 $3,019,353 $3,915,126
Add back: Amortization of trademark licenses and
trademarks with indefinite lives (net of tax
effect) - 292,241 211,716
---------------- ---------------- ----------------
Adjusted net income $3,029,195 $3,311,594 $4,126,842
================ ================ ================
Net income per common share - basic, as reported $ 0.30 $ 0.30 $ 0.39
Amortization of trademark licenses and trademarks
with indefinite lives (net of tax effect) - 0.03 0.02
---------------- ---------------- ----------------
Adjusted net income per common share - basic $ 0.30 $ 0.33 $ 0. 41
================ ================ ================
Net income per common share - diluted, as
Reported $ 0.29 $ 0.29 $ 0.38
Amortization of trademark licenses and trademarks
with indefinite lives (net of tax effect) - 0.03 0.02
---------------- ---------------- ----------------
Adjusted net income per common share - diluted $ 0.29 $ 0.32 $ 0.40
================ ================ ================
On January 1 and December 31, 2002, the nonamortizing trademark licenses
and trademarks were tested for impairment in accordance with the provisions of
SFAS No. 142. Fair values were estimated based on the Company's best estimate of
the expected present value of future cash flows. No amounts were impaired at
that time. In addition, the remaining useful lives of trademark licenses and
trademarks being amortized were reviewed and deemed to be appropriate.
The FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations,
which addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS No. 143 is effective for financial statements issued for
fiscal years beginning after September 15, 2002. The Company does not expect
that the adoption of this standard will have a material impact on its financial
position, cash flows or results of operations.
Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, effective for fiscal years
beginning after December 15, 2001. The new rules on asset impairment supersede
FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, and provide a single accounting model
for long-lived assets to be disposed of. The Company has performed an analysis
and determined that the adoption of this Statement had no effect on the earnings
or financial position of the Company.
In April 2002, the FASB issued Statement No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections, effective for fiscal years beginning after June 15, 2002. For most
companies, Statement No. 145 will require gains and losses on extinguishments of
debt to be classified as income or loss from continuing operations rather than
as extraordinary items as previously required under Statement No. 4.
Extraordinary treatment will be required for certain extinguishments as provided
in APB Opinion No. 30. Statement No. 145 also amends Statement No. 13 to require
certain modifications to capital leases be treated as a sale-leaseback and
modifies the accounting for sub-leases when the original lessee remains a
secondary obligor (or guarantor). In addition, the FASB rescinded Statement No.
44, which addressed the accounting for intangible assets of motor carriers and
made numerous technical corrections. The Company has not yet determined the
effect, if any, of the adoption of this Statement.
26
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities and supersedes
EITF No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring.) SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred.
Under EITF No. 94-3, a liability for an exit cost as defined in EITF No. 94-3
was recognized at the date of an entity's commitment to an exit plan. SFAS No.
146 also establishes that the liability should initially be measured and
recorded at fair value. The Company will adopt the provisions of SFAS No. 146
for exit or disposal activities that are initiated after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, effective for fiscal years ending after
December 15, 2002. Statement No. 148 amends SFAS No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition to SFAS
No. 123's fair value method of accounting for stock-based employee compensation.
SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and APB
Opinion No. 28, Interim Financial Reporting, to require disclosure in the
summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
The Company has adopted the new disclosure requirements of SFAS No. 148 as of
December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN No. 45"). FIN No. 45 clarifies and
expands on existing disclosure requirements for guarantees, including loan
guarantees. It also would require that, at the inception of a guarantee, the
Company must recognize a liability for the fair value of its obligation under
that guarantee. The initial fair value recognition and measurement provisions
will be applied on a prospective basis to certain guarantees issued or modified
after December 31, 2002. The disclosure provisions are effective for financial
statements of periods ending after December 15, 2002. The Company does not
expect that the adoption of FIN No. 45 will have a material impact on its
financial position, cash flows or results of operations.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51 ("FIN No. 46"). FIN
No. 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN No. 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN No. 46 must be applied for the first
interim or annual period beginning after June 15, 2003. Since the Company has no
interests in variable interest entities, the Company does not expect that the
adoption of FIN No. 46 will have a material impact on its financial position,
cash flows or results of operations.
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 its 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 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
27
of 1934, as amended) regarding the expectations of management with respect to
revenues, profitability, adequacy of funds from operations and our 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.
These statements are qualified by their terms and/or important factors,
many of which are outside our control that could cause actual results and events
to differ materially from the statements made including, but not limited to, the
following:
o The 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 and/or the Bureau of Alcohol,
Tobacco and Firearms and/or certain state regulatory agencies;
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 and in respect of many
which the Company's experience is limited. 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 store chains, specialty chain
stores, club stores, mass merchandisers 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 facility and the
actions of its creditors;
o The effectiveness of the Company's advertising, marketing and promotional
programs;
o The Company's ability to make suitable arrangements for the co-packing of
its various products including, but not limited to, its energy and
functional drinks in 8.3-ounce slim cans, smoothies in 11.5-ounce cans,
E2O Energy Water, Energade, Monster energy drinks, soy smoothies, sparkling
orangeades and lemonades in glass bottles and other products.
The foregoing list of important factors is not exhaustive.
Our actual results could be materially different from the results described
or anticipated by our forward-looking statements due to the inherent uncertainty
of estimates, forecasts and projections and may be better or worse than
anticipated. Given these uncertainties, you should not rely on forward-looking
statements. Forward-looking statements represent our estimates and assumptions
only as of the date that they were made. We expressly disclaim any duty to
provide updates to forward-looking statements, and the estimates and assumptions
associated with them, after the date of this report, in order to reflect changes
in circumstances or expectations or the occurrence of unanticipated events
except to the extent required by applicable securities laws.
28
Sales
The table set forth below discloses selected quarterly data regarding sales
for the past five years. Data from any one or more quarters is not necessarily
indicative of annual results or continuing trends.
Sales of beverages are expressed in unit case volume. A "unit case" means a
unit of measurement equal to 192 U.S. fluid ounces of finished beverage (24
eight-ounce servings) or concentrate sold that will yield 192 U.S. fluid ounces
of finished beverage. Unit case volume of the Company means number of unit cases
(or unit case equivalents) of beverages directly or indirectly sold by the
Company. Sales of food bars and cereals are expressed in actual cases. A case of
food bars and cereals is defined as follows:
o A fruit and grain bar and functional nutrition bar case equals ninety
1.76-ounce bars.
o A natural cereal case equals ten 13-ounce boxes measured by volume.
o An active nutrition bar case equals thirty-two 1.4-ounce bars.
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 our 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. The Company has not had
sufficient experience with its food bars, cereal products and Hard e malt-based
products and consequently has no knowledge of the trends which may occur with
such products. Quarterly fluctuations may also be affected by other factors
including the introduction of new products, 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, soda
concentrates and food products and increased advertising and promotional
expenses. See also "ITEM 1. BUSINESS - SEASONALITY."
Unit Case Volume / Case Sales (in Thousands)
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Quarter 1 3,597 3,091 2,451 2,287 1,733
Quarter 2 4,977 4,171 3,323 2,817 2,159
Quarter 3 5,146 4,271 3,157 3,148 2,625
Quarter 4 3,885 3,583 2,859 2,645 1,796
--------- --------- --------- --------- ---------
Total 17,605 15,116 11,790 10,897 8,313
========= ========= ========= ========= =========
Net Revenues (in Thousands)
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Quarter 1 $18,592 $16,908 $14,236 $13,836 $10,056
Quarter 2 26,265 22,337 20,702 17,471 12,566
Quarter 3 26,985 23,011 20,434 18,969 14,873
Quarter 4 20,204 18,402 16,334 15,908 11,133
--------- --------- --------- --------- ---------
Total $92,046 $80,658 $71,706 $66,184 $48,628
========= ========= ========= ========= =========
Inflation
The Company does not believe that inflation had a significant impact on the
Company's results of operations for the periods presented.
29
ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS
The principal market risks (i.e., the risk of loss arising from adverse
changes in market rates and prices) to which the Company is exposed to are
fluctuations in commodity prices affecting the cost of raw materials and changes
in interest rates on the Company's long term debt. The Company is subject to
market risk with respect to the cost of commodities because its ability to
recover increased costs through higher pricing may be limited by the competitive
environment in which it operates.
At December 31, 2002, the majority of the Company's debt consisted of
variable rate debt. The amount of variable rate debt fluctuates during the year
based on the Company's cash requirements. If average interest rates were to
increase one percent for the year ended December 31, 2002, the net impact on the
Company's pre-tax earnings would have been approximately $40,000.
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 49 through
70.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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
anticipated that the next annual meeting of stockholders will be held in October
or November, 2003.
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 (53) - 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.
Hilton H. Schlosberg (50) - 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 and 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. Vice Chairman, Secretary and a
director of HBC from July 1992 to the present.
Benjamin M. Polk (52) - 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. Partner with Winston & Strawn (New York, New York) where Mr.
Polk has practiced law with that firm and its predecessors, Whitman Breed Abbott
& Morgan LLP and Whitman & Ransom, from August 1976 to the present. (1)
30
Norman C. Epstein (62) - 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. (63) - Director of the Company since July 1992. Member
of the Audit Committee of the Board of Directors since April 2000. President and
Chief Executive Officer of HBC from July 1992 to June 1997. Consultant for The
Joseph Company from October 1997 to March 1999 and for Costa Macaroni
Manufacturing Company from July 2000 to January 2002. Director of Mentoring at
Biola University from July 2002 to present.
Mark S. Vidergauz (49) - Director of the Company and member of the
Compensation Committee of the Board of Directors of the Company since June 1998.
Member of the Audit Committee of the Board of Directors since April 2000.
Managing Director and Chief Executive Officer of Sage Group LLC from April 2000
to present. Managing director at the Los Angeles office of ING Barings LLC, a
diversified financial service institution headquartered in the Netherlands from
April 1995 to April 2000.
Mark Hall (48) - Senior Vice President, Single-Serve Products joined HBC in
1997. Prior to joining HBC, Mr. Hall spent three years with Arizona Beverages as
Vice President of Sales where he was responsible for sales and distribution of
Arizona products through a national network of beer distributors and soft drink
bottlers.
Kirk Blower (53) - Senior Vice President, Juice and Non-Carbonated
Products, of HBC since 1992. Mr. Blower has over 20 years of experience in sales
and marketing, primarily with the Coca-Cola organization.
Tim Welch (47) - Senior Vice President, Soda Products, joined HBC in 1999.
Mr. Welch has extensive experience in brand management and beverage marketing.
Prior to joining HBC, Mr. Welch served as Vice President of Marketing, North
America for Signet Armorlite, Inc. where he was responsible for managing new
product development, pricing, promotions, point-of-sale, forecasting and
developing company strategy.
(1) Mr. Polk and his law firm, Winston & Strawn, 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. Executive 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 year ended December 31, 2002, all
Section 16(a) filing requirements applicable to the Company's executive
officers, directors and greater than ten percent stockholders were complied
with, except that Form 5's in respect of option grants required to be filed by
each of Rodney C. Sacks and Hilton H. Schlosberg were inadvertently filed late.
31
ITEM 11. EXECUTIVE COMPENSATION
The following tables set forth certain information regarding the total
remuneration earned and grants of options/ 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 $100,000
during the year ended December 31, 2002. These amounts reflect total cash
compensation paid by the Company and its subsidiaries to these individuals
during the years December 31, 2000 through 2002.
SUMMARY COMPENSATION TABLE
Long Term
Compensation
ANNUAL COMPENSATION (4)
- ---------------------------------------- ------------------------------------------ -------------
Awards(5)
- ----------------------------- ---------- ------------- ------------ --------------- -------------
Securities
Other Annual underlying
Salary Bonus Compensation Options/SARs
Name and Principal Positions Year (1)($) (2)($) ($) (#)(6)
- ----------------------------- ---------- ------------- ------------ --------------- -------------
Rodney C. Sacks 2002 225,504 - 10,331(3) 150,000
Chairman, CEO 2001 194,400 8,000 7,314(3)
and Director 2000 194,400 10,000 6,262(3)
- ----------------------------- ---------- ------------- ------------ --------------- -------------
Hilton H. Schlosberg 2002 225,504 - 7,753(3) 150,000
Vice-Chairman, CFO, COO, 2001 194,400 8,000 7,314(3)
President, Secretary and 2000 194,400 10,000 6,263(3)
Director
- ----------------------------- ---------- ------------- ------------ --------------- -------------
Mark J. Hall 2002 160,000 10,000 7,733(3) 20,000
Senior Vice President 2001 160,000 8,000 7,349(3)
Single Serve Products 2000 160,000 20,000 8,061(3)
- ----------------------------- ---------- ------------- ------------ --------------- -------------
Kirk S. Blower 2002 118,000 4,000 7,238(3) 12,500
Senior Vice President 2001 115,000 3,000 7,364(3)
Juice and Non-Carbonated 2000 115,000 4,000 7,316(3)
Products
- ----------------------------- ---------- ------------- ------------ --------------- -------------
Timothy M. Welch 2002 115,500 11,300 57,942(7)
Senior Vice President 2001 111,269 4,000 14,587(8)
Soda Products 2000 110,000 3,000 14,202(9)
============================= ========== ============= ============ =============== =============
(1) SALARY - Pursuant to employment agreements, Messrs. Sacks and Schlosberg
were entitled to an annual base salary of $226,748, $209,952, and $194,400 for
2002, 2001 and 2000 respectively.
(2) BONUS - Payments made in 2003, 2002 and 2001 are for bonuses accrued in
2002, 2001 and 2000 respectively.
(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) LONG-TERM INCENTIVE PLAN PAYOUTS - None paid. No plan in place.
(5) RESTRICTED STOCK AWARDS - The Company does not have a plan for restricted
stock awards.
(6) STOCK APPRECIATION RIGHTS - The Company does not have a plan for stock
appreciation rights.
(7) Includes $46,483 for reimbursement of moving expense, $6,000 for auto
reimbursement expenses, $3,500 for housing expenses and $1,959 for other
miscellaneous perquisites.
(8) Includes $6,000 for auto reimbursement expenses, $6,000 for housing expenses
and $2,587 for other miscellaneous perquisites.
(9) Includes $6,000 for auto reimbursement expenses, $6,000 for housing expenses
and $2,202 for other miscellaneous perquisites.
ALL OTHER COMPENSATION - none paid
32
OPTION/SAR GRANTS FOR THE YEAR ENDED DECEMBER 31, 2002
Potential realizable
value at assumed annual
rates of stock price
appreciate for option
Individual Grants term
- --------------------------------------------------------------------------------------- --------------------------
Percent of
Number of total
Securities Options/SARs Exercise
underlying granted to or base
Options/SARs employees in price Expiration 5% 10%
Name granted (#) 2002 ($/Share) Date ($) ($)
- ---------------------- ------------------ ---------------- ------------- -------------- ------------ -------------
Rodney C. Sacks 150,000(1) 28.3% $3.57 7/12/2012 336,773 853,449
- ---------------------- ------------------ ---------------- ------------- -------------- ------------ -------------
Hilton H. Schlosberg 150,000(1) 28.3% $3.57 7/12/2012 336,773 853,449
- ---------------------- ------------------ ---------------- ------------- -------------- ------------ -------------
Mark J. Hall 20,000(1) 3.8% $3.57 7/12/2012 44,903 113,793
- ---------------------- ------------------ ---------------- ------------- -------------- ------------ -------------
Kirk S. Blower 12,500(1) 2.4% $3.57 7/12/2012 28,064 71,121
- ---------------------- ------------------ ---------------- ------------- -------------- ------------ -------------
Timothy M. Welch -
====================== ================== ================ ============= ============== ============ =============
(1) Options to purchase the Company's common stock become exercisable in equal
annual increments over 5 years beginning July 12, 2003.
AGGREGATED OPTION/SAR EXERCISES DURING THE YEAR ENDED
DECEMBER 31, 2002 AND OPTION/SAR VALUES AT DECEMBER 31, 2002
Value of
Number of underlying unexercised
unexercised in-the-money
options/SARs at December 31, 2002
December 31, 2002 (#) ($)
------------------------ --------------------
Shares acquired Value Exercisable/ Exercisable/
Name on exercise (#) Realized ($) Unexercisable Unexercisable
- ---------------------- ------------------- ------------------ ------------------------ --------------------
Rodney C. Sacks - - 137,500/150,000(1) 98,625/97,500
- ---------------------- ------------------- ------------------ ------------------------ --------------------
Hilton H. Schlosberg - - 137,500/150,000(1) 98,625/97,500
- ---------------------- ------------------- ------------------ ------------------------ --------------------
Mark J. Hall - - 116,000/20,000(2) 355,960/13,000
- ---------------------- ------------------- ------------------ ------------------------ --------------------
Kirk S. Blower - - 7,500/17,500(3) 0/8,125
- ---------------------- ------------------- ------------------ ------------------------ --------------------
Timothy M. Welch - - 36,000/36,000(4) 0/0
====================== =================== ================== ======================== ====================
(1) Includes options to purchase 37,500 shares of common stock at $1.59 per
share of which all are exercisable at December 31, 2002, granted pursuant to
Stock Option Agreements dated January 30, 1998 between the Company and Messrs.
Sacks and Schlosberg, respectively; options to purchase 100,000 shares of common
stock at $4.25 per share which are exercisable at December 31, 2002, granted
pursuant to Stock Option Agreements dated February 2, 1999 between the Company
and Messrs. Sacks and Schlosberg, respectively; and options to purchase 150,000
shares of common stock at $3.57 per share of which none are exercisable at
December 31, 2002, granted pursuant to Stock Option Agreements dated July 12,
2002 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 which are exercisable at December 31, 2002, 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 which are
exercisable at December 31, 2002, granted pursuant to a Stock Option Agreement
dated January 30, 1998 between the Company and Mr. Hall; options to purchase
20,000 shares of common stock at $3.57 per share of which none are exercisable
at December 31, 2002, granted pursuant to a Stock Option Agreement dated July
12, 2002 between the Company and Mr. Hall. On January 21, 2003, Mr. Hall
exercised the options in respect of (i) 96,000 shares at an exercise price of
$1.06 per share and (ii) 20,000 shares at an exercise price of $1.59 per share.
33
(3) Includes options to purchase 12,500 shares of common stock at $4.25 per
share of which 7,500 are exercisable at December 31, 2002, granted pursuant to a
Stock Option Agreement dated February 2, 1999 between the Company and Mr.
Blower; and options to purchase 12,500 shares of common stock at $3.57 per share
of which none are exercisable at December 31, 2002, granted pursuant to a Stock
Option Agreement dated July 12, 2002 between the Company and Mr. Blower.
(4) Includes options to purchase 72,000 shares of common stock at $4.44 per
share of which 36,000 are exercisable at December 31, 2002, granted pursuant to
a Stock Option Agreement dated February 1, 1999 between the Company and Mr.
Welch.
Performance Graph
The following graph shows a five-year comparison of cumulative total
returns: (1)
TOTAL SHAREHOLDER RETURNS
ANNUAL RETURN PERCENTAGES
For the years ended December 31,
Company Name/Index 1998 1999 2000 2001 2002
- ---------------------- -------- -------- -------- -------- --------
HANSEN NAT CORP 196.63 (19.77) (10.14) 8.39 0.50
S&P SMALLCAP 600 INDEX (1.31) 12.40 11.80 6.54 (14.63)
PEER GROUP (43.18) 8.47 17.06 47.07 14.40
INDEXED RETURNS
For the years ended December 31,
Base
Period
Company Name/Index 1997 1998 1999 2000 2001 2002
- ---------------------- ------ -------- -------- -------- -------- --------
HANSEN NAT CORP 100 296.63 238.00 213.85 231.79 232.95
S&P SMALLCAP 600 INDEX 100 98.69 110.94 124.03 132.13 112.80
PEER GROUP 100 56.82 61.63 72.15 106.10 121.38
(1) Annual return assumes reinvestment of dividends. Cumulative total return
assumes an initial investment of $100 on December 31, 1997. The Company's
self-selected peer group is comprised of National Beverage Corporation, Clearly
Canadian Beverage Company, Triarc Companies, Inc., Leading Brands, Inc., Cott
Corporation, Northland Cranberries and Jones Soda Co. All of the companies in
the peer group traded during the entire five-year period with the exception of
Triarc Companies, Inc., which sold their beverage business in October 2000 and
Jones Soda Co., which started trading in August 2000.
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
$226,748 for 2002 and $244,888 for 2003, 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, Chief Operating
Officer, Chief Financial Officer and Secretary for an annual base salary of
$226,748 for 2002 and $244,888 for 2003, 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.
34
The preceding descriptions of the employment agreements for Messrs. Sacks
and Schlosberg 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 pays outside directors annual fees of $7,000 plus $500 for each
meeting attended of the Board of Directors or any committee thereof. In 2002, we
paid each of Norman E. Epstein, Harold C. Taber, Jr. and Mark S. Vidergauz
$8,000 and we paid Benjamin M. Polk $7,500 for services provided for the
one-year period ended December 31, 2001. In 2003, we paid each of Norman E.
Epstein, Benjamin M. Polk, Harold C. Taber, Jr. and Mark S. Vidergauz director's
fees of $8,000 for services provided for the one-year period ended December 31,
2002. Commencing in 2003, the Company will pay outside directors an annual fee
of $10,000 plus $1,000 for each meeting of the Board of Directors attended.
Additionally, the Company will pay outside directors $500 for each committee
meeting attended in person and $250 for each meeting attended by telephone.
Employee Stock Option Plan
The Company has a stock option plan (the "Plan") that provided 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, or for shares of common stock valued at fair market value
on the date of purchase. Under the Plan, no additional options may be granted
after July 1, 2001.
During 2001, the Company adopted the Hansen Natural Corporation 2001 Stock
Option Plan ("2001 Option Plan"). The 2001 Option Plan provides for the grant of
options to purchase up to 2,000,000 shares of the common stock of the Company to
certain key employees of the Company and its subsidiaries. Options granted under
the 2001 Stock Option Plan may be incentive stock options under Section 422 of
the Internal Revenue Code, as amended (the "Code"), nonqualified stock options,
or stock appreciation rights.
The Plan and the 2001 Option Plan are administered by the Compensation
Committee of the Board of Directors of the Company, comprised of directors who
satisfy the "non-employee" director requirements of Rule 16b-3 under the
Securities Exchange Act of 1934 and the "outside director" provision of Section
162(m) of the Code. Grants under the Plan and the 2001 Option 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
35
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 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
The disclosure set forth in Item 5 of this report is incorporated herein.
(a) The following table sets forth information, as of March 3, 2003, in respect
of the only persons known to the Company who beneficially own more than 5% of
the outstanding common stock of the Company:
Amount and
Nature of Percent
Title Beneficial of
Of Class Name and Address of Beneficial Owner Owner Class
- ------------- --------------------------------------- -------------- --------
Common Stock Brandon Limited Partnership No. 1 (1) 654,822 5.8%
Brandon Limited Partnership No. 2 (2) 2,831,667 25.3%
Rodney C. Sacks (3) 4,011,489 (4) 35.8%
Hilton H. Schlosberg (5) 3,972,586 (6) 35.4%
Kevin Douglas, Douglas Family Trust
and James Douglas and Jean Douglas
Irrevocable Descendants' Trust (7) 730,011 (8) 6.3%
(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 1010 Railroad Street, Corona, California
92882.
(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 100,000 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 137,500
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, a limited partnership of which Mr. Sacks
is the general partner and his children and he are the limited partners, 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, a limited partnership of which Mr. Sacks is the general
partner and his children and he are the limited partners, and a trust for the
benefit of his children.
(5) The mailing address of Mr. Schlosberg is 1010 Railroad Street, Corona,
California 92882.
(6) Includes 348,597 shares of common stock owned by Mr. Schlosberg, of which
2,000 shares are jointly owned 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
100,000 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.
36
Mr. Schlosberg disclaims beneficial ownership of all shares deemed beneficially
owned by him hereunder except: (i) 348,597 shares of common stock, (ii) the
137,500 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.
(7) The mailing address of this reporting person is 1101 Fifth Avenue, Suite
360, San Rafael, California 94906.
(8) Includes 274,782 shares of common stock owned by Kevin Douglas; 226,909
shares of common stock owned by James Douglas and Jean Douglas Irrevocable
Descendants' Trust; and 228,320 shares of common stock owned by Douglas Family
Trust. Kevin Douglas, Douglas Family Trust and James Douglas and Jean Douglas
Irrevocable Descendants' Trust are deemed members of a group that shares voting
and dispositive power over the shares.
(b) The following table sets forth information as to the beneficial ownership of
shares of common stock, as of March 3, 2003, held by persons who are directors
and executive officers 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 4,011,489 (1) 35.8%
Hilton H. Schlosberg 3,972,586 (2) 35.4%
Mark J. Hall 68,000 *%
Kirk S. Blower 32,009 (3) *%
Timothy M. Welch 48,000 (4) *%
Harold C. Taber, Jr. 97,118 (5) *%
Mark S. Vidergauz 12,000 (6) *%
Benjamin M. Polk - -
Norman C. Epstein - -
Executive Officers and Directors as a group (9 members: 4,754,714 shares or
42.4% 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 100,000 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 137,500
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, a limited partnership of which Mr. Sacks
is the general partner and his children and he are the limited partners, 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, a limited partnership of which Mr. Sacks is the general
partner and his children and he are the limited partners, and a trust for the
benefit of his children.
(2) 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
100,000 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.
37
Mr. Schlosberg disclaims beneficial ownership of all shares deemed beneficially
owned by him hereunder except: (i) 348,597 shares of common stock, (ii) the
137,500 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 22,009 shares of common stock owned by Mr. Blower and options
presently exercisable to purchase 10,000 shares of common stock exercisable at
$4.25 per share, granted pursuant to a Stock Option Agreement dated February 2,
1999 between the Company and Mr. Blower.
(4) Includes options presently exercisable to purchase 48,000 shares of common
stock exercisable at $4.44 per share, granted pursuant to a Stock Option
Agreement dated as of February 1, 1999 between the Company and Mr. Welch.
(5) Includes 61,137 shares of common stock owned by Mr. Taber; and 35,981.7
shares of common stock owned by the Taber Family Trust of which Mr. Taber and
his wife are trustees.
(6) Includes options presently exercisable to purchase 12,000 shares of common
stock 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 Winston & Strawn, a law firm (together
with its predecessors) that has been retained by the Company since 1992.
Rodney C. Sacks is currently 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 2002, 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 2002, 2001 and 2000 were $164,199, $164,638 and
$115,520, respectively. The Company continues to purchase promotional items from
IFM Group, Inc. in 2003.
The preceding descriptions of agreements are qualified in their entirety by
reference to such agreements, which have been filed as exhibits to this Report.
38
ITEM 14. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's
management, including our Chief Executive Officer and Chief Financial Officer,
we have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures within 90 days prior to the filing date of
this annual report. Based upon this evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures are adequate and effective to ensure that material information
relating to the Company and our consolidated subsidiaries is made known to them
by others within those entities, particularly during the period in which this
annual report was prepared. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
PART IV
ITEM 15. 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 50
Consolidated Balance Sheets as of December 31, 2002 and 2001 51
Consolidated Statements of Income for the years ended
December 31, 2002, 2001 and 2000 52
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 2002, 2001 and 2000 53
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 54
Notes to Consolidated Financial Statements for the years
ended December 31, 2002, 2001 and 2000 56
(b) Financial Statement Schedule
Valuation and Qualifying Accounts for the years ended
December 31, 2002, 2001 and 2000 70
(c) Reports on From 8-K
None
39
SIGNATURES
Pursuant to the requirements of Sections 13 or 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
/s/ RODNEY C. SACKS Rodney C. Sacks Date: March 31, 2003
- ------------------- 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 31, 2003
- ------------------------- and Chief Executive Officer
Rodney C. Sacks (principal executive officer)
/s/ HILTON H. SCHLOSBERG Vice Chairman of the Board of March 31, 2003
- ------------------------- Directors, President, Chief
Hilton H. Schlosberg Operating Officer, Chief Financial
Officer and Secretary (principal
financial officer, controller and
principal accounting officer)
/s/ BENJAMIN M. POLK Director March 31, 2003
- -------------------------
Benjamin M. Polk
/s/ NORMAN C. EPSTEIN Director March 31, 2003
- -------------------------
Norman C. Epstein
/s/ HAROLD C. TABER, JR. Director March 31, 2003
- -------------------------
Harold C. Taber, Jr.
/s/ MARK S. VIDERGAUZ Director March 31, 2003
- -------------------------
Mark S. Vidergauz
40
CERTIFICATIONS PURSUANT TO RULE 13a-14
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Rodney Sacks, certify that:
1. I have reviewed this annual report on Form 10-K of Hansen Natural
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-4) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of controls
which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for
the registrant's auditors and material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls of in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003 /s/ RODNEY C. SACKS
------------------------------------
Rodney C. Sacks
Chairman of the Board of Directors
and Chief Executive Officer
41
I, Hilton Schlosberg, certify that:
1. I have reviewed this annual report on Form 10-K of Hansen Natural
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-4) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of controls
which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for
the registrant's auditors and material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls of in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003 /s/ HILTON H. SCHLOSBERG
------------------------------------
Hilton H. Schlosberg
Vice Chairman of the Board of Directors,
President, Chief Operating Officer, Chief
Financial Officer and Secretary
42
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Hansen Natural Corporation (the
"Company") on Form 10-K for the year ended December 31, 2002 as filed with the
Securities and Exchange Commission (the "Report"), the undersigned, Rodney C.
Sacks, Chairman of the Board of Directors and Chief Executive Officer of the
Company, and Hilton H. Schlosberg, Vice Chairman of the Board of Directors,
President, Chief Operating Officer, Chief Financial Officer and Secretary of the
Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: March 31, 2003 /s/ RODNEY C. SACKS
------------------------------------
Rodney C. Sacks
Chairman of the Board of Directors
and Chief Executive Officer
Date: March 31, 2003 /s/ HILTON H. SCHLOSBERG
------------------------------------
Hilton H. Schlosberg
Vice Chairman of the Board of Directors,
President, Chief Operating Officer, Chief
Financial Officer and Secretary
43
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
- ----------------- ----------------------------------------------------------------------------------------------------
2.1 Asset Purchase Agreement among Blue Sky Natural Beverage Co., a Delaware Corporation, as Purchaser
and Blue Sky Natural Beverage Co., a New Mexico Corporation as Seller and Robert Black dated as of
September 20, 2000.19
- ----------------- ----------------------------------------------------------------------------------------------------
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 Co-Packers Corporation
("Co-Packers"), 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 Co-Packers 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 Co-Packers 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 Co-Packers 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,
Co-Packers, 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
- ----------------- ----------------------------------------------------------------------------------------------------
44
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) Co-Packing 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. Sacks.11
- ----------------- ----------------------------------------------------------------------------------------------------
10 (ccc) Stock Option Agreement dated as of January 30, 1998 by and between Hansen Natural Corporation and
Hilton S. Schlosberg.11
- ----------------- ----------------------------------------------------------------------------------------------------
10 (ddd) Warrant Agreement made as of April 23, 1998 by and between Hansen Natural Corporation and Rick
Dees.12
- ----------------- ----------------------------------------------------------------------------------------------------
45
10 (eee) Modification to Revolving Credit Loan and Security Agreement as of December 31, 1998 by and
between Hansen Beverage Company and Comerica Bank - California.13
- ----------------- ----------------------------------------------------------------------------------------------------
10 (fff) Employment Agreement as of January 1, 1999 by and between Hansen Natural Corporation and Rodney C.
Sacks.13
- ----------------- ----------------------------------------------------------------------------------------------------
10 (ggg) Employment Agreement as of January 1, 1999 by and between Hansen Natural Corporation and Hilton S.
Schlosberg.13
- ----------------- ----------------------------------------------------------------------------------------------------
10 (hhh) Stock Option Agreement dated as of February 2, 1999 by and between Hansen Natural Corporation and
Rodney C. Sacks. (A version of this agreement containing a typographical error was previously
filed as an Exhibit to Form 10-k for the year ended December 31, 1998.
- ----------------- ----------------------------------------------------------------------------------------------------
10 (iii) Stock Option Agreement dated as of February 2, 1999 by and between Hansen Natural Corporation and
Hilton S. Schlosberg. (A version of this agreement containing a typographical error was
previously filed as an Exhibit to Form 10-k for the year ended December 31, 1998.
- ----------------- ----------------------------------------------------------------------------------------------------
10 (jjj) Stock Repurchase Agreement dated as of August 3, 1998, by and between Hansen Natural Corporation
and Rodney C. Sacks.14
- ----------------- ----------------------------------------------------------------------------------------------------
10 (kkk) Stock Repurchase Agreement dated as of August 3, 1998, by and between Hansen Natural Corporation
and Hilton H. Schlosberg.14
- ----------------- ----------------------------------------------------------------------------------------------------
10 (lll) Assignment and Agreement dated as of September 22, 2000 by the Fresh Juice Company of California,
Inc. and Hansen Beverage Company. 15
- ----------------- ----------------------------------------------------------------------------------------------------
10 (mmm) Settlement Agreement dated as of September 2000 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, 2000 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, 2000 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, 2000 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 2000 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. 16
- ----------------- ----------------------------------------------------------------------------------------------------
10 (vvv) Endorsement and Spokesman Arrangement dated as of February 18, 2000 by and between Hansen Beverage
Company and Sammy Sosa. 16
- ----------------- ----------------------------------------------------------------------------------------------------
10 (www) Standard Industrial Lease Agreement dated as of February 23, 2000 between Hansen Beverage Company
and 43 Railroad Partnership L.P. 16
- ----------------- ----------------------------------------------------------------------------------------------------
10 (xxx) Amended and Restated Variable Rate Installment Note by and between Comerica Bank - California and
Hansen Beverage Company. 17
- ----------------- ----------------------------------------------------------------------------------------------------
10 (yyy) Sixth Modification to Revolving Credit Loan & Security Agreement by and between Hansen Beverage
Company and Comerica Bank - California, dated May 23, 2000. 18
- ----------------- ----------------------------------------------------------------------------------------------------
10 (zzz) Contract Brewing agreement by and between Hard e Beverage Company and Reflo, Inc. dated March 23,
2000. 18
- ----------------- ----------------------------------------------------------------------------------------------------
10.1 Modification dated as of September 19, 2000, to Revolving Credit Loan and Security Agreement by
and between Hansen Beverage Company and Comerica Bank California. 19
- ----------------- ----------------------------------------------------------------------------------------------------
46
10.2 Asset Purchase Agreement among Hansen Junior Juice Company, as Purchaser and Pasco Juices, Inc. as
Seller and Hansen Beverage Company dated as of May 25, 2001.21
- ----------------- ----------------------------------------------------------------------------------------------------
10.3 Letter Agreement by and between Hansen Beverage Company and Hi-Country Corona, Inc. dated July 28,
2000.
- ----------------- ----------------------------------------------------------------------------------------------------
10.4 Packing Agreement Between Hansen Beverage Company and U.S. Continental Marketing, Inc. dated
August 14, 2000.
- ----------------- ----------------------------------------------------------------------------------------------------
10.5 Packaging Material Supply Agreement by and between Hansen Beverage Company and International Paper
Company dated November 30, 2000; First Addendum to the Packaging Material Supply Agreement dated
September 26, 2001; Second Addendum to the Packaging Material Supply Agreement dated February 19,
2002.
- ----------------- ----------------------------------------------------------------------------------------------------
10.6 Aseptic Packaging Agreement by and between Hansen Beverage Company and Johanna Foods dated
December 7, 2000.
- ----------------- ----------------------------------------------------------------------------------------------------
10.7 Standard Industrial Lease Agreement dated as of July 25, 2002 between Hansen Beverage Company and
555 South Promenade Partnership L.P. with addendum dated January 21, 2003.
- ----------------- ----------------------------------------------------------------------------------------------------
10.8 Letter Agreement by and between Hansen Beverage Company and McKinley Equipment Corporation dated
January 16, 2003.
- ----------------- ----------------------------------------------------------------------------------------------------
10.9 Advertising Display Agreement dated as of March 17, 2003 by and between Hansen Beverage Company and
the Las Vegas Monorail Company.
- ----------------- ----------------------------------------------------------------------------------------------------
10.10 Sponsorship Agreement dated as of March 7, 2003 by and between Hansen Beverage Company and
C.C.R.L., LLC.
- ----------------- ----------------------------------------------------------------------------------------------------
10.11 Public Relations Agreement dated as of March 18, 2003 by and between Hansen Beverage Company and
Reach Group Communications, LLC.
- ----------------- ----------------------------------------------------------------------------------------------------
10.12 Stock Option Agreement dated as of February 1, 1999 by and between Hansen Natural Corporation and
Timothy M. Welch.
- ----------------- ----------------------------------------------------------------------------------------------------
10.13 Stock Option Agreement dated as of February 2, 1999 by and between Hansen Natural Corporation and
Kirk S. Blower.
- ----------------- ----------------------------------------------------------------------------------------------------
10.14 Stock Option Agreement dated as of July 12, 2002 by and between Hansen Natural Corporation and
Rodney C. Sacks
- ----------------- ----------------------------------------------------------------------------------------------------
10.15 Stock Option Agreement dated as of July 12, 2002 by and between Hansen Natural Corporation and
Hilton H. Schlosberg
- ----------------- ----------------------------------------------------------------------------------------------------
10.16 Stock Option Agreement dated as of July 12, 2002 by and between Hansen Natural Corporation and
Mark J. Hall
- ----------------- ----------------------------------------------------------------------------------------------------
10.17 Stock Option Agreement dated as of July 12, 2002 by and between Hansen Natural Corporation and
Kirk S. Blower
- ----------------- ----------------------------------------------------------------------------------------------------
21 Subsidiaries 5
- ----------------- ----------------------------------------------------------------------------------------------------
23 Independent Auditors' Consent
- ----------------- ----------------------------------------------------------------------------------------------------
99.1 Audited Financial Statements of Blue Sky Natural Beverage Co., a New Mexico corporation
("BSNB-NM") for 1999 and 1998. 20
- ----------------- ----------------------------------------------------------------------------------------------------
99.2 Unaudited Balance Sheet at September 30, 2000 for BSNB-NM and Unaudited Statement of Operations
for the nine-months then ended. 20
- ----------------- ----------------------------------------------------------------------------------------------------
1 Filed previously as an exhibit to the Registration Statement on Form S-3
(no. 33-35796) (the "Registration Statement").
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.
47
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 period ended September
30, 1999.
16 Filed previously as an exhibit to Form 10-K for the year ended December 31,
1999.
17 Filed previously as an exhibit to Form 10-Q for the period ended March 31,
2000.
18 Filed previously as an exhibit to Form 10-Q for the period ended June 30,
2000.
19 Filed previously as an exhibit to Form 8-K dated September 20, 2000.
20 Filed previously as an exhibit to Form 8-K/A dated September 20, 2000.
21 Filed previously as an exhibit to Form 10-K for the year ended December 31,
2001.
48
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page
------
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
Independent Auditors' Report 50
Consolidated Balance Sheets as of December 31, 2002 and 2001 51
Consolidated Statements of Income for the years ended
December 31, 2002, 2001 and 2000 52
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2002, 2001 and 2000 53
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 54
Notes to Consolidated Financial Statements for the years ended
December 31, 2002, 2001 and 2000 56
Financial Statement Schedule - Valuation and Qualifying Accounts
for the years ended December 31, 2002, 2001 and 2000 70
49
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 (the "Company") as of December 31, 2002 and 2001,
and the related consolidated statements of income, shareholders' equity and cash
flows for the years ended December 31, 2002, 2001, and 2000. Our audits also
included the financial statement schedule listed in Item 15(b). These
consolidated financial statements and this financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and this 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, 2002 and 2001, and the results of their
operations and their cash flows for the years ended December 31, 2002, 2001, and
2000 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 basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets as a
result of adopting Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets", effective January 1, 2002. As also
discussed in Note 1, effective January 1, 2002, the Company adopted the
consensus in Emerging Issues Task Force Issue No. 01-09, "Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of a
Vendor's Products)" (EITF 01-09), resulting in the presentation of certain sales
promotion expenses and customer allowances as a reduction of net sales and
increase of cost of sales rather than operating expenses. The consolidated
financial statements for the years ended December 31, 2001 and 2000 have been
revised to reclassify such expenses and allowances as a reduction of net sales
and increase of cost of sales consistent with the 2002 presentation, in
accordance with EITF 01-09.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
March 13, 2003
50
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2001
2002 2001
------------------ ------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 537,920 $ 247,657
Accounts receivable (net of allowance for doubtful accounts,
sales returns and cash discounts of $1,098,645 in 2002 and
$625,270 in 2001 and promotional allowances of
$3,170,171 in 2002 and $2,981,556 in 2001 5,949,402 4,412,422
Inventories, net (Note 3) 11,643,734 11,956,680
Prepaid expenses and other current assets 1,627,685 974,155
Deferred income tax asset (Note 7) 1,145,133 949,176
------------------ ------------------
Total current assets 20,903,874 18,540,090
PROPERTY AND EQUIPMENT, net (Note 4) 1,862,807 1,945,146
INTANGIBLE AND OTHER ASSETS:
Trademark license and trademarks (net of accumulated 17,360,455 17,350,221
amortization of $84,330 in 2002 and $29,772 in 2001)
(Note 1)
Deposits and other assets 336,369 725,825
------------------ ------------------
17,696,824 18,076,046
------------------ ------------------
$ 40,463,505 $ 38,561,282
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 4,732,261 $ 3,919,741
Accrued liabilities 680,959 871,841
Accrued compensation 310,064 432,896
Current portion of long-term debt (Note 5) 230,740 337,872
------------------ ------------------
Total current liabilities 5,954,024 5,562,350
LONG-TERM DEBT, less current portion (Note 5) 3,606,040 5,851,105
DEFERRED INCOME TAX LIABILITY (Note 7) 2,532,697 1,814,278
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY: (Note 8)
Common stock - $0.005 par value; 30,000,000 shares
authorized; 10,259,764 shares issued, 10,053,003
outstanding in 2002; 10,251,764 shares issued, 10,045,003
outstanding in 2001 51,299 51,259
Additional paid-in capital 11,934,564 11,926,604
Retained earnings 17,199,426 14,170,231
Common stock in treasury, at cost; 206,761 in 2002 and 2001 (814,545) (814,545)
------------------ ------------------
Total shareholders' equity 28,370,744 25,333,549
------------------ ------------------
$ 40,463,505 $ 38,561,282
================== ==================
See accompanying notes to consolidated financial statements.
51
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------------ ------------------ -----------------
GROSS SALES $ 115,490,019 $ 99,693,390 $ 86,072,318
LESS: Discounts, allowances and 23,443,657 19,035,073 14,366,333
promotional payments
------------------ ------------------ -----------------
NET SALES 92,046,362 80,658,317 71,705,985
COST OF SALES 58,802,669 51,796,539 42,780,067
------------------ ------------------ -----------------
GROSS PROFIT 33,243,693 28,861,778 28,925,918
OPERATING EXPENSES:
Selling, general and administrative 27,896,202 22,803,433 21,654,495
Amortization of trademark license and 54,558 507,488 371,073
trademarks
------------------ ------------------ -----------------
Total operating expenses 27,950,760 23,310,921 22,025,568
------------------ ------------------ -----------------
OPERATING INCOME 5,292,933 5,550,857 6,900,350
NONOPERATING EXPENSE (INCOME):
Interest and financing expense 230,732 527,594 382,152
Interest income (2,974) (8,992) (12,914)
------------------ ------------------ -----------------
Net nonoperating expense 227,758 518,602 369,238
------------------ ------------------ -----------------
INCOME BEFORE PROVISION FOR 5,065,175 5,032,255 6,531,112
INCOME TAXES
PROVISION FOR INCOME TAXES 2,035,980 2,012,902 2,615,986
(Note 7)
------------------ ------------------ -----------------
NET INCOME $ 3,029,195 $ 3,019,353 $ 3,915,126
================== ================== =================
NET INCOME PER COMMON SHARE:
Basic $ 0.30 $ 0.30 $ 0.39
================== ================== =================
Diluted $ 0.29 $ 0.29 $ 0.38
================== ================== =================
NUMBER OF COMMON SHARES USED
IN PER SHARE COMPUTATIONS:
Basic 10,052,499 10,036,547 9,957,743
================== ================== =================
Diluted 10,339,604 10,314,904 10,405,703
================== ================== =================
See accompanying notes to consolidated financial statements.
52
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Common stock Additional Treasury stock Total
--------------------------- paid-in Retained -------------------------- shareholders'
Shares Amount capital earnings Shares Amount equity
------------- ------------- --------------- -------------- ------------ ------------- --------------
Balance,
January 1, 2000 10,010,084 $ 50,050 $ 11,340,074 $ 7,235,752 - $ - $ 18,625,876
Issuance of common 138,798 694 255,945 256,639
stock
Purchase of treasury (206,761) (814,545) (814,545)
stock
Reduction of tax 71,600 71,600
liability in
connection with the
exercise of certain
stock options
Net income 3,915,126 3,915,126
------------- ------------- --------------- -------------- ------------ ------------- --------------
Balance,
December 31, 2000 10,148,882 50,744 11,667,619 11,150,878 (206,761) (814,545) 22,054,696
Issuance of common 102,882 515 258,985 259,500
stock
Net income 3,019,353 3,019,353
------------- ------------- --------------- -------------- ------------ ------------- --------------
Balance,
December 31, 2001 10,251,764 51,259 11,926,604 14,170,231 (206,761) (814,545) 25,333,549
Issuance of common 8,000 40 7,960 8,000
stock
Net income 3,029,195 3,029,195
------------- ------------- --------------- -------------- ------------ ------------- --------------
Balance,
December 31, 2002 10,259,764 $ 51,299 $ 11,934,564 $ 17,199,426 (206,761) $ (814,545) $ 28,370,744
============= ============= =============== ============== ============ ============= ==============
See accompanying notes to consolidated financial statements.
53
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
----------------- ---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,029,195 $ 3,019,353 $ 3,915,126
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Amortization of trademark license and trademarks 54,558 507,488 371,073
Depreciation and other amortization 493,894 436,459 314,662
Loss (gain) on disposal of plant and equipment 5,318 (15,072) 52,786
Compensation expense related to the exercise
of stock options 230,879
Deferred income taxes 522,462 472,581 (89,386)
Effect on cash of changes in operating assets
and liabilities:
Accounts receivable (1,536,980) 2,384,892 (3,046,056)
Inventories 312,946 (1,048,785) (1,013,481)
Prepaid expenses and other current assets (35,704) (150,768) (269,698)
Accounts payable 812,520 24,957 (2,042,089)
Accrued liabilities (190,882) 67,721 261,649
Accrued compensation (122,832) 151,267 (180,656)
Income taxes payable/receivable (617,826) (878,266) 603,230
----------------- ---------------- -----------------
Net cash provided by (used in) operating
activities 2,726,669 5,202,706 (1,122,840)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (416,873) (529,905) (1,191,762)
Proceeds from sale of property and equipment 26,416 12,433
Increase in trademark license and trademarks (64,792) (118,651) (6,490,494)
Increase in deposits and other assets 389,456 (60,094) (181,343)
----------------- ---------------- -----------------
Net cash used in investing activities (92,209) (682,234) (7,851,166)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on long-term debt 9,204,471
Principal payments on long-term debt (2,352,197) (4,432,101) (1,551,049)
Issuance of common stock 8,000 28,621 256,639
Purchases of common stock, held in treasury (814,545)
----------------- ---------------- -----------------
Net cash (used in) provided by financing
activities (2,344,197) (4,403,480) 7,095,516
----------------- ---------------- -----------------
NET INCREASE (DECREASE) IN CASH 290,263 116,992 (1,878,490)
CASH AND CASH EQUIVALENTS, beginning of
year 247,657 130,665 2,009,155
----------------- ---------------- -----------------
CASH AND CASH EQUIVALENTS, end of year $ 537,920 $ 247,657 $ 130,665
----------------- ---------------- -----------------
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest $ 235,779 $ 573,029 $ 315,876
================= ================ =================
Income taxes $ 2,131,344 $ 2,445,957 $ 2,067,337
================= ================ =================
See accompanying notes to consolidated financial statements.
54
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
NONCASH TRANSACTIONS:
During 2001, the Company assumed long-term debt of $654,467, net of
discount of $95,533, and accrued liabilities of $196,677 in connection with the
acquisition of the Junior Juice trademark.
During 2000, the Company entered into capital leases of $546,972 for the
acquisition of promotional vehicles.
During 2000, the Company reduced its tax liability and increased additional
paid-in-capital in the amount of $71,600 in connection with the exercise of
certain stock options.
See accompanying notes to consolidated financial statements.
55
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
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
subsidiaries, Hansen Beverage Company ("HBC") which was incorporated in Delaware
on June 8, 1992 and Hard e Beverage Company ("HEB") formerly known as Hard
Energy Company, and previously known as CVI Ventures, Inc., which was
incorporated in Delaware on April 30, 1990. HBC conducts the vast majority of
the Company's operating business and generates substantially 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, and references herein to HEB
when used to describe the operating business of HEB, are references to the Hard
e brand business of HEB unless otherwise indicated.
In addition, HBC, through its wholly-owned subsidiary, Blue Sky Natural
Beverage Co. ("Blue Sky"), which was incorporated in Delaware on September 8,
2000, acquired full ownership of and operates the natural soda business
previously conducted by Blue Sky Natural Beverage Co., a New Mexico corporation
("BSNBC"), under the Blue Sky(R) trademark (Note 2).
During 2001, HBC, through its wholly-owned subsidiary, Hansen Junior Juice
Company ("Junior Juice"), which was incorporated on May 7, 2001, acquired full
ownership of the Junior Juice trademark. The Junior Juice trademark was
previously owned by Pasco Juices, Inc.
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 and soy Smoothies, Energy drinks, Energade
energy sports drinks, E2O energy water, "functional drinks", non-carbonated
ready-to-drink iced teas, lemonades and juice cocktails, sparkling lemonades and
orangeades, children's multi-vitamin juice products and still water under the
Hansen's(R) brand name, as well as nutrition bars and cereals also under the
Hansen's(R) brand name, natural sodas under the Blue Sky(R) brand name, juices
under the Junior Juice(R) brand name and malt based drinks under the Hard e
brand name, primarily in certain Western states, as well as in other states and,
on a limited basis, in other countries outside the United States.
Basis of Presentation - The accompanying consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America ("generally accepted accounting principles").
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Hansen and its wholly owned subsidiaries,
HBC, HEB, Blue Sky and Junior Juice since their respective dates of
incorporation. All intercompany balances and transactions have been eliminated
in consolidation.
Reclassifications - Certain reclassifications have been made in the
consolidated financial statements to conform to the 2002 presentation.
Cash and Cash Equivalents - The Company considers certificates of deposit
with original maturities of three months or less to be cash and cash
equivalents.
Inventories - Inventories are valued at the lower of first-in, first-out
(FIFO) cost or market value (net realizable value).
56
Property and Equipment - Property and equipment are stated at cost.
Depreciation of furniture, office equipment, equipment and vehicles is based on
their estimated useful lives (three to ten 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.
Trademark License and Trademarks - Trademark license and trademarks
represents the Company's exclusive ownership of the Hansen's(R) trademark in
connection with the manufacture, sale and distribution of beverages and water
and non-beverage products. 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 also owns the Blue Sky(R) trademark, which was acquired
in September 2000, and the Junior Juice(R) trademark, which was acquired in May
2001 (Note 2). The Company amortizes its trademark license and trademarks over 1
to 40 years. The adoption of SFAS No. 142, as described below, resulted in the
elimination of amortization of indefinite life assets, which reduced the
trademark amortization expense recognized by the Company in 2002.
Long-Lived Assets- Management regularly reviews property and equipment and
other long-lived assets, including certain identifiable intangibles, for
possible impairment. This review occurs annually, or more frequently if events
or changes in circumstances indicate the carrying amount of the asset may not be
recoverable. If there is indication of impairment of property and equipment or
amortizable intangible assets, then management prepares an estimate of future
cash flows (undiscounted and without interest charges) expected to result from
the use of the asset and its eventual disposition. If these cash flows are less
than the carrying amount of the asset, an impairment loss is recognized to write
down the asset to its estimated fair value. The fair value is estimated at the
present value of the future cash flows discounted at a rate commensurate with
management's estimates of the business risks. Annually, or earlier, if there is
indication of impairment of identified intangible assets not subject to
amortization, management compares the estimated fair value with the carrying
amount of the asset. An impairment loss is recognized to write down the
intangible asset to its fair value if it is less than the carrying amount.
Preparation of estimated expected future cash flows is inherently subjective and
is based on management's best estimate of assumptions concerning expected future
conditions. No impairments were identified as of December 31, 2002.
Revenue Recognition - The Company records revenue at the time the related
products are shipped and the risk of ownership has passed. Management believes
an adequate provision against net sales has been made for estimated returns,
allowances and cash discounts based on the Company's historical experience.
Freight Costs and Reimbursement of Freight Costs - In accordance with
Emerging Issues Task Force ("EITF") No. 00-10, Accounting for Shipping and
Handling Fees and Costs, reimbursements of freight charges are recorded in net
sales in the accompanying consolidated statements of income. For the years ended
December 31, 2002, 2001, and 2000, freight-out costs amounted to $5.8 million,
$4.2 million, and $4.1 million, respectively, and have been recorded in selling,
general and administrative expenses in the accompanying consolidated statements
of income.
Advertising and Promotional Allowances - 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,
general and administrative expenses amounted to $7.3 million, $4.3 million, and
$5.6 million for the years ended December 31, 2002, 2001 and 2000, respectively.
In addition, the Company supports its customers, including distributors, with
promotional allowances, a portion of which is utilized for marketing and
indirect advertising by them. Such promotional allowances amounted to $13.5
million, $12.2 million, and $8.3 million for the years ended December 31, 2002,
2001 and 2000, respectively.
Change in Accounting for Promotional Allowances - Prior to 2002, the
Company included its promotional allowances in selling, general and
administrative expenses. Effective the first quarter of 2002, the Company
57
adopted the consensus of the Financial Accounting Standards Board's ("FASB")
EITF No. 01-9, Accounting for Consideration Given by a Vendor to a Customer or a
Reseller of the Vendor's Products, which addresses various issues related to the
income statement classification of certain promotional payments, including
consideration from a vendor to a reseller or another party that purchases the
vendor's products. EITF No. 01-9 was issued in November 2001 and codified
earlier pronouncements. The consensus requires certain sales promotions and
customer allowances previously classified as selling, general and administrative
expenses to be classified as a reduction of net sales or as cost of goods sold.
The Company adopted EITF No. 01-9 on January 1, 2002. The effect of the change
in accounting related to the adoption of EITF No. 01-9 for the year ended
December 31, 2002 was to decrease net sales by $14,846,875, increase cost of
goods sold by $220,394 and decrease selling, general and administrative expenses
by $15,067,269. The consolidated financial statements for the years ended
December 31, 2001 and 2000 have been revised to reclassify such expenses and
allowances as a reduction of net sales and increase of cost of sales in
accordance with EITF 01-9. For the year ended December 31, 2001, $11,621,396 has
been reclassified as a reduction to net sales and $341,332 as an increase in
cost of sales, both of which were previously reported as selling, general and
administrative expense. For the year ended December 31, 2000, $8,026,724 has
been reclassified as a reduction of net sales and $133,390 as an increase in
cost of sales, both of which were previously reported as selling, general and
administrative expense.
Income Taxes - The Company accounts for income taxes under the provisions
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.
Stock Based Compensation - The Company accounts for its stock option plans
in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees,
(APB Opinion No. 25) and related Interpretations. Under APB Opinion No. 25, no
compensation expense is recognized because the exercise price of the Company's
employee stock options equals the market price of the underlying stock at the
date of the grant. In December 2002, the FASB issued SFAS No. 148, Accounting
for Stock-Based Compensation-Transition and Disclosure. SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-based Compensation, (SFAS No. 123) and is
effective immediately upon issuance. SFAS No. 148 provides alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation as well as amending the
disclosure requirements of Statement No. 123 to require interim and annual
disclosures about the method of accounting for stock based compensation and the
effect of the method used on reported results. The Company follows the
requirements of APB Opinion No. 25 and the disclosure only provision of SFAS No.
123, as amended by SFAS No. 148. Had compensation cost for the Company's option
plans been determined based on the fair value at the grant date for awards in
the years 2000 through 2002 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:
58
2002 2001 2000
---- ---- ----
Net income, as reported $3,029,195 $3,019,353 $3,915,126
Less: total stock based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects 356,914 336,376 281,278
Net income, pro forma $2,672,281 $2,682,977 $3,633,848
Net income per common share, as reported
Basic $ 0.30 $ 0.30 $ 0.39
Diluted $ 0.29 $ 0.29 $ 0.38
Net income per common share, pro forma
Basic $ 0.27 $ 0.27 $ 0.36
Diluted $ 0.26 $ 0.26 $ 0.35
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:
Risk-Free
Dividend Yield Expected Volatility Interest Rate Expected Lives
-------------- ------------------- ------------- --------------
2002 0% 8% 4.6% 8 years
2001 0% 30% 4.6% 6 years
2000 0% 48% 6.0% 6 years
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 and purchases of the
Company's common stock, held in treasury, using the treasury stock method.
Concentration Risk - Certain of the Company's products utilize components
(raw materials and/or co-packing services) from a limited number of sources. A
disruption in the supply 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 continues to take steps on an ongoing
basis to secure the availability of alternative sources for such components and
minimize the risk of any disruption in production.
One customer accounted for approximately 18%, 18%, and 23% of the Company's
sales for the years ended December 31, 2002, 2001 and 2000, respectively. A
decision by that, or any other major customer, 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.
During 2002, 2001 and 2000, sales outside of California represented 42%,
39% and 37% of the aggregate sales of the Company, respectively.
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 estimated credit losses, and historically, such
losses have been within management's expectations.
59
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, 2002, 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, 2002 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.
Segment Information - The Company's operating segments have been aggregated
into one reportable segment due to similarities of the economic characteristics
and nature of operations among the operations represented by the Company's
various product lines.
Change in Accounting for Goodwill and Other Intangible Assets - Effective
January 1, 2002, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets.
This statement discontinued the amortization of goodwill and indefinite-lived
intangible assets, subject to periodic impairment testing. Upon adoption of SFAS
No. 142, the Company evaluated the useful lives of its various trademark
licenses and trademarks and concluded that certain of the trademark licenses and
trademarks have indefinite lives. Unamortized trademark licenses and trademarks
ceased to be amortized effective January 1, 2002 and are subject to annual
impairment analysis. Had the non-amortization provision of SFAS No. 142 been
adopted as of January 1, 2000, net income and net income per share for the years
ended December 31, 2002, 2001, and 2000 would have been adjusted as follows:
For the years ended December 31,
2002 2001 2000
---------------- ---------------- ----------------
Net income, as reported $3,029,195 $3,019,353 $3,915,126
Add back: Amortization of trademark licenses and
trademarks (net of tax effect) - 292,241 211,716
---------------- ---------------- ----------------
Adjusted net income $3,029,195 $3,311,594 $4,126,842
================ ================ ================
Net income per common share - basic, as
reported $ 0.30 $ 0.30 $ 0.39
Amortization of trademark licenses and
trademarks (net of tax effect) - 0.03 0.02
---------------- ---------------- ----------------
Adjusted net income per common share -
basic $ 0.30 $ 0.33 $ 0.41
================ ================ ================
Net income per common share - diluted, as
reported $ 0.29 $ 0.29 $ 0.38
Amortization of trademark licenses and
trademarks (net of tax effect) - 0.03 0.02
---------------- ---------------- ----------------
Adjusted net income per common share -
diluted $ 0.29 $ 0.32 $ 0.40
================ ================ ================
On January 1, 2002 and December 31, 2002, the trademark licenses and
trademarks were tested for impairment in accordance with the provisions of SFAS
60
No. 142. Fair values were estimated based on the Company's best estimate of the
expected present value of future cash flows. No amounts were impaired at those
times. In addition, the remaining useful lives of trademark licenses and
trademarks being amortized were reviewed and deemed to be appropriate. The
following provides additional information concerning the Company's trademark
licenses and trademarks as of December 31:
2002 2001
---- ----
Amortizing trademark licenses and trademarks $ 1,138,902 $ 1,113,882
Accumulated amortization (84,330) (38,075)
------------- -------------
1,054,572 1,075,807
Non-amortizing trademark licenses and trademarks 16,305,883 16,274,414
------------- -------------
$ 17,360,455 $ 17,350,221
============= =============
All amortizing trademark licenses and trademarks have been assigned an
estimated finite useful life, and are amortized on a straight-line basis over
the number of years that approximate their respective useful lives ranging from
1 to 40 years (weighted average life of 30 years). The straight-line method of
amortization allocates the cost of the trademark licenses and trademarks to
earnings in proportion to the amount of economic benefits obtained by the
Company in that report period. Total amortization expense during the year ended
December 31, 2002 was $54,558. As of December 31, 2002, future estimated
amortization expense related to amortizing trademark licenses and trademarks
through the year ended December 31, 2008 is:
2003 $41,330
2004 38,105
2005 38,105
2006 37,990
2007 32,745
Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, effective for fiscal years
beginning after December 15, 2001. The new rules on asset impairment supersede
FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, and provide a single accounting model
for long-lived assets to be disposed of. The Company has performed an analysis
and determined that the adoption of this Statement had no effect on the earnings
or financial position of the Company.
In April 2002 the FASB issued Statement No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections, effective for fiscal years beginning after June 15, 2002. For most
companies, Statement No. 145 will require gains and losses on extinguishments of
debt to be classified as income or loss from continuing operations rather than
as extraordinary items as previously required under Statement No. 4.
Extraordinary treatment will be required for certain extinguishments as provided
in APB Opinion No. 30. Statement No. 145 also amends Statement No. 13 to require
certain modifications to capital leases be treated as a sale-leaseback and
modifies the accounting for sub-leases when the original lessee remains a
secondary obligor (or guarantor). In addition, the FASB rescinded Statement No.
44, which addressed the accounting for intangible assets of motor carriers and
made numerous technical corrections. The Company has not yet determined the
effect, if any, of the adoption of this Statement.
61
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities and supersedes
EITF No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring.) SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred.
Under EITF No. 94-3, a liability for an exit cost as defined in EITF No. 94-3
was recognized at the date of an entity's commitment to an exit plan. SFAS No.
146 also establishes that the liability should initially be measured and
recorded at fair value. The Company will adopt the provisions of SFAS No. 146
for exit or disposal activities that are initiated after December 31, 2002.
In December 2002 the FASB issued Statement No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure, effective for fiscal years
ending after December 15, 2002. Statement No. 148 amends Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition to Statement No. 123's fair value method of accounting for
stock-based employee compensation. Statement No. 148 also amends the disclosure
provisions of Statement No. 123 and APB Opinion No. 28, Interim Financial
Reporting, to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. The Company has adopted Statement
No. 148 as of December 31, 2002 and has complied with the new disclosure
requirements.
In November 2002 the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN No. 45"). FIN No. 45 clarifies and
expands on existing disclosure requirements for guarantees, including loan
guarantees. It also would require that, at the inception of a guarantee, the
Company must recognize a liability for the fair value of its obligation under
that guarantee. The initial fair value recognition and measurement provisions
will be applied on a prospective basis to certain guarantees issued or modified
after December 31, 2002. The disclosure provisions are effective for financial
statements of periods ending after December 15, 2002 (Note 6).The Company does
not expect that the adoption of the initial recognition and measurement
provisions of FIN No. 45 will have a material impact on its financial position,
cash flows or results of operations.
In January 2003 the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51 ("FIN No. 46"). FIN
No. 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN No. 46 must be applied for the first
interim or annual period beginning after June 15, 2003. Since the Company has no
interests in variable interest entities, the Company does not expect that the
adoption of FIN No. 46 will have a material impact on its financial position,
cash flows or results of operations.
2. ACQUISITIONS
On September 20, 2000, the Company acquired through its wholly-owned
subsidiary, Blue Sky, the beverage business of BSNBC, including the Blue Sky(R)
trademarks and certain other assets for a purchase price of $6.5 million. The
Blue Sky(R) products include a range of all-natural carbonated sodas and
seltzers that are marketed throughout the United States and in certain
international markets, principally to the health food trade. On May 25, 2001,
the Company acquired through its subsidiary Junior Juice, the Junior Juice
beverage business of Pasco Juices, Inc., including the Junior Juice(R)
trademarks and assumption of certain liabilities for a purchase price of
$946,677. The Junior Juice(R) products are comprised of 100% juices targeted at
toddlers.
62
The acquisitions have been accounted for as purchases in accordance with
Accounting Principles Board Opinion ("APB") No. 16, Business Combinations.
Accordingly, the purchase prices, inclusive of certain acquisition costs, were
allocated to the tangible and intangible assets acquired based on a valuation of
their respective fair values at the date of acquisition. The purchase price for
the acquisition of Blue Sky, inclusive of certain acquisition costs, was
financed through the Company's credit facility (Note 5). The purchase price for
the acquisition of Junior Juice was financed by the issuance of a note payable
to Pasco Juice, Inc., payable over five years and the assumption of certain
liabilities (Note 5).
Trademarks acquired are evaluated and amortized in accordance with SFAS No.
142. The operating results of Blue Sky and Junior Juice have been included in
the Company's results of operations since the respective dates of acquisition.
3. INVENTORIES
Inventories consist of the following at December 31:
2002 2001
---- ----
Raw materials $ 4,267,055 $ 4,742,102
Finished goods 8,023,118 7,615,345
-------------- --------------
12,290,173 12,357,447
Less inventory reserves (646,439) (400,767)
-------------- --------------
$ 11,643,734 $ 11,956,680
============== ==============
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
2002 2001
---- ----
Leasehold improvements $ 290,615 $ 283,103
Furniture and office equipment 776,401 707,025
Equipment and vehicles 2,712,838 2,450,257
------------- --------------
3,779,854 3,440,385
Less accumulated depreciation and amortization (1,917,047) (1,495,239)
------------- --------------
$ 1,862,807 $ 1,945,146
============= ==============
5. LONG-TERM DEBT
In 1997, HBC obtained a credit facility from Comerica Bank-California
("Comerica"), consisting of a revolving line of credit and a term loan. Such
revolving line of credit and term loan were secured by substantially all of
HBC's assets, including accounts receivable, inventory, trademarks, trademark
licenses and certain equipment. In 2000, HBC entered into a modification
agreement with Comerica to amend certain provisions under the above facility in
order to finance the acquisition of the Blue Sky business, repay the term loan,
and provide additional working capital ("Modification Agreement"). Pursuant to
the Modification Agreement, the revolving line of credit was increased to $12.0
million, reducing to $6.0 million by September 2004. The revolving line of
credit remains in full force and effect through September 2005. Interest on
borrowings under the line of credit is based on the bank's base (prime) rate,
plus an additional percentage of up to 0.5% or the LIBOR rate, plus an
additional percentage of up to 2.5%, depending upon certain financial ratios of
the Company.
The initial use of proceeds under the Modification Agreement was to pay the
seller in connection with the acquisition of the Blue Sky business, to repay the
remaining $807,000 balance due under the term loan and to provide additional
working capital. The Company's outstanding borrowings on the line of credit at
December 31, 2002 were $3.0 million.
63
The credit facility contains financial covenants which require the Company
to maintain certain financial ratios and achieve certain levels of annual
income. The facility also contains certain non-financial covenants. At December
31, 2002, the Company was in compliance with all covenants.
During 2000, the Company entered into capital leases for acquisition of
certain vehicles, payable over a five-year period and having an effective
interest rate of 8.8%. At December 31, 2002 and 2001, the assets acquired under
capital leases had a net book value of $285,085 and $402,387, net of accumulated
depreciation of $301,422 and $184,120, respectively.
Long-term debt consists of the following at December 31:
2002 2001
---- ----
Line of credit from Comerica, collateralized by substantially all of
HBC's assets, at an effective interest rate of LIBOR plus 2.5% (4.0%
as of December 31, 2002), due in September 2005 $ 2,969,000 $ 4,978,000
Note payable to Pasco Juices, Inc., collateralized by the Junior Juice
trademark, payable in quarterly installments of varying amounts through
May 2006, net of unamortized discount based on imputed interest rate of
4.5% of $77,976 at December 31, 2002 543,131 643,806
Note payable in connection with the acquisition of the Hansen's(R)
trademark and trade name, payable in three equal annual installments of
$143,750 each, paid in full in August 2002 143,750
Capital leases, collateralized by vehicles acquired, payable over 60
months in monthly installments at an effective interest rate of 8.8%,
with final payments ending in 2005 324,649 423,421
------------- -------------
3,836,780 6,188,977
Less: current portion of long-term debt (230,740) (337,872)
------------- -------------
$ 3,606,040 $ 5,851,105
============= =============
Long-term debt is payable as follows:
Year ending December 31:
2003 $ 230,740
2004 264,234
2005 3,195,314
2006 146,492
-------------
$ 3,836,780
=============
Interest expense amounted to $224,748, $520,160 and $380,651, for the years
ended December 31, 2002, 2001 and 2000, respectively.
6. COMMITMENTS AND CONTINGENCIES
Operating Leases - The Company leases its warehouse facility and corporate
offices under a 10 year lease beginning October 2000, when the Company first
occupied the facility. The facility lease and certain equipment and other
non-cancelable operating leases expire through 2010. The facility lease has
scheduled rent increases which are accounted for on a straight-line basis. Rent
expense under such leases amounted to $643,827, $644,454, and $416,505 for the
years ended December 31, 2002, 2001 and 2000, respectively.
64
Future minimum rental payments at December 31, 2002 under the leases
referred to above are as follows:
Year ending December 31:
2003 $ 653,727
2004 656,536
2005 658,179
2006 680,708
2007 660,468
Thereafter 1,879,017
--------------
$ 5,188,635
==============
Employment and Consulting Agreements - On January 1, 1999, the Company
entered into an employment agreement with Rodney C. Sacks and Hilton H.
Schlosberg pursuant to which Mr. Sacks and Mr. Schlosberg render services to the
Company as its Chairman and Chief Executive Officer, and its Vice Chairman,
President and Chief Financial Officer, respectively. The agreements provide for
an annual base salary of $180,000 each, 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 as well as 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.
Litigation - The Company is subject to, and involved in, 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.
Guarantees - The Company from time to time enters into certain types of
contracts that contingently require the Company to indemnify parties against
third party claims. These contracts primarily relate to: (i) certain agreements
with the Company's officers, directors and employees under which the Company may
be required to indemnify such persons for liabilities arising out of their
employment relationship, (ii) certain purchase agreements under which the
Company may have to indemnify the Company's customers from any claim, liability
or loss arising out of any actual or alleged injury or damages suffered in
connection with the consumption or purchase of the Company's products, and (iii)
certain real estate leases, under which the Company may be required to indemnify
property owners for liabilities and other claims arising from the Company's use
of the applicable premises.
The terms of such obligations vary. Generally, a maximum obligation is not
explicitly stated. Because the obligated amounts of these types of agreements
often are not explicitly stated, the overall maximum amount of the obligations
cannot be reasonably estimated. Further, the Company believes that its insurance
cover is adequate to cover any liabilities or claims arising out of such
instances referred to above. Historically, the Company has not been obligated to
make significant payments for these obligations and no liabilities have been
recorded for these obligations on its balance sheet as of December 31, 2002.
65
7. INCOME TAXES
Components of the income tax provision are as follows:
Year Ended December 31,
2002 2001 2000
---- ---- ----
Current income taxes:
Federal $ 1,173,693 $ 1,248,119 $ 2,106,316
State 339,825 292,202 599,056
------------- ------------- -------------
1,513,518 1,540,321 2,705,372
Deferred income taxes:
Federal 448,239 373,217 (57,309)
State 74,223 99,364 (32,077)
------------- ------------- -------------
522,462 472,581 (89,386)
------------- ------------- -------------
$ 2,035,980 $ 2,012,902 $ 2,615,986
============= ============= =============
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,
2002 2001 2000
---- ---- ----
Income tax provision using the
statutory rate $ 1,722,160 $ 1,710,967 $ 2,220,578
State taxes, net of federal tax benefit 267,440 293,602 380,945
Permanent differences 46,380 31,423 31,865
Other (23,090) (17,402)
------------- -------------- -------------
$ 2,035,980 $ 2,012,902 $ 2,615,986
============= ============== =============
Major components of the Company's deferred tax assets (liabilities) at
December 31 are as follows:
2002 2001
---- ----
Reserves for returns $ 70,487 $ 180,048
Reserves for bad debts 86,484 65,885
Reserves for obsolescence 271,504 171,689
Reserves for marketing development fund 326,760 159,327
Capitalization of inventory costs 145,553 115,783
State franchise tax 214,209 230,343
Accrued compensation 30,956 26,101
Amortization of graphic design 315,726 229,094
------------- -------------
Total deferred tax asset 1,461,679 1,178,270
Amortization of trademark license (2,617,097) (1,924,778)
Depreciation (232,146) (118,594)
------------- -------------
Total deferred tax liability (2,849,243) (2,043,372)
------------- -------------
Net deferred tax liability $(1,387,564) $ (865,102)
============= =============
8. STOCK OPTIONS AND WARRANTS
The Company has three stock option plans, the Hansen Natural Corporation
2001 Stock Option Plan ("2001 Option Plan"), the Employee Stock Option Plan
("the Plan") and the Outside Directors Stock Option Plan ("Directors Plan").
During 2001, the Company adopted the 2001 Stock Option Plan which provides
for the grant of options to purchase up to 2,000,000 shares of the common stock
of the Company to certain key employees of the Company and its subsidiaries.
66
Options granted under the 2001 Option Plan may be incentive stock options under
Section 422 of the Internal Revenue Code, as amended (the "Code"), nonqualified
stock options, or stock appreciation rights. 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. As of December 31, 2002, options to purchase 529,500 shares of Hansen
common stock had been granted under the 2001 Option Plan and options to purchase
1,433,500 shares of Hansen common stock remain available for grant under the
2001 Option Plan.
The Plan, as amended, provided for the granting of options to purchase not
more than 3,000,000 shares of Hansen common stock to key employees of the
Company and its subsidiaries through July 1, 2001. 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, 2002, options to purchase 2,111,700 shares of Hansen common stock had been
granted under the Plan, net of options that have expired.
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 (the "Board") 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, 2002, 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 remained available for grant.
For the years ended December 31, 2002, 2001, and 2000, the Company granted
529,500, 122,500, and 189,000 options to purchase shares under the Plan, the
2001 Option Plan, and Directors Plan at a weighted average grant date fair value
of $1.33, $1.36, and $2.26, respectively. Additional information regarding the
plans is as follows:
67
2002 2001 2000
---- ---- ----
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
------------- ------------- ------------- ------------- -------------- --------------
Options
outstanding,
beginning of year 1,053,400 $3.04 1,134,400 $2.84 1,093,327 $2.60
Options granted 529,500 $3.64 122,500 $3.49 189,000 $4.15
Options
exercised (8,000) $1.00 (152,500) $1.59 (38,327) $1.49
Options canceled
or expired (73,000) $2.54 (51,000) $4.06 (109,600) $3.17
------------- ------------- ------------- ------------- -------------- --------------
Options
outstanding,
end of year 1,501,900 $3.29 1,053,400 $3.04 1,134,400 $2.84
============= ============= ==============
Option price ra $1.00 to $0.75 to $0.75 to
end of year $5.25 $5.25 $5.25
The following table summarizes information about fixed-price stock options
outstanding at December 31, 2002:
------------------------------------------ -------------------------
Options Outstanding Options Exercisable
------------------------------------------ -------------------------
Weighted
Number average Weighted Number Weighted
outstanding at remaining average exercisable at average
Range of December 31, contractual exercise December 31, exercise
exercise prices 2002 life (in years) price 2002 price
--------------- ---------------- ---------- ---------------- --------
$1.00 to $1.13 216,000 Less than 1 $1.05 216,000 $1.05
$1.59 to $1.79 127,900 3 $1.63 127,900 $1.63
$3.02 to $3.95 688,000 8 $3.58 58,300 $3.54
$4.15 to $4.38 341,000 3 $4.25 221,200 $4.26
$4.44 to $5.25 129,000 3 $4.56 80,400 $4.55
--------------- ----------------
1,501,900 703,800
=============== ================
9. 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 each employee's
earnings. Matching contributions were $64,949, $58,211, and $49,323 for the
years ended December 31, 2002, 2001 and 2000 respectively.
10. RELATED-PARTY TRANSACTIONS
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 the years ended December 31, 2002, 2001 and 2000
were $79,843, $193,350, and $180,954, 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 during the years ended
December 31, 2002, 2001 and 2000 were $164,199, $164,638, and $115,520,
respectively.
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11. QUARTERLY FINANCIAL DATA (Unaudited)
Net Income per
Common Share
---------------
Net Sales Gross Profit Net Income Basic Diluted
------------- ------------- ------------ ------- -------
Quarter ended:
March 31, 2002 $18,592,394 $ 6,810,081 $ 410,645 $0.04 $0.04
June 30, 2002 26,264,788 9,833,837 1,271,083 0.13 0.12
September 30, 2002 26,985,256 9,677,851 1,270,225 0.12 0.12
December 31, 2002 20,203,924 6,921,924 77,242 0.01 0.01
------------- ------------- ------------ ------- -------
$92,046,362 $33,243,693 $3,029,195 $0.30 $0.29
============= ============= ============ ======= =======
Quarter ended:
March 31, 2001 $16,908,114 $ 6,300,246 $ 325,448 $0.03 $0.03
June 30, 2001 22,337,607 8,212,872 1,107,525 0.11 0.11
September 30, 2001 23,010,637 8,387,500 1,258,732 0.13 0.12
December 31, 2001 18,401,959 5,961,160 327,648 0.03 0.03
------------- ------------- ------------ ------- -------
$80,658,317 $28,861,778 $3,019,353 $0.30 $0.29
============= ============= ============ ======= =======
Certain of the figures reported above may differ from previously reported
figures for individual quarters due to rounding.
69
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Balance at Charged to
beginning of cost and Balance at end
Description period expenses Deductions of period
- ----------- ------------- ----------- ------------- --------------
Allowance for doubtful accounts, sales returns and cash discounts:
2002 $ 625,270 3,108,031 (2,634,656) $ 1,098,645
2001 $ 486,462 3,187,101 (3,048,293) $ 625,270
2000 $ 415,305 2,171,731 (2,100,574) $ 486,462
Promotional allowances:
2002 $ 2,981,556 12,660,386 (12,471,771) $ 3,170,171
2001 $ 2,370,260 12,167,783 (11,556,487) $ 2,981,556
2000 $ 1,651,604 8,295,866 (7,577,210) $ 2,370,260
Inventory reserves:
2002 $ 400,767 269,530 (23,858) $ 646,439
2001 $ 168,409 262,187 (29,829) $ 400,767
2000 $ 163,048 249,067 (243,706) $ 168,409
70