UNITED STATES
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, 2003
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 $78,990,346 computed by reference to the sale price for such
stock on the NASDAQ Small-Cap Market on March 11, 2004.
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 11, 2004 was 10,448,417 shares.
HANSEN NATURAL CORPORATION
FORM 10-K
TABLE OF CONTENTS
Item Number Page Number
PART I
1. Business 3
2. Properties 16
3. Legal Proceedings 16
4. Submission of Matters to a Vote of Security Holders 17
PART II
5. Market for the Registrant's Common Equity and Related
Shareholder Matters 17
6. Selected Consolidated Financial Data 18
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
7a. Qualitative and Quantitative Disclosures about Market Risks 35
8. Financial Statements and Supplementary Data 35
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 35
9a. Controls and Procedures 35
PART III
10. Directors and Executive Officers of the Registrant 36
11. Executive Compensation 38
12. Security Ownership of Certain Beneficial Owners and Management 43
13. Certain Relationships and Related Transactions 46
14. Principal Accountant Fees and Services 46
PART IV
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 47
Signatures 48
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, formerly known as Hard Energy
Company, and previously known as CVI Ventures, Inc., 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
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 2003 for the
alternative beverage category of the market are estimated at approximately $14.1
billion at wholesale, representing a growth rate of approximately 5.9% over the
revised estimated wholesale sales in 2002 of approximately $13.3 billion.
(Source: Beverage Marketing Corporation).
3
Products
We develop, 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(R) brand name.
Natural Sodas. Hansen's natural sodas have been a leading natural soda
brand in Southern California for the past 25 years. In 2003, 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 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 two additional flavors, ginger ale and creamy root beer. 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 and health food distributors (collectively 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 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 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 the energy drink) or artificial coloring and are made with high
quality natural flavors. Blue Sky(R) natural sodas and seltzer waters are
packaged in 12-ounce aluminum cans and are marketed primarily to our direct
retail customers.
4
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 extended this line into
unique proprietary 12-ounce glass bottles in both regular and diet versions.
This product line is marketed to our direct retail customers.
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 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, 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(R), 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(R)
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(R) 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(R) drinks in clear bottles through our
full service distributor network. We market our E2O Energy Water(R) drinks in
blue bottles to our direct retail customers. In 2003 we introduced a new
carbonated energy drink under the Hansen's(R) Deuce brand name, in a 16-ounce
can, but with a different flavor than our existing Hansen's(R) Energy drinks in
8.3-ounce cans.
Monster Energy(TM) Drinks. In 2002, we launched a new carbonated energy
drink under the Monster Energy(TM) brand name, in 16-ounce cans, 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
Energy(TM) drink contains different types and levels of supplements than our
Hansen's(R) energy drinks and is marketed through our full service distributor
network. In 2003, we introduced a low carb version of our Monster Energy(TM)
energy drink.
Lost(R) Energy Drinks. In 2004, we launched a new carbonated energy drink
under the Lost(R) brand name, in 16-ounce cans. The Lost(R) brand name is owned
by Lost International LLC and the drinks are produced, sold and distributed by
us under exclusive license from Lost International LLC.
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 White Grape and
Purple Grape juices, 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 (except Apple Cranberry which contains 27% juice) as well as
Vitamin C. Certain of these products also contain added calcium. 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 and in 2003 further extended our
fruit juice product line by introducing a 100% Apple Juice in aseptic pouches in
a 6.75-ounce size.
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.
5
In 2001, we introduced a new line of soy smoothies in 32- 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.
Sparkling Apple Cider. In 2002, we introduced a Sparkling Cider 100% juice
drink in a 1.5-liter Magnum glass bottle. However, due to reports of some
bottles breaking we promptly voluntarily recalled the product. We are pursuing a
claim against the third-party bottler for the costs and losses incurred by us.
We will reevaluate relaunching this product once certain production issues are
resolved.
We market the above juice and smoothie products to our direct retail
customers.
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 available in three flavors: Original with Lemon, Tropical Peach and
Wildberry. Lemonades are available in one flavor: Original Old Fashioned
Lemonade. Hansen's(R) juice cocktails were introduced in 1994 and are 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 10.14-ounce aseptic packages.
Juices for Children. In 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 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 "Hansen's Natural Multi-Vitamin Juice Slam(R)" that was
available to all of our customers. During 2000, we repositioned that line as a
100% juice line under the Juice Slam(R) name and are 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 and are
in the process of changing the size of the Juice Slam(R) package to 6.75 ounces
as well.
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.
6
Nutrition Bars and Cereals. 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 have discontinued all of these
lines other than the nutrition food bar line.
Hard e Product Line. In 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 of this product line are very
limited.
Bottled Water. Our still water products were introduced in 1993 and 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, the third party bottlers or packers add
filtered water and/or high fructose corn syrup, or sucrose, 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 are purchased by our co-packers
from various suppliers for manufacturing and packaging of the finished bars.
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. However, certain of our
material co-packing arrangements are described below:
(a) Our agreement with Southwest Canning and Packaging, Inc. ("Southwest")
pursuant to which Southwest packages a portion of our Hansen's(R) natural sodas.
This contract continues indefinitely and is subject to termination upon 60 days
written notice from either party;
(b) Our agreement with Nor-Cal Beverage Co., Inc. ("Nor-Cal") pursuant to
which Nor-Cal packages a portion of our Hansen's(R) juices in P.E.T. plastic
bottles. This contract continues until 2008 and is renewable annually thereafter
from year-to-year unless terminated by Hansen's not less than 60 days before the
end of the then current term.
7
(c) Our agreement with Seven-Up/RC Bottling Company of Southern California,
Inc. ("Seven-Up") pursuant to which Seven-Up packages a portion of our
Monster(TM) and Lost(R) brand energy drinks and a portion of our Hansen's(R)
natural sodas. This contract continues until March 2008 and is renewable
annually thereafter. Upon termination prior to such time we are entitled to
recover certain equipment we have purchased and installed at Seven-Up's
facility; and
(d) Our agreement with Tree Top, Inc. ("Tree Top") pursuant to which Tree
Top packages a portion of our Hansen's juices in P.E.T. plastic bottles. The
Tree Top agreement is for a period of one (1) year and is renewable thereafter
from year-to-year for additional one (1) year terms unless terminated by either
party. Either party is entitled, at any time, to terminate the agreement on
60 day's written notice.
Hard e malt-based drinks are manufactured for HEB by Reflo, Inc. ("Reflo"),
pursuant to a manufacturing and distribution agreement ("Reflo Agreement").
Either party may elect to terminate the Reflo Agreement at any time on 90 days
notice. Reflo administers the sales and distribution of such products throughout
the United States under the terms of the Reflo Agreement,, excluding Arizona,
California, Nevada and Oregon where HEB is itself responsible for the sales and
distribution of such products. Hard e is currently distributed in five states.
However, in many of such states, distribution is on a limited scale.
In many instances, equipment is purchased by us and installed at the
facilities of our packers to enable them to produce certain of our products. In
general, such equipment remains our property and is to be returned to us upon
termination of the packing arrangements with such packers or is amortized over a
pre-determined number of cases that are to be produced at the facilities
concerned.
We pack certain products outside of the West Coast region 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 for our products 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, labels,
flavors or supplement ingredients or certain sweetners, or packing arrangements,
we might not be able to satisfy demand on a short-term basis.
Although our production arrangements 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 and 16-ounce
cans, Gold Standard line, aseptic juice products, Energade(R), sparkling apple
cider in 1.5-liter magnum glass bottles, soy smoothies, MonsterTM and Lost(R)
energy drinks in 16-ounce cans and sparkling lemonades and orangeade lines.
There are also limited shrink sleeve labeling facilities available to us in the
United States with adequate capacity for our E2O Energy Water(R). 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 our various products to minimize the risk of any disruption in
production.
8
We have entered into distribution agreements for distribution in most
states of Hansen's(R) energy drinks, Monster Energy(TM) drinks, Lost(R) energy
drinks, Diet Red energy drinks, Energade(R) energy sports drinks and E2O Energy
Water(R). 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, the United Arab Emirates and India.
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 continue to take steps to reduce our inventory levels in an endeavor to
lower our warehouse and distribution costs.
During 2003, we continued to expand distribution of our natural sodas and
smoothies outside of California. We expanded our national sales force to support
and grow sales, primarily of Hansen's(R) energy drinks, Monster EnergyTM drinks,
Diet Red energy drinks, Energade(R) energy sports drinks and E2O Energy Water(R)
and we intend to continue to build such sales force in 2004.
Our Blue Sky(R) products are sold primarily to the health food trade,
natural food chains and mainstream grocery store chains, through specialty
health food distributors.
We have been awarded an exclusive contract by the State of California
("State") Department of Health Services, Women, Infant and Children ("WIC")
Supplemental Nutrition Branch ("DHS") to supply 100% apple juice and 100% apple
grape juice, in 64-ounce P.E.T. plastic bottles. The contract is for a period of
three years with a further one-year extension option to be mutually agreed
between Hansen's and the State of California. We bid the lowest net cost per
unit in terms of the wholesale price, less a rebate to the State.
We expect to sign formal written agreements with the State in accordance
with the bid process in due course. Delivery of the first products to the trade
is expected to begin in advance of the July 12, 2004 commencement date for the
contract.
At the present time, multiple manufacturers are supplying apple juice for
the WIC program. The new award makes Hansen's the exclusive supplier. We will
also be the exclusive supplier for the blended fruit juice category, a new WIC
category, with our 100% Apple Grape Juice. The WIC contract is expected to
expand the distribution of Hansen's juices, resulting in increased exposure for
the Hansen's brand. WIC-approved items are stocked by the grocery trade and by
WIC-only stores. Products are purchased by WIC consumers with vouchers given by
the DHS to qualified participants. The DHS estimates that Hansen's will be
supplying 24.5 million units per year of 64 oz. apple juice and 5.4 million
units per year of 64 oz. apple grape juice pursuant to this contract. These
estimates from the State, which we cannot independently verify or confirm, could
result in an increase in net sales for the company of more than $20 million per
annum. However, juices sold pursuant to this contract will be at lower margins
than those of the Company's traditional juice business.
9
Langer Juice Company ("Langer") filed a protest against the DHS's award of
the blended fruit juice category to the Company and Tree Top filed a protest
against the DHS's award of the shelf stable ready-to-drink apple juice category
to the Company. During February 2004 the hearing officer duly designated by the
DHS dismissed both the Langer and Tree Top protests. In March Tree Top filed a
petition for a writ of mandate directing the DHS to set aside their decision
awarding the apple juice contract to Hansen and to issue that award to Tree Top
or alternatively to require that the State rebid the apple juice contract. Such
petition is presently pending.
Our principal warehouse and distribution center and corporate offices
relocated to our current facility in October 2000. In January 2004 we leased an
additional warehouse facility in Corona to consolidate additional space that had
been leased by us on short term leases from time to time to meet our increased
warehousing needs due to increases in both sales volumes and products and
terminated the two short term leases concerned. We continue to take steps to
reduce our inventory levels wherever possible, 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,
sucrose 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 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 as
well as nutrition food bars and other ingredients, from independent suppliers
located 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 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. However, industry-wide shortages of certain fruits, and
fruit juices, and supplements and 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.
10
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 three 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. We believe
that many of those products 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 and Smoothies, 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 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.
Our energy drinks, including Hansen's(R) energy, Diet Red, Hansens(R)
energy Deuce, Monster Energy(TM) and Lost(R) energy in 8.3- and 16-ounce cans,
compete directly with Red Bull, Adrenaline Rush, Amp, 180, KMX, Venom, Extreme
Energy Shot, Rockstar, No Fear, US energy, 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.
11
Our E2O Energy Water(R) and still water products compete directly with
Vitamin Water, Reebok, Propel, Dasani, Aquafina, 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 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" methods 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
and extreme sports figures, coupons, sampling and sponsorship of selected causes
such as breast cancer research as well as extreme 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, snowmobile racing, 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
to promote the Hansen's(R) brand.
Additionally, during 2003 we entered into a multi-year sponsorship
agreement to advertise on the new Las Vegas Monorail ("Monorail Agreement") with
the Las Vegas Monorail Company ("LVMC") which includes the right to vend our
Monster Energy(TM) drinks and natural sodas on all stations. It is anticipated
that the initial term of the Monorail Agreement will commence in May 2004. The
initial term of the Monorail Agreement ends on the first anniversary of its
commencement date. Not less than 120 days before the expiration of the initial
term and each renewal term, as the case may be, We have the right to renew the
Monorail Agreement for a further one year term up to a maximum of nine
additional one year terms and the LVMC has the right, not withstanding such
election by us, to terminate the Monorail Agreement at the expiration of the
then current term.
12
We believe that one of the keys to success in the beverage industry is
differentiation; such as making Hansen's(R) products visually 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
are redesigned from time to time 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.
Where appropriate we partner with retailers to assist our marketing
efforts. For example, while we retain responsibility for the marketing of the
Juice Slam(R) 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 22% in 2003 compared to 2002. As of February 28, 2004, we employed
114 employees in sales and marketing activities.
Customers
Our customers are typically retail and specialty chains, club stores, mass
merchandisers, convenience chains, full service beverage distributors and health
food distributors. In 2003, sales to retailers represented 47% of our revenues,
sales to full service distributors represented 37% of our revenues, and sales to
health food distributors represented 10% of our revenues.
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 a number of different products from Hansen's regionally and one
product nationally), accounted for approximately 15% of our sales in 2003. A
decision by Costco 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.
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 2003, 2002 or 2001.
13
HBC, FJC's predecessor and the Trust also entered into a Royalty Sharing
Agreement pursuant to which royalties payable by third parties procured by FJC
or its predecessor or HBC are initially shared between the Trust and HBC and,
after a specified amount of royalties have been received, are shared equally
between HBC and FJC. Under the terms of the Agreement of Trust, FJC receives
royalty income paid to the Trust in excess of Trust expenses and a reserve
therefor.
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 i.e. until September 2004.
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), Monster(TM), Monster Energy(TM) and M
(stylized) Monster(TM).
We own in our own right, a number of trademarks including, but not limited
to, Hansen's(R), A New Kind a Buzz(R), Unleash the Beast(R), Hansen's energy(R),
Blue Energy(R), Energade(R), Hansen's E2O Energy Water(R), Hansen's
slim-down(R), Power Formula(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), Juice
Blast(R) and Red Rocker(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(R) 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 cans in refrigerated Visi coolers and walk-in coolers in
retail stores.
14
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.
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 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, 2004, we employed a total of 173 employees, 159 persons
on a full-time basis. Of our 173 employees, we employ 59 in administrative and
quality control capacities and 114 persons in sales and marketing capacities. We
have not experienced any work stoppages, and we consider relations with
our employees to be good.
Compliance with Environmental Laws
In California, we are required to collect redemption values from our
customers and to remit such redemption values 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 state agencies
based upon the number of cans and bottles of certain carbonated and
non-carbonated products, sold in such states.
15
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:
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. Our lease for this facility expires in October
2010. The area of the facility is approximately 113,600 square feet.
Additionally, in January 2004 we entered into a lease for additional warehouse
space in Corona, California. The area of this facility is approximately 80,000
square feet. This lease will expire at the end of March 2008 with an option to
extend the lease until October 2010. 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. A
settlement agreement was concluded between the parties and pursuant thereto a
consent judgment and permanent injunction was issued pursuant to which Sobe is
enjoined from certain conduct and competitive activities.
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 sought 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. In or about
April 2003 the action was settled and the Company was dismissed from the case on
terms favorable to the Company.
During 2002, in response to our cease and desist letter to Skyy Spirits LLC
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. The trial in this matter has been scheduled for
hearing in April 2004.
16
During 2003, in response to a cease and desist letter from the Coca-Cola
Company and its subsidiary Odwalla, Inc. in which they complained of the use by
us of the Monster trademark and name, we filed a complaint in the United States
District Court for the Southern District of California for a declaratory order
and additional relief. The Company is engaged in settlement discussions with the
Coca-Cola Company and Odwalla, Inc. If no settlement is reached, the Company
will vigorously pursue the matter. The Company believes that it has good
prospects of success.
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 17,
2003. 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 8,702,968
Hilton H. Schlosberg 8,702,968
Benjamin M. Polk 8,702,968
Norman C. Epstein 8,702,988
Harold C. Taber, Jr. 8,702,968
Mark S. Vidergauz 8,702,888
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, 2003, by a vote of 8,763,144 for, 6,250 against and 2,137
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 11, 2004, there were 10,448,417 shares of the Company's
Common Stock outstanding held by approximately 619 holders of record.
17
Stock Price and Dividend Information
The following table sets forth high and low bid closing quotations of our
Common Stock for the periods indicated:
High Low
------- -------
Year Ended December 31, 2003
First Quarter $ 4.50 $ 3.17
Second Quarter $ 4.50 $ 3.89
Third Quarter $ 6.24 $ 4.20
Fourth Quarter $ 9.40 $ 5.79
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
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, 2003 with
respect to shares of our common stock that may be issued under our equity
compensation plans.
Number of securities
Number remaining available
of securities Weighted-average for future issuance
to be issued exercise price of under equity
upon exercise of outstanding compensation plans
outstanding options, options, warrants (excluding securities
warrants and rights and rights reflected in column (a))
Plan category (a) (b) (c)
- --------------------------------- ------------------- ------------------------
Equity
compensation
plans
approved by
stockholders 1,469,800 $3.87 1,148,500
Equity
compensation
plans not
approved by
stockholders - - -
-------------------- ------------------- ------------------------
Total 1,469,800 $3.87 1,148,500
==================== =================== ========================
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, 1999 through 2003 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, and with the Management's Discussion and Analysis of Financial
Condition and Results of Operations included as Item 7 of this Annual Report on
Form 10-K.
18
(in thousands,
except per
share
information) 2003 2002 2001 2000 1999
- ------------ -------- -------- --------- -------- --------
Gross Sales $138,454 $115,490 $ 99,693 $ 86,072 $ 77,793
Net sales $110,352 $ 92,046 $ 80,658 $ 71,706 $ 66,184
Net income $ 5,930 $ 3,029 $ 3,019 $ 3,915 $ 4,478
Net income
per common share
Basic $ 0.58 $ 0.30 $ 0.30 $ 0.39 $ 0.45
Diluted $ 0.55 $ 0.29 $ 0.29 $ 0.38 $ 0.43
Total assets $ 47,997 $ 40,464 $ 38,561 $ 38,958 $ 28,709
Long-term debt $ 358 $ 3,606 $ 5,851 $ 9,732 $ 903
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion ("MD&A") is provided as a supplement to - and
should be read in conjunction with - our financial statements and the
accompanying notes ("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.
This overview provides our perspective on the individual sections of MD&A.
MD&A includes the following sections:
o Our Business - a general description of our business; the value drivers of
our business; and opportunities and risks;
o Results of Operations - an analysis of our consolidated results of
operations for the three years presented in our financial statements;
o Liquidity and Capital Resources - an analysis of our cash flows, sources
and uses of cash and contractual obligations;
o Application of Critical Accounting Policies and Pronouncements - a
discussion of accounting policies that require critical judgments and
estimates including newly issued accounting pronouncements;
o Sales - details of our sales measured on a quarterly basis in both dollars
and cases;
o Inflation - information about the impact that inflation may or may not have
on our results;
o Forward Looking Statements - cautionary information about forward looking
statements and a description of certain risks and uncertainties that could
cause our actual results to differ materially from the company's historical
results or our current expectations or projections; and
o Market Risks - Information about market risks and risk management. See
"Forward Looking Statements" and "ITEM 7A. - QUALITATIVE AND QUANTITATIVE
DISCLOSURES ABOUT MARKET RISKS"
19
Our Business
Overview
We develop, market, sell and distribute, in the main, a wide range of
branded beverages. The majority of our beverages fall within the growing
"alternative" beverage category. The principal brand names under which our
beverages are marketed are Hansen's(R), Monster Energy(TM), Blue Sky(R), Junior
Juice(R), and Lost(R). We own all of our above-listed brand names other than
Lost(R) which we produce, market, sell and distribute under an exclusive
licensing arrangement with Lost International LLC.
Our company principally generates revenues, income and cash flows by
developing, producing, marketing, selling and distributing finished beverage
products. We generally sell these products to retailers as well as distributors.
We incur significant marketing expenditures to support our brands including
advertising costs, sponsorship fees and special promotional events. We focus on
developing brand awareness and trial through sampling both in stores and at
events. Retailers and distributors receive rebates, promotions, point of sale
materials, merchandise displays and coolers. We also use in-store promotions and
in-store placement of point-of-sale materials and racks, prize promotions, price
promotions, competitions, and sponsorship of, and endorsements from, selected
public and extreme sports figures and causes. Consumers receive coupons,
discounts and promotional incentives. These marketing expenditures help to
enhance distribution and availability of our products as well as awareness and
increase consumer preference for our brands. Greater distribution and
availability, awareness and preference promotes long term growth.
During 2003, 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 believe that one of the keys to success in the beverage industry is
differentiation; such as making Hansen's(R) products visually 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
are redesigned from time to time 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.
We again achieved record sales in 2003. The increase in gross and net sales
in 2003 was primarily attributable to sales of our Monster Energy(R) drink,
which was introduced in April 2002, including our low carbohydrate ("lo-carb")
Monster Energy(R) drink which was introduced in 2003, as well as increased sales
of Natural Sodas, in particular Diet Natural Sodas, our Energy Deuce drink,
Junior Juice, Diet Energy, apple juice and, to a lesser extent, sparkling
beverages. The increase in gross and net sales was partially offset by decreased
sales primarily of energy drinks in 8.3-ounce cans, Smoothies, E2O Energy
Water(R), Soy Smoothies, Energade(R) energy sports drinks, and teas, lemonades
and cocktails.
During 2003, sales outside of California represented 47% of our aggregate
sales, as compared to approximately 42% of our aggregate sales in 2002. Sales to
distributors outside the United States during 2003 amounted to $1,612,000
compared to $1,242,000 in 2002.
Our customers are typically retail and specialty chains, club stores, mass
merchandisers, convenience chains, full service beverage distributors and health
food distributors. In 2003, sales to retailers represented 47% of our revenues,
sales to full service distributors represented 37% of our revenues and sales to
health food distributors represented 10% of our revenues.
20
In 2003, we introduced a carbonated lo-carb Monster Energy(R) drink in
16-ounce cans, a carbonated energy Deuce drink in 16-ounce cans, a diet root
beer Natural Soda, a 100% Apple Juice in aseptic pouches, and regular and diet
sparkling Lemonades and Orangeades in 12-ounce glass bottles.
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 lower in 2003 than in 2002. 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 and a
Blue Energy drink in 8.3-ounce cans. During the year, we continued to expand
distribution of the Blue Sky products into mainstream grocery chain stores
throughout the country.
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 2003, 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 2004 to support and grow the
sales of our products.
A chain grocery store strike in Southern California, which commenced during
the last quarter of 2003, adversely affected sales of those of our products that
are carried by the stores concerned. However, the drop in sales of such products
was partially offset by increased sales of certain of those products that are
carried by other retailers in Southern California.
In 2002, we introduced a Sparkling Cider 100% juice drink in a 1.5 liter
Magnum glass bottle. However, due to limited reports of some bottles breaking,
we promptly recalled the product. We are pursuing a claim for the costs and
losses incurred by us. We will reevaluate relaunching this product once certain
production issues are resolved to our satisfaction.
At the beginning of 2004, we launched a new carbonated energy drink under
the Lost(R) brand name, in a 16-ounce can. The Lost(R) brand name is owned by
Lost International LLC and the drinks are produced, sold and distributed by us
under exclusive license from Lost International LLC.
During 2004, we were awarded an exclusive contract by the State of
California, Department of Health Services Women, Infant and Children
Supplemental Nutrition Branch, to supply 100% Apple juice and 100% Apple Grape
juice in 64-ounce PET plastic bottles. See "ITEM 1 BUSINESS - MANUFACTURE and
DISTRIBUTION."
We continue to incur expenditures in connection with the development and
introduction of new products and flavors.
Value Drivers of our Business
We believe that the key value drivers of our business include the
following:
o Profitable Growth - We believe healthy brands - properly supported by
marketing and innovation, targeted to a broad consumer base-drive
profitable growth. We continue to broaden our family of brands. In
particular, we are expanding and growing our specialty beverages and energy
drinks to provide more alternatives to consumers. We are focused on
maintaining or increasing profit margins. We believe that tailored brand,
package, price and channel strategies help achieve profitable growth. We
are implementing these strategies with a view to accelerating profitable
growth.
21
o Cost Management - The principal focus of cost management will continue to
be on supplies and cost reduction. One key area of focus, for example, is
to decrease raw material costs, co-packing fees and general and
administrative costs as a percentage of net operating revenues. Another key
area of focus is the reduction in inventory levels. However, due to the
expansion in the number of our products as well as increased sales levels
in 2003, overall inventory levels increased.
o Efficient Capital Structure - Our capital structure is intended to optimize
our costs of capital. We believe our strong capital position, our ability
to raise funds at low effective cost and overall low costs of borrowing
provide a competitive advantage.
We believe that these value drivers, when properly implemented, will result
in (1) maintaining and improving our gross profit margin; (2) providing
additional leverage over time through reduced expenses as a percentage of net
operating revenues; and (3) optimizing our cost of capital. The ultimate measure
of success is and will be reflected in our current and future results of
operations.
Gross and net operating revenues, gross profits, operating income, and net
income and net income per share represent key measurements of the above value
drivers. In 2003, gross operating revenues totaled $138.5 million, a 19.9%
increase from 2002. Net operating revenues totaled $110.4 million, an increase
of 19.9% over 2002. Gross profit totaled $43.8 million in 2003, a 31.7% increase
from 2002. Operating income was $9.8 million compared to $5.3 million for 2002.
Net income was $5.9 million as compared to $3.0 million for 2002. Net income per
share (diluted) was $0.55 from $0.29 per diluted share in 2002. These
measurements will continue to be a key management focus in 2004 and beyond. See
also "Results of Operations for the Year Ended December 31, 2003 Compared to the
Year Ended December 31, 2002.
In 2003, the Company had working capital of $17.2 million compared to $15
million as of December 31, 2002. In 2003, our net cash provided by operating
activities was approximately $5.5 million, a 101% increase from 2002. Principal
uses of cash flows are purchases of inventory, increases in accounts receivable
and other assets, acquisition of property and equipment and trademark licenses
and trademarks. Repayment of our debt and accounts payable are expected to be
and remain our principal recurring use of cash and working capital funds. See
also LIQUIDITY AND CAPITAL RESOURCES.
Opportunities, Challenges and Risks
Looking forward, our management has identified certain challenges and risks
that demand the attention of the beverage industry and our company. Increase in
consumer and regulatory awareness of the health problems arising from obesity
and inactive lifestyles represents a challenge. We recognize that obesity is a
complex and serious public health problem. Our commitment to consumers begins
with our broad product line and a wide selection of diet, light and lo-carb
beverages, juices and juice drinks, sports drinks and waters and energy drinks.
We continuously strive to meet changing consumer needs through beverage
innovation, choice and variety.
Our historical success is attributable, in part, to our introduction of
different and innovative beverages. Our future success will depend, in part,
upon our continued ability to develop and introduce different and innovative
beverages, although there can be no assurance of our ability to do so. In order
to retain and expand our market share, we must continue to develop and introduce
different and innovative beverages and be competitive in the areas of quality,
health, method of distribution, brand image and intellectual property
protection. The beverage industry is subject to changing consumer preferences
and shifts in consumer preferences may adversely affect companies that misjudge
such preferences.
22
In addition, other key challenges and risks that could impact our company's
future financial results include, but are not limited to:
o maintenance of our brand images and product quality;
o profitable expansion and growth of our family of brands in the
competitive market place (See also "ITEM 1 BUSINESS - COMPETITION" and
"SALES AND MARKETING");
o restrictions on imports and sources of supply; duties or tariffs;
changes in government regulations; o protection of our existing
intellectual property portfolio of trademark licenses and trademarks
and the continuous pursuit of new and innovative trademarks for our
expanding product lines; and
o the imposition of additional restrictions.
We believe that the following opportunities exist for us:
o growth potential for non-alcoholic beverage categories including -
energy drinks, carbonated soft drinks, juices and juice drinks, sports
drinks and water;
o new product introductions intended to contribute to higher gross
profits;
o premium packages intended to generate strong revenue growth;
o significant package, pricing and channel opportunities to maximize
profitable growth; and
o proper positioning to capture industry growth.
23
Results of Operations
Percentage Change
-------------------------
2003 2002 2001 03 vs. 02 02 vs. 01
--------------- --------------- -------------- ------------ ------------
Gross sales $ 138,454,345 $ 115,490,019 $ 99,693,390 19.9% 15.8%
Less: Discounts, allowances
and promotional payments 28,102,149 23,443,657 19,035,073 19.9% 23.2%
--------------- --------------- -------------- ------------ ------------
Net sales 110,352,196 92,046,362 80,658,317 19.9% 14.1%
Cost of sales 66,577,168 58,802,669 51,796,539 13.2% 13.5%
--------------- --------------- -------------- ------------ ------------
Gross profit 43,775,028 33,243,693 28,861,778 31.7% 15.2%
Gross profit margin 39.7% 36.1% 35.8%
Selling, general and 33,887,045 27,896,202 22,803,433 21.5% 22.3%
administrative expenses
Amortization of trademark
license and trademarks 61,888 54,558 507,488 13.4% (89.2%)
--------------- --------------- -------------- ------------ ------------
Operating income 9,826,095 5,292,933 5,550,857 85.6% (4.6%)
Operating income as a percent
of net sales 8.9% 5.8% 6.9%
Net nonoperating expense 67,013 227,758 518,602 (70.6%) (56.1%)
--------------- --------------- -------------- ------------ ------------
Income before provision for
income taxes 9,759,082 5,065,175 5,032,255 92.7% 0.7%
Provision for income taxes 3,828,678 2,035,980 2,012,902 88.1% 1.1%
--------------- --------------- -------------- ------------ ------------
Effective tax rate 39.2% 40.2% 40.0%
Net income $ 5,930,404 $ 3,029,195 $ 3,019,353 95.8% 0.3%
=============== =============== ============== ============ ============
Net income as a percent of net
sales 5.4% 3.3% 3.7%
Net income per common share:
Basic $ 0.58 $ 0.30 $ 0.30 93.3% 0.0%
Diluted $ 0.55 $ 0.29 $ 0.29 89.7% 0.0%
Results of Operations for the Year Ended December 31, 2003 Compared to the
Year Ended December 31, 2002
Gross Sales. For the year ended December 31, 2003, gross sales were $138.5
million, an increase of $23.0 million or 19.9% higher than gross sales of $115.5
million for the year ended December 31, 2002. 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, 2003, net sales were $110.4
million, an increase of $18.3 million or 19.9% higher than net sales of $92.0
million for the year ended December 31, 2002. The increase in net sales was
primarily attributable to sales of our Monster Energy(TM) drink, which was
introduced in April 2002, as well as increased sales of Natural Sodas, Junior
Juice and, to a lesser extent, sparkling beverages. The increase in net sales
was partially offset by decreased sales of functional drinks, smoothies, E2O
Energy Water, Energade(R) energy sports drinks, and children's multi-vitamin
juice drinks as well as an increase in discounts, allowances and promotional
payments.
Gross Profit. Gross profit was $43.8 million for the year ended December
31, 2003, an increase of $10.5 million or 31.7% over the $33.2 million gross
profit for the year ended December 31, 2002. Gross profit as a percentage of net
sales was 39.7% for the year ended December 31, 2003 which was higher than gross
profit as a percentage of net sales of 36.1% for the year ended December 31,
2002. 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
partially reduced by higher promotional payments and allowances to promote our
products.
24
Total Operating Expenses. Total operating expenses were $33.9 million for
the year ended December 31, 2003, an increase of $6.0 million or 21.5% over
total operating expenses of $28.0 million for the year ended December 31, 2002.
Total operating expenses as a percentage of net sales slightly increased to
30.8% for the year ended December 31, 2003, from 30.4% for the year ended
December 31, 2002. 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 $33.9 million for the year ended December 31, 2003, an increase of
$6.0 million or 21.5% over selling, general and administrative expenses of $27.9
million for the year ended December 31, 2002. Selling, general and
administrative expenses as a percentage of net sales increased to 30.7% for the
year ended December 31, 2003 from 30.3% for the year ended December 31, 2002.
Selling expenses were $20.1 million for the year ended December 31, 2003, an
increase of $4.0 million or 25.1% over selling expenses of $16.1 million for the
year ended December 31, 2002. Selling expenses as a percentage of net sales
increased to 18.2% for the year ended December 31, 2003 from 17.4% for the year
ended December 31, 2002. The increase in selling expenses was primarily
attributable to increased distribution (freight) and storage expenses, trade
development activities including cooperative arrangements with our distributors,
sponsorships and promotions, in-store demonstrations and merchandise displays
which was partially offset by decreased expenditures for graphic design. In
addition, we incurred expenses of approximately $267,000 during 2003 in
connection with our sponsorship of the Las Vegas Monorail as part of our efforts
to promote our Monster product line. General and administrative expenses were
$13.8 million for the year ended December 31, 2003, an increase of $2.0 million
or 16.6% over general and administrative expenses of $11.8 million for the year
ended December 31, 2002. General and administrative expenses as a percentage of
net sales were 12.5% for the year ended December 31, 2003 which was slightly
lower than general and administrative expenses as a percentage of net sales of
12.9% for the year ended December 31, 2002. The increase in general and
administrative expenses was primarily attributable to an increase in payroll
costs as we expanded our headcount, as well as fees paid for legal and
accounting services and increased travel and insurance 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 $62,000 for the year ended December 31, 2003, an
increase of $7,000 from amortization of trademark license and trademarks of
$55,000 for the year ended December 31, 2002. The increase in amortization of
trademark license and trademarks was due to the acquisition of trademarks during
the year ended December 31, 2003.
Operating Income. Operating income was $9.8 million for the year ended
December 31, 2003, compared to $5.3 million for the year ended December 31,
2002. The $4.5 million increase in operating income was primarily attributable
to increased gross profits, which was partially offset by increased operating
expenses.
Net Nonoperating Expense. Net nonoperating expense was $67,000 for the year
ended December 31, 2003, which was $161,000 lower than net nonoperating expense
of $228,000 for the year ended December 31, 2002. Net nonoperating expense
consists of interest and financing expense and interest income. Interest and
financing expense for the year ended December 31, 2003 was $73,000, as compared
to $231,000 for the year ended December 31, 2002. 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 and royalty income
for the year ended December 31, 2003 was $6,000, as compared to interest income
of $3,000 for the year ended December 31, 2002. The increase in interest income
was primarily attributable to an increase in the cash available for investment
during the year ended December 31, 2003.
25
Provision for Income Taxes. Provision for income taxes for the year ended
December 31, 2003 was $3.8 million which was an increase of $1.8 million as
compared to the provision for income taxes of $2.0 million for the year ended
December 31, 2002. The increase in provision for income taxes was primarily
attributable to the increase in operating income. The effective combined federal
and state tax rate for 2003 was 39.2%, which was lower than the effective tax
rate of 40.2% for 2002 due to the increase in the apportionment of sales and
related state taxes to various states outside of California.
Net Income. Net income was $5.9 million for the year ended December 31,
2003, which was an increase of $2.9 million as compared to net income of $3.0
million for the year ended December 31, 2002. The increase in net income was
primarily attributable to the $10.5 million increase in gross profit and
decrease in nonoperating expense of $161,000 for the year ended December 31,
2003 which was partially offset by increased operating expenses of $6.0 million
and an increase in the provision of income taxes of $1.8 million.
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 EnergyTM drink, which was
introduced in April 2002, as well as increased sales of Natural Sodas, E2O
Energy Water(R), 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, 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.
26
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 consistent with 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 1 of the financial statements) which eliminated amortization on
indefinite-lived intangible assets.
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 Nonoperating Expense. Net nonoperating expense was $228,000 for the
year ended December 31, 2002, which was $291,000 lower than net nonoperating
expense of $519,000 for the year ended December 31, 2001. Net nonoperating
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.
27
Liquidity and Capital Resources
As of December 31, 2003, the Company had working capital of $17,196,000,
compared to working capital of $14,950,000 as of December 31, 2002. The increase
in working capital was primarily attributable to net income earned after
adjustments for certain noncash expenses, primarily depreciation and other
amortization, amortization of trademark license and trademarks, and 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,
2003 was $5,484,000, compared to cash provided by operating activities of
$2,727,000 during 2002. The increase in cash provided by operating activities
was primarily attributable to decreases in accounts receivable, and an increase
in accounts payable, income taxes payable, accrued compensation, and accrued
liabilities which was partially offset by increases in inventories. 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, 2003
was $2,438,000 as compared to net cash used in investment activities of $92,000
in 2002. The increase in net cash used in investing activities was primarily
attributable to increased purchases of property and equipment and an increase in
trademarks as well as a decrease in expenditures for deposits and other assets
in 2003 which was partially offset by proceeds from the sale of property and
equipment. 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 $2,486,000 for the year ending
December 31, 2003, as compared to net cash used in financing activities of
$2,344,000 in 2002. The increase in net cash used in financing activities as
compared to the prior year was primarily attributable to increased principal
payments of long-term debt, which was partially offset by increased proceeds
from the issuance of common stock during 2003.
HBC has a credit facility from Comerica Bank-California ("Comerica"),
consisting of a revolving line of credit and a term loan. 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 are secured by substantially all of HBC's assets, including
accounts receivable, inventory, trademarks, trademark licenses and certain
equipment. In accordance with the provisions of the credit facility, HBC can
borrow up to $12.0 million under its line of credit, 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, 2003, HBC had no
balances outstanding under the credit facility and borrowing capacity available
to the Company from Comerica under the credit facility was $7,800,000.
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 its financial ratios and annual net
income requirements and obtained a waiver from Comerica with regards to its
capital expenditure limitations at December 31, 2003.
28
If any event of default shall occur for any reason, whether voluntary or
involuntary, Comerica may declare all or any portion 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.
Purchase obligations represent commitments made by the Company and its
subsidiaries to various suppliers for raw materials used in the manufacturing
and packaging of our products. These obligations vary in terms.
Other commitments represent our obligations under our agreement with the
Las Vegas Monorail Company. See also "ITEM 1 - SALES AND MARKETING."
The following represents a summary of the Company's contractual obligations
and related scheduled maturities as of December 31, 2003:
Long-Term
Debt &
Capital Lease Operating Purchase Other
Obligations Leases Obligations Commitments Total
----------------- ---------------- ------------------ ------------------ ------------------
Year ending December 31:
2004 $ 244,271 $ 893,359 $ 6,732,789 $ 750,000 $ 8,620,419
2005 211,484 970,359 7,259,120 250,000 8,690,963
2006 146,580 1,017,128 7,259,120 8,422,828
2007 1,030,218 1,460,000 2,490,218
2008 773,997 773,997
Thereafter 1,199,730 1,199,730
----------------- ---------------- ------------------ ----------------- ------------------
$ 602,335 $ 5,884,791 $ 22,711,029 $ 1,000,000 $ 30,198,155
================= ================ ================== ================= ==================
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, 2004.
Accounting Policies and Pronouncements
Critical Accounting Policies
The Company's consolidated financial statements are prepared in accordance
with accounting principals generally accepted in the United States of America
("GAAP".) GAAP requires the Company to make estimates and assumptions that
affect the reported amounts in our consolidated financial statements including
various allowances and reserves for accounts receivable and inventories, the
estimated lives of long-lived assets and trademarks and trademark licenses as
well as claims and contingencies arising out of litigation or other transactions
that occur in the normal course of business.The following summarize the most
significant accounting and reporting policies and practices of the Company:
Trademark License and Trademarks - Trademark license and trademarks
primarily represent 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. 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.
29
In accordance with SFAS No. 142, we evaluate our trademark license and
trademarks annually for impairment. We measure impairment by the amount
that the carrying value exceeds the estimated fair value of the trademark
license and trademarks. The fair value is calculated using the income
approach. Based on our annual impairment analysis performed in the fourth
quarter of 2003, the estimated fair values of trademark license and
trademarks exceeded the carrying value.
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, 2003.
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 judgment 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, a
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, require adjustments. 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.
Accounts Receivable - The Company evaluates the collectibility of its trade
accounts receivable based on a number of factors. In circumstances where
the Company becomes aware of a specific customer's inability to meet its
financial obligations to the Company, a specific reserve for bad debts is
estimated and recorded which reduces the recognized receivable to the
estimated amount the Company believes will ultimately be collected. In
addition to specific customer identification of potential bad debts, bad
debt charges are recorded based on the Company's recent past loss history
and an overall assessment of past due trade accounts receivable
outstanding.
30
Inventories - Inventories are stated at the lower of cost to purchase
and/or manufacture the inventory or the current estimated market value of
the inventory. The Company regularly reviews its inventory quantities on
hand and records a provision for excess and obsolete inventory based
primarily on the Company's estimated forecast of product demand and/or its
ability to sell the products concerned and production requirements. Demand
for the Company's products can fluctuate significantly. Factors which could
affect demand for the Company's products include unanticipated changes in
consumer preferences, general market conditions or other factors, which may
result in cancellations of advance orders or a reduction in the rate of
reorders placed by customers and/or continued weakening of economic
conditions. Additionally, management's estimates of future product demand
may be inaccurate, which could result in an understated or overstated
provision required for excess and obsolete inventory.
Income Taxes - Current income tax expense is the amount of income taxes
expected to be payable for the current year. A deferred income tax asset or
liability is established for the expected future consequences of temporary
differences in the financial reporting and tax bases of assets and
liabilities. The Company considers future taxable income and ongoing,
prudent and feasible tax planning strategies in assessing the value of its
deferred tax assets. If the Company determines that it is more likely than
not that these assets will not be realized, the Company will reduce the
value of these assets to their expected realizable value, thereby
decreasing net income. Evaluating the value of these assets is necessarily
based on the Company's judgment. If the Company subsequently determined
that the deferred tax assets, which had been written down, would be
realized in the future, the value of the deferred tax assets would be
increased, thereby increasing net income in the period when that
determination was made. See Note 7 in Notes to Consolidated Financial
Statements.
Newly Issued Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," an interpretation SFAS Nos. 5, 57 and 107, and rescission of FIN 34,
"Disclosure of Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates
on the disclosures to be made by the guarantor in its interim and annual
financial statements about its obligations under certain guarantees that it has
issued. It also requires that a guarantor recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions of
this interpretation are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002, while the provisions of the disclosure
requirements are effective for financial statements of interim or annual periods
ending after December 15, 2002. The Company adopted such interpretation on
November 1, 2002 with no material impact to the consolidated financial
statements.
In January 2003, the FASB issued FIN 46(R), "Consolidation of Variable
Interest Entities," an interpretation of ARB No. 51, and revised in December
2003. FIN 46(R) 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(R) is
effective for all new variable interest entities created or acquired after
December 31, 2003. For variable interest entities created or acquired prior to
December 31, 2003, the provisions of FIN 46(R) must be applied for the first
interim or annual period beginning after March 15, 2004. The Company does not
expect that the adoption of FIN 46(R) will have a material impact on its
consolidated financial position, results of operations or cash flows, as the
Company has no interests in variable interest entities.
31
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of Both Liabilities and Equity," as amended by
various FASB staff positions posted in October and November 2003, which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer classify a financial instrument that is within
its scope which may have previously been reported as equity, as a liability (or
an asset in some circumstances). This statement is effective for financial
instruments entered into or modified after May 31, 2003 and otherwise is
generally effective at the beginning of the first interim period beginning after
June 15, 2003, except for mandatorily redeemable financial instruments of
nonpublic entities, which are subject to the provision of this statement for the
first fiscal period beginning after December 15, 2004. The Company does not
believe that the adoption of SFAS No. 150 will have a significant impact on its
consolidated financial position, results of operations or cash flows.
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 many its newer product introductions 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 increased advertising
and promotional expenses. See also "ITEM 1. BUSINESS - SEASONALITY."
32
Unit Case Volume / Case Sales (in Thousands)
2003 2002 2001 2000 1999
--------- -------- --------- ---------- ----------
Quarter 1 4,219 3,597 3,091 2,451 2,287
Quarter 2 5,356 4,977 4,171 3,323 2,817
Quarter 3 6,221 5,146 4,271 3,157 3,148
Quarter 4 4,625 3,885 3,583 2,859 2,645
--------- -------- --------- ---------- ----------
Total 20,421 17,605 15,116 11,790 10,897
========= ========= ========= ========== ===========
Net Revenues (in Thousands)
2003 2002 2001 2000 1999
--------- ---------- ---------- ----------- -----------
Quarter 1 $ 22,086 $18,592 $16,908 $14,236 $13,836
Quarter 2 28,409 26,265 22,337 20,702 17,471
Quarter 3 33,291 26,985 23,011 20,434 18,969
Quarter 4 26,566 20,204 18,402 16,334 15,908
---------- ---------- ----------- ----------- -----------
Total $ 110,352 $92,046 $80,658 $71,706 $66,184
========== =========== =========== ============ ===========
Inflation
The Company does not believe that inflation had a significant impact on the
Company's results of operations for the periods presented.
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
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, involve a number of risks, uncertainties
and other factors, that could cause actual results and events to differ
materially from the statements made including, but not limited to, the
following:
o Company's ability to generate sufficient cash flows to support capital
expansion plans and general operating activities;
o Decreased demand for our products resulting from changes in consumer
preferences;
o Changes in demand that are weather related, particularly in areas
outside of California;
o Competitive products and pricing pressures and the Company's ability
to gain or maintain its share of sales in the marketplace as a result
of actions by competitors;
33
o The introduction of new products;
o An inability to achieve volume growth through product and packaging
initiatives;
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, as well as changes in any other
food and drug laws, especially those that may affect the way in which
the Company's products are marketed and/or labeled and/or sold,
including the contents thereof, 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 Federal Trade
Commission, 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. There can
be no assurance that the Company will achieve projected levels or
mixes of product sales;
o The Company's ability to penetrate new markets;
o The marketing efforts of distributors of the Company's products, most
of which distribute products that are competitive with the products of
the Company;
o Unilateral decisions by distributors, grocery chains, specialty chain
stores, club stores and other customers to discontinue carrying all or
any of the Company's products that they are carrying at any time;
o The terms and/or availability of the Company's credit facility and the
actions of its creditors;
o The effectiveness of the Company's advertising, marketing and
promotional programs;
o Changes in product category consumption;
o Unforeseen economic and political changes;
o Possible recalls of the Company's products; and
o The Company's ability to make suitable arrangements for the co-packing
of any of its products including, but not limited to, its energy and
functional drinks in 8.3-ounce slim cans and 16-ounce cans, smoothies
in 11.5-ounce cans, E2O Energy Water(R), Energade(R), Monster
Energy(R) and Lost(R) 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.
34
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS
In the normal course of business, our financial position is routinely
subject to a variety of risks. The principal market risks (i.e., the risk of
loss arising from adverse changes in market rates and prices) which the Company
is exposed to are fluctuations in commodity prices affecting the cost of raw
materials and changes in interest rates of the Company's long term debt. We are
also subject to market risks with respect to the cost of commodities because our
ability to recover increased costs through higher pricing is limited by the
competitive environment in which we operate. We are also subject to other risks
associated with the business environment in which we operate, including the
collectability of accounts receivable.
At December 31, 2003, the majority of the Company's debt consisted of fixed
rather than 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, 2003, the net
impact on the Company's pre-tax earnings would have been insignificant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required to be furnished in response to this Item follows
the signature page hereto at pages 55 through 75.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 as of the end of the period covered by this
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 we are
required to disclose in reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in SEC rules and forms.
There have been no significant changes in internal control over financial
reporting that occurred during the fiscal period covered by this report that
have materially affected, or are reasonably likely to materially affect, the
registrant's internal control over financial reporting.
35
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, 2004.
The members of our Board of Directors and our executive officers are as
follows:
Name Age Position
-------------------------- ------- ---------------------------------------
Rodney C. Sacks(1) 54 Chairman of the Board of Directors and
Chief Executive Officer
Hilton H. Schlosberg(1) 51 Vice Chairman of the Board of
Directors, Chief Financial Officer,
Chief Operating Officer and
Secretary
Benjamin M. Polk 53 Director
Norman C. Epstein(2)(3) 63 Director
Harold C. Taber, Jr. (2) 64 Director
Mark S. Vidergauz(2)(3) 50 Director
Mark Hall 49 Senior Vice President, National Sales,
Single-Serve Products of HBC
Michael B. Schott 55 Vice President, National Sales,
Single-Serve Products of HBC
Kirk Blower 54 Senior Vice President, Juice and
Non-Carbonated Products of HBC
Thomas J. Kelly 49 Vice President - Controller and
Secretary of HBC
1 Member of the Executive Committee of the Board of Directors
2 Member of the Audit Committee of the Board of Directors
3 Member of the Compensation Committee of the Board of Directors
Rodney C. Sacks - 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 - 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 - 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 LLP (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)
36
Norman C. Epstein - 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. - 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 - 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 - 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.
Michael Schott - Vice President, National Sales, Single-Serve Products,
joined HBC in 2002. Prior to joining HBC, Mr. Schott held a number of management
positions in the beverage industry including president of Snapple Beverage Co.,
SOBE Beverage Co. and Everfresh Beverages, respectively. Mr. Schott has over 30
years of experience in sales and marketing, primarily with beverage companies in
key executive and operational roles.
Kirk Blower - Senior Vice President, Juice and Non-Carbonated Products, of
HBC since 1992. Mr. Blower has over 30 years of experience in sales and
marketing, primarily with the Coca-Cola organization.
Thomas J. Kelly - Vice President - Controller and Secretary of HBC since
1992. Prior to joining HBC, Mr. Kelly served as controller for Hansen Foods,
Inc. Mr. Kelly is a Certified Public Accountant and has worked in the beverage
business for over 20 years.
1 Mr. Polk and his law firm, Winston & Strawn LLP, serve as counsel to the
Company.
Audit Committee and Audit Committee Financial Expert
The Company has a separately designated standing Audit Committee
established in accordance with Section 3(a)(58)(A) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). The members of the Audit Committee
are Messrs. Epstein (Chairman), Taber and Vidergauz. The Board of Directors has
determined that Mr. Epstein is (1) an "audit committee financial expert," as
that term is defined in Item 401(h) of Regulation S-K of the Exchange Act, and
(2) independent as defined by the listing standards of Nasdaq and Section
10A(m)(3) of the Exchange Act.
37
Code of Ethics
We have adopted a Code of Ethics that applies to all our directors,
officers (including its principal executive officer, principal financial officer
and controller) and employees. The Code of Ethics and any amendment to the Code
of Ethics, as well as any waivers that are required to be disclosed by the rules
of the SEC or Nasdaq may be obtained at no cost to you by writing or telephoning
us at the following address or telephone number:
Hansen Beverage Company
1010 Railroad Street
Corona, CA 92882
(909) 739-6200
(800) HANSENS
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, 2003, 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, as reported in the annual report on Form 10-K for the year
ended December 31, 2002, 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.
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 $100,000
during the year ended December 31, 2003. These amounts reflect total cash
compensation paid by the Company and its subsidiaries to these individuals
during the years December 31, 2001 through 2003.
38
SUMMARY COMPENSATION TABLE
================================================================================
ANNUAL COMPENSATION Long Term
Compensation
- ----------------------------------------- --------------------------------------
Name and Other Securities
Principal Bonus(2) Annual underlying
Positions Year Salary ($) ($) Compensation Options (#)
- --------------------------------------------------------------------------------
Rodney C. Sacks 2003 225,833 35,000 19,333(3) 150,000
Chairman, CEO 2002 225,504 - 10,331(3) 150,000
and Director 2001 194,400 8,000 7,314(3) -
- --------------------------------------------------------------------------------
Hilton H. Schlosberg 2003 225,833 35,000 7,753(3) 150,000
Vice-Chairman, CFO, 2002 225,504 - 7,753(3) 150,000
COO,President, 2001 194,400 8,000 7,314(3) -
Secretary and
Director
- --------------------------------------------------------------------------------
Mark J. Hall 2003 175,000 70,000 9,554(3) -
Senior Vice President 2002 160,000 10,000 7,733(3) 20,000
Single Serve Products 2001 160,000 8,000 7,349(3) -
- --------------------------------------------------------------------------------
Michael Schott 2003 140,000 50,000 24,572(4)
Vice President 2002 57,256 20,000 7,311(5) 72,000
National Sales 2001 - - - -
Single Serve Products
- --------------------------------------------------------------------------------
Kirk S. Blower 2003 123,000 10,000 7,761(3)
Senior Vice President 2002 118,000 4,000 7,238(3) 12,500
Juice and 2001 115,000 3,000 7,364(3) -
Non-Carbonated
Products
================================================================================
1 SALARY - Pursuant to employment agreements, Messrs. Sacks and Schlosberg
were entitled to an annual base salary of $225,833, $226,748, and $209,952
for 2003, 2002 and 2001 respectively.
2 BONUS - Payments made in 2004, 2003 and 2002 are for bonuses accrued in
2003, 2002 and 2001 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 Includes $7,200 for auto reimbursement expense, $10,000 for housing
expenses, $1,200 for travel expenses, and $6,172 for other miscellaneous
perquisites.
5 Includes $2,945 for auto reimbursement expenses, $4,090 for housing
expenses and $276 for other miscellaneous perquisites.
39
OPTION GRANTS FOR THE YEAR ENDED DECEMBER 31, 2003
============================================================================================= ===========================
Potential realizable
value at assumed annual
rates of stock price
appreciation for option
Individual Grants term(2)
- --------------------------- ------------------ ----------------- ------------ --------------- ------------ --------------
Number of Percent of
Securities total Options Exercise
underlying granted to or base
Options granted employees in price Expiration 5% 10%
Name (#) 2003 ($/Share) Date ($) ($)
- --------------------------- ------------------ ----------------- ------------ --------------- ------------ --------------
Rodney C. Sacks 150,000 (1) 42.3% $4.20 5/28/2013 $396,204 $1,004,057
- --------------------------- ------------------ ----------------- ------------ --------------- ------------ --------------
Hilton H. Schlosberg 150,000 (1) 42.3% $4.20 5/28/2013 $396,204 $1,004,057
- --------------------------- ------------------ ----------------- ------------ --------------- ------------ --------------
Mark J. Hall - - - - - -
- --------------------------- ------------------ ----------------- ------------ --------------- ------------ --------------
Michael Schott - - - - - -
- --------------------------- ------------------ ----------------- ------------ --------------- ------------ --------------
Kirk S. Blower - - - - - -
=========================== ================== ================= ============ =============== ============ ==============
1 Options to purchase the Company's common stock become exercisable in equal
annual increments over 5 years beginning January 1, 2004.
2 The 5% and 10% assumed annual rates of appreciation are provided in
accordance with the rules and regulations of the SEC and do not represent
our estimates or projections of our future common stock price growth.
AGGREGATED OPTION EXERCISES DURING THE YEAR ENDED
DECEMBER 31, 2003 AND OPTION VALUES AT DECEMBER 31, 2003
================================================================================
Number of Value of
underlying unexercised
unexercised in-the-money
Options at options at
December 31, 2003 December 31, 2003
Shares (#) ($)
aquired Value --------------------------------------
on exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
- -------------------- ------------ ---------- ------------------- ------------------
Rodney C.Sacks - - 167,500/270,000(1) 818,625/1,215,000
- -------------------- ------------ ---------- ------------------- ------------------
Hilton H.Schlosberg - - 167,500/270,000(1) 818,625/1,215,000
- -------------------- ------------ ---------- ------------------- ------------------
Mark J. Hall 116,000 (2) $371,040 4,000/16,000(2) 19,400/77,600
- -------------------- ------------ ---------- ------------------- ------------------
Michael Schott - - 12,000/60,000(3) 54,840/274,200
- -------------------- ------------ ---------- ------------------- ------------------
Kirk S. Blower - - 12,500/12,500(4) 53,825/58,925
==================== ============ ========== =================== ================
1 Includes options to purchase 37,500 shares of common stock at $1.59 per
share of which all are exercisable at December 31, 2003, 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, 2003, granted pursuant to Stock Option Agreements dated February 2,
1999 between the Company and Messrs. Sacks and Schlosberg, respectively;
options to purchase 150,000 shares of common stock at $3.57 per share of
which 30,000 are exercisable at December 31, 2003, granted pursuant to
Stock Option Agreements dated July 12, 2002 between the Company and Messrs.
Sacks and Schlosberg, respectively; and options to purchase 150,000 shares
of common stock at $4.20 per share of which none are exercisable at
December 31, 2003 granted pursuant to Stock Option Agreements dated May 28,
2003 between the Company and Messrs. Sacks and Schlosberg, respectively.
2 Includes options to purchase 20,000 shares of common stock at $3.57 per
share of which 4,000 are exercisable at December 31, 2003, granted pursuant
to a Stock Option Agreement dated July 12, 2002 between the Company and Mr.
Hall.
40
3 Includes options to purchase 72,000 shares of common stock at $3.85 per
share of which 12,000 are exercisable at December 31, 2003, granted
pursuant to a Stock Option Agreement dated August 9, 2002 between the
Company and Mr. Schott.
4 Includes options to purchase 12,500 shares of common stock at $4.25 per
share of which 10,000 are exercisable at December 31, 2003, 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 2,500 are exercisable at December 31,
2003, granted pursuant to a stock Option Agreement dated July 12, 2002
between the Company and Mr. Blower.
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 1999 2000 2001 2002 2003
- ---------------------- -------- -------- -------- -------- --------
HANSEN NAT CORP (19.77) (10.14) 8.39 0.50 99.43
S&P SMALLCAP 600 INDEX 12.40 11.80 6.54 (14.63) 38.79
PEER GROUP 8.47 17.06 47.07 14.40 41.59
INDEXED RETURNS
For the years ended December 31,
Base
Period
Company Name/Index 1998 1999 2000 2001 2002 2003
- ---------------------- ------ -------- -------- -------- -------- --------
HANSEN NAT CORP 100 80.23 72.09 78.14 78.53 156.65
S&P SMALLCAP 600 INDEX 100 112.40 125.67 133.88 114.30 158.63
PEER GROUP 100 108.47 126.98 186.75 213.64 302.49
1 Annual return assumes reinvestment of dividends. Cumulative total return
assumes an initial investment of $100 on December 31, 1998. 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 June 1, 2003
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
$230,000 for the 7-months ended December 31, 2003, $245,000 for 2004, with
subsequent increases of a minimum of 5% for each subsequent year, 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 June 1, 2003 and
ends on December 31, 2008.
The Company also entered into an employment agreement dated as of June 1,
2003 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 $230,000 for the
7-months ended December 31, 2003, $245,000 for 2004, with subsequent increases
of a minimum of 5% for each subsequent year, 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 June 1, 2003 and ends on December
31, 2008.
41
The employment agreements for Messrs. Sacks and Schlosberg, and the terms
and conditions thereof, were discussed and approved by the Compensation
Committee of the Board of Directors.
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
In 2003, outside directors were entitled to an annual fee of $10,000 plus
$1,000 for each meeting of the Board of Directors attended. Outside directors
were also entitled to $500 for each committee meeting attended in person and
$250 for each committee meeting attended by telephone.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
The Company's Compensation Committee is composed of Mr. Epstein and Mr.
Vindergauz. No interlocking relationships exist between any member of the
Company's Board of Directors or Compensation Committee and any member of the
board of directors or compensation committee of any other company, nor has any
such interlocking relationship existed in the past. No member of the
Compensation Committee is or was formerly an officer or an employee of the
Company.
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
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).
42
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 11, 2004, 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
Title Name and Address and Nature of
Of Class of Beneficial Owner Beneficial Percent
Ownership of Class
- ------------------------ --------------------------- ----------------- ---------
Common Stock Brandon Limited Partnership No. 1 (1) 654,822 5.9%
Brandon Limited Partnership No. 2 (2) 2,831,667 25.5%
Rodney C. Sacks (3) 4,071,489(4) 36.7%
Hilton H. Schlosberg (5) 4,032,586(6) 36.4%
Kevin Douglas, Douglas Family Trust
and James Douglas and Jean Douglas
Irrevocable Descendants' Trust (7) 1,053,561(8) 9.5%
Fidelity Low Priced Stock Fund (9) 888,675 8.0%
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; options to purchase 100,000 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. Sacks; options presently
exercisable to purchase 30,000 shares of common stock, out of options to
purchase a total of 150,000 shares, exercisable at $3.57 per share, granted
pursuant to a Stock Option Agreement dated July 12, 2002 between the
Company and Mr. Sacks; and options presently exercisable to purchase 30,000
shares of common stock, out of options to purchase a total of 150,000
shares, exercisable at $4.20 per share, granted pursuant to a Stock Option
Agreement dated May 28, 2003 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
197,500 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.
43
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; options to
purchase 100,000 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. Schlosberg; options presently exercisable to purchase
30,000 shares of common stock, out of options to purchase a total of
150,000 shares, exercisable at $3.57 per share, granted pursuant to a Stock
Option Agreement dated July 12, 2002 between the Company and Mr.
Schlosberg; and options presently exercisable to purchase 30,000 shares of
common stock, out of options to purchase a total of 150,000 shares,
exercisable at $4.20 per share, granted pursuant to a Stock Option
Agreement dated May 28, 2003 between the Company and Mr. Schlosberg.
Mr. Schlosberg disclaims beneficial ownership of all shares deemed
beneficially owned by him hereunder except: (i) 348,597 shares of common
stock, (ii) the 197,500 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 404,036 shares of common stock owned by Kevin and Michelle
Douglas; 306,499 shares of common stock owned by James Douglas and Jean
Douglas Irrevocable Descendants' Trust; 322,306 shares of common stock
owned by Douglas Family Trust; and 20,720 shares of common stock owned by
James E. Douglas III. Kevin Douglas, James E. 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.
9 The mailing address of this reporting person is 82 Devonshire Street,
Boston, Massachusetts, 02109.
(b) The following table sets forth information as to the beneficial ownership of
shares of common stock, as of March 11, 2004, held by persons who are directors
of the Company and certain executive officers, naming them, and as to directors
and all executive officers of the Company as a group, without naming them:
Title of Class Name Amount Owned Percent of Class
- -------------------------------------- --------------- ------------------
Common Stock Rodney C. Sacks 4,071,489(1) 36.7%
Hilton H. Schlosberg 4,032,586(2) 36.4%
Mark J. Hall 72,000(3) *%
Michael Schott 24,384(4) *%
Kirk S. Blower 26,809(5) *%
Harold C. Taber, Jr. 97,119(6) *%
Mark S. Vidergauz 12,000(7) *%
Benjamin M. Polk -
Norman C. Epstein -
Executive Officers and Directors as a group: 10 members; 4,864,013 shares
or 43.9% in aggregate (8)
*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; options to purchase 100,000 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. Sacks; options presently
exercisable to purchase 30,000 shares of common stock, out of options to
purchase a total of 150,000 shares, exercisable at $3.57 per share, granted
pursuant to a Stock Option Agreement dated July 12, 2002 between the
Company and Mr. Sacks; and options presently exercisable to purchase 30,000
shares of common stock, out of options to purchase a total of 150,000
shares, exercisable at $4.20 per share, granted pursuant to a Stock Option
Agreement dated May 28, 2003 between the Company and Mr. Sacks.
44
Mr. Sacks disclaims beneficial ownership of all shares deemed beneficially
owned by him hereunder except: (i) 387,500 shares of common stock; (ii) the
197,500 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; options to
purchase 100,000 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. Schlosberg; options presently exercisable to purchase
30,000 shares of common stock, out of options to purchase a total of
150,000 shares, exercisable at $3.57 per share, granted pursuant to a Stock
Option Agreement dated July 12, 2002 between the Company and Mr.
Schlosberg; and options presently exercisable to purchase 30,000 shares of
common stock, out of options to purchase a total of 150,000 shares,
exercisable at $4.20 per share, granted pursuant to a Stock Option
Agreement dated May 28, 2003 between the Company and Mr. Schlosberg.
Mr. Schlosberg disclaims beneficial ownership of all shares deemed
beneficially owned by him hereunder except: (i) 348,597 shares of common
stock, (ii) the 197,500 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 68,000 shares of common stock owned by Mr. Hall and options
presently exercisable to purchase 4,000 shares of common stock, out of
options to purchase a total of 20,000 shares, exercisable at $3.57 per
share, granted pursuant to a Stock Option Agreement dated July 12, 2002
between the Company and Mr. Hall.
4 Includes 12,384 shares of common stock owned by Mr. Schott of which 2,500
shares are owned jointly by Mr. Schott and his children and options
presently exercisable to purchase 12,000 shares of common stock, out of
options to purchase a total of 72,000 shares, exercisable at $3.85 per
share, granted pursuant to a Stock Option Agreement dated August 9, 2002
between the Company and Mr. Schott.
5 Includes 11,809 shares of common stock owned by Mr. Blower and options
presently exercisable to purchase 12,500 shares of common stock out of
options to purchase a total of 12,500 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; options presently
exercisable to purchase 2,500 shares of common stock and out of options to
purchase a total of 12,500 shares, exercisable at $3.57 per share, granted
pursuant to a Stock Option Agreement dated July 12, 2002 between the
Company and Mr. Blower.
6 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.
7 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.
8 Includes securites beneficially owned by all directors and executive
officers of the Company including those listed above.
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.
45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Benjamin M. Polk is a partner in Winston & Strawn LLP, 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 2003, 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 2003, 2002 and 2001 were $331,478, $164,199 and
$164,638, respectively. The Company continues to purchase promotional items from
IFM Group, Inc. in 2004.
The preceding descriptions of agreements are qualified in their entirety by
reference to such agreements, which have been filed as exhibits to this Report.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Accounting Fees
Aggregate fees billed and unbilled to the company for service provided for
the years ended December 31, 2003, and 2002 by the Company's principal
accounting firm, Deloitte & Touche LLP, the member firms of Deloitte Touche
Tohmatsu, and their respective affiliates (collectively, "Deloitte & Touche"):
Year ended December 31,
2003 2002
----------- -----------
Audit Fees $132,500 $105,325
Audit-Related Fees (1) 5,000
----------- -----------
Total audit and audit-related fees 137,500 105,325
Tax Fees (2) 15,679
All other Fees
----------- -----------
Total Fees (3) $137,500 $121,004
=========== ===========
1 Audit related fees consist of consultation services related to
Sarbanes-Oxley Section 404 Implementation.
2 Tax fees consisted of fees for tax consultation services including advisory
services for state tax analysis and tax audit assistance.
3 For years ended December 31, 2003 and 2002, all of the services performed
by Deloitte & Touche have been pre-approved by the Audit Committee.
The Audit Committee has considered whether Deloitte & Touche's provision of
the non-audit services covered above is compatible with maintaining Deloitte &
Touche's independence and has determined that it is.
Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Auditors
The Audit Committee pre-approves the retention of the auditors and the
auditor's fees for all audit and non-audit services provided by the auditor, and
determines whether the provision of non-audit services is compatible with
maintaining the independence of the auditor. All services provided to us by our
auditors were pre-approved by the Audit Committee.
46
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 55
Consolidated Balance Sheets
as of December 31, 2003 and 2002 56
Consolidated Statements of Income for
the years ended December 31, 2003, 2002 and 2001 57
Consolidated Statements of Shareholders'
Equity for the years ended December 31, 2003,
2002 and 2001 58
Consolidated Statements of Cash Flows for
the years ended December 31, 2003, 2002 and 2001 59
Notes to Consolidated Financial Statements for
the years ended December 31, 2003, 2002 and 2001 61
(b) Financial Statement Schedule
Valuation and Qualifying Accounts for
the years ended December 31, 2003, 2002 and 2001 75
(c) Reports on From 8-K
None
47
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 30, 2004
- ------------------- Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
- ------------------------ ---------------------------------- ---------------
/s/ RODNEY C. SACKS Chairman of the Board of Directors March 30, 2004
- ------------------------ and Chief Executive Officer
Rodney C. Sacks (principal executive officer)
/s/ HILTON H. SCHLOSBERG Vice Chairman of the Board of March 30, 2004
- ------------------------ 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 30, 2004
- --------------------
Benjamin M. Polk
/s/ NORMAN C. EPSTEIN Director March 30, 2004
- -----------------------
Norman C. Epstein
/s/ HAROLD C. TABER, JR. Director March 30, 2004
- -----------------------
Harold C. Taber, Jr.
/s/ MARK S. VIDERGAUZ Director March 30, 2004
- -----------------------
Mark S. Vidergauz
48
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
- ----------------- ----------------------------------------------------------------------------------------------------
49
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
- ----------------- ----------------------------------------------------------------------------------------------------
50
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 Hanse'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
- ----------------- ----------------------------------------------------------------------------------------------------
51
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,
2000.22
- ----------------- ----------------------------------------------------------------------------------------------------
10.4 Packing Agreement Between Hansen Beverage Company and U.S. Continental Marketing, Inc. dated
August 14, 200022
- ----------------- ----------------------------------------------------------------------------------------------------
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. 22
- ----------------- ----------------------------------------------------------------------------------------------------
10.6 Aseptic Packaging Agreement by and between Hansen Beverage Company and Johanna Foods dated
December 7, 2000. 22
- ----------------- ----------------------------------------------------------------------------------------------------
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. 22
- ----------------- ----------------------------------------------------------------------------------------------------
10.8 Letter Agreement by and between Hansen Beverage Company and McKinley Equipment Corporation dated
January 16, 2003. 22
- ----------------- ----------------------------------------------------------------------------------------------------
10.9 Advertising Display Agreement dated as of March 17, 2003 by and between Hansen Beverage Company
and the Las Vegas Monorail Company. 22
- ----------------- ----------------------------------------------------------------------------------------------------
10.10 Sponsorship Agreement dated as of March 7, 2003 by and between Hansen Beverage Company and
C.C.R.L. 22
- ----------------- ----------------------------------------------------------------------------------------------------
10.11 Public Relations Agreement dated as of March 18, 2003 by and between Hansen Beverage Company and
Reach Group Communications, LLC. 22
- ----------------- ----------------------------------------------------------------------------------------------------
10.12 Stock Option Agreement dated as of February 1, 1999 by and between Hansen Natural Corporation and
Timothy M. Welch. 22
- ----------------- ----------------------------------------------------------------------------------------------------
10.13 Stock Option Agreement dated as of February 2, 1999 by and between Hansen Natural Corporation and
Kirk S. Blower. 22
- ----------------- ----------------------------------------------------------------------------------------------------
10.14 Stock Option Agreement dated as of July 12, 2002 by and between Hansen Natural Corporation and
Rodney C. Sacks22
- ----------------- ----------------------------------------------------------------------------------------------------
10.15 Stock Option Agreement dated as of July 12, 2002 by and between Hansen Natural Corporation and
Hilton H. Schlosberg22
- ----------------- ----------------------------------------------------------------------------------------------------
10.16 Stock Option Agreement dated as of July 12, 2002 by and between Hansen Natural Corporation and
Mark J. Hall 22
- ----------------- ----------------------------------------------------------------------------------------------------
10.17 Stock Option Agreement dated as of July 12, 2002 by and between Hansen Natural Corporation and
Kirk S. Blower 22
- ----------------- ----------------------------------------------------------------------------------------------------
10.18 Employment agreement between the Company and Rodney C. Sacks, dated as of June 1, 2003. 23
- ----------------- ----------------------------------------------------------------------------------------------------
10.19 Employment agreement between the Company and Hilton H. Schlosberg, dated as of June 1, 2003. 23
- ----------------- ----------------------------------------------------------------------------------------------------
10.20 2001 Stock Option Plan dated as of July 1, 2001. 24
- ----------------- ----------------------------------------------------------------------------------------------------
10.21 Stock Option Agreement dated as of May 20, 2003 by and between Hansen Natural Corporation and
Rodney C. Sacks
- ----------------- ----------------------------------------------------------------------------------------------------
10.22 Stock Option Agreement dated as of May 20, 2003 by and between Hansen Natural Corporation and
Hilton H. Schlosberg
- ----------------- ----------------------------------------------------------------------------------------------------
21 Subsidiaries 5
- ----------------- ----------------------------------------------------------------------------------------------------
23 Independent Auditors' Consent
- ----------------- ----------------------------------------------------------------------------------------------------
31.1 Certification by CEO pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
- ----------------- ----------------------------------------------------------------------------------------------------
31.2 Certification by CFO pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
- ----------------- ----------------------------------------------------------------------------------------------------
32.1 Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- ----------------- ----------------------------------------------------------------------------------------------------
32.2 Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- ----------------- ----------------------------------------------------------------------------------------------------
52
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.
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.
22 Filed previously as an exhibit to Form 10-K for the year ended
December 31, 2002.
23 Filed previously as an exhibit to Form 8-K dated September 17, 2003.
24 Filed previously as an exhibit to Form S-8 dated February 4, 2004.
53
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page
________________
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
Independent Auditors' Report 55
Consolidated Balance Sheets as of December 31, 2003 and 2002 56
Consolidated Statements of Income for the years ended
December 31, 2003, 2002 and 2001 57
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2003, 2002 and 2001 58
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001 59
Notes to Consolidated Financial Statements for the
years ended December 31, 2003, 2002 and 2001 61
Financial Statement Schedule - Valuation and Qualifying
Accounts for the years ended December 31, 2003, 2002 and 2001 75
54
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, 2003 and 2002,
and the related consolidated statements of income, shareholders' equity and cash
flows for the years ended December 31, 2003, 2002 and 2001. 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, 2003 and 2002, and the results of their
operations and their cash flows for the years ended December 31, 2003, 2002 and
2001 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 ("EITF") Issue No. 01-9, "Accounting for Consideration Given
by a Vendor to a Customer (Including a Reseller of a Vendor's Products),"
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 year ended
December 31, 2001 have been revised to reclassify such expenses and allowances
as a reduction of net sales and increase of cost of sales consistent with the
2003 and 2002 presentation, in accordance with EITF 01-9.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
March 26, 2004
55
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2003 AND 2002
- --------------------------------------------------------------------------------
2003 2002
------------------- -------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,098,785 $ 537,920
Accounts receivable (net of allowance for doubtful accounts,
sales returns and cash discounts of $875,351 in 2003 and
$1,098,645 in 2002 and promotional allowances of
$4,666,770 in 2003 and $3,170,171 in 2002 5,372,983 5,949,402
Inventories, net (Note 3) 17,643,786 11,643,734
Prepaid expenses and other current assets 481,777 1,627,685
Deferred income tax asset (Note 7) 2,080,609 1,145,133
------------------- -------------------
Total current assets 26,677,940 20,903,874
PROPERTY AND EQUIPMENT, net (Note 4) 2,803,282 1,862,807
INTANGIBLE AND OTHER ASSETS:
Trademark license and trademarks (net of accumulated
amortization of $146,218 in 2003 and $84,330 in 2002)
(Note 1) 18,293,704 17,360,455
Deposits and other assets 222,102 336,369
------------------- -------------------
18,515,806 17,696,824
------------------- -------------------
$47,997,028 $40,463,505
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,521,402 $ 4,732,261
Accrued liabilities 1,185,342 680,959
Accrued compensation 883,459 310,064
Current portion of long-term debt (Note 5) 244,271 230,740
Income taxes payable 647,263
------------------- -------------------
Total current liabilities 9,481,737 5,954,024
LONG-TERM DEBT, less current portion (Note 5) 358,064 3,606,040
DEFERRED INCOME TAX LIABILITY (Note 7) 3,107,649 2,532,697
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (Note 8):
Common stock - $0.005 par value; 30,000,000 shares
authorized; 10,624,864 shares issued, 10,418,103
outstanding in 2003; 10,259,764 shares issued, 10,053,003
outstanding in 2002 53,124 51,299
Additional paid-in capital 12,681,169 11,934,564
Retained earnings 23,129,830 17,199,426
Common stock in treasury, at cost; 206,761 in 2003 and 2002 (814,545) (814,545)
------------------- -------------------
Total shareholders' equity 35,049,578 28,370,744
------------------- -------------------
$47,997,028 $40,463,505
=================== ===================
See accompanying notes to consolidated financial statements.
56
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
2003 2002 2001
------------------- -------------------- ------------------
GROSS SALES $ 138,454,345 $ 115,490,019 $ 99,693,390
LESS: Discounts, allowances and
promotional payments 28,102,149 23,443,657 19,035,073
------------------- -------------------- ------------------
NET SALES 110,352,196 92,046,362 80,658,317
COST OF SALES 66,577,168 58,802,669 51,796,539
------------------- -------------------- ------------------
GROSS PROFIT 43,775,028 33,243,693 28,861,778
OPERATING EXPENSES:
Selling, general and administrative 33,887,045 27,896,202 22,803,433
Amortization of trademark license and
trademarks 61,888 54,558 507,488
------------------- -------------------- ------------------
Total operating expenses 33,948,933 27,950,760 23,310,921
------------------- -------------------- ------------------
OPERATING INCOME 9,826,095 5,292,933 5,550,857
NONOPERATING EXPENSE (INCOME):
Interest and financing expense 72,592 230,732 527,594
Interest and royalty income (5,579) (2,974) (8,992)
------------------- -------------------- ------------------
Net nonoperating expense 67,013 227,758 518,602
------------------- -------------------- ------------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 9,759,082 5,065,175 5,032,255
PROVISION FOR INCOME TAXES
(Note 7) 3,828,678 2,035,980 2,012,902
------------------- -------------------- ------------------
NET INCOME $ 5,930,404 $ 3,029,195 $ 3,019,353
=================== ==================== ==================
NET INCOME PER COMMON SHARE:
Basic $ 0.58 $ 0.30 $ 0.30
=================== ==================== ==================
Diluted $ 0.55 $ 0.29 $ 0.29
=================== ==================== ==================
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic 10,278,710 10,052,499 10,036,547
=================== ==================== ==================
Diluted 10,762,157 10,339,604 10,314,904
=================== ==================== ==================
See accompanying notes to consolidated financial statements.
57
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
Common stock Additional Treasury stock Total
---------------------------- paid-in Retained ------------------------- shareholders'
Shares Amount capital earnings Shares Amount equity
-------------- ------------- ---------------- ---------------- ------------ ------------ -----------------
Balance,
January 1, 2001 10,148,882 $ 50,744 $ 11,667,619 $ 11,150,878 (206,761) $(814,545) $ 22,054,696
Issuance of common
stock 102,882 515 258,985 259,500
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
stock 8,000 40 7,960 8,000
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
Issuance of common
stock 365,100 1,825 746,605 748,430
Net income 5,930,404 5,930,404
-------------- ------------- ---------------- ---------------- ------------ ------------ -----------------
Balance,
December 31, 2003 10,624,864 $ 53,124 $ 12,681,169 $ 23,129,830 (206,761) $(814,545) $ 35,049,578
============== ============= ================ ================ ============ ============ =================
See accompanying notes to consolidated financial statements.
58
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,930,404 $ 3,029,195 $ 3,019,353
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of trademark license and trademarks 61,888 54,558 507,488
Depreciation and other amortization 584,197 493,894 436,459
Loss (gain) on disposal of plant and equipment 31,992 5,318 (15,072)
Compensation expense related to the exercise
of stock options 230,879
Deferred income taxes (360,524) 522,462 472,581
Effect on cash of changes in operating assets
and liabilities:
Accounts receivable 576,419 (1,536,980) 2,384,892
Inventories (6,000,052) 312,946 (1,048,785)
Prepaid expenses and other current assets 500,713 (35,704) (150,768)
Accounts payable 1,789,141 812,520 24,957
Accrued liabilities 504,383 (190,882) 67,721
Accrued compensation 573,395 (122,832) 151,267
Income taxes payable/receivable 1,292,458 (617,826) (878,266)
--------------- --------------- ---------------
Net cash provided by operating activities 5,484,414 2,726,669 5,202,706
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,627,490) (416,873) (529,905)
Proceeds from sale of property and equipment 70,826 26,416
Additions to trademark license and trademarks (995,137) (64,792) (118,651)
Decrease (increase) in deposits and other assets 114,267 389,456 (60,094)
--------------- --------------- ---------------
Net cash used in investing activities (2,437,534) (92,209) (682,234)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (3,234,445) (2,352,197) (4,432,101)
Proceeds from issuance of common stock 748,430 8,000 28,621
--------------- --------------- ---------------
Net cash used in financing activities (2,486,015) (2,344,197) (4,403,480)
--------------- --------------- ---------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 560,865 290,263 116,992
CASH AND CASH EQUIVALENTS, beginning
of year 537,920 247,657 130,665
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, end of year $ 1,098,785 $ 537,920 $ 247,657
=============== =============== ===============
SUPPLEMENTAL INFORMATION:
Cash paid during the year for:
Interest $ 76,306 $ 235,779 $ 573,029
=============== =============== ===============
Income taxes $ 2,896,743 $ 2,131,344 $ 2,445,957
=============== =============== ===============
See accompanying notes to consolidated financial statements.
59
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- -------------------------------------------------------------------------------
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.
See accompanying notes to consolidated financial statements.
60
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
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
has 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 subsidiaries, Blue Sky Natural
Beverage Co. ("Blue Sky") and Hansen Junior Juice Company ("Junior Juice") owns
and operates the natural soda business under the Blue Sky(R) trademark and the
Junior Juice beverage business under the Junior Juice trademarks, respectively.
Nature of Operations -- Hansen markets and distributes Hansen's(R) Natural
Sodas, Signature Sodas, fruit juice and soy Smoothies, Energy drinks,
Energade(R) energy sports drinks, E20 Energy Water(R), functional drinks,
Sparkling Lemonades and Orangeades, multi-vitamin juice drinks in aseptic
packaging, Junior Juice(R) juice, iced teas, lemonades and juice cocktails,
apple juice, cider and juice blends, as well as nutrition bars, Blue Sky(R)
brand carbonated beverages, Monster EnergyTM brand energy drinks and Lost(R)
Energy brand energy drinks. The Company's subsidiary, HEB, markets and
distributes Hard e malt beverages.
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 2003 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. The Company maintains cash deposits with major banks which from
time to time may exceed federally insured limits. The Company periodically
assesses the financial condition of the institutions and believes that the risk
of any loss is minimal.
Inventories - Inventories are valued at the lower of first-in, first-out
(FIFO) cost or market value (net realizable value).
61
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. The Company amortizes its trademark license and trademarks over 1 to 25
years. Upon the adoption of Statement of Financial Standards ("SFAS") No. 142,
the Company ceased the amortization of indefinite life assets.
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, 2003.
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, 2003, 2002 and 2001, freight-out costs amounted to $7.0 million,
$5.8 million and $4.2 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 amounted to $8.8
million, $7.3 million and $4.3 million for the years ended December 31, 2003,
2002 and 2001, respectively. Advertising expenses were included in selling,
general and administrative expenses with the exception of coupon expenses which
were included as a reduction of net sales. 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 $17.2 million, $13.5 million and $12.2
million for the years ended December 31, 2003, 2002 and 2001, respectively.
62
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
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, 2003 was to decrease net sales by $19,452,566, increase cost of
goods sold by $80,530 and decrease selling, general, and administrative expenses
by $19,533,096 and 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 year ended December 31, 2001 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 expenses.
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 Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," 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, 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 SFAS 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 2001 through 2003 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:
63
2003 2002 2001
---- ---- ----
Net income, as reported $5,930,404 $3,029,195 $3,019,353
Less: total stock-based employee
compensation expense
determined under fair value
based method for all awards,
net of related tax effects 216,250 212,363 201,825
------------ ------------ ------------
Net income, pro forma $5,714,154 $2,816,832 $2,817,528
============ ============ ============
Net income per common share,
as reported:
Basic $0.58 $0.30 $0.30
Diluted $0.55 $0.29 $0.29
Net income per common share,
pro forma:
Basic $0.56 $0.28 $0.28
Diluted $0.53 $0.27 $0.27
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
-------------- ------------------- ------------- --------------
2003 0% 12% 3.5% 8 years
2002 0% 8% 4.6% 8 years
2001 0% 30% 4.6% 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 15%, 18% and 18% of the Company's
sales for the years ended December 31, 2003, 2002 and 2001, 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 2003, 2002 and 2001, sales outside of California represented 47%,
42% and 39% 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.
64
Fair Value of Financial Instruments - At December 31, 2003 and 2002, the
carrying values 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, 2003 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 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 deemed to have indefinite lives 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, 2001, net income and net income per share for the years ended
December 31, 2003, 2002, and 2001 would have been adjusted as follows:
For the years ended December 31,
2003 2002 2001
------------ ------------ ------------
Net income, as reported $5,930,404 $3,029,195 $3,019,353
Add back: Amortization of
trademark licenses and
trademarks (net of
tax effect) - - 292,241
------------ ------------ ------------
Adjusted net income $5,930,404 $3,029,195 $3,311,594
============ ============ ============
Net income per common share -
basic, as reported $ 0.58 $ 0.30 $ 0.30
Amortization of trademark
licenses and trademarks
(net of tax effect) - - 0.03
------------ ------------ ------------
Adjusted net income per
common share - basic $ 0.58 $ 0.30 $ 0.33
============ ============ ============
Net income per common share -
diluted, as reported $ 0.55 $ 0.29 $ 0.29
Amortization of trademark
licenses and trademarks
(net of tax effect) - - 0.03
------------ ------------ ------------
Adjusted net income per
common share - diluted $ 0.55 $ 0.29 $ 0.32
============ ============ ============
65
Upon adoption of SFAS No. 142 and as of December 31, 2002 and 2003, the
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 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:
2003 2002
---- ----
Amortizing trademark licenses
and trademarks $ 1,155,803 $ 1,138,902
Accumulated amortization (146,218) (84,330)
--------------- ---------------
1,009,585 1,054,572
Non-amortizing trademark
licenses and trademarks 17,284,119 16,305,883
--------------- ---------------
$ 18,293,704 $ 17,360,455
=============== ===============
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 25 years (weighted average life of 19 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, 2003 was $61,888. As of December 31, 2003, future estimated
amortization expense related to amortizing trademark licenses and trademarks
through the year ended December 31, 2008 is:
2004 $60,416
2005 $59,281
2006 $55,971
2007 $53,587
2008 $53,438
Newly Issued Accounting Pronouncements - In November 2002, the FASB issued
FASB Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," an interpretation SFAS Nos. 5, 57 and 107, and rescission of FIN 34,
"Disclosure of Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates
on the disclosures to be made by the guarantor in its interim and annual
financial statements about its obligations under certain guarantees that it has
issued. It also requires that a guarantor recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions of
this interpretation are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002, while the provisions of the disclosure
requirements are effective for financial statements of interim or annual periods
ending after December 15, 2002. The Company adopted such interpretation on
November 1, 2002 with no material impact to the consolidated financial
statements.
In January 2003, the FASB issued FIN 46(R), "Consolidation of Variable
Interest Entities-an interpretation of ARB No. 51," and revised in December
2003. FIN 46(R) 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(R) is
effective for all new variable interest entities created or acquired after
December 31, 2003. For variable interest entities created or acquired prior to
December 31, 2003, the provisions of FIN 46(R) must be applied for the first
interim or annual period beginning after March 15, 2004. The Company does not
expect that the adoption of FIN 46(R) will have a material impact on its
consolidated financial position, results of operations or cash flows, as the
Company has no interests in variable interest entities.
66
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of Both Liabilities and Equity," as amended by
various FASB staff positions posted in October and November 2003, which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer classify a financial instrument that is within
its scope which may have previously been reported as equity, as a liability (or
an asset in some circumstances). This statement is effective for financial
instruments entered into or modified after May 31, 2003 and otherwise is
generally effective at the beginning of the first interim period beginning after
June 15, 2003, except for mandatorily redeemable financial instruments of
nonpublic entities, which are subject to the provision of this statement for the
first fiscal period beginning after December 15, 2004. The Company does not
believe that the adoption of SFAS No. 150 will have a significant impact on its
consolidated financial position, results of operations or cash flows.
2. ACQUISITIONS
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.
The acquisition has been accounted for under the purchase method of
accounting in accordance with APB Opinion No. 16, "Business Combinations."
Accordingly, the purchase price, inclusive of certain acquisition costs, was
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 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 Junior Juice have been included in the Company's
results of operations since the date of acquisition.
3. INVENTORIES
Inventories consist of the following at December 31:
2003 2002
---- ----
Raw materials $ 6,979,701 $ 4,267,055
Finished goods 11,900,304 8,023,118
-------------- --------------
18,880,005 12,290,173
Less inventory reserves (1,236,219) (646,439)
-------------- --------------
$ 17,643,786 $ 11,643,734
============== ==============
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
2003 2002
---- ----
Leasehold improvements $ 230,027 $ 194,965
Furniture and office equipment 881,741 776,401
Equipment 2,481,917 1,703,855
Vehicles 1,636,878 1,104,633
------------- -------------
5,230,563 3,779,854
Less accumulated depreciation
and amortization (2,427,281) (1,917,047)
------------- -------------
$ 2,803,282 $ 1,862,807
============= =============
67
5. LONG-TERM DEBT
HBC has 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 accordance with the provisions of the credit facility, HBC
can borrow up to $12.0 million under its revolving line of credit, 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 Company had
no outstanding borrowings on the line of credit at December 31, 2003.
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 its financial ratios and annual net
income requirements and obtained a waiver from Comerica with regards to its
capital expenditure limitations at December 31, 2003.
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, 2003 and 2002, the assets acquired under
capital leases had a net book value of $121,178 and $285,085, net of accumulated
depreciation of $418,465 and $301,422, respectively.
Long-term debt consists of the following
at December 31: 2003 2002
---- ----
Line of credit from Comerica,
collateralized by substantially all
of HBC's assets, at an effective
interest rate of LIBOR plus 2.5%
(3.6% as of December 31, 2003), due
in September 2005 $ - $ 2,969,000
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 $29,547 and $77,976 at
December 31, 2003 and 2002, respectively 392,263 543,131
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 210,072 324,649
------------ -------------
602,335 3,836,780
Less: current portion of
long-term debt (244,271) (230,740)
------------ -------------
$ 358,064 $ 3,606,040
============ =============
Long-term debt is payable as follows:
Year ending December 31:
2004 $ 244,271
2005 211,484
2006 146,580
-----------
$ 602,335
===========
Interest expense amounted to $66,592, $224,748 and $520,160 for the years
ended December 31, 2003, 2002 and 2001, respectively.
68
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
noncancelable 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 $660,616, $643,827, and $644,454 for the
years ended December 31, 2003, 2002 and 2001, respectively. In January 2004, the
Company entered into a lease for additional warehouse space. This lease expires
in March 2008 with an option to renew through 2010.
Future minimum rental payments at December 31, 2003 under the leases
referred to above are as follows:
Year ending December 31:
2004 $ 893,359
2005 970,359
2006 1,017,128
2007 1,030,218
2008 773,997
Thereafter 1,199,730
------------------
$ 5,884,791
==================
Purchase Commitments - The Company has purchase commitments aggregating
approximately $22,711,000, which represent commitments made by the Company and
its subsidiaries to various suppliers of raw materials for the manufacturing and
packaging of its products. These obligations vary in terms.
Advertising Commitment - In March 2003, HBC entered into an advertising
display agreement ("Monorail Agreement") with the Las Vegas Monorail Company
("LVMC") in terms of which HBC was granted the right, in consideration of the
payment by HBC to LVMC of the sum of $1,000,000 per year, payable quarterly, to
advertise and promote its products on a designated four car monorail vehicle as
well as the right to sell certain of its products on all monorail stations for
payment of additional consideration.
It is anticipated that the initial term will commence in May 2004. The
initial term of the Monorail Agreement ends on the first anniversary of its
commencement date. Not less than 120 days before the expiration of the initial
term and each renewal term, as the case may be, HBC has the right to renew the
Monorail Agreement for a further one year term up to a maximum of nine
additional one year terms and the LVMC has the right, notwithstanding such
election by HBC, to terminate the Monorail Agreement at the expiration of the
then current term.
Employment and Consulting Agreements - On June 1, 2003, 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 $230,000 each for the 7 months ended December 31, 2003, increasing to
$245,000 for the year ending December 31, 2004 and increasing by a minimum of 5%
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 June
1, 2003 and ending December 31, 2008.
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.
69
During 2002, in response to a cease and desist letter to Skyy Spirits LLC
in which the Company alleged infringement by Skyy Spirits and/or its licensee of
the Company's 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. The Company filed a counterclaim
against Skyy Spirits and joined Miller Brewing Company in the proceedings in
which the Company has 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. The trial
in this matter has been scheduled for hearing in April 2004.
During 2003, in response to a cease and desist letter from the Coca-Cola
Company and its subsidiary Odwalla, Inc. in which they complained of the use by
us of the Monster trademark and name, the Company filed a complaint in the
United States District Court for the Southern District of California for a
declaratory order and additional relief. The Company is engaged in settlement
discussions with the Coca-Cola Company and Odwalla, Inc. If no settlement is
reached, the Company will vigorously pursue the matter. The Company believes
that it has good prospects of success.
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 distribution or 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
coverage 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 accordingly, the Company has
valued these obligations at $0 on its consolidated balance sheets as of December
31, 2003 and 2002.
7. INCOME TAXES
Components of the income tax provision are as follows:
Year Ended December 31,
2003 2002 2001
---- ---- ----
Current income taxes:
Federal $ 3,386,946 $ 1,173,693 $ 1,248,119
State 802,256 339,825 292,202
------------ ------------- -------------
4,189,202 1,513,518 1,540,321
Deferred income taxes:
Federal (290,357) 448,239 373,217
State (70,167) 74,223 99,364
------------- ------------- -------------
(360,524) 522,462 472,581
------------- ------------- -------------
$ 3,828,678 $ 2,035,980 $ 2,012,902
============= ============= =============
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:
70
Year Ended December 31,
2003 2002 2001
---- ---- ----
Income tax provision
using the statutory rate $ 3,318,088 $ 1,722,160 $ 1,710,967
State taxes, net of federal
tax benefit 521,475 267,440 293,602
Permanent differences 39,895 46,380 31,423
Other (50,780) (23,090)
------------- ------------- -------------
$ 3,828,678 $ 2,035,980 $ 2,012,902
============= ============= =============
Major components of the Company's deferred tax assets (liabilities) at
December 31 are as follows:
2003 2002
---- ----
Reserves for returns $ 93,556 $ 70,487
Reserves for bad debts 93,623 86,484
Reserves for obsolescence 519,212 271,504
Reserves for marketing development fund 754,517 326,760
Capitalization of inventory costs 169,317 145,553
State franchise tax 348,351 214,209
Accrued compensation 47,433 30,956
Amortization of graphic design 297,760 315,726
Other accrued expenses 54,602
------------- -------------
Total deferred tax asset 2,378,371 1,461,679
Amortization of trademark license (3,160,401) (2,617,097)
Depreciation (245,010) (232,146)
------------- -------------
Total deferred tax liability (3,405,411) (2,849,243)
------------- -------------
Net deferred tax liability $(1,027,040) $(1,387,564)
============= =============
8. STOCK OPTIONS
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 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.
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, 2003, options to purchase 915,500 shares of Hansen
common stock had been granted under the 2001 Option Plan and options to purchase
1,084,500 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, 2003, options to purchase 2,095,700 shares of Hansen common stock had been
granted under the Plan, net of options that have expired.
71
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 nonemployee 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, 2003, 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.
During the years ended December 31, 2003, 2002 and 2001, the Company
granted 355,000, 529,500 and 122,500 options to purchase shares under the Plan,
the 2001 Option Plan, and Directors Plan at a weighted-average grant date fair
value of $1.27, $1.12 and $1.36, respectively. Additional information regarding
the plans is as follows:
2003 2002 2001
-------------------- --------------------- ---------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
-------------------- --------------------- ---------------------
Options
outstanding,
beginning
of year 1,501,900 $3.29 1,053,400 $3.04 1,134,400 $2.84
Options granted 355,000 $4.43 529,500 $3.64 122,500 $3.49
Options
exercised (365,100) $2.05 (8,000) $1.00 (152,500) $1.59
Options
canceled
or expired (22,000) $3.53 (73,000) $2.54 (51,000) $4.06
-------------------- --------------------- ---------------------
Options
outstanding,
end of year 1,469,800 $3.87 1,501,900 $3.29 1,053,400 $3.04
==================== ===================== =====================
Option $1.13 $1.00 $0.75
price range to to to
end of year $8.23 $5.25 $5.25
72
The following table summarizes information about fixed-price stock options
outstanding at December 31, 2003:
-------------------------------------------- ------------------------
Options Outstanding Options Exercisable
-------------------------------------------- ------------------------
Weighted-
Number average Number
outstanding remaining Weighted- exercisable Weighted-
at contractual average at average
Range of December 31, life exercise December 31, exercise
exercise 2003 (in years) price 2003 price
prices -------------------------------------- ------------------------
$1.13 to $1.59 81,000 4 $1.56 81,000 $1.56
$3.02 to $3.95 669,600 7 $3.59 168,900 $3.57
$4.05 to $4.25 591,400 6 $4.22 243,600 $4.25
$4.31 to $5.25 107,800 3 $4.59 54,600 $4.62
$8.23 20,000 10 $8.23 - -
----------- -----------
1,469,800 548,100
=========== ===========
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 $70,518, $64,949 and $58,211 for the years
ended December 31, 2003, 2002 and 2001, 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, 2003, 2002 and 2001
were $59,146, $79,843 and $193,350, respectively.
Two directors and officers 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, 2003, 2002 and 2001 were $331,478, $164,199 and $164,638,
respectively.
11. SUBSEQUENT EVENT
Subsequent to year-end, the Company granted options to certain employees to
purchase 284,500 shares of Hansen common stock under the 2001 Option Plan at
exercise prices ranging from $8.11 to $10.32 per share.
73
12. QUARTERLY FINANCIAL DATA (Unaudited)
Net Income per
Common Share
---------------------
Net Sales Gross Profit Net Income Basic Diluted
-------------- -------------- ------------- --------- ---------
Quarter ended:
March 31, 2003 $ 22,086,348 $ 8,299,821 $ 633,071 $ 0.06 $ 0.06
June 30, 2003 28,409,138 11,448,565 1,977,184 0.19 0.19
September 30, 2003 33,291,088 13,286,852 2,093,835 0.21 0.19
December 31, 2003 26,565,622 10,739,790 1,226,314 0.12 0.11
-------------- -------------- ------------- --------- ---------
$110,352,196 $ 43,775,028 $ 5,930,404 $ 0.58 $ 0.55
============== ============== ============= ========= =========
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
============== ============== ============== ========== ==========
Certain of the figures reported above may differ from previously reported
figures for individual quarters due to rounding.
74
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
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:
2003 $ 1,098,645 2,936,429 (3,159,723) $ 875,351
2002 $ 625,270 3,108,031 (2,634,656) $ 1,098,645
2001 $ 486,462 3,187,101 (3,048,293) $ 625,270
Promotional allowances:
2003 $ 3,170,171 15,139,959 (13,643,360) $ 4,666,770
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
Inventory reserves:
2003 $ 646,439 589,780 - $ 1,236,219
2002 $ 400,767 269,530 (23,858) $ 646,439
2001 $ 168,409 262,187 (29,829) $ 400,767
75
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-92526, No. 333-41333, No. 333-89123, and No. 333-112482 of Hansen Natural
Corporation on Form S-8 of our report dated March 26, 2004 (which report
expresses an unqualified opinion and includes an explanatory paragraph referring
to changes in accounting), appearing in the Annual Report on Form 10-K of Hansen
Natural Corporation for the year ended December 31, 2003.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
March 26, 2004
76