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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___ to ___
Commission File Number 0-18761
HANSEN NATURAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 39-1679918
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
2380 Railroad Street, Suite 101, Corona, California 91720
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (909) 739 - 6200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Not Applicable Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Title of class
Common Stock, $.005 par value per share
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant was approximately $10,600,261 computed by reference to the sale
price for such stock on the Nasdaq Small-Cap Market on March 5, 1998.
The number of shares of the Registrant's Common Stock, $.005 par value
per share (being the only class of common stock of the Registrant), outstanding
on March 5, 1998 was 9,130,869 shares.
1
HANSEN NATURAL CORPORATION
FORM 10-K
TABLE OF CONTENTS
Item Number Page Number
PART I
1. Business 3
2. Properties 12
3. Legal Proceedings 12
4. Submission of Matters to a Vote of Security Holders 13
PART II
5. Market for the Registrant's Common Equity and Related
Shareholder Matters 13
6. Selected Financial Data 15
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
8. Financial Statements and Supplementary Data 22
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 22
PART III
10. Directors and Executive Officers of the Registrant 22
11. Executive Compensation 24
12. Security Ownership of Certain Beneficial Owners and Management 29
13. Certain Relationships and Related Transactions 31
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 33
Signatures 34
2
PART I
ITEM 1. BUSINESS
Background of the Company and Subsidiaries
Hansen Natural Corporation ("Hansen" or the "Company") is a Delaware
corporation which maintains its principal place of business at 2380 Railroad
Street, Suite 101, Corona, California 91720, and its telephone number is (909)
739 - 6200.
The Company is a holding company and carries on no operating business
except through its direct and indirect subsidiaries. Hansen Beverage Company, a
direct wholly-owned subsidiary of the Company ("HBC"), conducts substantially
all of the Company's operating business and generates substantially all of the
Company's operating revenues. The Company's other direct wholly-owned
subsidiary, CVI Ventures, Inc. ("CVI"), is inactive. The Company has one
indirect subsidiary, Hansen Beverage Company (UK) Limited ("HBC (UK)"), which is
in the course of being deregistered.
Background of the Hansen Business
In the 1930's, Hubert Hansen and his three sons started a business to
sell fresh non-pasteurized juices in Los Angeles, California. This business
eventually became Hansen's Juices, Inc., now known as The Fresh Juice Company of
California, Inc. ("FJC"). In 1977, Tim Hansen, one of the grandsons of Hubert
Hansen, perceived a demand for pasteurized natural juices and juice blends that
are shelf stable and formed Hansen Foods, Inc. ("HFI"), also based in Los
Angeles. Subsequently, HFI expanded its product line from juices to include
Hansen's(R) Natural Sodas. In November 1988, HFI reorganized its business under
Chapter 11 of the federal Bankruptcy Code. In connection with those
reorganization proceedings, California CoPackers Corporation (d/b/a/ Hansen
Beverage Company) ("CCC") acquired certain of the assets of HFI in January 1990.
On July 27, 1992, the Company, through its wholly-owned subsidiary,
HBC, acquired the Hansen's(R) brand natural soda and apple juice business (the
"Hansen Business") from CCC. 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.
Products
Hansen is engaged in the business of marketing, selling and
distributing so-called "alternative" beverage category sodas, fruit juices,
fruit juice Smoothies, non-carbonated ready-to-drink iced teas, lemonades, juice
cocktails, "functional" drinks and still water. Hansen's(R) Natural Sodas are
classified as "new age" beverages and have been a leading natural soda brand in
Southern California for the past twenty years.
In 1997, Hansen's(R) Natural Sodas had the highest sales amongst
comparable carbonated new age category beverages measured by unit volume in the
Southern California market (Source: Nielsen Scantrack Reports for Southern
California). Hansen's(R) Natural Sodas are currently available in nine regular
flavors consisting of Mandarin Lime, Lemon Lime, Grapefruit, Raspberry, Creamy
Root Beer, Vanilla Cola, Cherry Vanilla Creme, Peach Mango and Kiwi Strawberry.
Hansen has two low calorie sodas in Wildberry and Cola flavors. Hansen's(R)
Natural Sodas contain no preservatives, sodium, caffeine or artificial coloring
and are made with high quality natural flavors, high fructose corn syrup and in
the case of low calorie sodas, with aspartame as well, and citric acid.
Hansen's(R) Natural Sodas are currently packaged in 12-ounce aluminum cans.
Hansen also produces soda concentrate for sale to licensed bottlers. Management
is currently planning to introduce a line of premium natural sodas in
proprietary glass bottles, through existing distributors, later in 1998.
3
The new age beverage category includes sodas that are considered
natural, including those made without preservatives or artificial ingredients,
sparkling juices and flavored sparkling waters. The recent growth in popularity
of non-carbonated ready-to-drink iced teas, lemonades, juice cocktails and
sports drinks caused the beverage industry to combine so-called new age sodas
with non-carbonated ready-to-drink iced teas, lemonades, juice cocktails, single
serve juices, ready-to-drink iced coffees, sports drinks and single-serve still
water in a broader category known as the "alternative" beverage category. The
alternative beverage category is the fastest growing segment of the beverage
marketplace. (Source: Beverage Marketing Corporation). Sales for the alternative
beverage category of the market are estimated to have reached approximately $7.4
billion at wholesale in 1997 with a growth rate of approximately 7.8% over the
prior year. (Source: Beverage Marketing Corporation).
Hansen's ready-to-drink iced teas and lemonades were introduced in
1993. Hansen's ready-to-drink iced teas are currently available in five flavors:
Original with Lemon, Tropical Peach, Wildberry, Tangerine and Low Calorie
Blueberry Raspberry and its lemonades are currently available in three flavors:
Original Old Fashioned Lemonade, Pink Lemonade and Strawberry Lemonade. Hansen's
juice cocktails were introduced in 1994 and are currently available in six
flavors: Kiwi Strawberry Melon, Tangerine Pineapple with Passion Fruit,
California Paradise Punch, Mango Magic, Apple and Low Calorie Peach Mango.
Hansen's ready-to-drink iced teas are made with decaffeinated tea. The
Company's other non-carbonated products are made with high quality juices.
Hansen's non-carbonated products (other than its 100% juice products) are also
made with natural flavors, high fructose corn syrup and in the case of the low
calorie iced tea and low calorie juice cocktail, with aspartame, citric acid and
other ingredients. Hansen's ready-to-drink iced teas, lemonades and juice
cocktails are currently packaged in 16-ounce non-returnable wide-mouth glass
bottles. Management is currently considering introducing a line of premium
"functional" teas in unique glass bottles later in 1998 or in 1999.
The Company's juice product line currently includes Hansen's(R) Natural
Old Fashioned Apple Juice and Apple Cider which is packaged in 64- and 128-ounce
(P.E.T.) plastic bottles. The labels for the apple juice were completely
redesigned in 1997. Hansen's juice products compete in the shelf-stable juice
category. The Company is currently introducing two 100% juice products: an apple
strawberry juice blend and an apple grape juice blend in 64-ounce (P.E.T.)
plastic bottles. The Company is also in the process of introducing a 100% juice
DynaJuice(TM) in 46-ounce (P.E.T.) plastic bottles. DynaJuice(TM) is fortified
with fifteen vitamins and minerals.
In March 1995, the Company expanded its juice product line by
introducing a line of fruit juice Smoothies. The Company's fruit juice Smoothies
contain approximately 35% juice and have a smooth texture that is thick but
lighter than a nectar. The Company's fruit juice Smoothies provide 100% of the
recommended daily allowance for adults of Vitamins A, C & E (the antioxidant
triad) and represent Hansen's entry into the "functional"(nutraceutical)
beverage sector. The Company's fruit juice Smoothies are packaged in 11.5-ounce
aluminum cans and in a unique proprietary 13.5-ounce glass bottle designed by
the Company. Hansen's fruit juice Smoothies are available in seven flavors:
Strawberry Banana, Peach Berry, Mango Pineapple, Guava Strawberry, Pineapple
Coconut, Apricot Nectar and Tropical Passion. There is also available a lite
Smoothie and an energy Smoothie which is different, not only from other
beverages in the market, but also from other Smoothies. This product contains
Ginseng and Taurine, two popular energy supplements, as well as Vitamins B2, B6,
B12, Niacin, Vitamin C and Glucose. Management plans to introduce a line of
"super" Smoothies in 11.5-ounce cans and in a unique 13.5-ounce glass bottle,
later in 1998.
Hansen's still water products were introduced in 1993. Hansen's still
water products are packaged in plastic bottles ranging from .5-liter to
1.5-liters in size.
During April 1997, the Company introduced a lightly carbonated energy
drink in an 8.2-ounce slim can. Similar drinks are popular in Europe and
management believes that there are good prospects that these types of drinks
will become popular in the United States as well. The Company has concentrated
on marketing its energy drink through its distributor network. Almost all of the
distributors that currently distribute the Company's Smoothie products in
bottles have commenced to distribute the Company's new energy drink in 8.2-ounce
slim cans. In certain instances, new distributors who agreed to distribute the
Company's new energy drink, have subsequently agreed also to distribute the
Company's Smoothie products in bottles.
4
The Company's new energy drink falls within the category that has
generally been described as the "functional" beverage category, namely,
beverages that provide a real or perceived benefit in addition to simply
delivering refreshment. Management believes that the "functional" beverage
category has good growth potential. The Company has recently introduced
additional "functional" beverages namely, a ginger flavored d-stress(TM) drink,
an orange flavored anti-ox(TM) drink and a guarana berry flavored stamina(TM)
drink in 8.2-ounce slim cans. Initial response from distributors, certain
convenience chain store buyers and a limited number of consumers has been
positive and is encouraging.
During 1996, the Company discontinued marketing its Equator(R) brand of
ready-to-drink iced teas, lemonades and juice cocktails in cans but continues to
offer such products in 20-ounce cobalt blue glass bottles in limited markets.
Due to the low sales volume of Equator(R) products in such bottles, management
is presently evaluating whether or not to discontinue such line.
The Company continues to evaluate and intends to introduce additional
flavors and other types of beverages to complement its existing product lines.
Manufacture, Production and Distribution
The concentrates for Hansen's(R) Natural Soda products are blended at
independent production facilities. In each case, the concentrate is delivered by
independent trucking companies to Hansen's licensed bottlers and copackers, each
of which adds filtered water, high fructose corn syrup or, in the case of the
low calorie sodas, aspartame, citric acid and carbonation and packages the
products in approved container sizes. Hansen's most significant copacking
arrangement is with Southwest Canning and Packaging, Inc. ("Southwest") pursuant
to a contract under which Southwest packages Hansen's canned soda products for
sale in California and other areas where Hansen does not have a manufacturing
arrangement with a local bottler. This arrangement continues indefinitely and is
subject to termination on 60 days written notice from either party. The finished
products are sold to major grocery chain stores and to club stores in certain
regions through brokers; to club stores in certain regions, specialty chain
stores, mass merchandisers and the health food trade directly by Hansen; and
also by licensed bottlers and distributors.
The Company purchases juices and juice concentrates for its juice
products; juices, juice concentrates and flavors for its ready-to-drink iced
tea, lemonade and juice cocktail products; concentrates for its fruit juice
Smoothie products; and flavors, vitamins, herbal and other ingredients for its
functional drinks, from various producers and manufacturers. Such materials are
then delivered to the Company's copackers for manufacture and packaging of the
finished products.
The Company's soda, apple juice and juice products, ready-to-drink iced
tea, lemonade and juice cocktail products in bottles, Smoothie beverages and
still water products as well as its functional drinks are copacked by various
copackers under separate arrangements, each of which continue on a
month-to-month basis, except for the arrangement with Southwest which is
described above.
The apple juice, juice products, iced tea, lemonade, and juice cocktail
products and fruit juice Smoothie products in cans are sold primarily in
California, Nevada and Arizona to major grocery chain stores and in certain
limited instances to mass merchandisers through food brokers; and to club
stores, specialty chain stores and the health food trade directly by Hansen and
also through distributors. The Company's fruit juice Smoothie products in
bottles and functional drinks in 8.2-ounce slim cans are distributed almost
exclusively by bottlers and/or distributors that do not distribute other
products of the Company.
5
Management has secured limited additional copacking arrangements
outside California to enable the Company to produce certain of its products
closer to the markets where they are sold and thereby reduce freight costs. When
volumes in markets outside California justify, the Company will secure
additional copacking arrangements in an endeavor to further reduce freight
costs.
Sales in the United Kingdom were lower than anticipated during 1997; and,
as a consequence, the Company elected to curtail its direct operations in the
United Kingdom. At the end of 1997, the Company commenced with the
deregistration of its United Kingdom subsidiary and the closure of that
subsidiary's offices. In the future, the Company will deal with its distributor
in the United Kingdom from its corporate offices in California and will export
all products sold by it to such distributor from the United States.
The Company's ability to estimate demand is imprecise, particularly
with new products, and may be less precise during periods of rapid growth and
particularly in new markets. If the Company underestimates materially demand for
its products or is unable to secure sufficient copacking arrangements, it might
not be able to satisfy demand on a short-term basis.
Although the Company's arrangements for production of its products are
generally of short duration or terminable upon request, management believes that
a short disruption would not significantly affect the Company's revenues since
alternative copacking facilities in the United States with adequate capacity can
be obtained for each of its products (other than its functional drinks in
8.2-ounce slim cans) at commercially reasonable rates if necessary or desirable
and within a reasonably short time period. Production capacity in the United
States for the Company's functional drinks in 8.2-ounce slim cans is limited at
present and a disruption in production of such products could significantly
affect the Company's revenues from such products as alternative copacking
facilities in the United States with adequate capacity may not be available for
such products at commercially reasonable rates, if necessary or desirable,
within a reasonably short time period. The Company is currently taking steps to
secure the availability of an alternative copacking facility in the United
States with adequate capacity for the production of such products to minimize
the risk of any disruption in production.
The Company itself is primarily responsible for marketing its products
(other than its fruit juice Smoothies in bottles and functional drinks in
8.2-ounce slim cans) in California, Nevada, and Arizona. In the following
states, certain of Hansen's products are marketed by bottlers and/or
distributors which have entered into licensing and/or distribution agreements
with Hansen: Alaska, Arkansas, Colorado, Connecticut, District of Columbia,
Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky,
Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri,
Nebraska, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oregon,
Pennsylvania, Texas, Utah, Vermont, Virginia, Washington, West Virginia and
Wyoming. In many of these states, distribution is only on a limited scale. In
California, Nevada and Arizona, the Company's fruit juice Smoothies in bottles
and functional drinks in 8.2-ounce slim cans are marketed by bottlers and
distributors which have entered into distribution agreements with Hansen.
Certain of the Company's products, such as Smoothies in cans, natural sodas and
juice cocktails, are sold through club stores in the vast majority of states,
which includes but is not limited to the states listed above. Hansen's juice
products are currently marketed only in California, Nevada and Arizona. Certain
of the Company's products are also marketed in the United Kingdom and, on a more
limited basis, in other countries outside of the United States, including
Canada, Northern Mexico, Northern Ireland, Denmark, Philippines, Indonesia,
Taiwan, Hong Kong, and the Caribbean.
The Company intends to aggressively expand the distribution of its
products into new markets, both within the United States and abroad.
6
In 1997, management decided to replace its route distribution system in
Southern California with distribution arrangements with independent distributors
for the majority of the area previously covered. Although such transition
resulted in lower sales of the Company's products (generally because the
independent distributors also distribute other beverage products which in many
cases compete directly with the Company's products), such lower sales
nevertheless contributed positively to the profitability of the Company as
compared to the previous losses that were incurred by the Company from the route
distribution system.
The Company is continuing to expand distribution of its products by
seeking to enter into agreements with regional bottlers and beer or other direct
store delivery distributors having established sales, marketing and distribution
organizations. Hansen's licensed bottlers and distributors are affiliated with
and manufacture and/or distribute other soda and non-carbonated brands and other
beverage products. In many cases, such products are directly competitive with
the Company's products. The Company's strategy of licensing regional bottlers to
produce Hansen's(R) Natural Sodas from concentrate provided by the Company, has
not fulfilled management's expectations, partly because bottlers have preferred
to focus on alternative beverage products having higher margins than sodas. At
the end of 1997, management awarded the Company's distributor in Colorado the
right to market and distribute its Natural Sodas in that state in place of its
licensed bottler. The Company continues to utilize such bottler to manufacture
Natural Sodas on its behalf.
Management is currently evaluating various alternatives to expand the
distribution of Hansen's(R) Natural Sodas into selected new markets.
The Company intends to continue building its national sales
organization in 1998 to support and grow the sales of its products.
During 1997, a portion of the Company's sales outside the United States
were made directly by the Company through export sales to distributors outside
of the United States and a portion were made by the Company's indirect
subsidiary, HBC (UK). In 1998, sales outside the United States will be made
directly by the Company through distributors outside the United States,
following the decision to deregister HBC (UK) at the end of 1997. In 1997,
export sales to distributors outside the United States and sales in the United
Kingdom (which includes sales to other countries supplied from the United
Kingdom) amounted to approximately $519,000 and $335,000, respectively.
During the second quarter of 1997, management reevaluated the Company's
then existing warehousing, repacking and distribution arrangements, all of which
were in the hands of a third party. Management concluded that in consequence of
the expansion of the Company's business and increased volumes, it would be cost
efficient for the Company to rent its own warehouse facility and to appoint an
independent contractor to manage that facility, as well as the repacking and
distribution of the Company's products therefrom. Management also concluded that
it would be cost efficient for the Company's corporate offices to be relocated
to such facility. Consequently, the Company agreed to lease a warehouse in
Corona, California for use as the Company's corporate offices and primary
national warehouse, repacking and distribution center for the Company's
products. The warehouse was relocated to such facility during September 1997 and
the corporate offices on March 1, 1998. Although the Company agreed to sublease
a portion of the warehouse facility to the independent contractor which manages
the warehouse facility and the repacking and distribution of the Company's
products therefrom, the sublease could not be implemented as the entire
warehouse facility is being utilized for the Company's products due to higher
inventory levels which are attributable to increased sales and number of
products being marketed and distributed by the Company. In light of its
agreement with the independent contractor, it will not be necessary for the
Company to employ additional personnel to manage the warehouse facility, or for
the repacking or distribution of its products.
7
Competition
The Company's functional energy drink competes directly with Red Bull,
Hype, XTC and many other brands and its other functional drinks compete directly
with Elix, Lipovitan and other brands. The "functional" drink category is in its
infancy and increased competition is anticipated within a relatively short
period of time. A number of companies who market and distribute iced teas and
juice cocktails in larger volume packages, such as 16- and 20-ounce glass
bottles, have recently added or are in the process of adding vitamins, herbs
and/or nutrients to their products with a view to labeling their products as
"functional" beverages. However, many of those products are believed to contain
low levels of such ingredients and principally deliver refreshment.
The soda, juice, and non-carbonated beverage businesses are also highly
competitive. The principal areas of competition are pricing, packaging,
development of new products and flavors and marketing campaigns. The Company's
products compete with traditional soft drinks (cola and non-cola), and
alternative beverages, including new age beverages and ready-to-drink iced teas,
lemonades and juice cocktails as well as juices and juice drinks and nectars
produced by a relatively large number of manufacturers, most of which have
substantially greater financial and marketing resources than Hansen.
For its natural soda and other products, Hansen competes not only for
consumer acceptance, but also for maximum marketing efforts by multi-brand
licensed bottlers, brokers and distributors, many of which have a principal
affiliation with competing companies and brands. The Company's products compete
with all liquid refreshments and with products of much larger and substantially
better financed competitors, including the products of numerous nationally known
producers such as The Coca Cola Company, PepsiCo, Inc., Dr. Pepper/Seven-Up
Companies, Inc., Cadbury Schweppes, The Quaker Oats Company, Triarc Group of
Companies (which includes the RC Soda, Snapple, Mistic and Stewards brands) and
Nestle Beverage Company. More specifically, the Company's products compete with
other alternative beverages, including new age beverages, such as Snapple,
Mistic, Arizona, Clearly Canadian, Sobe, Everfresh, Nantucket Nectars, Mistic
Rain Forest Nectars, Very Fine, Calistoga, Blue Sky, Red Bull and Crystal Geyser
brands. Due to the rapid growth of the alternative beverage segment of the
beverage marketplace, certain large companies such as The Coca Cola Company and
PepsiCo, Inc. have introduced products in that market segment which compete
directly with the Company's products such as Nestea, Fruitopia, Lipton and Ocean
Spray. The Company's products also compete with private label brands such as
those carried by chain and club stores. Important factors affecting Hansen's
ability to compete successfully include taste and flavor of products, trade and
consumer promotion, rapid and effective development of new products, attractive
and different packaging, brand and product advertising and pricing. Hansen must
also compete for distributors who will concentrate on marketing the Company's
products over those of Hansen's competitors, provide stable and reliable
distribution and secure adequate shelf space in retail outlets. Competitive
pressures in the alternative beverage category could cause the Company's
products to lose market share or experience price erosion which could have a
material adverse effect on Hansen's business.
The Company's fruit juice Smoothies compete with Kern's nectars in the
western states and Libby's in the eastern states and Mistic Rain Forest Nectars
nationally and also with single serve juice products produced by many
competitors. Such competitive products are packaged in glass and P.E.T. bottles
ranging from 10- to 18-ounces in size and in 11.5-ounce aluminum cans. The juice
content of such competitive products ranges from 1% to 100%.
The Company's apple and other juice products compete directly with Tree
Top, Mott's, Martinelli's, Welsh's, Ocean Spray, Langer's, Adams and Eve,
Northland and also with other brands of apple juice and juice blends, especially
store brands. The Company's still water products compete directly with Evian,
Crystal Geyser, Naya, Palomar Mountain, Sahara, Arrowhead and other brands of
still water, especially store brands.
8
Marketing
Hansen's marketing strategy is to focus on consumers who seek beverages
which are perceived to be natural and healthy. To attract these consumers, the
Company emphasizes the natural ingredients and the absence of preservatives,
sodium, artificial coloring and caffeine in the Company's product lines (other
than the Company's new functional energy and stamina(TM) drinks which do contain
caffeine). This message is reinforced in the product packaging which is
undergoing extensive redesign. The regular wholesale price of Hansen's(R)
Natural Sodas in cans is slightly higher than mainstream soft drinks such as
Coca-Cola and Pepsi, although generally lower than the prices of the products of
many competitors in the new age category. In its marketing, Hansen emphasizes
its high quality "natural" image and the fact that its soda products contain no
preservatives, sodium, caffeine or artificial coloring. The regular wholesale
price of the Company's non-carbonated beverages and its Equator(R) brand is
slightly lower than competitive non-carbonated beverages marketed under the
Snapple, Mistic, Lipton, Nestea, Fruitopia, Ocean Spray and Arizona brands. In
its marketing, Hansen emphasizes its high quality natural image and the fact
that its iced tea products are decaffeinated and lighter than those of many of
its competitors. The regular wholesale prices of the Company's fruit juice
Smoothie products are similar to those of Kern's nectars. Without abandoning its
natural and healthy image, the Company has launched a new lightly carbonated
energy drink in 8.2-ounce slim cans, containing two popular energy supplements,
Ginseng and Taurine, to appeal to the young and active segment of the beverage
market that desires an energy boost from its beverage selection. Hansen's(R) new
energy drink also contains Vitamins B2, B6, B12, Niacin, Vitamin C, Ginkgo
Biloba, Guarana, Caffeine and Glucose. The Company has since launched three
additional lightly carbonated functional drinks. The first, a stamina(TM) drink
contains Coenzyme Q-10, L-Carnitine, Bee Pollen, Royal Jelly, Schizandra Berry
and Vitamins B5, B6, B12, Niacin, Vitamin C, Guarana Berry and Caffeine; the
second, a d-stress(TM) drink contains Kava Kava, St John's Wort, L-Tyrosine,
Chamomile as well as Vitamins B5, B6, B12, Niacin and Vitamin C; and the third,
an anti-ox(TM) drink contains Grape Seed Extract, Selenium, Echinacea, Vitamins
A, C and E as well as Vitamins B5, B6, B12 and Niacin. The supplements, amino
acids, vitamins, nutrients and herbs ("supplements") contained in each of the
functional drinks are intended to provide specific but different functional
benefits to the consumers of each of such products.
Hansen's internal research has revealed that Hansen's(R) Natural Sodas
have a high degree of repeat purchase. Therefore, Hansen's sales and marketing
strategy is to focus its primary efforts on developing brand awareness and trial
through sampling both in stores and at events. Hansen intends to place increased
emphasis on product sampling and participating in direct promotions. The Company
proposes to continue to use its refrigerated truck extensively at events at
which the Company's products, particularly its fruit juice Smoothies and Natural
Sodas, will be distributed to consumers for sampling. Hansen utilizes
"push-pull" tactics to achieve maximum shelf and display space exposure in sales
outlets and maximum demand from consumers for its products including
advertising, price promotions, couponing, sampling and sponsorship of sporting
events such as 10-K runs, bicycle races, volleyball tournaments and other
health- and sports-related activities and also participates in product
demonstrations, food tasting and other related events. Posters, print, radio and
television advertising together with price promotions and couponing are also
used extensively to promote the Hansen's(R) brand.
Management increased expenditures for its sales and marketing programs
by approximately 35% in 1997 compared to 1996.
Hansen intends to support its planned expansion of distribution and
sale of its products through the in-store placement of point-of-sale materials,
use of glide racks and a proprietary rolling rack for its functional drinks and
by developing local marketing programs in conjunction with its distributors in
their respective markets. By enlisting its distributors as participants in its
marketing and advertising programs, Hansen intends to create an environment
conducive to the growth of both the Hansen's(R) brand and the businesses of its
distributors.
In January 1994, the Company entered into an agreement with a barter
company for the exchange of certain inventory for future advertising and
marketing credits. The Company assigned a value of $490,000 to these credits
based on the net realizable value of the inventory exchanged ("cost basis"). As
of December 31, 1997, advertising and marketing credits, on a cost basis,
totaled $265,000. Advertising and marketing credits, on a barter basis, totaled
$527,000 at that date. Although such credits remain available for use by the
Company through January 2002, management is unable to estimate their remaining
net realizable value at December 31, 1997. Accordingly, the Company has fully
reserved against such amount in the accompanying financial statements.
9
Management continues to believe that one of the keys to success in the
beverage industry is differentiation; making Hansen's(R) products clearly
distinctive from other beverages on the shelves of retailers. The Company
reviews its products and packaging on an ongoing basis and, where practical,
endeavors to make them different, better and unique. The Company recently
redesigned the labels for Hansen's(R) juice products. In the case of Hansen's(R)
soda products, an inexpensive redesign of the can graphics was implemented
during 1997 as an interim measure. Management contemplates that the graphics for
the Company's Smoothie and soda products will be completely redesigned over the
next twelve months in an endeavor to develop a new packaging system that will
maximize visibility and identification of all Hansen's(R) brand products,
wherever they may be placed in stores.
Customers
The core of Hansen's business is currently based on retail chain,
specialty and club store distribution, primarily in California. These retail
chain, specialty and club stores account for approximately 72% of Hansen's
sales. Major customers include Costco Wholesale, Trader Joes, Sam's Club, Lucky,
Vons, Safeway, Ralph's, Hughes, Wal-Mart and Albertson's. Two customers
accounted for 29% and 11%, respectively, of the Company's sales for the year
ended December 31, 1997. A decision by either of these major customers to
decrease the amount purchased from the Company or to cease carrying the
Company's products could have a material adverse effect on the Company's
financial condition and results of operations.
Source and Availability of Raw Materials
The Company purchases its soda, functional drink and non-carbonated
beverage flavors and concentrates from independent suppliers located in the
United States and Mexico and juices, concentrates and flavors for its apple and
other juice products and fruit juice Smoothie products from independent
suppliers in the United States and abroad.
Suppliers regard flavors as proprietary to them. Consequently, Hansen
does not currently have the list of ingredients or formulae for its flavors and
certain of its concentrates readily available to it and is unable to obtain
these flavors or concentrates from alternative suppliers on short notice. The
Company was involved in determining the formulae for and securing suppliers of
the supplements contained in its functional drinks and is able to obtain such
supplements from alternative suppliers on reasonable notice. Industry wide
shortages of certain supplements have been and could, from time to time, be
experienced in the future, which could interfere with production.
Management continues to attempt to develop back-up sources of supply
for its flavors and concentrates from other suppliers as well as to conclude
arrangements with suppliers which would enable it to obtain access to certain
concentrate formulae in certain circumstances. The Company has been partially
successful in these endeavors. By working with suppliers rather than on its own,
Hansen is able to develop new products at low cost as well as to diversify its
supplier network.
Hansen's goal is to ensure that all raw materials used in the
manufacture and packaging of the Company's products, including its natural soda,
functional drinks and non-carbonated concentrates and juices, high fructose corn
syrup, citric acid, caps, cans, glass bottles and labels, are readily available
from two or more sources and is continuing its efforts to achieve this goal.
In connection with the development of new products and flavors, Hansen
contracts with independent suppliers who bear a large portion of the expense of
product development, thereby enabling Hansen to develop new products and flavors
at a relatively low cost. Hansen has historically developed and successfully
introduced new products and flavors and packaging for its products and currently
anticipates developing and introducing new products and flavors for its existing
natural beverage products.
10
Seasonality
Hansen normally experiences greater sales and profitability during its
second and third fiscal quarters (April through September). The consumption of
soda and non-carbonated beverage products fluctuates in part due to temperature
changes with the greatest consumption occurring during the warm months. During
months where temperatures are abnormally warm or cold, consumption goes up or
down accordingly. Similarly, consumption is affected in those regions where
temperature and other weather conditions undergo dramatic changes with the
seasons. Management anticipates that the sale of the Company's products may
become increasingly subject to seasonal fluctuations as more sales occur outside
of California in areas where weather conditions are intemperate. Sales of the
Company's apple juice products are less affected by such factors. The Company
believes that sales of its apple strawberry and apple grape, juice blends as
well as of its DynaJuice(TM) and functional drinks, will be less affected by
such factors. However, as the Company has not had the benefit of any prior
experience with such products, it is unable to predict the likely sales trend of
such products with any degree of accuracy.
Trademark
The Hansen's(R) trademark is crucial to the Company's business. This
trademark is registered in the U.S. Patent and Trademark Office and in various
countries throughout the world. The Hansen's(R) trademark is owned by a trust
(the "Trust")which was created by an agreement between Hansen and FJC's
predecessor("the Agreement of Trust"). The Trust has 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 has 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. Such
license is, however, terminable if certain minimum royalty payments are not made
to the Trust. A similar license agreement exists between the Trust and HBC with
regard to non-beverage products. Royalty expenses incurred in respect of such
non-carbonated beverages and water during 1997 amounted to $15,636. No royalties
are payable on sodas, juices, lemonades, juice cocktails, fruit juice Smoothies
or the "functional" drinks. HBC, FJC's predecessor and the Trust have also
entered into a Royalty Sharing Agreement pursuant to which royalties payable by
third parties procured by FJC or its predecessor or HBC will initially be shared
between the Trust and HBC and, after a specified amount of royalties have been
received, will be shared equally between HBC and FJC. Under the terms of the
Agreement of Trust, FJC will receive royalty income paid to the Trust in excess
of Trust expenses and a reserve therefor. Management believes that such royalty
payments as a percentage of sales are comparatively low. FJC's predecessor
applied to register the trademark Hansen's Smoothie(TM), and agreed to assign
its rights thereto to the Trust. The Company's right to use such trademark is
coextensive with its right to use the Hansen's(R) trademark. The Company has
applied to register a number of trademarks including, but not limited to,
LIQUIDFRUIT(TM), functionals(TM), anti-ox(TM), d-stress(TM), stamina(TM), THE
REAL DEAL(TM), It's Just Good(TM) and Aqua Blast(TM).
The Company owns in its own right the trademarks, Imported from
Nature(R), California's Natural Choice(R), California's Choice(R) and
Equator(R).
Government Regulation
The production and marketing of beverages are subject to the rules and
regulations of the United States Food and Drug Administration (the "FDA") and
other federal, state and local health agencies. The FDA also regulates the
labeling of containers including, without limitation, statements concerning
product ingredients.
11
Employees
As of March 5, 1998, Hansen employed a total of 53 employees, 43 of
whom are employed on a full-time basis. Of Hansen's 53 employees, 25 are
employed in administrative and quality control capacities and 28 are employed in
sales and marketing capacities.
During 1997, Mr. Harold C. Taber, Jr. elected to retire as President and
Chief Executive Officer of HBC. Mr. Taber agreed to act as a consultant to HBC
for a period of two years and to remain as a director of the Company. The
Company will continue to operate with three separate divisions namely, soda,
juice and down-the-street single serve, under existing management at the
direction of Messrs. Rodney Sacks and Hilton Schlosberg.
Compliance with Environmental Laws
The operation of Hansen's business is not materially affected by
compliance with federal, state or local environmental laws and regulations.
Under California law, Hansen is required to make California Redemption Value
payments to the State based upon the number of cans and bottles of its
carbonated products sold. As Hansen expands the sale of its products outside of
California, it may become subject to similar obligations under the laws of other
states.
ITEM 2. PROPERTIES
Hansen's corporate offices and warehouse are located in a single
building at 2380 Railroad Street, Suite 101, Corona, California 91720. This
facility is leased by HBC for a period of eighty nine (89) months commencing
from September 19, 1997. The gross area of the facility is approximately 66,700
square feet.
ITEM 3. LEGAL PROCEEDINGS
The second stage of the trial in HBC's action against ERLY Industries,
Inc. ("ERLY") in the Superior Court for the State of California, was held in
July 1997 for the sole purpose of determining the amount of HBC's damages, if
any, resulting from ERLY's breach of certain rights of first refusal provisions
contained in HBC's subordinated secured promissory note in the principal amount
of $4 million in favor of ERLY. In November 1997, the court held that HBC had
not suffered any damages as a result of ERLY's breach of the note. HBC has filed
an appeal against that judgement. A motion was made by ERLY for the costs of
such action to be awarded in its favor, which was dismissed by the court. ERLY
has filed a cross appeal on that issue. The full amount due under the note to
ERLY was paid in November 1997 with the proceeds of a term loan obtained by the
Company from Comerica Bank - California. The ultimate outcome of this matter
cannot presently be predicted.
Except as described above, there are no material pending legal
proceedings to which the Company or any of its subsidiaries is a party or to
which any of the properties is subject, other than ordinary routine litigation
incidental to the Company's business.
12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held on November
14, 1997. At the meeting, the following individuals were elected as directors of
the Company and received the number of votes set opposite their respective
names:
Votes For
-----------
Rodney C. Sacks 6,848,952
Hilton H. Schlosberg 6,855,876
Benjamin M. Polk 6,856,116
Norman C. Epstein 6,856,106
Harold C. Taber, Jr. 6,856,009
In addition, at the meeting the stockholders of the Company ratified
the appointment of Deloitte & Touche as independent auditors of the Company for
the year ending December 31, 1997, by a vote of 6,850,754 for, 10,410 against
and 8,762 abstaining.
In addition, at the meeting the stockholders of the Company ratified
the amendment of the Company's Stock Option Plan (the "Plan") to increase the
number of shares of Common Stock issuable pursuant to the Plan to 2,000,000
shares and to limit the number of options that may be granted to any individual
under the Plan during any 60-month period to 500,000 shares, by a vote of
5,279,533 for, 104,208 against and 56,169 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 5, 1998, there were 9,130,869 shares of Common Stock
outstanding held by approximately 796 holders of record.
13
Stock Price and Dividend Information
The following table sets forth high and low bid closing quotations for
the Common Stock, on a quarterly basis from January 1, 1995 to December 31,
1997:
Common Stock
-----------------------------------------
High Bid Low Bid
------------------ -----------------
Year Ended December 31, 1997
First Quarter $ 1 3/8 $ 1
Second Quarter $ 1 7/16 $ 31/32
Third Quarter $ 1 15/16 $ 1 3/8
Fourth Quarter $ 2 11/16 $ 1 9/16
Year Ended December 31, 1996
First Quarter $ 31/32 $ 5/8
Second Quarter $ 2 11/16 $ 5/8
Third Quarter $ 2 1/2 $ 1 5/8
Fourth Quarter $ 2 5/16 $ 1 1/16
Year Ended December 31, 1995
First Quarter $ 1 13/16 $ 1 7/16
Second Quarter $ 1 1/2 $ 1 3/16
Third Quarter $ 1 5/8 $ 1 1/8
Fourth Quarter $ 1 5/32 $ 5/8
The quotations for the Common Stock set forth above represent bid
quotations between dealers, do not include retail markups, mark-downs or
commissions and, bid quotations, may not necessarily represent actual
transactions and "real time" sale prices. The source of the bid information is
the Nasdaq Stock Market, Inc.
Hansen has not paid dividends to its stockholders since its inception
and does not anticipate paying dividends in the foreseeable future.
14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data set forth below with
respect to each of the years ended December 31, 1997, 1996, 1995, 1994 and 1993
and the balance sheet data for the dates indicated are derived from the
consolidated financial statements audited by Deloitte and Touche LLP,
independent certified public accountants, and should be read in conjunction with
those financial statements and notes thereto included elsewhere in this and in
the 1996 and 1995 Forms 10-K and in the 1994 and 1993 Forms 10-KSB.
(in 000's except per
share information) 1997 1996 1995 1994 1993
- -------------------- ------- ------- ------- -------- --------
Net sales $43,057 $35,565 $33,991 $28,816 $23,659
Net income (loss) $ 1,250 $ 357 $(1,350) $(1,407) $ 650
Net income(loss) per common share:
Basic $ 0.14 $ 0.04 $ (0.15) $ (0.15) $ 0.07
Diluted $ 0.13 $ 0.04 $ 0.08
Total assets $16,933 $16,109 $17,521 $17,654 $17,120
Long-term debt $ 3,408 $ - 0 - $ 4,032 $ 3,971 $ 3,875
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Management believes that during 1997 the Company continued to make
progress towards achieving its goal of geographically expanding the Hansen's(R)
brand as well as expanding the Hansen's(R) brand product range. During the
twelve months ended December 31, 1997, the expansion of distribution of certain
of the Company's products into markets outside of California continued to make
good progress and was boosted in April 1997 when the Company introduced its
lightly carbonated energy drink in an 8.2-ounce slim can. Repeat sales of that
product have been encouraging and early in 1998 the Company extended its
"functional" beverage product line by introducing three additional functional
drinks in 8.2-ounce slim cans. The Company proposes to introduce additional
packages in that line later in 1998.
During the early part of 1997, management decided to discontinue the
operation of its route distribution system in Southern California and instead to
secure distribution arrangements with independent distributors for the majority
of the area previously covered by the Company's route distribution system.
Although such transition resulted in lower sales of the Company's products
(generally because the independent distributors also distribute other beverage
products which in many cases compete directly with the Company's products), such
lower sales nevertheless contributed positively to the profitability of the
Company.
15
Sales in the United Kingdom were lower than anticipated during 1997; and,
as a consequence, the Company elected to curtail its direct operations in the
United Kingdom. At the end of 1997, the Company commenced with the
deregistration of its United Kingdom subsidiary and the closure of that
subsidiary's offices. In the future, the Company will deal with its distributor
in the United Kingdom from its corporate offices in California and will export
all products sold by it to such distributor from the United States. All costs
relating to the curtailing of the Company's United Kingdom operations have been
reflected in the accompanying financial statements.
Net sales and profitability were positively affected by sales of the
Company's fruit juice Smoothies and by sales of the Company's new energy drink
in 8.2-ounce slim cans which was introduced in April 1997. The increase in net
sales of the Company's Smoothie products was primarily due to increased sales to
club stores, retail stores and distributors. Such gains were, however, partially
offset by lower sales and gross profits from soda and Equator(R). Management
believes that the lower sales and gross profits from soda were primarily
attributable to decreased sales to retail stores and distributors due to
aggressive retail pricing and promotions of mainstream sodas. During 1997, the
Company offered its Equator(R) brand of ready-to-drink iced teas, lemonades and
juice cocktails in 20-ounce cobalt blue glass bottles in limited markets.
However, due to low sales volumes of such products, management is presently
evaluating whether or not to discontinue such line.
Net sales of apple juice were higher in 1997 than 1996. Such increase
was primarily attributable to aggressive pricing and promotions undertaken by
the Company as well as the redesign of the apple juice label late in 1997.
Net sales of iced teas, lemonades and juice cocktails were about the
same as in 1996.
The mix of products sold by the Company continued to change in 1997
with an increased percentage of sales being attributable to fruit juice
Smoothies as well as the Company's new lightly carbonated energy drink in
8.2-ounce slim cans. The aggregate gross profit margin achieved by the Company
as a percentage of net sales improved to 41.4% for the year ended December 31,
1997 compared to 39.1% for the comparable year ended December 31, 1996. Such
increase was primarily attributable to higher margins achieved as a result of a
change in the Company's product mix and to cost reductions achieved, details of
which are set out more fully below.
The Company's business was also affected by trends affecting the
beverage industry. Although the alternative beverage category remains the
fastest growing segment of the beverage marketplace, the rate of growth
experienced by the category as a whole over the past few years has continued to
slow down. Sales of all natural sodas have continued to remain relatively flat.
During 1997, sales outside of California represented 23.6% of the
aggregate sales of the Company or $11.2 million compared to 15.6% of the
aggregate sales of the Company or $6.1 million during 1996. Sales outside the
United States during 1997 were $854,000 of which $335,000 comprised sales in the
United Kingdom, including sales to distributors in other countries from the
United Kingdom and $519,000 from export sales to distributors outside of the
United States originating from the United States.
During 1997, the Company entered into several distribution agreements
for the sale of its products both within and outside the United States.
As discussed under "ITEM 1. BUSINESS - Manufacture, Production and
Distribution", it is anticipated that the Company will continue building its
national sales organization in 1998 to support and grow the sales of its
products.
In 1997, the Company benefited from cost reductions achieved in the
procurement of certain concentrates and juices, flavors and packaging materials,
the copacking of soda as well as the repacking of certain of its products. In
1998, cost savings should also be realized from the relocation of the Company's
warehouse and corporate offices to the Corona facility.
16
The Company continues to take steps to reduce costs, particularly the
costs of its soda and non-carbonated and Smoothie product lines.
The Company continues to incur expenditures in connection with the
development and introduction of new products and flavors.
Results of Operations for the Year Ended December 31, 1997 Compared to the Year
Ended December 31, 1996.
Net Sales. For the year ended December 31, 1997, net sales were
approximately $43.1 million, an increase of $7.5 million or 21.1% over the $35.6
million net sales for the year ended December 31, 1996. The increase in net
sales was primarily attributable to increased sales of Hansen's(R) fruit juice
Smoothies in cans and bottles and Hansen's(R) apple juice, and sales of
Hansen's(R) energy drink, which was introduced during April 1997. The increase
in net sales was partially offset by a decrease in net sales of soda and
Equator(R). Sales of iced teas, lemonades and juice cocktails were about the
same as in the comparable period in 1996.
Gross Profit. Gross profit was $17.8 million for the year ended
December 31, 1997, an increase of $3.9 million or 28.4% over the $13.9 million
gross profit for the year ended December 31, 1996. Gross profit as a percentage
of net sales increased to 41.4% for the year ended December 31, 1997 from 39.1%
for the year ended December 31, 1996. The increase in gross profit was primarily
attributable to the increase in net sales as well as cost reductions achieved
for certain raw materials and packaging. The increase in gross profit as a
percentage of net sales was primarily attributable to higher margins achieved as
a result of a change in the Company's product mix.
Total Operating Expenses. Total operating expenses were $16.0 million
for the year ended December 31, 1997, an increase of $2.8 million or 20.7%
higher than total operating expenses of $13.2 million for the year ended
December 31, 1996. Total operating expenses as a percentage of net sales
decreased to 37.0% for the year ended December 31, 1997, from 37.2% for the year
ended December 31, 1996. The increase in total operating expenses was primarily
attributable to increased selling, general and administrative expenses which was
partially offset by a decrease in amortization of trademark license and
trademarks and other expenses. The decrease in total operating expenses as a
percentage of net sales was primarily attributable to the increase in net sales
and the comparatively smaller increase in operating expenses from the comparable
period in 1996.
Selling, general and administrative expenses were $15.5 million for the
year ended December 31, 1997, an increase of $3.0 million or 23.4% higher than
selling, general and administrative expenses of $12.5 million for the year ended
December 31, 1996. Selling, general and administrative expenses as a percentage
of net sales increased to 35.9% for the year ended December 31, 1997 from 35.2%
for the year ended December 31, 1996. The increase in selling expenses was
primarily attributable to increases in distribution costs, advertising and costs
of promotional materials primarily to support the expansion of distribution and
sales of Smoothie bottles and the launch of the Company's new energy drink and
was partially attributable to the establishment of a reserve in the Company's
financial statements against the advertising and marketing credits more fully
described under "ITEM 1. BUSINESS - Marketing", above. The increase in general
and administrative expenses was primarily attributable to increased payroll
costs in connection with the Company's expansion activities into additional
states.
Amortization of trademark license and trademarks was approximately
$301,000 for the year ended December 31, 1997, a decrease of $96,000 from the
$397,000 for the year ended December 31, 1996. This decrease is attributable to
the change in the amortization period from 25 years to 40 years as more fully
described in Note 1 in the Company's Form 10-K for the year ended December 31,
1996.
Other expenses were $199,000 for the year ended December 31, 1997, a
decrease of $97,000 or 32.8% below other expenses of $296,000 for the year ended
December 31, 1996. This decrease was primarily attributable to the expiration of
certain consulting agreements which were entered into in connection with the
purchase of the Hansen Business. This decrease was partially offset by a new
consulting agreement entered into with the former president of HBC.
17
Operating Income. Operating income was $1.9 million for the year ended
December 31, 1997, compared to $677,000 for the year ended December 31, 1996.
Net Nonoperating Expense. Net nonoperating expense was $592,000 for the
year ended December 31, 1997, which was $274,000 higher than net nonoperating
expense of $317,000 for the year ended December 31, 1996. Net nonoperating
expense for the year ended December 31, 1997 consists of net interest and
financing expense and other expense. Net nonoperating expense for the year ended
December 31, 1996 consists of net interest and financing expense and other
income. Net interest and financing expense for the year ended December 31, 1997
was $522,000 compared to $577,000 for the year ended December 31, 1996. The
decrease in net interest and financing expense was attributable to a decrease in
the amortization of certain capitalized financing costs incurred in connection
with the securing of HBC's previous revolving line of credit, which were fully
amortized by the third quarter of 1996, and lower average short-term borrowings
during the year ended December 31, 1997 than during 1996. Other expense for 1997
consists of a $70,000 loss on the disposal of plant and equipment, arising
primarily from the closure of the route distribution system. Other income for
1996 consisted of $259,000 of income from the recovery under the Hawaiian Water
Partners note described in Note 3 in the Company's Form 10-K for the year ended
December 31, 1996.
Net Income. Net income was $1.3 million for the year ended December
31, 1997, compared to $357,000 for the year ended December 31, 1996. The
$893,000 increase in net income over prior year consists of an increase in
operating income of $1.2 million offset by an increase in nonoperating expense
of $274,000 and an increase of $38,000 in the provision for income taxes.
Results of Operations for the Year Ended December 31, 1996 Compared to the Year
Ended December 31, 1995.
Net Sales. For the year ended December 31, 1996, net sales were
approximately $35.6 million, an increase of $1.6 million or 4.6% over the $34.0
million net sales for the year ended December 31, 1995. The increase in net
sales was primarily attributable to sales of Hansen's(R) fruit juice Smoothies
in bottles which were introduced in 16-ounce bottles at the end of the third
quarter of 1995 and in unique proprietary 13.5-ounce bottles at the end of the
first quarter of 1996 and sales of Hansen's(R) fruit juice Smoothies in cans
which were introduced at the end of the first quarter of 1995. Significantly,
the increase in net sales of fruit juice Smoothies was partly offset by a 12.2%
decrease in net sales of soda in 1996 as compared with 1995. This decrease was
primarily attributable to decreased sales to club stores, retail and specialty
stores due to aggressive retail pricing and promotions of mainstream sodas. The
increase in net sales of fruit juice Smoothies was also partially offset by
decreased sales of ready-to-drink iced teas, lemonades and juice cocktails and
the discontinuance of Equator(R) products in certain markets. Net sales of
ready-to-drink iced teas, lemonades and juice cocktails decreased approximately
27% from prior year. This decrease was primarily attributable to lower sales to
retail and specialty chain stores and, to a lesser extent, lower sales to club
stores and distributors. The decrease in sales to these customers is primarily
attributable to aggressive competition from other brands, the decision by
certain club stores and specialty chain stores to limit the variety of these
types of Hansen's(R) products carried by them, the loss of distribution in
certain California retail chains and club stores and the loss of distributors
outside California. Such decrease was partially offset by increased sales of
juice cocktails to club stores in California. Net sales of apple juice were
approximately 5.1% greater than prior year. During the year, the Company
discontinued selling its line of Equator(R) teas, lemonades, and juice cocktails
in cans. The Company continues to market and sell these products in 20-ounce
glass bottles in selected markets.
Gross Profit. Gross profit was $13.9 million for the year ended
December 31, 1996, an increase of $1.8 million or 14.5% over the $12.1 million
gross profit for the year ended December 31, 1995. Gross profit as a percentage
of net sales increased to 39.1% for the year ended December 31, 1996 from 35.7%
for the year ended December 31, 1995. The increase in both gross profit and
gross profit as a percentage of net sales was primarily attributable to
decreases in the costs of aluminum cans and other raw materials which were
partially offset by increased copacking costs for sodas due to a change in the
production facility utilized by the Company late in the second quarter of 1996.
18
Total Operating Expenses. Total operating expenses were $13.2 million
for the year ended December 31, 1996, a decrease of $225,000 or 1.7% lower than
total operating expenses of $13.4 million for the year ended December 31, 1995.
Total operating expenses as a percentage of net sales decreased to 37.2% for the
year ended December 31, 1996 compared to total operating expenses as a
percentage of net sales of 39.5% for the year ended December 31, 1995. The
decrease in total operating expenses was primarily attributable to a decrease in
amortization of trademark license and trademarks and a decrease in other
expenses. The decrease in total operating expenses as a percentage of net sales
was primarily attributable to the increase in net sales and the decrease in
operating expenses, as compared to 1995.
In 1996, selling, general and administrative expenses of approximately
$12.5 million were level with such expenses incurred in 1995. However, selling,
general and administrative expenses as a percentage of net sales decreased to
35.2% in 1996 from 36.8% in 1995. The decrease in selling, general and
administrative expenses as a percentage of net sales was primarily attributable
to the increase in net sales and level selling, general and administrative
expenses in 1996 as compared to 1995.
Other expenses were $296,000 for the year ended December 31, 1996, a
decrease of $142,000 or 32.4% below other expenses of $437,000 for the year
ended December 31, 1995. This decrease was primarily attributable to the
expiration of certain consulting agreements which were entered into in
connection with the purchase of the Hansen Business and the merger between the
Company, CVI Ventures, Inc. and Continental Ventures, Inc.
Operating Income (Loss). Operating income was $677,000 for the year
ended December 31, 1996, compared to an operating loss of $1.3 million for the
year ended December 31, 1995.
Net Nonoperating Expense. Net nonoperating expense was $317,000 for the
year ended December 31, 1996, which was $277,000 higher than net nonoperating
expense of $41,000 for the year ended December 31, 1995. Net nonoperating
expense for the years ended December 31, 1996 and 1995 consists of net interest
and financing expense and other income. Net interest and financing expense for
the year ended December 31, 1996, was $577,000 compared to $440,000 for the year
ended December 31, 1995. The increase in net interest and financing expense was
attributable to expenses incurred in connection with a line of credit that was
obtained by the Company and additional interest expense in connection with that
line. Other income for 1996 and 1995 consists of $259,000 and $346,000 of income
respectively, from the recovery under the Hawaiian Water Partners note described
below, and for 1995, includes a $53,000 reduction in liabilities from the
recovery of an amount due from the sellers of the Hansen Business in connection
with the Mead settlement more fully described in "ITEM 3. LEGAL PROCEEDINGS" in
the Company's Form 10-K for the year ended December 31, 1995.
In connection with the acquisition of the Hansen Business, the Company
was assigned a promissory note made by Hawaiian Water Partners in the original
principal amount of $310,027 plus interest thereon and certain additional
principal amounts. The note was secured by the proceeds, if any, of a lawsuit.
The collectibility of this note was dependent upon the outcome of that lawsuit
and consequently, the Company full reserved against this asset. Following a
judgment in the lawsuit, a settlement was reached among the plaintiff, defendant
and competing claimants to the proceeds from the lawsuit. Under the terms of the
settlement, the Company was to receive a total of $616,000 plus interest. In
1995, the reserve against the note was reduced to $270,000 and the Company
recorded $346,000 in other income. Following receipt of the remaining proceeds
during 1996, the remaining reserve against the note was eliminated. In
connection therewith, $233,000 was recorded in other income during 1996, net of
$37,000 of attorney's fees incurred in connection with the settlement, which
constituted the full extent of recovery under this note.
19
Net Income (Loss). Net income was $357,000 for the year ended December
31, 1996 compared to a net loss of $1.35 million for the year ended December 31,
1995. The $1.71 million increase in net income over prior year consisted of an
increase in net operating income of $1.98 million offset by an increase in
nonoperating expenses of $277,000.
Liquidity and Capital Resources
As of December 31, 1997, the Company had working capital of $2,494,674
compared to a working capital deficit of $2,707,471 as of December 31, 1996. The
increase in working capital was primarily attributable to the reclassification
of the $4 million note payable to ERLY Industries (the "Note"), due on July 27,
1997, from current portion of long-term debt to long-term debt following the
refinancing of that Note pursuant to the terms of a term loan which was secured
by the Company from Comerica Bank-California during 1997. The term loan together
with the revolving credit facility in favor of Comerica Bank-California are
secured by all of the Company's assets, including its principal trademark
license, receivables and inventory. The increase in cash provided by operating
activities from $753,845 in 1996 to $1,318,538 in 1997 and a portion of the
increase in working capital was attributable to net income earned, after
adjustments for certain noncash expenses, primarily amortization of trademark
license and trademarks, depreciation and other amortization, during the year
ended December 31, 1997.
As part of the facility granted to the Company by Comerica
Bank-California, the Company obtained a revolving line of credit of up to $3
million in aggregate at any time outstanding. The utilization of this line of
credit by the Company is dependent upon certain levels of eligible accounts
receivable and inventory from time to time. The line of credit is secured by
substantially all of HBC's assets, including accounts receivable, inventory,
trademarks, trademark licenses and certain equipment. As of December 31, 1997,
no amounts were outstanding under the revolving line of credit and $3,916,666
was outstanding under the term loan. The term loan is payable over a period of
60 months.
The initial use of proceeds under the revolving line of credit was to
refinance HBC's previous line of credit and the initial use of proceeds under
the term loan was to make payment of the full principal balance owing by the
Company under the Note. The revolving line of credit is renewable on May 1,
1998. The Company anticipates that such line will be renewed on the expiration
date. However, there can be no assurance that it will, in fact, be renewed, or
if renewed, that the terms of such renewal will not be disadvantageous to HBC
and its business.
During 1997, the Company utilized a portion of its line of credit,
together with its own funds, for working capital, to finance its expansion and
development plans and to reduce long-term debt. Purchases of inventory and
financing of accounts receivable, as well as HBC's expansion and development
plans, have been, and for the foreseeable future, are expected to remain HBC's
principal recurring use of working capital funds.
Management believes that cash available from operations, including cash
resources and its revolving line of credit, will be sufficient for its working
capital needs, including purchase commitments for raw materials, debt servicing
and expansion and development needs as well as any purchases of capital assets
or equipment through December 31, 1998.
Although the Company has no current plans to incur any material capital
expenditures, management, from time to time, considers the acquisition of
capital equipment, particularly coolers and vans, businesses compatible with the
image of the Hansen's(R) brand and the introduction of new product lines. The
Company may require additional capital resources in the event of any such
transaction, depending upon the cash requirements relating thereto. Any such
transaction will also be subject to the terms and restrictions of HBC's credit
facilities.
20
Year 2000 Compliance
Many currently installed computer systems and software products
are coded to accept only two digit entries in the date code field. These date
code fields will need to accept four digit entries or be modified in some
fashion to distinguish 21st century dates from 20th century dates. This problem
could force computers to either shut down or provide incorrect data. As a
result, in less than three years, computer systems and software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
The Company has examined its internal computer systems and contacted its
software providers to determine whether the Company's software applications are
compliant with the Year 2000. While the Company believes that its internal
systems are fully Year 2000 compliant, the Company intends to continue to review
its internal systems for any problems as well as monitor its key customers and
suppliers for any impact that the Year 2000 may have on their information
systems which in turn could impact the Company. While it is difficult to
quantify the total cost to the Company of the Year 2000 compliance activities,
the Company does not expect the cost to be material.
Forward Looking Statements
Certain statements made in this Report, including certain statements
made in this Management's Discussion and Analysis, contain "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
regarding the expectations of management with respect to revenues,
profitability, adequacy of funds from operations and the Company's existing
credit facility, among other things.
Management cautions that these statements are qualified by their terms
and/or important factors, many of which are outside of the control of the
Company, that could cause actual results and events to differ materially from
the statements made herein, including, but not limited to, the following:
changes in consumer preferences, changes in demand that are weather related,
particularly in areas outside of California, competitive pricing pressures,
changes in the price of the raw materials for the Company's beverage products,
the marketing efforts of the distributors of the Company's products, most of
which distribute products that are competitive with the products of the Company,
as well as unilateral decisions that may be made by grocery chain stores,
specialty chain stores and club stores to discontinue carrying all or any of the
Company's products that they are carrying at any time. Management further notes
that the Company's plans and results may be affected by the terms of the
Company's credit facilities and the actions of its creditors.
Sales
The table set forth below discloses selected quarterly data regarding
sales for the past five years. Data from any one or more quarters are not
necessarily indicative of annual results or continuing trends.
Sales are expressed in actual cases and case equivalents. A case
equivalent is equal to the amount of soda concentrate sold that will yield
twenty-four 12-ounce (354 ml) cans measured by volume. Actual cases of soda
equal twenty-four 12-ounce (354 ml) cans or 11-ounce (325 ml) bottles or twelve
23-ounce (680 ml) bottles measured by volume. A case of apple juice equals
twelve 32-ounce bottles, six 64-ounce glass bottles, eight 64-ounce P.E.T.
bottles, four 128-ounce bottles or the equivalent volume. A case of
non-carbonated iced teas, lemonades and juice cocktails equals twenty-four
16-ounce (473 ml) bottles measured by volume. A case of still water equals
twenty-four 0.5-liter, twelve 1.0-liter and twelve 1.5-liter plastic bottles
measured by volume. A case of fruit juice Smoothies equals twenty-four
11.5-ounce (354 ml) cans or twenty-four 16-ounce (473 ml) or 13.5-ounce (400 ml)
bottles measured by volume. A case of "functional" drinks equals twenty-four 8.2
ounce (243 ml) cans measured by volume. A case of Equator(R) equals twenty-four
20-ounce (591 ml) bottles measured by volume.
21
The Company's quarterly results of operations reflect seasonal trends
that are primarily the result of increased demand in the warmer months of the
year. It has been Hansen's experience that beverage sales tend to be lower
during the first and fourth quarters of each fiscal year. Because the primary
historical market for Hansen's products is California, which has a year-long
temperate climate, the effect of seasonal fluctuations on quarterly results may
have been mitigated; however, such fluctuations may be more pronounced as the
distribution of Hansen's products expands outside of California. Quarterly
fluctuations may also be affected by other factors including the introduction of
new products including Hansen's functional drinks, the opening of new markets
where temperature fluctuations are more pronounced, the addition of new bottlers
and distributors, changes in the mix of the sales of its finished products and
soda concentrates and increased advertising and promotional expenses. See also
"ITEM 1. BUSINESS - Seasonality."
Case Sales (in Thousands)
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Quarter 1 861 940 834 953 750
Quarter 2 1,383 1,340 1,282 1,270 1,044
Quarter 3 1,648 1,341 1,580 1,210 1,125
Quarter 4 1,234 876 902 860 887
========= ========= ========= ========= =========
Totals 5,126 4,497 4,598 4,293 3,806
========= ========= ========= ========= =========
Sales Revenues (in Thousands)
1997 1996 1995 1994 1993
--------- -------- --------- --------- ---------
Quarter 1 $ 7,120 $ 7,365 $ 5,434 $6,050 $4,546
Quarter 2 11,496 10,394 9,560 8,749 6,349
Quarter 3 13,439 10,817 12,109 8,328 6,862
Quarter 4 11,002 6,989 6,888 5,689 5,902
========= ========= ========= ========= =========
Totals $43,057 $35,565 $33,991 $28,816 $23,659
========= ========= ========= ========= =========
Inflation
The Company does not believe that inflation had a significant impact on
the Company's results of operations for the periods presented.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required to be furnished in response to this item is
submitted hereinafter following the signature page hereto at pages F-1 through
F-18.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
General
Directors of the Company are elected annually by the holders of the
Common Stock and executive officers are elected annually by the Board of
Directors, to serve until the next annual meeting of stockholders or the Board
of Directors, as the case may be, or until their successors are elected and
qualified. It is presently anticipated that the next annual meeting of
stockholders and of the Board of Directors, respectively, will be held in
June 1998.
Set forth below are the names, ages and principal occupations for the
last five years of the directors and/or executive officers of the Company:
Rodney C. Sacks (48) - Chairman, Chief Executive Officer and director of
the Company from November 1990 to the present. Member of the Executive Committee
of the Board of Directors of the Company since October 1992. Chairman and a
director of HBC from June 1992 to the present. Mr. Sacks resigned from his
position as Chief Financial Officer of the Company in July 1996, which office
was assumed by Mr. Schlosberg.
22
Hilton H. Schlosberg (45) - Vice Chairman, President, Chief Operating
Officer, Chief Financial Officer, Secretary, and a 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. Member of the Audit Committee of
the Board of Directors of the Company since September 1997. Vice Chairman,
Secretary and a director of HBC from July 1992 to the present. In July 1996, Mr.
Schlosberg assumed the office of Chief Financial Officer, which was previously
held by Mr. Sacks. Director and/or Deputy Chairman of AAF Industries PLC, a
United Kingdom publicly quoted industrial group, from June 1990 until April
1995.
Benjamin M. Polk (47) - Director of the Company from November 1990 to
the present. Assistant Secretary of HBC since October 1992 and a director of HBC
since July 1992. Member of the Audit Committee of the Board of Directors of the
Company since September 1997. Member of the Compensation Committee of the Board
of Directors of the Company from April 1991 until September 1997. Partner with
Whitman Breed Abbott & Morgan (New York, New York) where Mr. Polk has practiced
law with that firm and its predecessor, Whitman & Ransom, from August 1976 to
the present.(1)
Norman C. Epstein (57) - Director of the Company and member of the
Compensation Committee of the Board of Directors 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. 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. (58) - Director of the Company since July 1992.
Consultant to the Company from July 1, 1997 to the present. Consultant to The
Joseph Company from September 1997 to the present. President and Chief Executive
Officer and a director of HBC from July 1992 to June 1997. On June 30, 1997,
Mr. Taber resigned from his employment as well as director, President and
Chief Executive Officer of HBC. In addition, effective June 30, 1997,
Mr. Taber resigned as a member of the Executive Committee on which he
served since October 1992.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than ten percent of a registered
class of the Company's equity securities, to file by specific dates with the SEC
initial reports of ownership and reports of changes in ownership of equity
securities of the Company. Officers, directors and greater than ten percent
stockholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms that they file. The Company is required to report in
this annual report on Form 10-K any failure of its directors and executive
officers and greater than ten percent stockholders to file by the relevant due
date any of these reports during the two preceding fiscal years.
(1) Mr. Polk and his law firm, Whitman Breed Abbott & Morgan, serve as counsel
to the Company.
23
To the Company's knowledge, based solely on review of copies of such
reports furnished to the Company during the two fiscal years ended December 31,
1997, all Section 16(a) filing requirements applicable to the Company's
officers, directors and greater than ten percent stockholders were complied
with, except that Raimana Martin, a former director of the Company, failed to
file timely reports with respect to sales of Common Stock on the open market for
the months of November and December 1995 and for the months of January,
February, March and April 1996. The Company understands that Mr. Martin has
subsequently filed reports for these months. However, the Company understands
that Mr. Martin has not filed reports with respect to sales made in May, June,
October, November and December, 1996 and January 1997. In addition, Norman
Epstein, a director of the Company, was required to file reports for the months
of August and December 1995 because he was, at the time, a director of Combined
Holdings Ltd. ("Combined"), which acquired shares at about those dates as a
distribution of its limited partnership interest in Brandon Limited Partnership
No. 2. Mr. Epstein resigned as a director of Combined in October 1996. The
Company understands that Mr. Epstein has filed the appropriate reports.
ITEM 11. EXECUTIVE COMPENSATION
The following tables set forth certain information regarding the total
remuneration earned and grants of options/SARs made to the chief executive
officer and each of the four most highly compensated executive officers of the
Company and its subsidiaries who received total cash compensation in excess of
$100,000 during the year ended December 31, 1997. These amounts reflect total
cash compensation earned by the Company and its subsidiaries to these
individuals during the fiscal years December 31, 1995 through 1997.
24
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------------
Long-Term Compensation
- ---------------------------------------- ---------------------------------------------- ------------------- ------------------
Annual Compensation(1) Awards(3) Payouts(4)
- ---------------------------------------- ---------------------------------------------- ------------------- ------------------
Other Securities
Annual Underlying All Other
Name and Principal Salary Bonus(2) Compensation Options/SARs Compensation
Positions Year ($) ($) ($) (#) ($)(5)
- ---------------------------- ----------- -------------- ------------ ------------------ ------------------- ------------------
Rodney C. Sacks 1997 160,000 12,302 -- --
Chairman, CEO 1996 135,000 10,293 -- --
and Director 1995 150,000 9,665 150,000 --
- ---------------------------- ----------- -------------- ------------ ------------------ ------------------- ------------------
Hilton H. Schlosberg 1997 158,030 5,572 -- --
Vice-Chairman, CFO 1996 127,500 5,358 -- --
President, Secretary and 1995 82,500 2,594 150,000 --
Director
- ---------------------------- ----------- -------------- ------------ ------------------ ------------------- ------------------
Harold C. Taber, Jr. 1997 112,104 5,200 34,200 100,000 1,325
Director 1996 165,000 19,299 -- 4,864
1995 200,000 18,668 -- 4,194
- ---------------------------- ----------- -------------- ------------ ------------------ ------------------- ------------------
Mark J. Hall 1997 116,250 40,000 6,327 120,000 --
Sr. Vice President
Distributor Division
- ---------------------------- ----------- -------------- ------------ ------------------ ------------------- ------------------
Kirk S. Blower 1997 102,850 10,000 7,468 -- --
Sr. Vice President 1996 98,351 12,119 -- --
Juice Division 1995 98,360 7,589 84,000 --
- ---------------------------- ----------- -------------- ------------ ------------------ ------------------- ------------------
(1) SALARY - Pursuant to his employment agreement, Mr. Sacks is entitled to an
annual base salary of $170,000. For 1997, Mr. Sacks agreed to a temporary
reduction of his annual base salary to $160,000. For 1996, Mr. Sacks agreed to a
temporary reduction of his annual base salary to $135,000. For 1995, Mr. Sacks
agreed to a temporary reduction of his annual base salary to $150,000.
Pursuant to his employment agreement, Mr. Schlosberg is entitled to an annual
base salary of $170,000 starting when he commenced full-time employment, during
July 1995. For 1997, Mr. Schlosberg agreed to a temporary reduction of his
annual base salary to $158,030. For 1996, Mr. Schlosberg agreed to a temporary
reduction of his annual base salary to $127,500. For 1995, Mr. Schlosberg agreed
to a temporary reduction of his annual base salary to $150,000.
Effective June 30, 1997, Mr. Taber elected to retire and terminated his
employment agreement with HBC and entered into a Severance and Consulting
Agreement with the Company and HBC (the "Consulting Agreement") pursuant to
which, among other matters, HBC agreed to retain Mr. Taber as a consultant for a
period of two years at a fixed monthly fee of $5,000. Pursuant to his previous
employment agreement, Mr. Taber was entitled to an annual base salary of
$170,000 and the payment of $30,000 per annum in lieu of a retirement plan. Also
included in Mr. Taber's compensation for 1997 is $30,000 for amounts earned
under the Consulting Agreement. For 1996, Mr. Taber agreed to a temporary
reduction of his annual base salary to $135,000. See "Employment Agreements
below".
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, except for Mr.
Taber for 1996. Mr. Taber's perquisites include $11,606 for automobile related
expenses, $3,934 for health insurance covering dependents and $3,759 for
disability insurance during 1996.
(2) BONUS - Payments made in 1998 for bonus accrued in 1997.
(3) RESTRICTED STOCK AWARDS - The Company does not have a plan for restricted
stock awards.
(4) LTIP PAYOUTS - None paid. No plan in place.
(5) ALL OTHER COMPENSATION - Includes amounts paid by the Company for premiums
on a life insurance policy insuring Mr. Taber.
25
OPTION/SAR EXERCISES AND FY-END VALUE TABLE(1)
- ------------------------------ ---------------- -----------------
Underlying Year-end Value
Unexercised of In-the-money
Options/SARs Unexercised
(# of shares) Options/SARs
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
- ------------------------------ ---------------- -----------------
Rodney C. Sacks 350,000/0 (2) $96,875/$0
- ------------------------------ ---------------- -----------------
Hilton H. Schlosberg 300,000/0 (3) $93,750/$0
- ------------------------------ ---------------- -----------------
Harold C. Taber, Jr. 100,000/0 (4) $43,250/$0
- ------------------------------ ---------------- -----------------
Mark J. Hall 0/120,000 (5) $0/$90,300
- ------------------------------ ---------------- -----------------
Kirk S. Blower 84,000/0 (6) $36,330/$0
- ------------------------------ ---------------- -----------------
OPTION/SAR GRANTS FOR THE YEAR ENDED DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------- ---------------------------
Potential Realizable
Value at Assumed Annual
Rates of Stock Price
Individual Grants Appreciate for Option Term
- --------------------------- -------------- ----------------- ------------- ------------- ------------ --------------
Number of Percent of
Securities Total
underlying Options/SAR
option/SARs Granted to
Name Granted (#) Employees in Exercise Expiration 5% 10%
1997 Base Price Date
- --------------------------- -------------- ----------------- ------------- ------------- ------------ --------------
Harold C. Taber, Jr. 100,000 21.25% $1.38 6/30/99 -- --
- --------------------------- -------------- ----------------- ------------- ------------- ------------ --------------
Mark J. Hall 120,000 25.50% $1.06 2/10/03 -- --
- --------------------------- -------------- ----------------- ------------- ------------- ------------ --------------
(1)There were no shares acquired upon exercise by any reporting executive
officer in 1997.
(2)Includes options to purchase 200,000 shares of Common Stock exercisable at
$1.75 per share granted pursuant to a Stock Option Agreement dated June 15, 1992
between the Company and Mr. Sacks and options to purchase 150,000 shares of
Common Stock exercisable at $1.25 per share granted pursuant to a Stock Option
Agreement dated July 3, 1995 between the Company and Mr. Sacks.
(3)Includes options to purchase 150,000 shares of Common Stock exercisable at
$1.75 per share granted pursuant to a Stock Option Agreement dated June 15, 1992
between the Company and Mr. Schlosberg and options to purchase 150,000 shares of
Common Stock exercisable at $1.25 per share granted pursuant to a Stock Option
Agreement dated July 3, 1995 between the Company and Mr. Schlosberg.
(4)Includes options to purchase 100,000 shares of Common Stock exercisable at
$1.38 per share granted pursuant to a Stock Option Agreement dated June 20, 1997
between the Company and Mr. Taber.
(5)Includes options to purchase 120,000 share of Common Stock at $1.00 per
share, of which none are exercisable at December 31, 1997, granted pursuant to a
Stock Option Agreement dated February 10, 1997 between the Company and Mr. Hall.
(6)Includes options to purchase 84,000 share of Common Stock exercisable at
$1.38 per share granted pursuant to a Stock Option Agreement dated June 30, 1995
between the Company and Mr. Blower.
26
Performance Graph
The following graph shows a five-year comparison of cumulative total returns.(1)
TOTAL SHAREHOLDER RETURNS
ANNUAL RETURN PERCENTAGE
Years Ending
COMPANY NAME/INDEX DEC93 DEC94 DEC95 DEC96 DEC97
- ------------------- ------ ----- ----- ----- -----
HANSEN NATURAL CORP (40.84) (28.57) (63.36) 54.59 70.62
S & P SMALLCAP 600 INDEX 18.79 ( 4.77) 29.96 21.32 25.58
PEER GROUP 63.07 (55.14) (25.32) 52.09 33.97
INDEXED RETURNS
Years Ending
Base
Period
COMPANY NAME/INDEX DEC92 DEC93 DEC94 DEC95 DEC96 DEC97
- ------------------ ----- ----- ----- ----- ----- -----
HANSEN NATURAL CORP 100 59.16 42.26 15.48 23.94 40.84
S & P SMALLCAP 600 INDEX 100 118.79 113.12 147.01 178.35 223.98
PEER GROUP 100 163.07 73.15 54.63 83.08 111.31
(1) Annual return assumes reinvestment of dividends. Cumulative total return
assumes an initial investment of $100 on December 31, 1992. The Company's
self-selected peer group is comprised of Atlantic Premium Brands, Ltd. (which
began trading in November 1993); Great Pines Water, Inc. (which began trading in
August 1993); Bev-Tyme, Inc. (formerly New Day Beverage, Inc.)(which began
trading in February 1993); Saratoga Beverage Group (which began trading in June
1993); and Cott Corporation (which began trading in June 1992). National
Beverage Corporation, Cable Car Beverage Corporation, Clearly Canadian Beverage
Company, Triarc Companies and Northland Cranberries, which are also members of
the peer group, traded during the entire five-year period.
27
Employment Agreements
The Company entered into an employment agreement dated as of January 1,
1994 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
$170,000, subject to adjustments annually, plus an annual bonus in an amount
determined at the discretion of the Board of Directors and certain fringe
benefits for the period commending January 1, 1994 and ending December 31, 1998.
For 1994, Mr. Sacks agreed to a temporary reduction of his annual base salary to
$160,000. For 1995, Mr. Sacks agreed to a temporary reduction of his annual base
salary to $150,000. For 1996, Mr. Sacks agreed to a temporary reduction of his
annual base salary to $135,000. For 1997, Mr. Sacks agreed to a temporary
reduction of his annual base salary to $160,000.
The Company also entered into an employment agreement dated as of
January 1, 1994, with Hilton H. Schlosberg pursuant to which Mr. Schlosberg
renders services to the Company as its Vice Chairman, President and Chief
Financial Officer, for an annual base salary of $170,000 starting when he
commenced full-time employment, subject to adjustment annually, plus an annual
bonus in an amount to be determined by the Board of Directors and certain fringe
benefits for the period commencing January 1, 1994 and ending December 31, 1998.
From commencement of full-time employment during July 1995, Mr. Schlosberg
agreed to a temporary reduction of his annual base salary to $150,000. For 1996,
Mr. Schlosberg agreed to a temporary reduction of his annual base salary to
$127,500. For 1997, Mr. Schlosberg agreed to a temporary reduction of his annual
base salary to $158,030.
Effective June 30, 1997, Mr. Taber elected to retire and terminated
his employment agreement with HBC and entered into a Severance and Consulting
Agreement with the Company and HBC (the "Consulting Agreement") pursuant to
which, among other matters, HBC agreed to retain Mr. Taber as a consultant for a
period of two years at a fixed monthly fee of $5,000 and Mr. Taber's Stock
Option Agreement with the Company dated as of June 30, 1995 was terminated and
replaced with a new Stock Option Agreement with the Company dated as of June 20,
1997 (the "Replacement Stock Option Agreement"). Under the terms of the
Replacement Stock Option Agreement, Mr. Taber was granted options to purchase
100,000 shares of common stock exercisable until June 30, 1999 at $1.38 per
share. Mr. Taber remains a director of the Company. In addition, Mr. Taber
agreed to repay amounts owed by him to HBC under a certain promissory note by
offsetting amounts owed under the note against accrued and unpaid base pay
payable under Mr. Taber's employment agreement and amounts payable under the
Consulting Agreement. See "Certain Relationships and Related Transactions"
below.
The preceding descriptions of the employment agreements for Messrs.
Sacks and Schlosberg and the Consulting Agreement and Replacement Stock Option
Agreement with Mr. Taber are qualified in their entirety by reference to such
agreements which have been filed or incorporated by reference as exhibits to his
Report.
Directors' Compensation
The Company's current policy is to pay outside directors (non-executive
officers) who are not contractually entitled to be nominated to serve as
directors, annual fees of $6,000 plus $500 for each meeting attended of the
Board of Directors or any committee thereof. Benjamin Polk and Norman Epstein
each earned directors fees of $7,000 for the one-year period ended December 31,
1997. See "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" below for
description of contractual obligations to nominate certain outside directors.
Employee Stock Option Plan
The Company has a stock option plan (the "Plan") that provides for the
grant of options to purchase up to 2 million shares of the Common Stock of the
Company to certain key employees of the Company and its subsidiaries. Options
granted under the Plan may either be incentive stock options qualified under
Section 422 of the Internal Revenue Code of 1986, as amended, or non-qualified
options. Such options are exercisable at fair market value on the date of grant
for a period of up to ten years. Under the Plan, shares subject to options may
be purchased for cash, for shares of Common Stock valued at fair market value on
the date of purchase or in consideration of the cancellation of options valued
at the difference between the exercise price thereof and the fair market value
of the Common Stock on the date of exercise. The Plan is administered by the
Compensation Committee of the Board of Directors, comprised of directors who
have not received grants of options under the Plan. Grants under the Plan are
made pursuant to individual agreements between the Company and each grantee that
specifies the terms of the grant, including the exercise price, exercise period,
vesting and other terms thereof.
28
Outside Directors Stock Option Plan
The Company has an option plan for its outside directors (the
"Directors Plan") that provides for the grant of options to purchase up to an
aggregate of 100,000 shares of Common Stock of the Company to directors of the
Company who are not and have not been employed by or acted as consultants to the
Company and its subsidiaries or affiliates and who are not and have not been
nominated to the Board of Directors of the Company pursuant to a contractual
arrangement. On the date of the annual meeting of stockholders at which an
eligible director is initially elected, each eligible director is entitled to
receive a one-time grant of an option to purchase 6,000 shares (12,000 shares if
the director is serving on a committee of the Board) of the Company's Common
Stock exercisable at the closing price for a share of Common Stock on the date
of grant. Options become exercisable one-third each on the first, second and
third anniversary of the date of grant; provided, however, that options granted
as of February 14, 1995 are exercisable 66 2/3% on the date of grant and 100% on
July 8, 1995; provided further, that all options held by an eligible director
become fully and immediately exercisable upon a change in control of the
Company. Options granted under the Directors Plan that are not exercised
generally expire ten years after the date of grant. Option grants may be made
under the Directors Plan for ten years from the effective date of the Directors
Plan. The Directors Plan is a "formula plan" so that a non-employee director's
participation in the Directors Plan does not affect his status as a
"disinterested person" (as defined in Rule 16b-3 under the Securities Exchange
Act of 1934).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) The following table sets forth information, as of March 5,
1998, of the only persons known to the Company who
beneficially own more than 5% of the outstanding Common Stock:
Title Name and Address of Amount and Nature of Percent
Of Class Beneficial Owner Beneficial Ownership of Class
- ------------ --------------------- -------------------- ------------
Common Stock Brandon Limited
Partnership No. 1 (1) 714,490 7.8%
Brandon Limited
Partnership No. 2 (2) 2,831,667 31.0%
Rodney C. Sacks (3) 4,021,157 (4) 42.3%
Hilton H. Schlosberg (5) 3,971,157 (6) 41.9%
(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
Hilton H. Schlosberg and Rodney C. Sacks.
(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
Hilton H. Schlosberg and Rodney C. Sacks.
(3) The mailing address of Mr. Sacks is 2380 Railroad Street, Suite 101, Corona,
California 91720.
29
(4) Includes 87,500 shares of Common Stock owned by Mr. Sacks. Also includes
714,490 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.
Includes options to purchase 200,000 shares of Common Stock exercisable at $1.75
per share granted pursuant to a Stock Option Agreement dated June 15, 1992
between the Company and Mr. Sacks; options to purchase 150,000 shares of Common
Stock exercisable at $1.25 per share granted pursuant to a Stock Option
Agreement dated July 3, 1995 between the Company and Mr. Sacks; and options to
purchase 75,000 shares of Common Stock at $1.59 per share, of which 37,500
shares are currently exercisable, granted pursuant to a Stock Option Agreement
dated January 30, 1998 between the Company and Mr. Sacks.
Mr. Sacks disclaims beneficial ownership of all shares deemed beneficially
owned by him hereunder except (i) 87,500 shares of Common Stock, (ii) the
425,000 shares presently issuable under the Plan and (iii) his proportionate
interest as a shareholder in the following shares beneficially owned by
Hazelwood Investments Limited, a company controlled by Mr. Sacks and his family
("Hazelwood"): (a) the 247,911 shares held by Brandon No. 1 allocable to
Hazelwood's limited partnership interest in Brandon No. 1 and (b) the 250,000
shares held by Brandon No. 2 allocable to Hazelwood's limited partnership
interest in Brandon No. 2.
(5) The mailing address of Mr. Schlosberg is 2380 Railroad Street, Suite 101,
Corona, California 91720.
(6) Includes 87,500 shares of Common stock owned by Mr. Schlosberg. Also
includes 714,490 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. Includes options to purchase 150,000 shares of Common
Stock exercisable at $1.75 per share granted pursuant to a Stock Option
Agreement dated June 15, 1992 between the Company and Mr. Schlosberg; options to
purchase 150,000 shares of Common Stock exercisable at $1.25 per share granted
pursuant to a Stock Option Agreement dated July 3, 1995 between the Company and
Mr. Schlosberg; and options to purchase 75,000 shares of Common Stock at $1.59
per share, of which 37,500 shares are currently exercisable, granted pursuant to
a Stock Option Agreement dated January 30, 1998 between the Company and Mr.
Schlosberg.
Mr. Schlosberg disclaims beneficial ownership of all shares deemed
beneficially owned by him hereunder except (i) 87,500 shares of Common Stock,
(ii) the 375,000 shares presently issuable under the Plan and (iii) his
proportionate interest as a shareholder in the following shares beneficially
owned by Brandon Securities Limited, a company controlled by Mr. Schlosberg and
his family: (a) the 247,911 shares held by Brandon No. 1 allocable to Brandon
Securities Limited's limited partnership interest in Brandon No 1 and (b) the
250,000 shares held by Brandon No. 2 allocable to Brandon Securities Limited's
limited partnership interest in Brandon No. 2.
(b) The following table sets forth information as to the ownership
of shares of Common Stock, as of March 5, 1998, held by
persons who are directors of the Company, naming them, and as
to directors and officers of the Company as a group, without
naming them:
Title of Class Name Amount Owned Percent of Class
- --------------- ---------------------- ----------------- ----------------
Common Stock Rodney C. Sacks 4,021,157 (1) 42.3%
Hilton H. Schlosberg 3,971,157 (2) 41.9%
Harold C. Taber, Jr. 174,581.7 (3) 1.9%
Norman C. Epstein 27,000 (4) *%
Benjamin M. Polk 32,000 (5) *%
Officers and Directors as a group (5 members:
4,679,739 shares or 46.9% in aggregate)
* Less than 2%
30
(1) Includes 87,500 shares of Common Stock owned by Mr. Sacks. Also includes
714,490 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.
Includes options to purchase 200,000 shares of Common Stock exercisable at $1.75
per share granted pursuant to a Stock Option Agreement dated June 15, 1992
between the Company and Mr. Sacks; options to purchase 150,000 shares of Common
Stock exercisable at $1.25 per share granted pursuant to a Stock Option
Agreement dated July 3, 1995 between the Company and Mr. Sacks; and options to
purchase 75,000 shares of Common Stock at $1.59 per share, of which 37,500
shares are currently exercisable, granted pursuant to a Stock Option Agreement
dated January 30, 1998 between the Company and Mr. Sacks.
Mr. Sacks disclaims beneficial ownership of all shares deemed beneficially
owned by him hereunder except (i) the 87,500 shares of Common Stock, (ii) the
425,000 shares presently issuable under the Plan and (iii) his proportionate
interest as a shareholder in the following shares beneficially owned by
Hazelwood Investments Limited, a company controlled by Mr. Sacks and his family
("Hazelwood"): (a) the 247,911 shares held by Brandon No. 1 allocable to
Hazelwood's limited partnership interest in Brandon No. 2.
(2) Includes 87,500 shares of Common Stock. Also includes 714,490 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. Includes
options to purchase 150,000 shares of Common Stock exercisable at $1.75 per
share granted pursuant to a Stock Option Agreement dated June 15, 1992 between
the Company and Mr. Schlosberg; options to purchase 150,000 shares of Common
Stock exercisable at $1.25 per share granted pursuant to a Stock Option
Agreement dated July 3, 1995 between the Company and Mr. Schlosberg; and options
to purchase 75,000 shares of Common Stock at $1.59 per share, of which 37,500
shares are currently exercisable, granted pursuant to a Stock Option Agreement
dated January 30, 1998 between the Company and Mr. Schlosberg.
Mr. Schlosberg disclaims beneficial ownership of all shares deemed
beneficially owned by him hereunder except (i) the 87,500 shares of Common
Stock, (ii) the 375,000 shares presently issuable under the Plan and (iii) his
proportionate interest as a shareholder in the following shares beneficially
owned by Brandon Securities Limited, a company controlled by Mr. Schlosberg and
his family: (a) the 247,911 shares held by Brandon No. 1 allocable to Brandon
Securities Limited's limited partnership interest in Brandon No. 1 and (b) the
250,000 shares held by Brandon No. 2 allocable to Brandon Securities Limited's
limited partnership interest in Brandon No. 2.
(3) Includes 74,581.7 shares of Common Stock owned by Mr. Taber. Also includes
options to purchase 100,000 shares of Common Stock exercisable at $1.38 per
share granted pursuant to a Stock Option Agreement dated June 20, 1997 between
the Company and Mr. Taber.
(4) Includes 15,000 shares of Common Stock registered in the name of Optimal
Hedge Limited, a nominee for Mr. Epstein. Also includes presently exercisable
options to purchase 12,000 shares of Common Stock under an Option Agreement with
the Company dated as of June 30, 1995 granted pursuant to the Directors Plan.
(5) Includes 20,000 shares of Common Stock owned by Mr. Polk. Also includes
presently exercisable options to purchase 12,000 shares of Common Stock under an
Option Agreement with the Company dated as of June 30, 1995 granted pursuant to
the Directors Plan.
There are no arrangements known to the Company the operation of which
may at a subsequent date result in a change of control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Benjamin M. Polk is a partner in the law firm of Whitman Breed Abbott &
Morgan, a law firm retained by the Company since 1992 and in the current fiscal
year.
31
Pursuant to the terms of a certain Assignment Agreement dated July 27,
1992 between FJC's predecessor and Hansen, the Company has agreed to nominate
and solicit proxies for the election to the Company's Board of Directors of one
of the trustees designated by the trustees of a certain trust (the "Trust")
formed pursuant to an Agreement of Trust dated July 27, 1992 for so long as the
Trust shall be in existence for the benefit of Hansen and FJC. The initial
designee of the Trust nominated to the Board was Anthony F. Kane who resigned
from the Board in June, 1993. No other designee has been nominated by the Trust.
Rodney C. Sacks is currently acting as the sole trustee of the Trust,
as FJC has failed to designate any person to act as Trustee. The Company and HBC
have agreed to indemnify Mr. Sacks and hold him harmless from any claims, loss,
liability or expense arising out of his acting as Trustee.
Harold C. Taber, Jr., who is a director of the Company and a consultant
to HBC, is indebted to the Company in the amount of $60,252 as of December 31,
1997.
The preceding descriptions of agreements are qualified in their
entirety by reference to such agreements which have been filed as exhibits to
this Report.
32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. Index to Financial Statements filed as part of this Report:
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1997, 1996 and 1995 F-7
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the
Years Ended December 31, 1997, 1996 and 1995 F-18
3. Exhibits
See the Index to Exhibits included hereinafter.
(b) Reports on Form 8-K
None
33
SIGNATURES
Pursuant to the requirements of Sections 13 and 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HANSEN NATURAL CORPORATION
By: /s/ RODNEY C. SACKS Date: March 31, 1998
-----------------------
Rodney C. Sacks
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
/s/ RODNEY C. SACKS Chairman of the Board of Directors March 31, 1998
- ----------------------- and Chief Executive Officer
Rodney C. Sacks (Principal Executive Officer)
/s/ HILTON H. SCHLOSBERG
- ----------------------- Vice Chairman of the Board of March 31, 1998
Hilton H. Schlosberg Directors, President,
Chief Operating Officer,
Principal Financial and
Accounting Officer and Secretary
/s/ BENJAMIN M. POLK
- ----------------------- Director March 31, 1998
Benjamin M. Polk
/s/ NORMAN C. EPSTEIN
- ----------------------- Director March 31, 1998
Norman C. Epstein
- ----------------------- Director March 31, 1998
/s/ HAROLD C. TABER, JR.
Harold C. Taber, Jr.
34
INDEX TO EXHIBITS
The following designated exhibits, as indicated below, are either filed
herewith or have heretofore been filed with the Securities and Exchange
Commission under the Securities Act of 1933 or the Securities Exchange Act of
1934 as indicated by footnote.
Exhibit No. Document Description
- ---------------- -------------------------------------------------------------------------------------------
3(a) Certificate of Incorporation (1)
- ---------------- -------------------------------------------------------------------------------------------
3(b) Amendment to Certificate of Incorporation dated October 21, 1992. (2)
- ---------------- -------------------------------------------------------------------------------------------
3(c) By-Laws (2)
- ---------------- -------------------------------------------------------------------------------------------
10(c) Asset Purchase Agreement dated June 8, 1992 ("Asset Purchase Agreement"), by and among
Unipac Corporation ("Unipac"), Hansen Beverage Company ("Hansen"), California CoPackers
Corporation ("CoPackers"), South Pacific Beverages, Ltd. ("SPB"), Harold C. Taber, Jr.
("Taber"), Raimana Martin ("R. Martin"), Charles Martin ("C. Martin"), and Marcus I.
Bender ("Bender"), and with respect to certain provisions, ERLY Industries, Inc.
("ERLY"), Bender Consulting Incorporated ("Bender Consulting") and Black Pearl
International, Ltd. ("Blank Pear"). (2)
- ---------------- -------------------------------------------------------------------------------------------
10(d) First Amendment to Asset Purchase Agreement dated as of July 10, 1992. (2)
- ---------------- -------------------------------------------------------------------------------------------
10(e) Second Amendment to Asset Purchase Agreement dated as of July 16, 1992. (2)
- ---------------- -------------------------------------------------------------------------------------------
10(f) Third Amendment to Asset Purchase Agreement dated as of July 17, 1992. (2)
- ---------------- -------------------------------------------------------------------------------------------
10(g) Fourth Amendment to Asset Purchase Agreement dated as of July 24, 1992. (2)
- ---------------- -------------------------------------------------------------------------------------------
10(h) Subordinated Secured Promissory Note of Hansen in favor of ERLY dated July 27, 1992 in
the principal amount of $4,000,000. (2)
- ---------------- -------------------------------------------------------------------------------------------
10(i) Security Agreement dated July 27, 1992 by and between Hansen and ERLY. (2)
- ---------------- -------------------------------------------------------------------------------------------
10(j) Stock Option Agreement by and between SPB and Unipac dated July 27, 1992 for an option
price of $4.75 per share. (2)
- ---------------- -------------------------------------------------------------------------------------------
10(k) Stock Option Agreement by and between Taber and Unipac dated July 27, 1992 for an option
price of $4.75 per share. (2)
- ---------------- -------------------------------------------------------------------------------------------
10(l) Stock Option Agreement by and between CoPackers and Unipac dated July 27, 1992 for an
option price of $4.75 per share. (2)
- ---------------- -------------------------------------------------------------------------------------------
10(n) Stock Option Agreement by and between SPB and Unipac dated July 27, 1992 for an option
price of $2.50 per share. (2)
- ---------------- -------------------------------------------------------------------------------------------
10(o) Stock Option Agreement by and between CoPackers and Unipac dated July 27, 1992 for an
option price of $2.50 per share. (2)
- ---------------- -------------------------------------------------------------------------------------------
10(p) Assignment Agreement re: Trademarks by and between Hansen's Juices, Inc. ("FJC"), and
Hansen, dated July 27, 1992. (8)
- ---------------- -------------------------------------------------------------------------------------------
10(q) Assignment of Trademarks dated July 27, 1992 by FJC to Gary Hansen, Anthony Kane and
Burton S. Rosky, as trustees under that certain trust agreement dated July 27, 1992 (the
"Trust"). (8)
- ---------------- -------------------------------------------------------------------------------------------
10(r) Assignment of License by CoPackers to Hansen dated as of July 27, 1992. (8)
- ---------------- -------------------------------------------------------------------------------------------
10(s) Employment Agreement between Hansen and Taber dated as of July 27, 1992. (3)
- ---------------- -------------------------------------------------------------------------------------------
10(t) Consulting Agreement by and between Hansen and Black Pearl dated July 27, 1992. (3)
- ---------------- -------------------------------------------------------------------------------------------
10(u) Consulting Agreement by and between Hansen and C. Martin dated July 27, 1992. (3)
- ---------------- -------------------------------------------------------------------------------------------
10(w) Registration Rights Agreement by and among Unipac, SPB, CoPackers, Taber, Wedbush Morgan
Securities ("Wedbush"), Rodney C. Sacks, and Hilton H. Schlosberg, dated July 27, 1992. (3)
- ---------------- -------------------------------------------------------------------------------------------
10(z) Soda Side Letter Agreement dated June 8, 1992 by and among Unipac, Hansen, SPB, Black
Pearl, Tahiti Beverages, S.A.R.L., R. Martin and C. Martin. (4)
- ---------------- -------------------------------------------------------------------------------------------
10(bb) Hansen/Taber Agreement dated July 27, 1992 by and among Hansen and Taber. (8)
- --------------- --------------------------------------------------------------------------------------------
10(cc) Other Beverage License Agreement dated July 27, 1992 by and between Hansen and the Trust.(8)
---------------- --------------------------------------------------------------------------
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)
- ---------------- -------------------------------------------------------------------------------------------
35
10(gg) Royalty Sharing Agreement dated July 27, 1992 by and between Hansen and the Trust. (8)
- ---------------- -------------------------------------------------------------------------------------------
10(hh) Fresh Juices License Agreement dated as of July 27, 1992 by and between Hansen and the
Trust. (8)
- ---------------- -------------------------------------------------------------------------------------------
10(ii) Incentive Stock Option Agreement dated July 27, 1992 by and between Unipac and Taber at
the option price of $2.00 per share. (2)
- ---------------- -------------------------------------------------------------------------------------------
10(jj) CoPacking Agreement dated November 24, 1992 by and between Tropicana Products Sales, Inc.
and Hansen. (4)
- ---------------- -------------------------------------------------------------------------------------------
10(kk) Office Lease, dated December 16, 1992 by and between Lest C. Smull as Trustee, and his
Successors under Declaration of Trust for the Smull family, dated December 7, 1984 , and
Hansen. (5)
- ---------------- -------------------------------------------------------------------------------------------
10(ll) Stock Option Agreement dated as of June 15, 1992 by and between Unipac and Rodney C.
Sacks. (5)
- ---------------- -------------------------------------------------------------------------------------------
10(mm) Stock Option Agreement dated as of June 15, 1992 by and between Unipac and Hilton H.
Schlosberg. (5)
- ---------------- -------------------------------------------------------------------------------------------
10(nn) Stock Option Agreement dated as of February 14, 1995 between Hansen Natural Corporation
and Benjamin M. Polk. (7)
- ---------------- -------------------------------------------------------------------------------------------
10(oo) Stock Option Agreement dated as of February 14, 1995 between Hansen Natural Corporation
and Norman C. Epstein. (7)
- ---------------- -------------------------------------------------------------------------------------------
10(pp) Employment Agreement dated as of January 1, 1994 between Hansen Natural Corporation and
Hilton H. Schlosberg. (6)
- ---------------- -------------------------------------------------------------------------------------------
10(qq) Employment Agreement dated as of January 1, 1994 between Hansen Natural Corporation and
Rodney C. Sacks. (6)
- ---------------- -------------------------------------------------------------------------------------------
10(rr) Stock Option Agreement dated as of July 3, 1995 between Hansen Natural Corporation and
Rodney C. Sacks. (8)
- ---------------- -------------------------------------------------------------------------------------------
10(ss) Stock Option Agreement dated as of July 3, 1995 between Hansen Natural Corporation and
Hilton H. Schlosberg. (8)
- ---------------- -------------------------------------------------------------------------------------------
10(tt) Stock Option Agreement dated as of June 30, 1995 between Hansen Natural Corporation and
Harold C. Taber, Jr. (8)
- ---------------- -------------------------------------------------------------------------------------------
10(uu) Standard Industrial Lease Agreement dated as of April 25, 1997 between Hansen Beverage
Company and 27 Railroad Partnership L.P. (9)
- ---------------- -------------------------------------------------------------------------------------------
10(vv) Sublease Agreement dated as of April 25, 1997 between Hansen Beverage Company and U.S.
Continental Packaging, Inc. (9)
- ---------------- -------------------------------------------------------------------------------------------
10(ww) Packaging Agreement dated April 14, 1997 between Hansen Beverage Company and U.S.
Continental Packaging, Inc. (10)
- ---------------- -------------------------------------------------------------------------------------------
10(xx) Revolving Credit Loan and Security Agreement dated May 15, 1997 between Comerica Bank -
California and Hansen Beverage Company. (10)
- ---------------- -------------------------------------------------------------------------------------------
10(yy) Severance and Consulting Agreement dated as of June 20, 1997 by and among Hansen Beverage
Company, Hansen Natural Corporation and Harold C. Taber, Jr. (10)
- ---------------- -------------------------------------------------------------------------------------------
10(zz) Stock Option Agreement dated as of June 20, 1997 by and between Hansen Natural
Corporation and Harold C. Taber, Jr. (10)
- ---------------- -------------------------------------------------------------------------------------------
10 (aaa) Variable Rate Installment Note dated October 14, 1997 between Comerica Bank - California
and Hansen Beverage Company. (10)
- ---------------- -------------------------------------------------------------------------------------------
21 Subsidiaries (5)
- ---------------- -------------------------------------------------------------------------------------------
23 Independent Auditors' Consent
- ---------------- -------------------------------------------------------------------------------------------
27 Financial Data Schedule
- ---------------- -------------------------------------------------------------------------------------------
36
(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 From 10-Q for the period ended June 30,
1997.
(10)Filed previously as an exhibit to From 10-Q for the period ended September
30, 1997.
37
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements for the years
ended December 31, 1997, 1996 and 1995 F-7
Valuation and Qualifying Accounts for the years ended
December 31, 1997, 1996 and 1995 F-18
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Hansen Natural Corporation
Anaheim, California
We have audited the accompanying consolidated balance sheets of Hansen Natural
Corporation and subsidiaries (the Company) as of December 31, 1997 and 1996, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the years ended December 31, 1997, 1996 and 1995. Our audits also
included the financial statement schedule listed in Item 14. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1997 and 1996, and the consolidated results of
their operations and cash flows for the years ended December 31, 1997, 1996 and
1995 in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to the
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
March 24, 1998
F-2
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996
---- ----
ASSETS
CURRENT ASSETS:
Cash $ 395,231 $ 186,931
Accounts receivable (net of allowance for doubtful
accounts, sales returns and cash discounts of $315,629
in 1997 and $234,749 in 1996 and promotional allowances
of $1,067,749 in 1997 and $926,045 in 1996)(Note 1) 1,533,748 944,227
Inventories (Notes 1 and 5) 3,915,983 3,111,124
Prepaid expenses and other current assets (Note 6) 214,468 331,869
-------------------- ---------------------
Total current assets 6,059,430 4,574,151
PROPERTY, PLANT AND EQUIPMENT, net (Notes 1 and 7) 412,496 602,272
INTANGIBLE AND OTHER ASSETS:
Trademark license and trademarks (net of accumulated amortization
of $2,390,878 in 1997 and $2,089,641 in 1996) (Note 1) 10,208,116 10,459,144
Notes receivable from officer and director 68,235 70,153
Deposits and other assets 185,082 403,353
-------------------- ---------------------
Total intangible and other assets 10,461,433 10,932,650
-------------------- ---------------------
$ 16,933,359 $ 16,109,073
==================== =====================
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings (Note 8) $ - $ 893,429
Accounts payable 2,277,000 2,139,050
Accrued compensation 322,114 71,972
Accrued liabilities 444,807 128,630
Current portion of long-term debt (net of unamortized
premium of $48,541 in 1996) (Note 9) 520,835 4,048,541
-------------------- ---------------------
Total current liabilities 3,564,756 7,281,622
LONG-TERM DEBT (Note 9) 3,407,824
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY:
Common stock - $.005 par value; 30,000,000
shares authorized; 9,130,869 shares issued and
outstanding in 1997 and 9,122,868 in 1996 45,654 45,614
Additional paid-in capital 10,858,315 10,847,355
Accumulated deficit (875,949) (2,126,100)
Foreign currency translation adjustment (Note 1) (67,241) 60,582
-------------------- ---------------------
Total shareholders' equity 9,960,779 8,827,451
-------------------- ---------------------
$ 16,933,359 $ 16,109,073
==================== =====================
See accompanying notes to consolidated financial statements.
F-3
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
NET SALES (Note 1) $ 43,057,064 $ 35,565,485 $ 33,990,675
COST OF SALES 25,222,881 21,671,064 21,855,369
-------------------- -------------------- -----------------
GROSS PROFIT 17,834,183 13,894,421 12,135,306
OPERATING EXPENSES:
Selling, general and administrative (Note 10) 15,452,188 12,524,850 12,506,770
Amortization of trademark license and trademarks(Note 1) 301,238 396,755 497,750
Other expenses 198,848 295,869 437,494
-------------------- -------------------- -----------------
Total operating expenses 15,952,274 13,217,474 13,442,014
-------------------- -------------------- -----------------
OPERATING INCOME (LOSS) 1,881,909 676,947 (1,306,708)
NONOPERATING EXPENSE (INCOME):
Net interest and financing expense 521,813 576,814 439,817
Other expense (income) (Note 3) 69,745 (259,433) (399,232)
-------------------- -------------------- -----------------
Net nonoperating expense 591,558 317,381 40,585
-------------------- -------------------- -----------------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES 1,290,351 359,566 (1,347,293)
PROVISION FOR INCOME TAXES (Note 4) 40,200 2,400 2,400
-------------------- -------------------- -----------------
NET INCOME (LOSS) $ 1,250,151 $ 357,166 $ (1,349,693)
==================== ==================== =================
NET INCOME (LOSS) PER COMMON SHARE(Note 1):
Basic $ 0.14 $ 0.04 $ (0.15)
==================== ==================== =================
Diluted $ 0.13 $ 0.04
==================== ====================
NUMBER OF COMMON SHARES USED
IN PER SHARE COMPUTATIONS:
Basic 9,125,630 9,122,868 9,122,868
==================== ==================== =================
Diluted 9,288,642 9,159,415
==================== ====================
See accompanying notes to consolidated financial statements.
F-4
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign
Common Stock Additional currency Total
----------------------------- paid-in Accumulated translation shareholders'
Shares Amount capital deficit adjustment equity
------------- ------------ ------------- --------------- ------------ ------------
Balance,
January 1, 1995 9,122,868 $ 45,614 $ 10,847,355 $(1,133,573) $ 32,315 $ 9,791,711
Foreign currency translation
adjustment (Note 1) 3,897 3,897
Net loss (1,349,693) (1,349,693)
------------- ------------- ------------- ------------ ------------ ------------
Balance,
December 31, 1995 9,122,868 45,614 10,847,355 (2,483,266) 36,212 8,445,915
Foreign currency translation
adjustment (Note 1) 24,370 24,370
Net income 357,166 357,166
------------- ------------- ------------- ------------ ------------ ------------
Balance,
December 31, 1996 9,122,868 45,614 10,847,355 (2,126,100) 60,582 8,827,451
Issuance of Common Stock 8,001 40 10,960 11,000
Foreign currency translation
adjustment (Note 1) (127,823) (127,823)
Net income 1,250,151 1,250,151
------------- ------------ ------------- ------------ ------------ -------------
Balance,
December 31, 1997 9,130,869 $ 45,654 $ 10,858,315 $ (875,949) $ (67,241) $ 9,960,779
============= ============ ============= ============ ============ =============
See accompanying notes to consolidated financial statements.
F-5
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,250,151 $ 357,166 $ (1,349,693)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Amortization of trademark license and trademarks 301,237 396,755 497,750
Depreciation and other amortization 270,115 249,035 246,969
Loss (gain) on disposal of plant and equipment 69,745 (2,129)
Effect on cash of changes in operating assets and liabilities:
Accounts receivable (589,521) 784,928 (712,533)
Inventories (804,859) 9,395 (430,275)
Prepaid expenses and other current assets 117,401 155,638 (21,359)
Accounts payable 137,950 (1,243,715) 13,971
Accrued compensation 250,142 6,139 18,262
Accrued liabilities 316,177 38,504 (270,950)
--------------- ------------- --------------
Net cash provided by (used in) operating activities 1,318,538 753,845 (2,009,987)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of plant and equipment (186,570) (97,650) (396,538)
Proceeds from sale of plant and equipment 37,945 61,893 103,494
Increase in trademark license and trademarks (50,209) (61,847) (96,639)
Decrease in notes receivable from officer and director 1,918 3,730 25,271
Decrease (increase) in deposits and other assets 218,271 40,150 (8,355)
--------------- ------------- -------------
Net cash provided by (used in) investing activities 21,355 (53,724) (372,767)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in short-term borrowings (893,429) (580,906) 1,474,335
Issuance of Common Stock 11,000
Increase in long-term debt 14,546
Principal payments on long-term debt (135,887) (44,570) (98,599)
--------------- ------------- -------------
Net cash (used in) provided by financing activities (1,003,770) (625,476) 1,375,736
EFFECT OF EXCHANGE RATE CHANGES ON CASH (127,823) 24,370 3,897
--------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH 208,300 99,015 (1,003,121)
CASH, beginning of year 186,931 87,916 1,091,037
--------------- ------------- -------------
CASH, end of year $ 395,231 $ 186,931 $ 87,916
=============== ============= =============
SUPPLEMENTAL INFORMATION:
Cash paid during the year for:
Interest $ 375,821 $ 459,182 $ 327,923
=============== ============= =============
Income taxes $ 2,400 $ 2,400 $ 2,400
=============== ============= =============
See accompanying notes to consolidated financial statements.
F-6
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Hansen Natural Corporation (the "Company" or "Hansen")
was incorporated in Delaware on April 25, 1990. Hansen owns all of the
issued and outstanding common stock of CVI Ventures, Inc. ("CVI"),
which was incorporated in Delaware on April 30, 1990. CVI is currently
inactive. Hansen owns all of the issued and outstanding common stock of
Hansen Beverage Company ("HBC"), which was incorporated in Delaware on
June 8, 1992. HBC owns all of the issued and outstanding ordinary
shares of Hansen Beverage Company (UK) Limited ("HBC (UK)"), which was
incorporated in England on July 13, 1993.
Nature of Operations - HBC is engaged in the marketing, sale and
distribution of Hansen's(R) Natural Sodas, Hansen's(R) Old Fashioned
Apple Juice, Hansen's(R) Natural Iced Teas, Hansen's(R) Natural
Lemonades, Hansen's(R) Natural Juice Cocktails, Hansen's(R) Natural
Fruit Juice Smoothies, Hansen's(R) Natural Still Water, Equator(R) Iced
Teas, Equator(R) Lemonades, Equator(R) Juice Cocktails and Hansen's(R)
energy primarily in certain Western states as well as other states, the
United Kingdom, and on a limited basis, in other countries outside the
United States.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Hansen and its wholly-owned
subsidiaries, CVI and HBC, and HBC's wholly-owned subsidiary HBC (UK),
since its date of incorporation. All intercompany balances and
transactions have been eliminated in consolidation.
Reclassifications - Certain reclassifications were made in the
consolidated financial statements to conform to the 1997, 1996 and
1995 presentations.
Translation of Foreign Currencies - Assets and liabilities of the
Company's United Kingdom subsidiary are translated into U.S. dollars at
year-end rates of exchange, and income and expenses are translated at
average rates during the respective years. The functional currency of
the subsidiary is the pound sterling; therefore, translation gains or
losses are recorded as a separate component of shareholders' equity.
Inventories - Inventories are valued at the lower of first-in,
first-out cost (FIFO) or market value (net realizable value).
Property, Plant and Equipment - Property, plant and equipment are
stated at cost. Depreciation of furniture, fixtures, equipment and
vehicles is based on their estimated useful lives (three to five years)
and is calculated using the straight-line method. Amortization of
leasehold improvements is based on the lesser of their estimated useful
lives or the terms of the related leases and is calculated using the
straight-line method.
Trademark License and Trademarks - Trademark license represents the
Company's license to use certain Hansen(R) brand names. Trademarks
represent expenditures incurred to trademark other branded names. Prior
to the third quarter of 1996, trademark license and trademarks were
being amortized over 25 years using the straight-line method.
Management periodically evaluates whether there has been any impairment
of the trademark license or trademarks based on an analysis of
applicable undiscounted expected future cash flows. During the third
quarter of 1996, the estimated life of the Company's trademark license
and trademarks was changed from 25 years to 40 years to more closely
conform such useful life with that used by other branded beverage
companies. The effect of such change in accounting estimate is (i) a
reduction in amortization of trademark license and trademarks of
$96,000 for the year 1997 and $101,000 for the year 1996 and (ii) an
increase in net income of $.01 per share on a diluted basis for the
years ended December 31, 1997 and 1996.
F-7
Revenue Recognition - The Company records revenue at the time the
related products are shipped.
Credit Risk - The Company sells its products nationally, primarily to
retailers and beverage distributors. The Company performs ongoing
credit evaluations of its customers and generally does not require
collateral. The Company maintains reserves for potential credit losses,
and such losses have been within management's expectations.
Net Income (Loss) Per Share - In accordance with the recently issued
Statement of Financial Accounting Standards("SFAS")No.128, Earnings per
Share, net income (loss) per share, on a basic and diluted basis, are
presented for all periods. Basic net income (loss) per share is
computed by dividing net income (loss) by the weighted average number
of common shares outstanding. Diluted net income (loss) per share is
computed by dividing net income (loss) by the weighted average number
of common and dilutive common equivalent shares outstanding, if
dilutive. Weighted average common equivalent shares include stock
options using the treasury stock method.
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 year.
Actual results could differ from those estimates.
Long-Lived Assets - The Company accounts for the impairment and
disposition of long-lived assets in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. In accordance with SFAS No. 121, long-lived
assets to be held are reviewed for events or changes in circumstances
which indicate that their carrying value may not be recoverable. The
Company periodically reviews the carrying value of long-lived assets to
determine whether or not an impairment to such value has occurred. As
of December 31, 1997, management does not believe that the Company's
long-lived assets have been impaired.
New Accounting Pronouncements - In 1997, SFAS No. 130, Reporting
Comprehensive Income and SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information, were issued and are effective for
fiscal years beginning after December 15, 1997. The Company is
reviewing the impact of these statements on its financial statements.
2. REORGANIZATION OF UNITED KINGDOM OPERATIONS
Sales in the United Kingdom were lower than anticipated during 1997;
and, as a consequence, the Company elected to curtail its direct
operations in the United Kingdom. At the end of 1997, the Company
commenced with the deregistration of its United Kingdom subsidiary and
the closure of that subsidiary's offices. In the future, the Company
will deal with its distributor in the United Kingdom from its corporate
offices in California and will export all products sold by it to such
distributor from the United States. Estimated costs of approximately
$50,000 relating to the curtailing of the Company's United Kingdom
operations have been reflected in the accompanying financial
statements.
F-8
3. OTHER EXPENSE (INCOME)
In connection with the acquisition of the Hansen business, the Company
was assigned a promissory note made by Hawaiian Water Partners in the
original principal amount of $310,027 plus interest thereon and certain
additional principal amounts. The note was secured by the proceeds, if
any, of a lawsuit. The collectibility of this note was dependent upon
the outcome of that lawsuit and, consequently, the Company fully
reserved against this asset. Following a judgment in the lawsuit, a
settlement was reached among the plaintiff, defendant and competing
claimants to the proceeds from the lawsuit. Under the terms of the
settlement, the Company was to receive a total of $616,000, plus
interest. In 1995, the reserve against the note was reduced to
$270,000, and the Company recorded $346,000 in other income. Following
receipt of the remaining proceeds during 1996, the remaining reserve
against the note was eliminated. In connection therewith, $233,000 was
recorded in other income during 1996, net of $37,000 of attorney's fees
incurred in connection with the settlement, which constituted the full
extent of recovery under this note.
4. INCOME TAXES
The Company accounts for income taxes under the provision of SFAS No.
109, Accounting for Income Taxes. This statement requires the
recognition of deferred tax assets and liabilities for the future
consequences of events that have been recognized in the Company's
financial statements or tax returns. Measurement of the deferred items
is based on enacted tax laws. In the event the future consequences of
differences between financial reporting bases and tax bases of the
Company's assets and liabilities result in a deferred tax asset, SFAS
No. 109 requires an evaluation of the probability of being able to
realize the future benefits indicated by such asset. A valuation
allowance related to a deferred tax asset is recorded when it is more
likely than not that some portion or all of the deferred tax asset will
not be realized.
Components of the income tax provision (benefit) are as follows:
Year Ended December 31,
1997 1996 1995
------ ------ ------
Current income taxes:
Federal $ - $ - $ -
State 40,200 2,400 2,400
----------------- ---------------- ---------------
$ 40,200 $ 2,400 $ 2,400
================= ================ ===============
Deferred income taxes:
Federal $ (89,215) $ 693,174 $(307,207)
State (38,435) 64,685 (40,808)
Less: change in valuation allowance 127,650 (757,859) 348,015
----------------- ---------------- ---------------
(-0-) (-0-) (-0-)
================= ================ ===============
$ 40,200 $ 2,400 $ 2,400
================= ================ ===============
The difference between the reported provision for income taxes and the
income tax provision (benefit) that would result from applying the 35%
federal statutory rate for 1997 and 34% federal statutory rate for
1995 and 1996 to income (loss) before provision for income taxes is as
follows:
Year Ended December 31,
1997 1996 1995
-------- -------- --------
Income tax provision (benefit)
using the statutory rate $ 451,623 $ 122,252 $ (458,080)
State taxes, net of federal tax benefit 40,200 2,400 2,400
Change in valuation allowance 127,650 (202,256) 348,015
Effect of foreign corporation (520,678) 69,386 143,370
Other (58,595) 10,618 (33,305)
----------------- ---------------- ---------------
$ 40,200 $ 2,400 $ 2,400
================= ================ ===============
F-9
Major components of the Company's deferred taxes at December 31 are as
follows:
Year Ended December 31,
1997 1996 1995
-------- -------- --------
Net operating loss carryforwards-non-SRLY $653,290 $603,222 $786,117
Net operating loss carryforwards - SRLY 101,160 32,149 324,594
Net operating loss carryforwards - State 107,021 88,960 111,552
Reserves for returns 61,730 60,533 53,425
Reserves for bad debts 28,860 30,310 11,235
Reserves for obsolescence 161,967 52,195 86,600
Capitalization of inventory costs 25,980 17,320 8,660
State franchise tax (31,383) (38,310) 25,631
Accrued compensation 139,474 31,164 28,506
Amortization of trademark license (920,997) (678,146) (492,885)
Depreciation (49,223) (49,168) (35,347)
---------------- ---------------- ----------------
277,879 150,229 908,088
Less valuation allowance (277,879) (150,229) (908,088)
---------------- ---------------- ----------------
$ (- 0 - ) $ ( - 0 - ) $ ( - 0 - )
================ ================ ================
The Company's federal income tax returns for the years 1992, 1993 and
1994 have been audited by the Internal Revenue Service. As a result of
this audit, certain SRLY and non-SRLY net operating losses have been
disallowed. Accordingly, the Company has reduced its deferred tax
assets and the related valuation allowance by the reduction of such
disallowed net operating losses at the effective federal tax rate.
The non-SRLY net operating loss carryforwards for federal and state
income tax purposes of approximately $1,920,000 expire through 2011.
The remaining SRLY net operating loss carryforwards for federal tax
purposes of approximately $298,000 expire through 2005.
During the year ended December 31, 1997, the operations of the
Company's foreign subsidiary, HBC (UK), ceased (see Note 2). In
connection therewith, certain intercompany balances were forgiven
resulting in income to the foreign subsidiary. The prior year's net
operating loss carryforwards were utilized to fully reduce the taxable
income of HBC (UK).
5. INVENTORIES
Inventories consist of the following at December 31:
1997 1996
---- ----
Raw materials $ 388,877 $ 876,498
Finished goods 3,527,106 2,234,626
---------------- ----------------
$ 3,915,983 $ 3,111,124
================ ================
F-10
6. PREPAID EXPENSES AND OTHER CURRENT ASSETS
In January 1994, the Company entered into an agreement with a barter
company for the exchange of certain inventory for future advertising
and marketing credits. The Company assigned a value of $490,000 to
these credits based on the net realizable value of the inventory
exchanged ("cost basis"). As of December 31, 1997, advertising and
marketing credits, on a cost basis, totaled $265,000. Advertising and
marketing credits, on a barter basis, totaled $527,000 at that date.
Although such credits remain available for use by the Company through
January 2002, management is unable to estimate their remaining net
realizable value at December 31, 1997. Accordingly, the Company has
fully reserved against such amount in the accompanying financial
statements.
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31:
1997 1996
---- ----
Leasehold improvements $ 54,203 $ 47,834
Furniture and office equipment 332,817 244,792
Equipment and vehicles 656,391 806,668
------------ ------------
1,043,411 1,099,294
Less accumulated depreciation (630,915) (497,022)
------------ ------------
$ 412,496 $ 602,272
============ ============
8. SHORT-TERM BORROWINGS
As part of the credit facility granted to the Company by Comerica
Bank-California ("Comerica"), the Company obtained a revolving line of
credit of up to $3 million in aggregate at any time outstanding. The
utilization of this line of credit by the Company is dependent upon
certain levels of eligible accounts receivable and inventory. The line
of credit is secured by substantially all of HBC's assets, including
accounts receivable, inventory, trademarks, trademark licenses and
certain equipment. As of December 31, 1997, no amounts were outstanding
under the revolving line of credit.
The initial use of proceeds under the revolving line of credit was to
refinance HBC's previous line of credit. The revolving line of credit
is renewable on May 1, 1998. The Company anticipates that such line
will be renewed on the expiration date. However, there can be no
assurance that it will, in fact, be renewed, or if renewed, that the
terms of such renewal will not be disadvantageous to HBC and its
business.
9. LONG TERM DEBT
In 1997, HBC obtained a credit facility from Comerica consisting of a
term loan of up to $4 million or such lesser amount as was necessary to
retire the note executed by the Company in favor of ERLY Industries,
Inc. ("ERLY") in the principal sum of $4 million (the "Note"). The full
amount due under the Note was paid during November 1997. The term loan
will mature in October 2002 and requires monthly payments of principal
and interest in set amounts which escalate over time plus payments of a
portion of HBC's adjusted cash flow, from year to year. The interest
rate payable on the term loan is 1.5% above the bank's base rate.
F-11
Long-term debt consists of the following at December 31: 1997 1996
----------- -----------
Note payable to ERLY Industries, collateralized by the trademark
license, due in monthly interest payments at an effective interest rate
of approximately 7 1/4%, net of unamortized premium of $48,541 in 1996,
due July 27, 1997 (discount based on imputed interest rate of 8.71%)
$ - 0 - $ 4,048,541
Note payable to Comerica, collateralized by substantially all of HBC's
assets, including accounts receivable, inventory, trademarks, trademark
licenses and certain equipment, due in monthly principal and interest
payments which escalate over time plus payments of a portion of HBC's
adjusted cash flow, from year to year, at an effective interest rate of
approximately 10%, due in October 2002 3,916,666
Note payable in connection with the acquisition of certain office
equipment, collateralized by such equipment, due in monthly payments of
$688 at an interest rate of approximately 11 1/4%, due June 15, 2000 11,993
------------ ------------
$ 3,928,659 $ 4,048,541
Less: current portion of long-term debt ( 520,835) ( 4,048,541)
============ ============
$ 3,407,824 $ - 0 -
============ ============
Long-term debt is payable as follows:
Year ending December 31:
1998 $ 520,874
1999 621,369
2000 719,750
2001 900,002
2002 1,166,664
===========
$3,928,659
===========
Interest expense amounted to $488,388, $498,413 and $406,227 for the
years ended December 31, 1997, 1996 and 1995.
10. COMMITMENTS AND CONTINGENCIES
Operating Leases - Hansen's warehouse facility and corporate offices
are leased for a period of 89 months commencing on September 19, 1997
on which date the warehouse facilities were occupied by the Company. On
March 1, 1998, the corporate offices of the Company were relocated to
such premises in Corona, California. This lease and certain equipment
under non-cancelable operating leases expire through 2005. Rent
expenses related to leases amounted to $157,240, $118,871 and $128,508
for the years ended December 31, 1997, 1996 and 1995, respectively.
Future minimum rental payments under such non-cancelable operating
leases referred to above are as follows:
F-12
Year ending December 31:
1998 $ 331,528
1999 340,644
2000 352,884
2001 359,784
2002 365,904
Thereafter 788,820
============
$2,539,564
============
Employment and Consulting Agreements - The Company entered into an
employment agreement with Rodney C. Sacks dated as of January 1, 1994
pursuant to which Mr. Sacks renders services to the Company as its
Chairman and Chief Executive Officer, and entered into an employment
agreement with Hilton H. Schlosberg dated as of January 1, 1994
pursuant to which Mr. Schlosberg renders services to the Company as its
Vice Chairman, President and Chief Financial Officer for an annual base
salary of $170,000 each, subject to adjustments annually, plus an
annual bonus in an amount determined at the discretion of the Board of
Directors and certain fringe benefits, both of which agreements
terminate on December 31, 1998. Future base salaries payable to Messrs.
Sacks and Schlosberg under their respective employment agreements
amount to $170,000 each.
Effective June 30, 1997, Mr. Taber elected to retire and terminated his
employment agreement with HBC and entered into a Severance and
Consulting Agreement with the Company and HBC (the "Consulting
Agreement") pursuant to which, among other matters, HBC agreed to
retain Mr. Taber as a consultant for a period of two years at a fixed
monthly fee of $5,000. In terms of the Consulting Agreement, Mr.
Taber's existing Stock Option Agreement dated as of June 30, 1995 was
terminated and substituted with a new Stock Option Agreement dated as
of June 20, 1997 (the "Replacement Stock Option Agreement") between
the parties. Under the terms of the Replacement Stock Option
Agreement, Mr. Taber was granted options to purchase 100,000 shares of
common stock, outside of the Company's stock option plans (see Note
11), exercisable until June 30, 1999 at $1.38 per share. Compensation
expense related to this option grant is not material. Mr. Taber
remains a director of the Company. In addition, other than with
respect to certain restrictive covenants, Mr. Taber agreed to repay
amounts owed by him to HBC under a certain promissory note by
offsetting amounts owed under the note against accrued and unpaid base
pay payable under Mr. Taber's employment agreement and amounts payable
under the Consulting Agreement, beginning January 1, 1998.
Purchase Commitments - As of December 31, 1997, the Company had open
purchase commitments for certain raw materials amounting to
approximately $608,000.
11. STOCK OPTIONS AND WARRANTS
The Company has two stock option plans: the Employee Stock Option Plan
("the Plan") and the Outside Directors Stock Option Plan ("Directors'
Plan").
F-13
The Plan provides for the granting of options to purchase not more than
two million shares of Hansen Common Stock to key employees of the
Company and its subsidiaries. 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, 1997, options to purchase 1,496,500
shares of Hansen Common Stock had been granted under the Plan, net of
options that have expired, and options to purchase 503,500 shares of
Hansen Common Stock remained available for grant under the plan.
Options granted under the Plan to purchase Hansen Common Stock pursuant
to individual stock option agreements are as follows:
On June 15, 1992, the Company granted to Rodney C. Sacks and
Hilton H. Schlosberg, options to purchase 200,000 and 150,000 shares of
Hansen Common Stock, respectively, each of which vest in increments of
50,000 shares on the date of grant and annually beginning January 1,
1993, exercisable for a ten-year period at an exercise price of $1.75
per share.
On July 3, 1995, the Company granted to Rodney C. Sacks and Hilton H.
Schlosberg, options for each to purchase 150,000 of Hansen Common
Stock of which 75,000 shares vest on January 1, 1996 and 75,000 shares
vest on January 1, 1997, exercisable for a ten-year period at an
exercise price of $1.25 per share.
Between July 27, 1992 and December 31, 1997, the Company granted
various members of management options to purchase an aggregate of
846,500 shares of Hansen Common Stock which vest in various increments
over a five-year period at exercise prices which vary between $0.72 and
$1.79 per share. These options exclude the options which were granted
to Rodney C. Sacks and Hilton H. Schlosberg, which are described above.
The Directors' Plan provides for the grant of options to purchase up to
100,000 shares of Common Stock of the Company to directors of the
Company who are not and have not been employed by or acted as
consultants to the Company and its subsidiaries or affiliates and who
are not and have not been nominated to the Board of Directors of the
Company pursuant to a contractual arrangement. On the date of the
annual meeting of shareholders, at which an eligible director is
initially elected, each eligible director is entitled to receive a
one-time grant of an option to purchase 6,000 shares (12,000 shares if
the director is serving on a committee of the Board) of the Company's
Common Stock, exercisable one-third each on the first, second and third
anniversary of the date of grant; provided, however, that options
granted as of February 14, 1995 are exercisable 66 2/3% on the date of
grant and 100% on July 8, 1995; provided, further, that all options
held by an eligible director become fully and immediately exercisable
upon a change in control of the Company. Options granted under the
Directors Plan that are not exercised generally expire ten years after
the date of grant. Option grants may be made under the Directors Plan
for ten years from the effective date of the Directors Plan. The
Directors Plan is a "formula" plan so that a non-employee director's
participation in the Directors Plan does not affect his status as a
"disinterested person" (as defined in Rule 16b-3 under the Securities
Exchange Act of 1934). As of December 31, 1997, options to purchase
24,000 shares of Hansen Common Stock had been granted under the
Directors Plan and options to purchase 76,000 shares of Hansen Common
Stock remain available for grant.
F-14
Information regarding these option plans is as follows:
1997 1996 1995
---- ---- ----
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
--------------- ------------- -------------- -------------- ------------- -------------
Options outstanding,
beginning of year 2,324,500 $2.14 3,111,235 $ 2.07 3,011,235 $ 2.51
Options granted 470,500 $1.16 150,000 $ .86 557,000 $1.28
Options exercised -0- -0- -0-
Options canceled or expired (1,174,500) $2.84 (936,735) $ 1.86 (457,000) $ 4.56
Options outstanding,
end of year 1,620,500 $1.35 2,324,500 $ 2.14 3,111,235 $ 2.07
Option price range $.72 to $ .72 to $ .97 to
end of year $1.79 $ 3.69 $ 3.51
The Company has adopted the disclosure-only provisions of SFAS No.
123, Accounting for Stock-Based Compensation. Accordingly, no
compensation cost has been recognized for the stock option plans. The
impact of stock options granted prior to 1995 has been excluded from
the pro forma calculation; accordingly, the 1997 and 1996 pro forma
adjustments are not indicative of future period pro forma adjustments,
when the calculation may apply to all applicable stock options. Had
compensation cost for the Company's option plans been determined based
on the fair value at the grant date for awards in 1997 consistent with
the provisions of SFAS No. 123, the Company's income and net income per
share would have been reduced to the pro forma amounts indicated below:
1997 1996 1995
---- ---- ----
Net income, as reported $1,250,151 $357,166 ($1,349,693)
Net income, pro forma $1,121,473 $ 49,819 ($1,657,040)
Net income per share, as reported
Basic $0.14 $0.04 ($0.15)
Diluted $0.13 $0.04
Net income per share, pro forma
Basic $0.12 $0.01 ($0.18)
Diluted $0.12 $0.01
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997: dividend yield of
0%; expected volatility of 43%; risk-free interest rate of 6.0%; and
expected lives of 3 years. The following weighted-average assumptions
were used for grants in 1996: dividend yield of 0%; expected volatility
of 81%; risk-free interest rate of 5.5%; and expected lives of 2 years.
The following weighted-average assumptions were used for grants in
1995: dividend yield of 0%; expected volatility of 81%; risk-free
interest rate of 5.9%; and expected lives of 3 years.
F-15
The following table summarizes information about fixed-price stock
options outstanding at December 31, 1997:
Options Outstanding Options Exercisable
------------------------------------------------------- ---------------------------------
Weighted
Number average Weighted average Number Weighted
outstanding at remaining exercise exercisable at average
Range of exercise December 31, 1997 contractual life price December 31, 1997 exercise
prices price
----------------------- ------------------ ----------------- ------------------ ------------------ --------------
$.72 to $ 1.13 413,000 6 $ 1.00 18,200 $ .83
$ 1.25 300,000 8 $ 1.25 300,000 $ 1.25
$ 1.38 472,000 1 $ 1.38 450,900 $ 1.38
$ 1.47 to $ 1.79 435,500 4 $ 1.72 370,000 $ 1.74
================== ==================
$.72 to $1.79 1,620,500 1,139,100
================== ==================
12. MAJOR CUSTOMERS
Two customers accounted for 29% and 11%, respectively, of the Company's
sales for the year ended December 31, 1997. Two customers accounted for
26% and 13%, respectively, of the Company's sales for the year ended
December 31, 1996. Two customers accounted for 27% and 14%,
respectively, of the Company's sales for the year ended December 31,
1995. A decision by either of these major customers to decrease the
amount purchased from the Company or to cease carrying the Company's
products could have a material adverse effect on the Company's
financial condition and results of operations.
13. LEGAL PROCEEDINGS
The second stage of the trial in HBC's action against ERLY in the
Superior Court for the State of California, was held in July 1997
for the sole purpose of determining the amount of HBC's damages,
if any, resulting from ERLY's breach of certain rights of first
refusal provisions contained in HBC's subordinated secured
promissory note in the principal amount of $4 million in favor of ERLY.
In November 1997, the court held that HBC had not suffered any damages
as a result of ERLY's breach of the note. HBC has filed an appeal
against that judgment. A motion was made by ERLY for the costs of such
action to be awarded in its favor, which was dismissed by the court.
ERLY has filed a cross appeal on that issue. The full amount due under
the note to ERLY was paid in November 1997 with the proceeds of a term
loan obtained by the Company from Comerica. The ultimate outcome of
this matter cannot presently be predicted.
The Company is also involved in various other legal matters arising in
the normal course of business. Although the results of these other
legal matters cannot be predicted with certainty, management believes
that the final outcome of such matters will not have a material adverse
effect on the Company's financial statements.
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14. RELATED PARTY
A director of the Company is a partner in a law firm which serves as
counsel to the Company. Payments made to such firm in connection with
services rendered to the Company during 1997, 1996 and 1995 were
$186,033, $238,069 and $187,625, respectively.
15. SUBSEQUENT EVENT
Subsequent to year-end, the Company granted options to purchase 410,500
shares of Hansen Common Stock under the Plan. Of such options granted,
200,000 options were in replacement of options due to expire in 1998
(see Note 11).
F-17
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------
Balance at
beginning of Charged to costs Charged to other Balance at end
Description period and expenses accounts Deductions of period
- ------------------- ------------------ --------------------- ------------------ ------------------ ------------------
Allowance for doubtful accounts, sales returns and cash discounts:
1997 $234,749 1,090,929 (1,010,049) $ 315,629
1996 $422,831 937,502 (1,125,584) $ 234,749
1995 $121,930 409,600 270,000 (1) (378,699) $ 422,831
Promotional Allowances:
1997 $926,045 4,034,845 (3,893,141) $ 1,067,749
1996 $782,034 3,915,447 (3,771,436) $ 926,045
1995 $895,377 3,295,549 (3,408,892) $ 782,034
- ------------------
(1) In connection with the receivable described in NOTE 3, the Company has a
reserve of $270,000 against the note receivable from Hawaiian Water Partners.
F-18