<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>k123104.txt
<DESCRIPTION>HNC 10K DECEMBER 31, 2004
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-18761
HANSEN NATURAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 39-1679918
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1010 Railroad Street, Corona, California 92882
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (951) 739 - 6200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Not Applicable Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Title of class
--------------
Common Stock, $0.005 par value per share
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant was $317,035,186 computed by reference to the sale price for such
stock on the NASDAQ Small-Cap Market on February 23, 2005.
The number of shares of the Registrant's common stock, $0.005 par value per
share (being the only class of common stock of the Registrant), outstanding on
February 23, 2005 was 10,935,189 shares.
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HANSEN NATURAL CORPORATION
FORM 10-K
TABLE OF CONTENTS
Item Number Page Number
----------- -----------
PART I
------
1. Business 3
2. Properties 15
3. Legal Proceedings 15
4. Submission of Matters to a Vote of Security Holders 15
PART II
5. Market for the Registrant's Common Equity and Related
Shareholder Matters 16
6. Selected Consolidated Financial Data 17
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
7a. Qualitative and Quantitative Disclosures about Market Risks 33
8. Financial Statements and Supplementary Data 33
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 33
9a. Controls and Procedures 33
PART III
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10. Directors and Executive Officers of the Registrant 35
11. Executive Compensation 38
12. Security Ownership of Certain Beneficial Owners and Management 42
13. Certain Relationships and Related Transactions 44
14. Principal Accountant Fees and Services 45
PART IV
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15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 46
Signatures 47
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PART I
ITEM 1. BUSINESS
Overview
Hansen Natural Corporation was incorporated in Delaware on April 25, 1990.
Its principal place of business is at 1010 Railroad Street, Corona, California
92882 and its telephone number is (951) 739-6200. When this report uses the
words "Hansen", "HBC", "the Company", "we", "us", and "our", these words refer
to Hansen Natural Corporation and our subsidiaries other than Hard e Beverage
Company ("HEB"), unless the context otherwise requires.
We are a holding company and carry on no operating business except through
our direct wholly owned subsidiaries, Hansen Beverage Company ("HBC") which was
incorporated in Delaware on June 8, 1992, and HEB, formerly known as Hard Energy
Company, and previously known as CVI Ventures, Inc., which was incorporated in
Delaware on April 30, 1990. HBC generates substantially all of our operating
revenues.
Corporate History
In the 1930's, Hubert Hansen and his three sons started a business to sell
fresh non-pasteurized juices in Los Angeles, California. This business
eventually became Hansen's Juices, Inc., which subsequently became known as The
Fresh Juice Company of California, Inc. ("FJC"). FJC retained the right to
market and sell fresh non-pasteurized juices under the Hansen trademark. In
1977, Tim Hansen, one of the grandsons of Hubert Hansen, perceived a demand for
pasteurized natural juices and juice blends that are shelf stable and formed
Hansen Foods, Inc. ("HFI"). HFI expanded its product line from juices to include
Hansen's(r) Natural Sodas. California Co-Packers Corporation (d/b/a/ Hansen
Beverage Company) ("CCC") acquired certain assets of HFI, including the right to
market the Hansen's(r) brand name, in January 1990. On July 27, 1992, HBC
acquired the Hansen's(r) brand natural soda and apple juice business from CCC.
Under our ownership, the Hansen beverage business has significantly expanded and
includes a wide range of beverages within the growing "alternative" beverage
category. In September 1999 we acquired all of FJC's rights to manufacture, sell
and distribute fresh non-pasteurized juice products under the Hansen's(r)
trademark together with certain additional rights. In 2000, HBC, through its
wholly-owned subsidiary, Blue Sky Natural Beverage Co. ("Blue Sky"), which was
incorporated in Delaware on September 8, 2000, acquired the natural soda
business previously conducted by Blue Sky Natural Beverage Co., a New Mexico
corporation ("BSNBC"), under the Blue Sky(r) trademark. In 2001, HBC, through
its wholly-owned subsidiary Hansen Junior Juice Company, ("Junior Juice"), which
was incorporated in Delaware on May 7, 2001, acquired the Junior Juice business
previously conducted by Pasco Juices, Inc. ("Pasco") under the Junior Juice(r)
trademark.
Industry Overview
The alternative beverage category combines non-carbonated ready-to-drink
iced teas, lemonades, juice cocktails, single serve juices, ready-to-drink iced
coffees, energy drinks, sports drinks, soy drinks and single-serve still water
(flavored and unflavored) with "new age" beverages, including sodas that are
considered natural, sparkling juices and flavored sparkling waters. The
alternative beverage category is the fastest growing segment of the beverage
marketplace according to Beverage Marketing Corporation. Sales in 2004 for the
alternative beverage category of the market are estimated at approximately $16.3
billion at wholesale, representing a growth rate of approximately 10.7% over the
revised estimated wholesale sales in 2003 of approximately $14.8 billion.
(Source: Beverage Marketing Corporation).
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Products
We develop, market, sell and distribute "alternative" beverage category
natural sodas, fruit juices, energy drinks and energy sports drinks, fruit juice
and soy smoothies, "functional drinks", sparkling lemonades and orangeades,
non-carbonated ready-to-drink iced teas, lemonades, juice cocktails, children's
multi-vitamin juice drinks and non-carbonated lightly flavored energy waters
under the Hansen's(r) brand name. We also market, sell and distribute energy
drinks under the MonsterTM brand name. In addition, we market nutrition food
bars under the Hansen's(r) brand name. We also market, sell and distribute,
natural sodas, premium natural sodas with supplements, organic natural sodas,
seltzer waters and energy drinks under the Blue Sky(r) brand name. Our fruit
juices for toddlers are marketed under the Junior Juice(r) brand name.
Natural Sodas. Hansen's natural sodas have been a leading natural soda
brand in Southern California for the past 25 years. In 2004, according to
Information Resources, Inc.'s Analyzer Reports for California, our natural sodas
recorded the highest sales among comparable carbonated new age category
beverages measured by unit volume in the California market. Our natural sodas
are available in thirteen regular flavors consisting of mandarin lime, key lime,
grapefruit, raspberry, creamy root beer, vanilla cola, cherry vanilla creme,
orange mango, kiwi strawberry, tropical passion, black cherry, ginger ale and
tangerine. In early 2001, we introduced a new line of diet sodas using
Splenda(r) sweetener as the primary sweetener. We initially introduced this line
in four flavors: peach, black cherry, tangerine lime, and kiwi strawberry and
have since added two additional flavors, ginger ale and creamy root beer. Our
natural sodas contain no preservatives, sodium, caffeine or artificial coloring
and are made with high quality natural flavors, citric acid and high fructose
corn syrup or, in the case of diet sodas, with Splenda(r) and Acesulfame-K. We
package our natural sodas in 12-ounce aluminum cans. In 2002, we introduced a
line of natural mixers in 8-ounce aluminum cans comprising club soda, tonic
water and ginger ale.
In January 1999, we introduced a premium line of Signature Sodas in unique
proprietary 14-ounce glass bottles. This line was marketed under the Hansen's(r)
brand name, primarily through our distributor network, in six flavors. In early
2003 we repositioned this line into lower cost 12-ounce glass packaging to
market our repositioned Signature Soda line at lower price points directly to
our retail customers such as grocery chains, club stores, specialty retail
chains and mass merchandisers and to the health food sector through specialty
and health food distributors (collectively referred to as our "direct retail
customers"). Signature Soda is available in 12-ounce glass bottles in five
flavors: orange creme, vanilla creme, ginger beer, sarsaparilla and black
cherry.
In September 2000, we acquired the Blue Sky Natural Soda business from
BSNBC. Our Blue Sky product line comprises natural sodas, premium sodas, organic
natural sodas, seltzer water, energy drinks and tea sodas. Blue Sky(r) natural
sodas are available in thirteen regular flavors consisting of lemon lime,
grapefruit, cola, root beer, raspberry, cherry vanilla creme, truly orange,
Jamaican ginger ale, black cherry, orange creme, Dr. Becker, grape and private
reserve cream soda. We also offer a Blue Sky(r) product line, a premium line of
natural sodas which contain supplements such as ginseng. This line is available
in six flavors consisting of ginseng creme, ginseng cola, ginseng root beer,
ginseng very berry creme, ginseng ginger ale, and ginseng cranberry-raspberry.
During 1999, Blue Sky(r) introduced a line of organic natural sodas, which are
available in six flavors consisting of prime lime cream, new century cola,
orange divine, ginger gale, black cherry cherish, and root beer. We also market
a seltzer water under the Blue Sky(r) label in three flavors: natural, lime and
lemon. In 2002, we introduced a lightly carbonated Blue Sky(r) energy drink in
an 8.3-ounce slim can. In 2004 we introduced a new line of Blue Sky natural tea
sodas in four flavors consisting of Imperial Lime Green Tea, Peach Mist Green
Tea, Pomegranate White Tea and Raspberry Red Tea. The Blue Sky(r) products
contain no preservatives, sodium or caffeine (other than the energy drink) or
artificial coloring and are made with high quality natural flavors. Blue Sky(r)
natural sodas, seltzer waters and tea sodas are all packaged in 12-ounce
aluminum cans and are marketed primarily to our direct retail customers.
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In 2001, we introduced a new line of sparkling lemonades (regular and pink)
and orangeades in unique proprietary 1-liter glass bottles and towards the end
of 2002, we introduced diet versions of our regular sparkling lemonades and
orangeades, also in 1-liter glass bottles. The sparkling lemonades and
orangeades contain real juice and pulp. In 2003, we extended this line into
unique proprietary 12-ounce glass bottles in both regular and diet versions.
This product line is marketed to our direct retail customers. The contract
packer who produced these products on our behalf underwent a change of ownership
and experienced production difficulties which adversely affected this product
line. We expect to reevaluate this product line once production issues are
resolved. Additionally, we are currently evaluating alternative packages for
this line.
Hansen's Energy Drinks. In 1997, we introduced a lightly carbonated citrus
flavored Hansen's(r) energy drink. Our energy drink competes in the "functional"
beverage category, namely, beverages that provide a real or perceived benefit in
addition to simply delivering refreshment. We offer our energy drink in three
versions: original citrus, tropical and wild berry. We also offer additional
functional drinks including a ginger flavored d-stress(r) drink, an orange
flavored b-well(tm) drink, a guarana berry flavored stamina(r) drink, a grape
flavored power drink, and a berry flavored "slim-down" drink that contains no
calories. Each of our energy and functional drinks contain different
combinations of vitamins, minerals, nutrients, herbs and supplements
("supplements"). Our energy drinks and functional drinks are sold in 8.3-ounce
cans and bottles. In 2004 we commenced to offer our Hansen's energy drink in
16-ounce cans as well. In 2001, we introduced Energade(r), a non-carbonated
energy sports drink in 23.5-ounce cans in two flavors, citrus and orange, and
subsequently introduced a third flavor, red rocker. We also introduced E2O
Energy Water(r), a non-carbonated lightly flavored water, in 24-ounce blue
polyethylene terephthalate ("P.E.T.") plastic bottles, in four flavors,
tangerine, apple, berry and lemon. In 2002, we expanded our E2O Energy Water(r)
line with four additional flavors in clear P.E.T. plastic bottles, mango melon,
kiwi strawberry, grapefruit and green tea. Our Energade(r) and E2O Energy
Water(r) drinks also contain different combinations and levels of supplements.
At the end of 2002, we introduced a lightly carbonated diet energy drink in
8.3-ounce cans under the Hansen's(r) Diet Red brand name. Our Diet Red energy
drink is sweetened with Splenda and Acesulfame-K. We market our energy, and
Energade drinks through our full service distributor network. We market our E2O
Energy Water(r) drinks in blue bottles to our direct retail customers. In 2003
we introduced a new carbonated energy drink under the Hansen's(r) Deuce brand
name, in a 16-ounce can, but with a different flavor than our existing
Hansen's(r) Energy drinks in 8.3-ounce cans.
Monster EnergyTM Drinks. In 2002, we launched a new carbonated energy drink
under the Monster EnergyTM brand name, in 16-ounce cans, which is almost double
the size of our regular energy drinks in 8.3-ounce cans and the vast majority of
competitive energy drinks currently on the market. Our Monster EnergyTM drink
contains different types and levels of supplements than our Hansen's(r) energy
drinks and is marketed through our full service distributor network. In 2003, we
introduced a low carbohydrate ("Lo-Carb") version of our Monster EnergyTM energy
drink. In 2004 we introduced 4-packs of our Monster Energy(tm) drinks including
our Lo-Carb version thereof and, towards the end of 2004, we launched a new
Monster Energy(tm) "Assault" (tm) energy drink in 16-ounce cans.
Lost(r) Energy Drinks. In 2004, we launched a new carbonated energy drink
under the Lost(r) brand name, in 16-ounce cans. The Lost(r) brand name is owned
by Lost International LLC and the drinks are produced, sold and distributed by
us under exclusive license from Lost International LLC.
Rumba(tm) Energy Juice. In December 2004, we launched a new non-carbonated
energy juice under the Rumba(tm) brand name in 16 ounce cans. Rumba(tm) is a
100% juice product that targets male and female morning beverage consumers and
is positioned as a substitute for coffee, caffeinated sodas and 100% orange or
other juices.
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Juice Products and Smoothies. Our fruit juice product line includes
Hansen's(r) Natural Old Fashioned Apple Juice which is packaged in 64-ounce
P.E.T. plastic bottles and 128-ounce polypropylene bottles and White Grape and
Concord Grape and Pomegranate juice, and Apple Strawberry, Apple Grape and Apple
Cranberry juice blends, in 64-ounce P.E.T. plastic bottles. These Hansen's(r)
juice products contain 100% juice (except Apple Cranberry and Pomegranate which
contain 27% juice) as well as Vitamin C. Certain of these products also contain
added calcium. Hansen's(r) juice products compete in the shelf-stable juice
category. In 2002, we extended our fruit juice and juice blend product line by
introducing certain of these products in 10-ounce P.E.T. plastic bottles and in
2003 further extended our fruit juice product line by introducing a 100% Apple
Juice in aseptic pouches in a 6.75-ounce size.
In March 1995, we introduced a line of fruit juice smoothie drinks in
11.5-ounce aluminum cans. Certain flavors were subsequently offered in glass and
P.E.T. plastic bottles. Hansen's fruit juice smoothies have a smooth texture
that is thick but lighter than a nectar. Hansen's smoothies in 11.5-ounce
aluminum cans contain approximately 35% juice while the juice levels of Hansen's
smoothies in glass and P.E.T. plastic bottles is 25%. Our fruit juice smoothies
provide 100% of the recommended daily intake for adults of Vitamins A, C & E and
represented Hansen's entry into what is commonly referred to as the "functional"
beverage category. Hansen's(r) fruit juice smoothies are available in 15
flavors: strawberry banana, peach berry, mango pineapple, guava strawberry,
pineapple coconut, apricot nectar, tropical passion, whipped orange, cranberry
twist, as well as the blast line comprising Island Blast, Colada Blast, Power
Berry Blast, Vita Blast and Banana Blast. In 2004, we repositioned our cranberry
raspberry lite smoothie as part of our new lo-carb line of smoothies. Our
lo-carb smoothie line currently consists of peach, mango and cran-raspberry
flavors in 12-ounce cans.
In 2001, we introduced a new line of soy smoothies in 32- and 11-ounce
aseptic packaging in five flavors: berry splash, tropical breeze, orange dream,
lemon chiffon and peach passion. The soy smoothies contain soy protein and fruit
juices. During 2004 we discontinued all of our soy smoothies in 32-ounce
asceptic packaging and four of the five flavors in 11-ounce aseptic packaging,
leaving Berry Splash.
Sparkling Apple Cider. In 2002, we introduced a Sparkling Cider 100% juice
drink in a 1.5- liter Magnum glass bottle. However, due to reports of some
bottles breaking we promptly voluntarily recalled the product in the fourth
quarter of 2003. We are pursuing a claim against the third-party bottler for the
costs and losses incurred by us. We will reevaluate relaunching this product
once certain production issues are resolved and a suitable co-packer has been
identified.
We market the above juice and smoothie products to our direct retail
customers.
Iced Teas, Lemonades and Juice Cocktails. We introduced Hansen's(r)
ready-to-drink iced teas and lemonades in 1993. Hansen's(r) ready-to-drink iced
teas are available in three flavors: Original with Lemon, Tropical Peach and
Wildberry. Lemonades are available in one flavor: Original Old Fashioned
Lemonade. Hansen's(r) juice cocktails were introduced in 1994 and are available
in three flavors: kiwi strawberry melon, tangerine pineapple with passion fruit,
and California paradise punch. We introduced a variety 12 pack of iced teas
during the first half of 2001, which experienced limited success. We are
continuing to market this package. Hansen's(r) ready-to-drink iced teas,
lemonades and juice cocktails were packaged in 16-ounce wide-mouth glass
bottles. At the end of 2002, we converted this line from 16-ounce glass bottles
to 16-ounce polypropylene bottles.
Hansen's(r) ready-to-drink iced teas are made with decaffeinated tea.
Hansen's(r) juice products and smoothies are made with high quality juices and
products that contain less than 100% fruit juice are also made with natural
flavors, high fructose corn syrup, citric acid and other ingredients.
In 1999, we introduced a line of specialty teas in 20-ounce glass bottles,
which we named our "Gold Standard" line. We subsequently introduced two
additional green tea flavors as well as two diet green flavors and six juice
cocktails. We are discontinuing certain of the specialty teas and all of the
juice cocktails but are continuing to market three regular green tea flavors and
the diet peach green tea flavor. Our Gold Standard line contains supplements,
but at lower levels than in our functional drinks. We continue to package our
Gold Standard Line in unique 20-ounce glass bottles. We discontinued marketing
green tea and original tea with lemon in 10.14-ounce aseptic packages.
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Juices for Children. In 1999, we introduced two new lines of children's
multi-vitamin juice drinks in 8.45-ounce aseptic packages. Each drink contains
eleven essential vitamins and six essential minerals. Each line has three
flavors. We introduce new flavors in place of existing flavors from time to
time. One of these two lines is a dual-branded 100% juice line named "Juice
Blast(r)" that was launched in conjunction with Costco Wholesale Corporation
("Costco") and is sold nationally through Costco stores. The other line was a
10% juice line named "Hansen's Natural Multi-Vitamin Juice Slam(r)" that was
available to all of our customers. During 2000, we repositioned that line as a
100% juice line under the Juice Slam(r) name and are marketing that line to
grocery store chain customers, the health food trade, and other customers. Both
the Juice Blast(r) and Juice Slam(r) lines are marketed in 6.75-ounce aseptic
packages.
In May 2001, we acquired the Junior Juice(r) beverage business. The Junior
Juice(r) product line is comprised of seven flavors of 100% juice in 4.23-ounce
aseptic packages and is targeted at toddlers. Six flavors of the Junior Juice(r)
line have calcium added and all flavors have vitamin C added. The current
flavors in the Junior Juice(r) line are apple, apple berry, orange twist, apple
grape, mixed fruit, fruit punch, and white grape.
Nutrition Bars. In 2000, we introduced a line of nutrition food bars under
the Hansen's(r) brand name. This line is made from grains and fruit. Sales of
this product line are very limited.
Hard e. In 2000, we introduced a malt-based drink under the name Hard e,
which contains up to five-percent alcohol. The Hard e product is not marketed
under the Hansen's(r) name. In 2004 we discontinued this line.
Bottled Water. Our still water products were introduced in 1993 and are
primarily sold in 0.5-liter plastic bottles to the food service trade.
Other Products
We continue to evaluate and, where considered appropriate, introduce
additional flavors and other types of beverages to complement our existing
product lines. We will also evaluate, and may, where considered appropriate,
introduce functional foods/snack foods that utilize similar channels of
distribution and/or are complementary to our existing products and/or to which
our brand names are able to add value.
Manufacture and Distribution
We do not directly manufacture our products but instead outsource the
manufacture to third party bottlers and contract packers.
We purchase concentrates, juices, flavors, vitamins, minerals, nutrients,
herbs, supplements, caps, labels, trays, boxes and other ingredients for our
beverage products which are delivered to our various third party bottlers and
co-packers. Depending on the product, the third party bottlers or packers add
filtered water and/or high fructose corn syrup, or sucrose, or cane sugar or
Splenda(r) brand sweetener, Acesulfame-K and/or citric acid or other ingredients
and supplements for the manufacture and packaging of the finished products into
approved containers. In the case of sodas and other carbonated beverages, the
bottler/packer adds carbonation to the products as part of the production
process.
We are generally responsible for arranging for the purchase of and delivery
to our third party bottlers and co-packers of the containers in which our
beverage products are packaged.
The ingredients for our nutrition food bars are purchased by our co-packers
from various suppliers for manufacturing and packaging of the finished bars.
All of our beverage products are manufactured by various third party
bottlers and co-packers situated throughout the United States and Canada under
separate arrangements with each of such parties. The majority of our
co-packaging arrangements are on a month-to-month basis. However, certain of our
material co-packing arrangements are described below:
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(a) Our agreement with Southwest Canning and Packaging, Inc. ("Southwest")
pursuant to which Southwest packages a portion of our Hansen's(r) natural sodas.
This contract continues indefinitely and is subject to termination upon 60 days
written notice from either party.
(b) Our agreement with Nor-Cal Beverage Co., Inc. ("Nor-Cal") pursuant to
which Nor-Cal packages a portion of our Hansen's(r) juices in P.E.T. plastic
bottles. This contract continues until 2008 and is renewable annually thereafter
from year-to-year unless terminated by Hansen's not less than 60 days before the
end of the then current term.
(c) Our agreement with Seven-Up/RC Bottling Company of Southern California,
Inc. ("Seven-Up") pursuant to which Seven-Up packages a portion of our MonsterTM
and Lost(r) brand energy drinks and a portion of our Hansen's(r) natural sodas.
This contract continues until March 2008 and is renewable annually thereafter.
Upon termination prior to such time we are entitled to recover certain equipment
we have purchased and installed at Seven-Up's facility.
(d) Our agreement with Southeast Atlantic Beverage Corporation
("Southeast") pursuant to which Southeast packages a portion of our Monster
Energy(tm) and Lost(r) brand energy drinks. This contract continues until July
2007 and is renewable annually thereafter.
(e) Our agreement with City Brewing Company LLC ("City Brew") pursuant to
which City Brew packages a portion of our Energade energy sports drinks. This
contract continues until December 2006. Either party is entitled, at any time,
to terminate the agreement on ninety (90) day's prior written notice to the
other party.
(f) Our agreement with Pri-Pak, Inc. ("Pri-Pak") pursuant to which Pri-Pak
packages a portion of our energy drinks in 8.3 ounce cans. This contract
continues indefinitely but may be terminated at any time by either party on
ninety (90) day's prior written notice to the other.
In many instances, equipment is purchased by us and installed at the
facilities of our co-packers to enable them to produce certain of our products.
In general, such equipment remains our property and is to be returned to us upon
termination of the packing arrangements with such co-packers or is amortized
over a pre-determined number of cases that are to be produced at the facilities
concerned.
We pack certain products outside of the West Coast region to enable us to
produce products closer to the markets where they are sold and thereby reduce
freight costs. As volumes in markets outside of California grow, we continue to
secure additional packing arrangements closer to such markets to further reduce
freight costs.
Our ability to estimate demand for our products is imprecise, particularly
with new products, and may be less precise during periods of rapid growth,
particularly in new markets. If we materially underestimate demand for our
products or are unable to secure sufficient ingredients or raw materials
including, but not limited to, glass, P.E.T./plastic bottles, cans, labels,
flavors or supplement ingredients or certain sweeteners, or packing
arrangements, we might not be able to satisfy demand on a short-term basis. The
supplier of sucralose has notified the Company that our purchases of sucralose
during 2005 will be subject to volume limitations due to the demand for
sucralose exceeding their production capacity. While we believe that we will be
able to secure sufficient quantities of sucralose during 2005 to meet the demand
for our products that contain sucralose, we are taking steps to reformulate
those products that contain sucralose with alternative sweetener systems to
avoid an interruption in supply of those products.
Although our production arrangements are generally of short duration or are
terminable upon request, we believe a short disruption or delay would not
significantly affect our revenues since alternative packing facilities in the
United States with adequate capacity can usually be obtained for many of our
products at commercially reasonable rates and/or, within a reasonably short time
period. However, there are limited packing facilities in the United States with
adequate capacity and/or suitable equipment for many of our newer products,
including Hansen's(r) brand energy drinks and functional drinks in 8.3-ounce and
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16-ounce cans, Gold Standard line, aseptic juice products, Energade(r),
sparkling apple cider in 1.5-liter magnum glass bottles, soy smoothies,
MonsterTM and Lost(r) energy drinks in 16-ounce cans and sparkling lemonades and
orangeade lines. There are also limited shrink sleeve labeling facilities
available to us in the United States with adequate capacity for our E2O Energy
Water(r). A disruption or delay in production of any of such products could
significantly affect our revenues from such products as alternative co-packing
facilities in the United States with adequate capacity may not be available for
such products either at commercially reasonable rates, and/or within a
reasonably short time period, if at all. Consequently, a disruption in
production of such products could affect our revenues. We continue to seek
alternative and/or additional co-packing facilities in the United States or
Canada with adequate capacity for the production of our various products to
minimize the risk of any disruption in production.
We have entered into distribution agreements for distribution in most
states of Hansen's(r) brand energy drinks, Monster EnergyTM drinks, Lost(r)
energy drinks, and Energade(r) energy sports drinks. Distribution levels vary
from state to state and from product to product. Certain of our products are
sold in Canada. We also sell a limited range of our products to distributors
outside of the United States, including Mexico, Japan, Korea, the Caribbean, and
Saudi Arabia.
We continually seek to expand distribution of our products by entering into
agreements with regional bottlers or other direct store delivery distributors
having established sales, marketing and distribution organizations. Many of our
bottlers and distributors are affiliated with and manufacture and/or distribute
other soda and non-carbonated brands and other beverage products. In many cases,
such products compete directly with our products.
We continue to take steps to reduce our inventory levels in an endeavor to
lower our warehouse and distribution costs.
During 2004, we continued to expand distribution of our natural sodas and
smoothies outside of California. We expanded our national sales force to support
and grow sales, primarily of Hansen's(r) energy drinks, Monster EnergyTM drinks,
Lost(r) energy drinks, and Energade(r) energy sports drinks and we intend to
continue to build such sales force in 2005.
Our Blue Sky(r) products are sold primarily to the health food trade,
natural food chains and mainstream grocery store chains, through specialty
health food distributors.
We concluded exclusive contracts with the State of California ("State")
Department of Health Services, Women, Infant and Children ("WIC") Supplemental
Nutrition Branch ("DHS") to supply 100% apple juice and 100% blended juice, in
64-ounce P.E.T. plastic bottles. The contracts are each for a period of three
years with a further one-year extension option to be mutually agreed between
Hansen's and the State of California. We bid the lowest net cost per unit in
terms of the wholesale price, less a rebate to the State. Formal written
agreements were signed with the State in accordance with the bid process. The
contracts commenced on July 12, 2004.
Under the contracts Hansen's is the exclusive supplier for both Apple Juice
and the blended juice category, a new WIC category, initially with our 100%
Apple Grape Juice. The WIC contracts are expected to expand the distribution of
Hansen's juices, resulting in increased exposure for the Hansen's brand.
WIC-approved items are stocked by the grocery trade and by WIC-only stores.
Products are purchased by WIC consumers with vouchers given by the DHS to
qualified participants. The DHS estimates that Hansen's will be supplying 24.5
million units per year of 64 oz. apple juice and 5.4 million units per year of
64 oz. apple grape juice pursuant to these contracts. These estimates from the
State, which we cannot independently verify or confirm, could result in an
increase in net sales for the company of more than $20 million per annum.
However, juices sold pursuant to these contracts will be at lower margins than
those of the Company's traditional juice business. Initial volumes suggest that
annual volumes are likely to be slightly lower than the DHS' estimates. However,
during 2005, Apple Strawberry juice will become eligible for redemption under
the WIC contracts.
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Our principal warehouse and distribution center and corporate offices
relocated to our current facility in October 2000. In January 2004 we leased an
additional warehouse facility in Corona to consolidate additional space that had
been leased by us on short term leases from time to time to meet our increased
warehousing needs due to increases in both sales volumes and products and
terminated the two short term leases concerned. We continue to take steps to
reduce our inventory levels wherever possible, in an endeavor to lower our
warehouse and distribution costs. See also "ITEM 2 - PROPERTIES."
Raw Materials and Suppliers
The principal raw materials used by us comprise aluminum cans, glass
bottles and P.E.T. plastic bottles as well as juices, high fructose corn syrup,
sucrose and sucralose, the costs of which are subject to fluctuations. Due to
the consolidations that have taken place in the glass industry over the past few
years, the prices of glass bottles continue to increase. The price of P.E.T.
plastic bottles and aluminum cans has increased over the past year. This will
continue to exert pressure on our gross margins. We are uncertain whether the
prices of those products will continue to rise in the future.
Generally, raw materials utilized by us in our business are readily
available from numerous sources. However, certain raw materials are manufactured
by only one company. Sucralose, which is used alone or in combination with
Acesulfame-K in the Company's low-calorie products, is purchased by us from a
single manufacturer. Cans for our energy and functional drinks (8.3 ounces) are
only manufactured by one company in the United States.
With regard to fruit juice and juice-drink products, the industry is
subject to variability of weather conditions, which may result in higher prices
and/or lower consumer demand for juices.
We purchase beverage flavors, concentrates, juices, supplements,
high-fructose corn syrup, cane sugar, sucrose, sucralose and other sweeteners as
well as other ingredients and nutrition food bars from independent suppliers
located in the United States and abroad.
Generally, flavor suppliers hold the proprietary rights to their flavors.
Consequently, we do not have the list of ingredients or formulae for our flavors
and certain of our concentrates readily available to us and we may be unable to
obtain these flavors or concentrates from alternative suppliers on short notice.
We have identified alternative suppliers of many of the supplements contained in
many of our beverages. However, industry-wide shortages of certain fruits and
fruit juices, and supplements and sweeteners have been and could, from time to
time in the future, be experienced, which could interfere with and/or delay
production of certain of our products.
We continually endeavor to develop back-up sources of supply for certain of
our flavors and concentrates from other suppliers as well as to conclude
arrangements with suppliers which would enable us to obtain access to certain
concentrates or product formulae in certain circumstances. We have been
partially successful in these endeavors. Additionally, in a limited number of
cases, contractual restrictions and/or the necessity to obtain regulatory
approvals and licenses may limit our ability to enter into agreements with
alternative suppliers and manufacturers and/or distributors.
In connection with the development of new products and flavors, independent
suppliers bear a large portion of the expense of product development, thereby
enabling us to develop new products and flavors at relatively low cost. We have
historically developed and successfully introduced new products and flavors and
packaging for our products and intend to continue developing and introducing
additional new beverages and flavors.
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Competition
The beverage industry is highly competitive. The principal areas of
competition are pricing, packaging, development of new products and flavors and
marketing campaigns. Our products compete with a wide range of drinks produced
by a relatively large number of manufacturers, most of which have substantially
greater financial, marketing and distribution resources than we do.
Important factors affecting our ability to compete successfully include
taste and flavor of products, trade and consumer promotions, rapid and effective
development of new, unique cutting edge products, attractive and different
packaging, branded product advertising and pricing. We also compete for
distributors who will concentrate on marketing our products over those of our
competitors, provide stable and reliable distribution and secure adequate shelf
space in retail outlets. Competitive pressures in the alternative, energy and
functional beverage categories as well as in the nutrition food bar categories
could cause our products to be unable to gain or to lose market share or we
could experience price erosion, which could have a material adverse affect on
our business and results.
Over the past four years we have experienced substantial competition from
new entrants in the energy drink category. A number of companies who market and
distribute iced teas and juice cocktails in larger volume packages, such as 16-
and 20-ounce glass bottles, including Sobe, Snapple Elements, Arizona and Fuse,
have added supplements to their products with a view to marketing their products
as "functional" or "energy" beverages or as having functional benefits. We
believe that many of those products contain lower levels of supplements and
principally deliver refreshment. In addition, many competitive products are
positioned differently than our energy or functional drinks. Our smoothies and
Gold Standard lines are positioned more closely against those products.
We compete not only for consumer acceptance, but also for maximum marketing
efforts by multi-brand licensed bottlers, brokers and distributors, many of
which have a principal affiliation with competing companies and brands. Our
products compete with all liquid refreshments and with products of much larger
and substantially better financed competitors, including the products of
numerous nationally and internationally known producers such as The Coca Cola
Company, PepsiCo, Inc., Cadbury Schwepps, which includes Dr. Pepper/Seven-up, RC
Cola, Snapple, Mistic and Stewart's brands, Nestle Beverage Company, Anheuser
Busch and Ocean Spray. More specifically, our products compete with other
alternative beverages, including new age beverages, such as Snapple, Elements,
Mistic, Arizona, Clearly Canadian, Sobe, Stewart's, Everfresh, Nantucket
Nectars, Vitamin Water, Fuse, VeryFine, V8 Splash and Smoothies, Calistoga,
Propel Fitness Water, AquaFina, Dasani, Reebok, and Crystal Geyser brands. Due
to the rapid growth of the alternative beverage segment of the beverage
marketplace, certain large companies such as The Coca-Cola Company and PepsiCo,
Inc. have introduced products in that market segment which compete directly with
our products such as Nestea, Fruitopia, Lipton, Propel, AquaFina, Dasani,
Adrenaline Rush, Amp, KMX and Dole. Our products also compete with private label
brands such as those carried by grocery store chains and club stores.
Our fruit juice smoothies compete directly with Kern's, Jumex, Jugos del
Valle and Libby's nectars, V8 Smoothies, as well as with single serve juice
products produced by many competitors. Such competitive products are packaged in
glass and P.E.T. bottles ranging from 8- to 48-ounces in size and in 11.5-ounce
aluminum cans. The juice content of such competitive products ranges from 1% to
100%.
Our apple and other juice products compete directly with Tree Top, Mott's,
Martinelli's, Welch's, Ocean Spray, Tropicana, Minute Maid, Langers, Apple and
Eve, Seneca, Northland and also with other brands of apple juice and juice
blends, especially store brands.
Our energy drinks, including Hansen's(r) energy, Diet Red, Hansens(r)
energy Deuce, Monster EnergyTM, Lost(r) Energy and Rumba(tm) Energy Juice in
8.3- and 16-ounce cans, compete directly with Red Bull, Adrenaline Rush, Amp,
180, KMX, Venom, Extreme Energy Shot, Rockstar, No Fear, Full Throttle, US
energy, Red Devil, Lipovitan, MET-Rx, Hype, XTC, and many other brands and our
other functional drinks compete directly with Elix, Lipovitan, MET-Rx, Think,
and other brands.
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Our E2O Energy Water(r) and still water products compete directly with
Vitamin Water, Reebok, Propel, Dasani, Aquafina, Fruit2O, Evian, Crystal Geyser,
Naya, Palomar Mountain, Sahara, Arrowhead, Dannon, and other brands of still
water especially store brands.
The nutrition food bar category is also highly competitive. Principal areas
of competition are pricing, packaging, development of new products and flavors
and marketing campaigns. Our nutrition food bars compete with products of other
independent bar companies such as Power Bar, Balance Bar, Gatorade, Kashi, Cliff
Bar, MET-Rx, and numerous other bars.
Sales and Marketing
We focus on consumers who seek products that are perceived to be natural
and healthy and emphasize the natural ingredients and the absence of
preservatives, sodium, artificial coloring and caffeine in our beverages (other
than our energy drinks) and the addition to most of our products, of one or more
supplements. We reinforce this message in our product packaging. Our marketing
strategy with respect to our nutrition food bars is similarly to focus on
consumers who seek bars that are perceived to be natural and healthy. We
emphasize the natural ingredients and the absence of preservatives.
Our sales and marketing strategy is to focus our efforts on developing
brand awareness and trial through sampling both in stores and at events in
respect of all our beverage and food products. We use our branded vehicles and
other promotional vehicles at events at which we distribute our products to
consumers for sampling. We utilize "push-pull" methods to achieve maximum shelf
and display space exposure in sales outlets and maximum demand from consumers
for our products including advertising, in store promotions and in store
placement of point of sale materials and racks, prize promotions, price
promotions, competitions, endorsements from selected public and extreme sports
figures, coupons, sampling and sponsorship of selected causes such as breast
cancer research and SPCA's as well as extreme sports teams such as the Pro
Circuit - Kawasaki Motocross team, extreme sports figures and sporting events
such as the Energy Pro Pipeline Surfing competition, marathons, 10k runs,
bicycle races, volleyball tournaments and other health and sports related
activities, including extreme sports, particularly supercross, freestyle motor
cross, surfing, skateboarding, wakeboarding, skiing, snowboarding, BMX, mountain
biking, snowmobile racing, etc. and also participate in product demonstrations,
food tasting and other related events. Posters, print, radio and television
advertising together with price promotions and coupons are also used to promote
the Hansen's(r) brand.
Additionally, in 2003 we entered into a multi-year sponsorship agreement to
advertise on the new Las Vegas Monorail ("Monorail Agreement") with the Las
Vegas Monorail Company ("LVMC") which includes the right to vend our Monster
EnergyTM drinks and natural sodas on all stations. The initial term of the
Monorail Agreement commenced in July 2004. For technical reasons the Monorail
did not operate for some months in 2004 but recommenced carrying passengers at
the end of December 2004. The initial term of the Monorail Agreement ends on the
first anniversary of its commencement date. Not less than 120 days before the
expiration of the initial term and each renewal term, as the case may be, we
have the right to renew the Monorail Agreement for a further one year term up to
a maximum of nine additional one year terms and the LVMC has the right, not
withstanding such election by us, to terminate the Monorail Agreement at the
expiration of the then current term. Due to the interruption in operations of
the Monorail, it is likely that the commencement date of the initial term will
be extended.
We believe that one of the keys to success in the beverage industry is
differentiation such as making Hansen's(r) products visually distinctive from
other beverages on the shelves of retailers. We review our products and
packaging on an ongoing basis and, where practical, endeavor to make them
different, better and unique. The labels and graphics for many of our products
are redesigned from time to time to maximize their visibility and
identification, wherever they may be placed in stores and we will continue to
reevaluate the same from time to time.
12
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Where appropriate we partner with retailers to assist our marketing
efforts. For example, while we retain responsibility for the marketing of the
Juice Slam(r) line of children's multi-vitamin juice drinks, Costco has
undertaken partial responsibility for the marketing of the Juice Blast(r) line.
We increased expenditures for our sales and marketing programs by
approximately 75% in 2004 compared to 2003. As of December 31, 2004, we employed
217 employees in sales and marketing activities.
Customers
Our customers are typically retail and specialty chains, club stores, mass
merchandisers, convenience chains, food service and full service beverage
distributors and health food distributors. In 2004, sales to retailers
represented 35% of our revenues, sales to full service distributors represented
52% of our revenues, and sales to health food distributors represented 6% of our
revenues.
Our major customers include Costco, Trader Joe's, Sam's Club, Vons,
Ralph's, Wal-Mart, Safeway and Albertson's. A decision by any major customer to
decrease amounts purchased from the Company or to cease carrying our products
could have a material negative effect on our financial condition and
consolidated results of operations.
Seasonality
Sales of ready-to-drink beverages are somewhat seasonal, with the second
and third calendar quarters accounting for the highest sales volumes. The volume
of sales in the beverage business may be affected by weather conditions. Sales
of our beverage products may become increasingly subject to seasonal
fluctuations as more sales occur outside of California.
Intellectual Property
We own numerous trademarks that are very important to our business.
Depending upon the jurisdiction, trademarks are valid as long as they are in use
and/or their registrations are properly maintained and they have not been found
to have become generic. Registrations of trademarks can generally be renewed as
long as the trademarks are in use. We also own the copyright in and to numerous
statements made and content appearing on the packaging of our products.
We own the Hansen's(r) trademark. This trademark is crucial to our business
and is registered in the U.S. Patent and Trademark Office and in various
countries throughout the world. We own a number of other trademarks including,
but not limited to, A New Kind a Buzz(r), Unleash the Beast(r), Hansen's
energy(r), Blue Energy(r), Energade(r), Hansen's E2O Energy Water(r), Hansen's
slim-down(r), Power Formula(r), THE REAL DEAL(r), LIQUIDFRUIT(r), Imported from
Nature(r), California's Natural Choice(r), California's Choice(r), Medicine
Man(r), Dyna Juice(r), Equator(r), Hansen's power(r), b*well(r), anti-ox(r),
d-stress(r), stamina(r), Aqua Blast(r), Antioxjuice(r) Intellijuice(r),
Defense(r), Immunejuice(r), Hansen's Natural Multi-Vitamin Juice Slam(r), Juice
Blast(r) and Red Rocker(r) in the United States and the Hansen's(r) and
"Smoothie(r)" trademarks in a number of countries around the world.
We have applied to register a number of trademarks in the United States and
elsewhere including, but not limited to, Monster EnergyTM, M (stylized)
MonsterTM, M (stylized) Monster EnergyTM, M (stylized) TM, Assault(tm), Energy
Pro(tm) and Rumba(tm).
In September 2000, in connection with the acquisition of the Blue Sky
Natural Beverage business, we, through our wholly owned subsidiary Blue Sky,
acquired the Blue Sky(r) trademark, which is registered in the United States and
Canada.
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In May 2001, in connection with the acquisition of the Junior Juice
beverage business, we, through our wholly owned subsidiary Junior Juice,
acquired the Junior Juice(r) trademark, which is registered in the United
States.
On April 4, 2000, the United States Patent and Trademark Office issued a
patent to us for an invention related to a shelf structure (rolling rack) and,
more particularly, a shelf structure for a walk-in cooler. Such shelf structure
is utilized by us to secure shelf space for and to merchandise our energy and
functional drinks in cans in refrigerated Visi coolers and walk-in coolers in
retail stores.
Government Regulation
The production, distribution and sale in the United States of many of our
products is subject to the Federal Food, Drug and Cosmetic Act; the Dietary
Supplement Health and Education Act of 1994; the Occupational Safety and Health
Act; various environmental statutes; and various other federal, state and local
statutes and regulations applicable to the production, transportation, sale,
safety, advertising, labeling and ingredients of such products. California law
requires that a specific warning appear on any product that contains a component
listed by the State as having been found to cause cancer or birth defects. The
law exposes all food and beverage producers to the possibility of having to
provide warnings on their products because the law recognizes no generally
applicable quantitative thresholds below which a warning is not required.
Consequently, even trace amounts of listed components can expose affected
products to the prospect of warning labels. Products containing listed
substances that occur naturally in the product or that are contributed to the
product solely by a municipal water supply are generally exempt from the warning
requirement. While none of our beverage products are required to display
warnings under this law, we cannot predict whether an important component of any
of our products might be added to the California list in the future. We also are
unable to predict whether or to what extent a warning under this law would have
an impact on costs or sales of our products.
Measures have been enacted in various localities and states that require
that a deposit be charged for certain non-refillable beverage containers. The
precise requirements imposed by these measures vary. Other deposit, recycling or
product stewardship proposals have been introduced in certain states and
localities and in Congress, and we anticipate that similar legislation or
regulations may be proposed in the future at the local, state and federal
levels, both in the United States and elsewhere.
Our facilities in the United States are subject to federal, state and local
environmental laws and regulations. Compliance with these provisions has not
had, and we do not expect such compliance to have, any material adverse effect
upon our capital expenditures, net income or competitive position.
Employees
As of December 31, 2004, we employed a total of 293 employees of which 205
were employed on a full-time basis. Of our 293 employees, we employ 76 in
administrative and operational capacities and 217 persons in sales and marketing
capacities. We have not experienced any work stoppages, and we consider
relations with our employees to be good.
Compliance with Environmental Laws
In California, we are required to collect redemption values from our
customers and to remit such redemption values to the State of California
Department of Conservation based upon the number of cans and bottles of certain
carbonated and non-carbonated products sold. In certain other states and Canada
where Hansen's(r) products are sold, we are also required to collect deposits
from our customers and to remit such deposits to the respective state agencies
based upon the number of cans and bottles of certain carbonated and
non-carbonated products sold in such states.
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Available Information
Our Internet address is www.hansens.com. Information contained on our
website is not part of this annual report on Form 10-K. Our annual report on
Form 10-K and quarterly reports on Form 10-Q will be made available free of
charge on www.hansens.com, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC. In addition,
you may request a copy of these filings (excluding exhibits) at no cost by
writing or telephoning us at the following address or telephone number:
Hansen Beverage Company
1010 Railroad Street
Corona, CA 92882
(951) 739-6200
(800) HANSENS
ITEM 2. PROPERTIES
Our corporate offices and main warehouse are located at 1010 Railroad
Street, Corona, California 92882. Our lease for this facility expires in October
2010. The area of the facility is approximately 113,600 square feet.
Additionally, in January 2004 we entered into a lease for additional warehouse
space in Corona, California. The area of this facility is approximately 80,000
square feet. This lease will expire at the end of March 2008 with an option to
extend the lease until October 2010. We also rent additional warehouse space on
a short-term basis from time to time in public warehouses situated throughout
the United States and Canada.
ITEM 3. LEGAL PROCEEDINGS
In September 2004 Barrington Capital Corporation through an alleged
successor in interest, Sandburg Financial Corporation (both entities with whom
the Company has never had any dealings) served a Notice of Motion ("Motion") on
the Company and each of its subsidiaries as well as on a number of other
unrelated entities and individuals. The Motion seeks to amend a default judgment
granted against a completely unconnected company, Hansen Foods, Inc., to add the
Company and its subsidiary companies, as well as the other entities and
individuals cited, as judgment debtors. The default judgment was entered on
February 15, 1996, for $7,626,000 plus legal interest and attorneys' fees in the
sum of $211,000 arising out of a breach of contract claim that allegedly
occurred in the 1980's. Barrington Capital Corporation's/Sandburg Financial
Corporation's claim is based on the misconceived and unsubstantiated theory that
the Company and its subsidiaries are alter egos and/or successors of Hansen
Foods, Inc. The Motion is based on demonstrably false allegations, misstated
legal propositions and lacks any substantial supporting evidence. The Company
and its subsidiaries intend to vigorously oppose the Motion and believe that the
Motion is without any merit.
Furthermore, we are subject to litigation from time to time in the normal
course of business. Although it is not possible to predict the outcome of such
litigation, based on the facts known to us and after consultation with counsel,
we believe that such litigation will not have a material adverse effect on our
financial position or results of operations.
Except as described above, there are no material pending legal proceedings
to which we or any of our subsidiaries is a party or to which any of our
properties is subject, other than ordinary and routine litigation incidental to
our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held on November 5,
2004. At the meeting, the following individuals were elected as directors of the
Company and received the number of votes set opposite their respective names:
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Director Votes For
-------- ---------
Rodney C. Sacks 9,196,568
Hilton H. Schlosberg 9,183,521
Benjamin M. Polk 9,128,394
Norman C. Epstein 9,952,134
Harold C. Taber, Jr. 9,117,996
Mark S. Vidergauz 10,008,409
Sydney Selati 10,006,957
In addition, at the meeting our stockholders ratified the appointment of
Deloitte & Touche LLP as independent auditors of the Company for the year ended
December 31, 2004, by a vote of 10,054,675 for, 22,954 against and 3,937
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 February 24, 2005, there were 10,935,189 shares of the Company's
Common Stock outstanding held by approximately 587 holders of record.
Stock Price and Dividend Information
The following table sets forth high and low bid closing quotations of our
Common Stock for the periods indicated:
High Low
--------- --------
Year Ended December 31, 2003
----------------------------
First Quarter $ 4.50 $ 3.17
Second Quarter $ 4.50 $ 3.89
Third Quarter $ 6.24 $ 4.20
Fourth Quarter $ 9.40 $ 5.79
Year Ended December 31, 2004
----------------------------
First Quarter $ 14.43 $ 7.92
Second Quarter $ 27.25 $ 13.51
Third Quarter $ 28.48 $ 18.14
Fourth Quarter $ 36.41 $ 23.09
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.
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We have not paid dividends to our stockholders since our inception and do
not anticipate paying dividends in the foreseeable future.
Equity Compensation Plan Information
The following table sets forth information as of December 31, 2004 with
respect to shares of our common stock that may be issued under our equity
compensation plans.
Number of securities
Number remaining available
of securities Weighted-average for future issuance
to be issued exercise price of under equity
upon exercise of outstanding compensation plans
outstanding options, options, warrants (excluding securities
warrants and rights and rights reflected in column (a))
Plan category (a) (b) (c)
--------------------------------- ------------------- ------------------------
Equity
compensation
plans
approved by
stockholders 1,298,400 $ 6.09 824,900
Equity
compensation
plans not
approved by
stockholders - - -
--------------------- ------------------- ------------------------
Total 1,298,400 $ 6.09 824,900
===================== =================== ========================
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statements of operations data set forth below with respect
to each of the years ended December 31, 2000 through 2004 and the balance sheet
data as of December 31, for the years indicated, are derived from our
consolidated financial statements audited by Deloitte & Touche LLP, independent
auditors, and should be read in conjunction with those financial statements and
notes thereto, and with the Management's Discussion and Analysis of Financial
Condition and Results of Operations included as Item 7 of this Annual Report on
Form 10-K.
(in thousands,
except per
share
information) 2004 2003 2002 2001 2000
-------------- -------- -------- -------- --------- ---------
Gross Sales $226,984 $138,454 $115,490 $99,693 $86,072
Net sales $180,341 $110,352 $ 92,046 $80,658 $71,706
Net income $ 20,387 $ 5,930 $ 3,029 $ 3,019 $ 3,915
Net income
per common share
Basic $ 1.91 $ 0.58 $ 0.30 $ 0.30 $ 0.39
Diluted $ 1.73 $ 0.55 $ 0.29 $ 0.29 $ 0.38
Total assets $ 82,022 $ 47,997 $ 40,464 $38,561 $38,958
Long-term debt $ 146 $ 358 $ 3,606 $ 5,851 $ 9,732
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion ("MD&A") is provided as a supplement to - and
should be read in conjunction with - our financial statements and the
accompanying notes ("Notes") included elsewhere in this Form 10-K. This
discussion contains forward-looking statements that are based on management's
current expectations, estimates and projections about our business and
operations. Our actual results may differ materially from those currently
anticipated and expressed in such forward-looking statements.
This overview provides our perspective on the individual sections of MD&A.
MD&A includes the following sections:
* Our Business - a general description of our business; the value
drivers of our business; and opportunities and risks;
* Results of Operations - an analysis of our consolidated results of
operations for the three years presented in our financial statements;
* Liquidity and Capital Resources - an analysis of our cash flows,
sources and uses of cash and contractual obligations;
* Application of Critical Accounting Policies and Pronouncements - a
discussion of accounting policies that require critical judgments and
estimates including newly issued accounting pronouncements;
* Sales - details of our sales measured on a quarterly basis in both
dollars and cases;
* Inflation - information about the impact that inflation may or may not
have on our results;
* Forward Looking Statements - cautionary information about forward
looking statements and a description of certain risks and
uncertainties that could cause our actual results to differ materially
from the company's historical results or our current expectations or
projections; and
* Market Risks - Information about market risks and risk management. See
"Forward Looking Statements" and "ITEM 7A. - QUALITATIVE AND
QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS."
Our Business
Overview
We develop, market, sell and distribute, in the main, a wide range of
branded beverages. The majority of our beverages fall within the growing
"alternative" beverage category. The principal brand names under which our
beverages are marketed are Hansen's(r), Monster Energy(tm), Blue Sky(r), Junior
Juice(r), Lost(r) and Rumba(tm). We own all of our above-listed brand names
other than Lost(r) which we produce, market, sell and distribute under an
exclusive licensing arrangement with Lost International LLC.
Our company principally generates revenues, income and cash flows by
developing, producing, marketing, selling and distributing finished beverage
products. We generally sell these products to retailers as well as distributors.
We incur significant marketing expenditures to support our brands including
advertising costs, sponsorship fees and special promotional events. We focus on
developing brand awareness and trial through sampling both in stores and at
events. Retailers and distributors receive rebates, promotions, point of sale
materials, merchandise displays and coolers. We also use in-store promotions and
in-store placement of point-of-sale materials and racks, prize promotions, price
promotions, competitions, and sponsorship of, and endorsements from. selected
public and extreme sports teams and figures and causes. Consumers receive
coupons, discounts and promotional incentives. These marketing expenditures help
to enhance distribution and availability of our products as well as awareness
and increase consumer preference for our brands. Greater distribution and
availability, awareness and preference promotes long term growth.
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During 2004, we continued to expand our existing product lines and further
develop our markets. In particular, we continue to focus on developing and
marketing beverages that fall within the category generally described as the
"alternative" beverage category, with particular emphasis on energy type drinks.
We believe that one of the keys to success in the beverage industry is
differentiation; such as making Hansen's(r) products visually distinctive from
other beverages on the shelves of retailers. We review our products and
packaging on an ongoing basis and, where practical, endeavor to make them
different, better and unique. The labels and graphics for many of our products
are redesigned from time to time to maximize their visibility and
identification, wherever they may be placed in stores and we will continue to
reevaluate the same from time to time.
We again achieved record sales in 2004. The increase in gross and net sales
in 2004 was primarily attributable to increased sales of our Monster Energy(r)
drink, which was introduced in April 2002, including our low carbohydrate
("lo-carb") Monster Energy(r) drink which was introduced in 2003 and sales of
Lost(r) energy drinks which were introduced at the beginning of 2004, as well as
increased sales of apple juice and apple grape juice, private label beverages
and our Energade(r) energy sports drinks. The increase in gross and net sales
was partially offset by decreased sales primarily of energy drinks in 8.3-ounce
cans, children's multi-vitamin juice drinks, and teas, lemonades and cocktails.
During 2004, sales outside of California represented 56 % of our aggregate
sales, as compared to approximately 47 % of our aggregate sales in 2003. Sales
to distributors outside the United States during 2004 amounted to $2,282,000
compared to $1,612,000 in 2003.
Our customers are typically retail and specialty chains, club stores, mass
merchandisers, convenience chains, full service beverage distributors and health
food distributors. In 2004, sales to retailers represented 35% of our revenues,
sales to full service distributors represented 52% of our revenues and sales to
health food distributors represented 6 % of our revenues.
In 2004, we introduced a carbonated Lost(r) Energy drink in 16-ounce cans,
a carbonated Monster Energy "Assault"(tm) drink in 16-ounce cans, a new line of
Blue Sky natural tea sodas in 12-ounce cans, Hansen's Energy Drinks in 16-ounce
cans, Rumba(tm) Energy Juice in 15.5-once cans and also introduced a new line of
lo-carb smoothies in 11.5-ounce cans.
Sales of our dual-branded 100% juice line named "Juice Blast(r)", which was
launched in conjunction with Costco and is sold through Costco stores, were $2.0
million in 2004 as compared to $6.0 million in 2003, primarily due to lost
distribution in certain regions. We have since managed to resecure distribution
of such juice line in certain of those regions. We have, in conjunction with
Costco, introduced new flavors in place of certain existing flavors and will
continue to introduce new flavors in an effort to ensure that the variety pack
remains fresh and different for consumers and retain and if possible increase
current distribution levels.
In September 2000, HBC, through its wholly owned subsidiary Blue Sky,
acquired the Blue Sky(r) Natural Soda business. The Blue Sky(r) Natural Soda
brand is the leading natural soda in the health food trade. Blue Sky offers
natural sodas, premium natural sodas with added ingredients such as Ginseng and
anti-oxidant vitamins, organic sodas and seltzer waters in 12-ounce cans and a
Blue Energy drink in 8.3-ounce cans and in 2004 introduced a new line of Blue
Sky natural tea sodas in 12-ounce cans. We plan to introduce a new line of Blue
Sky Lite natural sodas in 2005.
19
<PAGE>
In May 2001, HBC, through its wholly owned subsidiary Junior Juice,
acquired the Junior Juice(r) beverage business. The Junior Juice(r) product line
is comprised of a line of 100% juices packed in 4.23-ounce aseptic packages and
is targeted at toddlers.
During 2004, we entered into several new distribution agreements for the
sale of our products both within and outside the United States and substantially
expanded our national sales force and marketing and support staff. As discussed
under "ITEM 1 BUSINESS - MANUFACTURE and DISTRIBUTION", we anticipate that we
will continue building our national sales force in 2005 as well as our marketing
and support staff to support and grow the sales of our products.
A chain grocery store strike in Southern California, which commenced during
the last quarter of 2003 and terminated in the first quarter of 2004, adversely
affected sales of those of our products that were carried by the stores
concerned. However, the drop in sales of such products was partially offset by
increased sales of certain of those products that are carried by other retailers
in Southern California.
In 2002, we introduced a Sparkling Cider 100% juice drink in a 1.5-liter
Magnum glass bottle. However, due to limited reports of some bottles breaking in
2003, we promptly recalled the product. We are pursuing a claim for the costs
and losses incurred by us. We will reevaluate relaunching this product once
certain production issues are resolved to our satisfaction and a suitable
co-packer has been identified.
During 2004, we concluded exclusive contracts with the State of California,
Department of Health Services Women, Infant and Children Supplemental Nutrition
Branch, to supply 100% Apple juice and 100% blended juice in 64-ounce PET
plastic bottles. The contracts commenced on July 12, 2004. See "ITEM 1 BUSINESS
- MANUFACTURE and DISTRIBUTION."
We continue to incur expenditures in connection with the development and
introduction of new products and flavors.
Value Drivers of our Business
We believe that the key value drivers of our business include the
following:
* Profitable Growth - We believe natural, better for you brands properly
supported by marketing and innovation, targeted to a broad consumer
base-drive profitable growth. We continue to broaden our family of
brands. In particular, we are expanding and growing our specialty
beverages and energy drinks to provide more alternatives to consumers.
We are focused on maintaining or increasing profit margins. We believe
that tailored brand, package, price and channel strategies help
achieve profitable growth. We are implementing these strategies with a
view to accelerating profitable growth.
* Cost Management - The principal focus of cost management will continue
to be on supplies and cost reduction. One key area of focus, for
example, is to decrease raw material costs, co-packing fees and
general and administrative costs as a percentage of net operating
revenues. Another key area of focus is the reduction in inventory
levels. However, due to the expansion in the number of our products as
well as increased sales levels in 2004, overall inventory levels
increased. Additionally, the costs of aluminum cans and PET plastic
bottles which represent a large portion of our ingredient costs,
increased in 2004 and could continue to rise during 2005.
* Efficient Capital Structure - Our capital structure is intended to
optimize our costs of capital. We believe our strong capital position,
our ability to raise funds at low effective cost and overall low costs
of borrowing provide a competitive advantage.
20
<PAGE>
We believe that, subject to increases in the costs of certain raw materials
being contained, these value drivers, when properly implemented, will result in
(1) maintaining and improving our gross profit margin; (2) providing additional
leverage over time through reduced expenses as a percentage of net operating
revenues; and (3) optimizing our cost of capital. The ultimate measure of
success is and will be reflected in our current and future results of
operations.
Gross and net operating revenues, gross profits, operating income, and net
income and net income per share represent key measurements of the above value
drivers. In 2004, gross operating revenues totaled $227.0 million, a 63.9%
increase over 2003. Net operating revenues totaled $180.3 million, an increase
of 63.4% over 2003. Gross profit totaled $83.5 million in 2004, a 90.7% increase
from 2003. Operating income was $33.9 million compared to $9.8 million for 2003.
Net income was $20.4 million as compared to $5.9 million for 2003. Net income
per share (diluted) was $1.73 from $0.55 per diluted share in 2003. These
measurements will continue to be a key management focus in 2005 and beyond. See
also "Results of Operations for the Year Ended December 31, 2004 Compared to the
Year Ended December 31, 2003."
In 2004, the Company had working capital of $41.6 million compared to $17.2
million as of December 31, 2003. In 2004, our net cash provided by operating
activities was approximately $20.1 million, a 265.6% increase from 2003.
Principal uses of cash flows are purchases of inventory, increases in accounts
receivable and other assets, acquisition of property and equipment and trademark
licenses and trademarks. Repayment of our debt and accounts payable are expected
to be and remain our principal recurring use of cash and working capital funds.
See also "--LIQUIDITY AND CAPITAL RESOURCES. "
Opportunities, Challenges and Risks
Looking forward, our management has identified certain challenges and risks
that demand the attention of the beverage industry and our company. Increase in
consumer and regulatory awareness of the health problems arising from obesity
and inactive lifestyles represents a challenge. We recognize that obesity is a
complex and serious public health problem. Our commitment to consumers begins
with our broad product line and a wide selection of diet, light and lo-carb
beverages, juices and juice drinks, sports drinks and waters and energy drinks.
We continuously strive to meet changing consumer needs through beverage
innovation, choice and variety.
Our historical success is attributable, in part, to our introduction of
different and innovative beverages. Our future success will depend, in part,
upon our continued ability to develop and introduce different and innovative
beverages, although there can be no assurance of our ability to do so. In order
to retain and expand our market share, we must continue to develop and introduce
different and innovative beverages and be competitive in the areas of quality,
health, method of distribution, brand image and intellectual property
protection. The beverage industry is subject to changing consumer preferences
and shifts in consumer preferences may adversely affect companies that misjudge
such preferences.
In addition, other key challenges and risks that could impact our company's
future financial results include, but are not limited to:
* maintenance of our brand images and product quality;
* profitable expansion and growth of our family of brands in the
competitive market place (See also Item 1 "BUSINESS - COMPETITION and
"SALES AND MARKETING");
* restrictions on imports and sources of supply; duties or tariffs;
changes in government regulations;
21
<PAGE>
* protection of our existing intellectual property portfolio of
trademark licenses and trademarks and the continuous pursuit of new
and innovative trademarks for our expanding product lines; and
* limitations on available quantities of sucralose, a non-caloric
sweetener that is used in many of our beverage products, during 2005,
due to demand for such sweetener exceeding the supplier's production
capacity
* the imposition of additional restrictions.
We believe that the following opportunities exist for us:
* growth potential for non-alcoholic beverage categories including
energy drinks, carbonated soft drinks, juices and juice drinks, sports
drinks and water;
* new product introductions intended to contribute to higher gross
profits;
* premium packages intended to generate strong revenue growth;
* significant package, pricing and channel opportunities to maximize
profitable growth; and
* proper positioning to capture industry growth.
22
<PAGE>
Results of Operations
<TABLE>
<S> <C> <C> <C> <C> <C>
Percentage Change
-------------------------
2004 2003 2002 04 vs. 03 03 vs. 02
------------------- -------------------- ------------------ ------------ ------------
Gross sales $226,984,231 $138,454,345 $115,490,019 63.9% 19.9%
Less: Discounts, allowances
and promotional payments 46,643,096 28,102,149 23,443,657 66.0% 19.9%
------------------- -------------------- ------------------ ------------ ------------
Net sales 180,341,135 110,352,196 92,046,362 63.4% 19.9%
Cost of sales 96,874,750 66,577,168 58,802,669 45.5% 13.2%
------------------- -------------------- ------------------ ------------ ------------
Gross profit 83,466,385 43,775,028 33,243,693 90.7% 31.7%
Gross profit margin 46.3% 39.7% 36.1%
Selling, general and 49,507,137 33,887,045 27,896,202 46.1% 21.5%
administrative expenses
Amortization of trademark
license and trademarks 73,046 61,888 54,558 18.0% 13.4%
------------------- -------------------- ------------------ ------------ ------------
Operating income 33,886,202 9,826,095 5,292,933 244.9% 85.6%
Operating income as a percent
of net sales 18.8% 8.9% 5.8%
Net nonoperating (income) expense (51,995) 67,013 227,758 (177.6%) (70.6%)
------------------- -------------------- ------------------ ------------ ------------
Income before provision for
income taxes 33,938,197 9,759,082 5,065,175 247.8% 92.7%
Provision for income taxes 13,551,393 3,828,678 2,035,980 253.9% 88.1%
------------------- -------------------- ------------------ ------------ ------------
Effective tax rate 39.9% 39.2% 40.2%
Net income $ 20,386,804 $ 5,930,404 $ 3,029,195 243.8% 95.8%
=================== ==================== ================== ============ ============
Net income as a percent of net
sales 11.3% 5.4% 3.3%
Net income per common share:
Basic $ 1.91 $ 0.58 $ 0.30 229.3% 93.3%
Diluted $ 1.73 $ 0.55 $ 0.29 214.5% 89.7%
</TABLE>
Results of Operations for the Year Ended December 31, 2004 Compared to the
Year Ended December 31, 2003
Gross Sales. For the year ended December 31, 2004, gross sales were $227.0
million, an increase of $88.5 million or 63.9% higher than gross sales of $138.5
million for the year ended December 31, 2003. The increase in gross sales is
primarily attributable to increased sales of certain of our existing products
and the introduction of new products as discussed below in "Net Sales."
Net Sales. For the year ended December 31, 2004, net sales were $180.3
million, an increase of $70.0 million or 63.4% higher than net sales of $110.4
million for the year ended December 31, 2003. We again achieved record sales in
2004. The increase in gross and net sales in 2004 was primarily attributable to
increased sales by volume of our Monster Energy(r) drink, which was introduced
in April 2002, including our low carbohydrate ("lo-carb") Monster Energy(r)
drink which was introduced in 2003 and sales by volume of Lost(r) energy drinks
which were introduced at the beginning of 2004, as well as increased sales by
volume of apple juice and apple grape juice, private label beverages and our
Energade(r) energy sports drinks. Additionally, the increase in gross and net
sales was attributable to the increased sales prices and reduced allowances of
smoothies in cans and natural sodas. The increase in gross and net sales was
partially offset by decreased sales by volume primarily of Hansens energy drinks
in 8.3-ounce cans, children's multi-vitamin juice drinks, and teas, lemonades
and cocktails.
23
<PAGE>
Gross Profit. Gross profit was $83.5 million for the year ended December
31, 2004, an increase of $39.7 million or 90.7% over the $43.8 million gross
profit for the year ended December 31, 2003. Gross profit as a percentage of net
sales was 46.3% for the year ended December 31, 2004 which was higher than gross
profit as a percentage of net sales of 39.7 % for the year ended December 31,
2003, due primarily to higher gross profit margins achieved on the increased
sales of Monster Energy(r) and Lost(r) energy drinks. Although a greater
percentage of our sales comprised products having higher gross margins than the
prior year, the increase in profit margins was partially reduced by higher
promotional payments and allowances to promote our products.
Total Operating Expenses. Total operating expenses were $49.6 million for
the year ended December 31, 2004, an increase of $15.6 million or 46.0% over
total operating expenses of $33.9 million for the year ended December 31, 2003.
Total operating expenses as a percentage of net sales decreased slightly to
27.5% for the year ended December 31, 2004, from 30.8% for the year ended
December 31, 2003. The increase in total operating expenses was primarily
attributable to increased selling, general and administrative expenses. The
decrease in total operating expenses as a percentage of net sales was primarily
attributable to the comparatively lower increase in selling, general and
administrative expenses than the increase in net sales.
Selling, General and Administrative. Selling, general and administrative
expenses were $49.5 million for the year ended December 31, 2004, an increase of
$15.6 million or 46.1% over selling, general and administrative expenses of
$33.9 million for the year ended December 31, 2003. Selling, general and
administrative expenses as a percentage of net sales decreased to 27.5% for the
year ended December 31, 2004 from 30.7% for the year ended December 31, 2003.
Selling expenses were $29.2 million for the year ended December 31, 2004, an
increase of $9.1 million or 45.5% over selling expenses of $20.1 million for the
year ended December 31, 2003. Selling expenses as a percentage of net sales
decreased to 16.2% for the year ended December 31, 2004 from 18.2% for the year
ended December 31, 2003. The increase in selling expenses was primarily
attributable to increased distribution (freight) and storage expenses which
increased by $4.1 million, increased expenditures for trade development
activities and cooperative arrangements with our customers and distributors, and
royalties which increased by $2.4 million, and increased expenditures for
merchandise displays, point-of-sale materials, and premiums, which increased by
$2.0 million. General and administrative expenses were $20.3 million for the
year ended December 31, 2004, an increase of $6.5 million or 47.0% over general
and administrative expenses of $13.8 million for the year ended December 31,
2003. General and administrative expenses as a percentage of net sales decreased
to 11.2% for the year ended December 31, 2004 from 12.5% for the year ended
December 31, 2003. The increase in general and administrative expenses was
primarily attributable to payroll expenses which increased by $3.3 million,
professional services, consisting of legal, consulting and accounting services
primarily related to the implementation and testing required by the
Sarbanes-Oxley Act of 2002, and legal services related to protecting trademarks
which increased by $1.5 million, and travel and entertainment expenses which
increased by $622,000.
Amortization of Trademark License and Trademarks. Amortization of trademark
license and trademarks was $73,000 for the year ended December 31, 2004, an
increase of $11,000 over amortization of trademark license and trademarks of
$62,000 for the year ended December 31, 2003. The increase in amortization of
trademark license and trademarks was due to the acquisition of trademarks during
the year ended December 31, 2004.
Operating Income. Operating income was $33.9 million for the year ended
December 31, 2004, compared to $9.8 million for the year ended December 31,
2003. The $24.1 million increase in operating income was primarily attributable
to increased gross profits, which was partially offset by increased operating
expenses.
24
<PAGE>
Net Nonoperating Income/Expense. Net nonoperating income was $52,000 for
the year ended December 31, 2004, as compared to net nonoperating expense of
$67,000 for the year ended December 31, 2003. Net nonoperating income/expense
consists of interest income and interest and financing expense. Interest and
financing expense for the year ended December 31, 2004 was $42,000 as compared
to $73,000 for the year ended December 31, 2003. The decrease in interest and
financing expense was primarily attributable to the decrease in outstanding loan
balances and lower interest rates. Interest income for the year ended December
31, 2004 was $94,000, as compared to interest income of $6,000 for the year
ended December 31, 2003. The increase in interest income was primarily
attributable to an increase in the cash investment in interest bearing accounts
during the year ended December 31, 2004.
Provision for Income Taxes. Provision for income taxes for the year ended
December 31, 2004 was $13.6 million which was an increase of $9.7 million as
compared to the provision for income taxes of $3.8 million for the year ended
December 31, 2003. The increase in provision for income taxes was primarily
attributable to the increase in operating income. The effective combined federal
and state tax rate for 2004 was 39.9%, which was higher than the effective tax
rate of 39.2% for 2003 due to the increase in the statutory federal income tax
rate applicable to the Company's pre-tax income.
Net Income. Net income was $20.4 million for the year ended December 31,
2004, which was an increase of $14.5 million as compared to net income of $5.9
million for the year ended December 31, 2003. The increase in net income was
primarily attributable to the $39.7 million increase in gross profit and
decrease in nonoperating expense and increase in nonoperating income of $119,000
for the year ended December 31, 2004 which was partially offset by increased
operating expenses of $15.6 million and an increase in the provision for income
taxes of $9.7 million.
Results of Operations for the Year Ended December 31, 2003 Compared to the
Year Ended December 31, 2002
Gross Sales. For the year ended December 31, 2003, gross sales were $138.5
million, an increase of $23.0 million or 19.9% higher than gross sales of $115.5
million for the year ended December 31, 2002. The increase in gross sales is
primarily attributable to the introduction of new products and increased sales
of certain of our existing products as discussed below in "Net Sales."
Net Sales. For the year ended December 31, 2003, net sales were $110.4
million, an increase of $18.3 million or 19.9% higher than net sales of $92.0
million for the year ended December 31, 2002. The increase in net sales was
primarily attributable to sales of our Monster EnergyTM drink, which was
introduced in April 2002, as well as increased sales of Natural Sodas, Junior
Juice and, to a lesser extent, sparkling beverages. The increase in net sales
was partially offset by decreased sales of functional drinks, smoothies, E2O
Energy Water, Energade(r) energy sports drinks, and children's multi-vitamin
juice drinks as well as an increase in discounts, allowances and promotional
payments.
Gross Profit. Gross profit was $43.8 million for the year ended December
31, 2003, an increase of $10.5 million or 31.7% over the $33.2 million gross
profit for the year ended December 31, 2002. Gross profit as a percentage of net
sales was 39.7% for the year ended December 31, 2003 which was slightly higher
than gross profit as a percentage of net sales of 36.1% for the year ended
December 31, 2002. The increase in gross profit was primarily attributable to
increased net sales. Although a greater percentage of our sales comprised
products having higher gross margins than the prior year, the increase in profit
margins was partially reduced by higher promotional payments and allowances to
promote our products.
Total Operating Expenses. Total operating expenses were $33.9 million for
the year ended December 31, 2003, an increase of $6.0 million or 21.5% over
total operating expenses of $28.0 million for the year ended December 31, 2002.
Total operating expenses as a percentage of net sales slightly increased to
30.8% for the year ended December 31, 2003, from 30.4% for the year ended
December 31, 2002. The increase in total operating expenses was primarily
attributable to increased selling, general and administrative expenses. The
increase in total operating expenses as a percentage of net sales was primarily
attributable to the comparatively larger increase in selling, general and
administrative expenses than the increase in net sales.
25
<PAGE>
Selling, General and Administrative. Selling, general and administrative
expenses were $33.9 million for the year ended December 31, 2003, an increase of
$6.0 million or 21.5% over selling, general and administrative expenses of $27.9
million for the year ended December 31, 2002. Selling, general and
administrative expenses as a percentage of net sales increased to 30.7% for the
year ended December 31, 2003, from 30.3% for the year ended December 31, 2002.
Selling expenses were $20.1 million for the year ended December 31, 2003, an
increase of $4.0 million or 25.1% over selling expenses of $16.1 million for the
year ended December 31, 2002. Selling expenses as a percentage of net sales
increased to 18.2% for the year ended December 31, 2003, from 17.4% for the year
ended December 31, 2002. The increase in selling expenses was primarily
attributable to increased distribution (freight) and storage expenses, trade
development activities including cooperative arrangements with our distributors,
sponsorships and promotions, in-store demonstrations and merchandise displays
which was partially offset by decreased expenditures for graphic design. In
addition, we incurred expenses of approximately $267,000 during 2003 in
connection with our sponsorship of the Las Vegas Monorail as part of our efforts
to promote our Monster product line. General and administrative expenses were
$13.8 million for the year ended December 31, 2003, an increase of $2.0 million
or 16.6% over general and administrative expenses of $11.8 million for the year
ended December 31, 2002. General and administrative expenses as a percentage of
net sales were 12.5% for the year ended December 31, 2003 which was slightly
lower than general and administrative expenses as a percentage of net sales of
12.9% for the year ended December 31, 2002. The increase in general and
administrative expenses was primarily attributable to an increase in payroll
costs as we expanded our headcount, as well as fees paid for legal and
accounting services and increased travel and insurance expenses. The decrease in
general and administrative expenses as a percentage of net sales was primarily
attributable to the increase in net sales and the comparatively lower increase
in payroll costs.
Amortization of Trademark License and Trademarks. Amortization of trademark
license and trademarks was $62,000 for the year ended December 31, 2003, an
increase of $7,000 from amortization of trademark license and trademarks of
$55,000 for the year ended December 31, 2002. The increase in amortization of
trademark license and trademarks was due to the acquisition of trademarks during
the year ended December 31, 2003.
Operating Income. Operating income was $9.8 million for the year ended
December 31, 2003, compared to $5.3 million for the year ended December 31,
2002. The $4.5 million increase in operating income was primarily attributable
to increased gross profits, which was partially offset by increased operating
expenses.
Net Nonoperating Expense. Net nonoperating expense was $67,000 for the year
ended December 31, 2003, which was $161,000 lower than net nonoperating expense
of $228,000 for the year ended December 31, 2002. Net nonoperating expense
consists of interest and financing expense and interest income. Interest and
financing expense for the year ended December 31, 2003 was $73,000, as compared
to $231,000 for the year ended December 31, 2002. The decrease in interest and
financing expense was primarily attributable to decreased interest expense
incurred on our borrowings which was primarily attributable to the decrease in
outstanding loan balances and lower interest rates. Interest and royalty income
for the year ended December 31, 2003 was $6,000, as compared to interest income
of $3,000 for the year ended December 31, 2002. The increase in interest income
was primarily attributable to an increase in the cash available for investment
during the year ended December 31, 2003.
Provision for Income Taxes. Provision for income taxes for the year ended
December 31, 2003 was $3.8 million which was an increase of $1.8 million as
compared to the provision for income taxes of $2.0 million for the year ended
December 31, 2002. The increase in provision for income taxes was primarily
attributable to the increase in operating income. The effective combined federal
and state tax rate for 2003 was 39.2%, which was lower than the effective tax
rate of 40.2% for 2002 due to the increase in the apportionment of sales and
related state taxes to various states outside of California.
26
<PAGE>
Net Income. Net income was $5.9 million for the year ended December 31,
2003, which was an increase of $2.9 million as compared to net income of $3.0
million for the year ended December 31, 2002. The increase in net income was
primarily attributable to the $10.5 million increase in gross profit and
decrease in nonoperating expense of $161,000 for the year ended December 31,
2003 which was partially offset by increased operating expenses of $6.0 million
and an increase in the provision of income taxes of $1.8 million.
Liquidity and Capital Resources
As of December 31, 2004, the Company had working capital of $41,639,000,
compared to working capital of $17,196,000 as of December 31, 2003.
Net cash provided by operating activities for the year ended December 31,
2004 was $20,051,000, compared to net cash provided by operating activities of
$5,484,000 during 2003. The increase in cash provided by operating activities
was primarily attributable to an increase in net income as well as, accounts
payable, income taxes payable, accrued compensation and accrued liabilities
which was partially offset by increases in accounts receivable and inventories
as well as prepaid expenses. Purchases of inventories, increases in accounts
receivable and other assets, acquisition of property and equipment, acquisition
of trademark licenses and trademarks, and repayment of our line of credit and
accounts payable are expected to remain our principal recurring use of cash and
working capital funds.
Net cash used in investing activities for the year ended December 31, 2004
was $1,471,000 as compared to net cash used in investment activities of
$2,438,000 in 2003. The decrease in net cash used in investing activities was
primarily attributable to decreased purchases of property and equipment and a
decrease in expenditures for trademarks which was partially offset by an
increase in deposits and other assets as well as decreased proceeds from the
sale of property and equipment. Management, from time to time, considers the
acquisition of capital equipment, particularly, specific items of production
equipment required to produce certain of our products, merchandise display
racks, vans and promotional vehicles, coolers and other promotional equipment
and businesses compatible with the image of the Hansen's(r) brand, as well as
the introduction of new product lines.
Net cash provided by financing activities was $1,298,000 for the year
ending December 31, 2004, as compared to net cash used in financing activities
of $2,486,000 in 2003. The increase in net cash provided by financing activities
as compared to the prior year was primarily attributable to increased proceeds
from the issuance of common stock during 2004, which was partially offset by
principal payments of long-term debt.
HBC has a credit facility from Comerica Bank-California ("Comerica"),
consisting of a revolving line of credit and a term loan. The utilization of the
revolving line of credit by HBC is dependent upon certain levels of eligible
accounts receivable and inventory from time to time. Such revolving line of
credit and term loan are secured by substantially all of HBC's assets, including
accounts receivable, inventory, trademarks, trademark licenses and certain
equipment. In accordance with the provisions of the credit facility, HBC can
borrow up to 6.0 million under its line of credit. The revolving line of credit
remains in full force and effect through September 2005. Interest on borrowings
under the line of credit is based on bank's base (prime) rate, plus an
additional percentage of up to 0.5% or the LIBOR rate, plus an additional
percentage of up to 2.5%, depending upon certain financial ratios of HBC from
time to time. At December 31, 2004, HBC had no balances outstanding under the
credit facility.
27
<PAGE>
On March 1, 2005, the Company entered into an amendment of its credit
facility with Comerica in terms of which HBC can borrow up to $7.8 million under
its revolving line of credit. Under the amendment, the revolving line of credit
remains in full force and effect through June 1, 2006. Interest on borrowings
under the line of credit varies depending on a predetermined ratio of the
Company's funded senior debt to Earnings Before Interest Taxes Depreciation and
Amortization. The current rate of interest is prime minus 1.5% or the 30 day
LIBOR rate plus 1.25%.
The terms of the Company's line of credit contain certain financial
covenants including certain financial ratios. The Company was in compliance with
its covenants at December 31, 2004
If any event of default shall occur for any reason, whether voluntary or
involuntary, Comerica may declare all or any portion outstanding on the line of
credit immediately due and payable, exercise rights and remedies available to
secured parties under the Uniform Commercial Code, institute legal proceedings
to foreclose upon the lien and security interest granted or for the sale of any
or all collateral.
Purchase obligations represent commitments made by the Company and its
subsidiaries to various suppliers for raw materials used in the manufacturing
and packaging of our products. These obligations vary in terms.
Other commitments represent our obligations under our agreement with the
Las Vegas Monorail Company. See also "ITEM 1 - SALES AND MARKETING."
The following represents a summary of the Company's contractual obligations
and related scheduled maturities as of December 31, 2004:
<TABLE>
<CAPTION>
Long-Term
Debt &
Capital Lease Operating Purchase Other
Obligations Leases Obligations Commitments Total
----------------- ---------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C> <C>
Year ending December 31:
2005 $ 437,366 $ 980,473 $ 8,332,590 $ 1,042,000 $ 10,792,429
2006 146,486 1,027,242 5,022,648 6,196,376
2007 1,040,332 4,380,000 5,420,332
2008 775,683 775,683
2009 685,560 685,560
Thereafter 514,170 514,170
----------------- ---------------- ------------------ ----------------- ------------------
$ 583,852 $ 5,023,460 $ 17,735,238 $ 1,042,000 $ 24,384,550
================= ================ ================== ================= ==================
</TABLE>
Management believes that cash available from operations, including cash
resources and the revolving line of credit, will be sufficient for our working
capital needs, including purchase commitments for raw materials and inventory,
increases in accounts receivable, payments of tax liabilities, debt servicing,
expansion and development needs, purchases of shares of our common stock, as
well as any purchases of capital assets or equipment through December 31, 2005.
Accounting Policies and Pronouncements
Critical Accounting Policies
The Company's consolidated financial statements are prepared in accordance
with accounting principals generally accepted in the United States of America
("GAAP".) GAAP requires the Company to make estimates and assumptions that
affect the reported amounts in our consolidated financial statements including
various allowances and reserves for accounts receivable and inventories, the
estimated lives of long-lived assets and trademarks and trademark licenses as
well as claims and contingencies arising out of litigation or other transactions
that occur in the normal course of business. The following summarize the most
significant accounting and reporting policies and practices of the Company:
28
<PAGE>
Trademark License and Trademarks - Trademark license and trademarks
primarily represent the Company's exclusive ownership of the Hansen's(r)
trademark in connection with the manufacture, sale and distribution of
beverages and water and non-beverage products. The Company also owns in its
own right, a number of other trademarks in the United States as well as in
a number of countries around the world. The Company also owns the Blue
Sky(r) trademark, which was acquired in September 2000, and the Junior
Juice(r) trademark, which was acquired in May 2001. During 2002, the
Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. Under
the provisions on SFAS No. 142, the Company discontinued amortization on
indefinite-lived trademark licenses and trademarks while continuing to
amortize remaining trademark licenses and trademarks over one to 25 years.
In accordance with SFAS No. 142, we evaluate our trademark license and
trademarks annually for impairment or earlier if there is an indication of
impairment. If there is an indication of impairment of identified
intangible assets not subject to amortization, management compares the
estimated fair value with the carrying amount of the asset. An impairment
loss is recognized to write down the intangible asset to its fair value if
it is less than the carrying amount. The fair value is calculated using the
income approach. However, preparation of estimated expected future cash
flows is inherently subjective and is based on management's best estimate
of assumptions concerning expected future conditions. Based on management's
annual impairment analysis performed for the fourth quarter of 2004, the
estimated fair values of trademark license and trademarks exceeded the
carrying value.
Long-Lived Assets - Management regularly reviews property and equipment and
other long-lived assets, including certain identifiable intangibles, for
possible impairment. This review occurs annually, or more frequently if
events or changes in circumstances indicate the carrying amount of the
asset may not be recoverable. If there is indication of impairment of
property and equipment or amortizable intangible assets, then management
prepares an estimate of future cash flows (undiscounted and without
interest charges) expected to result from the use of the asset and its
eventual disposition. If these cash flows are less than the carrying amount
of the asset, an impairment loss is recognized to write down the asset to
its estimated fair value. The fair value is estimated at the present value
of the future cash flows discounted at a rate commensurate with
management's estimates of the business risks. During 2004, management
recognized an impairment to property and equipment as discussed in Note 3
of the attached financial statements.
Management believes that the accounting estimate related to impairment of
its long lived assets, including its trademark license and trademarks, is a
"critical accounting estimate" because: (1) it is highly susceptible to
change from period to period because it requires company management to make
assumptions about cash flows and discount rates; and (2) the impact that
recognizing an impairment would have on the assets reported on our
consolidated balance sheet, as well as net income, could be material.
Management's assumptions about cash flows and discount rates require
significant judgment because actual revenues and expenses have fluctuated
in the past and are expected to continue to do so.
In estimating future revenues, we use internal budgets. Internal budgets
are developed based on recent revenue data and future marketing plans for
existing product lines and planned timing of future introductions of new
products and their impact on our future cash flows.
Revenue Recognition - The Company records revenue at the time the related
products are shipped and the risk of ownership and title has passed.
Management believes an adequate provision against net sales has been made
for estimated returns, allowances and cash discounts based on the Company's
historical experience.
Advertising and Promotional Allowances - The Company accounts for
advertising production costs by expensing such production costs the first
time the related advertising takes place. In addition, the Company supports
its customers with promotional allowances, a portion of which is utilized
for marketing and indirect advertising by them. In certain instances, a
portion of the promotional allowances payable to customers based on the
levels of sales to such customers, promotion requirements or expected use
of the allowances, are estimated by the Company. If the level of sales,
promotion requirements or use of the allowances are different from such
estimates, the promotional allowances could, to the extent based on
estimates, require adjustments. During 2002, the Company adopted Emerging
Issues Task Force ("EITF") No. 01-9 which requires certain sales promotions
and customer allowances previously classified as selling, general and
administrative expenses to be classified as a reduction of sales or as cost
of goods sold. The Company presents advertising and promotional allowances
in accordance with the provisions of EITF No. 01-9.
29
<PAGE>
Accounts Receivable - The Company evaluates the collectibility of its trade
accounts receivable based on a number of factors. In circumstances where
the Company becomes aware of a specific customer's inability to meet its
financial obligations to the Company, a specific reserve for bad debts is
estimated and recorded which reduces the recognized receivable to the
estimated amount the Company believes will ultimately be collected. In
addition to specific customer identification of potential bad debts, bad
debt charges are recorded based on the Company's recent past loss history
and an overall assessment of past due trade accounts receivable
outstanding.
Inventories - Inventories are stated at the lower of cost to purchase
and/or manufacture the inventory or the current estimated market value of
the inventory. The Company regularly reviews its inventory quantities on
hand and records a provision for excess and obsolete inventory based
primarily on the Company's estimated forecast of product demand and/or its
ability to sell the product(s) concerned and production requirements.
Demand for the Company's products can fluctuate significantly. Factors
which could affect demand for the Company's products include unanticipated
changes in consumer preferences, general market conditions or other
factors, which may result in cancellations of advance orders or a reduction
in the rate of reorders placed by customers and/or continued weakening of
economic conditions. Additionally, management's estimates of future product
demand may be inaccurate, which could result in an understated or
overstated provision required for excess and obsolete inventory.
Income Taxes - Current income tax expense is the amount of income taxes
expected to be payable for the current year. A deferred income tax asset or
liability is established for the expected future consequences of temporary
differences in the financial reporting and tax bases of assets and
liabilities. The Company considers future taxable income and ongoing,
prudent and feasible tax planning strategies in assessing the value of its
deferred tax assets. If the Company determines that it is more likely than
not that these assets will not be realized, the Company will reduce the
value of these assets to their expected realizable value, thereby
decreasing net income. Evaluating the value of these assets is necessarily
based on the Company's judgment. If the Company subsequently determined
that the deferred tax assets, which had been written down, would be
realized in the future, the value of the deferred tax assets would be
increased, thereby increasing net income in the period when that
determination was made. See Note 7 in Notes to Consolidated Financial
Statements.
Newly Issued Accounting Pronouncements
Information regarding newly issued accounting pronouncements is contained
in Note 1 to the Consolidated Financial Statements for the year ended December
31, 2004, which note is incorporated herein by this reference.
Sales
The table set forth below discloses selected quarterly data regarding sales
for the past five years. Data from any one or more quarters is not necessarily
indicative of annual results or continuing trends.
Sales of beverages are expressed in unit case volume. A "unit case" means a
unit of measurement equal to 192 U.S. fluid ounces of finished beverage (24
eight-ounce servings) or concentrate sold that will yield 192 U.S. fluid ounces
of finished beverage. Unit case volume of the Company means number of unit cases
(or unit case equivalents) of beverages directly or indirectly sold by the
Company. Sales of food bars and cereals are expressed in actual cases. A case of
food bars and cereals is defined as follows:
30
<PAGE>
* A fruit and grain bar and functional nutrition bar case equals ninety
1.76-ounce bars.
* A natural cereal case equals ten 13-ounce boxes measured by volume.
* An active nutrition bar case equals thirty-two 1.4-ounce bars.
The Company's quarterly results of operations reflect seasonal trends that
are primarily the result of increased demand in the warmer months of the year.
It has been our experience that beverage sales tend to be lower during the first
and fourth quarters of each fiscal year. Because the primary historical market
for Hansen's products is California, which has a year-long temperate climate,
the effect of seasonal fluctuations on quarterly results may have been
mitigated; however, such fluctuations may be more pronounced as the distribution
of Hansen's products expands outside of California. The Company has not had
sufficient experience with many of its newer product introductions and
consequently has no knowledge of the trends which may occur with such products.
Quarterly fluctuations may also be affected by other factors including the
introduction of new products, the opening of new markets where temperature
fluctuations are more pronounced, the addition of new bottlers and distributors,
changes in the mix of the sales of its finished products and soda concentrates
and increased advertising and promotional expenses. See also "ITEM 1. BUSINESS -
SEASONALITY."
Unit Case Volume / Case Sales (in Thousands)
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
Quarter 1 5,368 4,219 3,597 3,091 2,451
Quarter 2 7,605 5,356 4,977 4,171 3,323
Quarter 3 8,916 6,221 5,146 4,271 3,157
Quarter 4 7,871 4,625 3,885 3,583 2,859
--------- --------- --------- --------- ---------
Total 29,760 20,421 17,605 15,116 11,790
========= ========= ========= ========= =========
Net Revenues (in Thousands)
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
Quarter 1 $ 31,299 $ 22,086 $ 18,592 $ 16,908 $ 14,236
Quarter 2 46,064 28,409 26,265 22,337 20,702
Quarter 3 52,641 33,291 26,985 23,011 20,434
Quarter 4 50,337 26,566 20,204 18,402 16,334
--------- --------- --------- --------- ---------
Total $180,341 $110,352 $ 92,046 $ 80,658 $ 71,706
========= ========= ========= ========= =========
Inflation
The Company does not believe that inflation had a significant impact on the
Company's results of operations for the periods presented.
Forward Looking Statements
The Private Security Litigation Reform Act of 1995 (the "Act") provides a
safe harbor for forward looking statements made by or on behalf of the Company.
The Company and its representatives may from time to time make written or oral
forward looking statements, including statements contained in this report and
other filings with the Securities and Exchange Commission and in reports to
shareholders and announcements. Certain statements made in this report may
constitute forward looking statements (within the meaning of Section 27.A of the
Securities Act 1933, as amended, and Section 21.E of the Securities Exchange Act
of 1934, as amended) regarding the expectations of management with respect to
revenues, profitability, adequacy of funds from operations and our existing
credit facility, among other things. All statements which address operating
performance, events or developments that management expects or anticipates will
or may occur in the future including statements related to new products, volume
growth, revenues, profitability, adequacy of funds from operations, and/or the
Company's existing credit facility, earnings per share growth, statements
expressing general optimism about future operating results and non historical
information, are forward looking statements within the meaning of the Act.
31
<PAGE>
These statements are qualified by their terms and/or important factors,
many of which are outside our control, involve a number of risks, uncertainties
and other factors, that could cause actual results and events to differ
materially from the statements made including, but not limited to, the
following:
Company's ability to generate sufficient cash flows to support capital
expansion plans and general operating activities;
* Decreased demand for our products resulting from changes in consumer
preferences;
* Changes in demand that are weather related, particularly in areas outside
of California;
* Competitive products and pricing pressures and the Company's ability to
gain or maintain its share of sales in the marketplace as a result of
actions by competitors;
* The introduction of new products;
* An inability to achieve volume growth through product and packaging
initiatives;
* Laws and regulations, and/or any changes therein, including changes in
accounting standards, taxation requirements (including tax rate changes,
new tax laws and revised tax law interpretations) and environmental laws as
well as the Federal Food Drug and Cosmetic Act, the Dietary Supplement
Health and Education Act, and regulations made thereunder or in connection
therewith, as well as changes in any other food and drug laws, especially
those that may affect the way in which the Company's products are marketed
and/or labeled and/or sold, including the contents thereof, as well as laws
and regulations or rules made or enforced by the Food and Drug
Administration and/or the Bureau of Alcohol, Tobacco and Firearms, and/or
Federal Trade Commission, and/or certain state regulatory agencies;
* Changes in the cost and availability of raw materials and the ability to
maintain favorable supply arrangements and relationships and procure timely
and/or adequate production of all or any of the Company's products;
* The Company's ability to achieve earnings forecasts, which may be based on
projected volumes and sales of many product types and/or new products,
certain of which are more profitable than others. There can be no assurance
that the Company will achieve projected levels or mixes of product sales;
* The Company's ability to penetrate new markets;
* The marketing efforts of distributors of the Company's products, most of
which distribute products that are competitive with the products of the
Company;
* Unilateral decisions by distributors, grocery chains, specialty chain
stores, club stores and other customers to discontinue carrying all or any
of the Company's products that they are carrying at any time;
* The terms and/or availability of the Company's credit facility and the
actions of its creditors;
* The effectiveness of the Company's advertising, marketing and promotional
programs;
* Changes in product category consumption;
* Unforeseen economic and political changes;
* Possible recalls of the Company's products; and
* The Company's ability to make suitable arrangements for the co-packing of
any of its products including, but not limited to, its energy and
functional drinks in 8.3-ounce slim cans and 16-ounce cans, smoothies in
11.5-ounce cans, E2O Energy Water(r), Energade(r), Monster EnergyTM and
Lost(r) energy drinks, RumbaTM energy juice, juices in 64-ounce PET plastic
bottles and aseptic packaging, soy smoothies, sparkling orangeades and
lemonades and apple cider in glass bottles and other products.
The foregoing list of important factors is not exhaustive.
32
<PAGE>
Our actual results could be materially different from the results described
or anticipated by our forward-looking statements due to the inherent uncertainty
of estimates, forecasts and projections and may be better or worse than
anticipated. Given these uncertainties, you should not rely on forward-looking
statements. Forward-looking statements represent our estimates and assumptions
only as of the date that they were made. We expressly disclaim any duty to
provide updates to forward-looking statements, and the estimates and assumptions
associated with them, after the date of this report, in order to reflect changes
in circumstances or expectations or the occurrence of unanticipated events
except to the extent required by applicable securities laws.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS
In the normal course of business, our financial position is routinely
subject to a variety of risks. The principal market risks (i.e., the risk of
loss arising from adverse changes in market rates and prices) which the Company
is exposed to are fluctuations in commodity prices affecting the cost of raw
materials and changes in interest rates of the Company's long term debt and the
limited availability of certain raw materials such as sucralose. We are also
subject to market risks with respect to the cost of commodities because our
ability to recover increased costs through higher pricing is limited by the
competitive environment in which we operate. We are also subject to other risks
associated with the business environment in which we operate, including the
collectability of accounts receivable.
At December 31, 2004, the majority of the Company's debt consisted of fixed
rather than variable rate debt. The amount of variable rate debt fluctuates
during the year based on the Company's cash requirements. If average interest
rates were to increase one percent for the year ended December 31, 2003, the net
impact on the Company's pre-tax earnings would have been insignificant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required to be furnished in response to this Item 8 follows
the signature page hereto at pages 51 through 69.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures - Under the supervision
and with the participation of the Company's management, including our Chief
Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. Based upon this
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures are adequate and
effective to ensure that material information we are required to disclose in
reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms.
There have been no significant changes in internal control over financial
reporting that occurred during the fiscal period covered by this report that
have materially affected, or are reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Management's Report on Internal Control Over Financial Reporting - Company
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Exchange Act Rule 13a-15(f).
Under the supervision and with the participation of company management,
including the principal executive officer and principal financial officer, the
company conducted an evaluation of the effectiveness of its internal control
over financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission as of December 31, 2004. Based on the company's evaluation under the
framework in Internal Control - Integrated Framework, management concluded that
the company's internal control over financial reporting was effective as of
December 31, 2004.
33
<PAGE>
Management's assessment of the effectiveness of internal control over
financial reporting as of December 31, 2004 has been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as stated in its
report, which is included herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Hansen Natural Corporation
Corona, California
We have audited management's assessment, included in the accompanying Management
Report on Internal Control over Financial Reporting, that Hansen Natural
Corporation and subsidiaries (the "Company") maintained effective internal
control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
34
<PAGE>
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2004, based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements and financial statement schedule listed in Item 15(b) as of and for
the years ended December 31, 2004 and 2003 of the Company and our report dated
March 14, 2005 expressed an unqualified opinion on those financial statements
and financial statement schedule.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 14, 2005
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors of the Company are elected annually by the holders of the common
stock and executive officers are elected annually by the Board of Directors, to
serve until the next annual meeting of stockholders or the Board of Directors,
as the case may be, or until their successors are elected and qualified. It is
anticipated that the next annual meeting of stockholders will be held in October
or November, 2005.
The members of our Board of Directors and our executive officers are as follows:
Name Age Position
------------------------ ------- ----------------------------------------
Rodney C. Sacks(1) 55 Chairman of the Board of Directors and
Chief Executive Officer
Hilton H. Schlosberg(1) 52 Vice Chairman of the Board of
Directors, Chief Financial Officer,
Chief Operating Officer and
Secretary
Benjamin M. Polk 53 Director
Norman C. Epstein(2),(3),(4) 64 Director
Sydney Selati(2) 66 Director
Harold C. Taber, Jr.(2),(4) 65 Director
Mark S. Vidergauz(3) 51 Director
Mark Hall 49 Senior Vice President,
Single-Serve Products, HBC
Michael B. Schott 56 Vice President, National Sales,
Single-Serve Products, HBC
Kirk Blower 54 Senior Vice President, Juice and
Non-Carbonated Products, HBC
Thomas J. Kelly 50 Vice President - Finance and
Secretary, HBC
1 Member of the Executive Committee of the Board of Directors
2 Member of the Audit Committee of the Board of Directors
3 Member of the Compensation Committee of the Board of Directors
4 Member of the Nominating Committee of the Board of Directors
35
<PAGE>
Rodney C. Sacks - Chairman of the Board of Directors of the Company, Chief
Executive Officer and director of the Company from November 1990 to the present.
Member of the Executive Committee of the Board of Directors of the Company since
October 1992. Chairman and a director of HBC from June 1992 to the present.
Hilton H. Schlosberg - Vice Chairman of the Board of Directors of the
Company, President, Chief Operating Officer, Secretary, and a director of the
Company from November 1990 to the present and Chief Financial Officer of the
Company since July 1996. Member of the Executive Committee of the Board of
Directors of the Company since October 1992. Vice Chairman, Secretary and a
director of HBC from July 1992 to the present.
Benjamin M. Polk - Director of the Company from November 1990 to the
present. Assistant Secretary of HBC since October 1992 and a director of HBC
since July 1992. Partner with Schulte Roth & Zabel LLP(1) since May 2004 and
previously a partner with Winston & Strawn LLP where. Mr. Polk practiced law
with that firm and its predecessors, from August 1976 to May 2004.
Norman C. Epstein - Director of the Company and member of the Compensation
Committee of the Board of Directors of the Company since June 1992 and member of
the Nominating Committee of the Board of Directors of the Company since
September 2004. Member and Chairman of the Audit Committee of the Board of
Directors of the Company since September 1997. Director of HBC since July 1992.
Director of Integrated Asset Management Limited, a company listed on the London
Stock Exchange since June 1998. Managing Director of Cheval Property Finance
PLC, 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).
Sydney Selati - Director of the Company and member of the Audit Committee
of the Board of Directors since September 2004. Mr. Selati has been a director
of Barbeques Galore Ltd. since July 1997 and Chairman of the Board of Directors
of Galore USA since May 1988. Mr. Selati was president of Sussex Group Limited
from 1984 to 1988.
Harold C. Taber, Jr. - Director of the Company since July 1992. Member of
the Audit Committee of the Board of Directors since April 2000 and member of the
Nominating Committee of the Board of Directors of the Company since September
2004. President and Chief Executive Officer of HBC from July 1992 to June 1997.
Consultant for The Joseph Company from October 1997 to March 1999 and for Costa
Macaroni Manufacturing Company from July 2000 to January 2002. Director of
Mentoring at Biola University from July 2002 to present.
Mark S. Vidergauz - Director of the Company and member of the Compensation
Committee of the Board of Directors of the Company since June 1998. Member of
the Audit Committee of the Board of Directors from April 2000 through May 2004.
Managing Director and Chief Executive Officer of Sage Group LLC from April 2000
to present. Managing director at the Los Angeles office of ING Barings LLC, a
diversified financial service institution headquartered in the Netherlands from
April 1995 to April 2000.
Mark Hall - Senior Vice President, Single-Serve Products, joined HBC in
1997. Prior to joining HBC, Mr. Hall spent three years with Arizona Beverages as
Vice President of Sales where he was responsible for sales and distribution of
Arizona products through a national network of beer distributors and soft drink
bottlers.
Michael Schott - Vice President, National Sales, Single-Serve Products,
joined HBC in 2002. Prior to joining HBC, Mr. Schott held a number of management
positions in the beverage industry including president of Snapple Beverage Co.,
SOBE Beverage Co. and Everfresh Beverages, respectively. Mr. Schott has over 30
years of experience in sales and marketing, primarily with beverage companies in
key executive and operational roles.
Kirk Blower - Senior Vice President, Juice and Non-Carbonated Products, of
HBC since 1992. Mr. Blower has over 30 years of experience in sales and
marketing, primarily with the Coca-Cola organization.
Thomas J. Kelly - Vice President - Finance and Secretary of HBC since 1992.
Prior to joining HBC, Mr. Kelly served as controller for California Copackers
Corporation. Mr. Kelly is a Certified Public Accountant and has worked in the
beverage business for over 20 years.
(1) Mr. Polk and his law firm, Schulte Roth & Zabel LLP, serve as counsel to
the Company.
36
<PAGE>
Audit Committee and Audit Committee Financial Expert
The Company has a separately designated standing Audit Committee
established in accordance with Section 3(a)(58)(A) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). The members of the Audit Committee
are Messrs. Epstein (Chairman), Taber and Selati. The Board of Directors has
determined that Mr. Epstein is (1) an "audit committee financial expert," as
that term is defined in Item 401(h) of Regulation S-K of the Exchange Act, and
(2) independent as defined by the listing standards of Nasdaq and Section
10A(m)(3) of the Exchange Act.
Nominating Committee
The Board of Directors of the Company established a Nominating Committee in
September 2004 consisting of Norman C. Epstein and Harold C. Taber Jr. and
adopted a Nominating Committee Charter which is available on our website at
www.hansens.com.
Code of Ethics
We have adopted a Code of Ethics that applies to all our directors,
officers (including its principal executive officer, principal financial officer
and controller) and employees. The Code of Ethics and any amendment to the Code
of Ethics, as well as any waivers that are required to be disclosed by the rules
of the SEC or Nasdaq may be obtained at no cost to you by writing or telephoning
us at the following address or telephone number:
Hansen Beverage Company
1010 Railroad Street
Corona, CA 92882
(951) 739-6200
(800) HANSENS
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than ten percent of a registered
class of the Company's equity securities, to file by specific dates with the SEC
initial reports of ownership and reports of changes in ownership of equity
securities of the Company. Executive officers, directors and greater than ten
percent stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms that they file. The Company is required to
report in this annual report on Form 10-K any failure of its directors and
executive officers and greater than ten percent stockholders to file by the
relevant due date any of these reports during the most recent fiscal year or
prior fiscal years.
To the Company's knowledge, based solely on review of copies of such
reports furnished to the Company during the year ended December 31, 2004, all
Section 16(a) filing requirements applicable to the Company's executive
officers, directors and greater than ten percent stockholders were complied
with, except for several Section 16(a) filings that were inadvertently filed
late by various officers and directors during the year and, as reported in the
annual report on Form 10-K for the year ended December 31, 2003, Form 5's in
respect of option grants required to be filed by each of Rodney C. Sacks and
Hilton H. Schlosberg were inadvertently filed late.
37
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following tables set forth certain information regarding the total
remuneration earned and grants of options/ made to the chief executive officer
and each of the four most highly compensated executive officers of the Company
and its subsidiaries who earned total cash compensation in excess of $100,000
during the year ended December 31, 2004. These amounts reflect total cash
compensation paid by the Company and its subsidiaries to these individuals
during the years December 31, 2002 through 2004.
SUMMARY COMPENSATION TABLE
================================================================================
Long Term
ANNUAL COMPENSATION Compensation
--------------------------------------------------------------------------------
Name and Other Securities
Principal Salary(1) Bonus Annual underlying
Positions Year ($) (2)($) Compensation Options (#)
--------------------------------------------------------------------------------
Rodney C. Sacks 2004 245,000 100,000 27,948(3) -
Chairman, CEO 2003 225,833 35,000 19,333(3) 150,000
and Director 2002 225,504 - 10,331(3) 150,000
--------------------------------------------------------------------------------
Hilton H. Schlosberg 2004 245,000 100,000 9,671(3) -
Vice-Chairman, CFO, 2003 225,833 35,000 7,753(3) 150,000
COO, President, 2002 225,504 - 7,753(3) 150,000
Secretary and
Director
--------------------------------------------------------------------------------
Mark J. Hall 2004 200,000 150,000 8,356(3) 60,000
Senior Vice President 2003 175,000 70,000 9,554(3) -
Single Serve Products 2002 160,000 10,000 7,733(3) 20,000
--------------------------------------------------------------------------------
Michael Schott 2004 160,000 20,000 29,027(6) 32,000
Vice President 2003 140,000 50,000 24,572(4) -
National Sales 2002 57,256 20,000 7,311(5) 72,000
Single Serve Products
--------------------------------------------------------------------------------
Thomas J. Kelly 2004 125,000 40,000 9,319(3) 25,000
Vice President 2003 115,000 15,000 6,937(3) -
Finance 2002 110,000 7,000 7,847(3) 10,000
--------------------------------------------------------------------------------
1 SALARY - Pursuant to employment agreements, Messrs. Sacks and Schlosberg
were entitled to an annual base salary of $245,000, $225,833, and $226,748
for 2004, 2003 and 2002 respectively.
2 BONUS - Payments made in 2005, 2004 and 2003 are for bonuses accrued in
2004, 2003 and 2002 respectively.
3 OTHER ANNUAL COMPENSATION - The cash value of perquisites of the named
persons did not total $50,000 or 10% of payments of salary and bonus for
the years shown.
4 Includes $7,200 for auto reimbursement expense, $10,000 for housing
expenses, $1,200 for travel expenses, and $6,172 for other miscellaneous
perquisites.
5 Includes $2,945 for auto reimbursement expenses, $4,090 for housing
expenses and $276 for other miscellaneous perquisites.
6 Includes $7,200 for auto reimbursement expense, $10,000 for housing
expenses, $4,800 for travel expenses, and $7,027 for other miscellaneous
perquisites.
38
<PAGE>
OPTION GRANTS FOR THE YEAR ENDED DECEMBER 31, 2004
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
============================================================================================ ===========================
Potential realizable
value at assumed annual
rates of stock price
appreciation for option
Individual Grants term(3)
-------------------------- ------------------ ----------------- ------------ --------------- ------------ --------------
Number of Percent of
Securities total Options Exercise
underlying granted to or base
Options granted employees in price Expiration 5% 10%
Name (#) 2004 ($/Share) Date ($) ($)
-------------------------- ------------------ ----------------- ------------ --------------- ------------ --------------
Rodney C. Sacks - - - - - -
-------------------------- ------------------ ----------------- ------------ --------------- ------------ --------------
Hilton H. Schlosberg - - - - - -
-------------------------- ------------------ ----------------- ------------ --------------- ------------ --------------
Mark J. Hall 60,000(1) 16.2% $8.15 1/15/14 $307,530 $779,340
-------------------------- ------------------ ----------------- ------------ --------------- ------------ --------------
Michael Schott 32,000(2) 8.6% $8.15 1/15/14 $164,016 $415,648
-------------------------- ------------------ ----------------- ------------ --------------- ------------ --------------
Thomas J. Kelly 25,000(1) 6.7% $8.15 1/15/14 $128,137 $324,725
-------------------------- ------------------ ----------------- ------------ --------------- ------------ --------------
</TABLE>
1 Options to purchase the Company's common stock become exercisable in equal
annual increments over 5 years beginning January 15, 2005.
2 Options to purchase the Company's common stock become exercisable in equal
annual increments over 4 years beginning January 15, 2005.
3 The 5% and 10% assumed annual rates of appreciation are provided in
accordance with the rules and regulations of the SEC and do not represent
our estimates or projections of our future Common Stock price growth.
AGGREGATED OPTION EXERCISES DURING THE YEAR ENDED
DECEMBER 31, 2004 AND OPTION VALUES AT DECEMBER 31, 2004
<TABLE>
=======================================================================================
<CAPTION>
<S> <C> <C> <C> <C>
Number of Value of
underlying unexercised
unexercised in-the-money
Options at options at
December 31, 2004 December 31, 2004
Shares (#) ($)
acquired Value -----------------------------------------
on exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
--------------------- ------------ ---------- -------------------- --------------------
Rodney C. Sacks 107,500 1,901,750 130,000/200,000(1) 4,182,300/6,492,400
--------------------- ------------ ---------- -------------------- --------------------
Hilton H. Schlosberg 107,500 1,901,750 130,000/200,000(1) 4,182,300/6,492,400
--------------------- ------------ ---------- -------------------- --------------------
Mark J. Hall 8,000 147,200 0/72,000(2) 0/2,089,680
-------------------- ------------- ---------- -------------------- --------------------
Michael Schott 24,000 565,320 0/80,000(3) 0/2,467,200
-------------------- ------------- ---------- -------------------- --------------------
Thomas J. Kelly 14,000 263,200 0/31,000(4) 0/ 903,540
==================== ============= ========== ==================== ====================
</TABLE>
1 Includes options to purchase 100,000 shares of common stock at $4.25 per
share which are exercisable at December 31, 2004, granted pursuant to Stock
Option Agreements dated February 2, 1999 between the Company and Messrs.
Sacks and Schlosberg, respectively; options to purchase 80,000 shares of
common stock at $3.57 per share of which none are exercisable at December
31, 2004, granted pursuant to Stock Option Agreements dated July 12, 2002
between the Company and Messrs. Sacks and Schlosberg, respectively; and
options to purchase 150,000 shares of common stock at $4.20 per share of
which 30,000 are exercisable at December 31, 2004 granted pursuant to Stock
Option Agreements dated May 28, 2003 between the Company and Messrs. Sacks
and Schlosberg, respectively.
2 Includes options to purchase 12,000 shares of common stock at $3.57 per
share of which none are exercisable at December 31, 2004, granted pursuant
to a Stock Option Agreement dated July 12, 2002 between the Company and Mr.
Hall; and options to purchase 60,000 shares of common stock at $8.15 per
share of which none are exercisable at December 31, 2004, granted pursuant
to a Stock Option Agreement dated January 15, 2004 between the Company ant
Mr. Hall.
39
<PAGE>
3 Includes options to purchase 48,000 shares of common stock at $3.85 per
share of which none are exercisable at December 31, 2004, granted pursuant
to a Stock Option Agreement dated August 9, 2002 between the Company and
Mr. Schott; and options to purchase 32,000 shares of common stock at $8.15
per share of which none are exercisable at December 31, 2004, granted
pursuant to a Stock Option Agreement dated January 15, 2004 between the
Company and Mr. Schott.
4 Includes options to purchase 6,000 shares of common stock at $3.57 per
share of which none are exercisable at December 31, 2004, granted pursuant
to a stock Option Agreement dated July 12, 2002 between the Company and Mr.
Kelly; and options to purchase 25,000 shares of common stock at $8.15 per
share of which none are exercisable at December 31, 2004, granted pursuant
to a Stock Option Agreement dated January 15, 2004 between the Company and
Mr. Kelly.
Performance Graph
The following graph shows a five-year comparison of cumulative total
returns:(1)
Total Shareholder Returns
ANNUAL RETURN PERCENTAGE
For the years ended December 31,
Company Name/Index 2000 2001 2002 2003 2004
---------------------- --------- -------- -------- -------- --------
HANSEN NATURAL CORP (10.14) 8.39 0.50 99.48 332.42
S&P SMALLCAP 600 INDEX 11.80 6.54 (14.63) 38.79 22.65
PEER GROUP 8.06 82.83 17.06 41.59 (1.94)
INDEX RETURNS
For the years ended December 31,
Base
Period
Company Name/Index 1999 2000 2001 2002 2003 2004
--------------------------------------- -------- -------- -------- ---------
HANSEN NATURAL CORP 100 89.86 97.39 97.88 195.25 844.29
S&P SMALLCAP 600 INDEX 100 111.80 119.11 101.68 141.13 173.09
PEER GROUP 100 108.06 197.56 231.26 327.44 321.08
1 Annual return assumes reinvestment of dividends. Cumulative total return
assumes an initial investment of $100 on December 31, 1999. The Company's
self-selected peer group is comprised of National Beverage Corporation,
Clearly Canadian Beverage Company, Triarc Companies, Inc., Leading Brands,
Inc., Cott Corporation, Northland Cranberries and Jones Soda Co. All of the
companies in the peer group traded during the entire five-year period with
the exception of Triarc Companies, Inc., which sold their beverage business
in October 2000, Jones Soda Co., which started trading in August 2000, and
Northland Cranberries, which began trading November 2001.
Employment Agreements
The Company entered into an employment agreement dated as of June 1, 2003
with Rodney C. Sacks pursuant to which Mr. Sacks renders services to the Company
as its Chairman and Chief Executive Officer for an annual base salary of
$230,000 for the 7-months ended December 31, 2003, $245,000 for 2004, with
subsequent increases of a minimum of 5% for each subsequent year, plus an annual
bonus in an amount determined at the discretion of the Board of Directors and
certain fringe benefits. The employment period commenced on June 1, 2003 and
ends on December 31, 2008.
40
<PAGE>
The Company also entered into an employment agreement dated as of June 1,
2003 with Hilton H. Schlosberg pursuant to which Mr. Schlosberg renders services
to the Company as its Vice Chairman, President, Chief Operating Officer, Chief
Financial Officer and Secretary for an annual base salary of $230,000 for the
7-months ended December 31, 2003, $245,000 for 2004, with subsequent increases
of a minimum of 5% for each subsequent year, plus an annual bonus in an amount
determined at the discretion of the Board of Directors and certain fringe
benefits. The employment period commenced on June 1, 2003 and ends on December
31, 2008.
The employment agreements for Messrs. Sacks and Schlosberg, and the terms
and conditions thereof, were discussed and approved by the Compensation
Committee of the Board of Directors.
The preceding descriptions of the employment agreements for Messrs. Sacks
and Schlosberg are qualified in their entirety by reference to such agreements,
which have been filed or incorporated by reference as exhibits to this report.
Directors' Compensation
In 2004, outside directors were entitled to an annual fee of $10,000 plus
$1,000 for each meeting of the Board of Directors attended. Outside directors
were also entitled to $500 for each committee meeting attended in person and
$250 for each committee meeting attended by telephone.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
The Company's Compensation Committee is composed of Mr. Epstein and Mr.
Vidergauz. No interlocking relationships exist between any member of the
Company's Board of Directors or Compensation Committee and any member of the
board of directors or compensation committee of any other company, nor has any
such interlocking relationship existed in the past. No member of the
Compensation Committee is or was formerly an officer or an employee of the
Company.
Employee Stock Option Plans
The Company has a stock option plan (the "Plan") that provided for the
grant of options to purchase up to 3,000,000 shares of the common stock of the
Company to certain key employees of the Company and its subsidiaries. Options
granted under the Plan may either be incentive stock options qualified under
Section 422 of the Internal Revenue Code of 1986, as amended, or non-qualified
options. Such options are exercisable at fair market value on the date of grant
for a period of up to ten years. Under the Plan, shares subject to options may
be purchased for cash, or for shares of common stock valued at fair market value
on the date of purchase. Under the Plan, no additional options may be granted
after July 1, 2001.
During 2001, the Company adopted the Hansen Natural Corporation 2001 Stock
Option Plan ("2001 Option Plan"). The 2001 Option Plan provides for the grant of
options to purchase up to 2,000,000 shares of the common stock of the Company to
certain key employees of the Company and its subsidiaries. Options granted under
the 2001 Stock Option Plan may be incentive stock options under Section 422 of
the Internal Revenue Code, as amended (the "Code"), nonqualified stock options,
or stock appreciation rights.
The Plan and the 2001 Option Plan are administered by the Compensation
Committee of the Board of Directors of the Company, comprised of directors who
satisfy the "non-employee" director requirements of Rule 16b-3 under the
Securities Exchange Act of 1934 and the "outside director" provision of Section
162(m) of the Code. Grants under the Plan and the 2001 Option Plan are made
pursuant to individual agreements between the Company and each grantee that
specifies the terms of the grant, including the exercise price, exercise period,
vesting and other terms thereof.
Outside Directors Stock Option Plan
The Company has an option plan for its outside directors (the "Directors
Plan") that provides for the grant of options to purchase up to an aggregate of
100,000 shares of common stock of the Company to directors of the Company who
are not and have not been employed by or acted as consultants to the Company and
41
<PAGE>
its subsidiaries or affiliates and who are not and have not been nominated to
the Board of Directors of the Company pursuant to a contractual arrangement. On
the date of the annual meeting of stockholders at which an eligible director is
initially elected, each eligible director is entitled to receive a one-time
grant of an option to purchase 6,000 shares (12,000 shares if the director is
serving on a committee of the Board) of the Company's Common Stock exercisable
at the closing price for a share of common stock on the date of grant. Options
become exercisable one-third each on the first, second and third anniversary of
the date of grant; provided that all options held by an eligible director become
fully and immediately exercisable upon a change in control of the Company.
Options granted under the Directors Plan that are not exercised generally expire
ten years after the date of grant. Option grants may be made under the Directors
Plan for ten years from the effective date of the Directors Plan. The Directors
Plan is a "formula plan" so that a non-employee director's participation in the
Directors Plan does not affect his status as a "disinterested person" (as
defined in Rule 16b-3 under the Securities Exchange Act of 1934).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The disclosure set forth in Item 5 of this report is incorporated herein.
(a) The following table sets forth information, as of February 23, 2005, in
respect of the only persons known to the Company who beneficially own more than
5% of the outstanding common stock of the Company:
Amount
and Nature of
Title Name and Address Beneficial Percent
Of Class of Beneficial Owner Ownership of Class
--------------------------------------------------------------------------------
Common Stock Brandon Limited Partnership No. 1(1) 297,822 2.6%
Brandon Limited Partnership No. 2(2) 1,591,667 14.1%
Rodney C. Sacks (3) 2,514,489(4) 22.3%
Hilton H. Schlosberg (5) 2,475,586(6) 21.9%
Kevin Douglas, Douglas Family Trust
and James Douglas and Jean Douglas
Irrevocable Descendants' Trust(7) 1,078,561(8) 9.5%
Fidelity Low Priced Stock Fund (9) 1,008,875 8.9%
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 Rodney C. Sacks and Hilton H. Schlosberg.
2 The mailing address of Brandon No. 2 is P.O. Box 30749, Seven Mile Beach,
Grand Cayman, British West Indies. The general partners of Brandon No. 2
are Rodney C. Sacks and Hilton H. Schlosberg.
3 The mailing address of Mr. Sacks is 1010 Railroad Street, Corona,
California 92882.
4 Includes 495,000 shares of common stock owned by Mr. Sacks; 297,822 shares
beneficially held by Brandon No. 1 because Mr. Sacks is one of Brandon No.
1's general partners; and 1,591,667 shares beneficially held by Brandon No.
2 because Mr. Sacks is one of Brandon No. 2's general partners. Also
includes options to purchase 100,000 shares of common stock exercisable at
$4.25 per share, granted pursuant to a Stock Option Agreement dated
February 2, 1999 between the Company and Mr. Sacks; and options presently
exercisable to purchase 30,000 shares of common stock, out of options to
purchase a total of 150,000 shares, exercisable at $4.20 per share, granted
pursuant to a Stock Option Agreement dated May 28, 2003 between the Company
and Mr. Sacks.
Mr. Sacks disclaims beneficial ownership of all shares deemed beneficially
owned by him hereunder except: (i) 495,000 shares of common stock; (ii) the
130,000 shares presently exercisable under Stock Option Agreements; and
(iii) 65,046 shares held by Brandon No. 1 allocable to the limited
partnership interests in Brandon No. 1 held by Mr. Sacks, his children, a
limited partnership of which Mr. Sacks is the general partner and his
children and he are the limited partners, and a trust for the benefit of
his children.
5 The mailing address of Mr. Schlosberg is 1010 Railroad Street, Corona,
California 92882.
42
<PAGE>
6 Includes 456,097 shares of common stock owned by Mr. Schlosberg, of which
2,000 shares are jointly owned by Mr. Schlosberg and his wife, 297,822
shares beneficially held by Brandon No. 1 because Mr. Schlosberg is one of
Brandon No. 1's general partners; and 1,591,667 shares beneficially held by
Brandon No. 2 because Mr. Schlosberg is one of Brandon No. 2's general
partners. Also includes options to purchase 100,000 shares of common stock
exercisable at $4.25 per share, granted pursuant to a Stock Option
Agreement dated February 2, 1999 between the Company and Mr. Schlosberg;
and options presently exercisable to purchase 30,000 shares of common
stock, out of options to purchase a total of 150,000 shares, exercisable at
$4.20 per share, granted pursuant to a Stock Option Agreement dated May 28,
2003 between the Company and Mr. Schlosberg.
Mr. Schlosberg disclaims beneficial ownership of all shares deemed
beneficially owned by him hereunder except: (i) 456,097 shares of common
stock, (ii) the 130,000 shares presently exercisable under Stock Option
Agreements; and (iii) 69,411 shares held by Brandon No. 1 allocable to the
limited partnership interests in Brandon No. 1 held by Mr. Schlosberg and
his children.
7 The mailing address of this reporting person is 1101 Fifth Avenue, Suite
360, San Rafael, California 94901.
8 Includes 414,786 shares of common stock owned by Kevin and Michelle
Douglas; 311,499 shares of common stock owned by James Douglas and Jean
Douglas Irrevocable Descendants' Trust; 329,056 shares of common stock
owned by Douglas Family Trust; and 23,220 shares of common stock owned by
James E. Douglas III. Kevin Douglas, James E. Douglas, Douglas Family Trust
and James Douglas and Jean Douglas Irrevocable Descendants' Trust are
deemed members of a group that shares voting and dispositive power over the
shares.
9 The mailing address of this reporting person is 82 Devonshire Street,
Boston, Massachusetts, 02109.
(b) The following table sets forth information as to the beneficial ownership of
shares of common stock, as of February 23, 2005, held by persons who are
directors of the Company and certain executive officers, naming them, and as to
directors and all executive officers of the Company as a group, without naming
them:
Title of Class Name Amount Owned Percent of Class
---------------------------------------------------------------------------
Common Stock Rodney C. Sacks 2,514,489(1) 22.3%
Hilton H. Schlosberg 2,475,586(2) 21.9%
Mark J. Hall 42,000(3) *%
Michael Schott 26,384(4) *%
Thomas J. Kelly 5,000(5) *%
Harold C. Taber, Jr. -
Mark S. Vidergauz -
Sydney Selati -
Benjamin M. Polk -
Norman C. Epstein -
Executive Officers and Directors as a group: 11 members; 3,188,271 shares or
28.2% in aggregate(6).
*Less than 1%
1 Includes 495,000 shares of common stock owned by Mr. Sacks; 297,822 shares
beneficially held by Brandon No. 1 because Mr. Sacks is one of Brandon No.
1's general partners; and 1,591,667 shares beneficially held by Brandon No.
2 because Mr. Sacks is one of Brandon No. 2's general partners. Also
includes options to purchase 100,000 shares of common stock exercisable at
$4.25 per share, granted pursuant to a Stock Option Agreement dated
February 2, 1999 between the Company and Mr. Sacks; and options presently
exercisable to purchase 30,000 shares of common stock, out of options to
purchase a total of 150,000 shares, exercisable at $4.20 per share, granted
pursuant to a Stock Option Agreement dated May 28, 2003 between the Company
and Mr. Sacks.
Mr. Sacks disclaims beneficial ownership of all shares deemed beneficially
owned by him hereunder except: (i) 495,000 shares of common stock; (ii) the
130,000 shares presently exercisable under Stock Option Agreements; and
(iii) 65,046 shares held by Brandon No. 1 allocable to the limited
partnership interests in Brandon No. 1 held by Mr. Sacks, his children, a
limited partnership of which Mr. Sacks is the general partner and his
children and he are the limited partners, and a trust for the benefit of
his children;
43
<PAGE>
2 Includes 456,097 shares of common stock owned by Mr. Schlosberg, of which
2,000 shares are owned jointly by Mr. Schlosberg and his wife; 297,822
shares beneficially held by Brandon No. 1 because Mr. Schlosberg is one of
Brandon No. 1's general partners; and 1,591,667 shares beneficially held by
Brandon No. 2 because Mr. Schlosberg is one of Brandon No. 2's general
partners. Also includes options to purchase 100,000 shares of common stock
exercisable at $4.25 per share, granted pursuant to a Stock Option
Agreement dated February 2, 1999 between the Company and Mr. Schlosberg;
options presently exercisable to purchase 30,000 shares of common stock,
out of and options presently exercisable to purchase 30,000 shares of
common stock, out of options to purchase a total of 150,000 shares,
exercisable at $4.20 per share, granted pursuant to a Stock Option
Agreement dated May 28, 2003 between the Company and Mr. Schlosberg.
Mr. Schlosberg disclaims beneficial ownership of all shares deemed
beneficially owned by him hereunder except: (i) 456,097 shares of common
stock, (ii) the 130,000 shares presently exercisable under Stock Option
Agreements; and (iii) 69,411 shares held by Brandon No. 1 allocable to the
limited partnership interests in Brandon No. 1 held by Mr. Schlosberg and
his children.
3 Includes 27,000 shares of common stock owned by Mr. Hall and options
presently exercisable to purchase 12,000 shares of common stock, out of
options to purchase a total of 60,000 shares, exercisable at $8.15 per
share, granted pursuant to a Stock Option Agreement dated January 15, 2004
between the Company and Mr. Hall; and options presently exercisable to
purchase 3,000 shares of common stock out of options to purchase a total of
15,000 shares of common stock exercisable at $8.15 per share, granted
pursuant to a Stock Option Agreement dated January 15, 2004 between the
Company and Mrs. Hall.
4 Includes 22,384 shares of common stock owned by Mr. Schott and options
presently exercisable to purchase 4,000 shares of common stock, out of
options to purchase a total of 32,000 shares, exercisable at $8.15 per
share, granted pursuant to a Stock Option Agreement dated January 15, 2004
between the Company and Mr. Schott.
5 Includes options presently exercisable to purchase 5,000 shares of common
stock and out of options to purchase a total of 25,000 shares, exercisable
at $8.15 per share, granted pursuant to a Stock Option Agreement dated
January 15, 2004 between the Company and Mr. Kelly.
6 Includes securities beneficially owned by all directors and executive
officers of the Company including those listed above.
There are no arrangements known to the Company, the operation of which may
at a subsequent date result in a change of control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Benjamin M. Polk is a partner in Schulte Roth & Zabel LLP, a law firm that
has been retained by the Company since May 2004, and was previously a partner
with Winston & Strawn LLP, a law firm (together with its predecessors) that had
been retained by the company since 1992.
Rodney C. Sacks is currently acting as the sole Trustee of a trust formed
pursuant to an Agreement of Trust dated July 27, 1992 for the purpose of holding
the Hansen's (r) trademark. The Company and HBC have agreed to indemnify Mr.
Sacks and hold him harmless from any claims, loss or liability arising out of
his acting as Trustee.
During 2004, the Company purchased promotional items from IFM Group, Inc.
("IFM"). Rodney C. Sacks, together with members of his family, own approximately
27% of the issued shares in IFM. Hilton H. Schlosberg, together with members of
his family, own approximately 43% of the issued shares in IFM. Purchases from
IFM of promotional items in 2004, 2003 and 2002 were $638,590, $331,478 and
$164,199, respectively. The Company continues to purchase promotional items from
IFM Group, Inc. in 2005.
The preceding descriptions of agreements are qualified in their entirety by
reference to such agreements, which have been filed as exhibits to this Report.
44
<PAGE>
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Accounting Fees
Aggregate fees billed and unbilled to the company for service provided for
the years ended December 31, 2004, and 2003 by the Company's principal
accounting firm, Deloitte & Touche LLP, the member firms of Deloitte Touche
Tohmatsu, and their respective affiliates (collectively, "Deloitte & Touche"):
Year ended December 31,
2004 2003
----------- -----------
Audit Fees $ 153,750 $ 132,500
Audit-Related Fees(1) 310,825 5,000
----------- -----------
Total audit and audit-related fees 464,575 137,500
Tax Fees(2)
All other Fees 8,360
----------- -----------
Total Fees(3) $ 472,935 $ 137,500
=========== ===========
1 Audit related fees consist of consultation services related to
Sarbanes-Oxley Section 404 Implementation.
2 Tax fees consisted of fees for tax consultation services including advisory
services for state tax analysis and tax audit assistance.
3 For years ended December 31, 2004 and 2003, all of the services performed
by Deloitte & Touche have been pre-approved by the Audit Committee.
The Audit Committee has considered whether Deloitte & Touche's provision of
the non-audit services covered above is compatible with maintaining Deloitte &
Touche's independence and has determined that it is.
Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Auditors
The Audit Committee's policy is to pre-approve all audit and non-audit
services provided by the Company's independent auditors. These services may
include audit services, audit-related services, tax services and other services.
Pre-approval is generally provided for up to one year, and any pre-approval is
detailed as to the particular service or category of services and is generally
subject to a specific budget. The Audit Committee has delegated pre-approval
authority to its Chairman when necessary due to timing considerations. Any
services approved by the Chairman must be reported to the full Audit Committee
at its next scheduled meeting. The independent auditors and management are
required to periodically report to the full Audit Committee regarding the extent
of services provided by the independent auditors in accordance with the
pre-approval policies, and the fees for the services performed to date.
45
<PAGE>
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Exhibits
See the Index to Exhibits included hereinafter.
2. Index to Financial Statements filed as part of this Report
Report of Independent Registered Public Accounting Firm 50
Consolidated Balance Sheets as of December 31, 2004 and 2003 51
Consolidated Statements of Income for the years ended
December 31, 2004, 2003 and 2002 52
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 2004, 2003 and 2002 53
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002 54
Notes to Consolidated Financial Statements for the years ended
December 31, 2004, 2003 and 2002 56
(b) Financial Statement Schedule
Valuation and Qualifying Accounts for the years ended
December 31, 2004, 2003 and 2002 69
(c) Reports on From 8-K
None
46
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HANSEN NATURAL CORPORATION
/s/ RODNEY C. SACKS Rodney C. Sacks Date: March 15, 2005
------------------- 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 March 15, 2005
------------------------ Directors and Chief Executive
Rodney C. Sacks Officer (principal executive
officer)
/s/ HILTON H. SCHLOSBERG Vice Chairman of the Board of March 15, 2005
------------------------ Directors, President, Chief
Hilton H. Schlosberg Operating Officer, Chief
Financial Officer and Secretary
(principal financial officer,
controller and principal
accounting officer)
/s/ NORMAN C. EPSTEIN Director March 15, 2005
------------------------
Norman C. Epstein
/s/ BENJAMIN M. POLK Director March 15, 2005
------------------------
Benjamin M. Polk
/s/ SYDNEY SELATI Director March 15, 2005
------------------------
Sydney Selati
/s/ HAROLD C. TABER, JR. Director March 15, 2005
------------------------
Harold C. Taber, Jr.
/s/ MARK S. VIDERGAUZ Director March 15, 2005
------------------------
Mark S. Vidergauz
47
<PAGE>
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
-------- ----------------------------------------------------------------------
10.23 Stock option Agreement dated as of January 15, 2004 by and between
Hansen Natural Corporation and Mark Hall.
-------- ----------------------------------------------------------------------
10.24 Stock option Agreement dated as of January 15, 2004 by and between
Hansen Natural Corporation and Michael Schott.
-------- ----------------------------------------------------------------------
10.25 Stock option Agreement dated as of January 15, 2004 by and between
Hansen Natural Corporation and Kirk Blower.
-------- ----------------------------------------------------------------------
10.26 Stock option Agreement dated as of January 15, 2004 by and between
Hansen Natural Corporation and Thomas J. Kelly.
-------- ----------------------------------------------------------------------
10.27 Contract Packing Agreement by and between Southwest Canning &
Packaging and Hansen Beverage Company dated April 5, 1996.
-------- ----------------------------------------------------------------------
10.28 Contract Manufacturing and Packaging Agreement by and between Nor-Cal
Beverage Co., Inc. and Hansen Beverage Company dated March 1, 2004;
First Amendment to the Contract Manufacturing and Packaging Agreement
dated March 4, 2004.
-------- ----------------------------------------------------------------------
10.29 Product Manufacture and Supply Agreement by and between Seven-Up/RC
Bottling Company of Southern California dated April 15, 2003.
-------- ----------------------------------------------------------------------
10.30 Contract Packer Agreement by and between Southeast Atlantic Beverage
Corporation and Hansen Beverage Company dated July 24, 2004.
-------- ----------------------------------------------------------------------
10.31 Beverage Production and Packaging Agreement by and between City
Brewing Company, LLC and Hansen Beverage Company dated February 23,
2005.
-------- ----------------------------------------------------------------------
10.32 Manufacturing Contract by and between Pri-Pak, Inc. and Hansen
Beverage Company dated October 16, 2003.
-------- ----------------------------------------------------------------------
10.33 Amended and Restated Loan and Security Agreement by and between
Comerica Bank - California and Hansen Beverage Company dated December
1, 2004.
-------- ----------------------------------------------------------------------
21 Subsidiaries(1)
-------- ----------------------------------------------------------------------
23 Independent Auditors' Consent
-------- ----------------------------------------------------------------------
31.1 Certification by CEO pursuant to Rule 13A-14(a) or 15D-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
-------- ----------------------------------------------------------------------
31.2 Certification by CFO pursuant to Rule 13A-14(a) or 15D-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
-------- ----------------------------------------------------------------------
32.1 Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
-------- ----------------------------------------------------------------------
32.2 Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
-------- ----------------------------------------------------------------------
(1) Filed previously as an exhibit to Form 10-KSB for the year ended December
31, 1992.
48
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page
--------------
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm 50
Consolidated Balance Sheets as of December 31, 2004 and 2003 51
Consolidated Statements of Income for the years ended December 31,
2004, 2003 and 2002 52
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2004, 2003 and 2002 53
Consolidated Statements of Cash Flows for the years ended December 31,
2004, 2003 and 2002 54
Notes to Consolidated Financial Statements for the years ended
December 31, 2004, 2003 and 2002 56
Financial Statement Schedule - Valuation and Qualifying Accounts
for the years ended December 31, 2004, 2003 and 2002 69
49
<PAGE>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Hansen Natural Corporation
Corona, California
We have audited the accompanying consolidated balance sheets of Hansen Natural
Corporation and subsidiaries (the "Company") as of December 31, 2004 and 2003,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 2004.
Our audits also included the financial statement schedule listed in Item 15(b).
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on the
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 14, 2005 expressed an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial reporting
and an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 14, 2005
50
<PAGE>
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
2004 2003
------------------- --------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 20,976,119 $ 1,098,785
Accounts receivable, net 12,650,055 5,372,983
Inventories, net (Note 2) 22,406,054 17,643,786
Prepaid expenses and other current assets 638,967 481,777
Deferred income tax asset (Note 7) 3,708,942 2,080,609
------------------- --------------------
Total current assets 60,380,137 26,677,940
PROPERTY AND EQUIPMENT, net (Note 3) 2,964,064 2,803,282
INTANGIBLE AND OTHER ASSETS:
Trademark license and trademarks (net of accumulated
amortization of $219,264 in 2004 and $146,218 in 2003)
(Note 1) 18,351,804 18,293,704
Deposits and other assets 326,312 222,102
------------------- --------------------
18,678,116 18,515,806
------------------- --------------------
$ 82,022,317 $ 47,997,028
=================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 14,542,753 $ 6,521,402
Accrued liabilities 1,582,968 1,185,342
Accrued compensation 1,831,627 883,459
Current portion of long-term debt (Note 4) 437,366 244,271
Income taxes payable 346,449 647,263
------------------- --------------------
Total current liabilities 18,741,163 9,481,737
LONG-TERM DEBT, less current portion (Note 4) 146,486 358,064
DEFERRED INCOME TAX LIABILITY (Note 7) 4,563,439 3,107,649
COMMITMENTS AND CONTINGENCIES (Note 6) - -
STOCKHOLDERS' EQUITY (Note 8):
Common stock - $0.005 par value; 30,000,000 shares
authorized; 11,119,864 shares issued, 10,913,013
outstanding in 2004; 10,624,864 shares issued, 10,418,103
outstanding in 2003 55,599 53,124
Additional paid-in capital 15,813,541 12,681,169
Retained earnings 43,516,634 23,129,830
Common stock in treasury, at cost; 206,761 in 2004 and 2003 (814,545) (814,545)
------------------- --------------------
Total shareholders' equity 58,571,229 35,049,578
------------------- --------------------
$ 82,022,317 $ 47,997,028
=================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
51
<PAGE>
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
2004 2003 2002
------------------ ------------------ -----------------
GROSS SALES $ 226,984,231 $ 138,454,345 $ 115,490,019
LESS: Discounts, allowances and
promotional payments 46,643,096 28,102,149 23,443,657
------------------ ------------------ -----------------
NET SALES 180,341,135 110,352,196 92,046,362
COST OF SALES 96,874,750 66,577,168 58,802,669
------------------ ------------------ -----------------
GROSS PROFIT 83,466,385 43,775,028 33,243,693
OPERATING EXPENSES:
Selling, general and administrative 49,507,137 33,887,045 27,896,202
Amortization of trademark license and
trademarks 73,046 61,888 54,558
------------------ ------------------ -----------------
Total operating expenses 49,580,183 33,948,933 27,950,760
------------------ ------------------ -----------------
OPERATING INCOME 33,886,202 9,826,095 5,292,933
NONOPERATING (INCOME) EXPENSE:
Interest and financing expense 41,988 72,592 230,732
Interest and royalty income (93,983) (5,579) (2,974)
------------------ ------------------ -----------------
Net nonoperating (income) expense (51,995) 67,013 227,758
------------------ ------------------ -----------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 33,938,197 9,759,082 5,065,175
PROVISION FOR INCOME TAXES
(Note 7) 13,551,393 3,828,678 2,035,980
------------------ ------------------ -----------------
NET INCOME $ 20,386,804 $ 5,930,404 $ 3,029,195
================== ================== =================
NET INCOME PER COMMON SHARE:
Basic $ 1.91 $ 0.58 $ 0.30
================== ================== =================
Diluted $ 1.73 $ 0.55 $ 0.29
================== ================== =================
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic 10,666,892 10,278,710 10,052,499
================== ================== =================
Diluted 11,809,940 10,762,157 10,339,604
================== ================== =================
</TABLE>
See accompanying notes to consolidated financial statements.
52
<PAGE>
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Common stock Additional Treasury stock Total
---------------------------- paid-in Retained ------------------------- shareholders'
Shares Amount capital earnings Shares Amount equity
-------------- ------------- -------------- -------- ----------- ------------ ------------------
Balance,
January 1, 2002 10,251,764 $ 51,259 $ 11,926,604 $ 14,170,231 (206,761) $ (814,545) $ 25,333,549
Exercise of stock
options 8,000 40 7,960 8,000
Net income 3,029,195 3,029,195
-------------- ------------- -------------- --------------- ----------- ------------ -------------------
Balance,
December 31, 2002 10,259,764 51,299 11,934,564 17,199,426 (206,761) (814,545) 28,370,744
Exercise of stock
options 365,100 1,825 746,605 748,430
Net income 5,930,404 5,930,404
-------------- ------------- -------------- --------------- ----------- ------------ -------------------
Balance,
December 31, 2003 10,624,864 53,124 12,681,169 23,129,830 (206,761) (814,545) 35,049,578
Exercise of stock
options 495,000 2,475 1,717,453 1,719,928
Reduction of tax liability
in connection with the
exercise of certain
stock options 1,414,919 1,414,919
Net income 20,386,804 20,386,804
-------------- ------------- -------------- --------------- ----------- ------------ -------------------
Balance,
December 31, 2004 11,119,864 $ 55,599 $ 15,813,541 $ 43,516,634 (206,761) $ (814,545) $ 58,571,229
============== ============= ============== =============== =========== ============ ===================
</TABLE>
See accompanying notes to consolidated financial statements.
53
<PAGE>
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
2004 2003 2002
------------------ ------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 20,386,804 $ 5,930,404 $ 3,029,195
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of trademark license and trademarks 73,046 61,888 54,558
Depreciation and other amortization 770,413 584,197 493,894
Impairment of operating equipment 587,877 - -
Loss on disposal of plant and equipment 120,200 31,992 5,318
Deferred income taxes (172,543) (360,524) 522,462
Provision for allowance for doubtful accounts (116,311) 16,996 52,122
Effect on cash of changes in operating assets
and liabilities:
Accounts receivable (7,160,761) 559,423 (1,589,102)
Inventories (4,762,268) (6,000,052) 312,946
Prepaid expenses and other current assets (157,190) 500,713 (35,704)
Accounts payable 8,021,351 1,789,141 812,520
Accrued liabilities 397,626 504,383 (190,882)
Accrued compensation 948,168 573,395 (122,832)
Income taxes payable/receivable 1,114,105 1,292,458 (617,826)
------------------ ------------------ ------------------
Net cash provided by operating activities 20,050,517 5,484,414 2,726,669
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,260,068) (1,627,490) (416,873)
Proceeds from sale of property and equipment 24,698 70,826
Additions to trademark license and trademarks (131,146) (995,137) (64,792)
(Increase) decrease in deposits and other assets (104,210) 114,267 389,456
------------------ ------------------ ------------------
Net cash used in investing activities (1,470,726) (2,437,534) (92,209)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (422,385) (3,234,445) (2,352,197)
Proceeds from issuance of common stock 1,719,928 748,430 8,000
------------------ ------------------ ------------------
Net cash provided by (used in) financing activities 1,297,543 (2,486,015) (2,344,197)
------------------ ------------------ ------------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 19,877,334 560,865 290,263
CASH AND CASH EQUIVALENTS, beginning
of year 1,098,785 537,920 247,657
------------------ ------------------ ------------------
CASH AND CASH EQUIVALENTS, end of year $ 20,976,119 $ 1,098,785 $ 537,920
================== ================== ==================
SUPPLEMENTAL INFORMATION:
Cash paid during the year for:
Interest $ 35,510 $ 76,306 $ 235,779
================== ================== ==================
Income taxes $ 12,538,355 $ 2,896,743 $ 2,131,344
================== ================== ==================
</TABLE>
See accompanying notes to consolidated financial statements.
54
<PAGE>
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
NONCASH TRANSACTIONS:
During 2004, the Company entered into capital leases of $403,902, for the
acquisition of promotional vehicles.
During 2004, the Company reduced current income taxes payable and increased
additional paid-in capital in the amount of $1,414,919 in connection with the
exercise of certain stock options.
See accompanying notes to consolidated financial statements.
55
<PAGE>
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Hansen Natural Corporation (the "Company" or "Hansen") was
incorporated in Delaware on April 25, 1990. The Company is a holding company and
has no operating business except through its direct wholly-owned subsidiaries,
Hansen Beverage Company ("HBC") which was incorporated in Delaware on June 8,
1992 and Hard e Beverage Company ("HEB") formerly known as Hard Energy Company,
and previously known as CVI Ventures, Inc., which was incorporated in Delaware
on April 30, 1990. HBC conducts the vast majority of the Company's operating
business and generates substantially all of the Company's operating revenues.
References herein to "Hansen" or the "Company" when used to describe the
operating business of the Company are references to the business of HBC unless
otherwise indicated, and references herein to HEB when used to describe the
operating business of HEB, are references to the Hard e brand business of HEB
unless otherwise indicated.
In addition, HBC, through its wholly-owned subsidiaries, Blue Sky Natural
Beverage Co. ("Blue Sky") and Hansen Junior Juice Company ("Junior Juice") owns
and operates the natural soda business under the Blue Sky(r) trademark and the
Junior Juice beverage business under the Junior Juice trademarks, respectively.
Nature of Operations -Hansen markets and distributes Hansen's(r) Natural
Sodas, Signature Sodas, fruit juice and soy Smoothies, Energy drinks,
Energade(r) energy sports drinks, E20 Energy Water(r), functional drinks,
Sparkling Lemonades and Orangeades, multi-vitamin juice drinks in aseptic
packaging, Junior Juice(r) juice, iced teas, lemonades and juice cocktails,
apple juice, cider and juice blends, as well as nutrition bars, Blue Sky(r)
brand carbonated beverages, Monster EnergyTM brand energy drinks and Lost(r)
Energy brand energy drinks and RumbaTM brand Energy Juice.
Basis of Presentation - The accompanying consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America ("generally accepted accounting principles").
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Hansen and its wholly owned subsidiaries,
HBC, HEB, Blue Sky and Junior Juice since their respective dates of
incorporation. All intercompany balances and transactions have been eliminated
in consolidation.
Reclassifications - Certain reclassifications have been made in the
consolidated financial statements to conform to the 2004 presentation.
Cash and Cash Equivalents - The Company considers certificates of deposit
with original maturities of three months or less to be cash and cash
equivalents. The Company maintains cash deposits with major banks which from
time to time may exceed federally insured limits. The Company periodically
assesses the financial condition of the institutions and believes that the risk
of any loss is minimal.
Inventories - Inventories are valued at the lower of first-in, first-out
(FIFO) cost or market value (net realizable value).
Property and Equipment - Property and equipment are stated at cost.
Depreciation of furniture, office equipment, equipment and vehicles is based on
their estimated useful lives (three to ten years) and is calculated using the
straight-line method. Amortization of leasehold improvements is based on the
lesser of their estimated useful lives or the terms of the related leases and is
calculated using the straight-line method.
56
<PAGE>
Trademark License and Trademarks - Trademark license and trademarks
represents the Company's exclusive ownership of the Hansen's(r) trademark in
connection with the manufacture, sale and distribution of beverages and water
and non-beverage products. The Company also owns a number of other trademarks in
the United States as well as in a number of countries around the world. The
Company also owns the Blue Sky(r) trademark, which was acquired in September
2000, and the Junior Juice(r) trademark, which was acquired in May 2001. The
Company amortizes its trademark license and trademarks over 1 to 25 years. Upon
the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142,
the Company ceased the amortization of indefinite life assets.
Long-Lived Assets - Management regularly reviews property and equipment and
other long-lived assets, including certain identifiable intangibles, for
possible impairment. This review occurs annually, or more frequently if events
or changes in circumstances indicate the carrying amount of the asset may not be
recoverable. If there is indication of impairment of property and equipment or
amortizable intangible assets, then management prepares an estimate of future
cash flows (undiscounted and without interest charges) expected to result from
the use of the asset and its eventual disposition. If these cash flows are less
than the carrying amount of the asset, an impairment loss is recognized to write
down the asset to its estimated fair value. The fair value is estimated at the
present value of the future cash flows discounted at a rate commensurate with
management's estimates of the business risks. Annually, or earlier, if there is
indication of impairment of identified intangible assets not subject to
amortization, management compares the estimated fair value with the carrying
amount of the asset. An impairment loss is recognized to write down the
intangible asset to its fair value if it is less than the carrying amount.
Preparation of estimated expected future cash flows is inherently subjective and
is based on management's best estimate of assumptions concerning expected future
conditions. During 2004, management recognized an impairment to property and
equipment as discussed in Note 3.
Revenue Recognition - The Company records revenue at the time the related
products are shipped and the risk of ownership and title has passed. Management
believes an adequate provision against net sales has been made for estimated
returns, allowances and cash discounts based on the Company's historical
experience.
Freight Costs and Reimbursement of Freight Costs - In accordance with
Emerging Issues Task Force ("EITF") No. 00-10, Accounting for Shipping and
Handling Fees and Costs, reimbursements of freight charges are recorded in net
sales in the accompanying consolidated statements of income. For the years ended
December 31, 2004, 2003 and 2002, freight-out costs amounted to $10.7 million,
$7.0 million and $5.8 million, respectively, and have been recorded in selling,
general and administrative expenses in the accompanying consolidated statements
of income.
Advertising and Promotional Allowances - The Company accounts for
advertising production costs by expensing such production costs the first time
the related advertising takes place. Advertising expenses amounted to $11.5
million, $8.8 million and $7.3 million for the years ended December 31, 2004,
2003 and 2002, respectively. Advertising expenses were included in selling,
general and administrative expenses with the exception of coupon expenses which
were included as a reduction of net sales. In addition, the Company supports its
customers, including distributors, with promotional allowances, a portion of
which is utilized for marketing and indirect advertising by them. In certain
instances, a portion of the promotional allowances payable to customers is based
on the levels of sales to such customers. Promotion requirements or expected use
of the allowances, are estimated by the Company. If the level of sales,
promotion requirements or use of the allowances are different from such
estimates, the promotional allowances could, to the extent based on estimates,
require adjustments. Such promotional allowances amounted to $35.5 million,
$17.2 million and $13.5 million for the years ended December 31, 2004, 2003 and
2002, respectively and were included in discounts, allowances and promotional
payments.
57
<PAGE>
Income Taxes - The Company accounts for income taxes under the provisions
of SFAS No. 109, Accounting for Income Taxes. This statement requires the
recognition of deferred tax assets and liabilities for the future consequences
of events that have been recognized in the Company's financial statements or tax
returns. Measurement of the deferred items is based on enacted tax laws. In the
event the future consequences of differences between financial reporting bases
and tax bases of the Company's assets and liabilities result in a deferred tax
asset, SFAS No. 109 requires an evaluation of the probability of being able to
realize the future benefits indicated by such asset. A valuation allowance
related to a deferred tax asset is recorded when it is more likely than not that
some portion or all of the deferred tax asset will not be realized.
Stock-Based Compensation - The Company accounts for its stock option plans
in accordance with Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. Under APB
Opinion No. 25, no compensation expense is recognized because the exercise price
of the Company's employee stock options equals the market price of the
underlying stock at the date of the grant. In December 2002, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure. SFAS No. 148 amends SFAS No.
123, Accounting for Stock-based Compensation, and was effective immediately upon
issuance. The Company follows the requirements of APB Opinion No. 25 and the
disclosure-only provision of SFAS No. 123, as amended by SFAS No. 148. Had
compensation cost for the Company's option plans been determined based on the
fair value at the grant date for awards consistent with the provisions of SFAS
No. 123, the Company's net income and net income per common share for the years
ended December 31, 2004 and 2003 would have been reduced to the pro forma
amounts indicated below:
2004 2003 2002
---- ---- ----
Net income, as reported $20,386,804 $5,930,404 $3,029,195
Less: total stock-based employee
compensation expense
determined under fair value
based method for all awards,
net of related tax effects 356,156 216,250 212,363
------------- ------------ -----------
Net income, pro forma $20,030,648 $5,714,154 $2,816,832
============= ============ ===========
Net income per common share,
as reported:
Basic $ 1.91 $ 0.58 $ 0.30
Diluted $ 1.73 $ 0.55 $ 0.29
Net income per common share,
pro forma:
Basic $ 1.88 $ 0.56 $ 0.28
Diluted $ 1.70 $ 0.53 $ 0.27
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used:
Risk-Free
Dividend Yield Expected Volatility Interest Rate Expected Lives
-------------- ------------------- -------------- --------------
2004 0% 46% 4.0% 8 years
2003 0% 12% 3.5% 8 years
2002 0% 8% 4.6% 6 years
Net Income Per Common Share - In accordance with SFAS No. 128, Earnings per
Share, net income per common share, on a basic and diluted basis, is presented
for all periods. Basic net income per share is computed by dividing net income
by the weighted average number of common shares outstanding. Diluted net income
per share is computed by dividing net income by the weighted average number of
common and dilutive common equivalent shares outstanding, if dilutive. Weighted
average common equivalent shares include stock options and purchases of the
Company's common stock, held in treasury, using the treasury stock method.
58
<PAGE>
Concentration Risk - Certain of the Company's products utilize components
(raw materials and/or co-packing services) from a limited number of sources. A
disruption in the supply of such components could significantly affect the
Company's revenues from those products, as alternative sources of such
components may not be available at commercially reasonable rates or within a
reasonably short time period. The Company continues to take steps on an ongoing
basis to secure the availability of alternative sources for such components and
minimize the risk of any disruption in production.
One customer accounted for approximately 8%, 15% and 18% of the Company's
sales for the years ended December 31, 2004, 2003 and 2002, respectively. A
decision by that, or any other major customer, to decrease the amount purchased
from the Company or to cease carrying the Company's products could have a
material adverse effect on the Company's financial condition and consolidated
results of operations.
During 2004, 2003 and 2002, sales outside of California represented 56%,
47% and 42% of the aggregate sales of the Company, respectively.
Credit Risk - The Company sells its products nationally, primarily to
retailers and beverage distributors. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. The
Company maintains reserves for estimated credit losses, and historically, such
losses have been within management's expectations.
Fair Value of Financial Instruments - At December 31, 2004 and 2003, the
carrying values of cash, accounts receivable and accounts payable approximate
fair value because of the short maturity of these financial instruments.
Long-term debt bears interest at a rate comparable to the prime rate; therefore,
management believes the carrying amount for the outstanding borrowings at
December 31, 2004 approximates fair value.
Use of Estimates - The preparation of the consolidated financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Segment Information - The Company's operating segments have been aggregated
into one reportable segment due to similarities of the economic characteristics
and nature of operations among the operations represented by the Company's
various product lines.
Change in Accounting for Goodwill and Other Intangible Assets - Effective
January 1, 2002, the Company adopted the provisions of SFAS No. 142, Goodwill
and Other Intangible Assets. This statement discontinued the amortization of
goodwill and indefinite-lived intangible assets, subject to periodic impairment
testing. Upon adoption of SFAS No. 142, the Company evaluated the useful lives
of its various trademark licenses and trademarks and concluded that certain of
the trademark licenses and trademarks have indefinite lives. Unamortized
trademark licenses and trademarks deemed to have indefinite lives ceased to be
amortized effective January 1, 2002 and are subject to annual impairment
analysis.
As of December 31, 2003 and 2004, the trademark licenses and trademarks
were tested for impairment in accordance with the provisions of SFAS No. 142.
Fair values were estimated based on the Company's best estimate of the expected
present value of future cash flows. No amounts were impaired at those times. The
following provides additional information concerning the Company's trademark
licenses and trademarks as of December 31:
59
<PAGE>
2004 2003
---- ----
Amortizing trademark licenses
and trademarks $ 1,169,248 $ 1,155,803
Accumulated amortization (219,264) (146,218)
------------- -------------
949,984 1,009,585
Nonamortizing trademark
licenses and trademarks 17,401,820 17,284,119
------------- -------------
$18,351,804 $18,293,704
============= =============
All amortizing trademark licenses and trademarks have been assigned an
estimated finite useful life, and are amortized on a straight-line basis over
the number of years that approximate their respective useful lives ranging from
1 to 25 years (weighted-average life of 23 years). The straight-line method of
amortization allocates the cost of the trademark licenses and trademarks to
earnings over the period of expected benefit. Total amortization expense during
the year ended December 31, 2004 was $73,046. As of December 31, 2004, future
estimated amortization expense related to amortizing trademark licenses and
trademarks through the year ended December 31, 2009 is:
2005 $55,214
2006 55,214
2007 55,214
2008 55,066
2009 55,066
Newly Issued Accounting Pronouncements - In November 2004, FASB issued
statement of Financial Accounting Standard No. 151, "Inventory Costs". The new
Statement amends Accounting Research Bulletin No. 43, Chapter 4, "Inventory
Pricing," to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material. This Statement requires
that those items be recognized as current-period charges and requires that
allocation of fixed production overheads to the cost of conversion be based on
the normal capacity of the production facilities. This statement is effective
for fiscal years beginning after June 15, 2005. The Company does not expect
adoption of this statement to have a material impact on our financial condition
or results of operations.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets - An Amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions. This statement amends APB Opinion No. 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provision in SFAS No. 153 are effective for nonmonetary
asset exchanges incurred during fiscal years beginning after June 15, 2005. The
Company is currently evaluating the effect, if any, of adopting SFAS No. 153.
In December 2004, FASB issued Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment. This Statement replaces FASB
Statement No. 123 and supersedes APB Opinion No. 25. Statement No. 123(R) will
require the fair value of all stock option awards issued to employees to be
recorded as an expense over the related vesting period. The Statement also
requires the recognition of compensation expense for the fair value of any
unvested stock option awards outstanding at the date of adoption. This standard
is effective for the company as of July 1, 2005. Management has not completed
their evaluation of the effect of these new rules on future statements.
60
<PAGE>
2. INVENTORIES
Inventories consist of the following at December 31:
2004 2003
---- ----
Raw materials $ 7,204,741 $ 6,979,701
Finished goods 16,157,000 11,900,304
----------- -----------
23,361,741 18,880,005
Less inventory reserves (955,687) (1,236,219)
----------- -----------
$22,406,054 $17,643,786
=========== ===========
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
2004 2003
---- ----
Leasehold improvements $ 268,068 $ 230,027
Furniture and office equipment 1,193,741 881,741
Equipment 1,488,571 2,481,917
Vehicles 2,359,264 1,636,878
----------- -----------
5,309,644 5,230,563
Less accumulated depreciation
and amortization (2,345,580) (2,427,281)
----------- -----------
$ 2,964,064 $ 2,803,282
=========== ===========
A portion of the equipment owned by the Company is comprised of equipment
and machinery that was utilized on a can line operated by a third party to
manufacture certain products, who subsequently ceased operations. At December
31, 2004, such equipment and machinery was idle and management had not finalized
its review of alternatives regarding the use thereof in prospective periods.
Accordingly, such equipment and machinery is included in Property and Equipment
as idle. Based on management's assessment of the marketplace for this equipment
and machinery with advice from an independent equipment broker, management
recorded an impairment charge in cost of sales of $587,876 to reduce the
carrying cost of this asset to its fair value of $232,308. If the equipment and
machinery is reinstated or refurbished, management will amortize the reduced
carrying value over an estimate of its productive life when placed in service.
4. DEBT
HBC has a credit facility from Comerica Bank-California ("Comerica"),
consisting of a revolving line of credit and a term loan. Such revolving line of
credit and term loan were secured by substantially all of HBC's assets,
including accounts receivable, inventory, trademarks, trademark licenses and
certain equipment. In accordance with the provisions of the credit facility, HBC
can borrow up to $6.0 million under its revolving line of credit. The revolving
line of credit remains in full force and effect through September 2005. Interest
on borrowings under the line of credit is based on the bank's base (prime) rate,
plus an additional percentage of up to 0.5% or the LIBOR rate, plus an
additional percentage of up to 2.5%, depending upon certain financial ratios of
the Company. The Company had no outstanding borrowings on the line of credit at
December 31, 2004.
On March 1, 2005, the Company entered into an amendment of its credit
facility with Comerica in terms of which HBC can borrow up to $7.8 million under
its revolving line of credit. Under the amendment, the revolving line of credit
remains in full force and effect through June 1, 2006. Interest on borrowings
under the line of credit varies depending on a predetermined ratio of the
Company's funded senior debt to Earnings Before Interest Taxes Depreciation and
Amortization. The current rate of interest is prime minus 1.5% or the 30 day
LIBOR rate plus 1.25%.
61
<PAGE>
The terms of the Company's line of credit contain certain financial
covenants including certain financial ratios. The Company was in compliance with
its covenants at December 31, 2004.
During 2000, the Company entered into capital leases for acquisition of
certain vehicles, payable over a five-year period and having an effective
interest rate of 8.8%. During 2004, the Company entered into capital leases for
acquisition of certain vehicles, payable over a 12 month period and having an
average effective interest rate of 5.4%.
Long-term debt consists of the following
at December 31:
2004 2003
---- ----
Note payable to Pasco Juices, Inc.,
collateralized by the Junior Juice
trademark, payable in quarterly
installments of varying amounts
through May 2006, net of unamortized
discount (based on imputed interest
rate of 4.5%) of $13,329 and $29,547
at December 31, 2004 and 2003,
respectively $ 267,390 $ 392,263
Capital leases, collateralized by
vehicles acquired, payable over 60
months in monthly installments at an
effective interest rate of 8.8%,
with final payments ending in 2005 86,828 210,072
Capital leases, collateralized by
vehicles acquired, payable over 12
months in monthly installments at an
average effective interest rate of 5.4%,
with final payments ending in 2005 229,634 -
--------- ----------
583,852 602,335
Less: current portion of
long-term debt (437,366) (244,271)
----------- ----------
$ 146,486 $ 358,064
=========== ==========
Long-term debt is payable as follows:
Year ending December 31:
2005 $ 437,366
2006 146,486
---------
$ 583,852
=========
At December 31, 2004 and 2003, the assets acquired under capital leases had
a net book value of $379,775 and $121,178, net of accumulated depreciation of
$518,988 and $418,465, respectively.
Interest expense amounted to $35,988, $66,592 and $224,748 for the years
ended December 31, 2004, 2003 and 2002, respectively.
62
<PAGE>
5. EARNINGS PER SHARE
A reconciliation of the weighted average shares used in the basic and
diluted earnings per common share computations for the three and years ended
December 31, 2004 and 2003 is presented below:
2004 2003
--------------- ---------------
Weighted-average shares outstanding:
Weighted-average shares outstanding -
Basic 10,666,892 10,278,710
Dilutive securities 1,143,048 483,447
--------------- ---------------
Weighted-average shares outstanding -
Diluted 11,809,940 10,762,157
=============== ===============
For the years ended December 31, 2004 and 2003, options outstanding
totaling 34,500 and 20,000 shares respectively, were excluded from the
calculations, as their effect would have been antidilutive.
6. COMMITMENTS AND CONTINGENCIES
Operating Leases - The Company leases its warehouse facility and corporate
offices under a 10 year lease beginning October 2000, when the Company first
occupied the facility. The facility lease and certain equipment and other
noncancelable operating leases expire through 2010. The facility lease has
scheduled rent increases which are accounted for on a straight-line basis. Rent
expense under such leases amounted to $965,730, $660,616, and $643,827 for the
years ended December 31, 2004, 2003 and 2002, respectively. In January 2004, the
Company entered into a lease for additional warehouse space. This lease expires
in March 2008 with an option to renew through 2010.
Future minimum rental payments at December 31, 2004 under the leases
referred to above are as follows:
Year ending December 31:
2005 $ 980,473
2006 1,027,242
2007 1,040,332
2008 775,683
2009 685,560
Thereafter 514,170
------------
$ 5,023,460
============
Purchase Commitments - The Company has purchase commitments aggregating
approximately $17,735,238, which represent commitments made by the Company and
its subsidiaries to various suppliers of raw materials for the manufacturing and
packaging of its products. These obligations vary in terms.
Advertising Commitment - In March 2003, HBC entered into an advertising
display agreement ("Monorail Agreement") with the Las Vegas Monorail Company
("LVMC") in terms of which HBC was granted the right, in consideration of the
payment by HBC to LVMC of the sum of $1,000,000 per year, payable quarterly, to
advertise and promote its products on a designated four car monorail vehicle as
well as the right to sell certain of its products on all monorail stations for
payment of additional consideration.
The initial term of the Monorail Agreement commenced in July 2004. The
initial term of the Monorail Agreement ends on the first anniversary of its
commencement date. However due to interruptions in the operations of the
Monorail, it is likely the commencement date of the initial term will be
extended. Not less than 120 days before the expiration of the initial term and
each renewal term, as the case may be, HBC has the right to renew the Monorail
Agreement for a further one year term up to a maximum of nine additional one
year terms and the LVMC has the right, notwithstanding such election by HBC, to
terminate the Monorail Agreement at the expiration of the then current term.
63
<PAGE>
Licensing Agreements - The Company produces, sells and distributes Lost(r)
Energy drinks under an exclusive license with Lost International LLC. The
license agreement requires certain royalty payments to be made related to the
sale of Lost(r) brand products.
Employment and Consulting Agreements - On June 1, 2003, the Company entered
into an employment agreement with Rodney C. Sacks and Hilton H. Schlosberg
pursuant to which Mr. Sacks and Mr. Schlosberg render services to the Company as
its Chairman and Chief Executive Officer, and its Vice Chairman, President and
Chief Financial Officer, respectively. The agreements provide for an annual base
salary of $230,000 each for the 7 months ended December 31, 2003, increasing to
$245,000 for the year ending December 31, 2004 and increasing by a minimum of 5%
for each subsequent twelve-month period during the employment period. In
addition, the agreement provides for an annual bonus in an amount determined at
the discretion of the Board of Directors of the Company as well as certain
fringe benefits for the period commencing June 1, 2003 and ending December 31,
2008.
Litigation - The Company is subject to, and involved in, claims and
contingencies related to lawsuits and other matters arising out of the normal
course of business. The ultimate liability associated with such claims and
contingencies, if any, is not likely to have a material adverse effect on the
financial condition of the Company.
In September 2004 Barrington Capital Corporation through an alleged
successor in interest, Sandburg Financial Corporation (both entities with whom
the Company has never had any dealings) served a Notice of Motion ("Motion") on
the Company and each of its subsidiaries as well as on a number of other
unrelated entities and individuals. The Motion seeks to amend a default judgment
granted against a completely unconnected company, Hansen Foods, Inc., to add the
Company and its subsidiary companies, as well as the other entities and
individuals cited, as judgment debtors. The default judgment was entered on
February 15, 1996, for $7,626,000 plus legal interest and attorneys' fees in the
sum of $211,000 arising out of a breach of contract claim that allegedly
occurred in the 1980's. Barrington Capital Corporation's/Sandburg Financial
Corporation's claim is based on the misconceived and unsubstantiated theory that
the Company and its subsidiaries are alter egos and/or successors of Hansen
Foods, Inc. The Motion is based on demonstrably false allegations, misstated
legal propositions and lacks any substantial supporting evidence. The Company
and its subsidiaries intend to vigorously oppose the Motion and believe that the
Motion is without any merit. The Company does not believe the Motion will have a
material adverse effect on the financial condition of the Company.
Guarantees - The Company from time to time enters into certain types of
contracts that contingently require the Company to indemnify parties against
third party claims. These contracts primarily relate to: (i) certain agreements
with the Company's officers, directors and employees under which the Company may
be required to indemnify such persons for liabilities arising out of their
employment relationship, (ii) certain distribution or purchase agreements under
which the Company may have to indemnify the Company's customers from any claim,
liability or loss arising out of any actual or alleged injury or damages
suffered in connection with the consumption or purchase of the Company's
products, and (iii) certain real estate leases, under which the Company may be
required to indemnify property owners for liabilities and other claims arising
from the Company's use of the applicable premises.
The terms of such obligations vary. Generally, a maximum obligation is not
explicitly stated. Because the obligated amounts of these types of agreements
often are not explicitly stated, the overall maximum amount of the obligations
cannot be reasonably estimated. Further, the Company believes that its insurance
coverage is adequate to cover any liabilities or claims arising out of such
instances referred to above. Historically, the Company has not been obligated to
make significant payments for these obligations and accordingly, the Company has
valued these obligations at $0 on its consolidated balance sheets as of December
31, 2004 and 2003.
64
<PAGE>
7. INCOME TAXES
Components of the income tax provision are as follows:
Year Ended December 31,
2004 2003 2002
---- ---- ----
Current income taxes:
Federal $11,305,019 $ 3,386,946 $ 1,173,693
State 2,418,917 802,256 339,825
------------ ------------- ------------
13,723,936 4,189,202 1,513,518
Deferred income taxes:
Federal (218,967) (290,357) 448,239
State 46,424 (70,167) 74,223
------------ ------------- -----------
(172,543) (360,524) 522,462
------------ ------------- -----------
$13,551,393 $ 3,828,678 $ 2,035,980
============ ============= ===========
The differences between the income tax provision that would result from
applying the 35% federal statutory rate to income before provision for income
taxes and the reported provision for income taxes are as follows:
Year Ended December 31,
2004 2003 2002
---- ---- ----
Income tax provision
using the statutory rate $11,878,369 $ 3,318,088 $ 1,722,160
State taxes, net of federal
tax benefit 1,602,471 521,475 267,440
Permanent differences 74,374 39,895 46,380
Rate change 23,735 - -
Other (27,556) (50,780)
----------- ------------- ------------
$13,551,393 $ 3,828,678 $ 2,035,980
============ ============= ============
Major components of the Company's deferred tax assets (liabilities) at
December 31 are as follows:
2004 2003
---- ----
Reserves for returns $ 385,371 $ 98,556
Reserves for doubtful accounts 45,838 93,623
Reserves for obsolescence 410,945 519,212
Reserves for marketing development fund 1,542,576 754,517
Capitalization of inventory costs 199,462 169,317
State franchise tax 1,014,799 348,351
Accrued compensation 109,951 47,433
Amortization of graphic design - 297,760
Other accrued expenses - 54,602
------------- ------------
Total deferred tax asset 3,708,942 2,378,371
Amortization of trademark license (3,857,784) (3,160,401)
Depreciation (583,708) (245,010)
Amortization of graphic design (121,947) -
------------- ------------
Total deferred tax liability (4,563,439) (3,405,411)
------------- ------------
Net deferred tax liability $ (854,497) $ (1,027,040)
============= ============
The Company believes it has adequately provided for income tax issues not
yet resolved with state tax authorities. At December 31, 2004, $394,597, was
accrued for such matters. Although not probable, the most adverse resolution of
these issues could result in additional charges to earnings in future periods.
Upon consideration of all relevant facts and circumstances, the Company does not
believe the ultimate resolution of these tax issues for all open tax periods
will have a material adverse effect upon its results of operations or financial
condition.
65
<PAGE>
8. STOCK OPTIONS
The Company has three stock option plans, the Hansen Natural Corporation
2001 Stock Option Plan ("2001 Option Plan"), the Employee Stock Option Plan (the
"Plan") and the Outside Directors Stock Option Plan ("Directors Plan").
During 2001, the Company adopted the 2001 Option Plan which provides for
the grant of options to purchase up to 2,000,000 shares of the common stock of
the Company to certain key employees of the Company and its subsidiaries.
Options granted under the 2001 Option Plan may be incentive stock options under
Section 422 of the Internal Revenue Code, as amended (the "Code"), nonqualified
stock options, or stock appreciation rights. Stock options are exercisable at
such time and in such amounts as determined by the Compensation Committee of the
Board of Directors of the Company up to a ten-year period after their date of
grant. As of December 31, 2004, options to purchase 1,227,100 shares of Hansen
common stock had been granted under the 2001 Option Plan and options to purchase
772,900 shares of Hansen common stock remain available for grant under the 2001
Option Plan.
The Plan, as amended, provided for the granting of options to purchase not
more than 3,000,000 shares of Hansen common stock to key employees of the
Company and its subsidiaries through July 1, 2001. Stock options are exercisable
at such time and in such amounts as determined by the Compensation Committee of
the Board of Directors of the Company up to a ten-year period after their date
of grant, and no options may be granted after July 1, 2001. The option price
will not be less than the fair market value at the date of grant. As of December
31, 2004, options to purchase 2,095,700 shares of Hansen common stock had been
granted under the Plan, net of options that have expired.
The Directors Plan provides for the grant of options to purchase up to
100,000 shares of common stock of the Company to directors of the Company who
are not and have not been employed by or acted as consultants to the Company and
its subsidiaries or affiliates and who are not and have not been nominated to
the Board of Directors of the Company (the "Board") pursuant to a contractual
arrangement. On the date of the annual meeting of shareholders, at which an
eligible director is initially elected, each eligible director is entitled to
receive a one-time grant of an option to purchase 6,000 shares (12,000 shares if
the director is serving on a committee of the Board) of the Company's common
stock, exercisable one-third each on the first, second and third anniversary of
the date of grant; provided, however, that options granted as of February 14,
1995, are exercisable 66 2/3% on the date of grant and 100% on July 8, 1995;
provided, further, that all options held by an eligible director become fully
and immediately exercisable upon a change in control of the Company. Options
granted under the Directors Plan that are not exercised generally expire ten
years after the date of grant. Option grants may be made under the Directors
Plan for ten years from the effective date of the Directors Plan. The Directors
Plan is a "formula" plan so that a nonemployee director's participation in the
Directors Plan does not affect his status as a "disinterested person" (as
defined in Rule 16b-3 under the Securities Exchange Act of 1934). As of December
31, 2004, options to purchase 48,000 shares of Hansen common stock had been
granted under the Directors Plan and options to purchase 52,000 shares of Hansen
common stock remained available for grant.
During the years ended December 31, 2004, 2003 and 2002, the Company
granted 371,000, 355,000 and 529,500 options to purchase shares under the 2001
Option Plan and the Directors Plan at a weighted-average grant date fair value
of $6.68, $1.27 and $1.12, respectively. Additional information regarding the
plans is as follows:
66
<PAGE>
2004 2003 2002
-------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
-------------------- -------------------- --------------------
Options
outstanding,
beginning
of year 1,469,800 $ 3.87 1,501,900 $3.29 1,053,400 $3.04
Options granted 371,000 $11.39 355,000 $4.43 529,500 $3.64
Options
exercised (495,000) $ 3.47 (365,100) $2.05 (8,000) $1.00
Options
canceled
or expired (47,400) $ 6.02 (22,000) $3.53 (73,000) $2.54
-------------------- -------------------- --------------------
Options
outstanding,
end of year 1,298,400 $ 6.09 1,469,800 $3.87 1,501,900 $3.29
Option
price range
end of year $ 3.02 $1.13 $1.00
to to to
$32.50 $8.23 $5.25
The following table summarizes information about fixed-price stock options
outstanding at December 31, 2004:
------------------------------------------------------ -------------------------
Options Outstanding Options Exercisable
------------------------------------------------------ -------------------------
Weighted-
Number average Number
outstanding remaining Weighted- exercisable Weighted-
Range of at contractual average at average
exercise December 31, life exercise December 31, exercise
prices 2004 (in years) price 2004 price
--------------------------------------------------------------------------------
$ 3.02 to $ 3.95 379,900 7 $ 3.60 30,600 $3.57
$ 4.05 to $ 5.25 549,500 7 4.24 277,500 4.26
$ 8.11 to $ 8.23 272,500 9 8.15 2,000 8.23
$10.32 to $18.17 62,000 9 16.77 - -
$25.01 to $32.50 34,500 8 27.33 - -
---------- ---------
1,298,400 310,100
========== =========
9. EMPLOYEE BENEFIT PLAN
Employees of Hansen Natural Corporation may participate in the Hansen
Natural Corporation 401(k) Plan, a defined contribution plan, which qualifies
under Section 401(k) of the Internal Revenue Code. Participating employees may
contribute up to 15% of their pretax salary up to statutory limits. The Company
contributes 25% of the employee contribution, up to 8% of each employee's
earnings. Matching contributions were $98,494, $70,518 and $64,949 for the years
ended December 31, 2004, 2003 and 2002, respectively.
10. RELATED-PARTY TRANSACTIONS
A director of the Company is a partner in a law firm that serves as counsel
to the Company and was a partner in another law firm that previously served as
counsel to the Company. Expenses incurred in connection with services rendered
by such firms to the Company during the years ended December 31, 2004, 2003 and
2002 were $173,878, $59,146 and $79,843, respectively.
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<PAGE>
Two directors and officers of the Company are principal owners of a company
that provides promotional materials to the Company. Expenses incurred to such
company in connection with promotional materials purchased during the years
ended December 31, 2004, 2003 and 2002 were $638,590, $331,478 and $164,199,
respectively.
11. QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C>
Net Income per
Common Share
--------------------
Net Sales Gross Profit Net Income Basic Diluted
-------------- -------------- ------------- --------- --------
Quarter ended:
March 31, 2004 $ 31,298,783 $ 13,907,821 $ 2,183,281 $ 0.21 $ 0.19
June 30, 2004 46,063,543 20,758,929 5,078,149 0.48 0.43
September 30, 2004 52,641,477 23,809,208 5,798,648 0.54 0.49
December 31, 2004 50,337,332 24,990,427 7,326,726 0.68 0.62
-------------- -------------- ------------- --------- ---------
$180,341,135 $ 83,466,385 $20,386,804 $ 1.91 $ 1.73
============== ============== ============= ========= =========
Quarter ended:
March 31, 2003 $ 22,086,348 $ 8,299,821 $ 633,071 $ 0.06 $ 0.06
June 30, 2003 28,409,138 11,448,565 1,977,184 0.19 0.19
September 30, 2003 33,291,088 13,286,852 2,093,835 0.21 0.19
December 31, 2003 26,565,622 10,739,790 1,226,314 0.12 0.11
-------------- -------------- ------------- -------- ---------
$110,352,196 $ 43,775,028 $ 5,930,404 $ 0.58 $ 0.55
============== ============== ============= ======== =========
</TABLE>
Certain of the figures reported above may differ from previously reported
figures for individual quarters due to rounding.
68
<PAGE>
HANSEN NATURAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
Balance at Charged to Balance at
beginning cost and end of
Description of period expenses Deductions period
--------------------------------------------------------------------------------
Allowance for doubtful accounts, sales returns and cash discounts:
2004 $ 875,351 3,585,153 (3,208,403) $1,252,101
2003 $1,098,645 2,936,429 (3,159,723) $ 875,351
2002 $ 625,270 3,108,031 (2,634,656) $1,098,645
Promotional allowances:
2004 $4,666,770 29,939,960 (28,336,986) $6,269,744
2003 $3,170,171 15,139,959 (13,643,360) $4,666,770
2002 $2,981,556 12,660,386 (12,471,771) $3,170,171
Inventory reserves:
2004 $1,236,219 184,472 (465,004) $ 955,687
2003 $ 646,439 589,780 - $1,236,219
2002 $ 400,767 269,530 (23,858) $ 646,439
69
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements No.
33-92526, No. 333-41333, No. 333-89123 and No. 333-112482 of Hansen Natural
Corporation on Form S-8 of our report dated March 14, 2005, relating to the
consolidated financial statements and financial statement schedule of Hansen
Natural Corporation and subsidiaries and management's report on internal control
over financial reporting appearing in the Annual Report on Form 10-K of Hansen
Natural Corporation for the year ended December 31, 2004.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
March 14, 2005
70
</TEXT>
</DOCUMENT>