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, 2006

 

OR

 

o 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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o  No x

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 o  No x

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. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):  Large accelerated filer   x   Accelerated filer   o    Non-accelerated filer   o

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act.)     Yes o  No x

The aggregate market value of the common equity held by nonaffiliates of the registrant was $3,547,763,048 computed by reference to the closing sale price for such stock on the NASDAQ Capital Market on June 30, 2006, the last business day of the registrant’s most recently completed second fiscal quarter.

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 May 16, 2007 was 90,059,124 shares.

 




HANSEN NATURAL CORPORATION

FORM 10-K

TABLE OF CONTENTS

Item Number

 

 

 

 

PART I

 

 

 

 

 

 

 

1.

 

Business

 

 

1A.

 

Risk Factors

 

 

1B.

 

Unresolved Staff Comments

 

 

2.

 

Properties

 

 

3.

 

Legal Proceedings

 

 

4.

 

Submission of Matters to a Vote of Security Holders

 

 

 

 

 

 

 

 

 

PART II

 

 

 

 

 

 

 

5.

 

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

 

6.

 

Selected Financial Data

 

 

7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

7A.

 

Quantitative and Qualitative Disclosures about Market Risks

 

 

8.

 

Financial Statements and Supplementary Data

 

 

9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

 

9A.

 

Controls and Procedures

 

 

9B.

 

Other Information

 

 

 

 

 

 

 

 

 

PART III

 

 

 

 

 

 

 

10.

 

Directors, Executive Officers and Corporate Governance

 

 

11.

 

Executive Compensation

 

 

12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

 

13.

 

Certain Relationships and Related Transactions, and Director Independence

 

 

14.

 

Principal Accountant Fees and Services

 

 

 

 

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

15.

 

Exhibits, Financial Statement Schedules

 

 

 

 

 

 

 

 

 

Signatures

 

 

 

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PART I

ITEM 1.                  BUSINESS

Overview

Hansen Natural Corporation was incorporated in Delaware on April 25, 1990. Our principal place of business is at 1010 Railroad Street, Corona, California 92882 and our 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 Monster LDA Company (“MLDA”), 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 MLDA, formerly known as Hard e Beverage Company, and previously known as Hard Energy Company and as CVI Ventures, Inc., which was incorporated in Delaware on April 30, 1990.  HBC generates all of our operating revenues.

We develop, market, sell and distribute “alternative” beverage category natural sodas, fruit juices and juice drinks, energy drinks and energy sports drinks, fruit juice smoothies and “functional drinks,” non-carbonated ready-to-drink iced teas, lemonades, juice cocktails, children’s multi-vitamin juice drinks, Junior Juice® juices and non-carbonated lightly flavored energy waters under the Hansen’s® brand name.  We also develop, market, sell and distribute energy drinks under the following brand names; Monster Energy®, Lost® Energy™, Joker Mad Energy™, Unbound Energy® and Ace™ brand names as well as Rumba™ brand energy juice.  We also market, sell and distribute Java Monster™ non-carbonated dairy based coffee drinks.  We also market, sell and distribute natural sodas, premium natural sodas with supplements, organic natural sodas, seltzer waters, sports drinks and energy drinks under the Blue Sky® brand name. Our fruit juices for toddlers are marketed under the Junior Juice® brand name.  We also market, sell and distribute vitamin and mineral drink mixes in powdered form under the Fizzit™ brand name.

The Company has two reportable segments, namely Direct Store Delivery (“DSD”), whose principal products comprise energy drinks, and the Warehouse segment (“Warehouse”), whose principal products comprise juice based and soda beverages. The DSD segment develops, markets and sells products primarily through an exclusive distributor network whereas the Warehouse segment develops, markets and sells products primarily directly to retailers.

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 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® brand name, in January 1990.  On July 27, 1992, HBC acquired the Hansen’s® 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 including in particular, energy drinks. In September 1999, we acquired all of FJC’s rights to manufacture, sell and distribute fresh non-pasteurized juice products under the Hansen’s® 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

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corporation (“BSNBC”), under the Blue Sky® 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® trademark.

Industry Overview

The alternative beverage category combines non-carbonated ready-to-drink iced teas, lemonades, juice cocktails, single serve juices and fruit beverages, ready-to-drink dairy and coffee drinks, energy drinks, sports drinks, and single-serve still water (flavored, unflavored and enhanced) 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. According to Beverage Marketing Corporation, wholesale sales in 2006 for the alternative beverage category of the market are estimated at $22.0 billion representing a growth rate of approximately 14.5% over the estimated wholesale sales in 2005 of approximately $19.2 billion.

Reportable Segments

The Company has two reportable segments, namely DSD, whose principal products comprise energy drinks and Warehouse, whose principal products comprise juice based and soda beverages.  The DSD segment develops, markets and sells products primarily through an exclusive distributor network whereas the Warehouse segment develops, markets and sells products primarily direct to retailers.  Corporate and unallocated amounts that do not relate to the DSD or Warehouse segments specifically have been allocated to “Corporate & Unallocated.”

For financial information about our reporting segments and geographic areas, refer to Note 16 of Notes to the Consolidated Financial Statements set forth in Part II, Item 8.  “Financial Statements and Supplementary Data” of this report, incorporated herein by reference.  For certain risks with respect to our energy drinks see Item 1A. “Risk Factors” below.

Products

Natural Sodas. Hansen’s Natural Sodas® have been a leading natural soda brand in Southern California for the past 25 years.  In 2006, 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 fourteen regular flavors consisting of mandarin lime, key lime, grapefruit, raspberry, ginger ale, creamy root beer, grapefruit, vanilla cola, cherry vanilla creme, orange mango, kiwi strawberry, tropical passion, black cherry and tangerine.  In early 2001, we introduced a new line of diet sodas using Splenda® 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 three additional flavors: ginger ale, creamy root beer and grapefruit.  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® 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® 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 four flavors: orange crème, vanilla crème, ginger beer and sarsaparilla.

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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, tea sodas and isotonic sports drinks.  Blue Sky® natural sodas are available in twelve regular flavors consisting of lemon lime, grapefruit, cola, root beer, raspberry, cherry vanilla creme, Jamaican ginger ale, black cherry, orange creme, Dr. Becker, grape and cream soda.  We also offer a premium line of Blue Sky® 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® introduced a line of organic natural sodas, which are available in six flavors consisting of lemon lime cream, new century cola, orange divine, ginger ale, black cherry cherish, and root beer.  We also market a seltzer water under the Blue Sky® label in three flavors: natural, lime and lemon.  In 2002, we introduced a lightly carbonated Blue Sky® energy drink in an 8.3-ounce slim can.  In 2006, we introduced a 16-ounce size of Blue Energy as well as both an 8.3-ounce and 16-ounce size of Blue Sky Juiced Energy, which is lightly carbonated and contains 50% juice.  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® 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® natural sodas, seltzer waters and tea sodas are all packaged in 12-ounce aluminum cans and are marketed primarily to our direct retail customers.  In March 2005, we introduced a new light line of Blue Sky® sodas using natural sweeteners in four flavors: cherry vanilla crème, creamy root beer, Jamaican ginger ale and wild raspberry in 12-ounce cans.  In the third quarter of 2005, we introduced a new line of Blue Sky® natural sodas with real sugar in 12-ounce cans in four flavors: cherry vanilla crème, cola, ginger ale and root beer.  In December 2005, we introduced a new line of Blue Sky® isotonic sports drinks in 16-ounce polyethylene terephthalate (“PET”) plastic bottles in three flavors: orange, lemon lime and fruit punch.

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 these products. In 2003, we extended this line into unique proprietary 12-ounce glass bottles in both regular and diet versions.  This product line was 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 in 2003, and as a result we discontinued this product line.  We are currently evaluating alternative packages for this line.

In 2006, we introduced a new line of Hansen’s green tea sodas under the Hansen® brand name in 16-ounce aluminum cans that contain no preservatives, sodium, caffeine or artificial colors, in four flavors; ginger, lemon mint, tangerine and pomegranate.  We also introduced a diet version that contains no carbohydrates or sugar in three flavors; tangerine, lemon mint, ginger and in 2007, introduced an additional diet flavor, pomegranate.

Hansen’s® Energy Drinks. In 1997, we introduced a lightly carbonated citrus flavored Hansen’s® energy drink in 8.3-ounce cans in 4 packs. 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 also offered additional functional energy drinks as well as other functional drinks including a ginger flavored d-stress® drink, an orange flavored b-well™ drink, a guarana berry flavored stamina® drink, a grape flavored power drink, and a berry flavored “slim-down” drink that contained no calories, in the same size cans.  We have since discontinued sales of such functional products. Our energy drinks contain vitamins, minerals, nutrients, herbs and supplements (collectively “supplements”).   In 2004, we offered our Hansen’s® energy drink in 16-ounce cans which has subsequently been discontinued. In 2006, we reintroduced our energy products through the Warehouse segment and introduced Hansen’s® Energy Pro™ 8.3-ounce cans in four packs. In 2001, we introduced Energade®, a non-carbonated energy sports drink in 23.5-ounce cans in two flavors, citrus and orange,

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and subsequently introduced a third flavor, red rocker, which we have since discontinued.  In 2001 we also introduced E2O Energy Water®, a non-carbonated lightly flavored water, in 24-ounce blue PET plastic bottles, in four flavors: tangerine, apple, berry and lemon.   We subsequently discontinued the apple flavor and introduced a green tea flavor in its place.  In 2002, we expanded our E2O Energy Water® line with four additional flavors in clear PET plastic bottles: mango melon, kiwi strawberry, grapefruit and green tea.  We have since discontinued the E2O Energy Water® line in clear PET plastic bottles.  Our Energade® and E2O Energy Water® 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 Diet Red Energy® brand name.  Our Diet Red Energy® energy drink is sweetened with Splenda® and Acesulfame-K.  We market our energy and Energade® drinks primarily through our full service distributor network.  We market our E2O Energy Water® drinks in blue bottles to our direct retail customers and are currently in the process of revaluating this line. In 2003, we introduced a new carbonated energy drink under the Hansen’s® Deuce brand name, in 16-ounce cans, but with a different flavor from our existing Hansen’s® energy drinks in 8.3-ounce cans.  We have since discontinued this product.

Monster Energy® Drinks.  In 2002, we launched a new carbonated energy drink under the Monster Energy® brand name, in 16-ounce cans, which was almost double the size of our regular energy drinks in 8.3-ounce cans and the vast majority of competitive energy drinks on the market at that time.  Our Monster Energy® drink contains different types and levels of supplements than our Hansen’s® energy drinks and is marketed through our full service distributor network.  In 2003, we introduced a low carbohydrate (“Lo-Carb”) version of our Monster Energy® energy drink.  In 2004, we introduced 4-packs of our Monster Energy® energy drinks including our Lo-Carb version thereof and, towards the end of 2004, we launched a new Monster Energy® Assault™ energy drink in 16-ounce cans.  During the first half of 2005, we introduced our Monster Energy® drinks and Lo-Carb Monster Energy® in 24-ounce size cans as well as Monster Energy®, Lo-Carb Monster Energy® and Monster Energy® Assault™ in 8.3-ounce size cans.  In September 2005, we introduced a new Monster Energy® Khaos™ energy drink in 16-ounce cans.  Monster Energy® Khaos™ is lightly carbonated and contains 70% juice. In 2006, we introduced our Monster Energy® Assault™ and Monster Energy® Khaos™ energy drinks in 24-ounce size cans.  Also in 2006, we introduced Monster Energy® Khaos™ energy drinks in 8.3-ounce size cans.  During the first quarter 2007 we introduced a new Monster M-80™ energy drink in 16-ounce size cans. Monster M-80™ energy drinks are lightly carbonated and contain 80% juice.  We also introduced Monster Energy® energy drinks in 8-packs.

Lost® Energy™ Drinks.  In 2004, we launched a new carbonated energy drink under the Lost® brand name, in 16-ounce cans. Towards the end of 2005, we introduced a lo-carb version of Lost® under the Perfect 10™ brand name as well as a new Lost® Five-O™ energy drink, all in 16-ounce cans.  Lost® Five-O™ contains 50% juice and is lightly carbonated.  In December 2005, we introduced Lost® and Lost® Five-O™ in 24-ounce size cans.  The Lost® 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™ Energy Juice.  In December 2004, we launched a new non-carbonated energy juice under the Rumba™ brand name in 15.5-ounce cans.  Rumba™ energy juice 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.

Joker Mad EnergyDrinks.  In the first quarter of 2005, we introduced Joker Mad Energy™ energy drinks in 16-ounce cans.  Joker Mad Energy™ energy drinks come in regular, lo-carb and juice versions in 16-ounce cans.

Ace™ Energy Drinks.  In August 2006, we introduced Ace™ energy drinks in 16-ounce cans.  Ace™ energy drinks come in regular, lo-carb and juice versions in 16-ounce cans.

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Unbound Energy® Drinks.  In October 2006, we acquired the Unbound Energy® trademark and assumed the production, marketing and sale of Unbound Energy® energy drinks in 16-ounce cans. We subsequently introduced lo-carb and juice versions in 16-ounce cans.

Java Monster™ Coffee Drinks. In May 2007, we launched a new non-carbonated dairy based coffee drink under the Java Monster™ brand name in 16-ounce cans.  Java Monster™ comes in three versions, “Big Black,” “Loca Moca” and “Mean Bean.”

Juice Products and Smoothies.  Our fruit juice product line includes Hansen’s® Natural Apple Juice, which is packaged in 64-ounce PET plastic bottles and 128-ounce polypropylene bottles and White Grape, White Grape Peach, Purple Grape, Orange, Pomegranate, Apple Strawberry and Apple Grape juice blends, in 64-ounce PET plastic bottles.  These Hansen’s® juice products contain 100% juice (except Pomegranate which contains 27% juice) as well as Vitamin C.  Hansen’s® juice products compete in the shelf-stable juice category.  We also offer light juices (light grape, cranberry and apple) and juice cocktails (apple medley, apple pear, apple berry and apple white grape) in 64-ounce PET plastic bottles, as well as juice cocktails (apple cranberry, apple white grape, apple berry and apple) in 32-ounce PET plastic bottles.

In March 1995, we introduced a line of fruit juice smoothie drinks in 11.5-ounce aluminum cans.  Certain flavors were subsequently offered in glass and PET plastic bottles. We have since discontinued offering smoothies in glass and PET plastic bottle packages.  Hansen’s fruit juice smoothies have a smooth texture that is thick but lighter than a nectar.  In 2006, we reformulated Hansen’s smoothies by adding more fruit purees. Hansen’s smoothies in 11.5-ounce aluminum cans now contain approximately 25% juice.  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® fruit juice smoothies are available in ten flavors: strawberry banana, peach berry, mango pineapple, guava strawberry, pineapple coconut, apricot nectar, tropical passion, whipped orange, as well as the blast line comprising Island Energy Blast and Colada Energy 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.

We market the above juice and smoothie products to our direct retail customers.

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 this product in the fourth quarter of 2003. We still intend to reevaluate relaunching this product once certain production issues are resolved and a suitable co-packer has been identified.

Iced Teas, Lemonades and Juice Cocktails. We introduced Hansen’s® ready-to-drink iced teas and lemonades in 1993 and juice cocktails in 1994 in 16-ounce glass bottles.   At the end of 2002, we converted this line from 16-ounce glass bottles to 16-ounce polypropylene bottles. This line was discontinued in 2006.

In 1999, we introduced a line of specialty teas in 20-ounce glass bottles, which we named our “Gold Standard” line.  This line was discontinued in 2006.

In 2006, we introduced a new line of iced teas in sleek 16-ounce wide mouth PET plastic bottles.  This line is sweetened with cane sugar and includes green tea, peach green tea, lycee green tea and pomegranate green tea.  In addition, we offer a sugar free peach green tea with sucralose and an unsweetened black tea.

Juices for Children.  In 1999, we introduced two new lines of children’s multi-vitamin juice drinks in 8.45-ounce aseptic boxes.  Each drink contains eleven essential vitamins and six essential minerals.  We introduce new flavors in place of existing flavors from time to time.  One of these two

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lines is a dual-branded 100% juice line named Juice Blast® that was launched in conjunction with Costco Wholesale Corporation (“Costco”) and is sold through Costco stores.  The other line was a 10% juice line named “Hansen’s Natural Multi-Vitamin Juice Slam®” that was available to all of our customers.  During 2000, we repositioned that line as a 100% juice line under the Juice Slam® name and market that line to grocery store chain customers, the health food trade, and other customers.  Both the Juice Blast® and Juice Slam® lines are marketed in 6.75-ounce aseptic boxes.  The Juice Slam® line has four flavors and the Juice Blast® line has three flavors.

In 2003 we further extended our fruit juice product line by introducing a 100% apple juice in 6.75-ounce aseptic pouches under the Apple Blasters™ brand.  In 2006 we discontinued our Apple Blasters™ product and repositioned our pouch line by introducing two Juice Slam® organic pouches in organic apple and organic fruit punch flavors.

In May 2001, we acquired the Junior Juice® beverage business.  The Junior Juice® 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® line have calcium added and all flavors have vitamin C added. The current flavors in the Junior Juice® line are apple, apple berry, orange twist, apple grape, mixed fruit, fruit punch and white grape.

In 2006, we extended the Junior Juice® line by adding organic apple and organic berry medley juice products in 4.23-ounce aseptic boxes. Each of our organic Junior Juice® products have 100% juice and contain 100% of the daily recommended allowance of vitamin C and 10% of the daily recommended allowance of calcium.

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. Sales of this product line are very limited.

Fizzit™ Powdered Drink Mixes. In December 2005, we introduced a new line of vitamin and mineral drink mixes in powdered form under the Fizzit™ brand name in both functional and vitamin and mineral formulas.  The functional formulas are offered in raspberry (joint formula), orange (immune support formula), strawberry (immune support formula) and cranberry (women’s health formula).  The vitamin and mineral formula is offered in lemon line and strawberry flavors.

During 2006, we continued to expand our existing product lines and further develop our markets.  In particular, we continued 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.

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.

We also develop and supply, on a limited basis, selected beverages in different formats to a limited number of customers with the objective of solidifying our relationship with those customers.

Manufacture and Distribution

We do not directly manufacture our products but instead outsource the manufacturing process to third party bottlers and contract packers.

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We purchase concentrates, juices, flavors, supplements, cans, bottles, aseptic boxes, aseptic pouches, 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® 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 accordance with our formulas.  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.

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:

(a) Our agreement with Gluek Brewing Company (“Gluek”) pursuant to which Gluek packages certain of our energy drinks in 8.3-, 15.5-, 16- and 24-ounce cans.  This contract continues until August 2008 and is automatically renewed for one year periods thereafter.  Either party is entitled at any time to terminate the agreement upon 180 days prior written notice to the other party.

(b) Our agreement with Seven-Up/RC Bottling Company of Southern California, Inc. (“Seven-Up”) pursuant to which Seven-Up packages certain of our MonsterTM and Lost® Energy brand energy drinks and a portion of our Hansen’s Natural Sodas®.  This contract continues until March 2009.  Upon termination prior to such time we are entitled to recover certain equipment we have purchased and installed at Seven-Up’s facility.

(c) Our agreement with City Brewing Company LLC (“City Brew”) pursuant to which City Brew packages certain of our Energade® energy sports drinks and energy drinks in 16- and 24-ounce cans.  This contract continues until July 31, 2007. Either party is entitled, at any time, to terminate the agreement upon 90 days prior written notice to the other party.

(d) Our agreement with Nor-Cal Beverage Co., Inc. (“Nor-Cal”) pursuant to which Nor-Cal packages certain of our Hansen’s® juices in PET plastic bottles.  This contract continues until August 2007 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.

(e) Our agreement with Whitlock Packaging, Inc. (WPI) pursuant to which WPI packages certain of our 4.23-ounce and 6.75-ounce aseptic juice beverages which include Junior Juice, Juice Slam and Juice Blast.  This contract, which commenced on January 1, 2001, is renewable annually thereafter and may be terminated by either party with not less than 60 days notice.

(f) Our agreement with Dr. Pepper Bottling Co. (“Dr. Pepper”) pursuant to which Dr. Pepper packages certain of our energy drinks in 16-ounce cans.  This contract continues until December 31, 2009 and is renewable annually thereafter, unless terminated by either party with not less than 30 days notice.

(g) Our agreement with Lucerne Foods, Inc. (“Safeway-Norwalk”) pursuant to which Safeway-Norwalk packages certain of our energy drinks in 16-ounce cans and Hansen’s Natural Sodas® in 12- ounce cans.  This contract continues until March 31, 2009 and is renewable annually thereafter unless terminated by either party not less than 6 months.

(h) Our agreement with Pri-Pak, Inc. (“Pri-Pak”) pursuant to which Pri-Pak packages certain of our energy drinks.  This contract continues indefinitely but may be terminated at any time by either party upon ninety (90) days prior written notice to the other.

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(i) Our agreement with Carolina Beer & Beverage pursuant to which Carolina Beer & Beverage packages certain of our energy drinks in 8-ounce, 16-ounce and 24-ounce cans.  This contract continues until April 10, 2009 and is renewable annually thereafter, unless terminated by either party with not less than 180 days notice.

(j) Our agreement with Southeast Atlantic Beverage Corporation (“Southeast”) pursuant to which Southeast packages certain of our Monster Energy® and Lost® Energy brand energy drinks.  This contract continues until July 2007 and is renewable annually thereafter, unless terminated by either party not less than 180 days prior to the end of the then current term.

(k) Our agreement with Southwest Canning and Packaging, Inc. (“Southwest”) pursuant to which Southwest packages certain of our Hansen’s Natural Sodas®.  This contract continues indefinitely and is subject to termination upon 60 days written notice from either party.

(l) Our agreement with Olympic Foods, Inc. (“OFI”) pursuant to which OFI packages certain of our 4.23-ounce and 6.75-ounce aseptic juice beverages which include Junior Juice, Juice Slam and Juice Blast.  This contract continues until January 1, 2008 and is renewable annually thereafter, unless terminated by either party not less than 120 days.

In certain 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, PET/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.

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® brand energy drinks in 8.3-ounce cans, aseptic juice products, Energade® in 24-ounce cans, teas in 16-ounce PET/plastic bottles, Monster Energy®, Lost® Energy, RumbaTM, Joker Mad EnergyTM, Ace™, Unbound Energy® energy drinks in 8.3-, 15.5-, 16-, and 24-ounce cans and Java Monster™ coffee drinks in 16-ounce cans. 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.

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On April 28, 2006, HBC entered into a distribution agreement with Cadbury Bebidas, S.A. de C.V. (“Cadbury Bebidas”), for exclusive distribution by Cadbury Bebidas throughout Mexico, excluding Baja California, of our Monster Energy® and Lost® EnergyTM energy products.

On May 8, 2006, HBC entered into the Monster Beverages Off-Premise Distribution Coordination Agreement and the Allied Products Distribution Coordination Agreement (jointly, the “Off-Premise Agreements”) with Anheuser-Busch, Inc., a Missouri corporation (“AB”).  Under the Off-Premise Agreements, select Anheuser-Busch distributors (the “AB Distributors”) will distribute and sell, in markets designated by HBC, HBC’s Monster Energy® and Lost® EnergyTM brands non-alcoholic energy drinks, Rumba™ brand energy juice and Unbound Energy®  brand energy drinks, as well as additional products that may be agreed between the parties.  We intend to continue building our national distributor network primarily with select AB distributors as well as with our sales force throughout 2007 to support and grow the sales of our products.

Pursuant to the Anheuser-Busch Distribution Agreements (the “AB Distribution Agreements”) entered into with newly appointed AB Distributors, non-refundable payments totaling $20.9 million were made to the Company by such newly appointed AB Distributors for the costs of terminating the Company’s prior distributors through December, 31, 2006. Such receipts have been accounted for as deferred revenue in the accompanying consolidated balance sheet as of December 31, 2006 and will be recognized as revenue ratably over the anticipated 20 year life of the respective AB Distribution Agreements.

As of December 31, 2006, amounts totaling $3.3 million had been paid to the Company by certain other AB Distributors in anticipation of executing AB Distribution Agreements with the Company. Such receipts have been accounted for as customer deposit liabilities in the accompanying condensed consolidated balance sheet as of December 31, 2006.

Through December 31, 2006, the Company incurred termination costs amounting to $12.7 million in aggregate to certain of its prior distributors. Such termination costs have been expensed in full and are included in operating expenses for the year ended December 31, 2006. Certain amounts totaling $7.0 million included in such termination costs were not paid to our prior distributors before the end of our fiscal year and are therefore included in accrued liabilities in the accompanying consolidated balance sheet as of December 31, 2006.

On February 8, 2007, HBC entered into the On-Premise Distribution Coordination Agreement (the “On-Premise Agreement”) with AB.  Under the On-Premise Agreement, AB will manage and coordinate the sales, distribution and merchandising of Monster Energy® energy drinks to on-premise retailers including bars, nightclubs and restaurants in territories approved by HBC.

On March 1, 2007, HBC entered into a distribution agreement with Pepsi-QTG Canada, a division of PepsiCo Canada, ULC (“Pepsi Canada”), for the exclusive distribution by Pepsi Canada throughout Canada of our Monster Energy®, Lost® EnergyTM, Hansen’s® and Joker Mad Energy™ energy products.

Distribution levels vary from state to state and from product to product.  Certain of our products are sold in Canada and Mexico.  We also sell a limited range of our products to distributors outside of the United States, including in the Caribbean, Central and South America, Japan, Korea, 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 endeavor to reduce our inventory levels.

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During 2006, 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 Monster Energy® drinks, Lost® EnergyTM, AceTM, Unbound Energy®, and Joker Mad EnergyTM energy drinks, RumbaTM energy juice and Energade® energy sports drinks and we intend to continue to build such sales force in 2007.

Our Blue Sky® products are sold primarily to the health food trade, natural food chains and mainstream grocery store chains, through specialty health food distributors.

During 2004, we entered into 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 PET plastic bottles. The contracts commenced on July 12, 2004 and were due to expire in July 2007.  The parties have mutually agreed to extend the contracts until July 11, 2008.

Under these contracts Hansen’s is the exclusive supplier for both Apple Juice and for the blended juice category, a new WIC category, initially with our 100% Apple Grape Juice.  During 2005, our Apple Strawberry Juice was approved within the blended juice category and became eligible for redemption under the WIC contract in addition to our 100% Apple Grape Juice.  The WIC contracts have expanded 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.

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, California 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 two short term leases concerned. This facility was subsequently sublet on April 1, 2007. In June 2006, the Company leased additional warehouse and office space in Corona, California for a one-year period. In October 2006, we entered into a lease agreement pursuant to which we leased 346,495 square feet of warehouse and distribution space also located in Corona, California.  This lease commitment provides for minimum rental payments for 120 months commencing March 2007, excluding renewal options.  The monthly rental payments are $167,586 at the commencement of the lease and increase over the lease term by 7.5% at the end of each 30 month period. The new warehouse and distribution space will replace our existing warehouse and distribution space located in Corona, California. We plan to sublet our existing office, warehouse and distribution space for the remainder of the lease term, unless we are able to find a tenant acceptable to the landlord and the landlord agrees to the early termination of the lease.

In October 2006, we also entered into an agreement to acquire 1.8 acres of vacant land for a purchase price of $1.4 million, located adjacent to the newly leased warehouse and distribution space in Corona, California for the purpose of constructing a new office building which will replace our existing office space in Corona, California. In the interim, we have leased additional office space located near our existing corporate offices.  (See “Part I Item 2 – Properties”).

Raw Materials and Suppliers

The principal raw materials used by us are aluminum cans, glass bottles and PET 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 prices of PET plastic bottles and aluminum cans increased significantly in 2006 and again in 2007. The prices of high fructose corn syrup, sucrose and certain juice concentrates, including apple, increased in 2006 and certain of these ingredients continued to increase in 2007.  These increased costs, together with increased costs primarily of energy,

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gas and freight, resulted in increases in certain product costs which are ongoing and are expected to continue to exert pressure on our gross margins in 2007.  We are uncertain whether the prices of these or any other raw materials or ingredients 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.  Certain of our cans are only manufactured by a single 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 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 flavor formulas 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.

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 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.

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Over the past five 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 tea 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 Schweppes plc, Red Bull Gmbh, Kraft Foods, Inc., Nestle Beverage Company, Tree Top and Ocean Spray. We also compete with companies that are smaller or primarily local in operation.  Our products also compete with private label brands such as those carried by grocery store chains, convenience store chains and club stores.

Our natural sodas compete directly with traditional soda products including those marketed by The Coca-Cola Company, PepsiCo, Inc. and Cadbury Schweppes plc, as well as with carbonated beverages marketed by smaller or primarily local companies such as Jones Soda Co., Clearly Canadian Beverage Company, Crystal Geyser, J.M. Smucker Company and with private label brands such as those carried by grocery store chains, convenience 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 PET 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® energy, Diet Red, Monster Energy®, Lost® Energy™, Joker Mad Energy™, Ace™ Energy, Unbound Energy® and Rumba™ energy juice in 8.3-, 15.5-, 16- and 24-ounce cans, compete directly with Red Bull, Rockstar, Full Throttle, No Fear, Amp, Adrenaline Rush, 180, Extreme Energy Shot, Red Devil, Rip It, NOS, Boo Koo, and many other brands.  The Coca-Cola Company and PepsiCo Inc. also market and/or distribute additional products in that market segment such as Mountain Dew, Mountain Dew MDX and Vault.

Our Java Monster™ coffee drinks compete directly with Starbucks Frappuccino and other coffee drinks, Cinnabon coffee drinks and Godiva dairy based drinks.

Our E2O Energy Water® and still water products compete directly with Vitamin Water, Propel, Dasani, Aquafina, Fruit2O, Evian, Crystal Geyser, Naya, Palomar Mountain, Sahara, Arrowhead, Dannon, and other brands of flavored water and still water, especially store brands.

Sales and Marketing

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 beverages and drink mixes.  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,

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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 cancer research and SPCA’s as well as of extreme sports teams such as the Pro Circuit – Kawasaki Motocross and Supercross teams, Kawasaki Factory Motocross and Supercross teams, Alan Pflueger Desert Racing Team, Kenny Bernstein Drag Racing Team, extreme sports figures and athletes, sporting events such as the Monster Energy® Pipeline Pro Surfing competition, marathons, 10k runs, bicycle races, volleyball tournaments and other health and sports related activities, including extreme sports, particularly supercross, freestyle motocross, surfing, skateboarding, wakeboarding, skiing, snowboarding, BMX, mountain biking, snowmobile racing, and also participate in product demonstrations, food tasting and other related events.  Posters, print, radio and television advertising together with price promotions and coupons, may also be used to promote our brands.

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 Energy® drinks and natural sodas on all stations.  The initial term of the Monorail Agreement commenced on January 1, 2005 and has been renewed annually thereafter.  We have renewed the agreement for 2007 but at a lower annual rate.

We believe that one of the keys to success in the beverage industry is differentiation such as making Hansen’s® products visually distinctive from other beverages on the shelves of retailers.  We review our products and packaging on an ongoing basis and, where practical, endeavor to make them different, better and unique.  The labels and graphics for many of our products are redesigned from time to time to maximize their visibility and identification, wherever they may be placed in stores and we will continue to reevaluate the same from time to time.

Where appropriate we partner with retailers to assist our marketing efforts.  For example, while we retain responsibility for the marketing of the Juice Slam® line of children’s multi-vitamin juice drinks, Costco has undertaken partial responsibility for the marketing of the Juice Blast® line.

We increased expenditures for our sales and marketing programs by approximately 50­­% in 2006 compared to 2005.  As of December 31, 2006, we employed 591 employees in sales and marketing activities, of which 231 were employed on a full-time basis.

Customers

Our customers are typically retail grocery and specialty chains, wholesalers, club stores, drug chains, mass merchandisers, convenience chains, full service beverage distributors, health food distributors and food service customers.  Sales to our various customer types for 2006 are reflected below.  The allocations below reflect changes made by the Company to the categories historically reported.

Retail Grocery, specialty chains and wholesalers

 

12

%

Club stores, drug chains & mass merchandisers

 

14

%

Full service distributors

 

69

%

Health food distributors

 

2

%

Other

 

3

%

 

Our customers include Cadbury Schweppes Bottling Group (formally known as Dr. Pepper Bottling/7UP Bottling Group), Wal-Mart, Inc. (including Sam’s Club), Kalil Bottling Group, Trader Joe’s, John Lenore & Company, Costco, Kroger, Safeway and Albertsons.  A decision by any large 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.  Cadbury Schweppes Bottling Group, a customer of the DSD division, accounted for approximately 19%,18% and

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13% of our net sales for the years ended December 31, 2006, 2005 and 2004, respectively. Wal-Mart, Inc. (including Sam’s Club), a customer of both the DSD and Warehouse divisions, accounted for approximately 12% of our net sales for the year ended December 31, 2006.

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 with respect to our products.  However, the energy drink category appears to be less seasonal than traditional beverages.  As the percentage of our sales that are represented by such products continues to increase, seasonal fluctuations will be further mitigated.  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 sales of our finished products and changes in and/or increased advertising, marketing and promotional expenses.

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® 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 trademark registrations including, but not limited to, A New Kind a Buzz®,Unleash the Beast!®, Hansen’s Energy®, Blue Energy®, Energade®, Hansen’s E2O Energy Water®, Hansen’s Slim Down®, Power Formula®, The Real Deal®, Liquidfruit®, California’s Natural Choice®, Medicine Man®, Hansen’s Power®, B·Well®, Anti-ox®, D-stress®, Stamina®, Defense®, Immunejuice®, Hansen’s Natural Multi-Vitamin Juice Slam®, Juice Blast®, Red Rocker®, Monster Energy®, M (stylized)®, M Monster Energy® and Hansen’s Natural Soda® in the United States and, the Monster®, Monster Energy®, M(stylized)®, Hansen’s® and Smoothie® 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™, Monster Energy™, M(stylized)™, Assault™, Energy Pro™, Khaos™, Monster M-80™, Predator™, M Monster Mutant™, Joker Mad Energy™, Ace™, Rumba™, Fizzit™ and Fizz Bomb™, Java Monster™, Mean Bean™, Java Monster Big Black™, Loca Moca™ and The Juice is Loose™.

In September 2000, in connection with the acquisition of the Blue Sky Natural Beverage business, we acquired the Blue Sky® trademark which is registered in the United States and Canada, through our wholly owned subsidiary Blue Sky.

In May 2001, in connection with the acquisition of the Junior Juice beverage business, we acquired the Junior Juice® trademark, which is registered in the United States, through our wholly owned subsidiary Junior Juice.

In October 2006, we acquired the Unbound Energy® trademark which is registered in the United Sates.

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.

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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, 2006, we employed a total of 748 employees of which 377 were employed on a full-time basis.  Of our 748 employees, we employ 157 in administrative and operational capacities and 591 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® 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

(800) 426-7367

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ITEM 1A.           RISK FACTORS

In addition to the other information in this report, you should carefully consider the following risks.  If any of the following risks actually occur, our business, financial condition and/or operating results could be materially adversely affected.  The risk factors summarized below are not the only risks we face.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

If we fail to maintain effective disclosure controls and procedures and internal control over financial reporting on a consolidated basis, our stock price and investor confidence in our Company could be materially and adversely affected.

We are required to maintain both disclosure controls and procedures and internal control over financial reporting that are effective for the purposes described in Part II, Item 9A. If we fail to do so, our business, results of operations or financial condition and the value of our stock could be materially harmed.

Part II, Item 9A reports our changes in internal control over financial reporting relating to the documentation of stock option grants. We cannot assure that these efforts will be successful and we may face additional risks of errors or delays in preparing our consolidated financial statements and associated risks of potential late filings of periodic reports and increased expenses arising from such matters.

Legal proceedings related to our historical stock option grant practices and other issues may significantly harm our business.

Several lawsuits have been filed against us and current officers and members of the Board of Directors in connection with our prior stock option practices. These lawsuits are described more fully in Part I, Item 3. “Legal Proceedings” and in Part II, Item 8, Note 10 to our consolidated financial statements contained in this Form 10-K. Defending these lawsuits will result in significant expenditures and the continued diversion of our management’s time and attention from the operation of our business, which could have a negative effect on our business operations. From time to time, we may become involved in other litigation or other proceedings. Matters arising out of or related to our review of historic stock option granting practices, including the outcome of the informal inquiry commenced by the SEC, any other proceedings which may be brought against us by the SEC or other governmental agencies, the outcome of our delisting proceedings and the outcome of litigation could possibly harm our future results of operations or financial condition due to expenses we may incur to defend ourselves or the ramifications of an adverse decision.

Increased competition could hurt our business.

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.  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 Schweppes plc, Red Bull Gmbh, Kraft Foods Inc., Nestle Beverage Company, Tree Top and Ocean Spray.  We also compete with companies that are smaller or primarily local in operation.  Our products also compete with private label brands such as

19




those carried by grocery store chains, convenience store chains, and club stores.  There can be no assurance that we will not encounter difficulties in maintaining our current revenues or market share or position due to competition in the beverage industry.  If our revenues decline, our business, financial condition and results of operations could be adversely affected.

We derive a substantial portion of revenues from our energy drinks and competitive pressure in the “energy drink” category could adversely affect our operating results.

A substantial portion of our sales are derived from our energy drinks, including in particular our Monster Energy® brand energy drinks. Our DSD segment which comprises primarily energy drinks, represented 85% of net sales for the year ended December 31, 2006.  Any decrease in the sales of our Monster Energy® brand energy drinks could significantly adversely affect our future revenues and net income. Historically, we have experienced substantial competition from new entrants in the energy drink category.  Our energy drinks compete directly with Red Bull, Rockstar, Full Throttle, No Fear, Amp, Adrenaline Rush, 180, Extreme Energy Shot, Red Devil, Rip It, Nos, Boo Koo and many other brands.  A number of companies who market and distribute iced teas and juice cocktails in different packages, such as 16- and 20-ounce glass bottles, including Sobe, Snapple Elements, Arizona, Fuse, and Vitamin Water, have added supplements to their products with a view to marketing their products as “functional” or “energy” beverages or as having functional benefits.  In addition, certain large companies such as The Coca-Cola Company and PepsiCo Inc. market and/or distribute products in that market segment such as Mountain Dew, Mountain Dew MDX, and Vault.  Competitive pressures in the energy drink category could impact our revenues or we could experience price erosion or lower market share, any of which could have a material adverse affect on our business and results.

Change in consumer preferences may reduce demand for some of our products.

There is increasing awareness and concern for the health consequences of obesity.  This may reduce demand for our non-diet beverages, which could affect our profitability.

Consumers are seeking greater variety in their beverages. Our future success will depend, in part, upon our continued ability to develop and introduce different and innovative beverages.  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 and health, although there can be no assurance of our ability to do so. There is no assurance that consumers will continue to purchase our products in the future.  Additionally, many of our products are considered premium products and to maintain market share during recessionary periods we may have to reduce profit margins which would adversely affect our results of operations.  Product lifecycles for some beverage brands and/or products and/or packages may be limited to a few years before consumers’ preferences change.  The beverages we currently market are in varying stages of their lifecycles and there can be no assurance that such beverages will become or remain profitable for us.  The beverage industry is subject to changing consumer preferences and shifts in consumer preferences may adversely affect us if we misjudge such preferences.  We may be unable to achieve volume growth through product and packaging initiatives.  We also may be unable to penetrate new markets.  If our revenues decline, our business, financial condition and results of operations will be adversely affected.

We rely on bottlers and other contract packers to manufacture our products. If we are unable to maintain good relationships with our bottlers and contract packers and/or their ability to manufacture our products becomes constrained or unavailable to us, our business could suffer.

We do not directly manufacture our products, but instead outsource such manufacturing to bottlers and other contract packers.  Although our production arrangements are generally of short duration or are terminable upon request, in the event of a disruption or delay, we may be unable to procure alternative packing facilities at commercially reasonable rates and/or within a reasonably short time period.  In addition, there are limited packing facilities in the United States with adequate capacity

20




and/or suitable equipment for many of our products, including Hansen’s® brand energy drinks in 8.3-ounce and 16-ounce cans, our PET tea line, aseptic juice products, juices in 64-ounce PET plastic bottles, Energade®, Monster Energy®, Lost® Energy™, Ace™, Unbound Energy®, RumbaTM and Joker Mad EnergyTM energy drinks in 8.3-, 15.5-, 16-, and 24-ounce cans, Java MonsterTM coffee drinks in 16-ounce cans and other products.  There are also limited shrink sleeve labeling facilities available to us in the United States with adequate capacity for our E2O Energy Water®.  A disruption or delay in production of any of such products could significantly affect our revenues from such products as alternative co-packing facilities in the United States with adequate capacity may not be available for such products either at commercially reasonable rates, and/or within a reasonably short time period, if at all.  Consequently, a disruption in production of such products could adversely affect our revenues.

We rely on bottlers and distributors to distribute our DSD products.  If we are unable to secure such bottlers and distributors and/or we are unable to maintain good relationships with our existing bottlers and distributors, our business could suffer.

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 (both alcoholic and non-alcoholic), including energy drinks.  In many cases, such products compete directly with our products.

The marketing efforts of our distributors are important for our success.  If our DSD brands prove to be less attractive to our existing bottlers and distributors and/or if we fail to attract additional bottlers and distributors, and/or our bottlers and/or distributors do not market and promote our products above the products of our competitors, our business, financial condition and results of operations could be adversely affected.

Our customers are material to our success.  If we are unable to maintain good relationships with our existing customers, our business could suffer.

Unilateral decisions could be taken by our distributors, and/or convenience chains, grocery chains, specialty chain stores, club stores and other customers to discontinue carrying all or any of the our products that they are carrying at any time, which could cause our business to suffer.

Two customers accounted for approximately 19% and 12% of the Company’s net sales for the year ended December 31, 2006, respectively. One customer accounted for approximately 18% and 13% of the Company’s net sales for the years ended December 31, 2005 and 2004, respectively.  A decision by either customer, or any other large 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.

We have 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 PET 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. The parties have mutually agreed to extend the contracts until July 11, 2008. There is no certainty whether we will be successful in securing any new future WIC contracts with the State.  If we are unsuccessful in securing new future WIC contracts with the State, our revenues from those products could be materially adversely affected.

Increases in cost or shortages of raw materials or increases in costs of co-packing could harm our business.

The principal raw materials used by us comprise aluminum cans, glass bottles and PET plastic bottles as well as juices, high fructose corn syrup, sucrose and sucralose, the costs of which are subject to

21




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 prices of PET plastic bottles and aluminum cans increased in 2006 and again in 2007. The prices of high fructose corn syrup, sucrose and certain juice concentrates, including apple, increased in 2006 and certain of these ingredients continued to increase in early 2007. These increased costs, together with increased costs primarily of energy and gas and freight resulted in increases in certain product costs which are ongoing and are expected to continue to exert pressure on our gross margins in 2007.  In addition, certain of our co-pack arrangements allow such co-packers to increase their charges based on certain of their own cost increases.  We are uncertain whether the prices of any of the above or any other raw materials or ingredients will continue to rise in the future and whether we will be able to pass any of such increases on to our customers.

In addition, some of these raw materials, such as a sucralose and certain sizes of cans, are available from a limited number of suppliers.  Sucralose, which is used in many of the Company’s products including the Company’s low-calorie products, is purchased by us from a single manufacturer. While we believe that our 2007 sucralose volume allocation will be sufficient to meet the demand for our products that contain sucralose, we may need to reformulate certain of those products that contain sucralose with alternative sweetener systems to avoid an interruption in supply of those products, should the need arise.

We may not correctly estimate demand for our products.  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, PET plastic bottles, cans, glass, labels, sucralose, flavors, supplements, certain sweeteners, or packing arrangements, we might not be able to satisfy demand on a short-term basis.  Moreover, industry-wide shortages of certain juice concentrates, 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 and could have a material adverse effect on our business and financial results.  We do not use hedging agreements or alternative instruments to manage this risk.

The costs of packaging supplies are subject to price increases from time to time and we may be unable to pass all or some of such increased costs on to our customers.

The majority of our packaging supplies contracts allow our suppliers to alter the costs they charge us for packaging supplies based on changes in the costs of the underlying commodities that are used to produce those packaging supplies, such as resin for PET bottles, aluminum for cans, pulp for cartons and/or trays.  These changes in the prices we pay for our packaging supplies occur at certain predetermined times that vary by product and supplier.  Accordingly, we bear the risk of increases in the costs of these packaging supplies, including the underlying costs of the commodities that comprise these packaging supplies. We do not use derivative instruments to manage this risk.  If the costs of these packaging supplies increase, we may be unable to pass these costs along to our customers through corresponding adjustments to the prices we charge, which could have a material adverse effect on our results of operations.

We rely upon our ongoing relationships with our key flavor suppliers.  If we are unable to source our flavors on acceptable terms from our key suppliers, we could suffer disruptions in our business.

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. Industry-wide shortages of certain juice concentrates, 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.  If we have to replace a flavor supplier, we could experience temporary disruptions in our ability to deliver products to our customers which could have a material adverse effect on our results of operations.

22




Our intellectual property rights are critical to our success, the loss of such rights could materially adversely affect our business.

We own numerous trademarks that are very important to our business.  We also own the copyright in and to portion of the content on the packaging of our products.  We regard our trademarks, copyrights, and similar intellectual property as critical to our success and attempt to protect such property with registered and common law trademarks and copyrights, restrictions on disclosure and other actions to prevent infringement.  Product packages, mechanical designs and artwork are important to our success and we take action to protect against imitation of our packaging and trade dress and to protect our trademarks and copyrights as necessary.  However, there can be no assurance that other third parties will not infringe or misappropriate our trademarks and similar proprietary rights.  If we lose some or all of our intellectual property rights, our business may be materially adversely affected.

Significant changes in government regulation may hinder sales.

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. New statutes and regulations may also be instituted in the future. If a regulatory authority finds that a current or future product or production run is not in compliance with any of these regulations, we may be fined, or such products may have to be recalled and/or reformulated and/or packaging changed, thus adversely affecting our financial condition and operations.  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.  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.

If we are unable to maintain brand image or product quality, or if we encounter product recalls, our business may suffer.

Our success depends on our ability to maintain and build brand image for our existing products, new products and brand extensions. We have no assurance that our advertising, marketing and promotional programs will have the desired impact on our products’ brand image and on consumer preferences.  Product quality issues, real or imagined, or allegations of product contamination, even if fake or unfounded, could tarnish the image of the affected brands and may cause consumers to choose other products.  We may be required from time to time to recall products entirely or from specific co-packers, markets or batches.  Product recalls could adversely affect our profitability and our brand image.  We do not maintain recall insurance.

While we have to date not experienced any credible product liability litigation, there is no assurance that we will not experience such litigation in the future.  In the event we were to experience product liability claims or a product recall, our financial condition and business operations could be materially adversely effected.

If we do not maintain sufficient inventory levels or if we are unable to deliver our products to our customers in sufficient quantities, or if our retailer’s inventory levels are too high, our operating results will be adversely affected.

If we do not accurately anticipate the future demand for a particular product or the time it will take to obtain new inventory, our inventory levels will not be appropriate and our results of operations

23




may be negatively impacted.  If we fail to meet our shipping schedules, we could damage our relationships with distributors and/or retailers, increase our shipping costs or cause sales opportunities to be delayed or lost. In order to be able to deliver our products on a timely basis, we need to maintain adequate inventory levels of the desired products.  If the inventory of our products held by our distributors and/or retailers is too high, they will not place orders for additional products, which would unfavorably impact our future sales and adversely affect our operating results.

If we are not able to retain the full-time services of senior management there may be an adverse effect on our operations and/or our operating performance until we find suitable replacements.

Our business is dependent, to a large extent, upon the services of our senior management.  We do not maintain key person life insurance for any members of our senior management.  We currently have employment agreements with Mr. Sacks and Mr. Schlosberg which end on December 31, 2008.  The loss of services of either of these persons or any other key members of our senior management could adversely affect our business until suitable replacements can be found.  There may be a limited number of personnel with the requisite skills to serve in these positions and we may be unable to locate or employ such qualified personnel on acceptable terms.

Weather could adversely affect our supply chain and demand for our products.

With regard to fruit juice, fruit juice concentrates and natural flavors, the beverage industry is subject to variability of weather conditions, which may result in higher prices and/or the nonavailability of any of such items.  Sales of our products may also be influenced to some extent by weather conditions in the markets in which we operate, particularly in areas outside of California.  Weather conditions may influence consumer demand for certain of our beverages, which could have an adverse effect on our results of operations.

Potential changes in accounting practices and/or taxation may adversely affect our financial results.

We cannot predict the impact that future changes in accounting standards or practices may have on our financial results.  New accounting standards could be issued that could change the way we record revenues, expenses, assets and liabilities.  These changes in accounting standards could adversely affect our reported earnings.  Increases in direct and indirect income tax rates could affect after tax income.   Equally, increases in indirect taxes (including environmental taxes pertaining to the disposal of beverage containers) could affect our products’ affordability and reduce our sales.

Volatility of stock price may restrict sale opportunities.

Our stock price is affected by a number of factors, including stockholder expectations, financial results, the introduction of new products by us and our competitors, general economic and market conditions, estimates and projections by the investment community and public comments by other persons and many other factors, many of which are beyond our control.  We may be unable to achieve analysts’ 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. As a result, our stock price is subject to significant volatility and stockholders may not be able to sell our stock at attractive prices.

Provisions in our organizational documents and control by insiders may prevent changes in control even if such changes would be beneficial to other stockholders.

Our organizational documents may limit changes in control.  Furthermore, on May 16, 2007, Mr. Sacks and Mr. Schlosberg together may be deemed to control a maximum of 21.8% of our outstanding common stock.  Consequently, Mr. Sacks and Mr. Schlosberg could exercise significant control on matters submitted to a vote of our stockholders, including electing directors, amending organizational documents and approving extraordinary transactions such as a takeover attempt, even though such actions may be favorable to the other common stockholders.

24




Our cash flow may not be sufficient to fund our long term goals.

We may be unable to generate sufficient cash flow to support our capital expenditure plans and general operating activities.  In addition, the terms and/or availability of our credit facility and/or the activities of our creditors could affect the financing of our future growth.

Litigation or legal proceedings could expose us to significant liabilities and thus negatively affect our financial results.

We are a party, from time to time, to various litigation claims and legal proceedings, which could adversely affect our financial results.

ITEM 1B.           UNRESOLVED STAFF COMMENTS

None.

ITEM 2.              PROPERTIES

Our corporate offices and main warehouse are currently located at 1010 Railroad Street, Corona, California 92882. Our lease for this facility expires in October 2010.  The area of the facility is approximately 141,000 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. This facility was subsequently sublet on April 1, 2007.  In June 2006, the Company leased additional warehouse and office space in Corona, California for a one year period.

In October 2006, we entered into a lease agreement pursuant to which we leased 346,495 square feet of warehouse and distribution space located in Corona, California.  This lease commitment provides for minimum rental payments for 120 months commencing March 2007, excluding renewal options.  The monthly rental payments are $167,586 at the commencement of the lease and increase over the lease term by 7.5% at the end of each 30 month period. The new warehouse and distribution space will replace our existing warehouse and distribution space located in Corona, California. We plan to sublet our existing office, warehouse and distribution space for the remainder of the lease term, unless we are able to find a tenant acceptable to the landlord and the landlord agrees to the early termination of the lease.

In October 2006, we also entered into an agreement to acquire 1.8 acres of vacant land for a purchase price of $1.4 million, located adjacent to the new leased warehouse and distribution space located in Corona, California for the purpose of constructing a new office building which will replace the Company’s existing office space in Corona, California.  In the interim, we have leased additional office space located near our existing corporate offices.

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

Litigation - In June 2006, HBC filed a lawsuit against Rockstar, Inc., Rockstar Beverage Corporation and Rockstar Brewing Company, Inc., all Nevada corporations (collectively “Rockstar”), for false designation of origin, trademark infringement, unfair competition, deceptive trade practices and unfair competition, seeking an injunction and damages based on Rockstar’s unauthorized use of HBC’s valuable and distinctive Monster Energy®  trade dress in connection with its alcoholic energy beverage

25




known as “Rockstar 21.”  HBC alleges that the overall appearance of Rockstar’s “Rockstar 21” beverage container is confusingly similar to the appearance of HBC’s Monster Energy® beverages.  Further, HBC alleges that Rockstar is infringing on other trademarks owned and used by HBC.  Rockstar has denied HBC’s allegations and filed counterclaims against HBC based on allegations that HBC has removed and destroyed Rockstar point-of-sale advertisements from retail stores.  Hansen believes Rockstar’s counterclaims are without merit and intends to diligently defend against those counterclaims.  In September 2006, the court dismissed HBC’s claims on summary judgment and Rockstar’s counterclaims were withdrawn without prejudice.  Hansen has appealed the court’s decision which is currently pending before the United States Court of Appeals for the Ninth Circuit.

In August 2006, HBC filed a lawsuit against National Beverage Company, Shasta Beverages, Inc., Newbevco Inc. and Freek’N Beverage Corp. (collectively “National”) seeking an injunction and damages for trademark infringement, trademark dilution, unfair competition and deceptive trade practices based on National’s unauthorized use of HBC’s valuable and distinctive Monster Energy® trade dress in connection with a line of energy drinks it launched under the “Freek” brand name. On October 5, 2006 the United States District Court for the Central District of California issued a preliminary injunction enjoining National from manufacturing, distributing, shipping, marketing, selling or offering to sell Freek energy drinks in containers that are the same or similar to the current containers or any containers confusingly similar to HBC’s current Monster Energy® trade dress.  National has appealed the decision of the United States District Court for the Central District of California to grant the preliminary injunction and this appeal is currently pending before the United States Court of Appeals for the Ninth Circuit.  National has filed a counter claim against HBC for injunctive relief preventing HBC and its agents from continuing to destroy “Freek” point of sale materials, disparaging “Freek” products and intentionally interfering with National’s economic and business relationships.  Based on the allegations contained in the National counter claims, the Company believes the National claims are without merit. The trial in the above complaint for HBC’s claims for a permanent injunction, damages and costs, and with respect to National’s counter claims, is scheduled to begin on August 7, 2007.  The ultimate outcome of this matter cannot be predicted with certainty.

In August 2006, HBC filed an action in the Federal Courts of Australia, Victoria District Registry against Bickfords Australia (Pty) Limited and Meak (Pty) Ltd. (collectively “Bickfords”), in which HBC is seeking an injunction restraining Bickfords from selling or offering for sale or promoting for sale in Australia any energy drink or beverage under the Monster Energy or Monster marks or any similar marks and for damages and costs.  The hearing took place in February 2007 and was adjourned for argument to be presented to the court in June 2007.

In September 2006, Christopher Chavez purporting to act on behalf of himself and a class of consumers yet to be defined filed an action in the United States District Court, Northern District of California, against the company and its subsidiaries for unfair business practices, false advertising, violation of California Consumers Legal Remedies Act, fraud, deceit and/or misrepresentation alleging that the company misleadingly labels its Blue Sky beverages as originating in and/or being canned under the authority of a company located in Santa Fe, New Mexico.  The company has been advised by counsel that it has valid defenses to Chavez’s class action lawsuit and intends to vigorously defend the action.

The Company is 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 the Company and after consultation with counsel, management believes that such litigation in the aggregate will likely not have a material adverse effect on the Company’s financial position or results of operations.

Derivative Litigation - From November 2006 through January 2007, purported derivative lawsuits relating to the Company’s past stock option grants were filed by parties identifying themselves as shareholders of Hansen.  These lawsuits name as defendants certain of Hansen’s current and former employees, officers and directors, and name Hansen as a nominal defendant.  Three of these cases, Chandler v. Sacks, et al. (No. RIC460186), Plotkin v. Sacks, et al. (No. RIC460485), and Alama v. Sacks, et al. (No. RIC463968), were filed in the Superior Court of California, County of Riverside (the “State

26




Derivative Actions”).  Two additional shareholder derivative lawsuits, Linan v. Sacks, et al. (No. ED CV 06-01393) and Cribbs v. Blower et al. (No. ED CV 07-00037), were filed in the United States District Court for the Central District of California.  On March 26, 2007, the Cribbs and Linan actions were consolidated for all purposes before the District Court, which appointed lead and local counsel and restyled the action as In re Hansen Natural Corporation Derivative Litigation (No. ED CV 07-37 JFW (PLAx)) (the “Federal Derivative Action”).

Plaintiffs in both the State Derivative Actions and the Federal Derivative Action, who purport to bring suit on behalf of the Company, have made no demand on the Board of Directors and allege that such demand is excused.  The complaints in the derivative actions allege, among other things, that by improperly dating certain Hansen stock option grants, defendants breached their fiduciary duties, wasted corporate assets, unjustly enriched themselves and violated federal and California statutes.  Plaintiffs seek, among other things, unspecified damages to be paid to Hansen, corporate governance reforms, an accounting, rescission, restitution and the creation of a constructive trust.

On April 4, 2007, the plaintiff in the Chandler action applied for a temporary restraining order and a preliminary injunction, seeking, inter alia, to restrain an April 20, 2007 shareholders meeting, to impose restrictions on the defendants’ ability to issue or exercise stock options or to transfer the proceeds of stock option grants, and to compel discovery.  On April 6, 2007, the Superior Court of California denied plaintiff’s application for a temporary restraining order in its entirety.  On April 24, 2007, the plaintiff in the Chandler action filed a motion for a preliminary injunction again seeking, inter alia, to impose restrictions on the defendants’ ability to issue or exercise stock options or to transfer the proceeds of stock option grants, and to compel discovery. On April 24, 2007, defendants filed a motion to consolidate the State Derivative Actions as well as a motion seeking to stay the State Derivative Actions.  By stipulation that was so ordered by the Court on May 25, 2007, the parties agreed to resolve the April 24, 2007 motions as follows: (i) the Chandler and Plotkin actions are now consolidated; (ii) the consolidated State Derivative Actions are stayed for all purposes until February 29, 2008; and (iii) the motion for a preliminary injunction has been withdrawn and may not be refiled while the stay is pending.

On April 16, 2007, the Alama v. Sacks lawsuit filed in California Superior Court was voluntarily dismissed.  On May 23, 2007, Alama filed a substantially similar complaint in the Chancery Court of Delaware, New Castle County (No. 2978).

On April 11, 2007, plaintiffs in the Federal Derivative Action filed an application for a temporary restraining order and preliminary injunction seeking to prevent an April 20, 2007, shareholders meeting and alleged violation of federal laws relating to proxy statements.  On April 16, 2007, the District Court denied plaintiffs’ application for a temporary restraining order and sua sponte ordered plaintiffs to show cause why sanctions should not be issued against plaintiffs’ law firm for the filing of a frivolous motion. On May 30, 2007, the District Court, while noting that it still found that plaintiffs’ application for a temporary restraining order “bordered on the frivolous,” declined to impose sanctions against plaintiffs’ law firm. On April 23, 2007, the Federal Derivative Action plaintiffs filed an amended consolidated complaint. The Company must answer or otherwise respond to the complaint by June 11, 2007.

Based on the allegations contained in the complaints, the Company believes that Plaintiffs’ claims are without merit, and the Company intends to vigorously defend against the lawsuits.  However, the ultimate outcome of these matters cannot be predicted with certainty.

Securities Litigation - From November 2006 through December 2006, several plaintiffs filed shareholder class actions in the United States District Court for the Central District of California against Hansen and certain of its employees, officers and directors, entitled Hutton v. Hansen Natural Corp., et al. (No. 06-07599), Kingery v. Hansen Natural Corp., et al. (No. 06-07771), Williams v. Hansen Natural Corp., et al. (No. 06-01369), Ziolkowski v. Hansen Natural Corp., et al. (No. ED 06-01403), Walker v. Hansen Natural Corp., et al. (No. 06-08229) (the “Class Actions”).  On February 27, 2007, the Class Actions were consolidated by the District Court and styled as In re Hansen Natural Corporation Securities Litigation (CV06-07599 JFW (PLAx)).  The Court appointed Jason E. Peltier as lead plaintiff

27




(“Lead Plaintiff”) and approved lead counsel.  Lead Plaintiff filed a consolidated class action complaint on April 30, 2007.  The consolidated class action complaint supersedes all previously filed class action complaints and is the operative complaint to which the Company must respond. The Company must answer or otherwise respond to the complaint by June 25, 2007.  Lead Plaintiff alleges, on behalf of all persons who purchased Hansen common stock during the period beginning November 12, 2001 through November 9, 2006 (the “Class Period”), that Hansen and the individual defendants made misleading statements and omissions of material fact which artificially inflated the market price of Hansen common stock throughout the Class Period.  Plaintiffs further allege that defendants violated Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by misrepresenting or failing to disclose that defendants incorrectly dated stock option grants, that the Company’s internal controls were inadequate, and that, as a result, defendants engaged in improper accounting practices.  Plaintiffs seek an unspecified amount of damages.

Based on the allegations contained in the amended consolidated complaint, the Company believes that Plaintiffs’ claims are without merit, and the Company intends to vigorously defend against the lawsuit.  However, the ultimate outcome of this matter cannot be predicted with certainty.

SEC Inquiry - On October 26, 2006, the Company received a letter from the Staff of the Pacific Regional Office of the Securities and Exchange Commission (the “SEC”) requesting that the Company voluntarily produce certain documents and information relating to the Company’s filing of SEC Forms 4 and the Company’s stock option grant practices from January 1, 1996 to the present.   The SEC subsequently agreed, in the absence of any further requests, to limit the voluntary production of certain documents and information from January 1, 2001 to the present.  The Company has cooperated with the SEC and believes it has completed its production of the documents and information requested in the October 26, 2006 letter.

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

On June 1, 2006, the Company held a special meeting of stockholders for the following purposes:  (1) to approve an amendment to the Company’s Certificate of Incorporation to increase the number of authorized shares of common stock, par value $0.005 per share, from 30,000,000 (pre-split) to 120,000,000 (post-split); and (2) to approve an amendment to the Company’s 2001 Stock Option Plan to increase the number of shares of common stock reserved for issuance thereunder by 1,500,000 pre-split; 6,000,000 post-split (see Part II, Item 8, Notes 1 and 12 to our consolidated financial statements contained in this From 10-K). The stockholders approved the increase in the number of authorized shares and the amendment to the Company’s 2001 Stock Option Plan.

The annual meeting of stockholders of the Company was held on November 10, 2006.  At the meeting, the following individuals were elected as directors of the Company and received the number of votes set opposite their respective names:

Director

 

Votes For

 

Votes Withheld

 

Rodney C. Sacks

 

67,477,688

 

17,816,862

 

Hilton H. Schlosberg

 

66,570,408

 

18,724,142

 

Benjamin M. Polk

 

67,240,983

 

18,053,567

 

Norman C. Epstein

 

80,210,176

 

5,084,374

 

Harold C. Taber, Jr.

 

79,732,948

 

5,561,602

 

Mark S. Vidergauz

 

65,720,322

 

19,574,228

 

Sydney Selati

 

82,881,289

 

2,413,261

 

 

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In addition, at the meeting our stockholders ratified the appointment of Deloitte & Touche LLP as the independent registered public accounting firm of the Company for the year ended December 31, 2006, by a vote of 84,784,685 for, 323,722 against, 186,141 abstaining and zero broker non-votes.

On April 20, 2007, the Company held a special meeting of stockholders to approve an amendment to Section 4(a) of the Company’s Stock Option Plan for Outside Directors (the “1994 Plan”), which extended the time period during which grants may be made under the 1994 Plan though November 30, 2004. The stockholders approved the amendment by a vote of 51,977,232 for, 10,496,620 against, 115,816 abstaining and no broker non-votes.  The Company has informed Nasdaq that such stockholder approval was obtained.

PART II

ITEM 5.           MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

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 Capital Market under the symbol “HANS”.  As of May 16, 2007, there were 90,059,124 shares of the Company’s common stock outstanding held by approximately 411 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 (as adjusted for the stock split that occurred on July 7, 2006 and the stock split that occurred on August 8, 2005) (see Part II, Item 8, Note 1 to our consolidated financial statements contained in this Form 10-K):

Year Ended December 31, 2007

 

High

 

Low

 

First Quarter

 

$

42.24

 

$

32.50

 

 

Year Ended December 31, 2006

 

High

 

Low

 

First Quarter

 

$

31.72

 

$

19.40

 

Second Quarter

 

$

50.53

 

$

30.29

 

Third Quarter

 

$

52.72

 

$

26.06

 

Fourth Quarter

 

$

35.57

 

$

24.75

 

 

Year Ended December 31, 2005

 

High

 

Low

 

First Quarter

 

$

7.50

 

$

4.19

 

Second Quarter

 

$

10.77

 

$

6.66

 

Third Quarter

 

$

13.43

 

$

10.12

 

Fourth Quarter

 

$

21.68

 

$

10.50

 

 

The quotations for the common stock set forth above represent bid quotations between dealers, do not include retail markups, mark-downs or commissions and bid quotations may not necessarily represent actual transactions and “real time” sale prices.  The source of the bid information is the NASDAQ Stock Market, Inc.

We have not paid cash dividends to our stockholders since our inception and do not anticipate paying cash dividends in the foreseeable future.

29




Equity Compensation Plan Information

The following table sets forth information as of December 31, 2006 with respect to shares of our common stock that may be issued under our equity compensation plans.

Plan category

 

Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)

 

Weighted-average
exercise price of
outstanding
options, warrants
and rights
(b)

 

Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)

 

 

 

 

 

 

 

 

 

Equity compensation plans approved by stockholders

 

12,534,450

 

$

5.17

 

6,902,450

 

 

 

 

 

 

 

 

 

Equity compensation plans not approved by stockholders

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

12,534,450

 

$

5.17

 

6,902,450

 

 

Performance Graph

The following graph shows a five-year comparison of cumulative total returns:(1)


(1) Annual return assumes reinvestment of dividends.  Cumulative total return assumes an initial investment of $100 on December 31, 2001.  The Company’s new self-selected peer group is comprised of National Beverage Corporation, Clearly Canadian Beverage Company, Leading Brands, Inc., Jones Soda Company and Cott Corporation. The Company’s old self-selected peer group is comprised of National Beverage Corporation, Clearly Canadian Beverage Company, Triarc Companies, Inc., Leading Brands, Inc., Cott Corporation and Northland Cranberries (acquired by Sun Northland LLC in November 2005).

30




ITEM 6.             SELECTED FINANCIAL DATA

The consolidated statements of operations data set forth below with respect to each of the years ended December 31, 2002 through 2006 and the balance sheet data as of December 31, for the years indicated, are derived from our audited consolidated financial statements 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 Part II, Item 7 of this Annual Report on Form 10-K.

(in thousands, except
per share information)

 

2006

 

2005

 

2004

 

2003

 

2002

 

Gross sales*

 

$

696,322

 

$

415,417

 

$

224,098

 

$

135,655

 

$

112,885

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

605,774

 

$

348,886

 

$

180,341

 

$

110,352

 

$

92,046

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

$

316,594

 

$

182,543

 

$

83,466

 

$

43,775

 

$

32,032

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit as a percentage to net sales

 

52.3

%

52.3

%

46.3

%

39.7

%

34.8

%

Operating income

 

$

158,579

 

$

103,443

 

$

33,886

 

$

9,826

 

$

5,293

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

97,949

 

$

62,775

 

$

20,387

 

$

5,930

 

$

3,029

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.09

 

$

0.71

 

$

0.24

 

$

0.07

 

$

0.04

 

Diluted

 

$

0.99

 

$

0.65

 

$

0.22

 

$

0.07

 

$

0.04

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

308,372

 

$

163,890

 

$

82,022

 

$

47,997

 

$

40,464

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

303

 

$

525

 

$

583

 

$

602

 

$

3,837

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

$

225,084

 

$

125,509

 

$

58,571

 

$

35,050

 

$

28,371

 

 


* Gross sales, although used internally by management as an indicator of operating performance, should not be considered as an alternative to net sales, which is determined in accordance with generally accepted accounting principals in the United States of America (“GAAP”), and should not be used alone as an indicator of operating performance in place of net sales.  Additionally, gross sales may not be comparable to similarly titled measures used by other companies as gross sales has been defined by the Company’s internal reporting requirements.  However, gross sales is used by management to monitor operating performance including sales performance of particular products, salesperson performance, product growth or declines and overall Company performance.  The use of gross sales allows evaluation of sales performance before the effect of any promotional items, which can mask certain performance issues. Management believes the presentation of gross sales allows a more comprehensive presentation of the Company’s operating performance.  Gross sales may not be realized in the form of cash receipts as promotional payments and allowances may be deducted from payments received from customers (See “Part II, Item 7 - Results of Operations”).

31




ITEM 7.              MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided as a supplement to – and should be read in conjunction with – our financial statements and the accompanying notes (“Notes”) included in Part II, Item 8 of 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:

·                  Review of Historic Stock Option Granting Practices – a discussion of our review of historic stock option granting practices and related findings.

·                  Nasdaq Proceedings – a discussion of our Nasdaq proceedings.

·                  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;

·                  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 “Part II, Item 7A. - Qualitative AND Quantitative Disclosures About Market Risks”).

Review of Historic Stock Option Granting Practices

On October 26, 2006, we received a letter from the Staff of the Pacific Regional Office of the SEC requesting that we voluntarily produce certain documents and information relating to the filing of SEC Forms 4 and our stock option granting practices from January 1, 1996 to the present.  The SEC subsequently agreed, in the absence of any further requests, to limit the voluntary production of certain documents and information from January 1, 2001 to the present.  We have cooperated with the SEC and believe that we have completed our production of the documents and information requested in the October 26, 2006 letter.

In November 2006, we appointed a special committee of the Board of Directors (the “Special Committee”) to undertake an independent investigation relating to our stock option grants and our stock option granting practices. The Special Committee retained independent counsel and accounting advisors to assist in conducting the investigation.  The Special Committee reviewed all stock option grants from January 1, 2001 through November 13, 2006.  In the course of its investigation, the Special Committee reviewed over one million documents and emails and extensively interviewed numerous officers and directors, as well as certain other personnel.

The Special Committee has completed its independent investigation and found no willful or intentional misconduct in connection with the granting or dating of, or accounting for, stock options. The Special Committee also found that the late filing of certain Form 4 reports, as identified in a report issued

32




last year by Glass Lewis & Co., did not indicate that option grants had been backdated. The Special Committee found no evidence raising concerns with the integrity of management and found that management and other company personnel interviewed in the course of the investigation were cooperative and credible.

Based on the Special Committee’s review of all stock option grants and our evaluation of applicable accounting rules, management concluded that the terms with respect to 10 new hire grants and two merit grants, had not been determined with finality as at the grant date, resulting in a decision to change the measurement dates for such grants.  Additionally, seven grants were identified where the stock option agreements mistakenly reflected the exercise price at either the closing price of our common stock on the date prior to the grant date or the opening price of our common stock on the grant date instead of the closing price on the grant date, resulting in minor pricing errors. The pre-tax compensation expense resulting from the above-described accounting errors is approximately $0.1 million, which should have been recorded within operating expenses over the period from January 1, 2001 through the second quarter ended June 30, 2006.

Additionally, we identified one grant where there was an error in the application of APB No. 25 related to a grant modification given to a non-executive employee in fiscal 2001 and a separate error in the application of SFAS No. 123(R), related to the cancellation of a grant to a non-executive employee in 2006.  The pre-tax compensation adjustment for these two grants is approximately $1.0 million which should have been recorded within operating expenses over the period January 1, 2001 through June 30, 2006.

As a result of the issues discussed above regarding our past stock option practices, certain of our option grants that were previously characterized as Incentive Stock Options in accordance with Internal Revenue Code Section 422 (“ISO’s”) will be considered to be non-qualified stock options.

The unintentional accounting errors arising from the items discussed above caused non-cash compensation expense together with related employment tax expenses to be understated by a cumulative amount of $1.3 million ($1.0 million net of income tax) over the period January 1, 2001 through June 30, 2006. We have concluded that the impact of these errors is not material to our historical consolidated financial statements for any previously reported period. A correcting entry to record the cumulative impact of these errors was recorded during the fiscal year ended December 31, 2006. The Company also does not consider the adjustment to be material to the fiscal year ended December 31, 2006. The adjustments increased other operating expenses by $1.3 million and reduced provision for income taxes by $0.3 million, which resulted in a $1.0 million reduction in net income. The adjustment also had the effect of increasing non-current deferred tax assets by $0.05 million and reducing additional paid-in capital by $0.2 million at December 31, 2006.

The Special Committee also found that during the time period covered by its review, internal accounting controls relating to our stock option granting process were inadequate, specifically control deficiencies related to the process of documenting the approval of stock option grants and the financial accounting in connection with certain option grants.

In the summer of 2006, our internal audit department performed an analysis of certain aspects of our process for granting stock options. During that time, management implemented improvements relating to the documentation of stock option grants. These improvements included contemporaneous documentation of the approval of stock option grants and contemporaneous preparation of stock option agreements for the grants approved. Such practices were implemented during the quarter ended September 30, 2006. Additionally, beginning the second quarter of 2006, the accounting department implemented new procedures to review and verify the accuracy of grant prices. During the fourth quarter of 2006, the Company also implemented additional procedures for the communication and recording of modifications and cancellations of stock option grants.

33




Effective January 1, 2007, we implemented new written procedures regarding the granting of stock options. Under these new procedures, the Compensation Committee of the Board of Directors (“Compensation Committee”) has sole and exclusive authority to grant stock option awards to all employees who are not new hires and to all new hires who are subject to Section 16 of the Exchange Act. The Compensation Committee and the Executive Committee of the Board of Directors (“Executive Committee”) each independently has the authority to grant awards to new hires who are not Section 16 employees. Awards granted by the Executive Committee are not subject to approval or ratification by the Board or the Compensation Committee. For purposes of these procedures, a new hire means: (i) an employee who is commencing employment with the Company or its subsidiaries; or (ii) an employee who is receiving a promotion to a new position with the Company or one of its subsidiaries. The grant date of any award to a new hire shall be the first day that The Nasdaq Stock Market (“Nasdaq”) is open in the calendar month following the employee’s commencement of employment or the date of the employee’s promotion (as the case may be).  Other than awards to new hires, awards may only be granted at a single meeting held during the last two weeks of May and November of each year. The grant date of any award granted at a May or November meeting shall be the first day that Nasdaq is open in June following such May meeting, or December following such November meeting (as the case may be). The new procedures also require certain same day documentation. The Special Committee found that the above described procedures constitute “best practices.” The Compensation Committee will review and approve stock option awards to our named executive officers (“NEOs”) based upon a review of competitive compensation data, its assessment of individual performance, a review of each executive’s long term incentives and retention considerations.

Nasdaq Proceedings

On November 15, 2006, we received a Nasdaq Staff Determination letter from Nasdaq stating that because we had not yet filed our Form 10-Q for the quarter ended September 30, 2006, we were not in compliance with the filing requirements for continued listing under Nasdaq Marketplace Rule 4310(c)(14), and that our securities are, therefore, subject to delisting from the Nasdaq Capital Market. We made a request for a hearing before the Nasdaq Listing Qualifications Panel (the “Panel”).

On January 4, 2007, we notified Nasdaq of our inadvertent issuance of an out-of-plan stock option to purchase 12,000 shares of our common stock (pre stock splits) to an outside director on November 5, 2004, approximately four months after the period for granting options under the Company’s Stock Option Plan for Outside Directors (the “1994 Plan”) had expired, in apparent violation of Nasdaq Marketplace Rule 4350(i)(1)(A).  On January 10, 2007, we received another Nasdaq Staff Determination letter stating that because we had not yet regained compliance with Nasdaq Marketplace Rule 4350(i)(1)(A), such violation served as an additional basis for delisting the Company’s securities from the Nasdaq Capital Market.

The Panel hearing was held on January 25, 2007.  The Panel granted our request for continued listing of our securities on The Nasdaq Stock Market. Our continued listing is subject to certain conditions, including: (1) on or about March 26, 2007, we were required to submit to Nasdaq a copy of our final investigatory report or were required to respond to Nasdaq questions regarding the Special Committee’s investigation of option grants; (2) on or before May 1, 2007, we were required to inform the Panel that we had obtained stockholder approval for the granting of the out-of-plan option grant, or had unwound the option grant; and (3) on or before May 14, 2007, we were required to file our Form 10-Q for the quarter ended September 30, 2006.

On March 5, 2007, we received an additional Nasdaq Staff Determination letter from Nasdaq stating that because we had not yet filed our Form 10-K for the fiscal year ended December 31, 2006, we are not in compliance with the filing requirements for continued listing under Nasdaq Marketplace Rule 4310(c)(14), and that this filing delinquency serves as an additional basis for delisting us from Nasdaq.

On May 16, 2007, we received an additional Nasdaq Staff Determination letter from Nasdaq stating that because we had not yet filed our Form 10-Q for the quarter ended March 31, 2007, we are not in compliance with the filing requirements for continued listing under Nasdaq Marketplace Rule 4310(c)(14), and that this filing delinquency serves as an additional basis for delisting us from Nasdaq.

34




We have met conditions (1), (2) and (3) of the Panel’s decision relating to our request for continued listing of our securities on the Nasdaq Capital Market.  We are still required to file our Form 10-Q for the three-months ended March 31, 2007 to achieve compliance with the filing requirements for continued listing under Nasdaq Marketplace Rule 4310(c)(14). By filing this Form 10-K, the Company has complied with the Panel’s deadline of June 14, 2007 for the filing of the Form 10-K for the fiscal year ended December 31, 2006. The Company anticipates filing the Form 10-Q for the three-months ended March 31, 2007 as soon as practicable and within the time period required by Nasdaq to continue to be listed on the Nasdaq Capital Market.

As a result of the late filing of the 10-Q for the quarter ended September 30, 2006, the Form 10-K for the fiscal year ended December 31, 2006, and the 10-Q for the three-months ended March 31, 2007 we will be ineligible to register our securities on Form S-3 for sale by us or resale by others for one year.  The inability to use Form S-3 could adversely affect our ability to raise capital during this period. However, we are still eligible to register our securities on Form S-1.  If we fail to timely file a future periodic report with the SEC and our stock were delisted, it could severely impact our ability to raise future capital and could have an adverse impact on our overall future liquidity.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our historical consolidated financial statements and notes thereto.

Our Business

Overview

We develop, market, sell and distribute “alternative” beverage category natural sodas, fruit juices and juice drinks, energy drinks and energy sports drinks, fruit juice smoothies and “functional drinks,” non-carbonated ready-to-drink iced teas, lemonades, juice cocktails, children’s multi-vitamin juice drinks, Junior Juice® juices and non-carbonated lightly flavored energy waters under the Hansen’s® brand name.  We also develop, market, sell and distribute energy drinks under the following brand names; Monster Energy®, Lost® Energy™, Joker Mad Energy™, Unbound Energy® and Ace™ brand names as well as Rumba™ brand energy juice.  We also market, sell and distribute Java Monster™ non-carbonated dairy based coffee drinks. We also market, sell and distribute natural sodas, premium natural sodas with supplements, organic natural sodas, seltzer waters, sports drinks and energy drinks under the Blue Sky® brand name. Our fruit juices for toddlers are marketed under the Junior Juice® brand name.  We also market, sell and distribute vitamin and mineral drink mixes in powdered form under the Fizzit™ brand name.

We have two reportable segments, namely DSD, whose principal products comprise energy drinks, and Warehouse, whose principal products comprise juice based and soda beverages.  The DSD segment develops, markets and sells products primarily through an exclusive distributor network, whereas the Warehouse segment develops, markets and sells products primarily direct to retailers.

Our sales and marketing strategy for all our beverages and drink mixes is to focus our efforts on developing brand awareness and trial through sampling both in stores and at events.  We use our branded vehicles and other promotional vehicles at events where we sample our products to consumers.  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 cancer research and SPCAs, as well as extreme sports teams such as the Pro Circuit – Kawasaki Motocross and Supercross teams, Kawasaki Factory Motocross and Supercross

35




teams, Alan Pflueger Desert Racing Team, Kenny Bernstein Drag Racing Team, extreme sports figures and athletes, sporting events such as the Monster Energy® Pro Pipeline surfing competition, Winter and Summer X-Games, marathons, 10k runs, bicycle races, volleyball tournaments and other health and sports related activities, including extreme sports, particularly supercross, freestyle motocross, surfing, skateboarding, wakeboarding, skiing, snowboarding, BMX, mountain biking, snowmobile racing, etc., and we also participate in product demonstrations, food tasting and other related events.  Posters, print, radio and television advertising, together with price promotions and coupons, may also be used to promote our brands.

We believe that one of the keys to success in the beverage industry is differentiation, such as making Hansen’s® 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.

During 2006, we continued to expand our existing product lines and further develop our markets.  In particular, we continued 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.

During the second quarter of 2006, we entered into the Monster Beverages Off-Premise Distribution Coordination Agreement and the Allied Products Distribution Coordination Agreement (jointly, the “Off-Premise Agreements”) with Anheuser-Busch, Inc., a Missouri corporation (“AB”).  Under the Off-Premise Agreements, select Anheuser-Busch distributors (the “AB Distributors”) will distribute and sell, in markets designated by HBC, HBC’s Monster Energy® and Lost® EnergyTM brands non-alcoholic energy drinks, Rumba™ brand energy juice and Unbound Energy®  brand energy drinks, as well as additional products that may be agreed between the parties.  We intend to continue building our national distributor network primarily with select AB distributors as well as with our sales force throughout 2007 to support and grow the sales of our products.

Pursuant to the Anheuser-Busch Distribution Agreements (the “AB Distribution Agreements”) entered into with newly appointed AB Distributors, non-refundable payments totaling $20.9 million were made to the Company by such newly appointed AB Distributors for the costs of terminating the Company’s prior distributors through December 31, 2006. Such receipts have been accounted for as deferred revenue in the accompanying consolidated balance sheet as of December 31, 2006 and will be recognized as revenue ratably over the anticipated 20 year life of the respective AB Distribution Agreements.

As of December 31, 2006, amounts totaling $3.3 million had been paid to the Company by certain other AB Distributors in anticipation of executing AB Distribution Agreements with the Company. Such receipts have been accounted for as customer deposit liabilities in the accompanying consolidated balance sheet as of December 31, 2006.

Through December 31, 2006, the Company incurred termination costs amounting to $12.7 million in aggregate to certain of its prior distributors. Such termination costs have been expensed in full and are included in operating expenses for the year ended December 31, 2006. Certain amounts totaling $7.0 million included in such termination costs were not paid to our prior distributors before our fiscal year end and are therefore included in accrued liabilities in the accompanying consolidated balance sheet as of December 31, 2006.

On April 28, 2006, HBC entered into a distribution agreement with Cadbury Bebidas, S.A. de C.V. (“Cadbury Bebidas”), for exclusive distribution by Cadbury Bebidas throughout Mexico, excluding Baja California, of our Monster Energy® and Lost® Energy™ energy products.

36




On February 8, 2007, HBC entered into the On-Premise Distribution Coordination Agreement (the “On-Premise Agreement”) with AB.  Under the On-Premise Agreement, AB will manage and coordinate the sales, distribution and merchandising of Monster Energy® energy drinks to on-premise retailers including bars, nightclubs and restaurants in territories approved by HBC.

On March 1, 2007, HBC entered into a distribution agreement with Pepsi-QTG Canada, a division of PepsiCo Canada, ULC (“Pepsi Canada”), for the exclusive distribution by Pepsi Canada throughout Canada of our Monster Energy®, Lost® Energy™, Hansen’s® and Joker Mad Energy™ energy products.

We again achieved record gross sales in 2006.  The increase in gross sales in 2006 was primarily attributable to increased sales volume of certain of our existing products as well as certain new products, particularly Monster Energy® KhaosTM energy drinks, Ace TM energy drinks and Unbound Energy® drinks.  The percentage increase in gross sales was lower than the percentage increase in net sales, primarily due to a decrease in promotional and other allowances as a percentage of gross sales, which decreased from 16.0% to 13.0%.  The actual amount of promotional and other allowances increased to $90.5 million from $66.5 million for the years ended December 31, 2006 and December 31, 2005, respectively.

A substantial portion of our gross sales are derived from our Monster Energy® brand energy drinks.  Any decrease in sales of our Monster Energy® brand energy drinks could significantly adversely affect our future revenues and net income. Competitive pressure in the “energy drink” category could adversely affect our operating results. (See “Part I, Item 1A. - Risk Factors”)

During the year ended December 31, 2006, gross sales shipped outside of California represented 67.8% of our gross sales, as compared to 61.5% for the comparable period in 2005. During the year ended December 31, 2006, gross sales to distributors outside the United States amounted to $19.3 million, as compared to $5.6 million for the year ended December 31, 2005.  Such sales were approximately 2.8% of gross sales for the year ended December 31, 2006 and approximately 1.3% of gross sales for the comparable period in 2005.

Our customers are typically retail grocery and specialty chains, wholesalers, club stores, drug chains, mass merchandisers, convenience chains, full service beverage distributors, health food distributors and food service customers. Gross sales to our various customer types for 2006 are reflected below.  The allocations below reflect changes made by the Company to the categories historically reported.

 

 

2006

 

2005

 

2004

 

Retail Grocery, specialty chains and wholesalers

 

12

%

19

%

25

%

Club stores, drug chains & mass merchandisers

 

14

%

11

%

13

%

Full service distributors

 

69

%

65

%

52

%

Health food distributors

 

2

%

3

%

6

%

Other

 

3

%

2

%

4

%

 

Our customers include Cadbury Schweppes Bottling Group (formally known as Dr. Pepper Bottling/7UP Bottling Group), Wal-Mart, Inc. (including Sam’s Club), Kalil Bottling Group, Trader Joe’s, John Lenore & Company, Costco, Kroger, Safeway and Albertsons.  A decision by any large 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.  Cadbury Schweppes Bottling Group, a customer of the DSD division, accounted for approximately 19%, 18% and 13% of our net sales for the years ended December 31, 2006, 2005 and 2004, respectively. Wal-Mart, Inc. (including Sam’s Club), a customer of both the DSD and Warehouse divisions, accounted for approximately 12% of the Company’s net sales for the year ended December 31, 2006.

37




In September 2000, HBC, through its wholly owned subsidiary Blue Sky, acquired the Blue Sky® Natural Soda business.  The Blue Sky® 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 Sky® 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. In 2005, we introduced a new line of Blue Sky® lite natural sodas, a new line of Blue Sky® natural sodas made with real sugar and a new line of non-carbonated Blue Sky® isotonic sports drinks. In 2006, we introduced our Blue Sky® Blue Energy drinks in 16-ounce cans and introduced a new Blue Sky®  juice based energy drink in both 8-ounce and 16-ounce cans.

In May 2001, HBC, through its wholly owned subsidiary Junior Juice, acquired the Junior Juice® beverage business.  The Junior Juice® product line is comprised of a line of 100% juices packed in 4.23-ounce aseptic packages and is targeted at toddlers.

 In October 2006, we acquired the Unbound Energy® trademark and assumed the production, marketing and sale of Unbound Energy® energy drinks in 16-ounce cans. We subsequently introduced a lo-carb and juice version in 16-ounce cans.

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 and will expire in July 2008.  (See “Part I, 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, increased sales levels in 2006, and the conclusion of the agreements with AB, overall inventory levels increased.  During 2006, the costs of PET plastic bottles and aluminum cans, as well as the costs of high fructose corn syrup, sucrose, certain juice concentrates, including apple, and certain packaging and freight costs also increased.

·                  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 if necessary at low effective cost and overall low costs of borrowing provide a competitive advantage.

38




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/or 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 sales, gross profits, operating income, and net income and net income per share represent key measurements of the above value drivers.  In 2006, gross sales totaled $696.3 million, a 67.6% increase over 2005.  Net sales totaled $605.8 million in 2006, an increase of 73.6% over 2005.  Gross profit totaled $316.6 million in 2006, a 73.4% increase from 2005.  Operating income was $158.6 million compared to $103.4 million for 2005.  Net income was $97.9 million as compared to $62.8 million for 2005.  Net income per diluted share was $0.99 as compared to net income per diluted share of $0.65 in 2005.  These measurements will continue to be a key management focus in 2007 and beyond.   See also “Results of Operations for the Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005.”

In 2006, the Company had working capital of $212.3 million compared to $107.3 million as of December 31, 2005.  In 2006, our net cash provided by operating activities was approximately $76.4 million as compared to $54.6 million in 2005.  Principal uses of cash flows are purchases of inventory, increases in accounts receivable and other assets, acquisition of property and equipment and trademarks.  Payment of accounts payable and income taxes payable are expected to be and remain our principal recurring use of cash and working capital funds. (See also “Part II, Item 7. - 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 “Part I, Item 1. -  Business - Competition and Sales and Marketing”);

·                  restrictions on imports and sources of supply; duties or tariffs; changes in government regulations;

39




·                  protection of our existing intellectual property portfolio of trademarks and the continuous pursuit of new and innovative trademarks for our expanding product lines;

·                  limitations on available quantities of sucralose, a non-caloric sweetener that is used in many of our beverage products, due to demand for such sweetener exceeding the supplier’s production capacity, as well as limitations on available quantities of certain package containers such as the 24-ounce cap can and copacking availability;

·                  the imposition of additional restrictions; and

·                  (See also “Part I, Item 1A. - Risk Factors”) for additional information about risks and uncertainties facing our Company.

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;

·                  proper positioning to capture industry growth; and

·                  broadening distribution/expansion opportunities

40




Results of Operations

 

 

 

 

 

 

 

 

Percentage Change

 

 

 

2006

 

2005

 

2004

 

06 vs. 05

 

05 vs. 04

 

Gross sales, net of discounts & returns *

 

$

696,322

 

$

415,417

 

$

224,098

 

67.6

%

85.4

%

Less: Promotional and other allowances**

 

90,548

 

66,531

 

43,757

 

36.1

%

52.0

%

Net sales

 

605,774

 

348,886

 

180,341

 

73.6

%

93.5

%

Cost of sales

 

289,180

 

166,343

 

96,875

 

73.8

%

71.7

%

Gross profit

 

316,594

 

182,543

 

83,466

 

73.4

%

118.7

%

Gross profit margin as a percentage of net sales

 

52.3

%

52.3

%

46.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

158,015

 

79,100

 

49,580

 

99.8

%

59.5

%

Operating income

 

158,579

 

103,443

 

33,886

 

53.3

%

205.3

%

Operating income as a percent of net sales

 

26.2

%

29.6

%

18.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

3,660

 

1,351

 

52

 

170.9

%

2,498.1

%

Income before provision for income taxes

 

162,239

 

104,794

 

33,938

 

54.8

%

208.8

%

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

64,290

 

42,019

 

13,551

 

53.0

%

210.1

%

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

97,949

 

$

62,775

 

$

20,387

 

56.0

%

207.9

%

Net income as a percent of net sales

 

16.2

%

18.0

%

11.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

  Basic

 

$

1.09

 

$

0.71

 

$

0.24

 

53.0

%

196.9

%

  Diluted

 

$

0.99

 

$

0.65

 

$

0.22

 

52.9

%

201.2

%

 

 

 

 

 

 

 

 

 

 

 

 

Case sales (in thousands) (in 192-ounce case equivalents)

 

72,740

 

48,214

 

29,760

 

50.9

%

62.0

%

 


* Gross sales, although used internally by management as an indicator of operating performance, should not be considered as an alternative to net sales, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of net sales.  Additionally, gross sales may not be comparable to similarly titled measures used by other companies as gross sales has been defined by our internal reporting requirements.  However, gross sales is used by management to monitor operating performance including sales performance of particular products, salesperson performance, product growth or declines and our overall performance.  The use of gross sales allows evaluation of sales performance before the effect of any promotional items, which can mask certain performance issues. Management believes the presentation of gross sales allows a more comprehensive presentation of our operating performance.  Gross sales may not be realized in the form of cash receipts as promotional payments and allowances may be deducted from payments received from customers.

** Although the expenditures described in this line item are determined in accordance with GAAP and meet GAAP requirements, the disclosure thereof does not conform with GAAP presentation requirements.  Additionally, the presentation of promotional and other allowances may not be comparable to similar items presented by other companies.  The presentation of promotional and other allowances facilitates an evaluation of the impact thereof on the determination of net sales and illustrates the spending levels incurred to secure such sales. Promotional and other allowances constitute a material portion of our marketing activities.

41




Results of Operations for the Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005

Segment Reclassification. RumbaTM brand energy juice, which was previously reported in the Warehouse segment, is now reported in the DSD segment.  Similarly, Hansen’s® energy drinks, which were previously reported in the DSD segment, are now reported in the Warehouse segment.  For presentation purposes, these changes are assumed to have commenced January 1, 2006 and are reflected as such in the figures for the year ended December 31, 2006.  The comparable figures for such products for the years ended December 31, 2005 and 2004, respectively, as previously reported, have been recast to reflect the above reclassification.

Gross Sales.* Gross sales were $696.3 million for the year ended December 31, 2006, an increase of approximately $280.9 million or 67.6% higher than the $415.4 million gross sales for the year ended December 31, 2005.  The increase in gross sales for 2006 was primarily attributable to increased sales volumes of certain of our existing products, including the full year sales of Monster Energy® KhaosTM energy drinks which were introduced in August 2005. Promotional and other allowances were $90.5 million for 2006 an increase of 24.0 million or 36.1% higher than promotional and other allowances of $66.5 million for 2005. Promotional and other allowances as a percentage of gross sales decreased from 16.0% in 2005 to 13.0% in 2006.  As a result the percentage increase in gross sales in 2006 was lower than the percentage increase in net sales.

*Gross sales – see definition above.

Net Sales. Net sales were $605.8 million for the year ended December 31, 2006, an increase of approximately $256.9 million or 73.6% higher than net sales of $348.9 million for the year ended December 31, 2005.  The increase in net sales was primarily attributable to increased sales by volume of our Monster Energy® brand energy drinks, which include Monster Energy® drinks (introduced in April 2002), lo-carb Monster Energy® drinks (introduced in 2003), Monster Energy® AssaultTM energy drinks (introduced in September 2004), as well as sales of Monster Energy® KhaosTM energy drinks (introduced in August 2005). To a lesser extent, the increase in net sales was attributable to increased sales by volume of teas, lemonades and juice cocktails, Lost® Energy™ drinks (introduced in January 2004), sports drinks, Rumba™ brand energy juice (introduced December 2004), Junior Juice®, Ace™ energy drinks (introduced in August 2006) and Unbound Energy® energy drinks. The increase in net sales was partially offset by decreased sales by volume primarily of Hansen’s® energy drinks, smoothies in cans and Energade® energy sports drinks.

Case sales, in 192-ounce case equivalents were 72.7 million cases for the year ended December 31, 2006, an increase of 24.5 million cases or 50.9% higher than case sales of 48.2 million cases for the year ended December 31, 2005. The overall average net sales price per case increased to $8.33 for 2006 or 15% higher than the net sales price per case of $7.24 for 2005.  The increase in the average net sales prices per case was attributable to an increase in the proportion of case sales derived from higher priced products.

Net sales for the DSD segment were $514.3 million for year ended December 31, 2006, an increase of approximately $251.4 million or 95.6% higher than net sales of $262.9 million for the year ended December 31, 2005.  The increase in net sales was primarily attributable to increased sales by volume of our Monster Energy® brand energy drinks, which include Monster Energy® drinks, lo-carb Monster Energy® drinks, Monster Energy® AssaultTM energy drinks, as well as sales of Monster Energy® KhaosTM energy drinks. To a lesser extent, the increase in net sales was attributable to increased sales by volume of Lost® Energy™ drinks, RumbaTM brand energy juice, AceTM energy drinks and Unbound Energy® energy drinks.  The increase in net sales was partially offset by decreased sales by volume primarily of Energade® energy sports drinks.

Net sales for the Warehouse segment were $91.5 million for the year ended December 31, 2006, an increase of approximately $5.5 million or 6.4% higher than net sales of $86.0 million for the year

42




ended December 31, 2005. The increase in net sales was primarily attributable to increased sales by volume of teas, lemonades and juice cocktails, Junior Juice® and sports drinks.  The increase in net sales was partially offset by decreased sales by volume primarily of Hansen’s® energy drinks and smoothies in cans.

Gross Profit.***  Gross profit was $316.6 million for the year ended December 31, 2006, an increase of approximately $134.1 million or 73.4% higher than the gross profit of $182.5 million for the year ended December 31, 2005.  Gross profit as a percentage of net sales was 52.3% for both 2006 and 2005.  Increases in sales volumes contributed to an increase in gross profit dollars.  Gross profit as a percentage of net sales was affected by an increase in the percentage of sales within the DSD segment of certain packages that have lower gross profit margins. In addition, gross profit as a percentage of net sales was also affected by a significant increase in certain freight-in costs due to the addition of new co-packers and warehouses and an increase in the cost of certain raw materials including sucrose, PET and aluminum cans and apple juice concentrate. These factors were offset by increased sales of DSD segment products which have higher gross profit margins than those in the Warehouse segment.

***Gross profit may not be comparable to that of other entities since some entities include all costs associated with their distribution process in cost of sales, whereas others exclude certain costs and instead include such costs within another line item such as operating expenses.

Operating Expenses.  Total operating expenses were $158.0 million for the year ended December 31, 2006, an increase of approximately $78.9 million or 99.8% higher than total operating expenses of $79.1 million for the year ended December 31, 2005. Total operating expenses as a percentage of net sales increased to 26.1% for 2006 from 22.6% for 2005. The increase in total operating expenses and total operating expenses as a percentage of net sales was primarily attributable to increased selling and distribution, and general and administrative expenses.

Selling and distribution expenses were $95.3 million for the year ended December 31, 2006, an increase of approximately $44.5 million or 87.8% higher than selling and distribution expenses of $50.8 million for the year ended December 31, 2005.  Selling and distribution expenses as a percentage of net sales for 2006 were 15.7%, which was higher than selling and distribution expenses as a percentage of net sales of 14.6% for 2005.  The increase in selling and distribution expenses was partially attributable to increased out-bound freight and warehouse costs of $18.9 million primarily due to increased volumes of shipments and increased freight rates and fuel prices, as well as increased expenditures of $6.9 million for merchandise displays primarily in anticipation of the changeover to select AB distributors, $4.3 million for sponsorships and endorsements, $4.3 million for trade development activities with distributors and customers, $2.7 million for commissions and royalties, and $1.8 million for sampling programs.

General and administrative expenses were $62.7 million for the year ended December 31, 2006, an increase of approximately $34.4 million or 121.6% higher than general and administrative expenses of $28.3 million for the year ended December 31, 2005. General and administrative expenses as a percentage of net sales for 2006 were 10.4%, which was higher than general and administrative expenses as a percentage of net sales of 8.1% for 2005.  The increase in general and administrative expenses was primarily attributable to the costs associated with terminating existing distributors of $12.7 million, stock compensation expense of $8.3 million as a result of our adoption of SFAS 123R which was not expensed in the previous year (see Part II, Item 8, Note 12, “Stock-Based Compensation”) including a cumulative adjustment of $1.3 million relating to stock based compensation and related charges (see Part II, Item 8, Note 13, “Review of Historic Stock Option Granting Practices”), an increase in payroll expenses of $5.3 million, and an increase of $5.2 million in professional services costs, including legal and accounting fees.  Included in legal and accounting fees are costs of $3.8 million relating to the Company’s special investigation of stock option grants.

Contribution Margin.  Contribution margin represents net sales by segment less the cost of sales and operating expenses which can be directly attributed to segment net sales. Contribution margin for the

43




DSD segment was $187.9 million for the year ended December 31, 2006, an increase of approximately $78.9 million or 72.4% higher than contribution margin of $109.0 million for the year ended December 31, 2005.  The increase in contribution margin for the DSD segment was primarily attributable to the increase in net sales of Monster Energy® brand energy drinks.  Contribution margin for the Warehouse segment was $6.1 million for 2006, a decrease of approximately $4.3 million or 41.0% lower than contribution margin of $10.4 million for 2005.  The decrease in the contribution margin for the Warehouse segment was primarily attributable to reduced sales of Hansen’s® energy drinks and a reduction in gross margin as a result of increased costs of raw materials and production.

Operating Income.  Operating income was $158.6 million for the year ended December 31, 2006, an increase of approximately $55.2 million or 53.4% higher than operating income of $103.4 million for the year ended December 31, 2005.  The increase in operating income was attributable to higher gross profit, which was offset by increased selling, distribution, general and administrative expenses. Operating income as a percentage of net sales decreased to 26.2% for 2006 from 29.6% for 2005.  The decrease in operating income as a percentage of net sales was primarily attributable to increased general and administrative expenses as a percentage of net sales.

Interest Income, net.  Net interest income was $3.7 million for the year ended December 31, 2006, an increase of $2.3 million from net interest income of $1.4 million for the year ended December 31, 2005.  The increase in net interest income was primarily attributable to increased interest revenue earned on the Company’s invested cash balances which have increased significantly over the year.

Provision for Income Taxes.  Provision for income taxes for the year ended December 31, 2006 was $64.3 million as compared to provision for income taxes of $42.0 million for the year ended December 31, 2005.  The effective combined federal and state tax rate for was 39.6%, which was lower than the effective tax rate of 40.1% for 2005.  The decrease in the effective tax rate was primarily attributable to certain interest income earned on securities that are exempt from federal income taxes and, certain federal tax credits relating to export sales, and to a lesser extent, a decrease in state taxes due to the apportionment of sales to various states outside of California which have lower state tax rates.  This decrease was partially offset by stock-based compensation relating to incentive stock options for which we received no tax benefit.

Net Income.  Net income was $97.9 million for the year ended December 31, 2006, an increase of $35.1 million or 56.0% higher than net income of $62.8 million for the year ended December 31, 2005.  The increase in net income was attributable to the increase in gross profit of approximately $134.1 million and the increase in net interest income of approximately $2.3 million, which was partially offset by an increase in operating expenses of approximately $79.0 million and an increase in provision for income taxes of approximately $22.3 million.

Results of Operations for the Year Ended December 31, 2005 Compared to the Year Ended December 31, 2004

Segment Reclassification. RumbaTM brand energy juice, which was previously reported in the Warehouse segment, is now reported in the DSD segment.  Similarly, Hansen’s® energy drinks, which were previously reported in the DSD segment, are now reported in the Warehouse segment.  For presentation purposes, these changes are assumed to have commenced January 1, 2006 and are reflected as such in the figures for the year ended December 31, 2006.  The comparable figures for such products for the years ended December 31, 2005 and 2004, respectively, as previously reported, have been restated to reflect the above reclassification.

Gross Sales.  For the year ended December 31, 2005, gross sales were $415.4 million, an increase of $191.3 million or 85.4% higher than gross sales of $224.1 million for the year ended December 31, 2004.  The increase in gross sales was primarily attributable to increased sales of certain of our existing products and the introduction of new products as discussed below in “Net Sales.”  The percentage increase in gross sales was lower than the percentage increase in net sales due to a decrease in

44




the promotional and other allowances as a percentage of gross sales, which decreased from 19.5% for the year ended December 31, 2004 to 16.0% for the year ended December 31, 2005, although the actual amount of promotional and other allowances increased from $43.8 million to $66.5 million for the respective periods.

*Gross sales – see definition above

Net Sales.  For the year ended December 31, 2005, net sales were $ 348.9 million, an increase of $168.5 million or 93.5% higher than net sales of $180.3 million for the year ended December 31, 2004.  We again achieved record sales in 2005. The increase in gross and net sales in 2005 was primarily attributable to increased sales by volume of our Monster Energy® drinks, which were introduced in April 2002, including our lo-carb Monster Energy® drinks, which were introduced in 2003, our Monster Energy® AssaultTM energy drinks, which were introduced in September 2004, sales of Monster Energy® KhaosTM energy drinks, which were introduced in August 2005, increased sales by volume of Lost® EnergyTM energy drinks which were introduced in January 2004, and to a lesser extent, to sales of Joker Mad EnergyTM drinks which were introduced in January 2005, as well as increased sales by volume of apple juice and juice blends, and children’s multi-vitamin juice drinks and Rumba™ which was introduced in December 2004.  The increase in gross and net sales was partially offset by decreased sales by volume primarily of Hansen’s Natural Sodas®, Hansen’s® energy drinks, Energade® and Smoothies in cans.  Net sales case volumes (calculated on 192 U.S. fluid ounces of finished beverage equivalent basis) increased from 29.8 million cases for the year ended December 31, 2004 to 48.2 million cases for the year ended December 31, 2005, an increase of 18.4 million cases or 62.0%.  The overall average net sales price per case also increased to $7.24 per case for the year ended December 31, 2005 from $6.06 for the year ended December 31, 2004, an increase of 19.5%.  The increase in the average net sales prices per case was due to an increase in the proportion of case sales derived from higher priced products as described below.

Net sales for the DSD segment were $262.9 million for the year ended December 31, 2005, an increase of approximately $163.5 million or 164.4% higher than net sales of $99.4 million for the year ended December 31, 2004.  The increase in net sales for the DSD segment was primarily attributable to increased sales by volume of our Monster Energy® drinks, including our lo-carb Monster Energy® drinks, our Monster Energy® Assault TM energy drinks, sales of Monster Energy® KhaosTM energy drinks, increased sales by volume of Lost® EnergyTM energy drinks. The increase in net sales was also attributable, to a lesser extent, to sales of Joker Mad EnergyTM drinks and RumbaTM energy juice.  The increase in net sales was partially offset by lower sales by volume of Energade®.

Net sales for the Warehouse segment were $86.0 million for the year ended December 31, 2005, an increase of approximately $5.1 million or 6.3% higher than net sales of $80.9 million for the year ended December 31, 2004. The increase in net sales for the Warehouse segment was primarily attributable to increased sales by volume of Hansen’s® apple juice and juice blends, children’s multi-vitamin juice drinks. The increase in net sales was partially offset by lower sales by volume of smoothies in cans, Hansen’s® energy drinks and Hansen’s Natural Sodas®.

Gross Profit.  Gross profit was $182.5 million for the year ended December 31, 2005, an increase of $99.1 million or 118.7% over the $83.5 million gross profit for the year ended December 31, 2004.  Gross profit as a percentage of net sales was 52.3% for the year ended December 31, 2005 which was higher than gross profit as a percentage of net sales of 46.3% for the year ended December 31, 2004, due primarily to higher gross profit margins achieved on the increased sales of Monster Energy® and Lost® EnergyTM 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.

*** Gross Profit – see definition above

45




Total Operating Expenses.  Total operating expenses were $79.1 million for the year ended December 31, 2005, an increase of $29.5 million or 59.6% over total operating expenses of $49.6 million for the year ended December 31, 2004.  Total operating expenses as a percentage of net sales decreased to 22.6% for the year ended December 31, 2005, from 27.4% for the year ended December 31, 2004.  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.

Distribution expenses, which include out-bound freight and warehousing expenses after manufacture, were $22.1 million for the year ended December 31, 2005 and $12.4 million for the year ended December 31, 2004 and have been included in operating expenses.

Selling.  Selling expenses were $50.8 million for the year ended December 31, 2005, an increase of $21.5 million or 73.7% over selling expenses of $29.2 million for the year ended December 31, 2004.  Selling expenses as a percentage of net sales decreased to 14.6% for the year ended December 31, 2005 from 16.2% for the year ended December 31, 2004.  The increase in selling expenses was primarily attributable to increased distribution (freight) and storage expenses which increased by $9.7 million, increased expenditures for trade development activities and cooperative arrangements with our customers and distributors, which increased by $4.2 million, increased expenditures for merchandise displays, point-of-sale materials, and premiums, which increased by $3.0 million, increased expenditures for sponsorships and endorsements which increased $1.7 million, increased expenditures for advertising which increased by $1.3 million, and increased expenditures for samples, which increased by $1.2 million.

General and Administrative. General and administrative expenses were $28.3 million for the year ended December 31, 2005, an increase of $8.0 million or 39.4% over general and administrative expenses of $20.3 million for the year ended December 31, 2004.  General and administrative expenses as a percentage of net sales decreased to 8.1% for the year ended December 31, 2005 from 11.3% for the year ended December 31, 2004. The increase in general and administrative expenses was primarily attributable to payroll expenses which increased by $3.6 million, distributor termination payments which increased by $1.2 million and travel and entertainment expenses which increased by $0.7 million.

Amortization of Trademarks. Amortization of trademarks was $0.07 million for the year ended December 31, 2005, a decrease of $0.003 million from amortization of trademarks of $0.073 million for the year ended December 31, 2004. The decrease in amortization of trademarks was due to a reduction in the balance of definite life trademarks.

Contribution Margin.  Contribution margin represents net sales by segment less the cost of sales and operating expenses which can be directly attributed to segment net sales.  Contribution margin for the DSD segment was $109.0 million for the year ended December 31, 2005, an increase of approximately $73.9 million or 210.5% higher than contribution margin of $35.1 million for the year ended December 31, 2004.  The increase in contribution margin for the DSD segment was primarily attributable to the increase in net sales of Monster Energy® brand energy drinks and Lost® EnergyTM energy drinks.  Contribution margin for the Warehouse segment was $10.4 million for the year ended December 31, 2005, an increase of approximately $0.8 million or 8.3% higher than contribution margin of $9.6 million for year ended December 31, 2004.  The increase in the contribution margin for the Warehouse segment was primarily attributable to increased sales of apple juice and juice blends which was offset by the reduced contribution from lower sales of Hansen’s® energy drinks.

Operating Income.  Operating income was $103.4 million for the year ended December 31, 2005, compared to $33.9 million for the year ended December 31, 2004.  The $69.6 million increase in operating income was primarily attributable to increased gross profits, which was partially offset by increased operating expenses.

46




Interest Income, net.  Net interest income was $1.4 million for the year ended December 31, 2005, as compared to net interest income of $52,000 for the year ended December 31, 2004.  Net interest income consists of interest income and interest and financing expense. The increase in interest income was primarily attributable to an increase in the cash balances in interest bearing accounts during the year ended December 31, 2005.  Interest income for the year ended December 31, 2005 was $1.4 million compared to interest income of $0.09 million for the year ended December 31, 2004.  Interest and financing expense for the year ended December 31, 2005 was $0.08 million compared to $0.04 million for the year ended December 31, 2004.  The increase in interest and financing expense was primarily attributable to an increase in capital leases entered into during 2005.

Provision for Income Taxes.  Provision for income taxes for the year ended December 31, 2005 was $42.0 million which was an increase of $28.4 million as compared to the provision for income taxes of $13.6 million for the year ended December 31, 2004.  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 2005 was 40.1%, as compared to an effective tax rate of 39.9% for 2004.

Net Income. Net income was $62.8 million for the year ended December 31, 2005, which was an increase of $42.4 million as compared to net income of $20.4 million for the year ended December 31, 2004.  The increase in net income was primarily attributable to the $99.1 million increase in gross profit and an increase of net interest income of $1.3 million for the year ended December 31, 2005 which was partially offset by increased operating expenses of $29.5 million and an increase in the provision for income taxes of $28.4 million.

Liquidity and Capital Resources

Cash flows provided by operating activities – Net cash provided by operating activities was $76.4 million for the year ended December 31, 2006, as compared to $54.6 million in the comparable period in 2005.  For 2006, cash provided by operating activities was primarily attributable to net income earned of $97.9 million and adjustments for certain non-cash expenses consisting of $8.3 million of share-based compensation and $1.5 million of depreciation and other amortization. In 2006, cash provided by operations also increased due to a $20.4 million increase in deferred revenue, a $14.0 million increase in accrued liabilities, a $7.7 million increase in accounts payable, a $21.1 million increase in income taxes payable, a $1.0 million increase in accrued compensation and a $3.3 million increase in customer deposit liabilities.  In 2006, cash provided by operating activities was reduced due to a $45.6 million increase in inventories, a $25.9 million increase in accounts receivable, a $17.3 million increase in tax benefit from exercise of stock options and a $10.9 million increase in deferred income taxes. The increase in accounts receivable was attributable to increased sales volumes as well as to increased sales to certain classes of customers who have longer payment terms. The increase in inventory is attributable to the addition of new copackers and warehouses, the introduction of new products and planned inventory levels to meet consumer demand.

Purchases of inventories, increases in accounts receivable and other assets, acquisition of property and equipment, acquisition of trademarks, payments of accounts payable and income taxes payable are expected to remain our principal recurring use of cash.

Cash flows (used in) provided by investing activities Net cash used in investing activities was $95.2 million for the year ended December 31, 2006, as compared to $3.2 million provided by investing activities in the comparable period in 2005.  For 2006, cash used in investing activities was primarily attributable to purchases of short-term investments, particularly available-for-sale and held-to-maturity investments.  Cash provided by investing activities was primarily attributable to sales and maturities of held-to-maturity and available-for-sale investments. For both periods, cash used in investing activities included the acquisitions of fixed assets consisting of vans and promotional vehicles and other equipment to support the marketing and promotional activities of the Company, production equipment, computer and office furniture and equipment used for sales and administrative activities, as wells as certain leasehold improvements.  Management expects that it will continue to use a portion of its cash in excess

47




of its requirements for operations, for purchasing short-term investments and for other corporate purposes.  Management, from time to time, considers the acquisition of capital equipment, specifically items of production equipment required to produce certain of our products, storage racks, vans and promotional vehicles, coolers and other promotional equipment as well as the introduction of new product lines and businesses compatible with the image of the Company’s brands.

Cash flows (used in) provided by financing activities – Net cash used in financing activities was $7.7 million for the year ended December 31, 2006, as compared to net cash provided by financing activities of $0.1 million for the comparable period in 2005.  For 2006, cash used in financing activities was primarily attributable to purchases of $27.7 million of the Company’s common stock and principal payments of long-term debt of $1.2 million in relation to lease payments made on vehicle leases entered into over the past year.  In 2006, cash used in financing activities was partially offset by a $17.3 million tax benefit in connection with the exercise of certain stock options and by proceeds of $3.9 million received from the issuance of common stock.

Debt and other obligations HBC has a credit facility from Comerica Bank (“Comerica”) consisting of a revolving line of credit which was amended in May 2007. In accordance with the amended provisions of the credit facility, HBC increased its available borrowing under the revolving line of credit from $7.5 million collateralized to $10.0 million non-collateralized.  The revolving line of credit remains in full force and effect through June 1, 2008.  Interest on borrowings under the line of credit is based on Comerica’s base (prime) rate minus up to 1.5%, or varying LIBOR rates up to 180 days, plus an additional percentage of up to 1.75%, depending upon certain financial ratios maintained by HBC. The Company had no outstanding borrowings on this line of credit at December 31, 2006.

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, 2006.

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 them, including instituting legal proceedings.

Noncancelable contractual obligations include our obligations under our agreement with the Las Vegas Monorail Company and other commitments.  (See also “Part II, Item 8 - Note 10, Commitments & Contingencies”).

Purchase commitments include obligations 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.

The following represents a summary of the Company’s contractual obligations and related scheduled maturities as of December 31, 2006:

 

 

Payments due by period (in thousands)

 

Obligations

 

Total

 

Less than
1 year

 

1-3
years

 

3-5
years

 

More than
5 years

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncancelable Contracts

 

$

26,459

 

$

13,197

 

$

13,142

 

$

120

 

$

 

Capital Leases

 

303

 

299

 

4

 

 

 

Operating Leases

 

26,198

 

3,079

 

6,033

 

4,966

 

12,120

 

Purchase Commitments

 

25,385

 

21,554

 

3,831

 

 

 

 

 

$

78,345

 

$

38,129

 

$

23,010

 

$

5,086

 

$

12,120

 

 

48




In addition to the above obligations, pursuant to a can supply agreement between the Company and Rexam Beverage Can Company (“Rexam”), dated as of January 1, 2006, the Company has undertaken to purchase a minimum volume of 24-ounce resealable aluminum beverage cans over the four-year period commencing from January 1, 2006 through December 31, 2009.  Should the Company fail to purchase the minimum volume, the Company will be obligated to reimburse Rexam for certain capital reimbursements on a pro-rated basis.  The Company’s maximum liability under this agreement is $8.6 million, subject to compliance by Rexam with a number of conditions under this agreement.

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 at least the next twelve months. Based on the Company’s current plans, at this time the Company estimates that capital expenditures are likely to be less than $10.0 million through December 2007.  However, future business opportunities may cause a change in this estimate.

In October 2006, the Company entered into a lease agreement pursuant to which the Company leased 346,495 square feet of warehouse and distribution space located in Corona, California.  This lease commitment provides for minimum rental payments for 120 months commencing March 2007, excluding renewal options.  The monthly rental payments are $167,586 at the commencement of the lease and increase over the lease term by 7.5% at the end of each 30 month period.  The new warehouse and distribution space will replace the Company’s existing warehouse and distribution space located in Corona, California. We plan to sublet our existing office, warehouse and distribution space for the remainder of the lease term, unless we are able to find a tenant acceptable to the landlord and the landlord agrees to the early termination of the lease.

In October 2006, the Company also entered into an agreement to acquire 1.8 acres of vacant land for a purchase price of $1.4 million, located adjacent to the new leased warehouse and distribution facility located in Corona, California for the purpose of constructing a new office building thereon which will replace the Company’s existing office space in Corona, California.  In the interim, the Company has leased additional office space located near our existing corporate offices.

Accounting Policies and Pronouncements

Critical Accounting Policies

The Company’s consolidated financial statements are prepared in accordance with 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, as well as claims and contingencies arising out of litigation or other transactions that occur in the normal course of business.  The following summarizes the most significant accounting and reporting policies and practices of the Company:

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.

49




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, production availability and/or its ability to sell the product(s) concerned.  Demand for the Company’s products can fluctuate significantly. Factors that could affect demand for the Company’s products include unanticipated changes in consumer preferences, general market conditions or other factors that may result in cancellations of advance orders or reductions 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.

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.  No impairments were identified as of December 31, 2006.

Management believes that the accounting estimate related to impairment of its long lived assets, including its trademarks, is a “critical accounting estimate” because: (1) the estimate 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.

Intangibles – Intangibles are comprised primarily of trademarks that represent the Company’s exclusive ownership of the Hansen’s® trademark in connection with the manufacture, sale and distribution of beverages, water, non-beverage products and the Monster Energy® trademark in connection with the manufacture, sale and distribution of supplements and beverages.  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® trademark, which was acquired in September 2000, and the Junior Juice® trademark, which was acquired in May 2001. During 2002, the Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 142, Goodwill and Other Intangible Assets. Under the provisions on SFAS No. 142, the Company discontinued amortization on indefinite-lived trademarks while continuing to amortize remaining trademarks over one to 25 years.

In accordance with SFAS No. 142, we evaluate our 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 impairment analysis performed for the year ended December 31, 2006, the estimated fair values of trademarks exceeded the carrying value.

50




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 recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is reasonably assured.  Management believes that adequate provision has been made for cash discounts, returns and spoilage based on the Company’s historical experience. Amounts paid to the Company by newly appointed AB Distributors for the costs of terminating certain of the Company’s prior distributors are accounted for as deferred revenue which will be recognized as revenue ratably over the anticipated 20 year life of the respective AB Distribution Agreements.

Net Sales – Net sales have been determined after deduction of promotional and other allowances in accordance with Emerging Issues Task Force Issue (“EITF”) No. 01-09.

Cost of Sales – Cost of sales consists of the costs of raw materials utilized in the manufacture of our products, co-packing fees, repacking fees, in-bound freight charges, as well as certain internal transfer costs, warehouse expenses incurred prior to the manufacture of the Company’s finished products and certain quality control costs.  Raw materials account for the largest portion of the cost of sales.  Raw materials include cans, bottles, other containers, ingredients and packaging materials.

Operating Expenses – Operating expenses include selling expenses such as distribution expenses to transport our products to our customers and warehousing expenses after manufacture, as well as expenses for advertising, sampling and in-store demonstration costs, costs for merchandise displays, point-of-sale materials and premium items, sponsorship expenses, other marketing expenses and design expenses. Operating expenses also include such costs as payroll costs, travel costs, professional service fees including legal fees, termination payments made to certain of the Company’s prior distributors, depreciation, and other general and administrative costs.

Stock-Based Compensation – Beginning in fiscal year 2006, the Company accounts for share-based compensation arrangements in accordance with the provisions of SFAS 123R, which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values. The Company uses the Black-Scholes-Merton option pricing formula to estimate the fair value of its stock options at the date of grant. The Black-Scholes-Merton option pricing formula was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The Company’s employee stock options, however, have characteristics significantly different from those of traded options. For example, employee stock options are generally subject to vesting restrictions and are generally not transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility, the expected life of an option and the number of awards ultimately expected to vest. Changes in subjective input assumptions can materially affect the fair value estimates of an option. Furthermore, the estimated fair value of an option does not necessarily represent the value that will ultimately be realized by an employee. The Company uses historical data to estimate the expected price volatility, the expected option life and the expected forfeiture rate. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. If actual results are not consistent with the Company’s assumptions and judgments used in estimating the key assumptions, the Company may be required to increase or decrease compensation expense or income tax expense, which could be material to its results of operations.

51




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 determines 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.

Newly Issued Accounting Pronouncements

Information regarding newly issued accounting pronouncements is contained in Part II, Item 8, Note 1 to the Consolidated Financial Statements for the year ended December 31, 2006.

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, which have been discontinued and are not material, are expressed in actual cases.

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’s experience with its energy drink products, suggests that they are less seasonal than traditional beverages.  As the percentage of the Company’s sales that are represented by such products continues to increase, seasonal fluctuations will be further mitigated.  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 changes in and/or increased advertising and promotional expenses.  (See also “Part I, Item 1. - Business – Seasonality”).

52




 

 

2006

 

2005

 

2004

 

2003

 

2002

 

Unit Case Volume / Case Sales (in Thousands)

 

 

 

 

 

 

 

 

 

 

 

Quarter 1

 

14,974

 

9,295

 

5,368

 

4,219

 

3,597

 

Quarter 2

 

19,136

 

12,368

 

7,605

 

5,356

 

4,977

 

Quarter 3

 

21,176

 

13,983

 

8,916

 

6,221

 

5,146

 

Quarter 4

 

17,454

 

12,568

 

7,871

 

4,625

 

3,885

 

Total

 

72,740

 

48,214

 

29,760

 

20,421

 

17,605

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Revenues (in Thousands)

 

 

 

 

 

 

 

 

 

 

 

Quarter 1

 

$

119,746

 

$

60,014

 

$

31,299

 

$

22,086

 

$

18,592

 

Quarter 2

 

156,037

 

85,441

 

46,064

 

28,409

 

26,265

 

Quarter 3

 

178,647

 

105,421

 

52,641

 

33,291

 

26,985

 

Quarter 4

 

151,344

 

98,010

 

50,337

 

26,566

 

20,204

 

Total

 

$

605,774

 

$

348,886

 

$

180,341

 

$

110,352

 

$

92,046

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Price per Case

 

 

 

 

 

 

 

 

 

 

 

Quarter 1

 

$

8.00

 

$

6.46

 

$

5.83

 

$

5.23

 

$

5.17

 

Quarter 2

 

$

8.15

 

$

6.91

 

$

6.06

 

$

5.30

 

$

5.28

 

Quarter 3

 

$

8.44

 

$

7.54

 

$

5.90

 

$

5.35

 

$

5.24

 

Quarter 4

 

$

8.67

 

$

7.80

 

$

6.40

 

$

5.74

 

$

5.20

 

Total

 

$

8.33

 

$

7.24

 

$

6.06

 

$

5.40

 

$

5.23

 

 

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 Securities Litigation Reform Act of 1995 (the “Act”) provides a safe harbor for forward looking statements made by or on behalf of the Company.  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.  Without limiting the foregoing, the words “believes,” “thinks,” “anticipates,” “plans,” “expects,” and similar expressions are intended to identify forward-looking statements.

53




Management cautions that 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:

·                  Matters related to or arising out of the Company’s stock option grants and procedures and related matters;

·                  The impact on the Company of late SEC filings, possible delisting from Nasdaq and shareholder litigation;

·                  Any other proceedings which may be brought against the Company by the SEC or other governmental agencies;

·                  The outcome of the shareholder derivative actions and shareholders securities litigation filed against certain of the Company’s officers and directors, and the possibility of other private litigation relating to such stock option grants and related matters;

·                  Our ability to address any significant deficiencies or material weakness in our internal control over financial reporting;

·                  The 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;

·                  The Company’s ability to sustain the current level of sales of our Monster Energy® brand energy drinks;

·                  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 Explosives and/or the Federal Trade Commission and/or certain state regulatory agencies;

·                  Changes in the costs 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, convenience chains, 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;

·                  Disruption in distribution or sales and/or decline in sales due to the termination of the distribution agreements with certain of the Company’s existing distributors or distribution networks and the appointment of selected AB wholesalers as distributors in their place for the territories of such terminated distributors;

54




·                  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, 16-ounce cans and/or 24-ounce cans, smoothies in 11.5-ounce cans, E2O Energy Water®, Energade®, Monster Energy®, Lost® Energy™ drinks, Joker Mad EnergyTM energy drinks and Unbound Energy® energy drinks in 8.3-ounce and/or 16-ounce and/or 24-ounce cans, RumbaTM energy juice in 16-ounce cans, Java MonsterTM coffee drinks in 16-ounce cans, juices in 64-ounce PET plastic bottles and aseptic packaging, sparkling orangeades and lemonades and apple cider in glass bottles and other products;

·                  Loss of the Company’s intellectual property rights;

·                  Failure to retain the full-time services of senior management of the Company, and inability to immediately find suitable replacements;

·                  Volatility of stock prices may restrict sales or other opportunities;

·                  Provisions in the Company’s organizational documents and/or control by insiders may prevent changes in control even if such changes would be beneficial to other stockholders;

·                  Exposure to significant liabilities due to litigation or legal proceedings.

The foregoing list of important factors and other risks detailed from time to time in the Company’s reports filed with the Securities and Exchange Commission is not exhaustive.  See “Part I, Item 1A. – Risk Factors,” for a more complete discussion of these risks and uncertainties and for other risks and uncertainties.  Those factors and the other risk factors described therein are not necessarily all of the important factors that could cause actual results or developments to differ materially from those expressed in any of our forward-looking statements.  Other unknown or unpredictable factors also could harm our results. Consequently, 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.               QUANTITATIVE AND QUALITATIVE 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) to which the Company is exposed are fluctuations in energy and fuel prices, commodity prices affecting the costs of juice concentrates and other raw materials (including, but not limited to, increases in the price of aluminum for cans, resin for PET plastic bottles, as well as sucrose and high fructose corn syrup, which are used in many of the Company’s products), changes in interest rates on the Company’s long-term debt and 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.  In addition, we are subject to other risks associated with the business environment in which we operate, including the collectibility of accounts receivable.

At December 31, 2006, the Company’s debt consisted of amounts owed in connection with certain fixed-rate capital leases.  There have been no significant changes to the Company’s exposure to market risks.

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 91 through 123.

55




 

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 We conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting – During the fourth quarter of 2006, the Company implemented new written procedures, effective January 1, 2007, regarding the granting of stock options. Under these new procedures, the Compensation Committee of the Board of Directors (the “Compensation Committee”) has sole and exclusive authority to grant stock option awards to all employees who are not new hires and to all new hires who are subject to Section 16 of the Exchange Act.  The Compensation Committee and the Executive Committee of the Board each independently has the authority to grant awards to new hires who are not Section 16 employees. Awards granted by the Executive Committee are not subject to approval or ratification by the Board or the Compensation Committee. For purposes of these procedures, a new hire means: (i) an employee who is commencing employment with the Company or its subsidiaries; or (ii) an employee who is receiving a promotion to a new position with the Company or one of its subsidiaries. The grant date of any award to a new hire shall be the first day that Nasdaq is open in the calendar month following the employee’s commencement of employment or the date of the employee’s promotion (as the case may be). Other than awards to new hires, awards may only be granted at a single meeting held during the last two weeks of May and November of each year. The grant date of any award granted at a May or November meeting shall be the first day that Nasdaq is open in June following such May meeting, or December following such November meeting (as the case may be). The new procedures also require certain same day documentation. During the fourth quarter of 2006, the Company also implemented additional procedures for the communication and recording of modifications and cancellations of stock option grants.

Management’s Report on Internal Control Over Financial Reporting – Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f).  Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2006, based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our management’s evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2006.

Our independent registered public accounting firm has issued an attestation report on management’s assessment of our internal control over financial reporting. This report appears below.

56




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Hansen Natural Corporation
Corona, California

We have audited management’s assessment, included in the accompanying Management’s 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, 2006, 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.

57




In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, 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, 2006, 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 as of and for the year ended December 31, 2006, of the Company and our report dated June 5, 2007, expressed an unqualified opinion on those financial statements and financial statement schedule and included an explanatory paragraph referring to the adoption of Statement of Financial Accounting Standards No. 123R, “Share-based Payment” in 2006.

/s/ DELOITTE & TOUCHE LLP

Costa Mesa, California
June 5, 2007

ITEM 9B.               OTHER INFORMATION

None.

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PART III

ITEM 10.               DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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 November 2007.

The members of our Board of Directors and our executive officers are as follows:

Name

 

Age

 

Position

 

 

 

 

 

 

 

Rodney C. Sacks(1)

 

57

 

Chairman of the Board of Directors and Chief Executive Officer

 

Hilton H. Schlosberg(1)

 

54

 

Vice Chairman of the Board of Directors, Chief Financial Officer, Chief Operating Officer and Secretary

 

Benjamin M. Polk

 

56

 

Director

 

Norman C. Epstein(2), (3),(4)

 

66

 

Director

 

Sydney Selati(2),(3)

 

68

 

Director

 

Harold C. Taber, Jr. (2),(4),(5)

 

68

 

Director

 

Mark S. Vidergauz (3)

 

53

 

Director

 

Mark Hall

 

51

 

President, Monster Beverage Division of HBC

 

Michael B. Schott

 

59

 

Senior Vice President, National Sales, Monster Beverage Division of HBC

 

Kirk Blower

 

56

 

Senior Vice President, Non-Carbonated Products of HBC

 

 

 

 

 

 

 

Thomas J. Kelly

 

53

 

Vice President – Finance and Secretary of HBC

 

 


(1)  Member of the Executive Committee of the Board of Directors

(2)  Member of the Audit Committee of the Board of Directors

(3)  Member of the Compensation Committee of the Board of Directors

(4)  Member of the Nominating Committee of the Board of Directors

(5)  Member of the Special Committee of the Board of Directors

Rodney C. Sacks – Chairman of the Board of Directors of the Company, Chief Executive Officer and director of the Company from November 1990 to the present.  Member of the Executive Committee of the Board of Directors of the Company since October 1992.  Chairman and a director of HBC from June 1992 to the present.

Hilton H. Schlosberg – Vice Chairman of the Board of Directors of the Company, President,  Chief Operating Officer, Secretary, and a director of the Company from November 1990 to the present and Chief Financial Officer of the Company since July 1996.  Member of the Executive Committee of the Board of Directors of the Company since October 1992. Vice Chairman, Secretary and a director of HBC from July 1992 to the present.

59




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 and member of the Compensation Committee of the Board of Directors since March 2007.  Mr. Selati was a director of Barbeques Galore Ltd. From 1997 to 2005 and was Chairman of the Board of Directors of Barbeques Galore USA from 1988 to 2005.  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 – President, Monster Beverage Division, 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 B. Schott - Vice President, National Sales, Monster Beverage Division, 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. Mr. Schott is currently on medical leave.

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.

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Audit Committee and Audit Committee Financial Expert

We have 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 our Audit Committee are Messrs. Epstein (Chairman), Taber and Selati. Our 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.

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 controllers) 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
(800) 426-7367

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, 2006, all Section 16(a) filing requirements applicable to the Company’s executive officers, directors and greater than ten percent stockholders were complied with, except that Form 4’s with respect to an option exercise to purchase the Company’s stock required to be filed by Mike Schott and Mark Vidergauz and a sale of shares of the Company’s common stock required to be filed by Mark Vidergauz, and Norman Epstein were inadvertently filed late. The respective transactions were subsequently filed on Form 4’s.

ITEM 11.               EXECUTIVE COMPENSATION

Compensation Committee Interlocks and Insider Participation in Compensation Decisions

The Company’s Compensation Committee was comprised of Mr. Epstein and Mr. Vidergauz and since March 16, 2007 is comprised of Mr. Epstein, Mr. Vidergauz and Mr. Selati.  No interlocking relationships exist between any member of our 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 our Compensation Committee is or was formerly an officer or an employee of Hansen’s.

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Compensation Committee Report

We have reviewed and discussed with management certain Compensation Discussion and Analysis provisions to be included in this Form 10-K. Based on the reviews and discussions referred to below, we recommend to the Board that the Compensation and Analysis referred to above be included in the Company’s Form 10-K.

Compensation Committee

Norman C. Epstein, Chairman
Mark S. Vidergauz
Sydney Selati

COMPENSATION DISCUSSION AND ANALYSIS

Compensation Philosophy

Our executive compensation program for Named Executive Officers listed in the summary compensation table on the following pages, whom we refer to as our NEOs, is designed to attract, as needed, individuals with the skills necessary for us to achieve our business plan, to motivate our executive talent, to reward those individuals fairly over time and to retain those individuals who continue to perform at or above the levels that are deemed essential to ensure our success. The program is also designed to reinforce a sense of ownership, urgency and overall entrepreneurial spirit and to link rewards to measurable corporate and individual performance.  In applying these principles we seek to integrate compensation programs with our short and long term strategic plans and to align the interests of the NEOs with the long term interests of stockholders through award opportunities that can result in ownership of stock.

Compensation Program Components

The compensation programs for our NEOs are generally administered by or under direction of the Compensation Committee (in the case of Rodney Sacks, the Chairman and Chief Executive Officer, and Hilton Schlosberg, the President and Chief Financial Officer), and the Executive Committee (in the case of the other NEOs) and are reviewed on an annual basis to ensure that remuneration levels and benefits are competitive and reasonable and continue to achieve the goals set out in our compensation philosophy. On January 1, 2007, we implemented a new policy regarding the issuance of stock options, which is discussed below.

Neither we nor our Compensation Committee have retained a compensation consultant to review policies and procedures with respect to executive compensation or to advise the Company on compensation matters.  While we do not set compensation at set percentage levels relative to the market, we do seek to provide salary, incentive compensation opportunities and employee benefits that are competitive within the industry and within the labor markets in which we participate.

Our NEO compensation currently has three primary components:  base compensation or salary, discretionary annual bonus, and stock option awards granted pursuant to our Hansen Natural Corporation 2001 Stock Option Plan, which we refer to as the 2001 Stock Option Plan, which is described below under “Long Term Incentive Programs.”

Each of the primary components of NEO compensation is discussed below:

Base Salary

Base salaries for our NEOs are established based on the scope of their respective responsibilities, taking into account competitive market compensation paid by other companies for individuals in similar positions.  Generally, in line with our compensation philosophy, we believe that NEO base salaries

62




should be targeted near the median of the range for individuals in like positions with similar responsibilities in comparable companies.  We fix NEO base compensation at levels which we believe enable us to hire and retain individuals in a competitive environment and to reward satisfactory performance at an acceptable level based upon contributions to our overall business goals.  Base salaries are generally reviewed annually, but may be adjusted from time to time to realign salaries with market levels, taking into account such individual’s responsibilities, performance and experience.  In reviewing base salaries, we consider several factors, including cost of living increases, levels of responsibility, experience, a comparison to base salaries paid for comparable positions by our competitors and companies in our geography, as well as our own base salaries for other executives and individual performance and results achieved.  The annual review usually occurs in the first quarter of each calendar year and has been completed for fiscal 2006.  We may also utilize input from executive search firms when making crucial hiring decisions.

Discretionary Annual Bonus

We provide incentive compensation to our NEOs in the form of annual cash bonuses based on individual and company-wide financial and operational performance and/or results, consistent with our emphasis on pay-for-performance incentive compensation programs. These parameters vary depending on the individual executive, but relate generally to strategic factors such as sales, distribution levels, introduction of new products, operating performance, contribution margins and profitability. We do not have a formula for determination of annual cash bonuses with respect to our NEOs.  We generally utilize cash bonuses to reward performance achievements for the time horizon of one year or less. 

In some cases, the annual bonus amounts are determined as a percentage of base salary.  The actual amount of the annual bonus is determined and paid in the first quarter following a review of each NEO’s individual performance and contribution to our strategic goals during the prior year.

The Compensation Committee determines the annual bonuses for Rodney Sacks and Hilton Schlosberg and the Executive Committee (comprised of the Chairman and Chief Executive Officer and President and Chief Financial Officer) determines the annual bonuses for the other NEOs.  Annual bonuses typically include discretionary bonus amounts that are awarded based on individual circumstances deemed appropriate and fair by the relevant committee. The annual bonuses for fiscal 2006 have been determined.

Long Term Incentive Program

We believe that long term performance is achieved through an ownership culture that encourages superior performance by our NEOs through the use of stock option awards. Our stock option plans have been established to provide our NEOs with incentives to further align their interests with the interests of the stockholders. Grants under stock option plans vest over a number of years, generally up to 5 years.

Our 2001 Stock Option Plan authorizes us to grant options to purchase shares of common stock to our employees.  The Compensation Committee is the administrator of the Stock Option Plan and is authorized to grant stock options to employees thereunder.  The Executive Committee is also authorized to grant options thereunder.  Stock option grants are made to key employees when they are hired and from time to time thereafter, as well as on occasion following a significant change in their job responsibilities.  Prior to 2007, stock option grants were generally made to existing NEOs at periodic intervals at the discretion of the Compensation Committee or the Executive Committee. None of our NEOs were awarded any stock option grants during 2006.  

Effective January 1, 2007, we implemented a new policy regarding the issuance of stock options.  Under the new procedures, the Compensation Committee has sole and exclusive authority to grant stock option awards to all employees who are not new hires and to all new hires who are subject to Section 16 of the Exchange Act.  The Compensation Committee and the Executive Committee of the Board each independently has the authority to grant awards to new hires who are not Section 16 employees. Awards

63




granted by the Executive Committee are not subject to approval or ratification by the Board or the Compensation Committee. For purposes of these procedures, a new hire means: (i) an employee who is commencing employment with the Company or its subsidiaries; or (ii) an employee who is receiving a promotion to a new position with the Company or one of its subsidiaries.  The grant date of any award to a new hire shall be the first day that Nasdaq is open in the calendar month following the employee’s commencement of employment or the date of the employee’s promotion (as the case may be). Other than awards to new hires, awards may only be granted at a single meeting held during the last two weeks of May and November of each year. The grant date of any award granted at a May or November meeting shall be the first day that Nasdaq is open in June following such May meeting, or December following such November meeting (as the case may be). The new procedures also require certain same day documentation.

The Compensation Committee will review and approve stock option awards to our NEOs based upon a review of competitive compensation data, its assessment of individual performance, a review of each executive’s long term incentives and retention considerations.

Other Compensation

Certain NEOs who are parties to employment agreements will continue to be subject to such agreements in their current form until such time as the Compensation Committee determines in its discretion that revisions to such employment agreements are advisable. Current employment agreements have not been changed during their respective terms.  In addition, we intend to continue to maintain our current benefits and perquisites for our NEOs, which include automobile and benefit premiums, among other perquisites.  However, the Compensation Committee in its discretion may revise, amend or add to such NEOs benefits and prerequisites if it deems it advisable. We believe these benefits and perquisites are currently in line with those provided by comparable companies for similarly situated executives.

General

We view the above components of compensation as related but distinct.  We do not believe that significant compensation derived from one component of compensation should negate or reduce compensation from other components.  We determine the appropriate level for each compensation component based in part, but not exclusively, on competitive benchmarks consistent with our recruiting and retention goals, our view of internal equity and consistency and other considerations we deem relevant such as rewarding performance.  We believe that stock option awards should be granted for future performance and are an important compensation related motivator to attract and retain executives and that salary and bonus levels are secondary considerations to our NEOs.  Except as described herein, neither our Compensation Committee nor our Executive Committee have adopted any formal or informal policies or guidelines for allocating compensation between short term and long term and current compensation between cash and non-cash compensation.  However, our Compensation Committee and Executive Committee’s respective philosophy is to make a greater percentage of our NEOs compensation performance rewarded through equity rather than cash if we perform well over time.  Each element of compensation is determined differently for each individual NEO based on specific facts and circumstances applicable at the time and to that specific NEO. 

Our Compensation Committee and Executive Committee’s current intent is to perform at least annually a strategic review of our NEOs compensation to determine whether they have provided adequate incentives and motivation to our NEOs and whether they adequately compensate our NEOs relative to comparable officers in other companies with which we compete for executives.  These companies may or may not be public companies or even consumer product, food or beverage companies.  For compensation decisions, including decisions regarding the grant of equity compensation relating to NEOs other than our Chairman and Chief Executive Officer and President and Chief Financial Officer, the Compensation Committee specifically considers recommendations from the Executive Committee.

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Employee Benefit Plans

Our employees, including our NEOs, are entitled to various employee benefits which include medical and dental care plans, car allowances, other allowances, group life, disability, 401(k) plan as well as paid time off.

401(k) Plan

Our employees, including our NEOs, may participate in our 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.  We contribute 25% of the employee contribution, up to 8% of each employee’s earnings, which vest 20% each year for five years after the first anniversary date.

SUMMARY COMPENSATION TABLE

On August 8, 2005, our common stock was split on a two-for-one basis through a 100% stock dividend.  On July 7, 2006 our common stock was split on a four-for-one basis through a 300% stock dividend. All share information has been presented to reflect the stock splits.

The following table summarizes the total compensation of our NEOs in 2006.  During the year ended December 31, 2006, our NEOs were Rodney C. Sacks, Hilton H. Schlosberg, Mark J. Hall, Michael Schott and Thomas J. Kelly.

Name and Principal
Position

 

Year

 

Salary ($)

 

Bonus ($)

 

Stock
Awards
($)

 

Option
Awards
($)(1)

 

Non-Equity
Incentive Plan
Compensation ($)

 

Change in
Pension Value
and Nonqualified
Deferred
Compensation
Earnings ($)

 

All Other
Compensation ($)
(A)

 

Total ($)

 

Rodney C. Sacks
Chairman, CEO and
Director

 

2006

 

275,000

 

125,000

 

 

2,135,420

 

 

 

41,602

 

2,577,022

 

Hilton H. Schlosberg
Vice-Chairman, CFO,
COO, President,
Secretary and Director

 

2006

 

275,000

 

125,000

 

 

2,135,420

 

 

 

31,217

 

2,566,637

 

Mark J. Hall President
Monster Beverage
Division

 

2006

 

250,000

 

200,000

 

 

1,063,339

 

 

 

20,288

 

1,533,627

 

Michael Schott Senior
Vice President
National Sales Monster
Beverage Division

 

2006

 

195,000

 

30,000

 

 

308,822

 

 

 

93,171

 

626,993

 

Thomas J. Kelly
Vice President Finance

 

2006

 

160,000

 

40,000

 

 

51,010

 

 

 

21,437

 

272,447

 

 


(1)   The amounts represent the current year unaudited compensation expense for all share-based payment awards based on estimated fair values, computed in accordance with Financial Accounting Standards Board Statement No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”), excluding any impact of assumed forfeiture rates.  We record compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes-Merton option pricing formula with the following assumptions: 0% dividend yield; 58.0% expected volatility; 4.7% risk free interest rate; 6 years expected lives and 0% forfeiture rate.

65




(A) ALL OTHER COMPENSATION

Name

 

Automobile
($)

 

401 K Match ($)

 

Benefit
Premiums ($)

 

Perquisites ($)

 

Housing
Allowance ($)

 

Total

 

Rodney C. Sacks

 

25,771

 

4,710

 

9,429

 

1,692

 

 

41,602

 

Hilton H.
Schlosberg

 

15,261

 

4,710

 

9,854

 

1,392

 

 

31,217

 

Mark J. Hall

 

10,566

 

4,077

 

5,645

 

 

 

20,288

 

Michael Schott

 

9,932

 

4,373

 

9,077

 

9,800

 

59,989

 

93,171

 

Thomas J. Kelly

 

8,103

 

3,480

 

9,854

 

 

 

21,437

 

 

Discussion of Summary Compensation Table:

Agreements with named Executive Officers:

Rodney C. Sacks.  We entered into an employment agreement dated as of June 1, 2003 with Rodney C. Sacks pursuant to which Mr. Sacks renders services as our Chairman and Chief Executive Officer. Under his employment agreement, Mr. Sacks’ annual base salary was $230,000 for the seven month period ending December 31, 2003, increased to $245,000 per annum for the 12 month period ending December 31, 2004 and increases by a minimum of five percent (5%) for each subsequent 12 month period during the employment period. Mr. Sacks is eligible to receive an annual bonus in an amount determined at the discretion of our Board as well as certain fringe benefits.  The employment period commenced on June 1, 2003 and ends on December 31, 2008.  Since commencement of the employment period, we have granted Mr. Sacks an option, subject to time based vesting, to purchase 1,200,000 shares of common stock (post-split) pursuant to a stock option agreement dated May 28, 2003, an option to purchase 1,200,000 shares of common stock (post-split) pursuant to a stock option agreement dated March 23, 2005 and an option to purchase 600,000 shares of common stock (post-split) pursuant to a stock option agreement dated November 11, 2005. Under his employment agreement, Mr. Sacks is subject to a confidentiality covenant and a six-month post-termination non-competition covenant.  The severance provisions in Mr. Sacks’ employment agreement are discussed in the “Potential Payments Upon Termination or Change in Control” section below.

Hilton H. Schlosberg.  We entered into an employment agreement dated as of June 1, 2003 with Hilton Schlosberg pursuant to which Mr. Schlosberg renders services as our President and Chief Financial Officer. Under his employment agreement, Mr. Schlosberg’s annual base salary was $230,000 for the seven month period ending December 31, 2003, increased to $245,000 per annum for the 12 month period ending December 31, 2004 and increases by a minimum of five percent (5%) for each subsequent 12 month period during the employment period.  Mr. Schlosberg is eligible to receive an annual bonus in an amount determined at the discretion of our Board as well as certain fringe benefits.  The employment period commenced on June 1, 2003 and ends on December 31, 2008.  Since commencement of the employment period, we have granted Mr. Schlosberg an option, subject to time based vesting, to purchase 1,200,000 shares of common stock (post-split) pursuant to a stock option agreement dated as May 28, 2003, an option to purchase 1,200,000 shares of common stock (post-split) pursuant to a stock option agreement dated March 23, 2005 and an option to purchase 600,000 shares of common stock (post-split) pursuant to a stock option agreement dated November 11, 2005. Under his employment agreement, Mr. Schlosberg is subject to a confidentiality covenant and a six-month post-termination non-competition covenant.  The severance provisions in Mr. Schlosberg’s employment agreement are discussed in the “Potential Payments Upon Termination or Change in Control” section below.

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Mark J. Hall.  On January 21, 1997 Mr. Hall executed our written offer of employment.  The written offer of employment specifies that Mr. Hall’s employment with us is “at will” and thus may be terminated at any time for any or no reason.  Mr. Hall’s base compensation was $250,000 as of December 31, 2006 and he is currently eligible to receive a bonus of up to 51% of his base compensation, subject to review by our Executive Committee.  Since January 1, 1999, we have granted Mr. Hall an option, subject to time based vesting, to purchase 160,000 shares of common stock (post-split) pursuant to a stock option agreement dated July 12, 2002, an option to purchase 480,000 shares of common stock (post-split) pursuant to a stock option agreement dated January 15, 2004, an option to purchase 800,000 shares of common stock (post-split) pursuant to a stock option agreement dated March 23, 2005, an option to purchase 100,000 shares of common stock (post-split) pursuant to a stock option agreement dated September 28, 2005 and an option to purchase 100,000 shares of common stock (post-split) pursuant to a stock option agreement dated November 11, 2005. 

Michael Schott.  On August 5, 2002 Mr. Schott executed our written offer of employment.  The written offer of employment specifies that Mr. Schott’s employment with us is “at will” and thus may be terminated at any time for any or no reason.  Mr. Schott’s base compensation was $195,000 as of December 31, 2006 and he is currently eligible to receive a bonus of up to 40% of his base compensation, subject to review by our Executive Committee. Since commencement of employment, we have granted Mr. Schott an option, subject to time based vesting, to purchase 576,000 shares of common stock (post-split) pursuant to a stock option agreement dated August 9, 2002, an option to purchase 256,000 shares of common stock (post-split) pursuant to a stock option agreement dated January 15, 2004, an option to purchase 200,000 shares of common stock (post-split) pursuant to a stock option agreement dated March 23, 2005 and an option to purchase 48,000 shares of common stock (post-split) pursuant to a stock option agreement dated November 11, 2005. 

Thomas J. Kelly.  Mr. Kelly’s employment is “at will” and thus may be terminated at any time for any or no reason.  Mr. Kelly’s base compensation was $160,000 as of December 31, 2006 and he is currently eligible to receive a bonus, subject to review by our Executive Committee. Since January 1, 1999, we have granted Mr. Kelly an option, subject to time based vesting, to purchase 80,000 shares of common stock (post-split) pursuant to a stock option agreement dated February 2, 1999, an option to purchase 80,000 shares of common stock (post-split) pursuant to a stock option agreement dated July 12, 2002, an option to purchase 200,000 shares of common stock (post-split) pursuant to a stock option agreement dated January 15, 2004 and an option to purchase 8,000 shares of common stock (post-split) pursuant to a stock option agreement dated November 11, 2005.

GRANTS OF PLAN-BASED AWARDS

No plan-based awards were granted to our NEOs during the year ended December 31, 2006.

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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

The following table summarizes the outstanding equity awards held by our NEOs at December 31, 2006.

 

 

 

Option Awards

 

Stock Awards

 

Name

 

Grant Date

 

Number of
Securities
Underlying
Unexercised
Options
Exerciseable
(#)

 

Number of
Securities
Underlying
Unexercised
Unearned
Options (#)

 

Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)

 

Option
Exercise
Price ($)

 

Option
Exercise
Expiration
Date

 

Number of
Shares or
Units of
Stock That
Have Not
Vested (#)

 

Market
Value of
Shares or
Units of
Stock That
Have Not
Vested ($)

 

Equity
Incentive
Plan Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested (#)

 

Equity
Incentive Plan
Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested ($)

 

Rodney C.

 

2/2/1999

 

580,000

 

 

 

0.53125

 

2/2/2009

 

 

 

 

 

Sacks

 

7/12/2002

 

544,088

 

 

 

0.44625

 

7/12/2012

 

 

 

 

 

 

5/28/2003

 

575,912

 

480,000

(1)

 

0.53125

 

5/28/2013

 

 

 

 

 

 

3/23/2005

 

240,000

 

960,000

(2)

 

6.58750

 

3/23/2015

 

 

 

 

 

 

11/11/2005

 

120,000

 

480,000

(3)

 

16.87000

 

11/11/2015

 

 

 

 

 

Hilton H.

 

2/2/1999

 

580,000

 

 

 

0.53125

 

2/2/2009

 

 

 

 

 

Schlosberg

 

7/12/2002

 

544,088

 

 

 

0.44625

 

7/12/2012

 

 

 

 

 

 

 

5/28/2003

 

575,912

 

480,000

(1)

 

0.53125

 

5/28/2013

 

 

 

 

 

 

 

3/23/2005

 

240,000

 

960,000

(2)

 

6.58750

 

3/23/2015

 

 

 

 

 

 

 

11/11/2005

 

120,000

 

480,000

(3)

 

16.87000

 

11/11/2015

 

 

 

 

 

Mark J. Hall

 

7/12/2002

 

32,000

 

32,000

(4)

 

0.44625

 

7/12/2012

 

 

 

 

 

 

1/15/2004

 

 

288,000

(5)

 

1.01875

 

1/15/2014

 

 

 

 

 

 

3/23/2005

 

 

640,000

(6)

 

6.58750

 

3/23/2015

 

 

 

 

 

 

9/28/2005

 

20,000

 

80,000

(7)

 

10.94750

 

9/28/2015

 

 

 

 

 

 

11/11/2005

 

20,000

 

80,000

(8)

 

16.87000

 

11/11/2015

 

 

 

 

 

Michael

 

8/9/2002

 

 

192,000

(9)

 

0.48125

 

8/9/2012

 

 

 

 

 

Schott

 

1/15/2004

 

 

128,000

(10)

 

1.01875

 

1/15/2014

 

 

 

 

 

 

 

3/23/2005

 

 

160,000

(11)

 

6.58750

 

3/23/2015

 

 

 

 

 

 

 

11/11/2005

 

9,600

 

38,400

(12)

 

16.87000

 

11/11/2015

 

 

 

 

 

Thomas J.

 

7/12/2002

 

 

16,000

(13)

 

0.44625

 

7/12/2012

 

 

 

 

 

Kelly

 

1/15/2004

 

 

120,000

(14)

 

1.01875

 

1/15/2014

 

 

 

 

 

 

11/11/2005

 

1,600

 

6,400

(15)

 

16.87000

 

11/11/2015

 

 

 

 

 

 


(1)   Vest as follows: 240,000 on January 1, 2007; 240,000 on January 1, 2008

(2)   Vest as follows: 240,000 on March 23, 2007; 240,000 on March 23, 2008; 240,000 on March 23, 2009; 240,000 on March 23, 2010

(3)   Vest as follows: 120,000 on November 11, 2007; 120,000 on November 11, 2008; 120,000 on November 11, 2009, 120,000 on November 11, 2010

(4)   Vest as follows: 32,000 on July 12, 2007

(5)   Vest as follows: 96,000 on January 15, 2007; 96,000 on January 15, 2008; 96,000 on January 15, 2009

(6)   Vest as follows: 160,000 on March 23, 2007; 160,000 on March 23, 2008; 160,000 on March 23, 2009; 160,000 on March 23, 2010

(7)   Vest as follows: 20,000 on September 28, 2007; 20,000 on September 28, 2008; 20,000 on September 28, 2009; 20,000 on September 28, 2010

(8)   Vest as follows: 20,000 on November 11, 2007; 20,000 on November 11, 2008; 20,000 on November 11, 2009; 20,000 on November 11, 2010

(9)   Vest as follows: 96,000 on August 9, 2007; 96,000 on August 9, 2008

(10) Vest as follows: 64,000 on January 15, 2007; 64,000 on January 15, 2008

(11) Vest as follows: 40,000 on March 23, 2007; 40,000 on March 23, 2008; 40,000 on March 23, 2009; 40,000 on March 23, 2010

(12) Vest as follows: 9,600 on November 11, 2007; 9,600 on November 11, 2008; 9,600 on November 11, 2009; 9,600 on November 11, 2010

(13) Vest as follows: 16,000 on July 12, 2007

(14) Vest as follows: 40,000 on January 15, 2007; 40,000 on January 15, 2008; 40,000 on January 15, 2009

(15) Vest as follows: 1,600 on November 11, 2007; 1,600 on November 11, 2008; 1,600 on November 11, 2009; 1,600 on November 11, 2010 

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OPTION EXERCISES AND STOCK VESTED

The following table summarizes exercise of stock options by our NEOs during the Company’s fiscal year ended December 31, 2006.

 

Option Awards

 

Stock Awards

 

Name

 

Number of Shares
Acquired on
Exercise (#)

 

Value Realized on
Exercise ($)

 

Number of Shares
Acquired on
Vesting (#)

 

Value Realized on
Vesting ($)

 

Rodney C. Sacks

 

460,000

 

$

20,579,000

 

 

 

Hilton H. Schlosberg

 

460,000

 

20,579,000

 

 

 

Mark J. Hall

 

256,000

 

9,293,360

 

 

 

Michael Schott

 

200,000

 

6,484,438

 

 

 

Thomas J. Kelly

 

56,000

 

1,776,100

 

 

 

 

PENSION BENEFITS

We do not maintain or make contributions to a defined benefit plan for any employees.

NON QUALIFIED DEFERRED COMPENSATION

None of our NEOs participated or have account balances in non-qualified defined contribution plans or other deferred compensation plans maintained by us.  The Compensation Committee, which is comprised solely of “outside directors” as defined for the purposes of Section 162(m) of the Internal Revenue Code, may elect to provide our officers or other employees with non-qualified defined contribution or deferred compensation benefits should they deem such benefits appropriate.

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

We have entered into certain agreements and maintain certain plans that may require us to make certain payments and/or provide certain benefits to the NEOs in the event of a termination of employment or a change of control.  The following tables and narrative disclosure summarize the potential payments to each NEO assuming that one of the events listed in the tables below occurs.  The tables assume that the event occurred on December 31, 2006, the last day of our fiscal year.

Key Employment Agreement and Stock Option Agreement Definitions

For purposes of the employment agreements with Mr. Sacks and Mr. Schlosberg described in this section, cause, (under which we may terminate their employment),  is defined as (i) an act or acts of dishonesty or gross misconduct on the executive’s part which result or are intended to result in material damage to our business or reputation or (ii) repeated material violations by the executive of his obligations relating to his position and duties which violations are demonstrably willful and deliberate on the executives part and which result in material damage to our business or reputation and as to which material violations our Board has notified the executive in writing.

For purposes of the employment agreements with Mr. Sacks and Mr. Schlosberg described in this section, constructive termination, (under which they may terminate their employment), is defined as (i) without the written consent of the executive, (A) the assignment to the executive of any duties inconsistent in any substantial respect with the executive’s position, authority or responsibilities as contemplated by the position and duties described in his employment agreement, or (B) any other substantial adverse change in such position, including titles, authority or responsibilities; (ii) any failure by us to comply with any of the provisions of his employment agreement, other than an insubstantial or

69




inadvertent failure remedied by us promptly after receipt of notice thereof given by the executive; (iii) our requiring the executive without his consent to be based at any office location outside of Orange County, California except for travel reasonably required in the performance of the executive’s responsibilities; or (iv) any failure by us to obtain the assumption and agreement to perform the employment agreement by a successor as contemplated by Section 13(b) of the employment agreement, provided that the successor has had actual written notice of the existence of the respective employment agreement and its terms and an opportunity to assume our responsibilities under the employment agreement during a period of 10 business days after receipt of such notice.

For purposes of the employment agreements with Mr. Sacks and Mr. Schlosberg described in this section, disability is defined as disability which would entitle the executive to receive full long-term disability benefits under our long-term disability plan, or if no such plan shall then be in effect, any physical or mental disability or incapacity which renders the executive incapable of performing the services required of him in accordance with his obligations under Section 5 of the employment agreement for a period of more than 120 days in the aggregate during any 12-month period during the Employment Period.

For purposes of the stock option agreements with Mr. Sacks and Mr. Schlosberg described in this section, change in control is defined as (i) the acquisition of “Beneficial Ownership” by any person (as defined in rule 13(d)–3 under the Exchange Act), corporation or other entity other than us or a wholly owned subsidiary of 20% or more of our outstanding stock, (ii) the sale or disposition of substantially all of our assets, or (iii) our merger with another corporation in which our Common Stock is no longer outstanding after such merger.

For purposes of the stock option agreements with Mr. Sacks and Mr. Schlosberg described in this section, cause, (under which we may terminate their employment), is defined as the individual’s act of fraud or dishonesty, knowing and material failure to comply with applicable laws or regulations or drug or alcohol abuse; and good reason, (under which they may terminate their employment), is defined as a reduction in the individual’s compensation or benefits, the individual’s removal from his current position or the assignment to the individual of duties or responsibilities that are inconsistent with the dignity, importance or scope of his position with us.

For purposes of all the stock option agreements described in this section, total disability is defined as the complete and permanent inability of the executive to perform all his duties of employment with us.

For purposes of the employment offer letters with Mr. Hall and Mr. Schott described in this section, cause, (under which we may terminate their employment), shall mean an act of dishonesty, or reasons which justify their summary dismissal.

For purposes of Mr. Schott’s employment offer letter, a material change by us of the employee’s functions, duties and responsibility, which materially reduces his position with us or a requirement by us that he relocate to California without providing reasonable reimbursement to him for moving expenses or a material reduction in the basic salary payable by us to him, will constitute constructive termination entitling him to the benefits of termination of his employment without cause.

For purposes of the stock option agreements with Mr. Hall and Mr. Schott, (exclusive of Mr. Schott’s August 9, 2002 agreement) described in this section, change in control is generally defined as (i) the acquisition of “Beneficial Ownership” by any person (as defined in Rule 13(d)–3 under the Exchange Act ), corporation or other entity other than us or a wholly owned subsidiary of ours of 50% or more of our outstanding stock, (ii) the sale or disposition of substantially all of our assets, or (iii) our merger with another corporation in which our Common Stock is no longer outstanding after such merger.

For purposes of the stock option agreement with Mr. Schott dated August 9, 2002 described within, change in control is generally defined as (i) the acquisition of “Beneficial Ownership” by any person (as defined in rule 13(d)–3 under the Exchange Act ), corporation or other entity other than us or a wholly owned subsidiary of ours of 30% or more of our outstanding stock, (ii) the sale or disposition of substantially all of our assets, or (iii) our merger with another corporation in which our Common Stock is no longer outstanding after such merger.

70




For purposes of the stock option agreements with Mr. Hall, Mr. Schott and Mr. Kelly described in this section, cause, (under which we may terminate their employment), is defined as the individual’s act of fraud or dishonesty, knowing and material failure to comply with applicable laws or regulations or satisfactorily perform his duties of employment, insubordination or drug or alcohol abuse.

Rodney C. Sacks

Circumstances of Termination

 

 

 

Payments and Benefits

 

Death ($)

 

Disability ($)

 

Cause and
Voluntary
Termination ($)

 

Termination by
Corporation
other than for
Cause or
Disability and
Termination by
the Executive
for Contructive
Termination ($)

 

Change in
control ($)

 

 

 

(a)

 

(a)

 

(b)

 

(c)

 

(d)

 

Base Salary

 

275,000

 

275,000

 

 

509,348

 

 

Vacation

 

21,154

 

21,154

 

21,154

 

21,154

 

 

Benefit Plans

 

8,652

 

15,094

 

 

30,188

 

 

Automobile

 

25,771

 

25,771

 

 

51,542

 

 

Perquisites and other personal benefits