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September 16, 2005
George F. Ohsiek
Branch Chief
U.S. Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W., MS 03-08
Washington D.C. 20549
Re: Hansen Natural Corporation
Dear Mr. Ohsiek:
Reference is made to your letter of August 1, 2005. We would like to thank you
for extending our response deadline to September 19, 2005. We have now had the
opportunity to consider the comments in your letter and respond as set forth
below. For ease of reference we have used the same paragraph numbers as were
used in your letter and have included your comment immediately above our
response.
References in the "Hansen's Response" sections of this letter to the words
"Hansen", "the Company", "we", "us", and "our", mean Hansen Natural Corporation
and its subsidiaries. References herein to "you", "your", "staff" and
"Commission" mean the U.S. Securities and Exchange Commission and its staff.
Please note that we are requesting confidential treatment for Exhibits B through
G referred to in response to comment 3 below. Our confidential treatment request
for Exhibits B through G will be submitted under separate cover in accordance
with Rule 83 of the Freedom of Information Act ("FOIA"), 17 C.F.R. 200.83.
1. Item 6. Selected Consolidated Financial Data, page 17
--------------------------------------------------------
We read your response to comment 2 in our letter dated June 9, 2005. We note
your justification for including promotional allowances in your non-GAAP
performance measure, "Gross Sales" however we are unclear how you have presented
justification for including estimated returns, allowances and cash discounts in
the non-GAAP measure. Additionally, you have not disclosed the material
limitations associated with the use of "Gross Sales" as compared to "Net Sales"
and the manner in which management compensates for these limitations when using
Mr. George F. Ohsiek, Jr.
Securities and Exchange Commission
September 15, 2005
Page 2 of 10
the non-GAAP financial measure. Refer to Question 8 of the Frequently Asked
Questions Regarding the Use of Non-GAAP Financial Measures, which is available
on our website at www.sec.gov. We believe an alternative way to inform investors
of your sales volumes and impact promotional allowances had in operations would
be to quantify the amount of cans or bottles sold for the various fiscal periods
and disclose the amount of promotional allowances included in arriving at "Net
Sales" in your MD&A discussion similar to your disclosure on page 57 under the
caption Advertising and Promotional Allowances.
Hansen's Response:
------------------
Consistent with our discussions with your staff, we have reflected gross
sales net of estimated returns, spoilage allowances and cash discounts. In
our most recent 10-Q, we have noted the limitations associated with the use
of gross sales and explained the manner in which management uses gross
sales and have separately listed and explained the level of allowances and
promotional payments and relevance thereof.
We respectfully refer you to the table set out in our most recent 10-Q for
the quarterly period ended June 30, 2005 with respect to the "Results of
Operations" subsection within the MD&A section.
Furthermore, in the narrative in the results of operations for the three-
and six- month periods, we have specifically analyzed the changes in net
sales in both price and volume and specifically detailed the case volumes
in this paragraph.
In response to the last sentence of comment number 1 in your letter, the
amount of promotional allowances has been specifically identified in the
table on page 20 of the 10-Q, as also presented in Exhibit A.
2. Notes to Consolidated financial Statements
------------------------------------------
We read your response to comment 7 in our report dated June 9, 2005. Product
line revenue disclosures should identify products from which each reportable
segment derives its revenue and should mirror the financial information used to
prepare your general-purpose financial statements. Please tell us the product
categories reported to senior management in daily, weekly or monthly sales for
the purposes of managing the business. Please note that if providing disclosure
of product line revenue information is impracticable you should so state in
accordance with paragraph 37 of SFAS 131. Also, refer to Section II.J.3. of the
Current Accounting and Disclosure Issues in the Division of Corporation Finance
updated March 4, 2005 and available on our website at www.sec.gov.
Mr. George F. Ohsiek, Jr.
Securities and Exchange Commission
September 15, 2005
Page 3 of 10
Hansen's Response:
------------------
We respectfully refer to our response to comment number 7 in our letter
dated July 15, 2005. After reassessing the criteria of SFAS 131, we now
consider that we have two reportable segments, based on the different
methods by which certain product groupings (including package format) are
managed and are sold and delivered to customers, namely Direct Store
Delivery ("DSD") products (primarily energy drinks) and Warehouse delivery
("Warehouse") products (primarily juice based and soda beverages).
Specialty and Nutrition products have, for practical purposes, been
discontinued. The last sentence of paragraph 36 states "Information
required by paragraphs 37-39 need be provided only if it is not provided as
part of the reportable operating segment information provided by this
statement". As we will be providing revenues by DSD and Warehouse products
respectively, in our future financial statements, we believe we will meet
the requirements of the revenue disclosures required by paragraph 37.
We have daily and cumulative month-to-date sales reports that are
distributed to select employees, primarily sales and marketing managers,
and the Chief Operating Decision Maker ("CODM"). On a monthly basis, our
accounting department aggregates substantially all energy products into our
DSD Segment, and aggregates primarily juice-based and soda products into
our Warehouse Segment. Accordingly, our DSD reportable segment includes
sales of substantially all our energy products and our Warehouse reportable
segment includes sales of primarily our juice-based and soda beverages.
3. Segment Information, page 59
----------------------------
We read your response to comment 12 in our letter dated June 9, 2005. With
regard to your request to disclose one reportable segment we refer you to
paragraphs 109-111 of SFAS 131, which address concerns about competitive harm.
Please note that SFAS 131 does not require an enterprise to report information
that is not prepared for internal use if reporting it would be impracticable.
From your response we fail to see how reporting the required SFAS 131
disclosures would be impracticable for you since the information is prepared
internally and that is the way your reportable segments are being managed. In
order to better understand how you concluded that you only have two reportable
operating segments, please provide us the following:
* The name and position of your chief operating decision maker;
* A complete copy of the year end and a recent monthly internal management
report provided to your chief operating decision-maker that includes your
operating results;
* A copy of the package given to the Board of Directors for the same time
periods; and
* An organizational chart detailing your management structure under the chief
operating decision-maker as it relates to managing the operational aspects
of your business.
Mr. George F. Ohsiek, Jr.
Securities and Exchange Commission
September 15, 2005
Page 4 of 10
Additionally, please tell us the measure(s) that your CODM uses to evaluate and
allocate resources to your operating segments. For each measure that you list,
as well as for revenues and gross margin, please provide us your computation of
these measures for the last five years and demonstrate how that information
supports the similarity of the economic characteristics of the operating
segments. If after reassessing the criteria in SFAS 131, you now believe that
you have separate reportable segments, please revise your future financial
statements accordingly.
Hansen's Response:
------------------
In our response to comment 12 of your letter dated June 9, 2005, we
determined that after reassessing SFAS 131 and the increased percentage of
DSD sales attributable to energy drinks, which on an on-going basis are
demonstrating higher average gross margins than Warehouse products, we now
consider that we have two reportable segments which comprise DSD, whose
principal products comprise energy drinks, and Warehouse, whose principal
products comprise juice based and soda beverages.
Please note that we have included segment disclosures in accordance with
SFAS 131 in our Form 10-Q for the three- and six-months ended June 30, 2005
and 2004. Please also note that Exhibits B through G referred to below are
being sent to the Staff under separate cover. To assist you in
understanding how we concluded that we have two reportable operating
segments, please note the following:
* The CODM of Hansen's is the Executive Committee of the Board of Directors
which is currently comprised of our Chief Executive Officer, Rodney C.
Sacks, and our President, Chief Financial Officer and Chief Operating
Officer, Hilton H. Schlosberg.
* A copy of our year-end reporting package for the year ended December 31,
2004 provided to the CODM is included as Exhibit B. Internal financial
information was historically reported in a format with four divisions,
although the business operations of the Company were in fact evaluated by
the CODM on a consolidated basis with the DSD division reporting to Rodney
Sacks and the Warehouse division (juice, soda and specialty) reporting to
Hilton Schlosberg. To more accurately reflect the manner in which the
business operations are managed, the format of the reporting packages was
updated to reflect the results of the DSD segment and Warehouse segment
respectively. This appears from the most recent reporting package for the
quarter ended June 30, 2005 provided to the CODM which is included as
Exhibit C. This package more accurately reflects the manner in which the
business operations of the Company are managed by Rodney Sacks and Hilton
Schlosberg individually and are evaluated on a consolidated basis by the
Mr. George F. Ohsiek, Jr.
Securities and Exchange Commission
September 15, 2005
Page 5 of 10
CODM. As appears from such reports, gross profit, gross profit margins and
contribution margins from the DSD segment are substantially greater than
gross profit, gross profit margins and contribution margins from the
Warehouse segment. Historically, the gross profit and contribution margins
of the various products in the Warehouse segment have generally been
similar.
* A copy of our year end reporting package for the year ended December 31,
2004 provided to the Board of Directors ("Board") is included as Exhibit D.
A copy of our most recent quarter end reporting package for the quarter
ended June 30, 2005 provided to our Board is included as Exhibit E. The
reporting packages provided to the Board have generally followed the format
of the reporting packages provided to the CODM (for the most recently
completed year or quarter concerned prior to the Board meeting). In line
with the change in the reporting package to the CODM, which more accurately
reflects the manner in which the business operations of the Company are
managed, the reporting package to the Board reflects the results of the two
operating segments of the Company, namely DSD and Warehouse. Commencing
with the quarter ended June 30, 2005, the Board does not receive profit
measure information by product line but instead receives such information
for the two operating segments of the Company. The Board does continue to
receive sales information on a product line basis.
* A copy of our organizational chart, which details the management structure
reporting to our CODM, is included as Exhibit F. As can be seen from our
organizational chart, the Company does not have separate managers for each
product line. Instead, the Company has a centralized management structure
that is defined along our operating segment lines. Marketing, marketing
services, sales and support employees are generally dedicated to their
respective segments as a whole rather than to individual product lines.
For resource allocations, the CODM uses variable factors and criteria that they
deem appropriate from time to time which includes, but is not limited to, their
industry experience and general prospects for the various categories of
beverages from time to time. The CODM currently receives financial information
which reflects adjusted gross sales, allowances and promotional payments, net
sales, gross profit and contribution margin levels for the DSD and Warehouse
segments, respectively, which they utilize as part of their evaluation for
resource allocation.
Based on these measures utilized by our CODM as listed above, we have included
in Exhibit G summarized financial information of our adjusted gross sales for
our last 5 fiscal years, 2000 through 2004 and for the six-months ended June 30,
2005 in a format consistent with our June 30, 2005 presentation.
Mr. George F. Ohsiek, Jr.
Securities and Exchange Commission
September 15, 2005
Page 6 of 10
We have also included in Exhibit G summarized financial information of
allowances and promotional payments, net sales, gross profit and gross profit
percent, contribution margin and contribution margin percent for last 3 fiscal
years, 2002 through 2004 and for the six-months ended June 30, 2005 in a format
consistent with our June 30, 2005 presentation. The presentation of allowances
and promotional payments, net sales, gross profit, gross profit percent,
contribution margin and contribution margin percent for fiscal years 2000 and
2001 is impracticable to present on a comparable segment basis due to the
Company's adoption of EITF No. 01-9 in 2002. The adoption of EITF No. 01-9
resulted in material reclassifications to net sales, gross profit, gross profit
percent and contribution margin percent for the 2000 and 2001 fiscal years.
However, these reclassifications were not tracked on a segment or product basis.
Therefore, the comparable segment net sales, gross profit, gross profit percent
and contribution margin percent information for these periods is not available
or practicable to ascertain.
In addition to the quantitative economic characteristics, the Company reviewed
the qualitative economic characteristics of paragraph 17 of SFAS No. 131,
reaching the following conclusions:
* The Company is involved in the beverage industry and the products it
markets and sells are all beverages (with extremely limited exception.)
* For all beverage products, the Company utilizes third party co-packers for
production.
* The DSD Segment, in the main, sells to third party full-service
distributors who have exclusive sale and distribution rights to the DSD
Segment products in their specified territories. On the other hand, the
Warehouse Segment sells directly to retail grocery chain stores, specialty
stores such as Trader Joe's, mass merchandisers, club stores, drug stores
and health food stores. In the case of the health food stores, products are
mainly sold directly to such stores, but are delivered through a network of
health food or specialty distributors. Salespersons employed within the
Warehouse Segment and third party brokers generally sell all the products
of the Warehouse Segment.
* The methods used to distribute the Company's products are similar. The
Company uses common carriers or company owned transport vehicles. For
retail chain customers, the vast majority of products are delivered to
central depots of the retail chain customers or, in some instances, the
retail chain customers pick up loads at Company warehouses.
* The regulatory environment is generally the same for all non-alcoholic
beverages.
Mr. George F. Ohsiek, Jr.
Securities and Exchange Commission
September 15, 2005
Page 7 of 10
Based on the measures used by the CODM as described above, the Company
reassessed the criteria in SFAS No. 131 and has disclosed segment information in
footnote 8 of its Form 10-Q for the three- and six-months ended June 30, 2005.
***
The Company acknowledges that (i) it is responsible for the adequacy and
accuracy of the disclosures in the filing; (ii) staff comments or changes to
disclosure in response to staff comments do not preclude the Commission from
taking action with respect to the filing; and (iii) the Company may not assert
staff comments as a defense in any proceeding initiated by the Commission or any
person under the federal securities laws of the United States.
If you have any further comments or would like to discuss any of the responses
above, please contact us at (951) 739-6200 at your convenience.
Sincerely,
/s/RODNEY C. SACKS /s/HILTON H. SCHLOSBERG
- ---------------------------------- --------------------------------
Rodney C. Sacks Hilton H. Schlosberg
Chairman of the Board of Directors Vice Chairman of the Board of Directors,
and Chief Executive Officer President, Chief Operating Officer,
Chief Financial Officer and Secretary
Mr. George F. Ohsiek, Jr.
Securities and Exchange Commission
September 15, 2005
Page 8 of 10
EXHIBIT A
Results of Operations
The following table sets forth key statistics for the three- and six-months
ended June 30, 2005 and 2004, respectively.
Three-Months Ended Percentage Six-Months Ended Percentage
June 30, Change June 30, Change
--------------------------------- ------------ --------------------------------- -------------
2005 2004 05 vs. 04 2005 2004 05 vs. 04
---------------- ---------------- ------------ ---------------- ---------------- -------------
Gross sales, net of
discounts & returns * $102,499,664 $ 57,120,726 79.4% $175,461,754 $ 95,209,244 84.3%
Less: Allowances and
promotional
payments ** 17,059,109 11,057,183 54.3% 30,006,927 17,846,918 68.1%
---------------- ---------------- ------------ ---------------- ---------------- -------------
Net sales 85,440,555 46,063,543 85.5% 145,454,827 77,362,326 88.0%
Cost of sales 40,513,477 25,304,614 60.1% 70,198,431 42,695,576 64.4%
---------------- ---------------- ------------ ---------------- ---------------- -------------
Gross profit 44,927,078 20,758,929 116.4% 75,256,396 34,666,750 117.1%
Gross profit margin 52.6% 45.1% 51.7% 44.8%
Selling, general and
administrative
expenses 19,558,402 12,335,494 58.6% 35,149,974 22,578,732 55.7%
Amortization of
trademark 13,838 19,269 (28.2%) 28,084 39,365 (28.7%)
---------------- ---------------- ------------ ---------------- ---------------- -------------
Operating income 25,354,838 8,404,166 201.7% 40,078,338 12,048,653 232.6%
Operating income as a
percent of net sales 29.7% 18.2% 27.6% 15.6%
Net nonoperating
income (expense) 253,876 (8,434) (3,110.1%) 371,394 (19,048) (2,049.8%)
---------------- ---------------- ------------ ---------------- ---------------- -------------
Income before
provision for income
taxes 25,608,714 8,395,732 205.0% 40,449,732 12,029,605 236.3%
Provision for income
taxes 10,363,016 3,317,583 212.4% 16,359,321 4,768,175 243.1%
---------------- ---------------- ------------ ---------------- ---------------- -------------
Effective tax rate 40.5% 39.5% 40.4% 39.6%
Net income $ 15,245,698 $ 5,078,149 200.2% $ 24,090,411 $ 7,261,430 231.8%
================ ================ ============ ================ ================ =============
Net income as a
percent of net sales 17.8% 11.0% 16.6% 9.4%
Net income per common share (post-split):
Basic (Notes 6 & 7) $ 0.69 $ 0.24 $ 1.09 $ 0.35
Diluted (Notes 6 & 7) $ 0.63 $ 0.22 $ 0.99 $ 0.31
Case Sales (in thousands) (in 192-ounce case equivalents)
12,368 7,605 62.6% 21,663 12,973 67.0%
Mr. George F. Ohsiek, Jr.
Securities and Exchange Commission
September 15, 2005
Page 9 of 10
* Gross sales, net of discounts and returns, 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 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 payment
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
allowances and promotional payments may not be comparable to similar items
presented by other companies. The presentation of allowances and promotional
payments facilitates an evaluation of the impact thereof on the determination of
net sales and illustrates the spending levels incurred to secure such sales.
Allowances and promotional payments constitute a material portion of the
marketing activities of the Company.
Mr. George F. Ohsiek, Jr.
Securities and Exchange Commission
September 15, 2005
Page 10 of 10
EXHIBIT B
Year-end reporting package provided to Chief Operating Decision Maker for
December 31, 2004
EXHIBIT C
Quarter-end reporting package provided to Chief Operating Decision Maker for
June 30, 2005
EXHIBIT D
Year-end reporting package provided to Board of Directors for December 31, 2004
EXHIBIT E
Quarter-end reporting package provided to Board of Directors for June 30, 2005
EXHIBIT F
Organization Chart
EXHIBIT G
Summarized financial information utilized as part of the evaluation for resource
allocation