| HANSEN NATURAL CORP 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 |
| 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 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 "e energy drink "e category could adversely affect our operating results |
| Our DSD segment which comprises primarily energy drinks, represented 77dtta4prca of net sales for the year ended December 31, 2005 |
| Any decrease in the sales of our Monster Energy(R) 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, Adrenaline Rush, Amp, Rockstar, No Fear, Full Throttle, 180, KMX, Venom, Extreme Energy Shot, US energy, Red Devil, Rip It, Nos, Boo Koo, Lipovitan, MET-Rx, Hype, XTC, 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 "e functional "e or "e energy "e 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, Vault, Adrenaline Rush, Amp, No Fear, Full Throttle, and Rockstar |
| 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 |
| 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 |
| 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 &apos 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 and/or suitable equipment for many of our products, including Hansenapstas(R) brand energy drinks in 8dtta3-ounce and 16-ounce cans, Gold Standard line, aseptic juice products, juices in 64-ounce PET plastic bottles, Energade(R), Monster Energy(R), Lost(R), Rumba(TM) and Joker Mad Energy(TM) energy drinks in 8dtta3, 15dtta5, 16, and 24-ounce cans, sparkling lemonades and orangeades 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(R) |
| A disruption or delay in production of any of such products could significantly affect our revenues from such products as alternative co-packing facilities in the United States with adequate capacity may not be available for such products either at commercially reasonable rates, and/or within a reasonably short time period, if at all |
| Consequently, a disruption in production of such products could 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 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 |
| 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 |
| One customer accounted for approximately 18prca and 13prca of the Companys sales for the years ended December 31, 2005 and 2004, respectively |
| A decision by that, or any other large customer, to decrease the amount purchased from the Company or to cease carrying the Companys products could have a material adverse effect on the Companys financial condition and consolidated results of operations |
| We have exclusive contracts with the State of California ( "e State "e ) Department of Health Services, Women, Infant and Children ( "e WIC "e ) Supplemental Nutrition Branch ( "e DHS "e ) to supply 100prca apple juice and 100prca 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 Hansens and the State of California |
| The current contracts expire on July 11, 2007, and we have no knowledge of whether the contracts will be extended for a further one year, or 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 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 high fructose corn syrup, sucrose and certain juice concentrates have also increased during the year, particularly apple concentrate |
| 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 2006 |
| 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 the Companyapstas low-calorie products, is purchased by us from a single manufacturer |
| The supplier of sucralose has notified us that our purchases of sucralose during 2006 will be subject to volume limitations due to demand for sucralose exceeding production capacity |
| While we believe that our 2006 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 |
| 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, 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 |
| 20 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 and aluminum for cans |
| 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 cost 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 |
| 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 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 |
| 21 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 &apos 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 |
| 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 are not able to retain the full-time services of senior management it may have 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 |
| 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 a 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 &apos affordability and reduce our sales |
| Volatility of Stock Price may restrict sale opportunities |
| 22 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 |
| 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, at February 10, 2006, Mr |
| Sacks and Mr |
| Schlosberg together may be deemed to control a maximum of 21dtta2prca of our outstanding common stock |
| 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 |
| 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 |