10-Q 1 a09-31120_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2009

 

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.)

 

550 Monica Circle, Suite 201

Corona, California 92880

(Address of principal executive offices) (Zip code)

 

(951) 739 – 6200

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o
 (Do not check if smaller reporting company)

 

Smaller reporting company 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 Registrant had 89,090,201 shares of common stock, par value $0.005 per share, outstanding as of October 30, 2009.

 

 

 


Table of Contents

 

HANSEN NATURAL CORPORATION AND SUBSIDIARIES

SEPTEMBER 30, 2009

 

INDEX

 

 

 

Page No.

 

 

 

Part I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008

3

 

 

 

 

Condensed Consolidated Statements of Income for the Three- and Nine-Months Ended September 30, 2009 and 2008

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine-Months Ended September 30, 2009 and 2008

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

Item 2.

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

31

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

53

 

 

 

Item 4.

Controls and Procedures

54

 

 

 

Part II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

55

 

 

 

Item 1A.

Risk Factors

58

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

58

 

 

 

Item 3.

Defaults Upon Senior Securities

59

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

59

 

 

 

Item 5.

Other Information

59

 

 

 

Item 6.

Exhibits

59

 

 

 

 

Signatures

60

 

2



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

HANSEN NATURAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2009 AND DECEMBER 31, 2008

(In Thousands, Except Par Value) (Unaudited)

 

 

 

September 30, 
2009

 

December 31, 
2008

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

317,657

 

$

256,801

 

Short-term investments

 

30,187

 

29,145

 

Trade accounts receivable, net

 

91,939

 

45,233

 

Distributor receivables

 

5,350

 

90,722

 

Inventories

 

123,942

 

116,326

 

Prepaid expenses and other current assets

 

9,705

 

8,379

 

Prepaid income taxes

 

 

4,977

 

Deferred income taxes

 

9,741

 

9,741

 

Total current assets

 

588,521

 

561,324

 

 

 

 

 

 

 

INVESTMENTS

 

87,969

 

89,567

 

PROPERTY AND EQUIPMENT, net

 

28,075

 

14,389

 

DEFERRED INCOME TAXES

 

63,170

 

65,748

 

INTANGIBLES, net

 

31,674

 

28,365

 

OTHER ASSETS

 

1,885

 

2,444

 

Total Assets

 

$

801,294

 

$

761,837

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

 

$

66,950

 

$

64,787

 

Accrued liabilities

 

25,957

 

12,524

 

Accrued distributor terminations

 

3,151

 

102,282

 

Accrued compensation

 

6,103

 

6,782

 

Current portion of debt

 

381

 

959

 

Income taxes payable

 

5,189

 

 

Total current liabilities

 

107,731

 

187,334

 

 

 

 

 

 

 

DEFERRED REVENUE

 

132,604

 

138,187

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 9)

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

Common stock - $0.005 par value; 120,000 shares authorized; 97,207 shares issued and 89,090 outstanding as of September 30, 2009; 96,851 shares issued and 90,328 outstanding as of December 31, 2008

 

486

 

484

 

Additional paid-in capital

 

131,045

 

117,106

 

Retained earnings

 

617,039

 

461,680

 

Accumulated other comprehensive loss

 

(4,525

)

(10,825

)

Common stock in treasury, at cost; 8,117 and 6,523 shares as of September 30, 2009 and December 31, 2008, respectively

 

(183,086

)

(132,129

)

Total stockholders’ equity

 

560,959

 

436,316

 

Total Liabilities and Stockholders’ Equity

 

$

801,294

 

$

761,837

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

 

HANSEN NATURAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE- AND NINE-MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

(In Thousands, Except Per Share Amounts) (Unaudited)

 

 

 

Three-Months Ended

 

Nine-Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

NET SALES

 

$

307,929

 

$

284,986

 

$

852,385

 

$

779,408

 

 

 

 

 

 

 

 

 

 

 

COST OF SALES

 

142,897

 

135,550

 

395,345

 

379,039

 

 

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

165,032

 

149,436

 

457,040

 

400,369

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

72,117

 

67,644

 

205,565

 

197,560

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

92,915

 

81,792

 

251,475

 

202,809

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

Interest and other income, net

 

183

 

2,111

 

1,599

 

8,506

 

Other-than-temporary impairment of investments

 

(342

)

 

(3,880

)

 

Total other income (expense)

 

(159

)

2,111

 

(2,281

)

8,506

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

 

92,756

 

83,903

 

249,194

 

211,315

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

36,251

 

31,466

 

93,835

 

79,835

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

56,505

 

$

52,437

 

$

155,359

 

$

131,480

 

 

 

 

 

 

 

 

 

 

 

NET INCOME PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.63

 

$

0.57

 

$

1.72

 

$

1.42

 

Diluted

 

$

0.60

 

$

0.54

 

$

1.63

 

$

1.34

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND COMMON STOCK EQUIVALENTS:

 

 

 

 

 

 

 

 

 

Basic

 

90,154

 

92,337

 

90,380

 

92,852

 

Diluted

 

94,683

 

96,916

 

95,060

 

97,997

 

 

See accompanying notes to condensed consolidated financial statements.

 

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HANSEN NATURAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

(In Thousands) (Unaudited)

 

 

 

Nine-Months Ended

 

 

 

September 30, 2009

 

September 30, 2008

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

155,359

 

$

131,480

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Amortization of trademark

 

56

 

42

 

Depreciation and other amortization

 

3,929

 

2,559

 

Loss on disposal of property and equipment

 

82

 

87

 

Stock-based compensation

 

9,761

 

9,776

 

Impairment on investments

 

3,880

 

 

Deferred income taxes

 

 

(2,160

)

Tax benefit from exercise of stock options

 

(2,219

)

(2,198

)

Provision for doubtful accounts

 

11

 

1

 

Effect on cash of changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(46,220

)

3,486

 

Distributor receivables

 

85,372

 

5,038

 

Inventories

 

(7,116

)

(12,326

)

Prepaid expenses and other current assets

 

(1,287

)

(5,324

)

Prepaid income taxes

 

4,977

 

 

Accounts payable

 

2,600

 

3,958

 

Accrued liabilities

 

12,006

 

3,259

 

Accrued distributor terminations

 

(99,151

)

(471

)

Accrued compensation

 

(683

)

(727

)

Income taxes payable

 

7,408

 

1,644

 

Deferred revenue

 

(5,583

)

(1,899

)

Net cash provided by operating activities

 

123,182

 

136,225

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Sales and maturities of held-to-maturity investments

 

49,931

 

 

Sales of available-for-sale investments

 

13,428

 

266,978

 

Purchases of held-to-maturity investments

 

(59,978

)

 

Purchases of available-for-sale investments

 

 

(106,685

)

Purchases of property and equipment

 

(16,549

)

(4,333

)

Proceeds from sale of property and equipment

 

127

 

79

 

Additions to intangibles

 

(3,365

)

(1,488

)

Decrease in other assets

 

567

 

105

 

Net cash (used in) provided by investing activities

 

(15,839

)

154,656

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Principal payments on debt

 

(1,299

)

(842

)

Tax benefit from exercise of stock options

 

2,219

 

2,198

 

Issuance of common stock

 

1,737

 

1,725

 

Purchases of common stock held in treasury

 

(50,957

)

(49,966

)

Net cash used in financing activities

 

(48,300

)

(46,885

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

1,813

 

 

 

 

 

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

60,856

 

243,996

 

CASH AND CASH EQUIVALENTS, beginning of period

 

256,801

 

12,440

 

CASH AND CASH EQUIVALENTS, end of period

 

$

317,657

 

$

256,436

 

 

 

 

 

 

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

45

 

$

33

 

Income taxes

 

$

86,397

 

$

80,839

 

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS

 

The Company entered into capital leases for the acquisition of promotional vehicles of $0.7 million and $0.9 million for the nine-months ended September 30, 2009 and 2008, respectively.

 

See accompanying notes to condensed consolidated financial statements.

 

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HANSEN NATURAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

1.                                       BASIS OF PRESENTATION

 

Reference is made to the Notes to Consolidated Financial Statements, in Hansen Natural Corporation’s (“Hansen” or the “Company”) Annual Report on Form 10-K for the year ended December 31, 2008 (“Form 10-K”), for a summary of significant accounting policies utilized by the Company and its consolidated subsidiaries, Hansen Beverage Company (“HBC”), Monster LDA Company, formerly known as Hard e Beverage Company and previously known as Hard Energy Company and as CVI Ventures, Inc., Monster Energy Europe Limited (incorporated in the United Kingdom), Monster Energy Limited (incorporated in Ireland), Monster Energy AU Pty, Ltd. (incorporated in Australia), Monster Energy Brasil Comércio de Bebidas Ltda (incorporated in Brazil), Monster Energy Canada Ltd. (incorporated in Canada), Blue Sky Natural Beverage Co. (“Blue Sky”), Hansen Junior Juice Company (“Junior Juice”),  X-Truck, Inc. (“X-Truck”) and Epicenter Music Festival, LLC (“EMF”) and other disclosures, which should be read in conjunction with this Quarterly Report on Form 10-Q (“Form 10-Q”).  HBC conducts the vast majority of the Company’s operating business and accounts for the vast majority of the Company’s operating revenues.

 

The Company’s condensed consolidated financial statements included in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and Securities and Exchange Commission (“SEC”) rules and regulations applicable to interim financial reporting.  They do not include all the information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP.  The information set forth in these interim condensed consolidated financial statements for the three- and nine-months ended September 30, 2009 and 2008 is unaudited and reflects all adjustments, which include only normal recurring adjustments and which in the opinion of management are necessary to make the interim condensed consolidated financial statements not misleading.  Results of operations for periods covered by this report may not necessarily be indicative of results of operations for the full year.

 

The preparation of financial statements in conformity with GAAP necessarily requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from these estimates.

 

Management has evaluated all events and transactions occurring after the balance sheet date through the filing of this quarterly report on Form 10-Q on November 9, 2009.

 

2.                                       RECENT ACCOUNTING PRONOUNCEMENTS

 

In June 2009, the Financial Accounting Standards Board (the “FASB”) issued FASB Accounting Standards Codification (“ASC”) ASC 105, (formerly Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification” and the Hierarchy of Generally Accepted Accounting Principles). This standard establishes only two levels of U.S. GAAP, authoritative and nonauthoritative. The FASB Accounting Standards Codification (the

 

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HANSEN NATURAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

“Codification”) became the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification, became nonauthoritative. The Codification was effective on a prospective basis for interim and annual reporting periods ending after September 15, 2009.  The adoption of the Codification did not have any impact on the Company’s consolidated financial position, results of operations or liquidity.

 

On January 1, 2008, the Company adopted ASC 820, “Fair Value Measurements” (formerly SFAS No. 157) for its financial assets and liabilities. The Company’s adoption of ASC 820 did not have a material impact on its financial position, results of operations or liquidity.  In accordance with ASC 820-10-55, “Effective Date of FASB Statement No. 157” (formerly FASB Staff Position (“FSP”) FAS 157-2), the Company elected to defer until January 1, 2009 the adoption of ASC 820 for all non-financial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis. The adoption of ASC 820 for those assets and liabilities within the ASC 820-10-55 did not have a material impact on the Company’s financial position, results of operations or liquidity.

 

On January 1, 2009, the Company adopted ASC 350-30-35, “Determination of Useful Life of Intangible Assets” (formerly FSP FAS 142-3) which amended the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under ASC 350, “Goodwill and Other Intangible Assets” (formerly SFAS No. 142). ASC 350-30-35 also requires expanded disclosure related to the determination of intangible asset useful lives. The Company’s adoption of this standard did not have a material impact on its financial position, results of operations or liquidity.

 

On April 1, 2009, the Company adopted ASC 825-10-65, “Interim Disclosures about Fair Value of Financial Instruments” (formerly FSP FAS 107-1 and Accounting Principles Board No. 28-1), which amended ASC 825-50, “Disclosures About Fair Value of Financial Instruments,” (formerly SFAS No. 107), to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements.  ASC 825-10-65 also amends ASC 825-10 to require those disclosures in summarized financial information at interim reporting periods.  ASC 825-10-65 does not require disclosures for earlier periods presented for comparative purposes at initial adoption.  In periods after initial adoption comparative disclosures are required for periods ending after initial adoption.  The Company’s adoption of ASC 825-10-65 did not have a material impact on its financial position, results of operations or liquidity.

 

On April 1, 2009, the Company adopted ASC 320-10-65, “Recognition and Presentation of Other-Than-Temporary Impairments” (formerly FSP FAS 115-2 and FAS 124-2).  ASC 320-10-65 modifies the requirements for recognizing other-than-temporary impairment on debt securities and significantly changes the impairment model for such securities. Under ASC 320-10-65, a security is considered to be other-than-temporarily impaired if the present value of cash flows expected to be collected are less than the security’s amortized cost basis (the difference being defined as the “Credit Loss”) or if the fair value of the security is less than the security’s amortized cost basis and the investor intends, or more likely than not will be required, to sell the security before recovery of the security’s amortized cost basis. If an other-than-temporary impairment exists, the charge to earnings

 

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HANSEN NATURAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

is limited to the amount of Credit Loss if the investor does not intend to sell the security, and it is more likely than not that it will not be required to sell the security, before recovery of the security’s amortized cost basis. Any remaining difference between fair value and amortized cost is recognized in other comprehensive loss, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings. This standard also modifies the presentation of other-than-temporary impairment losses and increases related disclosure requirements. The Company’s adoption of this standard did not have a material impact on its financial position, results of operations or liquidity (see Note 3).

 

On April 1, 2009, the Company adopted ASC 820-10-65, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (formerly FSP FAS 157-4), which provides additional guidance for estimating fair value in accordance with ASC 820 when the volume and level of activity for the asset or liability have significantly decreased.  ASC 820-10-65 also includes guidance on identifying circumstances that indicate a transaction is not orderly.  This standard does not require disclosures for earlier periods presented for comparative purposes at initial adoption.  In periods after initial adoption, comparative disclosures are required for periods ending after initial adoption.  The Company’s adoption of this standard did not have a material impact on its financial position, results of operations or liquidity.

 

On April 1, 2009, the Company adopted ASC 855, “Subsequent Events” (formerly SFAS No. 165).  ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  Specifically, it sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosure that an entity should make about events or transactions that occurred after the balance sheet date.  The Company’s adoption of this standard did not have an impact on its financial position, results of operations or liquidity.

 

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS No. 167”).  This standard has not yet been adopted into Codification.  SFAS No. 167 amends the consolidation guidance applicable to variable interest entities and requires enhanced disclosures about an enterprise’s involvement in a variable interest entity. This statement also requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity. SFAS No. 167 is effective beginning January 1, 2010. The Company is currently evaluating the effect of SFAS No. 167 on its financial position, results of operations and liquidity.

 

In August 2009, the FASB issued Update No. 2009-05, “Fair Value Measurements and Disclosures (Topic 820) — Measuring Liabilities at Fair Value” (“ASU 2009-05”). ASU 2009-05 amends ASC 820, “Fair Value Measurements and Disclosures”, to provide further guidance on measuring the fair value of a liability. It primarily does three things: 1) sets forth the types of valuation techniques to be used to value a liability when a quoted price in an active market for the identical liability is not available, 2) clarifies that when estimating the fair value of a liability, a

 

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HANSEN NATURAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability, and 3) clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market, when no adjustments to the quoted price of the asset are required, are Level 1 fair value measurements.  This standard will be effective for the Company beginning in the fourth quarter of 2009. The Company is currently evaluating the effect of this update on its financial position, results of operations and liquidity.

 

In September 2009, the FASB issued Update No. 2009-13, “Multiple-Deliverable Revenue Arrangements - a consensus of the FASB Emerging Issues Task Force” (“ASU 2009-13”). It updates the existing guidance regarding multiple-element revenue arrangements currently included under ASC 605-25, “Revenue Recognition”. The revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) eliminates the residual method to allocate the arrangement consideration. The guidance also expands the disclosure requirements for revenue recognition and will be effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. The Company is currently evaluating the effect of this update on its financial position, results of operations and liquidity.

 

3.                                       FAIR VALUE MEASUREMENTS

 

ASC 820 provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements.  ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The three levels of inputs required by the standard that the Company uses to measure fair value are summarized below.

 

·                  Level 1: Quoted prices in active markets for identical assets or liabilities.

 

·                  Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.

 

·                  Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

ASC 820 requires the use of observable market inputs (quoted market prices) when measuring fair value and requires a Level 1 quoted price to be used to measure fair value whenever possible.

 

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HANSEN NATURAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

The following tables present the fair value of the Company’s financial assets recorded at fair value on a recurring basis segregated among the appropriate levels within the fair value hierarchy, at September 30, 2009 and December 31, 2008:

 

September 30, 2009

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

$

33,854

 

$

 

$

 

$

33,854

 

Money market funds

 

253,809

 

 

 

253,809

 

U.S. Treasuries

 

59,981

 

 

 

59,981

 

Auction rate securities

 

 

 

88,169

 

88,169

 

Total

 

$

347,644

 

$

 

$

88,169

 

$

435,813

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

317,657

 

$

 

$

 

$

317,657

 

Short-term investments

 

29,987

 

 

200

 

30,187

 

Investments

 

 

 

87,969

 

87,969

 

Total

 

$

347,644

 

$

 

$

88,169

 

$

435,813

 

 

December 31, 2008

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

$

23,944

 

$

 

$

 

$

23,944

 

Money market funds

 

172,558

 

 

 

172,558

 

U.S. Treasuries

 

80,240

 

 

 

80,240

 

Municipal securities

 

1,154

 

 

 

1,154

 

Auction rate securities

 

 

 

97,617

 

97,617

 

Total

 

$

277,896

 

$

 

$

97,617

 

$

375,513

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

256,801

 

$

 

$

 

$

256,801

 

Short-term investments

 

21,095

 

 

8,050

 

29,145

 

Investments

 

 

 

89,567

 

89,567

 

Total

 

$

277,896

 

$

 

$

97,617

 

$

375,513

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

The following table provides a summary of changes in fair value of the Company’s Level 3 financial assets for the three- and nine-months ended September 30, 2009:

 

 

 

Level 3
Auction Rate
Securities

 

Balance at December 31, 2008

 

$

97,617

 

Transfers to Level 3

 

 

Recognized loss included in income

 

(3,539

)

Unrealized gain included in other comprehensive loss

 

2,936

 

Net settlements

 

(10,475

)

Balance at March 31, 2009

 

86,539

 

Transfers to Level 3

 

 

Recognized loss included in income

 

 

Unrealized gain included in other comprehensive loss

 

3,163

 

Net settlements

 

(1,500

)

Balance at June 30, 2009

 

88,202

 

Transfers to Level 3

 

 

Recognized loss included in income

 

(342

)

Unrealized gain included in other comprehensive loss

 

609

 

Net settlements

 

(300

)

Balance at September 30, 2009

 

$

88,169

 

 

The Company’s Level 3 assets are comprised of municipal or educational related or other public body notes with an auction reset feature (“auction rate securities”). The majority of these notes carry an investment grade or better credit rating and are additionally backed by various federal agencies and/or monoline insurance companies. The applicable interest rate is reset at pre-determined intervals, usually every 7 to 35 days. Liquidity for these auction rate securities was typically provided by an auction process which allowed holders to sell their notes at periodic auctions.  During the nine-months ended September 30, 2009 and prior periods, the auctions for these auction rate securities failed. The auction failures have been attributable to inadequate buyers and/or buying demand and/or the lack of support from financial advisors and sponsors.  In the event that there is a failed auction, the indenture governing the security in some cases requires the issuer to pay interest at a default rate that may be above market rates for similar instruments. The securities for which auctions have failed will continue to accrue and/or pay interest at their pre-determined rates and be auctioned every 7 to 35 days until their respective auction succeeds, the issuer calls the securities, they mature or the Company is able to sell the securities to third parties. As a result, the Company’s ability to liquidate and fully recover the carrying value of its auction rate securities in the near term may be limited. Consequently, these securities, except those that were redeemed at par after September 30, 2009, are classified as long-term investments in the accompanying condensed consolidated balance sheets.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

At September 30, 2009, the Company held auction rate securities with a face value of $100.2 million (amortized cost basis of $95.8 million). A Level 3 valuation was performed on the Company’s auction rate securities as of September 30, 2009, which indicated an impairment of $12.1 million, a decrease of $2.8 million from $14.9 million as of December 31, 2008, resulting in a fair value of $88.2 million, which is included in short- and long-term investments.  This valuation utilized a mark-to-model approach which included estimates for interest rates, timing and amount of cash flows, credit and liquidity premiums, and expected holding periods for the auction rate securities.  These assumptions are typically volatile and subject to change as the underlying data sources and market conditions evolve.

 

On April 1, 2009, the Company adopted ASC 320-10-65 which amended the other-than-temporary impairment model for debt securities.

 

Under ASC 320-10-65, an other-than-temporary impairment must be recognized through earnings if an investor has the intent to sell the debt security or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized cost basis.  However, even if an investor does not expect to sell a debt security, it must evaluate expected cash flows to be received and determine if a Credit Loss has occurred.  In the event of a Credit Loss and absent the intent or requirement to sell a debt security before recovery of its amortized cost, only the amount associated with the Credit Loss is recognized as an expense in the income statement.  The amount of loss relating to other factors is recorded in accumulated other comprehensive loss. ASC 320-10-65 also requires additional disclosures regarding the calculation of the Credit Loss and the factors considered in reaching a conclusion that an investment is not other-than-temporarily impaired. As of April 1, 2009, the date of adoption of ASC 320-10-65, the Company recorded no cumulative effect adjustment of non-credit related losses related to the previously recognized other-than-temporary impairment charges.

 

The Company determined that of the $12.1 million impairment of its auction rate securities at September 30, 2009, $7.6 million was temporary and $4.5 million was other-than-temporary.  The other-than-temporary impairment was deemed Credit Loss related.  The Company recorded $0.3 million and $3.9 million of other-than-temporary impairment that was deemed Credit Loss related through earnings during the three- and nine-months ended September 30, 2009, respectively.  At September 30, 2009, $7.6 million of temporary impairment has been recorded, less a tax benefit of $3.1 million, as a component of accumulated other comprehensive loss.  The factors evaluated to differentiate between temporary impairment and other-than-temporary impairment included the projected future cash flows, credit ratings actions, and assessment of the credit quality of the underlying collateral, as well as the other factors included in the valuation model for debt securities described above.

 

Based on the Company’s ability to access cash and cash equivalents and other short-term investments and based on the Company’s expected operating cash flows, the Company does not anticipate that the current lack of liquidity of these investments will have a material effect on its liquidity or working capital.  If uncertainties in the credit and capital markets continue or there are ratings downgrades on the auction rate securities held by the Company, the Company may be required to recognize additional impairments on these investments.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

4.             INVESTMENTS

 

The following table summarizes the Company’s investments at September 30, 2009 and December 31, 2008:

 

September 30, 2009

 

Amortized
Cost

 

Gross
Unrealized
Holding
Gains

 

Gross
Unrealized
Holding
Losses

 

Fair
Value

 

Continuous
Unrealized
Loss Position
less than 12
Months

 

Continuous
Unrealized
Loss Position
greater than
12 Months

 

Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasuries

 

$

29,987

 

$

 

$

 

$

29,987

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

200

 

 

 

200

 

 

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

95,618

 

 

7,649

 

87,969

 

 

7,649

 

Total

 

$

125,805

 

$

 

$

7,649

 

$

118,156

 

$

 

$

7,649

 

 

December 31, 2008

 

Amortized
Cost

 

Gross
Unrealized
Holding
Gains

 

Gross
Unrealized
Holding
Losses

 

Fair
Value

 

Continuous
Unrealized
Loss Position
less than 12
Months

 

Continuous
Unrealized
Loss Position
greater than
12 Months

 

Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasuries

 

$

19,941

 

$

 

$

 

$

19,941

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal securities

 

1,154

 

 

 

1,154

 

 

 

Auction rate securities

 

8,050

 

 

 

8,050

 

 

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

103,923

 

 

14,356

 

89,567

 

14,356

 

 

Total

 

$

133,068

 

$

 

$

14,356

 

$

118,712

 

$

14,356

 

$

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

The following table summarizes the maturities of the Company’s investments at September 30, 2009:

 

 

 

Amortized
Cost

 

Fair Value

 

Less than 1 year

 

$

30,187

 

$

30,187

 

Due 1 - 10 years

 

701

 

674

 

Due 11 - 20 years

 

10,083

 

9,359

 

Due 21 - 30 years

 

60,674

 

55,387

 

Due 31 - 40 years

 

24,160

 

22,549

 

Total

 

$

125,805

 

$

118,156

 

 

5.             INVENTORIES

 

Inventories consist of the following at:

 

 

 

September 30,
2009

 

December 31,
2008

 

Raw materials

 

$

33,446

 

$

24,454

 

Finished goods

 

90,496

 

91,872

 

 

 

$

123,942

 

$

116,326

 

 

6.             PROPERTY AND EQUIPMENT, Net

 

Property and equipment consist of the following at:

 

 

 

September 30,
2009

 

December 31,
2008

 

Land

 

$

1,417

 

$

1,417

 

Leasehold improvements

 

2,309

 

2,112

 

Furniture and fixtures

 

1,722

 

1,182

 

Office and computer equipment

 

5,222

 

2,998

 

Computer software

 

5,608

 

1,845

 

Equipment

 

13,184

 

3,850

 

Vehicles

 

9,367

 

8,175

 

 

 

38,829

 

21,579

 

Less: accumulated depreciation and amortization

 

(10,754

)

(7,190

)

 

 

$

28,075

 

$

14,389

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

7.             INTANGIBLES, Net

 

Intangibles consist of the following at:

 

 

 

September 30,
2009

 

December 31,
2008

 

Amortizing trademarks

 

$

1,059

 

$

1,169

 

Accumulated amortization

 

(402

)

(456

)

 

 

657

 

713

 

Non-amortizing intangibles

 

31,017

 

27,652

 

 

 

$

31,674

 

$

28,365

 

 

All amortizing trademarks have been assigned an estimated useful life and such trademarks are amortized on a straight-line basis over the number of years that approximate their respective useful lives ranging from one to 25 years (weighted-average life of 20 years).  Amortization expense was $0.01 million for both the three-months ended September 30, 2009 and 2008 and $0.04 million for both the nine-months ended September 30, 2009 and 2008.

 

8.             DISTRIBUTION AGREEMENTS

 

Pursuant to certain new and/or amended distribution agreements entered into with certain distributors, net amounts of $5.0 million and $(0.4) million due from/(to) such distributors were recorded during the nine-months ended September 30, 2009 and 2008, respectively.  Such amounts are accounted for as deferred revenue in the condensed consolidated balance sheets at September 30, 2009 and 2008, respectively.  Deferred revenue is recognized as revenue ratably over the anticipated life of the respective distribution agreement, generally 20 years. Revenue recognized was $1.8 million and $0.5 million for the three-months ended September 30, 2009 and 2008, respectively.  Revenue recognized was $5.6 million and $1.5 million for the nine-months ended September 30, 2009 and 2008, respectively.  The Company had $7.4 million of current deferred revenue included in accrued liabilities in the accompanying condensed consolidated balance sheet as of September 30, 2009.  The Company incurred termination costs to certain of its prior distributors amounting to $0.1 million and $(0.2) million during the three-months ended September 30, 2009 and 2008, and $1.9 million and $(0.04) million during the nine-months ended September 30, 2009 and 2008, respectively. These amounts are included in operating expenses in the condensed consolidated statements of income.

 

9.             COMMITMENTS AND CONTINGENCIES

 

Purchase Commitments — The Company has purchase commitments aggregating approximately $49.6 million, which represent commitments made by the Company and its subsidiaries to various suppliers of raw materials for the manufacturing and packaging of its products.  These obligations vary in terms and are due within the next 12 months.

 

The Company has noncancelable contractual obligations aggregating approximately $50.2 million, which are related primarily to sponsorships and other marketing activities.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

In addition to the above obligations, pursuant to a can supply agreement between the Company and Rexam Beverage Can Company (“Rexam”), dated as of September 9, 2009 (the “2010 Supply Agreement”), the Company has undertaken to purchase a minimum volume of 24-ounce re-sealable aluminum beverage cans in 2010.  The Company’s minimum purchase obligation under the 2010 Supply Agreement is approximately $27.3 million, subject to compliance by Rexam with certain conditions.  Effective September 30, 2009, the 2010 Supply Agreement waived the minimum purchase volumes required pursuant to the 2006 Supply Agreement dated January 1, 2006 between the Company and Rexam.

 

In the fourth quarter of 2008, the Company entered into licensing and programming agreements with SAP America, Inc., to use its global enterprise resource planning software initiative to replace the Company’s existing legacy software.  The Company also entered into agreements with Axon Solutions, Inc. and Vistex Inc. for the implementation and configuration of the SAP software.  The Company estimates the remaining cost for implementation of the initiative will be approximately $2.1 million.  The project commenced in the first quarter of 2009 with a targeted production live date in the first quarter of 2010.

 

Litigation — In August 2006, the Company 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 the Company’s valuable and distinctive Monster Energy® trade dress in connection with a line of energy drinks it launched under the “Freek” brand name.  In June 2007, the parties entered into a confidential settlement agreement resolving the parties’ disputes in the litigation. National subsequently repudiated the settlement agreement and the Company responded by filing a motion in the United States District Court for the Central District of California to enforce the terms of the confidential settlement agreement.  On August 14, 2007, the United States District Court entered an order enforcing the settlement agreement and permanently enjoining National from manufacturing, distributing, shipping, marketing, selling and offering to sell “Freek” energy drinks in containers using the original “Freek” trade dress that was subject to the District Court’s preliminary injunction.  National appealed the District Court’s decision to the Ninth Circuit Court of Appeals.  On September 30, 2009, the Ninth Circuit affirmed the District Court’s Order enforcing the settlement agreement between National and the Company.

 

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 Superior Court of the State of California, City and County of San Francisco, 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.  Defendants removed this Superior Court action to the United States District Court for the Northern District of California under the Class Action Fairness Act, and filed motions for dismissal or transfer.  On June 11, 2007, the United States District Court, Northern District of California granted the Company’s motion to dismiss Chavez’s complaint with prejudice. On June 21, 2007, Chavez filed an appeal with the United States Court of Appeals for the Ninth Circuit, and the Court

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

heard oral arguments on January 14, 2009.  Subsequently, on June 23, 2009, the Court filed a memorandum opinion reversing the opinion of the United States District Court and remanding the case to the United States District Court for further proceedings.  The Company filed an answer to the complaint on behalf of all the defendants on July 20, 2009, essentially denying the allegations set forth in the complaint.  The Court conducted a Case Management Conference on August 24, 2009.  At that time, it scheduled a class certification hearing for March 2010, any dispositive motions for hearing for October 2010, and a pre-trial conference for December 2010.  The Company believes it has meritorious defenses to the allegations and plans a vigorous defense.  Discovery began during the third quarter of 2009.

 

On July 3, 2008, the Company filed a lawsuit in the Superior Court for the State of California for Los Angeles County against St. Paul Mercury Insurance Company (“St. Paul”) due to St. Paul’s failure to reimburse the Company for certain costs and expenses incurred and paid by the Company for and in connection with the investigation and defense of various proceedings relating to certain stock option grants made by the Company, including the Company’s internal Special Committee investigation costs (the “St. Paul Complaint”).  The Company had purchased from St. Paul a directors and officers insurance policy that the Company contended covered such expenses during the pertinent time period.  St. Paul reimbursed the Company for certain of the costs and expenses associated with the Company’s successful defense against the subject proceedings, but refused to pay the remainder of the limits of its policy.  The St. Paul Complaint alleged that St. Paul was liable to the Company for the difference.  The St. Paul Complaint sought damages arising from St. Paul’s breach of the policy, punitive damages, and reimbursement of the attorneys’ fees expended by the Company in the investigation and litigation.  On August 1, 2008, St. Paul removed the lawsuit to the United States District Court for the Central District of California.  Following a mediation of the dispute, the parties entered into a confidential settlement agreement on terms satisfactory to both parties.  The Company executed a stipulation with St. Paul voluntarily to dismiss the St. Paul Complaint with prejudice that was filed with the Court on September 2, 2009, and the Company has separately released the claims it had asserted against St. Paul.

 

On July 11, 2008, the Company initiated an action against Citigroup Inc., Citigroup Global Markets, Inc., and Citi Smith Barney, in the United States District Court, Central District of California, for violations of federal securities laws and the Investment Advisers Act of 1940, as amended, arising out of the Company’s purchase of auction rate securities.  The Court granted the defendants’ motion to compel arbitration before the Financial Industry Regulatory Authority (“FINRA”).  The matter is now proceeding before FINRA and has been set for hearing in March 2010.

 

On August 28, 2008, the Company initiated an action against Oppenheimer Holdings Inc., Oppenheimer & Co. Inc., and Oppenheimer Asset Management Inc., in the United States District Court, Central District of California, for violations of federal securities laws and the Investment Advisors Act, arising out of the Company’s purchase of auction rate securities.  The defendants answered the complaint on October 14, 2008 denying the allegations set forth therein.  The Oppenheimer action was deemed a related case to the Company’s action against Citigroup Inc. (described above).  After the Court granted the defendants’ motion to compel arbitration in the Citigroup Inc. case, the Company stipulated to arbitration before FINRA, where the matter is now

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

proceeding and has been set for hearing in April 2010.  The Company has voluntarily dismissed, without prejudice, its claims against Oppenheimer Asset Management, Inc.  The Panel recently denied Oppenheimer Holdings, Inc.’s motion to be dismissed from the proceeding.

 

In May 2009, Avraham Wellman, purporting to act on behalf of himself and a class of consumers in Canada, filed a putative class action in the Ontario Superior Court of Justice, in the City of Toronto, Ontario, Canada, against the Company and its former Canadian distributor, Pepsi-Cola Canada Ltd., as defendants.  The plaintiff alleges that the defendants misleadingly packaged and labeled Monster Energy® products in Canada by not including sufficiently specific statements with respect to contra-indications and/or adverse reactions associated with the consumption of the energy drink products.  The plaintiff’s claims against the defendants are for negligence, unjust enrichment, and making misleading/false representations in violation of the Competition Act (Canada), the Food and Drugs Act (Canada) and the Consumer Protection Act, 2002 (Ontario).  The plaintiff claims general damages on behalf of the putative class in the amount of CDN$20 million, together with punitive damages of CDN$5 million, plus legal costs and interest. The plaintiff’s certification motion materials have not yet been filed.  In accordance with class action practice in Ontario, the Company will not file an answer to the complaint until after the determination of the certification motion.  The Company believes that the plaintiff’s complaint is without merit and plans a vigorous defense.

 

In addition to the above matters, the Company is subject to litigation from time to time in the normal course of business, including claims from terminated distributors.  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.

 

Securities Litigation - On September 11, 2008, a federal securities class action complaint styled Cunha v. Hansen Natural Corp., et al. was filed in the United States District Court for the Central District of California (the “District Court”). On September 17, 2008, a second federal securities class action complaint styled Brown v. Hansen Natural Corp., et al. was also filed in the District Court.

 

On July 14, 2009, the Court entered an order consolidating the actions and appointing lead counsel and the Structural Ironworkers Local Union #1 Pension Fund as lead plaintiff.  On August 28, 2009 lead plaintiff filed a Consolidated Complaint for Violations of Federal Securities Laws (the “Consolidated Class Action Complaint”).  The Consolidated Class Action Complaint purports to be brought on behalf of a class of purchasers of the Company’s stock during the period November 9, 2006 through November 8, 2007 (the “Class Period”).  It names as defendants the Company, Rodney C. Sacks, Hilton H. Schlosberg, and Thomas J. Kelly.  Plaintiff principally alleges that, during the Class Period, the defendants made false and misleading statements relating to the Company’s distribution coordination agreements with Anheuser-Busch, Inc. (“AB”) and its sales of “Allied” energy drink lines, and engaged in sales of shares in the Company on the basis of material non-public information.  Plaintiff also alleges that the Company’s financial statements for the second quarter of 2007 did not include certain promotional expenses.  The Consolidated Class Action Complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and seeks an unspecified amount of damages.

 

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(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

Pursuant to the briefing schedule now in effect, defendants’ motion to dismiss must be filed by November 16, 2009; lead plaintiff’s opposition must be filed by January 2010; and defendant’s reply brief must be filed by February 2010.

 

Derivative Litigation — On October 15, 2008, a derivative complaint was filed in the United States District Court for the Central District of California (the “District Court”), styled Merckel v. Sacks, et al.  On November 17, 2008, a second derivative complaint styled Dislevy v. Sacks, et al. was also filed in the District Court.  The derivative suits were each brought, purportedly on behalf of the Company, by a shareholder of the Company who made no prior demand on the Company’s Board of Directors.

 

On June 29, 2009, the Court entered an order consolidating the Merckel and Dislevy actions.  On July 13, 2009, the Court entered an order re-styling the consolidated actions as In re Hansen Derivative Shareholder Litigation, appointing lead plaintiff and lead counsel, and establishing a schedule for the filing of a consolidated amended complaint and for defendants’ response to such complaint (the “July 13 Order”).

 

On October 13, 2009, lead plaintiff filed a Consolidated Shareholder Derivative Complaint (the “Consolidated Derivative Complaint”).  The Consolidated Derivative Complaint names as defendants certain current and former officers, directors, and employees of the Company, including Rodney C. Sacks, Hilton H. Schlosberg, Harold C. Taber, Jr., Benjamin M. Polk, Norman C. Epstein, Mark S. Vidergauz, Sydney Selati, Thomas J. Kelly, Mark J. Hall, and Kirk S. Blower, as well as Hilrod Holdings, L.P.  The Company is named as a nominal defendant.  The factual allegations of the Consolidated Derivative Complaint are similar to those set forth in the Consolidated Class Action Complaint described above.  Plaintiff alleges that, from November 2006 to the present, the defendants caused the Company to issue false and misleading statements concerning its business prospects and failed to properly disclose problems related to its non-Monster energy drinks, the prospects for the Anheuser-Busch distribution relationship, and alleged “inventory loading” that affected the Company’s results for the second quarter of 2007.  Plaintiff further alleges that while the Company’s shares were purportedly artificially inflated because of those improper statements, certain of the defendants sold Company stock while in possession of material non-public information. The Consolidated Derivative Complaint asserts various causes of action, including breach of fiduciary duty, aiding and abetting breach of fiduciary duty, violation of Cal. Corp. Code §§ 25402 and 25403 for insider selling, and unjust enrichment. The suit seeks an unspecified amount of damages to be paid to the Company and adoption of corporate governance reforms, among other things.

 

Pursuant to the July 13 Order, the Company must file its motion to dismiss by November 30, 2009; plaintiff’s opposition papers must be filed by January 2010; and the Company’s reply brief must be filed by February 2010.  None of the other defendants need answer, move to dismiss, or otherwise respond to the Consolidated Derivative Complaint until or unless the District Court orders the Company to file an answer, in which case the other defendants will have 45 days after the filing of the Company’s answer to move to dismiss or otherwise respond to the Consolidated Derivative Complaint.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

Although the ultimate outcome of these matters cannot be determined with certainty, the Company believes that the allegations in the Consolidated Class Action Complaint and the Consolidated Derivative Complaint are without merit. The Company intends to vigorously defend against these lawsuits.

 

10.           COMPREHENSIVE INCOME

 

The components of comprehensive income are as follows:

 

 

 

Three-Months Ended

 

Nine-Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Net income, as reported

 

$

56,505

 

$

52,437

 

$

155,359

 

$

131,480

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Change in unrealized loss on available- for-sale securities, net of tax

 

451

 

28

 

4,130

 

(3,348

)

Foreign currency translation adjustments

 

826

 

200

 

2,170

 

194

 

Comprehensive income

 

$

57,782

 

$

52,665

 

$

161,659

 

$

128,326

 

 

The components of accumulated other comprehensive loss are as follows:

 

 

 

September 30, 2009

 

December 31, 2008

 

Accumulated net unrealized loss on available-for-sale securities, net of tax benefit of $3.1 million and $5.7 million as of September 30, 2009 and December 31, 2008, respectively

 

$

(4,530

)

$

(8,660

)

Foreign currency translation adjustments

 

5

 

(2,165

)

Total accumulated other comprehensive loss

 

$

(4,525

)

$

(10,825

)

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

11.                                 TREASURY STOCK PURCHASE

 

On April 25, 2008, the Board of Directors of the Company authorized the repurchase of up to $200.0 million of the Company’s common stock. During the three- and nine-months ended September 30, 2009, the Company purchased 1.6 million shares of common stock at an average purchase price of $31.96 per share for a total amount of $51.0 million, which the Company now holds in treasury.

 

12.                                 STOCK-BASED COMPENSATION

 

The Company has two stock option plans under which shares were available for grant at September 30, 2009: the Hansen Natural Corporation Amended and Restated 2001 Stock Option Plan (the “2001 Option Plan”) and the 2009 Hansen Natural Corporation Stock Incentive Plan for Non-Employee Directors (the “2009 Directors Plan”).  The 2009 Directors Plan, which replaced the 2005 Hansen Natural Corporation Stock Option Plan for Non-Employee Directors (the “2005 Directors Plan”), was approved by the Board of Directors on April 13, 2009, and ratified by the stockholders of the Company at the annual meeting of stockholders, held on June 4, 2009.

 

The 2001 Option Plan permits the granting of options to purchase up to 22,000,000 shares of the common stock of the Company to certain key employees or non-employees of the Company and its subsidiaries.  Options granted under the 2001 Option Plan may be incentive stock options under Section 422 of the Internal Revenue Code, as amended, non-qualified stock options or stock appreciation rights.  The Compensation Committee of the Board of Directors 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 Securities and Exchange Act of 1934, as amended (the “Exchange Act”).  The Compensation Committee and the Executive Committee of the Board of Directors 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.  Stock options are generally exercisable up to a 10 year period after their date of grant.  As of September 30, 2009, options to purchase 17,692,900 shares of the Company’s common stock had been granted, net of cancellations, and options to purchase 4,307,100 shares of the Company’s common stock remain available for grant under the 2001 Option Plan.  Outstanding options under the 2001 Option Plan generally vest over five years from the grant date and generally expire up to 10 years after the grant date.

 

The 2009 Directors Plan permits the granting of options, stock appreciation rights (each, an “SAR”), and other stock-based awards to purchase up to an aggregate of 800,000 shares of common stock of the Company to non-employee directors of the Company.  The 2009 Directors Plan is administered by the Board of Directors.  Each award granted under the 2009 Directors Plan will be evidenced by a written agreement and will contain the terms and conditions that the Board of Directors deems appropriate.  The Board of Directors may grant such awards on the last business day prior to the date of the annual meeting of stockholders.  Any award granted under the 2009 Directors Plan will vest, with respect to 100% of such award, on the last business day prior to the date of the annual meeting, in the calendar year following the calendar year in which such award is granted.  The Board of Directors may determine the exercise price per share of the Company’s common stock

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

under each option, but such price may not be less than 100% of the closing price of the Company’s common stock for one share on the date an option is granted.  Option grants may be made under the 2009 Directors Plan for 10 years from June 4, 2009.  The Board of Directors may also grant SARs, independently, or in connection with an option grant.  The Board of Directors may determine the exercise price per share of the Company’s common stock under each SAR, but such price may not be less than the greater of (i) the fair market value of a share on the date the SAR is granted and (ii) the price of the related option, if the SAR is granted in connection with an option grant.  Additionally, the Board of Directors may grant other stock-based awards, which include awards of shares of the Company’s common stock, restricted shares of the Company’s common stock, and awards that are valued based on the fair market value of shares of the Company’s common stock.  SARs and other stock-based awards are subject to the general provisions of the 2009 Directors Plan. The Board of Directors may amend or terminate the 2009 Directors Plan at any time.  As of September 30, 2009, no options to purchase shares of the Company’s common stock had been granted under the 2009 Directors Plan, and options to purchase 800,000 shares of the Company’s common stock remained available for grant.

 

The 2005 Directors Plan, which was replaced by the 2009 Directors Plan, permitted the granting of options to purchase up to an aggregate of 800,000 shares of common stock of the Company to non-employee directors of the Company.  On the date of the annual meeting of stockholders at which an eligible director was initially elected, each eligible director was entitled to receive a one-time grant of an option to purchase 24,000 shares of the Company’s common stock exercisable at the closing price for a share of common stock on the date of grant.  Additionally, on the fifth anniversary of the election of eligible directors elected or appointed to the Board of Directors, and each fifth anniversary thereafter, each eligible director was to receive an additional grant of an option to purchase 19,200 shares of the Company’s common stock.  Options became exercisable in four equal installments, with the grant immediately vested with respect to 25% of the grant and the remaining installments vesting on the three successive anniversaries of the date of grant; provided that all options held by an eligible director became fully and immediately exercisable upon a change in control of the Company.  Options granted under the 2005 Directors Plan that were not exercised generally expired 10 years after the date of grant.  Option grants could be made under the 2005 Directors Plan for 10 years from the effective date of the 2005 Directors Plan.  The 2005 Directors Plan was a “formula plan” so that a non-employee director’s participation in the 2005 Directors Plan did not affect his status as a “disinterested person” (as defined in Rule 16b-3 of the Exchange Act).  As of September 30, 2009, options to purchase 76,800 shares of the Company’s common stock had been granted under the 2005 Directors Plan.

 

Under the Company’s stock option plans, all grants are made at prices based on the fair value of the options on the date of grant.  The Company recorded $3.3 million and $4.0 million of compensation expense relating to outstanding options during the three-months ended September 30, 2009 and 2008, respectively.  The Company recorded $9.8 million of compensation expense relating to outstanding options for both the nine-months ended September 30, 2009 and 2008. Refer to “Change in Estimated Forfeiture Rate” within this Note 12 for additional information.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

The Company records 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 assumptions included in the table below. The Company records compensation expense for non-employee stock options based on the estimated fair value of the options as of the earlier of (1) the date at which a commitment for performance by the non-employee to earn the stock option is reached, and (2) the date at which the non-employee’s performance is complete, using the Black-Scholes-Merton option pricing formula with the assumptions included in the table below.  The Company uses historical data to determine the exercise behavior, volatility and forfeiture rate of the options.  The following weighted-average assumptions were used to estimate the fair value of options granted during the three- and nine-months ended September 30, 2009 and 2008:

 

 

 

Three-Months Ended
September 30,

 

Nine-Months Ended
September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Dividend yield

 

0.0%

 

0.0%

 

0.0%

 

0.0%

 

Expected volatility

 

62%

 

63%

 

64%

 

62%

 

Risk free interest rate

 

2.6%

 

3.5%

 

2.3%

 

3.5%

 

Expected lives

 

5.7 Years

 

6.0 Years

 

5.4 Years

 

5.6 Years

 

 

The following table summarizes the Company’s activities with respect to its stock option plans as follows:

 

Options

 

Number of
Shares (In
Thousands)

 

Weighted-
Average
Exercise
Price Per
Share

 

Weighted-
Average
Remaining
Contractual
Term (In
Years)

 

Aggregate
Intrinsic
Value

 

Balance at January 1, 2009

 

10,030

 

$

12.38

 

6.4

 

$

216,580

 

Granted 01/01/09 - 03/31/09

 

123

 

$

33.90

 

 

 

 

 

Granted 04/01/09 - 06/30/09

 

232

 

$

36.40

 

 

 

 

 

Granted 07/01/09 - 09/30/09

 

76

 

$

32.12

 

 

 

 

 

Exercised

 

(356

)

$

4.74

 

 

 

 

 

Cancelled or forfeited

 

(216

)

$

18.91

 

 

 

 

 

Outstanding at September 30, 2009

 

9,889

 

$

13.49

 

5.8

 

$

232,349

 

Vested and expected to vest in the future at September 30, 2009

 

9,452

 

$

12.63

 

5.7

 

$

230,039

 

Exercisable at September 30, 2009

 

6,333

 

$

7.45

 

4.9

 

$

186,166

 

 

The weighted-average grant-date fair value of options granted, using the Black-Scholes-Merton option pricing formula and the assumptions included in the table above, during the three-months ended September 30, 2009 and 2008 was $18.47 per share and $16.31 per share, respectively. The weighted-average grant-date fair value of options granted during the nine-months ended September 30, 2009 and 2008 was $19.90 per share and $18.57 per share, respectively. The

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

total intrinsic value of options exercised during the three-months ended September 30, 2009 and 2008 was $1.4 million and $5.7 million, respectively. The total intrinsic value of options exercised during the nine-months ended September 30, 2009 and 2008 was $11.1 million and $28.4 million, respectively.

 

Cash received from options exercised under all plans for the three-months ended September 30, 2009 and 2008 was approximately $0.3 million and $0.5 million, respectively.  Cash received from options exercised under all plans for both the nine-months ended September 30, 2009 and 2008 was approximately $1.7 million.  The actual tax benefit realized for tax deductions from non-qualified stock option exercises and disqualifying dispositions of incentive stock options for the three-months ended September 30, 2009 and 2008 was $0.1 million and $0.02 million, respectively.  The actual tax benefit realized for tax deductions from non-qualified stock option exercises and disqualifying dispositions of incentive stock options for both the nine-months ended September 30, 2009 and 2008 was $2.2 million.

 

At September 30, 2009, there was $32.6 million of total unrecognized compensation expense related to nonvested shares granted to both employees and non-employees under the Company’s stock-based payment plans.  That cost is expected to be recognized over a weighted-average period of 2.4 years.

 

Change in Estimated Forfeiture Rate

 

During the nine-months ended September 30, 2009, based on historical experience, the Company modified the estimated annual forfeiture rate used in recognizing stock-based compensation expense for its most senior executives based on their dissimilar historical forfeiture experience as compared to the forfeiture experience for non-senior executives. This modification resulted in a change from a 3.0% forfeiture rate for all employees to a 0% forfeiture rate for senior executives and an 11.2% forfeiture rate for all other recipients. During the same period, the Company also realized a benefit from actual forfeiture experience that was higher than previously estimated for unvested stock options, resulting primarily from non-senior executives and other employee departures from the Company. The cumulative impact of the revised forfeiture rates reduced stock-based compensation expense by approximately $1.1 million for the nine-months ended September 30, 2009.

 

13.                                 INCOME TAXES

 

The following is a roll forward of the Company’s total gross unrecognized tax benefits for the nine-months ended September 30, 2009:

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

 

 

Gross Unrealized Tax
Benefits

 

Balance at December 31, 2008

 

$

1,912

 

Additions for tax positions related to the current year

 

315

 

Additions for tax positions related to the prior year

 

89

 

Decreases related to settlement with taxing authority

 

(1,912

)

Balance at September 30, 2009

 

$

404

 

 

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the tax provision in the Company’s condensed consolidated financial statements.  As of September 30, 2009, the Company had approximately $0.02 million in interest and penalties related to recognized tax benefits accrued.  In addition, $0.1 million of benefit was recognized through the provision for income tax expense during the three-months ended September 30, 2009.  Amounts accrued are attributable to the Domestic Production Deduction.  It is expected that the amount of unrecognized tax benefits will change in the next 12 months; however, the Company does not expect the change to have a material impact on its financial position, results of operations or liquidity.

 

On August 9, 2007, the Internal Revenue Service began its examination of the Company’s U.S. federal income tax return for the period ended December 31, 2005.  The examination was completed in March 2009 with no significant adjustments.

 

In March 2009, the Internal Revenue Service concluded its examination of the Company’s Domestic Production Deduction tax claim attributable to the 2005 and 2006 years.  The Company’s position was upheld on its uncertain tax positions attributable to the Domestic Production Deduction and as a result, the amount of gross unrealized tax benefits was reduced by $1.9 million. The removal of accrued uncertain tax positions and related interest and penalties previously recorded resulted in a $2.1 million increase in net income for the nine-months ended September 30, 2009.

 

The Company is subject to U.S. federal income tax as well as to income tax in multiple state jurisdictions.  Federal income tax returns of the Company are subject to IRS examination for the 2006 through 2008 tax years. State income tax returns are subject to examination for the 2005 through 2008 tax years.

 

14.                                 EARNINGS PER SHARE

 

A reconciliation of the weighted-average shares used in the basic and diluted earnings per common share computations for the three- and nine-months ended September 30, 2009 and 2008 is presented below:

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

 

 

Three-Months Ended

 

Nine-Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

90,154

 

92,337

 

90,380

 

92,852

 

Dilutive securities

 

4,529

 

4,579

 

4,680

 

5,145

 

Diluted

 

94,683

 

96,916

 

95,060

 

97,997

 

 

For the three-months ended September 30, 2009 and 2008, options outstanding totaling 2.5 million and 2.1 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive.  For the nine-months ended September 30, 2009 and 2008, options outstanding totaling 2.4 million and 1.2 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive.

 

15.                                 SEGMENT INFORMATION

 

The Company has two reportable segments, namely Direct Store Delivery (“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 DSD or Warehouse segments have been allocated to “Corporate & Unallocated.”

 

The net revenues derived from the DSD and Warehouse segments and other financial information related thereto for the three-months ended September 30, 2009 and 2008 are as follows:

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

 

 

Three-Months Ended September 30, 2009

 

 

 

DSD

 

Warehouse

 

Corporate and
Unallocated

 

Total

 

Net sales

 

$

282,367

 

$

25,562

 

$

 

$

307,929

 

Contribution margin

 

101,827

 

2,129

 

 

103,956

 

Corporate and unallocated expenses

 

 

 

(11,041

)

(11,041

)

Operating income

 

 

 

 

 

 

 

92,915

 

Other income (expense)

 

(511

)

 

352

 

(159

)

Income before provision for income taxes

 

 

 

 

 

 

 

92,756

 

Depreciation and amortization

 

1,174

 

8

 

502

 

1,684

 

Trademark amortization

 

 

11

 

1

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

Three-Months Ended September 30, 2008

 

 

 

DSD

 

Warehouse

 

Corporate and
Unallocated

 

Total

 

Net sales

 

$

257,698

 

$

27,288

 

$

 

$

284,986

 

Contribution margin

 

94,743

 

1,097

 

 

95,840

 

Corporate and unallocated expenses

 

 

 

(14,048

)

(14,048

)

Operating income

 

 

 

 

 

 

 

81,792

 

Other income (expense)

 

(8

)

 

2,119

 

2,111

 

Income before provision for income taxes

 

 

 

 

 

 

 

83,903

 

Depreciation and amortization

 

516

 

8

 

496

 

1,020

 

Trademark amortization

 

 

11

 

3

 

14

 

 

Revenue is derived from sales to external customers.  Operating expenses that pertain to each segment are allocated to the appropriate segment.

 

Included in net sales for the DSD segment for the three-months ended September 30, 2009, was revenue of $2.3 million related to the Epicenter Music Festival (held in August 2009) and revenue of $0.9 million related to X-Truck, Inc. Included in contribution margin for the DSD segment for the three-months ended September 30, 2009, were operating losses of $2.5 million related to X-Truck, Inc. and Epicenter Music Festival, LLC.

 

Corporate and unallocated expenses were $11.0 million for the three-months ended September 30, 2009 and included $9.3 million of payroll costs, of which $3.3 million was attributable to stock-based compensation expense (see Note 12, “Stock-Based Compensation”), $3.2 million attributable to professional service expenses, including accounting and legal costs, and $3.2 million of other operating expenses.  Included as a reduction to corporate and unallocated expenses were proceeds of $4.7 million related to reimbursements of legal expenses paid by the Company.  Corporate and unallocated expenses were $14.0 million for the three-months ended September 30, 2008 and included $8.8 million of payroll costs, of which $4.0 million was attributable to stock-based compensation expense (see Note 12, “Stock-Based Compensation”), $2.7 million attributable to professional service expenses, including accounting and legal costs and $2.5 million of other operating expenses. Certain items, including operating assets and income taxes, are not allocated to individual segments and therefore are not presented above.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

One customer made up approximately 30% of the Company’s net sales for the three-months ended September 30, 2009. One customer made up approximately 14% of the Company’s net sales for the three-months ended September 30, 2008.

 

Net sales to customers outside the United States amounted to $41.2 million and $27.0 million for the three-months ended September 30, 2009 and 2008, respectively. Such sales were approximately 13.4% and 9.5% of net sales for the three-months ended September 30, 2009 and 2008, respectively.

 

The net revenues derived from DSD and Warehouse segments and other financial information related thereto for the nine-months ended September 30, 2009 and 2008 are as follows:

 

 

 

Nine-Months Ended September 30, 2009

 

 

 

DSD

 

Warehouse

 

Corporate and
Unallocated

 

Total

 

Net sales

 

$

781,333

 

$

71,052

 

$

 

$

852,385

 

Contribution margin

 

286,521

 

4,616

 

 

291,137

 

Corporate and unallocated expenses

 

 

 

(39,662

)

(39,662

)

Operating income

 

 

 

 

 

 

 

251,475

 

Other income (expense)

 

(545

)

 

(1,736

)

(2,281

)

Income before provision for income taxes

 

 

 

 

 

 

 

249,194

 

Depreciation and amortization

 

2,600

 

23

 

1,306

 

3,929

 

Trademark amortization

 

 

33

 

23

 

56

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine-Months Ended September 30, 2008

 

 

 

DSD

 

Warehouse

 

Corporate and Unallocated

 

Total

 

Net sales

 

$

705,974

 

$

73,434

 

$

 

$

779,408

 

Contribution margin

 

241,005

 

243

 

 

241,248

 

Corporate and unallocated expenses

 

 

 

(38,439

)

(38,439

)

Operating income

 

 

 

 

 

 

 

202,809

 

Other income (expense)

 

(29

)

 

8,535

 

8,506

 

Income before provision for income taxes

 

 

 

 

 

 

 

211,315

 

Depreciation and amortization

 

1,091

 

24

 

1,444

 

2,559

 

Trademark amortization

 

 

33

 

9

 

42

 

 

Revenue is derived from sales to external customers.  Operating expenses that pertain to each segment are allocated to the appropriate segment.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

Included in net sales for the DSD segment for the nine-months ended September 30, 2009, was revenue of $2.3 million related to the Epicenter Music Festival and revenue of $2.2 million related to X-Truck, Inc. Included in contribution margin for the DSD segment for the nine-months ended September 30, 2009, were operating losses of $3.1 million related to X-Truck, Inc. and Epicenter Music Festival, LLC.

 

Corporate and unallocated expenses were $39.7 million for the nine-months ended September 30, 2009 and included $27.0 million of payroll costs, of which $9.8 million was attributable to stock-based compensation expense (see Note 12, “Stock-Based Compensation”), $9.1 million attributable to professional service expenses, including accounting and legal costs, and $8.3 million of other operating expenses.  Included as a reduction to corporate and unallocated expenses were proceeds of $4.7 million related to reimbursements of legal expenses paid by the Company.  Corporate and unallocated expenses were $38.4 million for the nine-months ended September 30, 2008 and included $24.6 million of payroll costs, of which $9.8 million was attributable to stock-based compensation expense (see Note 12, “Stock-Based Compensation”), and $7.2 million attributable to professional service expenses, including accounting and legal costs. Certain items, including operating assets and income taxes, are not allocated to individual segments and therefore are not presented above.

 

One customer made up approximately 30% of the Company’s net sales for the nine-months ended September 30, 2009.  Two customers made up approximately 16% and 11%, respectively, of the Company’s net sales for the nine-months ended September 30, 2008.

 

Net sales to customers outside the United States amounted to $101.7 million and $67.1 million for the nine-months ended September 30, 2009 and 2008, respectively.  Such sales were approximately 11.9% and 8.6% of net sales for the nine-months ended September 30, 2009 and 2008, respectively.

 

The Company’s net sales by product line for the three- and nine-months ended September 30, 2009 and 2008, respectively, were as follows:

 

 

 

Three-Months Ended

 

Nine-Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Energy drinks

 

$

279,005

 

$

258,110

 

$

778,222

 

$

707,482

 

Non-carbonated (primarily juice based beverages)

 

16,943

 

18,420

 

44,675

 

50,009

 

Carbonated (primarily soda beverages)

 

8,804

 

8,456

 

25,042

 

21,917

 

Other

 

3,177

 

 

4,446

 

 

 

 

$

307,929

 

$

284,986

 

$

852,385

 

$

779,408

 

 

16.                                 RELATED PARTY TRANSACTIONS

 

A director of the Company is a partner in a law firm that serves as counsel to the Company.  Expenses incurred in connection with services rendered by such firm to the Company during the three-months ended September 30, 2009 and 2008 were $0.4 million and $0.2 million, respectively.  Expenses incurred in connection with services rendered by such firm to the Company during the nine-months ended September 30, 2009 and 2008 were $1.0 million and $1.9 million, respectively.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

Two directors and officers of the Company and their families are principal owners of a company that provides promotional materials to the Company. Expenses incurred with such company in connection with promotional materials purchased during the three-months ended September 30, 2009 and 2008 were $0.3 million and $0.2 million, respectively.  Expenses incurred with such company in connection with promotional materials purchased were $0.7 million and $0.6 million for the nine-months ended September 30, 2009 and 2008, respectively.

 

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Our Business

 

Overview

 

We develop, market, sell and distribute “alternative” beverage category natural sodas, fruit juices, juice blends, juice drinks, energy drinks and energy sports drinks, fruit juice smoothies and “functional” drinks, non-carbonated ready-to-drink iced teas, children’s multi-vitamin juice drinks, Junior Juice® juices, Junior Juice Water and flavored sparkling beverages under the Hansen’s® brand name.  We also develop, market, sell and distribute energy drinks under the following brand names: Monster Energy®; Monster Hitman Energy Shooter™ and Lost® Energy™ brand names as well as Rumba®, Samba and Tango brand energy juices.  We also market, sell and distribute the Java Monster™ line of non-carbonated dairy based coffee + energy drinks.  In May 2009, we introduced Monster Energy® Import energy drink which is packaged in 550 ml re-sealable aluminum cans and in June 2009, we introduced X-Presso Monster™-Hammer, a non-carbonated espresso energy drink packaged in 6.75-ounce aluminum cans.  Both of these products are manufactured in Europe and imported into the United States.  In July 2009, we introduced Nitrous™ Monster Energy®, a line of energy drinks which is carbonated and contains nitrous oxide, and is packaged in re-sealable 12-ounce sleek aluminum cap-cans, in three variants. Additionally, we 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.  We have marketed, sold and distributed enhanced water beverages under the Vidration™ brand name since July 2008.

 

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 Monster Energy® brand energy drinks include Monster Energy® drinks (introduced in April 2002), lo-carb Monster Energy® drinks (introduced in August 2003), Monster Energy® Assault® energy drinks (introduced in September 2004), Monster Energy® KhaosTM energy drinks (introduced in August 2005), Monster Energy® M-80TM energy drinks (introduced in March 2007, named “RIPPER” in certain countries), Monster Energy® Heavy Metal™ energy drinks (introduced in November 2007), Monster Energy® MIXXD™ energy drinks (introduced in December 2007)  and Monster Energy® Import (introduced in May 2009).

 

The Company intends to launch a new line of ready-to-drink iced teas in 23-ounce cans under the “Peace Tea” brand name.  The Peace Tea line will initially be launched in four flavors: green tea, imported Ceylon tea, sweet lemon tea and razzleberry tea.

 

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Our Java MonsterTM line of non-carbonated dairy based coffee + energy drinks include Java Monster™ Originale™, Java Monster™ Loca Moca®, Java Monster™ Mean Bean® (each introduced in April 2007), Java Monster™ Russian, Java Monster™ Irish Blend™, Java Monster™ Chai Hai™, Java Monster™ Nut Up™, Java Monster™  and Lo-Ball (each introduced in December 2007).

 

A substantial portion of our gross sales are derived from our Monster Energy® brand energy drinks and our Java MonsterTM product line.  Any decrease in sales of our Monster Energy® brand energy drinks and/or Java MonsterTM product line and/or our Nitrous™ Monster Energy® drinks could cause a significant adverse effect on our future revenues and net income.  Our DSD segment represented 91.7% and 90.4% of our net sales for the three-months ended September 30, 2009 and 2008, respectively.  Our DSD segment represented 91.7% and 90.6% of our net sales for the nine-months ended September 30, 2009 and 2008, respectively.  Competitive pressure in the energy drink category could adversely affect our operating results.

 

Our sales and marketing strategy for all our beverages 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 offer samples of 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, racks, coolers and barrel coolers, prize promotions, price promotions, competitions, endorsements from selected public and extreme sports figures, coupons, sampling and sponsorship of selected causes.  In-store posters, outdoor posters, print, radio and television advertising, together with price promotions and coupons, may also be used to promote our brands.  Our extreme sports team endorsements include teams such as the Pro Circuit — Kawasaki Motocross and Supercross teams, Kawasaki Factory Motocross and Supercross teams, Robby Gordon Racing Team, Ken Block Rally Racing Team and the Tech 3 Moto GP Team.  Our individual athlete and/or personality endorsements include extreme sports figures and athletes such as NASCAR Camping World Truck Series racer Ricky Carmichael, World Champion Moto GP motorcycle racer Valentino Rossi, World Champion Formula 1 racer Jensen Button, television personalities such as Rob Dyrdek as well as many other athletes that compete in other extreme sports related activities, particularly, the Winter and Summer X-Games, supercross, motocross, freestyle motocross, endurocross, Moto GP racing, Formula 1 racing, surfing, skateboarding, wakeboarding, skiing, snowboarding, BMX, mountain biking, snowmobile freestyle, snowmobile racing, NASCAR racing, off-road truck racing, rally racing, etc.  Our event endorsements include a wide range of events such as the Monster Energy® Supercross Series, the AMA Pro Motocross Championship Series, the Vans Warped Tour, the Australian SuperX Supercross Series as well as events run by our marketing entities X-Truck, Inc. and Epicenter Music Festival, LLC.

 

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.

 

Our gross sales* of $355.0 million for the three-months ended September 30, 2009 represented record sales for our third fiscal quarter.  The increase in gross sales for the three-months ended September 30, 2009 was primarily attributable to increased sales of our Monster Energy® brand energy drinks.

 

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* 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 procedures. 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.

 

Gross sales to customers outside the United States amounted to $50.0 million and $30.7 million for the three-months ended September 30, 2009 and 2008, respectively. Such sales were approximately 14.0% and 9.5% of gross sales for the three-months ended September 30, 2009 and 2008, respectively.  Gross sales to customers outside the United States amounted to $124.6 million and $77.7 million for the nine-months ended September 30, 2009 and 2008, respectively.  Such sales were approximately 12.7% and 8.7% of gross sales for the nine-months ended September 30, 2009 and 2008, respectively.  Gross sales to customers outside the United States of $0.4 million and $1.7 million for the three- and nine-months ended September 30, 2008, respectively, have been reclassified to gross sales within the United States from the amounts previously reported.

 

Our customers are primarily full service beverage distributors, retail grocery and specialty chains, wholesalers, club stores, drug chains, mass merchandisers, convenience chains, health food distributors and food service customers.  Gross sales to our various customer types for the three- and nine-months ended September 30, 2009 and 2008 are reflected below.  Such information reflects sales made by us directly to the customer types concerned, which include our full service beverage distributors.  Such full service beverage distributors in turn sell certain of our products to the same customer types. We do not have complete details of their sales of our products to their respective customer types and therefore limit our description of our customer types to include our sales to such full service distributors without reference to their sales to their own customers.  The allocations below reflect changes made by us to the categories historically reported.

 

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Three-Months Ended
September 30,

 

Nine-Months Ended
September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Full service distributors

 

65%

 

68%

 

65%

 

67%

 

Club stores, drug chains & mass merchandisers

 

12%

 

12%

 

13%

 

13%

 

Outside the U.S.

 

14%

 

10%

 

13%

 

9%

 

Retail grocery, specialty chains and wholesalers

 

6%

 

8%

 

6%

 

8%

 

Other

 

3%

 

2%

 

3%

 

3%

 

 

Our customers include Coca-Cola Enterprises, Inc. (“CCE”), Coca-Cola Bottling Company, CCBCC Operations, LLC, United Bottling Contracts Company, LLC and other Coca-Cola Company independent bottlers (collectively, the “TCCC North American Bottlers”), Wal-Mart, Inc. (including Sam’s Club), select Anheuser-Busch, Inc. (“AB”) distributors (the “AB Distributors”), Kalil Bottling Group, Trader Joe’s, John Lenore & Company, Pepsi Canada (terminated by us effective December 31, 2008), Swire Coca-Cola, Costco, The Kroger Co., Safeway Inc. and SUPERVALU, Inc.  A decision by any large customer to decrease amounts purchased from the Company or to cease carrying our products could have a material adverse effect on our financial condition and consolidated results of operations.  CCE, a customer of the DSD segment with sales within specific markets in the United States, Canada, the United Kingdom and certain countries in Europe, accounted for approximately 30% of our net sales for both the three- and nine-months ended September 30, 2009, respectively.  Dr. Pepper Snapple Group, Inc. (the “DPS Group”), a former customer of the DSD division, accounted for approximately 14% and 16% of our net sales for the three- and nine-months ended September 30, 2008, respectively.  Our distribution agreement with the DPS Group was terminated by us effective November 9, 2008.  The terminated DPS Group territories are now serviced by a combination of TCCC North American Bottlers and AB Distributors.

 

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Results of Operations

 

The following table sets forth key statistics for the three- and nine-months ended September 30, 2009 and 2008, respectively.

 

 

 

Three-Months Ended
September 30,

 

Percentage
Change

 

Nine-Months Ended
September 30,

 

Percentage
Change

 

 

 

2009

 

2008

 

09 vs. 08

 

2009

 

2008

 

09 vs. 08

 

Gross sales, net of discounts & returns * (1)

 

$

355,048

 

$

325,152

 

9.2

%

$

979,732

 

$

893,284

 

9.7

%

Less: Promotional and other allowances**

 

47,119

 

40,166

 

17.3

%

127,347

 

113,876

 

11.8

%

Net sales(1)

 

307,929

 

284,986

 

8.1

%

852,385

 

779,408

 

9.4

%

Cost of sales

 

142,897

 

135,550

 

5.4

%

395,345

 

379,039

 

4.3

%

Gross profit

 

165,032

 

149,436

 

10.4

%

457,040

 

400,369

 

14.2

%

Gross profit margin as a percentage of net sales

 

53.6

%

52.4

%

 

 

53.6

%

51.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

72,117

 

67,644

 

6.6

%

205,565

 

197,560

 

4.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses as a percentage of net sales

 

23.4

%

23.7

%

 

 

24.1

%

25.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

92,915

 

81,792

 

13.6

%

251,475

 

202,809

 

24.0

%

Operating income as a percentage of net sales

 

30.2

%

28.7

%

 

 

29.5

%

26.0

%