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Monster Beverage Corp 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-10.8
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.2
  7. Ex-32.2

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 June 30, 2010

 

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 x 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 88,166,076 shares of common stock, par value $0.005 per share, outstanding as of August 2, 2010.

 

 

 



Table of Contents

 

HANSEN NATURAL CORPORATION AND SUBSIDIARIES

JUNE 30, 2010

 

INDEX

 

 

 

 

Page No.

 

 

 

 

Part I.

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009

 

3

 

 

 

 

 

Condensed Consolidated Statements of Income for the Three- and Six-Months Ended June 30, 2010 and 2009

 

4

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six-Months Ended June 30, 2010 and 2009

 

5

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

6

 

 

 

 

Item 2.

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

 

28

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

46

 

 

 

 

Item 4.

Controls and Procedures

 

48

 

 

 

 

Part II.

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

48

 

 

 

 

Item 1A.

Risk Factors

 

52

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

52

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

52

 

 

 

 

Item 4.

Reserved

 

52

 

 

 

 

Item 5.

Other Information

 

52

 

 

 

 

Item 6.

Exhibits

 

53

 

 

 

 

 

Signatures

 

53

 

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 JUNE 30, 2010 AND DECEMBER 31, 2009

(In Thousands, Except Par Value) (Unaudited)

 

 

 

June 30,
2010

 

December 31,
2009

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

409,911

 

$

328,349

 

Short-term investments

 

61,662

 

18,487

 

Trade accounts receivable, net

 

127,564

 

104,206

 

Distributor receivables

 

3,916

 

4,699

 

Inventories

 

139,233

 

108,143

 

Prepaid expenses and other current assets

 

16,577

 

11,270

 

Deferred income taxes

 

10,350

 

10,350

 

Total current assets

 

769,213

 

585,504

 

 

 

 

 

 

 

INVESTMENTS

 

59,484

 

80,836

 

PROPERTY AND EQUIPMENT, net

 

32,038

 

33,314

 

DEFERRED INCOME TAXES

 

61,065

 

65,678

 

INTANGIBLES, net

 

39,752

 

33,512

 

OTHER ASSETS

 

3,343

 

1,226

 

Total Assets

 

$

964,895

 

$

800,070

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

 

$

87,504

 

$

48,863

 

Accrued liabilities

 

34,003

 

14,174

 

Deferred revenue

 

9,452

 

9,125

 

Accrued distributor terminations

 

2,553

 

2,977

 

Accrued compensation

 

5,978

 

7,623

 

Current portion of debt

 

135

 

206

 

Income taxes payable

 

19,293

 

761

 

Total current liabilities

 

158,918

 

83,729

 

 

 

 

 

 

 

DEFERRED REVENUE

 

127,513

 

131,388

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 9)

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

Common stock - $0.005 par value; 120,000 shares authorized; 97,917 shares issued and 88,166 outstanding as of June 30, 2010; 97,285 shares issued and 88,159 outstanding as of December 31, 2009

 

490

 

486

 

Additional paid-in capital

 

157,204

 

137,040

 

Retained earnings

 

766,797

 

670,396

 

Accumulated other comprehensive loss

 

(4,185

)

(4,667

)

Common stock in treasury, at cost; 9,751 shares and 9,126 shares as of June 30, 2010 and December 31, 2009, respectively

 

(241,842

)

(218,302

)

Total stockholders’ equity

 

678,464

 

584,953

 

Total Liabilities and Stockholders’ Equity

 

$

964,895

 

$

800,070

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

HANSEN NATURAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE- AND SIX-MONTHS ENDED JUNE 30, 2010 AND 2009

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

 

 

 

Three-Months Ended

 

Six-Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

NET SALES

 

$

365,701

 

$

300,250

 

$

603,812

 

$

544,456

 

 

 

 

 

 

 

 

 

 

 

COST OF SALES

 

172,351

 

138,421

 

285,907

 

252,448

 

 

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

193,350

 

161,829

 

317,905

 

292,008

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

83,674

 

69,046

 

157,443

 

133,448

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

109,676

 

92,783

 

160,462

 

158,560

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

Interest and other income, net

 

1,034

 

401

 

1,443

 

1,418

 

Loss on investments and put option, net (Note 3)

 

(713

)

 

(137

)

(3,539

)

Total other income (expense)

 

321

 

401

 

1,306

 

(2,121

)

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

 

109,997

 

93,184

 

161,768

 

156,439

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

46,159

 

35,895

 

65,367

 

57,584

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

63,838

 

$

57,289

 

$

96,401

 

$

98,855

 

 

 

 

 

 

 

 

 

 

 

NET INCOME PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.72

 

$

0.63

 

$

1.09

 

$

1.09

 

Diluted

 

$

0.69

 

$

0.60

 

$

1.04

 

$

1.04

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Basic

 

88,587

 

90,604

 

88,467

 

90,519

 

Diluted

 

92,969

 

95,282

 

92,983

 

95,285

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

HANSEN NATURAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX-MONTHS ENDED JUNE 30, 2010 AND 2009

(In Thousands) (Unaudited)

 

 

 

Six-Months Ended

 

 

 

June 30, 2010

 

June 30, 2009

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

96,401

 

$

98,855

 

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

 

 

 

 

 

Amortization of trademark

 

24

 

44

 

Depreciation and other amortization

 

5,450

 

2,247

 

Loss on disposal of property and equipment

 

155

 

53

 

Stock-based compensation

 

8,513

 

6,460

 

Gain on put option

 

(4,100

)

 

Loss on investments, net

 

4,238

 

3,539

 

Deferred income taxes

 

2,584

 

 

Excess tax benefit from exercise of stock options

 

(6,644

)

(2,091

)

Provision for doubtful accounts

 

1,265

 

140

 

Effect on cash of changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(25,336

)

(56,645

)

Distributor receivables

 

783

 

66,728

 

Inventories

 

(32,757

)

(950

)

Prepaid expenses and other current assets

 

(3,805

)

(4,681

)

Prepaid income taxes

 

 

4,977

 

Accounts payable

 

40,231

 

(7,320

)

Accrued liabilities

 

20,480

 

13,326

 

Accrued distributor terminations

 

(424

)

(98,420

)

Accrued compensation

 

(1,636

)

(1,846

)

Income taxes payable

 

25,176

 

10,624

 

Deferred revenue

 

(3,875

)

(4,053

)

Net cash provided by operating activities

 

126,723

 

30,987

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Maturities of held-to-maturity investments

 

59,987

 

19,941

 

Sales of available-for-sale investments

 

8,500

 

13,129

 

Sales of trading investments

 

600

 

 

Purchases of held-to-maturity investments

 

(89,969

)

(29,990

)

Purchases of property and equipment

 

(4,384

)

(10,579

)

Proceeds from sale of property and equipment

 

47

 

95

 

Additions to intangibles

 

(6,264

)

(1,498

)

Decrease in other assets

 

335

 

555

 

Net cash used in investing activities

 

(31,148

)

(8,347

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Principal payments on debt

 

(239

)

(883

)

Tax benefit from exercise of stock options

 

6,644

 

2,091

 

Issuance of common stock

 

5,021

 

1,338

 

Purchases of common stock held in treasury

 

(23,540

)

 

Net cash (used in) provided by financing activities

 

(12,114

)

2,546

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(1,899

)

1,296

 

 

 

 

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

81,562

 

26,482

 

CASH AND CASH EQUIVALENTS, beginning of period

 

328,349

 

256,801

 

CASH AND CASH EQUIVALENTS, end of period

 

$

409,911

 

$

283,283

 

 

 

 

 

 

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

6

 

$

34

 

Income taxes

 

$

37,579

 

$

45,636

 

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS

 

The Company entered into capital leases for the acquisition of promotional vehicles of $0.2 million and $0.7 million for the six-months ended June 30, 2010 and 2009, respectively.

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

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 and Subsidiaries (“Hansen” or the “Company”) Annual Report on Form 10-K for the year ended December 31, 2009 (“Form 10-K”) for a summary of significant accounting policies utilized by the Company and its consolidated subsidiaries and other disclosures, which should be read in conjunction with this Quarterly Report on Form 10-Q (“Form 10-Q”).

 

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 six-months ended June 30, 2010 and 2009 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.

 

The Company has reclassified $9.1 million of current deferred revenue from accrued liabilities on the consolidated balance sheet as of December 31, 2009 in order to conform to the current year presentation as a separate line item.

 

2.                                       RECENT ACCOUNTING PRONOUNCEMENTS

 

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, “Improving Disclosures about Fair Value Measurements”. ASU 2010-06 requires additional disclosures about fair value measurements including transfers in and out of Levels 1 and 2, and a higher level of disaggregation for the different types of financial instruments. In addition, with respect to the reconciliation of Level 3 fair value measurements, information on purchases, sales, issuances and settlements, requires separate presentation. The guidance also requires disclosure of valuation techniques and inputs used for fair value measurement of the Company’s Level 3 financial assets. The Company adopted the new guidance as of March 31, 2010, except for disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements, which are required for fiscal years beginning after December 15, 2010.  The new guidance requires expanded disclosures only, and did not and is not expected to have a material effect on the Company’s financial position, results of operations and liquidity.

 

6


 


Table of Contents

 

HANSEN NATURAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

In September 2009, the FASB issued Update No. 2009-13, which updates the existing guidance regarding multiple-element revenue arrangements currently included under ASC 605-25. 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 OF CERTAIN ASSETS AND LIABILITIES

 

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.

 

7



Table of Contents

 

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 June 30, 2010 and December 31, 2009:

 

June 30, 2010

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

$

44,002

 

$

 

$

 

$

44,002

 

Money market funds

 

350,912

 

 

 

350,912

 

U.S. Treasuries

 

59,977

 

 

 

59,977

 

Auction rate securities

 

 

 

76,166

 

76,166

 

Put option related to auction rate securities

 

 

 

4,100

 

4,100

 

Total

 

$

454,891

 

$

 

$

80,266

 

$

535,157

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

409,911

 

$

 

$

 

$

409,911

 

Short-term investments

 

44,980

 

 

16,682

 

61,662

 

Investments

 

 

 

59,484

 

59,484

 

Prepaid expenses and other current assets

 

 

 

1,636

 

1,636

 

Other assets

 

 

 

2,464

 

2,464

 

Total

 

$

454,891

 

$

 

$

80,266

 

$

535,157

 

 

December 31, 2009

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

$

16,474

 

$

 

$

 

$

16,474

 

Money market funds

 

266,877

 

 

 

266,877

 

U.S. Treasuries

 

59,996

 

 

 

59,996

 

Auction rate securities

 

 

 

84,325

 

84,325

 

Total

 

$

343,347

 

$

 

$

84,325

 

$

427,672

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

328,349

 

$

 

$

 

$

328,349

 

Short-term investments

 

14,998

 

 

3,489

 

18,487

 

Investments

 

 

 

80,836

 

80,836

 

Total

 

$

343,347

 

$

 

$

84,325

 

$

427,672

 

 

8



Table of Contents

 

HANSEN NATURAL CORPORATION AND SUBSIDIARIES

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 as of June 30, 2010:

 

 

 

Level 3
Auction Rate
Securities

 

Level 3 Put
Option

 

Balance at December 31, 2009

 

$

84,325

 

$

 

Transfers to Level 3

 

 

 

Recognized gain included in income

 

 

5,092

 

Recognized loss included in income

 

(4,516

)

 

Unrealized gain included in other comprehensive loss

 

4,635

 

 

Net settlements

 

(3,675

)

 

Balance at March 31, 2010

 

$

80,769

 

$

5,092

 

Transfers to Level 3

 

 

 

Recognized gain included in income

 

279

 

 

Recognized loss included in income

 

 

(992

)

Unrealized gain included in other comprehensive loss

 

543

 

 

Net settlements

 

(5,425

)

 

Balance at June 30, 2010

 

$

76,166

 

$

4,100

 

 

The majority of 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”). A large portion 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 six-months ended June 30, 2010 and the year ended December 31, 2009, 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 June 30, 2010 and December 31, 2009, or those that the Company intends to sell prior to June 30, 2011 as a result of the agreement described below, are classified as long-term investments in the accompanying consolidated balance sheets.

 

In March 2010, the Company entered into an agreement (the “ARS Agreement”), related to $54.2 million in par value auction rate securities (“ARS Securities”).  Under the ARS Agreement, the Company has the right, but not the obligation, to sell these ARS Securities including all accrued but unpaid interest (the “Put Option”) as follows: (i) on or after March 22, 2011, up to $13.6 million

 

9



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HANSEN NATURAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

aggregate par value; and (ii) semi-annual or annual installments thereafter with full sale rights available on or after March 22, 2013. The ARS Securities will continue to accrue interest until redeemed through the Put Option, or as determined by the auction process or the terms outlined in the prospectus of the respective ARS Securities when the auction process fails. During the three-months ended June 30, 2010, $0.6 million of par value ARS Securities were redeemed through normal market channels.  Subsequent to June 30, 2010, $2.5 million of par value ARS Securities matured or were redeemed through normal market channels.

 

The ARS Agreement represents a firm commitment in accordance with ASC 815, which defines a firm commitment with an unrelated party, binding on both parties and usually legally enforceable, with the following characteristics: (i) the commitment specifies all significant terms, including the quantity to be exchanged, the fixed price, and the timing of the transaction; and (ii) the commitment includes a disincentive for nonperformance that is sufficiently large to make performance probable. The enforceability of the ARS Agreement results in a Put Option and should be recognized as a separate freestanding asset and is accounted for separately from the Company’s auction rate securities. The Put Option does not meet the definition of a derivative instrument under ASC 815.  Therefore, the Company elected the fair value option under ASC 825-10 in accounting for the Put Option.  As of June 30, 2010, the Company recorded $4.1 million ($5.1 million as of March 31, 2010) as the fair market value of the Put Option ($1.6 million current portion included in prepaid expenses and other current assets and $2.5 million long-term portion included in other assets) in the condensed consolidated balance sheet, with a corresponding (loss) gain of ($1.0) million and $4.1 million recorded in other income (expense) in the condensed consolidated statement of income for the three-and six-months ended June 30, 2010, respectively.  The valuation of the Put Option utilized a mark-to-model approach which included estimates for interest rates, timing and amount of cash flows, adjusted for any bearer risk associated with the put issuer’s ability to repurchase the ARS Securities beginning March 22, 2011, and expected holding periods for the Put Option. These assumptions are typically volatile and subject to change as the underlying data sources and market conditions evolve. The Put Option will continue to be adjusted on each balance sheet date based on its then fair value, with changes in fair value recorded in earnings.

 

At June 30, 2010, the Company held auction rate securities with a face value of $87.3 million (amortized cost basis of $78.6 million). A Level 3 valuation was performed on the Company’s auction rate securities as of June 30, 2010 resulting in a fair value of $27.2 million for the Company’s available-for-sale auction rate securities (after a $6.5 million impairment) and $49.0 million for the Company’s trading auction rate securities, which are 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.

 

ASC 320-10-65 indicates that 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

 

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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 a loss 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.

 

In connection with the ARS Agreement, during the first fiscal quarter of 2010, the Company reclassified $54.2 million of auction rate securities from available-for-sale to trading in accordance with ASC 320, as the Company has the ability and intent to exercise the related Put Option beginning March 22, 2011. As a result, the Company immediately recognized a loss on trading securities of $4.9 million through earnings during the first fiscal quarter of 2010.  In addition, the Company determined that of the $6.5 million impairment of its available-for-sale auction rate securities at June 30, 2010, $2.4 million was deemed temporary and $4.1 million was deemed other-than-temporary. The other-than-temporary impairment was deemed Credit Loss related.  The Company recorded a net $0.4 million gain through earnings as a result of the redemption, at par, of a previously other-than-temporary impaired security during the six-months ended June 30, 2010 ($3.9 million and $0.5 million had been previously deemed other-than-temporary Credit Loss related and were charged through earnings for the years ended December 31, 2009 and 2008, respectively). At June 30, 2010, $2.4 million of temporary impairment has been recorded, less a tax benefit of $1.0 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.

 

The net effect of the acquisition of the Put Option during the first fiscal quarter of 2010, the revaluation of the Put Option as of June 30, 2010, the transfer from available-for-sale to trading of the ARS Securities during the first fiscal quarter of 2010, the revaluation of trading ARS Securities as of June 30, 2010 and a recognized gain resulting from the redemption at par of a previously other-than-temporary impaired security during the first fiscal quarter of 2010, resulted in losses of $0.7 million and $0.1 million, included in other income (expense) for the three-and six-months ended June 30, 2010, respectively.

 

The Company holds additional auction rate securities that do not have a related put option.  These auction rate securities will continue to be classified as available-for-sale.  The Company intends to retain its investment in the issuers until the earlier of the anticipated recovery in market value or maturity.

 

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 uncertainties in the expected performance of the issuer of the Put Option arise, or there are rating 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 June 30, 2010 and December 31, 2009:

 

June 30, 2010

 

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

 

$

44,980

 

$

 

$

 

$

44,980

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

225

 

 

22

 

203

 

 

22

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

29,422

 

 

2,462

 

26,960

 

 

2,462

 

Total

 

$

74,627

 

$

 

$

2,484

 

72,143

 

$

 

$

2,484

 

Trading

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

16,479

 

 

 

 

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

32,524

 

 

 

 

 

Total

 

 

 

 

 

 

 

$

121,146

 

 

 

 

 

 

December 31, 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

 

$

14,998

 

$

 

$

 

$

14,998

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

3,651

 

 

162

 

3,489

 

 

162

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

88,334

 

 

7,498

 

80,836

 

 

7,498

 

Total

 

$

106,983

 

$

 

$

7,660

 

$

99,323

 

$

 

$

7,660

 

 

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

 

The following table summarizes the maturities of the Company’s investments at June 30, 2010 and December 31, 2009:

 

 

 

June 30, 2010

 

December 31, 2009

 

 

 

Amortized
Cost

 

Fair Value

 

Amortized
Cost

 

Fair Value

 

Less than 1 year

 

$

61,684

 

$

61,662

 

$

18,649

 

$

18,487

 

Due 1 - 10 years

 

 

 

300

 

282

 

Due 11 - 20 years

 

2,750

 

2,553

 

4,950

 

4,578

 

Due 21 - 30 years

 

47,083

 

44,818

 

58,925

 

53,570

 

Due 31 - 40 years

 

12,113

 

12,113

 

24,159

 

22,406

 

Total

 

$

123,630

 

$

121,146

 

$

106,983

 

$

99,323

 

 

5.                                       INVENTORIES

 

Inventories consist of the following at:

 

 

 

June 30,
2010

 

December 31,
2009

 

Raw materials

 

$

54,041

 

$

43,663

 

Finished goods

 

85,192

 

64,480

 

 

 

$

139,233

 

$

108,143

 

 

6.                                       PROPERTY AND EQUIPMENT, Net

 

Property and equipment consist of the following at:

 

 

 

June 30,
2010

 

December 31,
2009

 

Land

 

$

3,076

 

$

3,076

 

Leasehold improvements

 

2,409

 

2,365

 

Furniture and fixtures

 

1,890

 

1,752

 

Office and computer equipment

 

5,390

 

5,585

 

Computer software

 

8,345

 

8,313

 

Equipment

 

15,551

 

12,377

 

Vehicles

 

12,854

 

12,170

 

 

 

49,515

 

45,638

 

Less: accumulated depreciation and amortization

 

(17,477

)

(12,324

)

 

 

$

32,038

 

$

33,314

 

 

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

 

7.                                       INTANGIBLES, Net

 

Intangibles consist of the following at:

 

 

 

June 30,
2010

 

December 31,
2009

 

Amortizing intangibles

 

$

1,047

 

$

1,073

 

Accumulated amortization

 

(428

)

(414

)

 

 

619

 

659

 

Non-amortizing intangibles

 

39,133

 

32,853

 

 

 

$

39,752

 

$

33,512

 

 

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 June 30, 2010 and 2009, respectively.  Amortization expense was $0.02 million for both the six-months ended June 30, 2010 and 2009, respectively.

 

8.                                       DISTRIBUTION AGREEMENTS

 

Amounts received pursuant to distribution agreements entered into with certain distributors have been accounted for as deferred revenue in the accompanying condensed consolidated balance sheets and are recognized as revenue ratably over the anticipated life of the respective distribution agreement, generally 20 years. Revenue recognized was $1.9 million and $1.8 million for the three-months ended June 30, 2010 and 2009, respectively.  Revenue recognized was $3.7 million for both the six-months ended June 30, 2010 and 2009, respectively.

 

9.                                       COMMITMENTS AND CONTINGENCIES

 

The Company has purchase commitments aggregating approximately $16.7 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.

 

In addition to the above purchase obligations, pursuant to a can supply agreement between the Company and Rexam Beverage Can Company (“Rexam”), the Company has undertaken to purchase a minimum volume of 24-ounce re-sealable aluminum beverage cans through December 31, 2010.  The Company has satisfied its minimum purchase obligation under this agreement as of June 30, 2010.

 

The Company has noncancelable contractual obligations aggregating approximately $51.1 million, which are related primarily to sponsorships and other marketing activities.

 

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In 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 in North America. The Company also entered into agreements with Axon Solutions, Inc. and Vistex Inc. for the implementation and configuration of the SAP software. As of January 2010, the Company had completed its North American transition to the SAP enterprise resource planning system. The Company intends to complete the transition for its international operations over a multi-year period. The Company estimates the remaining cost for implementation of the initiative will be approximately $0.2 million.

 

Litigation — In September 2006, Christopher Chavez purporting to act on behalf of himself and a class of proposed consumers filed an action in the Superior Court of the State of California, County of San Francisco, against the Company and its subsidiaries for unfair business practices, false advertising, violation of California Consumers Legal Remedies Act (“CLRA”) fraud, deceit and/or misrepresentation alleging that the Company misleadingly labels its Blue Sky beverages as manufactured and canned/bottled wholly in Santa Fe, New Mexico.  Defendants removed this Superior Court action to the United States District Court for the Northern District of California (the “District Court”) under the Class Action Fairness Act and filed motions for dismissal or transfer.  On June 11, 2007, the District Court granted the Company’s motion to dismiss Chavez’s complaint with prejudice.  On June 23, 2009, the United States Court of Appeals for the Ninth Circuit (“Ninth Circuit”) filed a memorandum opinion reversing the decision of the District Court and remanded the case to the District Court for further proceedings.  The Company filed a motion to dismiss the CLRA claims; the plaintiff filed a motion for a decision on a preemption issue; and the plaintiff filed a motion for class certification.  The hearing for all three motions occurred on May 27, 2010.  On June 18, 2010, the District Court entered an order certifying the class, ruled that there was no preemption by federal law, and denied the Company’s motion to dismiss.  The class that the District Court certified initially consists of all persons who purchased any beverage bearing the Blue Sky mark or brand in the United States at any time between May 16, 2002 and June 30, 2006.  On July 2, 2010, the Company filed a petition with the Ninth Circuit seeking permission to file an immediate appeal to reverse the decision to certify a class.  The Company believes it has meritorious defenses to all the allegations and plans a vigorous defense.  Discovery on the merits of the claims and defenses has just begun.

 

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 Advisers Act of 1940, as amended, arising out of the Company’s purchase of auction rate securities.  The Company stipulated to arbitration before the Financial Industry Regulatory Authority (“FINRA”), where the matter is now proceeding and is expected to be rescheduled for early 2011.  The Company has voluntarily dismissed, without prejudice, its claims against Oppenheimer Asset Management, Inc.  The FINRA panel 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

 

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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 practices 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, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder, and seeks an unspecified amount of damages.

 

On November 16, 2009, the defendants filed their motion to dismiss the Consolidated Class Action Complaint pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b), as well as the Private Securities Litigation Reform Act.  On July 12, 2010, following a hearing, the District Court granted the Defendants’ motion to dismiss the Consolidated Class Action Complaint, with leave to amend, on the grounds, among others, that it failed to specify which statements Plaintiff claimed were false or misleading, failed adequately to allege that certain statements were actionable or false or misleading, and failed adequately to demonstrate that Defendants acted with scienter.  Under the Court’s order, lead plaintiff has until August 27, 2010 to file an amended complaint.

 

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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 Raymond Merckel as lead plaintiff and appointing lead counsel, and establishing a schedule for the filing of a consolidated amended complaint and for defendants’ response to such complaint.

 

On October 13, 2009, a purported Consolidated Shareholder Derivative Complaint (the “Consolidated Derivative Complaint”) was filed.  The Consolidated Derivative Complaint named 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 was named as a nominal defendant. The factual allegations of the Consolidated Derivative Complaint were similar to those set forth in the Consolidated Class Action Complaint described above.  The Consolidated Derivative Complaint alleged 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.  The Consolidated Derivative Complaint further alleged 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 asserted 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 sought an unspecified amount of damages to be paid to the Company and adoption of corporate governance reforms, among other things.

 

On January 8, 2010, the Company filed its motion to dismiss the Consolidated Derivative Complaint pursuant to Federal Rules of Civil Procedure 12(b)(6) and 23.1.  Plaintiff’s counsel filed an opposition to the motion on February 22, 2010, in which it stated that lead plaintiff Raymond Merckel was no longer communicating with counsel and that it had located another shareholder of the Company, Anastasia Brueckheimer, who was willing to act as lead plaintiff.  On March 2, 2010, Plaintiff’s counsel filed a motion to amend the Consolidated Derivative Complaint pursuant to Rule 15(a)(2) for the purpose of replacing Mr. Merckel as lead plaintiff.

 

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On July 12, 2010, the District Court held a hearing on the Company’s motion to dismiss and on Plaintiff counsel’s motion to amend the Consolidated Derivative Complaint.  In conjunction with the hearing, the District Court issued a tentative ruling that did not grant the motion to amend and instead indicated that the proposed substitute lead plaintiff, Ms. Brueckheimer, should have sought to intervene in the action pursuant to Rule 24.  The Court’s tentative ruling further stated that (assuming that Ms. Brueckheimer were allowed to substitute as lead plaintiff) the Company’s motion to dismiss the Consolidated Derivative Complaint would be granted, with leave to amend, on the ground that the allegations of demand futility were insufficient to excuse the failure to make a pre-suit demand on the Company’s Board of Directors.  Following the hearing, the District Court allowed Ms. Brueckheimer to file a motion for leave to intervene, and Ms. Brueckheimer subsequently filed a motion to intervene on July 16, 2010.  On August 5, 2010, the parties filed a stipulation and proposed order with the District Court pursuant to which Ms. Brueckheimer would be permitted to intervene in the Derivative Litigation as lead plaintiff and to file a Verified Complaint in Intervention (the “Complaint in Intervention”) similar in all material respects to the Consolidated Derivative Complaint.  Assuming the District Court enters the proposed order, the Complaint in Intervention shall be deemed to have been dismissed with leave to amend for the reasons set forth in the Court’s July 12, 2010 ruling, and Ms. Brueckheimer will have until September 7, 2010 to file a Verified Amended Consolidated Shareholder Derivative Complaint.

 

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

 

Six-Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net income, as reported

 

$

63,838

 

$

57,289

 

$

96,401

 

$

98,855

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

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

 

331

 

1,908

 

3,149

 

3,678

 

Foreign currency translation adjustments

 

(2,352

)

604

 

(2,667

)

1,344

 

Comprehensive income

 

$

61,817

 

$

59,801

 

$

96,883

 

$

103,877

 

 

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The components of accumulated other comprehensive loss are as follows:

 

 

 

June 30, 2010

 

December 31, 2009

 

Accumulated net unrealized loss on available-for-sale securities, net of tax benefit of $1.0 million and $3.1 million as of June 30, 2010 and December 31, 2009, respectively

 

$

(1,440

)

$

(4,589

)

Foreign currency translation adjustments

 

(2,745

)

(78

)

Total accumulated other comprehensive loss

 

$

(4,185

)

$

(4,667

)

 

11.                                 TREASURY STOCK PURCHASE

 

During the three-months ended June 30, 2010, the Company purchased 0.6 million shares of common stock at an average purchase price of $37.68 per share, which the Company holds in treasury.  (See Part II, Item II “Unregistered Sales of Equity Securities and Use of Proceeds”).

 

12.                                 STOCK-BASED COMPENSATION

 

The Company has two stock option plans under which shares were available for grant at June 30, 2010: 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”). At June 30, 2010, there were 4.1 million shares available for grant under the Company’s stock option plans.

 

Under the Company’s stock option plans, all grants are made at exercise prices based on the fair value of the common stock on the date of grant. The Company recorded $3.5 million and $3.7 million of compensation expense relating to outstanding options and restricted stock units (granted to outside Directors under the 2009 Directors Plan) during the three-months ended June 30, 2010 and 2009, respectively.  The Company recorded $8.5 million and $6.4 million of compensation expense relating to outstanding options and restricted stock units during the six-months ended June 30, 2010 and 2009, respectively. Refer to “Change in Estimated Forfeiture Rate” within this Note 12 for additional information.

 

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. Stock-based compensation cost for restricted stock units is measured based on the closing fair market value of the Company’s common stock at the date of grant. 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.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The following weighted-average assumptions were used to estimate the fair value of options granted during the three- and six months ended June 30, 2010 and 2009, respectively:

 

 

 

Three-Months Ended June 30,

 

Six-Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Dividend yield

 

0.0%

 

0.0%

 

0.0%

 

0.0%

 

Expected volatility

 

58.7%

 

63.5%

 

59.2%

 

64.4%

 

Risk-free interest rate

 

2.2%

 

2.5%

 

2.3%

 

2.3%

 

Expected term

 

5.7 Years

 

5.5 Years

 

5.7 Years

 

5.3 Years

 

 

Expected Volatility: The Company uses historical volatility as it provides a reasonable estimate of the expected volatility. Historical volatility is based on the most recent volatility of the stock price over a period of time equivalent to the expected term of the option.

 

Risk-Free Interest Rate: The risk-free interest rate is based on the U.S. Treasury zero coupon yield curve in effect at the time of grant for the expected term of the option.

 

Expected Term: The Company’s expected term represents the weighted-average period that the Company’s stock options are expected to be outstanding. The expected term is based on expected time to post-vesting exercise of options by employees. The Company uses historical exercise patterns of previously granted options to derive employee behavioral patterns used to forecast expected exercise patterns.

 

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

 

 

 

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, 2010

 

10,705

 

$

15.37

 

5.9

 

$

248,288

 

Granted 01/01/10 - 03/31/10

 

74

 

$

39.42

 

 

 

 

 

Granted 04/01/10 - 06/30/10

 

213

 

$

39.83

 

 

 

 

 

Exercised

 

(632

)

$

7.95

 

 

 

 

 

Cancelled or forfeited

 

(150

)

$

33.34

 

 

 

 

 

Outstanding at June 30, 2010

 

10,210

 

$

16.25

 

5.6

 

$

235,105

 

Vested and expected to vest in the future at June 30, 2010

 

9,823

 

$

15.50

 

5.4

 

$

233,496

 

Exercisable at June 30, 2010

 

7,135

 

$

9.33

 

4.4

 

$

213,153

 

 

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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 weighted-average grant-date fair value of options granted during the three-months ended June 30, 2010 and 2009 was $21.85 per share and $20.84 per share, respectively. The weighted-average grant-date fair value of options granted during the six-months ended June 30, 2010 and 2009 was $21.91 per share and $20.21 per share, respectively. The total intrinsic value of options exercised during the three-months ended June 30, 2010 and 2009 was $0.5 million and $2.1 million, respectively. The total intrinsic value of options exercised during the six-months ended June 30, 2010 and 2009 was $21.3 million and $9.7 million, respectively.

 

Cash received from option exercises under all plans for the three-months ended June 30, 2010 and 2009 was approximately $0.5 million and $0.3 million, respectively. Cash received from option exercises under all plans for the six-months ended June 30, 2010 and 2009 was approximately $5.0 million and $1.3 million, respectively. The excess tax benefit realized for tax deductions from non-qualified stock option exercises and disqualifying dispositions of incentive stock options for the three-months ended June 30, 2010 and 2009 was $0.1 million and $0.9 million, respectively. The excess tax benefit realized for tax deductions from non-qualified stock option exercises and disqualifying dispositions of incentive stock options for the six-months ended June 30, 2010 and 2009 was $6.6 million and $2.1 million, respectively.

 

At June 30, 2010, there was $48.5 million of total unrecognized compensation expense related to nonvested shares granted to both employees and non-employees under the Company’s share-based payment plans. That cost is expected to be recognized over a weighted-average period of 3.1 years.

 

On June 9, 2010, the Company granted 0.006 million restricted stock units to outside Directors vesting one year after grant date. The weighted-average grant-date fair value of the restricted stock units granted during the three-months ended June 30, 2010 was $38.40 per share. At June 30, 2010, total unrecognized compensation expense relating to unvested restricted stock units was $0.2 million, which is expected to be recognized over a weighted-average period of one year.

 

Change in Estimated Forfeiture Rate

 

During the three-months ended March 31, 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 non-senior executives.  This modification resulted in a change from a 3.0% forfeiture rate to an 11.2% forfeiture rate for the Company’s employees and non-senior executives. 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 impact of these events was a benefit of approximately $1.1 million which was included in operating expenses in the condensed consolidated statement of income for the six-months ended June 30, 2009.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

13.                                 INCOME TAXES

 

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The realization of deferred tax assets is assessed periodically based on several interrelated factors. These factors include the Company’s expectation to generate sufficient future taxable income and the projected time period over which these deferred tax assets will be realized.  A valuation allowance is recorded when necessary to reduce deferred tax assets to the amount that will more likely than not be realized.

 

During the three-months ended June 30, 2010, the Company established a full valuation allowance against a deferred tax asset, resulting from cumulative net operating losses incurred by a foreign subsidiary of the Company.  The effect of the valuation allowance and its related impact on the Company’s overall tax rate was to increase the Company’s provision for income taxes by $4.2 million for the three- and six-months ended June 30, 2010.

 

The following is a roll forward of the Company’s total gross unrecognized tax benefits, not including interest and penalties, for the six-months ended June 30, 2010:

 

 

 

Gross Unrealized Tax
Benefits

 

Balance at December 31, 2009

 

$

397

 

Additions for tax positions related to the current year

 

 

Additions for tax positions related to the prior year

 

 

Decreases related to settlement with taxing authority

 

 

Balance at June 30, 2010

 

$

397

 

 

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Company’s consolidated financial statements. As of June 30, 2010, the Company had approximately $0.04 million in interest and penalties related to recognized tax benefits accrued.  It is not expected that the amount of unrecognized tax benefits will change in the next 12 months.

 

The Company is subject to U.S. federal income tax as well as to income tax in multiple state and other jurisdictions.  Federal income tax returns of the Company are subject to IRS examination for the 2006 through 2009 tax years. State income tax returns are subject to examination for the 2005 through 2009 tax years.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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 six-months ended June 30, 2010 and 2009 is presented below:

 

 

 

Three-Months Ended

 

Six-Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

88,587

 

90,604

 

88,467

 

90,519

 

Dilutive securities

 

4,382

 

4,678

 

4,516

 

4,766

 

Diluted

 

92,969

 

95,282

 

92,983

 

95,285

 

 

For the three-months ended June 30, 2010 and 2009, options outstanding totaling 2.0 million and 2.3 million shares, respectively, were excluded from the calculations, as their effect would have been antidilutive.  For the six-months ended June 30, 2010 and 2009, options outstanding totaling 2.0 million and 2.3 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 (“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.”

 

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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 net revenues derived from the DSD and Warehouse segments and other financial information related thereto for the three-months ended June 30, 2010 and 2009 are as follows:

 

 

 

Three-Months Ended June 30, 2010

 

 

 

DSD

 

Warehouse

 

Corporate and
Unallocated

 

Total

 

Net sales

 

$

341,292

 

$

24,409

 

$

 

$

365,701

 

Contribution margin

 

129,394

 

1,832

 

 

131,226

 

Corporate and unallocated expenses

 

 

 

 

 

(21,550

)

(21,550

)

Operating income

 

 

 

 

 

 

 

109,676

 

Other income (expense)

 

(4

)

 

325

 

321

 

Income before provision for income taxes

 

 

 

 

109,997

 

Depreciation and amortization

 

1,565

 

12

 

1,232

 

2,809

 

Trademark amortization

 

 

11

 

1

 

12

 

 

 

 

Three-Months Ended June 30, 2009

 

 

 

DSD

 

Warehouse

 

Corporate and
Unallocated

 

Total

 

Net sales

 

$

273,459

 

$

26,791

 

$

 

$

300,250

 

Contribution margin

 

104,982

 

1,743

 

 

106,725

 

Corporate and unallocated expenses

 

 

 

 

 

(13,942

)

(13,942

)

Operating income

 

 

 

 

 

 

 

92,783

 

Other income (expense)

 

(17

)

 

418

 

401

 

Income before provision for income taxes

 

 

 

 

93,184

 

Depreciation and amortization

 

862

 

8

 

307

 

1,177

 

Trademark amortization

 

 

11

 

1

 

12

 

 

During the first fiscal quarter of 2010, the Company reclassified the Rumba®, Samba and Tango brand energy juices, Lost® Energy™ brand energy drinks and Vidration™ vitamin enhanced water, which were previously reported in the DSD division, to the Warehouse division and recast segment information for the first quarter of 2009. The reclassification resulted in an increase in net sales of the Warehouse division and a decrease in net sales of the DSD division of $3.0 million for the three-months ended June 30, 2009, from amounts previously reported. The reclassification also resulted in an increase in contribution margin of the Warehouse division and a decrease in contribution margin of the DSD division of $0.4 million for the three-months ended June 30, 2009,  from amounts previously reported.

 

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

 

Corporate and unallocated expenses were $21.5 million for the three-months ended June 30, 2010 and included $11.7 million of payroll costs, of which $3.5 million was attributable to stock-based compensation expense (see Note 12, “Stock-Based Compensation”), $4.8 million attributable to professional service expenses, including accounting and legal costs, $1.2 million of

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

depreciation, $1.3 million of bad debt expense and $2.5 million of other operating expenses.  Corporate and unallocated expenses were $13.9 million for the three-months ended June 30, 2009 and included $8.9 million of payroll costs, of which $3.7 million was attributable to stock-based compensation expense (see Note 12, “Stock-Based Compensation”), $2.8 million attributable to professional service expenses, including accounting and legal costs, and $2.2 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.

 

One customer accounted for approximately 35% and 31% of the Company’s net sales for the three-months ended June 30, 2010 and 2009, respectively.

 

Net sales to customers outside the United States amounted to $52.5 million and $31.4 million for the three-months ended June 30, 2010 and 2009, respectively. Such sales were approximately 14.4% and 10.4% of net sales for the three-months ended June 30, 2010 and 2009, respectively.

 

The net revenues derived from the DSD and Warehouse segments and other financial information related thereto for the six-months ended June 30, 2010 and 2009 are as follows:

 

 

 

Six-Months Ended June 30, 2010

 

 

 

DSD

 

Warehouse

 

Corporate and
Unallocated

 

Total

 

Net sales

 

$

558,446

 

$

45,366

 

$

 

$

603,812

 

Contribution margin

 

202,449

 

2,098

 

 

204,547

 

Corporate and unallocated expenses

 

 

 

 

 

(44,085

)

(44,085

)

Operating income

 

 

 

 

 

 

 

160,462

 

Other income (expense)

 

55

 

 

1,251