Quarterly Report

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

 

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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.

 

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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.

 

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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.

 

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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 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.

 

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HANSEN NATURAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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.

 

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HANSEN NATURAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

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HANSEN NATURAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

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HANSEN NATURAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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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HANSEN NATURAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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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HANSEN NATURAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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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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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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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