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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

 

 

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 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.

 

 

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 92,431,568 shares of common stock, par value $0.005 per share, outstanding as of October 27, 2008.

 

 

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HANSEN NATURAL CORPORATION AND SUBSIDIARIES SEPTEMBER 30, 2008

 

INDEX

 

			Page No.
Part I.		FINANCIAL INFORMATION
	Item 1.	Condensed Consolidated Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007	3
		Condensed Consolidated Statements of Income for the Three- and Nine-Months Ended September 30, 2008 and 2007	4
		Condensed Consolidated Statements of Cash Flows for the Nine-Months Ended September 30, 2008 and 2007	5
		Notes to Condensed Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49
	Item 4.	Controls and Procedures	50
	Part II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	51
	Item 1A.	Risk Factors	54
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
	Item 4	Submission of Matters to a Vote of Security Holders	54
	Item 5.	Other Information	55
	Item 6.	Exhibits	55
		Signatures	56

 

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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 SEPTEMBER 30, 2008 AND DECEMBER 31, 2007

(In Thousands, Except Par Value) (Unaudited)

 

		September 30, 2008			December 31, 2007
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	256,436		$	12,440
Short-term investments		14,838			63,125
Accounts receivable, net		72,972			81,497
Inventories		110,466			98,140
Prepaid expenses and other current assets		9,181			3,755
Deferred income taxes		13,352			11,192
Total current assets		477,245			270,149
INVESTMENTS		109,530			227,085
PROPERTY AND EQUIPMENT, net		11,067			8,567
DEFERRED INCOME TAXES		16,208			14,006
INTANGIBLES, net		25,512			24,066
OTHER ASSETS		584			730
		$	640,146		$	544,603
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	60,724		$	56,766
Accrued liabilities		12,277			9,019
Accrued distributor terminations		3,841			4,312
Accrued compensation		5,100			5,827
Current portion of capital leases		673			663
Income taxes payable		5,740			6,294
Total current liabilities		88,355			82,881
DEFERRED REVENUE		37,656			39,555
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS’ EQUITY:
Common stock - $0.005 par value; 120,000 shares authorized; 96,785 shares issued and 92,432 outstanding as of September 30, 2008; 95,849 shares issued and 93,191 outstanding as of December 31, 2007		484			479
Additional paid-in capital		110,352			96,749
Retained earnings		485,128			353,648
Accumulated other comprehensive loss		(3,201		)	(47		)
Common stock in treasury, at cost; 4,354 and 2,658 shares as of September 30, 2008 and December 31, 2007, respectively		(78,628		)	(28,662		)
Total stockholders’ equity		514,135			422,167
		$	640,146		$	544,603

 

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 NINE-MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

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

 

		Three-Months Ended						Nine-Months Ended
		September 30						September 30
		2008			2007			2008			2007
NET SALES		$	284,986		$	247,211		$	779,408		$	657,826
COST OF SALES		135,550			118,829			379,039			315,555
GROSS PROFIT		149,436			128,382			400,369			342,271
OPERATING EXPENSES		67,644			55,002			197,560			175,559
OPERATING INCOME		81,792			73,380			202,809			166,712
INTEREST AND OTHER INCOME, net		2,111			2,161			8,506			5,439
INCOME BEFORE PROVISION FOR INCOME TAXES		83,903			75,541			211,315			172,151
PROVISION FOR INCOME TAXES		31,466			29,744			79,835			67,845
NET INCOME		$	52,437		$	45,797		$	131,480		$	104,306
NET INCOME PER COMMON SHARE:
Basic		$	0.57		$	0.50		$	1.42		$	1.15
Diluted		$	0.54		$	0.46		$	1.34		$	1.06
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND COMMON STOCK EQUIVALENTS:
Basic		92,337			91,572			92,852			90,589
Diluted		96,916			98,895			97,997			98,586

 

See accompanying notes to condensed consolidated financial statements.

 

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HANSEN NATURAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR NINE-MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(In Thousands) (Unaudited)

 

		Nine-Months Ended
		September 30, 2008			September 30, 2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	131,480		$	104,306
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of trademark		42			42
Depreciation and other amortization		2,559			1,488
Loss on disposal of property and equipment		87			25
Stock-based compensation		9,776			6,348
Deferred income taxes		(2,160		)	(9,632		)
Tax benefit from exercise of stock options		(2,198		)	(27,332		)
Provision for doubtful accounts		1			159
Effect on cash of changes in operating assets and liabilities:
Accounts receivable		8,524			(35,581		)
Inventories		(12,326		)	(17,012		)
Prepaid expenses and other current assets		(5,324		)	(4,654		)
Prepaid income taxes		—			(9,210		)
Accounts payable		3,958			46,310
Accrued liabilities		3,259			(6,802		)
Accrued distributor terminations		(471		)	(1,240		)
Accrued compensation		(727		)	(201		)
Income taxes payable		1,644			23,341
Deferred revenue		(1,899		)	19,747
Net cash provided by operating activities		136,225			90,102
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales and maturities of held-to-maturity investments		—			3,528
Sales of available-for-sale investments		266,978			93,878
Purchases of available-for-sale investments		(106,685		)	(192,110		)
Purchases of property and equipment		(4,333		)	(2,995		)
Proceeds from sale of property and equipment		79			257
Additions to trademarks		(1,488		)	(2,762		)
Decrease in other assets		105			104
Net cash provided by (used in) investing activities		154,656			(100,100		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt		(842		)	(602		)
Tax benefit from exercise of stock options		2,198			27,332
Issuance of common stock		1,725			7,213
Purchases of common stock held in treasury		(49,966		)	—
Net cash (used in) provided by financing activities		(46,885		)	33,943
NET INCREASE IN CASH AND CASH EQUIVALENTS		243,996			23,945
CASH AND CASH EQUIVALENTS, beginning of period		12,440			35,129
CASH AND CASH EQUIVALENTS, end of period		$	256,436		$	59,074
SUPPLEMENTAL INFORMATION:
Cash paid during the year for:
Interest		$	33		$	33
Income taxes		$	80,839		$	63,436

 

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HANSEN NATURAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(In Thousands) (Unaudited) (Continued)

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS

 

The Company entered into capital leases for the acquisition of promotional vehicles of $0.9 million and $1.0 million for the nine-months ended September 30, 2008 and 2007, respectively.

 

The Company purchased $0.05 million and $0.5 million of property, plant and equipment which was included in accounts payable as of September 30, 2008 and 2007, 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 (“Form 10-K”), for a summary of significant accounting policies utilized by Hansen Natural Corporation (“Hansen” or the “Company”) and its wholly-owned subsidiaries, Hansen Beverage Company (“HBC”), Monster LDA Company, formerly known as Hard e Beverage Company and previously known as Hard Energy Company and as CVI Ventures, Inc., Monster Energy UK Limited (Incorporated in the United Kingdom), a direct wholly owned subsidiary of HBC and Monster Energy Limited (incorporated in Ireland), a direct wholly owned subsidiary of HBC, Monster Energy AU Pty, Ltd. (incorporated in Australia), a direct wholly owned subsidiary of HBC, Blue Sky Natural Beverage Co. (“Blue Sky”), a direct wholly owned subsidiary of HBC, Hansen Junior Juice Company (“Junior Juice”), a direct wholly owned subsidiary of HBC, and other disclosures, which should be read in conjunction with this Quarterly Report on Form 10-Q (“Form 10-Q”).

 

The Company’s financial statements included in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and Securities and Exchange Commission (“SEC”) rules and regulations applicable to interim financial reporting.  They do not include all the information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP.  The information set forth in these interim condensed consolidated financial statements for the three- and nine-months ended September 30, 2008 and 2007 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 $0.1 million of customer deposit liabilities in the accompanying condensed consolidated balance sheet as of December 31, 2007 from customer deposit liabilities to accrued liabilities to conform to the current period presentation.

 

2.             RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

On January 1, 2008, the Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”), for its financial assets and liabilities. The Company’s adoption of SFAS No. 157 did not have a material impact on its financial position, results of operations or liquidity.  In accordance with Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”), the Company elected to defer until January 1, 2009 the adoption of SFAS

 

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HANSEN NATURAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

No. 157 for all nonfinancial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis. The adoption of SFAS No. 157 for those assets and liabilities within the scope of FSP 157-2 is not expected to have a material impact on the Company’s financial position, results of operations or liquidity.

 

In October 2008, the FASB issued FSP FAS No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active” (“FSP 157-3”), that clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 is effective upon issuance, including prior periods for which the financial statements have not been issued.  The adoption of FSP 157-3 did not have a material impact on the Company’s financial position, results of operations or liquidity.

 

SFAS No. 157 provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. SFAS No. 157 defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. SFAS No. 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required by the standard that the Company uses to measure fair value.

 

·      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.

 

SFAS No. 157 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.

 

On January 1, 2008, the Company adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”), which permits entities to choose to measure many financial instruments and certain other items at fair value. The adoption of SFAS No. 159 did not have an impact on the Company’s condensed consolidated financial statements as management did not elect the fair value option for any other financial instruments.

 

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HANSEN NATURAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). This standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP for non-governmental entities. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board’s amendments to Interim Auditing Standards Section 411, “The Meaning of Present Fairly in Conformity with GAAP.”  The Company does not expect the adoption of SFAS No. 162 to have a material impact on its condensed consolidated financial statements.

 

In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No.142, “Goodwill and Other Intangible Assets.” FSP 142-3 also requires expanded disclosure related to the determination of intangible asset useful lives. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. Earlier adoption is not permitted.  The Company does not expect the adoption of FSP 142-3 to have a material impact on its condensed consolidated financial statements.

 

3.             FAIR VALUE OF CERTAIN FINANCIAL ASSETS AND LIABILITIES

 

In accordance with SFAS No. 157, the following represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of September 30, 2008:

 

		Level 1			Level 2			Level 3			Total
Cash		$	15,355		$	—		$	—		$	15,355
Money market funds		180,877			—			—			180,877
U.S. Treasuries		60,204			—			—			60,204
Municipal securities		12,943			—			—			12,943
Auction rate securities		—			—			111,425			111,425
Total		$	269,379		$	—		$	111,425		$	380,804
Amounts included in:
Cash and cash equivalents		$	256,436		$	—		$	—		$	256,436
Short-term investments		12,943			—			1,895			14,838
Long-term investments		—			—			109,530			109,530
Total		$	269,379		$	—		$	111,425		$	380,804

 

The Company’s Level 3 assets are comprised of municipal or educational related or other public body notes with an auction reset feature (“auction rate securities”). The majority of these notes carry an investment grade or better credit rating and certain of the notes 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.  During the nine-months

 

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HANSEN NATURAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

ended September 30, 2008, a large portion of the auctions for these auction rate securities failed. There is no assurance that auctions on the remaining auction rate securities in the Company’s investment portfolio will succeed. The auction failures appear to 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 generally requires the issuer to pay interest at a default rate that is generally above market rates for similar instruments. The securities for which auctions have failed will continue to accrue and/or pay interest at their predetermined 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, certain of these securities are classified as long-term investments in the accompanying consolidated balance sheets.

 

A Level 3 valuation was performed for the Company’s auction rate securities as of September 30, 2008, which indicated a fair value of $111.4 million. The 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. They represent the Company’s current estimates given available data as of September 30, 2008.

 

Based on the Level 3 valuation performed as of September 30, 2008 for the purpose of complying with GAAP, the Company determined that there was a decline in fair value of its auction rate securities of $5.6 million, which was deemed temporary.  This amount has been recorded net of a tax benefit of $2.2 million, as a component of other comprehensive loss for the nine-months ended September 30, 2008. Factors considered in determining whether a loss is temporary include length of time and the extent to which the investment’s fair value has been less than the cost basis, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and the Company’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery of fair value.

 

These auction rate securities will continue to accrue and/or pay interest at their contractual rates until their respective auctions succeed.  Based on the Company’s ability to access cash and other short-term investments and based on the Company’s expected operating cash flows, the Company does not anticipate that the current lack of liquidity of these investments will have a material effect on its liquidity or working capital.  If uncertainties in the credit and capital markets continue or there are ratings downgrades on the auction rate securities held by the Company, the Company may be required to recognize other-than-temporary impairments on these long-term investments.

 

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HANSEN NATURAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The following table provides a summary of changes in fair value of the Company’s Level 3 financial assets as of September 30, 2008:

 

 

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HANSEN NATURAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

4.             INVESTMENTS

 

The following table summarizes the Company’s investments at September 30, 2008 and December 31, 2007:

 

September 30, 2008		Amortized Cost			Gross Unrealized Holding Gains			Gross Unrealized Holding Losses			Fair Value
Available-for-sale
Short-term:
Municipal securities		$	12,943		$	—		$	—		$	12,943
Auction rate securities		1,900			—			5			1,895
Long-term:
Auction rate securities		115,075			—			5,545			109,530
Total		$	129,918		$	—		$	5,550		$	124,368

 

December 31, 2007		Amortized Cost			Gross Unrealized Holding Gains			Gross Unrealized Holding Losses			Fair Value
Available-for-sale
Short-term:
Municipal securities		$	63,125		$	—		$	—		$	63,125
Long-term:
Auction rate securities		227,085			4			—			227,089
Total		$	290,210		$	4		$	—		$	290,214

 

The Company’s short-term investments as of December 31, 2007 included variable rate demand notes of $60.6 million.  Although the underlying maturities of these securities are long-term in nature, the investments are classified as short-term because they contain a ‘put’ feature which allows the holder to tender the securities at par value on seven days notice.  The ‘put’ feature is supported by a letter of credit or standby purchase agreement provided by a highly-rated commercial bank. The notes are issued by municipalities and other tax-exempt entities and the interest rate payable on these investments resets on a weekly basis.  Subsequent to December 31, 2007, the Company redeemed all its holdings of variable rate demand notes at par value.

 

5.             INVENTORIES

 

Inventories consist of the following at:

 

		September 30, 2008			December 31, 2007
Raw materials		$	27,062		$	32,293
Finished goods		83,404			65,847
		$	110,466		$	98,140

 

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HANSEN NATURAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

6.             PROPERTY AND EQUIPMENT, Net

 

Property and equipment consist of the following at:

 

		September 30, 2008			December 31, 2007
Land		$	1,417		$	—
Leasehold improvements		2,111			2,027
Furniture and office equipment		4,348			3,921
Equipment		3,093			1,937
Vehicles		6,896			5,333
		17,865			13,218
Less: accumulated depreciation and amortization		(6,798		)	(4,651		)
		$	11,067		$	8,567

 

7.             INTANGIBLES, Net

 

Intangibles consist of the following at:

 

		September 30, 2008			December 31, 2007
Amortizing trademarks		$	1,169		$	1,169
Accumulated amortization		(443		)	(401		)
		726			768
Non-amortizing trademarks		24,786			23,298
		$	25,512		$	24,066

 

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 19 years).  Amortization expense recorded was $0.01 million for both the three-months ended September 30, 2008 and 2007, respectively. Amortization expense recorded was $0.04 million for both the nine-months ended September 30, 2008 and 2007, respectively.  As of September 30, 2008, future estimated amortization expense related to amortizing trademarks through September 30, 2013 is approximately $0.05 million per year.

 

8.             COMMITMENTS AND CONTINGENCIES

 

Purchase Commitments – The Company has purchase commitments aggregating approximately $52.5 million, which represent commitments made by the Company and its subsidiaries to various suppliers of raw materials for the manufacturing and packaging of its products.  These obligations vary in terms and are due within the next twelve months.

 

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HANSEN NATURAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

In addition to the above obligations, pursuant to a can supply agreement between the Company and Rexam Beverage Can Company (“Rexam”) dated as of January 1, 2006, as amended, the Company has undertaken to purchase a minimum volume of 24-ounce resealable aluminum beverage cans over the four year period commencing from January 1, 2006 through December 31, 2009.  Under the terms of the agreement, if the Company fails to purchase the minimum volume, the Company will be obligated to reimburse Rexam for certain capital reimbursements on a pro-rated basis.  The Company’s maximum liability under this agreement as of September 30, 2008 is $4.7 million subject to compliance by Rexam with certain conditions.

 

Litigation – In August 2006, HBC filed a lawsuit against National Beverage Company, Shasta Beverages, Inc., Newbevco Inc. and Freek’N Beverage Corp. (collectively “National”) seeking an injunction and damages for trademark infringement, trademark dilution, unfair competition and deceptive trade practices based on National’s unauthorized use of HBC’s valuable and distinctive Monster Energy® trade dress in connection with a line of energy drinks it launched under the “Freek” brand name.  In June 2007, the parties entered into a confidential settlement agreement resolving the parties’ disputes in the litigation.  National subsequently repudiated the settlement agreement and HBC responded by filing a motion in the United States District Court for the Central District of California to enforce the terms of the confidential settlement agreement.  On August 14, 2007, the United States District Court entered an Order enforcing the settlement agreement and permanently enjoining National from manufacturing, distributing, shipping, marketing, selling and offering to sell “Freek” energy drinks in containers using the original “Freek” trade dress that was subject to the District Court’s preliminary injunction.  National filed a notice of appeal with the Ninth Circuit Court of Appeals of the United States.  National requested that the District Court stay this Order pending its appeal to the Ninth Circuit Court of Appeals, which was subsequently denied by the District Court.  The Ninth Circuit Court of Appeals has scheduled oral arguments for December 11, 2008.

 

In August 2006, HBC filed an action in the Federal Courts of Australia, Victoria District Registry against Bickfords Australia (Pty) Limited and Meak (Pty) Ltd. (collectively “Bickfords”), in which HBC is seeking an injunction restraining Bickfords from selling or offering for sale or promoting for sale in Australia any energy drink or beverage under the Monster Energy or Monster marks or any similar marks and for damages and costs.  The defendants cross-claimed seeking an order to restrain HBC from selling, or offering for sale, or promoting in Australia any drink product under the Monster EnergyÒ or MonsterÒ trademarks or any similar trademarks and for costs.  The trial took place in February 2007 and closing oral submissions took place in June 2007.  The Court handed down its decision on March 31, 2008, in which the Court dismissed both parties’ actions.  As a result, neither HBC nor Bickfords are restrained from using the Monster or Monster Energy marks in Australia.  HBC is appealing the Court’s decision. The appeal hearing took place on August 4 and 5, 2008 and HBC is awaiting the decision of the Court.

 

In September 2006, Christopher Chavez purporting to act on behalf of himself and a class of consumers yet to be defined filed an action in the Superior Court, of the State of California, City and County of San Francisco, against the Company and its subsidiaries for unfair business practices, false advertising, violation of California Consumers Legal Remedies Act, fraud, deceit and/or misrepresentation alleging that the Company misleadingly labels its Blue Sky beverages as

 

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originating in and/or being canned under the authority of a company located in Santa Fe, New Mexico.  Defendants removed this Superior Court action to the United States Court for the Northern District of California under the Class Action Fairness Act, and filed motions for dismissal or transfer.  On June 11, 2007, the United States District Court, Northern District of California granted the Company’s motion to dismiss Chavez’s complaint with prejudice. On June 21, 2007, Mr. Chavez noticed an appeal in the United States Court of Appeal for the Ninth Circuit.  Mr. Chavez, as the appellant, has filed his opening brief and Hansen’s response has also been filed.  The appeal has not been scheduled for hearing.

 

In January 2007, the Company’s distributor for the Riverside and San Bernardino, California territories, Gate City Beverage Company (“Gate City”), notified the Company of its intention to sell its business and requested the Company consent to the assignment of the distribution agreement with the Company.  The Company declined its consent and exercised its contractual right to terminate the Gate City distribution agreement upon thirty days prior written notice.  Gate City threatened to take “appropriate action” against the Company and third parties for what it contended was an improper termination of the distribution agreement.  The Company denied Gate City’s assertion regarding improper termination of the applicable distribution agreement.  On February 6, 2008, Gate City filed a demand for arbitration with the American Arbitration Association to be held in Orange County, California, claiming damages in an amount exceeding $5.0 million, plus attorneys’ fees and costs.  The Company disputes liability and is defending the claim. The parties are presently conducting discovery and the arbitration hearing has been set for March 30, 2009 through April 3, 2009.

 

On July 3, 2008, the Company filed a lawsuit in the Superior Court for the State of California for Los Angeles County against St. Paul Mercury Insurance Company (“St. Paul”) due to St. Paul’s failure to reimburse the Company for certain costs and expenses incurred and paid by the Company for and in connection with the investigation and defense of various proceedings relating to certain stock option grants made by the Company (the “St. Paul Complaint”).   St. Paul sold the Company a directors and officers insurance policy that covered such expenses during the pertinent time period.   St. Paul has reimbursed the Company for certain of the costs and expenses associated with the Company’s successful defense against the proceedings, but has refused to pay the remainder of the limits of its policy.  The St. Paul Complaint alleges that St. Paul is liable to the Company for the difference.   The St. Paul Complaint seeks a declaration concerning the amount the Company is owed by St. Paul and asserts claims for breach of contract and tortuous breach of the implied covenants of good faith and fair dealing.  The Company seeks damages arising from St. Paul’s breach of the policy, punitive damages, and reimbursement of the attorneys’ fees expended in the investigation and litigation. On August 1, 2008, St. Paul removed the lawsuit to the United States District Court for the Central District of California.  On August 8, 2008, St. Paul answered the St. Paul Complaint and denied that it has any further responsibility to the Company beyond the amount for which it had previously reimbursed the Company.  A trial has been preliminarily scheduled in this litigation for November 17, 2009.  The parties are presently engaged in the preliminary phases of pre-trial discovery.

 

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On July 11, 2008, the Company initiated an action against Citigroup Inc., Citigroup Global Markets, Inc. and Citi Smith Barney, in the United States District Court, Central District of California, for violations of federal securities laws and the Investment Advisors Act, arising out of the Company’s purchase of auction rate securities.  The Court has granted defendants’ motion to compel arbitration before the Financial Industry Regulatory Authority.

 

On August 28, 2008, the Company initiated an action against Oppenheimer Holdings Inc.; Oppenheimer & Co. Inc.; and Oppenheimer Asset Management Inc., in the United States District Court, Central District of California, for violations of federal securities laws and the Investment Advisors Act, arising out of the Company’s purchase of auction rate securities.  The defendants answered the complaint on October 14, 2008 denying the allegations set forth therein.

 

The 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.

 

Both actions, filed by single individual shareholders purportedly on behalf of a class of purchasers of the Company’s stock during the period May 23, 2007 through November 8, 2007 (the “Class Period”), name as defendants the Company, Rodney C. Sacks, and Hilton H. Schlosberg. The allegations of both complaints are substantially similar. Plaintiffs allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Plaintiffs allege, among other things, that during the Class Period, the defendants issued materially false and misleading statements that failed to disclose that: (i) the Company’s second quarter sales results were “materially impacted by inventory loading as customers were induced to purchase more product before the Company raised its prices in its Monster Energy drink line and its Java Monster drink line” (ii) the Company was “experiencing declining sales in its non-core drink lines” (iii) the Company was “experiencing production shortfalls with its Java Monster drink line” and (iv) as a result of the foregoing, defendants “lacked a reasonable basis for their positive statements about the Company and its prospects.” The complaints seek an unspecified amount of damages.

 

Plaintiffs’ motions for appointment of Lead Plaintiff are due by November 10, 2008.  After Lead Plaintiff is appointed, if a motion for consolidation is granted, defendants must respond within forty-five days from the date of service of any consolidated complaint or the designation of one complaint as the operative complaint in the consolidated class actions.  If a motion for consolidation is denied, then defendants must respond to the complaint forty-five days from the date on which the denial of such motion is entered on the Court’s docket.

 

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Derivative Litigation – On September 15, 2008, a derivative complaint was filed in the Superior Court of the State of California, County of Riverside, styled Stueve v. Sacks, et al. (RIC508262).  On October 15, 2008, a second derivative complaint was filed in the United States District Court for the Central District of California, styled Merckel v. Sacks, et al.  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.

 

Stueve has decided to voluntarily withdraw his complaint, which was based on factual allegations that were substantially similar to those set forth in the two securities class action complaints described above.  On October 31, 2008, the parties entered into and submitted for the Court’s approval a stipulation providing for the dismissal of the Stueve action in its entirety and without prejudice.

 

The Merckel complaint names as defendants certain current and former officers, directors, and employees of the Company and HBC, 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 the administrator of the Estate of Michael B. Schott and Hilrod Holdings, L.P.  The Company is named as a nominal defendant.  The factual allegations of the Merckel complaint are also substantially similar to those set forth in the two securities class action complaints described above.  The Merckel complaint alleges, among other things, that between May 2007 and the present, the defendants directed the Company to issue a series of improper statements concerning its business prospects. The complaint further alleges that while the Company’s shares were purportedly artificially inflated because of those improper statements, certain defendants sold Company stock while in possession of material non-public information regarding the Company’s “true” business prospects. The complaint asserts causes of action for breaches of fiduciary duties, aiding and abetting breaches of fiduciary duty, violations of Cal. Corp. Code §§ 25402 and 25403 for insider selling, and unjust enrichment. The suit seeks an unspecified amount of damages to be paid to the Company, adoption of corporate governance reforms, and equitable and injunctive relief.

 

Although the ultimate outcome of these matters cannot be determined with certainty, the Company believes that the complaints are without merit. The Company intends to vigorously defend against these lawsuits.

 

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9.             COMPREHENSIVE INCOME

 

The components of comprehensive income are as follows:

 

		Three-Months Ended						Nine-Months Ended
		September 30,						September 30,
		2008			2007			2008			2007
Net income, as reported		$	52,437		$	45,797		$	131,480		$	104,306
Other comprehensive income (loss):
Change in unrealized loss on available-for-sale securities, net of tax		28			—			(3,348		)	—
Foreign currency translation adjustments		200			—			194			—
Comprehensive income		$	52,665		$	45,797		$	128,326		$	104,306

 

The components of accumulated other comprehensive (loss) is as follows:

 

		September 30, 2008			December 31, 2007
Accumulated net unrealized loss on available-for-sale securities, net of tax benefit of $2,203		$	(3,348	)	$	—
Foreign currency translation adjustments		147			(47		)
Total accumulated other comprehensive loss		$	(3,201	)	$	(47	)

 

10.           TREASURY STOCK PURCHASE

 

During the nine-months ended September 30, 2008 the Company purchased 1.7 million shares of common stock at an average purchase price of $29.46 per share which the Company holds in treasury.

 

11.           STOCK-BASED COMPENSATION

 

The Company has two stock option plans under which shares were available for grant at September 30, 2008: the Hansen Natural Corporation Amended and Restated 2001 Stock Option Plan (the “2001 Option Plan”) and the 2005 Hansen Natural Corporation Stock Option Plan for Non-Employee Directors (the “2005 Directors Plan”).

 

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The 2001 Option Plan permits the granting of options to purchase up to 22,000,000 shares of the common stock of the Company to certain key employees or non-employees of the Company and its subsidiaries.  Options granted under the 2001 Option Plan may be incentive stock options under Section 422 of the Internal Revenue Code, as amended, non-qualified stock options or stock appreciation rights.  Stock options are exercisable at such time and in such amounts as determined by the Compensation Committee of the Board of Directors of the Company up to a ten-year period after their date of grant.  As of September 30, 2008, options to purchase 17,397,700 shares of the Company’s common stock had been granted, net of cancellations, and options to purchase 4,602,300 shares of the Company’s common stock remain available for grant under the 2001 Option Plan.

 

The 2005 Directors Plan permits the granting of options to purchase up to an aggregate of 800,000 shares of common stock of the Company to non-employee directors of the Company.  On the date of the annual meeting of stockholders at which an eligible director is initially elected, each eligible director is entitled to receive a one-time grant of an option to purchase 24,000 shares of the Company’s common stock exercisable at the closing price for a share of common stock on the date of grant. Additionally, on the fifth anniversary of the election of eligible directors elected or appointed to the Board of Directors, and each fifth anniversary thereafter, each eligible director shall receive an additional grant of an option to purchase 19,200 shares of the Company’s common stock.  Options become exercisable in four equal installments, with the grant immediately vested with respect to 25% of the grant and the remaining installments vesting on the three successive anniversaries of the date of grant; provided that all options held by an eligible director become fully and immediately exercisable upon a change in control of the Company.  Options granted under the 2005 Directors Plan that are not exercised generally expire ten years after the date of grant.  Option grants may be made under the 2005 Directors Plan for ten years from the effective date of the 2005 Directors Plan.  The 2005 Directors Plan is a “formula plan” so that a non-employee director’s participation in the 2005 Directors Plan does not affect his status as a “disinterested person” (as defined in Rule 16b-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)).  As of September 30, 2008, options to purchase 76,800 shares of the Company’s common stock had been granted under the 2005 Directors Plan, and options to purchase 723,200 shares of the Company’s common stock remained available for grant.

 

Under the Company’s stock option plans, all grants are made at prices based on the fair market value of the options on the date of grant.  Outstanding options generally vest over five years from the grant date and generally expire up to ten years after the grant date. The Company recorded $4.0 million and $2.2 million of compensation expense relating to outstanding options during the three-months ended September 30, 2008 and 2007, respectively. The Company recorded $9.8 million and $6.3 million of compensation expense relating to outstanding options during the nine-months ended September 30, 2008 and 2007, respectively.

 

The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes-Merton option pricing formula with the assumptions included in the table below. The Company records compensation expense for non-employee stock options based on the estimated fair value of the options as of the earlier of (1) the date at which a commitment for performance by the non-employee to earn the stock option is reached, or (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

 

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forfeiture rate of the options.  The following weighted-average assumptions were used to estimate the fair value of options granted during the three- and nine-months ended September 30, 2008 and 2007:

 

		Three-Months Ended September 30,				Nine-Months Ended September 30,
		2008		2007		2008		2007
Dividend yield		0.0	%	0.0	%	0.0	%	0.0	%
Expected volatility		63	%	60	%	62	%	61	%
Risk free interest rate		3.5	%	4.7	%	3.5	%	4.8	%
Expected lives		6.0 Years		5.5 Years		5.6 Years		5.6 Years

 

The following table summarizes the Company’s activities with respect to its stock option plans for the nine-months ended September 30, 2008 as follows:

 

Options		Number of Shares (In Thousands)		Weighted- Average Exercise Price Per Share			Weighted- Average Remaining Contractual Term (In Years)		Aggregate Intrinsic Value
Balance at Jaunuary 1, 2008		9,462		$	7.91		6.5		$	344,589
Granted 01/01/08 - 03/31/08		40		$	41.08
Granted 04/01/08 - 06/30/08		1,479		$	31.94
Granted 07/01/08 - 09/30/08		93		$	26.93
Exercised		(937	)	$	1.84
Cancelled		(121	)	$	21.57
Outstanding at September 30, 2008		10,016		$	12.16		6.6		$	189,475
Vested and expected to vest in the future at September 30, 2008		9,658		$	11.79		6.5		$	185,947
Exercisable at September 30, 2008		4,859		$	4.99		5.4		$	123,227

 

The weighted-average grant-date fair value of options granted during the three-months ended September 30, 2008 and 2007 was $16.31 per share and $26.89 per share, respectively. The weighted-average grant-date fair value of options granted during the nine-months ended September 30, 2008 and 2007 was $18.57 per share and $23.56 per share, respectively. The total intrinsic value of options exercised during the three-months ended September 30, 2008 and 2007 was $5.7 million and $72.9 million, respectively.  The total intrinsic value of options exercised during the nine-months ended September 30, 2008 and 2007 was $28.4 million and $110.0 million, respectively.

 

Cash received from option exercises under all plans for the three-months ended September 30, 2008 and 2007 was approximately $0.5 million and $3.3 million, respectively.  Cash received from option exercises under all plans for the nine-months ended September 30, 2008 and 2007 was approximately $1.7 million and $7.2 million, respectively. The actual tax benefit realized for tax

 

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deductions from non-qualified stock option exercises and disqualifying dispositions of incentive stock options for the three-months ended September 30, 2008 and 2007 was $0.02 million and $18.0 million, respectively.  The actual tax benefit realized for tax deductions from non-qualified stock option exercises and disqualifying dispositions of incentive stock options for the nine-months ended September 30, 2008 and 2007 was $2.2 million and $27.3 million, respectively.

 

At September 30, 2008, there was $41.4 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 2.5 years.

 

12.           INCOME TAXES

 

Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (“FIN No. 48”).  FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.”  FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. This pronouncement also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

 

Upon adoption of FIN No. 48 as of January 1, 2007, the Company’s reassessment of its tax positions did not have a material impact on the consolidated financial statements.  The following is a rollforward of the Company’s total gross unrecognized tax benefits for the nine-months ended September 30, 2008 (in thousands):

 

		Gross Unrealized Tax Benefits
Balance at December 31, 2007		$	1,291
Additions for tax positions related to the current year		601
Balance at September 30, 2008		$	1,892

 

The gross unrealized tax benefits, if recognized, would result in a reduction of the Company’s provision and effective tax rate. With the adoption of FIN No. 48, the Company has decided to classify interest and penalties as a component of tax expense.  No interest and penalties on unrecognized tax benefits were accrued as of September 30, 2008.  The Company believes that the uncertainty which gives rise to the total amount of unrecognized tax benefit at September 30, 2008, will be resolved within the next 12 months.

 

On August 9, 2007, the Internal Revenue Service began its examination of the Company’s U.S. federal income tax return for the period ended December 31, 2005.  The examination is expected to be completed within the next twelve months.

 

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13.           EARNINGS PER SHARE

 

A reconciliation of the weighted average shares used in the basic and diluted earnings per common share computations for the three- and nine-months ended September 30, 2008 and 2007 is presented below:

 

		Three-Months Ended				Nine-Months Ended
		September 30,				September 30,
		2008		2007		2008		2007
Weighted-average shares outstanding:
Basic		92,337		91,572		92,852		90,589
Dilutive securities		4,579		7,323		5,145		7,997
Diluted		96,916		98,895		97,997		98,586

 

For the three-months ended September 30, 2008 and 2007, options outstanding totaling 2.1 million and 0.3 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive.  For the nine-months ended September 30, 2008 and 2007, options outstanding totaling 1.2 million and 0.2 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive.

 

14.           SEGMENT INFORMATION

 

The Company has two reportable segments, namely Direct Store Delivery (“DSD”), whose principal products comprise energy drinks, and Warehouse, whose principal products comprise juice based and soda beverages.  The DSD segment develops, markets and sells products primarily through an exclusive distributor network, whereas the Warehouse segment develops, markets and sells products primarily direct to retailers. Corporate and unallocated amounts that do not relate to DSD or Warehouse segments have been allocated to “Corporate & Unallocated.”

 

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The net revenues derived from DSD and Warehouse segments and other financial information related thereto for the three-months ended September 30, 2008 and 2007 are as follows:

 

		Three-Months Ended September 30, 2008
		DSD			Warehouse			Corporate and Unallocated			Total
Net sales		$	257,698		$	27,288		$	—		$	284,986
Contribution margin		94,743			1,097			—			95,840
Corporate and unallocated expenses		—			—			(14,048		)	(14,048		)
Operating income											81,792
Interest and other income, net		(8		)	—			2,119			2,111
Income before provision for income taxes											83,903
Depreciation and amortization		516			8			496			1,020
Trademark amortization		—			11			3			14

 

		Three-Months Ended September 30, 2007
		DSD			Warehouse			Corporate and Unallocated			Total
Net sales		$	221,888		$	25,323		$	—		$	247,211
Contribution margin		82,328			1,242			—			83,570
Corporate and unallocated expenses		—			—			(10,190		)	(10,190		)
Operating income											73,380
Interest and other income, net		(16		)	—			2,177			2,161
Income before provision for income taxes											75,541
Depreciation and amortization		238			8			324			570
Trademark amortization		—			11			3			14

 

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

 

Contribution margin for the DSD segment recognizes termination costs of ($0.2) million and $0.3 million in aggregate during the three-months ended September 30, 2008 and 2007, respectively, to certain of the Company’s distributors.

 

Corporate and unallocated expenses were $14.0 million for the three-months ended September 30, 2008 and included $8.8 million of payroll costs, of which $4.0 million was attributable to stock-based compensation expense (see Note 11, “Stock-Based Compensation”), and $2.7 million attributable to professional service expenses, including accounting and legal costs. Corporate and unallocated expenses were $10.2 million for the three-months ended September 30, 2007 and included $6.7 million of payroll costs, of which $2.2 million was attributable to stock based compensation expense (see Note 11, “Stock-Based Compensation”), and $1.8 million of professional service expenses, including accounting and legal costs. Certain items, including operating assets and income taxes, are not allocated to individual segments and therefore are not presented above.

 

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One customer made up approximately 14% of the Company’s net sales for the three-months ended September 30, 2008. Two customers made up approximately 15% and 13% respectively, of the Company’s net sales for the three-months ended September 30, 2007.

 

The net revenues derived from DSD and Warehouse segments and other financial information related thereto for the nine-months ended September 30, 2008 and 2007 are as follows:

 

		Nine-Months Ended September 30, 2008
		DSD			Warehouse			Corporate and Unallocated			Total
Net sales		$	705,974		$	73,434		$	—		$	779,408
Contribution margin		241,005			243			—			241,248
Corporate and unallocated expenses		—			—			(38,439		)	(38,439		)
Operating income											202,809
Interest and other income, net		(29		)	—			8,535			8,506
Income before provision for income taxes											211,315
Depreciation and amortization		1,091			24			1,444			2,559
Trademark amortization		—			33			9			42

 

		Nine-Months Ended September 30, 2007
		DSD			Warehouse			Corporate and Unallocated			Total
Net sales		$	585,610		$	72,216		$	—		$	657,826
Contribution margin		204,645			2,929			—			207,574
Corporate and unallocated expenses		—			—			(40,862		)	(40,862		)
Operating income											166,712
Interest and other income, net		(33		)	—			5,472			5,439
Income before provision for income taxes											172,151
Depreciation and amortization		644			24			820			1,488
Trademark amortization		—			33			9			42

 

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

 

Contribution margin for the DSD segment recognizes termination costs of ($0.04) million and $15.0 million in aggregate during the nine-months ended September 30, 2008 and 2007, respectively, to certain of the Company’s distributors.

 

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