Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

 

For the quarterly period ended September 30, 2013

 

Commission File Number 0-18761

 

 

MONSTER BEVERAGE 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.)

 

1 Monster Way

Corona, California 92879

(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 __

 

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    No __

 

 

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 ___    No  X

 

The Registrant had 167,673,196 shares of common stock, par value $0.005 per share, outstanding as of October 24, 2013.

 



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

SEPTEMBER 30, 2013

 

 

INDEX

 

Part I.

FINANCIAL INFORMATION

 

Page No.

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012

 

3

 

 

 

 

 

Condensed Consolidated Statements of Income for the Three- and Nine-Months Ended September 30, 2013 and 2012

 

4

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three- and Nine-Months Ended September 30, 2013 and 2012

 

5

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine-Months Ended September 30, 2013 and 2012

 

6

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

 

 

Item 2.

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

 

30

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

48

 

 

 

 

Item 4.

Controls and Procedures

 

48

 

 

 

 

Part II.

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

49

 

 

 

 

Item 1A.

Risk Factors

 

52

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

53

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

53

 

 

 

 

Item 4.

Mine Safety Disclosures

 

53

 

 

 

 

Item 5.

Other Information

 

53

 

 

 

 

Item 6.

Exhibits

 

53

 

 

 

 

 

Signatures

 

54

 

2



Table of Contents

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2013 AND DECEMBER 31, 2012

(In Thousands, Except Par Value) (Unaudited)

 

 

September 30,
2013

 

 

December 31,
2012

 

ASSETS

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

Cash and cash equivalents

 

  $

287,019

 

 

  $

222,514

 

Short-term investments

 

315,572

 

 

97,042

 

Accounts receivable, net

 

339,155

 

 

236,044

 

Distributor receivables

 

4,050

 

 

666

 

Inventories

 

247,368

 

 

203,106

 

Prepaid expenses and other current assets

 

29,799

 

 

24,983

 

Prepaid income taxes

 

38,516

 

 

33,709

 

Deferred income taxes

 

16,978

 

 

17,004

 

Total current assets

 

1,278,457

 

 

835,068

 

 

 

 

 

 

 

 

INVESTMENTS

 

9,725

 

 

21,393

 

PROPERTY AND EQUIPMENT, net

 

88,495

 

 

69,137

 

DEFERRED INCOME TAXES

 

61,407

 

 

59,503

 

INTANGIBLES, net

 

63,613

 

 

54,648

 

OTHER ASSETS

 

10,170

 

 

3,576

 

Total Assets

 

  $

1,511,867

 

 

  $

1,043,325

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

Accounts payable

 

  $

162,851

 

 

  $

127,330

 

Accrued liabilities

 

63,213

 

 

38,916

 

Accrued promotional allowances

 

131,103

 

 

91,208

 

Deferred revenue

 

14,702

 

 

12,695

 

Accrued compensation

 

12,826

 

 

12,926

 

Income taxes payable

 

53,577

 

 

5,470

 

Total current liabilities

 

438,272

 

 

288,545

 

 

 

 

 

 

 

 

DEFERRED REVENUE

 

113,204

 

 

110,383

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 9)

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

Common stock - $0.005 par value; 240,000 shares authorized;
205,893 shares issued and 167,653 outstanding as of September 30, 2013;
203,759 shares issued and 165,776 outstanding as of December 31, 2012

 

1,029

 

 

1,019

 

Additional paid-in capital

 

357,991

 

 

287,953

 

Retained earnings

 

1,771,219

 

 

1,508,664

 

Accumulated other comprehensive (loss) income

 

(1,134

)

 

2,074

 

Common stock in treasury, at cost; 38,240 and 37,983 shares as of September 30, 2013 and December 31, 2012, respectively

 

(1,168,714

)

 

(1,155,313

)

Total stockholders’ equity

 

960,391

 

 

644,397

 

Total Liabilities and Stockholders’ Equity

 

  $

1,511,867

 

 

  $

1,043,325

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE- AND NINE-MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three-Months Ended

 

 

Nine-Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2013

 

 

2012

 

 

2013

 

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET SALES

 

  $

590,422

 

 

  $

541,940

 

 

  $

1,705,579

 

 

  $

1,589,185

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COST OF SALES

 

282,952

 

 

268,348

 

 

809,809

 

 

767,417

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

307,470

 

 

273,592

 

 

895,770

 

 

821,768

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

156,041

 

 

132,907

 

 

457,610

 

 

385,026

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

151,429

 

 

140,685

 

 

438,160

 

 

436,742

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER (EXPENSE) INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other (expense) income, net

 

(750

)

 

331

 

 

(8,690

)

 

255

 

Gain on investments and put options, net (Note 3)

 

44

 

 

222

 

 

2,681

 

 

585

 

Total other (expense) income

 

(706

)

 

553

 

 

(6,009

)

 

840

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

 

150,723

 

 

141,238

 

 

432,151

 

 

437,582

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

58,536

 

 

55,096

 

 

169,596

 

 

165,545

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

  $

92,187

 

 

  $

86,142

 

 

  $

262,555

 

 

  $

272,037

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

  $

0.55

 

 

  $

0.49

 

 

  $

1.58

 

 

  $

1.55

 

Diluted

 

  $

0.53

 

 

  $

0.47

 

 

  $

1.51

 

 

  $

1.47

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

167,457

 

 

175,026

 

 

166,483

 

 

175,347

 

Diluted

 

173,948

 

 

183,899

 

 

173,344

 

 

185,365

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE- AND NINE-MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(In Thousands) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three-Months Ended
September 30,

 

 

Nine-Months Ended
September 30,

 

 

 

2013

 

 

2012

 

 

2013

 

 

2012

 

Net income, as reported

 

  $

92,187

 

 

  $

86,142

 

 

  $

262,555

 

 

  $

272,037

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Change in foreign currency translation

 

1,850

 

 

2,725

 

 

(1,683

)

 

2,452

 

Available-for-sale investments:

 

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized gains

 

-

 

 

-

 

 

-

 

 

-

 

Reclassification adjustment for net gains included in net income

 

-

 

 

-

 

 

(1,525

)

 

-

 

Net change in available-for-sale investments

 

-

 

 

-

 

 

(1,525

)

 

-

 

Other comprehensive income (loss)

 

1,850

 

 

2,725

 

 

(3,208

)

 

2,452

 

Comprehensive income

 

  $

94,037

 

 

  $

88,867

 

 

  $

259,347

 

 

  $

274,489

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(In Thousands) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine-Months Ended

 

 

 

September 30, 2013

 

September 30, 2012

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

 $

262,555

 

 $

272,037

 

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

 

 

 

 

 

Amortization of trademark

 

36

 

36

 

Depreciation and other amortization

 

16,408

 

15,228

 

Gain on disposal of property and equipment

 

(53)

 

(52)

 

Stock-based compensation

 

21,592

 

21,581

 

Loss on put option

 

411

 

1,110

 

Gain on investments, net

 

(3,091)

 

(1,695)

 

Deferred income taxes

 

(926)

 

2,571

 

Tax benefit from exercise of stock options

 

(30,250)

 

(4,295)

 

Effect on cash of changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(104,666)

 

(70,533)

 

Distributor receivables

 

(3,384)

 

-

 

Inventories

 

(46,687)

 

(38,646)

 

Prepaid expenses and other current assets

 

(13,026)

 

136

 

Prepaid income taxes

 

(4,906)

 

(17,974)

 

Accounts payable

 

33,731

 

27,814

 

Accrued liabilities

 

21,157

 

26,652

 

Accrued promotional allowances

 

40,175

 

(9,306)

 

Accrued distributor terminations

 

3,524

 

(77)

 

Accrued compensation

 

(51)

 

1,463

 

Income taxes payable

 

78,447

 

(3,831)

 

Deferred revenue

 

4,838

 

(4,170)

 

Net cash provided by operating activities

 

275,834

 

218,049

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Maturities of held-to-maturity investments

 

179,575

 

596,587

 

Sales of available-for-sale investments

 

5,775

 

61,950

 

Sales of trading investments

 

1,250

 

16,765

 

Purchases of held-to-maturity investments

 

(392,870)

 

(557,168)

 

Purchases of available-for-sale investments

 

-

 

(9,502)

 

Purchases of property and equipment

 

(32,612)

 

(25,813)

 

Proceeds from sale of property and equipment

 

8,762

 

238

 

Additions to intangibles

 

(9,001)

 

(4,490)

 

(Increase) decrease in other assets

 

(7,576)

 

385

 

Net cash (used in) provided by investing activities

 

(246,697)

 

78,952

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Principal payments on debt

 

(1,322)

 

(1,622)

 

Tax benefit from exercise of stock options

 

30,250

 

4,295

 

Issuance of common stock

 

18,198

 

8,368

 

Purchases of common stock held in treasury

 

(13,401)

 

(386,776)

 

Net cash provided by (used in) financing activities

 

33,725

 

(375,735)

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

1,643

 

2,457

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

64,505

 

(76,277)

 

CASH AND CASH EQUIVALENTS, beginning of period

 

222,514

 

359,331

 

CASH AND CASH EQUIVALENTS, end of period

 

 $

287,019

 

 $

283,054

 

 

 

 

 

 

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

 $

36

 

 $

40

 

Income taxes

 

 $

97,171

 

 $

184,451

 

 

See accompanying notes to condensed consolidated financial statements.

 

6



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(In Thousands) (Unaudited) (Continued)

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS

 

The Company entered into capital leases for the acquisition of promotional vehicles of $1.9 million and $1.4 million for the nine-months ended September 30, 2013 and 2012, respectively.

 

Included in accounts payable is equipment purchased of $2.0 million and $0.4 million as of September 30, 2013 and December 31, 2012, respectively.

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

7



Table of Contents

 

MONSTER BEVERAGE 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 Monster Beverage Corporation and Subsidiaries (the “Company” or, in reference to the Company’s former name, “Hansen Natural Corporation”) Annual Report on Form 10-K for the year ended December 31, 2012 (“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 nine-months ended September 30, 2013 and 2012 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.

 

2.                                    RECENT ACCOUNTING PRONOUNCEMENTS

 

In July 2013, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force)”. The amendments in this ASU provide guidance on the financial statements presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward with certain exceptions, in which case such an unrecognized tax benefit should be presented in the financial statements as a liability. The amendments in this ASU do not require new recurring disclosures. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments in ASU No. 2013-11 are not expected to have a material impact on the Company’s financial position, results of operations or liquidity.

 

8



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

In February 2013, the FASB issued ASU No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The guidance became effective for the Company on January 1, 2013. The adoption of ASU 2013-02 did not have a material impact on the Company’s financial position, results of operations or liquidity.

 

3.                                    INVESTMENTS

 

The following table summarizes the Company’s investments at:

 

September 30, 2013

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 $

6,515

 

 $

-

 

 $

-

 

 $

6,515

 

$

-

 

$

-

Municipal securities

 

302,059

 

56

 

-

 

302,115

 

-

 

-

Total

 

 $

308,574

 

 $

56

 

 $

-

 

308,630

 

 $

-

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

6,998

 

 

 

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

9,725

 

 

 

 

Total

 

 

 

 

 

 

 

 $

325,353

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

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

 

 $

16,040

 

 $

-

 

 $

-

 

 $

16,040

 

$

-

 

$

-

Certificates of deposit

 

2,201

 

-

 

-

 

2,201

 

-

 

-

Municipal securities

 

77,038

 

-

 

11

 

77,027

 

11

 

-

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

3,310

 

2,483

 

-

 

5,793

 

-

 

-

Total

 

 $

98,589

 

 $

2,483

 

 $

11

 

101,061

 

 $

11

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

1,763

 

 

 

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

15,600

 

 

 

 

Total

 

 

 

 

 

 

 

 $

118,424

 

 

 

 

 

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Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

During the nine-months ended September 30, 2013, the Company recognized $2.5 million of realized gains on the sale of available-for-sale investments. Realized gains or losses on the sale of all other investments during the nine-months ended September 30, 2013 were not significant. During the year ended December 31, 2012, realized gains or losses recognized on the sale of investments were not significant.

 

The Company recognized a net gain through earnings on its trading securities as follows:

 

 

 

Three-Months Ended
September 30,

 

Nine-Months Ended
September 30,

 

 

2013

 

2012

 

2013

 

2012

Gain on transfer from available-for-sale to trading

 

 $

-

 

 $

-

 

 $

-

 

 $

-

Gain on trading securities sold

 

140

 

27

 

140

 

1,100

Gain on trading securities held

 

71

 

80

 

468

 

579

Gain on trading securites

 

 $

211

 

 $

107

 

 $

608

 

 $

1,679

 

 

The Company’s investments at September 30, 2013 and December 31, 2012 in U.S. Treasuries, certificates of deposit and/or municipal securities carried investment grade credit ratings. All of the Company’s investments at September 30, 2013 in municipal, educational or other public body securities with an auction reset feature (“auction rate securities”) also carried investment grade credit ratings.  A portion of the Company’s investments at December 31, 2012 in auction rate securities carried investment grade credit ratings.

 

The following table summarizes the underlying contractual maturities of the Company’s investments at:

 

 

 

September 30, 2013

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

Amortized Cost

 

Fair Value

 

Amortized Cost

 

Fair Value

Less than 1 year:

 

 

 

 

 

 

 

 

U.S. Treasuries

 

 $

-

 

 $

-

 

 $

16,040

 

 $

16,040

Certificates of deposit

 

6,515

 

6,515

 

2,201

 

2,201

Municipal securities

 

302,059

 

302,115

 

77,038

 

77,027

Due 11 - 20 years:

 

 

 

 

 

 

 

 

Auction rate securities

 

10,861

 

10,861

 

10,748

 

10,748

Due 21 - 30 years:

 

 

 

 

 

 

 

 

Auction rate securities

 

5,862

 

5,862

 

9,925

 

12,408

Total

 

 $

325,297

 

 $

325,353

 

 $

115,952

 

 $

118,424

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

4.                                    FAIR VALUE OF CERTAIN FINANCIAL ASSETS AND LIABILITIES

 

Accounting Standards Codification (“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 on the sale of 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.

 

The following tables present the Company’s held-to-maturity investments at amortized cost as well as the fair value of the Company’s financial assets that are recorded at fair value on a recurring basis, segregated among the appropriate levels within the fair value hierarchy at:

 

11


 


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

September 30, 2013

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

  $

187,984

 

$

-

 

$

-

 

$

187,984

 

Money market funds

 

56,750

 

-

 

-

 

56,750

 

Certificates of deposit

 

-

 

6,515

 

-

 

6,515

 

Municipal securities

 

-

 

344,344

 

-

 

344,344

 

Auction rate securities

 

-

 

-

 

16,723

 

16,723

 

Put option related to auction rate securities

 

-

 

-

 

1,519

 

1,519

 

Total

 

  $

244,734

 

$

350,859

 

$

18,242

 

$

613,835

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

  $

244,734

 

$

42,285

 

$

-

 

$

287,019

 

Short-term investments

 

-

 

308,574

 

6,998

 

315,572

 

Investments

 

-

 

-

 

9,725

 

9,725

 

Prepaid expenses and other current assets

 

-

 

-

 

729

 

729

 

Other assets

 

-

 

-

 

790

 

790

 

Total

 

  $

244,734

 

$

350,859

 

$

18,242

 

$

613,835

 

 

December 31, 2012

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

  $

147,113

 

$

-

 

$

-

 

$

147,113

 

Money market funds

 

63,974

 

-

 

-

 

63,974

 

U.S. Treasuries

 

-

 

24,065

 

-

 

24,065

 

Certificates of deposit

 

-

 

5,603

 

-

 

5,603

 

Municipal securities

 

-

 

77,038

 

-

 

77,038

 

Auction rate securities

 

-

 

-

 

23,156

 

23,156

 

Put option related to auction rate securities

 

-

 

-

 

1,929

 

1,929

 

Total

 

  $

211,087

 

$

106,706

 

$

25,085

 

$

342,878

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

  $

211,087

 

$

11,427

 

$

-

 

$

222,514

 

Short-term investments

 

-

 

95,279

 

1,763

 

97,042

 

Investments

 

-

 

-

 

21,393

 

21,393

 

Prepaid expenses and other current assets

 

-

 

-

 

225

 

225

 

Other assets

 

-

 

-

 

1,704

 

1,704

 

Total

 

  $

211,087

 

$

106,706

 

$

25,085

 

$

342,878

 

 

 

The majority of the Company’s short-term investments are classified within Level 1 or Level 2 of the fair value hierarchy.  The Company’s valuation of its Level 1 investments, which include money market funds, is based on quoted market prices in active markets for identical securities. The Company’s valuation of its Level 2 investments, which include U.S. Treasuries, certificates of deposit and municipal securities, is based on other observable inputs, specifically a market approach which utilizes valuation models, pricing systems, mathematical tools and other relevant information for the same or similar securities. There were no transfers between Level 1 and Level 2 measurements during the nine-months ended September 30, 2013 or the year ended December 31, 2012, and there were no changes in the Company’s valuation techniques.

 

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Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The Company’s Level 3 assets are comprised of auction rate securities and put options. The Company’s Level 3 valuation utilized a mark-to-model approach which included estimates for interest rates, timing and amount of cash flows, credit and liquidity premiums, as well as 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. A significant change in any single input could have a significant valuation impact; however, no single input has a more significant impact on valuation than another. There were no changes in the Company’s valuation techniques of its Level 3 assets during the nine-months ended September 30, 2013.

 

The following table presents quantitative information related to the significant unobservable inputs utilized in the Company’s Level 3 recurring fair value measurements as of September 30, 2013.

 

 

 

Valuation Technique

 

Unobservable Input

 

Range (Weighted-Average)

Auction Rate Securities

 

Discounted cash flow

 

Maximum rate probability

 

0.34%-2.17% (1.21%)

 

 

 

 

Principal returned probability

 

76.72%-95.14% (86.75%)

 

 

 

 

Default probability

 

4.07%-22.94% (12.04%)

 

 

 

 

Liquidity risk

 

3.50%-3.50% (3.50%)

 

 

 

 

Recovery rate

 

60-60 (60)

 

 

 

 

 

 

 

Put Options

 

Discounted cash flow

 

Counterparty risk

 

0.73%-1.04% (0.83%)

 

At September 30, 2013, the Company held auction rate securities with a face value of $18.2 million (amortized cost basis of $16.7 million). A Level 3 valuation was performed on the Company’s auction rate securities as of September 30, 2013 resulting in a fair value of $16.7 million for the Company’s trading auction rate securities (after a $1.5 million impairment), which are included in short-term and long-term investments.

 

In June 2011, the Company entered into an agreement (the “2011 ARS Agreement”), related to $24.5 million of par value auction rate securities (the “2011 ARS Securities”).  Under the 2011 ARS Agreement, the Company has the right to sell the 2011 ARS Securities including all accrued but unpaid interest thereon (the “2011 Put Option”) as follows: (i) on or after July 1, 2013, up to $1.0 million aggregate par value; (ii) on or after October 1, 2013, up to an additional $1.0 million aggregate par value; and (iii) in quarterly installments thereafter based on a formula of the then outstanding 2011 ARS Securities, as adjusted for normal market redemptions, with full sale rights available on or after April 1, 2016. The 2011 ARS Securities will continue to accrue interest until redeemed through the 2011 Put Option, or as determined by the auction process, or should the auction process fail, the terms outlined in the prospectus of the respective 2011 ARS Securities. Under the 2011 ARS Agreement, the Company has the obligation, should it receive written notification from the put issuer, to sell the 2011 ARS Securities at par plus all accrued but unpaid interest. During the nine-months ended September 30, 2013, $1.0 million of 2011 ARS Securities were redeemed at par through the exercise of a portion of the 2011 Put Option and $0.3 million of 2011 ARS Securities were redeemed at par through normal market channels ($1.3 million and $3.7 million of 2011 ARS Securities were redeemed at par through normal market channels during the years ended December 31, 2012 and 2011, respectively). Subsequent to September 30, 2013, $1.0 million of 2011 ARS Securities were redeemed at par through the exercise of a portion of the 2011 Put Option. The 2011 Put Option does not meet the definition of derivative instruments under ASC 815.  Therefore, the Company elected the fair value option under ASC 825-10 in accounting for the 2011 Put Option. As of September 30, 2013, the Company recorded $1.5 million as the fair market value of the 2011 Put Option, included in prepaid expenses and other current assets, as well as in other assets, in the condensed consolidated balance sheet.

 

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Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

In March 2010, the Company entered into an agreement (the “2010 ARS Agreement”), related to $54.2 million of par value auction rate securities (the “2010 ARS Securities”).  Under the 2010 ARS Agreement, the Company had the right, but not the obligation, to sell the 2010 ARS Securities including all accrued but unpaid interest thereon (the “2010 Put Option”), under various terms. During the three-months ended March 31, 2012, the remaining $15.7 million of par value 2010 ARS Securities were redeemed at par through the exercise of the 2010 Put Option, which exhausted the Company’s rights under the 2010 ARS Agreement.

 

The net effect of (i) the revaluation of the 2011 Put Option as of September 30, 2013; (ii) the redemption at par of certain 2011 ARS Securities; (iii) the revaluation of the Company’s trading auction rate securities as of September 30, 2013; and (iv) a recognized gain resulting from the redemption of previously other-than-temporary impaired securities; resulted in a gain of $0.04 million and $2.7 million, which is included in other (expense) income for the three- and nine-months ended September 30, 2013, respectively. The net effect of (i) the revaluation of the 2011 Put Option and the 2010 Put Option as of September 30, 2012; (ii) the revaluation of the Company’s trading auction rate securities as of September 30, 2012; (iii) the redemption at par of certain 2011 ARS Securities; (iv) the redemption at par of certain 2010 ARS Securities, including those redeemed at par through the exercise of the 2010 Put Option; and (v) a recognized gain resulting from the redemption at par of a previously other-than-temporary impaired security; resulted in a gain of $0.2 million and $0.6 million, which is included in other (expense) income for the three- and nine-months ended September 30, 2012, respectively.

 

The following table provides a summary reconciliation of the Company’s financial assets that are recorded at fair value on a recurring basis using significant unobservable inputs (Level 3):

 

 

 

Three-Months Ended
September 30, 2013

 

Three-Months Ended
September 30, 2012

 

 

Auction
Rate
Securities

 

Put Options

 

Auction
Rate
Securities

 

Put Options

Opening Balance

 

  $

17,762

 

  $

1,686

 

  $

20,873

 

  $

1,816

Transfers into Level 3

 

-

 

-

 

-

 

-

Transfers out of Level 3

 

-

 

-

 

-

 

-

Total gains (losses) for the period:

 

 

 

 

 

 

 

 

Included in earnings

 

211

 

(167)

 

107

 

115

Included in other comprehensive income

 

-

 

-

 

-

 

-

Settlements

 

(1,250)

 

-

 

(225)

 

-

Closing Balance

 

  $

16,723

 

  $

1,519

 

  $

20,755

 

  $

1,931

 

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Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

 

Nine-Months Ended
September 30, 2013

 

Nine-Months Ended
September 30, 2012

 

 

Auction
Rate
Securities

 

Put Options

 

Auction
Rate
Securities

 

Put Options

Opening Balance

 

  $

23,156

 

  $

1,929

 

  $

35,852

 

  $

3,041

Transfers into Level 3

 

-

 

-

 

-

 

-

Transfers out of Level 3

 

-

 

-

 

-

 

-

Total gains (losses) for the period:

 

 

 

 

 

 

 

 

Included in earnings

 

3,091

 

(410)

 

1,693

 

(1,110)

Included in other comprehensive income

 

(2,483)

 

-

 

-

 

-

Settlements

 

(7,041)

 

-

 

(16,790)

 

-

Closing Balance

 

  $

16,723

 

  $

1,519

 

  $

20,755

 

  $

1,931

 

5.                                    INVENTORIES

 

Inventories consist of the following at:

 

 

 

September 30,
2013

 

December 31,
2012

Raw materials

 

  $

76,914

 

  $

65,010

Finished goods

 

170,454

 

138,096

 

 

  $

247,368

 

  $

203,106

 

 

6.                                   PROPERTY AND EQUIPMENT, Net

 

Property and equipment consist of the following at:

 

 

 

September 30,
2013

 

December 31,
2012

Land

 

  $

5,382

 

  $

5,382

Leasehold improvements

 

1,673

 

2,300

Furniture and fixtures

 

4,279

 

2,087

Office and computer equipment

 

14,004

 

8,981

Computer software

 

933

 

1,135

Equipment

 

59,411

 

48,427

Buildings

 

33,309

 

21,998

Vehicles

 

29,862

 

26,037

 

 

148,853

 

116,347

Less: accumulated depreciation and amortization

 

(60,358)

 

(47,210)

 

 

  $

88,495

 

  $

69,137

 

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Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

7.                                    INTANGIBLES, Net

 

Intangibles consist of the following at:

 

 

 

September 30,
2013

 

December 31,
2012

Amortizing intangibles

 

  $

1,061

 

  $

1,061

Accumulated amortization

 

(589)

 

(553)

 

 

472

 

508

Non-amortizing intangibles

 

63,141

 

54,140

 

 

  $

63,613

 

  $

54,648

 

All amortizing intangibles have been assigned an estimated useful life and such intangibles are amortized on a straight-line basis over the number of years that approximate their respective useful lives ranging from one to 25 years (weighted-average life of 20 years).  Amortization expense was $0.01 million for both the three-months ended September 30, 2013 and September 30, 2012. Amortization expense was $0.04 million for both the nine-months ended September 30, 2013 and September 30, 2012.

 

8.                                    DISTRIBUTION AGREEMENTS

 

Pursuant to new and/or amended distribution agreements entered into with certain distributors, amounts of $9.7 million from such distributors, relating to the costs associated with terminating agreements with the Company’s prior distributors, were recorded for the nine-months ended September 30, 2013. Such amounts 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 $2.0 million and $1.9 million for the three-months ended September 30, 2013 and 2012, respectively. Revenue recognized was $6.3 million for both the nine-months ended September 30, 2013 and 2012, respectively.

 

The Company incurred termination costs to certain of its prior distributors amounting to $0.4 million and $0.01 million in aggregate for the three-months ended September 30, 2013 and 2012, respectively. The Company incurred termination costs to certain of its prior distributors amounting to $10.7 million and $0.6 million in aggregate for the nine-months ended September 30, 2013 and 2012, respectively. Such termination costs have been expensed in full and are included in operating expenses for the three- and nine-months ended September 30, 2013 and 2012. Accrued distributor terminations included in accrued liabilities in the accompanying consolidated balance sheets as of September 30, 2013 and December 31, 2012 were $4.3 million and $0.9 million, respectively.

 

9.                                    COMMITMENTS AND CONTINGENCIES

 

The Company had purchase commitments aggregating approximately $34.9 million at September 30, 2013, which represented commitments made by the Company and its subsidiaries to various suppliers of raw materials for the production of its products. These obligations vary in terms, but are generally satisfied within one year.

 

16



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The Company had contractual obligations aggregating approximately $74.9 million at September 30, 2013, which related primarily to sponsorships and other marketing activities.

 

The Company had operating lease commitments aggregating approximately $16.7 million at September 30, 2013, which related primarily to warehouse and office space.

 

On August 12, 2013, the Company moved into its new corporate headquarters located in Corona, CA, which was previously acquired by the Company in October 2012.

 

Value Added Tax (“VAT”) – The Company is seeking guidance from Her Majesty’s Revenue & Customs (“HMRC”), the VAT taxing authority in the United Kingdom, to ascertain if the Company should have charged VAT to certain customers in the United Kingdom on a portion of the Company’s sales to those customers beginning in 2010.  If HMRC determines that the Company should have charged VAT on such sales, the VAT would represent only a pass-through tax to our customers in the United Kingdom. Therefore, any related adjustment should represent an accounts receivable and accounts payable gross-up on the balance sheet and have no impact on the Company’s results of operations. The Company estimates the maximum amount of the potential VAT pass-through tax to be $47.1 million at September 30, 2013 ($33.2 million at December 31, 2012). If HMRC determines that the Company should have charged VAT on such sales, it is possible that a tax penalty may be assessed by HMRC. However, the Company believes any such penalty would not have a material impact on its financial position, results of operations or liquidity.

 

Litigation – 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 “Wellman Action”).  The plaintiff alleges that the defendants misleadingly packaged and labeled Monster Energy® products in Canada by not including sufficiently specific statements with respect to contra-indications and/or adverse reactions associated with the consumption of the energy drink products.  The plaintiff’s claims against the defendants are for negligence, unjust enrichment, and making misleading/false representations in violation of the Competition Act (Canada), the Food and Drugs Act (Canada) and the Consumer Protection Act, 2002 (Ontario).  The plaintiff claims general damages on behalf of the putative class in the amount of CDN$20 million, together with punitive damages of CDN$5 million, plus legal costs and interest. The plaintiff’s certification motion materials have not yet been filed. The Company believes that any such damages, if awarded, would not have a material adverse effect on the Company’s financial position or results of operations. 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.

 

17



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

On October 17, 2012, Wendy Crossland and Richard Fournier filed a lawsuit in the Superior Court of the State of California, County of Riverside, styled Wendy Crossland and Richard Fournier v. Monster Beverage Corporation, against the Company claiming that the death of their 14 year old daughter (Anais Fournier) was caused by her consumption of two 24-ounce Monster Energy® drinks over the course of two days in December 2011.  The plaintiffs allege strict product liability, negligence, fraudulent concealment, breach of implied warranties and wrongful death.  The plaintiffs claim general damages in excess of $25,000 and punitive damages.  The Company filed a demurrer and a motion to strike the plaintiffs’ complaint on November 19, 2012, and the plaintiffs filed a first amended complaint on December 19, 2012.  The Company filed its answer to the first amended complaint on June 7, 2013.  The court set a mediation completion date of November 26, 2013 and indicated that if the parties needed additional time to complete the mediation, the mediation could be scheduled for a later date.  Discovery has commenced but no trial date has been set. The Company believes that the plaintiffs’ complaint is without merit and plans a vigorous defense.  The Company also believes that any such damages, if awarded, would not have a material adverse effect on the Company’s financial position or results of operations.

 

The Company has also been named as a defendant in other complaints containing similar allegations to those presented in the Fournier lawsuit, each of which the Company believes is also without merit and would not have a material adverse effect on the Company’s financial position or results of operations in the event any damages were awarded.

 

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. After the District Court consolidated the two actions and appointed the Structural Ironworkers Local Union #1 Pension Fund as lead plaintiff, a Consolidated Complaint for Violations of Federal Securities Laws was filed on August 28, 2009 (the “Consolidated Class Action Complaint”).

 

The Consolidated Class Action Complaint purported 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 named as defendants the Company, Rodney C. Sacks, Hilton H. Schlosberg, and Thomas J. Kelly. Plaintiff principally alleged 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 alleged that the Company’s financial statements for the second quarter of 2007 did not include certain promotional expenses.  The Consolidated Class Action Complaint alleged 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 sought an unspecified amount of damages.

 

The District Court dismissed the Consolidated Class Action Complaint, with leave to amend, on July 12, 2010. Plaintiff thereafter filed a Consolidated Amended Class Action Complaint for Violations of Federal Securities Laws on August 27, 2010 (the “Amended Class Action Complaint”).  While similar in many respects to the Consolidated Class Action Complaint, the Amended Class Action Complaint drops certain of the allegations set forth in the Consolidated Class Action Complaint and makes certain new allegations, including that the Company engaged in “channel stuffing” during the Class Period that rendered false or misleading the Company’s reported sales results and certain other statements made by the defendants.  In addition, it no longer names Thomas J. Kelly as a defendant.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

On September 4, 2012, the District Court dismissed certain of the claims in the Amended Class Action Complaint, including plaintiff’s allegations relating to promotional expenses, but denied defendants’ motion to dismiss with regard to the majority of plaintiff’s claims, including plaintiff’s channel stuffing allegations. Plaintiff filed a motion seeking class certification on December 6, 2012.  At a hearing on plaintiff’s class certification motion held on June 20, 2013, the District Court issued a tentative ruling indicating that it was inclined to deny the motion, without prejudice.  The District Court has not yet, however, issued a final ruling and the motion for class certification remains sub judice. Fact discovery in the action has been stayed pending resolution of the class certification motion.

 

The Amended Class Action Complaint seeks an unspecified amount of damages.  As a result, the amount or range of reasonably possible litigation losses to which the Company is exposed cannot be estimated. Although the ultimate outcome of this action cannot be determined with certainty, the Company believes that the allegations in the Amended Class Action Complaint are without merit.  The Company intends to vigorously defend against this lawsuit.

 

State Attorney General Inquiry – In July 2012, the Company received a subpoena from a state attorney general in connection with an investigation concerning the Company’s advertising, marketing, promotion, ingredients, usage and sale of its Monster Energy® brand of energy drinks. As the investigation is in an early stage, it is unknown what, if any, action the state attorney general may take against the Company, the relief which may be sought in the event of any such proceeding or whether such proceeding could have a material adverse effect on the Company’s business, financial condition or results of operations.

 

San Francisco City Attorney Litigation.  On October 31, 2012, the Company received a written request for information from the City Attorney for the City and County of San Francisco concerning the Company’s advertising and marketing of its Monster Energy® brand of energy drinks and specifically concerning the safety of its products for consumption by adolescents.  In a letter dated March 29, 2013, the San Francisco City Attorney threatened to bring suit against the Company if it did not agree to take the following five steps immediately:  (i) “Reformulate its product to lower the caffeine content to safe levels”; (ii) “Provide adequate warning labels”; (iii) “Cease promoting over-consumption in marketing”; (iv) “Cease use of alcohol and drug references in marketing”; and (v) “Cease targeting minors.”

 

On April 29, 2013, the Company and its wholly owned subsidiary, Monster Energy Company, filed a complaint for declaratory and injunctive relief against the San Francisco City Attorney in United States District Court for the Central District of California (the “Central District Court”), styled Monster Beverage Corp., et al. v. Dennis Herrera.  The Company seeks a declaration from the Central District Court that the San Francisco City Attorney’s investigation and demands are impermissible and preempted, subject to the doctrine of primary jurisdiction, are unconstitutional in that they violate the First and Fourteenth Amendments’ prohibitions against compelled speech,

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

content-based speech and commercial speech, are impermissibly void-for-vagueness, and/or violate the Commerce Clause.  On June 3, 2013, the City Attorney filed a motion to dismiss the Company’s complaint, arguing in part that the complaint should be dismissed in light of the San Francisco Action (described below) filed on May 6, 2013.  On August 22, 2013, the Central District Court granted in part and denied in part the City Attorney’s motion.

 

On October 17, 2013 (after the San Francisco Action described below was remanded to San Francisco Superior Court), the City Attorney filed a renewed motion to dismiss.  A hearing on that motion is scheduled for December 9, 2013.

 

On May 6, 2013, the San Francisco City Attorney filed a complaint for declaratory and injunctive relief, civil penalties and restitution for alleged violation of California’s Unfair Competition Law, Business & Professions Code sections 17200, et seq., styled People Of The State Of California ex rel. Dennis Herrera, San Francisco City Attorney v. Monster Beverage Corporation, San Francisco Superior Court (the “San Francisco Action”).  The City Attorney alleges that the Company (1) mislabeled its products as a dietary supplement, in violation of California’s Sherman Food, Drug and Cosmetic Law, California Health & Safety Code sections 109875 et. seq.; (2) is selling an “adulterated” product because caffeine is not generally recognized as safe (“GRAS”) due to the alleged lack of scientific consensus concerning the safety of the levels of caffeine in the Company’s products; and (3) is engaged in unfair and misleading business practices because its marketing (a) does not disclose the health risks that energy drinks pose for children and teens; (b) fails to warn against and promotes unsafe consumption; (c) implicitly promotes mixing of energy drinks with alcohol or drugs; and (d) is deceptive because it includes unsubstantiated claims about the purported special benefits of its “killer” ingredients and “energy blend.” The City Attorney seeks a declaration that the Company has engaged in unfair and unlawful business acts and practices in violation of the Unfair Competition Law; an injunction from performing or proposing to perform any acts in violation of the Unfair Competition Law; restitution; and civil penalties. On June 3, 2013, the Company removed the case to the United States District Court for the Northern District of California (the “Northern District Court”).  On July 3, 2013, the Company filed a motion to dismiss, stay, or transfer the action to the Central District Court.  On that same day, the City Attorney filed a motion to remand the case back to state court.  On September 18, 2013, the Northern District Court granted the City Attorney’s motion to remand.  Because of the remand, the Northern District Court did not reach the merits of the Company’s motion to dismiss, stay, or transfer the action.

 

Following remand of the San Francisco Action, the Superior Court designated the case as complex and set an initial case management conference for December 13, 2013.  The Company’s initial response to the complaint is due 30 days after the case management conference.

 

The Company denies that it has violated the Unfair Competition Law or any other law and believes that the City Attorney’s claims and demands are preempted and unconstitutional, as alleged in the action the Company filed in the Central District Court.  The Company intends to vigorously defend against this lawsuit.  At this time, no evaluation of the likelihood of an unfavorable outcome or range of potential loss can be expressed.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

In addition to the above matters, the Company has been named as a defendant in various false advertising putative class actions and in a private attorney general action, each of which contains certain allegations similar to those presented in the Wellman Action.  In these actions, plaintiffs allege that defendants misleadingly labeled and advertised Monster Energy® brand products that allegedly were ineffective for the advertised benefits (including, but not limited to, an allegation that the products do not hydrate as advertised because they contain caffeine).  The plaintiffs further allege that the Monster Energy® brand products at issue are unsafe because they contain one or more ingredients that allegedly could result in illness, injury or death. In connection with these product safety allegations, the plaintiffs claim that the product labels did not provide adequate warnings and/or that the Company did not include sufficiently specific statements with respect to contra-indications and/or adverse reactions associated with the consumption of its energy drink products (including, but not limited to, claims that certain ingredients, when consumed individually or in combination with other ingredients, could result in high blood pressure, palpitations, liver damage or other negative health effects and/or that the products themselves are unsafe).  Based on these allegations, the plaintiffs assert claims for violation of state consumer protection statutes, including unfair competition and false advertising statutes, and for breach of warranty and unjust enrichment.  In their prayers for relief, the plaintiffs seek, inter alia, compensatory and punitive damages, restitution, attorneys’ fees, and, in some cases, injunctive relief.  Furthermore, the Company is subject to litigation from time to time in the normal course of business, including intellectual property litigation and claims from terminated distributors.  Although it is not possible to predict the outcome of such litigation, based on the facts known to the Company, 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.

 

10.                            ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

 

Changes in accumulated other comprehensive (loss) income by component, after tax, for the nine-months ended September 30, 2013 are as follows:

 

 

 

Currency
Translation
Gains (Losses)

 

Unrealized
Gains (Losses)
on Available-for-
Sale Securities

 

Total

Balance at December 31, 2012

 

$

549

 

$

1,525

 

$

2,074

Other comprehensive loss before reclassifications

 

(1,683)

 

-

 

(1,683)

Amounts reclassified from accumulated other comprehensive (loss) income

 

-

 

(1,525)

1

(1,525)

Net current-period other comprehensive loss

 

(1,683)

 

(1,525)

 

(3,208)

Balance at September 30, 2013

 

$

(1,134)

 

$

-

 

$

(1,134)

 

1 Included in other (expense) income.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

11.                            TREASURY STOCK PURCHASE

 

On November 13, 2012, the Company’s Board of Directors authorized a new share repurchase program for the repurchase of up to $250.0 million of the Company’s outstanding common stock (the “November 2012 Repurchase Plan”). During the nine-months ended September 30, 2013, the Company purchased 0.257 million shares of common stock at an average purchase price of $51.99 per share for a total amount of $13.4 million (excluding broker commissions), which exhausted the availability under the November 2012 Repurchase Plan.

 

On April 7, 2013, the Company’s Board of Directors authorized a new share repurchase program for the repurchase of up to $200.0 million of the Company’s outstanding common stock (the “April 2013 Repurchase Plan”).  As of November 8, 2013, no shares have been purchased under the April 2013 Repurchase Plan.

 

During the three- and nine-months ended September 30, 2013, 87 shares and 875 shares, respectively, were purchased from employees in lieu of cash payments for options exercised or withholding taxes due for a total amount of $0.005 million and $0.05 million, respectively. While such purchases are considered common stock repurchases, they are not counted as purchases against the Company’s authorized share repurchase programs, including the April 2013 Repurchase Plan.

 

12.                            STOCK-BASED COMPENSATION

 

The Company has two stock-based compensation plans under which shares were available for grant at September 30, 2013: the Monster Beverage Corporation 2011 Omnibus Incentive Plan (the “2011 Omnibus Incentive Plan”) and the 2009 Monster Beverage Corporation Stock Incentive Plan for Non-Employee Directors (the “2009 Directors Plan”).

 

The Company recorded $7.2 million and $7.9 million of compensation expense relating to outstanding options, restricted stock awards, stock appreciation rights and restricted stock units during the three-months ended September 30, 2013 and 2012, respectively. The Company recorded $21.6 million of compensation expense relating to outstanding options, restricted stock awards, stock appreciation rights and restricted stock units during both the nine-months ended September 30, 2013 and 2012.

 

The excess tax benefit realized for tax deductions from non-qualified stock option exercises, disqualifying dispositions of incentive stock options, vesting of restricted stock units and restricted stock awards for both the three-months ended September 30, 2013 and 2012 was $1.4 million. The excess tax benefit realized for tax deductions from non-qualified stock option exercises, disqualifying dispositions of incentive stock options, vesting of restricted stock units and restricted stock awards for the nine-months ended September 30, 2013 and 2012 was $30.2 million and $4.3 million, respectively.

 

Stock Options

 

Under the Company’s stock-based compensation plans, all stock options granted as of September 30, 2013 were granted at prices based on the fair value of the Company’s common stock on the date of grant. 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 forfeiture rate of the options.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The following weighted-average assumptions were used to estimate the fair value of options granted during:

 

 

 

Three-Months Ended September 30,

 

Nine-Months Ended September 30,

 

 

 

2013¹

 

2012

 

2013

 

2012

 

Dividend yield

 

0.0 %

 

0.0 %

 

0.0 %

 

0.0 %

 

Expected volatility

 

0 %

 

47.7 %

 

47.9 %

 

47.9 %

 

Risk-free interest rate

 

0.0 %

 

0.6 %

 

0.9 %

 

0.7 %

 

Expected term

 

0.0 Years

 

5.4 Years

 

5.7 Years

 

5.4 Years

 

 

1 No options were granted during the three-months ended September 30, 2013.

 

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

 

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

 

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

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Weighted-

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

 

 

 

 

Number of

 

Exercise

 

Contractual

 

 

 

 

 

Shares (In

 

Price Per

 

Term (In

 

Aggregate

 

Options

 

Thousands)

 

Share

 

Years)

 

Intrinsic Value

 

Outstanding at January 1, 2013

 

14,000

 

$

12.12

 

4.1

 

$

572,530

 

Granted 01/01/13 - 03/31/13

 

636

 

$

47.36

 

 

 

 

 

Granted 04/01/13 - 06/30/13

 

450

 

$

54.00

 

 

 

 

 

Granted 07/01/13 - 09/30/13

 

-

 

$

-   

 

 

 

 

 

Exercised

 

(1,906)

 

$

9.55

 

 

 

 

 

Cancelled or forfeited

 

(169)

 

$

27.47

 

 

 

 

 

Outstanding at September 30, 2013

 

13,011

 

$

15.47

 

4.0

 

$

482,058

 

Vested and expected to vest in the future at September 30, 2013

 

12,650

 

$

14.66

 

3.8

 

$

478,562

 

Exercisable at September 30, 2013

 

10,033

 

$

9.05

 

2.8

 

$

433,715

 

 

No options were granted during the three-months ended September 30, 2013. The weighted-average grant-date fair value of options granted during the three-months ended September 30, 2012 was $24.88 per share. The weighted-average grant-date fair value of options granted during the nine-months ended September 30, 2013 and 2012 was $22.44 per share and $25.73 per share, respectively. The total intrinsic value of options exercised during the three-months ended September 30, 2013 and 2012 was $3.3 million and $84.6 million, respectively. The total intrinsic value of options exercised during the nine-months ended September 30, 2013 and 2012 was $87.6 million and $204.3 million, respectively.

 

Cash received from option exercises under all plans for both the three-months ended September 30, 2013 and 2012 was approximately $1.9 million. Cash received from option exercises under all plans for the nine-months ended September 30, 2013 and 2012 was approximately $18.2 million and $8.4 million, respectively.

 

At September 30, 2013, there was $42.4 million of total unrecognized compensation expense related to non-vested options granted to employees under the Company’s share-based payment plans. That cost is expected to be recognized over a weighted-average period of 2.6 years.

 

Restricted Stock Awards and Restricted Stock Units

 

Stock-based compensation cost for restricted stock awards and restricted stock units is measured based on the closing fair market value of the Company’s common stock at the date of grant. In the event that the Company has the option and intent to settle a restricted stock unit in cash, the award is classified as a liability and revalued at each balance sheet date.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The following table summarizes the Company’s activities with respect to non-vested restricted stock awards and non-vested restricted stock units as follows:

 

 

 

 

 

Weighted

 

 

 

Number of

 

Average

 

 

 

Shares (in

 

Grant-Date

 

 

 

thousands)

 

Fair Value

 

Non-vested at January 1, 2013

 

637

 

$

46.97  

 

Granted 01/01/13 - 03/31/13

 

8

 

$

50.89  

 

Granted 04/01/13 - 06/30/13

 

15

 

$

54.64  

 

Granted 07/01/13 - 09/30/13

 

-

 

$

-

 

Vested

 

(258)

 

$

43.83  

 

Forfeited/cancelled

 

(7)

 

$

58.91  

 

Non-vested at September 30, 2013

 

395

 

$

49.14  

 

 

 

No restricted stock awards or restricted stock units were granted during the three-months ended September 30, 2013. The weighted-average grant-date fair value of restricted stock units and restricted stock awards granted during the three-months ended September 30, 2012 was $59.87 per share. The weighted-average grant-date fair value of restricted stock units and restricted stock awards granted during the nine-months ended September 30, 2013 and 2012 was $53.25 and $62.31 per share, respectively. As of September 30, 2013, 0.4 million of restricted stock units and restricted stock awards are expected to vest in the future.

 

At September 30, 2013, total unrecognized compensation expense relating to non-vested restricted stock awards and non-vested restricted stock units was $16.4 million, which is expected to be recognized over a weighted-average period of 2.1 years.

 

13.                            INCOME TAXES

 

The following is a roll-forward of the Company’s total gross unrecognized tax benefits, not including interest and penalties, for the nine-months ended September 30, 2013:

 

 

 

Gross Unrealized Tax Benefits

 

Balance at December 31, 2012

 

$

926

 

Additions for tax positions related to the current year

 

-

 

Additions for tax positions related to the prior year

 

9

 

Decreases related to settlement with taxing authority

 

-

 

Balance at September 30, 2013

 

$

935

 

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Company’s condensed consolidated financial statements. As of September 30, 2013, the Company had accrued approximately $0.4 million in interest and penalties related to unrecognized tax benefits. If the Company were to prevail on all uncertain tax positions, the resultant impact on the Company’s effective tax rate would not be significant. It is expected that the amount of unrecognized tax benefits will not change within the next 12 months.

 

On March 8, 2013, the Internal Revenue Service (“IRS”) began its examination of the Company’s U.S. federal income tax returns for the years ended December 31, 2010 and 2011. The Company is also in various stages of examination with certain states.

 

The Company is subject to U.S. federal income tax as well as to income tax in multiple state and foreign jurisdictions. Federal income tax returns are subject to IRS examination for the 2010, 2011 and 2012 tax years. State income tax returns are subject to examination for the 2009 through 2012 tax years.

 

14.                            EARNINGS PER SHARE

 

A reconciliation of the weighted-average shares used in the basic and diluted earnings per common share computations is presented below:

 

 

 

Three-Months Ended

 

Nine-Months Ended

 

 

 

September 30,

 

Septemer 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

167,457

 

175,026

 

166,483

 

175,347

 

Dilutive securities

 

6,491

 

8,873

 

6,861

 

10,018

 

Diluted

 

173,948

 

183,899

 

173,344

 

185,365

 

 

For the three-months ended September 30, 2013 and 2012, options outstanding totaling 1.5 million and 0.4 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive.  For the nine-months ended September 30, 2013 and 2012, options outstanding totaling 1.2 million and 0.2 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive.

 

15.                            SEGMENT INFORMATION

 

The Company has two reportable segments, namely Direct Store Delivery (“DSD”), whose principal products comprise energy drinks, and Warehouse (“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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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The net revenues derived from the DSD and Warehouse segments and other financial information related thereto are as follows:

 

 

 

Three-Months Ended September 30, 2013

 

 

 

DSD

 

Warehouse

 

Corporate and
Unallocated

 

Total

 

Net sales

 

  $

566,768

 

  $

23,654

 

  $

-

 

  $

590,422

 

Contribution margin

 

194,915

 

(2,193)

 

-

 

192,722

 

Corporate and unallocated expenses

 

-

 

-

 

(41,293)

 

(41,293

)

Operating income

 

 

 

 

 

 

 

151,429

 

Other (expense) income

 

180

 

-

 

(886)

 

(706

)

Income before provision for income taxes

 

 

 

 

 

 

 

150,723

 

Depreciation and amortization

 

(5,069)

 

(67)

 

(960)

 

(6,096

)

Trademark amortization

 

-

 

(11)

 

(1)

 

(12

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three-Months Ended September 30, 2012

 

 

 

DSD

 

Warehouse

 

Corporate and
Unallocated

 

Total

 

Net sales

 

  $

516,268

 

  $

 25,672

 

  $

-

 

  $

 541,940

 

Contribution margin

 

170,096

 

41

 

-

 

170,137

 

Corporate and unallocated expenses

 

-

 

-

 

(29,452)

 

(29,452

)

Operating income

 

 

 

 

 

 

 

140,685

 

Other (expense) income

 

147

 

-

 

406

 

553

 

Income before provision for income taxes

 

 

 

 

 

 

 

141,238

 

Depreciation and amortization

 

(3,884)

 

(38)

 

(1,233)

 

(5,155

)

Trademark amortization

 

-

 

(11)

 

(1)

 

(12

)

 

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

 

Corporate and unallocated expenses were $41.3 million for the three-months ended September 30, 2013 and included $19.8 million of payroll costs, of which $7.2 million was attributable to stock-based compensation expense (see Note 12, “Stock-Based Compensation”), $10.9 million attributable to professional service expenses, including accounting and legal costs, and $10.6 million of other operating expenses.  Corporate and unallocated expenses were $29.5 million for the three-months ended September 30, 2012 and included $19.8 million of payroll costs, of which $7.9 million was attributable to stock-based compensation expense (see Note 12, “Stock-Based Compensation”), $4.5 million attributable to professional service expenses, including accounting and legal costs, $1.2 million of depreciation and $4.0 million of other operating expenses.

 

Coca-Cola Refreshments USA Inc. (“CCR”), a customer of the DSD segment, accounted for approximately 29% and 28% of the Company’s net sales for the three-months ended September 30, 2013 and 2012, respectively.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Net sales to customers outside the United States amounted to $121.1 million and $114.5 million for the three-months ended September 30, 2013 and 2012, respectively.

 

The net revenues derived from the DSD and Warehouse segments and other financial information related thereto are as follows:

 

 

 

Nine-Months Ended September 30, 2013

 

 

 

DSD

 

Warehouse

 

Corporate and
Unallocated

 

Total

 

Net sales

 

  $

1,627,936

 

  $

77,643

 

  $

-

 

  $

1,705,579

 

Contribution margin

 

548,906

 

(682)

 

-

 

548,224

 

Corporate and unallocated expenses

 

-

 

-

 

(110,064)

 

(110,064

)

Operating income

 

 

 

 

 

 

 

438,160

 

Other (expense) income

 

468

 

(1)

 

(6,476)

 

(6,009

)

Income before provision for income taxes

 

 

 

 

 

 

 

432,151

 

Depreciation and amortization

 

(14,091)

 

(168)

 

(2,149)

 

(16,408

)

Trademark amortization

 

-

 

(33)

 

(3)

 

(36

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine-Months Ended September 30, 2012

 

 

 

DSD

 

Warehouse

 

Corporate and
Unallocated

 

Total

 

Net sales

 

  $

1,515,476

 

  $

 73,709

 

  $

 -

 

  $

1,589,185

 

Contribution margin

 

515,010

 

3,817

 

-

 

518,827

 

Corporate and unallocated expenses

 

-

 

-

 

(82,085)

 

(82,085

)

Operating income

 

 

 

 

 

 

 

436,742

 

Other (expense) income

 

414

 

-

 

426

 

840

 

Income before provision for income taxes

 

 

 

 

 

 

 

437,582

 

Depreciation and amortization

 

(11,577)

 

(93)

 

(3,558)

 

(15,228

)

Trademark amortization

 

-

 

(33)

 

(3)

 

(36

)

 

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

 

Corporate and unallocated expenses were $110.1 million for the nine-months ended September 30, 2013 and included $60.6 million of payroll costs, of which $21.6 million was attributable to stock-based compensation expense (see Note 12, “Stock-Based Compensation”), $27.9 million attributable to professional service expenses, including accounting and legal costs, and $21.6 million of other operating expenses.  Corporate and unallocated expenses were $82.1 million for the nine-months ended September 30, 2012 and included $55.4 million of payroll costs, of which $21.6 million was attributable to stock-based compensation expense (see Note 12, “Stock-Based Compensation”), $11.6 million attributable to professional service expenses, including accounting and legal costs, $3.6 million of depreciation and $11.5 million of other operating expenses.

 

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Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Coca-Cola Refreshments USA Inc. (“CCR”), a customer of the DSD segment, accounted for approximately 29% of the Company’s net sales for both the nine-months ended September 30, 2013 and 2012, respectively.

 

Net sales to customers outside the United States amounted to $354.9 million and $318.0 million for the nine-months ended September 30, 2013 and 2012, respectively.

 

The Company’s net sales by product line were as follows: