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 March 31, 2014

 

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 167,077,394 shares of common stock, par value $0.005 per share, outstanding as of April 28, 2014.

 



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

MARCH 31, 2014

 

 

INDEX

 

Part I.

FINANCIAL INFORMATION

 

Page No.

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013

 

3

 

 

 

 

 

Condensed Consolidated Statements of Income for the Three-Months Ended March 31, 2014 and 2013

 

4

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three-Months Ended March 31, 2014 and 2013

 

5

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three-Months Ended March 31, 2014 and 2013

 

6

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

 

 

Item 2.

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

 

26

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

38

 

 

 

 

Item 4.

Controls and Procedures

 

39

 

 

 

 

Part II. OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

39

 

 

 

 

Item 1A.

Risk Factors

 

42

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

42

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

42

 

 

 

 

Item 4.

Mine Safety Disclosures

 

42

 

 

 

 

Item 5.

Other Information

 

43

 

 

 

 

Item 6.

Exhibits

 

43

 

 

 

 

 

Signatures

 

44

 

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 MARCH 31, 2014 AND DECEMBER 31, 2013

(In Thousands, Except Par Value) (Unaudited)

 

 

March 31,
2014

 

 

December 31,
2013

 

ASSETS

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

Cash and cash equivalents

 

  $

312,020

 

 

  $

211,349

 

Short-term investments

 

438,932

 

 

402,247

 

Accounts receivable, net

 

342,140

 

 

291,638

 

Distributor receivables

 

3,646

 

 

4,542

 

Inventories

 

204,061

 

 

221,449

 

Prepaid expenses and other current assets

 

28,482

 

 

21,376

 

Prepaid income taxes

 

5,008

 

 

9,518

 

Deferred income taxes

 

20,924

 

 

20,924

 

Total current assets

 

1,355,213

 

 

1,183,043

 

 

 

 

 

 

 

 

INVESTMENTS

 

8,131

 

 

9,792

 

PROPERTY AND EQUIPMENT, net

 

91,733

 

 

88,143

 

DEFERRED INCOME TAXES

 

63,443

 

 

63,611

 

INTANGIBLES, net

 

65,525

 

 

65,774

 

OTHER ASSETS

 

9,538

 

 

10,146

 

Total Assets

 

  $

1,593,583

 

 

  $

1,420,509

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

Accounts payable

 

  $

125,581

 

 

  $

119,376

 

Accrued liabilities

 

71,959

 

 

59,113

 

Accrued promotional allowances

 

113,846

 

 

99,470

 

Deferred revenue

 

14,034

 

 

13,832

 

Accrued compensation

 

9,046

 

 

14,864

 

Income taxes payable

 

45,900

 

 

9,359

 

Total current liabilities

 

380,366

 

 

316,014

 

 

 

 

 

 

 

 

DEFERRED REVENUE

 

110,491

 

 

112,216

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

Common stock - $0.005 par value; 240,000 shares authorized;
206,266 shares issued and 167,074 outstanding as of March 31, 2014;
206,014 shares issued and 166,822 outstanding as of December 31, 2013

 

1,031

 

 

1,030

 

Additional paid-in capital

 

383,183

 

 

368,069

 

Retained earnings

 

1,942,575

 

 

1,847,325

 

Accumulated other comprehensive loss

 

(1,131

)

 

(1,233

)

Common stock in treasury, at cost; 39,192 and 39,192 shares as of March 31, 2014 and December 31, 2013, respectively

 

(1,222,932

)

 

(1,222,912

)

Total stockholders’ equity

 

1,102,726

 

 

992,279

 

Total Liabilities and Stockholders’ Equity

 

  $

1,593,583

 

 

  $

1,420,509

 

 

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-MONTHS ENDED MARCH 31, 2014 AND 2013

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

 

 

 

 

 

 

Three-Months Ended

 

 

 

March 31,

 

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

NET SALES

 

  $

536,129

 

 

  $

484,223

 

 

 

 

 

 

 

 

COST OF SALES

 

249,311

 

 

232,184

 

 

 

 

 

 

 

 

GROSS PROFIT

 

286,818

 

 

252,039

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

137,955

 

 

144,733

 

 

 

 

 

 

 

 

OPERATING INCOME

 

148,863

 

 

107,306

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

Interest and other income (expense), net

 

155

 

 

(4,473

)

(Loss) gain on investments and put options, net (Note 3)

 

(1

)

 

2,571

 

Total other income (expense)

 

154

 

 

(1,902

)

 

 

 

 

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

 

149,017

 

 

105,404

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

53,767

 

 

41,908

 

 

 

 

 

 

 

 

NET INCOME

 

  $

95,250

 

 

  $

63,496

 

 

 

 

 

 

 

 

NET INCOME PER COMMON SHARE:

 

 

 

 

 

 

Basic

 

  $

0.57

 

 

  $

0.38

 

Diluted

 

  $

0.55

 

 

  $

0.37

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Basic

 

166,913

 

 

165,525

 

Diluted

 

173,741

 

 

172,559

 

 

 

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-MONTHS ENDED MARCH 31, 2014 AND 2013

(In Thousands) (Unaudited)

 

 

 

 

 

 

 

 

 

Three-Months Ended
March 31,

 

 

 

2014

 

 

2013

 

Net income, as reported

 

  $

95,250

 

 

  $

63,496

 

Other comprehensive income (loss):

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

102

 

 

(1,092

)

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)

 

102

 

 

(2,617

)

Comprehensive income

 

  $

95,352

 

 

  $

60,879

 

 

 

 

 

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 THREE-MONTHS ENDED MARCH 31, 2014 AND 2013

(In Thousands) (Unaudited)

 

 

Three-Months Ended

 

 

 

March 31, 2014

 

March 31, 2013

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

 $

95,250

 

 $

63,496

 

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

 

 

 

 

 

Depreciation and amortization

 

6,453

 

5,060

 

Gain on disposal of property and equipment

 

(100)

 

(2)

 

Stock-based compensation

 

6,986

 

6,959

 

Loss (gain) on put option

 

67

 

(83)

 

Gain on investments, net

 

(66)

 

(2,489)

 

Deferred income taxes

 

168

 

(398)

 

Tax benefit from exercise of stock options

 

(2,602)

 

(176)

 

Effect on cash of changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(42,544)

 

(69,713)

 

Distributor receivables

 

947

 

(8,314)

 

Inventories

 

17,410

 

(14,080)

 

Prepaid expenses and other current assets

 

(7,110)

 

(10,584)

 

Prepaid income taxes

 

4,417

 

27,417

 

Accounts payable

 

6,068

 

7,479

 

Accrued liabilities

 

4,610

 

9,879

 

Accrued promotional allowances

 

14,708

 

13,939

 

Accrued distributor terminations

 

-

 

7,372

 

Accrued compensation

 

(5,838)

 

(5,377)

 

Income taxes payable

 

39,095

 

9,270

 

Deferred revenue

 

(1,517)

 

6,238

 

Net cash provided by operating activities

 

136,402

 

45,893

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Maturities of held-to-maturity investments

 

151,035

 

66,344

 

Sales of trading investments

 

1,725

 

-

 

Purchases of held-to-maturity investments

 

(187,718)

 

(69,464)

 

Purchases of property and equipment

 

(9,871)

 

(8,732)

 

Proceeds from sale of property and equipment

 

237

 

18

 

Decrease (increase) in intangibles

 

105

 

(3,362)

 

Decrease (increase) in other assets

 

543

 

(219)

 

Net cash used in investing activities

 

(43,944)

 

(15,415)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Principal payments on debt

 

(620)

 

(296)

 

Tax benefit from exercise of stock options

 

2,602

 

176

 

Issuance of common stock

 

5,728

 

2,381

 

Purchases of common stock held in treasury

 

(20)

 

(13,361)

 

Net cash provided by (used in) financing activities

 

7,690

 

(11,100)

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

523

 

641

 

 

 

 

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

100,671

 

20,019

 

CASH AND CASH EQUIVALENTS, beginning of period

 

211,349

 

222,514

 

CASH AND CASH EQUIVALENTS, end of period

 

 $

312,020

 

 $

242,533

 

 

 

 

 

 

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

 $

12

 

 $

5

 

Income taxes

 

 $

9,747

 

 $

5,663

 

 

 

 

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 THREE-MONTHS ENDED MARCH 31, 2014 AND 2013

(In Thousands) (Unaudited) (Continued)

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS

 

Included in accounts payable are property and equipment purchases of $0.2 million and $2.0 million as of March 31, 2014 and December 31, 2013, 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, 2013 (“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-months ended March 31, 2014 and 2013 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 April 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, “Presentation of Financial Statements and Property, Plant, and Equipment - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”.  ASU 2014-08 provides new guidance related to the definition of a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. This new guidance is effective for fiscal years beginning on or after December 15, 2014 and interim periods within those years. The adoption of ASU 2014-08 is 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)

 

3.                                    INVESTMENTS

 

The following table summarizes the Company’s investments at:

 

March 31, 2014

 

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

 

 $

22,043

 

 $

-

 

 $

-

 

 $

22,043

 

 $

-

 

 $

-

Commercial paper

 

9,990

 

-

 

-

 

9,990

 

-

 

-

Municipal securities

 

400,504

 

25

 

-

 

400,529

 

-

 

-

Total

 

 $

432,537

 

 $

25

 

 $

-

 

432,562

 

 $

-

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

6,395

 

 

 

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

8,131

 

 

 

 

Total

 

 

 

 

 

 

 

 $

447,088

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 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

 

 $

22,045

 

 $

-

 

 $

-

 

 $

22,045

 

 $

-

 

 $

-

Commercial paper

 

5,991

 

-

 

-

 

5,991

 

-

 

-

Municipal securities

 

367,819

 

48

 

-

 

367,867

 

-

 

-

Total

 

 $

395,855

 

 $

48

 

 $

-

 

395,903

 

 $

-

 

 $

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

6,392

 

 

 

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

9,792

 

 

 

 

Total

 

 

 

 

 

 

 

 $

412,087

 

 

 

 

 

During the three-months ended March 31, 2014, realized gains or losses recognized on the sale of investments were not significant. During the year ended December 31, 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 year ended December 31, 2013 were not significant.

 

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

 

 

 

Three-Months Ended
March 31,

 

 

 

2014

 

 

2013

 

Gain on trading securities sold

 

 $

131

 

 

 $

-

 

(Loss) gain on trading securities held

 

(64

)

 

6

 

Gain on trading securites

 

 $

67

 

 

 $

6

 

 

The Company’s investments at March 31, 2014 and December 31, 2013 in certificates of deposit, commercial paper and/or municipal securities carried investment grade credit ratings.  All of the Company’s investments at March 31, 2014 and December 31, 2013 in municipal, educational or other public body securities with an auction reset feature (“auction rate securities”) also carried investment grade credit ratings.

 

9



Table of Contents

 

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 underlying contractual maturities of the Company’s investments at:

 

 

 

March 31, 2014

 

December 31, 2013

 

 

 

Amortized Cost

 

Fair Value

 

Amortized Cost

 

Fair Value

 

Less than 1 year:

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 $

22,043

 

 $

22,043

 

 $

22,045

 

 $

22,045

 

Commercial paper

 

9,990

 

9,990

 

5,991

 

5,991

 

Municipal securities

 

400,504

 

400,529

 

367,819

 

367,867

 

Due 11 - 20 years:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

11,053

 

11,053

 

11,102

 

11,102

 

Due 21 - 30 years:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

3,473

 

3,473

 

5,082

 

5,082

 

Total

 

 $

447,063

 

 $

447,088

 

 $

412,039

 

 $

412,087

 

 

 

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 and liabilities that are recorded at fair value on a recurring basis, segregated among the appropriate levels within the fair value hierarchy at:

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

March 31, 2014

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

  $

207,079

 

$

-

 

$

-

 

$

207,079

 

Money market funds

 

73,014

 

-

 

-

 

73,014

 

Certificates of deposit

 

-

 

22,043

 

-

 

22,043

 

Commercial paper

 

-

 

9,990

 

-

 

9,990

 

Municipal securities

 

-

 

432,431

 

-

 

432,431

 

Auction rate securities

 

-

 

-

 

14,526

 

14,526

 

Put option related to auction rate securities

 

-

 

-

 

1,024

 

1,024

 

Foreign currency derivatives

 

-

 

(21

)

-

 

(21

)

Total

 

  $

280,093

 

$

464,443

 

$

15,550

 

$

760,086

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

  $

280,093

 

$

31,927

 

$

-

 

$

312,020

 

Short-term investments

 

-

 

432,537

 

6,395

 

438,932

 

Accounts receivable, net

 

-

 

349

 

-

 

349

 

Investments

 

-

 

-

 

8,131

 

8,131

 

Prepaid expenses and other current assets

 

-

 

-

 

485

 

485

 

Other assets

 

-

 

-

 

539

 

539

 

Accrued liabilities

 

-

 

(370

)

-

 

(370

)

Total

 

  $

280,093

 

$

464,443

 

$

15,550

 

$

760,086

 

 

December 31, 2013

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

  $

139,300

 

$

-

 

$

-

 

$

139,300

 

Money market funds

 

60,102

 

-

 

-

 

60,102

 

Certificates of deposit

 

-

 

22,045

 

-

 

22,045

 

Commercial paper

 

-

 

5,991

 

-

 

5,991

 

Municipal securities

 

-

 

379,766

 

-

 

379,766

 

Auction rate securities

 

-

 

-

 

16,184

 

16,184

 

Put option related to auction rate securities

 

-

 

-

 

1,092

 

1,092

 

Total

 

  $

199,402

 

$

407,802

 

$

17,276

 

$

624,480

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

  $

199,402

 

$

11,947

 

$

-

 

$

211,349

 

Short-term investments

 

-

 

395,855

 

6,392

 

402,247

 

Investments

 

-

 

-

 

9,792

 

9,792

 

Prepaid expenses and other current assets

 

-

 

-

 

486

 

486

 

Other assets

 

-

 

-

 

606

 

606

 

Total

 

  $

199,402

 

$

407,802

 

$

17,276

 

$

624,480

 

 

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 certificates of deposit, commercial paper 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. The Company’s valuation of its Level 2 foreign exchange contracts is based on quoted market prices of the same or similar instruments, adjusted for counterparty risk. There were no transfers between Level 1 and Level 2 measurements during the three-months ended March 31, 2014 or the year ended December 31, 2013, and there were no changes in the Company’s valuation techniques.

 

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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’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 three-months ended March 31, 2014.

 

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 March 31, 2014.

 

 

 

Valuation Technique

 

Unobservable Input

 

Range (Weighted-Average)

Auction Rate Securities: Trading

 

Discounted cash flow

 

Maximum rate probability

 

0.61%-2.48% (1.53%)

 

 

 

 

Principal returned probability

 

85.58%-94.70% (86.91%)

 

 

 

 

Default probability

 

4.28%-12.18% (11.56%)

 

 

 

 

Liquidity risk

 

3.00%-3.00% (3.00%)

 

 

 

 

Recovery rate

 

60-60 (60)

 

 

 

 

 

 

 

Put Options

 

Discounted cash flow

 

Counterparty risk

 

0.43%-0.68% (0.51%)

 

At March 31, 2014, the Company held auction rate securities with a face value of $15.5 million (amortized cost basis of $14.5 million). A Level 3 valuation was performed on the Company’s auction rate securities as of March 31, 2014 resulting in a fair value of $14.5 million for the Company’s trading auction rate securities (after a $1.0 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 three-months ended March 31, 2014, $1.7 million of 2011 ARS Securities were redeemed at par through the exercise of a portion of the 2011 Put Option ($2.3 million, $1.3 million and $3.7 million of par value 2011 ARS Securities were redeemed at par during the years ended December 31, 2013, 2012 and 2011, respectively). Subsequent to March 31, 2014, $1.7 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 March 31, 2014, the Company recorded $1.0 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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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The net effect of (i) the revaluation of the 2011 Put Option as of March 31, 2014; (ii) the redemption at par of certain 2011 ARS Securities; and (iii) the revaluation of the Company’s trading auction rate securities as of March 31, 2014 resulted in a loss of $0.001 million, which is included in other income (expense) for the three-months ended March 31, 2014. The net effect of (i) the revaluation of the 2011 Put Option as of March 31, 2013; (ii) the revaluation of the Company’s trading auction rate securities as of March 31, 2013; and (iii) a recognized gain resulting from the redemption of previously other-than-temporary impaired securities resulted in a gain of $2.6 million, which is included in other income (expense) for the three-months ended March 31, 2013.

 

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
March 31, 2014

 

Three-Months Ended
March 31, 2013

 

 

Auction
Rate
Securities

 

Put Options

 

Auction
Rate
Securities

 

Put Options

Opening Balance

 

  $

16,184

 

  $

1,092

 

  $

23,156

 

  $

1,929

Transfers into Level 3

 

-

 

-

 

-

 

-

Transfers out of Level 3

 

-

 

-

 

-

 

-

Total gains (losses) for the period:

 

 

 

 

 

 

 

 

Included in earnings

 

67

 

(68)

 

2,489

 

82

Included in other comprehensive income

 

-

 

-

 

(2,483)

 

-

Settlements

 

(1,725)

 

-

 

(5,792)

 

-

Closing Balance

 

  $

14,526

 

  $

1,024

 

  $

17,370

 

  $

2,011

 

 

5.                                    DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

The Company is exposed to foreign currency exchange rate risks related primarily to its foreign business operations. During the three-months ended March 31, 2014, the Company entered into forward currency exchange contracts with financial institutions to create an economic hedge to specifically manage a portion of the foreign exchange risk exposure associated with certain consolidated subsidiaries’ non-functional currency denominated assets and liabilities. All foreign currency exchange contracts entered into by the Company as of March 31, 2014 have terms of one month or less. The Company does not enter into forward currency exchange contracts for speculation or trading purposes.

 

The Company has not designated its foreign currency exchange contracts as hedge transactions under ASC 815. Therefore, gains and losses on the Company’s foreign currency exchange contracts are recognized in interest and other income (expense), net, in the condensed consolidated statements of income, and are largely offset by the changes in the fair value of the underlying economically hedged item.

 

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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 notional amount and fair value of all outstanding foreign currency derivative instruments in the condensed consolidated balance sheets consist of the following at:

 

 

 

March 31,2014

 

Derivatives not designated as
hedging instruments under
FASB ASC 815-20

 

Notional
Amount

 

Fair
Value

 

Balance Sheet Location

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

Foreign currency exchange contracts:

 

 

 

 

 

 

 

Receive CAD/pay USD

 

  $

12,234

 

  $

70

 

Accounts receivable, net

 

Receive USD/pay JPY

 

24,216

 

279

 

Accounts receivable, net

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Foreign currency exchange contracts:

 

 

 

 

 

 

 

Receive EUR/pay USD

 

  $

15,577

 

  $

(8)

 

Accrued liabilities

 

Receive USD/pay AUD

 

9,204

 

(51)

 

Accrued liabilities

 

Receive USD/pay ZAR

 

14,713

 

(235)

 

Accrued liabilities

 

Receive USD/pay MXN

 

3,742

 

(25)

 

Accrued liabilities

 

Receive USD/pay CLP

 

5,106

 

(46)

 

Accrued liabilities

 

Receive USD/pay COP

 

2,229

 

(5)

 

Accrued liabilities

 

 

The Company had no foreign currency exchange contracts outstanding at December 31, 2013.

 

The net losses on derivative instruments in the condensed consolidated statements of income were as follows:

 

 

 

 

 

 

Amount of loss
recognized in income on
derivatives

 

 

 

 

 

Three-months ended

 

Derivatives not designated as
hedging instruments under
FASB ASC 815-20

 

Location of loss
recognized in income on
derivatives

 

March 31,
2014

 

March 31,
2013

 

Foreign currency exchange contracts

 

Interest and other income (expense), net

 

  $

359

 

  $

-

 

 

 

6.                                    INVENTORIES

 

Inventories consist of the following at:

 

 

 

March 31,
2014

 

 

December 31,
2013

 

Raw materials

 

 $

64,550

 

 

 $

68,088

 

Finished goods

 

139,511

 

 

153,361

 

 

 

 $

204,061

 

 

 $

221,449

 

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

7.                                    PROPERTY AND EQUIPMENT, Net

 

Property and equipment consist of the following at:

 

 

 

March 31,
2014

 

December 31,
2013

Land

 

  $

5,382

 

  $

5,382

Leasehold improvements

 

2,737

 

2,222

Furniture and fixtures

 

3,494

 

3,474

Office and computer equipment

 

14,514

 

14,135

Computer software

 

655

 

791

Equipment

 

66,752

 

62,552

Buildings

 

37,980

 

33,468

Vehicles

 

29,860

 

30,442

 

 

161,374

 

152,466

Less: accumulated depreciation and amortization

 

(69,641)

 

(64,323)

 

 

  $

91,733

 

  $

88,143

 

8.                                    INTANGIBLES, Net

 

Intangibles consist of the following at:

 

 

 

March 31,
2014

 

December 31,
2013

Amortizing intangibles

 

  $

1,140

 

  $

1,076

Accumulated amortization

 

(665)

 

(590)

 

 

475

 

486

Non-amortizing intangibles

 

65,050

 

65,288

 

 

  $

65,525

 

  $

65,774

 

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 19 years).  Amortization expense was $0.1 million and $0.01 million for the three-months ended March 31, 2014 and 2013, respectively.

 

9.                                    DISTRIBUTION AGREEMENTS

 

Amounts received pursuant to new and/or amended distribution agreements entered into with certain distributors, relating to the costs associated with terminating agreements with the Company’s prior distributors, have been accounted for as deferred revenue in the accompanying condensed consolidated balance sheets and are recognized as revenue ratably over the anticipated life of the respective distribution agreement, generally 20 years. Revenue recognized was $1.9 million and $2.4 million for the three-months ended March 31, 2014 and 2013, respectively.

 

The Company incurred termination costs to certain of its prior distributors amounting to $0.01 million and $8.3 million in aggregate for the three-months ended March 31, 2014 and 2013, respectively. Such termination costs have been expensed in full and are included in operating expenses for the three-months ended March 31, 2014 and 2013.

 

10.                           COMMITMENTS AND CONTINGENCIES

 

The Company had purchase commitments aggregating approximately $31.3 million at March 31, 2014, 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.

 

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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 had contractual obligations aggregating approximately $92.9 million at March 31, 2014, which related primarily to sponsorships and other marketing activities.

 

The Company had operating lease commitments aggregating approximately $14.8 million at March 31, 2014, which related primarily to warehouse and office space.

 

Value Added Tax (“VAT”) – The Company sought guidance from Her Majesty’s Revenue & Customs (“HMRC”), the VAT taxing authority in the United Kingdom, to determine if the Company should have charged VAT in the United Kingdom on a portion of the Company’s sales beginning May 26, 2010.  The Company did not receive conclusive guidance from HMRC and has taken the position that it should only have charged VAT beginning October 3, 2013, pursuant to a new production agreement effective on this date. As a result, the Company has recorded for the period from October 3, 2013 to March 31, 2014, an $8.7 million VAT receivable and an $8.7 million VAT payable included in accounts receivable, net and accrued liabilities, respectively, in the accompanying condensed consolidated balance sheet at March 31, 2014.

 

Should it be determined that VAT should have been charged on such sales beginning on May 26, 2010, such VAT would represent a pass-through tax in the United Kingdom and would result in an adjustment to accounts receivable and a corresponding adjustment to accrued liabilities 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 for the period beginning on May 26, 2010 through October 3, 2013 to be $47.1 million. If it is determined that the Company should have charged VAT on such sales prior to October 3, 2013, it is possible that a tax penalty may be assessed by HMRC. However, the Company believes that any such penalty would not have a material impact on its financial position, results of operations or liquidity.

 

Litigation – 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 parties attended a court ordered mediation on January 23, 2014.  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”).

 

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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 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 dropped certain of the allegations set forth in the Consolidated Class Action Complaint and made 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 named Thomas J. Kelly as a defendant.

 

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, which the court denied, without prejudice, on January 17, 2014.

 

Following a mediation conducted by an independent mediator, the Company entered into a Stipulation of Settlement on April 16, 2014 that, if approved by the District Court, will resolve the litigation and result in the action being dismissed with prejudice.  A preliminary approval hearing with respect to the proposed settlement is scheduled for June 19, 2014.

 

Under the terms of the proposed settlement, the Company has agreed that certain of its insurance carriers will pay $16.25 million into an escrow account for distribution to a proposed settlement class, certified by the District Court for settlement purposes only and consisting of all persons who purchased or otherwise acquired the Company’s stock during the Class Period.  Excluded from the proposed settlement class are the Company’s officers and directors, members of their immediate families and their legal representatives, heirs, successors or assigns and any entity in which defendants have or had a controlling interest, as well as any putative member of the settlement class who submits a valid and timely request for exclusion in the manner ultimately approved by the District Court.  Under the proposed settlement, defendants and various of their related persons and entities will receive a full release of all claims that were or could have been brought in the action as well as all claims that arise out of, are based upon or relate to the allegations, transactions, facts, representations, omissions or other matters involved in the complaints filed in the action or any statement communicated to the public during the Class Period, and the purchase, acquisition or sale of the Company’s stock during the Class Period.

 

The proposed settlement contains no admission of any liability or wrongdoing on the part of the defendants, each of whom continues to deny all of the allegations against them and believes that the claims are without merit.  Because the full amount of the proposed settlement will be paid by the Company’s insurance carriers, the settlement will not have an effect on the Company’s results of operations.

 

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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)

 

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. 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 products 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, 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 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, in 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 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 the San Francisco Action back to state court.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

On October 17, 2013 (after the San Francisco Action described above was remanded to San Francisco Superior Court), the City Attorney filed a renewed motion to dismiss and on December 16, 2013, the Central District Court granted the City Attorney’s renewed motion, dismissing the action.  The Company filed a Notice of Appeal to the Ninth Circuit on December 18, 2013.

 

On January 15, 2014, the Company filed a demurrer to and motion to strike allegations in the complaint in the San Francisco Action.  On March 5, 2014, the Court overruled the demurrer, granted the motion to strike as to one theory for relief pleaded by the City Attorney, and lifted the stay on discovery.

 

On March 20, 2014, the City Attorney filed an amended complaint, adding allegations supporting the theory for relief as to which the Court had granted the motion to strike.  On April 18, 2014, the Company filed a renewed motion to strike, challenging the theory for relief previously rejected by the Court, as well as a motion asking the Court to bifurcate and/or stay claims relating to the safety of Monster Energy® drinks, pending resolution of the ongoing FDA investigation of the safety and labeling of food products to which caffeine is added.  These motions are calendared for hearing on May 21, 2014.

 

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.

 

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. 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. The Company regards these cases and allegations as having no merit. 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.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

11.                            ACCUMULATED OTHER COMPREHENSIVE LOSS

 

Changes in accumulated other comprehensive loss by component, after tax, for the three-months ended March 31, 2014 are as follows:

 

 

 

Currency
Translation
Gains (Losses)

 

 

 

 

 

 

 

Balance at December 31, 2013

 

 $

(1,233)

 

 

Other comprehensive income before reclassifications

 

102

 

 

Amounts reclassified from accumulated other comprehensive loss

 

-

 

 

Net current-period other comprehensive income

 

102

 

 

Balance at March 31, 2014

 

 $

(1,131)

 

 

 

12.                            TREASURY STOCK PURCHASE

 

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”). During the three-months ended March 31, 2014, no shares of common stock were purchased under the April 2013 Repurchase Plan. During the year ended December 31, 2013, the Company purchased 0.951 million shares of common stock at an average purchase price of $56.98 per share for a total amount of $54.2 million (excluding broker commissions) under the April 2013 Repurchase Plan.

 

During the three-months ended March 31, 2014, 281 shares were purchased from employees in lieu of cash payments for options exercised or withholding taxes due for a total amount of $0.02 million. 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.

 

13.                            STOCK-BASED COMPENSATION

 

The Company has two stock-based compensation plans under which shares were available for grant at March 31, 2014: 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 $7.0 million of compensation expense relating to outstanding options, restricted stock awards, stock appreciation rights and restricted stock units for both the three-months ended March 31, 2014 and 2013.

 

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 three-months ended March 31, 2014 and 2013 was $2.6 million and $0.2 million, respectively.

 

Stock Options

 

Under the Company’s stock-based compensation plans, all stock options granted as of March 31, 2014 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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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.

 

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

 

 

 

Three-Months Ended March 31,

 

 

 

2014

 

2013

 

Dividend yield

 

0.0 %

 

0.0 %

 

Expected volatility

 

43.1 %

 

47.8 %

 

Risk-free interest rate

 

1.6 %

 

0.9 %

 

Expected term

 

5.9 years

 

5.4 years

 

 

 

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

 

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

 

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

 

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

 

 

 

 

 

 

 

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, 2014

 

12,973

 

  $

15.70

 

3.7

 

  $

675,595

 

Granted

 

689

 

  $

70.06

 

 

 

 

 

Exercised

 

(235)

 

  $

24.33

 

 

 

 

 

Cancelled or forfeited

 

(16)

 

  $

47.09

 

 

 

 

 

Outstanding at March 31, 2014

 

13,411

 

  $

18.30

 

3.8

 

  $

686,398

 

Vested and expected to vest in the future at March 31, 2014

 

12,905

 

  $

16.92

 

3.6

 

  $

678,326

 

Exercisable at March 31, 2014

 

10,323

 

  $

9.45

 

2.4

 

  $

619,368

 

 

The weighted-average grant-date fair value of options granted during the three-months ended March 31, 2014 and 2013 was $29.86 per share and $20.52 per share, respectively. The total intrinsic value of options exercised during the three-months ended March 31, 2014 and 2013 was $11.4 million and $3.3 million, respectively.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Cash received from option exercises under all plans for the three-months ended March 31, 2014 and 2013 was approximately $5.7 million and $2.4 million, respectively.

 

At March 31, 2014, there was $56.2 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 2.8 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.

 

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

 

 

 

Number of
Shares (in
thousands)

 

Weighted
Average
Grant-Date
Fair Value

 

Non-vested at January 1, 2014

 

391

 

 

$

49.27

 

Granted

 

-

 

 

$

-

 

Vested

 

(17

)

 

$

57.18

 

Forfeited/cancelled

 

(6

)

 

$

57.30

 

Non-vested at March 31, 2014

 

368

 

 

$

48.78

 

 

No awards were granted during the three-months ended March 31, 2014. The weighted-average grant-date fair value of restricted stock units and restricted stock awards granted during the three-months ended March 31, 2013 was $50.89 per share. As of March 31, 2014, 0.3 million of restricted stock units and restricted stock awards are expected to vest over their respective terms.

 

At March 31, 2014, total unrecognized compensation expense relating to non-vested restricted stock awards and non-vested restricted stock units was $10.9 million, which is expected to be recognized over a weighted-average period of 1.9 years.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

14.        INCOME TAXES

 

The following is a roll-forward of the Company’s total gross unrecognized tax benefits, not including interest and penalties, for the three-months ended March 31, 2014:

 

 

 

Gross Unrecognized Tax
Benefits

 

 

Balance at December 31, 2013

 

$

935

 

 

Additions for tax positions related to the current year

 

-

 

 

Additions for tax positions related to the prior year

 

-

 

 

Decreases related to settlement with taxing authority

 

-

 

 

Balance at March 31, 2014

 

$

935

 

 

 

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 March 31, 2014, 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.

 

The Company is subject to U.S. federal income tax as well as to income tax in multiple state and foreign jurisdictions.

 

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 2012 U.S. federal income tax return is subject to IRS examination. State income tax returns are subject to examination for the 2009 through 2012 tax years.

 

15.        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

 

 

 

March 31,

 

 

 

2014

 

2013

 

Weighted-average shares outstanding:

 

 

 

 

 

Basic

 

166,913

 

165,525

 

Dilutive securities

 

6,828

 

7,034

 

Diluted

 

173,741

 

172,559

 

 

For the three-months ended March 31, 2014 and 2013, options and awards outstanding totaling 0.6 million shares and 0.8 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

16.        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.”

 

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

 

 

 

Three-Months Ended March 31, 2014

 

 

DSD

 

Warehouse

 

Corporate and
Unallocated

 

Total

Net sales

 

$

514,355

 

 

$

21,774

 

 

$

-

 

 

$

536,129

 

Contribution margin

 

186,468

 

 

296

 

 

-

 

 

186,764

 

Corporate and unallocated expenses

 

-

 

 

-

 

 

(37,901

)

 

(37,901

)

Operating income

 

 

 

 

 

 

 

 

 

 

148,863

 

Other income (expense)

 

26

 

 

-

 

 

128

 

 

154

 

Income before provision for income taxes

 

 

 

 

 

 

 

 

 

 

149,017

 

Depreciation and amortization

 

(4,944

)

 

(81

)

 

(1,428

)

 

(6,453

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three-Months Ended March 31, 2013

 

 

DSD

 

Warehouse

 

Corporate and
Unallocated

 

Total

Net sales

 

$

460,175

 

 

$

24,048

 

 

$

-

 

 

$

484,223

 

Contribution margin

 

138,974

 

 

382

 

 

-

 

 

139,356

 

Corporate and unallocated expenses

 

-

 

 

-

 

 

(32,050

)

 

(32,050

)

Operating income

 

 

 

 

 

 

 

 

 

 

107,306

 

Other income (expense)

 

188

 

 

-

 

 

(2,090

)

 

(1,902

)

Income before provision for income taxes

 

 

 

 

 

 

 

 

 

 

105,404

 

Depreciation and amortization

 

(4,421

)

 

(58

)

 

(581

)

 

(5,060

)

 

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 $37.9 million for the three-months ended March 31, 2014 and included $21.1 million of payroll costs, of which $7.0 million was attributable to stock-based compensation expense (see Note 13, “Stock-Based Compensation”), $10.1 million attributable to professional service expenses, including accounting and legal costs and $6.7 million of other operating expenses.  Corporate and unallocated expenses were $32.0 million for the three-months ended March 31, 2013 and included $19.4 million of payroll costs, of which $7.0 million was attributable to stock-based compensation expense (see Note 13, “Stock-Based Compensation”), $7.6 million attributable to professional service expenses, including accounting and legal costs and $5.0 million attributable to other operating expenses.

 

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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 31% and 30% of the Company’s net sales for the three-months ended March 31, 2014 and 2013, respectively.

 

Net sales to customers outside the United States amounted to $115.8 million and $106.3 million for the three-months ended March 31, 2014 and 2013, respectively.

 

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

 

 

 

Three-Months Ended

 

 

March 31,

Product Line

 

2014

 

 

2013

 

Energy drinks

 

$

499,013

 

 

$

446,026

 

Non-carbonated (primarily juice based beverages and Peace Tea® iced teas)

 

26,446

 

 

27,972

 

Carbonated (primarily soda beverages)

 

7,014

 

 

6,401

 

Other

 

3,656

 

 

3,824

 

 

 

$

536,129

 

 

$

484,223

 

 

17.        RELATED PARTY TRANSACTIONS

 

Two directors and officers of the Company and their families are principal owners of a company that provides promotional materials to the Company. Expenses incurred with such company in connection with promotional materials purchased during the three-months ended March 31, 2014 and 2013 were $0.07 million and $0.2 million, respectively.

 

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

 

Our Business

 

Overview

 

Monster Beverage Corporation was incorporated in Delaware on April 25, 1990. Our principal place of business is located at 1 Monster Way, Corona, California 92879 and our telephone number is (951) 739-6200. When this report uses the words “the Company”, “Hansen Natural Corporation” (the Company’s former name), “we”, “us”, and “our”, these words refer to Monster Beverage Corporation and its subsidiaries, unless the context otherwise requires. We are a holding company and conduct no operating business except through our consolidated subsidiaries.

 

We develop, market, sell and distribute “alternative” beverage category beverages primarily under the following brand names:

 

·                                         Monster Energy®

 

·                 Hansen’s®

·                                         Monster Rehab®

 

·                 Hansen’s Natural Cane Soda®

·                                         Monster Energy Extra Strength Nitrous Technology®

 

·                 Junior Juice®

·                                         Java Monster®

 

·                 Blue Sky®

·                                         X-Presso Monster®

 

·                 Hubert’s®

·                                         Muscle Monster®

 

·                 Worx Energy®

·                                         Punch Monster™

 

·                 Peace Tea®

 

Our Monster Energy® drinks, which represented 92.9% and 91.9% of our net sales for the three-months ended March 31, 2014 and 2013, respectively, include the following:

 

·                                         Monster Energy®

 

·                               Java Monster® Kona Blend

·                                         Lo-Carb Monster Energy®

 

·                               Java Monster® Loca Moca®

·                                         Monster Assault®

 

·                               Java Monster® Mean Bean®

·                                         Monster Khaos®

 

·                               Java Monster® Vanilla Light

·                                         Monster M-80® (named Ripper® in certain countries)

 

·                               Java Monster® Irish Blend®

·                                         Monster Energy® Absolutely Zero

 

·                               Java Monster® Toffee

·                                         Monster Energy® Import

 

·                               Java Monster® Kona Cappuccino™

·                                         Monster Energy® Import Light

 

·                               Monster Energy Extra Strength Nitrous Technology® Super Dry™

·                                         Punch Monster™ Baller’s Blend (formerly Dub Edition)

 

·                                         Punch Monster™ Mad Dog (formerly Dub Edition)

 

·                               Monster Energy Extra Strength Nitrous Technology® Anti-Gravity®

·                                         Monster Rehab® Tea + Lemonade + Energy

 

·                                         Monster Rehab® Rojo Tea + Energy

 

·                               Monster Energy Extra Strength Nitrous Technology® Black Ice™

·                                         Monster Rehab® Green Tea + Energy

 

·                                         Monster Rehab® Protean + Energy

 

·                               X-Presso Monster® Hammer

·                                         Monster Rehab® Tea + Orangeade + Energy

 

·                               X-Presso Monster® Midnite

·                                         Monster Rehab® Tea + Pink Lemonade + Energy

 

·                               Monster Cuba-Lima®

·                                         Muscle Monster® Vanilla

 

·                               Monster Energy® Zero Ultra

·                                         Muscle Monster® Chocolate

 

·                               Monster Energy® Ultra Blue™

·                                         Muscle Monster® Coffee

 

·                               Monster Energy® Ultra Red™

·                                         Muscle Monster® Strawberry

 

·                               M3® Monster Energy® Super Concentrate

·                                         Muscle Monster® Peanut Butter Cup

 

·                               Übermonster® Energy Brew

 

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We have 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.

 

During the three-months ended March 31, 2014, we continued to expand our existing product lines and flavors and further developed our markets. In particular, we continued to focus on developing and marketing beverages that fall within the category generally described as the “alternative” beverage category. During the three-months ended March 31, 2014, we introduced the following products:

 

·                        Punch Monster™ Baller’s Blend (formerly Dub Edition) (January 2014).

·                        Punch Monster™ Mad Dog (formerly Dub Edition) (January 2014).

·                        Peace Tea Beverage Company™ Viva Mango™, a mango flavored juice drink (February 2014).

 

In the normal course of business we discontinue certain products and/or product lines. Those products or product lines discontinued during the three-months ended March 31, 2014, either individually or in aggregate, did not have a material adverse impact on our financial position, results of operations or liquidity.

 

Our gross sales (as defined below) of $613.7 million for the three-months ended March 31, 2014 represented record sales for our first fiscal quarter. The vast majority of our gross sales are derived from our Monster Energy® brand energy drinks. Gross sales of our Monster Energy® brand energy drinks were $576.5 million for the three-months ended March 31, 2014, an increase of $55.3 million, or 94.2% of our overall increase in gross sales for the three-months ended March 31, 2014.

 

Our DSD segment represented 95.9% and 95.0% of our consolidated net sales for the three-months ended March 31, 2014 and 2013, respectively. Our Warehouse segment represented 4.1% and 5.0% of our consolidated net sales for the three-months ended March 31, 2014 and 2013, respectively.

 

Our sales and marketing strategy for all our beverages is to focus our efforts on developing brand awareness through image enhancing programs and product sampling. We use our branded vehicles and other promotional vehicles at events where we offer samples of our products to consumers. We utilize “push-pull” methods to enhance shelf and display space exposure in sales outlets (including advertising, in-store promotions and in-store placement of point-of-sale materials, racks, coolers and barrel coolers) to encourage demand from consumers for our products. We also support our brands with prize promotions, price promotions, competitions, endorsements from selected public and sports figures, personality endorsements (including from television and other well-known sports personalities), coupons, sampling and sponsorship of selected causes, events, athletes and teams. In-store posters, outdoor posters, print, radio and television advertising (directly and through our sponsorships and endorsements) and coupons may also be used to promote our brands.

 

We believe that one of the keys to success in the beverage industry is differentiation, making our brands and products visually distinctive from other beverages on the shelves of retailers. We review our products and packaging on an ongoing basis and, where practical, endeavor to make them different, better and unique. The labels and graphics for many of our products are redesigned from time to time to maximize their visibility and identification, wherever they may be placed in stores, which we will continue to reevaluate from time to time.

 

All of our beverage products are manufactured by various third party bottlers and co-packers situated throughout the United States and abroad, under separate arrangements with each party.

 

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Our growth strategy includes expanding our international business. Gross sales to customers outside the United States amounted to $144.3 million and $130.7 million for the three-months ended March 31, 2014 and 2013, respectively. Such sales were approximately 23% of gross sales for both the three-months ended March 31, 2014 and 2013.

 

Our customers are primarily full service beverage distributors, retail grocery and specialty chains, wholesalers, club stores, drug chains, mass merchandisers, convenience chains, health food distributors, food service customers and the military. Gross sales to our various customer types for the three-months ended March 31, 2014 and 2013 are reflected below. Such information includes sales made by us directly to the customer types concerned, which include our full service beverage distributors in the United States. Such full service beverage distributors in turn sell certain of our products to some of the same customer types listed below. We limit our description of our customer types to include only our sales to such full service distributors without reference to such distributors’ sales to their own customers.

 

 

 

Three-Months Ended
March 31,

 

 

2014

 

2013

Full service distributors

 

62%

 

62%

Club stores, drug chains & mass merchandisers

 

9%

 

10%

Outside the U.S.

 

23%

 

23%

Retail grocery, specialty chains and wholesalers

 

4%

 

3%

Other

 

2%

 

2%

 

 

Our customers include Coca-Cola Refreshments USA Inc. (“CCR”), Coca-Cola Enterprises, Coca-Cola Refreshments Canada, Ltd. (formerly known as Coca-Cola Bottling Company), CCBCC Operations, LLC, United Bottling Contracts Company, LLC, certain bottlers of the Coca-Cola Hellenic Bottling Company, Swire Coca-Cola, USA  and certain other Coca-Cola Company independent bottlers, Anheuser-Busch, Inc. (“AB”), select independent AB distributors, Asahi, Kalil Bottling Group, Wal-Mart, Inc. (including Sam’s Club) and Costco. A decision by any large customer to decrease amounts purchased from us or to cease carrying our products could have a material negative effect on our financial condition and consolidated results of operations.  CCR accounted for approximately 31% and 30% of our net sales for the three-months ended March 31, 2014 and 2013, respectively.

 

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Results of Operations

 

The following table sets forth key statistics for the three-months ended March 31, 2014 and 2013, respectively.

 

(In thousands, except per share amounts)

 

Three-Months Ended
March 31,

 

Percentage
Change

 

 

 

2014

 

2013

 

14 vs. 13

 

Gross sales, net of discounts & returns *

 

  $

613,723

 

  $

554,951

 

10.6%

 

Less: Promotional and other allowances**

 

77,594

 

70,728

 

9.7%

 

Net sales

 

536,129

 

484,223

 

10.7%

 

 

 

 

 

 

 

 

 

Cost of sales

 

249,311

 

232,184

 

7.4%

 

Gross profit***

 

286,818

 

252,039

 

13.8%

 

Gross profit as a percentage of net sales

 

53.5%

 

52.1%

 

 

 

 

 

 

 

 

 

 

 

Operating expenses1

 

137,955

 

144,733

 

(4.7%)

 

Operating expenses as a percentage of net sales

 

25.7%

 

29.9%

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

148,863

 

107,306

 

38.7%

 

Operating income as a percentage of net sales

 

27.8%

 

22.2%

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

Interest and other income (expense), net

 

155

 

(4,473)

 

103.5%

 

(Loss) gain on investments and put options, net

 

(1)

 

2,571

 

100.0%

 

Total other income (expense)

 

154

 

(1,902)

 

108.1%

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

149,017

 

105,404

 

41.4%

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

53,767

 

41,908

 

28.3%

 

 

 

 

 

 

 

 

 

Income taxes as a percentage of income before taxes

 

36.1%

 

39.8%

 

 

 

 

 

 

 

 

 

 

 

Net income

 

  $

95,250

 

  $

63,496

 

50.0%

 

Net income as a percentage of net sales

 

17.8%

 

13.1%

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

Basic

 

 

$0.57

 

 

$0.38

 

48.8%

 

Diluted

 

 

$0.55

 

 

$0.37

 

49.0%

 

 

 

 

 

 

 

 

 

Case sales (in thousands)

 

 

 

 

 

 

 

(in 192-ounce case equivalents)

 

51,926

 

47,749

 

8.7%

 

 

1Includes $0.01 million and $8.3 million for the three-months ended March 31, 2014 and 2013, respectively, related to expenditures attributable to the costs associated with terminating existing distributors.

 

*Gross sales is used internally by management as an indicator of and to monitor operating performance, including sales performance of particular products, salesperson performance, product growth or declines and overall Company performance. The use of gross sales allows