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, 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 167,637,920 shares of common stock, par value $0.005 per share, outstanding as of October 27, 2014.

 



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

SEPTEMBER 30, 2014

 

 

INDEX

 

Part I.

FINANCIAL INFORMATION

 

Page No.

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013

 

3

 

 

 

 

 

Condensed Consolidated Statements of Income for the Three- and Nine-Months Ended September 30, 2014 and 2013

 

4

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three- and Nine-Months Ended September 30, 2014 and 2013

 

5

 

 

 

 

 

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

 

30

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

46

 

 

 

 

Item 4.

Controls and Procedures

 

47

 

 

 

 

Part II.

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

47

 

 

 

 

Item 1A.

Risk Factors

 

47

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

47

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

47

 

 

 

 

Item 4.

Mine Safety Disclosures

 

48

 

 

 

 

Item 5.

Other Information

 

48

 

 

 

 

Item 6.

Exhibits

 

48

 

 

 

 

 

Signatures

 

48

 

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, 2014 AND DECEMBER 31, 2013

(In Thousands, Except Par Value) (Unaudited)

 

 

 

 

 

 

 

 

 

September 30,
2014

 

 

December 31,
2013

 

ASSETS

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

Cash and cash equivalents

 

  $

408,323

 

 

  $

211,349

 

Short-term investments

 

588,041

 

 

402,247

 

Accounts receivable, net

 

330,176

 

 

291,638

 

Distributor receivables

 

2,989

 

 

4,542

 

Inventories

 

205,449

 

 

221,449

 

Prepaid expenses and other current assets

 

25,472

 

 

21,376

 

Intangibles held-for-sale, net

 

18,079

 

 

-

 

Prepaid income taxes

 

18,026

 

 

9,518

 

Deferred income taxes

 

20,924

 

 

20,924

 

Total current assets

 

1,617,479

 

 

1,183,043

 

 

 

 

 

 

 

 

INVESTMENTS

 

28,419

 

 

9,792

 

PROPERTY AND EQUIPMENT, net

 

88,487

 

 

88,143

 

DEFERRED INCOME TAXES

 

71,530

 

 

63,611

 

INTANGIBLES, net

 

49,100

 

 

65,774

 

OTHER ASSETS

 

7,863

 

 

10,146

 

Total Assets

 

  $

1,862,878

 

 

  $

1,420,509

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

Accounts payable

 

  $

145,373

 

 

  $

119,376

 

Accrued liabilities

 

66,599

 

 

59,113

 

Accrued promotional allowances

 

127,265

 

 

99,470

 

Deferred revenue

 

14,335

 

 

13,832

 

Accrued compensation

 

14,342

 

 

14,864

 

Income taxes payable

 

2,697

 

 

9,359

 

Total current liabilities

 

370,611

 

 

316,014

 

 

 

 

 

 

 

 

DEFERRED REVENUE

 

105,827

 

 

112,216

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

Common stock - $0.005 par value; 240,000 shares authorized; 206,918 shares issued and 167,636 outstanding as of September 30, 2014; 206,014 shares issued and 166,822 outstanding as of December 31, 2013

 

1,035

 

 

1,030

 

Additional paid-in capital

 

417,601

 

 

368,069

 

Retained earnings

 

2,205,179

 

 

1,847,325

 

Accumulated other comprehensive loss

 

(6,337

)

 

(1,233

)

Common stock in treasury, at cost; 39,282 and 39,192 shares as of September 30, 2014 and December 31, 2013, respectively

 

(1,231,038

)

 

(1,222,912

)

Total stockholders’ equity

 

1,386,440

 

 

992,279

 

Total Liabilities and Stockholders’ Equity

 

  $

1,862,878

 

 

  $

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- AND NINE-MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

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

 

 

 

 

 

 

 

 

Three-Months Ended

 

Nine-Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

NET SALES

 

  $

635,972

 

  $

590,422

 

  $

1,859,301

 

  $

1,705,579

 

 

 

 

 

 

 

 

 

 

 

COST OF SALES

 

294,052

 

282,952

 

851,274

 

809,809

 

 

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

341,920

 

307,470

 

1,008,027

 

895,770

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

152,013

 

156,041

 

453,443

 

457,610

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

189,907

 

151,429

 

554,584

 

438,160

 

 

 

 

 

 

 

 

 

 

 

OTHER (EXPENSE) INCOME:

 

 

 

 

 

 

 

 

 

Interest and other (expense) income, net

 

(1,012)

 

(750)

 

(668)

 

(8,690

)

(Loss) gain on investments and put options, net (Note 4)

 

(26)

 

44

 

(39)

 

2,681

 

Total other (expense) income

 

(1,038)

 

(706)

 

(707)

 

(6,009

)

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

 

188,869

 

150,723

 

553,877

 

432,151

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

67,269

 

58,536

 

196,023

 

169,596

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

  $

121,600

 

  $

92,187

 

$

357,854

 

  $

262,555

 

 

 

 

 

 

 

 

 

 

 

NET INCOME PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

Basic

 

  $

0.73

 

  $

0.55

 

$

2.14

 

  $

1.58

 

Diluted

 

  $

0.70

 

  $

0.53

 

$

2.06

 

  $

1.51

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Basic

 

167,346

 

167,457

 

167,116

 

166,483

 

Diluted

 

174,270

 

173,948

 

174,016

 

173,344

 

 

 

 

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, 2014 AND 2013

(In Thousands) (Unaudited)

 

 

 

 

 

 

 

 

Three-Months Ended
September 30,

 

Nine-Months Ended
September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Net income, as reported

 

  $

121,600

 

 $

92,187

 

  $

357,854

 

  $

262,555

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

(5,716)

 

1,850

 

(5,104)

 

(1,683

)

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 (loss) income

 

(5,716)

 

1,850

 

(5,104)

 

(3,208

)

Comprehensive income

 

  $

115,884

 

  $

94,037

 

  $

352,750

 

  $

259,347

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

(In Thousands) (Unaudited)

 

 

 

 

 

 

 

 

Nine-Months Ended

 

 

 

September 30, 2014

 

September 30, 2013

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

  $

357,854

 

  $

262,555

 

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

 

 

 

 

 

Depreciation and amortization

 

19,124

 

16,444

 

Gain on disposal of property and equipment

 

(379)

 

(53

)

Stock-based compensation

 

22,509

 

21,592

 

Loss on put option

 

771

 

411

 

Gain on investments, net

 

(732)

 

(3,091

)

Deferred income taxes

 

(7,919)

 

(926

)

Tax benefit from exercise of stock options

 

(11,541)

 

(30,250

)

Effect on cash of changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(45,759)

 

(104,666

)

Distributor receivables

 

2,047

 

(3,384

)

Inventories

 

13,300

 

(46,687

)

Prepaid expenses and other current assets

 

(4,564)

 

(13,026

)

Prepaid income taxes

 

(8,723)

 

(4,906

)

Accounts payable

 

30,032

 

33,731

 

Accrued liabilities

 

12,387

 

21,157

 

Accrued promotional allowances

 

32,421

 

40,175

 

Accrued distributor terminations

 

(2,338)

 

3,524

 

Accrued compensation

 

(467)

 

(51

)

Income taxes payable

 

4,909

 

78,447

 

Deferred revenue

 

(5,883)

 

4,838

 

Net cash provided by operating activities

 

407,049

 

275,834

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Maturities of held-to-maturity investments

 

545,774

 

179,575

 

Sales of available-for-sale investments

 

-

 

5,775

 

Sales of trading investments

 

12,075

 

1,250

 

Purchases of held-to-maturity investments

 

(761,538)

 

(392,870

)

Purchases of property and equipment

 

(19,300)

 

(32,612

)

Proceeds from sale of property and equipment

 

745

 

8,762

 

Increase in intangibles

 

(1,765)

 

(9,001

)

Decrease (increase) in other assets

 

1,027

 

(7,576

)

Net cash used in investing activities

 

(222,982)

 

(246,697

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Principal payments on debt

 

(1,316)

 

(1,322

)

Tax benefit from exercise of stock options

 

11,541

 

30,250

 

Issuance of common stock

 

15,050

 

18,198

 

Purchases of common stock held in treasury

 

(8,126)

 

(13,401

)

Net cash provided by financing activities

 

17,149

 

33,725

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(4,242)

 

1,643

 

 

 

 

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

196,974

 

64,505

 

CASH AND CASH EQUIVALENTS, beginning of period

 

211,349

 

222,514

 

CASH AND CASH EQUIVALENTS, end of period

 

  $

408,323

 

  $

287,019

 

 

 

 

 

 

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

  $

27

 

  $

36

 

Income taxes

 

  $

210,090

 

  $

97,171

 

 

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, 2014 AND 2013

(In Thousands) (Unaudited) (Continued)

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS

 

The Company entered into capital leases for the acquisition of promotional vehicles of $0.7 million and $1.9 million for the nine-months ended September 30, 2014 and 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- and nine-months ended September 30, 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.                                    ACQUISITIONS AND DIVESTITURES

 

On August 14, 2014, the Company and The Coca-Cola Company (“Coca-Cola”) entered into definitive agreements for a long-term strategic relationship in the global energy drink category (the “Coca-Cola Transaction”). In the Coca-Cola Transaction, the Company, New Laser Corporation, a wholly owned subsidiary of the Company (“NewCo”), New Laser Merger Corp., a wholly owned subsidiary of NewCo (“Merger Sub”), Coca-Cola and European Refreshments, an indirect wholly owned subsidiary of Coca-Cola, entered into a transaction agreement, and the Company, Coca-Cola and NewCo entered into an asset transfer agreement. Pursuant to the agreements, the Company will reorganize into a new holding company by merging Merger Sub into the Company, with the Company surviving as a wholly owned subsidiary of NewCo.  In the merger, each outstanding share of the Company’s common stock will be converted into one share of NewCo’s common stock.

 

Subject to the terms and conditions of the agreements, upon the closing of the Coca-Cola Transaction, (1) NewCo will issue to Coca-Cola newly issued shares of common stock representing approximately 16.7% of the total number of shares of issued and outstanding NewCo common stock (after giving effect to the new issuance) and Coca-Cola will have the right to nominate two (reduced to one in 36 months or if Coca-Cola’s equity interest in NewCo exceeds 20%) individuals to NewCo’s Board of Directors, (2) Coca-Cola will transfer its global energy drink business (including the NOS®, Full Throttle®, Burn®, Mother®, Play® and Power Play®, and Relentless® brands) to NewCo, and the Company will transfer its non-energy drink business (including the Hansen’s® Natural Soda, Peace Tea®, Hubert’s® Lemonade and Hansen’s® Juice Product brands) to Coca-Cola, (3) the Company and Coca-Cola will amend their current distribution coordination agreements by expanding distribution of the Company’s products into additional territories pursuant to long-term commercial agreements with Coca-Cola’s network of owned or controlled bottlers/distributors and independent bottling and distribution partners, and (4) Coca-Cola will make a net cash payment of $2.15 billion to the Company ($625.0 million of which will be held in escrow, subject to release upon achievement of milestones relating to the transfer of distribution rights).

 

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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 closing of the transaction is subject to customary closing conditions and is expected to close in early 2015.

 

3.                                    RECENT ACCOUNTING PRONOUNCEMENTS

 

In September 2014, the Company elected to early adopt FASB 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. The adoption of ASU 2014-08 did not have a material impact on the Company’s financial position, results of operations or liquidity.

 

In June 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-12, “Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force)”.  ASU 2014-12 clarifies that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. ASU 2014-12 is effective for annual periods, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted. ASU 2014-12 may be applied either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The adoption of ASU 2014-12 is not expected to have a material impact on the Company’s financial position, results of operations or liquidity.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which supersedes previous revenue recognition guidance. ASU 2014-09 requires that a company recognize revenue at an amount that reflects the consideration to which the company expects to be entitled in exchange for transferring goods or services to a customer. In applying the new guidance, a company will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 is effective for reporting periods beginning after December 15, 2016 and can be adopted using either a full retrospective or modified approach. The Company is currently evaluating the impact of ASU 2014-09 on its financial position, results of operations and liquidity.

 

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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.                                    INVESTMENTS

 

The following table summarizes the Company’s investments at:

 

September 30, 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

 

  $

2,504

 

  $

-

 

  $

-

 

  $

2,504

 

  $

-

 

  $

-

 

Commercial paper

 

1,000

 

-

 

-

 

1,000

 

-

 

-

 

Municipal securities

 

579,695

 

123

 

-

 

579,818

 

-

 

-

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal securities

 

28,419

 

4

 

-

 

28,423

 

-

 

-

 

Total

 

  $

611,618

 

  $

127

 

  $

-

 

611,745

 

  $

-

 

  $

-

 

Trading

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

4,842

 

 

 

 

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

-

 

 

 

 

 

Total

 

 

 

 

 

 

 

  $

616,587

 

 

 

 

 

 

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- and nine-months ended September 30, 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
September 30,

 

Nine-Months Ended
September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Gain on trading securities sold

 

  $

630

 

  $

140

 

  $

900

 

  $

140

 

Gain (loss) on trading securities held

 

18

 

71

 

(167)

 

468

 

Gain on trading securites

 

  $

648

 

  $

211

 

  $

733

 

  $

608

 

 

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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 investments at September 30, 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 September 30, 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.

 

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

 

 

 

September 30, 2014

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized Cost

 

Fair Value

 

Amortized Cost

 

Fair Value

 

Less than 1 year:

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

  $

2,504

 

  $

2,504

 

  $

22,045

 

  $

22,045

 

Commercial paper

 

1,000

 

1,000

 

5,991

 

5,991

 

Municipal securities

 

579,695

 

579,818

 

367,819

 

367,867

 

Due 1 - 10 years:

 

 

 

 

 

 

 

 

 

Municipal securities

 

28,419

 

28,423

 

-

 

-

 

Due 11 - 20 years:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

4,842

 

4,842

 

11,102

 

11,102

 

Due 21 - 30 years:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

-

 

-

 

5,082

 

5,082

 

Total

 

  $

616,460

 

  $

616,587

 

  $

412,039

 

  $

412,087

 

 

 

5.                                    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.

 

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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 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:

 

September 30, 2014

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

  $

216,147

 

  $

-

 

  $

-

 

  $

216,147

 

Money market funds

 

150,533

 

-

 

-

 

150,533

 

Certificates of deposit

 

-

 

2,504

 

-

 

2,504

 

Commercial paper

 

-

 

1,000

 

-

 

1,000

 

Municipal securities

 

-

 

649,757

 

-

 

649,757

 

Auction rate securities

 

-

 

-

 

4,842

 

4,842

 

Put option related to auction rate securities

 

-

 

-

 

320

 

320

 

Foreign currency derivatives

 

-

 

32

 

-

 

32

 

Total

 

  $

366,680

 

  $

653,293

 

  $

5,162

 

  $

1,025,135

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

  $

366,680

 

  $

41,643

 

  $

-

 

  $

408,323

 

Short-term investments

 

-

 

583,199

 

4,842

 

588,041

 

Accounts receivable, net

 

-

 

159

 

-

 

159

 

Investments

 

-

 

28,419

 

-

 

28,419

 

Prepaid expenses and other current assets

 

-

 

-

 

320

 

320

 

Other assets

 

-

 

-

 

-

 

-

 

Accrued liabilities

 

-

 

(127

)

-

 

(127

)

Total

 

  $

366,680

 

  $

653,293

 

  $

5,162

 

  $

1,025,135

 

 

 

 

 

 

 

 

 

 

 

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 nine-months ended September 30, 2014 or the year ended December 31, 2013, 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, 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 September 30, 2014.

 

 

 

Valuation Technique

 

Unobservable Input

 

Range (Weighted-Average)

Auction Rate Securities:

 

 

 

 

 

 

Trading

 

 Discounted cash flow

 

 Maximum rate probability

 

 0.70%-2.81% (2.33%)

 

 

 

 

 Principal returned probability

 

 85.10%-94.30% (87.03%)

 

 

 

 

 Default probability

 

 4.46%-12.36% (10.64%)

 

 

 

 

 Liquidity risk

 

 3.00%-3.00% (3.00%)

 

 

 

 

 Recovery rate

 

 60-60 (60)

 

 

 

 

 

 

 

Put Options

 

 Discounted cash flow

 

 Counterparty risk

 

 0.43%-0.54% (0.46%)

 

 

 

 

 

 

 

 

At September 30, 2014, the Company held auction rate securities with a face value of $5.2 million (amortized cost basis of $4.8 million). A Level 3 valuation was performed on the Company’s auction rate securities as of September 30, 2014 resulting in a fair value of $4.8 million for the Company’s trading auction rate securities (after a $0.4 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, 2014, $12.1 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 September 30, 2014, $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, 2014, the Company recorded $0.3 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)

 

The net effect of (i) the revaluation of the 2011 Put Option as of September 30, 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 September 30, 2014 resulted in a loss of ($0.03) million and ($0.04) million, which is included in other (expense) income for the three- and nine-months ended September 30, 2014, respectively. 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 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, 2014

 

Three-Months Ended September 30, 2013

 

 

 

Auction
Rate
Securities

 

Put Options

 

Auction
Rate
Securities

 

Put Options

 

Opening Balance

 

$

12,819

 

$

994

 

$

17,762

 

$

1,686

 

Transfers into Level 3

 

-

 

-

 

-

 

-

 

Transfers out of Level 3

 

-

 

-

 

-

 

-

 

Total gains (losses) for the period:

 

 

 

 

 

 

 

 

 

Included in earnings

 

648

 

(674)

 

211

 

(167)

 

Included in other comprehensive income

 

-

 

-

 

-

 

-

 

Settlements

 

(8,625)

 

-

 

(1,250)

 

-

 

Closing Balance

 

$

4,842

 

$

320

 

$

16,723

 

$

1,519

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine-Months Ended
September 30, 2014

 

Nine-Months Ended
September 30, 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

 

732

 

(772)

 

3,091

 

(410)

 

Included in other comprehensive income

 

-

 

-

 

(2,483)

 

-

 

Settlements

 

(12,074)

 

-

 

(7,041)

 

-

 

Closing Balance

 

$

4,842

 

$

320

 

$

16,723

 

$

1,519

 

 

6.                                    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- and nine-months ended September 30, 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 September 30, 2014 have terms of one month or less. The Company does not enter into forward currency exchange contracts for speculation or trading purposes.

 

14



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 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 (expense) income, 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.

 

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

 

 

 

September 30, 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 USD/pay AUD

 

$

9,170

 

$

2

 

Accounts receivable, net

 

       Receive USD/pay JPY

 

15,414

 

39

 

Accounts receivable, net

 

       Receive USD/pay ZAR

 

13,169

 

107

 

Accounts receivable, net

 

       Receive USD/pay CLP

 

2,069

 

8

 

Accounts receivable, net

 

       Receive USD/pay COP

 

2,225

 

3

 

Accounts receivable, net

 

 

 

 

 

 

 

 

 

 Liabilities:

 

 

 

 

 

 

 

  Foreign currency exchange contracts:

 

 

 

 

 

 

 

       Receive EUR/pay USD

 

$

12,808

 

$

(50)

 

Accrued liabilities

 

       Receive CAD/pay USD

 

13,444

 

(70)

 

Accrued liabilities

 

       Receive USD/pay MXN

 

3,279

 

(7)

 

Accrued liabilities

 

 

 

 

 

 

 

 

 

 

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

 

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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 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

 

September 30,
2014

 

September 30,

2013

 

Foreign currency exchange contracts

 

Interest and other income (expense), net

 

  $

960  

 

  $

-    

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of loss
recognized in income on
derivatives

 

 

 

 

 

Nine-months ended

 

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

 

Location of loss
recognized in income on
derivatives

 

September 30,
2014

 

September 30,

2013

 

Foreign currency exchange contracts

 

Interest and other income (expense), net

 

  $

194  

 

  $

-    

 

 

 

 

 

 

 

 

 

 

7.                                    INVENTORIES

 

Inventories consist of the following at:

 

 

 

September 30,
2014

 

December 31,
2013

 

Raw materials

 

$

 63,865

 

$

 68,088

 

Finished goods

 

141,584

 

153,361

 

 

 

$

 205,449

 

$

 221,449

 

 

 

8.                                    PROPERTY AND EQUIPMENT, Net

 

Property and equipment consist of the following at:

 

 

 

September 30,
2014

 

December 31,
2013

 

Land

 

$

5,382

 

$

5,382

 

Leasehold improvements

 

2,791

 

2,222

 

Furniture and fixtures

 

3,451

 

3,474

 

Office and computer equipment

 

14,899

 

14,135

 

Computer software

 

563

 

791

 

Equipment

 

73,614

 

62,552

 

Buildings

 

38,382

 

33,468

 

Vehicles

 

29,351

 

30,442

 

 

 

168,433

 

152,466

 

Less: accumulated depreciation and amortization

 

(79,946)

 

(64,323)

 

 

 

$

88,487

 

$

88,143

 

 

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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)

 

9.                                    INTANGIBLES, Net

 

Intangibles consist of the following at:

 

 

 

September 30,
2014

 

December 31,
2013

 

Amortizing intangibles

 

$

232

 

$

1,076

 

Accumulated amortization

 

(50)

 

(590)

 

 

 

182

 

486

 

Non-amortizing intangibles

 

48,918

 

65,288

 

 

 

$

49,100

 

$

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 16 years).  Amortization expense was $ 0.1 million and $0.01 million for the three-months ended September 30, 2014 and 2013, respectively. Amortization expense was $0.4 million and $0.04 million for the nine-months ended September 30, 2014 and 2013, respectively. At September 30, 2014, $18.0 million of non-amortizing intangibles and $0.1 million of amortizing intangibles (net of accumulated amortization) are subject to divestiture under the Coca-Cola Transaction and are included in intangibles held-for-sale in the accompanying condensed consolidated balance sheet at September 30, 2014.

 

10.                            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 $2.0 million for the three-months ended September 30, 2014 and 2013, respectively. Revenue recognized was $5.8 million and $6.4 million for the nine-months ended September 30, 2014 and 2013, respectively.

 

The Company incurred termination amounts (net of adjustments to estimated amounts previously accrued) to certain of its prior distributors amounting to a credit of ($0.7) million and an expense of $0.4 million in aggregate for the three-months ended September 30, 2014 and 2013, respectively. The Company incurred termination amounts (net of adjustments to estimated amounts previously accrued) to certain of its prior distributors amounting to a credit of ($0.2) million and an expense of $10.7 million in aggregate for the nine-months ended September 30, 2014 and 2013, respectively. Such termination amounts have been expensed in full and are included in operating expenses for the three- and nine-months ended September 30, 2014 and 2013.

 

11.                            COMMITMENTS AND CONTINGENCIES

 

The Company had purchase commitments aggregating approximately $37.0 million at September 30, 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.

 

The Company had contractual obligations aggregating approximately $70.6 million at September 30, 2014, which related primarily to sponsorships and other marketing activities.

 

The Company had operating lease commitments aggregating approximately $13.3 million at September 30, 2014, which related primarily to warehouse and office space.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Legal Proceedings

 

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 and trial has been scheduled for August 21, 2015. 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 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.

 

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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, 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.  The Court granted preliminary approval of the settlement by an Order dated July 28, 2014.  Plaintiff filed a motion seeking final approval of the settlement on September 29, 2014.  Under the schedule previously entered by the Court, settlement class members have until December 1, 2014 to object to or opt-out of the settlement.  The final approval hearing is scheduled for January 29, 2015.

 

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.

 

State Attorney General Inquiry – In July 2012, the Company received a subpoena from the Attorney General for the State of New York in connection with its investigation concerning the Company’s advertising, marketing, promotion, ingredients, usage and sale of its Monster Energy® brand of energy drinks. Production of documents pursuant to that subpoena was completed in approximately May 2014.

 

On August 6, 2014, the Attorney General for the State of New York issued a second subpoena seeking additional documents and the deposition of a Company employee.  On September 8, 2014, the Company moved to quash the second subpoena.  Briefing on the motion is currently ongoing.  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.”

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

(i)                                  The Company Action - 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 (the “Company Action”) 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 Action, 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 the Company Action and on December 16, 2013, the Central District Court granted the City Attorney’s renewed motion, dismissing the Company Action.  The Company filed a Notice of Appeal to the Ninth Circuit on December 18, 2013.  The Company’s opening brief is due on November 28, 2014.

 

(ii)                              The San Francisco Action - 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 San Francisco Action 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 San Francisco Action 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.

 

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.  On May 22, 2014, the Court denied the Company’s motion to strike and motion to bifurcate and/or stay claims relating to safety.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

On June 16, 2014, the Company filed a petition for writ of mandate with the Court of Appeal, asking for a writ directing the trial court to vacate its order denying the Company’s motion to bifurcate and/or stay the San Francisco Action, and instead to stay proceedings pending FDA’s investigation.  On June 19, 2014, the Court of Appeal denied the petition.  On June 25, 2014, the Company filed a petition for review with the California Supreme Court.  On July 23, 2014, the Supreme Court denied the petition.

 

On August 27, 2014, the Court issued an order setting the case for a two-week bench trial beginning on February 8, 2016.  On September 5, 2014, the City Attorney filed a second amended complaint, adding Monster Energy Company as a defendant.  A case management conference is scheduled for December 5, 2014. Discovery is ongoing.

 

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.

 

The Company evaluates, on a quarterly basis, developments in legal proceedings and other matters that could cause an increase or decrease in the amount of the liability that is accrued, if any, or in the amount of any related insurance reimbursements recorded. As of September 30, 2014 and December 31, 2013, the Company’s consolidated balance sheets include accrued loss contingencies of approximately $17.95 million and $17.0 million, respectively, and receivables for insurance reimbursements of approximately $16.25 million and $16.25 million, respectively. Although it is not possible to predict the ultimate 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)

 

12.                            ACCUMULATED OTHER COMPREHENSIVE LOSS

 

Changes in accumulated other comprehensive loss by component, after tax, for the nine-months ended September 30, 2014 are as follows:

 

 

 

 

Currency
Translation
Losses

 

 

 

 

 

 

 

Balance at December 31, 2013

 

 

$

(1,233

)

Other comprehensive loss before reclassifications

 

 

(5,104

)

Amounts reclassified from accumulated other comprehensive loss

 

 

-

 

Net current-period other comprehensive loss

 

 

(5,104

)

Balance at September 30, 2014

 

 

$

(6,337

)

 

13.                            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 nine-months ended September 30, 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 both the three- and nine-months ended September 30, 2014, 0.09 million shares were purchased from employees in lieu of cash payments for options exercised or withholding taxes due for a total amount of $8.1 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.

 

14.                            STOCK-BASED COMPENSATION

 

The Company has two stock-based compensation plans under which shares were available for grant at September 30, 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 $7.4 million and $7.2 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, 2014 and 2013, respectively. The Company recorded $22.5 million and $21.6 million of compensation expense relating to outstanding options, restricted stock awards, stock appreciation rights and restricted stock units during the nine-months ended September 30, 2014 and 2013, respectively.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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 September 30, 2014 and 2013 was $8.2 million and $1.4 million, respectively. 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, 2014 and 2013 was $11.5 million and $30.2 million, respectively.

 

Stock Options

 

Under the Company’s stock-based compensation plans, all stock options granted as of September 30, 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 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 September 30,

 

Nine-Months Ended September 30,

 

 

2014¹

 

2013¹

 

2014

 

2013

Dividend yield

 

-

 

-

 

0.0 %

 

0.0 %

Expected volatility

 

-

 

-

 

42.4 %

 

47.9 %

Risk-free interest rate

 

-

 

-

 

1.6 %

 

0.9 %

Expected term

 

-

 

-

 

5.8 Years

 

5.7 Years

 

1 No options were granted during the three-months ended September 30, 2014 and 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

 

 

Options

 

Shares (In
thousands)

 

Price Per
Share

 

Term (In
years)

 

Aggregate
Intrinsic Value

Outstanding at January 1, 2014

 

12,973

 

  $

15.70

 

3.7

 

  $

675,595

Granted 01/01/14 - 03/31/14

 

689

 

  $

70.06

 

 

 

 

Granted 04/01/14 - 06/30/14

 

104

 

  $

69.15

 

 

 

 

Granted 07/01/14 - 09/30/14

 

-

 

  $

-    

 

 

 

 

Exercised

 

(686)

 

  $

21.95

 

 

 

 

Cancelled or forfeited

 

(106)

 

  $

45.32

 

 

 

 

Outstanding at September 30, 2014

 

12,974

 

  $

18.44

 

3.3

 

  $

950,080

Vested and expected to vest in the future at September 30, 2014

 

12,574

 

  $

17.22

 

3.0

 

  $

936,106

Exercisable at September 30, 2014

 

10,215

 

  $

9.90

 

2.0

 

  $

835,288

 

No option awards were granted during the three-months ended September 30, 2014 and 2013. The weighted-average grant-date fair value of options granted during the nine-months ended September 30, 2014 and 2013 was $29.33 per share and $22.44 per share, respectively. The total intrinsic value of options exercised during the three-months ended September 30, 2014 and 2013 was $25.4 million and $3.3 million, respectively. The total intrinsic value of options exercised during the nine-months ended September 30, 2014 and 2013 was $40.4 million and $87.6 million, respectively.

 

Cash received from option exercises under all plans for the three-months ended September 30, 2014 and 2013 was approximately $7.3 million and $1.9 million, respectively. Cash received from option exercises under all plans for the nine-months ended September 30, 2014 and 2013 was approximately $15.0 million and $18.2 million, respectively.

 

At September 30, 2014, there was $46.2 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 2.5 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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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, 2014

 

391

 

 $

49.27

Granted 01/01/14 - 03/31/14

 

-

 

 $

-    

Granted 04/01/14 - 06/30/14

 

10

 

 $

69.00

Granted 07/01/14 - 09/30/14

 

-

 

 $

-    

Vested

 

(237)

 

 $

44.11

Forfeited/cancelled

 

(13)

 

 $

51.15

Non-vested at September 30, 2014

 

151

 

 $

58.56

 

No restricted stock awards or restricted stock units were granted during the three-months ended September 30, 2014 and 2013. The weighted-average grant-date fair value of restricted stock units and restricted stock awards granted during the nine-months ended September 30, 2014 and 2013 was $69.00 and $53.25 per share, respectively. As of September 30, 2014, 0.1 million of restricted stock units and restricted stock awards are expected to vest over their respective terms.

 

At September 30, 2014, total unrecognized compensation expense relating to non-vested restricted stock awards and non-vested restricted stock units was $6.5 million, which is expected to be recognized over a weighted-average period of 2.4 years.

 

15.                            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, 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 September 30, 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 September 30, 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 change in the amount of unrecognized tax benefits within the next 12 months will not be significant.

 

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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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 and 2013 U.S. federal income tax returns are subject to IRS examination. State income tax returns are subject to examination for the 2010 through 2013 tax years.

 

16.                            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,

 

September 30,

 

 

2014

 

2013

 

2014

 

2013

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

167,346

 

167,457

 

167,116

 

166,483

Dilutive securities

 

6,924

 

6,491

 

6,900

 

6,861

Diluted

 

174,270

 

173,948

 

174,016

 

173,344

 

For the three-months ended September 30, 2014 and 2013, options and awards outstanding totaling 0.8 million shares and 1.5 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive.  For the nine-months ended September 30, 2014 and 2013, options and awards outstanding totaling 0.8 million shares and 1.2 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive.

 

17.                            SEGMENT INFORMATION

 

The Company has two operating and 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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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

 

 

Three-Months Ended September 30, 2014

 

 

DSD

 

Warehouse

 

Corporate and
Unallocated

 

Total

Net sales

 

 $

609,938

 

 $

26,034

 

 $

-

 

 $

635,972

Contribution margin*

 

232,666

 

604

 

-

 

233,270

Corporate and unallocated expenses

 

-

 

-

 

(43,363)

 

(43,363)

Operating income

 

 

 

 

 

 

 

189,907

Other income (expense)

 

231

 

-

 

(1,269)

 

(1,038)

Income before provision for income taxes

 

 

 

 

 

 

 

188,869

Depreciation and amortization

 

(4,626)

 

(85)

 

(1,419)

 

(6,130)

 

 

 

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 income (expense)

 

180

 

-

 

(886)

 

(706)

Income before provision for income taxes

 

 

 

 

 

 

 

150,723

Depreciation and amortization

 

(5,069)

 

(78)

 

(961)

 

(6,108)

 

*Contribution margin is defined as gross profit less certain operating expenses deemed by management to be directly attributable to the respective reportable segment. Contribution margin is used by management as a key indicator of reportable segment profitability.

 

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 $43.4 million for the three-months ended September 30, 2014 and included $21.9 million of payroll costs, of which $7.4 million was attributable to stock-based compensation expense (see Note 14, “Stock-Based Compensation”), $12.7 million of professional service expenses, including accounting and legal costs and $8.8 million of other operating expenses.  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 14, “Stock-Based Compensation”), $10.9 million attributable to professional service expenses, including accounting and legal costs, and $10.6 million attributable to other operating expenses.

 

Coca-Cola Refreshments USA Inc. (“CCR”), a customer of the DSD segment, accounted for approximately 28% and 29% of the Company’s net sales for the three-months ended September 30, 2014 and 2013, respectively.

 

Net sales to customers outside the United States amounted to $136.3 million and $121.1 million for the three-months ended September 30, 2014 and 2013, respectively.

 

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

 

 

 

Nine-Months Ended September 30, 2014

 

 

DSD

 

Warehouse

 

Corporate and
Unallocated

 

Total