Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

 

For the quarterly period ended June 30, 2015

 

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 205,498,468 shares of common stock, par value $0.005 per share, outstanding as of July 29, 2015.

 


 


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

JUNE 30, 2015

 

 

INDEX

 

Part I.

 

FINANCIAL INFORMATION

 

Page No.

 

 

 

 

 

Item 1.

 

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the Three- and Six-Months Ended June 30, 2015 and 2014

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three- and Six-Months Ended June 30, 2015 and 2014

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six-Months Ended June 30, 2015 and 2014

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2.

 

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

 

35

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

54

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

54

 

 

 

 

 

Part II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

54

 

 

 

 

 

Item 1A.

 

Risk Factors

 

54

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

55

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

55

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

55

 

 

 

 

 

Item 5.

 

Other Information

 

55

 

 

 

 

 

Item 6.

 

Exhibits

 

55

 

 

 

 

 

 

 

Signatures

 

57

 

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 JUNE 30, 2015 AND DECEMBER 31, 2014

(In Thousands, Except Par Value) (Unaudited)

 

 

 

June 30,
2015

 

 

December 31,
2014

ASSETS

 

 

 

 

CURRENT ASSETS:

 

 

 

 

Cash and cash equivalents

 

$

 1,696,295

 

$

 370,323

Short-term investments

 

1,234,858

 

781,134

Accounts receivable, net

 

372,669

 

280,203

TCCC Transaction receivable

 

125,000

 

-

Distributor receivables

 

666

 

552

Inventories

 

180,892

 

174,573

Prepaid expenses and other current assets

 

22,628

 

19,673

Intangibles held-for-sale, net

 

-

 

18,079

Prepaid income taxes

 

92,386

 

8,617

Deferred income taxes

 

196,985

 

40,275

Total current assets

 

3,922,379

 

1,693,429

 

 

 

 

 

INVESTMENTS

 

52,364

 

42,940

PROPERTY AND EQUIPMENT, net

 

92,538

 

90,156

DEFERRED INCOME TAXES

 

-

 

54,106

GOODWILL

 

1,287,777

 

-

OTHER INTANGIBLE ASSETS, net

 

428,166

 

50,748

OTHER ASSETS

 

8,357

 

7,496

Total Assets

 

$

 5,791,581

 

$

 1,938,875

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

Accounts payable

 

$

 194,731

 

$

 127,641

Accrued liabilities

 

52,242

 

40,271

Accrued promotional allowances

 

128,059

 

114,047

Accrued distributor terminations

 

64,621

 

-

Deferred revenue

 

26,417

 

49,926

Accrued compensation

 

14,404

 

17,983

Income taxes payable

 

11,453

 

5,848

Total current liabilities

 

491,927

 

355,716

 

 

 

 

 

DEFERRED REVENUE

 

355,379

 

68,009

 

 

 

 

 

DEFERRED INCOME TAXES

 

89,455

 

-

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 12)

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

Common stock - $0.005 par value; 240,000 shares authorized;
206,666 shares issued and 205,491 outstanding as of June 30, 2015;
207,004 shares issued and 167,722 outstanding as of December 31, 2014

 

1,033

 

1,035

Additional paid-in capital

 

3,952,030

 

426,145

Retained earnings

 

1,081,547

 

2,330,510

Accumulated other comprehensive loss

 

(19,073)

 

(11,453)

Common stock in treasury, at cost; 1,175 and 39,282 shares as of June 30, 2015 and December 31, 2014, respectively

 

(160,717)

 

(1,231,087)

Total stockholders’ equity

 

4,854,820

 

1,515,150

Total Liabilities and Stockholders’ Equity

 

$

 5,791,581

 

$

 1,938,875

 

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 SIX-MONTHS ENDED JUNE 30, 2015 AND 2014

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

 

 

 

Three-Months Ended

 

Six-Months Ended

 

 

June 30,

 

June 30,

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

NET SALES

 

$

693,722

 

$

687,199

 

$

1,320,512

 

$

1,223,329

 

 

 

 

 

 

 

 

 

COST OF SALES

 

299,214

 

307,911

 

557,048

 

557,222

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

394,508

 

379,288

 

763,464

 

666,107

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

189,839

 

163,475

 

551,167

 

301,430

 

 

 

 

 

 

 

 

 

GAIN ON SALE OF MONSTER NON-ENERGY (NOTE 3)

 

161,470

 

-

 

161,470

 

-

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

366,139

 

215,813

 

373,767

 

364,677

 

 

 

 

 

 

 

 

 

INTEREST AND OTHER (EXPENSE) INCOME, net

 

(1,015)

 

178

 

218

 

332

 

 

 

 

 

 

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

 

365,124

 

215,991

 

373,985

 

365,009

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

136,120

 

74,988

 

140,568

 

128,755

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

229,004

 

$

141,003

 

$

233,417

 

$

236,254

 

 

 

 

 

 

 

 

 

NET INCOME PER COMMON SHARE:

 

 

 

 

 

 

 

 

Basic

 

$

1.29

 

$

0.84

 

$

1.35

 

$

1.41

Diluted

 

$

1.26

 

$

0.81

 

$

1.31

 

$

1.36

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Basic

 

176,985

 

167,098

 

173,447

 

167,006

Diluted

 

181,417

 

173,964

 

177,998

 

173,869

 

See accompanying notes to condensed consolidated financial statements.

 

4



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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE- AND SIX-MONTHS ENDED JUNE 30, 2015 AND 2014

(In Thousands) (Unaudited)

 

 

 

Three-Months Ended
June 30,

 

Six-Months Ended
June 30,

 

 

2015

 

2014

 

2015

 

2014

Net income, as reported

 

$

229,004

 

$

141,003

 

$

233,417

 

$

236,254

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

2,360

 

510

 

(7,620)

 

612

 

Available-for-sale investments:

 

 

 

 

 

 

 

 

 

Change in net unrealized gains

 

-

 

-

 

-

 

-

 

Reclassification adjustment for net gains included in net income

 

-

 

-

 

-

 

-

 

Net change in available-for-sale investments

 

-

 

-

 

-

 

-

 

Other comprehensive income (loss)

 

2,360

 

510

 

(7,620)

 

612

 

Comprehensive income

 

$

231,364

 

$

141,513

 

$

225,797

 

$

236,866

 

 

See accompanying notes to condensed consolidated financial statements.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX-MONTHS ENDED JUNE 30, 2015 AND 2014

(In Thousands) (Unaudited)

 

 

 

Six-Months Ended

 

 

June 30, 2015

 

June 30, 2014

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

233,417

 

$

236,254

 

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

 

 

 

 

 

Depreciation and amortization

 

13,249

 

12,995

 

Gain on disposal of property and equipment

 

(108)

 

(185

)

Gain on sale of Monster Non-Energy

 

(161,470)

 

-

 

Stock-based compensation

 

14,837

 

15,089

 

Loss on put option

 

-

 

97

 

Gain on investments, net

 

-

 

(84

)

Deferred income taxes

 

156,710

 

168

 

Excess tax benefit from stock-based compensation

 

(300,331)

 

(3,303

)

Effect on cash of changes in operating assets and liabilities, net of acquisition and divestiture:

 

 

 

 

 

Accounts receivable

 

(95,235)

 

(99,711

)

Distributor receivables

 

191

 

1,242

 

Inventories

 

(28,919)

 

13,536

 

Prepaid expenses and other current assets

 

(3,322)

 

(4,189

)

Prepaid income taxes

 

(84,147)

 

2,503

 

Accounts payable

 

72,124

 

36,113

 

Accrued liabilities

 

12,482

 

17,529

 

Accrued promotional allowances

 

18,038

 

31,776

 

Accrued distributor terminations

 

64,767

 

165

 

Accrued compensation

 

(3,493)

 

(4,618

)

Income taxes payable

 

(7,533)

 

6,780

 

Deferred revenue

 

(40,792)

 

(3,180

)

Net cash (used in) provided by operating activities

 

(139,535)

 

258,977

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Maturities of held-to-maturity investments

 

480,281

 

324,819

 

Sales of available-for-sale investments

 

100

 

-

 

Sales of trading investments

 

725

 

3,450

 

Proceeds from transfer of distribution rights to TCCC

 

179,658

 

-

 

Purchases of held-to-maturity investments

 

(944,193)

 

(421,797

)

Purchases of property and equipment

 

(15,827)

 

(15,074

)

Proceeds from the sale of Monster Non-Energy

 

198,008

 

-

 

Proceeds from sale of property and equipment

 

161

 

310

 

Increase in intangibles

 

(3,566)

 

(828

)

(Increase) decrease in other assets

 

(1,214)

 

1,102

 

Net cash used in investing activities

 

(105,867)

 

(108,018

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Principal payments on debt

 

(530)

 

(973

)

Excess tax benefit from stock-based compensation

 

300,331

 

3,303

 

Issuance of common stock

 

1,689,120

 

7,716

 

Purchases of common stock held in treasury

 

(412,217)

 

(59

)

Net cash provided by financing activities

 

1,576,704

 

9,987

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(5,330)

 

756

 

 

 

 

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

1,325,972

 

161,702

 

CASH AND CASH EQUIVALENTS, beginning of period

 

370,323

 

211,349

 

CASH AND CASH EQUIVALENTS, end of period

 

$

1,696,295

 

$

373,051

 

 

 

 

 

 

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

12

 

$

18

 

Income taxes

 

$

76,285

 

$

119,654

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX-MONTHS ENDED JUNE 30, 2015 AND 2014

(In Thousands) (Unaudited) (Continued)

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS

 

The Company entered into capital leases for the acquisition of promotional vehicles of $0.9 million and $0.5 million for the six-months ended June 30, 2015 and 2014, respectively.

 

During the six-months ended June 30, 2015, the Company issued 11.8 million shares of the Company’s common stock in exchange for KO Energy (see Note 3).

 

During the six-months ended June 30, 2015, in connection with the TCCC Transaction (as defined in Note 3), $125.0 million relating to the transfer of certain distribution rights was deposited into escrow pending certain transition milestones (see Note 3).

 

During the six-months ended June 30, 2015, the Company cancelled 41.5 million shares of treasury stock (see Note 14). Amounts previously recorded as treasury stock were netted against common stock and retained earnings.

 

See accompanying notes to condensed consolidated financial statements.

 

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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)

 

1.                                    BASIS OF PRESENTATION

 

Reference is made to the Notes to Consolidated Financial Statements, in Monster Beverage Corporation and Subsidiaries (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2014 (“Form 10-K”) for a summary of significant accounting policies utilized by the Company and its consolidated subsidiaries and other disclosures, which should be read in conjunction with this Quarterly Report on Form 10-Q (“Form 10-Q”).

 

The Company’s condensed consolidated financial statements included in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and Securities and Exchange Commission (“SEC”) rules and regulations applicable to interim financial reporting.  They do not include all the information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP.  The information set forth in these interim condensed consolidated financial statements for the three- and six-months ended June 30, 2015 and 2014 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.

 

In the second quarter of 2015, as a result of the acquisitions and divestitures described in Note 3, the Company revised its reportable segments to reflect management’s new view of the business and to align its external financial reporting with its new operating and internal financial reporting model. Historical segment information has been revised to reflect the effect of this change. See Note 18 for additional information about the Company’s new reporting segments.

 

2.                                    ADDITIONS TO SIGNIFICANT ACCOUNTING POLICIES

 

Business Combinations – Business acquisitions are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 “Business Combinations”.  ASC 805 requires the reporting entity to identify the acquirer, determine the acquisition date, recognize and measure the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquired entity, and recognize and measure goodwill or a gain from the purchase. The acquiree’s results are included in the Company’s consolidated financial statements from the date of acquisition. Assets acquired and liabilities assumed are recorded at their fair values and the excess of the purchase price over the amounts assigned is recorded as goodwill, or if the fair value of the assets acquired exceeds the purchase price consideration, a bargain purchase gain is recorded. Adjustments to fair value assessments are recorded to goodwill over the measurement period (not longer than twelve months). The acquisition method also requires that acquisition-related transaction and post-acquisition restructuring costs be charged to expense and requires the Company to recognize and measure certain assets and liabilities including those arising from contingencies and contingent consideration in a business combination.

 

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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)

 

Goodwill – The Company records goodwill when the consideration paid for an acquisition exceeds the fair value of net tangible and intangible assets acquired, including related tax effects. Goodwill is not amortized; instead goodwill is tested for impairment on an annual basis, or more frequently if the Company believes indicators of impairment exist. The Company first assesses qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value. If the Company determines that the fair value is less than the carrying value, the Company will use a two-step process to determine the amount of goodwill impairment. The first step requires comparing the fair value of the reporting unit to its net book value, including goodwill. A potential impairment exists if the fair value of the reporting unit is lower than its net book value. The second step of the process, performed only if a potential impairment exists, involves determining the difference between the fair value of the reporting unit’s net assets, other than goodwill, and the fair value of the reporting unit. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value.

 

3.                                    ACQUISITIONS AND DIVESTITURES

 

On June 12, 2015, Monster Beverage 1990 Corporation (formerly Monster Beverage Corporation) (“Old Monster”), now a wholly owned subsidiary of the Company, completed the transactions contemplated by the definitive agreements entered into with The Coca-Cola Company (“TCCC”) on August 14, 2014, which provided for a long-term strategic relationship in the global energy drink category (the “TCCC Transaction”).

 

Also, on June 12, 2015, Old Monster effected a holding company reorganization in connection with the TCCC Transaction by merging New Laser Merger Corp., a wholly owned subsidiary of the Company into Old Monster, with Old Monster surviving as a wholly owned subsidiary of the Company (the “Holding Company Reorganization”), and the Company changed its name from New Laser Corporation to “Monster Beverage Corporation.”

 

In the Holding Company Reorganization, each Old Monster common share, par value $0.005 per share, outstanding immediately prior to the consummation of the Holding Company Reorganization (other than any Old Monster common shares that were owned by Old Monster immediately prior to the closing of the TCCC Transaction, which were cancelled, (see Note 14)) was converted automatically into the right to receive one Company common share, par value $0.005 per share. In addition, upon consummation of the Holding Company Reorganization:

 

·                 each unexercised and unexpired stock option then outstanding under any equity compensation plan of Old Monster, whether or not then exercisable, ceased to represent a right to acquire Old Monster common shares and was converted automatically into a right to acquire the same number of Company common shares, on the same terms and conditions as were applicable under such Old Monster stock option; and

 

·                 each share of restricted stock and each restricted stock unit of Old Monster granted under all outstanding equity compensation plans ceased to represent or relate to Old Monster common shares and was converted automatically to represent or relate to Company common shares, on the same terms and conditions as were applicable to such Old Monster restricted stock and restricted stock units (including the vesting or other lapse restrictions (without acceleration thereof by virtue of the Holding Company Reorganization and the TCCC Transaction)).

 

Promptly following the effective time of the Holding Company Reorganization, Old Monster assigned to the Company all obligations of Old Monster under Old Monster’s equity compensation plans and each stock option agreement, restricted stock award agreement, restricted stock unit award agreement and any similar agreement entered into pursuant to such equity compensation plans. In addition, all obligations of Old Monster under any employment agreements and indemnification agreements were assigned to the Company.

 

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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)

 

Immediately after the effective time of the Holding Company Reorganization, (1) the Company issued to TCCC 34,040,534 newly issued Company common shares representing approximately 16.7% of the total number of outstanding Company common shares (after giving effect to such issuance) (the “New Issuance”) and TCCC appointed two individuals to the Company’s Board of Directors, (2) TCCC transferred all of its rights in and to TCCC’s worldwide energy drink business (“KO Energy”) to the Company, (3) Old Monster transferred all of its rights in and to its non-energy drink business (“Monster Non-Energy”) to TCCC (such transfer, together with the transfer of KO Energy, the “Asset Transfers”), (4) the Company and TCCC amended the distribution coordination agreements previously existing between them to govern the transition of third parties’ rights to distribute the Company’s energy products in most territories in the U.S. to members of TCCC’s distribution network, which consists of owned or controlled bottlers/distributors and independent bottling/distribution partners, and (5) TCCC and one of its subsidiaries made an aggregate net cash payment to the Company of $2.15 billion, $125.0 million of which is currently held in escrow as described below (the “Escrow Agreement”), subject to release upon the achievement of milestones relating to the transition of distribution rights to TCCC’s distribution network.

 

Under the terms of the Escrow Agreement and the transition payment agreement entered into in connection therewith, if the distribution rights in the U.S. that are transitioned to TCCC’s distribution network represent case sales in excess of the following percentages of a target case sale amount agreed to by the parties, amounts in the escrow fund in excess of the applicable amounts below will be released to the Company:

 

Percentage Transitioned

 

Escrow Release

40%

 

Amounts in excess of $375 million

50%

 

Amounts in excess of $312.5 million

60%

 

Amounts in excess of $250 million

70%

 

Amounts in excess of $187.5 million

80%

 

Amounts in excess of $125 million

90%

 

Amounts in excess of $62.5 million

95%

 

All remaining amounts

 

On the one-year anniversary of the closing of the TCCC Transaction, the then-remaining escrow amount, less an amount sufficient to cover any unresolved claims, will be released to TCCC. Any severance or other release amount described above that becomes payable following the one-year anniversary will be paid directly from TCCC to the Company.

 

TCCC is contractually obligated to authorize payment to the Company of the funds in escrow upon achievement of the milestones referred to above. As of August 10, 2015, distribution rights in the U.S. representing approximately 89% of the target case sales have been transitioned to TCCC’s distribution network.  As a result, $125 million is currently held in escrow. The Company expects to commence steps to transition sufficient additional distribution rights, which will, in due course, result in the release of all remaining amounts held in escrow. Therefore, the Company believes that achievement of the milestones is probable.

 

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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 TCCC Transaction consideration allocation:

 

 

 

 

Identifiable

Assets Acquired
and Liabilities

Assumed

 

 

Consideration
Transferred

 

Equity issued to TCCC for cash (22.2 million shares issued)

 

$

-

 

 

$

1,647,333

 

Equity issued to TCCC for KO Energy (11.8 million shares issued)

 

-

 

 

1,521,802

 

KO Energy intangibles - trademarks (non-amortizing)

 

325,500

 

 

-

 

KO Energy intangibles - customer relationships (amortizing)

 

35,000

 

 

-

 

KO Energy intangibles - other (non-amortizing)

 

13,700

 

 

-

 

KO Energy inventories

 

6,144

 

 

-

 

KO Energy accounts payable

 

(2,758

)

 

-

 

Goodwill

 

1,287,777

 

 

-

 

Deferred tax liability

 

(143,561

)

 

-

 

New and amended U.S. distribution rights transferred to TCCC’s distribution network

 

-

 

 

304,658

 

Monster Non-Energy business transferred to TCCC

 

-

 

 

198,009

 

Cash and escrow receivable

 

2,150,000

 

 

-

 

Total

 

$

3,671,802

 

 

$

3,671,802

 

 

The preliminary book value of the KO Energy inventories, prepaid expenses and other current assets and accounts payable approximate fair value. The fair value analysis has yet to progress to a stage where there is sufficient information for a definitive measurement of the respective fair values.  Accordingly, the respective fair value allocation is preliminary and is based on valuations derived from estimated fair value assumptions used by management. The Company expects to complete its fair value analysis at a level of detail necessary to finalize the underlying fair value allocations no later than twelve months from the closing of the TCCC Transaction. Any differences between the final respective fair value allocations and the preliminary management estimates may differ materially and potentially have a material impact on the Company’s financial position, results of operations or liquidity.

 

The Company has determined goodwill in accordance with ASC 805-30-30-1, “Business Combinations,” which requires the recognition of goodwill for the excess of the aggregate consideration over the net of amounts of identifiable assets acquired and liabilities assumed as of the acquisition date.

 

The goodwill recorded as part of the TCCC Transaction is not deductible for tax purposes. The goodwill includes access to new geographies, access to new sales channels, including vending and specialty accounts, as well as the opportunity for supply chain optimization.

 

The Company determined the estimated fair values of KO Energy trademarks, customer relationships and other intangibles as follows:

 

1.            Trademarks—valued using the relief from royalty method. Royalty rates for the different brands were selected based on brand strength and profitability.

 

2.            Customer relationships—valued using the with- and-without method assuming that the customer relationships could be rebuilt over a one-year period.

 

3.            Other (Trade Secrets/Formulas)—valued using the cost savings method.

 

The Company determined the estimated fair value of the “new and amended U.S. distribution rights” transferred to TCCC’s distribution network using the discounted cash flow method. The cash flows were defined as the expected cost savings arising from the new distribution agreements.

 

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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 determined the estimated fair value of the Monster Non-Energy brands sold utilizing the discounted cash flow method and market multiple method. Market multiples for each brand were selected based on profitability, size and expected growth for each brand. The resulting business enterprise value derived under the income and market approaches was then adjusted for working capital and fixed assets that were not transferred to TCCC.

 

Of the approximately 34.0 million shares of the Company’s common stock issued to TCCC in the TCCC Transaction, approximately 11.8 million shares, or 34.8% of the total shares issued, were allocated to the purchase of KO Energy and approximately 22.2 million shares, or 65.2% of the total shares issued, were issued for cash. The 34.8% allocation was based on the relative fair value of KO Energy to the approximate fair value of the 34.0 million shares of Old Monster’s common stock on August 14, 2014. The remaining shares of the Company’s common stock were deemed to be issued for cash. The $2.15 billion of cash and escrow receivable was first allocated to the new and amended U.S. distribution rights and the Monster Non-Energy business based on their respective preliminary fair values, and the residual cash of $1.6 billion was then allocated to the equity issued for cash. On August 14, 2014, the date on which the terms of the TCCC Transaction were agreed to and announced, the closing market price of Old Monster’s common stock was $71.65 per share. The fair value of KO Energy per ASC 820 is approximately $880.1 million, which approximates the negotiated price for KO Energy based on the closing market price of Old Monster’s common stock on August 14, 2014. However, per ASC 805, equity securities issued as consideration in a business combination are to be recorded at fair value as of the closing date. Therefore, the value of the Company’s common stock issued to TCCC in exchange for KO Energy was $128.39 per share, the closing price of the Company’s common stock on June 12, 2015, resulting in a total consideration value transferred for KO Energy of $1.5 billion.

 

The Company recognized a gain of $161.5 million on the disposal of Monster Non-Energy during the three- and six-months ended June 30, 2015.

 

The following unaudited pro forma condensed combined financial information is presented as if the TCCC Transaction had closed on January 1, 2014:

 

 

 

Three-Months Ended June 30, 2015

 

 

 

 

 

 

 

Pro Forma Adjustments

 

 

 

 

 

Monster
Beverage
Corporation
as reported¹

 

KO
Energy²

 

Disposal of
Monster
Non-
Energy³

 

Other

 

Pro Forma
Combined

 

Net sales

 

  $

693,722

 

  $

57,422

 

  $

(29,516)

 

  $

3,089

 

  $

724,717

 

Net income

 

229,004

 

41,136

 

(100,652)

 

(11,659) 

 

157,829

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three-Months Ended June 30, 2014

 

 

 

 

 

 

 

Pro Forma Adjustments

 

 

 

 

 

Monster
Beverage
Corporation
as reported

 

KO Energy

 

Disposal of
Monster
Non-Energy

 

Other

 

Pro Forma
Combined

 

Net sales

 

  $

687,199

 

  $

85,608

 

  $

(43,796)

 

  $

3,851

 

  $

732,862

 

Net income

 

141,003

 

54,614

 

(1,878)

 

(24,978) 

 

168,761

 

 

¹Includes net sales of $13.0 million and net income of $5.8 million related to the acquired KO Energy assets since the date of acquisition, June 12, 2015.

 

²Includes results through June 12, 2015, the date the TCCC Transaction was finalized. Net income for KO Energy includes only net revenues and direct operating expenses, rather than full “carve-out” financial statements, because such financial information would not be meaningful given that it is not possible to provide a meaningful allocation of business unit and corporate costs, interest or tax in respect of KO Energy.

 

³Includes results through June 12, 2015. Net income includes gain recognized on the sale of Monster Non-Energy of $161.5 million (as tax affected).

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

 

Six-Months Ended June 30, 2015

 

 

 

 

 

 

 

Pro Forma Adjustments

 

 

 

 

 

Monster
Beverage
Corporation
as reported¹

 

KO Energy²

 

Disposal of
Monster Non-
Energy³

 

Other

 

Pro Forma
Combined

 

Net sales

 

  $

1,320,512

 

  $

138,127

 

  $

(60,824)

 

$

6,897

 

$

1,404,712

 

Net income

 

233,417

 

100,575

 

(101,881)

 

(36,608)

 

195,503

 

 

 

 

Six-Months Ended June 30, 2014

 

 

 

 

 

 

 

Pro Forma Adjustments

 

 

 

 

 

Monster
Beverage
Corporation
as reported

 

KO Energy

 

Disposal of
Monster Non-
Energy

 

Other

 

Pro Forma
Combined

 

Net sales

 

  $

1,223,329

 

  $

171,216

 

  $

(77,984)

 

$

7,659

 

$

1,324,220

 

Net income

 

236,254

 

109,228

 

(3,021)

 

(50,614)

 

291,847

 

 

¹Includes net sales of $13.0 million and net income of $5.8 million related to the acquired KO Energy assets since the date of acquisition, June 12, 2015.

 

²Includes results through June 12, 2015, the date the TCCC Transaction was finalized. Net income for KO Energy includes only net revenues and direct operating expenses, rather than full “carve-out” financial statements, because such financial information would not be meaningful given that it is not possible to provide a meaningful allocation of business unit and corporate costs, interest or tax in respect of KO Energy.

 

³Includes results through June 12, 2015. Net income includes gain recognized on the sale of Monster Non-Energy of $161.5 million (as tax affected).

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Pro-Forma Adjustments – Other include the following:

 

 

 

Three-Months

 

Three-Months

 

Six-Months

 

Six-Months

 

 

Ended

 

Ended

 

Ended

 

Ended

 

 

June 30, 2015

 

June 30, 2014

 

June 30, 2015

 

June 30, 2014

Net sales:

 

 

 

 

 

 

 

 

 

Amortization of deferred revenue

 

  $

3,089

 

  $

3,851

 

  $

6,897

 

  $

7,659

 

 

 

 

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

 

 

 

 

Amortization of deferred revenue

 

  $

3,089

 

  $

3,851

 

  $

6,897

 

  $

7,659

 

To record sales commissions

 

(6,431)

 

(9,588)

 

(15,470)

 

(19,176

)

To record amortization of definite lived KO Energy intangibles

 

(1,400)

 

(1,745)

 

(3,126)

 

(3,471

)

To eliminate TCCC Transaction expenses

 

11,536

 

1,068

 

15,134

 

1,068

 

Estimated provision for income taxes on pro forma adjustments

 

(2,616)

 

2,470

 

(1,322)

 

5,359

 

Estimated provision for income taxes on KO Energy income

 

(15,837)

 

(21,034)

 

(38,721)

 

(42,053

)

Total

 

  $

(11,659)

 

  $

(24,978)

 

  $

(36,608)

 

  $

(50,614

)

 

For purposes of the unaudited pro forma financial information, a combined U.S. Federal and state statutory tax rate of 38.5% has been used. This rate does not reflect the Company’s expected effective tax rate, which includes other tax charges and benefits, and does not take into account any historical or possible future tax events that may impact the combined company.

 

The unaudited pro forma financial information is presented for information purposes only and is not intended to represent or be indicative of the combined results of operations that the Company would have reported had the TCCC Transaction been completed as of the date and for the periods presented, and should not be taken as representative of the Company’s consolidated results of operations following the completion of the TCCC Transaction. In addition, the unaudited pro forma financial information is not intended to project the future financial results of operations of the combined company. The unaudited pro forma combined financial information does not reflect any cost savings, operational synergies or revenue enhancements that the combined company may achieve as a result of the TCCC Transaction or the costs to combine the operations or costs necessary to achieve cost savings, operating synergies and revenue enhancements.

 

4.                                    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 FASB issued 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

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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 was to be effective for reporting periods beginning after December 15, 2016.  However, on July 9, 2015, the FASB voted to approve a one-year deferral of the effective date. This new guidance is effective for the Company beginning January 1, 2018 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)

 

5.                                    INVESTMENTS

 

The following table summarizes the Company’s investments at:

 

June 30, 2015

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

182,130

 

$

-

 

$

-

 

$

182,130

 

$

-

 

$

-

 

U.S. Treasuries

 

74,981

 

6

 

-

 

74,987

 

-

 

-

 

Certificates of deposit

 

32,001

 

-

 

-

 

32,001

 

-

 

-

 

Municipal securities

 

587,740

 

82

 

42

 

587,780

 

42

 

-

 

U.S. government agency securities

 

350,859

 

27

 

10

 

350,876

 

10

 

-

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal securities

 

52,364

 

33

 

5

 

52,392

 

5

 

-

 

U.S. government agency securities

 

-

 

-

 

-

 

-

 

-

 

-

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate demand notes

 

3,901

 

-

 

-

 

3,901

 

-

 

-

 

Total

 

$

1,283,976

 

$

148

 

$

57

 

1,284,067

 

$

57

 

$

-

 

Trading

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

3,246

 

 

 

 

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

-

 

 

 

 

 

Total

 

 

 

 

 

 

 

$

1,287,313

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

19,482

 

$

-

 

$

2

 

$

19,480

 

$

-

 

$

-

 

Municipal securities

 

744,542

 

105

 

-

 

744,647

 

-

 

-

 

U.S. government agency securities

 

9,199

 

-

 

1

 

9,198

 

-

 

-

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal securities

 

42,940

 

10

 

-

 

42,950

 

-

 

-

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate demand notes

 

4,001

 

-

 

-

 

4,001

 

-

 

-

 

Total

 

$

820,164

 

$

115

 

$

3

 

820,276

 

$

-

 

$

-

 

Trading

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

3,910

 

 

 

 

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

-

 

 

 

 

 

Total

 

 

 

 

 

 

 

$

824,186

 

 

 

 

 

 

During the three- and six-months ended June 30, 2015 and 2014, realized gains or losses recognized on the sale of investments were not significant. During the three- and six-months ended June 30, 2015 and 2014, the net gains recognized on the Company’s trading securities were not significant.

 

The Company’s investments at June 30, 2015 and December 31, 2014 in commercial paper, U.S. Treasuries, certificates of deposit, municipal securities, U.S. government agency securities and/or variable rate demand notes (“VRDNs”) carried investment grade credit ratings. VRDNs are floating rate municipal bonds with embedded put options that allow the bondholder to sell the security at par plus accrued interest. All of the put options are secured by a pledged liquidity source. While they are classified as marketable investment securities, the put option allows the VRDNs to be liquidated at par on a same day, or more generally on a seven

 

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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)

 

day, settlement basis. All of the Company’s investments at June 30, 2015 and December 31, 2014 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:

 

 

 

June 30, 2015

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

Amortized Cost

 

Fair Value

 

Amortized Cost

 

Fair Value

Less than 1 year:

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

182,130

 

$

182,130

 

$

19,482

 

$

19,480

 

U.S. Treasuries

 

74,981

 

74,987

 

-

 

-

 

Certificates of deposit

 

32,001

 

32,001

 

-

 

-

 

Municipal securities

 

587,740

 

587,780

 

744,542

 

744,647

 

U.S. government agency securities

 

350,859

 

350,876

 

9,199

 

9,198

 

Due 1 - 10 years:

 

 

 

 

 

 

 

 

 

Municipal securities

 

52,364

 

52,392

 

42,940

 

42,950

 

Due 11 - 20 years:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

3,246

 

3,246

 

3,910

 

3,910

 

Due 21 - 30 years:

 

 

 

 

 

 

 

 

 

Variable rate demand notes

 

3,901

 

3,901

 

4,001

 

4,001

 

Total

 

$

1,287,222

 

$

1,287,313

 

$

824,074

 

$

824,186

 

 

6.                                    FAIR VALUE OF CERTAIN FINANCIAL ASSETS AND LIABILITIES

 

ASC 820 provides a framework for measuring fair value and requires 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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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, available-for-sale investments at fair value and 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

$

174,404

 

$

-

 

$

-

 

$

174,404

 

Money market funds

 

688,934

 

-

 

-

 

688,934

 

Commercial paper

 

-

 

365,364

 

-

 

365,364

 

U.S. Treasuries

 

-

 

74,981

 

-

 

74,981

 

Certificates of deposit

 

-

 

84,002

 

-

 

84,002

 

Municipal securities

 

-

 

662,874

 

-

 

662,874

 

U.S. government agency securities

 

-

 

925,811

 

-

 

925,811

 

Variable rate demand notes

 

-

 

3,901

 

-

 

3,901

 

Auction rate securities

 

-

 

-

 

3,246

 

3,246

 

Put option related to auction rate securities

 

-

 

-

 

189

 

189

 

Foreign currency derivatives

 

-

 

-

 

(139)

 

(139)

 

Total

 

$

863,338

 

$

2,116,933

 

$

3,296

 

$

2,983,567

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

863,338

 

$

832,957

 

$

-

 

$

1,696,295

 

Short-term investments

 

-

 

1,231,612

 

3,246

 

1,234,858

 

Accounts receivable, net

 

-

 

-

 

139

 

139

 

Investments

 

-

 

52,364

 

-

 

52,364

 

Prepaid expenses and other current assets

 

-

 

-

 

189

 

189

 

Accrued liabilities

 

-

 

-

 

(278)

 

(278)

 

Total

 

$

863,338

 

$

2,116,933

 

$

3,296

 

$

2,983,567

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

$

196,090

 

$

-

 

$

-

 

$

196,090

 

Money market funds

 

106,928

 

-

 

-

 

106,928

 

Commercial paper

 

-

 

19,482

 

-

 

19,482

 

Municipal securities

 

-

 

854,787

 

-

 

854,787

 

U.S. government agency securities

 

-

 

9,199

 

-

 

9,199

 

Variable rate demand notes

 

-

 

4,001

 

-

 

4,001

 

Auction rate securities

 

-

 

-

 

3,910

 

3,910

 

Put option related to auction rate securities

 

-

 

-

 

250

 

250

 

Foreign currency derivatives

 

-

 

(252)

 

-

 

(252)

 

Total

 

$

303,018

 

$

887,217

 

$

4,160

 

$

1,194,395

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

303,018

 

$

67,305

 

$

-

 

$

370,323

 

Short-term investments

 

-

 

777,224

 

3,910

 

781,134

 

Accounts receivable, net

 

-

 

83

 

-

 

83

 

Investments

 

-

 

42,940

 

-

 

42,940

 

Prepaid expenses and other current assets

 

-

 

-

 

250

 

250

 

Accrued liabilities

 

-

 

(335)

 

-

 

(335)

 

Total

 

$

303,018

 

$

887,217

 

$

4,160

 

$

1,194,395

 

 

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 commercial paper, U.S. Treasuries, certificates of deposit, municipal securities, U.S. government agency securities and VRDNs, is based on other observable inputs, specifically a market approach which utilizes valuation models, pricing systems, mathematical tools and other relevant

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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 six-months ended June 30, 2015 or the year ended December 31, 2014, and there were no changes in the Company’s valuation techniques.

 

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 six-months ended June 30, 2015.

 

At June 30, 2015, the Company held auction rate securities with a face value of $3.4 million (amortized cost basis of $3.2 million). A Level 3 valuation was performed on the Company’s auction rate securities as of June 30, 2015 resulting in a fair value of $3.2 million for the Company’s trading auction rate securities (after a $0.2 million impairment), which are included in short-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 six-months ended June 30, 2015, $0.7 million of ARS Securities were redeemed ($13.1 million, $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, 2014, 2013, 2012 and 2011, respectively). Subsequent to June 30, 2015, $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 June 30, 2015, the Company recorded $0.2 million as the fair market value of the 2011 Put Option, included in prepaid expenses and other current assets.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

June 30, 2015

 

Three-Months Ended

June 30, 2014

 

 

 

Auction
Rate
Securities

 

Put Options

 

Auction
Rate
Securities

 

Put Options

 

Opening Balance

 

$

3,910

 

$

250

 

$

14,526

 

$

1,024

 

Transfers into Level 3

 

-

 

-

 

-

 

-

 

Transfers out of Level 3

 

-

 

-

 

-

 

-

 

Total gains (losses) for the period:

 

 

 

 

 

 

 

 

 

Included in earnings

 

61

 

(61)

 

17

 

(30)

 

Included in other comprehensive income

 

-

 

-

 

-

 

-

 

Settlements

 

(725)

 

-

 

(1,724)

 

-

 

Closing Balance

 

$

3,246

 

$

189

 

$

12,819

 

$

 994

 

 

 

 

 

 

 

 

 

 

 

 

 

Six-Months Ended

June 30, 2015

 

Six-Months Ended

June 30, 2014

 

 

 

Auction
Rate
Securities

 

Put Options

 

Auction
Rate
Securities

 

Put Options

 

Opening Balance

 

$

3,910

 

$

250

 

$

16,184

 

$

1,092

 

Transfers into Level 3

 

-

 

-

 

-

 

-

 

Transfers out of Level 3

 

-

 

-

 

-

 

-

 

Total gains (losses) for the period:

 

 

 

 

 

 

 

 

 

Included in earnings

 

61

 

(61)

 

84

 

(98)

 

Included in other comprehensive income

 

-

 

-

 

-

 

-

 

Settlements

 

(725)

 

-

 

(3,449)

 

-

 

Closing Balance

 

$

3,246

 

$

189

 

$

12,819

 

$

994

 

 

7.                                    DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

The Company is exposed to foreign currency exchange rate risks related primarily to its foreign business operations. During the six-months ended June 30, 2015 and the year ended December 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 of the Company that were outstanding as of June 30, 2015 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, 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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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:

 

June 30, 2015

 

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 GBP

 

$

4,406

 

$

1

 

Accounts receivable, net

 

       Receive USD/pay CAD

 

4,865

 

60

 

Accounts receivable, net

 

       Receive USD/pay MXN

 

7,455

 

69

 

Accounts receivable, net

 

       Receive USD/pay COP

 

1,329

 

9

 

Accounts receivable, net

 

 

 

 

 

 

 

 

 

 Liabilities:

 

 

 

 

 

 

 

  Foreign currency exchange contracts:

 

 

 

 

 

 

 

       Receive EUR/pay USD

 

$

15,517

 

$

 (17)

 

Accrued liabilities

 

       Receive USD/pay AUD

 

 

8,551

 

 

(72)

 

Accrued liabilities

 

       Receive USD/pay JPY

 

 

9,241

 

 

(124)

 

Accrued liabilities

 

       Receive USD/pay ZAR

 

 

12,808

 

 

(54)

 

Accrued liabilities

 

       Receive USD/pay CLP

 

 

3,813

 

 

(11)

 

Accrued liabilities

 

 

December 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

 

$

19,940

 

$

83

 

Accounts receivable, net

 

 

 

 

 

 

 

 

 

 Liabilities:

 

 

 

 

 

 

 

  Foreign currency exchange contracts:

 

 

 

 

 

 

 

       Receive EUR/pay USD

 

$

13,265

 

$

(75)

 

Accrued liabilities

 

       Receive USD/pay AUD

 

 

8,343

 

 

(48)

 

Accrued liabilities

 

       Receive USD/pay JPY

 

 

10,620

 

 

(84)

 

Accrued liabilities

 

       Receive USD/pay ZAR

 

 

14,760

 

 

(105)

 

Accrued liabilities

 

       Receive USD/pay MXN

 

 

4,961

 

 

(11)

 

Accrued liabilities

 

       Receive USD/pay CLP

 

 

2,685

 

 

(10)

 

Accrued liabilities

 

       Receive USD/pay COP

 

 

2,845

 

 

(2)

 

Accrued liabilities

 

 

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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

 

June 30, 2015

 

June 30, 2014

 

Foreign currency exchange contracts

 

Interest and other income, net

 

  $

(63) 

 

  $

(406) 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of loss
recognized in income on
derivatives

 

 

 

 

 

Six-months ended

 

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

 

Location of loss
recognized in income on
derivatives

 

June 30, 2015

 

June 30, 2014

 

Foreign currency exchange contracts

 

Interest and other income, net

 

  $

(1,919) 

 

  $

(765) 

 

 

 

 

 

 

 

 

 

 

8.                                    INVENTORIES

 

Inventories consist of the following at:

 

 

 

June 30,
2015

 

December 31,
2014

 

Raw materials

 

$

58,586

 

$

59,938

 

Finished goods

 

122,306

 

114,635

 

 

 

$

180,892

 

$

174,573

 

 

9.                                    PROPERTY AND EQUIPMENT, Net

 

Property and equipment consist of the following at:

 

 

 

June 30,
2015

 

December 31,
2014

 

Land

 

$

6,792

 

$

6,792

 

Leasehold improvements

 

2,807

 

2,796

 

Furniture and fixtures

 

3,487

 

3,371

 

Office and computer equipment

 

10,519

 

10,072

 

Computer software

 

1,955

 

1,317

 

Equipment

 

92,807

 

84,263

 

Buildings

 

39,096

 

37,311

 

Vehicles

 

29,022

 

27,813

 

 

 

186,485

 

173,735

 

Less: accumulated depreciation and amortization

 

(93,947)

 

(83,579)

 

 

 

$

92,538

 

$

90,156

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

10.                            GOODWILL AND OTHER INTANGIBLE ASSETS

 

The following is a roll-forward of goodwill for the six-months ended June 30, 2015 by reportable segment:

 

 

 

Finished
Goods

 

Concentrate

 

Total

 

Balance at December 31, 2014

 

  $

 

  $

 

  $

 

Acquisitions

 

785,277 

 

502,500 

 

1,287,777 

 

Balance at June 30, 2015

 

  $

785,277 

 

  $

502,500 

 

  $

1,287,777 

 

 

Intangible assets consist of the following at:

 

 

 

June 30,
2015

 

December 31,
2014

 

Amortizing intangibles

 

  $

35,249 

 

  $

233 

 

Accumulated amortization

 

(396) 

 

(50) 

 

 

 

34,853 

 

183 

 

Non-amortizing intangibles

 

393,313 

 

50,565 

 

 

 

  $

428,166 

 

  $

50,748 

 

 

Amortizing intangibles primarily consist of customer relationships. All amortizing intangibles have been assigned an estimated finite useful life and such intangibles are amortized on a straight-line basis over the number of years that approximate their respective useful lives, generally 5 years. Total amortization expense recorded was $0.3 million and $0.1 million for the three-months ended June 30, 2015 and 2014, respectively. Total amortization expense recorded was $0.3 million and $0.25 million for the six-months ended June 30, 2015 and 2014, respectively. Non-amortizing intangibles primarily consist of indefinite-lived tradenames.

 

11.                            DISTRIBUTION AGREEMENTS

 

As part of the TCCC Transaction, the amended distribution coordination agreements entered into with TCCC provided for the transition of third parties’ rights to distribute the Company’s products in most territories in the U.S. and Canada to members of TCCC’s distribution network, which consists of owned or controlled bottlers/distributors and independent bottling/distribution partners. In February 2015, in accordance with its then existing agreements with certain affected third-party distributors, Old Monster sent notices of termination to the applicable affected third-party distributors in the U.S., providing for the termination of their respective distribution agreements.  The associated distribution rights relating to such terminated distribution agreements have been transitioned to the TCCC distribution network as of the effective date of termination of the affected third-party distributors’ rights in the applicable territories.  As of August 10, 2015, distribution rights in the U.S. representing approximately 89% of the target case sales (see Note 3), have been transitioned to TCCC’s distribution network.

 

In accordance with ASC No. 420 “Exit or Disposal Cost Obligations”, the Company expenses distributor termination costs in the period in which the written notification of termination occurs.  As a result, the Company incurred termination costs of $12.2 million and $218.2 million for the three- and six-months ended June 30, 2015. Such termination costs have been expensed in full and are included in operating expenses for the three- and six-months ended June 30, 2015.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

In the normal course of business, 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, are accounted for as deferred revenue and are recognized as revenue ratably over the anticipated life of the respective distribution agreement, generally 20 years. Revenue recognized was $3.2 million and $3.8 million for the three-months ended June 30, 2015 and 2014, respectively. Revenue recognized was $46.5 million and $7.5 million for the six-months ended June 30, 2015 and 2014, respectively. Included in the $46.5 million of revenue recognized for the six-months ended June 30, 2015 was $39.8 million related to the accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors who were sent notices of termination during the first quarter of 2015, as described above.

 

12.                            COMMITMENTS AND CONTINGENCIES

 

The Company had purchase commitments aggregating approximately $39.3 million at June 30, 2015, 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 $87.2 million at June 30, 2015, which related primarily to sponsorships and other marketing activities.

 

The Company had operating lease commitments aggregating approximately $11.2 million at June 30, 2015, which related primarily to warehouse and office space.

 

In April 2015, the Company entered into an agreement, subject to the attainment of requisite entitlements, to acquire approximately 56 acres of vacant land located in Jurupa Valley, CA for an estimated purchase price of $38.1 million. The Company was unable to secure the requisite entitlements and therefore terminated this agreement.

 

Legal Proceedings

 

The Company has been named a defendant in various personal injury lawsuits, claiming that the death or other serious injury of the plaintiffs was caused by consumption of Monster Energy® drinks. The plaintiffs in these lawsuits allege strict product liability, negligence, fraudulent concealment, breach of implied warranties and wrongful death. The Company believes that each complaint is without merit and plans a vigorous defense. The Company also believes that any damages, if awarded, would not have a material adverse effect on the Company’s financial position or 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 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 in the Supreme Court, New York County. The motion was fully briefed and was argued on March 17, 2015.  No decision has been rendered. 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.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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 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.”

 

(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 sought 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, 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 appeal is fully briefed but has not yet been set for argument.

 

(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 sought 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.

 

After a motion to strike filed by the Company was granted in part, 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, 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 September 5, 2014, the City Attorney filed a second amended complaint, adding Monster Energy Company as a defendant. The Company and Monster Energy Company filed answers to the second amended complaint on October 4, 2014 and November 10, 2014, respectively. Discovery is ongoing.

 

The Court has set the case for a two-week bench trial beginning on February 8, 2016.

 

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.

 

The actions or investigations described above have not progressed to a point where a reasonably possible range of losses associated with their ultimate outcome can be estimated at this time. If the final resolution of any such litigation or proceedings is unfavorable, the Company’s financial condition, operating results and cash flows could be materially affected.

 

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 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.