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, 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 ¨

 

 

 

Non-accelerated filer ¨ (Do not check if smaller reporting company)

 

Smaller reporting company ¨

 

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 202,722,461 shares of common stock, par value $0.005 per share, outstanding as of October 26, 2015.

 



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

SEPTEMBER 30, 2015

 

 

INDEX

 

 

Part I.

FINANCIAL INFORMATION

Page No.

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

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

3

 

 

 

 

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

4

 

 

 

 

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

5

 

 

 

 

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

34

 

 

 

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

56

 

 

 

Item 5.

Other Information

56

 

 

 

Item 6.

Exhibits

56

 

 

 

 

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 SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

(In Thousands, Except Par Value) (Unaudited)

 

 

 

September 30,
2015

 

December 31,
2014

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

  $

1,240,717

 

  $

370,323

 

Short-term investments

 

1,544,710

 

781,134

 

Accounts receivable, net

 

407,771

 

280,203

 

TCCC Transaction receivable

 

125,000

 

-

 

Distributor receivables

 

714

 

552

 

Inventories

 

159,691

 

174,573

 

Prepaid expenses and other current assets

 

25,742

 

19,673

 

Intangibles held-for-sale, net

 

-

 

18,079

 

Prepaid income taxes

 

90,933

 

8,617

 

Deferred income taxes

 

155,369

 

40,275

 

Total current assets

 

3,750,647

 

1,693,429

 

 

 

 

 

 

 

INVESTMENTS

 

34,355

 

42,940

 

PROPERTY AND EQUIPMENT, net

 

94,727

 

90,156

 

DEFERRED INCOME TAXES

 

-

 

54,106

 

GOODWILL

 

1,287,777

 

-

 

OTHER INTANGIBLE ASSETS, net

 

428,201

 

50,748

 

OTHER ASSETS

 

8,031

 

7,496

 

Total Assets

 

  $

5,603,738

 

  $

1,938,875

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

 

  $

238,106

 

  $

127,641

 

Accrued liabilities

 

67,933

 

40,271

 

Accrued promotional allowances

 

124,539

 

114,047

 

Accrued distributor terminations

 

7,654

 

-

 

Deferred revenue

 

31,413

 

49,926

 

Accrued compensation

 

20,152

 

17,983

 

Income taxes payable

 

14,809

 

5,848

 

Total current liabilities

 

504,606

 

355,716

 

 

 

 

 

 

 

DEFERRED REVENUE

 

355,128

 

68,009

 

 

 

 

 

 

 

DEFERRED INCOME TAXES

 

89,447

 

-

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 11)

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

Common stock - $0.005 par value; 240,000 shares authorized; 206,788 shares issued and 202,731 outstanding as of September 30, 2015; 207,004 shares issued and 167,722 outstanding as of December 31, 2014

 

1,034

 

1,035

 

Additional paid-in capital

 

3,966,395

 

426,145

 

Retained earnings

 

1,256,121

 

2,330,510

 

Accumulated other comprehensive loss

 

(20,851)

 

(11,453)

 

Common stock in treasury, at cost; 4,057 and 39,282 shares as of September 30, 2015 and December 31, 2014, respectively

 

(548,142)

 

(1,231,087)

 

Total stockholders’ equity

 

4,654,557

 

1,515,150

 

Total Liabilities and Stockholders’ Equity

 

  $

5,603,738

 

  $

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 NINE-MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

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

 

 

 

Three-Months Ended

 

Nine-Months Ended

 

 

 

 

 

 

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

NET SALES

 

  $

756,619

 

  $

635,972

 

  $

2,077,131

 

  $

1,859,301

 

 

 

 

 

 

 

 

 

 

 

COST OF SALES

 

291,143

 

294,052

 

848,191

 

851,274

 

 

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

465,476

 

341,920

 

1,228,940

 

1,008,027

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

174,038

 

152,013

 

725,205

 

453,443

 

 

 

 

 

 

 

 

 

 

 

GAIN ON SALE OF MONSTER NON-ENERGY (NOTE 2)

 

-

 

-

 

161,470

 

-

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

291,438

 

189,907

 

665,205

 

554,584

 

 

 

 

 

 

 

 

 

 

 

INTEREST INCOME AND OTHER (EXPENSE), net

 

(3,362)

 

(1,038)

 

(3,144)

 

(707)

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

 

288,076

 

188,869

 

662,061

 

553,877

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

113,502

 

67,269

 

254,070

 

196,023

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

  $

174,574

 

  $

121,600

 

  $

407,991

 

  $

357,854

 

 

 

 

 

 

 

 

 

 

 

NET INCOME PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

Basic

 

  $

0.85

 

  $

0.73

 

  $

2.22

 

  $

2.14

 

Diluted

 

  $

0.84

 

  $

0.70

 

  $

2.17

 

  $

2.06

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Basic

 

205,051

 

167,346

 

184,098

 

167,116

 

Diluted

 

208,094

 

174,270

 

188,131

 

174,016

 

 

 

 

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, 2015 AND 2014

(In Thousands) (Unaudited)

 

 

 

Three-Months Ended
September 30,

 

Nine-Months Ended
September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Net income, as reported

 

  $

174,574

 

  $

121,600

 

  $

407,991

 

  $

357,854

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

(1,778)

 

(5,716)

 

(9,398)

 

(5,104)

 

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 loss

 

(1,778)

 

(5,716)

 

(9,398)

 

(5,104)

 

Comprehensive income

 

  $

172,796

 

  $

115,884

 

  $

398,593

 

  $

352,750

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

(In Thousands) (Unaudited)

 

 

 

Nine-Months Ended

 

 

 

September 30, 2015

 

September 30, 2014

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

  $

407,991

 

  $

357,854

 

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

 

 

 

 

 

Depreciation and amortization

 

21,757

 

19,124

 

Gain on disposal of property and equipment

 

(212)

 

(379)

 

Gain on sale of Monster Non-Energy

 

(161,470)

 

-

 

Stock-based compensation

 

23,689

 

22,509

 

Loss on put option

 

-

 

771

 

Gain on investments, net

 

-

 

(732)

 

Deferred income taxes

 

(115,098)

 

(7,919)

 

Excess tax benefit from stock-based compensation

 

(303,914)

 

(11,541)

 

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

 

 

 

 

 

Accounts receivable

 

(132,614)

 

(45,759)

 

Distributor receivables

 

393

 

2,047

 

Inventories

 

(9,076)

 

13,300

 

Prepaid expenses and other current assets

 

(6,863)

 

(4,564)

 

Prepaid income taxes

 

(83,276)

 

(8,723)

 

Accounts payable

 

75,142

 

30,032

 

Accrued liabilities

 

29,296

 

12,387

 

Accrued promotional allowances

 

15,196

 

32,421

 

Accrued distributor terminations

 

7,706

 

(2,338)

 

Accrued compensation

 

2,414

 

(467)

 

Income taxes payable

 

312,750

 

4,909

 

Deferred revenue

 

(35,991)

 

(5,883)

 

Net cash provided by operating activities

 

47,820

 

407,049

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Maturities of held-to-maturity investments

 

998,762

 

545,774

 

Sales of available-for-sale investments

 

4,001

 

-

 

Sales of trading investments

 

2,625

 

12,075

 

Proceeds from transfer of distribution rights to TCCC

 

179,658

 

-

 

Purchases of held-to-maturity investments

 

(1,760,178)

 

(761,538)

 

Purchases of property and equipment

 

(25,627)

 

(19,300)

 

Proceeds from the sale of Monster Non-Energy

 

198,008

 

-

 

Proceeds from sale of property and equipment

 

484

 

745

 

Increase in intangibles

 

(5,352)

 

(1,765)

 

(Increase) decrease in other assets

 

(1,039)

 

1,027

 

Net cash used in investing activities

 

(408,658)

 

(222,982)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Principal payments on debt

 

(807)

 

(1,316)

 

Excess tax benefit from stock-based compensation

 

303,914

 

11,541

 

Issuance of common stock

 

1,691,051

 

15,050

 

Purchases of common stock held in treasury

 

(758,974)

 

(8,126)

 

Net cash provided by financing activities

 

1,235,184

 

17,149

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(3,952)

 

(4,242)

 

 

 

 

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

870,394

 

196,974

 

CASH AND CASH EQUIVALENTS, beginning of period

 

370,323

 

211,349

 

CASH AND CASH EQUIVALENTS, end of period

 

  $

1,240,717

 

  $

408,323

 

 

 

 

 

 

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

  $

21

 

  $

27

 

Income taxes

 

  $

141,184

 

  $

210,090

 

 

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, 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 $1.1 million and $0.7 million for the nine-months ended September 30, 2015 and 2014, respectively.

 

Included in accounts payable as of September 30, 2015 are treasury stock purchases of $40.7 million.

 

During the nine-months ended September 30, 2015, the Company issued 11.8 million shares of the Company’s common stock in exchange for KO Energy (see Note 2).

 

During the nine-months ended September 30, 2015, in connection with the TCCC Transaction (as defined in Note 2), $125.0 million relating to the transfer of certain distribution rights was deposited into escrow pending certain transition milestones (see Note 2).

 

During the nine-months ended September 30, 2015, the Company cancelled 41.5 million shares of treasury stock (see Note 13). Amounts previously recorded as treasury stock were netted against common stock and retained earnings.

 

 

 

 

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”) 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 nine-months ended September 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 2, 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 17 for additional information about the Company’s new reporting segments.

 

2.                                    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 13)), 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:

 

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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)

 

·               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.

 

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, (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, pursuant to an escrow agreement (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 amount described above that becomes payable following the one-year anniversary will be paid directly from TCCC 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)

 

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 November 6, 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.

 

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 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.

 

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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 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.

 

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 second quarter of 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)

 

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 September 30, 2015

 

 

 

 

 

 

Pro Forma Adjustments

 

 

 

 

Monster
Beverage
Corporation
as reported¹

 

KO Energy

 

Disposal of
Monster Non-
Energy

 

Other

 

Pro Forma
Combined

Net sales

 

 $

756,619

 

 $

-

 

 $

-

 

 $

-

 

 $

756,619

Net income

 

174,574

 

-

 

-

 

180

 

174,754

 

 

 

 

 

 

 

 

 

 

 

 

 

Three-Months Ended September 30, 2014

 

 

 

 

 

 

Pro Forma Adjustments

 

 

 

 

Monster
Beverage
Corporation
as reported

 

KO Energy

 

Disposal of
Monster Non-
Energy

 

Other

 

Pro Forma
Combined

Net sales

 

 $

635,972

 

 $

85,608

 

 $

(41,624)

 

 $

3,840

 

 $

683,796

Net income

 

121,600

 

54,614

²

(1,376)

 

(24,075)

 

150,763

 

¹Includes net sales of $69.9 million and net income of $27.4 million (tax affected) related to the acquired KO Energy assets for the three-months ended September 30, 2015.

²The $54.6 million of net income for KO Energy for the three-months ended September 30, 2014 is presented before tax. The associated estimated provision for income taxes is included in the “Other” category.

 

 

 

Nine-Months Ended September 30, 2015

 

 

 

 

 

 

Pro Forma Adjustments

 

 

 

 

Monster
Beverage
Corporation
as reported¹

 

KO Energy²

 

Disposal of
Monster Non-
Energy³

 

Other

 

Pro Forma
Combined

Net sales

 

 $

2,077,131

 

 $

138,127

 

 $

(60,824)

 

 $

6,803

 

 $

2,161,237

Net income

 

407,991

 

100,575

4

(101,881)

 

(36,487)

 

370,198

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine-Months Ended September 30, 2014

 

 

 

 

 

 

Pro Forma Adjustments

 

 

 

 

Monster
Beverage
Corporation
as reported

 

KO Energy

 

Disposal of
Monster Non-
Energy

 

Other

 

Pro Forma
Combined

Net sales

 

 $

1,859,301

 

 $

256,824

 

 $

(119,608)

 

 $

11,393

 

 $

2,007,910

Net income

 

357,854

 

163,842

4

(4,398)

 

(74,747)

 

442,551

 

¹Includes net sales of $82.9 million and net income of $32.9 million (tax affected) 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.

 

4The $100.6 million of net income for the nine-months ended September 30, 2015 and $163.8 million of net income for KO Energy for the nine-months ended September 30, 2014 are presented before tax. The associated estimated provision for income taxes is included in the “Other” category.

 

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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
Ended
September 30,
2015

 

Three-Months
Ended
September 30,
2014

 

Nine-Months
Ended
September 30,
2015¹

 

Nine-Months
Ended
September 30,
2014

Net sales:

 

 

 

 

 

 

 

 

Amortization of deferred revenue

 

  $

-

 

  $

3,840

 

  $

6,803

 

  $

11,393

 

 

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

 

 

 

Amortization of deferred revenue

 

  $

-

 

  $

3,840

 

  $

6,803

 

  $

11,393

To record sales commissions

 

-

 

(9,588)

 

(15,470)

 

(28,764)

To record amortization of definite lived KO Energy intangibles

 

-

 

(1,764)

 

(3,126)

 

(5,236)

To eliminate TCCC Transaction expenses

 

292

 

2,567

 

15,425

 

3,635

Estimated provision for income taxes on pro forma adjustments

 

(112)

 

1,904

 

(1,398)

 

7,304

Estimated provision for income taxes on KO Energy income

 

-

 

(21,034)

 

(38,721)

 

(63,079)

Total

 

  $

180

 

  $

(24,075)

 

  $

(36,487)

 

  $

(74,747)

 

 

¹Includes amortization of deferred revenue, sales commissions and amortization of intangibles through June 12, 2015, the date the TCCC Transaction was consummated.

 

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.

 

3.                                    RECENT ACCOUNTING PRONOUNCEMENTS

 

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”.  ASU 2015-11 requires entities to measure inventory at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for annual periods, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted. The adoption of ASU 2015-11 is not expected to have a material impact on the Company’s financial position, results of operations or liquidity.

 

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Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

In 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 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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Table of Contents

 

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, 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

 

  $

306,858

 

  $

-

 

  $

-

 

  $

306,858

 

  $

-

 

  $

-

U.S. Treasuries

 

92,994

 

5

 

-

 

92,999

 

-

 

-

Certificates of deposit

 

44,506

 

-

 

-

 

44,506

 

-

 

-

Municipal securities

 

611,370

 

319

 

10

 

611,679

 

10

 

-

U.S. government agency securities

 

487,495

 

23

 

4

 

487,514

 

4

 

-

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

Municipal securities

 

29,333

 

16

 

4

 

29,345

 

4

 

-

U.S. government agency securities

 

5,022

 

-

 

3

 

5,019

 

3

 

-

Total

 

  $

1,577,578

 

  $

363

 

  $

21

 

1,577,920

 

  $

21

 

  $

-

Trading

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

1,487

 

 

 

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

-

 

 

 

 

Total

 

 

 

 

 

 

 

  $

1,579,407

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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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, 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 day, settlement basis. All of the Company’s investments at September 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:

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

Amortized Cost

 

Fair Value

 

Amortized Cost

 

Fair Value

Less than 1 year:

 

 

 

 

 

 

 

 

Commercial paper

 

  $

306,858

 

  $

306,858

 

  $

19,482

 

  $

19,480

U.S. Treasuries

 

92,994

 

92,999

 

-

 

-

Certificates of deposit

 

44,506

 

44,506

 

-

 

-

Municipal securities

 

611,370

 

611,679

 

744,542

 

744,647

U.S. government agency securities

 

487,495

 

487,514

 

9,199

 

9,198

Due 1 - 10 years:

 

 

 

 

 

 

 

 

Municipal securities

 

29,333

 

29,345

 

42,940

 

42,950

U.S. government agency securities

 

5,022

 

5,019

 

-

 

-

Due 11 - 20 years:

 

 

 

 

 

 

 

 

Auction rate securities

 

1,487

 

1,487

 

3,910

 

3,910

Due 21 - 30 years:

 

 

 

 

 

 

 

 

Variable rate demand notes

 

-

 

-

 

4,001

 

4,001

Total

 

  $

1,579,065

 

  $

1,579,407

 

  $

824,074

 

  $

824,186

 

5.                                    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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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, 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:

 

September 30, 2015

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

$

194,242

 

$

-

 

$

-

 

$

194,242

 

Money market funds

 

624,007

 

-

 

-

 

624,007

 

Commercial paper

 

-

 

361,833

 

-

 

361,833

 

U.S. Treasuries

 

-

 

111,993

 

-

 

111,993

 

Certificates of deposit

 

-

 

115,509

 

-

 

115,509

 

Municipal securities

 

-

 

670,186

 

-

 

670,186

 

U.S. government agency securities

 

-

 

740,525

 

-

 

740,525

 

Variable rate demand notes

 

-

 

-

 

-

 

-

 

Auction rate securities

 

-

 

-

 

1,487

 

1,487

 

Put option related to auction rate securities

 

-

 

-

 

48

 

48

 

Foreign currency derivatives

 

-

 

(570

)

-

 

(570

)

Total

 

$

818,249

 

$

1,999,476

 

$

1,535

 

$

2,819,260

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

818,249

 

$

422,468

 

$

-

 

$

1,240,717

 

Short-term investments

 

-

 

1,543,223

 

1,487

 

1,544,710

 

Accounts receivable, net

 

-

 

48

 

-

 

48

 

Investments

 

-

 

34,355

 

-

 

34,355

 

Prepaid expenses and other current assets

 

-

 

-

 

48

 

48

 

Accrued liabilities

 

-

 

(618

)

-

 

(618

)

Total

 

$

818,249

 

$

1,999,476

 

$

1,535

 

$

2,819,260

 

 

 

 

 

 

 

 

 

 

 

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

 

 

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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 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 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, 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 nine-months ended September 30, 2015.

 

At September 30, 2015, the Company held auction rate securities with a face value of $1.54 million (amortized cost basis of $1.49 million). A Level 3 valuation was performed on the Company’s auction rate securities as of September 30, 2015 resulting in a fair value of $1.49 million for the Company’s trading auction rate securities (after a $0.05 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 had 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 continued to accrue interest until redeemed through the 2011 Put Option, or as determined by the auction process, or should the auction process have failed, the terms outlined in the prospectus of the respective 2011 ARS Securities. Under the 2011 ARS Agreement, the Company had the obligation, should it have received 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, 2015, $2.6 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 September 30, 2015, the Company’s remaining $1.5 million balance of 2011 ARS Securities were redeemed at par through the exercise of the remaining portion of the 2011 Put Option, which exhausted the Company’s rights under the 2011 ARS Agreement. The 2011 Put Option did 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, 2015, the Company recorded $0.05 million as the fair market value of the 2011 Put Option, included in prepaid expenses and other current assets.

 

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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 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, 2015

 

Three-Months Ended
September 30, 2014

 

 

 

Auction
Rate
Securities

 

Put Options

 

Auction
Rate
Securities

 

Put Options

 

Opening Balance

 

  $

3,246

 

  $

189

 

  $

12,819

 

  $

994

 

Transfers into Level 3

 

-

 

-

 

-

 

-

 

Transfers out of Level 3

 

-

 

-

 

-

 

-

 

Total gains (losses) for the period:

 

 

 

 

 

 

 

 

 

Included in earnings

 

141

 

(141)

 

648

 

(674)

 

Included in other comprehensive income

 

-

 

-

 

-

 

-

 

Settlements

 

(1,900)

 

-

 

(8,625)

 

-

 

Closing Balance

 

  $

1,487

 

  $

48

 

  $

4,842

 

  $

320

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine-Months Ended
September 30, 2015

 

Nine-Months Ended
September 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

 

202

 

(202)

 

732

 

(772)

 

Included in other comprehensive income

 

-

 

-

 

-

 

-

 

Settlements

 

(2,625)

 

-

 

(12,074)

 

-

 

Closing Balance

 

  $

1,487

 

  $

48

 

  $

4,842

 

  $

320

 

 

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 nine-months ended September 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 September 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 income and other (expense), net, in the condensed consolidated statements of income, and are largely offset by the changes in the fair value of the underlying economically hedged item.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

September 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

 

$

9,410

 

$

36

 

Accounts receivable, net

Receive USD/pay JPY

 

5,389

 

12

 

Accounts receivable, net

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Foreign currency exchange contracts:

 

 

 

 

 

 

Receive EUR/pay USD

 

$

26,749

 

$

(160)

 

Accrued liabilities

Receive USD/pay AUD

 

7,263

 

(17)

 

Accrued liabilities

Receive USD/pay ZAR

 

14,921

 

(243)

 

Accrued liabilities

Receive USD/pay MXN

 

7,442

 

(72)

 

Accrued liabilities

Receive USD/pay RUB

 

1,736

 

(21)

 

Accrued liabilities

Receive USD/pay BRL

 

2,284

 

(58)

 

Accrued liabilities

Receive USD/pay CLP

 

1,631

 

(29)

 

Accrued liabilities

Receive USD/pay COP

 

1,120

 

(18)

 

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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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 gain
recognized in income on
derivatives

 

 

 

 

 

Three-months ended

 

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

 

Location of gain
recognized in income on
derivatives

 

September 30,
2015

 

September 30,
2014

 

 

 

 

 

 

 

 

 

Foreign currency exchange contracts

 

Interest income and other (expense), net

 

$

3,552

 

$

960

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of gain
recognized in income on
derivatives

 

 

 

 

 

Nine-months ended

 

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

 

Location of gain
recognized in income on
derivatives

 

September 30,
2015

 

September 30,
2014

 

 

 

 

 

 

 

 

 

Foreign currency exchange contracts

 

Interest income and other (expense), net

 

$

1,634

 

$

194

 

 

7.                                    INVENTORIES

 

Inventories consist of the following at:

 

 

 

September 30,
2015

 

December 31,
2014

 

Raw materials

 

$

56,578

 

$

59,938

 

Finished goods

 

103,113

 

114,635

 

 

 

$

159,691

 

$

174,573

 

 

8.                                    PROPERTY AND EQUIPMENT, Net

 

Property and equipment consist of the following at:

 

 

 

September 30,
2015

 

December 31,
2014

 

Land

 

$

6,792

 

$

6,792

 

Leasehold improvements

 

2,745

 

2,796

 

Furniture and fixtures

 

3,497

 

3,371

 

Office and computer equipment

 

10,864

 

10,072

 

Computer software

 

2,283

 

1,317

 

Equipment

 

99,874

 

84,263

 

Buildings

 

39,421

 

37,311

 

Vehicles

 

28,391

 

27,813

 

 

 

193,867

 

173,735

 

Less: accumulated depreciation and amortization

 

(99,140)

 

(83,579)

 

 

 

$

94,727

 

$

90,156

 

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

9.                                    GOODWILL AND OTHER INTANGIBLE ASSETS

 

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

 

 

 

Finished
Products

 

Concentrate

 

Total

 

Balance at December 31, 2014

 

$

-

 

$

-

 

$

-

 

Acquisitions

 

785,277

 

502,500

 

1,287,777

 

Balance at September 30, 2015

 

$

785,277

 

$

502,500

 

$

1,287,777

 

 

 

Intangible assets consist of the following at:

 

 

 

September 30,
2015

 

December 31,
2014

 

Amortizing intangibles

 

$

35,264

 

$

233

 

Accumulated amortization

 

(2,148)

 

(50)

 

 

 

33,116

 

183

 

Non-amortizing intangibles

 

395,085

 

50,565

 

 

 

$

428,201

 

$

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 $1.8 million and $0.1 million for the three-months ended September 30, 2015 and 2014, respectively. Total amortization expense recorded was $2.1 million and $0.4 million for the nine-months ended September 30, 2015 and 2014, respectively. Non-amortizing intangibles primarily consist of indefinite-lived tradenames.

 

10.                            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 were 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 November 6, 2015, distribution rights in the U.S. representing approximately 89% of the target case sales (see Note 2) 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 $2.5 million and $220.7 million for the three- and nine-months ended September 30, 2015. Such termination costs have been expensed in full and are included in operating expenses for the three- and nine-months ended September 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 $5.5 million and $1.9 million for the three-months ended September 30, 2015 and 2014, respectively. Revenue recognized was $45.1 million and $5.8 million for the nine-months ended September 30, 2015 and 2014, respectively. Included in the $45.1 million of revenue recognized for the nine-months ended September 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.

 

11.                            COMMITMENTS AND CONTINGENCIES

 

The Company had purchase commitments aggregating approximately $37.5 million at September 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 $77.6 million at September 30, 2015, which related primarily to sponsorships and other marketing activities.

 

The Company had operating lease commitments aggregating approximately $10.6 million at September 30, 2015, which related primarily to warehouse and office space.

 

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.

 

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

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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.

 

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.

 

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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 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.

 

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, 2015, the Company’s consolidated balance sheet includes accrued loss contingencies of approximately $2.8 million.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

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, 2015 are as follows:

 

 

 

Currency

 

 

 

Translation

 

 

 

Losses

 

 

 

 

 

Balance at December 31, 2014

 

$

11,453

 

Other comprehensive loss before reclassifications

 

-

 

Amounts reclassified from accumulated other comprehensive loss

 

-

 

Net current-period other comprehensive loss

 

9,398

 

Balance at September 30, 2015

 

$

20,851

 

 

13.                            TREASURY STOCK

 

On June 12, 2015, as part of the TCCC Transaction, the Company cancelled 41.5 million shares of treasury stock owned by the Company. The cancelled stock had a carrying value of approximately $1,482.6 million. The Company’s accounting policy upon the formal retirement of treasury stock is to deduct its par value from common stock and to reflect any excess of cost over par as a deduction from retained earnings.

 

On April 7, 2013, the Company’s Board of Directors authorized a new share repurchase program for the repurchase of up to $200.0 million of the Company’s outstanding common stock (the “April 2013 Repurchase Plan”).  During the three-months ended September 30, 2015, the Company purchased 1.1 million shares of common stock at an average purchase price of $134.71 per share, for a total amount of $145.7 million (excluding broker commissions), which exhausted the availability under the April 2013 Repurchase Plan.

 

On September 11, 2015, the Company’s Board of Directors authorized a new share repurchase program for the repurchase of up to $500.0 million of the Company’s outstanding common stock (the “September 2015 Repurchase Plan”). During the three-months ended September 30, 2015, the Company purchased 1.8 million shares of common stock at an average purchase price of $134.27 per share, for a total amount of $241.8 million (excluding broker commissions), under the September 2015 Repurchase Plan.

 

During the three-months ended September 30, 2015, 75 shares were purchased from employees in lieu of cash payments for options exercised or withholding taxes due for a total amount of $0.01 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 September 2015 Repurchase Plan or the April 2013 Repurchase Plan. Such shares are included in common stock in treasury in the accompanying condensed consolidated balance sheet at September 30, 2015.

 

14.                            STOCK-BASED COMPENSATION

 

The Company has two stock-based compensation plans under which shares were available for grant at September 30, 2015: 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”).

 

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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 recorded $8.9 million and $7.4 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, 2015 and 2014, respectively. The Company recorded $23.7 million and $22.5 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, 2015 and 2014, 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 three-months ended September 30, 2015 and 2014 was $3.6 million and $8.2 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, 2015 and 2014 was $303.9 million and $11.5 million, respectively.

 

Stock Options

 

Under the Company’s stock-based compensation plans, all stock options granted as of September 30, 2015 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,

 

 

2015

 

2014¹

 

2015

 

2014

Dividend yield

 

0.0%

 

-

 

0.0%

 

0.0%

Expected volatility

 

36.7%

 

-

 

37.1%

 

42.4%

Risk-free interest rate

 

1.5%

 

-

 

1.6%

 

1.6%

Expected term

 

6.1 years

 

-

 

5.8 years

 

5.8 years

 

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

 

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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Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

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

 

Options

 

Number of
Shares (In
thousands)

 

Weighted-
Average
Exercise
Price Per
Share

 

Weighted-
Average
Remaining
Contractual
Term (In
years)

 

Aggregate
Intrinsic Value

 

Outstanding at January 1, 2015

 

13,066

 

 $

19.73

 

3.1

 

 $

1,158,412