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, 2012

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.)

 

 

550 Monica Circle, Suite 201

Corona, California 92880

(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 171,369,859 shares of common stock, par value $0.005 per share, outstanding as of October 26, 2012.

 



Table of Contents

 

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

SEPTEMBER 30, 2012

 

INDEX

 

Part I.

FINANCIAL INFORMATION

 

Page No.

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011

 

3

 

 

 

 

 

Condensed Consolidated Statements of Income for the Three- and Nine-Months Ended September 30, 2012 and 2011

 

4

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three- and Nine-Months Ended September 30, 2012 and 2011

 

5

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine-Months Ended September 30, 2012 and 2011

 

6

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

 

 

Item 2.

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

 

31

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

49

 

 

 

 

Item 4.

Controls and Procedures

 

49

 

 

 

 

Part II.

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

50

 

 

 

 

Item 1A.

Risk Factors

 

53

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

54

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

54

 

 

 

 

Item 4.

Mine Safety Disclosures

 

55

 

 

 

 

Item 5.

Other Information

 

55

 

 

 

 

Item 6.

Exhibits

 

55

 

 

 

 

 

Signatures

 

56

 

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, 2012 AND DECEMBER 31, 2011

(In Thousands, Except Par Value) (Unaudited)                                                                                                 

 

 

 

 

 

 

 

 

 

September 30,
2012

 

 

December 31,
2011

 

ASSETS

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

Cash and cash equivalents

 

  $

283,054

 

 

  $

359,331

 

Short-term investments

 

307,654

 

 

411,282

 

Trade accounts receivable, net

 

288,584

 

 

218,072

 

Distributor receivables

 

669

 

 

669

 

Inventories

 

193,934

 

 

155,613

 

Prepaid expenses and other current assets

 

20,190

 

 

20,912

 

Prepaid income taxes

 

18,424

 

 

370

 

Deferred income taxes

 

16,428

 

 

16,428

 

Total current assets

 

1,128,937

 

 

1,182,677

 

 

 

 

 

 

 

 

INVESTMENTS

 

19,882

 

 

23,194

 

PROPERTY AND EQUIPMENT, net

 

57,574

 

 

45,151

 

DEFERRED INCOME TAXES

 

56,005

 

 

58,576

 

INTANGIBLES, net

 

52,851

 

 

48,396

 

OTHER ASSETS

 

3,673

 

 

4,405

 

Total Assets

 

  $

1,318,922

 

 

  $

1,362,399

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

Accounts payable

 

  $

152,449

 

 

  $

113,446

 

Accrued liabilities

 

58,973

 

 

31,966

 

Accrued promotional allowances

 

78,526

 

 

87,746

 

Deferred revenue

 

12,360

 

 

11,583

 

Accrued compensation

 

11,897

 

 

10,353

 

Income taxes payable

 

2,833

 

 

10,996

 

Total current liabilities

 

317,038

 

 

266,090

 

 

 

 

 

 

 

 

DEFERRED REVENUE

 

112,209

 

 

117,151

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 9)

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

Common stock - $0.005 par value; 240,000 shares authorized; 202,661 shares issued and 171,355 outstanding as of September 30, 2012; 198,729 shares issued and 174,277 outstanding as of December 31, 2011

 

1,013

 

 

994

 

Additional paid-in capital

 

262,805

 

 

229,301

 

Retained earnings

 

1,440,681

 

 

1,168,644

 

Accumulated other comprehensive income (loss)

 

905

 

 

(1,547

)

Common stock in treasury, at cost; 31,306 and 24,452 shares as of September 30, 2012 and December 31, 2011, respectively

 

(815,729

)

 

(418,234

)

Total stockholders’ equity

 

889,675

 

 

979,158

 

Total Liabilities and Stockholders’ Equity

 

  $

1,318,922

 

 

  $

1,362,399

 

 

 

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, 2012 AND 2011

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three-Months Ended

 

Nine-Months Ended

 

 

September 30,

 

September 30,

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

NET SALES

 

  $

541,940

 

 

  $

474,709

 

 

  $

1,589,185

 

 

  $

1,293,273

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COST OF SALES

 

268,348

 

 

224,402

 

 

767,417

 

 

613,208

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

273,592

 

 

250,307

 

 

821,768

 

 

680,065

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

132,907

 

 

118,217

 

 

385,026

 

 

327,039

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

140,685

 

 

132,090

 

 

436,742

 

 

353,026

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income (expense), net

 

331

 

 

(63

)

 

255

 

 

564

 

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

 

222

 

 

(799

)

 

585

 

 

(850

)

Total other income (expense)

 

553

 

 

(862

)

 

840

 

 

(286

)

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

 

141,238

 

 

131,228

 

 

437,582

 

 

352,740

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

55,096

 

 

48,836

 

 

165,545

 

 

131,057

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

  $

86,142

 

 

  $

82,392

 

 

  $

272,037

 

 

  $

221,683

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

  $

0.49

 

 

  $

0.47

 

 

  $

1.55

 

 

  $

1.25

 

Diluted

 

  $

0.47

 

 

  $

0.44

 

 

  $

1.47

 

 

  $

1.18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

175,026

 

 

175,952

 

 

175,347

 

 

176,916

 

Diluted

 

183,899

 

 

186,640

 

 

185,365

 

 

187,164

 

 

 

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, 2012 AND 2011

(In Thousands) (Unaudited)

 

 

 

Three-Months Ended
September 30,

 

 

Nine-Months Ended
September 30,

 

 

 

2012

 

 

2011

 

 

2012

 

 

2011

 

Net income, as reported

 

 

$

86,142

 

 

 

$

82,392

 

 

 

$

272,037

 

 

 

$

221,683

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gain on available-for-sale securities, net of tax

 

-

 

 

-

 

 

-

 

 

1,478

 

Foreign currency translation adjustments

 

2,725

 

 

(3,509

)

 

2,452

 

 

(3,263

)

Comprehensive income

 

 

$

88,867

 

 

 

$

78,883

 

 

 

$

274,489

 

 

 

$

219,898

 

 

 

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, 2012 AND 2011

(In Thousands) (Unaudited)

 

 

 

Nine-Months Ended

 

 

 

September 30, 2012

 

 

September 30, 2011

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

 

 

$

272,037

 

 

 

$

221,683

 

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

 

 

 

 

 

 

Amortization of trademark

 

36

 

 

39

 

Depreciation and other amortization

 

15,228

 

 

12,152

 

Gain on disposal of property and equipment

 

(52

)

 

(93

)

Stock-based compensation

 

21,581

 

 

12,722

 

Loss (gain) on put option

 

1,110

 

 

(3,671

)

(Gain) loss on investments, net

 

(1,695

)

 

259

 

Deferred income taxes

 

2,571

 

 

-

 

Tax benefit from exercise of stock options

 

(4,295

)

 

(3,363

)

Effect on cash of changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

(70,533

)

 

(69,630

)

Distributor receivables

 

-

 

 

(99

)

Inventories

 

(38,646

)

 

(11,833

)

Prepaid expenses and other current assets

 

136

 

 

713

 

Prepaid income taxes

 

(17,974

)

 

9,706

 

Accounts payable

 

27,814

 

 

55,306

 

Accrued liabilities

 

26,652

 

 

12,269

 

Accrued promotional allowances

 

(9,306

)

 

(6,195

)

Accrued distributor terminations

 

(77

)

 

(393

)

Accrued compensation

 

1,463

 

 

1,497

 

Income taxes payable

 

(3,831

)

 

5,563

 

Deferred revenue

 

(4,170

)

 

(3,629

)

Net cash provided by operating activities

 

218,049

 

 

233,003

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Maturities of held-to-maturity investments

 

596,587

 

 

280,839

 

Sales of available-for-sale investments

 

61,950

 

 

22,658

 

Sales of trading investments

 

16,765

 

 

30,975

 

Purchases of held-to-maturity investments

 

(557,168

)

 

(449,116

)

Purchases of available-for-sale investments

 

(9,502

)

 

(33,312

)

Purchases of property and equipment

 

(25,813

)

 

(19,926

)

Proceeds from sale of property and equipment

 

238

 

 

349

 

Additions to intangibles

 

(4,490

)

 

(4,190

)

Decrease in other assets

 

385

 

 

1,061

 

Net cash provided by (used in) investing activities

 

78,952

 

 

(170,662

)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Principal payments on debt

 

(1,622

)

 

(1,178

)

Tax benefit from exercise of stock options

 

4,295

 

 

3,363

 

Issuance of common stock

 

8,368

 

 

17,794

 

Purchases of common stock held in treasury

 

(386,776

)

 

(149,043

)

Net cash used in financing activities

 

(375,735

)

 

(129,064

)

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

2,457

 

 

(962

)

 

 

 

 

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

(76,277

)

 

(67,685

)

CASH AND CASH EQUIVALENTS, beginning of period

 

359,331

 

 

354,842

 

CASH AND CASH EQUIVALENTS, end of period

 

 

$

283,054

 

 

 

$

287,157

 

 

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

 

 

Interest

 

 

$

40

 

 

 

$

34

 

Income taxes

 

 

$

184,451

 

 

 

$

115,701

 

 

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, 2012 AND 2011

(In Thousands) (Unaudited) (Continued)

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS

 

The Company entered into capital leases for the acquisition of promotional vehicles of $1.4 million and $2.1 million for the nine-months ended September 30, 2012 and 2011, respectively.

 

Included in accounts payable as of September 30, 2012 are treasury stock purchases of $10.7 million.

 

 

See accompanying notes to condensed consolidated financial statements.

 

7



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

1.                                    BASIS OF PRESENTATION

 

Reference is made to the Notes to Consolidated Financial Statements, in Monster Beverage Corporation and Subsidiaries (the “Company” or, in reference to the Company’s former name, “Hansen Natural Corporation”) Annual Report on Form 10-K for the year ended December 31, 2011 (“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, 2012 and 2011 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.

 

As disclosed in the Company’s Form 10-K, management concluded that its presentation of accounts receivable, net of certain promotional allowances as of December 31, 2010, should be adjusted to present such receivables and accrued expenses on a gross basis with regard to those customers for which the Company does not allow net settlement. Such adjustment did not change total net cash provided by operating activities in the condensed consolidated statement of cash flows for the nine-months ended September 30, 2011. However, the following line items within net cash flows from operating activities were adjusted for the nine-months ended September 30, 2011 (cash used in operating activities in parentheses); (i) accounts receivable by ($30.5) million; (ii) accounts payable by $32.8 million; (iii) accrued liabilities by $3.9 million; and (iv) accrued promotional allowances by ($6.2) million. (See Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations” for additional discussion of the Company’s promotional allowances).

 

8



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

2.                                    RECENT ACCOUNTING PRONOUNCEMENTS

 

In July 2012, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2012-02, “Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” ASU 2012-02 permits entities to assess qualitative factors first in determining whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, no further analysis would be required. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The adoption of ASU 2012-02 will not have a material impact on the Company’s financial position, results of operations or liquidity.

 

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity and requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. ASU 2011-05 became effective for the Company on January 1, 2012. The adoption of ASU 2011-05 did not have any impact on the Company’s financial position, results of operations or liquidity.

 

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards (“IFRS”).  ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. ASU 2011-04 became effective for the Company on January 1, 2012. The adoption of ASU 2011-04 did not have any impact on the Company’s financial position, results of operations or liquidity.

 

9



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

3.                                    INVESTMENTS

 

The following table summarizes the Company’s investments at:

 

September 30, 2012

 

Amortized
Cost

 

 

Gross
Unrealized
Holding
Gains

 

 

Gross
Unrealized
Holding
Losses

 

 

Fair
Value

 

 

Continuous
Unrealized
Loss Position
less than 12
Months

 

 

Continuous
Unrealized
Loss Position
greater than 12
Months

 

Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

17,015

 

 

$

2

 

 

$

-

 

 

$

17,017

 

 

$

-

 

 

$

-

 

Municipal securities

 

253,283

 

 

-

 

 

46

 

 

253,237

 

 

46

 

 

-

 

U.S. government agency securities

 

29,982

 

 

3

 

 

-

 

 

29,985

 

 

-

 

 

-

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate demand notes

 

6,501

 

 

-

 

 

-

 

 

6,501

 

 

-

 

 

-

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

3,310

 

 

-

 

 

-

 

 

3,310

 

 

-

 

 

-

 

Total

 

$

310,091

 

 

$

5

 

 

$

46

 

 

310,050

 

 

$

46

 

 

$

-

 

Trading

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

 

 

 

873

 

 

 

 

 

 

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

 

 

 

16,572

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

$

327,495

 

 

 

 

 

 

 

 

December 31, 2011

 

Amortized
Cost

 

 

Gross
Unrealized
Holding
Gains

 

 

Gross
Unrealized
Holding
Losses

 

 

Fair
Value

 

 

Continuous
Unrealized
Loss Position
less than 12
Months

 

 

Continuous
Unrealized
Loss Position
greater than 12
Months

 

Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasuries

 

$

8,034

 

 

$

5

 

 

$

-

 

 

$

8,039

 

 

$

-

 

 

$

-

 

Certificates of deposit

 

29,034

 

 

1

 

 

-

 

 

29,035

 

 

-

 

 

-

 

Corporate bonds

 

2,022

 

 

-

 

 

-

 

 

2,022

 

 

-

 

 

-

 

Municipal securities

 

284,605

 

 

-

 

 

64

 

 

284,541

 

 

64

 

 

-

 

U.S. government agency securities

 

16,005

 

 

2

 

 

-

 

 

16,007

 

 

-

 

 

-

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate demand notes

 

58,924

 

 

-

 

 

-

 

 

58,924

 

 

-

 

 

-

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

3,320

 

 

-

 

 

-

 

 

3,320

 

 

-

 

 

-

 

Total

 

$

401,944

 

 

$

8

 

 

$

64

 

 

401,888

 

 

$

64

 

 

$

-

 

Trading

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

 

 

 

12,658

 

 

 

 

 

 

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

 

 

 

19,874

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

$

434,420

 

 

 

 

 

 

 

 

During the three- and nine-months ended September 30, 2012 and the year ended December 31, 2011, realized gains or losses recognized on the sale of investments were not significant.

 

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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 recognized a net gain (loss) through earnings on its trading securities as follows:

 

 

 

Three-Months Ended
September 30,

 

Nine-Months Ended
September 30,

 

 

2012

 

 

2011

 

 

2012

 

 

2011

 

(Loss) on transfer from available-for-sale to trading

 

$

-

 

 

$

-

 

 

$

-

 

 

$

(2,439

)

Gain on trading securities sold

 

27

 

 

1,335

 

 

1,100

 

 

3,351

 

Gain (loss) on trading securities held

 

80

 

 

(1,220

)

 

579

 

 

(1,201

)

Gain (loss) on trading securites

 

$

107

 

 

$

115

 

 

$

1,679

 

 

$

(289

)

 

The Company’s investments at September 30, 2012 and December 31, 2011 in U.S. Treasuries, certificates of deposit, corporate bonds, municipal securities, U.S. government agency securities and 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.  A portion of the Company’s investments at September 30, 2012 and December 31, 2011 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, 2012

 

December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized Cost

 

Fair Value

 

 

Amortized Cost

 

 

Fair Value

 

Less than 1 year:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasuries

 

$

-

 

 

$

-

 

 

$

8,034

 

 

$

8,039

 

Certificates of deposit

 

17,015

 

 

17,017

 

 

29,034

 

 

29,035

 

Corporate bonds

 

-

 

 

-

 

 

2,022

 

 

2,022

 

Municipal securities

 

253,283

 

 

253,237

 

 

284,605

 

 

284,541

 

U.S. government agency securities

 

29,982

 

 

29,985

 

 

16,005

 

 

16,007

 

Due 1 - 10 years:

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate demand notes

 

-

 

 

-

 

 

5,775

 

 

5,775

 

Due 11 - 20 years:

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate demand notes

 

3,000

 

 

3,000

 

 

12,716

 

 

12,716

 

Auction rate securities

 

10,896

 

 

10,896

 

 

5,158

 

 

5,158

 

Due 21 - 30 years:

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate demand notes

 

2,501

 

 

2,501

 

 

27,902

 

 

27,902

 

Auction rate securities

 

9,859

 

 

9,859

 

 

25,134

 

 

25,134

 

Due 31 - 40 years:

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate demand notes

 

1,000

 

 

1,000

 

 

12,532

 

 

12,532

 

Auction rate securities

 

-

 

 

-

 

 

5,559

 

 

5,559

 

Total

 

$

327,536

 

 

$

327,495

 

 

$

434,476

 

 

$

434,420

 

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

4.                                    FAIR VALUE OF CERTAIN FINANCIAL ASSETS AND LIABILITIES

 

Accounting Standards Codification (“ASC”) 820 provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. ASC 820 defines fair value as the price that would be received to sell 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 as well as the fair value of the Company’s financial assets that are recorded at fair value on a recurring basis, segregated among the appropriate levels within the fair value hierarchy at:

 

September 30, 2012

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash

 

$

165,754

 

 

$

-

 

 

$

-

 

 

$

165,754

 

Money market funds

 

116,684

 

 

-

 

 

-

 

 

116,684

 

Certificates of deposit

 

-

 

 

17,015

 

 

-

 

 

17,015

 

Municipal securities

 

-

 

 

253,899

 

 

-

 

 

253,899

 

U.S. government agency securities

 

-

 

 

29,982

 

 

-

 

 

29,982

 

Variable rate demand notes

 

-

 

 

6,501

 

 

-

 

 

6,501

 

Auction rate securities

 

-

 

 

-

 

 

20,755

 

 

20,755

 

Put option related to auction rate securities

 

-

 

 

-

 

 

1,931

 

 

1,931

 

Total

 

$

282,438

 

 

$

307,397

 

 

$

22,686

 

 

$

612,521

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

282,438

 

 

$

616

 

 

$

-

 

 

$

283,054

 

Short-term investments

 

-

 

 

306,781

 

 

873

 

 

307,654

 

Investments

 

-

 

 

-

 

 

19,882

 

 

19,882

 

Prepaid expenses and other current assets

 

-

 

 

-

 

 

121

 

 

121

 

Other assets

 

-

 

 

-

 

 

1,810

 

 

1,810

 

Total

 

$

282,438

 

 

$

307,397

 

 

$

22,686

 

 

$

612,521

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash

 

$

81,879

 

 

$

-

 

 

$

-

 

 

$

81,879

 

Money market funds

 

230,029

 

 

-

 

 

-

 

 

230,029

 

U.S. Treasuries

 

8,034

 

 

-

 

 

-

 

 

8,034

 

Certificates of deposit

 

-

 

 

69,078

 

 

-

 

 

69,078

 

Corporate bonds

 

-

 

 

2,022

 

 

-

 

 

2,022

 

Municipal securities

 

-

 

 

291,984

 

 

-

 

 

291,984

 

U.S. government agency securities

 

-

 

 

16,005

 

 

-

 

 

16,005

 

Variable rate demand notes

 

-

 

 

58,924

 

 

-

 

 

58,924

 

Auction rate securities

 

-

 

 

-

 

 

35,852

 

 

35,852

 

Put options related to auction rate securities

 

-

 

 

-

 

 

3,041

 

 

3,041

 

Total

 

$

319,942

 

 

$

438,013

 

 

$

38,893

 

 

$

796,848

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

311,908

 

 

$

47,423

 

 

$

-

 

 

$

359,331

 

Short-term investments

 

8,034

 

 

390,590

 

 

12,658

 

 

411,282

 

Investments

 

-

 

 

-

 

 

23,194

 

 

23,194

 

Prepaid expenses and other current assets

 

-

 

 

-

 

 

873

 

 

873

 

Other assets

 

-

 

 

-

 

 

2,168

 

 

2,168

 

Total

 

$

319,942

 

 

$

438,013

 

 

$

38,893

 

 

$

796,848

 

 

13



Table of Contents

 

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 and U.S. Treasuries, is based on quoted market prices in active markets for identical securities. The Company’s valuation of its Level 2 investments, which include certificates of deposit, corporate bonds, municipal securities, U.S. government agency securities and VRDNs, is based on other observable inputs, specifically a valuation model which utilizes vendor pricing for similar securities. There were no transfers between Level 1 and Level 2 measurements during the three- and nine-months ended September 30, 2012, 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 three- and nine-months ended September 30, 2012.

 

The following table presents quantitative information related to the significant unobservable inputs utilized in the Company’s Level 3 recurring fair value measurements as of September 30, 2012.

 

 

 

Valuation Technique

 

Unobservable Input

 

Range (Weighted-Average)

Auction Rate Securities:

 

 

 

 

 

 

Trading

 

Discounted cash flow

 

Maximum rate probability

 

0.37%-1.67% (0.91%)

 

 

 

 

Principal returned probability

 

86.66%-95.61% (87.72%)

 

 

 

 

Default probability

 

3.88%-11.86% (11.36%)

 

 

 

 

Liquidity risk

 

3.50%-3.50% (3.50%)

 

 

 

 

Recovery rate

 

60-60 (60)

Auction Rate Securities:

 

 

 

 

 

 

Available-for-sale

 

Market comparable bonds

 

Comparable price

 

54-64 (60)

 

 

 

 

 

 

 

Put Options

 

Discounted cash flow

 

Counterparty risk

 

1.40%-1.99% (1.74%)

 

At September 30, 2012, the Company held auction rate securities with a face value of $28.0 million (amortized cost basis of $20.8 million). A Level 3 valuation was performed on the Company’s auction rate securities as of September 30, 2012 resulting in a fair value of $3.3 million for the Company’s available-for-sale auction rate securities (after a $5.0 million impairment) and $17.4 million for the Company’s trading auction rate securities (after a $2.3 million impairment), which are included in short-term and long-term investments.

 

In June 2011, the Company entered into an agreement (the “2011 ARS Agreement”), related to $24.5 million of par value auction rate securities (the “2011 ARS Securities”).  Under the 2011 ARS Agreement, the Company has the right to sell the 2011 ARS Securities including all accrued but unpaid interest thereon (the “2011 Put Option”) as follows: (i) on or after July 1, 2013, up to $1.0 million aggregate par value; (ii) on or after October 1, 2013, up to an additional $1.0 million aggregate par value; and (iii) in quarterly installments thereafter based on a formula of the then

 

14



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

outstanding 2011 ARS Securities, as adjusted for normal market redemptions, with full sale rights available on or after April 1, 2016. The 2011 ARS Securities will continue to accrue interest until redeemed through the 2011 Put Option, or as determined by the auction process, or should the auction process fail, the terms outlined in the prospectus of the respective 2011 ARS Securities. Under the 2011 ARS Agreement, the Company has the obligation, should it receive written notification from the put issuer, to sell the 2011 ARS Securities at par plus all accrued but unpaid interest. During the nine-months ended September 30, 2012, $1.0 million of 2011 ARS Securities were redeemed through normal market channels ($3.7 million of par value 2011 ARS Securities were redeemed at par through normal market channels during the year ended December 31, 2011). The 2011 Put Option does not meet the definition of derivative instruments under ASC 815.  Therefore, the Company elected the fair value option under ASC 825-10 in accounting for the 2011 Put Option. As of September 30, 2012, the Company recorded $1.9 million as the fair market value of the 2011 Put Option, included in, prepaid expenses and other assets, and other assets, in the condensed consolidated balance sheet.

 

In March 2010, the Company entered into an agreement (the “2010 ARS Agreement”), related to $54.2 million of par value auction rate securities (the “2010 ARS Securities”).  Under the 2010 ARS Agreement, the Company had the right, but not the obligation, to sell the 2010 ARS Securities including all accrued but unpaid interest thereon (the “2010 Put Option”), under various terms. During the three-months ended March 31, 2012, the remaining $15.7 million of par value 2010 ARS Securities were redeemed at par through the exercise of the 2010 Put Option, which exhausted the Company’s rights under the 2010 ARS Agreement (as of December 31, 2011, $38.5 million of par value 2010 ARS Securities had been redeemed at par through the exercise of the 2010 Put Option as well as through normal market channels).

 

The Company holds additional auction rate securities that do not have a related put option.  These auction rate securities continue to be classified as available-for-sale securities.  The Company intends to retain such investments until the earlier of the recovery in market value or maturity.

 

The net effect of (i) the revaluation of the 2011 Put Option and the 2010 Put Option as of September 30, 2012; (ii) the revaluation of the Company’s trading auction rate securities as of September 30, 2012; (iii) the redemption at par of certain 2011 ARS Securities; (iv) the redemption at par of certain 2010 ARS Securities, including those redeemed at par through the exercise of the 2010 Put Option; and (v) a recognized gain resulting from the redemption at par of a previously other-than-temporary impaired security; resulted in a gain of $0.2 million and $0.6 million, which is included in other income (expense) for the three- and nine-months ended September 30, 2012, respectively. The net effect of (i) the acquisition of the 2011 Put Option during the second fiscal quarter of 2011; (ii) the revaluation of the 2011 Put Option and the 2010 Put Option as of September 30, 2011; (iii) the transfer from available-for-sale to trading of the 2011 ARS Securities during the second fiscal quarter of 2011; (iv) the revaluation of the Company’s trading auction rate securities as of September 30, 2011; (v) the redemption at par of certain 2011 ARS Securities and 2010 ARS Securities, including those redeemed through the exercise of the 2010 Put Option; and (vi) a recognized gain resulting from the redemption at par of a previously other-than-temporary impaired security during the first fiscal quarter of 2011, resulted in a (loss) of ($0.8) million included in other income (expense) for both the three- and nine-months ended September 30, 2011.

 

15



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 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, 2012

 

Three-Months Ended
September 30, 2011

 

 

Auction
Rate
Securities

 

 

Put Options

 

Auction
Rate
Securities

 

 

Put Options

Opening Balance

 

 

$

20,873

 

 

 

$

1,816

 

 

 

$

55,636

 

 

 

$

4,091

 

Transfers into Level 3

 

-

 

 

-

 

 

-

 

 

-

 

Transfers out of Level 3

 

-

 

 

-

 

 

-

 

 

-

 

Total gains (losses) for the period:

 

 

 

 

 

 

 

 

 

 

 

 

Included in earnings

 

107

 

 

115

 

 

115

 

 

(914

)

Included in other comprehensive income

 

-

 

 

-

 

 

-

 

 

-

 

Settlements

 

(225

)

 

-

 

 

(16,375

)

 

-

 

Closing Balance

 

 

$

20,755

 

 

 

$

1,931

 

 

 

$

39,376

 

 

 

$

3,177

 

 

 

 

Nine-Months Ended
September 30, 2012

 

Nine-Months Ended
September 30, 2011

 

 

Auction
Rate
Securities

 

 

Put Options

 

Auction
Rate
Securities

 

 

Put Options

Opening Balance

 

 

$

35,852

 

 

 

$

3,041

 

 

 

$

68,252

 

 

 

$

3,768

 

Transfers into Level 3

 

-

 

 

-

 

 

-

 

 

-

 

Transfers out of Level 3

 

-

 

 

-

 

 

-

 

 

-

 

Total gains (losses) for the period:

 

 

 

 

 

 

 

 

 

 

 

 

Included in earnings

 

1,693

 

 

(1,110

)

 

(259

)

 

(591

)

Included in other comprehensive income

 

-

 

 

-

 

 

2,408

 

 

-

 

Settlements

 

(16,790

)

 

-

 

 

(31,025

)

 

-

 

Closing Balance

 

 

$

20,755

 

 

 

$

1,931

 

 

 

$

39,376

 

 

 

$

3,177

 

 

5.                                    INVENTORIES

 

Inventories consist of the following at:

 

 

 

September 30,
2012

 

 

December 31,
2011

 

 

Raw materials

 

 

$

62,076

 

 

 

$

51,103

 

 

Finished goods

 

131,858

 

 

104,510

 

 

 

 

 

$

193,934

 

 

 

$

155,613

 

 

 

16



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

6.                                    PROPERTY AND EQUIPMENT, Net

 

Property and equipment consist of the following at:

 

 

 

September 30,
2012

 

 

December 31,
2011

 

Land

 

 

$

3,923

 

 

 

$

3,626

 

Leasehold improvements

 

2,311

 

 

2,132

 

Furniture and fixtures

 

2,089

 

 

2,000

 

Office and computer equipment

 

7,997

 

 

6,727

 

Computer software

 

9,722

 

 

9,303

 

Equipment

 

44,437

 

 

33,286

 

Buildings

 

12,709

 

 

3,211

 

Vehicles

 

25,949

 

 

21,827

 

 

 

109,137

 

 

82,112

 

Less: accumulated depreciation and amortization

 

(51,563

)

 

(36,961

)

 

 

 

$

57,574

 

 

 

$

45,151

 

 

7.                                    INTANGIBLES, Net

 

Intangibles consist of the following at:

 

 

 

September 30,
2012

 

 

December 31,
2011

 

Amortizing intangibles

 

 

$

1,061

 

 

 

$

1,059

 

Accumulated amortization

 

(541

)

 

(504

)

 

 

520

 

 

555

 

Non-amortizing intangibles

 

52,331

 

 

47,841

 

 

 

 

$

52,851

 

 

 

$

48,396

 

 

All amortizing intangibles have been assigned an estimated useful life and such intangibles are amortized on a straight-line basis over the number of years that approximate their respective useful lives ranging from one to 25 years (weighted-average life of 20 years).  Amortization expense was $0.01 million and $0.02 million for the three-months ended September 30, 2012 and 2011, respectively. Amortization expense was $0.04 million for both the nine-months ended September 30, 2012 and 2011.

 

8.                                    DISTRIBUTION AGREEMENTS

 

Amounts received pursuant to new and/or amended distribution agreements entered into with certain distributors, relating to the costs associated with terminating agreements with the Company’s prior distributors, have been accounted for as deferred revenue in the accompanying condensed consolidated balance sheets and are recognized as revenue ratably over the anticipated life of the respective distribution agreement, generally 20 years. Revenue recognized was $1.9 million for both the three-months ended September 30, 2012 and 2011.  Revenue recognized was $6.3 million and $5.8 million for the nine-months ended September 30, 2012 and 2011, respectively.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

9.                                    COMMITMENTS AND CONTINGENCIES

 

The Company had purchase commitments aggregating approximately $66.2 million at September 30, 2012, 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 $72.3 million at September 30, 2012, which related primarily to sponsorships and other marketing activities.

 

The Company had operating lease commitments aggregating approximately $15.8 million at September 30, 2012, which related primarily to warehouse and office space.

 

In March 2012, the Company acquired an approximately 75,425 square foot, free standing, three-story office building, including the real property thereunder and improvements thereon, located in Corona, CA (the “March 2012 Property”) for a purchase price of $9.7 million. In October 2012, the Company acquired an approximately 141,000 square foot, free standing, six-story office building, including the real property thereunder and improvements thereon, located in Corona, CA (the “October 2012 Property”) adjacent to the March 2012 Property, for a purchase price of $18.8 million. The Company intends to complete the necessary improvements to the October 2012 Property and occupy the building as the Company’s new corporate headquarters at some time in the future. The October 2012 Property should more effectively address the future growth needs of the Company.

 

Litigation — In September 2006, Christopher Chavez purporting to act on behalf of himself and a certain class of consumers filed an action in the Superior Court of the State of California, County of San Francisco, against the Company and its subsidiaries for unfair business practices, false advertising, violation of California Consumers Legal Remedies Act (“CLRA”), fraud, deceit and/or misrepresentation alleging that the Company misleadingly labels its Blue Sky® beverages as manufactured and canned/bottled wholly in Santa Fe, New Mexico. Defendants removed this Superior Court action to the United States District Court for the Northern District of California (the “District Court”) under the Class Action Fairness Act and filed motions for dismissal or transfer.  On June 11, 2007, the District Court granted the Company’s motion to dismiss Chavez’s complaint with prejudice.  On June 23, 2009, the United States Court of Appeals for the Ninth Circuit (“Ninth Circuit”) filed a memorandum opinion reversing the decision of the District Court and remanded the case to the District Court for further proceedings.  The Company filed a motion to dismiss the CLRA claims; the plaintiff filed a motion for a decision on a preemption issue; and the plaintiff filed a motion for class certification.  On June 18, 2010, the District Court entered an order certifying the class, ruled that there was no preemption by federal law, and denied the Company’s motion to dismiss.  The class that the District Court certified initially consists of all persons who purchased any beverage bearing the Blue Sky mark or brand in the United States at any time between May 16, 2002 and June 30, 2006.  On September 9, 2010, the District Court approved the form of the class notice and its distribution plan; and set an opt-out date of December 10, 2010.  On January 27, 2012, the parties entered into a settlement agreement on terms acceptable to the Company. On June 1, 2012, the District Court granted final approval of the settlement and entered judgment.  On June 26, 2012,

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

an objector to the settlement filed a notice appealing the District Court’s judgment, which is now pending in the Ninth Circuit Court of Appeals. The Company does not believe that the settlement or the pending appeal will have a material adverse effect on the Company’s financial position or results of operations.

 

In May 2009, Avraham Wellman, purporting to act on behalf of himself and a class of consumers in Canada, filed a putative class action in the Ontario Superior Court of Justice, in the City of Toronto, Ontario, Canada, against the Company and its former Canadian distributor, Pepsi-Cola Canada Ltd., as defendants.  The plaintiff alleges that the defendants misleadingly packaged and labeled Monster Energy® products in Canada by not including sufficiently specific statements with respect to contra-indications and/or adverse reactions associated with the consumption of the energy drink products.  The plaintiff’s claims against the defendants are for negligence, unjust enrichment, and making misleading/false representations in violation of the Competition Act (Canada), the Food and Drugs Act (Canada) and the Consumer Protection Act, 2002 (Ontario).  The plaintiff claims general damages on behalf of the putative class in the amount of CDN$20 million, together with punitive damages of CDN$5 million, plus legal costs and interest. The plaintiff’s certification motion materials have not yet been filed. The Company believes that any such damages, if awarded, would not have a material adverse effect on the Company’s financial position or results of operations. In accordance with class action practices in Ontario, the Company will not file an answer to the complaint until after the determination of the certification motion.  The Company believes that the plaintiff’s complaint is without merit and plans a vigorous defense.

 

On October 17, 2012, Wendy Crossland and Richard Fournier filed a lawsuit in the Superior Court of the State of California, County of Riverside, against the Company claiming that the death of their 14 year old daughter (Anais Fournier) was caused by her consumption of two 24-ounce Monster Energy® drinks over the course of two days in December 2011.  The plaintiffs allege strict product liability, negligence, fraudulent concealment, breach of implied warranties and wrongful death.  The plaintiffs claim general damages in excess of $25,000 and punitive damages.  The Company believes that the plaintiffs’ complaint is without merit and plans a vigorous defense.  The Company also believes that any such damages, if awarded, would not have a material adverse effect on the Company’s financial position or results of operations.

 

Securities Litigation — On September 11, 2008, a federal securities class action complaint styled Cunha v. Hansen Natural Corp., et al. was filed in the United States District Court for the Central District of California (the “District Court”). On September 17, 2008, a second federal securities class action complaint styled Brown v. Hansen Natural Corp., et al. was also filed in the District Court.

 

On July 14, 2009, the District Court entered an order consolidating the actions and appointing lead counsel and the Structural Ironworkers Local Union #1 Pension Fund as lead plaintiff. On August 28, 2009, lead plaintiff filed a Consolidated Complaint for Violations of Federal Securities Laws (the “Consolidated Class Action Complaint”).  The Consolidated Class Action Complaint purported to be brought on behalf of a class of purchasers of the Company’s stock during the period November 9, 2006 through November 8, 2007 (the “Class Period”).  It named as defendants the Company, Rodney C. Sacks, Hilton H. Schlosberg, and Thomas J. Kelly. Plaintiff principally alleged

 

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

 

that, during the Class Period, the defendants made false and misleading statements relating to the Company’s distribution coordination agreements with Anheuser-Busch, Inc. (“AB”) and its sales of “Allied” energy drink lines, and engaged in sales of shares in the Company on the basis of material non-public information.  Plaintiff also alleged that the Company’s financial statements for the second quarter of 2007 did not include certain promotional expenses.  The Consolidated Class Action Complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder, and sought an unspecified amount of damages.

 

On November 16, 2009, the defendants filed their motion to dismiss the Consolidated Class Action Complaint pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b), as well as the Private Securities Litigation Reform Act.  On July 12, 2010, following a hearing, the District Court granted the defendants’ motion to dismiss the Consolidated Class Action Complaint, with leave to amend, on the grounds, among others, that it failed to specify which statements plaintiff claimed were false or misleading, failed adequately to allege that certain statements were actionable or false or misleading, and failed adequately to demonstrate that defendants acted with scienter.

 

On August 27, 2010, plaintiff filed a Consolidated Amended Class Action Complaint for Violations of Federal Securities Laws (the “Amended Class Action Complaint”).  While similar in many respects to the Consolidated Class Action Complaint, the Amended Class Action Complaint drops certain of the allegations set forth in the Consolidated Class Action Complaint and makes certain new allegations, including that the Company engaged in “channel stuffing” during the Class Period that rendered false or misleading the Company’s reported sales results and certain other statements made by the defendants.  In addition, it no longer names Thomas J. Kelly as a defendant.  The Amended Class Action Complaint continues to allege violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, and seeks an unspecified amount of damages.

 

Defendants filed a motion to dismiss the Amended Class Action Complaint on November 8, 2010.  At a hearing on defendants’ motion to dismiss the Amended Class Action Complaint held on May 12, 2011, the District Court issued a tentative ruling granting the motion to dismiss as to certain of plaintiff’s claims, including plaintiff’s allegations relating to promotional expenses, but denying the motion to dismiss with regard to the majority of plaintiff’s claims, including plaintiff’s channel stuffing allegations.  On September 4, 2012, the District Court issued a Notice of Ruling (the “Order”) adopting the May 12, 2011 tentative ruling as its final ruling on defendants’ motion to dismiss.  On October 22, 2012, the District Court denied defendants’ motion for reconsideration of the Order or certification of an interlocutory appeal from the Order.  The District Court has set a schedule for briefing and discovery in connection with plaintiff’s motion for class certification, and has scheduled a hearing on that motion for April 1, 2013.  Fact discovery in the action has been stayed pending resolution of the class certification motion.

 

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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

Derivative Litigation — On September 13, 2012, two derivative complaints were filed in California Superior Courts, purportedly on behalf of the Company, by shareholders of the Company who made no prior demand on the Company’s Board of Directors.  One action, in the Superior Court for the County of Riverside, is styled Iron Workers District Council of Tennessee Valley & Vicinity Pension Plan v. Sacks, et al. The other action, in the Superior Court for the County of Los Angeles, is styled Rumbaugh v. Sacks, et al.

 

The Iron Workers complaint names as defendants certain officers, directors, and employees of the Company, including Sacks, Schlosberg, Harold C. Taber, Jr., Benjamin M. Polk, Norman C. Epstein, Mark S. Vidergauz, Sydney Selati, and Thomas J. Kelly. The Rumbaugh complaint names each of the same individuals as defendants, with the exception of Thomas J. Kelly.  The Company is named as a nominal defendant in each action. The factual allegations of the two complaints are substantially similar.  Each alleges, among other things, that the Individual Defendants breached their fiduciary duties to the Company by causing the Company to market, advertise, and promote its Monster Energy® brand of energy drinks in a way that has exposed, and will continue to expose, the Company to costly investigations into its compliance with federal and state laws and regulations pertaining to food and beverage advertising.  The complaints further allege that, beginning in February 2012, the Individual Defendants further breached their fiduciary duties by making statements in press releases and public filings about the Company’s earnings and financial condition and by failing to disclose that the Company was improperly advertising, marketing, and promoting its Monster Energy® brand of energy drinks.  The Iron Workers complaint further alleges that while the Company’s shares were purportedly artificially inflated because of those improper statements, certain defendants sold Company stock while in possession of material non-public information regarding the Company’s “true” business health. The Iron Workers complaint asserts causes of action for breach of fiduciary duty and unjust enrichment.  In addition to those causes of action, the Rumbaugh complaint also asserts causes of action for abuse of control, gross mismanagement and waste of corporate assets.  The plaintiffs seek an unspecified amount of damages to be paid to the Company, adoption of corporate governance reforms, and equitable and injunctive relief.

 

The complaints have been served on certain of the defendants named therein.  The Company intends to seek transfer of the Rumbaugh complaint to Riverside, where it can be consolidated with the Iron Workers complaint.  The deadline for response to the Iron Workers complaint has been extended until after the motion to transfer is decided. Although the ultimate outcome of these matters cannot be determined with certainty, the Company believes that the complaints are without merit.  The Company intends to vigorously defend against these lawsuits.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

In addition to the above matters, the Company is subject to litigation from time to time in the normal course of business, including claims from terminated distributors.  Although it is not possible to predict the outcome of such litigation, based on the facts known to the Company and after consultation with counsel, management believes that such litigation in the aggregate will likely not have a material adverse effect on the Company’s financial position or results of operations.

 

10.                            ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

The components of accumulated other comprehensive income (loss) are as follows:

 

 

 

September 30, 2012

 

December 31, 2011

Foreign currency translation adjustments

 

 

$

905

 

 

 

$

(1,547

)

Total accumulated other comprehensive income (loss)

 

 

$

905

 

 

 

$

(1,547

)

 

11.                            TREASURY STOCK PURCHASE

 

On October 12, 2011, the Company’s Board of Directors authorized a new share repurchase program for the repurchase of up to $250.0 million of the Company’s outstanding common stock and on August 13, 2012, the Company’s Board of Directors approved the authorization of an increase of an additional $250.0 million (collectively the “2011-2012 Repurchase Plan”), increasing the total amount available under the 2011-2012 Repurchase Plan at that time to $500.0 million. During the three- and nine-months ended September 30, 2012, the Company purchased 6.9 million shares of common stock at an average purchase price of $57.99 per share for a total amount of $397.5 million (excluding broker commissions), which the Company holds in treasury.

 

Subsequent to September 30, 2012, the Company purchased an additional 1.9 million shares at an average purchase price of $54.99 per share, which exhausted the availability under the 2011-2012 Repurchase Plan.

 

12.                            STOCK-BASED COMPENSATION

 

The Company has two stock-based compensation plans under which shares were available for grant at September 30, 2012: 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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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The Company recorded $7.9 million and $4.9 million of compensation expense relating to outstanding options, restricted stock awards, stock appreciation rights and restricted stock units during the three-months ended September 30, 2012 and 2011, respectively.  The Company recorded $21.6 million and $12.8 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, 2012 and 2011, 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, 2012 and 2011 was $1.4 million and $2.2 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, 2012 and 2011 was $4.3 million and $3.4 million, respectively.

 

Stock Options

 

Under the Company’s stock-based compensation plans, all stock options granted as of September 30, 2012 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,

 

 

2012

 

2011

 

2012

 

2011

Dividend yield

 

0.0 %

 

0.0 %

 

0.0 %

 

0.0 %

Expected volatility

 

47.7 %

 

52.7 %

 

47.9 %

 

54.1 %

Risk-free interest rate

 

0.6 %

 

1.3 %

 

0.7 %

 

1.7 %

Expected term

 

5.4 Years

 

5.7 Years

 

5.4 Years

 

5.9 Years

 

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

 

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

 

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 the expected time to post-vesting exercise of options by employees. The Company uses historical exercise patterns of previously granted options to derive employee behavioral patterns used to forecast expected exercise patterns.

 

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

 

Options

 

Number of
Shares (In
Thousands)

 

Weighted-
Average
Exercise
Price Per
Share

 

Weighted-
Average
Remaining
Contractual
Term (In
Years)