Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

 

For the quarterly period ended March 31, 2013

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 165,963,808 shares of common stock, par value $0.005 per share, outstanding as of April 26, 2013.

 



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

MARCH 31, 2013

 

INDEX

 

Part I.

FINANCIAL INFORMATION

 

Page No.

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012

 

3

 

 

 

 

 

Condensed Consolidated Statements of Income for the Three-Months Ended March 31, 2013 and 2012

 

4

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three-Months Ended March 31, 2013 and 2012

 

5

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three-Months Ended March 31, 2013 and 2012

 

6

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

 

 

Item 2.

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

 

29

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

44

 

 

 

 

Item 4.

Controls and Procedures

 

44

 

 

 

 

Part II.

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

44

 

 

 

 

Item 1A.

Risk Factors

 

49

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

50

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

50

 

 

 

 

Item 4.

Mine Safety Disclosures

 

50

 

 

 

 

Item 5.

Other Information

 

50

 

 

 

 

Item 6.

Exhibits

 

51

 

 

 

 

 

Signatures

 

51

 

2



Table of Contents

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2013 AND DECEMBER 31, 2012

(In Thousands, Except Par Value) (Unaudited)

 

 

 

 

 

 

 

March 31,
2013

 

December 31,
2012

ASSETS

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

Cash and cash equivalents

 

  $

242,533

 

 

  $

222,514

 

Short-term investments

 

102,139

 

 

97,042

 

Accounts receivable, net

 

308,675

 

 

236,044

 

Distributor receivables

 

8,980

 

 

666

 

Inventories

 

215,337

 

 

203,106

 

Prepaid expenses and other current assets

 

35,628

 

 

24,983

 

Prepaid income taxes

 

6,403

 

 

33,709

 

Deferred income taxes

 

17,004

 

 

17,004

 

Total current assets

 

936,699

 

 

835,068

 

 

 

 

 

 

 

 

INVESTMENTS

 

13,631

 

 

21,393

 

PROPERTY AND EQUIPMENT, net

 

74,596

 

 

69,137

 

DEFERRED INCOME TAXES

 

60,856

 

 

59,503

 

INTANGIBLES, net

 

57,999

 

 

54,648

 

OTHER ASSETS

 

3,591

 

 

3,576

 

Total Assets

 

  $

1,147,372

 

 

  $

1,043,325

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

Accounts payable

 

  $

135,477

 

 

  $

127,330

 

Accrued liabilities

 

55,356

 

 

38,916

 

Accrued promotional allowances

 

103,846

 

 

91,208

 

Deferred revenue

 

13,079

 

 

12,695

 

Accrued compensation

 

7,488

 

 

12,926

 

Income taxes payable

 

14,520

 

 

5,470

 

Total current liabilities

 

329,766

 

 

288,545

 

 

 

 

 

 

 

 

DEFERRED REVENUE

 

116,235

 

 

110,383

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 9)

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

Common stock - $0.005 par value; 240,000 shares authorized; 203,895 shares issued and 165,655 outstanding as of March 31, 2013; 203,759 shares issued and 165,776 outstanding as of December 31, 2012

 

1,019

 

 

1,019

 

Additional paid-in capital

 

297,409

 

 

287,953

 

Retained earnings

 

1,572,160

 

 

1,508,664

 

Accumulated other comprehensive (loss) income

 

(543

)

 

2,074

 

Common stock in treasury, at cost; 38,240 and 37,983 shares as of March 31, 2013 and December 31, 2012, respectively

 

(1,168,674

)

 

(1,155,313

)

Total stockholders’ equity

 

701,371

 

 

644,397

 

Total Liabilities and Stockholders’ Equity

 

  $

1,147,372

 

 

  $

1,043,325

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE-MONTHS ENDED MARCH 31, 2013 AND 2012

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

 

 

 

 

 

 

 

 

 

Three-Months Ended

 

 

March 31,

 

 

2013

 

2012

 

 

 

 

 

 

 

NET SALES

 

  $

484,223

 

 

  $

454,605

 

 

 

 

 

 

 

 

COST OF SALES

 

232,184

 

 

213,436

 

 

 

 

 

 

 

 

GROSS PROFIT

 

252,039

 

 

241,169

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

144,733

 

 

114,884

 

 

 

 

 

 

 

 

OPERATING INCOME

 

107,306

 

 

126,285

 

 

 

 

 

 

 

 

OTHER (EXPENSE) INCOME:

 

 

 

 

 

 

Interest and other (expense) income, net

 

(4,473

)

 

(50

)

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

 

2,571

 

 

396

 

Total other (expense) income

 

(1,902

)

 

346

 

 

 

 

 

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

 

105,404

 

 

126,631

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

41,908

 

 

50,532

 

 

 

 

 

 

 

 

NET INCOME

 

  $

63,496

 

 

  $

76,099

 

 

 

 

 

 

 

 

NET INCOME PER COMMON SHARE:

 

 

 

 

 

 

Basic

 

  $

0.38

 

 

  $

0.44

 

Diluted

 

  $

0.37

 

 

  $

0.41

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Basic

 

165,525

 

 

174,832

 

Diluted

 

172,559

 

 

185,262

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE-MONTHS ENDED MARCH 31, 2013 AND 2012

(In Thousands) (Unaudited)

 

 

 

 

 

 

 

 

Three-Months Ended
March 31,

 

 

2013

 

2012

Net income, as reported

 

  $

63,496

 

 

  $

76,099

 

Other comprehensive (loss) income:

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

(1,092

)

 

2,455

 

Available-for-sale investments:

 

 

 

 

 

 

Change in net unrealized gains

 

-

 

 

-

 

Reclassification adjustment for net gains included in net income

 

(1,525

)

 

-

 

Net change in available-for-sale investments

 

(1,525

)

 

-

 

Other comprehensive (loss) income

 

(2,617

)

 

2,455

 

Comprehensive income

 

  $

60,879

 

 

  $

78,554

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE-MONTHS ENDED MARCH 31, 2013 AND 2012

(In Thousands) (Unaudited)

 

 

 

 

 

 

 

 

 

Three-Months Ended

 

 

March 31, 2013

 

March 31, 2012

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

 

  $

63,496

 

 

  $

76,099

 

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

 

 

 

 

 

 

Amortization of trademark

 

12

 

 

12

 

Depreciation and other amortization

 

5,048

 

 

4,956

 

Gain on disposal of property and equipment

 

(2

)

 

(39

)

Stock-based compensation

 

6,959

 

 

6,571

 

(Gain) loss on put option

 

(83

)

 

1,391

 

Gain on investments, net

 

(2,489

)

 

(1,787

)

Deferred income taxes

 

(398

)

 

2,574

 

Tax benefit from exercise of stock options

 

(176

)

 

(492

)

Effect on cash of changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

(69,713

)

 

(33,867

)

Distributor receivables

 

(8,314

)

 

(43

)

Inventories

 

(14,080

)

 

(34,128

)

Prepaid expenses and other current assets

 

(10,584

)

 

257

 

Prepaid income taxes

 

27,417

 

 

(1,216

)

Accounts payable

 

7,479

 

 

16,201

 

Accrued liabilities

 

9,879

 

 

14,058

 

Accrued promotional allowances

 

13,939

 

 

(34,034

)

Accrued distributor terminations

 

7,372

 

 

(76

)

Accrued compensation

 

(5,377

)

 

(3,836

)

Income taxes payable

 

9,270

 

 

25,784

 

Deferred revenue

 

6,238

 

 

(1,615

)

Net cash provided by operating activities

 

45,893

 

 

36,770

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Maturities of held-to-maturity investments

 

66,344

 

 

141,806

 

Sales of available-for-sale investments

 

-

 

 

29,891

 

Sales of trading investments

 

-

 

 

15,750

 

Purchases of held-to-maturity investments

 

(69,464

)

 

(190,635

)

Purchases of available-for-sale investments

 

-

 

 

(2,001

)

Purchases of property and equipment

 

(8,732

)

 

(14,542

)

Proceeds from sale of property and equipment

 

18

 

 

164

 

Additions to intangibles

 

(3,362

)

 

(749

)

(Increase) decrease in other assets

 

(219

)

 

302

 

Net cash used in investing activities

 

(15,415

)

 

(20,014

)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Principal payments on debt

 

(296

)

 

(610

)

Tax benefit from exercise of stock options

 

176

 

 

492

 

Issuance of common stock

 

2,381

 

 

2,722

 

Purchases of common stock held in treasury

 

(13,361

)

 

-

 

Net cash (used in) provided by financing activities

 

(11,100

)

 

2,604

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

641

 

 

12,747

 

 

 

 

 

 

 

 

NET INCREASE IN CASH AND

 

 

 

 

 

 

CASH EQUIVALENTS

 

20,019

 

 

32,107

 

CASH AND CASH EQUIVALENTS, beginning of period

 

222,514

 

 

359,331

 

CASH AND CASH EQUIVALENTS, end of period

 

  $

242,533

 

 

  $

391,438

 

 

 

 

 

 

 

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest

 

  $

5

 

 

  $

14

 

Income taxes

 

  $

5,663

 

 

  $

23,491

 

 

See accompanying notes to condensed consolidated financial statements.

 

6



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE-MONTHS ENDED MARCH 31, 2013 AND 2012

(In Thousands) (Unaudited) (Continued)

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS

 

The Company entered into capital leases for the acquisition of promotional vehicles of $0.4 million and $0.8 million for the three-months ended March 31, 2013 and 2012, respectively.

 

Included in accounts receivable, net, are sales of available-for-sale investments of $5.8 million as of March 31, 2013.

 

Included in accounts payable are property and equipment purchases of $2.0 million and $0.4 million as of March 31, 2013 and December 31, 2012, respectively.

 

See accompanying notes to condensed consolidated financial statements.

 

7



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

1.                                    BASIS OF PRESENTATION

 

Reference is made to the Notes to Consolidated Financial Statements, in Monster Beverage Corporation and Subsidiaries (the “Company” or, in reference to the Company’s former name, “Hansen Natural Corporation”) Annual Report on Form 10-K for the year ended December 31, 2012 (“Form 10-K”) for a summary of significant accounting policies utilized by the Company and its consolidated subsidiaries and other disclosures, which should be read in conjunction with this Quarterly Report on Form 10-Q (“Form 10-Q”).

 

The Company’s condensed consolidated financial statements included in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and Securities and Exchange Commission (“SEC”) rules and regulations applicable to interim financial reporting.  They do not include all the information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP.  The information set forth in these interim condensed consolidated financial statements for the three-months ended March 31, 2013 and 2012 is unaudited and reflects all adjustments, which include only normal recurring adjustments and which in the opinion of management are necessary to make the interim condensed consolidated financial statements not misleading.  Results of operations for periods covered by this report may not necessarily be indicative of results of operations for the full year.

 

The preparation of financial statements in conformity with GAAP necessarily requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from these estimates.

 

2.                                    RECENT ACCOUNTING PRONOUNCEMENTS

 

In February 2013, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”.  ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The guidance became effective for the Company on January 1, 2013. The adoption of ASU 2013-02 did not have a material impact on the Company’s financial position, results of operations or liquidity.

 

8



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

3.                                    INVESTMENTS

 

The following table summarizes the Company’s investments at:

 

March 31, 2013

 

Amortized
Cost

 

 

Gross
Unrealized
Holding
Gains

 

 

Gross
Unrealized
Holding
Losses

 

 

Fair
Value

 

 

Continuous
Unrealized
Loss Position
less than 12
Months

 

 

Continuous
Unrealized
Loss Position
greater than 12
Months

Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasuries

 

  $

16,023

 

 

  $

2

 

 

  $

-

 

 

  $

16,025

 

 

  $

-

 

 

  $

-

 

Certificates of deposit

 

6,706

 

 

-

 

 

-

 

 

6,706

 

 

-

 

 

-

 

Municipal securities

 

75,671

 

 

32

 

 

-

 

 

75,703

 

 

-

 

 

-

 

Total

 

  $

98,400

 

 

  $

34

 

 

  $

-

 

 

98,434

 

 

  $

-

 

 

  $

-

 

Trading

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

 

 

 

3,739

 

 

 

 

 

 

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

 

 

 

13,631

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

  $

115,804

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasuries

 

  $

16,040

 

 

  $

-

 

 

  $

-

 

 

  $

16,040

 

 

  $

-

 

 

  $

-

 

Certificates of deposit

 

2,201

 

 

-

 

 

-

 

 

2,201

 

 

-

 

 

-

 

Municipal securities

 

77,038

 

 

-

 

 

11

 

 

77,027

 

 

11

 

 

-

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

3,310

 

 

2,483

 

 

-

 

 

5,793

 

 

-

 

 

-

 

Total

 

  $

98,589

 

 

  $

2,483

 

 

  $

11

 

 

101,061

 

 

  $

11

 

 

  $

-

 

Trading

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

 

 

 

1,763

 

 

 

 

 

 

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

 

 

 

15,600

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

  $

118,424

 

 

 

 

 

 

 

 

During the three-months ended March 31, 2013, the Company recognized $2.5 million of realized gains on the sale of available-for-sale investments. During the year ended December 31, 2012, realized gains or losses recognized on the sale of investments were not significant.

 

9



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

 

 

Three-Months Ended
March 31,

 

 

 

2013

 

2012

 

Gain on transfer from available-for-sale to trading

 

$

-

 

$

-

 

Gain on trading securities sold

 

-

 

1,019

 

Gain on trading securities held

 

6

 

754

 

Gain on trading securites

 

$

6

 

$

1,773

 

 

 

The Company’s investments at March 31, 2013 and December 31, 2012 in U.S. Treasuries, certificates of deposit and/or municipal securities carried investment grade credit ratings.  All of the Company’s investments at March 31, 2013 in municipal, educational or other public body securities with an auction reset feature (“auction rate securities”) also carried investment grade credit ratings.  A portion of the Company’s investments at December 31, 2012 in auction rate securities carried investment grade credit ratings.

 

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

 

 

 

March 31, 2013

 

December 31, 2012

 

 

 

 

Amortized Cost

 

Fair Value

 

Amortized Cost

 

Fair Value

 

Less than 1 year:

 

 

 

 

 

 

 

 

 

U.S. Treasuries

 

$

16,023

 

$

16,025

 

$

16,040

 

$

16,040

 

Certificates of deposit

 

6,706

 

6,706

 

2,201

 

2,201

 

Municipal securities

 

75,671

 

75,703

 

77,038

 

77,027

 

Due 11 - 20 years:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

10,758

 

10,758

 

10,748

 

10,748

 

Due 21 - 30 years:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

6,612

 

6,612

 

9,925

 

12,408

 

Total

 

$

115,770

 

$

115,804

 

$

115,952

 

$

118,424

 

 

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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 on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The three levels of inputs required by the standard that the Company uses to measure fair value are summarized below.

 

·                 Level 1: Quoted prices in active markets for identical assets or liabilities.

 

·               Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.

 

·                 Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

ASC 820 requires the use of observable market inputs (quoted market prices) when measuring fair value and requires a Level 1 quoted price to be used to measure fair value whenever possible.

 

The following tables present the Company’s held-to-maturity investments at amortized cost as well as the fair value of the Company’s financial assets that are recorded at fair value on a recurring basis, segregated among the appropriate levels within the fair value hierarchy at:

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

March 31, 2013

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

 

$

153,066

 

$

-

 

$

-

 

$

153,066

 

Money market funds

 

 

76,930

 

-

 

-

 

76,930

 

U.S. Treasuries

 

 

-

 

16,023

 

-

 

16,023

 

Certificates of deposit

 

 

-

 

11,708

 

-

 

11,708

 

Municipal securities

 

 

-

 

83,206

 

-

 

83,206

 

Auction rate securities

 

 

-

 

-

 

17,370

 

17,370

 

Put option related to auction rate securities

 

 

-

 

-

 

2,011

 

2,011

 

Total

 

 

$

229,996

 

$

110,937

 

$

19,381

 

$

360,314

 

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

229,996

 

$

12,537

 

$

-

 

$

242,533

 

Short-term investments

 

 

-

 

98,400

 

3,739

 

102,139

 

Investments

 

 

-

 

-

 

13,631

 

13,631

 

Prepaid expenses and other current assets

 

 

-

 

-

 

491

 

491

 

Other assets

 

 

-

 

-

 

1,520

 

1,520

 

Total

 

 

$

229,996

 

$

110,937

 

$

19,381

 

$

360,314

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

 

$

147,113

 

$

-

 

$

-

 

$

147,113

 

Money market funds

 

 

63,974

 

-

 

-

 

63,974

 

U.S. Treasuries

 

 

-

 

24,065

 

-

 

24,065

 

Certificates of deposit

 

 

-

 

5,603

 

-

 

5,603

 

Municipal securities

 

 

-

 

77,038

 

-

 

77,038

 

Auction rate securities

 

 

-

 

-

 

23,156

 

23,156

 

Put option related to auction rate securities

 

 

-

 

-

 

1,929

 

1,929

 

Total

 

 

$

211,087

 

$

106,706

 

$

25,085

 

$

342,878

 

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

211,087

 

$

11,427

 

$

-

 

$

222,514

 

Short-term investments

 

 

-

 

95,279

 

1,763

 

97,042

 

Investments

 

 

-

 

-

 

21,393

 

21,393

 

Prepaid expenses and other current assets

 

 

-

 

-

 

225

 

225

 

Other assets

 

 

-

 

-

 

1,704

 

1,704

 

Total

 

 

$

211,087

 

$

106,706

 

$

25,085

 

$

342,878

 

 

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 U.S. Treasuries, certificates of deposit and municipal securities, 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-months ended March 31, 2013 or the year ended December 31, 2012, and there were no changes in the Company’s valuation techniques.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The Company’s Level 3 assets are comprised of auction rate securities and put options. The Company’s Level 3 valuation utilized a mark-to-model approach which included estimates for interest rates, timing and amount of cash flows, credit and liquidity premiums, as well as expected holding periods for the auction rate securities. These assumptions are typically volatile and subject to change as the underlying data sources and market conditions evolve. A significant change in any single input could have a significant valuation impact; however, no single input has a more significant impact on valuation than another. There were no changes in the Company’s valuation techniques of its Level 3 assets during the three-months ended March 31, 2013.

 

The following table presents quantitative information related to the significant unobservable inputs utilized in the Company’s Level 3 recurring fair value measurements as of March 31, 2013.

 

 

 

 

Valuation Technique

 

Unobservable Input

 

Range (Weighted-Average)

Auction Rate Securities:

 

 

 

 

 

 

Trading

 

Discounted cash flow

 

Maximum rate probability

 

0.40%-1.84% (1.0%)

 

 

 

 

Principal returned probability

 

86.69%-95.49% (87.8%)

 

 

 

 

Default probability

 

3.88%-11.69% (11.2%)

 

 

 

 

Liquidity risk

 

3.50%-3.50% (3.50%)

 

 

 

 

Recovery rate

 

60-60 (60)

 

 

 

 

 

 

 

Put Options

 

Discounted cash flow

 

Counterparty risk

 

0.68%-1.29% (0.89%)

 

 

At March 31, 2013, the Company held auction rate securities with a face value of $19.5 million (amortized cost basis of $17.4 million). A Level 3 valuation was performed on the Company’s auction rate securities as of March 31, 2013 resulting in a fair value of $17.4 million for the Company’s trading auction rate securities (after a $2.1 million impairment), which are included in short-term and long-term investments.

 

In June 2011, the Company entered into an agreement (the “2011 ARS Agreement”), related to $24.5 million of par value auction rate securities (the “2011 ARS Securities”).  Under the 2011 ARS Agreement, the Company has the right to sell the 2011 ARS Securities including all accrued but unpaid interest thereon (the “2011 Put Option”) as follows: (i) on or after July 1, 2013, up to $1.0 million aggregate par value; (ii) on or after October 1, 2013, up to an additional $1.0 million aggregate par value; and (iii) in quarterly installments thereafter based on a formula of the then outstanding 2011 ARS Securities, as adjusted for normal market redemptions, with full sale rights available on or after April 1, 2016. The 2011 ARS Securities will continue to accrue interest until redeemed through the 2011 Put Option, or as determined by the auction process, or should the auction process fail, the terms outlined in the prospectus of the respective 2011 ARS Securities. Under the 2011 ARS Agreement, the Company has the obligation, should it receive written notification from the put issuer, to sell the 2011 ARS Securities at par plus all accrued but unpaid interest. During the three-months ended March 31, 2013, no 2011 ARS Securities were redeemed through normal market channels ($1.3 million and $3.7 million of par value 2011 ARS Securities were redeemed at par through normal market channels during the years ended December 31, 2012 and 2011, respectively). The 2011 Put Option does not meet the definition of derivative instruments

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

under ASC 815.  Therefore, the Company elected the fair value option under ASC 825-10 in accounting for the 2011 Put Option. As of March 31, 2013, the Company recorded $2.0 million as the fair market value of the 2011 Put Option, included in prepaid expenses and other assets, as well as in 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.

 

The net effect of (i) the revaluation of the 2011 Put Option as of March 31, 2013; (ii) the revaluation of the Company’s trading auction rate securities as of March 31, 2013; and (iii) a recognized gain resulting from the redemption of previously other-than-temporary impaired securities; resulted in a gain of $2.6 million, which is included in other (expense) income for the three-months ended March 31, 2013. The net effect of (i) the revaluation of the 2011 Put Option and the 2010 Put Option as of March 31, 2012; (ii) the revaluation of the Company’s trading auction rate securities as of March 31, 2012; (iii) the redemption at par of certain 2010 ARS Securities, including those redeemed at par through the exercise of the 2010 Put Option; and (iv) a recognized gain resulting from the redemption at par of a previously other-than-temporary impaired security; resulted in a gain of $0.4 million, which is included in other (expense) income for the three-months ended March 31, 2012.

 

The following table provides a summary reconciliation of the Company’s financial assets that are recorded at fair value on a recurring basis using significant unobservable inputs (Level 3):

 

 

 

Three-Months Ended
March 31, 2013

 

Three-Months Ended
March 31, 2012

 

 

 

Auction
Rate
Securities

 

 

Put Options

 

Auction
Rate
Securities

 

 

Put Options

 

Opening Balance

 

$

23,156

 

 

$

1,929

 

$

35,852

 

 

$

3,041

 

Transfers into Level 3

 

-

 

 

-

 

-

 

 

-

 

Transfers out of Level 3

 

-

 

 

-

 

-

 

 

-

 

Total gains (losses) for the period:

 

 

 

 

 

 

 

 

 

 

 

Included in earnings

 

2,489

 

 

82

 

1,787

 

 

(1,392

)

Included in other comprehensive income

 

(2,483

)

 

-

 

-

 

 

-

 

Settlements

 

(5,792

)

 

-

 

(15,775

)

 

-

 

Closing Balance

 

$

17,370

 

 

$

2,011

 

$

21,864

 

 

$

1,649

 

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

5.                                    INVENTORIES

 

Inventories consist of the following at:

 

 

 

March 31,
2013

 

December 31,
2012

 

Raw materials

 

$

65,204

 

$

65,010

 

Finished goods

 

150,133

 

138,096

 

 

 

$

215,337

 

$

203,106

 

 

 

6.                                    PROPERTY AND EQUIPMENT, Net

 

Property and equipment consist of the following at:

 

 

 

March 31,
2013

 

December 31,
2012

 

Land

 

$

5,382

 

$

5,382

 

Leasehold improvements

 

2,305

 

2,300

 

Furniture and fixtures

 

3,592

 

2,087

 

Office and computer equipment

 

9,973

 

8,981

 

Computer software

 

1,147

 

1,135

 

Equipment

 

52,190

 

48,427

 

Buildings

 

24,502

 

21,998

 

Vehicles

 

27,087

 

26,037

 

 

 

126,178

 

116,347

 

Less: accumulated depreciation and amortization

 

(51,582)

 

(47,210

)

 

 

$

74,596

 

$

69,137

 

 

 

7.                                    INTANGIBLES, Net

 

Intangibles consist of the following at:

 

 

 

March 31,
2013

 

December 31,
2012

 

Amortizing intangibles

 

$

1,061

 

$

1,061

 

Accumulated amortization

 

(565)

 

(553

)

 

 

496

 

508

 

Non-amortizing intangibles

 

57,503

 

54,140

 

 

 

$

57,999

 

$

54,648

 

 

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 for both the three-months ended March 31, 2013 and March 31, 2012.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

8.                                    DISTRIBUTION AGREEMENTS

 

Pursuant to new and/or amended distribution agreements entered into with certain distributors, amounts of $8.2 million from such distributors, relating to the costs associated with terminating agreements with the Company’s prior distributors, were recorded for the three-months ended March 31, 2013. Such amounts 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 $2.4 million and $2.5 million for the three-months ended March 31, 2013 and 2012, respectively.

 

The Company incurred termination costs to certain of its prior distributors amounting to $8.3 million and $0.1 million in aggregate for the three-months ended March 31, 2013 and 2012, respectively. Such termination costs have been expensed in full and are included in operating expenses for the three-months ended March 31, 2013 and 2012. Accrued distributor terminations included in accrued liabilities in the accompanying consolidated balance sheets as of March 31, 2013 and December 31, 2012 were $8.2 million and $0.9 million, respectively.

 

9.                                    COMMITMENTS AND CONTINGENCIES

 

The Company had purchase commitments aggregating approximately $66.8 million at March 31, 2013, 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 $95.5 million at March 31, 2013, which related primarily to sponsorships and other marketing activities.

 

The Company had operating lease commitments aggregating approximately $18.4 million at March 31, 2013, 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 located in Corona, CA, including the real property thereunder and improvements thereon (the “March 2012 Property”), which the Company has not occupied, as well as additional parking spaces, for a total 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 in the third quarter of 2013. The October 2012 Property should more effectively address the future growth needs of the Company, compared to the March 2012 Property.  In December 2012, the Company commenced marketing efforts to sell the March 2012 Property and met the criteria established by ASC No. 360 for classifying the March 2012 Property as an asset held for sale. As a result, the March 2012 Property is included in prepaid expenses and other current assets in the accompanying consolidated balance sheet as of March 31, 2013 and December 31, 2012.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

Litigation – 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 “Wellman Action”).  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, styled Wendy Crossland and Richard Fournier v. Monster Beverage Corporation, against the Company claiming that the death of their 14 year old daughter (Anais Fournier) was caused by her consumption of two 24-ounce Monster Energy® drinks over the course of two days in December 2011.  The plaintiffs allege strict product liability, negligence, fraudulent concealment, breach of implied warranties and wrongful death.  The plaintiffs claim general damages in excess of $25,000 and punitive damages.  The Company 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 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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

“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 June 20, 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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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

State Attorney General Inquiry – In July 2012, the Company received a subpoena from a state attorney general in connection with an investigation concerning the Company’s advertising, marketing, promotion, ingredients, usage and sale of its Monster Energy® brand of energy drinks. 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, was styled Iron Workers District Council of Tennessee Valley & Vicinity Pension Plan v. Sacks, et al.  The other action, originally filed in the Superior Court for the County of Los Angeles, was styled Rumbaugh v. Sacks, et al.

 

The Iron Workers complaint named as defendants certain officers, directors and employees of the Company, including Rodney Sacks, Hilton Schlosberg, Harold C. Taber, Jr., Benjamin M. Polk, Norman C. Epstein, Mark S. Vidergauz, Sydney Selati, and Thomas J. Kelly.  The Rumbaugh complaint named each of the same individuals as defendants, with the exception of Thomas J. Kelly.  The Company was named as a nominal defendant in each action.

 

The factual allegations of the two complaints were substantially similar.  Each alleged, 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 alleged 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 alleged 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 asserted causes of action for breach of fiduciary duty and unjust enrichment.  In addition to those causes of action, the Rumbaugh complaint also asserted causes of action for abuse of control, gross mismanagement and waste of corporate assets.  Plaintiffs sought an unspecified amount of damages to be paid to the Company, adoption of corporate governance reforms, and equitable and injunctive relief.

 

By stipulation of the parties, the Rumbaugh complaint was transferred to Riverside Superior Court.  On March 4, 2013, and March 6, 2013, respectively, on the parties’ stipulation, the Iron Workers and Rumbaugh matters were dismissed with prejudice as to the named plaintiffs and without prejudice as to any other Company shareholder.  No consideration was offered or exchanged to induce or reward either Plaintiff’s voluntary dismissal.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

On May 3, 2013, a derivative complaint was filed in United States District Court for the Central District of California, purportedly on behalf of the Company, by a shareholder of the Company who made no prior demand on the Company’s Board of Directors.  The action is styled Eric Spitzer v. Sacks, et al, United States District Court for the Central District of California.  Through his counsel, Spitzer had previously served a request that the Company produce certain books and records pursuant to section 220 of the Delaware General Corporation Law.  Counsel for the Company and Spitzer exchanged correspondence relating to the demand.  After Spitzer refused to narrow his demand, the Company ultimately denied the demand in a letter dated February 14, 2013.

 

The Spitzer complaint named as defendants certain officers, directors, and employees of the Company, including Rodney Sacks, Hilton Schlosberg, Harold C. Taber, Jr., Benjamin M. Polk, Norman C. Epstein, Mark S. Vidergauz, Sydney Selati, and Thomas J. Kelly.  The Company is named as a nominal defendant.

 

Spitzer alleges, among other things, that the Individual Defendants breached their fiduciary duties to the Company by causing the Company to (a) engage in illicit activity regarding the promotion, marketing, advertising, ingredients, usage and sale of its Monster Energy brand of energy drinks; (b) lack adequate internal and financial controls; and (c) issue financial statements that were materially false and misleading, all in a way that has exposed, and will continue to expose, the Company to costly investigations.  The complaint further alleges 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 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.  The complaint asserts causes of action for breach of fiduciary duty abuse of control, gross mismanagement, and unjust enrichment.  Spitzer seeks an unspecified amount of damages to be paid to the Company, adoption of corporate governance reforms, and equitable and injunctive relief.

 

Although the ultimate outcome of this matter cannot be determined with certainty, the Company believes that the complaint is without merit.  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.

 

San Francisco City Attorney Litigation.  On October 31, 2012, the Company received a written request for information from the City Attorney for the City and County of San Francisco concerning the Company’s advertising and marketing of its Monster Energy® brand of energy drinks and specifically concerning the safety of its products for consumption by adolescents.  In a letter dated March 29, 2013, the San Francisco City Attorney threatened to bring suit against the Company if it did not agree to take the following five steps immediately:  (i) “Reformulate its product to lower the caffeine content to safe levels”; (ii) “Provide adequate warning labels”; (iii) “Cease promoting over-consumption in marketing”; (iv) “Cease use of alcohol and drug references in marketing”; and (v) “Cease targeting minors.”

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

On April 29, 2013, the Company and its wholly owned subsidiary, Monster Energy Company, filed a complaint for declaratory and injunctive relief against the San Francisco City Attorney in United States District Court for the Central District of California, styled Monster Beverage Corp., et al. v. Dennis Herrera.  The Company seeks a declaration from the 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.  The San Francisco City Attorney’s response to the complaint is currently due on June 11, 2013.

 

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, San Francisco Superior Court.  The City Attorney alleges that the Company (1) mislabeled its products as a dietary supplement, in violation of California’s Sherman Food, Drug and Cosmetic Law, California Health & Safety Code sections 109875 et. seq.; (2) is selling an “adulterated” product because caffeine is not generally recognized as safe (“GRAS”) due to the alleged lack of scientific consensus concerning the safety of the levels of caffeine in the Company’s products; and (3) is engaged in unfair and misleading business practices because its marketing (a) does not disclose the health risks that energy drinks pose for children and teens; (b) fails to warn against and promotes unsafe consumption; (c) implicitly promotes mixing of energy drinks with alcohol or drugs; and (d) is deceptive because it includes unsubstantiated claims about the purported special benefits of its “killer” ingredients and “energy blend.” The City Attorney seeks a declaration that the Company has engaged in unfair and unlawful business acts and practices in violation of the Unfair Competition Law; an injunction from performing or proposing to perform any acts in violation of the Unfair Competition Law; restitution; and civil penalties.

 

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 it filed in United States District Court.  The Company intends to vigorously defend against this lawsuit.  At this time, no evaluation of the likelihood of an unfavorable outcome or range of potential loss can be expressed.

 

In addition to the above matters, the Company has been named as a defendant in various false advertising putative class actions and in a private attorney general action, each of which contains allegations similar to those presented in the Wellman 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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

10.                            ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

 

Changes in accumulated other comprehensive (loss) income by component, after tax, for the three-months ended March 31, 2013 are as follows:

 

 

 

 

Currency
Translation
Gains (Losses)

 

 

Unrealized
Gains (Losses)
on Available-for-
Sale Securities

 

 

Total

 

Balance at December 31, 2012

 

 

$

549

 

 

$

1,525

 

 

$

2,074

 

Other comprehensive loss before reclassifications

 

 

(1,092)

 

 

-

 

 

(1,092)

 

Amounts reclassified from accumulated other comprehensive (loss) income

 

 

-

 

 

(1,525)

1

 

(1,525)

 

Net current-period other comprehensive loss

 

 

(1,092)

 

 

(1,525)

 

 

(2,617)

 

Balance at March 31, 2013

 

 

$

(543)

 

 

$

-

 

 

$

(543)

 

 

1 Included in other (expense) income.

 

11.                            TREASURY STOCK PURCHASE

 

On November 13, 2012, 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 (the “November 2012 Repurchase Plan”). During the three-months ended March 31, 2013, the Company purchased 0.257 million shares of common stock at an average purchase price of $51.99 per share for a total amount of $13.4 million (excluding broker commissions), which exhausted the availability under the November 2012 Repurchase Plan.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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”).  As of May 10, 2013, no shares have been purchased under the April 2013 Repurchase Plan.

 

12.                            STOCK-BASED COMPENSATION

 

The Company has two stock-based compensation plans under which shares were available for grant at March 31, 2013: the Monster Beverage Corporation 2011 Omnibus Incentive Plan (the “2011 Omnibus Incentive Plan”) and the 2009 Monster Beverage Corporation Stock Incentive Plan for Non-Employee Directors (the “2009 Directors Plan”).

 

The Company recorded $7.0 million and $6.6 million of compensation expense relating to outstanding options, restricted stock awards, stock appreciation rights and restricted stock units during the three-months ended March 31, 2013 and 2012, 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 March 31, 2013 and 2012 was $0.2 million and $0.5 million, respectively.

 

Stock Options

 

Under the Company’s stock-based compensation plans, all stock options granted as of March 31, 2013 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 March 31,

 

 

 

2013

 

2012

 

Dividend yield

 

0.0 %

 

0.0 %

 

Expected volatility

 

47.8 %

 

48.3 %

 

Risk-free interest rate

 

0.9 %

 

0.9 %

 

Expected term

 

5.4 Years

 

5.5 Years

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

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

 

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

 

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

 

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, 2013

 

14,000

 

$

12.12

 

4.1

 

$

572,530

 

Granted

 

636

 

$

47.36

 

 

 

 

 

Exercised

 

(117)

 

$

20.27

 

 

 

 

 

Cancelled or forfeited

 

(113)

 

$

25.55

 

 

 

 

 

Outstanding at March 31, 2013

 

14,406

 

$

13.51

 

4.1

 

$

497,761

 

Vested and expected to vest in the future at March 31, 2013

 

13,999

 

$

12.75

 

4.0

 

$

493,506

 

Exercisable at March 31, 2013

 

11,037

 

$

8.36

 

3.1

 

$

434,897

 

 

The weighted-average grant-date fair value of options granted during the three-months ended March 31, 2013 and 2012 was $20.52 per share and $25.48 per share, respectively. The total intrinsic value of options exercised during the three-months ended March 31, 2013 and 2012 was $3.3 million and $107.4 million, respectively.

 

Cash received from option exercises under all plans for the three-months ended March 31, 2013 and 2012 was approximately $2.4 million and $2.7 million, respectively.

 

At March 31, 2013, there was $40.7 million of total unrecognized compensation expense related to non-vested options granted to employees under the Company’s share-based payment plans. That cost is expected to be recognized over a weighted-average period of 2.5 years.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Restricted Stock Awards and Restricted Stock Units

 

Stock-based compensation cost for restricted stock awards and restricted stock units is measured based on the closing fair market value of the Company’s common stock at the date of grant. In the event that the Company has the option and intent to settle a restricted stock unit in cash, the award is classified as a liability and revalued at each balance sheet date.

 

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

 

 

 

Number of
Shares (in
thousands)

 

 

Weighted
Average
Grant-Date
Fair Value

 

Non-vested at January 1, 2013

 

637

 

 

$

46.97

 

Granted

 

8

 

 

$

50.89

 

Vested

 

(18)

 

 

$

57.45

 

Forfeited/cancelled

 

(6)

 

 

$

60.11

 

Non-vested at March 31, 2013

 

621

 

 

$

46.58

 

 

The weighted-average grant-date fair value of restricted stock units and restricted stock awards granted during the three-months ended March 31, 2013 and 2012 was $50.89 and $57.45 per share, respectively. As of March 31, 2013, 0.5 million of restricted stock units and restricted stock awards are expected to vest.

 

At March 31, 2013, total unrecognized compensation expense relating to non-vested restricted stock awards and non-vested restricted stock units was $21.9 million, which is expected to be recognized over a weighted-average period of 2.2 years.

 

13.                            INCOME TAXES

 

The following is a roll-forward of the Company’s total gross unrecognized tax benefits, not including interest and penalties, for the three-months ended March 31, 2013:

 

 

 

Gross Unrealized Tax
Benefits

 

Balance at December 31, 2012

 

$

926

 

Additions for tax positions related to the current year

 

-

 

Additions for tax positions related to the prior year

 

397

 

Decreases related to settlement with taxing authority

 

-

 

Balance at March 31, 2013

 

$

1,323

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Company’s condensed consolidated financial statements. As of March 31, 2013, the Company had accrued approximately $0.4 million in interest and penalties related to unrecognized tax benefits. If the Company were to prevail on all uncertain tax positions, the resultant impact on the Company’s effective tax rate would not be significant. It is expected that the amount of unrecognized tax benefits will not change within the next 12 months.

 

On March 8, 2013, the Internal Revenue Service (“IRS”) began its examination of the Company’s U.S. federal income tax returns for the years ended December 31, 2010 and 2011. The Company is also in various stages of examination with certain states.

 

The Company is subject to U.S. federal income tax as well as to income tax in multiple state and foreign jurisdictions. Federal income tax returns are subject to IRS examination for the 2010, 2011 and 2012 tax years. State income tax returns are subject to examination for the 2008 through 2012 tax years.

 

14.                            EARNINGS PER SHARE

 

A reconciliation of the weighted-average shares used in the basic and diluted earnings per common share computations is presented below:

 

 

 

Three-Months Ended
March 31,

 

 

 

2013

 

2012

 

Weighted-average shares outstanding:

 

 

 

 

 

Basic

 

165,525

 

174,832

 

Dilutive securities

 

7,034

 

10,430

 

Diluted

 

172,559

 

185,262

 

 

For the three-months ended March 31, 2013 and 2012, options outstanding totaling 0.8 million and 0.2 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive.

 

15.                            SEGMENT INFORMATION

 

The Company has two reportable segments, namely Direct Store Delivery (“DSD”), whose principal products comprise energy drinks, and Warehouse (“Warehouse”), whose principal products comprise juice-based and soda beverages.  The DSD segment develops, markets and sells products primarily through an exclusive distributor network, whereas the Warehouse segment develops, markets and sells products primarily direct to retailers. Corporate and unallocated amounts that do not relate to DSD or Warehouse segments have been allocated to “Corporate & Unallocated.”

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

 

 

 

Three-Months Ended March 31, 2013

 

 

 

 

DSD

 

 

 

Warehouse

 

 

 

Corporate and
Unallocated

 

 

 

Total

 

Net sales

 

 

$

460,175

 

 

 

$

24,048

 

 

 

$

-

 

 

 

$

484,223

 

Contribution margin

 

 

138,974

 

 

 

382

 

 

 

-

 

 

 

139,356

 

Corporate and unallocated expenses

 

 

-

 

 

 

-

 

 

 

(32,050

)

 

 

(32,050

)

Operating income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

107,306

 

Other income (expense)

 

 

188

 

 

 

-

 

 

 

(2,090

)

 

 

(1,902

)

Income before provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

105,404

 

Depreciation and amortization

 

 

(4,421

)

 

 

(47

)

 

 

(580

)

 

 

(5,048

)

Trademark amortization

 

 

-

 

 

 

(11

)

 

 

(1

)

 

 

(12

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three-Months Ended March 31, 2012

 

 

 

 

DSD

 

 

 

Warehouse

 

 

 

Corporate and
Unallocated

 

 

 

Total

 

Net sales

 

 

$

431,182

 

 

 

$

23,423

 

 

 

$

-

 

 

 

$

454,605

 

Contribution margin

 

 

149,092

 

 

 

2,157

 

 

 

-

 

 

 

151,249

 

Corporate and unallocated expenses

 

 

-

 

 

 

-

 

 

 

(24,964

)

 

 

(24,964

)

Operating income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

126,285

 

Other income (expense)

 

 

100

 

 

 

-

 

 

 

246

 

 

 

346

 

Income before provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

126,631

 

Depreciation and amortization

 

 

(3,783

)

 

 

(29

)

 

 

(1,144

)

 

 

(4,956

)

Trademark amortization

 

 

-

 

 

 

(11

)

 

 

(1

)

 

 

(12

)

 

Revenue is derived from sales to external customers.  Operating expenses that pertain to each segment are allocated to the appropriate segment.

 

Corporate and unallocated expenses were $32.0 million for the three-months ended March 31, 2013 and included $19.4 million of payroll costs, of which $7.0 million was attributable to stock-based compensation expense (see Note 12, “Stock-Based Compensation”), $7.6 million attributable to professional service expenses, including accounting and legal costs and $5.0 million of other operating expenses.  Corporate and unallocated expenses were $25.0 million for the three-months ended March 31, 2012 and included $17.7 million of payroll costs, of which $6.6 million was attributable to stock-based compensation expense (see Note 12, “Stock-Based Compensation”), $4.7 million attributable to professional service expenses, including accounting and legal costs, and $2.6 million of other operating expenses.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Coca-Cola Refreshments USA Inc. (“CCR”), a customer of the DSD segment, accounted for approximately 30% of the Company’s net sales for both the three-months ended March 31, 2013 and 2012.

 

Net sales to customers outside the United States amounted to $106.3 million and $79.2 million for the three-months ended March 31, 2013 and 2012, respectively.

 

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

 

 

 

 

Three-Months Ended

 

 

 

 

March 31,

 

Product Line

 

 

2013

 

 

 

2012

 

Energy drinks

 

 

$

446,026

 

 

 

$

418,912

 

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

 

 

27,972

 

 

 

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