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, 2015

 

Commission File Number 0-18761

 

 

MONSTER BEVERAGE CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware

39-1679918

 

(State or other jurisdiction of

(I.R.S. Employer

 

incorporation or organization)

Identification No.)

 

1 Monster Way

Corona, California 92879

(Address of principal executive offices) (Zip code)

 

 

(951) 739 – 6200

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes  X    No __

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes    No __

 

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Large Accelerated Filer x

Accelerated filer o

 

 

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

Smaller reporting company o

 

Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).

 

Yes ___    No  X

 

The Registrant had 170,171,054 shares of common stock, par value $0.005 per share, outstanding as of April 28, 2015.

 



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

MARCH 31, 2015

 

 

INDEX

 

Part I.

 

FINANCIAL INFORMATION

 

Page No.

 

 

 

 

 

Item 1.

 

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

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

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the Three-Months Ended March 31, 2015 and 2014

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three-Months Ended March 31, 2015 and 2014

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three-Months Ended March 31, 2015 and 2014

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2.

 

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

 

28

 

 

 

 

 

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

 

44

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

44

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

45

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

45

 

 

 

 

 

Item 5.

 

Other Information

 

45

 

 

 

 

 

Item 6.

 

Exhibits

 

45

 

 

 

 

 

 

 

Signatures

 

46

 

2



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PART I – FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2015 AND DECEMBER 31, 2014

(In Thousands, Except Par Value) (Unaudited)

_

 

 

 

March 31,
2015

 

December 31,
2014

ASSETS

 

 

 

 

CURRENT ASSETS:

 

 

 

 

Cash and cash equivalents

 

$

 362,787

 

$

 370,323

Short-term investments

 

647,284

 

781,134

Accounts receivable, net

 

343,427

 

280,203

Distributor receivables

 

628

 

552

Inventories

 

197,914

 

174,573

Prepaid expenses and other current assets

 

25,174

 

19,673

Intangibles held-for-sale, net

 

18,079

 

18,079

Prepaid income taxes

 

21,648

 

8,617

Deferred income taxes

 

224,954

 

40,275

Total current assets

 

1,841,895

 

1,693,429

 

 

 

 

 

INVESTMENTS

 

41,240

 

42,940

PROPERTY AND EQUIPMENT, net

 

88,296

 

90,156

DEFERRED INCOME TAXES

 

54,106

 

54,106

INTANGIBLES, net

 

52,300

 

50,748

OTHER ASSETS

 

7,109

 

7,496

Total Assets

 

$

 2,084,946

 

$

 1,938,875

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

Accounts payable

 

$

 167,789

 

$

 127,641

Accrued liabilities

 

46,147

 

40,271

Accrued promotional allowances

 

107,229

 

114,047

Accrued distributor terminations

 

205,980

 

-

Deferred revenue

 

10,584

 

49,926

Accrued compensation

 

9,972

 

17,983

Income taxes payable

 

1,586

 

5,848

Total current liabilities

 

549,287

 

355,716

 

 

 

 

 

DEFERRED REVENUE

 

67,305

 

68,009

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 11)

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

Common stock - $0.005 par value; 240,000 shares authorized;
211,609 shares issued and 170,158 outstanding as of March 31, 2015;
207,004 shares issued and 167,722 outstanding as of December 31, 2014

 

1,058

 

1,035

Additional paid-in capital

 

636,274

 

426,145

Retained earnings

 

2,334,924

 

2,330,510

Accumulated other comprehensive loss

 

(21,433)

 

(11,453)

Common stock in treasury, at cost; 41,451 and 39,282 shares as of March 31, 2015 and December 31, 2014, respectively

 

(1,482,469)

 

(1,231,087)

Total stockholders’ equity

 

1,468,354

 

1,515,150

Total Liabilities and Stockholders’ Equity

 

$

 2,084,946

 

$

 1,938,875

 

See accompanying notes to condensed consolidated financial statements.

 

3



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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE-MONTHS ENDED MARCH 31, 2015 AND 2014

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

        

                

    

 

 

 

 

Three-Months Ended

 

 

March 31,

 

 

2015

 

2014

 

 

 

 

 

NET SALES

 

$

 626,791

 

$

 536,129

 

 

 

 

 

COST OF SALES

 

257,834

 

249,311

 

 

 

 

 

GROSS PROFIT

 

368,957

 

286,818

 

 

 

 

 

OPERATING EXPENSES

 

361,328

 

137,955

 

 

 

 

 

OPERATING INCOME

 

7,629

 

148,863

 

 

 

 

 

INTEREST AND OTHER INCOME, net

 

1,233

 

154

 

 

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

 

8,862

 

149,017

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

4,448

 

53,767

 

 

 

 

 

NET INCOME

 

$

 4,414

 

$

 95,250

 

 

 

 

 

NET INCOME PER COMMON SHARE:

 

 

 

 

Basic

 

$

 0.03

 

$

 0.57

Diluted

 

$

 0.03

 

$

 0.55

 

 

 

 

 

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

 

 

 

 

Basic

 

169,871

 

166,913

Diluted

 

173,778

 

173,741

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

FOR THE THREE-MONTHS ENDED MARCH 31, 2015 AND 2014

(In Thousands) (Unaudited)

 

 

 

 

Three-Months Ended
March 31,

 

 

2015

 

2014

Net income, as reported

 

$

4,414

 

$

95,250

 

Other comprehensive (loss) income:

 

 

 

 

 

Change in foreign currency translation adjustment

 

(9,980)

 

102

 

Available-for-sale investments:

 

 

 

 

 

Change in net unrealized gains

 

-

 

-

 

Reclassification adjustment for net gains included in net income

 

-

 

-

 

Net change in available-for-sale investments

 

-

 

-

 

Other comprehensive (loss) income

 

(9,980)

 

102

 

Comprehensive (loss) income

 

$

(5,566)

 

$

95,352

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE-MONTHS ENDED MARCH 31, 2015 AND 2014

(In Thousands) (Unaudited)

 

 

 

 

Three-Months Ended

 

 

March 31, 2015

 

March 31, 2014

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

4,414

 

$

95,250

 

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

6,470

 

6,453

 

Gain on disposal of property and equipment

 

(46)

 

(100

)

Stock-based compensation

 

6,354

 

6,986

 

Loss on put option

 

-

 

67

 

Gain on investments, net

 

-

 

(66

)

Deferred income taxes

 

-

 

168

 

Excess tax benefit from stock-based compensation

 

(184,679)

 

(2,602

)

Effect on cash of changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(68,138)

 

(42,544

)

Distributor receivables

 

66

 

947

 

Inventories

 

(26,547)

 

17,410

 

Prepaid expenses and other current assets

 

(5,895)

 

(7,110

)

Prepaid income taxes

 

(13,498)

 

4,417

 

Accounts payable

 

42,742

 

6,068

 

Accrued liabilities

 

5,387

 

4,610

 

Accrued promotional allowances

 

(2,160)

 

14,708

 

Accrued distributor terminations

 

205,980

 

-

 

Accrued compensation

 

(7,866)

 

(5,838

)

Income taxes payable

 

(4,298)

 

39,095

 

Deferred revenue

 

(40,041)

 

(1,517

)

Net cash (used in) provided by operating activities

 

(81,755)

 

136,402

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Maturities of held-to-maturity investments

 

253,732

 

151,035

 

Sales of available-for-sale investments

 

101

 

-

 

Sales of trading investments

 

-

 

1,725

 

Purchases of held-to-maturity investments

 

(118,283)

 

(187,718

)

Purchases of property and equipment

 

(4,687)

 

(9,871

)

Proceeds from sale of property and equipment

 

102

 

237

 

(Increase) decrease in intangibles

 

(1,552)

 

105

 

Decrease in other assets

 

227

 

543

 

Net cash provided by (used in) investing activities

 

129,640

 

(43,944

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Principal payments on debt

 

(196)

 

(620

)

Excess tax benefit from stock-based compensation

 

184,679

 

2,602

 

Issuance of common stock

 

19,119

 

5,728

 

Purchases of common stock held in treasury

 

(251,382)

 

(20

)

Net cash (used in) provided by financing activities

 

(47,780)

 

7,690

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(7,641)

 

523

 

 

 

 

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

(7,536)

 

100,671

 

CASH AND CASH EQUIVALENTS, beginning of period

 

370,323

 

211,349

 

CASH AND CASH EQUIVALENTS, end of period

 

$

362,787

 

$

312,020

 

 

 

 

 

 

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

5

 

$

12

 

Income taxes

 

$

22,703

 

$

9,747

 

 

See accompanying notes to condensed consolidated financial statements.

 

6



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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE-MONTHS ENDED MARCH 31, 2015 AND 2014

(In Thousands) (Unaudited) (Continued)

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS

 

The Company entered into capital leases for the acquisition of promotional vehicles of $0.2 million for both the three-months ended March 31, 2015 and 2014.

 

 

 

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, 2014 (“Form 10-K”) for a summary of significant accounting policies utilized by the Company and its consolidated subsidiaries and other disclosures, which should be read in conjunction with this Quarterly Report on Form 10-Q (“Form 10-Q”).

 

The Company’s condensed consolidated financial statements included in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and Securities and Exchange Commission (“SEC”) rules and regulations applicable to interim financial reporting.  They do not include all the information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP.  The information set forth in these interim condensed consolidated financial statements for the three-months ended March 31, 2015 and 2014 is unaudited and reflects all adjustments, which include only normal recurring adjustments and which in the opinion of management are necessary to make the interim condensed consolidated financial statements not misleading.  Results of operations for periods covered by this report may not necessarily be indicative of results of operations for the full year.

 

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

 

2.                                    ACQUISITIONS AND DIVESTITURES

 

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

 

Subject to the terms and conditions of the agreements, upon the closing of the TCCC Transaction, (1) TCCC will acquire newly issued NewCo common shares representing approximately 16.7% of the total number of outstanding NewCo common shares (giving effect to such issuance) and TCCC will be entitled to appoint two individuals (reduced to one in 36 months or if TCCC’s equity interest in NewCo exceeds 20%) to NewCo’s Board of Directors for a specified period, (2) TCCC will transfer all rights in and to its global energy drink business (including the NOS®, Full Throttle®, Burn®, Mother®, Play® and Power Play®, and Relentless® brands) to NewCo, and the Company will transfer all of its rights in and to its non-energy drink business (including the Hansen’s® Natural Soda, Peace Tea®, Hubert’s® Lemonade and Hansen’s® Juice Product brands) to TCCC, (3) the Company and TCCC will amend the distribution coordination agreements currently existing between them to govern the transition of third parties’ rights to distribute the Company’s energy products in most territories in the U.S. to members of TCCC’s distribution network, which consists of owned or controlled bottlers/distributors and independent bottling/distribution partners, and (4) TCCC or one of its subsidiaries will make a net cash payment to the Company of $2.15 billion, of which up to $625.0 million of which will be held in escrow (the “Escrow Agreement”), subject to release upon achievement of milestones relating to the transfer of distribution rights to TCCC’s distribution network.

 

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Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

Percentage Transitioned

Escrow Release

40%

Amounts in excess of $375 million

50%

Amounts in excess of $312.5 million

60%

Amounts in excess of $250 million

70%

Amounts in excess of $187.5 million

80%

Amounts in excess of $125 million

90%

Amounts in excess of $62.5 million

95%

All remaining amounts

 

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

 

TCCC is contractually obligated to authorize payment to the Company of the funds in escrow upon achievement of the milestones referred to above. As of April 6, 2015, distribution rights in the U.S. representing approximately 84% of the target case sales have been transitioned to TCCC’s distribution network. In addition, the Company has sent notices of termination representing an additional 5% of the affected third-party distributors, and the associated distribution rights for those territories will be transitioned to TCCC’s distribution network effective as of May 11, 2015. As a result, it is anticipated that $125 million will be held in escrow at the closing, with the remaining $500 million to be paid to the Company at closing. The Company expects to commence steps to transition sufficient additional distribution rights following the closing of the TCCC Transaction, which will, in due course, result in the release of all remaining amounts held in escrow. Therefore, the Company believes that achievement of the milestones is probable.

 

The closing of the TCCC Transaction is subject to customary closing conditions and is now expected to close in the second quarter of 2015.

 

3.                                    RECENT ACCOUNTING PRONOUNCEMENTS

 

In September 2014, the Company elected to early adopt FASB ASU No. 2014-08, “Presentation of Financial Statements and Property, Plant, and Equipment - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”.  ASU 2014-08 provides new guidance related to the definition of a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The adoption of ASU 2014-08 did not have a material impact on the Company’s financial position, results of operations or liquidity.

 

In June 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-12, “Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after

 

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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 Requisite Service Period (a consensus of the FASB Emerging Issues Task Force)”.  ASU 2014-12 clarifies that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. ASU 2014-12 is effective for annual periods, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted. ASU 2014-12 may be applied either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The adoption of ASU 2014-12 is not expected to have a material impact on the Company’s financial position, results of operations or liquidity.

 

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

 

4.                                    INVESTMENTS

 

The following table summarizes the Company’s investments 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, 2015

 

Amortized Cost

 

Gross
Unrealized
Holding
Gains

 

Gross
Unrealized
Holding
Losses

 

Fair
Value

 

Continuous
Unrealized
Loss Position
less than 12
Months

 

Continuous
Unrealized
Loss Position
greater than 12
Months

Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

15,991

 

$

-

 

$

1

 

$

15,990

 

$

-

 

$

-

 

Municipal securities

 

622,082

 

48

 

-

 

622,130

 

-

 

-

 

U.S. Government Agencies

 

1,401

 

-

 

-

 

1,401

 

-

 

-

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal securities

 

33,662

 

8

 

-

 

33,670

 

-

 

-

 

U.S. Government Agencies

 

7,578

 

-

 

7

 

7,571

 

-

 

-

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate demand notes

 

3,900

 

-

 

-

 

3,900

 

-

 

-

 

Total

 

$

684,614

 

$

56

 

$

8

 

684,662

 

$

-

 

$

-

 

Trading

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

3,910

 

 

 

 

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

-

 

 

 

 

 

Total

 

 

 

 

 

 

 

$

688,572

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

Amortized Cost

 

Gross
Unrealized
Holding
Gains

 

Gross
Unrealized
Holding
Losses

 

Fair
Value

 

Continuous
Unrealized
Loss Position
less than 12
Months

 

Continuous
Unrealized
Loss Position
greater than 12
Months

 

Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

19,482

 

$

-

 

$

2

 

$

19,480

 

$

-

 

$

-

 

Municipal securities

 

744,542

 

105

 

-

 

744,647

 

-

 

-

 

U.S. Government Agencies

 

9,199

 

-

 

1

 

9,198

 

-

 

-

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal securities

 

42,940

 

10

 

-

 

42,950

 

-

 

-

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate demand notes

 

4,001

 

-

 

-

 

4,001

 

-

 

-

 

Total

 

$

820,164

 

$

115

 

$

3

 

820,276

 

$

-

 

$

-

 

Trading

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

3,910

 

 

 

 

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

-

 

 

 

 

 

Total

 

 

 

 

 

 

 

$

824,186

 

 

 

 

 

 

During the three-months ended March 31, 2015 and 2014, realized gains or losses recognized on the sale of investments were not significant. During the three-months ended March 31, 2015 and 2014, the net gains recognized on the Company’s trading securities was not significant.

 

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

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

 

 

March 31, 2015

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

Amortized Cost

 

Fair Value

 

Amortized Cost

 

Fair Value

Less than 1 year:

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

15,991

 

$

15,990

 

$

19,482

 

$

19,480

 

Municipal securities

 

622,082

 

622,130

 

744,542

 

744,647

 

U.S. government agency securities

 

1,401

 

1,401

 

9,199

 

9,198

 

Due 1 - 10 years:

 

 

 

 

 

 

 

 

 

Municipal securities

 

33,662

 

33,670

 

42,940

 

42,950

 

U.S. government agency securities

 

7,578

 

7,571

 

 

 

 

 

Due 11 - 20 years:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

3,910

 

3,910

 

3,910

 

3,910

 

Due 21 - 30 years:

 

 

 

 

 

 

 

 

 

Variable rate demand notes

 

3,900

 

3,900

 

4,001

 

4,001

 

Total

 

$

688,524

 

$

688,572

 

$

824,074

 

$

824,186

 

 

5.                                    FAIR VALUE OF CERTAIN FINANCIAL ASSETS AND LIABILITIES

 

Accounting Standards Codification (“ASC”) 820 provides a framework for measuring fair value and requires disclosures regarding fair value measurements. ASC 820 defines fair value as the price that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The three levels of inputs required by the standard that the Company uses to measure fair value are summarized below.

 

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

 

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

 

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

 

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

 

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

 

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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, 2015

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

$

162,105

 

$

-

 

$

-

 

$

162,105

 

Money market funds

 

197,887

 

-

 

-

 

197,887

 

Commercial paper

 

-

 

15,991

 

-

 

15,991

 

Municipal securities

 

-

 

658,539

 

-

 

658,539

 

U.S. government agency securities

 

-

 

8,979

 

-

 

8,979

 

Variable rate demand notes

 

-

 

3,900

 

-

 

3,900

 

Auction rate securities

 

-

 

-

 

3,910

 

3,910

 

Put option related to auction rate securities

 

-

 

-

 

250

 

250

 

Foreign currency derivatives

 

-

 

216

 

-

 

216

 

Total

 

$

359,992

 

$

687,625

 

$

4,160

 

$

1,051,777

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

359,992

 

$

2,795

 

$

-

 

$

362,787

 

Short-term investments

 

-

 

643,374

 

3,910

 

647,284

 

Accounts receivable, net

 

-

 

393

 

-

 

393

 

Investments

 

-

 

41,240

 

-

 

41,240

 

Prepaid expenses and other current assets

 

-

 

-

 

250

 

250

 

Accrued liabilities

 

-

 

(177)

 

-

 

(177)

 

Total

 

$

359,992

 

$

687,625

 

$

4,160

 

$

1,051,777

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

$

196,090

 

$

-

 

$

-

 

$

196,090

 

Money market funds

 

106,928

 

-

 

-

 

106,928

 

Commercial paper

 

-

 

19,482

 

-

 

19,482

 

Municipal securities

 

-

 

854,787

 

-

 

854,787

 

U.S. government agency securities

 

-

 

9,199

 

-

 

9,199

 

Variable rate demand notes

 

-

 

4,001

 

-

 

4,001

 

Auction rate securities

 

-

 

-

 

3,910

 

3,910

 

Put option related to auction rate securities

 

-

 

-

 

250

 

250

 

Foreign currency derivatives

 

-

 

(252)

 

-

 

(252)

 

Total

 

$

303,018

 

$

887,217

 

$

4,160

 

$

1,194,395

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

303,018

 

$

67,305

 

$

-

 

$

370,323

 

Short-term investments

 

-

 

777,224

 

3,910

 

781,134

 

Accounts receivable, net

 

-

 

83

 

-

 

83

 

Investments

 

-

 

42,940

 

-

 

42,940

 

Prepaid expenses and other current assets

 

-

 

-

 

250

 

250

 

Accrued liabilities

 

-

 

(335)

 

-

 

(335)

 

Total

 

$

303,018

 

$

887,217

 

$

4,160

 

$

1,194,395

 

 

The majority of the Company’s short-term investments are classified within Level 1 or Level 2 of the fair value hierarchy.  The Company’s valuation of its Level 1 investments, which include money market funds, is based on quoted market prices in active markets for identical securities. The Company’s valuation of its Level 2 investments, which include commercial paper, municipal securities, U.S. government agency securities and VRDNs, is based on other observable inputs, specifically a market approach which utilizes valuation models, pricing systems, mathematical tools and other relevant information for the same or similar securities. The Company’s valuation of its Level 2 foreign exchange contracts is based on quoted market prices of the same or similar instruments, adjusted for counterparty risk. There were no transfers between Level 1 and Level 2 measurements during the three-months ended March 31, 2015 or the year ended December 31, 2014, 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, 2015.

 

At March 31, 2015, the Company held auction rate securities with a face value of $4.2 million (amortized cost basis of $3.9 million). A Level 3 valuation was performed on the Company’s auction rate securities as of March 31, 2015 resulting in a fair value of $3.9 million for the Company’s trading auction rate securities (after a $0.3 million impairment), which are included in short-term investments.

 

In June 2011, the Company entered into an agreement (the “2011 ARS Agreement”), related to $24.5 million of par value auction rate securities (the “2011 ARS Securities”).  Under the 2011 ARS Agreement, the Company has the right to sell the 2011 ARS Securities including all accrued but unpaid interest thereon (the “2011 Put Option”) as follows: (i) on or after July 1, 2013, up to $1.0 million aggregate par value; (ii) on or after October 1, 2013, up to an additional $1.0 million aggregate par value; and (iii) in quarterly installments thereafter based on a formula of the then outstanding 2011 ARS Securities, as adjusted for normal market redemptions, with full sale rights available on or after April 1, 2016. The 2011 ARS Securities will continue to accrue interest until redeemed through the 2011 Put Option, or as determined by the auction process, or should the auction process fail, the terms outlined in the prospectus of the respective 2011 ARS Securities. Under the 2011 ARS Agreement, the Company has the obligation, should it receive written notification from the put issuer, to sell the 2011 ARS Securities at par plus all accrued but unpaid interest. During the three-months ended March 31, 2015, no 2011 ARS Securities were redeemed ($13.1 million, $2.3 million, $1.3 million and $3.7 million of par value 2011 ARS Securities were redeemed at par during the years ended December 31, 2014, 2013, 2012 and 2011, respectively). Subsequent to March 31, 2015, $0.7 million of 2011 ARS Securities were redeemed at par through the exercise of a portion of the 2011 Put Option. The 2011 Put Option does not meet the definition of derivative instruments under ASC 815.  Therefore, the Company elected the fair value option under ASC 825-10 in accounting for the 2011 Put Option. As of March 31, 2015, the Company recorded $0.3 million as the fair market value of the 2011 Put Option, included in prepaid expenses and other current assets.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

 

 

Three-Months Ended
March 31, 2015

 

Three-Months Ended
March 31, 2014

 

 

 

Auction
Rate
Securities

 

Put Options

 

Auction
Rate
Securities

 

Put Options

 

Opening Balance

 

$

3,910

 

$

250

 

$

16,184

 

$

1,092

 

Transfers into Level 3

 

-

 

-

 

-

 

-

 

Transfers out of Level 3

 

-

 

-

 

-

 

-

 

Total gains (losses) for the period:

 

 

 

 

 

 

 

 

 

Included in earnings

 

-

 

-

 

67

 

(68)

 

Included in other comprehensive income

 

-

 

-

 

-

 

-

 

Settlements

 

-

 

-

 

(1,725)

 

-

 

Closing Balance

 

$

3,910

 

$

250

 

$

14,526

 

$

1,024

 

 

 

6.                                    DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

The Company is exposed to foreign currency exchange rate risks related primarily to its foreign business operations. During the three-months ended March 31, 2015 and the year ended December 31, 2014, the Company entered into forward currency exchange contracts with financial institutions to create an economic hedge to specifically manage a portion of the foreign exchange risk exposure associated with certain consolidated subsidiaries’ non-functional currency denominated assets and liabilities. All foreign currency exchange contracts of the Company that were outstanding as of March 31, 2015 have terms of one month or less. The Company does not enter into forward currency exchange contracts for speculation or trading purposes.

 

The Company has not designated its foreign currency exchange contracts as hedge transactions under ASC 815. Therefore, gains and losses on the Company’s foreign currency exchange contracts are recognized in interest and other income, net, in the condensed consolidated statements of income, and are largely offset by the changes in the fair value of the underlying economically hedged item.

 

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Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

March 31, 2015

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

 

Notional
Amount

 

Fair
Value

 

Balance Sheet Location

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

Foreign currency exchange contracts:

 

 

 

 

 

 

 

Receive USD/pay AUD

 

$

8,069

 

$

166

 

Accounts receivable, net

 

Receive USD/pay JPY

 

9,367

 

60

 

Accounts receivable, net

 

Receive USD/pay ZAR

 

13,161

 

101

 

Accounts receivable, net

 

Receive USD/pay MXN

 

6,349

 

30

 

Accounts receivable, net

 

Receive USD/pay CLP

 

2,828

 

-

 

Accounts receivable, net

 

Receive USD/pay COP

 

2,628

 

36

 

Accounts receivable, net

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Foreign currency exchange contracts:

 

 

 

 

 

 

 

Receive EUR/pay USD

 

$

11,252

 

$

(177)

 

Accrued liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

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

 

Notional
Amount

 

Fair
Value

 

Balance Sheet Location

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

Foreign currency exchange contracts:

 

 

 

 

 

 

 

Receive CAD/pay USD

 

$

19,940

 

$

83

 

Accounts receivable, net

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Foreign currency exchange contracts:

 

 

 

 

 

 

 

Receive EUR/pay USD

 

$

13,265

 

$

(75)

 

Accrued liabilities

 

Receive USD/pay AUD

 

8,343

 

(48)

 

Accrued liabilities

 

Receive USD/pay JPY

 

10,620

 

(84)

 

Accrued liabilities

 

Receive USD/pay ZAR

 

14,760

 

(105)

 

Accrued liabilities

 

Receive USD/pay MXN

 

4,961

 

(11)

 

Accrued liabilities

 

Receive USD/pay CLP

 

2,685

 

(10)

 

Accrued liabilities

 

Receive USD/pay COP

 

2,845

 

(2)

 

Accrued liabilities

 

 

 

The net losses on derivative instruments in the condensed consolidated statements of income were as follows:

 

 

 

 

 

Amount of loss
recognized in income on
derivatives

 

 

 

 

 

Three-months ended

 

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

 

Location of loss
recognized in income on
derivatives

 

March 31,
2015

 

March 31,
2014

 

 

 

 

 

 

 

 

 

Foreign currency exchange contracts

 

Interest and other income, net

 

$

(1,856)

 

$

(359)

 

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

7.                                    INVENTORIES

 

Inventories consist of the following at:

 

 

 

March 31,
2015

 

December 31,
2014

 

Raw materials

 

$

65,311

 

$

59,938

 

Finished goods

 

132,603

 

114,635

 

 

 

$

197,914

 

$

174,573

 

 

 

8.                                    PROPERTY AND EQUIPMENT, Net

 

Property and equipment consist of the following at:

 

 

 

 

March 31,

2015

 

December 31,

2014

Land

 

$

 6,792

 

$

 6,792

Leasehold improvements

 

2,723

 

2,796

Furniture and fixtures

 

3,359

 

3,371

Office and computer equipment

 

10,229

 

10,072

Computer software

 

1,774

 

1,317

Equipment

 

86,887

 

84,263

Buildings

 

37,746

 

37,311

Vehicles

 

27,235

 

27,813

 

 

176,745

 

173,735

Less: accumulated depreciation and amortization

 

(88,449)

 

(83,579)

 

 

$

 88,296

 

$

 90,156

 

9.                                    INTANGIBLES, Net

 

Intangibles consist of the following at:

 

 

 

March 31,
2015

 

December 31,
2014

Amortizing intangibles

 

$

 233

 

$

 233

Accumulated amortization

 

(50)

 

(50)

 

 

183

 

183

Non-amortizing intangibles

 

52,117

 

50,565

 

 

$

 52,300

 

$

 50,748

 

All amortizing intangibles have been assigned an estimated finite useful life and such intangibles are amortized on a straight-line basis over the number of years that approximate their respective useful lives ranging from one to 25 years (weighted-average life of 17 years). Total amortization expense recorded was $0.001 million and $0.1 million for the three-months ended March 31, 2015 and 2014, respectively. At March 31, 2015, $18.0 million of non-amortizing intangibles and $0.1 million of amortizing intangibles (net of accumulated amortization) are subject to divestiture under the TCCC Transaction and are included in intangibles held-for-sale in the accompanying consolidated balance sheet at March 31, 2015.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

10.                            DISTRIBUTION AGREEMENTS

 

As part of the TCCC Transaction, the amended distribution coordination agreements to be entered into with TCCC provide for the transition of third parties’ rights to distribute the Company’s products in most territories in the U.S. and Canada to members of TCCC’s distribution network, which consists of owned or controlled bottlers/distributors and independent bottling/distribution partners. In February 2015, in accordance with its existing agreements with certain affected third-party distributors, the Company sent notices of termination to the applicable affected third-party distributors in the U.S., providing for the termination of their respective distribution agreements, to be effective at various dates beginning in March 2015.

 

In accordance with ASC No. 420 “Exit or Disposal Cost Obligations”, the Company expenses distributor termination costs in the period in which the written notification of termination occurs.  As a result, the Company incurred termination costs of $206.0 million for the three-months ended March 31, 2015. Such termination costs have been expensed in full and are included in operating expenses for the three-months ended March 31, 2015.

 

In the normal course of business, amounts received pursuant to new and/or amended distribution agreements entered into with certain distributors, relating to the costs associated with terminating agreements with the Company’s prior distributors, are accounted for as deferred revenue and are recognized as revenue ratably over the anticipated life of the respective distribution agreement, generally 20 years. Revenue recognized was $43.3 million and $3.7 million for the three-months ended March 31, 2015 and 2014, respectively. Included in the $43.3 million of revenue recognized for the three-months ended March 31, 2015 was $39.8 million related to the accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors who were sent notices of termination during the first quarter of 2015, as described above.

 

11.                            COMMITMENTS AND CONTINGENCIES

 

The Company had purchase commitments aggregating approximately $22.5 million at March 31, 2015, which represented commitments made by the Company and its subsidiaries to various suppliers of raw materials for the production of its products. These obligations vary in terms, but are generally satisfied within one year.

 

The Company had contractual obligations aggregating approximately $93.3 million at March 31, 2015, which related primarily to sponsorships and other marketing activities.

 

The Company had operating lease commitments aggregating approximately $11.5 million at March 31, 2015, which related primarily to warehouse and office space.

 

In April 2015, the Company entered into an agreement, subject to the attainment of requisite entitlements, to acquire approximately 56 acres of vacant land located in Jurupa Valley, CA for an estimated purchase price of $38.1 million. The Company plans to construct a new warehouse on such land, which will replace its existing leased warehouse space located in Corona, CA. The Company has deposited $0.5 million into escrow with the balance due at closing. There is no assurance the Company will be successful in obtaining the requisite entitlements.

 

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Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Legal Proceedings

 

 On October 17, 2012, Wendy Crossland and Richard Fournier filed a lawsuit in the Superior Court of the State of California, County of Riverside, styled Wendy Crossland and Richard Fournier v. Monster Beverage Corporation, against the Company claiming that the death of their 14 year old daughter (Anais Fournier) was caused by her consumption of two 24-ounce Monster Energy® drinks over the course of two days in December 2011. The plaintiffs allege strict product liability, negligence, fraudulent concealment, breach of implied warranties and wrongful death. The plaintiffs claim general damages in excess of $25,000 and punitive damages. The Company filed a demurrer and a motion to strike the plaintiffs’ complaint on November 19, 2012, and the plaintiffs filed a first amended complaint on December 19, 2012. The Company filed its answer to the first amended complaint on June 7, 2013. The parties attended a court ordered mediation on January 23, 2014. Discovery has commenced and trial has been scheduled for August 21, 2015. The Company believes that the plaintiffs’ complaint is without merit and plans a vigorous defense. The Company also believes that any such damages, if awarded, would not have a material adverse effect on the Company’s financial position or results of operations.

 

The Company has also been named as a defendant in other complaints containing similar allegations to those presented in the Fournier lawsuit, each of which the Company believes is also without merit and would not have a material adverse effect on the Company’s financial position or results of operations in the event any damages were awarded.

 

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

 

On August 6, 2014, the Attorney General for the State of New York issued a second subpoena seeking additional documents and the deposition of a Company employee. On September 8, 2014, the Company moved to quash the second subpoena in the Supreme Court, New York County. The motion was fully briefed and was argued on March 17, 2015.  No decision has been rendered. It is unknown what, if any, action the state attorney general may take against the Company, the relief which may be sought in the event of any such proceeding or whether such proceeding could have a material adverse effect on the Company’s business, financial condition or results of operations.

 

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

 

(i) The Company Action – On April 29, 2013, the Company and its wholly owned subsidiary, Monster Energy Company, filed a complaint for declaratory and injunctive relief against the San Francisco City Attorney (the “Company Action”) in United States District Court for the Central District of California (the “Central District Court”), styled Monster Beverage Corp., et al. v. Dennis Herrera. The Company sought a declaration from the Central District Court that the San Francisco City Attorney’s investigation and demands are impermissible and preempted, subject to the doctrine of primary jurisdiction, are unconstitutional in that they violate the First and Fourteenth Amendments’ prohibitions against compelled speech, content-based speech and commercial speech, are impermissibly void-for-vagueness, and/or violate the Commerce Clause. On June 3, 2013, the City Attorney filed a motion to dismiss the Company Action, arguing in part that the complaint should be dismissed in light of the San Francisco Action (described below) filed on May 6, 2013. On August 22, 2013, the Central District Court granted in part and denied in part the City Attorney’s motion.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

On October 17, 2013, the City Attorney filed a renewed motion to dismiss the Company Action and on December 16, 2013, the Central District Court granted the City Attorney’s renewed motion, dismissing the Company Action. The Company filed a Notice of Appeal to the Ninth Circuit on December 18, 2013. The appeal is fully briefed but has not yet been set for argument.

 

(ii) The San Francisco Action – On May 6, 2013, the San Francisco City Attorney filed a complaint for declaratory and injunctive relief, civil penalties and restitution for alleged violation of California’s Unfair Competition Law, Business & Professions Code sections 17200, et seq., styled People Of The State Of California ex rel. Dennis Herrera, San Francisco City Attorney v. Monster Beverage Corporation, in San Francisco Superior Court (the “San Francisco Action”). The City Attorney alleges that the Company (1) mislabeled its products as a dietary supplement, in violation of California’s Sherman Food, Drug and Cosmetic Law, California Health & Safety Code sections 109875 et. seq.; (2) is selling an “adulterated” product because caffeine is not generally recognized as safe (“GRAS”) due to the alleged lack of scientific consensus concerning the safety of the levels of caffeine in the Company’s products; and (3) is engaged in unfair and misleading business practices because its marketing (a) does not disclose the health risks that energy drinks pose for children and teens; (b) fails to warn against and promotes unsafe consumption; (c) implicitly promotes mixing of energy drinks with alcohol or drugs; and (d) is deceptive because it includes unsubstantiated claims about the purported special benefits of its “killer” ingredients and “energy blend.” The City Attorney sought a declaration that the Company has engaged in unfair and unlawful business acts and practices in violation of the Unfair Competition Law; an injunction from performing or proposing to perform any acts in violation of the Unfair Competition Law; restitution; and civil penalties.

 

After a motion to strike filed by the Company was granted in part, on March 20, 2014, the City Attorney filed an amended complaint, adding allegations supporting the theory for relief as to which the Court had granted the motion to strike. On April 18, 2014, the Company filed a renewed motion to strike, as well as a motion asking the Court to bifurcate and/or stay claims relating to the safety of Monster Energy® drinks, pending resolution of the ongoing FDA investigation of the safety and labeling of food products to which caffeine is added. On May 22, 2014, the Court denied the Company’s motion to strike and motion to bifurcate and/or stay claims relating to safety.

 

On September 5, 2014, the City Attorney filed a second amended complaint, adding Monster Energy Company as a defendant. The Company and Monster Energy Company filed answers to the second amended complaint on October 4, 2014 and November 10, 2014, respectively. Discovery is ongoing.

 

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

 

The Company denies that it has violated the Unfair Competition Law or any other law and believes that the City Attorney’s claims and demands are preempted and unconstitutional, as alleged in the action the Company filed in the Central District Court. The Company intends to vigorously defend against this lawsuit. At this time, no evaluation of the likelihood of an unfavorable outcome or range of potential loss can be expressed.

 

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

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

In addition to the above matters, the Company has been named as a defendant in various false advertising putative class actions and in a private attorney general action. In these actions, plaintiffs allege that defendants misleadingly labeled and advertised Monster Energy® brand products that allegedly were ineffective for the advertised benefits (including, but not limited to, an allegation that the products do not hydrate as advertised because they contain caffeine). The plaintiffs further allege that the Monster Energy® brand products at issue are unsafe because they contain one or more ingredients that allegedly could result in illness, injury or death. In connection with these product safety allegations, the plaintiffs claim that the product labels did not provide adequate warnings and/or that the Company did not include sufficiently specific statements with respect to contra-indications and/or adverse reactions associated with the consumption of its energy drink products (including, but not limited to, claims that certain ingredients, when consumed individually or in combination with other ingredients, could result in high blood pressure, palpitations, liver damage or other negative health effects and/or that the products themselves are unsafe). Based on these allegations, the plaintiffs assert claims for violation of state consumer protection statutes, including unfair competition and false advertising statutes, and for breach of warranty and unjust enrichment. In their prayers for relief, the plaintiffs seek, inter alia, compensatory and punitive damages, restitution, attorneys’ fees, and, in some cases, injunctive relief. The Company regards these cases and allegations as having no merit. Furthermore, the Company is subject to litigation from time to time in the normal course of business, including intellectual property litigation and claims from terminated distributors.

 

Although it is not possible to predict the ultimate outcome of such litigation, based on the facts known to the Company, management believes that such litigation in the aggregate will likely not have a material adverse effect on the Company’s financial position or results of operations. 

 

The Company evaluates, on a quarterly basis, developments in legal proceedings and other matters that could cause an increase or decrease in the amount of the liability that is accrued, if any, or in the amount of any related insurance reimbursements recorded. As of March 31, 2015, the Company’s consolidated balance sheets include accrued loss contingencies of approximately $5.5 million, and receivables for insurance reimbursements of approximately $1.8 million. 

 

12.                            ACCUMULATED OTHER COMPREHENSIVE LOSS

 

Changes in accumulated other comprehensive loss by component, after tax, for the three-months ended March 31, 2015 are as follows:

 

 

 

Currency
Translation
Losses

 

 

 

Balance at December 31, 2014

 

$

 11,453

Other comprehensive loss before reclassifications

 

9,980

Amounts reclassified from accumulated other comprehensive loss

 

-

Net current-period other comprehensive loss

 

9,980

Balance at March 31, 2015

 

$

 21,433

 

13.                            TREASURY STOCK PURCHASE

 

On April 7, 2013, the Company’s Board of Directors authorized a new share repurchase program for the repurchase of up to $200.0 million of the Company’s outstanding common stock (the “April 2013 Repurchase Plan”). During the three-months ended March 31, 2015, no shares of common stock were purchased under the April 2013 Repurchase Plan.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

During the three-months ended March 31, 2015, 2.2 million shares were purchased from employees in lieu of cash payments for options exercised or withholding taxes due for a total amount of $251.4 million. While such purchases are considered common stock repurchases, they are not counted as purchases against the Company’s authorized share repurchase programs, including the April 2013 Repurchase Plan.

 

14.                            STOCK-BASED COMPENSATION

 

The Company has two stock-based compensation plans under which shares were available for grant at March 31, 2015: the Monster Beverage Corporation 2011 Omnibus Incentive Plan (the “2011 Omnibus Incentive Plan”) and the 2009 Monster Beverage Corporation Stock Incentive Plan for Non-Employee Directors (the “2009 Directors Plan”).

 

The Company recorded $6.4 million and $7.0 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, 2015 and 2014, respectively.

 

The excess tax benefit realized for tax deductions from non-qualified stock option exercises, disqualifying dispositions of incentive stock options, vesting of restricted stock units and restricted stock awards for the three-months ended March 31, 2015 and 2014 was $184.7 million and $2.6 million, respectively.

 

Stock Options

 

Under the Company’s stock-based compensation plans, all stock options granted as of March 31, 2015 were granted at prices based on the fair value of the Company’s common stock on the date of grant. The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes-Merton option pricing formula with the assumptions included in the table below. The Company records compensation expense for non-employee stock options based on the estimated fair value of the options as of the earlier of (1) the date at which a commitment for performance by the non-employee to earn the stock option is reached or (2) the date at which the non-employee’s performance is complete, using the Black-Scholes-Merton option pricing formula with the assumptions included in the table below. The Company uses historical data to determine the exercise behavior, volatility and forfeiture rate of the options.

 

The following weighted-average assumptions were used to estimate the fair value of options granted during:

 

 

 

Three-Months Ended March 31,

 

 

2015

 

2014

Dividend yield

 

0.0%

 

0.0%

Expected volatility

 

37.1%

 

43.1%

Risk-free interest rate

 

1.6%

 

1.6%

Expected term

 

5.8 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.

 

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.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

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, 2015

 

13,066

 

$

19.73

 

3.1

 

$

1,158,412

 

Granted 01/01/15 - 03/31/15

 

903

 

$

133.68

 

 

 

 

 

Exercised

 

(4,589)

 

$

4.17

 

 

 

 

 

Cancelled or forfeited

 

(16)

 

$

40.61

 

 

 

 

 

Outstanding at March 31, 2015

 

9,364

 

$

38.30

 

4.8

 

$

937,246

 

Vested and expected to vest in the future at March 31, 2015

 

8,869

 

$

35.23

 

4.6

 

$

915,012

 

Exercisable at March 31, 2015

 

6,284

 

$

17.00

 

2.9

 

$

762,806

 

 

The weighted-average grant-date fair value of options granted during the three-months ended March 31, 2015 and 2014 was $50.16 per share and $29.86 per share, respectively. The total intrinsic value of options exercised during the three-months ended March 31, 2015 and 2014 was $515.7 million and $11.4 million, respectively.

 

Cash received from option exercises under all plans for the three-months ended March 31, 2015 and 2014 was approximately $19.0 million and $5.7 million, respectively.

 

At March 31, 2015, there was $88.2 million of total unrecognized compensation expense related to non-vested options granted to employees under the Company’s share-based payment plans. That cost is expected to be recognized over a weighted-average period of 3.2 years.

 

Restricted Stock Awards and Restricted Stock Units

 

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

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The following table summarizes the Company’s activities with respect to 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, 2015

 

149

 

$

61.09

 

Granted

 

83

 

$

135.48

 

Vested

 

(16)

 

$

57.05

 

Forfeited/cancelled

 

(2)

 

$

57.45

 

Non-vested at March 31, 2015

 

214

 

$

90.23

 

 

 

The weighted-average grant-date fair value of restricted stock units and restricted stock awards granted during the three-months ended March 31, 2015 was $135.48 per share. No awards were granted during the three-months ended March 31, 2014. As of March 31, 2015, 0.2 million of restricted stock units and restricted stock awards are expected to vest over their respective terms.

 

At March 31, 2015, total unrecognized compensation expense relating to non-vested restricted stock awards and non-vested restricted stock units was $16.2 million, which is expected to be recognized over a weighted-average period of 2.4 years.

 

15.                            INCOME TAXES

 

The following is a roll-forward of the Company’s total gross unrecognized tax benefits, not including interest and penalties, for the three-months ended March 31, 2015:

 

 

 

Gross Unrecognized Tax
Benefits

 

Balance at December 31, 2014

 

$

935

 

Additions for tax positions related to the current year

 

-

 

Additions for tax positions related to the prior year

 

-

 

Decreases related to settlement with taxing authority

 

-

 

Balance at March 31, 2015

 

$

935

 

 

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Company’s condensed consolidated financial statements. As of March 31, 2015, the Company had accrued approximately $0.4 million in interest and penalties related to unrecognized tax benefits. If the Company were to prevail on all uncertain tax positions, the resultant impact on the Company’s effective tax rate would not be significant. It is expected that the change in the amount of unrecognized tax benefits within the next 12 months will not be significant.

 

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

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

On March 8, 2013, the Internal Revenue Service (“IRS”) began its examination of the Company’s U.S. federal income tax returns for the years ended December 31, 2010 and 2011. The examination was completed in January 2015 with no material adjustments. The Company is also in various stages of examination with certain states and certain foreign jurisdictions. The 2012 and 2013 U.S. federal income tax returns are subject to IRS examination. State income tax returns are subject to examination for the 2010 through 2013 tax years.

 

16.                            EARNINGS PER SHARE

 

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

 

 

 

 

Three-Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

Weighted-average shares outstanding:

 

 

 

 

 

Basic

 

169,871

 

166,913

 

Dilutive securities

 

3,907

 

6,828

 

Diluted

 

173,778

 

173,741

 

 

For the three-months ended March 31, 2015 and 2014, options and awards outstanding totaling 0.4 million shares and 0.6 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive.

 

17.                            SEGMENT INFORMATION

 

The Company has two operating and reportable segments, namely Direct Store Delivery (“DSD”), whose principal products comprise energy drinks, and Warehouse (“Warehouse”), whose principal products comprise juice-based and soda beverages.  The DSD segment develops, markets and sells products primarily through an exclusive distributor network, whereas the Warehouse segment develops, markets and sells products primarily direct to retailers. Corporate and unallocated amounts that do not relate to DSD or Warehouse segments have been allocated to “Corporate & Unallocated.” No asset information has been provided for the Company’s reportable segments as management does not measure or allocate assets on a segment basis. Following the consummation of the TCCC Transaction, the Company anticipates that it will have two operating and reporting segments: Finished Products, the principal products of which will likely include the Company’s Monster Energy® drink products that currently make up the majority of the DSD segment, and Concentrate, the principal products of which will likely include the various energy drink brands transferred to the Company from TCCC.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

 

 

Three-Months Ended March 31, 2015

 

 

 

DSD

 

Warehouse

 

Corporate and
Unallocated

 

Total

 

Net sales

 

$

 605,811

(1)

$

 20,980

 

$

 -

 

$

626,791

(1)

Contribution margin*

 

57,660

(2)

(40)

 

-

 

57,620

(2)

Corporate and unallocated expenses

 

-

 

-

 

(49,991)

 

(49,991)

 

Operating income

 

 

 

 

 

 

 

7,629

(1), (2)

Interest and other income, net

 

42

 

-

 

1,191

 

1,233

 

Income before provision for income taxes

 

 

 

 

 

 

 

8,862

(1), (2)

Depreciation and amortization

 

(5,119)

 

(75)

 

(1,276)

 

(6,470)

 

 

 

 

 

 

 

Three-Months Ended March 31, 2014

 

 

 

DSD

 

Warehouse

 

Corporate and
Unallocated

 

Total

 

Net sales

 

$

 514,355

(1)

$

 21,774

 

$

 -

 

$

536,129

(1)

Contribution margin*

 

186,468

(2)

296

 

-

 

186,764

(2)

Corporate and unallocated expenses

 

-

 

-

 

(37,901)

 

(37,901)

 

Operating income

 

 

 

 

 

 

 

148,863

(1), (2)

Other income (expense)

 

26

 

-

 

128

 

154

 

Income before provision for income taxes

 

 

 

 

 

 

 

149,017

(1), (2)

Depreciation and amortization

 

(4,944)

 

(81)

 

(1,428)

 

(6,453)

 

 

 

(1) Includes $43.3 million and $3.7 million for the three-months ended March 31, 2015 and 2014, respectively, related to the recognition of deferred revenue. Included in the $43.3 million recognition of deferred revenue for the three-months ended March 31, 2015, is $39.8 million related to the accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors who were sent notices of termination during the first quarter of 2015.

 

(2) Includes $206.0 million and $0.01 million for the three-months ended March 31, 2015 and 2014, respectively, related to distributor termination costs.

 

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

 

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

 

Corporate and unallocated expenses were $50.0 million for the three-months ended March 31, 2015 and included $28.5 million of payroll costs, of which $6.4 million was attributable to stock-based compensation expense (see Note 14, “Stock-Based Compensation”), $14.5 million of professional service expenses, including accounting and legal costs and $7.0 million of other operating expenses.  Corporate and unallocated expenses were $37.9 million for the three-months ended March 31, 2014 and included $21.1 million of payroll costs, of which $7.0 million was attributable to stock-based compensation expense (see Note 14, “Stock-Based Compensation”), $10.1 million attributable to professional service expenses, including accounting and legal costs, and $6.7 million attributable to other operating expenses.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

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 35% and 31% of the Company’s net sales for the three-months ended March 31, 2015 and 2014, respectively.

 

Net sales to customers outside the United States amounted to $113.0 million and $115.8 million for the three-months ended March 31, 2015 and 2014, respectively.

 

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

 

 

 

Three-Months Ended

 

 

March 31,

Product Line

 

2015

 

2014

Energy drinks

 

$

552,729

 

$

499,013

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

 

24,513

 

26,446

Carbonated (primarily soda beverages)

 

6,202

 

7,014

Other

 

43,347

 

3,656

 

 

$

626,791

 

$

536,129

 

18.                            RELATED PARTY TRANSACTIONS

 

Two directors and officers of the Company and their families are principal owners of a company that provides promotional materials to the Company. Expenses incurred with such company in connection with promotional materials purchased during the three-months ended March 31, 2015 and 2014 were $0.9 million and $0.07 million, respectively.

 

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Our Business

 

Monster Beverage Corporation was incorporated in Delaware on April 25, 1990. Our principal place of business is located at 1 Monster Way, Corona, California 92879 and our telephone number is (951) 739-6200. When this report uses the words “the Company”, “NewCo”, “Hansen Natural Corporation” (the Company’s former name), “we”, “us”, and “our”, these words refer to Monster Beverage Corporation and its subsidiaries, unless the context otherwise requires. We are a holding company and conduct no operating business except through our consolidated subsidiaries.

 

Acquisitions and Divestitures

 

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

 

Subject to the terms and conditions of the agreements, upon the closing of the TCCC Transaction, (1) TCCC will acquire newly issued NewCo common shares representing approximately 16.7% of the total number of outstanding NewCo common shares (giving effect to such issuance) and TCCC will be entitled to appoint two individuals (reduced to one in 36 months or if TCCC’s equity interest in NewCo exceeds 20%) to NewCo’s Board of Directors for a specified period, (2) TCCC will transfer all rights in and to its global energy drink business (including the NOS®, Full Throttle®, Burn®, Mother®, Play® and Power Play®, and Relentless® brands) to NewCo, and the Company will transfer all of its rights in and to its non-energy drink business (including the Hansen’s® Natural Soda, Peace Tea®, Hubert’s® Lemonade and Hansen’s® Juice Product brands) to TCCC, (3) the Company and TCCC will amend the distribution coordination agreements currently existing between them to govern the transition of third parties’ rights to distribute the Company’s energy products in most territories in the U.S. to members of TCCC’s distribution network, which consists of owned or controlled bottlers/distributors and independent bottling/distribution partners, and (4) TCCC or one of its subsidiaries will make a net cash payment to the Company of $2.15 billion, of which up to $625.0 million of which will be held in escrow (the “Escrow Agreement”), subject to release upon achievement of milestones relating to the transfer of distribution rights to TCCC’s distribution network.

 

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

 

Percentage Transitioned

 

Escrow Release

40%

 

Amounts in excess of $375 million

50%

 

Amounts in excess of $312.5 million

60%

 

Amounts in excess of $250 million

70%

 

Amounts in excess of $187.5 million

80%

 

Amounts in excess of $125 million

90%

 

Amounts in excess of $62.5 million

95%

 

All remaining amounts

 

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

 

TCCC is contractually obligated to authorize payment to the Company of the funds in escrow upon achievement of the milestones referred to above. In February 2015, in accordance with its existing agreements with the applicable third-party distributors, the Company sent notices of termination to certain affected third-party distributors in the U.S., providing for the termination of their respective distribution agreements, to be effective at various dates beginning in March 2015.  As of April 6, 2015, distribution rights in the U.S. representing approximately 84% of the target case sales have been transitioned to TCCC’s distribution network. In addition, the Company has sent notices of termination representing an additional 5% of the affected third-party distributors, and the associated distribution rights for those territories will be transitioned to TCCC’s distribution network effective as of May 11, 2015. As a result, it is anticipated that $125 million will be held in escrow at the closing, with the remaining $500 million to be paid to the Company at closing. The Company expects to commence steps to transition sufficient additional distribution rights following the closing of the Transactions, which will, in due course, result in the release of all remaining amounts held in escrow. Therefore, the Company believes that achievement of the milestones is probable.

 

The closing of the transaction is subject to customary closing conditions and is now expected to close in the second quarter of 2015.

 

In accordance with ASC No. 420 “Exit or Disposal Cost Obligations”, the Company expenses distributor termination costs in the period in which the written notification of termination occurs.  As a result, the Company incurred termination amounts of $206.0 million for the three-months ended March 31, 2015 related to the distribution rights transferred to TCCC’s distribution network. Such termination amounts have been expensed in full and are included in operating expenses for the three-months ended March 31, 2015. In addition, the Company recognized as income $39.8 million related to accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors who were sent notices of termination during the first quarter of 2015.

 

The following table summarizes the selected items discussed above for the three-months ended March 31, 2015:

 

Income Statement Items (in thousands):

 

Included in Net Sales:

 

 

 

Accelerated recognition of deferred revenue

 

$

39,761

 

 

 

 

 

Included in Operating Expenses:

 

 

 

Distributor termination costs

 

$

205,980

 

 

 

 

 

Net Impact on Operating Income

 

$

(166,219

)

 

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Overview

 

We develop, market, sell and distribute “alternative” beverage category beverages primarily under the following brand names:

 

·                                     Monster Energy®

 

·                  Hansen’s®

·                                     Monster Rehab®

 

·                  Hansen’s Natural Cane Soda®

·                                     Monster Energy Extra Strength Nitrous Technology®

 

·                  Junior Juice®

·                                     Java Monster®

 

·                  Blue Sky®

·                                     Muscle Monster®

 

·                  Hubert’s®

·                                     Punch Monster®

 

·                  Peace Tea®

·                                     Juice Monster®

 

·                  Übermonster®

·                                     M3®

 

 

 

Our Monster Energy® drinks, which represented 88.1% and 92.9% of our net sales for the three-months ended March 31, 2015 and 2014, respectively, include the following:

 

·                                               Monster Energy®

 

·                            Java Monster® Kona Blend

·                                               Lo-Carb Monster Energy®

 

·                            Java Monster® Loca Moca®

·                                               Monster Assault®

 

·                            Java Monster® Mean Bean®

·                                               Juice Monster™ Khaos®

 

·                            Java Monster® Vanilla Light

·                                               Juice Monster™ Ripper®

 

·                            Java Monster® Irish Blend®

·                                               Monster Energy® Absolutely Zero

 

·                            Java Monster® Cappuccino

·                                               Monster Energy® Import

 

·                            Monster Energy Extra Strength Nitrous Technology® Super Dry™

·                                               Punch Monster® Baller’s Blend (formerly Dub Edition)

 

·                                               Punch Monster® Mad Dog (formerly Dub Edition)

 

·                            Monster Energy Extra Strength Nitrous Technology® Anti-Gravity®

·                                               Monster Rehab® Tea + Lemonade + Energy

 

·                                               Monster Rehab® Rojo Tea + Energy

 

·                            Monster Cuba-Lima®

·                                               Monster Rehab® Green Tea + Energy

 

·                            Monster Energy® Zero Ultra

·                                               Monster Rehab® Tea + Orangeade + Energy

 

·                            Monster Energy® Ultra Blue™

·                                               Monster Rehab® Tea + Pink Lemonade + Energy

 

·                            Monster Energy® Ultra Red™

·                                               Monster Rehab® Peach Tea + Energy

 

·                            Monster Energy® Ultra Black™

·                                               Muscle Monster® Vanilla

 

·                            Monster Energy® Ultra Sunrise®

·                                               Muscle Monster® Chocolate

 

·                            Monster Energy® Ultra Citron™

·                                               Muscle Monster® Coffee

 

·                            Monster Energy® Unleaded

·                                               Muscle Monster® Strawberry

 

·                            Übermonster® Energy Brew™

·                                               Muscle Monster® Peanut Butter Cup

 

·                            M3® Monster Energy® Super Concentrate

·                                               Monster Energy® Valentino Rossi

 

 

 

 

We have two operating and reportable segments, namely Direct Store Delivery (“DSD”), the principal products of which comprise energy drinks, and Warehouse (“Warehouse”), the principal products of which 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. Following the consummation of the TCCC Transaction, the Company anticipates that it will have two operating and reporting segments: Finished Products, the principal products of which will likely include the Company’s Monster Energy® drink products that currently make up the majority of the DSD segment, and Concentrate, the principal products of which will likely include the various energy drink brands transferred to the Company from TCCC.

 

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During the three-months ended March 31, 2015, we continued to expand our existing product lines and flavors and further developed our markets. In particular, we continued to focus on developing and marketing beverages that fall within the category generally described as the “alternative” beverage category. During the three-months ended March 31, 2015, we introduced the following products:

 

·    Monster Energy® Ultra Citron™, a carbonated energy drink which contains zero calories and zero sugar (January 2015).

·    Monster Rehab® Peach Tea + Energy (January 2015).

 

In the normal course of business we discontinue certain products and/or product lines. Those products or product lines discontinued during the three-months ended March 31, 2015, either individually or in aggregate, did not have a material adverse impact on our financial position, results of operations or liquidity.

 

Our net sales of $626.8 million for the three-months ended March 31, 2015 represented record sales for our first fiscal quarter. The vast majority of our net sales are derived from our Monster Energy® brand energy drinks. Net sales of our Monster Energy® brand energy drinks were $552.2 million for the three-months ended March 31, 2015, an increase of $54.2 million, or 59.8% of our overall increase in net sales for the three-months ended March 31, 2015.  Net sales for the three-months ended March 31, 2015 included $39.8 million related to the accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors, which represented 43.9% of our overall increase in net sales.

 

Changes in foreign currency exchange rates had an unfavorable impact on net sales of approximately 2% for the three-months ended March 31, 2015, which was primarily due to a stronger U.S. dollar compared to certain local currencies in which we conduct certain of our international business.

 

Our DSD segment represented 96.7% and 95.9% of our consolidated net sales for the three-months ended March 31, 2015 and 2014, respectively. Our Warehouse segment represented 3.3% and 4.1% of our consolidated net sales for the three-months ended March 31, 2015 and 2014, respectively.

 

Our sales and marketing strategy for all our beverages is to focus our efforts on developing brand awareness through image enhancing programs and product sampling. We use our branded vehicles and other promotional vehicles at events where we offer samples of our products to consumers. We utilize “push-pull” methods to enhance shelf and display space exposure in sales outlets (including racks, coolers and barrel coolers), advertising, in-store promotions and in-store placement of point-of-sale materials to encourage demand from consumers for our products. We also support our brands with prize promotions, price promotions, competitions, endorsements from selected public and sports figures, personality endorsements (including from television and other well-known sports personalities), sampling and sponsorship of selected causes, events, athletes and teams. In-store posters, outdoor posters, print, radio and television advertising (directly and through our sponsorships and endorsements) and coupons may also be used to promote our brands.

 

We believe that one of the keys to success in the beverage industry is differentiation, making our brands and products visually distinctive from other beverages on the shelves of retailers. We review our products and packaging on an ongoing basis and, where practical, endeavor to make them different, better and unique. The labels and graphics for many of our products are redesigned from time to time to maximize their visibility and identification, wherever they may be placed in stores, which we will continue to reevaluate from time to time.

 

All of our beverage products are manufactured by various third party bottlers and co-packers situated throughout the United States and abroad, under separate arrangements with each party.

 

Our growth strategy includes expanding our international business. Gross sales to customers outside the United States amounted to $141.0 million and $144.3 million for the three-months ended March 31, 2015 and 2014, respectively. Such sales were approximately 21% and 23% of gross sales for the three-months ended March 31, 2015 and 2014, respectively. Changes in foreign currency exchange rates had an unfavorable impact on gross sales to customers outside the United Sates of approximately 11% for the three-months ended March 31, 2015, which was primarily due to a stronger U.S. dollar compared to certain local currencies in which we conduct certain of our international business.

 

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Our customers are primarily full service beverage distributors, retail grocery and specialty chains, wholesalers, club stores, drug chains, mass merchandisers, convenience chains, health food distributors, food service customers and the military. Gross sales to our various customer types for the three-months ended March 31, 2015 and 2014 are reflected below. Such information includes sales made by us directly to the customer types concerned, which include our full service beverage distributors in the United States. Such full service beverage distributors in turn sell certain of our products to some of the same customer types listed below. We limit our description of our customer types to include only our sales to our full service distributors without reference to such distributors’ sales to their own customers.

 

 

 

 

Three-Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

Full service distributors

 

65%

 

62%

 

Club stores, drug chains & mass merchandisers

 

9%

 

9%

 

Outside the U.S.

 

21%

 

23%

 

Retail grocery, specialty chains and wholesalers

 

3%

 

4%

 

Other

 

2%

 

2%

 

 

 

Our customers include Coca-Cola Refreshments USA Inc. (“CCR”), Coca-Cola Enterprises, Coca-Cola Refreshments Canada, Ltd. (formerly known as Coca-Cola Bottling Company), CCBCC Operations, LLC, United Bottling Contracts Company, LLC, certain bottlers of the Coca-Cola Hellenic Bottling Company, Swire Coca-Cola, USA and certain other TCCC independent bottlers, Anheuser-Busch, Inc. (“AB”), select independent AB distributors, Asahi, Kalil Bottling Group, Wal-Mart, Inc. (including Sam’s Club) and Costco. In February 2015, in accordance with its existing agreements with the applicable AB Distributors, the Company sent notices of termination to the majority of the AB Distributors in the U.S. for the termination of their respective distribution agreements, to be effective at various dates beginning in March 2015.  The associated distribution rights have been or will be transitioned to TCCC’s network of owned or controlled bottlers/distributors and independent bottling and distribution partners as of the effective date of termination of the affected AB Distributors’ rights in the applicable territories. A decision by any large customer to decrease amounts purchased from us or to cease carrying our products could have a material negative effect on our financial condition and consolidated results of operations.  CCR accounted for approximately 35% and 31% of our net sales for the three-months ended March 31, 2015 and 2014, respectively.

 

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Results of Operations

 

The following table sets forth key statistics for the three-months ended March 31, 2015 and 2014, respectively.

 

 

 

Three-Months Ended

 

Percentage

 

(In thousands, except per share amounts)

 

March 31,

 

Change

 

 

 

2015

 

2014

 

15 vs. 14

 

Net sales¹

 

  $

626,791

 

  $

536,129

 

16.9%

 

 

 

 

 

 

 

 

 

Cost of sales

 

257,834

 

249,311

 

3.4%

 

Gross profit*¹

 

368,957

 

286,818

 

28.6%

 

Gross profit as a percentage of net sales¹

 

58.9%

 

53.5%

 

 

 

 

 

 

 

 

 

 

 

Operating expenses²

 

361,328

 

137,955

 

161.9%

 

Operating expenses as a percentage of net sales

 

57.6%

 

25.7%

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

7,629

 

148,863

 

(94.9%)

 

Operating income as a percentage of net sales

 

1.2%

 

27.8%

 

 

 

 

 

 

 

 

 

 

 

Interest and other income, net

 

1,233

 

154

 

700.6%

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

8,862

 

149,017

 

(94.1%)

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

4,448

 

53,767

 

(91.7%)