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ACQUISITIONS AND DIVESTITURES | 9 Months Ended
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Sep. 30, 2015
ACQUISITIONS AND DIVESTITURES |
ACQUISITIONS AND DIVESTITURES | 2.ACQUISITIONS AND DIVESTITURES On June 12, 2015, Monster Beverage 1990 Corporation (formerly Monster Beverage Corporation) (“Old Monster”), now a wholly owned subsidiary of the Company, completed the transactions contemplated by the definitive agreements entered into with The Coca-Cola Company (“TCCC”) on August 14, 2014, which provided for a long-term strategic relationship in the global energy drink category (the “TCCC Transaction”). Also, on June 12, 2015, Old Monster effected a holding company reorganization in connection with the TCCC Transaction by merging New Laser Merger Corp., a wholly owned subsidiary of the Company into Old Monster, with Old Monster surviving as a wholly owned subsidiary of the Company (the “Holding Company Reorganization”), and the Company changed its name from New Laser Corporation to “Monster Beverage Corporation.” In the Holding Company Reorganization, each Old Monster common share, par value $0.005 per share, outstanding immediately prior to the consummation of the Holding Company Reorganization (other than any Old Monster common shares that were owned by Old Monster immediately prior to the closing of the TCCC Transaction, which were cancelled (see Note 13)), was converted automatically into the right to receive one Company common share, par value $0.005 per share. In addition, upon consummation of the Holding Company Reorganization:
| · |  | each unexercised and unexpired stock option then outstanding under any equity compensation plan of Old Monster, whether or not then exercisable, ceased to represent a right to acquire Old Monster common shares and was converted automatically into a right to acquire the same number of Company common shares, on the same terms and conditions as were applicable under such Old Monster stock option; and
| · |  | each share of restricted stock and each restricted stock unit of Old Monster granted under all outstanding equity compensation plans ceased to represent or relate to Old Monster common shares and was converted automatically to represent or relate to Company common shares, on the same terms and conditions as were applicable to such Old Monster restricted stock and restricted stock units (including the vesting or other lapse restrictions (without acceleration thereof by virtue of the Holding Company Reorganization and the TCCC Transaction)).
Promptly following the effective time of the Holding Company Reorganization, Old Monster assigned to the Company all obligations of Old Monster under Old Monster’s equity compensation plans and each stock option agreement, restricted stock award agreement, restricted stock unit award agreement and any similar agreement entered into pursuant to such equity compensation plans. In addition, all obligations of Old Monster under any employment agreements and indemnification agreements were assigned to the Company. Immediately after the effective time of the Holding Company Reorganization, (1) the Company issued to TCCC 34,040,534 newly issued Company common shares representing approximately 16.7% of the total number of outstanding Company common shares (after giving effect to such issuance) (the “New Issuance”) and TCCC appointed two individuals to the Company’s Board of Directors, (2) TCCC transferred all of its rights in and to TCCC’s worldwide energy drink business (“KO Energy”) to the Company, (3) Old Monster transferred all of its rights in and to its non-energy drink business (“Monster Non-Energy”) to TCCC, (4) the Company and TCCC amended the distribution coordination agreements previously existing between them to govern the transition of third parties’ rights to distribute the Company’s energy products in most territories in the U.S. to members of TCCC’s distribution network, which consists of owned or controlled bottlers/distributors and independent bottling/distribution partners, and (5) TCCC and one of its subsidiaries made an aggregate net cash payment to the Company of $2.15 billion, $125.0 million of which is currently held in escrow as described below, pursuant to an escrow agreement (the “Escrow Agreement”), subject to release upon the achievement of milestones relating to the transition of distribution rights to TCCC’s distribution network. Under the terms of the Escrow Agreement and the transition payment agreement entered into in connection therewith, if the distribution rights in the U.S. that are transitioned to TCCC’s distribution network represent case sales in excess of the following percentages of a target case sale amount agreed to by the parties, amounts in the escrow fund in excess of the applicable amounts below will be released to the Company:
Percentage Transitioned | Escrow Release
40% | Amounts in excess of $375 million
50% | Amounts in excess of $312.5 million
60% | Amounts in excess of $250 million
70% | Amounts in excess of $187.5 million
80% | Amounts in excess of $125 million
90% | Amounts in excess of $62.5 million
95% | All remaining amounts
On the one-year anniversary of the closing of the TCCC Transaction, the then-remaining escrow amount, less an amount sufficient to cover any unresolved claims, will be released to TCCC. Any amount described above that becomes payable following the one-year anniversary will be paid directly from TCCC to the Company. TCCC is contractually obligated to authorize payment to the Company of the funds in escrow upon achievement of the milestones referred to above. As of November 6, 2015, distribution rights in the U.S. representing approximately 89% of the target case sales have been transitioned to TCCC’s distribution network. As a result, $125 million is currently held in escrow. The Company expects to commence steps to transition sufficient additional distribution rights, which will, in due course, result in the release of all remaining amounts held in escrow. Therefore, the Company believes that achievement of the milestones is probable. The following table summarizes the TCCC Transaction consideration allocation:
|  | Identifiable Assets Acquired and Liabilities Assumed |  | Consideration Transferred |
Equity issued to TCCC for cash (22.2 million shares issued) |  | $ | - |  | $ | 1,647,333 |
Equity issued to TCCC for KO Energy (11.8 million shares issued) |  | - |  | 1,521,802 |
KO Energy intangibles - trademarks (non-amortizing) |  | 325,500 |  | - |
KO Energy intangibles - customer relationships (amortizing) |  | 35,000 |  | - |
KO Energy intangibles - other (non-amortizing) |  | 13,700 |  | - |
KO Energy inventories |  | 6,144 |  | - |
KO Energy accounts payable |  | (2,758) |  | - |
Goodwill |  | 1,287,777 |  | - |
Deferred tax liability |  | (143,561) |  | - |
New and amended U.S. distribution rights transferred to TCCC’s distribution network |  | - |  | 304,658 |
Monster Non-Energy business transferred to TCCC |  | - |  | 198,009 |
Cash and escrow receivable |  | 2,150,000 |  | - |
Total |  | $ | 3,671,802 |  | $ | 3,671,802 |
The preliminary book value of the KO Energy inventories, prepaid expenses and other current assets and accounts payable approximate fair value. The fair value analysis has yet to progress to a stage where there is sufficient information for a definitive measurement of the respective fair values. Accordingly, the respective fair value allocation is preliminary and is based on valuations derived from estimated fair value assumptions used by management. The Company expects to complete its fair value analysis at a level of detail necessary to finalize the underlying fair value allocations no later than twelve months from the closing of the TCCC Transaction. Any differences between the final respective fair value allocations and the preliminary management estimates may differ materially and potentially have a material impact on the Company’s financial position, results of operations or liquidity. The Company has determined goodwill in accordance with ASC 805-30-30-1, “Business Combinations,” which requires the recognition of goodwill for the excess of the aggregate consideration over the net amounts of identifiable assets acquired and liabilities assumed as of the acquisition date. The goodwill recorded as part of the TCCC Transaction is not deductible for tax purposes. The goodwill includes access to new geographies, access to new sales channels, including vending and specialty accounts, as well as the opportunity for supply chain optimization. The Company determined the estimated fair values of KO Energy trademarks, customer relationships and other intangibles as follows:
| 1. |  | Trademarks—valued using the relief from royalty method. Royalty rates for the different brands were selected based on brand strength and profitability.
| 2. |  | Customer relationships—valued using the with- and-without method assuming that the customer relationships could be rebuilt over a one-year period.
| 3. |  | Other (Trade Secrets/Formulas)—valued using the cost savings method.
The Company determined the estimated fair value of the “new and amended U.S. distribution rights” transferred to TCCC’s distribution network using the discounted cash flow method. The cash flows were defined as the expected cost savings arising from the new distribution agreements. The Company determined the estimated fair value of the Monster Non-Energy brands sold utilizing the discounted cash flow method and market multiple method. Market multiples for each brand were selected based on profitability, size and expected growth for each brand. The resulting business enterprise value derived under the income and market approaches was then adjusted for working capital and fixed assets that were not transferred to TCCC. Of the approximately 34.0 million shares of the Company’s common stock issued to TCCC in the TCCC Transaction, approximately 11.8 million shares, or 34.8% of the total shares issued, were allocated to the purchase of KO Energy and approximately 22.2 million shares, or 65.2% of the total shares issued, were issued for cash. The 34.8% allocation was based on the relative fair value of KO Energy to the approximate fair value of the 34.0 million shares of Old Monster’s common stock on August 14, 2014. The remaining shares of the Company’s common stock were deemed to be issued for cash. The $2.15 billion of cash and escrow receivable was first allocated to the new and amended U.S. distribution rights and the Monster Non-Energy business based on their respective preliminary fair values, and the residual cash of $1.6 billion was then allocated to the equity issued for cash. On August 14, 2014, the date on which the terms of the TCCC Transaction were agreed to and announced, the closing market price of Old Monster’s common stock was $71.65 per share. The fair value of KO Energy per ASC 820 is approximately $880.1 million, which approximates the negotiated price for KO Energy based on the closing market price of Old Monster’s common stock on August 14, 2014. However, per ASC 805, equity securities issued as consideration in a business combination are to be recorded at fair value as of the closing date. Therefore, the value of the Company’s common stock issued to TCCC in exchange for KO Energy was $128.39 per share, the closing price of the Company’s common stock on June 12, 2015, resulting in a total consideration value transferred for KO Energy of $1.5 billion. The Company recognized a gain of $161.5 million on the disposal of Monster Non-Energy during the second quarter of 2015. The following unaudited pro forma condensed combined financial information is presented as if the TCCC Transaction had closed on January 1, 2014:
|  | Three-Months Ended September 30, 2015
|  |  |  |  |  | Pro Forma Adjustments |  |
|  | Monster Beverage Corporation as reported¹ |  | KO Energy |  | Disposal of Monster Non- Energy |  | Other |  | Pro Forma Combined
Net sales |  | $ | 756,619 |  | $ | - |  | $ | - |  | $ | - |  | $ | 756,619
Net income |  | 174,574 |  | - |  | - |  | 180 |  | 174,754
|  | Three-Months Ended September 30, 2014
|  |  |  |  |  | Pro Forma Adjustments |  |
|  | Monster Beverage Corporation as reported |  | KO Energy |  | Disposal of Monster Non- Energy |  | Other |  | Pro Forma Combined
Net sales |  | $ | 635,972 |  | $ | 85,608 |  | $ | (41,624) |  | $ | 3,840 |  | $ | 683,796
Net income |  | 121,600 |  | 54,614 | ² | (1,376) |  | (24,075) |  | 150,763
¹Includes net sales of $69.9 million and net income of $27.4 million (tax affected) related to the acquired KO Energy assets for the three-months ended September 30, 2015. ²The $54.6 million of net income for KO Energy for the three-months ended September 30, 2014 is presented before tax. The associated estimated provision for income taxes is included in the “Other” category.
|  | Nine-Months Ended September 30, 2015
|  |  |  |  |  | Pro Forma Adjustments |  |
|  | Monster Beverage Corporation as reported¹ |  | KO Energy² |  | Disposal of Monster Non- Energy³ |  | Other |  | Pro Forma Combined
Net sales |  | $ | 2,077,131 |  | $ | 138,127 |  | $ | (60,824) |  | $ | 6,803 |  | $ | 2,161,237
Net income |  | 407,991 |  | 100,575 | 4 | (101,881) |  | (36,487) |  | 370,198
|  | Nine-Months Ended September 30, 2014
|  |  |  |  |  | Pro Forma Adjustments |  |
|  | Monster Beverage Corporation as reported |  | KO Energy |  | Disposal of Monster Non- Energy |  | Other |  | Pro Forma Combined
Net sales |  | $ | 1,859,301 |  | $ | 256,824 |  | $ | (119,608) |  | $ | 11,393 |  | $ | 2,007,910
Net income |  | 357,854 |  | 163,842 | 4 | (4,398) |  | (74,747) |  | 442,551
¹Includes net sales of $82.9 million and net income of $32.9 million (tax affected) related to the acquired KO Energy assets since the date of acquisition, June 12, 2015. ²Includes results through June 12, 2015, the date the TCCC Transaction was finalized. Net income for KO Energy includes only net revenues and direct operating expenses, rather than full “carve-out” financial statements, because such financial information would not be meaningful given that it is not possible to provide a meaningful allocation of business unit and corporate costs, interest or tax in respect of KO Energy. ³Includes results through June 12, 2015. Net income includes gain recognized on the sale of Monster Non-Energy of $161.5 million. 4 The $100.6 million of net income for the nine-months ended September 30, 2015 and $163.8 million of net income for KO Energy for the nine-months ended September 30, 2014 are presented before tax. The associated estimated provision for income taxes is included in the “Other” category. Pro-Forma Adjustments – Other include the following:
|  | Three-Months Ended September 30, 2015 |  | Three-Months Ended September 30, 2014 |  | Nine-Months Ended September 30, 2015¹ |  | Nine-Months Ended September 30, 2014
Net sales: |  |  |  |  |  |  |  |
Amortization of deferred revenue |  | $ | - |  | $ | 3,840 |  | $ | 6,803 |  | $ | 11,393
Net income: |  |  |  |  |  |  |  |
Amortization of deferred revenue |  | $ | - |  | $ | 3,840 |  | $ | 6,803 |  | $ | 11,393
To record sales commissions |  | - |  | (9,588) |  | (15,470) |  | (28,764)
To record amortization of definite lived KO Energy intangibles |  | - |  | (1,764) |  | (3,126) |  | (5,236)
To eliminate TCCC Transaction expenses |  | 292 |  | 2,567 |  | 15,425 |  | 3,635
Estimated provision for income taxes on pro forma adjustments |  | (112) |  | 1,904 |  | (1,398) |  | 7,304
Estimated provision for income taxes on KO Energy income |  | - |  | (21,034) |  | (38,721) |  | (63,079)
Total |  | $ | 180 |  | $ | (24,075) |  | $ | (36,487) |  | $ | (74,747)
¹Includes amortization of deferred revenue, sales commissions and amortization of intangibles through June 12, 2015, the date the TCCC Transaction was consummated. For purposes of the unaudited pro forma financial information, a combined U.S. Federal and state statutory tax rate of 38.5% has been used. This rate does not reflect the Company’s expected effective tax rate, which includes other tax charges and benefits, and does not take into account any historical or possible future tax events that may impact the combined company. The unaudited pro forma financial information is presented for information purposes only and is not intended to represent or be indicative of the combined results of operations that the Company would have reported had the TCCC Transaction been completed as of the date and for the periods presented, and should not be taken as representative of the Company’s consolidated results of operations following the completion of the TCCC Transaction. In addition, the unaudited pro forma financial information is not intended to project the future financial results of operations of the combined company. The unaudited pro forma combined financial information does not reflect any cost savings, operational synergies or revenue enhancements that the combined company may achieve as a result of the TCCC Transaction or the costs to combine the operations or costs necessary to achieve cost savings, operating synergies and revenue enhancements.

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- Definition The entire disclosure for business combinations, including leverage buyout transactions (as applicable), and divestitures. This may include a description of a business combination or divestiture (or series of individually immaterial business combinations or divestitures) completed during the period, including background, timing, and assets and liabilities recognized and reclassified or sold. This element does not include fixed asset sales and plant closings. + References No definition available. + Details
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