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ACQUISITIONS AND DIVESTITURES | 9 Months Ended
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Sep. 30, 2016
ACQUISITIONS AND DIVESTITURES |
ACQUISITIONS AND DIVESTITURES | 2. ACQUISITIONS AND DIVESTITURES American Fruits & Flavors On April 1, 2016, the Company completed its acquisition of flavor supplier and long-time business partner American Fruits & Flavors (“AFF”), in an asset acquisition that brought the Company’s primary flavor supplier in-house, secured the intellectual property of the Company’s most important flavors in perpetuity and further enhanced its flavor development and global flavor footprint capabilities (the “AFF Transaction”). Pursuant to the terms of the AFF Transaction, the Company purchased AFF for $688.5 million in cash after adjustments. The Company accounted for the AFF Transaction in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 “Business Combinations”. The following table summarizes the preliminary fair value allocations of the AFF Transaction consideration:
|  | Identifiable Assets Acquired and Liabilities Assumed |  | Consideration Transferred |
Intangibles - flavor formulas (non-amortizing)¹ |  | $ | 618,000 |  | $ | - |
Intangibles - flavor formulas (amortizing) |  | 641 |  | - |
Intangibles - customer relationships (amortizing) |  | 30,100 |  | - |
Intangibles - trademarks (amortizing) |  | 500 |  | - |
Intangibles - other (amortizing) |  | 200 |  | - |
Working capital (excluding inventory) |  | 1,861 |  | - |
Inventory |  | 27,600 |  | - |
Property and equipment, net |  | 1,175 |  | - |
Favorable leases |  | 4,480 |  | - |
Goodwill |  | 3,928 |  | - |
Cash |  | - |  | 688,485 |
Total |  | $ | 688,485 |  | $ | 688,485 |
1 Represents proprietary formulas for the Company’s principal products. 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 allocations are preliminary and are 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 allocation as soon as practicable, but no later than twelve months from the closing of the AFF Transaction. The final respective fair value allocations and the preliminary estimates of management may differ substantially. However, the impact of any such differences on the Company’s financial position, results of operations and liquidity would not be material. The Company determined the estimated fair values as follows: · Flavor formulas (non-amortizing) – multi-period excess earnings method · Flavor formulas (amortizing) – replacement cost method · Customer relationships – multi-period excess earnings method · Trademarks – relief-from-royalty method · Inventory – comparative sales method and replacement cost method · Property and equipment, net – replacement cost method · Favorable leases – discounted cash flow method The preliminary book value of the working capital (excluding inventory) approximates fair value. 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. For tax purposes, the AFF Transaction was recorded as an asset purchase. As such, the Company received a step-up in tax basis of the AFF assets, net, equal to the purchase price. In accordance with Regulation S-X, pro forma unaudited condensed financial information for the AFF Transaction has not been provided as the impact of the transaction on the Company’s financial position, results of operations and liquidity was not material. The Coca-Cola Company On June 12, 2015, the Company completed the transactions contemplated by the definitive agreements entered into with The Coca-Cola Company (“TCCC”) on August 14, 2014 (the “TCCC Transaction”), which provided for a long-term strategic relationship in the global energy drink category. In consequence of the TCCC Transaction, (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) at such time 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) the Company 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 was held in escrow through June 17, 2016, 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. transitioned to TCCC’s distribution network represented 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 would 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
As of September 30, 2016, distribution rights in the U.S. representing approximately 89% of the target case sales had been transitioned to TCCC’s distribution network. As a result, on the one-year anniversary of the closing of the TCCC Transaction, the then-remaining escrow amount of $125 million was released to TCCC. Going forward TCCC will directly pay to the Company the amounts described above that become payable as a result of future target case sale transitions. The Company expects to transition sufficient additional distribution rights to receive all such amounts. The following unaudited pro forma condensed combined financial information is presented as if the TCCC Transaction had closed on January 1, 2015:
|  | Three-Months Ended September 30, 2015 |
|  |  |  |  |  | Pro Forma Adjustments |  |  |
|  | Monster Beverage Corporation as reported ¹ |  | KO Energy |  | Disposal of Monster Non- Energy |  | Other |  | Pro Forma Combined |
Net sales |  | $ | 756,619 |  | $ | - |  | $ | - |  | $ | - |  | $ | 756,619 |
Net income |  | 174,574 |  | - |  | - |  | 180 |  | 174,754 |
|  | Nine-Months Ended September 30, 2015 |
|  |  |  |  |  | Pro Forma Adjustments |  |  |
|  | Monster Beverage Corporation as reported ² |  | KO Energy ³ |  | Disposal of Monster Non- Energy 4 |  | Other |  | Pro Forma Combined |
Net sales |  | $ | 2,077,131 |  | $ | 138,127 |  | $ | (60,824) |  | $ | 6,803 |  | $ | 2,161,237 |
Net income |  | 407,991 |  | 100,575 |  | (101,881) |  | (36,487) |  | 370,198 |
1 Includes 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. 2 Includes net sales of $82.9 million and net income of $32.9 million (tax affected) related to the acquired KO Energy assets from June 12, 2015 (the date of acquisition) through September 30, 2015. 3 Includes results through June 12, 2015, the date the TCCC Transaction was finalized. The $100.6 million of net income for KO Energy for the nine-months ended September 30, 2015, is presented before tax. The associated estimated provision for income taxes is included in the “Other” category. Net income for KO Energy includes only net revenues and direct operating expenses, rather than full “carve-out” financial statements, because such financial statements 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. 4 Includes results through June 12, 2015. Net income includes the gain recognized on the sale of Monster Non-Energy of $161.5 million. Pro-Forma Adjustments – Other include the following:
|  | Three-Months Ended September 30, 2015 |  | Nine-Months Ended September 30, 2015 |
Net sales: |  |  |  |  |
Amortization of deferred revenue |  | $ | - |  | $ | 6,803 |
Net income: |  |  |  |  |
Amortization of deferred revenue |  | $ | - |  | $ | 6,803 |
To record sales commissions |  | - |  | (15,470) |
To record amortization of definite lived KO Energy intangibles |  | - |  | (3,126) |
To eliminate TCCC Transaction expenses |  | 292 |  | 15,425 |
Estimated provision for income taxes on pro forma adjustments |  | (112) |  | (1,398) |
Estimated provision for income taxes on KO Energy income |  | - |  | (38,721) |
Total |  | $ | 180 |  | $ | (36,487) |
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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