San Francisco Chronicle - (Sunday)
A MONSTER FALL
Former audio powerhouse now struggling for survival
There was a time, not long ago, when Monster was on everyone’s ears. From 2009 to 2012, its sales of headphones, audio equipment and cables grew tenfold. The company sold a billion dollars of gear in 2012, including the hit Beats brand. CEO Noel Lee hung out with music royalty like Lady Gaga and Mary J. Blige.
Now Monster is ailing, as is Lee, amid a fight with a former executive. Its sales have plummeted nearly 95 percent in five years. Retail stores such as Circuit City and RadioShack that once sold its wares have gone belly-up. Its partnership with Beats dissolved before the headphone maker saw a $3.2 billion payday in its sale to Apple. A February Super Bowl ad, the company’s first ever, was a dud, with Marketing Week rating it a “loser.” And new ventures into online gambling and cryptocurrency have gone nowhere. A company that once hung its name on San Francisco’s Candlestick Park is
fighting for its life. While Lee proclaims that the company he founded four decades ago will see another 40 years, the company started laying people off in September.
Its South San Francisco headquarters now occupy just part of one floor of an office building. It shut a distribution center in Las Vegas late last year. In May, it reported having 139 employees, down from 800 a decade ago; the company won’t say how many remain.
Lee is using his personal fortune to cover the company’s cash shortfalls, the company told The Chronicle. In April, filings show, Lee converted $92.6 million in debt owed by the company into preferred shares. That’s on top of his 80 percent stake in the company.
Lee, 69, was hospitalized for an unspecified illness in September and is recovering at his condominium in Las Vegas. A spokeswoman declined to make him available for comment.
“Mr. Lee has and always will support Monster and has in the past self-funded the company through debt and equity,” as is common with entrepreneurs who own a majority of their business, the spokeswoman said.
“He lost touch, and he lost control,” said Fereidoun “Fred” Khalilian, the company’s recently ousted chief operating officer.
Khalilian, who became chief operating officer last year and was fired in July, owns 12 percent of the company, according to filings, a stake he earned by taking shares as compensation for his brief stint. Monster is contesting his holding.
Khalilian and Monster have both filed for restraining orders against the other. Khalilian, accused of workplace violence, can’t come within 1,000 yards of Lee or other Monster employees. Khalilian, meanwhile, is seeking to prevent Monster from taking away his shares or diluting his stake.
The filing for a restraining order against Khalilian alleges that he threatened violence against employees and their families. In a statement, Lee’s executive assistant said Khalilian told her that if Lee tried to remove him from the company, Khalilian would kill him.
Khalilian said the accusations are untrue and that the restraining order is part of the plot to take away his shares.
Lee “is one of the best engineers in the world,” Khalilian said. “He’s engineering in his mind right now how he can destroy me.”
Monster, founded 40 years ago, has outlasted many of the electronics stores that sold its highend audio cables and speakers. The death of physical retailers has made it harder for Monster to compete, according to Kevin Lee, Noel’s son. He rejoined the business in November after leaving in 2015 to start his own headphone business, Sol Republic, which he sold to air-purifier company HoMedics.
“We lost tons of money not because we’re a poorly run business,” Kevin Lee said of Monster. “It’s the change in the industry that has made it challenging for midsized companies like us.” The company said in filings that it has no longterm contracts with any of its retailers. At the lone Best Buy store in San Francisco, the only Monster products for sale were surge protectors and a screen cleaner, which was out of stock. There was no sign of the headphones worn by musician Iggy Azalea in February’s Super Bowl ad.
Sales plunged from $87.7 million in 2016 to $57.5 million in 2017; it lost $29 million in 2016, $27 million in 2017 and $19.6 million from January to March. In August, Monster told the Securities and Exchange Commission it needed more time to complete its financials, and has not disclosed its finances since. It is on its fourth chief financial officer since 2015 and parted ways with its audit firm in April. As of December, it had $7.8 million cash on hand, a figure it hasn’t updated in more recent filings.
“We should’ve gone out of business,” Kevin Lee said. “My dad, he only cares about Monster and the business. He’s basically put the profit he’s made on Monster in the past back into Monster.”
Noel Lee, a former laser-fusion design engineer, started making audio cables in his family’s Richmond District garage in 1979. His company earned its reputation as an innovator in sound, building a portfolio of more than 500 patents. It grew to sell every imaginable audio accessory, from furniture that housed subwoofers and televisions to Monster Mints sold at the checkout stand.
In 2008, Monster signed a deal with Beats Electronics, a fledgling startup from Hollywood record executive Jimmy Iovine and rapper Dr. Dre, to design, make, and distribute the original Beats by Dre headphones. The relationship didn’t last. The contract — which Kevin Lee told tech news site Gizmodo he agreed to hastily — specified that in the event of a buyout, Monster would hand over every patent and prototype it developed for the headphones. Monster lost out when Apple acquired Beats in 2014.
Monster sued Beats and its co-founders the next year, unsuccessfully, and paid out $17.5 million to cover attorney’s fees and damages for Beats in March. Monster is appealing the award. In 2017, Beats sued Monster for allegedly withholding $95 million in royalties. The litigation is ongoing.
Without Beats, Monster struggled to hold onto its consumer electronics business. Over the years, it rolled out wireless speakers, surge protectors and batteries, as well as the new highend headphones advertised at the Super Bowl. A licensee sold Monster-branded virtual reality goggles and GoPro-like sports cameras.
Last year, Noel Lee tapped Khalilian, a Florida entrepreneur whom he met through an acquaintance, to redefine the business.
Khalilian first pitched Lee on getting into online gambling with an Indian tribe, a venture that has since been put on hold.
Monster then attempted to raise $300 million by offering a bitcoin-like cryptocurrency. The SEC, which is moving to oversee such offerings as securities sales, rejected Monster’s filing in June. A Monster spokeswoman said the company is in contact with the agency about its application, though no new public filings have been made since August.
As Khalilian brought radical ideas to Monster, employees started to form their own ideas about him. In Monster’s petition for a restraining order against him, six workers wrote statements of support, describing him as an ambitious but “erratic” executive who exploded in fits of anger and threatened violence.
Khalilian boasted about being investigated for the rape and murder of a woman who was found “chopped into 20 pieces,” according to Amir Shafi, former chief information officer at Monster, and David Augusto, who was hired to introduce Monster to potential investors.
Khalilian said he has never threatened violence against Monster employees and that the story about a rape and murder was fabricated by Monster employees and spread in an effort to tarnish his reputation. Police records show Khalilian has been charged with first-degree battery three times and false imprisonment once in Orlando; each time, he accepted the conviction without admitting guilt.
Khalilian is also banned from the telemarketing business after settling charges with the Federal Trade Commission, which accused him of using prerecorded calls to sell fake auto warranties. (Monster knew of his history: It was disclosed in the company’s filings with the SEC.)
Noel Lee wrote in a statement that Khalilian wanted to steal the company from him. Khalilian
doesn’t wholly disagree with that characterization.
“When I went around trying to raise money, it was impossible,” Khalilian said. Investors asked why they would spend money on a company that’s losing tens of millions of dollars a year and botched its contract with Beats. Khalilian decided his meetings with potential investors would be more fruitful without Lee.
On July 14, Lee replied to an email from Khalilian that included 12 other employees. Lee gave Khalilian a choice: fulfill the obligations of chief operating officer without “creating animosity,” or leave.
In a September news release, the company celebrated its upcoming 40th anniversary by saying it had cleaned out the executive suite, firing Khalilian as well as “the team he brought into the company to do a hostile takeover” of Monster. The news release included an undated booking photo of Khalilian and links to a dozen or so unflattering articles about Khalilian’s past. When asked about Khalilian’s time at Monster and his legal action against the company, Kevin Lee declined to comment. A spokeswoman said Khalilian’s stake in Monster — disclosed to potential investors in the company’s filings — “has not been established” and is the focus of pending litigation.
“When you are crippled and you’re handicapped like Noel, it’s so easy to say my partner wants to hurt me,” Khalilian said. Noel Lee has a degenerative nerve disorder that prevents him from walking, according to a Monster spokeswoman, and uses a Segway to get around.
“He’s saying I want to kill him,” Khalilian said. “I want to keep my stock.”
“When I went around trying to raise money, it was impossible.” Fereidoun “Fred” Khalilian, ousted chief operating officer