Our Business

Overview

We develop, market, sell and distribute "alternative" beverage category natural sodas, fruit juices and juice drinks, energy drinks and energy sports drinks, fruit juice smoothies and "functional" drinks, non-carbonated ready-to-drink iced teas, children's multi-vitamin juice drinks, Junior Juice® juices, Junior Juice Water and flavored sparkling beverages under the Hansen's® brand name. We also develop, market, sell and distribute energy drinks under the following brand names: Monster Energy®; Monster Hitman Energy Shooter™ and Lost® Energy™ brand names as well as Rumba®, Samba and Tango brand energy juices. We also market, sell and distribute the Java Monster™ line of non-carbonated dairy based coffee drinks. Additionally, we market, sell and distribute natural sodas, premium natural sodas with supplements, organic natural sodas, seltzer waters, sports drinks and energy drinks under the Blue Sky® brand name. In July 2008, we began to market, sell and distribute enhanced water beverages under the Vidration™ brand name.

We have two reportable segments, namely DSD, whose principal products comprise energy drinks, and 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.

Our Monster Energy® brand energy drinks include Monster Energy® drinks (introduced in April 2002), lo-carb Monster Energy® drinks (introduced in August 2003), Monster Energy® Assault® energy drinks (introduced in September 2004), Monster Energy® KhaosTM energy drinks (introduced in August 2005), Monster Energy® M-80TM energy drinks (introduced in March 2007, named "RIPPER" in certain countries), Monster Energy® Heavy Metal™ energy drinks (introduced in November 2007) and Monster Energy® MIXXD™ energy drinks (introduced in December 2007).

A substantial portion of our gross sales are derived from our Monster Energy® brand energy drinks. Any decrease in sales of our Monster Energy® brand energy drinks could cause a significant adverse effect on our future revenues and net income. Our DSD segment represented 91.1% and 89.4% of our net sales for the three-months ended March 31, 2009 and 2008, respectively. Competitive pressure in the energy drink category could adversely affect our operating results.

Our sales and marketing strategy for all our beverages is to focus our efforts on developing brand awareness and trial through sampling both in stores and at events. We use our branded vehicles and other promotional vehicles at events where we sample our products to consumers. We utilize "push-pull" methods to achieve maximum shelf and display space exposure in sales outlets and maximum demand from consumers for our products, including advertising, in-store promotions and in-store placement of point-of-sale materials, racks, coolers and barrel coolers, prize promotions, price promotions, competitions, endorsements from selected public and extreme sports figures, coupons, sampling and sponsorship of selected causes such as cancer research. Our extreme sports team endorsements include teams such as the Pro Circuit - Kawasaki Motocross and Supercross teams, Kawasaki Factory Motocross and Supercross teams, Robby Gordon Racing Team, Ken Block

Rally Racing Team and the Tech 3 Moto GP Team. Our individual athlete and/or personality endorsements include extreme sports figures and athletes such as NASCAR Camping World Truck Series racer Ricky Carmichael, World Champion Moto GP motorcycle racer Valentino Rossi, television personalities such as Rob Dyrdek as well as many athletes that compete in other extreme sports related activities, particularly, the Winter and Summer X-Games, supercross, motocross, freestyle motocross, surfing, skateboarding, wakeboarding, skiing, snowboarding, BMX, mountain biking, snowmobile freestyle, snowmobile racing, etc. Our event endorsements include a wide range of events such as the Monster Energy® Supercross Series, the AMA Pro Motocross Championship Series and the Vans Warped Tour. In-store posters, outdoor posters, print, radio and television advertising, together with price promotions 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, such as making Hansen's® 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, and we will continue to reevaluate the same from time to time.

Our gross sales* of $278.9 million for the three-months ended March 31, 2009 again represented record sales for our first fiscal quarter. The increase in gross sales for the three-months ended March 31, 2009 was primarily attributable to increased sales of our Monster Energy® brand energy drinks. Gross sales for the three-months ended March 31, 2008 were impacted by a price increase announced during the fourth quarter of 2007 for all of our Monster Energy® brand energy drinks in 16-ounce cans and our Java Monster™ line of non-carbonated dairy based coffee drinks, effective January 1, 2008. We estimate that gross sales for the three-months ended March 31, 2008 were reduced by approximately 8% to 9% as a result of purchases made by our customers in advance of such price increases. We did not limit the amount of purchases our customers could execute at our existing 2007 fourth quarter prices.

* Gross sales, although used internally by management as an indicator of operating performance, should not be considered as an alternative to net sales, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of net sales. Additionally, gross sales may not be comparable to similarly titled measures used by other companies as gross sales has been defined by our internal reporting requirements. However, gross sales is used by management to monitor operating performance including sales performance of particular products, salesperson performance, product growth or declines and our overall performance. The use of gross sales allows evaluation of sales performance before the effect of any promotional items, which can mask certain performance issues. Management believes the presentation of gross sales allows a more comprehensive presentation of our operating performance. Gross sales may not be realized in the form of cash receipts as promotional payments and allowances may be deducted from payments received from customers.

Gross sales to customers outside the United States amounted to $35.3 million and $20.1 million for the three-months ended March 31, 2009 and 2008, respectively. Such sales were approximately 12.6% and 8.2% of gross sales for the three-months ended March 31, 2009 and 2008, respectively. The reclassification of certain military customers from gross sales to customers within the United States to gross sales to customers outside the United States, resulted in an increase in gross sales outside the United States of $3.1 million for the three-months ended March 31, 2008 over amounts previously reported.

During the first quarter of 2009, we ascertained that it was likely that our west coast co-packer of our aseptic juice products would cease to produce such products in the near future. We have secured alternative co-packing facilities to replace that portion of our volume of such products, but have not yet commenced production. As a result, there may be a disruption in our ability to continue to supply that portion of our volume of such products to customers, either partially or completely.

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 and food service customers. Gross sales to our various customer types for the three-months ended March 31, 2009 and 2008 are reflected below. Such information reflects sales by us direct to the customer types concerned, which include our full service beverage distributors. Such full service beverage distributors in turn sell certain of our products to the same customer types. We do not have complete details of their sales of our products to their respective customer types and therefore limit our description of our customer types to include our sales to such full service distributors without reference to their sales to their own customers. The allocations below reflect changes made by us to the categories historically reported.

                                                    Three-Months Ended
                                                        March 31,
                                                     2009        2008
Full service distributors                            63%         66%
Club stores, drug chains & mass merchandisers        15%         14%
Outside the U.S.                                     13%          8%
Retail grocery, specialty chains and wholesalers      6%          9%
Other                                                 3%          3%

Our customers include Coca Cola Enterprises, Inc. ("CCE"), Coca Cola Bottling Company, CCBCC Operations, LLC, United Bottling Contracts Company, LLC and other Coca Cola Company independent bottlers (collectively, the "TCCC North American Bottlers"), Wal-Mart, Inc. (including Sam's Club), select Anheuser-Busch, Inc. ("AB") distributors (the "AB Distributors"), Kalil Bottling Group, Trader Joe's, John Lenore & Company, Pepsi Canada (terminated by us effective December 31, 2008), Swire Coca-Cola, Costco, The Kroger Co., Safeway Inc. and Albertsons. A decision by any large customer to decrease amounts purchased from the Company or to cease carrying our products could have a material negative effect on our financial condition and consolidated results of operations. CCE, a customer of the DSD segment, accounted for approximately 28% of our net sales for the three-months ended March 31, 2009. Wal-Mart, Inc. (including Sam's Club), a customer of both the DSD and Warehouse divisions, accounted for approximately 11% and 12% of our net sales for the three-months ended March 31, 2009 and 2008, respectively. Dr. Pepper Snapple Group, Inc., a former customer of the DSD division, accounted for approximately 22% of our net sales for the three-months ended March 31, 2008. Our distribution agreement with the Dr. Pepper Snapple Group, Inc. was terminated by us effective November 9, 2008. The related terminated distributor territories are now serviced by a combination of TCCC North American Bottlers and AB Distributors.

Results of Operations



The following table sets forth key statistics for the three-months ended
March 31, 2009 and 2008, respectively.



                                                   Three-Months Ended       Percentage
                                                       March 31,              Change
                                                   2009          2008        09 vs. 08
Gross sales, net of discounts & returns *       $ 278,854     $ 243,999         14.3%
Less: Promotional and other allowances**           34,648        31,821          8.9%
Net sales1                                        244,206       212,178         15.1%
Cost of sales                                     114,027       107,459          6.1%
Gross profit                                      130,179       104,719         24.3%
Gross profit margin as a percentage of net
sales                                               53.3%         49.4%

Operating expenses                                 64,402        61,891          4.1%

Operating expenses as a percentage of net
sales                                               26.4%         29.2%

Operating income                                   65,777        42,828         53.6%
Operating income as a percentage of net
sales                                               26.9%         20.2%

Other (expense) income:
Interest and other income, net                      1,016         3,626       (72.0%)
Other-than-temporary impairment of
investments                                        (3,539 )         -        (100.0%)
Total other (expense) income                       (2,523 )       3,626      (169.6%)

Income before provision for income taxes           63,254        46,454         36.2%

Provision for income taxes                         21,689        17,643         22.9%

Net income                                      $  41,565     $  28,811         44.3%
Net income as a percentage of net sales             17.0%         13.6%

Net income per common share:
Basic                                               $0.46         $0.31         48.9%
Diluted                                             $0.44         $0.29         49.9%

Case sales (in thousands) (in 192-ounce case
equivalents)                                       23,468        22,274          5.4%

1Includes $1.9 million and $0.5 million for the three-months ended March 31, 2009 and 2008, respectively, related to the recognition of deferred revenue attributable to distribution agreements entered into with certain distributors.

* Gross sales - see definition above

** Although the expenditures described in this line item are determined in accordance with GAAP and meet GAAP requirements, the disclosure thereof does not conform with GAAP presentation requirements. Additionally, the presentation of promotional and other allowances may not be comparable to similar items presented by other companies. The presentation of promotional and other allowances facilitates an evaluation of the impact thereof on the determination of net sales and illustrates the spending levels incurred to secure such sales. Promotional and other allowances constitute a material portion of our marketing activities.

Results of Operations for the Three-Months Ended March 31, 2009 Compared to the Three-Months Ended March 31, 2008

Gross Sales.*Gross sales were $278.9 million for the three-months ended March 31, 2009, an increase of approximately $34.9 million, or 14.3% higher than gross sales of $244.0 million for the three-months ended March 31, 2008. The increase in gross sales was primarily attributable to increased sales by volume and increased sales price per case for certain of our Monster Energy® brand energy drinks as well as sales of certain new products such as the Monster Hitman Energy Shooter™ product line (introduced in September 2008). To a lesser extent the increase in gross sales was attributable to increased sales by volume of Hansen's Natural Sodas®. The increase in gross sales was partially offset by decreased sales by volume of our Java Monster™ line of non-carbonated dairy based coffee drinks, juice blends, Lost Energy® brand energy drinks and sports drinks. Gross sales for the three-months ended March 31, 2008 were impacted by a price increase announced during the fourth quarter of 2007 for all of our Monster Energy® brand energy drinks in 16-ounce cans and our Java Monster™ line of non-carbonated dairy based coffee drinks, effective January 1, 2008. We estimate that gross sales for the three-months ended March 31, 2008 were reduced by approximately 8% to 9% as a result of purchases made by our customers in advance of such price increases. Gross sales for the three-months ended March 31, 2009 were also impacted by an increase of $1.4 million related to the recognition of deferred revenue. Promotional and other allowances were $34.6 million for the three-months ended March 31, 2009, an increase of $2.8 million, or 8.9% higher than promotional and other allowances of $31.8 million for the three-months ended March 31, 2008. Promotional and other allowances as a percentage of gross sales decreased to 12.4% from 13.0% for the three-months ended March 31, 2009 and 2008, respectively. As a result, the percentage increase in gross sales for the three-months ended March 31, 2009 was lower than the percentage increase in net sales.

*Gross sales - see definition above.

Net Sales. Net sales were $244.2 million for the three-months ended March 31, 2009, an increase of approximately $32.0 million, or 15.1% higher than net sales of $212.2 million for the three-months ended March 31, 2008. The increase in net sales was primarily attributable to increased sales by volume and increased sales price per case for certain of our Monster Energy® brand energy drinks as well as sales of certain new products such as the Monster Hitman Energy Shooter™ product line. To a lesser extent, the increase in net sales was attributable to increased sales by volume of apple juice and Hansen's Natural Sodas®. The increase in net sales was partially offset by decreased sales by volume of our Java Monster™ line of non-carbonated dairy based coffee drinks, juice blends, Lost Energy® brand energy drinks and sports drinks. Net sales for the three-months ended March 31, 2008 were impacted by a price increase announced during the fourth quarter of 2007 for our Monster Energy® brand energy drinks in 16-ounce cans and our Java Monster™ line of non-carbonated dairy based coffee drinks, effective January 1, 2008. We estimate that net sales for the three-months ended March 31, 2008 were reduced by approximately 8% to 9% as a result of purchases made by our customers in advance of such price increases. Net sales for the three-months ended March 31, 2009 were also impacted by an increase of $1.4 million related to the recognition of deferred revenue.

Case sales, in 192-ounce case equivalents, were 23.5 million cases for the three-months ended March 31, 2009, an increase of 1.2 million cases or 5.4% higher than case sales of 22.3 million cases for the three-months ended March 31, 2008. The overall average net sales price per case increased to $10.41 for the three-months ended March 31, 2009 or 9.2% higher than the average net sales price per case of $9.53 for the three-months ended March 31, 2008. The increase in the average net sales prices per case was attributable to an increase in the proportion of case sales derived from higher priced products.

Net sales for the DSD segment were $222.5 million for the three-months ended March 31, 2009, an increase of approximately $32.8 million, or 17.3% higher than net sales of $189.8 million for the three-months ended March 31, 2008. The increase in net sales was primarily attributable to increased sales by volume and increased sales price per case for certain of our Monster Energy® brand energy drinks, as well as sales of certain new products such as the Monster Hitman Energy Shooter™ product line. The increase in net sales was partially offset by decreased sales by volume of our Java Monster™ line of non-carbonated dairy based coffee drinks and Lost Energy® brand energy drinks.

Net sales for the Warehouse segment were $21.7 million for the three-months ended March 31, 2009, a decrease of approximately $0.8 million, or 3.5% lower than net sales of $22.5 million for the three-months ended March 31, 2008. The decrease in net sales was primarily attributable to decreased sales by volume of juice blends and sports drinks. The decrease in net sales was partially offset by increased sales by volume of apple juice and Hansen's Natural Sodas®. Changes in pricing within the Warehouse segment did not have a material impact on net sales for the three-months ended March 31, 2009.

Gross Profit.*** Gross profit was $130.2 million for the three-months ended March 31, 2009, an increase of approximately $25.5 million, or 24.3% higher than the gross profit of $104.7 million for the three-months ended March 31, 2008. Gross profit as a percentage of net sales increased to 53.3% for the three-months ended March 31, 2009 from 49.4% for the three-months ended March 31, 2008. The increase in net sales contributed to the increase in gross profit dollars. The increase in gross profit as a percentage of net sales was partially attributable to increased sales of DSD segment products which have higher gross profit margins than those in the Warehouse segment as well as a decrease in the percentage of sales within the DSD segment of the Java Monster™ line of non-carbonated dairy based coffee drinks which have lower gross profit margins than our Monster Energy® brand energy drinks. In addition, the increase in gross profit as a percentage of net sales was attributable to a decrease in the cost of certain raw materials including certain containers and packaging materials and certain juice concentrates, particularly apple juice concentrate as well as decreased trade marketing costs.

***Gross profit may not be comparable to that of other entities since some entities include all costs associated with their distribution process in cost of sales, whereas others exclude certain costs and instead include such costs within another line item such as operating expenses.

Operating Expenses. Total operating expenses were $64.4 million for the three-months ended March 31, 2009, an increase of approximately $2.5 million, or 4.1% higher than total operating expenses of $61.9 million for the three-months ended March 31, 2008. Total operating expenses as a percentage of net sales was 26.4% for the three-months ended March 31, 2009, compared to 29.2% for three-months ended March 31, 2008. The increase in operating expenses in dollars was partially attributable to increased expenditures of $2.2 million for sponsorships and endorsements, increased expenditures of $1.6 million for our trade development program, increased payroll expenses of $2.7 million and increased expenditures of $1.1 million related to the costs

associated with terminating existing distributors. The increase in operating expenses in dollars was partially offset by decreased expenditures of $3.3 million for merchandise displays, decreased expenditures of $1.1 million for out-bound freight and warehouse costs and decreased expenditures of $1.0 million for in-store demos. The individual increases in operating expenses include costs of $5.2 million, or 2.1% of net sales, relating to the launch of the Monster Energy® brand in Europe for the three-months ended March 31, 2009.

Contribution Margin. Contribution margin for the DSD segment was $79.3 million for the three-months ended March 31, 2009, an increase of approximately $23.0 million, or 40.9% higher than contribution margin of $56.3 million for the three-months ended March 31, 2008. The increase in the contribution margin for the DSD segment was primarily due to increased sales of Monster Energy® brand energy drinks as well as sales of certain new products such as the Monster Hitman Energy Shooter™ product line. Contribution margin for the Warehouse segment was $1.2 million for the three-months ended March 31, 2009, approximately $2.3 million higher than contribution margin of ($1.1) million for the three-months ended March 31, 2008. The increase in the contribution margin for the Warehouse segment was primarily attributable to an increase in gross margin as a result of decreases in the costs of certain raw materials, particularly apple juice concentrate and by a reduction in sales rebates within our juice product line as a result of the termination of our exclusive contracts with the State of California Department of Health Services, Women, Infant and Children ("WIC") Supplemental Nutrition Branch in April 2008. The WIC program continues on a non-exclusive basis in which we participate with our apple, grape, white grape and pineapple 64-ounce juice products. Juice blends are not eligible under the existing program.

Operating Income. Operating income was $65.8 million for the three-months ended March 31, 2009, an increase of approximately $23.0 million, or 53.6% higher than operating income of $42.8 million for the three-months ended March 31, 2008. Operating income as a percentage of net sales increased to 26.9% for the three-months ended March 31, 2009 from 20.2% for the three-months ended March 31, 2008. The increase in operating income and operating income as a percentage of net sales was primarily due to an increase in gross profit of $25.5 million.

Other (Expense) Income. Other (expense) income was ($2.5) million for the three-months ended March 31, 2009, a decrease of $6.1 million from $3.6 million for the three-months ended March 31, 2008. This decrease was primarily attributable to a $3.5 million other-than temporary impairment of long-term investments and decreased interest revenue earned on our cash balances and short- and long-term investments.

Provision for Income Taxes. Provision for income taxes for the three-months ended March 31, 2009 was $21.7 million, as compared to $17.6 million for the three-months ended March 31, 2008. The effective combined federal and state tax rate was 34.3% and 38.0% for the three-months ended March 31, 2009 and 2008, respectively. The decrease in the effective tax rate for the three-months ended March 31, 2009 was primarily due to a $1.9 million reduction in our uncertain tax positions as a result of the Internal Revenue Service's conclusion of its examination of our Domestic Production Deduction tax claim (See Note 12 in

Net Income. Net income was $41.6 million for the three-months ended March 31, 2009, an increase of $12.8 million or 44.3% higher than net income of $28.8 million for the three-months ended March 31, 2008. The increase in net income was primarily attributable to an increase in gross profit of $25.5 million. This was partially offset by an increase in operating expenses of $2.5 million, a decrease in other (expense) income of $6.1 million and an increase in provision for income taxes of $4.0 million.

Liquidity and Capital Resources

Cash flows (used in) provided by operating activities - Net cash used in operating activities was $3.7 million for the three-months ended March 31, 2009, as compared with net cash provided by operating activities of $25.9 million for the three-months ended March 31, 2008. For the three-months ended March 31, 2009, cash used in operating activities was primarily attributable to a $90.3 million decrease in accrued distributor terminations, a $50.6 million increase in accounts receivable, an $8.1 million decrease in accounts payable and a $3.6 million decrease in accrued compensation. For the three-months ended March 31, 2009, cash used in operating activities was reduced due to a $66.4 million decrease in distributor receivables, net income earned of $41.6 million and adjustments for certain non-cash expenses consisting of a $3.5 million impairment on investments and $2.7 million of stock-based compensation. For the three-months ended March 31, 2009, cash used in operating activities was also reduced due to a $12.3 million increase in accrued liabilities, a $12.1 million . . .