Our Business

Overview

We develop, market, sell and distribute "alternative" beverage category natural sodas, fruit juices, juice blends, 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 + energy drinks. In May 2009, we introduced Monster Energy® Import energy drink which is packaged in 550 ml re-sealable aluminum cans and in June 2009, we introduced X-Presso Monster™-Hammer, a non-carbonated espresso energy drink packaged in 6.75-ounce aluminum cans. Both of these products are manufactured in Europe and imported into the United States. In July 2009, we introduced Nitrous™ Monster Energy®, a line of energy drinks which is carbonated and contains nitrous oxide, and is packaged in re-sealable 12-ounce sleek aluminum cap-cans, in three variants. 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. We have marketed, sold and distributed enhanced water beverages under the Vidration™ brand name since July 2008.

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), Monster Energy® MIXXD™ energy drinks (introduced in December 2007) and Monster Energy® Import (introduced in May 2009).

The Company intends to launch a new line of ready-to-drink iced teas in 23-ounce cans under the "Peace Tea" brand name. The Peace Tea line will initially be launched in four flavors: green tea, imported Ceylon tea, sweet lemon tea and razzleberry tea.

Our Java MonsterTM line of non-carbonated dairy based coffee + energy drinks include Java Monster™ Originale™, Java Monster™ Loca Moca®, Java Monster™ Mean Bean® (each introduced in April 2007), Java Monster™ Russian, Java Monster™ Irish Blend™, Java Monster™ Chai Hai™, Java Monster™ Nut Up™, Java Monster™ and Lo-Ball (each introduced in December 2007).

A substantial portion of our gross sales are derived from our Monster Energy® brand energy drinks and our Java MonsterTM product line. Any decrease in sales of our Monster Energy® brand energy drinks and/or Java MonsterTM product line and/or our Nitrous™ Monster Energy® drinks could cause a significant adverse effect on our future revenues and net income. Our DSD segment represented 91.7% and 90.4% of our net sales for the three-months ended September 30, 2009 and 2008, respectively. Our DSD segment represented 91.7% and 90.6% of our net sales for the nine-months ended September 30, 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 offer samples of 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. In-store posters, outdoor posters, print, radio and television advertising, together with price promotions and coupons, may also be used to promote our brands. 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, World Champion Formula 1 racer Jensen Button, television personalities such as Rob Dyrdek as well as many other athletes that compete in other extreme sports related activities, particularly, the Winter and Summer X-Games, supercross, motocross, freestyle motocross, endurocross, Moto GP racing, Formula 1 racing, surfing, skateboarding, wakeboarding, skiing, snowboarding, BMX, mountain biking, snowmobile freestyle, snowmobile racing, NASCAR racing, off-road truck racing, rally racing, etc. Our event endorsements include a wide range of events such as the Monster Energy® Supercross Series, the AMA Pro Motocross Championship Series, the Vans Warped Tour, the Australian SuperX Supercross Series as well as events run by our marketing entities X-Truck, Inc. and Epicenter Music Festival, LLC.

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 $355.0 million for the three-months ended September 30, 2009 represented record sales for our third fiscal quarter. The increase in gross sales for the three-months ended September 30, 2009 was primarily attributable to increased sales of our Monster Energy® brand energy drinks.

* 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 procedures. 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 $50.0 million and $30.7 million for the three-months ended September 30, 2009 and 2008, respectively. Such sales were approximately 14.0% and 9.5% of gross sales for the three-months ended September 30, 2009 and 2008, respectively. Gross sales to customers outside the United States amounted to $124.6 million and $77.7 million for the nine-months ended September 30, 2009 and 2008, respectively. Such sales were approximately 12.7% and 8.7% of gross sales for the nine-months ended September 30, 2009 and 2008, respectively. Gross sales to customers outside the United States of $0.4 million and $1.7 million for the three- and nine-months ended September 30, 2008, respectively, have been reclassified to gross sales within the United States from the amounts previously reported.

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- and nine-months ended September 30, 2009 and 2008 are reflected below. Such information reflects sales made by us directly 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      Nine-Months Ended
                                             September 30,           September 30,
                                            2009        2008        2009        2008
Full service distributors                   65%         68%         65%         67%
Club stores, drug chains & mass
merchandisers                               12%         12%         13%         13%
Outside the U.S.                            14%         10%         13%          9%
Retail grocery, specialty chains and
wholesalers                                  6%          8%          6%          8%
Other                                        3%          2%          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 SUPERVALU, Inc. A decision by any large customer to decrease amounts purchased from the Company or to cease carrying our products could have a material adverse effect on our financial condition and consolidated results of operations. CCE, a customer of the DSD segment with sales within specific markets in the United States, Canada, the United Kingdom and certain countries in Europe, accounted for approximately 30% of our net sales for both the three- and nine-months ended September 30, 2009, respectively. Dr. Pepper Snapple Group, Inc. (the "DPS Group"), a former customer of the DSD division, accounted for approximately 14% and 16% of our net sales for the three- and nine-months ended September 30, 2008, respectively. Our distribution agreement with the DPS Group was terminated by us effective November 9, 2008. The terminated DPS Group 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- and nine-months
ended September 30, 2009 and 2008, respectively.



                            Three-Months Ended       Percentage       Nine-Months Ended       Percentage
                               September 30,           Change           September 30,           Change
                             2009         2008       09 vs. 08        2009         2008       09 vs. 08
Gross sales, net of
discounts & returns *
(1)                       $  355,048    $ 325,152           9.2 %   $ 979,732    $ 893,284           9.7 %
Less: Promotional and
other allowances**            47,119       40,166          17.3 %     127,347      113,876          11.8 %
Net sales(1)                 307,929      284,986           8.1 %     852,385      779,408           9.4 %
Cost of sales                142,897      135,550           5.4 %     395,345      379,039           4.3 %
Gross profit                 165,032      149,436          10.4 %     457,040      400,369          14.2 %
Gross profit margin as
a percentage of net
sales                           53.6 %       52.4 %                      53.6 %       51.4 %

Operating expenses            72,117       67,644           6.6 %     205,565      197,560           4.1 %

Operating expenses as
a percentage of net
sales                           23.4 %       23.7 %                      24.1 %       25.3 %

Operating income              92,915       81,792          13.6 %     251,475      202,809          24.0 %
Operating income as a
percentage of net
sales                           30.2 %       28.7 %                      29.5 %       26.0 %

Other income
(expense):
Interest and other
income, net                      183        2,111         (91.3 )%      1,599        8,506         (81.2 )%
Other-than-temporary
impairment of
investments                     (342 )          -        (100.0 )%     (3,880 )          -        (100.0 )%
Total other income
(expense)                       (159 )      2,111        (107.5 )%     (2,281 )      8,506        (126.8 )%

Income before
provision for income
taxes                         92,756       83,903          10.6 %     249,194      211,315          17.9 %

Provision for income
taxes                         36,251       31,466          15.2 %      93,835       79,835          17.5 %

Net income                $   56,505    $  52,437           7.8 %   $ 155,359    $ 131,480          18.2 %
Net income as a
percentage of net
sales                           18.4 %       18.4 %                      18.2 %       16.9 %

Net income per common
share:
Basic                     $     0.63    $    0.57          10.4 %   $    1.72    $    1.42          21.4 %
Diluted                   $     0.60    $    0.54          10.3 %   $    1.63    $    1.34          21.8 %

Case sales (in
thousands)
(in 192-ounce case
equivalents)                  29,800       28,009           6.4 %      82,524       79,009           4.4 %

(1) Includes $2.2 million and $0.5 million for the three-months ended September 30, 2009 and 2008, respectively, related to the recognition of deferred revenue. Includes $5.9 million and $1.5 million for the nine-months ended September 30, 2009 and 2008, respectively, related to the recognition of deferred revenue.

* 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 September 30, 2009 Compared to the Three-Months Ended September 30, 2008

Gross Sales.* Gross sales were $355.0 million for the three-months ended September 30, 2009, an increase of approximately $29.9 million, or 9.2% higher than gross sales of $325.2 million for the three-months ended September 30, 2008. The increase in gross sales was primarily attributable to increased sales by volume of our Monster Energy® brand energy drinks as well as sales of certain new products such as our Monster Energy® Import energy drink, our Nitrous™ Monster Energy® product line and our X-Presso Monster™-Hammer energy drink. To a lesser extent the increase in gross sales was attributable to gross revenues generated by increased sales by volume of aseptic juice drinks. The increase in gross sales was partially offset by decreased sales by volume of our Java MonsterTM product line, apple juice and our Lost Energy® brand energy drinks. Included in gross sales were $2.2 million and $0.5 million related to the recognition of deferred revenue for the three-months ended September 30, 2009 and 2008, respectively, revenue of $2.3 million related to the Epicenter Music Festival (held in August 2009) and revenue of $0.9 million related to X-Truck, Inc. for the three-months ended September 30, 2009. Promotional and other allowances were $47.1 million for the three-months ended September 30, 2009, an increase of $7.0 million, or 17.3% higher than promotional and other allowances of $40.2 million for the three-months ended September 30, 2008. Promotional and other allowances as a percentage of gross sales increased to 13.3% from 12.4% for the three-months ended September 30, 2009 and 2008, respectively. As a result, the percentage increase in gross sales for the three-months ended September 30, 2009 was higher than the percentage increase in net sales.

*Gross sales - see definition above.

Net Sales. Net sales were $307.9 million for the three-months ended September 30, 2009, an increase of approximately $22.9 million, or 8.1% higher than net sales of $285.0 million for the three-months ended September 30, 2008. The increase in net sales was primarily attributable to increased sales by volume of our Monster Energy® brand energy drinks as well as sales of certain new products such as our Monster Energy® Import energy drink, our Nitrous™ Monster Energy® product line and our X-Presso Monster™-Hammer energy drink. To a lesser extent, the increase in net sales was attributable to increased sales by volume of aseptic juice drinks. The increase in net sales was partially offset by decreased sales by volume of our Java MonsterTM product line, apple juice, our Monster Hitman Energy Shooter™ product line and our Lost Energy® brand energy drinks. Included in net sales for the three-months ended September 30, 2009 and 2008, were $2.2 million and $0.5 million, respectively, related to the recognition of deferred revenue, revenue of $2.3 million related to the Epicenter Music Festival and revenue of $0.9 million related to X-Truck, Inc. for the three-months ended September 30, 2009.

Case sales, in 192-ounce case equivalents, were 29.8 million cases for the three-months ended September 30, 2009, an increase of approximately 1.8 million cases or 6.4% higher than case sales of 28.0 million cases for the three-months ended September 30, 2008. The overall average net

sales price per case increased to $10.33 for the three-months ended September 30, 2009 or 1.6% higher than the average net sales price per case of $10.17 for the three-months ended September 30, 2008. The increase in the average net sales price 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 $282.4 million for the three-months ended September 30, 2009, an increase of approximately $24.7 million, or 9.6% higher than net sales of $257.7 million for the three-months ended September 30, 2008. The increase in net sales was primarily attributable to increased sales by volume of our Monster Energy® brand energy drinks as well as sales of certain new products such as the Monster Energy® Import energy drink, our Nitrous™ Monster Energy® product line and our X-Presso Monster™-Hammer energy drink. The increase in net sales was partially offset by decreased sales by volume of our Java MonsterTM product line, our Monster Hitman Energy Shooter™ product line and our Lost Energy® brand energy drinks. Included in net sales for the DSD segment for the three-months ended September 30, 2009 and 2008, were $2.2 million and $0.5 million, respectively, related to the recognition of deferred revenue, revenue of $2.3 million related to the Epicenter Music Festival and revenue of $0.9 million related to X-Truck, Inc. for the three-months ended September 30, 2009.

Net sales for the Warehouse segment were $25.6 million for the three-months ended September 30, 2009, a decrease of approximately $1.7 million, or 6.3% lower than net sales of $27.3 million for the three-months ended September 30, 2008. The decrease in net sales was primarily attributable to decreased sales by volume of apple juice and Junior Juice® aseptic juices. The decrease in net sales was partially offset by increased sales by volume of aseptic juice drinks as well as a decrease in promotional and other allowances as a percentage of gross sales.

Gross Profit.*** Gross profit was $165.0 million for the three-months ended September 30, 2009, an increase of approximately $15.6 million, or 10.4% higher than the gross profit of $149.4 million for the three-months ended September 30, 2008. Gross profit margin as a percentage of net sales increased to 53.6% for the three-months ended September 30, 2009 from 52.4% for the three-months ended September 30, 2008. The increase in net sales contributed to the increase in gross profit dollars. The increase in gross profit margin 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, a decrease in the percentage of sales within the DSD segment of the Java Monster™ product line, which has lower gross profit margins than our Monster Energy® brand energy drinks, as well as an increase in the gross profit margin of the Warehouse segment. 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.

***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. We include out-bound freight and warehouse costs in operating expenses.

Operating Expenses. Total operating expenses were $72.1 million for the three-months ended September 30, 2009, an increase of approximately $4.5 million, or 6.6% higher than total operating expenses of $67.6 million for the three-months ended September 30, 2008. Total operating expenses as a percentage of net sales was 23.4% for the three-months ended September 30, 2009, compared to 23.7% for the three-months ended September 30, 2008. The increase in operating expenses in dollars was partially attributable to increased expenditures of $4.1 million for

sponsorships and endorsements, increased payroll expenses of $2.2 million, increased expenditures of $1.4 million for advertising expenses, increased expenditures of $0.9 million for travel expenses, $0.9 million of increased depreciation costs, increased expenditures of $0.8 million for commissions and royalties and increased expenditures of $0.7 million for merchandise displays. The increase in operating expenses in dollars was partially offset by proceeds of $4.7 million related to reimbursements of legal expenses paid by the Company, decreased expenditures of $1.5 million for out-bound freight and decreased expenditures of $0.6 million for storage and warehouse costs. Total operating expenses include costs of $7.1 million, or 2.3% of net sales, and $3.7 million, or 1.3% of net sales, relating to the launch of the Monster Energy® brand in Europe for the three-months ended September 30, 2009 and 2008, respectively.

Contribution Margin. Contribution margin for the DSD segment was $101.8 million for the three-months ended September 30, 2009, an increase of approximately $7.1 million, or 7.5% higher than contribution margin of $94.7 million for the three-months ended September 30, 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 our Monster Energy® Import energy drink, our Nitrous™ Monster Energy® product line and our X-Presso Monster™-Hammer energy drink. Contribution margin for the Warehouse segment was $2.1 million for the three-months ended September 30, 2009, approximately $1.0 million higher than contribution margin of $1.1 million for the three-months ended September 30, 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.

Operating Income. Operating income was $92.9 million for the three-months ended September 30, 2009, an increase of approximately $11.1 million, or 13.6% higher than operating income of $81.8 million for the three-months ended September 30, 2008. Operating income as a percentage of net sales increased to 30.2% for the three-months ended September 30, 2009 from 28.7% for the three-months ended September 30, 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 $15.6 million. To a lesser extent the increase in operating income was attributable to proceeds of $4.7 million related to reimbursements of legal expenses paid by the Company. The increase in operating income was partially offset by operating losses of $2.5 million related to X-Truck, Inc. and Epicenter Music Festival, LLC.

Other Income (Expense). Other income (expense) was $(0.2) million for the three-months ended September 30, 2009, a decrease of $2.3 million from $2.1 million for the three-months ended September 30, 2008. This decrease was primarily attributable to 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 September 30, 2009 was $36.3 million, as compared to $31.5 million for the three-months ended September 30, 2008. The effective combined federal and state tax rate was 39.1% and 37.5% for the three-months ended September 30, 2009 and 2008, respectively. The increase in the effective combined tax rate for the three-months ended September 30, 2009 was primarily attributable to a decrease . . .