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 + energy drinks. In May 2009, we introduced Monster Energy® Import energy drinks which are packaged in 550ml 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 are carbonated and contain nitrous oxide, which are packaged in re-sealable 12-ounce sleek aluminum cans. 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), Monster Energy® MIXXD™ energy drinks (introduced in December 2007) and Monster Energy® Import (introduced in May 2009).

In July 2009, we introduced a new line of Nitrous™ Monster Energy® drinks in three variants: Super Dry, Anti Gravity and Killer-B.

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™ Lo-Ball, (each introduced in December 2007) and X-Presso Monster™-Hammer, a non-carbonated espresso energy drink (introduced in June 2009).

A substantial portion of our gross sales are derived from our Monster Energy® brand energy drinks and our Java MonsterTM line of non-carbonated dairy based coffee + energy drinks. Any decrease in sales of our Monster Energy® brand energy drinks and/or Java MonsterTM line of non-carbonated dairy based coffee + energy drinks and/or our Nitrous™ Monster Energy® drinks could cause a significant adverse effect on our future revenues and net income. Our DSD segment represented 92.1% and 91.6% of our net sales for the three-months ended June 30, 2009 and 2008, respectively. Our DSD segment represented 91.6% and 90.7% of our net sales for the six-months ended June 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 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. 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, 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 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 $345.8 million for the three-months ended June 30, 2009 again represented record sales for our second fiscal quarter. The increase in gross sales for the three-months ended June 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 $39.4 million and $27.0 million for the three-months ended June 30, 2009 and 2008, respectively. Such sales were approximately 11.4% and 8.2% of gross sales for the three-months ended June 30, 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 in 2008, resulted in an increase in gross sales outside the United States of $7.4 million for the three-months ended June 30, 2008 over amounts previously reported. Gross sales to customers outside the United States amounted to $74.6 million and $47.1 million for the six-months ended June 30, 2009 and 2008, respectively. Such sales were approximately 11.9% and 8.2% of gross sales for the six-months ended June 30, 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 in 2008 resulted in an increase in gross sales outside the United States of $10.5 million for the six-months ended June 30, 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 secured alternative co-packing facilities to replace that portion of our volume of such products during the second quarter of 2009. This disruption did not have a material impact on our financial position, results of operations or liquidity.

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 six-months ended June 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       Six-Months Ended
                                              June 30,                June 30,
                                          2009        2008        2009        2008
Full service distributors                 67%         68%         65%         67%
Club stores, drug chains & mass
merchandisers                             12%         14%         13%         14%
Outside the U.S.                          11%          8%         12%          8%
Retail grocery, specialty chains and
wholesalers                                7%          7%          7%          8%
Other                                      3%          3%          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 negative 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 31% and 30% of our net sales for the three- and six-months ended June 30, 2009, respectively. Wal-Mart, Inc. (including Sam's Club), a customer of both the DSD and Warehouse divisions, accounted for approximately 9% and 13% of our net sales for the three-months ended June 30, 2009 and 2008, respectively and 10% and 12% of our net sales for the six-months ended June 30, 2009 and 2008, respectively. Dr. Pepper Snapple Group, Inc., a former customer of the DSD division, accounted for approximately 16% of our net sales for both the three-and six-months ended June 30, 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- and six-months
ended June 30, 2009 and 2008, respectively.



                            Three-Months Ended     Percentage      Six-Months Ended      Percentage
                                 June 30,            Change            June 30,            Change
                             2009        2008      09 vs. 08       2009        2008      09 vs. 08
Gross sales, net of
discounts & returns *     $  345,830   $ 324,134          6.7 %  $ 624,684   $ 568,132         10.0 %
Less: Promotional and
other allowances**            45,580      41,890          8.8 %     80,228      73,710          8.8 %
Net sales(1)                 300,250     282,244          6.4 %    544,456     494,422         10.1 %
Cost of sales                138,421     136,031          1.8 %    252,448     243,489          3.7 %
Gross profit                 161,829     146,213         10.7 %    292,008     250,933         16.4 %
Gross profit margin as
a percentage of net
sales                           53.9 %      51.8 %                    53.6 %      50.8 %

Operating expenses            69,046      68,023          1.5 %    133,448     129,916          2.7 %

Operating expenses as a
percentage of net sales         23.0 %      24.1 %                    24.5 %      26.3 %

Operating income              92,783      78,190         18.7 %    158,560     121,017         31.0 %
Operating income as a
percentage of net sales         30.9 %      27.7 %                    29.1 %      24.5 %

Other income (expense):
Interest and other
income, net                      401       2,769        (85.5 )%     1,418       6,395        (77.8 )%
Other-than-temporary
impairment of
investments                        -           -                    (3,539 )         -       (100.0 )%
Total other income
(expense)                        401       2,769        (85.5 )%    (2,121 )     6,395       (133.2 )%

Income before provision
for income taxes              93,184      80,959         15.1 %    156,439     127,412         22.8 %

Provision for income
taxes                         35,895      30,727         16.8 %     57,584      48,369         19.1 %

Net income                $   57,289   $  50,232         14.0 %  $  98,855   $  79,043         25.1 %
Net income as a
percentage of net sales         19.1 %      17.8 %                    18.2 %      16.0 %

Net income per common
share:
Basic                     $     0.63   $    0.54         17.0 %  $    1.09   $    0.85         28.6 %
Diluted                   $     0.60   $    0.51         17.3 %  $    1.04   $    0.80         29.3 %

Case sales (in
thousands)
(in 192-ounce case
equivalents)                  29,256      28,716          1.9 %     52,724      50,990          3.4 %

(1) Includes $1.8 million and $0.5 million for the three-months ended June 30, 2009 and 2008, respectively, related to the recognition of deferred revenue attributable to distribution agreements entered into with certain distributors. Includes $3.7 million and $1.0 million for the six-months ended June 30, 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 June 30, 2009 Compared to the Three-Months Ended June 30, 2008

Gross Sales.* Gross sales were $345.8 million for the three-months ended June 30, 2009, an increase of approximately $21.7 million, or 6.7% higher than gross sales of $324.1 million for the three-months ended June 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 the Monster Hitman Energy Shooter™ product line (introduced in September 2008) and Monster Energy® Import energy drinks (introduced in May 2009). To a lesser extent the increase in gross sales was attributable to increased sales by volume of Rumba®, Samba and Tango brand energy juices and 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 + energy drinks, Lost Energy® brand energy drinks and juice blends. Included in gross sales for the three-months ended June 30, 2009 and 2008, were $1.8 million and $0.5 million, respectively, related to the recognition of deferred revenue. Promotional and other allowances were $45.6 million for the three-months ended June 30, 2009, an increase of $3.7 million, or 8.8% higher than promotional and other allowances of $41.9 million for the three-months ended June 30, 2008. Promotional and other allowances as a percentage of gross sales increased to 13.2% from 12.9% for the three-months ended June 30, 2009 and 2008, respectively. As a result, the percentage increase in gross sales for the three-months ended June 30, 2009 was higher than the percentage increase in net sales.

*Gross sales - see definition above.

Net Sales. Net sales were $300.2 million for the three-months ended June 30, 2009, an increase of approximately $18.0 million, or 6.4% higher than net sales of $282.2 million for the three-months ended June 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 Hitman Energy Shooter™ product line and Monster Energy® Import energy drinks. To a lesser extent, the increase in net sales was attributable to increased sales by volume of Hansen's Natural Sodas® and Rumba®, Samba and Tango brand energy juices. The increase in net sales was partially offset by decreased sales by volume of our Java Monster™ line of non-carbonated dairy based coffee + energy drinks and Lost Energy® brand energy drinks. Included in net sales for the three-months ended June 30, 2009 and 2008, were $1.8 million and $0.5 million, respectively, related to the recognition of deferred revenue.

Case sales, in 192-ounce case equivalents, were 29.3 million cases for the three-months ended June 30, 2009, an increase of approximately 0.5 million cases or 1.9% higher than case sales of 28.7 million cases for the three-months ended June 30, 2008. The overall average net sales price per case increased to $10.26 for the three-months ended June 30, 2009 or 4.4% higher than the average net sales price per case of $9.83 for the three-months ended June 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 $276.4 million for the three-months ended June 30, 2009, an increase of approximately $17.9 million, or 6.9% higher than net sales of $258.6 million for the three-months ended June 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 Hitman Energy Shooter™ product line and Monster Energy® Import energy drinks. To a lesser extent, the increase in net sales for the DSD segment was attributable to increased sales by volume of Rumba®, Samba and Tango brand energy juices. The increase in net sales was partially offset by decreased sales by volume of our Java Monster™ line of non-carbonated dairy based coffee + energy drinks and Lost Energy® brand energy drinks.

Net sales for the Warehouse segment were $23.8 million for the three-months ended June 30, 2009, an increase of approximately $0.1 million, or 0.5% higher than net sales of $23.7 million for the three-months ended June 30, 2008. The increase in net sales was primarily attributable to increased sales by volume of Hansen's Natural Sodas® and aseptic juice drinks as well as a decrease in promotional and other allowances as a percentage of gross sales. The increase in net sales was partially offset by decreased sales by volume of juice blends.

Gross Profit.*** Gross profit was $161.8 million for the three-months ended June 30, 2009, an increase of approximately $15.6 million, or 10.7% higher than the gross profit of $146.2 million for the three-months ended June 30, 2008. Gross profit as a percentage of net sales increased to 53.9% for the three-months ended June 30, 2009 from 51.8% for the three-months ended June 30, 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 + energy 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.

***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 $69.0 million for the three-months ended June 30, 2009, an increase of approximately $1.0 million, or 1.5% higher than total operating expenses of $68.0 million for the three-months ended June 30, 2008. Total operating expenses as a percentage of net sales was 23.0% for the three-months ended June 30, 2009, compared to 24.1% for the three-months ended June 30, 2008. The increase in operating expenses in dollars was partially attributable to increased payroll expenses of $1.5 million, increased expenditures of $1.3 million for professional service fees, including legal and accounting and increased expenditures of $1.1 million for sponsorships and endorsements. The increase in operating expenses in dollars was partially offset by decreased expenditures of $2.9 million for out-bound freight and warehouse costs. Total operating expenses include costs of $4.1 million, or 1.4% of net sales, relating to the launch of the Monster Energy® brand in Europe for the three-months ended June 30, 2009.

Contribution Margin. Contribution margin for the DSD segment was $105.4 million for the three-months ended June 30, 2009, an increase of approximately $15.4 million, or 17.1% higher than contribution margin of $90.0 million for the three-months ended June 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 the Monster Hitman Energy Shooter™ product line. Contribution margin for the Warehouse segment was $1.3 million for the three-months ended June 30, 2009, approximately $1.0 million higher than contribution margin of $0.3 million for the three-months ended June 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 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. Our juice blends are not currently eligible to participate under the existing program.

Operating Income. Operating income was $92.8 million for the three-months ended June 30, 2009, an increase of approximately $14.6 million, or 18.7% higher than operating income of $78.2 million for the three-months ended June 30, 2008. Operating income as a percentage of net sales increased to 30.9% for the three-months ended June 30, 2009 from 27.7% for the three-months ended June 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.

Other Income (Expense). Other income (expense) was $0.4 million for the three-months ended June 30, 2009, a decrease of $2.4 million from $2.8 million for the three-months ended June 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 June 30, 2009 was $35.9 million, as compared to $30.7 million for the three-months ended June 30, 2008. The effective combined federal and state tax rate was comparable at 38.5% and 37.9% for the three-months ended June 30, 2009 and 2008, respectively.

Net Income. Net income was $57.3 million for the three-months ended June 30, 2009, an increase of $7.1 million or 14.0% higher than net income of $50.2 million for the three-months ended June 30, 2008. The increase in net income . . .