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™, Lost® Energy™, Joker Mad Energy™, Unbound Energy® and Ace™ 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. We also 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 also commenced to market, sell and distribute enhanced water beverages under the Vidration™ brand name.

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® Khaos™ energy drinks (introduced in August 2005), Monster M-80™ energy drinks (introduced in March 2007), Monster Heavy Metal™ energy drinks (introduced in November 2007) and Monster MIXXD™ energy drinks (introduced in December 2007).

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 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 and racks, prize promotions, price promotions, competitions, endorsements from selected public and extreme sports figures, coupons, sampling and sponsorship of selected causes such as cancer research and SPCAs, as well as extreme sports teams such as the Pro Circuit - Kawasaki Motocross and Supercross teams, Kawasaki Factory Motocross and Supercross teams, Robby Gordon Racing Team, Kawasaki Factory International Moto GP Team, Kenny Bernstein Drag Racing Team, Ken Block Rally Racing Team, Ricky Carmichael NASCAR Camping World East Series, Iron Horse Mountain Bike Team, extreme sports figures and athletes, sporting events such as the Monster Energy® Supercross Series, the Monster Energy® Outdoor Motocross Series, the Monster Energy® Pro Pipeline surfing competition, Winter and Summer X-Games, Canadian Outdoor Motocross Series, CORR Short Course Off-Road Truck Racing, ski and

snowboard competitions and other health and sports related activities, including extreme sports, particularly supercross, motocross, freestyle, surfing, skateboarding, wakeboarding, skiing, snowboarding, BMX, mountain biking, snowmobile racing, etc., and we also participate in product demonstrations, food tasting and other related events. 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.

During the second quarter of 2006, we entered into the Monster Beverages Off-Premise Distribution Coordination Agreement and the Allied Products Distribution Coordination Agreement (jointly, the "AB Off-Premise Agreements") with Anheuser-Busch, Inc., a Missouri corporation ("AB"). Under the AB Off-Premise Agreements, select Anheuser-Busch Distributors (the "AB Distributors") distribute and sell, in markets designated by HBC, HBC's Monster Energy® and Lost® Energy™ brands non-alcoholic energy drinks, Rumba™, Samba and Tango brand energy juice and Unbound Energy® brand energy drinks, as well as additional products that may be agreed between the parties.

Pursuant to the AB Distribution Agreements (the "AB Distribution Agreements") entered into with AB Distributors, net reimbursements of $0.4 million to such AB Distributors and net contributions of $21.1 million from such AB Distributors relating to the costs of terminating our prior distributors were recorded by us for the nine-months ended September 30, 2008 and 2007, respectively. Such amounts have been accounted for as deferred revenue in the accompanying condensed consolidated balance sheets and will be recognized as revenue ratably over the anticipated 20 year life of the respective AB Distribution Agreements. Revenue recognized was $0.5 million for both the three-months ended September 30, 2008 and 2007, respectively. Revenue recognized was $1.5 million and $1.4 million for the nine-months ended September 30, 2008 and 2007, respectively. Related distributor receivables of $0.6 million and $4.5 million are included in accounts receivable net, in the accompanying condensed consolidated balance sheets as of September 30, 2008 and December 31, 2007, respectively.

As of September 30, 2008 and December 31, 2007, amounts totaling $0.1 million, respectively, were received by us from certain other AB Distributors in anticipation of executing AB Distribution Agreements with us. Such receipts have been accounted for as customer deposit liabilities and are included in accrued liabilities in the accompanying condensed consolidated balance sheets.

We incurred termination costs amounting to ($0.2) million and $0.3 million in aggregate during the three-months ended September 30, 2008 and 2007, respectively, to certain of our prior distributors. We incurred termination costs amounting to ($0.04) million and $15.0 million in aggregate during the nine-months ended September 30, 2008 and 2007, respectively, to certain of our prior distributors. Such termination costs have been expensed in full and are included in operating expenses for the three- and nine-months ended September 30, 2008 and 2007. Accrued distributor terminations in the accompanying condensed consolidated balance sheets as of September 30, 2008 and December 31, 2007 were $3.8 million and $4.3 million, respectively.

On October 3, 2008, we entered into the Monster Energy Distribution Coordination Agreement (the "TCCC North American Coordination Agreement") with The Coca-Cola Company ("TCCC"). Pursuant to the TCCC North American Coordination Agreement, we have designated, and in the future may designate, territories in which we wish distributors from TCCC's network of partially owned and independent bottlers (the "TCCC North American Bottlers") to distribute and sell primarily our Monster Energy® beverages (the "Products") in the United States and Canada.

Coca-Cola Enterprises Inc. ("CCE") has been appointed to distribute, directly and through certain sub-distributors, the Products in portions of twenty-three U.S. states (the "U.S. Territories"), commencing in November, 2008. We may designate additional territories within reasonable proximity to the U.S. Territories and CCE will use reasonable good faith efforts to add the additional territories. Under the Monster Energy Canadian Distribution Agreement with the Coca-Cola Bottling Company ("CCBC"), CCBC has been appointed to distribute, directly and through certain sub-distributors, the Products in Canada, with performance to commence on January 1, 2009.

On October 3, 2008, we entered into the Monster Energy International Coordination Agreement (the "TCCC International Coordination Agreement") with TCCC. Pursuant to the TCCC International Coordination Agreement, we have designated, and in the future may designate, countries in which we wish to appoint TCCC distributors to distribute and sell the Products.

We entered into the Monster Energy International Distribution Agreement and the Monster Energy Belgium Distribution Agreement with CCE pursuant to which CCE has been appointed to distribute, directly, and through certain sub-distributors, the Products in Great Britain, France, Belgium, the Netherlands, Luxembourg and Monaco.

As a result, we will transition certain of our existing distribution arrangements to newly appointed distributors, including TCCC North American Bottlers and new AB Distributors. In connection with the transition, we will make termination payments to certain existing distributors who will be terminated. Such termination costs will be expensed in full and included in operating expenses. Non-refundable contributions were previously received by us from certain of these existing distributors, who will be terminated. Such contributions were previously treated as deferred revenue. Upon termination, the associated balance in deferred revenue will be recognized as revenue. The impact of the above amounts is currently estimated to be a charge in the range of $110 million to $130 million in the aggregate, but could be higher or lower. The actual termination payments could differ significantly from current estimates because the estimates are largely based on our estimate of each affected distributor's contractual termination rights. These estimates include assumptions related to each distributor's own sales and gross profit levels, net of certain allowances. The actual termination costs and related revenue will be recorded in the period in which the terminations become effective, which will primarily be in the fourth fiscal quarter of 2008.

We will receive from newly appointed distributors non-refundable contributions estimated to be in the range of $110 million to $130 million for the purpose of covering the costs of terminating the affected distributors, but could be higher or lower. The non-refundable contributions could differ significantly from current estimates because the estimates are based largely on our estimate of each affected terminated distributor's own sales. These contributions will be recorded as deferred revenue, which will be recognized as revenue ratably over the anticipated 20-year life of the distribution agreements.

As discussed under Review of Historic Stock Option Granting Practices in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", included in our Form 10-K for the fiscal year ended December 31, 2006, and Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations", included in our Form 10-Q for the quarter ended March 31, 2007, a special committee of our Board of Directors concluded its review of our stock option grants and granting practices. In connection with this review, and with respect to related litigation and other related matters, we incurred professional service fees, net of insurance proceeds of $0.1 million for the three-months ended September 30, 2007. There were no professional service fees in connection with our special investigation of stock option grants and granting practices, related litigation and other related matters during the three-months ended September 30, 2008. In connection with this review, and with respect to related litigation and other related matters, we incurred professional service fees, net of insurance proceeds, of ($0.2) million, and $11.0 million for the nine-months ended September 30, 2008 and 2007, respectively.

The following table summarizes the selected items discussed above for the three- and nine-months ended September 30, 2008 and 2007:

                                             Three-Months Ended                       Nine-Months Ended
                                               September 30,                            September 30,
                                          2008                2007                 2008               2007
                                     (In Thousands)      (In Thousands)       (In Thousands)     (In Thousands)
Included in Deferred Revenue:
Contributions from, net of
reimbursements to AB
Distributors                        $              5    $          1,290     $           (360 )  $        21,136

Included in Net Sales:
Recognition of deferred revenue     $            523    $            453     $          1,539    $         1,389

Included in Operating Expenses:
Termination payments to prior
distributors                        $           (193 )  $            322     $            (43 )  $        15,023
Professional service fees (net
of insurance proceeds)
associated with the review of
stock option grants and granting
practices, related litigation
and other related matters           $              -    $             95 (1) $           (200 )  $        11,000 (1)

We again achieved record gross sales* of $325.2 million in the third quarter of 2008. The increase in gross sales for the three-months ended September 30, 2008 was primarily attributable to increased sales of our Monster Energy® brand energy drinks. The percentage increase in gross sales was slightly higher than the percentage increase in net sales, primarily due to an increase in promotional and other allowances as a percentage of gross sales, which increased from 11.0% for the three-months ended September 30, 2007 to 12.4% for the three-months ended September 30, 2008. The actual amount of promotional and other allowances increased to $40.2 million from $30.6 million for the three-months ended September 30, 2008 and 2007, respectively.

*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 accounting principles generally accepted in the United States of America ("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.

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 affect on our future revenues and net income. Competitive pressure in the "energy drink" category could adversely affect our operating results.

Gross sales shipped outside of California represented 75.6% and 72.1% of our gross sales, for the three-months ended September 30, 2008 and 2007, respectively. Gross sales shipped outside of California represented 77.0% and 72.2% of our gross sales for the nine-months ended September 30, 2008 and 2007, respectively. Gross sales to customers outside the United States amounted to $31.1 million and $13.9 million for the three-months ended September 30, 2008 and 2007, respectively. Such sales were approximately 9.7% and 4.9% of gross sales for the three-months ended September 30, 2008 and 2007, respectively. Gross sales to customers outside the United States amounted to $79.4 million and $40.4 million for the nine-months ended September 30, 2008 and 2007, respectively. Such sales were approximately 8.9% and 5.4% of gross sales for the nine-months ended September 30, 2008 and 2007, respectively.

Our customers are typically retail grocery and specialty chains, wholesalers, club stores, drug chains, mass merchandisers, convenience chains, full service beverage distributors, health food distributors and food service customers. Gross sales to our various customer types for the three- and nine-months ended September 30, 2008 and 2007 are reflected below. The allocations below reflect changes made by us to the categories historically reported.

                                       Three-Months Ended       Nine-Months Ended
                                         September 30,            September 30,
                                       2008         2007        2008         2007
Retail grocery, specialty chains
and wholesalers                              8 %          8 %         8 %          9 %
Club stores, drug chains & mass
merchandisers                               12 %         16 %        13 %         15 %
Full service distributors                   75 %         72 %        74 %         72 %
Health food distributors                     2 %          2 %         2 %          2 %
Other                                        3 %          2 %         3 %          2 %

Our customers include Dr Pepper Snapple Group, Inc., Wal-Mart, Inc. (including Sam's Club), AB Distributors, Kalil Bottling Group, Trader Joe's, John Lenore & Company, Pepsi Canada, Swire Coca-Cola, Costco, The Kroger Co., Safeway Inc. and Albertsons. A decision by any large customer to decrease amounts purchased from us or to cease carrying our products could have a material negative effect on our financial condition and consolidated results of operations. Dr Pepper

Snapple Group, Inc., a customer of the DSD division, accounted for approximately 16% of our net sales for both the nine-months ended September 30, 2008 and 2007, respectively. Wal-Mart, Inc. (including Sam's Club), a customer of both the DSD and Warehouse divisions, accounted for approximately 11% and 13% of our net sales for the nine-months ended September 30, 2008 and 2007, respectively.

We continue to incur expenditures in connection with the development and introduction of new products and flavors.

Results of Operations



The following table sets forth key statistics for the three- and nine-months
ended September 30, 2008 and 2007, respectively.



                          Three-Months Ended     Percentage      Nine-Months Ended     Percentage
                            September 30,          Change          September 30,         Change
                           2008        2007      08 vs. 07       2008        2007      08 vs. 07
Gross sales, net of
discounts & returns *   $  325,152   $ 277,845         17.0 %  $ 893,284   $ 748,496         19.3 %
Less: Promotional and
other allowances**          40,166      30,634         31.1 %    113,876      90,670         25.6 %
Net sales                  284,986     247,211         15.3 %    779,408     657,826         18.5 %
Cost of sales              135,550     118,829         14.1 %    379,039     315,555         20.1 %
Gross profit               149,436     128,382         16.4 %    400,369     342,271         17.0 %
Gross profit margin
as a percentage of
net sales                     52.4 %      51.9 %                    51.4 %      52.0 %

Operating expenses(1)       67,644      55,002         23.0 %    197,560     175,559         12.5 %

Operating expenses as
a percentage of net
sales                         23.7 %      22.2 %                    25.3 %      26.7 %

Operating income            81,792      73,380         11.5 %    202,809     166,712         21.7 %
Operating income as a
percent of net sales          28.7 %      29.7 %                    26.0 %      25.3 %

Interest and other
income, net                  2,111       2,161         (2.3 )%     8,506       5,439         56.4 %
Income before
provision for income
taxes                       83,903      75,541         11.1 %    211,315     172,151         22.7 %

Provision for income
taxes                       31,466      29,744          5.8 %     79,835      67,845         17.7 %

Net income              $   52,437   $  45,797         14.5 %  $ 131,480   $ 104,306         26.1 %
Net income as a
percent of net sales          18.4 %      18.5 %                    16.9 %      15.9 %

Net income per common
share:

Basic                   $     0.57   $    0.50         13.6 %  $    1.42   $    1.15         23.0 %
Diluted                 $     0.54   $    0.46         16.8 %  $    1.34   $    1.06         26.8 %

Case sales (in
thousands) (in
192-ounce case
equivalents)                28,009      26,450          5.9 %     79,009      72,796          8.5 %

* 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 to 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, 2008 Compared to the Three-Months Ended September 30, 2007

Gross Sales.* Gross sales were $325.2 million for the three-months ended September 30, 2008, an increase of approximately $47.3 million or 17.0% higher than gross sales of $277.8 million for the three-months ended September 30, 2007. 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 Monster Hitman Energy Shooter™ (introduced in September 2008), Monster MIXXD™ energy drinks (introduced in December 2007) and Monster Heavy Metal™ energy drinks (introduced in November 2007). To a lesser extent, the increase in gross sales was attributable to increased sales by volume of apple juice and aseptic juices, increased sales price per case for our Java Monster™ line of non-carbonated dairy based coffee drinks (introduced in April 2007) and increased sales by volume of Junior Juice® aseptic juices. The increase in gross sales was partially offset by decreased sales by volume of juice blends. Promotional and other allowances were $40.2 million for the three-months ended September 30, 2008, an increase of $9.5 million or 31.1% higher than promotional and other allowances of $30.6 million for the three-months ended September 30, 2007. Promotional and other allowances as a percentage of gross sales increased to 12.4% for the three-months ended September 30, 2008, as compared to 11.0% for the three-months ended September 30, 2007. As a result, the percentage increase in gross sales for the three-months ended September 30, 2008 was higher than the percentage increase in net sales.

*Gross sales - see definition above.

Net Sales. Net sales were $285.0 million for the three-months ended September 30, 2008, an increase of approximately $37.8 million or 15.3% higher than net sales of $247.2 million for the three-months ended September 30, 2007. 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 Monster Hitman Energy Shooter™, Monster MIXXD™ energy drinks and Monster Heavy Metal™ energy drinks. To a lesser extent, the increase in net sales was attributable to increased sales by volume of apple juice and aseptic juices. The increase in net sales was partially offset by decreased sales by volume of juice blends and Lost Energy® brand energy drinks.

Case sales, in 192-ounce case equivalents, were 28.0 million cases for the three-months ended September 30, 2008, an increase of 1.6 million cases or 5.9% higher than case sales of 26.5 million cases for the three-months ended September 30, 2007. The overall average net sales price per case increased to $10.17 for the three-months ended September 30, 2008 or 8.9% higher than the average net sales price per case of $9.35 for the three-months ended September 30, 2007. 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 as well as the price increases for our Monster Energy® brand energy drinks in 16-ounce cans effective January 1, 2008, price increases for our Monster Energy® brand energy drinks in 24-ounce cans effective July 1, 2007 and price increases in our Java Monster™ line of non-carbonated dairy based coffee drinks effective January 1, 2008.

Net sales for the DSD segment were $257.7 million for the three-months ended September 30, 2008, an increase of approximately $35.8 million or 16.1% higher than net sales of $221.9 million for the three-months ended September 30, 2007. 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 Monster Hitman Energy Shooter™, Monster MIXXD™ energy drinks and Monster Heavy Metal™ energy drinks. The increase in net sales was partially offset by decreased sales by volume of Lost Energy® brand energy drinks.

Net sales for the Warehouse segment were $27.3 million for the three-months . . .