XLON:0N30 Central European Distribution Corp Quarterly Report 10-Q/A Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q/A

(Amendment No. 1)

 

 

(MARK ONE)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                     TO                    

COMMISSION FILE NUMBER 001-35293

 

 

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

 

 

Delaware   54-1865271

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

3000 Atrium Way, Suite 265

Mt. Laurel, New Jersey

  08054
(Address of Principal Executive Offices)   (Zip code)

(856) 273-6980

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

 

Large Accelerated Filer   x    Accelerated Filer   ¨
Non-Accelerated Filer   ¨  (Do not check if a smaller reporting company)    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  ¨    No  x

The number of shares outstanding of each class of the issuer’s common stock as of May 8, 2012: Common Stock ($.01 par value) 78,842,022

 

 

 


Table of Contents

 

EXPLANATORY NOTE

Central European Distribution Corporation (“we”, “us”, “our,” or the “Company”) is filing this Amendment No. 1 on Form 10-Q/A (this “Amendment”) to the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2012, initially filed with the SEC on May 10, 2012 (the “Original Filing”). This Form 10-Q/A amends the Original Filing to restate the Company’s unaudited condensed consolidated financial statements for the three months ended March 31, 2012 and 2011 (the “Restatement”).

As previously disclosed, the Company changed its senior management at its principal operating subsidiary in Russia, the Russian Alcohol Group (“RAG”), during April 2012. Following this change, senior Company management requested that the new management team review RAG’s business operations and internal controls, including an assessment of the resources and needs of the corporate finance and reporting departments. Based on the preliminary findings of that review, senior management concluded that the Company’s financial statements for the years ended December 31, 2011 and 2010 should no longer be relied upon because of a failure to reflect the timely reporting of the full amount of retroactive trade rebates and trade marketing refunds provided to RAG’s customers in Russia.

Thereafter, the Audit Committee of the Company’s Board of Directors initiated an internal investigation, with the assistance of outside counsel and forensic accountants engaged by outside counsel, regarding the Company’s retroactive trade rebates, trade marketing refunds and related accounting issues. The Audit Committee, through its counsel, voluntarily notified the SEC of the investigation and is cooperating with the SEC. The Audit Committee has completed its accounting investigation, and has identified accounting irregularities at RAG, which resulted in the understatement of retroactive trade rebates and trade marketing refunds, as well as certain other errors that were concealed from both the Company’s senior management and the independent auditors. Certain reclassifications have also been made to conform data for all periods presented with the current presentation. For a more detailed description of the Restatement, see Note 2, “Restatement of unaudited condensed consolidated financial statements”, to the accompanying unaudited condensed consolidated financial statements.

As a result of the investigation, the Company has also determined that a control deficiency existed which contributed to the incorrect accounting for the Company’s retroactive trade rebates and trade marketing refunds for customers giving rise to the Restatement and that this deficiency constituted a material weakness in internal control over financial reporting. In connection with the investigation, the Company’s management also identified a material weakness in the Company’s internal control over financial reporting regarding the implementation of our policy on compliance with applicable laws as of December 31, 2011. Furthermore, the Company has expanded certain disclosure items related to income taxes in Note 8, as well as fair value measurement in Note 15.

We are also filing a quarterly report on Form 10-Q for the three and six months ended June 30, 2012 which includes restated balances and results as of and for the three and six months ended June 30, 2011, an amendment on Form 10-K/A for the year ended December 31, 2011 which includes restated balances and results as of and for the year ended December 31, 2010, and an amendment on Form 10-Q/A to the Company’s quarterly report on Form 10-Q for the three and nine months ended September 30, 2011 to restate the Company’s consolidated balance sheets as of those dates, and the consolidated statements of operations, the consolidated statements of cash flows, and the consolidated statement of changes in stockholders’ equity and the notes related thereto for periods covered by such financial statements to reflect the effects of the Restatement on the Company’s respective annual and unaudited Interim financial information.

This Amendment amends and restates only Items 1, 2, and 4 of Part I of the Original Filing, in each case, solely as a result of, and to reflect, the Restatement and no other information in the Original Filing is amended hereby. Except as required to reflect the effects of the Restatement, no additional modifications or updates in this Amendment have been made to the Original Filing. Information not affected by the Restatement remains unchanged and reflects the disclosures made at the time of the Original Filing. This Amendment does not describe other events occurring after the original filing, including exhibits, or modify or update those disclosures affected by subsequent events. Accordingly, this Amendment should be read in conjunction with our filings made with the SEC subsequent to the date of the Original Filing, including any amendments to those filings. In addition, pursuant to the rules of the SEC, Item 6 of Part II of the Original Filing has been amended to contain currently dated certifications from the Company’s Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications of the Company’s Chief Executive Officer and Chief Financial Officer are attached to this Amendment as Exhibits 31.1, 31.2, 32.1 and 32.2.


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INDEX

 

         PAGE  

PART I FINANCIAL INFORMATION

  

Item 1

  Condensed Consolidated Financial Statements (unaudited)   
  Condensed Consolidated Balance Sheets as of March 31, 2012 (unaudited) and as of December 31, 2011      1   
 

Condensed Consolidated Statements of Operations and Comprehensive Income (unaudited) for the three month periods ended March 31, 2012 and March 31, 2011

     2   
 

Condensed Consolidated Statements of Cash Flow (unaudited) for the three month periods ended March  31, 2012 and March 31, 2011

     3   
  Notes to Condensed Consolidated Financial Statements (unaudited)      4   

Item 2

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      23   

Item 3

  Quantitative and Qualitative Disclosures about Market Risk      32   

Item 4

  Controls and Procedures      32   

PART II OTHER INFORMATION

     33   

Item 1

  Legal Proceedings      33   

Item 1A

  Risk Factors      33   

Item 6

  Exhibits      34   


Table of Contents

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

All amounts are expressed in thousands

(except share information)

 

    

March 31,

2012

(unaudited)

   

December 31,

2011

 
     (Restated,
see Note 2)
   

 

 

ASSETS

    

Current Assets

    

Cash and cash equivalents

   $ 107,798      $ 94,410   

Accounts receivable, net of allowance for doubtful accounts at March 31, 2012 of $26,889 and at December 31, 2011 of $24,510

     220,257        410,866   

Inventories

     120,785        117,690   

Prepaid expenses

     23,169        16,538   

Other current assets

     21,722        23,020   

Deferred income taxes

     2,646        4,717   

Debt issuance costs

     2,959        2,962   
  

 

 

   

 

 

 

Total Current Assets

     499,336        670,203   

Intangible assets, net

     508,605        463,848   

Goodwill

     735,572        670,294   

Property, plant and equipment, net

     190,742        176,660   

Deferred income taxes, net

     22,811        21,488   

Debt issuance costs

     12,789        13,550   

Non-current assets held for sale

     675        675   
  

 

 

   

 

 

 

Total Non-Current Assets

     1,471,194        1,346,515   
  

 

 

   

 

 

 

Total Assets

   $ 1,970,530      $ 2,016,718   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current Liabilities

    

Trade accounts payable

   $ 69,868      $ 144,797   

Bank loans and overdraft facilities

     66,708        85,762   

Short-term obligations under Convertible Senior Notes

     305,977        0   

Income taxes payable

     8,391        9,607   

Taxes other than income taxes

     101,323        189,515   

Other accrued liabilities

     73,441        48,208   

Current portions of obligations under capital leases

     1,159        1,109   
  

 

 

   

 

 

 

Total Current Liabilities

     626,867        478,998   

Long-term obligations under capital leases

     728        532   

Long-term obligations under Convertible Senior Notes

     0        304,645   

Long-term obligations under Senior Secured Notes

     950,643        932,089   

Long-term accruals

     2,191        2,000   

Deferred income taxes

     99,199        91,128   

Commitments and contingent liabilities (Note 14)

    
  

 

 

   

 

 

 

Total Long-Term Liabilities

     1,052,761        1,330,394   

Stockholders’ Equity

    

Common Stock ($0.01 par value, 120,000,000 shares authorized, 73,125,230 and 72,740,302 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively)

     731        727   

Preferred Stock ($0.01 par value, 1,000,000 shares authorized, none issued and outstanding)

     0        0   

Additional paid-in-capital

     1,370,335        1,369,471   

Accumulated deficit

     (1,137,700     (1,197,884

Accumulated other comprehensive income

     57,686        35,162   

Less Treasury Stock at cost (246,037 shares at March 31, 2012 and December 31, 2011)

     (150     (150
  

 

 

   

 

 

 

Total Stockholders’ Equity

     290,902        207,326   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 1,970,530      $ 2,016,718   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

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CENTRAL EUROPEAN DISTRIBUTION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)

All amounts are expressed in thousands

(except per share information)

 

     Three months ended March 31,  
     2012     2011  
     (Restated,
see Note 2)
    (Restated,
see Note 2)
 

Sales

   $ 321,756      $ 318,081   

Excise taxes

     (175,767     (179,727

Net sales

     145,989        138,354   

Cost of goods sold

     90,874        85,685   
  

 

 

   

 

 

 

Gross profit

     55,115        52,669   
  

 

 

   

 

 

 

Selling, general and administrative expenses

     58,934        55,370   

Gain on remeasurement of previously held equity interests

     0        (7,898
  

 

 

   

 

 

 

Operating income / (loss)

     (3,819     5,197   
  

 

 

   

 

 

 

Non operating income / (expense), net

    

Interest income / (expense), net

     (26,302     (26,852

Other financial income / (expense), net

     97,588        30,522   

Other non operating income / (expense), net

     (2,598     (976
  

 

 

   

 

 

 

Income before income taxes and equity in net losses from unconsolidated investments

     64,869        7,891   
  

 

 

   

 

 

 

Income tax expense

     (4,685     (1,979

Equity in net losses of affiliates

     0        (7,946
  

 

 

   

 

 

 

Net income (loss) attributable to the company

     60,184        (2,034
  

 

 

   

 

 

 

Net income from operations per share of common stock, basic

   $ 0.83      $ (0.03

Net income from operations per share of common stock, diluted

   $ 0.82      $ (0.03

Other comprehensive income, net of tax:

    

Foreign currency translation adjustments

     22,524        134,173   
  

 

 

   

 

 

 

Comprehensive income attributable to the company

   $ 82,708      $ 132,139   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

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CENTRAL EUROPEAN DISTRIBUTION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)

All amounts are expressed in thousands

 

     Three months ended March 31,  
     2012     2011  
     (Restated,
see Note 2)
    (Restated,
see Note 2)
 

Cash flows from operating activities

    

Net income

   $ 60,184      $ (2,034

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     4,815        5,131   

Deferred income taxes

     1,488        5   

Unrealized foreign exchange gains

     (98,006     (31,859

Stock options fair value expense

     864        693   

Equity loss in affiliates

     0        7,946   

Gain on fair value remeasurement of previously held equity interest

     0        (6,397

Other non cash items

     221        1,771   

Changes in operating assets and liabilities:

    

Accounts receivable

     226,070        264,074   

Inventories

     8,413        (16,586

Prepaid expenses and other current assets

     (2,318     (17,520

Trade accounts payable

     (89,358     (50,002

Other accrued liabilities and payables (including taxes)

     (88,607     (70,625
  

 

 

   

 

 

 

Net cash provided by operating activities

     23,766        84,597   

Cash flows from investing activities

    

Purchase of fixed assets

     (1,329     (505

Proceeds from the disposal of fixed assets

     127        0   

Purchase of trademarks

     0        (17,473

Acquisitions of subsidiaries, net of cash acquired

     0        (23,475
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,202     (41,453

Cash flows from financing activities

    

Borrowings on bank loans and overdraft facility

     8,594        0   

Payment of bank loans, overdraft facility and other borrowings

     (26,872     (4,104

Decrease in short term capital leases payable

     90        (102

Proceeds from options exercised

     0        66   
  

 

 

   

 

 

 

Net cash used in financing activities

     (18,188     (4,140
  

 

 

   

 

 

 

Currency effect on brought forward cash balances

     9,012        6,992   

Net increase in cash

     13,388        45,996   

Cash and cash equivalents at beginning of period

     94,410        122,116   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 107,798      $ 168,112   
  

 

 

   

 

 

 

Supplemental Schedule of Non-cash Investing Activities

    

Common stock issued in connection with investment in subsidiaries

   $ 0      $ 23,131   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

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CENTRAL EUROPEAN DISTRIBUTION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Amounts in tables expressed in thousands, except share and per share information

 

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization and description of business

Central European Distribution Corporation (“CEDC”) and its subsidiaries (collectively referred to as “we,” “us,” “our,” or the “Company”) operate primarily in the alcohol beverage industry. We are one of the largest producers of vodka in the world and are Central and Eastern Europe’s largest integrated spirit beverages business, measured by total volume, with approximately 33.2 million nine-liter cases produced and distributed in 2011. Our business primarily involves the production and sale of our own spirit brands (principally vodka), and the importation on an exclusive basis of a wide variety of spirits, wines and beers. Our primary operations are conducted in Poland, Russia, Ukraine and Hungary. We have six operational manufacturing facilities located in Poland and Russia.

In Poland, we are one of the largest vodka producers with a brand portfolio that includes Absolwent, Żubrówka, Żubrówka Biała, Bols, Palace and Soplica brands, each of which we produce at our Polish distilleries. We produce and sell vodkas primarily in three of four vodka sectors: premium, mainstream and economy. In Poland, we also own and produce Royal, the top-selling vodka in Hungary.

We are also the largest vodka producer in Russia, the world’s largest vodka market. Our Green Mark brand is the top-selling mainstream vodka in Russia and the second-largest vodka brand by volume in the world, and our Parliament and Zhuravli brands are two top-selling sub-premium vodkas in Russia.

As well as sales and distribution of its own branded spirits, the Company is a leading exclusive importer of wines and spirits in Poland, Russia and Hungary.

Liquidity

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. As discussed further in Note 6, certain credit and factoring facilities are coming due in 2012, which the Company expects to renew. Furthermore, our Convertible Senior Notes (the “Convertible Notes”) are due on March 15, 2013. Our current cash on hand, estimated cash from operations and available credit facilities will not be sufficient to make the repayment on Convertible Notes and, unless the transaction with Russian Standard Corporation is completed as scheduled, the Company may default on them. The Company’s cash flow forecasts include the assumption that certain credit and factoring facilities that are coming due in 2012 will be renewed to manage working capital needs. Moreover, the Company had a net loss and significant impairment charges in 2011 and current liabilities exceed current assets at March 31, 2012. These conditions raise substantial doubt about the Company’s ability to continue as a going concern unless the transaction with Russian Standard described below is completed as scheduled.

As discussed further in Note 17, on April 23, 2012, the Company announced that definitive agreements had been signed with Russian Standard Corporation (via Roust Trading Limited) for a strategic transaction. Pursuant to these agreements, on May 4, 2012 Roust Trading Limited and its affiliates invested $100 million in the Company by purchasing a combination of newly issued shares of the Company’s common stock and notes exchangeable into the Company’s common shares following shareholder approval. In addition, Roust Trading Limited has agreed to purchase from the Company up to $210 million principal amount of newly issued, Unsecured Senior Notes due July 31, 2016 at a blended interest rate of 6.00%. While we believe that this transaction would allow the Company to settle the Convertible Notes before March 15, 2013, the transaction is subject to certain risks, including shareholder approval which may not be obtained. The Company’s annual general meeting (AGM) is scheduled for June 29, 2012 at which time the final vote of the shareholders will be known. We believe that if the transaction is completed as scheduled, the Convertible Notes will be repaid by their maturity date which would substantially reduce doubts about the Company’s ability to continue as a going concern.

Basis of presentation

These unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

CEDC’s subsidiaries maintain their books of account and prepare their statutory financial statements in their respective local currencies. The subsidiaries’ financial statements have been adjusted to reflect U.S. GAAP for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary to fairly present our financial condition, results of operations and comprehensive income and cash flows for the interim periods presented have been included. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012.

 

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The balance sheet at December 31, 2011 has been derived from the audited restated financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our annual report on Form 10-K/A for the year ended December 31, 2011, dated October 4, 2012.

The significant interim accounting policies include the recognition of a pro-rata share of certain estimated annual sales incentives, marketing, promotion and advertising costs, generally in proportion to sales, and the recognition of income taxes using an estimated annual effective tax rate adjusted for tax amendments related to prior years and changes in estimate.

On February 7, 2011, the Company acquired full voting and economic control over Whitehall Group and changed the accounting treatment for its interest in Whitehall from the equity method of accounting to consolidation beginning on February 7, 2011.

 

2. RESTATEMENT OF UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In April 2012, the Company changed its senior management at the Russian Alcohol Group (“RAG”), its main operating subsidiary in Russia. Following this change, the Company’s senior management requested that the new RAG senior management team review RAG’s business operations and internal controls, including an assessment of the resources and needs of the corporate finance and reporting departments, as identified in Item 9A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 initially filed with the Securities Exchange Commission (“SEC”) on February 29, 2012.

Based on the preliminary findings of that review, CEDC’s senior management concluded that the Company’s financial statements for the years ended December 31, 2010 and 2011 should no longer be relied upon because of a failure to reflect the timely reporting of the full amount of retroactive trade rebates and trade marketing refunds provided to RAG’s customers in Russia.

Thereafter, the Audit Committee of the Company’s Board of Directors initiated an internal investigation, with the assistance of outside counsel and forensic accountants engaged by outside counsel, regarding the Company’s retroactive trade rebates, trade marketing refunds and related accounting issues. The Audit Committee, through its counsel, voluntarily notified the SEC of the investigation and is cooperating with the SEC. The Audit Committee has completed its accounting investigation, and has identified accounting irregularities at RAG, which resulted in the understatement of retroactive trade rebates and trade marketing refunds, as well as certain other errors that were concealed from both the Company’s senior management and the independent auditors.

As a result of the investigation, the Company determined that certain retroactive trade rebates provided to RAG’s customers in Russia were not recorded, and therefore the consolidated sales for the years ended December 31, 2011 and 2010 were overstated by $29.6 and $11.3 million, respectively. The consolidated sales for the three months ended March 31, 2012 were not affected by this error and for the three months ended March 31, 2011 were overstated by $5.5 million. The accounts receivable as at March 31, 2012, December 31, 2011 and March 31, 2011 were overstated by $48.4, $44.5 and $20.7 million, respectively. Furthermore, the Company improperly accounted for promotional compensation granted to customers and as a result the accounts receivable as at March 31, 2012, December 31, 2011 and March 31, 2011 were additionally overstated by $7.8, $8.1 and $7.7 million, respectively, and the consolidated sales for the three months ended March 31, 2012 and 2011 were overstated by $1.6 and $2.8 million, respectively.

 

As of March 31, 2012 the Company:

 

  - decreased accounts receivable by additional $4.3 million (in addition to the $48.4 million relating to unrecorded retroactive trade rebates and $7.8 million relating to promotional compensation granted to customers, described above) resulting from other individually immaterial adjustments;

 

  - decreased current deferred income taxes by $3.9 million, the adjustment is mainly a result of additional valuation allowance of $14.2 million offset by additional deferred tax recognized in relation to retroactive rebates for customers of $8.6 million, and other individually immaterial adjustments;

 

  - increased goodwill by $3.9 million, of which $2.7 million relates to unrecognized impairment of property, plant and equipment acquired in a business combinations in RAG in 2008 (adjusted also as of December 31, 2010).

In addition to the adjustments described above as of March 31, 2011 the Company:

 

  - decreased accounts receivable by additional $16.3 million (in addition to the $20.7 million relating to unrecorded retroactive trade rebates and $7.7 million relating to promotional compensation granted to customers, described above); this adjustment resulted mainly from a cut-off error of $14.1 million, where revenue for the second quarter of 2011 was recognized in March 2011 and other individually immaterial adjustments;

 

  - increased inventories by $9.5 million, resulting mainly from the cut-off error described above;

 

  - increased goodwill by $4.0 million, of which $2.7 million relates to unrecognized impairment of property, plant and equipment on acquisition of RAG in 2008;

 

  - increased trade payables by $10.1 million, of which $8.5 million relates to payables for marketing costs wrongly presented as other accrued liabilities;

 

  - decreased other accrued liabilities by $7.2 million, mainly as a result of adjustment to accruals for marketing costs described above, offset by immaterial adjustments.

In the unaudited condensed consolidated statement of operations for the three months ended March 31, 2011 the Company:

 

  - decreased sales by additional $9.8 million (in addition to the $5.5 million relating to unrecorded retroactive trade rebates and $2.8 million relating to promotional compensation granted to customers, described above) mainly due to sales cut-off error in the amount of $11.9 million offset by other individually immaterial adjustments;

 

  - decreased cost of goods sold by $11.7 million mainly due to sales cut-off error in the amount of $10.3 million and other immaterial adjustments.

As a result, the Audit Committee of the Company’s Board of Directors concluded that the Company should restate its unaudited condensed consolidated balance sheets as of March 31, 2012 and 2011, and its unaudited condensed consolidated statements of operations and comprehensive income, changes in stockholders’ equity and cash flows for three months ended March 31, 2012 and 2011.

In addition to the errors and irregularities described above, the Company also included in the restated consolidated financial statements other adjustments, which are immaterial individually and in the aggregate, related primarily to previously unrecorded adjustments identified during the preparation of the unaudited condensed consolidated financial statements at March 31, 2012 and 2011, as well as, the write-off of non-recoverable VAT and prepayments, recording provisions for known obsolete inventory and accruing for certain other operating expenses. Furthermore, the Company has expanded certain disclosure items related to income and deferred taxes in Note 8.

The impact of the corrections of the errors discussed above on the consolidated balance sheets, consolidated statements of operations and comprehensive income, consolidated statements of cash flow and consolidated statements of changes in stockholders’ equity is shown in the accompanying tables (in thousands, except for per share data).

 

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Condensed Consolidated Balance Sheet – March 31, 2012 (unaudited)

 

     As at March 31, 2012
As reported
    Adjustment     As at March 31,  2012
Restated
 

Current Assets

      

Cash and cash equivalents

   $ 107,798      $ 0      $ 107,798   

Accounts receivable, net of allowance for doubtful accounts of $26,221 as reported and $26,889 as restated

     280,761        (60,504     220,257   

Inventories

     121,324        (539     120,785   

Prepaid expenses

     23,594        (425     23,169   

Other current assets

     19,341        2,381        21,722   

Deferred income taxes

     6,572        (3,926     2,646   

Debt issuance cost

     2,959        0        2,959   
  

 

 

   

 

 

   

 

 

 

Total Current Assets

     562,349        (63,013     499,336   

Intangible assets, net

     508,605        0        508,605   

Goodwill

     731,675        3,897        735,572   

Property, plant and equipment, net

     193,838        (3,096     190,742   

Deferred income taxes, net

     22,811        0        22,811   

Debt issuance costs

     12,789        0        12,789   

Non-current assets held for sale

     675        0        675   
  

 

 

   

 

 

   

 

 

 

Total Non-Current Assets

     1,470,393        801        1,471,194   
  

 

 

   

 

 

   

 

 

 

Total Assets

     2,032,742        (62,212     1,970,530   
  

 

 

   

 

 

   

 

 

 

Current Liabilities

      

Trade accounts payable

     69,868        0        69,868   

Bank loans and overdraft facilities

     66,708        0        66,708   

Short-term obligations under Convertible Senior Notes

     305,977        0        305,977   

Income taxes payable

     7,208        1,183        8,391   

Taxes other than income taxes

     99,863        1,460        101,323   

Other accrued liabilities

     70,715        2,726        73,441   

Current portions of obligations under capital leases

     1,159        0        1,159   
  

 

 

   

 

 

   

 

 

 

Total Current Liabilities

     621,498        5,369        626,867   

Long-term obligations under capital leases

     728        0        728   

Long-term obligations under Senior Secured Notes

     950,643        0        950,643   

Long-term accruals

     2,221        (30     2,191   

Deferred income taxes

     99,199        0        99,199   
  

 

 

   

 

 

   

 

 

 

Total Long-Term Liabilities

     1,052,791        (30     1,052,761   

Stockholders’ Equity

      

Common Stock ($0.01 par value, 120,000,000 shares authorized, 73,125,230 shares issued and outstanding)

     731        0        731   

Preferred Stock ($0.01 par value, 1,000,000 shares authorized, none issued and outstanding)

     0        0        0   

Additional paid-in-capital

     1,370,335        0        1,370,335   

Accumulated deficit

     (1,069,070     (68,630     (1,137,700

Accumulated other comprehensive income

     56,607        1,079        57,686   

Less Treasury Stock at cost (246,037 shares)

     (150     0        (150
  

 

 

   

 

 

   

 

 

 

Total Stockholder’s Equity

     358,453        (67,551     290,902   
  

 

 

   

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 2,032,742      $ (62,212   $ 1,970,530   
  

 

 

   

 

 

   

 

 

 

 

6


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Condensed Consolidated Statement of Operations – 3 months ended March 31, 2012 (unaudited)

 

    

Three months ended

March 31, 2012

As reported

   

Adjustment

   

Three months ended

March 31, 2012

Restated

 

Sales

   $ 323,975      $ (2,219   $ 321,756   

Excise taxes

     (175,767     0        (175,767

Net sales

     148,208        (2,219     145,989   

Cost of goods sold

     89,529        1,345        90,874   
  

 

 

   

 

 

   

 

 

 

Gross profit

     58,679        (3,564     55,115   
  

 

 

   

 

 

   

 

 

 

Selling, general and administrative expenses

     61,770        (2,836     58,934   
  

 

 

   

 

 

   

 

 

 

Operating income / (loss)

     (3,091     (728     (3,819
  

 

 

   

 

 

   

 

 

 

Non operating income / (expense), net

      

Interest income / (expense), net

     (26,224     (78     (26,302

Other financial income / (expense), net

     97,922        (334     97,588   

Other non operating income / (expense), net

     (2,598     0        (2,598
  

 

 

   

 

 

   

 

 

 

Income before income taxes and equity in net losses from unconsolidated investments

     66,009        (1,140     64,869   
  

 

 

   

 

 

   

 

 

 

Income tax expense

     (3,513     (1,172     (4,685
  

 

 

   

 

 

   

 

 

 

Net income attributable to the company

     62,496        (2,312     60,184   
  

 

 

   

 

 

   

 

 

 

Net income from operations per share of common stock, basic

     0.86        (0.03     0.83   

Net income from operations per share of common stock, diluted

     0.86        (0.04     0.82   

Other comprehensive income, net of tax:

      

Foreign currency translation adjustments

     28,719        (6,195     22,524   
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to the company

   $ 91,215      $ (8,507   $ 82,708   
  

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidated Statements of Cash Flow – 3 months ended March 31, 2012 (unaudited)

 

    

Three months ended

March 31, 2012

As reported

   

Adjustment

   

Three months ended

March 31, 2012

Restated

 

Cash flows from operating activities

      

Net income

   $ 62,496      $ (2,312   $ 60,184   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

     4,815        0        4,815   

Deferred income taxes

     121        1,367        1,488   

Unrealized foreign exchange gains

     (98,681     675        (98,006

Stock options fair value expense

     864        0        864   

Other non cash items

     (26     247        221   

Changes in operating assets and liabilities:

      

Accounts receivable

     226,728        (658     226,070   

Inventories

     6,964        1,449        8,413   

Prepaid expenses and other current assets

     (3,114     796        (2,318

Trade accounts payable

     (89,358     0        (89,358

Other accured liabilities and payables (including taxes)

     (87,043     (1,564     (88,607
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     23,766        0        23,766   

Cash flows from investing activities

      

Purchase of fixed assets

     (1,329     0        (1,329

Proceeds from the disposal of fixed assets

     127        0        127   
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (1,202     0        (1,202

Cash flows from financing activities

      

Borrowings on bank loans and overdraft facility

     8,594        0        8,594   

Payment of bank loans, overdraft facility and other borrowings

     (26,872     0        (26,872

Decrease in short term capital leases payable

     90        0        90   
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (18,188     0        (18,188

Currency effect on brought forward cash balances

     9,012        0        9,012   

Net increase in cash

     13,388        0        13,388   

Cash and cash equivalents at beginning of period

     94,410        0        94,410   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 107,798      $ 0      $ 107,798   
  

 

 

   

 

 

   

 

 

 

 

 

8


Table of Contents

Condensed Consolidated Balance Sheet - March 31, 2011 (unaudited)

 

     Balance as at
March 31, 2011
As Reported
    Adjustments     Balance as at
March 31, 2011
Restated
 

Current Assets

      

Cash and cash equivalents

   $ 168,112      $ 0      $ 168,112   

Accounts receivable, net of allowance for doubtful accounts of $34,056 as reported and $35,005 as restated

     296,513        (44,678     251,835   

Inventories

     137,504        9,462        146,966   

Prepaid expenses and other current assets

     70,415        (979     69,436   

Deferred income taxes

     87,849        (677     87,172   

Debt issuance cost

     2,739        9        2,748   
  

 

 

   

 

 

   

 

 

 

Total Current Assets

     763,132        (36,863     726,269   

Intangible assets, net

     684,844        0        684,844   

Goodwill, net

     1,832,878        3,988        1,836,866   

Property, plant and equipment, net

     221,584        (3,202     218,382   

Deferred income taxes

     43,805        0        43,805   

Debt issuance costs

     16,042        0        16,042   
  

 

 

   

 

 

   

 

 

 

Total Non-Current Assets

     2,799,153        786        2,799,939   
  

 

 

   

 

 

   

 

 

 

Total Assets

   $ 3,562,285      $ (36,077   $ 3,526,208   
  

 

 

   

 

 

   

 

 

 

Current Liabilities

      

Trade accounts payable

   $ 80,018      $ 10,076      $ 90,094   

Bank loans and overdraft facilities

     72,496        0        72,496   

Income taxes payable

     3,325        0        3,325   

Taxes other than income taxes

     98,525        (1,444     97,081   

Other accrued liabilities

     105,405        (7,204     98,201   

Current portions of obligations under capital leases

     838        0        838   
  

 

 

   

 

 

   

 

 

 

Total Current Liabilities

     360,607        1,428        362,035   

Long-term obligations under capital leases

     1,096        0        1,096   

Long-term obligations under Senior Notes

     1,288,564        0        1,288,564   

Long-term accruals

     2,321        (31     2,290   

Deferred income taxes

     183,000        0        183,000   
  

 

 

   

 

 

   

 

 

 

Total Long Term Liabilities

     1,474,981        (31     1,474,950   

Stockholders’ Equity

      

Common Stock ($0.01 par value, 120,000,000 shares authorized, 72,716,235 shares issued and outstanding)

     727        0        727   

Additional paid-in-capital

     1,367,509        0        1,367,509   

Retained earnings

     161,371        (37,905     123,466   

Accumulated other comprehensive income

     197,240        431        197,671   

Less Treasury Stock at cost (246,037 shares)

     (150     0        (150
  

 

 

   

 

 

   

 

 

 

Total Stockholder’s Equity

     1,726,697        (37,474     1,689,223   
  

 

 

   

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 3,562,285      $ (36,077   $ 3,526,208   
  

 

 

   

 

 

   

 

 

 

Condensed Consolidated Statement of Operations – Three months ended March 31, 2011 (unaudited)

 

     Three months ended
March 31, 2011
As reported
    Adjustments     Three months ended
March 31, 2011
Restated
 

Sales

   $ 336,139      $ (18,058   $ 318,081   

Excise taxes

     (179,428     (299     (179,727

Net sales

     156,711        (18,357     138,354   

Cost of goods sold

     97,374        (11,689     85,685   
  

 

 

   

 

 

   

 

 

 

Gross profit

     59,337        (6,668     52,669   
  

 

 

   

 

 

   

 

 

 

Selling, general and administrative expenses

     57,877        (2,507     55,370   

Gain on remeasurement of previously held equity interests

     (7,898     0        (7,898
  

 

 

   

 

 

   

 

 

 

Operating income

     9,358        (4,161     5,197   
  

 

 

   

 

 

   

 

 

 

Non operating income / (expense), net

      

Interest expense, net

     (26,852     0        (26,852

Other financial income, net

     31,046        (524     30,522   

Other non operating expenses, net

     (976     0        (976
  

 

 

   

 

 

   

 

 

 

Income before taxes and equity in net income from unconsolidated investments

     12,576        (4,685     7,891   
  

 

 

   

 

 

   

 

 

 

Income tax expense

     (2,641     662        (1,979

Equity in net losses of affiliates

     (8,814     868        (7,946
  

 

 

   

 

 

   

 

 

 

Net income / (loss)

   $ 1,121      $ (3,155   $ (2,034
  

 

 

   

 

 

   

 

 

 

Net income / (loss) from operations per share of common stock, basic

   $ 0.02      $ (0.05   $ (0.03

Net income / (loss) from operations per share of common stock, diluted

   $ 0.02      $ (0.05   $ (0.03

Other comprehensive income, net of tax

      

Foreign currency translation adjustments

     137,016        (2,843     134,173   
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to the Company

   $ 138,137      $ (5,998   $ 132,139   
  

 

 

   

 

 

   

 

 

 

 

9


Table of Contents

Condensed Consolidated Statements of Cash Flow - Three months ended March 31, 2011 (unaudited)

 

     Three months ended
March 31, 2011
As reported
    Adjustments     Three months ended
March 31, 2011
Restated
 

Cash flows from operating activities of continuing operations

      

Net income / (loss)

   $ 1,121      $ (3,155   $ (2,034

Adjustments to reconcile net income / (loss) to net cash provided by operating activities:

      

Depreciation and amortization

     5,131        0        5,131   

Deferred income taxes

     725        (720     5   

Unrealized foreign exchange gains

     (31,651     (208     (31,859

Stock options fair value expense

     693        0        693   

Equity loss in affiliates

     8,814        (868     7,946   

Gain on fair value remeasurement of previously held equity interest, net of deferred tax

     (6,397     0        (6,397

Other non cash items

     1,780        (9     1,771   

Changes in operating assets and liabilities:

      

Accounts receivable

     268,051        (3,977     264,074   

Inventories

     (5,197     (11,389     (16,586

Prepayments and other current assets

     (16,860     (660     (17,520

Trade accounts payable

     (83,645     33,643        (50,002

Other accrued liabilities and payables

     (58,176     (12,449     (70,625
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities from continuing operations

     84,389        208        84,597   

Cash flows from investing activities of continuing operations

      

Purchase of fixed assets

     (505     0        (505

Purchase of trademarks

     (17,473     0        (17,473

Acquisitions of subsidiaries, net of cash acquired

     (23,475     0        (23,475
  

 

 

   

 

 

   

 

 

 

Net cash (used in) / provided by investing activities from continuing operations

     (41,453     0        (41,453

Cash flows from financing activities of continuing operations

      

Payment of bank loans, overdraft facility and other borrowings

     (4,104     0        (4,104

Decrease in short term capital leases payable

     (102     0        (102

Proceeds from options exercised

     66        0        66   
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities from continuing operations

     (4,140     0        (4,140

Currency effect on brought forward cash balances

     6,992        0        6,992   

Net increase in cash

     45,788        208        45,996   

Cash and cash equivalents at beginning of period

     122,324        (208     122,116   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 168,112      $ 0      $ 168,112   
  

 

 

   

 

 

   

 

 

 

Supplemental Schedule of Non-cash Investing Activities

      

Common stock issued in connection with investment in subsidiaries

   $ 23,131      $ 0      $ 23,131   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosures of cash flow information

      

Interest paid

   $ 6,329      $ 0      $ 6,329   

Income tax paid

   $ 7,012      $ 0      $ 7,012   
  

 

 

   

 

 

   

 

 

 

 

10


Table of Contents

Condensed Consolidated Statements of Changes in Stockholders’ Equity – March 31, 2011 (unaudited)

 

     Balance as at
March 31, 2011
As Reported
    Adjustments     Balance as at
March 31, 2011
Restated
 

Common Stock

   $ 727      $ 0      $ 727   

Additional Paid-in Capital

     1,367,509        0        1,367,509   

Retained Earnings

     161,371        (37,905     123,466   

Accumulated other comprehensive income of continuing operations

     197,240        431        197,671   

Accumulated other comprehensive income of discontinued operations

     0        0        0   

Less Treasury Stock at cost

     (150     0        (150
  

 

 

   

 

 

   

 

 

 

Total

   $ 1,726,697      $ (37,474   $ 1,689,223   

 

 

11


Table of Contents
3. SALE OF ACCOUNTS RECEIVABLE

On February 24, 2011, two subsidiaries of the Company, namely CEDC International sp. z o.o. (“CEDC International”) and Polmos Białystok S.A. (“Polmos Bialystok”), entered into factoring arrangements (“Factoring Agreements”) with ING Commercial Finance Polska (“ING Polska”) for the sale up to 290.0 million Polish zlotys (approximately $93.0 million) of receivables. On January 1, 2012, the total limit under the Factoring Agreements was reduced from 290.0 million Polish zlotys ($93.0 million) to 250.0 million Polish zlotys ($80.2 million) and from March 1, 2012 it was further reduced to 220.0 million Polish zlotys ($70.5 million). The Factoring Agreements were to mature on April 30, 2012, however on April 25, 2012 the Company extended these agreements until September 30, 2012 with further decrease of the total limit from April 25, 2012 to 200.0 million Polish zlotys (approximately $64.1 million).

As of March 31, 2012, the total balance of receivables under factoring amounted to 177.3 million Polish zlotys (approximately $56.8 million) of the 220.0 million Polish zlotys limit available.

For the three months ended March 31, 2012, the Company sold receivables in the amount of 302.8 million Polish zlotys ($97.1 million) and recognized a loss on the sale in the statement of operations and comprehensive income in the amount of 3.2 million Polish zlotys ($1.0 million) in respect of the non-recourse factoring. The Company has no continuing involvement with the sold non-recourse receivables.

As of March 31, 2012, the liabilities from factoring with recourse amounted to $1.4 million and are included in the short term bank loans in the balance sheet. Corresponding receivables from factoring with recourse are presented under accounts receivable in the balance sheet.

 

4. COMPREHENSIVE INCOME

Comprehensive income is defined as all changes in equity during a period except those resulting from investments by owners and distributions to owners. Comprehensive income includes net income adjusted by foreign currency translation adjustments. The foreign translation losses/gains on the re-measurements from foreign currencies to U.S. dollars are classified separately as foreign currency translation adjustment within accumulated other comprehensive income included in stockholders’ equity.

As of March 31, 2012, our functional currencies (Polish zloty, Russian ruble and Hungarian forint) exchange rates used to translate the balance sheet strengthened against the U.S. dollar as compared to the exchange rates as of December 31, 2011, and as a result $22.5 million of foreign currency translation adjustment was recognized as part of total comprehensive income, which mainly related to an increase in goodwill and intangible assets.

 

12


Table of Contents
5. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share for the periods indicated.

 

 

     Three months ended March 31,  
     2012      2011  
     (Restated,
see Note 2)
     (Restated,
see Note 2)
 

Net income / (loss)

   $ 60,184       $ (2,034

Weighted average shares of common stock outstanding (used to calculate basic EPS)

     72,885         71,208   

Net effect of dilutive employee stock options based on the treasury stock method

     217         147   
  

 

 

    

 

 

 

Weighted average shares of common stock outstanding (used to calculate diluted EPS)

     73,102         71,355   

Net income / (loss) per common share—basic

   $ 0.83       $ (0.03

Net income / (loss) per common share—diluted

   $ 0.82       $ (0.03

Employee stock options granted have been included in the above calculations of diluted earnings per share where the exercise price is less than the average market price of the common stock during the three months ended March 31, 2012 and 2011. In addition there is no adjustment to fully diluted shares related to the Convertible Senior Notes as the average market price was below the conversion price for the periods.

 

6. BORROWINGS

Bank Facilities

As of March 31, 2012, the Company has outstanding liability of €25.0 million ($33.4 million) from the term loans from Zenit Bank, Alfa Bank and Raiffeisen Bank drawn by Whitehall:

 

   

The loan agreement with Zenit Bank, dated March 29, 2011, matures on June 6, 2012. The credit limit under this loan agreement is €10.0 million ($13.3 million) and the loan is released in tranches maturing in 365 days, no later than June 6, 2012. The loan was released in four tranches between April 21, 2011 and September 13, 2011, and is repayable between April 20, 2012 and May 18, 2012. As of March 31, 2012, the Company had outstanding liability of €5.0 million ($6.7 million) from this term loan;

 

   

The loan agreement with Alfa Bank, dated July 22, 2008, matures on October 18, 2014. The credit limit under this agreement is €20.0 million ($26.7 million) and the loan is released in tranches maturing within three, six or nine months, depending if they are pledged by inventory. The loan was released in eight tranches between September 14, 2011 and March 30, 2012, and is repayable between April 28, 2012 and October 30, 2012. As of March 31, 2012, the Company had outstanding liability of €15.1 million ($20.1 million) from this term loan;

 

   

The loan agreement with Raiffeisen Bank, dated July 6, 2010, matures on July 6, 2012. The credit limit under this agreement is €10.0 million ($13.3 million) and the loan is released in tranches maturing within one to 12 months, not later than July 6, 2012. The loan was released in five tranches between September 12, 2011 and October 26, 2011, and is repayable between May 18, 2012, and July 6, 2012. As of March 31, 2012, the Company had outstanding liability of €4.9 million ($6.5 million) from this term loan.

The aforementioned loans drawn by Whitehall are guaranteed by Whitehall companies. The loans from Zenit Bank and Alfa Bank are secured by the Company’s inventory.

As of March 31, 2012, the Company has outstanding term loans of 879.6 million Russian rubles ($30.0 million) from Unicredit and JSC Grand Invest Bank, both drawn by Russian Alcohol, as well as, an overdraft facility from Sberbank drawn by Bravo Premium:

 

   

The loan agreement with Unicredit, dated May 24, 2011, matures on November 23, 2012. This loan has no financial covenants and is secured by inventory of up to 720 million Russian rubles ($24.6 million) and guarantees given by companies of Russian Alcohol. As of March 31, 2012, the Company has outstanding liability of 600.0 million Russian rubles ($20.5 million) from this term loan;

 

   

The loan agreement with JSC Grand Invest Bank, dated November 25, 2011, matures on November 23, 2012. This loan has no financial covenants that need to be met. As of March 31, 2012, the Company has outstanding liability of 279.6 million Russian rubles ($9.5 million) from this term loan;

 

13


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The overdraft agreement with Sberbank, dated February 6, 2012, matures on February 5, 2013. The credit limit under this agreement is 60.0 million Russian rubles ($2.0 million). This loan is secured by fixed assets. As of March 31, 2012, the Company has outstanding liability of 52.5 million Russian rubles ($1.8 million) from this overdraft facility.

As of March 31, 2012, the Company had available to use under existing overdraft facility in Hungary 100.0 million Hungarian forints ($0.5 million).

Convertible Senior Notes due 2013

On March 7, 2008, the Company completed the issuance of $310 million aggregate principal amount of 3% Convertible Senior Notes due 2013 (the “Convertible Senior Notes”). Interest is due semi-annually on the 15th of March and September, beginning on September 15, 2008. The Convertible Senior Notes are convertible in certain circumstances into cash and, if applicable, shares of our common stock, based on an initial conversion rate of 14.7113 shares per $1,000 principal amount, subject to certain adjustments. Upon conversion of the notes, the Company will deliver cash up to the aggregate principal amount of the notes to be converted and, at the election of the Company, cash and/or shares of common stock in respect to the remainder, if any, of the conversion obligation. The proceeds from the Convertible Senior Notes were used to fund the cash portions of the acquisition of Copecresto Enterprises Limited and Whitehall.

As of March 31, 2012 and December 31, 2011, the Company had accrued interest of $0.4 million and $2.7 million, respectively, related to the Convertible Senior Notes, with the next coupon due for payment on September 15, 2012. Total obligations under the Convertible Senior Notes are shown net of deferred finance costs, amortized over the life of the borrowings using the effective interest rate method as shown in the table below:

 

     March 31,     December 31,  
     2012     2011  

Convertible Senior Notes

   $ 310,000      $ 310,000   

Unamortized debt discount

     (851     (1,070

Debt discount related to ASC 470-20

     (3,172     (4,285
  

 

 

   

 

 

 

Total

   $ 305,977      $ 304,645   
  

 

 

   

 

 

 

For the three months ended March 31, 2012 and March 31, 2011, the additional pre-tax non-cash interest expense recognized in the consolidated statement of operations was $1.1 million each. Accumulated amortization related to the debt discount was $16.5 million and $12.2 million as of March 31, 2012 and March 3 1, 2011, respectively. Pre-tax increase in non-cash interest expense on our consolidated statements of operations and comprehensive income to be recognized until 2013, the maturity date of the CSNs, amounts to $3.2 million.

Senior Secured Notes due 2016

On December 2, 2009, the Company issued $380 million 9.125% Senior Secured Notes due 2016 and €380 million ($507.0 million) 8.875% Senior Secured Notes due 2016 (the “2016 Notes”) in an unregistered offering to institutional investors. The Company used a portion of the net proceeds from the 2016 Notes to redeem the Company’s outstanding 2012 Notes, having an aggregate principal amount of €245.4 million ($327.4 million) on January 4, 2010. The remainder of the net proceeds from the 2016 Notes was used to (i) purchase Lion Capital’s remaining equity interest in Russian Alcohol by exercising the Lion Option and the Co-Investor Option, pursuant to the terms and conditions of the Lion Option Agreement and the Co-Investor Option Agreement, respectively (ii) repay all amounts outstanding under Russian Alcohol credit facilities; and (iii) repay certain other indebtedness.

On December 9, 2010, the Company issued an additional €50.0 million ($66.7 million) 8.875% Senior Secured Notes due 2016 (the “2016 Notes”) in an unregistered offering to institutional investors. The Company used the net proceeds from the additional 2016 Notes to repay its term loans and overdraft facilities with Bank Handlowy w Warszawie S.A and Bank Zachodni WBK S.A.

 

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As of March 31, 2012 and December 31, 2011 the Company had accrued interest of $28.5 million and $7.0 million respectively, related to the Senior Secured Notes due 2016, with the next coupon due for payment on June 1, 2012.

 

     March 31,     December 31,  
     2012     2011  

Senior Secured Notes due 2016

   $ 953,705      $ 935,296   

Unamortized debt discount

     (3,062     (3,207
  

 

 

   

 

 

 

Total

   $ 950,643      $ 932,089   
  

 

 

   

 

 

 

 

     March 31,  
     2012  

Principal repayments for the following years

  

2012

   $ 43,215   

2013

     327,912   

2014

     0   

2015

     0   

2016 and beyond

     950,643   
  

 

 

 

Total

   $ 1,321,770   
  

 

 

 

 

7. INVENTORIES

The following table summarizes our inventories:

 

     March 31,      December 31,  
   2012
(Restated,
see Note 2)
     2011  

Raw materials and supplies

   $ 22,926       $ 22,237   

In-process inventories

     8,046         2,655   

Finished goods and goods for resale

     89,813         92,798   
  

 

 

    

 

 

 

Total

   $ 120,785       $ 117,690   
  

 

 

    

 

 

 

Because of the nature of the products supplied by the Company, great attention is paid to inventory rotation. The number of days in inventory increased from at approximately 81 days as of December 31, 2011 to approximately 121 days as of March 31, 2012. As a comparison, the number of days in inventory as of March 31, 2011 amounted to 154 days with total balance of $147.0 million.

 

8. INCOME TAXES

Our tax charge for the three months ended March 31, 2012 was $4.7 million which represents an effective tax rate for this period of 7.2%. The underlying tax rates in our key jurisdictions are 19% in Poland, 20% in Russia, 21% in Ukraine, 16% in Hungary and 35% in the United States. Changes in the Company’s uncertain income tax position, excluding the related accrual for interest and penalties, for the three-month period ended March 31, 2012 result from additions to accruals for current and prior year tax positions. There were no reductions for prior year tax positions, settlements or lapses in statutes of limitations. As of March 31, 2012 and December 31, 2011, the uncertain income tax position balance was $7.0 million and $7.1 million, respectively.

 

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9. OPERATING SEGMENTS

The Company operates and manages its business based upon three primary geographic segments: Poland, Russia and Hungary. Selected financial data split based upon this segmentation assuming elimination of intercompany revenues and profits is shown below: Segment information represents only continuing operations.

 

     Segment Net Sales
Three months ended March 31,
 
     2012      2011  
     (Restated,
see Note 2)
     (Restated,
see Note 2)
 

Segment

     

Poland

   $ 47,135       $ 46,617   

Russia

     93,426         86,579   

Hungary

     5,428         5,158   
  

 

 

    

 

 

 

Total Net Sales

   $ 145,989       $ 138,354   

 

     Operating income / (loss)
Three months ended March 31,
 
     2012     2011  
     (Restated,
see Note 2)
    (Restated,
see Note 2)
 

Segment

    

Poland before fair value adjustments

   $ 6,480      $ 4,793   

Gain on remeasurement of previously held equity interests

     0        7,898   
  

 

 

   

 

 

 

Poland after fair value adjustments

     6,480        12,691   

Russia

     (8,463     (6,220

Hungary

     720        661   

Corporate Overhead

    

General corporate overhead

     (1,692     (1,242

Option Expense

     (864     (693
  

 

 

   

 

 

 

Total Operating income / (loss)

   $ (3,819   $ 5,197   

 

     Identifiable Operating Assets  
     March 31,
2012
     December 31,
2011
 
     (Restated,
see Note 2)
    

 

 

Segment

     

Poland

   $ 599,163       $ 600,940   

Russia

     1,319,980         1,369,744   

Hungary

     22,957         20,265   

Corporate

     28,430         25,769   
  

 

 

    

 

 

 

Total Identifiable Assets

   $ 1,970,530       $ 2,016,718   

 

     Goodwill  
     March  31,
2012

(Restated,
see Note 2)
     December 31,
2011
 

Segment

     

Poland

   $ 276,188       $ 252,080   

Russia

     452,691         412,105   

Hungary

     6,693         6,109   
  

 

 

    

 

 

 

Total Goodwill

   $ 735,572       $ 670,294   

 

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10. INTEREST EXPENSE, NET

The following items are included in Interest expense, net:

 

     Three months ended March 31,  
     2012
(Restated,
see Note 2)
    2011  

Interest income

   $ 245      $ 525   

Interest expense

     (26,547     (27,377
  

 

 

   

 

 

 

Total interest expense, net

   ($ 26,302   ($ 26,852

 

11. OTHER FINANCIAL INCOME, NET

The following items are included in Other financial income, net:

 

     Three months ended March 31,  
    

2012

    2011  
     (Restated,
see Note 2)
    (Restated,
see Note 2)
 

Foreign exchange impact related to foreign currency financing

   $ 98,347      $ 31,127   

Other gains / (losses)

     (759     (605
  

 

 

   

 

 

 

Total other financial income / (expense), net

   $ 97,588      $ 30,522   

 

12. OTHER NON-OPERATING EXPENSE

The following items are included in Other Non-Operating Expense:

 

     Three months ended March 31,  
     2012     2011  

Factoring costs and bank fees

     (2,262     (671

Other gains / (losses)

     (336     (305
  

 

 

   

 

 

 

Total other non operating income / (expense), net

   ($ 2,598   ($ 976

 

13. STOCK BASED COMPENSATION PLANS AND WARRANTS

During the three months ended March 31, 2012, the range of exercise prices for outstanding options was $2.00 to $60.92. During the three months ended March 31, 2012, the weighted average remaining contractual life of options outstanding is 4.9 years. Exercise prices for options exercisable as of March 31, 2012 ranged from $2.00 to $60.92. The Company has also granted 51,761 restricted stock units at an average price of $4.38 and 399,415 restricted stock at an average price of $4.38 during the first quarter of 2012.

The Company has issued stock options to employees under stock based compensation plans. Stock options are issued at the current market price, subject to a vesting period, which varies from one to three years. As of March 31, 2012, the Company has not changed the terms of any outstanding awards.

During the three months ended March 31, 2012, the Company recognized compensation cost of $0.86 million.

As of March 31, 2012, there was $3.4 million of total unrecognized compensation cost related to non-vested stock options, restricted stock units and restricted stock granted under the Company’s Stock Incentive Plan. The costs are expected to be recognized over period through 2012-2015.

The following weighted-average assumptions were used in the calculation of fair value for options granted during 2011. For the three months ended March 31, 2012 the Company did not grant any options to its employees.

 

     December 31, 2011  

Fair Value

   $ 7.60   

Dividend Yield

     0

Expected Volatility

     66.1

Weighted Average Volatility

     66.1

Risk Free Interest Rate

     3

Expected Life of Options from Grant

     3.2   

 

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14. COMMITMENTS AND CONTINGENT LIABILITIES

Supply contracts

The Company has various agreements covering its sources of supply, which, in some cases, may be terminated by either party on relatively short notice. Thus, there is a risk that a portion of the Company’s supply of products could be curtailed at any time.

Bank Guarantees

In accordance with current legislation in Russia each producer of spirit beverages must acquire excise stamps and must pay excise tax in full before buying spirit for production purposes. For each lot of stamps purchased, the alcohol producer must provide the relevant body with a bank guarantee in the full amount of payment for the excise tax to secure the legality of usage of the excise stamps. This bank guarantee serves as insurance against the illegal usage of excise stamps by an alcohol producer.

In addition, under new legislation effective since August 1, 2011 the producer purchasing spirit alcohol must a) prepay the excise tax in full or b) provide the relevant tax body with a bank guarantee in the full amount of the excise tax before purchasing to secure payment of the excise tax. This bank guarantee serves as insurance that the excise tax is paid in time.

Russian Alcohol signed a guarantee line agreement with multiple banks pursuant to which it was provided with a guarantee limit of 18.2 billion Russian rubles (approximately $620.8 million) for a period from 1 to 4 years, Bravo Premium signed a guarantee line agreement with multiple banks pursuant to which it was provided with a guarantee limit of 600.0 million Russian rubles (approximately $20.5 million) for a period from 1 to 2 years and Whitehall signed a guarantee line agreement with multiple banks pursuant to which it was provided with a guarantee limit of 1.7 billion Russian rubles (approximately $58.0 million) as insurance against the illegal usage of excise stamps.

According to the agreements, companies have the right to obtain bank guarantees during the agreement term for each purchase of excise stamps and for the purchase of spirit. The guarantees for excise stamps are held by Rosalkoregulirovanie (the Federal Service for Alcohol Market Regulation), during the whole production period for which the excise stamps were purchased. The guarantee for excise tax is held by the beneficiary (the tax body) for 6 months after the end of month the spirit was purchased.

As of March 31, 2012, the Company has bank guarantees related to customs duties on imported goods in Poland of $2.0 million.

Operating Leases and Rent Commitments

The Company makes rental payments for real estate, vehicles, office, computer, and manufacturing equipment under operating leases. The following is a schedule by years of the future rental payments under the non-cancelable operating lease as of March 31, 2012:

 

2012

   $ 8,753   

2013

     9,130   

2014

     8,722   

2015

     8,148   

2016

     5,536   

Thereafter

     2,976   
  

 

 

 

Total

   $ 43,265   
  

 

 

 

During the first quarter of 2012, the Company continued its policy of renewing its transportation fleet by way of capital leases. The future minimum lease payments for the assets under capital lease as of March 31, 2012 are as follows:

 

2012

   $ 1,194   

2013

     522   

2014

     171   
  

 

 

 

Gross payments due

   $ 1,887   

Less interest

     (132
  

 

 

 

Net payments due

   $ 1,755   
  

 

 

 

 

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Legal proceedings

From time to time we are involved in legal proceedings arising in the normal course of our business, including opposition and cancellation proceedings with respect to trademarks similar to some of our brands, and other proceedings, both in the United States and elsewhere. Except as set forth below, we are not currently involved in or aware of any pending or threatened proceedings that we reasonably expect, either individually or in the aggregate, will result in a material adverse effect on our consolidated financial statements.

On October 24, 2011, a class action complaint titled Steamfitters Local 449 Pension Fund vs. Central European Distribution Corporation, et al., was filed in the United States District Court, District of New Jersey on behalf of a putative class of all purchasers of our common stock from August 5, 2010 through February 28, 2011 against us and certain of our officers. The complaint seeks unspecified money damages and alleges violations of federal securities law in connection with alleged materially false and misleading statements and/or omissions regarding our business, financial results and prospects in our public statements and public filings with the U.S. Securities & Exchange Commission for the second and third quarters of 2010, relating to declines in our vodka portfolio, our need to take an impairment charge relating to the deterioration in fair value of certain of our brands in Poland and negative financial results from the launch of Żubrówka Biała. Subsequent to the above complaint, a second, substantially identical class action complaint titled Tim Schuler v. Central European Distribution Corporation, et al., was filed in the same court. Motions to consolidate the two cases and for the appointment of lead plaintiff and lead counsel have been filed and are awaiting decision. As a result, no response to the complaints has yet been filed. The Company intends to mount a vigorous defense to the claims asserted. As of March 31, 2012 the original plaintiffs, Steamfitters Pension Fund and Tim Schuler, no longer remain in the lawsuits and the current plaintiffs are now the Prosperity Group and the Arkansas Pension Fund, however the names of the lawsuits have remained unchanged.

On November 11, 2011, a purported shareholder derivative action, titled Ying Yeung v. William V. Carey, et al., was filed in the United States District Court, District of New Jersey against the current members of our board of directors (and against the Company as the nominal defendant), seeking unspecified damages on behalf of the Company. A second, substantially identical shareholder derivative complaint, titled Russell Partch v. William V. Carey, et al., was subsequently filed in the same court. Plaintiff alleges that our directors breached their fiduciary duties of care, good faith and loyalty to the Company by failing to establish and maintain adequate internal controls and by failing to exercise proper oversight over management, which would have prevented the Company from disseminating the allegedly false and misleading statements to shareholders that are the subject of the securities class action litigation described above. The derivative actions are at a very preliminary stage, and no response to the complaints has yet been filed.

Although we believe the allegations in the class and derivative complaints are without merit, these types of lawsuits can be protracted, time-consuming, distracting to management and expensive and, whether or not the claims are ultimately successful, could ultimately have an adverse effect on our business.

 

15. FAIR VALUE MEASUREMENTS

The Company utilizes the accounting guidance for fair value measurements and disclosures for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the condensed financial statements on a recurring basis or on a nonrecurring basis during the reporting period. The fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based upon the best use of the asset or liability at the measurement date. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability. The accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three levels of inputs used to measure fair value are as follows:

 

Level 1       Quoted prices in active markets for identical assets or liabilities.
Level 2       Observable inputs other than quoted prices included in Level 1. We value assets and liabilities included in this level using dealer and broker quotations, certain pricing models, bid prices, quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable market data.
Level 3       Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

As of March 31, 2012, the Company held certain financial assets that are measured at fair value on a recurring basis. These consisted of cash and cash equivalents. The monetary assets represented by these financial instruments are primarily located in Poland, Hungary and Russia. Consequently, they are subject to currency translation risk when reporting in U.S. Dollars. The fair values of the cash and cash equivalents, Convertible Senior Notes and Secured Senior Notes is determined based on quoted market prices in public markets and is categorized as Level 1. The Company does not have any financial assets measured at fair value on a recurring basis as Level 3 and there were no transfers in or out of Level 1, Level 2 or Level 3 during the three months ended March 31, 2012.

 

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Non-financial assets and liabilities, such as goodwill and long-lived assets, are accounted for at fair value on a nonrecurring basis. These items are tested for impairment on the occurrence of a triggering event or in the case of goodwill, on at least an annual basis. Management reviews long-lived assets for potential impairment whenever significant events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment exists when the carrying amount of the long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the estimated undiscounted cash flows expected to result from the use and eventual depletion of the asset. If an impairment exists, the resulting write-down would be the difference between the fair market value of the long-lived asset and the related net book value. As of the balance sheet date, the carrying value of its long-lived assets are recoverable and no impairment existed.

The following table sets forth by level, within the fair value hierarchy, the Company’s financial assets accounted for at fair value on a recurring and nonrecurring basis (cash and cash equivalents as well as assets held for sale) and fair values of financial assets accounted for at their carrying value (Convertible Senior Notes and Secured Senior Notes) as of March 31, 2012 and December 31, 2011.

 

            Assets at Fair Value Using  
     Total      Quoted Prices  in
Activated Markets for
Identical Assets
(Level 1)
     Significant  Other
Observable
Inputs

(Level 2)
     Unobservable
Inputs
(Level 3)
 

March 31, 2012

           

Recurring items

           

Cash and cash equivalents

   $ 107,798       $ 107,798       $ 0       $ 0   

Convertible Senior Notes

   $ 272,800       $ 272,800       $ 0       $ 0   

Secured Senior Notes

   $ 731,350       $ 731,350       $ 0       $ 0   

Nonrecurring items

           

Assets held for sale

   $ 675       $ 0       $ 0       $ 675   

December 31, 2011

           

Recurring items

           

Cash and cash equivalents

   $ 94,410       $ 94,410       $ 0       $ 0   

Convertible Senior Notes

   $ 248,000       $ 248,000       $ 0       $ 0   

Secured Senior Notes

   $ 702,700       $ 702,700       $ 0       $ 0   

Nonrecurring items

           

Assets held for sale

   $ 675       $ 0       $ 0       $ 675   

The Company has other financial instruments, such as receivables, accounts payable, overdrafts, short term bank loans and other liabilities which have been excluded from the tables above. Due to the short-term nature of these instruments, the carrying value approximate their fair values. The Company did not have any other financial instruments with the scope of the fair value disclosure requirements as of March 31, 2012.

 

16. EFFECTS OF FOREIGN CURRENCY MOVEMENTS

Substantially all of the Company’s operating cash flows and assets are denominated in Polish zloty, Russian ruble and Hungarian forint. This means that the Company is exposed to translation movements both on its balance sheet and statement of operations and comprehensive income. The impact on working capital items is demonstrated on the cash flow statement as the movement in exchange on cash and cash equivalents. The impact on the statement of operations is by the movement of the average exchange rate used to restate the statement of operations from Polish zloty, Russian ruble and Hungarian forint to U.S. dollars. The amounts shown as exchange rate gains or losses on the face of the statements of operations relate only to realized gains or losses on transactions that are not denominated in Polish zloty, Russian ruble or Hungarian forint. Table below presents the exchange rates used for translation of our balance sheet and statement of operations and comprehensive income balances as of and for the three months ended March 31, 2012:

 

     Balance sheet rate
as of
March 31, 2012
     Balance sheet rate
as of
December 31, 2011
     Average rate for the
three months ended
March 31, 2012
     Average rate for the
three months ended
March 31, 2011
 

PLN / US$

     3.1191         3.4174         3.2249         2.8800   

RUR / US$

     29.3148         32.2092         30.1674         29.2089   

HUF / US$

     221.2128         240.6620         225.5175         198.6207   

Because the Company’s reporting currency is the U.S. dollar, the translation effects of fluctuations in the exchange rate of our functional currencies have impacted the Company’s financial condition and results of operations and have affected the comparability of our results between financial periods.

 

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The Company has borrowings including its Convertible Notes due 2013 and Senior Secured Notes due 2016 that are denominated in U.S. dollars and euros, which have been lent to its operations where the functional currency is the Polish zloty and Russian ruble. The effect of having debt denominated in currencies other than the Company’s functional currencies is to increase or decrease the value of the Company’s liabilities on that debt in terms of the Company’s functional currencies when those functional currencies depreciate or appreciate in value respectively. As a result of this, the Company is exposed to gains and losses on the re-measurement of these liabilities. The table below summarizes the pre-tax impact of a one percent movement in each of the exchange rate which could result in a significant impact in the results of the Company’s operations.

 

Exchange Rate

   Value of notional amount    Pre-tax impact of a 1%
movement in exchange rate
 

USD-Polish zloty

   $426 million    $ 4.3 million gain/loss   

USD-Russian ruble

   $264 million    $ 2.6 million gain/loss   

EUR-Polish zloty

   €430 million or approximately $574 million    $ 5.7 million gain/loss   

 

17. SUBSEQUENT EVENTS

On April 23, 2012, the Company announced that definitive agreements had been signed with Russian Standard Corporation (via Roust Trading Limited) for a strategic transaction. Pursuant to a securities purchase agreement, Roust Trading Limited has agreed to make an investment in the Company in three stages, subject to typical closing conditions. First, on May 4, 2012 Roust Trading Limited acquired 5,714,286 newly issued shares of the Company’s common stock for an aggregate purchase price of $30 million, or $5.25 per share, and JSC “Russian Standard Bank,” an affiliate of Roust Trading Limited, purchased $70 million aggregate principal amount of senior notes due March 18, 2013, bearing an interest rate of 3.00% (the “New Debt”) issued by the Company. Subject to the consummation of the Second Closing (as defined in the securities purchase agreement), the Company (on or after January 30, 2013) or Roust Trading Limited (on or after the completion of the Second Closing) may cause the New Debt to effectively be exchanged for newly issued shares of the Company’s common stock equal to the then-outstanding principal amount of the New Debt, plus accrued and unpaid interest thereon as of the Second Closing, divided by $5.25. The total amount of shares of the Company’s common stock expected to be issued in relation to the New Debt is approximately 13,333,333 shares of the Company’s common stock plus any additional shares representing accrued and unpaid interest under the New Debt as of the Second Closing. Second, if shareholder approval is obtained, then (subject to typical closing conditions), Roust Trading Limited will purchase $102.6 million aggregate principal amount of senior rollover notes due July 31, 2016 (the “Rollover Notes”), from the Company. The Company must use the proceeds (net of fees and expenses) from the issuance of the Rollover Notes to repurchase the Convertible Senior Notes held by Roust Trading Limited or its affiliates, in the same principal amount as the Rollover Notes, at par. Third, the Company, at its option, may issue to Roust Trading Limited senior backstop notes in an aggregate principal amount of up to $107.5 million due July 31, 2016 (the “Backstop Notes”) to be used by the Company to pay the remaining principal amount of the Convertible Senior Notes then outstanding. Each of the Rollover Notes and Backstop Notes will bear a blended interest rate of 6.00% over the term of each note.

The Company and Roust Trading Limited also entered into a governance agreement in support of this investment. In accordance with this governance agreement, Roust Trading Limited may nominate up to three directors to the Company’s Board of Directors depending on the amount of the Company’s common stock held by Roust Trading Limited. In addition, Roust Trading Limited received various minority protection rights.

 

18. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”), which is effective for annual reporting periods beginning after December 15, 2011. This guidance amends certain accounting and disclosure requirements related to fair value measurements. Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. The Company adopted ASU 2011-04 during the first quarter of the current fiscal year. The adoption of ASU 2011-04 did not have a material impact on the Company’s consolidated financial statements other than disclosures related to fair value measurements.

 

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In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”), which was issued to enhance comparability between entities that report under U.S. GAAP and IFRS, and to provide a more consistent method of presenting non-owner transactions that affect an entity’s equity. ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity and requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. However, in December 2011, the FASB issued ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (“ASU 2011-12”), which deferred the guidance on whether to require entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement where net income is presented and the statement where other comprehensive income is presented for both interim and annual financial statements. ASU 2011-12 reinstated the requirements for the presentation of reclassifications that were in place prior to the issuance of ASU 2011-05 and did not change the effective date for ASU 2011-05. For public entities, the amendments in ASU 2011-05 and ASU2011-12 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and should be applied retrospectively. The Company adopted both ASU 2011-05 and ASU 2011-12 during the first quarter of the current fiscal year. The adoption of ASU 2011-05 and ASU 2011-12 did not have a material impact on the Company’s consolidated financial statements, other than presentation of comprehensive income.

In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment” (“ASU 2011-08”), which simplifies testing for impairment by allowing an entity to first assess qualitative factors and determine if it is more likely than not (defined as 50% or more) that the fair value of the reporting unit is less than its carrying amount. That determination can then be used to decide if it is necessary to perform the two-step goodwill impairment test. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, which corresponds to the Company’s first quarter of current fiscal year. The Company will adopt ASU 2011-08 during the current fiscal year and this adoption is not expected to have a material impact on the Company’s consolidated financial statements.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following analysis should be read in conjunction with the Condensed Consolidated Financial Statements and the notes thereto appearing elsewhere in this report.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking Information.

This report (and other oral and written statements we have made or make, including press releases containing information about our business, results of operations, financial condition, guidance and other business developments), contains forward-looking statements, which provide our current expectations or forecasts of future events. These forward-looking statements may be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “intends,” “may,” “will” or “should” or, in each case, their negative, or other variations or comparable terminology, but the absence of these words does not necessarily mean that a statement is not forward-looking. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this report and include, without limitation:

 

   

information concerning possible or assumed future results of operations, trends in financial results and business plans, including those relating to earnings growth and revenue growth, liquidity, prospects, strategies and the industry in which the Company and its affiliates operate, as well as the integration of recent acquisitions and other investments and the effect of such acquisitions and other investments on the Company;

 

   

statements about the expected level of our costs and operating expenses, and about the expected composition of the Company’s revenues;

 

   

information about the impact of governmental regulations on the Company’s businesses;

 

   

statements about local and global credit markets, currency exchange rates and economic conditions;

 

   

other statements about the Company’s plans, objectives, expectations and intentions including with respect to its credit facility and other outstanding indebtedness; and

 

   

other statements that are not historical facts.

By their nature, forward-looking statements involve known and unknown risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, the development of the industries in which we operate, and the effects of acquisitions and other investments on us may differ materially from those anticipated in or suggested by the forward-looking statements contained in this report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate, are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods.

We urge you to read and carefully consider the items of this and other reports and documents that we have filed with or furnished to the SEC for a more complete discussion of the factors and risks that could affect our future performance and the industry in which we operate, including the risk factors described in this report and in the Company’s Annual Report on Form 10-K filed with the SEC on February 29, 2012. In light of these risks, uncertainties and assumptions, the forward-looking events described in this report may not occur as described, or at all.

You should not unduly rely on these forward-looking statements, because they reflect our views only as of the date of this report. The Company undertakes no obligation to publicly update or revise any forward-looking statement to reflect circumstances or events after the date of this report, or to reflect on the occurrence of unanticipated events. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements referred to above and contained elsewhere in this report.

The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the notes thereto found elsewhere in this report.

 

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Overview

The Company is one of the world’s largest vodka producers and Central and Eastern Europe’s largest integrated spirit beverages business with its primary operations in Poland, Russia and Hungary. During 2011, the Company continued its strategy of integrating the business in Russia following the buyout of the remaining stake in Whitehall in the first quarter of 2011 when the Company took full economic and controlling ownership of the business. During the first quarter of 2012, the Company continued to focus on developing sales volumes in its key markets of Poland and Russia as well as reorganizing the Russia operations. Both the Polish and Russian vodka markets continued to see an overall market decline. In Poland, however, the Company was able to see year on year domestic volume and value growth for the quarter ending March 31, 2012 primarily due to the continued success of Żubrówka Biała and the higher margin flavored segment including Soplica. Total Russian volumes were down which were driven mainly by lower domestic vodka volumes, as a result of wholesalers de-stocking to lower levels of inventory and reduced sales to key accounts, during our renegotiations in the first quarter of 2012, partially offset by higher export volumes. On the domestic vodka front, sales volumes for the first quarter 2012 in Russia were down by 15% as compared to 2011, however, sell out from wholesalers to the retail trade was only down 8%—9% reflecting the impact of continued de-stocking. Finally spirit, which is the main ingredient in vodka production showed signs of stabilizing in both Russia and Poland, however Russia is still impacted as compared to the same quarter in the prior year due to the rapid increases in spirit prices during 2011.

Restatement

The Company is restating its unaudited condensed consolidated financial statements for the three months ended March 31, 2012 and 2011. The Restatement corrects certain accounting errors primarily related to the accounting for retroactive rebates provided to customers during those periods, accounting for revenue transactions, asset write offs, cut off errors and income taxes. The Restatement also includes reclassifications of accounts payable for periods prior to 2011 to conform to the current presentation. All amounts in Management’s Discussion and Analysis of Financial Conditions and Results of Operations (Restated) have been adjusted, as appropriate, for the effects of the Restatement. For a more detailed description of the Restatement, see Note 2, “Restatement of unaudited condensed consolidated financial statements”, to the accompanying condensed consolidated financial statements.

Significant factors affecting our consolidated results of operations

Effect of Exchange Rate and Interest Rate Fluctuations

Substantially all of Company’s operating cash flows and assets are denominated in Polish zloty, Russian ruble and Hungarian forint. This means that the Company is exposed to translation movements both on its balance sheet and statement of operations. The impact on working capital items is demonstrated on the cash flow statement as the movement in exchange on cash and cash equivalents. The impact on the statement of operations is due to the movement of the average exchange rate used to restate the statements of operations from Polish zloty, Russian ruble and Hungarian forint to U.S. dollars. The amounts shown as exchange rate gains or losses on the face of the statements of operations relate only to realized gains or losses on transactions that are not denominated in Polish zloty, Russian ruble or Hungarian forint. The table below presents the exchange rates used for translation of our balance sheet and statement of operations balances as of and for the quarter ended March 31, 2012:

 

     Balance sheet rate
as of
March 31, 2012
     Average rate for the
three months ended
March 31, 2012
 

PLN / US$

     3.1191         3.2249   

RUR / US$

     29.3148         30.1674   

HUF / US$

     221.2128         225.5175   

Because the Company’s reporting currency is the U.S. dollar, the translation effects of fluctuations in the exchange rate of our functional currencies have impacted the Company’s financial condition and results of operations and have affected the comparability of our results between financial periods.

The Company also has borrowings including its Convertible Notes due 2013 and Senior Secured Notes due 2016 that are denominated in U.S. dollars and euros, which have been lent to its operations where the functional currency is the Polish zloty and Russian ruble. The effect of having debt denominated in currencies other than the Company’s functional currencies is to increase or decrease the value of the Company’s liabilities on that debt in terms of the Company’s functional currencies when those functional currencies depreciate or appreciate in value, respectively. As a result of this, the Company is exposed to gains and losses on the re-measurement of these liabilities. The table below summarizes the pre-tax impact of a one percent movement in each of the exchange rate which could result in a significant impact in the results of the Company’s operations.

 

Exchange Rate

   Value of notional amount    Pre-tax impact of a 1%
movement in exchange rate
 

USD-Polish zloty

   $426 million    $  4.3 million gain/loss   

USD-Russian ruble

   $264 million    $  2.6 million gain/loss   

EUR-Polish zloty

   €430 million or approximately $574 million    $  5.7 million gain/loss   

 

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Results of Operations:

Three months ended March 31, 2012 compared to three months ended March 31, 2011

A summary of the Company’s operating performance (expressed in thousands except per share amounts) is presented below.

 

     Three months ended March 31,  
     2012     2011  
     (Restated)     (Restated)  

Sales

   $ 321,756      $ 318,081   

Excise taxes

     (175,767     (179,727
  

 

 

   

 

 

 

Net sales

     145,989        138,354   

Cost of goods sold

     90,874        85,685   
  

 

 

   

 

 

 

Gross profit

     55,115        52,669   
  

 

 

   

 

 

 

Selling, general and administrative expenses

     58,934        55,370   

Gain on remeasurement of previously held equity interests

     0        (7,898
  

 

 

   

 

 

 

Operating income / (loss)

     (3,819     5,197   
  

 

 

   

 

 

 

Non operating income / (expense), net

    

Interest income / (expense), net

     (26,302     (26,852

Other financial income / (expense), net

     97,588        30,522   

Other non operating income / (expense), net

     (2,598     (976
  

 

 

   

 

 

 

Income before taxes and equity in net income from unconsolidated investments

     64,869        7,891   
  

 

 

   

 

 

 

Income tax expense

     (4,685     (1,979

Equity in net losses of affiliates

     0        (7,946
  

 

 

   

 

 

 

Net income attributable to the company

     60,184        (2,034
  

 

 

   

 

 

 

Net income from operations per share of common stock, basic

   $ 0.83      $ (0.03

Net income from operations per share of common stock, diluted

   $ 0.82      $ (0.03

Other comprehensive loss, net of tax:

    

Foreign currency translation adjustments

     22,524        134,173   
  

 

 

   

 

 

 

Comprehensive income attributable to the company

   $ 82,708      $ 132,139   
  

 

 

   

 

 

 

 

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Net Sales

Net sales represent total sales net of all customer rebates, excise tax on production and imports, and value added tax. Total net sales increased by approximately 5.5%, or $7.6 million, from $138.4 million for the three months ended March 31, 2011 to $146.0 million for the three months ended March 31, 2012. The increase was driven by the consolidation of Whitehall only for two months in 2011 comparing to a full quarter in 2012 of $6.5 million and higher local currency sales value of $9.2 million. These increases were partially offset by the impact of foreign currency exchange translation of $8.1 million. In Russia although sales volumes were lower, this was offset by improved pricing and lower trade marketing spend in the quarter.

 

     Segment Net Sales
Three months ended March 31,
 
     2012      2011  
     (Restated)      (Restated)  

Segment

     

Poland

   $ 47,135       $ 46,617   

Russia

     93,426         86,579   

Hungary

     5,428         5,158   
  

 

 

    

 

 

 

Total Net Sales

   $ 145,989       $ 138,354   

Sales for Poland increased by $0.5 million from $46.6 million for the three months ended March 31, 2011 to $47.1 million for the three months ended March 31, 2012. This increase was driven mainly by volume growth of domestic vodkas of 7% and export volume growth of 17%, resulting in a net sales value increase of $5.5 million, or 11.8% in local currency terms, offset by weaker Polish zloty against the U.S. dollar which accounted for approximately $5.0 million of sales in U.S. dollar terms. The Company continued to see strong demand for its Żubrówka Biała as well as higher margin flavored vodkas including Soplica.

Sales for Russia increased by $6.8 million from $86.6 million for the three months ended March 31, 2011 to $93.4 million for the three months ended March 31, 2012. Local currency sales value increased by $2.8 million, which was driven by overall lower sales volumes of 15% offset by improved pricing and lower trade marketing. Lower sales volumes in Russia were primarily due to an overall weak vodka market in Russia, with total sales volumes in the industry down during the quarter, as well as continued lower inventory levels in the wholesale trade and reduced sales to key accounts during our renegotiations in the first quarter of 2012. The 15% decline in domestic sales represents the decline in sales into the trade, whereas sales out of the trade to the end customer was only down 8%—9%, with the difference due to the impact of de-stocking. The sales value decrease of the Russian business was also driven by the weakening of the Russian ruble against the U.S. dollar which accounted for approximately $2.5 million of sales in U.S. dollar terms. This was partially offset by the effect of consolidation of Whitehall only for two months in 2011 comparing to full quarter in 2012, resulting in a year on year increase of $6.5 million.

Sales for Hungary increased by $0.2 million from $5.2 million for the three months ended March 31, 2011 to $5.4 million for the three months ended March 31, 2012 which resulted in a $0.9 million increase in volumes on local currency terms offset by a weaker Hungarian forint against the U.S. dollar which accounted for approximately $0.7 million of sales in U.S. dollar terms.

Gross Profit

Total gross profit increased by approximately 4.6%, or $2.4 million, to $55.1 million for the three months ended March 31, 2012, from $52.7 million for the three months ended March 31, 2011. The increase in margin was driven primarily by the higher sales value in Russia. Gross profit margins as a percentage of net sales decreased by 0.3 percentage points from 38.1% to 37.8 % for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011. The change in gross margin percentage was driven by the year on year growth of spirit pricing which resulted in approximately $3.2 million of additional cost in the first quarter of 2012. The spirit prices in Russia have however recently begun to stabilize since January 2012, and in Poland spirit prices have been stable since February 2011 and into the beginning of 2012.

Operating Expenses

Operating expenses consist of selling, general and administrative, or “SG&A” expenses, advertising expenses, non-production depreciation and amortization, and provision for bad debts. Total operating expenses excluding fair value adjustments increased by $3.5 million, from $55.4 million for the three months ended March 31, 2011 to $58.9 million for the three months ended March 31, 2012. For comparability of costs between periods, operating expenses, after excluding the fair value adjustments, are shown separately in the table below. As a percent of net sales they increased from 40.0% for the three months ended March 31, 2011 to 40.4% for the three months ended March 31, 2012.

 

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The table below sets forth the items of operating expenses.

 

     Operating Expenses
Three Months Ended
March 31,
 
     2012
(Restated)
     2011
(Restated)
 

SG&A

   $ 50,088       $ 48,253   

Marketing

     6,490         4,266   

Depreciation and amortization

     2,356         2,851   
  

 

 

    

 

 

 

Sub-Total

     58,934         55,370   

Fair value adjustments

     0         (7,898
  

 

 

    

 

 

 

Total operating expense

   $ 58,934       $ 47,472   

SG&A consists of salaries, warehousing and transportation costs, administrative expenses and bad debt expense. SG&A expenses increased by $1.8 million, from $48.3 million for the three months ended March 31, 2011 to $50.1 million for the three months ended March 31, 2012. The increase in SG&A is primarily due to the inclusion of a full quarter of the Whitehall Group in 2012 of $4.0 million, redundancy costs in Russia of $2.2 million as well as over all inflationary increases including transport costs in Russia.

Marketing expenses increased by $2.2 million, from $4.3 million for the three months ended March 31, 2011, to $6.5 million for the three months ended March 31, 2012, mainly due to higher marketing spending primarily in Russia and Ukraine.

Depreciation and amortization decreased by $0.5 million, from $2.9 million for the three months ended March 31, 2011 to $2.4 million for the three months ended March 31, 2012.

Operating Income

Total operating income decreased by $9.0 million, from $5.2 million income for the three months ended March 31, 2011 to $3.8 million loss for the three months ended March 31, 2012, primarily driven by lower domestic sales and higher spirit costs in the Russian market. The table below summarizes the segmental split of operating profit.

 

     Operating Income/(Loss)
Three months ended March 31,
 
     2012     2011  
     (Restated)     (Restated)  

Segment

    

Poland before fair value adjustments

   $ 6,480      $ 4,793   

Gain on remeasurement of previously held equity interests

     0        7,898   
  

 

 

   

 

 

 

Poland after fair value adjustments

     6,480        12,691   

Russia

     (8,463     (6,220

Hungary

     720        661   

Corporate Overhead

    

General corporate overhead

     (1,692     (1,242

Option Expense

     (864     (693
  

 

 

   

 

 

 

Total Operating Profit/(Loss)

   $ (3,819   $ 5,197   

Underlying operating income in Poland excluding fair value adjustments increased by approximately 35.4%, or $1.7 million, from $4.8 million for the three months ended March 31, 2011 to $6.5 million for the three months ended March 31, 2012. The operating loss in Russia increased by $2.3 million from 6.2 million loss for the three months ended March 31, 2011 to $8.5 million loss for the three months ended March 31, 2012. The changes in operating income in both of these segments were driven by all of the factors described above.

Non Operating Income and Expenses

Total interest expense decreased by approximately 2.2%, or $0.6 million, from $26.9 million for the three months ended March 31, 2011 to $26.3 million for the three months ended March 31, 2012. This decrease was primarily driven by the euro exchange rate as compared to the Polish zloty.

 

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The Company recognized $97.6 million of non-cash unrealized foreign exchange rate income in the three months ended March 31, 2012, primarily related to the impact of movements in exchange rates on our U.S. dollar and euro denominated liabilities, as compared to $30.5 million of gain in the three months ended March 31, 2011.

Total other non-operating expenses increased by $1.6 million, from a loss of $1.0 million for the three months ended March 31, 2011 to a loss of $2.6 million for the three months ended March 31, 2012.

 

 

     Three months ended March 31,  
     2012     2011  

Factoring costs and bank fees

     (2,262     (671

Other gains / (losses)

     (336     (305
  

 

 

   

 

 

 

Total other non operating income / (expense), net

   $ (2,598   $ (976

Income Tax

Our effective tax rate for the three months ended March 31, 2012 was 7.2% as compared to an average blended statutory rate of 21%. The difference in effective tax rates was due primarily to permanent tax differences related to the treatment of unrealized foreign exchange rate gains in Poland.

Statement of Liquidity and Capital Resources

During the three months ended March 31, 2012, the Company’s primary sources of liquidity were cash flows generated from operations. The Company’s primary uses of cash were to fund its working capital requirements, service indebtedness and finance capital expenditures. The following table sets forth selected information concerning the Company’s consolidated cash flow during the periods indicated.

 

 

     Three months ended
March 31, 2012
    Three months ended
March 31, 2011
(Restated)
 

Cash flow from operating activities

   $ 23,766      $ 84,597   

Cash flow from investing activities

   $ (1,202   $ (41,453

Cash flow from financing activities

   $ (18,188   $ (4,140

Management views and performs analysis of financial and non financial performance indicators of the business by segments that are split by countries. The extensive analysis of indicators such as sales value in local currencies, gross margin and operating expenses by segment is included in the MD&A section of this Form 10-Q/A.

Net cash flow from operating activities

Net cash flow from operating activities represents net cash from operations and interest. Overall cash flow from operating activities decreased from cash generation of $84.6 million for the three months ended March 31, 2011 to cash generation of $23.8 million for the three months ended March 31, 2012. The primary factors contributing to this lower cash generation in 2012 are due to the fact that in the first quarter of 2011, the Company entered into factoring arrangements in Poland for the first time which resulted in higher cash collection during this quarter. In 2011 the Polish operations received the cash inflow from the peak Q4 2010 sales as well as the cash from the factored receivables of the quarter, resulting in a one-off benefit in cash flow for the period. During the same period in 2012, the Polish operations only received the normal factored cash flow from the first quarter of 2012.

Overall working capital movements of accounts receivable, inventory and accounts payable provided approximately $54.2 million of cash during the three months ended March 31, 2012. Days sales outstanding (“DSO”) as of March 31, 2012 amounted to 48 days as compared to 56 days as of March 31, 2011. The number of days in inventory as of March 31, 2012 amounted to 121 days as compared to 154 days as of March 31, 2011. In addition, the ratio of our current assets to current liabilities, net of inventories, was 0.6 as of March 31, 2012.

Net cash flow used in investing activities

Net cash flows used in investing activities represent net cash used to acquire subsidiaries and fixed assets. Net cash outflow for the three months ended March 31, 2012 was $1.2 million.

 

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Net cash flow from financing activities

Net cash flow from financing activities represents cash used for servicing indebtedness, borrowings under credit facilities. Net cash used in financing activities was $18.2 million for the three months ended March 31, 2012 as compared to an outflow of $4.1 million for the three months ended March 31, 2011. The primary use in the three months ended March 31, 2012 was repayment of loans by the Company offset by certain loans drawn in Russia. For details see Note 6 to the Condensed Consolidated Financial Statements.

The Company’s Future Liquidity and Capital Resources

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. As discussed further in Note 6, our Convertible Senior Notes (the “Convertible Notes”) are due on March 15, 2013. Our current cash on hand, estimated cash from operations and available credit facilities will not be sufficient to make the repayment and the Company may default on the Convertible Notes, unless the transaction with Russian Standard Corporation is completed as scheduled. The Company’s cash flow forecasts include the assumption that certain credit and factoring facilities that are coming due in 2012 will be renewed to manage working capital needs. Moreover, the Company had a net loss and significant impairment charges in 2011 and current liabilities exceed current assets at March 31, 2012. These conditions raise substantial doubt about the Company’s ability to continue as a going concern unless the transaction with Russian Standard described below is completed as scheduled.

As discussed further in Note 17, on April 23, 2012, the Company announced that definitive agreements had been signed with Russian Standard Corporation (via Roust Trading Limited) for a strategic transaction. Pursuant to these agreements, on May 4, 2012 Roust Trading Limited and its affiliates invested $100 million in the Company by purchasing a combination of newly issued shares of the Company’s common stock and notes exchangeable into the Company’s common shares following shareholder approval. In addition, Roust Trading has agreed to purchase from the Company up to $210 million principal amount of newly issued, unsecured senior notes due July 31, 2016 at a blended interest rate of 6.00%. While we believe that this transaction would allow the Company to settle the Convertible Notes before March 15, 2013, the transaction is subject to certain risks, including shareholder approval which may not be obtained. The Company’s annual general meeting (AGM) is scheduled for June 29, 2012 at which time the final vote of the shareholders will be known. We believe that if the transaction is completed as scheduled, Convertible Notes will be repaid by their maturity date which would substantially reduce doubts about the Company’s ability to continue as a going concern. Under the terms of the Indenture for our Senior Secured Notes due 2016, we expect that any indebtedness we incur in exchange for, or to redeem or refinance, all or a portion of the Convertible Notes will be required to be incurred as permitted refinancing indebtedness (a term defined in the Indenture); as a result, the terms of the indenture may limit our ability to enter into agreements that contain limitations on dividends (and certain payments having similar effects) payable to the Company (or its subsidiaries) by its subsidiaries. Any failure to pay the Convertible Notes would also be an event of default under our Senior Secured Notes due 2016 and the terms of our other indebtedness. Such events would jeopardize our ability to continue as a going concern. Notwithstanding the foregoing, we believe that cash on hand, cash from operations and available credit facilities will be sufficient to fund our anticipated cash requirements for working capital purposes and normal capital expenditures, and that we will remain in compliance with the financial covenants contained in our debt agreements, for at least the next twelve months. The Company’s cash flow forecasts used in making this determination include the assumption that certain credit and factoring facilities that are coming due in 2012 will be renewed to manage the Company’s working capital needs.

For additional information, see also “Risk Factors—Risks Relating to Our Indebtedness”—included in Item 8 of our annual report on Form 10-K filed with the SEC on February 29, 2012.

Financing Arrangements

Bank Facilities

As of March 31, 2012, the Company has outstanding liability of €25.0 million ($33.4 million) from the term loans from Zenit Bank, Alfa Bank and Raiffeisen Bank drawn by Whitehall:

 

   

The loan agreement with Zenit Bank dated March 29, 2011, matures on June 6, 2012. The credit limit under this loan agreement is €10.0 million ($13.3 million) and the loan is released in tranches maturing in 365 days, no later than June 6, 2012. The loan was released in four tranches between April 21, 2011, and September 13, 2011, repayable between April 20, 2012 and May 18, 2012. As of March 31, 2012, the Company has outstanding liability of €5.0 million ($6.7 million) from this term loan;

 

   

The loan agreement with Alfa Bank dated July 22, 2008, matures on October 18, 2014. The credit limit under this agreement is €20.0 million ($26.7 million) and the loan is released in tranches maturing within three, six or nine months, depending if they are pledged on inventory. The loan was released in eight tranches between September 14, 2011, and March 30, 2012, repayable between April 28, 2012 and October 30, 2012. As of March 31, 2012 €15.1 million ($20.1 million) of this limit was granted to the Company;

 

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The loan agreement with Raiffeisen Bank dated July 6, 2010, matures on July 6, 2012. The credit limit under this agreement is €10.0 million ($13.3 million) and the loan is released in tranches maturing within one to 12 months, not later than July 6, 2012 . The loan was released in five tranches between September 12, 2011, and October 26, 2011, repayable between May 18, 2012, and July 6, 2012. As of March 31, 2012, the Company has outstanding liability of €4.9 million ($6.5 million) from this term loan.

The aforementioned loans drawn by Whitehall have no financial covenants that need to be met and are guaranteed by Whitehall companies. The loans from Zenit Bank and Alfa Bank are also secured on the Company’s inventory.

As of March 31, 2012, the Company also has outstanding total liability of 879.6 million Russian rubles ($30.0 million) from term loans from Unicredit and JSC Grand Invest Bank, both drawn by Russian Alcohol, as well as, an overdraft facility from Sberbank drawn by Bravo Premium:

 

   

The loan agreement with Unicredit dated May 24, 2011, matures on November 23, 2012. This loan has no financial covenants and is secured by goods up to 720 million Russian rubles ($24.6 million) and guarantees given by companies of Russian Alcohol. As of March 31, 2012, the Company has outstanding liability of 600.0 million Russian rubles ($20.5 million) from this term loan;

 

   

The loan agreement with JSC Grand Invest Bank dated November 25, 2011, matures on November 23, 2012. This loan has no financial covenants that need to be met. As of March 31, 2012, the Company has outstanding liability of 279.6 million Russian rubles ($9.5 million) from this term loan;

 

   

The overdraft agreement with Sberbank dated February 6, 2012, matures on February 5, 2013. The credit limit under this agreement is 60 million Russian rubles ($2.0 million). This loan has no financial covenants and is secured by fixed assets. As of March 31, 2012, the Company has outstanding liability of 52.5 million Russian rubles ($1.8 million) from this overdraft facility.

As of March 31, 2012, the Company had available to use under existing overdraft facility in Hungary 100.0 million Hungarian forints ($0.5 million).

Senior Secured Notes due 2016

On December 2, 2009, the Company issued and sold $380 million 9.125% Senior Secured Notes due 2016 and €380 million ($507 million) 8.875% Senior Secured Notes due 2016 (the “2016 Notes”) in an offering to institutional investors that was not required to be registered with the SEC. The Company used a portion of the net proceeds from the 2016 Notes to redeem the Company’s outstanding 2012 Notes, having an aggregate principal amount of €245.4 million ($327.4 million) on January 4, 2010. The remainder of the net proceeds from the 2016 Notes was used to (i) purchase Lion Capital’s remaining equity interest in Russian Alcohol by exercising the Lion Option and the Co-Investor Option, pursuant to the terms and conditions of the Lion Option Agreement and the Co-Investor Option Agreement, respectively (ii) repay all amounts outstanding under the Russian Alcohol credit facilities; and (iii) repay certain other indebtedness.

On December 9, 2010 the Company issued and sold additional €50 million ($66.7 million) 8.875% Senior Secured Notes due 2016 (the “2016 Notes”) in an offering to institutional investors that was not required to be registered with the SEC. The Company used the net proceeds from the additional 2016 Notes to repay its term loans and overdraft facilities with Bank Handlowy w Warszawie S.A and Bank Zachodni WBK S.A.

The 2016 Notes are guaranteed on a senior basis by certain of the Company’s subsidiaries. We are required to ensure that subsidiaries representing at least 85% of our consolidated EBITDA, as defined in the indenture, guarantee the notes. The notes are secured, directly or indirectly, by a variety of our and our subsidiary’s assets, including shares of the issuer of the notes and subsidiaries in Poland, Cyprus, Russia and Luxembourg, certain intercompany loans made by the issuer of the notes and our Russian finance company in connection with the issuance of the notes, trademarks related to the Soplica brand registered in Poland, European Union trademarks for the Parliament brand registered in Germany, and bank accounts over $5.0 million. We have also provided mortgages over our Polmos and Bols production plants and the Russian Alcohol Siberian and Topaz Distilleries. The indenture governing the 2016 Notes contains certain restrictive covenants, including covenants limiting the Company’s ability to: incur or guarantee additional debt; make certain restricted payments; transfer or sell assets; enter into transactions with affiliates; create certain liens; create restrictions on the ability of restricted subsidiaries to pay dividends or other payments; issue guarantees of indebtedness by restricted subsidiaries; enter into sale and leaseback transactions; merge, consolidate, amalgamate or combine with other entities; designate restricted subsidiaries as unrestricted subsidiaries; and engage in any business other than a permitted business. The indenture governing the 2016 Notes also contains a cross-acceleration covenant, which would apply in the event that we do not repay when due our Convertible Notes or any other indebtedness which equals or exceeds $30 million. In addition, in the event of a change of control (as that term is used in our indenture), we would be required to offer to repay the outstanding indebtedness under the 2016 Notes at a price equal to 101% of the aggregate principal amount thereof.

 

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Convertible Senior Notes

On March 7, 2008, the Company completed the issuance of $310 million aggregate principal amount of 3% Convertible Senior Notes due 2013 (the “Convertible Notes”). Interest is due semi-annually on the 15th of March and September, beginning on September 15, 2008. The Convertible Notes are convertible in certain circumstances into cash and, if applicable, shares of our common stock, based on an initial conversion rate of 14.7113 shares per $1,000 principal amount, subject to certain adjustments. Upon conversion of the notes, the Company will deliver cash up to the aggregate principal amount of the notes to be converted and, at the election of the Company, cash and/or shares of common stock in respect to the remainder, if any, of the conversion obligation. The proceeds from the Convertible Notes were used to fund the cash portions of the acquisitions of Copecresto Enterprises Limited and Whitehall. The indenture governing the Convertible Notes also contains a cross-acceleration covenant, which would apply in the event that we do not repay when due any indebtedness which equals or exceeds $30 million. In addition, in the event of a fundamental change (as that term is used in our indenture), we would be required to offer to repay the outstanding indebtedness under the Convertible Notes in cash at a price equal to 100% of the aggregate principal amount thereof.

Effects of Inflation and Foreign Currency Movements

Inflation in Poland is projected at 3.7% for 2012, compared to actual inflation of 4.6% in 2011. In Russia, Hungary and Ukraine, inflation for 2012 is projected at 6.0%, 4.9% and 6.5% respectively, compared to actual inflation of 6.1%, 4.1% and 8.0% in 2011.

Substantially all of the Company’s operating cash flows and assets are denominated in Polish zloty, Russian ruble and Hungarian forint. This means that the Company is exposed to translation movements both on its balance sheet and statement of operations. The impact on working capital items is demonstrated on the cash flow statement as the movement in exchange on cash and cash equivalents. The impact on the statement of operations is by the movement of the average exchange rate used to restate the statement of operations from Polish zloty, Russian ruble and Hungarian forint to U.S. dollars. The amounts shown as exchange rate gains or losses on the face of the statements of operations relate only to realized gains or losses on transactions that are not denominated in Polish zloty, Russian ruble or Hungarian forint. Table below presents the exchange rates used for translation of our balance sheet and statement of operations balances as of and for the quarter ended March 31, 2012:

 

     Balance sheet rate
as of
March 31, 2012
     Average rate for the
three months ended
March 31, 2012
 

PLN / US$

     3.1191         3.2249   

RUR / US$

     29.3148         30.1674   

HUF / US$

     221.2128         225.5175   

Because the Company’s reporting currency is the U.S. dollar, the translation effects of fluctuations in the exchange rate of our functional currencies have impacted the Company’s financial condition and results of operations and have affected the comparability of our results between financial periods.

The Company has borrowings including its Convertible Notes due 2013 and Senior Secured Notes due 2016 that are denominated in U.S. dollars and euros, which have been lent to its operations where the functional currency is the Polish zloty and Russian ruble. The effect of having debt denominated in currencies other than the Company’s functional currencies is to increase or decrease the value of the Company’s liabilities on that debt in terms of the Company’s functional currencies when those functional currencies depreciate or appreciate in value respectively. As a result of this, the Company is exposed to gains and losses on the re-measurement of these liabilities. The table below summarizes the pre-tax impact of a one percent movement in each of the exchange rate which could result in a significant impact in the results of the Company’s operations.

 

Exchange Rate

   Value of notional amount    Pre-tax impact of a 1%
movement in exchange rate
 

USD-Polish zloty

   $426 million    $ 4.3 million gain/loss   

USD-Russian ruble

   $264 million    $ 2.6 million gain/loss   

EUR-Polish zloty

   €430 million or approximately $574 million    $ 5.7 million gain/loss   

Significant Accounting Policies and Estimates

For a discussion of our critical accounting policies, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2011 Annual Report on Form 10-K.

 

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Table of Contents
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our operations are conducted primarily in Poland and Russia, and our functional currencies are primarily the Polish zloty, Hungarian forint and Russian ruble, and our reporting currency is the U.S. dollar. Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, bank loans, overdraft facilities and long-term debt. All of the monetary assets represented by these financial instruments are located in Poland, Russia and Hungary. Consequently, they are subject to currency translation movements when reporting in U.S. dollars.

If the U.S. dollar increases in value against the Polish zloty, Russian ruble or Hungarian forint, the value in U.S. dollars of assets, liabilities, revenues and expenses originally recorded in Polish zloty, Russian ruble or Hungarian forint will decrease. Conversely, if the U.S. dollar decreases in value against the Polish zloty, Russian ruble or Hungarian forint, the value in U.S. dollars of assets, liabilities, revenues and expenses originally recorded in Polish zloty, Russian ruble or Hungarian forint will increase. Thus, increases and decreases in the value of the U.S. dollar can have a material impact on the value in U.S. dollars of our non-U.S. dollar assets, liabilities, revenues and expenses, even if the value of these items has not changed in their original currency.

The Company has borrowings including its Convertible Notes due 2013 and Senior Secured Notes 2016 that are denominated in U.S. dollars and euros, which have been lent to its operations where the functional currency is the Polish zloty and Russian ruble. The effect of having debt denominated in currencies other than the Company’s functional currencies is to increase or decrease the value of the Company’s liabilities on that debt in terms of the Company’s functional currencies when those functional currencies depreciate or appreciate in value respectively. As a result of this, the Company is exposed to gains and losses on the re-measurement of these liabilities. The table below summarizes the pre-tax impact of a one percent movement in each of the exchange rate which could result in a significant impact in the results of the Company’s operations.

 

Exchange Rate

   Value of notional amount    Pre-tax impact of a 1%
movement in exchange rate
 

USD-Polish zloty

   $426 million    $ 4.3 million gain/loss   

USD-Russian ruble

   $264 million    $ 2.6 million gain/loss   

EUR-Polish zloty

   €430 million or approximately $574 million    $ 5.7 million gain/loss   

 

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures.

We have carried out an evaluation under the supervision of, and with the participation of, our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2012. Since December 31, 2011, we have begun the restructuring of our corporate finance and reporting department in Poland and Russia to implement more effective internal controls over financial reporting. However, our evaluation has disclosed material weaknesses still exist in our internal control over financial reporting as noted in Management’s Assessment on Internal Control over Financial Reporting located in Item 9A, Financial Statements and Supplementary Data, of our restated 2011 Annual Report on Amendment No. 2 on Form 10-K/A.

Due to our material weaknesses, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are not effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Changes in internal control over financial reporting.

There has been no material change in internal control over financial reporting in the quarter ended March 31, 2012, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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Table of Contents

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

Please refer to Note 14 of the accompanying Condensed Consolidated Financial Statements attached herein for a discussion of certain legal proceedings.

 

Item 1A. Risk Factors.

For a discussion of the Company’s risk factors, see the information under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on February 29, 2012.

 

33


Table of Contents
Item 6. Exhibits.

(a) Exhibits

 

Exhibit

Number

 

Exhibit Description

3.1   Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Quarterly Report on Form 10-Q filed with the SEC on May 5, 2010 and incorporated herein by reference).
3.2   Amended and Restated Bylaws (filed as Exhibit 3.2 to the Quarterly Report on Form10-Q filed with the SEC on November 9, 2011 and incorporated herein by reference).
10.63(a)   Securities Purchase Agreement, dated April 23, 2012 by and among Central European Distribution Corporation and Roust Trading Ltd. (filed as Exhibit 10.1 to the Periodic Report on Form 8-K filed with the SEC on April 24, 2012 and incorporated herein by reference).
10.63(b)   Governance Agreement, dated April 23, 2012 by and among Central European Distribution Corporation and Roust Trading Ltd. (filed as Exhibit 10.2 to the Periodic Report on Form 8-K filed with the SEC on April 24, 2012 and incorporated herein by reference).
10.63(c)   Registration Rights Agreement, dated April 23, 2012, by and among Central European Distribution Corporation and Roust Trading Ltd. (filed as Exhibit 10.3to the Periodic Report on Form 8-K filed with the SEC on April 24, 2012 and incorporated herein by reference).
10.63(d)   Voting Agreement, dated April 23, 2012, by and among Central European Distribution Corporation and Roust Trading Ltd. (filed as Exhibit 10.4 to the Periodic Report on Form 8-K filed with the SEC on April 24, 2012 and incorporated herein by reference).
31.1*   Certificate of the CEO pursuant to Rule 13a-15(e) or Rule 15d-15(e).
31.2*   Certificate of the CFO pursuant to Rule 13a-15(e) or Rule 15d-15(e).
32.1*   Certification of the CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*   Certification of the CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1(a)   Voting Agreement, dated April 23, 2012, by and among Central European Distribution Corporation, Mr. David Bailey and Roust Trading Ltd. (filed as Exhibit 99.1 to the Periodic Report on Form 8-K filed with the SEC on April 24, 2012 and incorporated herein by reference).
99.1(b)   Voting Agreement, dated April 23, 2012, by and among Central European Distribution Corporation, Mr. N. Scott Fine and Roust Trading Ltd. (filed as Exhibit 99.2 to the Periodic Report on Form 8-K filed with the SEC on April 24, 2012 and incorporated herein by reference).
99.1(c)   Voting Agreement, dated April 23, 2012, by and among Central European Distribution Corporation, Mr. William Shanahan and Roust Trading Ltd. (filed as Exhibit 99.3 to the Periodic Report on Form 8-K filed with the SEC on April 24, 2012 and incorporated herein by reference).
99.1(d)   Voting Agreement, dated April 23, 2012, by and among Central European Distribution Corporation, Mr. Robert Koch and Roust Trading Ltd. (filed as Exhibit 99.4 to the Periodic Report on Form 8-K filed with the SEC on April 24, 2012 and incorporated herein by reference).
99.1(e)   Voting Agreement, dated April 23, 2012, by and among Central European Distribution Corporation, Mr. Markus Sieger and Roust Trading Ltd. (filed as Exhibit 99.5 to the Periodic Report on Form 8-K filed with the SEC on April 24, 2012 and incorporated herein by reference).
99.1(f)   Voting Agreement, dated April 23, 2012, by and among Central European Distribution Corporation, Mr. Marek Forysiak and Roust Trading Ltd. (filed as Exhibit 99.6 to the Periodic Report on Form 8-K filed with the SEC on April 24, 2012 and incorporated herein by reference).
99.1(g)   Voting Agreement, dated April 23, 2012, by and among Central European Distribution Corporation, Mr. William V. Carey and Roust Trading Ltd. (filed as Exhibit 99.7 to the Periodic Report on Form 8-K filed with the SEC on April 24, 2012 and incorporated herein by reference).
101*   The following financial statements from Central European Distribution Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Income, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Cash Flows, (iv) Notes to Consolidated Financial Statements, tagged as blocks of text.

 

* Filed herewith.

 

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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  CENTRAL EUROPEAN DISTRIBUTION CORPORATION
  (registrant)

Date: October 4, 2012

  By:   /s/ David Bailey
    David Bailey
    Interim Chief Executive Officer

Date: October 4, 2012

  By:   /s/ Bartosz Kołaciński
    Bartosz Kołaciński
    Interim Chief Financial Officer

 

35

XLON:0N30 Central European Distribution Corp Quarterly Report 10-Q/A Filling

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