Form 10-Q Amendment No. 1
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 SEPTEMBER 30, 2011

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 November 4, 2011: Common Stock ($.01 par value) 72,739,924

 

 

 


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 and nine months ended September 30, 2011, initially filed with the SEC on November 9, 2011 (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 and nine months ended September 30, 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 3, “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 and deferred taxes 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 include 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 include 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 months ended March 31, 2012 covering restated comparable balances and results as of and for the three months ended March 31, 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 and 2 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.


Table of Contents

INDEX

 

         PAGE  

PART I

 

FINANCIAL INFORMATION

  

Item 1

 

Condensed Consolidated Financial Statements (unaudited)

  
 

Condensed Consolidated Balance Sheets as of September 30, 2011 (unaudited) and as of December  31, 2010

     1   
 

Condensed Consolidated Statements of Operations (unaudited) for the three month and nine month periods ended September 30, 2011 and September 30, 2010

     2   
 

Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the nine month period ended September 30, 2011 and year ended December 31, 2010

     3   
 

Condensed Consolidated Statements of Cash Flow (unaudited) for the nine month periods ended September 30, 2011 and September 30, 2010

     4   
 

Notes to Condensed Consolidated Financial Statements (unaudited)

     5   

Item 2

 

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

     28   

Item 3

 

Quantitative and Qualitative Disclosures about Market Risk

     44   

Item 4

 

Controls and Procedures

     44   

PART II

 

OTHER INFORMATION

     46   

Item 6

 

Exhibits

     48   


Table of Contents

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

All amounts are expressed in thousands

(except share information)

 

    

September 30,

2011

(unaudited)

   

December 31,

2010

 
    

(Restated,

see Note 3)

   

(Restated,

see Note 3)

 
ASSETS     

Current Assets

    

Cash and cash equivalents

   $ 111,191      $ 122,116   

Accounts receivable, net of allowance for doubtful accounts at September 30, 2011 of $28,473 and at December 31, 2010 of $20,863

     236,486        433,168   

Inventories

     121,441        91,874   

Prepaid expenses and other current assets

     46,092        33,754   

Deferred income taxes

     45,660        80,956   

Debt issuance costs

     2,972        2,739   
  

 

 

   

 

 

 

Total Current Assets

     563,842        764,607   

Intangible assets, net

     471,695        627,342   

Goodwill, net

     1,068,378        1,452,986   

Property, plant and equipment, net

     181,185        189,880   

Deferred income taxes

     57,056        44,028   

Equity method investment in affiliates

     0        243,010   

Debt issuance costs

     14,283        16,656   

Non-current assets held for sale

     676        8,614   
  

 

 

   

 

 

 

Total Non-Current Assets

     1,793,273        2,582,516   
  

 

 

   

 

 

 

Total Assets

   $ 2,357,115      $ 3,347,123   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current Liabilities

    

Trade accounts payable

   $ 87,724      $ 92,840   

Bank loans and overdraft facilities

     54,213        45,359   

Income taxes payable

     1,070        5,708   

Taxes other than income taxes

     89,644        182,343   

Other accrued liabilities

     54,519        57,901   

Current portions of obligations under capital leases

     931        758   

Deferred consideration

     0        5,000   
  

 

 

   

 

 

 

Total Current Liabilities

     288,101        389,909   

Long-term debt, less current maturities

     18,738        0   

Long-term obligations under capital leases

     838        1,175   

Long-term obligations under Senior Notes

     1,262,087        1,250,758   

Long-term accruals

     1,963        2,767   

Deferred income taxes

     131,459        169,318   
  

 

 

   

 

 

 

Total Long-Term Liabilities

     1,415,085        1,424,018   

Stockholders’ Equity

    

Common Stock ($0.01 par value, 120,000,000 shares authorized, 72,739,924 and 70,752,670 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively)

     728        708   

Preferred Stock ($0.01 par value, 7,000,000 shares authorized, none issued)

     0        0   

Additional paid-in-capital

     1,368,864        1,343,639   

(Accumulated deficit)/Retained earnings

     (728,602     125,500   

Accumulated other comprehensive income

     13,089        63,499   

Less Treasury Stock at cost (246,037 shares at September 30, 2011 and December 31, 2010, respectively)

     (150     (150
  

 

 

   

 

 

 

Total Stockholders’ Equity

     653,929        1,533,196   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 2,357,115      $ 3,347,123   
  

 

 

   

 

 

 

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

 

1


Table of Contents

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

All amounts are expressed in thousands

(except per share information)

 

     Three months ended September 30,     Nine months ended September 30,  
     2011     2010     2011     2010  
    

(Restated,

see Note 3)

   

  

   

(Restated,

see Note 3)

   

  

 

Sales

   $ 432,942      $ 347,492      $ 1,176,861      $ 1,058,260   

Excise taxes

     (223,304     (189,732     (630,513     (575,097
  

 

 

   

 

 

   

 

 

   

 

 

 

Net sales

     209,638        157,760        546,348        483,163   

Cost of goods sold

     131,427        80,448        340,820        243,241   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     78,211        77,312        205,528        239,922   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

     61,710        48,239        180,836        144,369   

Gain on remeasurement of previously held equity interests

     0        0        (7,898     0   

Impairment charge

     674,515        0        674,515        0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     (658,014     29,073        (641,925     95,553   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non operating income / (expense), net

        

Interest income / (expense), net

     (28,123     (25,749     (83,336     (77,848

Other financial income / (expense), net

     (170,337     81,773        (120,807     4,987   

Other non operating income / (expense), net

     (10,683     (914     (14,320     (12,266
  

 

 

   

 

 

   

 

 

   

 

 

 

Income / (loss) before taxes and equity in net income from unconsolidated investments

     (867,157     84,183        (860,388     10,426   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax benefit / (expense)

     18,422        (17,023     14,232        (2,275

Equity in net income / (losses) of affiliates

     0        1,719        (7,946     2,163   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income / (loss) from continuing operations

     (848,735     68,879        (854,102     10,314   
  

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations

        

Income / (loss) from operations

     0        30,870        0        (11,815

Income tax benefit / (expense)

     0        147        0        37   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income / (loss) on discontinued operations

     0        31,017        0        (11,778
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income / (loss)

   $ (848,735   $ 99,896      $ (854,102   $ (1,464
  

 

 

   

 

 

   

 

 

   

 

 

 

Income / (loss) from continuing operations per share of common stock, basic

   $ (11.71   $ 0.98      $ (11.85   $ 0.15   

Income / (loss) from discontinued operations per share of common stock, basic

   $ 0.00      $ 0.44      $ 0.00      $ (0.17
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (11.71   $ 1.42      $ (11.85   $ (0.02

Income from continuing operations per share of common stock, diluted

   $ (11.71   $ 0.98      $ (11.85   $ 0.15   

Income / (loss) from discontinued operations per share of common stock, diluted

   $ 0.00      $ 0.43      $ 0.00      $ (0.17
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (11.71   $ 1.41      $ (11.85   $ (0.02

Other comprehensive income / (loss), net of tax:

        

Foreign currency translation adjustments

     (215,010     (19,374     (50,410     (75,086
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income / (loss) attributable to the Company

   $ (1,063,745   $ 80,522      $ (904,512   $ (76,550
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

2


Table of Contents

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN

STOCKHOLDERS’ EQUITY

All amounts are expressed in thousands

(except per share information)

 

    Common Stock     Preferred Stock     Treasury Stock                 Accumulated     Accumulated     Total  
    No. of
Shares
    Amount     No. of
Shares
    Amount     No. of
Shares
    Amount     Additional
Paid-in
Capital
    (Accumulated
Deficit) /
Retained
Earnings
    other
comprehensive
income of
continuing
operations
    other
comprehensive
income of
discontinued
operations
   

Balance at December 31, 2009

    69,412      $ 694        0        0        246      ($ 150   $ 1,296,391      $ 264,917      $ 82,994      $ 40,316      $ 1,685,162   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative effect of restatement on opening balance

    0        0        0        0        0        0        0        (1,344     1,344        0        0   

Net loss for 2010

    0        0        0        0        0        0        0        (138,073     0        0        (138,073

Foreign currency translation adjustment

    0        0        0        0        0        0        0        0        (20,839     (40,316     (61,155
             

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss for 2010

    0        0        0        0        0        0        0        (139,417     (19,495     (40,316     (199,228

Common stock issued in connection with options

    263        3        0        0        0        0        5,915        0        0        0        5,918   

Common stock issued in connection with acquisitions

    1,078        11        0        0        0        0        41,333        0        0        0        41,344   

Balance at December 31, 2010 (restated)

    70,753      $ 708        0        0        246      ($ 150   $ 1,343,639      $ 125,500      $ 63,499      $ 0      $ 1,533,196   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss for 2011 (unaudited)

    0        0        0        0        0        0        0        (854,102     0        0        (854,102

Foreign currency translation adjustment (unaudited)

    0        0        0        0        0        0        0        0        (50,410     0        (50,410
             

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss for 2011 (unaudited)

    0        0        0        0        0        0        0        (854,102     (50,410     0        (904,512

Common stock issued in connection with options (unaudited)

    89        1        0        0        0        0        2,069        0        0        0        2,070   

Common stock issued in connection with acquisitions (unaudited)

    1,897        19        0        0        0        0        23,156        0        0        0        23,175   

Balance at September 30, 2011 (unaudited, restated)

    72,739      $ 728        0        0        246      ($ 150   $ 1,368,864      ($ 728,602   $ 13,089      $ 0      $ 653,929   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

3


Table of Contents

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)

All amounts are expressed in thousands

 

     Nine months ended September 30,  
     2011     2010  
    

(Restated,

see Note 3)

   

  

 

Cash flows from operating activities of continuing operations

    

Net loss

   $ (854,102   $ (1,464

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

    

Net loss from discontinued operations

     0        11,778   

Depreciation and amortization

     15,328        12,717   

Deferred income taxes

     (5,138     (12,103

Unrealized foreign exchange (gains) / losses

     118,366        (2,090

Cost of debt extinguishment

     0        14,114   

Stock options fair value expense

     1,998        2,433   

Dividends received

     0        17,983   

Equity (income)/loss in affiliates

     7,946        (2,163

Gain on fair value remeasurement of previously held equity interest

     (6,397     0   

Impairment charge

     674,515        0   

Impairments related to assets held for sale

     7,355        0   

Other non-cash items

     6,170        11,532   

Changes in operating assets and liabilities:

    

Accounts receivable

     246,153        155,430   

Inventories

     (9,183     (3,179

Prepayments and other current assets

     (7,701     (4,253

Trade accounts payable

     (42,518     (44,636

Other accrued liabilities and payables (including taxes)

     (106,396     (81,407
  

 

 

   

 

 

 

Net cash provided by operating activities from continuing operations

     46,396        74,692   

Cash flows from investing activities of continuing operations

    

Purchase of fixed assets

     (5,422     (3,226

Purchase of intangibles (licenses)

     (693     0   

Changes in restricted cash

     0        481,419   

Purchase of trademarks

     (17,473     (6,000

Disposal of subsidiaries

     0        124,160   

Acquisitions of subsidiaries, net of cash acquired

     (24,125     (135,964
  

 

 

   

 

 

 

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

     (47,713     460,389   

Cash flows from financing activities of continuing operations

    

Borrowings on bank loans and overdraft facility

     36,027        18,568   

Payment of bank loans, overdraft facility and other borrowings

     (37,892     (76,265

Payment of Senior Secured Notes

     0        (367,954

Repayment of obligation to former shareholders

     0        7,500   

Decrease in short term capital leases payable

     (34     0   

Increase in short term capital leases payable

     0        324   

Options exercised

     72        2,336   
  

 

 

   

 

 

 

Net cash used in financing activities from continuing operations

     (1,827     (415,491
  

 

 

   

 

 

 

Cash flows from discontinued operations

    

Net cash used in operating activities of discontinued operations

     0        2,806   

Net cash provided by investing activities of discontinued operations

     0        (330

Net cash provided by financing activities of discontinued operations

     0        100   
  

 

 

   

 

 

 

Net cash used in discontinued operations

     0        2,576   

Adjustment to reconcile the change in cash balances of discontinued operations

     0        (2,576

Currency effect on brought forward cash balances

     (7,781     (13,172

Net increase / (decrease) in cash

     (10,925     106,418   

Cash and cash equivalents at beginning of period

     122,116        126,439   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 111,191      $ 232,857   
  

 

 

   

 

 

 

Supplemental Schedule of Non-cash Investing Activities

    

Common stock issued in connection with investment in subsidiaries

   $ 23,175      $ 41,344   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information

    

Interest paid

   $ 50,574      $ 82,406   

Income tax paid

   $ 5,770      $ 25,441   
  

 

 

   

 

 

 

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

 

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Table of Contents

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 DESCRIPTION OF BUSINESS

Central European Distribution Corporation (“CEDC”), a Delaware corporation incorporated on September 4, 1997, 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 32.7 million nine-liter cases produced and distributed in 2010. 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 and Hungary. Additionally in 2010, we opened up a new operation in the Ukraine to import and sell our vodkas, primarily Green Mark. 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.

 

2. 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 cash flows for the interim periods presented have been included. Operating results for the three and nine month periods ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ended December 31, 2011.

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 covering also restated comparable balances for the year ended December 31, 2010, dated October 4, 2012.

The balance sheet at December 31, 2010 has been derived from the restated audited financial statements at that date, described above, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

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.

 

3. 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 that review, 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 three and nine months ended September 30, 2011 and the year ended December 31, 2010 were overstated by $7.6, $19.8 and $11.3 million, respectively and the accounts receivable as at September 30, 2011 and December 31, 2010 were overstated by $33.6 million and $15.6 million, respectively affecting other various lines for $2.5 and $4.3 million, respectively. Moreover, as a result of the inconsistent presentation of retroactive trade rebates accounts receivable were overstated as at December 31, 2010 by $22.5 million and accounts payable and other accrued liabilities were overstated by $17.5 million and $5.0 million, respectively. Furthermore, the Company improperly accounted for promotional compensation granted to customers and as a result the accounts receivable as at September 30, 2011 and December 31, 2010 were additionally overstated by $9.1 and $5.5 million respectively, the consolidated sales for the three and nine months ended September 30, 2011 and for the year ended December 31, 2010 were overstated by $5.5, $12.0 and $7.5 million, respectively, and the operating expenses for the three and nine months ended September 30, 2011 were overstated by $3.0 and $7.2 million, respectively.

As of December 31, 2010 expense accruals of $6.3 million were wrongly presented as accounts payables, causing the accounts payables to be overstated and accruals to be understated by the same amount. Furthermore, goodwill increased by $2.7 million, as a result of unrecognized impairment of property, plant and equipment on acquisition of RAG in 2008. In addition, identified unrecorded liabilities resulted in an understatement of other accrued liabilities and trade accounts payable by $3.7 million and $1.7 million, respectively, resulting from number of individually immaterial adjustments.

In addition to the adjustments described above as of September 30, 2011 the Company:

 

  - decreased accounts receivable by additional $25.6 million (in addition to the $33.6 million relating to unrecorded retroactive trade rebates and $9.1 million relating to promotional compensation granted described above); this adjustment resulted mainly from a cut-off error of $22.8 million, where revenue for the fourth quarter of 2011 was recognized in September 2011;

 

  - increased inventories by $16.3 million, resulting mainly from the cut-off error described above;

 

  - decreased taxes other than income taxes payable by $2.6 million, which is also a result of the above described cut-off error;

 

  - increased goodwill by $3.6 million, of which $2.7 million relates to unrecognized impairment of property, plant and equipment on acquisition of RAG in 2008 (adjusted also as of December 31, 2010);

In the unaudited condensed consolidated statement of operations for the three months ended September 30, 2011 the Company:

 

  - decreased sales by additional $5.6 million (in addition to the $7.6 million relating to unrecorded retroactive trade rebates and $5.5 million relating to promotional compensation granted to customers described above) mainly due to sales cut-off error in the amount of $3.9 million;

 

  - decreased the cost of goods sold by $4.3 million mainly due to sales cut-off error in the amount of $3.3 million.

In the unaudited condensed consolidated statement of operations for the nine months ended September 30, 2011 the Company:

 

  - decreased sales by additional $19.1 million (in addition to the $19.8 million relating to unrecorded retroactive trade rebates and $12.0 million relating to promotional compensation granted to customers described above) mainly due to sales cut-off error in the amount of $19.1 million;

 

  - decreased the cost of goods sold by $19.0 million mainly due to sales cut-off error in the amount of $16.5 million and other individually immaterial adjustments;

As a result, the Audit Committee of the Company’s Board of Directors concluded that the Company should restate its consolidated balance sheets as of September 30, 2011 (unaudited) and December 31, 2010, and the related consolidated statements of changes in stockholders’ equity, the unaudited condensed consolidated statements of operations for three and nine months ended September 30, 2011 and unaudited condensed consolidated statement of cash flows for nine months ended September 30, 2011. The unaudited condensed consolidated statements of operations for three and nine months ended September 30, 2010 and unaudited condensed consolidated statement of cash flows for nine months ended September 30, 2010 were not affected by the restatement.

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 consolidated financial statements at September 30, 2011 and December 31, 2010, as well as, write-off of non-recoverable VAT and prepayments, recording provisions for 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 15.

The impact of the corrections of the errors discussed above on the consolidated balance sheets, consolidated statements of operations, 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 Statement of Operations – Three months ended September 30, 2011 (unaudited)

 

     Three months ended
September 30, 2011
As reported
    Adjustments     Three months ended
September 30, 2011
Restated
 

Sales

   $ 451,592      $ (18,650   $ 432,942   

Excise taxes

     (222,742     (562     (223,304
  

 

 

   

 

 

   

 

 

 

Net sales

     228,850        (19,212     209,638   

Cost of goods sold

     135,742        (4,315     131,427   
  

 

 

   

 

 

   

 

 

 

Gross profit

     93,108        (14,897     78,211   
  

 

 

   

 

 

   

 

 

 

Operating expenses

     63,757        (2,047     61,710   

Impairment charge

     674,515        0        674,515   
  

 

 

   

 

 

   

 

 

 

Operating income

     (645,164     (12,850     (658,014
  

 

 

   

 

 

   

 

 

 

Non operating income / (expense), net

      

Interest income / (expense), net

     (29,033     910        (28,123

Other financial income / (expense), net

     (170,809     472        (170,337

Other non operating income / (expense), net

     (11,633     950        (10,683
  

 

 

   

 

 

   

 

 

 

Income / (loss) before taxes and equity in net income from unconsolidated investments

     (856,639     (10,518     (867,157
  

 

 

   

 

 

   

 

 

 

Income tax benefit / (expense)

     16,789        1,633        18,422   
  

 

 

   

 

 

   

 

 

 

Net income / (loss)

   $ (839,850   $ (8,885   $ (848,735
  

 

 

   

 

 

   

 

 

 

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

   $ (11.59   $ (0.12   $ (11.71

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

   $ (11.59   $ (0.12   $ (11.71

Other comprehensive income / (loss), net of tax:

      

Foreign currency translation adjustment

     (221,597     6,587        (215,010
  

 

 

   

 

 

   

 

 

 

Comprehensive income / (loss) attributable to the Company

   $ (1,061,447   $ (2,298   $ (1,063,745
  

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidated Statement of Operations – Nine months ended September 30, 2011 (unaudited)

 

     Nine months ended
September  30, 2011
As reported
    Adjustments     Nine months ended
September  30, 2011
Restated
 

Sales

   $ 1,227,732      $ (50,871   $ 1,176,861   

Excise taxes

     (630,214     (299     (630,513
  

 

 

   

 

 

   

 

 

 

Net sales

     597,518        (51,170     546,348   

Cost of goods sold

     359,831        (19,011     340,820   
  

 

 

   

 

 

   

 

 

 

Gross profit

     237,687        (32,159     205,528   
  

 

 

   

 

 

   

 

 

 

Operating expenses

     190,052        (9,216     180,836   

Gain on remeasurement of previously held equity interests

     (7,898     0        (7,898

Impairment charge

     674,515        0        674,515   
  

 

 

   

 

 

   

 

 

 

Operating income

     (618,982     (22,943     (641,925
  

 

 

   

 

 

   

 

 

 

Non operating income / (expense), net

      

Interest income / (expense), net

     (84,246     910        (83,336

Other financial income / (expense), net

     (121,015     208        (120,807

Other non operating income / (expense), net

     (15,270     950        (14,320
  

 

 

   

 

 

   

 

 

 

Income / (loss) before taxes and equity in net income from unconsolidated investments

     (839,513     (20,875     (860,388
  

 

 

   

 

 

   

 

 

 

Income tax benefit / (expense)

     12,612        1,620        14,232   

Equity in net income / (losses) of affiliates

     (8,814     868        (7,946
  

 

 

   

 

 

   

 

 

 

Net income / (loss)

   $ (835,715   $ (18,387   $ (854,102
  

 

 

   

 

 

   

 

 

 

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

   $ (11.60   $ (0.25   $ (11.85

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

   $ (11.60   $ (0.25   $ (11.85

Other comprehensive income / (loss), net of tax:

      

Foreign currency translation adjustments

     (53,428     3,018        (50,410
  

 

 

   

 

 

   

 

 

 

Comprehensive income / (loss) attributable to the Company:

   $ (889,143   $ (15,369   $ (904,512
  

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidated Balance Sheet – September 30, 2011 (unaudited)

 

     Balance as at
September 30, 2011
As Reported
    Adjustments     Balance as at
September 30, 2011
Restated
 

Current Assets

      

Cash and cash equivalents

   $ 111,191      $ 0      $ 111,191   

Accounts receivable, net of allowance for doubtful accounts of $27,355 as reported and $28,473 as restated

     304,808        (68,322     236,486   

Inventories

     105,161        16,280        121,441   

Prepaid expenses and other current assets

     45,539        553        46,092   

Deferred income taxes

     45,437        223        45,660   

Debt issuance costs

     2,972        0        2,972   
  

 

 

   

 

 

   

 

 

 

Total Current Assets

     615,108        (51,266     563,842   

Intangible assets, net

     471,695        0        471,695   

Goodwill, net

     1,064,729        3,649        1,068,378   

Property, plant and equipment, net

     184,014        (2,829     181,185   

Deferred income taxes

     57,056        0        57,056   

Debt issuance costs

     14,283        0        14,283   

Non-current assets held for sale

     676        0        676   
  

 

 

   

 

 

   

 

 

 

Total Non-Current Assets

     1,792,453        820        1,793,273   
  

 

 

   

 

 

   

 

 

 

Total Assets

   $ 2,407,561      $ (50,446   $ 2,357,115   
  

 

 

   

 

 

   

 

 

 

Current Liabilities

      

Trade accounts payable

   $ 88,424      $ (700   $ 87,724   

Bank loans and overdraft facilities

     54,213        0        54,213   

Income taxes payable

     1,070        0        1,070   

Taxes other than income taxes

     92,233        (2,589     89,644   

Other accrued liabilities

     54,804        (285     54,519   

Current portions of obligations under capital leases

     931        0        931   
  

 

 

   

 

 

   

 

 

 

Total Current Liabilities

     291,675        (3,574     288,101   

Long-term debt, less current maturities

     18,738        0        18,738   

Long-term obligations under capital leases

     838        0        838   

Long-term obligations under Senior Notes

     1,262,087        0        1,262,087   

Long-term accruals

     1,991        (28     1,963   

Deferred income taxes

     131,459        0        131,459   
  

 

 

   

 

 

   

 

 

 

Total Long-Term Liabilities

     1,415,113        (28     1,415,085   

Stockholders’ Equity

      

Common Stock ($0.01 par value, 120,000,000 shares authorized, 72,739,924 shares issued and outstanding)

     728        0        728   

Preferred Stock ($0.01 par value, 7,000,000 shares authorized, none issued)

     0        0        0   

Additional paid-in-capital

     1,368,864        0        1,368,864   

(Accumulated deficit)/Retained earnings

     (675,465     (53,137     (728,602

Accumulated other comprehensive income

     6,796        6,293        13,089   

Less Treasury Stock at cost (246,037 shares)

     (150     0        (150
  

 

 

   

 

 

   

 

 

 

Total Stockholder’s Equity

     700,773        (46,844     653,929   
  

 

 

   

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 2,407,561      $ (50,446   $ 2,357,115   
  

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidated Statements of Cash Flow – Nine months ended September 30, 2011 (unaudited)

 

     Nine months ended
September  30, 2011
As reported
    Adjustments     Nine months ended
September  30, 2011
Restated
 

Cash flows from operating activities of continuing operations

      

Net loss

   $ (835,715   $ (18,387   $ (854,102

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

      

Depreciation and amortization

     15,328        0        15,328   

Deferred income taxes

     (3,683     (1,455     (5,138

Unrealized foreign exchange (gains) / losses

     118,574        (208     118,366   

Stock options fair value expense

     1,998        0        1,998   

Equity (income)/loss in affiliates

     8,814        (868     7,946   

Gain on fair value remeasurement of previously held equity interest

     (6,397     0        (6,397

Impairment charge

     674,515        0        674,515   

Impairments related to assets held for sale

     7,355        0        7,355   

Other non-cash items

     5,899        271        6,170   

Changes in operating assets and liabilities:

      

Accounts receivable

     219,475        26,678        246,153   

Inventories

     10,860        (20,043     (9,183

Prepayments and other current assets

     (6,199     (1,502     (7,701

Trade accounts payable

     (65,246     22,728        (42,518

Other accrued liabilities and payables (including taxes)

     (99,422     (6,974     (106,396
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities from continuing operations

     46,156        240        46,396   

Cash flows from investing activities of continuing operations

      

Purchase of fixed assets

     (5,391     (31     (5,422

Purchase of intangibles (licenses)

     (693     0        (693

Purchase of trademarks

     (17,473     0        (17,473

Acquisitions of subsidiaries, net of cash acquired

     (24,124     (1     (24,125
  

 

 

   

 

 

   

 

 

 

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

     (47,681     (32     (47,713

Cash flows from financing activities of continuing operations

      

Borrowings on bank loans and overdraft facility

     36,027        0        36,027   

Payment of bank loans, overdraft facility and other borrowings

     (37,892     0        (37,892

Decrease in short term capital leases payable

     (34     0        (34

Options exercised

     72        0        72   
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities from continuing operations

     (1,827     0        (1,827

Currency effect on brought forward cash balances

     (7,781     0        (7,781

Net increase/(decrease) in cash

     (11,133     208        (10,925

Cash and cash equivalents at beginning of period

     122,324        (208     122,116   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 111,191      $ 0      $ 111,191   
  

 

 

   

 

 

   

 

 

 

Supplemental Schedule of Non-cash Investing Activities

      

Common stock issued in connection with investment in subsidiaries

   $ 23,175      $ 0      $ 23,175   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosures of cash flow information

      

Interest paid

   $ 50,574      $ 0      $ 50,574   

Income tax paid

   $ 5,770      $ 0      $ 5,770   
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidated Statements of Changes in Stockholders’ Equity – September 30, 2011 (unaudited)

 

     Balance as at
September 30, 2011
as reported
    Adjustments     Balance as at
September 30, 2011
restated
 

Common Stock

   $ 728      $ 0      $ 728   

Less Treasury Stock at cost

     (150     0        (150

Additional Paid-in Capital

     1,368,864        0        1,368,864   

Accumulated deficit

     (675,465     (53,137     (728,602

Accumulated other comprehensive income of continuing operations

     6,796        6,293        13,089   
  

 

 

   

 

 

   

 

 

 

Total

   $ 700,773      $ (46,844   $ 653,929   

 

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Consolidated Balance Sheet – December 31, 2010

 

     Balance as at
December 31, 2010
As Reported
    Adjustments     Balance as at
December 31, 2010
Restated
 

Current Assets

      

Cash and cash equivalents

   $ 122,324      $ (208   $ 122,116   

Accounts receivable, net of allowance for doubtful accounts of $20,357 as reported and $20,863 as restated

     478,379        (45,211     433,168   

Inventories

     93,678        (1,804     91,874   

Prepaid expenses and other current assets

     35,202        (1,448     33,754   

Deferred income taxes

     80,956        0        80,956   

Debt issuance cost

     2,739        0        2,739   
  

 

 

   

 

 

   

 

 

 

Total Current Assets

     813,278        (48,671     764,607   

Intangible assets, net

     627,342        0        627,342   

Goodwill, net

     1,450,273        2,713        1,452,986   

Property, plant and equipment, net

     192,863        (2,983     189,880   

Deferred income taxes

     44,028        0        44,028   

Equity method investment in affiliates

     243,128        (118     243,010   

Debt issuance costs

     16,656        0        16,656   

Non-current assets held for sale

     8,614        0        8,614   
  

 

 

   

 

 

   

 

 

 

Total Non-Current Assets

     2,582,904        (388     2,582,516   
  

 

 

   

 

 

   

 

 

 

Total Assets

   $ 3,396,182      $ (49,059   $ 3,347,123   
  

 

 

   

 

 

   

 

 

 

Current Liabilities

      

Trade accounts payable

   $ 114,958      $ (22,118   $ 92,840   

Bank loans and overdraft facilities

     45,359        0        45,359   

Income taxes payable

     5,102        606        5,708   

Taxes other than income taxes

     182,232        111        182,343   

Other accrued liabilities

     55,070        2,831        57,901   

Current portions of obligations under capital leases

     758        0        758   

Deferred consideration

     5,000        0        5,000   
  

 

 

   

 

 

   

 

 

 

Total Current Liabilities

     408,479        (18,570     389,909   

Long-term obligations under capital leases

     1,175        0        1,175   

Long-term obligations under Senior Notes

     1,250,758        0        1,250,758   

Long-term accruals

     2,572        195        2,767   

Deferred income taxes

     168,527        791        169,318   
  

 

 

   

 

 

   

 

 

 

Total Long Term Liabilities

     1,423,032        986        1,424,018   

Stockholders’ Equity

      

Common Stock ($0.01 par value, 120,000,000 shares authorized, 70,752,670 shares issued and outstanding)

     708        0        708   

Additional paid-in-capital

     1,343,639        0        1,343,639   

Retained earnings

     160,250        (34,750     125,500   

Accumulated other comprehensive income

     60,224        3,275        63,499   

Less Treasury Stock at cost (246,037 shares)

     (150     0        (150
  

 

 

   

 

 

   

 

 

 

Total Stockholder’s Equity

     1,564,671        (31,475     1,533,196   
  

 

 

   

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 3,396,182      $ (49,059   $ 3,347,123   
  

 

 

   

 

 

   

 

 

 

 

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Consolidated Statements of Changes in Stockholders’ Equity – December 31, 2010

 

     Balance as at
December 31, 2010

As Reported
    Adjustments     Balance as at
December 31, 2010
Restated
 

Common Stock

   $ 708      $ 0      $ 708   

Less Treasury Stock at cost

     (150     0        (150

Additional Paid-in Capital

     1,343,639        0        1,343,639   

Retained Earnings

     160,250        (34,750     125,500   

Accumulated other comprehensive income of continuing operations

     60,224        3,275        63,499   
  

 

 

   

 

 

   

 

 

 

Total

   $ 1,564,671      $ (31,475   $ 1,533,196   

 

4. ACQUISITIONS

Russian Alcohol Acquisition

On February 4, 2011, pursuant to the agreement dated November 9, 2009, with Kylemore International Invest Corporation (“Kylemore”), an indirect minority stockholder of the Russian Alcohol Group (“Russian Alcohol”), the Company paid $5 million as a final settlement related to Russian Alcohol acquisition.

 

 

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Whitehall Group Acquisition

On February 7, 2011, the Company entered into a definitive Share Sale and Purchase Agreement and registration rights agreement, in accordance with the terms that were agreed by the parties on November 29, 2010, and disclosed in the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 3, 2010. Pursuant to these agreements, among other things and upon the terms and subject to the conditions contained therein, we received 20% of the economic and 51% of the voting interest in the Whitehall Group (“Whitehall”) previously not owned by us (currently the Company has full voting and economic ownership), as well as the global intellectual property rights for the Kauffman Vodka brand. In exchange we paid total consideration of $93.2 million including $17.5 million for the intellectual property rights for the Kauffman Vodka brand.

The Company recorded contingent consideration representing the fair value of a right given to Mark Kauffman as a share price indemnity until the registration date. The fair value of this contingent consideration was recorded at $1.7 million as of the acquisition date on provisional basis. This consideration was settled in March 2011 through a payment by the Company of $0.7 million in cash and the issuance of 938,501 additional shares to Mark Kauffman.

As a result of this transaction, 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.

Whitehall is one of the leading importers and distributors of premium wines and spirits in Russia. We believe that this acquisition will give the Company a significant base for further expansion and gaining expected synergies of the combined operations of the Company and Whitehall in the import market in Russia. The goodwill arising out of Whitehall acquisition is attributable to the ability that Whitehall provides us to develop into the leading importer of spirits in the Russian market.

At March 31, 2011, the Company accounted for the acquisition of Whitehall on a provisional basis. During the second quarter of 2011, the Company obtained a third party valuation of contingent consideration and recorded additional $0.2 million into goodwill. Details of the fair value of consideration transferred are presented in the following table:

 

Cash

   $ 69,109   

Common stock

     22,101   

Contingent consideration

     1,976   
  

 

 

 

Total Fair value of consideration transferred

     93,186   

Less: value of intellectual property rights to Kauffman Vodka brand

     (17,473
  

 

 

 

Total consideration paid for the remaining shares in Whitehall

   $ 75,713   
  

 

 

 

The fair value of the net assets acquired in connection with Whitehall acquisition as of the acquisition date is:

 

     Whitehall  

ASSETS

  

Cash and cash equivalents

     16,190   

Accounts receivable

     51,263   

Inventories

     30,700   

Taxes

     577   

Prepaid expenses and other current assets

     12,916   

Property, plant and equipment

     869   

Intangibles assets

     8,723   

Equity method investments in affiliates

     17,871   
  

 

 

 

Total Assets

   $ 139,109   
  

 

 

 

LIABILITIES

  

Trade accounts payable

     38,887   

Bank loans and overdraft facilities

     27,835   

Taxes

     4,325   

Deferred income taxes

     13   

Other accrued liabilities

     12,811   
  

 

 

 

Total Liabilities (restated)

   $ 83,871   
  

 

 

 

Net identifiable assets and liabilities (restated)

   $ 55,238   

 

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The amount of goodwill recognized at the acquisition date was calculated as follows:

 

Fair value of previously held interest

   $ 250,156   

Consideration paid for the remaining shares in Whitehall

     75,713   

Less: Net identifiable assets and liabilities

     (55,238
  

 

 

 

Goodwill on acquisition (restated)

   $ 270,631   
  

 

 

 

The Company recognized a one-time gain on remeasurement of previously held equity interest in the amount of $7.9 million based on a discounted cash flow model with the following assumptions: (i) discount rate of 11.13%, (ii) terminal value growth rate of 3.5%, (iii) control premium of 10%. We estimated the growth rates in projecting cash flows based on a detailed five year plan.

The following table sets forth the unaudited pro forma results of operations of the Company for the three and nine month periods ended September 30, 2011 and 2010. The unaudited pro forma results of operations give effect to the Company’s acquisitions as if they occurred on January 1, 2011 and 2010. The unaudited pro forma results of operations are presented after giving effect to certain adjustments for depreciation, amortization of deferred financing costs, interest expense on the acquisition financing, and related income tax effects. The unaudited pro forma results of operations are based upon currently available information and certain assumptions that the Company believes are reasonable under the circumstances. The unaudited pro forma results of operations do not purport to present what the Company’s results of operations would actually have been if the aforementioned transactions had in fact occurred on such date or at the beginning of the period indicated, nor do they project the Company’s financial position or results of operations at any future date or for any future period.

 

     Three months ended September 30,      Nine months ended September 30,  
     2011     2010      2011     2010  
     (Restated,
see Note 3)
   

 

     (Restated,
see Note 3)
   

 

 

Net sales

   $ 209,638      $ 195,565       $ 552,843      $ 577,513   

Net income/(loss)

   $ (848,735   $ 100,325       $ (854,385   $ (924

Net income /(loss) per share data:

         

Basic earnings per share of common stock

   $ (11.71   $ 1.39       $ (11.86   $ (0.01

Diluted earnings per share of common stock

   $ (11.71   $ 1.38       $ (11.86   $ (0.01

Kauffman Vodka is one of the leading super-premium vodkas in Russia with a strong presence in top-end restaurants, hotels and among key customers. The brand is also exported to high-end customers in over 25 countries The purchase price of intellectual property rights for the Kauffman Vodka brand was treated as a separate element of this transaction and its fair value was allocated based on discounted cash flow model with the following assumptions: (i) discount rate of 11.13%, (ii) terminal value growth rate of 3.0%. We estimated the growth rates in projecting cash flows based on a detailed five year plan. This was treated as a purchase of an intangible asset with an indefinite useful life. The Company considers the Kauffman Vodka brand to have a longstanding market-leader or high brand recognition within the top premium high price market segment in Russia. The Company has a long-term strategy associated to this brand and believes that Kauffmann Vodka has a significant value to the Company’s continuing operations in the top premium segment, and as such is an important factor in attracting and retaining customers. Based on the Company’s development strategy with respect to the usage of Kauffman Vodka brand it was concluded that the Company would not plan to discontinue this brand in the foreseeable future. Given the above, we have determined that the Kauffmann Vodka brand will generate cash flows for an indefinite period of time; therefore, we have concluded that the useful life of this brand is indefinite.

 

5. ASSETS AND LIABILITIES OF BUSINESS HELD FOR SALE

On July 28, 2011 the Company committed to sell First Tula Distillery (“Tula”), a production plant in Russia. As part of the ongoing restructuring process in Russia, in order to optimize the efficiency of the Russian segment of the Company’s operations, the Company decided to shut down Tula’s operations. Starting in August 2011, all production activity has been suspended and all of the employees were terminated. The Company recognized a RUR 221.6 million (approximately $7.4 million) loss, related to the classifications of the assets at the lower of carrying amount or estimated fair value less costs to sell. The Company is currently looking for a buyer of Tula’s assets and would expect to close this transaction within one-year timeframe.

In the consolidated balance sheet we present in a separate line fixed assets of Tula as of September 30, 2011 and December 31, 2010 of $0.7 million and $8.6 million respectively, as assets held for sale.

 

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6. SALE OF ACCOUNTS RECEIVABLE

On February 24, 2011, two subsidiaries of the Company, namely CEDC International Polska 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 $89.0 million) of receivables. The Factoring Agreements are ongoing agreements, which provide for two types of factoring, recourse and non-recourse factoring.

As of September 30, 2011 the total balance of receivables under factoring amounted to 182.0 million Polish zlotys (approximately $55.8 million) of the 290 million Polish zlotys limit available.

For the three and nine months ended September 30, 2011, the Company sold receivables in the amount of $117.8 million and $297.2 million respectively and recognized a loss on the sale in the statement of operations in the amount of $0.9 million and $1.9 million in respect of the non-recourse factoring. The Company has no continuing involvement with the sold non-recourse receivables.

On October 14, 2010, Russian Alcohol entered into a factoring agreement (“Factoring Agreement”) with Gazprombank OJSC (“GPB”) for the sale up to 1,022 million Russian rubles (approximately $36.5 million) of receivables. The Factoring Agreement is an ongoing agreement, which provides for factoring with recourse. However due to changes in Russian legislation, the Company discontinued its factoring in Russia in September 2011.

For the three and nine months ended September 30, 2011, the Company sold receivables in the amount of 458.3 million Russian rubles and 706.7 million Russian rubles (approximately $14.3 million and $23.2 million), respectively, and recognized a loss on the sale in the statement of operations for the three and nine months ended September 30, 2011 in the amount of 3.0 million Russian rubles and 3.9 million Russian rubles (approximately $0.09 and $0.12 million), respectively.

As of September 30, 2011, the liabilities from factoring with recourse amounted to $4.3 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.

 

7. INTANGIBLE ASSETS OTHER THAN GOODWILL

The major components of intangible assets are:

 

Non-amortizable intangible assets:

  

Trademarks as at December 31, 2010

   $ 627,221   

Impairment charge

     (127,585

Acquisitions during the period

     17,473   

Foreign exchange impact

     (52,151
  

 

 

 

Trademarks as at September 30, 2011

     464,958   

Amortizable intangible assets:

  

Customer relationships as at December 31, 2010

     121   

Acquisitions during the period

     8,200   

Less amortization for the period

     (925

Foreign exchange impact

     (659
  

 

 

 

Customer relationships as at September 30, 2011

     6,737   

Total intangible assets

   $ 471,695   
  

 

 

 

Management considers trademarks associated with high or market-leader brand recognition within their market segments to be indefinite-lived assets, based on the length of time they have existed, the comparatively high volumes sold and their general market positions relative to other products in their respective market segments.

Based on this and together with the evidence provided by analyses of vodka products life cycles, market studies, competitive and environmental trends, we believe that these trademarks will continue to generate cash flows for an indefinite period of time, and that the useful lives of these trademarks are therefore indefinite. In accordance with ASC Topic 350-30, intangible assets with an indefinite life are not amortized but are reviewed at least annually for impairment. These trademarks include Soplica, Żubrówka, Absolwent, Royal, Palace, Parliament, Green Mark, Zhuravli, Kauffman Vodka, Urozhay and the trademark rights to Bols Vodka in Poland, Hungary and Russia.

 

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As of September 30, 2011, the Company assessed recent events and current circumstances, including current and future performance, relaunch and rebranding plans in 2011 and 2012. Resulting from these events, the Company identified certain impairment indicators that would trigger the need for an impairment test, including performance of certain brands below expectations.

As of September 30, 2011 in order to support the value of trademarks, the Company calculated the fair value of trademarks using a discounted cash flow approach based on the following assumptions:

 

   

Risk free rates for Poland and Russia used for calculation of discount rate were based upon current market rates of long term Polish Government Bonds rates and long-term Russian Government Bonds rates. When estimating discount rates to be used for the calculation we have taken into account current market conditions in Poland and Russia separately. As a result of our assumptions and calculations, we have determined discount rates of 9.09% and 11.03% for Poland and Russia, respectively.

 

   

The Company estimated the growth rates in projecting cash flows for each of our trademarks separately, based on four year plan assumptions related to each trademark.

 

   

The Company estimated the terminal value growth rates for trademarks from 2.5% for Polish trademarks to 3.0% for Russian trademarks.

Based upon the above analysis performed and due to the continued lower performance of certain Polish brands as compared to expectations for 2011 and subsequent years, the Company has determined that the fair market value of the trademarks related to these brands is below carrying value. The decrease in fair value primarily resulted from the very good performance of Żubrówka Biała brand, which cannibalized the performance of other brands, mainly Bols Vodka, the underperformance of which was most significant.

As a result the Company recorded an impairment charge of $127.6 million during the third quarter of 2011 that included an impairment to the carrying values of our trademarks.

The change in the recorded book value of trademarks between September 30, 2011 and December 31, 2010 resulted mainly from the recognized impairment charge described above and acquisition of the Kauffman Vodka trademark for $17.5 million as well as foreign exchange translation differences of $52.2 million caused by depreciation of the Polish zloty and Russian ruble against the U.S. dollar.

 

8. GOODWILL

Goodwill results from the Company’s acquisitions of Bols, Polmos Bialystok, Parliament, Russian Alcohol, Whitehall and Bols Hungary.

 

Goodwill, as at December 31, 2010 (restated)

   $ 1,452,986   

Impairment charges during the period

     (546,930

Acquisitions during the period

     270,631   

Foreign exchange impact

     (108,309
  

 

 

 

Goodwill, as at September 30, 2011 (restated)

   $ 1,068,378   
  

 

 

 

Goodwill is tested by the Company annually for impairment during the fourth quarter or earlier upon the occurrence of certain events or substantive changes in circumstances that indicate goodwill is more likely than not impaired, which could result from significant adverse changes in the business climate and declines in the value of our business. Such indicators may include a sustained, decline in our stock price; a decline in our expected future cash flows; adverse change in the economic or business environment; the testing for recoverability of a significant asset group, among others. The occurrence of these indicators could have a significant impact on the recoverability of goodwill and could have a material impact on our consolidated financial statements.

Subsequently to the Company’s earnings release for the year ended December 31, 2010, the market value of the shares in CEDC dropped significantly. The Company considered the significant decrease in market value to be a triggering event of potential goodwill impairment. The Company performed impairment testing at March 31, 2011 and the fair value of reporting units was above the carrying amount and no impairment charge was recognized. During the third quarter of 2011, the Company was closely monitoring events or changes in circumstances that might impact the assumptions used in the four year business model and identified certain impairment indicators that would trigger the need for an impairment test, including sustained difference in enterprise market capitalization and book value and performance of reporting units below expectations, changing of sales channel and product mix, declining vodka markets in Poland and Russia and market disruptions from relicensing in Russia. Based on these events, the Company determined that it was more likely than not that the fair value of our reporting units was less than its carrying amount and accordingly, the Company performed a goodwill impairment test as of September 30, 2011.

 

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As of September 30, 2011, in order to support the value of goodwill, the Company calculated the fair value of the reporting units using a discounted cash flow approach based on the following assumptions:

 

   

Risk free rates for Poland and Russia used for calculation of discount rate were based upon current market rates of long term Polish Government Bonds rates and long-term Russian Government Bonds rates. When estimating discount rates to be used for the calculation we have taken into account current market conditions in Poland and Russia separately. As a result of our assumptions and calculations, the following discount rates of 9.09% and 11.03% for Poland and Russia, respectively have been determined,

 

   

The Company has identified impairment indicators for the following reporting units and tested their fair value: Poland Core Business Unit and Russia Core Business Unit. In respect of the Poland Fine Wines Unit, Russia Import Unit and Hungary Unit there were no impairment indicators identified.

 

   

The Company estimated the growth rates in projecting cash flows for each of our reporting group separately, based on a detailed four year plan related to each reporting unit,

 

   

The Company estimated the terminal value growth rates for goodwill from 2.5% for Polish unit and 3.0% for Russian reporting unit.

Based on goodwill impairment test as of September 30, 2011, it was determined that the carrying value of our Core Business unit in Russia and Poland exceeded its fair value. The primary reasons for this was the continuous decline in spirits market in Poland and Russia, the cannibalization of premium brands by mainstream brands resulting in lower margins in Poland, as well as, relicensing process in Russia for wholesalers in the second and third quarter of current year that resulted in decrease in number of active wholesalers in the market. As a result, the Company completed step two of the impairment test, and compared the implied fair value of the reporting unit’s goodwill to the carrying amount of the reporting unit’s goodwill. As the carrying amount of the reporting unit’s goodwill for Core Business unit in Russia and Poland was greater than the implied fair value of a the underlying reporting units’ goodwill values, an impairment loss was recognized for the excess amounting to $546.9 million.

 

9. EQUITY METHOD INVESTMENTS IN AFFILIATES

We held the following investments in unconsolidated affiliates:

 

          Carrying Value  
    

Type of affiliate

   September 30,
2011
     
    
     December 31,
2010
(Restated,
see Note 3)
 

Whitehall Group

  

Equity-Accounted Affiliate

   $ 0       $ 243,010   
     

 

 

    

 

 

 
  

Total Carrying value

   $ 0       $ 243,010   
     

 

 

    

 

 

 

As of December 31, 2010, the Company had an 80% economic interest and an effective voting interest of 49% in Whitehall and a voting interest of 25% in the Moet Hennessy Russia joint venture (“MH”), through Whitehall’s 50% stake in MH. On February 7, 2011, the acquisition of the remaining portion of Whitehall not previously owned was completed. The Company changed the accounting treatment for its interest in Whitehall from the equity method of accounting to consolidation starting from February 7, 2011.

On March 30, 2011, the Company through its ownership of Whitehall sold its stake in MH to Moet Hennessey. As of the completion of this transaction, Whitehall will no longer have any direct ownership stake in MH, however, it will continue cooperation with MH as a key distributor in the Russian market.

The Company received $10.9 million of dividends from Whitehall during the year ended December 31, 2010 and $7.6 million of dividends received in January 2011, when Whitehall was consolidated under the equity method.

 

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The summarized financial information of investments are shown in the below table with the balance sheet financial information reflecting Whitehall and MH accounted under the equity method as of December 31, 2010. The results from operations for the three and nine month periods ended September 30, 2011 include the results of Whitehall from January 1, 2011 to February 7, 2011 and MH from January 1, 2011 to March 30, 2011.

 

     Total
September 30, 2011
     Total
December 31, 2010
 

Current assets

   $ 0       $ 142,256   

Noncurrent assets

     0         101,329   

Current liabilities

     0         101,966   

Noncurrent liabilities

   $ 0       $ 0   

 

    

Total
Three months ended

September 30, 2011

    

Total

Three months ended

September 30, 2010

    

Total
Nine months ended

September 30, 2011

   

Total
Nine months ended

September 30, 2010

 
    

 

    

 

     (Restated,
see Note 3)
   

 

 

Net sales

   $ 0       $ 37,805       $ 6,494      $ 94,350   

Gross margin

     0         14,457         1,995        34,254   

Operating profit/(loss)

     0         4,611         (9,975     2,850   

Income/(loss) from continuing operations

     0         2,148         (9,933     2,703   

Net income/(loss) attributable to the registrant

     0         2,148         (9,933     2,703   

Net income/(loss) attributable to CEDC

   $ 0       $ 1,719       $ (7,946   $ 2,163   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

10. COMPREHENSIVE INCOME/(LOSS)

Comprehensive income/(loss) is defined as all changes in equity during a period except those resulting from investments by owners and distributions to owners. Comprehensive income/(loss) includes net income adjusted by, among other items, foreign currency translation adjustments and our proportionate share of the comprehensive income/(loss) of our equity method affiliates. 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 September 30, 2011, our functional currencies (Polish zloty, Russian ruble and Hungarian forint) used to translate the balance sheet were weaker against the U.S. dollar as compared to the exchange rate as of December 31, 2010, and as a result $50.4 million of foreign currency translation adjustment was recognized as part of total comprehensive income related to continuing operations.

 

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11. EARNINGS PER SHARE

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

 

    

Three months ended

September 30,

    

Nine months ended

September 30,

 
     2011     2010      2011     2010  
    

(Restated,

see Note 3)

   

  

    

(Restated,

see Note 3)

   

  

 

Basic:

         

Net income / (loss) from continuing operations, net of noncontrolling interests in subsidiaries

   $ (848,735   $ 68,879       $ (854,102   $ 10,314   

Income / (loss) on discontinued operations

     0        31,017         0        (11,778
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income / (loss)

   $ (848,735   $ 99,896       $ (854,102   $ (1,464
  

 

 

   

 

 

    

 

 

   

 

 

 

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

     72,490        70,432         72,063        69,925   

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

     104        183         115        270   
  

 

 

   

 

 

    

 

 

   

 

 

 

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

     72,594        70,615         72,178        70,195   

Net income / (loss) per common share - basic:

         

Continuing operations

   $ (11.71   $ 0.98       $ (11.85   $ 0.15   

Discontinued operations

   $ 0.00      $ 0.44       $ 0.00      $ (0.17
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ (11.71   $ 1.42       $ (11.85   $ (0.02
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income / (loss) per common share - diluted:

         

Continuing operations

   $ (11.71   $ 0.98       $ (11.85   $ 0.15   

Discontinued operations

   $ 0.00      $ 0.43       $ 0.00      $ (0.17
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ (11.71   $ 1.41       $ (11.85   $ (0.02
  

 

 

   

 

 

    

 

 

   

 

 

 

Employee stock options granted have been included in the above calculations of diluted earnings per share since the exercise price is less than the average market price of the common stock during the three and nine month periods ended September 30, 2011 and 2010. 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.

 

12. BORROWINGS

Bank Facilities

On December 17, 2010, the Company entered into a term and overdraft facilities Agreement (the “Credit Facility”) with Bank Handlowy w Warszawie S.A. (“Bank Handlowy”), as Agent, Original Lender and Security Agent, and Bank Zachodni WBK S.A. (“WBK”), as Original Lender. The Credit Facility provides for a credit limit of up to 330.0 million Polish zloty (or approximately $ 111.5 million) which may be disbursed as one term loan and two overdraft facilities to be used to (i) refinance existing credit facilities and (ii) finance general business purposes of the borrowers. On December 20, 2010, the Company drew approximately 130.0 million Polish zloty (or approximately $43.9 million), and used the net proceeds to repay previous loan facilities with other lenders.

On February 28, 2011 the Company, entered into a letter agreement with Bank Handlowy and WBK pursuant to which and subject to the terms and conditions contained therein, the parties agreed, to waive any breach of the Consolidated Coverage Ratio covenant and the Net Leverage Ratio covenant relating to the Calculation Period ending on December 31, 2010 and amended these ratios for purposes of the Calculation Period ending on September 30, 2011 to 1.28:1 and 8.35:1, respectively. As a result of the Letter Agreement, our failure to comply with the Consolidated Coverage Ratio covenant and the Net Leverage Ratio covenant as of December 31, 2010 did not result in a default under the Credit Facility. In connection with this agreement, the Company agreed to pay a one-time waiver fee of PLN 3.3 million (approximately $1.15 million). In addition, the Company agreed with its lenders that the amount available under the overdraft facilities included in the Credit Facility is reduced to PLN 120 million (approximately $41.6 million) and the margins on term loan and overdraft facilities will be increased (with effect from March 1, 2011) to 4.25% and 3.25%, respectively, and the margin on letters of credit issued thereunder will be increased to 2.50%.

 

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On April 21, 2011, the Company entered into an amended set of terms for the Credit Facility. As part of the amendment, on April 22, 2011, the Company repaid the remaining PLN 122.5 million ($44.3 million) term facility while at the same time retaining the PLN 120 million ($43.4 million) overdraft limit which was further decreased to PLN 60 million ($18.4 million) as of September 30, 2011. The overdraft facility going forward does not contain either the Consolidated Coverage Ratio or the Net Leverage Ratio previously required under the Credit Facility. Furthermore, the Company has no covenant compliance obligations at September 30, 2011 related to the Credit Facility. In addition to the elimination of covenants, the revised terms of the overdraft facility provide for an initial 100 basis point reduction in the margin charged to the Company, with further reductions coming over the next three months, and the maximum amount available for borrowing under the overdraft facility will be reduced over the course of the next three months as well. The outstanding liability under this overdraft facility as of September 30, 2011 amounted to $16.1 million.

As of September 30, 2011, the Company has outstanding liability of $33.9 million from the term loans from Zenit Bank, Alfa Bank and Raiffeisen Bank drawn by Whitehall with renewal dates in the first and second quarter of 2012, as well as a liability of $18.7 million from the term loan from Unicredit drawn by Russian Alcohol with maturity date in November 2012. This loan has no financial covenants that need to be met and is secured by goods up to 720 million Russian rubles and guarantees given by companies of Russian Alcohol.

As of September 30, 2011, the Company had available under existing overdraft facilities in Poland approximately $16.6 million from the Credit Facility mentioned above and approximately $0.5 million available in Hungary.

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 September 30, 2011 the Company had accrued interest of $0.4 million related to the Convertible Senior Notes, with the next coupon due for payment on March 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:

 

     September 30,
2011
    December 31,
2010
 

Convertible Senior Notes

   $ 310,000      $ 310,000   

Unamortized debt discount

     (1,291     (2,311

Debt discount related to ASC 470-20

     (5,337     (8,567
  

 

 

   

 

 

 

Total

   $ 303,372      $ 299,122   
  

 

 

   

 

 

 

Senior Secured Notes due 2016

On December 2, 2009, the Company issued $380 million 9.125% Senior Secured Notes due 2016 and €380 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 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 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 September 30, 2011 and December 31, 2010 the Company had accrued interest of $28.8 million and $7.1 million respectively, related to the Senior Secured Notes due 2016, with the next coupon due for payment on December 1, 2011.

 

     September 30,
2011
    December 31,
2010
 

Senior Secured Notes due 2016

   $ 962,060        955,296   

Unamortized debt discount

     (3,345     (3,660
  

 

 

   

 

 

 

Total

   $ 958,715      $ 951,636   
  

 

 

   

 

 

 

 

     September 30,
2011
 

Principal repayments for the following years

  

2011

   $ 16,264   

2012

     56,687   

2013

     303,372   

2014

     0   

2015 and beyond

     958,715   
  

 

 

 

Total

   $ 1,335,038   
  

 

 

 

 

13. INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out method) or market value. Elements of cost include materials, labor and overhead and are classified as follows:

 

     September 30,
2011
     December 31,
2010
 
    

(Restated,

see Note 3)

    

(Restated,

see Note 3)

 

Raw materials and supplies

   $ 23,260       $ 26,847   

In-process inventories

     2,376         3,314   

Finished goods and goods for resale

     95,805         61,713   
  

 

 

    

 

 

 

Total

   $ 121,441       $ 91,874   
  

 

 

    

 

 

 

 

14. STOCKHOLDER’S EQUITY

On September 6, 2011, the Company adopted a Rights Agreement between the Company and American Stock Transfer & Trust Company LLC, as rights agent, dated as of that date (“the Rights Agreement”), and declared a dividend distribution of one preferred share purchase right (a “Right”) for each outstanding share of common stock that was payable to stockholders of record as of the close of business on September 19, 2011 (the “Record Date”). Subject to the terms, provisions and conditions of the Rights Agreement, each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock of the Company, par value $0.01 per share (the “Preferred Shares”), at a price of $45.00 per one one-thousandth of a Preferred Share (the “Purchase Price”), subject to adjustment.

Initially, the Rights will be attached to all Common Share certificates or to the registration of uncertificated Common Shares in the Company’s share register, if any, and no separate certificates evidencing the Rights (“Right Certificates”) will be issued. Separate Right Certificates will be mailed to holders of record of the Common Shares as of the close of business on the earlier to occur of (i) the tenth business day following a public announcement indicating that a person or group of affiliated or associated persons (an “Acquiring Person”) has acquired beneficial ownership of 10% or more of the outstanding Common Shares (which includes for this purpose stock referenced in derivative transactions and securities) or (ii) the tenth business day (or such later date as the Board of Directors may determine prior to such time as any Person becomes an Acquiring Person) following the commencement of, or announcement of an intention to make a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 10% or more of the then outstanding Common Shares (the earlier of such dates being the “Distribution Date”).

 

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The Rights Agreement provides that, until the Distribution Date (or earlier expiration, redemption or exchange of the Rights), (i) the Rights will be transferred with and only with the Common Shares, (ii) new Common Share certificates issued after the Record Date upon transfer or new issuance of Common Shares will contain a notation incorporating the Rights Agreement by reference, and the initial transaction statement or subsequent periodic statements with respect to uncertificated Common Shares, if any, that are registered after the Record Date upon transfer or new issuance of such Common Shares will also contain a notation incorporating the Rights Agreement by reference and (iii) the surrender for transfer of any certificates for Common Shares, or the registration of transfer of ownership in the Company’s share register with respect to uncertificated Common Shares, outstanding as of the Record Date will also constitute the transfer of the Rights associated with the Common Shares represented by such certificate or registration.

The Rights are not exercisable until the Distribution Date. The Rights will expire on September 6, 2021 (the “Expiration Date”), unless the Expiration Date is amended or unless the Rights are earlier redeemed or exchanged by the Company, in each case, as described below.

If a person or group becomes an Acquiring Person (with certain limited exceptions), each holder of a Right will thereafter have the right to receive, upon exercise, Common Shares (or, in certain circumstances, Preferred Shares or other similar securities of the Company) having a value equal to two times the exercise price of the Right. Notwithstanding any of the foregoing, following the existence of an Acquiring Person, all Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by any Acquiring Person will be null and void.

In the event that the Company is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power are sold after a person or group has become an Acquiring Person, proper provision will be made so that each holder of a Right will thereafter have the right to receive, upon the exercise thereof at the then-current exercise price of the Right, that number of shares of common stock of the acquiring company, which at the time of such transaction will have a market value of two times the exercise price of the Right.

At any time after any person or group becomes an Acquiring Person and prior to the acquisition by such person or group of 50% or more of the outstanding Common Shares, the Board of Directors of the Company may exchange the Rights (other than Rights owned by such person or group which will have become void), in whole or in part, at an exchange ratio of one Common Share, or one one-thousandth of a Preferred Share (or of a share of a class or series of the Company’s preferred stock having equivalent rights, preferences and privileges), per Right (subject to adjustment).

At any time prior to the Distribution Date, the Board of Directors of the Company may redeem the Rights, in whole but not in part, at a price of $0.01 per Right (the “Redemption Price”). The redemption of the Rights may be made effective at such time on such basis with such conditions as the Board of Directors, in its sole discretion, may establish. Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price.

The terms of the Rights may be amended by the Board of Directors of the Company without the consent of the holders of the Rights, except that from and after the Distribution Date no such amendment may adversely affect the interests of the holders of the Rights (other than the Acquiring Person).

The number of outstanding Rights and the number of one one-thousandths of a Preferred Share issuable upon exercise of each Right are subject to adjustment under certain circumstances.

Because of the nature of the Preferred Shares’ dividend, liquidation and voting rights, the value of the one one-thousandth interest in a Preferred Share purchasable upon exercise of each Right should approximate the value of one Common Share.

Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation any dividend, liquidation or voting rights.

 

15. INCOME TAXES

The Company operates in several tax jurisdictions primarily: the United States of America, Poland, Hungary and Russia. All subsidiaries file their own corporate tax returns as well as account for their own deferred tax assets and liabilities. The Company does not file a tax return in the United States of America based upon its consolidated income, but does file a return based on its income taxable in the United States of America. For income taxes accounted for on an interim basis, the Company estimates the annual effective tax rate and applies this rate to its pre-tax US GAAP income/(loss), unless a discrete event occurs that requires additional consideration.

The Company files income tax returns in the U.S., Poland, Hungary, Russia, as well as in various other countries throughout the world in which we conduct our business. The major tax jurisdictions and their earliest fiscal years that are currently open for tax examinations are 2006 in the U.S., Poland and Hungary and 2008 in Russia.

 

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Due to revision of the outlook for the future, in connection with the decline of the spirits market in Poland and Russia, pricing impact from continued growth of discounters and the cannibalization of Premium brands by Mainstream brands resulting in lower margins in Poland, the Company performed an analysis of the recoverability of its deferred tax asset balance related to tax losses carried forward. Based on the analysis the Company recorded full provision for the deferred tax assets in Poland, which was recognized previously in relation to tax losses carried forward. The total deferred tax asset as of September 30, 2011 amounts to $102.7 million in comparison to deferred tax liability of $131.5 million.

 

16. 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 September 30,
     Segment Net Sales
Nine months ended September 30,
 
     2011      2010      2011      2010  
    

(Restated,

see Note 3)

    

  

    

(Restated,

see Note 3)

    

  

 

Segment

           

Poland

   $ 58,234       $ 52,382       $ 163,463       $ 153,213   

Russia

     143,623         98,744         362,393         311,667   

Hungary

     7,781         6,634         20,492         18,283   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Net Sales

   $ 209,638       $ 157,760       $ 546,348       $ 483,163   

 

     Operating Income / (Loss)
Three months ended September 30,
    Operating Income / (Loss)
Nine months ended September 30,
 
     2011     2010     2011     2010  
    

(Restated,

see Note 3)

   

  

   

(Restated,

see Note 3)

   

  

 

Segment

        

Poland before fair value adjustments

   $ 8,120      $ 14,276      $ 21,155      $ 40,197   

Gain on remeasurement of previously held equity interests

     0        0        7,898        0   

Impairment charge

     (213,687     0        (213,687     0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Poland after fair value adjustments

     (205,567     14,276        (184,634     40,197   

Russia before fair value adjustments

     9,167        15,843        6,011        58,816   

Impairment charge

     (460,828     0        (460,828     0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Russia after fair value adjustments

     (451,661         15,843        (454,817       58,816   

Hungary

     1,446        1,001        3,387        2,800   

Corporate Overhead

        

General corporate overhead

     (1,570     (1,286     (3,862     (3,827

Option Expense

     (662     (761     (1,999     (2,433
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Income / (Loss)

   $ (658,014   $ 29,073      $ (641,925   $ 95,553   

 

     Identifiable Operating Assets  
     September 30,
2011
     December 31,
2010
 
    

(Restated,

see Note 3)

    

(Restated,

see Note 3)

 

Segment

     

Poland

   $ 688,427       $ 1,167,175   

Russia

     1,604,533         2,141,666   

Hungary

     21,142         33,495   

Corporate

     43,013         4,787   
  

 

 

    

 

 

 

Total Identifiable Assets

   $ 2,357,115       $ 3,347,123   

 

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Table of Contents
     Goodwill  
     September 30,
2011
     December 31,
2010
 
    

(Restated,

see Note 3)

    

(Restated,

see Note 3)

 

Segment

     

Poland

   $ 264,247       $ 387,448   

Russia

     797,727         1,058,485   

Hungary

     6,404         7,053   
  

 

 

    

 

 

 

Total Goodwill

   $ 1,068,378       $ 1,452,986   

 

17. INTEREST EXPENSE, NET

The following items are included in Interest expense, net:

 

     Three months ended September 30,     Nine months ended September 30  
     2011     2010     2011     2010  
    

(Restated,

see Note 3)

   

  

   

(Restated,

see Note 3)

   

  

 

Interest income

   $ 127      $ 1,294      $ 1,008      $ 3,666   

Interest expense

     (28,250     (27,043     (84,344     (81,514
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest (expense), net

   ($ 28,123   ($ 25,749   ($ 83,336   ($ 77,848

 

18. OTHER FINANCIAL INCOME, NET

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

 

     Three months ended September 30,      Nine months ended September 30,  
     2011     2010      2011     2010  
    

(Restated,

see Note 3)

   

  

    

(Restated,

see Note 3)

   

  

 

Foreign exchange impact related to foreign currency financing

   ($ 173,664   $ 81,773       ($ 123,196   $ 792   

Other gains

     3,327        0         2,389        4,195   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total other financial income / (expense), net

   ($ 170,337   $ 81,773       ($ 120,807   $ 4,987   

 

19. OTHER NON-OPERATING EXPENSE

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

 

     Three months ended September 30,     Nine months ended September 30,  
     2011     2010     2011     2010  
    

(Restated,

see Note 3)

   

  

   

(Restated,

see Note 3)

   

  

 

Early redemption call premium

   $ 0      $ 0      $ 0      $ (14,115

Write-off of unamortized offering costs

     0        0        0        (4,076

Dividend received

     0        0        0        7,642   

Write-off of assets held for sale

     (7,355     0        (7,355     0   

Other gains / (losses)

     (3,328     (914     (6,965     (1,717
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other non operating income / (expense), net

   $ (10,683   $ (914   $ (14,320   $ (12,266

Other non-operating items in the three and nine month period ended September 30, 2010 include early redemption call premium as well as write-off of unamortized offering costs both related to the 2012 Senior Secured Notes that were refinanced with the new 2016 Senior Secured Notes in January 2010.

 

20. STOCK OPTION PLANS AND WARRANTS

The Company recognizes the cost of all employee stock options on a straight-line attribution basis over their respective vesting periods, net of estimated forfeitures.

 

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Table of Contents

Determining the fair value of share-based awards at the grant date requires judgment, including estimating the expected term that the stock options will be outstanding prior to exercise, the associated volatility and the expected dividends. Judgment is also required in estimating the amount of share-based awards expected to be forfeited prior to vesting. If actual forfeitures differ significantly from these estimates, share-based compensation expense could be materially impacted.

A summary of the Company’s stock option and restricted stock units activity, and related information for the three month periods ended March 31, 2011, June 30, 2011 and September 30, 2011 is as follows:

 

Total Options

  

Number of

Options

   

Weighted-

Average

Exercise Price

 

Outstanding at January 1, 2011

     1,300,400      $ 29.06   

Granted

     82,000      $ 23.06   

Exercised

     (13,063   $ 5.02   

Forfeited

     (16,833   $ 27.75   
  

 

 

   

 

 

 

Outstanding at March 31, 2011

     1,352,504      $ 28.65   

Exercisable at March 31, 2011

     1,080,512      $ 29.43   

Outstanding at April 1, 2011

     1,352,504      $ 28.65   

Granted

     79,250      $ 11.02   

Exercised

     (5,062   $ 1.13   

Forfeited

     (21,825   $ 27.37   
  

 

 

   

 

 

 

Outstanding at June 30, 2011

     1,404,867      $ 27.77   

Exercisable at June 30, 2011

     1,111,625      $ 29.12   

Outstanding at July 1, 2011

     1,404,867      $ 27.77   

Granted

     0      $ 0   

Exercised

     0      $ 0   

Forfeited

     0      $ 0   
  

 

 

   

 

 

 

Outstanding at September 30, 2011

     1,404,867      $ 27.77   

Exercisable at September 30, 2011

     1,111,625      $ 29.12   

 

Nonvested restricted stock units

  

Number of

Restricted

Stock Units

   

Weighted-

Average Grant

Date Fair

Value

 

Nonvested at January 1, 2011

     79,150      $ 35.82   

Granted

     378      $ 25.55   

Vested

     (20,223   $ 30.42   

Forfeited

     (4,329   $ 16.04   
  

 

 

   

 

 

 

Nonvested at March 31, 2011

     54,976      $ 37.96   

Nonvested at April 1, 2011

     54,976      $ 37.96   

Granted

     28,685      $ 11.53   

Vested

     (3,679   $ 60.59   

Forfeited

     (364   $ 32.06   
  

 

 

   

 

 

 

Nonvested at June 30, 2011

     79,618      $ 27.42   

Nonvested at July 1, 2011

     79,618      $ 27.42   

Granted

     67,940      $ 10.63   

Vested

     (6,987   $ 69.35   

Forfeited

     0      $ 0   
  

 

 

   

 

 

 

Nonvested at September 30, 2011

     140,571      $ 17.22   

 

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Table of Contents

Nonvested restricted stock

   Number of
Restricted
Stock
    Weighted-
Average  Grant
Date Fair
Value
 

Nonvested at January 1, 2011

     46,001      $ 29.84   

Granted

     40,035      $ 22.86   

Vested

     (1,000   $ 35.01   

Forfeited

     (7,501   $ 29.73   
  

 

 

   

 

 

 

Nonvested at March 31, 2011

     77,535      $ 26.18   

Nonvested at April 1, 2011

     77,535      $ 26.18   

Granted

     7,583      $ 11.25   

Vested

     0      $ 0.00   

Forfeited

     0      $ 0.00   
  

 

 

   

 

 

 

Nonvested at June 30, 2011

     85,118      $ 24.85   

Nonvested at July 1, 2011

     85,118      $ 24.85   

Granted

     0      $ 0   

Vested

     0      $ 0   

Forfeited

     0      $ 0   
  

 

 

   

 

 

 

Nonvested at September 30, 2011

     85,118      $ 24.85   

During the three months ended September 30, 2011, the range of exercise prices for outstanding options was $2.00 to $60.92. During 2011, the weighted average remaining contractual life of options outstanding will be 5.3 years. Exercise prices for options exercisable as of September 30, 2011 ranged from $2.00 to $60.92. The Company has also granted 67,940 restricted stock units at an average price of $10.63 during the third quarter of 2011.

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 September 30, 2011, the Company has not changed the terms of any outstanding awards.

During the three months ended September 30, 2011, the Company recognized compensation cost of $2.0 million and a related deferred tax asset of $0.4 million.

As of September 30, 2011, there was $2.0 million of total unrecognized compensation cost related to non-vested stock options, restricted stock units and restricted stock granted under the Plan. The costs are expected to be recognized over period through 2011-2015.

Total cash received from exercise of options during the nine months ended September 30, 2011 amounted to $72 thousand.

For the three month period ended September 30, 2011, the compensation expense related to all options was calculated based on the fair value of each option grant using a binomial distribution model. The Company has never paid cash dividends and does not currently have plans to pay cash dividends, and thus has assumed a 0% dividend yield. Expected volatilities are based on an average of implied and historical volatility projected over the remaining term of the options. The expected life of stock options is estimated based on historical data on exercise of stock options, post-vesting forfeitures and other factors to estimate the expected term of the stock options granted. The risk-free interest rates are derived from the U.S. Treasury yield curve in effect on the date of grant for instruments with a remaining term similar to the expected life of the options. In addition, the Company applies an expected forfeiture rate when amortizing stock-based compensation expenses. The estimate of the forfeiture rates is based primarily upon historical experience of employee turnover. As individual grant awards become fully vested, stock-based compensation expense is adjusted to recognize actual forfeitures. The following weighted-average assumptions were used in the calculation of fair value:

 

     Nine months ended September 30,  
     2011     2010  

Fair Value

   $ 7.60      $ 12.57   

Dividend Yield

     0     0

Expected Volatility

     66.1     68.2

Weighted Average Volatility

     66.1     68.2

Risk Free Interest Rate

     0.3     0.3% - 0.5

Expected Life of Options from Grant

     3.2        3.2   

 

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Table of Contents
21. COMMITMENTS AND CONTINGENT LIABILITIES

The Company is involved in litigation from time to time and has claims against it in connection with matters arising in the ordinary course of business. In the opinion of management, the outcome of these proceedings will not have a material adverse effect on the Company’s operations.

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 1st 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.

Under this requirement Russian Alcohol Group signed a “guarantee line” agreement with multiple banks pursuant to which it was provided with a guarantee limit of 11.6 billion Russian rubles (approximately $362.2 million) for a period of 5 years.

Russian Alcohol Group has the right to obtain bank guarantees during the agreement term for each purchase of excise stamps and for the purchase of spirit. The guarantee for excise stamps is held by the beneficiary (Rosalkoregulirovanie) 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.

 

22. SUBSEQUENT EVENTS

On October 24, 2011, a class action complaint entitled Steamfitters Local 449 Pension Fund vs. Central European Distribution Corporation, et al. was filed 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, alleging 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, a new vodka product. The complaint seeks unspecified money damages. We believe the allegations are without merit and intend to vigorously defend ourselves, therefore no provision for any potential liability in this respect has been recorded as of September 30, 2011.

 

23. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

There were no new accounting pronouncements adopted during the three months ended September 30, 2011 that had a material impact on the unaudited condensed consolidated financial statements, except for ASU No. 2011-05, “Presentation of Comprehensive Income”. The adoption of ASU No. 2011-05 did not have a material impact on the Company’s consolidated financial statements, other than presentation of comprehensive income.

 

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Table of Contents
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 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 subsidiaries operate;

 

   

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

 

   

statements about consummation, financing, results and integration of the Company’s acquisitions, including future acquisitions the Company may make;

 

   

information about the impact of Polish and/or Russian regulations on the Company business;

 

   

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

 

   

other statements about the Company’s plans, objectives, expectations and intentions; 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 industry in which we operate, and the effects of acquisitions 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 the other reports that we have filed with or furnished to the SEC for a more complete discussion of the factors and risks that could affect us and 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 March 1, 2011. 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 judgment 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 provides information which management believes is relevant to the reader’s assessment and understanding of the Company’s results of operations and financial condition and should be read in conjunction with the Condensed Consolidated Financial Statements and the notes thereto found elsewhere in this report.

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 the third quarter of 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 where the Company took full economic and controlling ownership of the business. In addition, the Company continued to focus on growing sales volumes in its key markets of Poland and Russia. Overall, both the Polish and Russian vodka markets continued to see an overall market decline, however in Poland the Company was able to see year on year domestic volume growth for the nine months

 

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ending September 30, 2011 of 46% primarily due to the continued success of its recently launched Żubrówka Biała brand. Total Russian volumes were up which was driven primarily by the growth of the export business. On the domestic front, sales volumes for the third quarter of 2011 in Russia were down slightly by 1% as compared the same period in 2010. This was due to factors including an overall market that was down and the continued impact of the wholesaler relicensing process at the beginning of the quarter. Finally spirit, which is the main ingredient in vodka production, continued to see the high price levels from 2010 in the third quarter, which together with higher levels of market investment resulted in a contraction of gross margins as compared to the prior year and impacted total gross margins by $17.3 million for the first nine months of 2011 as compared to the prior year.

Restatement

The Company is restating its unaudited condensed consolidated financial statements for the three and nine months ended September 30, 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 3, “Restatement of unaudited condensed consolidated financial statements”, to the accompanying condensed consolidated financial statements.

Significant factors affecting our consolidated results of operations

Effect of Acquisitions of Whitehall

As disclosed in prior filings, on May 23, 2008, the Company and certain of its affiliates entered into, and closed upon, a Share Sale and Purchase Agreement and certain other agreements whereby the Company acquired shares representing 50% minus one vote of the voting power, and 80% of the economic interests in Whitehall.

On February 7, 2011, the Company entered into a definitive Share Sale and Purchase Agreement and registration rights agreement, in accordance with the terms that were agreed by the parties on November 29, 2010, and disclosed in the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 3, 2010. Pursuant to these agreements, among other things and upon the terms and subject to the conditions contained therein, we received the remaining 20% of the economic interest and 50% plus one vote of the voting interest in the Whitehall Group (“Whitehall”) previously not owned by us, as well as the global intellectual property rights for the Kauffman Vodka brand. In exchange we paid total consideration of $93.2 million including $17.5 million for the intellectual property rights for the Kauffman Vodka brand. For further details on the whole structure of this acquisition please refer to Note 4 of the accompanying Consolidated Condensed Financial Statements attached herein.

As a result of this transaction, the Company acquired 100% of the voting and economic interest in the Whitehall Group and changed the accounting treatment for interest in Whitehall from the equity method of accounting to consolidation starting from February 7, 2011.

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.

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 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 $582 million    $5.8 million gain/loss

 

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Effect of Impairment Testing

The Company continued to observe an overall market environment of declining vodka consumption and significant price sensitivities in its core markets of Poland and Russia. Additionally the Company experienced other key changes in market conditions, including changing of sales channel and product mix and market disruptions from relicensing in Russia. As such the Company determined that an impairment indicator exists, performed a goodwill impairment test during the third quarter of 2011 and took an impairment charge of $546.9 million related to its core businesses in Poland and Russia. Also related to this was the underperformance of certain brands in Poland, primarily Bols Vodka, due to among other factors cannibalization of volumes from recently launched brands such as Żubrówka Biała. Therefore, the Company also took an impairment charge for trademarks during the third quarter of 2011 of $127.6 million.

Results of Operations:

Three months ended September 30, 2011 compared to three months ended September 30, 2010

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

 

     Three months ended September 30,  
     2011        2010  
    

(Restated)

      

  

 

Sales

   $ 432,942         $ 347,492   

Excise taxes

     (223,304        (189,732
  

 

 

      

 

 

 

Net sales

     209,638           157,760   

Cost of goods sold

     131,427           80,448   
  

 

 

      

 

 

 

Gross profit

     78,211           77,312   
  

 

 

      

 

 

 

Operating expenses

     61,710           48,239   

Impairment charge

     674,515           0   
  

 

 

      

 

 

 

Operating income

     (658,014        29,073   
  

 

 

      

 

 

 

Non operating income / (expense), net

       

Interest income / (expense), net

     (28,123        (25,749

Other financial income / (expense), net

     (170,337        81,773   

Other non operating income / (expense), net

     (10,683        (914
  

 

 

      

 

 

 

Income / (loss) before taxes and equity in net income from unconsolidated investments

     (867,157        84,183   
  

 

 

      

 

 

 

Income tax benefit / (expense)

     18,422           (17,023

Equity in net income of affiliates

     0           1,719   
  

 

 

      

 

 

 

Income / (loss) from continuing operations

     (848,735        68,879   
  

 

 

      

 

 

 

Discontinued operations

       

Income from operations

     0           30,870   

Income tax benefit

     0           147   
  

 

 

      

 

 

 

Income on discontinued operations

     0           31,017   
  

 

 

      

 

 

 

Net income / (loss)

   $ (848,735      $ 99,896   
  

 

 

      

 

 

 

Income / (loss) from continuing operations per share of common stock, basic

   ($ 11.71      $ 0.98   

Income / (loss) from discontinued operations per share of common stock, basic

   ($ 0.00      $ 0.44   
  

 

 

      

 

 

 

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

   ($ 11.71      $ 1.42   

Income / (loss) from continuing operations per share of common stock, diluted

   ($ 11.71      $ 0.98   

Income / (loss) from discontinued operations per share of common stock, diluted

   ($ 0.00      $ 0.43   
  

 

 

      

 

 

 

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

   ($ 11.71      $ 1.41   

Other comprehensive income / (loss), net of tax:

       

Foreign currency translation adjustments

     (215,010        (19,374
  

 

 

      

 

 

 

Comprehensive income / (loss) attributable to the Company

   $ (1,063,745      $ 80,522   
  

 

 

      

 

 

 

 

 

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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 32.8%, or $51.8 million, from $157.8 million for the three months ended September 30, 2010 to $209.6 million for the three months ended September 30, 2011. The increase was driven primarily by the consolidation of Whitehall during the third quarter of 2011, as it was not consolidated in the third quarter of 2010, resulting in an increase of $33.0 million, the underlying local currency sales growth (volume growth in Poland and price increases in Russia) of $12.0 million and the impact of foreign exchange translation of $6.8 million.

 

     Segment Net Sales
Three months ended September 30,
 
     2011        2010  
    

(Restated)

      

  

 

Segment

       

Poland

   $ 58,234         $ 52,382   

Russia

     143,623           98,744   

Hungary

     7,781           6,634   
  

 

 

      

 

 

 

Total Net Sales

   $ 209,638         $ 157,760   

Sales for Poland increased by $5.8 million from $52.4 million for the three months ended September 30, 2010 to $58.2 million for the three months ended September 30, 2011. This increase was driven mainly by a volume growth of 21% resulting in a net sales increase of $3.0 million as well as a strengthening of the Polish zloty against the U.S. dollar which accounted for approximately $2.8 million of sales in U.S. dollar terms. The total value growth of approximately 7% for the three months ended September 30, 2011 as compared to the prior period was lower than growth in volume terms due a number of factors. These factors include the increased trade marketing spend, which is a reduction of net sales revenue, to support the competitive Polish trading environment, continued growth of the discounter channel, which has the highest sales rebates and product mix, and sales of Żubrówka Biała which continued to cannibalize sales of higher price brands such as Bols and Soplica.

Sales for Russia increased by $44.9 million from $98.7 million for the three months ended September 30, 2010 to $143.6 million for the three months ended September 30, 2011. Included in the sales growth was a sales increase of $33.0 million from the consolidation of Whitehall in 2011, volume growth of 3% which together with price increases in Russia resulted in a increase of $8.7 million in sales, and strengthening of the Russian ruble against the U.S. dollar which accounted for approximately $3.2 million of sales in U.S. dollar terms. Of the $8.7 million of organic sales growth, export sales grew by $8.0 million; however export sales to the Ukraine, which represented 75% of these exports, contribute a lower gross margin percentage than domestic sales. The remainder of the organic sales growth was driven by higher value sales in the domestic volume. Although domestic volume sales were down by 1%, overall sales value increased by $0.7 million in local currency terms, due primarily to price increases taken during the year 2011. Lower sales volumes in Russia were primarily due to an overall soft spirit market in Russia, with total sales volumes in the industry down during the quarter as well continued disruption in the market related to the industry-wide relicensing process. This process led to instances where the wholesalers’ licenses were not timely renewed, which affected all of our businesses, with the biggest impact on domestic vodka sales.

Sales for Hungary increased by $1.2 million from $6.6 million for the three months ended September 30, 2010 to $7.8 million for the three months ended September 30, 2011 which resulted in a $0.4 million increase in volumes on local currency terms as well as a increase resulting from strengthening of the Hungarian forint against the U.S. dollar which accounted for approximately $0.8 million of sales in U.S. dollar terms.

Gross Profit

Total gross profit increased by approximately 1.2%, or $0.9 million, to $78.2 million for the three months ended September 30, 2011, from $77.3 million for the three months ended September 30, 2010, reflecting the increase in gross profit margins percentage in the three months ended September 30, 2011.

Gross profit margins as a percentage of net sales declined by 11.7 percentage points from 49.0% to 37.3% for the three months ended September 30, 2011 as compared to the three months ended September 30, 2010. This decline was primarily driven by the higher market investments due to the competitive environment, as well as higher spirit pricing in both markets. Additionally impacting the gross profit in Poland was the cannibalization of sales volumes of our premium brand Bols by our new mainstream product Żubrówka Biała, which has a lower contribution per liter. The overall impact of higher cost of goods which includes the higher spirit pricing resulted in a $6.2 million impact on gross margins for three months ended September 30, 2011 compared to the same period in 2010.

 

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Operating Expenses

Operating expenses consist of selling, general and administrative, or “S,G&A” expenses, advertising expenses, non-production depreciation and amortization, and provision for bad debts. Total operating expenses increased by $688.0 million, from $48.2 million for the three months ended September 30, 2010 to $736.2 million for the three months ended September 30, 2011. Operating expenses as a percent of net sales increased from 30.6% for the three months ended September 30, 2010 to 351.2% for the three months ended September 30, 2011. The increase resulted primarily from the impairment charges for Poland and Russia recorded as of September 30, 2011 of $674.5 million and consolidation of the results of Whitehall giving an additional $9.0 million of costs, relicensing and restructuring costs in Russia of $2.8 million, and costs associated with the production plant Tula which was closed during the quarter of $3.5 million.

For comparability of costs between periods operating expenses after excluding the impairment charge are shown separately in the table below. As a percent of net sales they decreased from 30.6% for the three months ended September 30, 2010 to 29.4% for the three months ended September 30, 2011. Operating expenses net of fair value adjustments and impairment charges increased by $13.5 million, from $48.2 million for the three months ended September 30, 2010 to $61.7 million for the three months ended September 30, 2011.

The table below sets forth the items of operating expenses.

 

    

Operating Expenses

Three Months Ended September 30,

 
         2011    
(Restated)
         2010    
    
 

S,G&A

   $ 52,596       $ 40,536   

Marketing

     6,472         5,907   

Depreciation and amortization

     2,642         1,796   
  

 

 

    

 

 

 

Sub-Total

     61,710         48,239   

Impairment charge

     674,515         0   
  

 

 

    

 

 

 

Total operating expense

   $ 736,225       $ 48,239   

S,G&A consists of salaries, warehousing and transportation costs, administrative expenses and bad debt expense. S,G&A expenses increased by $12.1 million, from $40.5 million for the three months ended September 30, 2010 to $52.6 million for the three months ended September 30, 2011. Of this increase $1.7 million is due to exchange rate changes of the Polish zloty and Russian ruble against the U.S. dollar.

Marketing expenses increased by $0.6 million, from $5.9 million for the three months ended September 30, 2010 to $6.5 million, for the three months ended September 30, 2011, mainly due to higher marketing spending aligned to re-launching some of our products in 2011.

Depreciation and amortization increased by $0.8 million, from $1.8 million for the three months ended September 30, 2010 to $2.6 million for the three months ended September 30, 2011.

Operating Income

Total operating income decreased by $687.1 million, from $29.1 million income for the three months ended September 30, 2010 to $658.0 million loss for the three months ended September 30, 2011, primarily driven by impairment charges for Poland and Russia recorded as of September 30, 2011. The table below summarizes the segmental split of operating profit.

 

    

Operating Income/(Loss)

Three months ended September 30,

 
         2011    
(Restated)
        2010    
    
 

Segment

    

Poland before fair value adjustments

   $ 8,120      $ 14,276   

Impairment charge

     (213,687     0   
  

 

 

   

 

 

 

Poland after fair value adjustments

     (205,567     14,276   

Russia before fair value adjustments

     9,167        15,843   

Impairment charge

     (460,828     0   
  

 

 

   

 

 

 

Russia after fair value adjustments

     (451,661     15,843   

Hungary

     1,446        1,001   

Corporate Overhead

    

General corporate overhead

     (1,570     (1,286

Option Expense

     (662     (761
  

 

 

   

 

 

 

Total Operating Income/(Loss)

   $ (658,014   $ 29,073   

 

 

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Underlying operating income in Poland excluding fair value adjustments decreased by approximately 43.4%, or $6.2 million, from $14.3 million for the three months ended September 30, 2010 to $8.1 million for the three months ended September 30, 2011. The operating income in Russia excluding fair value adjustments decreased by 41.8%, or $6.6 million from $15.8 million for the three months ended September 30, 2010 to $9.2 million for the three months ended September 30, 2011. The changes in operating income in both of these segments were driven by all of the factors described above. Operating income for the three months ended September 30, 2011 was also impacted by the effect of the goodwill and trademark impairment charges. As noted above and as described in more detail in Notes 7 and 8 to the financial statements, the Company determined that certain impairment indicators existed during the quarter which subsequently led to the impairment charges of $213.7 million for Poland and $460.8 million for Russia.

Non Operating Income and Expenses

Total interest expense increased primarily due to issuance of an additional €50.0 million Senior Secured Notes due 2016 on December 9, 2010, by approximately 9.3%, or $2.4 million, from $25.7 million for the three months ended September 30, 2010 to $28.1 million for the three months ended September 30, 2011.

The Company recognized $170.3 million of non-cash unrealized foreign exchange rate loss in the three months ended September 30, 2011, primarily related to the impact of movements in exchange rates on our U.S. dollar and euro denominated liabilities, as compared to $81.8 million of gain in the three months ended September 30, 2010. The loss resulted mainly from the depreciation of the Polish zloty and Russian ruble against the U.S. dollar and euro in the third quarter of 2011.

Total other non-operating expenses increased by $9.8 million, from $0.9 million for the three months ended September 30, 2010 to $10.7 million for the three months ended September 30, 2011. This increase is mainly due to $7.4 million write-off of First Tula Distillery (“Tula”) assets to net realizable value. Additionally the Company began to factor receivables in 2011 which represent $1.1 million of expense for the three months ended September 30, 2011.

 

     Three months ended September 30,  
         2011    
(Restated)
        2010    
    
 

Write-off of assets held for sale

     (7,355     0   

Other gains / (losses)

     (3,328     (914
  

 

 

   

 

 

 

Total other non operating income / (expense), net

   $ (10,683   $ (914

Income Tax

Our effective tax rate for the three months ended September 30, 2011 was 2.1% as compared to an average blended statutory rate of 21%. The difference between the statutory and effective tax rates was due primarily to permanent tax differences related to valuation allowances recorded against loss carry forwards that the Company believes will not be utilized in the future.

 

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Nine months ended September 30, 2011 compared to nine months ended September 30, 2010

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

 

     Nine months ended September 30,  
         2011    
(Restated)
        2010    
    
 

Sales

   $ 1,176,861      $ 1,058,260   

Excise taxes

     (630,513     (575,097
  

 

 

   

 

 

 

Net sales

     546,348        483,163   

Cost of goods sold

     340,820        243,241   
  

 

 

   

 

 

 

Gross profit

     205,528        239,922   
  

 

 

   

 

 

 

Operating expenses

     180,836        144,369   

Gain on remeasurement of previously held equity interests

     (7,898     0   

Impairment charge

     674,515        0   
  

 

 

   

 

 

 

Operating income / (loss)

     (641,925     95,553   
  

 

 

   

 

 

 

Non operating income / (expense), net

    

Interest income / (expense), net

     (83,336     (77,848

Other financial income / (expense), net

     (120,807     4,987   

Other non operating income / (expense), net

     (14,320     (12,266
  

 

 

   

 

 

 

Income / (loss) before taxes and equity in net income from unconsolidated investments

     (860,388     10,426   
  

 

 

   

 

 

 

Income tax benefit / (expense)

     14,232        (2,275

Equity in net income / (losses) of affiliates

     (7,946     2,163   
  

 

 

   

 

 

 

Income / (loss) from continuing operations

     (854,102     10,314   
  

 

 

   

 

 

 

Discontinued operations

    

Loss from operations

     0        (11,815

Income tax benefit

     0        37   
  

 

 

   

 

 

 

Loss on discontinued operations

     0        (11,778
  

 

 

   

 

 

 

Net loss

   $ (854,102   $ (1,464
  

 

 

   

 

 

 

Income / (loss) from continuing operations per share of common stock, basic

   $ (11.85   $ 0.15   

Income / (loss) from discontinued operations per share of common stock, basic

   $ 0.00      $ (0.17
  

 

 

   

 

 

 

Net loss from operations per share of common stock, basic

   $ (11.85   $ (0.02

Income / (loss) from continuing operations per share of common stock, diluted

   $ (11.85   $ 0.15   

Income / (loss) from discontinued operations per share of common stock, diluted

   $ 0.00      $ (0.17
  

 

 

   

 

 

 

Net loss from operations per share of common stock, diluted

   $ (11.85   $ (0.02

Other comprehensive income / (loss), net of tax:

    

Foreign currency translation adjustments

     (50,410     (75,086
  

 

 

   

 

 

 

Comprehensive income / (loss) attributable to the Company

   $ (904,512   $ (76,550
  

 

 

   

 

 

 

 

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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 13.1%, or $63.1 million, from $483.2 million for the nine months ended September 30, 2010 to $546.3 million for the nine months ended September 30, 2011. The increase was driven primarily by the consolidation of Whitehall starting from the first quarter of 2011, as it was not consolidated in 2010, resulting in an increase of $91.3 million, as well as underlying local currency sales growth in Poland. This increase was partially offset by reduction of sales volume of our domestic vodka business in Russia as further discussed below. Our business split by segment, which represents our primary geographic locations of operations, Poland, Russia and Hungary, is shown below:

 

     Segment Net Sales  
     Nine months ended September 30,  
         2011    
(Restated)
         2010    
    
 

Segment

     

Poland

   $ 163,463       $ 153,213   

Russia

     362,393         311,667   

Hungary

     20,492         18,283   
  

 

 

    

 

 

 

Total Net Sales

   $ 546,348       $ 483,163   

Sales for Poland increased by $10.3 million from $153.2 million for the nine months ended September 30, 2010 to $163.5 million for the nine months ended September 30, 2011. This increase was driven mainly by a strengthening of the Polish zloty against the U.S. dollar which accounted for approximately $15.4 million of sales in U.S. dollar terms and higher volume sales of $13.9 million offset by a decrease in sales due to higher market investments and product sales mix in total of $19.0 million.

Sales for Russia increased by $50.7 million from $311.7 million for the nine months ended September 30, 2010 to $362.4 million for the nine months ended September 30, 2011. Included in the sales growth was a sales increase of $91.3 million from the consolidation of Whitehall into sales starting from February 2011. Additionally, sales increased by $13.0 million in U.S. dollar terms due to strengthening of the Russian ruble against the U.S. dollar. Export sales grew by $25.3 million; however export sales to the Ukraine, which represented 68% of these exports, contribute a lower gross margin percentage than domestic sales. Offsetting this was mainly lower local currency sales of $75.5 million and a $3.4 million decrease in sales for Bravo in the first quarter due to suspended production caused by its production license not being timely renewed. In early April, Bravo received its production license and normal sales continued again from this point with higher sales of its ready to drink products of $2.4 million in comparison to second quarter 2010.

Sales for Hungary increased by $2.2 million from $18.3 million for the nine months ended September 30, 2010 to $20.5 million for the nine months ended September 30, 2011 which results in a $0.7 million increase in volumes in local currency terms as well as a increase resulting from strengthening of the Hungarian forint against the U.S. dollar which accounted for approximately $1.5 million of sales in U.S. dollar terms.

Gross Profit

Total gross profit decreased by approximately 14.3%, or $34.4 million, to $205.5 million for the nine months ended September 30, 2011, from $239.9 million for the nine months ended September 30, 2010, reflecting the decrease in gross profit margins percentage in the nine months ended September 30, 2011.

Gross profit margins as a percentage of net sales declined by 12.1 percentage points from 49.7% to 37.6% for the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010. This decline was primarily driven by the shift of sales from premium segment vodkas to the mainstream vodkas segment which has lower margin in both Poland and Russia, higher trade marketing spend in Russia and Poland, as well as substantially higher spirit pricing in both markets. The overall impact of higher cost of goods which includes the higher spirit pricing resulted in a $17.3 million impact on gross margins for nine months ended September 30, 2011 compared to the same period in 2010. Additionally impacting the gross profit in Poland was the cannibalization of the sales volumes of our premium brand Bols, by our new mainstream product Żubrówka Biała, which has a lower contribution per liter.

 

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Table of Contents

Operating Expenses

Operating expenses consist of selling, general and administrative, or “S,G&A” expenses, advertising expenses, non-production depreciation and amortization, and provision for bad debts. Total operating expenses increased by $703.1 million, from $144.4 million for the nine months ended September 30, 2010 to $847.5 million for the nine months ended September 30, 2011. This change is primarily driven by a non-cash impairment charge for Poland and Russia recorded as of September 30, 2011 of $674.5 million, and one-time gain recognized in the nine month period ended September 30, 2011, amounting to $7.9 million based on the remeasurement of previously held equity interests in Whitehall to fair value. For comparability of costs between periods, items of operating expenses after excluding this fair value adjustment are shown separately in the table below. Operating expenses, excluding fair value adjustments as a percent of net sales increased from 29.9% for the nine months ended September 30, 2010 to 33.1% for the nine months ended September 30, 2011. Operating expenses, net of fair value adjustments increased by $36.4 million, from $144.4 million for the nine months ended September 30, 2010 to $180.8 million for the nine months ended September 30, 2011. The increase resulted primarily from the consolidation of the results of Whitehall giving additional $25.5 million of costs, relicensing and restructuring costs in Russia of $7.2 million, as well as strengthening of the Russian ruble and Polish zloty against the U.S. dollar which accounted for approximately $7.7 million of sales in U.S. dollar terms.

The table below sets forth the items of operating expenses.

 

    

Operating Expenses

Nine Months Ended September 30,

 
         2011    
(Restated)
        2010    
    
 

S,G&A

   $ 156,025      $ 122,261   

Marketing

     16,360        16,059   

Depreciation and amortization

     8,451        6,049   
  

 

 

   

 

 

 

Sub-Total

     180,836