10-K 1 d542120d10k.htm FORM 10K Form 10K
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

 

Form 10-K

 

 

 

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2012

OR

 

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

FOR THE TRANSITION PERIOD                      FROM                     

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)

 

 

Registrant’s telephone number, including area code: (856) 273-6980

Securities registered pursuant to Section 12(b) of the Act:

Not Applicable

Securities registered pursuant to Section 12(g) of the Act:

Not Applicable

 

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes   x    No  ¨

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K.  ¨.

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    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

There is no public market for the Company’s Common Stock. As of June 5, 2013, the Company had 10,000 shares of Common Stock outstanding.

 

 

Documents Incorporated by Reference

None.

 

 

 


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EXPLANATORY NOTE

Central European Distribution Corporation (“we”, ”us”, ”our,” or the “Company”) is restating its historical financial statements for the year ended December 31, 2011 and the year ended December 31, 2010, filed with the United States Securities and Exchange Commission (the “SEC”) on October 5, 2012 (the “Original Filing”). The Company is presenting this restatement in its 2012 Annual Report on Form 10-K.

On May 9, 2013, the senior management of the Company following consultation with the audit committee and the board of directors of the Company, concluded that the Company would restate its consolidated financial statements for the periods from and after October 1, 2010 (“Restatement Periods”) to correct accounting errors resulting from a failure to properly account for certain deferred tax assets and liabilities relating to the acquisition of the Russian Alcohol Group (“RAG”) in 2009. As a result, the Company’s consolidated financial statements for the Restatement Periods should no longer be relied upon. The restatement does not have any impact on previously reported operating income or loss or cash flows reported for any of the periods covered.

As previously announced, the Company changed its senior management during January 2013, including the appointment of a new Chief Executive Officer and Chief Financial Officer of the Company. Following these changes, the Company’s new officers continued and completed a thorough review of the Company’s business operations, internal controls and financial statement consolidation procedures, which had started in the fourth quarter of 2012. Through the process of reviewing the Company’s financial statement consolidation procedures and during the preparation of the consolidated financial statements, certain errors were identified relating to the recognition of deferred tax assets and liabilities relating to the acquisition of RAG in the fourth quarter of 2009.

During the Restatement Periods, the Company erroneously recognized a deferred tax asset relating to certain transaction costs incurred by the Company on behalf of its subsidiary in the acquisition of RAG, based on the assumption that the costs were temporary differences and that the related deferred tax asset would be realized in the future. The costs represent a difference in the accounting and tax basis of the Company in the subsidiaries (an “outside basis difference”). Because the recognition criteria for a deferred tax asset relating to such differences were not met, the deferred tax asset should not have been recognized.

Furthermore, during the Restatement Periods, the Company recognized a deferred tax liability related to a gain on the re-measurement of a previously held interest in RAG, based on the assumption that related income tax would be payable in the future. However, the recognition did not consider the fact that the ownership of RAG was structured in such a way that this gain could be recovered tax free. As a result the deferred tax liability should not have been recognized.

The aggregate effect of the adjustments identified resulted in a reduction of the Company’s consolidated net income by $2.2 million, $12.9 million and $8.0 million for the years ended December 31, 2011, 2010, and 2009 respectively. The Company concluded that there is no material effect of the adjustments on the periods prior to September 30, 2010. The adjustments do not have any impact on previously reported operating income or loss or cash flows reported during any of the periods covered.

In addition to the adjustments described above the Company identified certain presentation errors. As of December 31, 2011, a $4.2 million deferred tax liability calculated on retained earnings of certain subsidiaries was erroneously decreasing the deferred tax asset instead of being presented as a liability. This presentation error was also repeated in the first, second and third quarter of 2012 and amounted to $2.9 million, $2.5 million and $2.5 million respectively. As of December 31, 2010 a $29.3 million valuation allowance which related to the deferred tax asset on net operating losses (“NOL”) was presented as a decrease of a long term deferred tax asset instead of a short term deferred tax asset. This presentation error was also repeated in the first, second and third quarter of 2011 and amounted to $30.7 million, $31.5 million and $10.6 million respectively.

For a more detailed description of the Restatement, see Note 2 “Restatement of consolidated financial statements”, to the accompanying consolidated financial statements.

The Company believes that a thorough review of the Company’s financial statement consolidation procedures was a key and necessary step in addressing the material weaknesses in its internal control over financial reporting previously disclosed in the Company’s 2011 Annual Report on Form 10-K/A, and the Company’s new management team is working diligently to change the control environment and strengthen the Company’s internal control system over financial reporting.


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TABLE OF CONTENTS

 

     Page  

PART I

     

Item 1.

  

Business

     4   

Item 1A.

  

Risk Factors

     19   

Item 2.

  

Properties

     31   

Item 3.

  

Legal Proceedings

     32   

Item 4.

  

Mine Safety Disclosures

     33   

PART II

     

Item 5.

  

Market for Registrant’s Common Equity and Related Stockholder Matters

     33   

Item 6.

  

Selected Financial Data

     35   

Item 7.

  

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

     36   

Item 7A.

  

Quantitative and Qualitative Disclosures about Market Risk

     58   

Item 8.

  

Financial Statements and Supplementary Data

     59   

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     108   

Item 9A.

  

Controls and Procedures

     108   

PART III

     

Item 10.

  

Directors and Executive Officers of the Registrant

     110   

Item 11.

  

Executive Compensation

     115   

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management

     123   

Item 13.

  

Certain Relationships and Related Transactions

     123   

Item 14.

  

Principal Accountant Fees and Services

     126   

PART IV

     

Item 15.

  

Exhibits, Financial Statement Schedules and Reports on Form 8-K

     128   

Signatures

     129   


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The disclosure and analysis of Central European Distribution Corporation in this report (and in other oral and written statements we have made or may make, including press releases containing information about our business, results of operations, financial condition, guidance and other business developments), contain forward-looking statements, which provide the Company’s current expectations or forecasts of future events. Forward-looking statements in this report and elsewhere include, without limitation:

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

other statements that are not historical facts.

Words such as “believes”, “estimates,” “anticipates,” “expects,” “intends,” “may,” “will” or “should” or, in each case, their negative, or other variations or comparable terminology may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements. The Company’s actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the factors described in the section entitled “Risk Factors” in this report. Other factors besides those described in this report could also affect actual results. You should carefully consider the factors described in the section entitled “Risk Factors” in evaluating the Company’s forward-looking statements.

We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, the development of the industries in which we operate, and the effects of acquisitions and other investments on us may differ materially from those anticipated in or suggested by the forward-looking statements contained in this report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate, are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods.

We urge you to read and carefully consider the items of this and other reports and documents that we have filed with or furnished to the Securities and Exchange Commission (“SEC”) for a more complete discussion of the factors and risks that could affect our future performance and the industry in which we operate, including the risk factors described in this Annual Report on Form 10-K. 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, which speak only as of the date of this report. The Company undertakes no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this report, or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks the Company describes in the reports it files from time to time with the SEC.

In this Form 10-K and any amendment or supplement hereto, unless otherwise indicated, the terms “CEDC”, the “Company”, “we”, “us”, and “our” refer and relate to Central European Distribution Corporation, a Delaware corporation, and, where appropriate, its subsidiaries.


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PART I

 

Item 1. 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 29.9 million nine-liter cases produced and sold in 2012. 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 and Russia and we also have operations in Hungary and Ukraine. CEDC has a total work force of approximately 4,100 employees.

In Poland, we are one of the largest vodka producers with a brand portfolio that includes Absolwent, Żubrówka, Żubrówka Biała, Soplica, Bols and Palace brands, each of which we produce at our Polish distilleries. Soplica, which we relaunched at the end of 2011 and extended the line with new flavor brands, was one of the fastest growing brands in our portfolio in Poland with flavor brands doubling its sales on the Polish market during 2012. We produce and sell vodkas primarily in three vodka sectors: premium, mainstream and economy. One of our vodkas we produce in Poland is Royal, which was the top-selling vodka in Hungary during 2012 according to trade statistics.

In Russia, the world’s largest vodka market, trade statistics for 2012 show that we were the largest vodka producer in the country, that our Green Mark brand was the top-selling mainstream vodka in the country and that our Talka, Parliament and Zhuravli brands were among top-selling sub-premium vodkas in the country.

Our brands in Poland and Russia are well-represented in all vodka sectors. Our production capacity in both countries gives us the ability to introduce new brands to both markets. The best recent examples from Poland are Żubrówka Biała, which we introduced in November of 2010, Soplica Pigwowa introduced in 2011 and Żubrówka Palona launched in 2012. In Russia we introduced Talka in July of 2011 and Parliament Honey & Pepper in 2012. We believe our ability to introduce new brands to market in an ever changing economic and consumer preference environment gives us a distinct advantage over most of our competitors.

For the year ended December 31, 2012, our Polish and Russian operations accounted for 29.1% and 67.5% of our revenues respectively and, excluding impairment and certain unallocated corporate charges, 40.7% and 53.8% of our operating profit, respectively.

We are a leading importer of spirits and wines in Poland, Russia and Hungary, and we generally seek to develop a complete portfolio of premium imported wines and spirits in each of the markets we serve. In Poland we maintain exclusive import contracts for a number of internationally recognized brands, including Jim Beam Bourbon, Grant’s Whisky, Campari, Jägermeister, Remy Martin Cognac, Corona, Budweiser (Budvar), E&J Gallo wines, Carlo Rossi wines, Metaxa Brandy, Sierra Tequila, Teacher’s Whisky, Cinzano, Old Smuggler, and Concha y Toro wines. In Russia our import portfolio includes E&J Gallo wines, Concha y Toro wines, Paul Masson wines, Jose Cuervo tequila, Great Valley brandy, Label 5 and Glen Clyde whiskies among others. In Russia we are also producing ready-to-drink alcoholic beverages: Elle, gin-based Bravo Classic, and wine-based Amore.

In addition to our operations in Poland, Russia, and Hungary we have a sales office in Ukraine and distribution agreements for our vodka brands in a number of key export markets including the United Kingdom, Ukraine, the Baltics and the CIS for Green Mark, Zhuravli, Parliament and Żubrówka, the United States, Japan, the United Kingdom, France for Żubrówka and many other Western European countries. In 2012, exports represented 4.2% of our sales by value.

Reorganization and Emergence from Chapter 11

Chapter 11 Filing

On April 7, 2013, CEDC and its subsidiaries CEDC Finance Corporation International, Inc. and CEDC Finance Corporation, LLC (together with CEDC, the “Debtors”) filed voluntary petitions for reorganization (the “Chapter 11 Cases”) under Chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) in order to effectuate the Debtors’ prepackaged Chapter 11 Plan of Reorganization described below. The Chapter 11 Cases were jointly administered under the caption “In re: Central European Distribution Corporation, et al.” Case No. 13-10738. The Plan of Reorganization was confirmed by the Bankruptcy Court on May 13, 2013. The Effective Date of the Plan was June 5, 2013.

The Company believes that this successful restructuring will improve its financial strength and flexibility and enable it to focus on maximizing the value of its strong brands and market position. The Chapter 11 Cases and the Plan of Reorganization, which were approved by the Bankruptcy Court, eliminated approximately $665.2 million in debt from the Company’s balance sheet, did not involve the Company’s operating subsidiaries in Poland, Russia, Ukraine or Hungary and had no impact on their business operations. Operations in these countries are independently funded and continued to generate revenue during this process. All obligations to employees, vendors, credit support providers and government authorities were honored in the ordinary course without interruption.

 

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Background to Chapter 11 Filing

Prior to filing the Chapter 11 Cases, the management of the Company, in consultation with the Board and with the assistance of financial and legal advisors, reviewed the Company’s alternatives in light of its financial obligations, in particular the Company’s 3.00% Convertible Senior Notes due 2013 (“2013 Notes”). The Board and the management of the Company evaluated all available alternatives and the Company and its advisors worked to further develop those alternatives to address the maturity of the 2013 Notes, including a strategic alliance with Mr. Roustam Tariko, other possible strategic investments, the sale of certain assets and an exchange for the 2013 Notes.

Following this work and in light of the impending maturity of the 2013 Notes, on February 25, 2013, the Company launched (i) exchange offers in respect of its 2013 Notes and CEDC Finance International, Inc.’s (“CEDC FinCo”) Senior Secured Notes due 2016 (the “2016 Notes”), (ii) a solicitation of consents to amendments to the indenture governing the 2016 Notes, and (iii) a solicitation of votes on a pre-packaged Chapter 11 Plan of Reorganization relating to the 2013 Notes and the 2016 Notes. These transactions were launched by the Company to begin a process of consensual restructuring of the Company’s obligations with the participation of Roust Trading Ltd. (“RTL”), a significant equity and debt holder in the Company, a Steering Committee of holders of approximately 30% of the outstanding principal amount of the 2016 Notes (the “2016 Steering Committee”) and beneficial owners holding an aggregate of approximately $85.7 million in outstanding principal amount of the 2013 Notes (the “2013 Steering Committee”), however none of RTL, the 2016 Steering Committee or the 2013 Steering Committee supported these transactions as launched by the Company. Following the launch of these transactions on February 25, 2013, these stakeholders continued to negotiate the terms of a mutually agreeable restructuring of the Company’s obligations.

On March 11, 2013, the Company announced amended terms to these exchange offers, and the consent and vote solicitations to reflect terms agreed to and supported by the Company, RTL and the 2016 Steering Committee. On March 19, 2013, the Company announced the termination of its exchange offer in respect of the 2013 Notes and continued to solicit votes from the holders of the 2013 Notes on an amended pre-packaged Chapter 11 plan of reorganization (the “Plan of Reorganization”) included in a supplement (the “Supplement”) filed by the Company with the SEC on Form 8-K on March 19, 2013, to the Restated Offering Memorandum Consent Solicitation Statement and Disclosure Statement filed with the SEC on March 11, 2013 (the “Offering Memorandum”). The exchange offer in respect of the 2016 Notes was also subsequently terminated. After extensive discussion with representatives of RTL, the 2016 Steering Committee and the 2013 Steering Committee and deliberation regarding the Company’s alternatives, the Board resolved unanimously to support the transactions described in the Offering Memorandum and Supplement (the “Restructuring Transactions”).

Voting on the Plan of Reorganization closed on April 4, 2013. According to the official vote tabulation prepared by CEDC’s voting and information agent, impaired creditors voted overwhelmingly to accept the Plan of Reorganization. In particular, approximately 95% of the 2013 Notes were voted. The Plan of Reorganization was accepted by 99.13% in number and 99.00% in amount of those 2013 Notes that were voted on the Plan of Reorganization. Approximately 95% of all 2016 Notes were voted, and of those, 97.26% in number and 97.34% in amount voted to accept the Plan of Reorganization.

On April 7, 2013, CEDC announced that the Debtors had received overwhelming support from creditors for the Restructuring Transactions and the CEDC Board of Directors resolved to implement the Restructuring Transactions through the prepackaged Plan of Reorganization. Accordingly, the Company filed the Chapter 11 Cases in the Bankruptcy Court in order to effectuate the Plan of Reorganization.

CEDC and CEDC FinCo also announced the successful completion of the consent solicitation conducted with respect to the indenture governing the 2016 Notes, as the requisite consents were obtained to approve the Covenant Amendments, the Collateral and Guarantee Amendments and the Bankruptcy Waiver Amendments, each as defined in the Amended and Restated Offering Memorandum, Consent Solicitation Statement and Disclosure Statement dated March 8, 2013. Approximately 95% of the 2016 Notes by principal amount voted to approve those waivers and amendments.

Finally, CEDC and CEDC FinCo announced the termination of the exchange offer for the 2016 Notes. The exchange offer failed to meet the minimum tender condition necessary for the consummation of the offer.

On May 13, 2013, the Bankruptcy Court entered an order confirming the Plan. The Effective Date of the Plan was June 5, 2013.

Description of the Plan of Reorganization

The Plan of Reorganization included the following:

 

   

RTL made a $172.0 million cash investment and exchanged the $50 million secured credit facility provided by RTL to CEDC (the “RTL Investment”) pursuant to the facility agreement dated March 1, 2013 (the “RTL Credit Facility”) for new shares of common stock of the Company, with the proceeds of the RTL Investment used to fund the cash consideration in the exchange offer for 2016 Notes described below;

 

   

all 2016 Notes were exchanged for (i) an aggregate principal amount of new Senior Secured Notes due 2018 (the “New Secured Notes”) equal to $450 million plus the aggregate interest accrued but unpaid on the outstanding 2016 Notes not accepted for tender in the reverse “Dutch Auction” available to 2016 Noteholders (as described in the Offering Memorandum) in accordance with their existing terms in respect of the period from March 16, 2013 to the earlier of June 1, 2013 and the date preceding the date of issuance of the New Secured Notes, (ii) $200 million aggregate principal amount of new 10% Convertible Junior Secured Notes due 2018 (the “New Convertible Secured Notes“ and, together with the New Secured Notes, the “New Notes”) and (iii) $172 million in cash (together, the “Exchange Offer”). This consideration afforded holders of 2016 Notes an estimated recovery of approximately 83.7%;

 

   

all 2013 Notes and the $20.0 million principal amount of CEDC Senior Notes due March 18, 2013 (the “RTL Notes”) were exchanged for their pro rata share (based upon the approximate $282.0 million sum of aggregate principal amount of 2013 Notes and the RTL Notes outstanding and accrued interest calculated through March 15, 2013) of $16.9 million in cash, which was also funded by RTL; and

 

   

in exchange for the RTL Investment and funding the cash distribution to 2013 Noteholders, RTL and its affiliates received new shares of common stock of the Company representing 100% of reorganized CEDC. All of the Company’s shares of common stock outstanding prior to the Effective Date of the Plan were cancelled.

 

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In addition, RTL made an offer (i) outside the United States in “offshore transactions” in compliance with Regulation S under US Securities Act of 1933 (the “Securities Act”); and (ii) to “accredited investors” as defined under Regulation D of the Securities Act (“Accredited Investors”) to exchange (the “RTL Offer”), subject to certain conditions, 2013 Notes not held by RTL in exchange for an aggregate of $25.0 million in cash (the “Cash Payment”) and securities issued by RTL (the “RTL Offer Notes”). Each accepting holder assigned to RTL all of its rights under such 2013 Notes, including the right to its distribution under the Plan of Reorganization included in the Supplement.

Holders of 2013 Notes other than RTL who participated in the RTL Offer received an estimated recovery of 34.9%. Holders of 2013 Notes that did not participate in the RTL Offer received their proportionate share of $16.9 million in cash under the Plan of Reorganization (shared with the RTL Notes). Holders of 2013 Notes that participated in the RTL Offer did not receive a distribution from CEDC or its U.S. subsidiaries under the Plan of Reorganization.

 

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Our Competitive Strengths as a Group

Leading Brand Portfolio in Poland, Russia and Hungary—In Poland, Russia and Hungary, we have a leading portfolio of domestic vodkas covering all key sectors. In addition to our domestic vodka portfolio we have a complementary import portfolio of leading import wines and spirits. This combined portfolio gives us a distinct advantage in the market by allowing us to provide a full spectrum portfolio of top domestic and import brands.

Depth of market position in PolandWe are a leading producer and importer of alcoholic beverages in Poland. Our portfolio includes top-selling brands that we produce as well as brands that we import on an exclusive basis. Our broad range of products, including our own vodka brands as well as imported wine and spirit brands, allows us to address a wide range of consumer tastes and trends as well as wholesaler needs and provides us with a solid portfolio base. Additionally, we have the scope and ability to bring new products to market in a timely and cost efficient manner to meet the changing desires of our consumers.

Solid platform for further expansion in the fragmented Russian spirits marketIn 2012, we were the largest vodka producer in Russia, producing approximately 15 million nine-liter cases. Our large portfolio of alcoholic beverages consists of our own brands, including Green Mark, which for 2012 was the top-selling mainstream vodka brand in Russia, Parliament, Zhuravli and Talka, one of the top-selling sub-premium vodka brands in Russia and imported products. These vodka and import brands are supported by a combined sales force of approximately 2,100 people. We believe our combined size and the geographic coverage of our sales force enable us to benefit from the ongoing consolidation in the Russian spirits market. Furthermore, we believe we have the necessary infrastructure to introduce new brands to the market place in the segments where consumer demand is strongest.

 

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Our sales force in Russia includes people allocated to Exclusive Sales Teams, or ESTs. ESTs are employed by distributors that carry our vodka products but focus exclusively on the merchandising, marketing and sale of our portfolio. Because spirits advertising is heavily regulated in Russia, we believe that this structure provides us with meaningful marketing benefits as it allows us to maintain direct relationships with retailers and to ensure that our products receive prominent shelf space. Distributors who employ our ESTs are solely compensated through a rebate on purchases of our vodka brands. This arrangement enables us to maintain an expansive and exclusive sales force covering almost all regions of Russia with limited associated fixed overhead costs.

Attractive import platform for international spirit companies to market and sell products in Poland, Russia and Hungary—Our existing import platform, under which we are the exclusive importer of numerous brands of spirits and wines into each of our core markets, combined with our sales and marketing organizations in Poland, Russia and Hungary provide us with an opportunity to continue to expand our import portfolio. We believe we are well-positioned to serve the needs of other international spirit companies that wish to sell products in these markets.

Business Strategies

Capitalize on the Russian market consolidationThe Russian vodka market is currently fragmented, and we believe we will be able to take market share from smaller competitors in the near and long-term. We estimate that the top five vodka producers in Russia accounted for estimated 56% of the total market share in 2012 as compared to 26% estimated in 2006. We believe, based on our experience of consolidation trends in Poland, that the combined market share of the top five vodka producers in Russia could increase from 56% as the Russian market continues to consolidate. We intend to capitalize on our leading brand position, our breadth of portfolio, our ability to bring new brands to market and our expansive sales and distribution network to expand our market share in Russia.

Develop our portfolio of exclusive import brands—In addition to the development of our own brands, our strategy is to be the leading importer of wines and spirits in the markets where we operate. We have already developed an extensive wine and spirit import portfolio within Poland. In Russia, we intend to capitalize on the well-developed import platform and our sales and marketing strength by developing new import opportunities and capitalizing on the overall growth in imports. We also plan to utilize the platform we have developed in Ukraine for import wine, spirit and ready-to-drink alcoholic beverages opportunities.

Continue to focus on sales of our domestic and export brands and exclusive import brandsWithin Poland we intend to continue our marketing efforts behind Żubrówka Bison Grass and Żubrówka Biała, as well as Żubrówka Palona launched in May 2012. We will also continue to develop extension for our other vodka brands such as Soplica which was repackaged with new flavors during 2012. We are also in the process of completing an extensive program to introduce new variant of Bols vodka and develop new packaging and flavors of Absolwent vodka in our core markets. Within Russia we concentrate our efforts in upcoming months on development of new flavors and restyling of our core brands such as Green Mark, Zhuravli, Talka, Parliament and Urozhay. Moreover our plans include introducing new brand of mainstream vodka and new mainstream brandy.

Develop export opportunities for our vodka brandsWe also intend to seek new export opportunities for our vodka brands, such as Żubrówka Bison Grass, Green Mark, Soplica, Kauffman, Talka, Parliament and Royal vodka, through new export package launches and product extensions. During 2012 we continued to develop a new export structure within the group to leverage the portfolio strength of our brands to develop further export opportunities.

 

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Industry Overview

Poland

The total value of the alcoholic beverage market in Poland (including beer, wine and spirits) was estimated to be approximately $8.8 billion in 2012. Total sales value of alcoholic beverages at current prices increased by approximately 6.0% from December 2011 to December 2012. Beer and vodka account for approximately 87% of the value of sales of all alcoholic beverages.

Spirits

We are one of the leading producers of vodka in Poland. We compete primarily with four other major spirit producers in Poland, most of which are privately-owned. The spirit market in Poland is dominated by the vodka market. Domestic vodka consumption dominates the Polish spirits market with over 90% market share, as Poland is the fourth largest market in the world for the consumption of vodka and one of the top 25 markets for total alcohol consumption worldwide. The Polish vodka market is divided into four segments based on quality and price (*):

 

   

Top premium and imported vodkas, with such brands as Finlandia, Absolut, Chopin;

 

   

Premium segment, with such brands as Bols Vodka, Sobieski, Wyborowa, Smirnoff, Maximus and Palace Vodka;

 

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Mainstream segment, with such brands as Absolwent, Batory, Złota Gorzka, Soplica, Żubrówka Bison Grass, Żubrówka Biała, Żołądkowa Gorzka, Krupnik, Luksusowa, Polska, Czysta de Luxe; and

 

   

Economy segment, with such brands as Starogardzka, Krakowska, Żytniówka, Boss, Niagara, Śląska, 1906, Z Czerwoną Kartką, and Ludowa.

 

(*) Brands in bold face type are produced by the Company.

We produce vodka in key market segments and have our largest market share in the mainstream and premium segments. Though vodka brands compete against each other from segment to segment, the most competition is found within each segment. As we have a number of top-selling vodka brands in Poland, and have approximately a 23.2% market share measured by value, we are in a good position to compete effectively in all three segments.

In terms of value, the top premium and imported segment accounts for approximately 3.7% of total sales volume of vodka, while the premium segment accounts for approximately 11.3% of total sales volume. The mainstream segment, which is the largest, now represents 64.1% of total sales volume. Sales in the economy segment currently represent 20.7% of total sales volume.

Brown spirits

Whisky market in Poland has been growing dynamically over the last few years. Sales by volume increased in 2012 by 27.1% as compared to 2011. With our brands such as Grant’s, Tullamore Dew and Jim Beam bourbon we have 12.3% share by volume in the whisky market. We aim to have 13.4% by the end of 2013. Our plans include intensifying marketing and promotional activities for Grant’s and introducing new brands from Beam portfolio .

Wine

The Polish wine market, which grew to an estimated 110 million liters in 2012, is represented primarily by two categories: table wines, which account for 2.2% of the total alcohol market, and sparkling wines, which account for 0.6% of the total alcohol market. As Poland has almost no local wine production, the wine market has traditionally been dominated by imports, with lower priced Bulgarian wines representing the bulk of sales. We believe that there is space for category growth in long term perspective, as average wine consumption per capita in Poland is only 2.7 liters per year. In 2012, our exclusive agency brand, Carlo Rossi, continued to be the number one selling wine in Poland by value with 9.3% market share in table wine market. For 2013 we plan further portfolio line extension and development of Carlo Rossi Sweet Red, introduced in 2012.

Moreover, we believe that consumer preference is trending towards higher priced table wines. Premium and super premium wine category grew by 17% by volume over last 5 years. The best-selling wines in Poland previously retailed for under $3 per bottle. Currently, the best-selling wines retail in the $3-$6 range.

Beer

Sales of beer remained stable in volume in 2012 but still account for 51% of the total sales value of alcoholic beverages in Poland. Three major international producers, Heineken, SAB Miller and Carlsberg, control 82% of the market through their local brands.

Russia

Russia, with its official production of approximately 1,064 million liters of vodka in 2012, is by far the largest vodka market worldwide. The Russian vodka market is fragmented with, in our estimation, the top five producers having a combined volume market share of approximately 54.3% in 2012. This number is up from 2006 when the top five producers only had an estimated 26% market share. Further sector consolidation has been ongoing in recent years, with the potential to continue in the near term despite the market being down approximately by 2.8% in 2012. We believe we are well-positioned to participate in the consolidation of the Russian vodka market in 2013 as we have the leading brands by volume and value in the mainstream and sub-premium categories together with a dedicated sales force and ESTs. In addition, the Russian government has put in place very restrictive policies on the advertising of spirits. We believe these policies make it difficult for any competitor to buy market share by out-spending its rivals.

We believe that a key factor that will impact the Russian vodka market will be the continued role of the Russian government in the form of further controls to reduce the black market as well as planned excise tax increases. On one hand the government has continued to develop policies to reduce the number of players who operate in the black market. This was evidenced in recent years through the overall industry re-licensing process which left a number of producers and distributors unable to operate as their licenses were not renewed. We believe a continuation of this policy will be to the benefit of the larger legitimate vodka producers in the market including our Russian operations. At the same time, the government has taken steps to increase excise taxes which in turn will increase the shelf price of vodka in the market. Compared to annual average historical increases of 9%-10% during the last five years, the indexation from 2012-2015 will be 100 rubles per liter of 100% spirit per year.

 

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The Russian spirit market has also been impacted by higher spirit pricing, since the beginning of 2010, spirits prices in the market have increased by 115% which has impacted our production cost by $18.1 million in 2011 and $13.8 million in 2012. As the supply of spirit in Russia is generally controlled by a small number of producers and we purchase spirits primarily from a single source, we do not expect to see reductions in spirit pricing in the upcoming periods, and we may see further increases in spirit pricing. We cannot assure you that we will be able to offset the effects of higher spirit prices or excise taxes through price or volume increases or whether the recent declines in the vodka market will impact our ability to do so. We believe however, that producers who operate in higher priced segments of the markets will have less negative impact as a result of lower consumer demand from higher shelf prices as the excise tax is fixed per liter of spirit and thus the percent increase will impact higher priced brands less. Additionally, as the largest producer of vodka in Russia, we believe we have the purchasing power to obtain the most competitive spirit prices in the market. Therefore although prices may increase we believe that given our purchasing power we will have advantageous spirit pricing vis-à-vis some of our competitors. Our strategy over the last few years in Russia has been focused on the mainstream and sub-premium price points and we believe we have a well-placed vodka portfolio, together with higher priced import brands, to best weather these upcoming challenges.

Spirits

The Russian vodka market is generally divided into five segments based on quality and price: premium, sub-premium, mainstream, economy and cheap. The premium segment accounts for approximately 2.8% of total sales volume of vodka, while the sub-premium segment accounts for approximately 14.6% of total sales volume. The mainstream segment now represents 32.0% of total sales volume. Sales in the economy and cheap segment currently represent 50.3% of total sales volume. We believe that price increase due to excise increase in July 2012 forced the consumers to switch towards mainstream and sub-premium products.

Vodka represented about 90% of the total Russian spirits market in 2012. The vodka market decreased by approximately 2.8% in 2012 versus 2011, and we believe that the market will continue to see volume declines in the next few years. However as before, we believe the premiumization process should most benefit the mainstream and sub-premium brands, particularly in light of the planned excise tax increases and thus we would expect overall value in the market to grow. We believe we are well-positioned for this with the bestselling brands in both the sub-premium and mainstream sectors. In addition, with our current capacity and relatively little capitalization expense, we plan to introduce new brands to the market to capture sales in any sector that we believe will have the most dynamic growth potential.

The Russian vodka market is quite fragmented, with the top five producers only having an estimated 54.3% market share in 2012 as compared to an estimated 88.5% market share in Poland and an estimated 84.4% market share in Ukraine. We believe that the Russian market will experience trends similar to those experienced in the Polish market and will continue to see further consolidation of the market as the retail infrastructure further consolidates and develops and the effects of the economic crisis stabilize and diminish. We believe that this consolidation post crisis will increase significantly over the next 5 years.

Wine

Wine market in Russia is expected to remain stable during the years 2013-2014. Currently the fastest growing category in the Russian wine market is sparkling wine. In 2012, sparkling wine sales grew by 5.3% by volume and 17.9% by value terms, according to Gosstat. Despite the fact that domestic wines prevail on the market, the share of imported higher quality wines has been constantly growing. We believe we can benefit in the future from the growing Russian wine market through the import and distribution of high-value wines and the addition of new wines to our import and distribution portfolio in Russia. Through Whitehall, we import wines from Constellation and Concha y Toro among others.

Ready to Drink (RTD)

The ready to drink (or long drink) market in Russia consists of pre-mixed beverages with 9% or less alcohol content. The key segments of the market are gin-based drinks, alco-energy drinks and fruit-based drinks. Over the last few years, we have focused our portfolio away from lower margin PET packaging into higher margin trendy glass packaging. Our portfolio includes the gin-based Bravo Classic brand, which accounts for approximately 39% of our long drinks sales volume, and the higher end brands: wine-based Amore which continued to grow in 2012 to 43% of our sales volume and Elle which we plan to develop in 2013. As of year-end 2012, we held a 7.34% market share in the RTD category. We have focused over the last two years on improving the profitability of these products through a combination of more targeted selling and mix improvement. The long drinks business continues to show significant margin and operating profit improvement over prior years.

In 2012 the Government has implemented changes in the legislation for low alcohol content products affecting the market for RTD’s, including significant limitations on press advertising and ban on retail sales of RTD in particular regions in Russia. We believe we are well positioned to address these changes and where required move to a wine based RTD which will be allowed to be promoted in press. This is evidenced by a number of toll filling contracts we entered into at the end of 2012 for production of other parties’ brands due to the limited number of producers in the market who are positioned to address these regulatory changes.

 

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Hungary

Spirits

The Hungarian spirit market is dominated primarily by fruit-based eau-de-vie, brown spirits and bitters. According to trade statistics, the most popular spirit drinks during 2012 were Royal Vodka, Unicum, Jägermeister, Kalinka Vodka, Hubertus liqueur, Futyulos fruit eau-de-vie, Ballantine’s, Jim Beam, Johnnie Walker, Finlandia and Metaxa. The current significant trends in the Hungarian spirit market are the overall decrease in total spirit consumption and a pronounced move by the consumer to branded VFM imported spirits and home-distilled spirits. Our Royal Vodka brand is the number one selling vodka in Hungary. In addition, Hungary is the fifth largest market in the world for sales of our exclusive agency brand, Jägermeister.

We believe that the total size of the spirit market in Hungary is approximately 59 million liters which has slightly declined in 2012 by approximately 0.5%. However, despite the decreasing total sales volume of spirits, we believe that the share of imported spirits, the segment in which we operate, is stable, while the consumption of local spirits is in decline. The increased share of imported spirits was a result of eliminated custom duty and the improving purchasing power since the European Union accession, as well as the continuous marketing and advertising activities of the imported spirit brands. Since the economic crisis hit the market, the increase of the share of imported spirits stopped.

The spirit market is split into two major segments in Hungary: local producers and importers. The local producers are primarily dealing with low-cost, mainstream or below, local products, as well as, with premium fruit-based spirits (Palinka). CEDC introduced in 2011 its own Palinka-like brand—EstiKornel—to participate in this important segment of the market. The import spirit market is more competitive and relatively fragmented. The major players are the market leader ZwackUnicumZrt (with an interest in both the local and import spirit segment), CEDC as the largest spirit importer, Duna Pro (Bacardi-Martini portfolio), Pernod Ricard Hungary, Heinemann and Coca-Cola (the distributor of Brown-Forman brands). Our advantage in Hungary is the combination of our wide portfolio which has the number one leading brands in the vodka, bitter and imported brandy categories, and our experienced sales and marketing team which offers premium service and builds strong brand equities.

Operating Segments

We operate and manage our business based upon three primary geographic segments: Poland, Russia and Hungary.

Segment revenue and profit information and additional financial data for our operating segments is provided in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 25 to the consolidated financial statements in Part II, Item 8 “Financial Statements and Supplemental Data” of this Annual Report on Form 10-K.

Poland

We are one of the leading producers of vodka by value and volume in Poland. We own two production sites in Poland, one in Oborniki and one in Białystok. In the Oborniki distillery, we produce the Bols and Soplica vodka brands, among other spirit brands. In Białystok we produce Absolwent and Żubrówka Biała which have been two of the leading vodkas in Poland. Absolwent and Soplica have consistently been two of the top ten mainstream selling vodkas in Poland. Żubrówka Biała showed significant growth in 2012 and had a market share of 10.7% at the end of 2012. Our Żubrówka Bison Grass is exported out of Poland to many markets around the world, including France, United Kingdom and Japan. In 2012 we also introduced new flavor—Żubrówka Palona being unique alternative for flavor vodka and whiskey consumers, with no direct competitors.

We are the leading importer of spirits, wine and beer in Poland. We currently import on an exclusive basis approximately 40 leading brands of spirits, wine from over 30 producers and 2 brands of beer.

Brands

We sold approximately 11.2 million nine-liter cases of vodka, wine and spirits through our Polish business in 2012 including both our own produced vodka brands as well as our exclusive agency import brands.

Our mainstream vodkas are represented by the Absolwent, Soplica, Żubrówka Bison Grass and Żubrówka Biała brands among others. Of our brands, in 2012 Żubrówka Biała was the top selling brand with over 3.0 million nine-liter cases sold in 2012 together with Absolwent being one of the top-selling brands in Poland for over 8 years. Soplica clear and flavor has been a fixture in the mainstream category over the last several years. Successful launch of new flavor Soplica Pigwowa and Soplica Orzech Laskowy distinctive marketing campaign allowed us to increase its sales by 58% in volume. Our Żubrówka Bison Grass brand is the second best-selling flavored and colored vodka in Poland and is exported to markets around the world. In 2012, we sold approximately 143 thousand nine-liter cases of Żubrówka Bison Grass outside of Poland.

Bols vodka continues to be our best-selling premium vodka both in Poland and Hungary. For 2013 we plan to launch completely new variant of Bols which we believe will help us to rebuild brand quality perception and recruit new consumers.

 

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In Poland we own and produce the top selling vodka in Hungary, Royal Vodka, which we distribute through our subsidiary Bols Hungary.

Import Portfolio

We have exclusive rights to import and distribute approximately 70 leading brands of spirits, wine and beer into Poland and distribute these products throughout the country. We also provide marketing support to the suppliers who have entrusted us with their brands.

Our exclusive import brands in Poland include the following:

 

LIQUEURS

 

WHITE

SPIRITS

      

BROWN

SPIRITS

  

VERMOUTH &

BITTERS

  

WINE &

CHAMPAGNES

  

BEER

Sambuca   Patron Tequila      Jim Beam    Cinzano    Miguel Torres    Budweiser-Budvar
Amaretto Florence   Tequila Sierra      Camus    Campari    Concha y Toro   
Amaretto Venice   Cana Rio Cachaca      Remy Martin    Jaegermeister    Gallo    Corona
Cointreau   Gin Finsbury      Metaxa       Carlo Rossi   
Passoa   Nostalgia Ouzo      Torres       B. P. Rothschild   
Bols Liqueurs   Grappa Primavera      Teacher’s       Frescobaldi   
  Tequila Sauza      Old Smuggler       Codorniu   
  Rum Old Pascas      Grant’s       Piper Heidsieck   
  Gin Hendricks      Glenfiddich       Penfolds   
       Balvenie       Trivente   
       Tullamore Dew       Rosemount   
             Trinity Oaks   
             Terra d’oro   
             M.Chapoutier   
             BoireManoux   
             Faustino   
             J.Moreau & Fils   
             Kressmann   
             Laroche   

The following table illustrates the breakdown of our sales in Poland in the Year ended December 31, 2012, 2011 and 2010:

 

Volume Sales Mix by Product Category

   2012      2011      2010  

Domestic Vodka

     75%         75%         73%   

Vodka Export

     5%         5%         3%   

Imports Beer

     6%         5%         7%   

Wine

     10%         10%         8%   

Spirits other than vodka

     3%         3%         5%   

Other

     1%         2%         4%   
  

 

 

    

 

 

    

 

 

 

Total

     100%         100%         100%   
  

 

 

    

 

 

    

 

 

 

Export activities

We have a number of Polish and Russian brands that we believe have export potential. In the second half of 2012, we restructured our export operations to create one business unit offering a portfolio of Polish and Russian brands for export markets. We believe that this focus together with a strong core export portfolio will allow us to increase sales of our exports over the upcoming years.

 

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During 2012, our core export brand from Poland, Żubrówka, which was primarily exported to the United Kingdom, France, and Japan, was also introduced to the Ukrainian market.

We are continuing to develop our third party private label export business in which we produce vodka to be sold under labels other than our own. Customers range from major retail chains in Europe to premium brand owners in the United States. For example, we currently produce Ultimat vodka (ultra-luxury vodka sold primarily in the United States) for Patron as well as other similar agreements.

Employees

As of December 31, 2012, we employed 880 individuals in Poland.

Polish labor laws require that certain benefits be provided to employees, such as a certain number of vacation days, maternity leave and retirement bonuses. The law also restricts us from terminating employees without cause and, in most instances, requires a severance payment of one to three months’ salary. Additionally, we are required to contribute monthly payments to the governmental health and pension system. Most of our employees are not unionized, and we have had no significant employee relations issues. In addition to the required Polish labor law requirements, we maintained an employee incentive stock option plan for key management and provide supplemental health insurance for qualified employees. The incentive stock option plan was terminated in June 2013 as a result of the Plan of Reorganization

Trademarks

With the acquisitions of Polish distilleries, we became the owners of vodka brand trademarks. The major trademarks we have acquired are: the Bols vodka brand (we have franchise rights to the Bols vodka brand in Poland, Russia and Hungary), the Soplica brand, Absolwent and Żubrówka brands. We also have the trademark for Royal Vodka which is produced in Poland and which we currently sell in Hungary through our Bols Hungary subsidiary. See “Risk Factors—We may not be able to protect our intellectual property rights.”

Russia

We are the leading integrated spirits beverages business in Russia with an approximate 14.7% market share by volume in vodka production. We produce Green Mark, the leading mainstream vodka in Russia and as well as the leading sub-premium vodkas in Russia, Parliament, Zhuravli and Talka. We also produce Yamskaya under contract manufacturing by Tartspiritprom, an economy vodka in Russia, and premixed alcohol drinks (or long drinks).

The hypermarkets and large retail chains are expanding throughout Russia with different sized formatted stores, which are expected to better cover and penetrate those areas outside of the major cities of Russia. As we have central agreements in place with these hypermarkets and large retail chains, as well as a large trademark budget for spirits in Russia and the leverage it brings, we expect to benefit from this expansion.

We also own Whitehall, which holds the exclusive rights to the import of such leading premium wine and spirit brands as Concha y Toro, Paul Masson, Robert Mondavi, DeKuyper, Jose Cuervo, Label 5 and Glen Clyde. In addition to these import activities, Whitehall has distribution centers in Moscow, Saint Petersburg, and Rostov as well as a wine and spirits retail network located in Moscow.

Brands

We produced and sold approximately 15.0 million nine-liter cases of vodka through our Russian business in 2012 in the main vodka segments in Russia: premium, sub-premium, mainstream, economy and cheap. In addition we produced and sold approximately 2.4 million nine-liter cases of long drinks.

In the mainstream segment we produce Green Mark, the leading mainstream vodka in Russia, as well as Talka, Zhuravli and Parliament which are among the leading sub-premium brands. In October of 2010, we introduced Black Sail brandy in 3, 4 and 5 star versions. In 2011 we introduced a new brand to the Russian market: Talka. Moreover, we launched 6 new variants of vodka, including new flavor Parliament Honey & Pepper.

 

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Import Portfolio

We are one of the leading importers of wine and spirits in Russia. Whitehall, our main import company, has exclusive rights to import and distribute a number of brands of spirits and wines into Russia. Through Whitehall, we have one of the leading platforms for importing and distributing faster growing imported brown spirits and wines in Russia. Exclusively imported brands include the following:

 

SPIRITS

  

WINES

Cortel Brandy    Concha y Toro
DeKuyper    Robert Mondavi
Great Valley    Paul Masson
Jose Cuervo    Nobilo
Label 5    Trivento
   PascualToso
   Janneau
   Kumala&Flagstone
   Pere Magloire
  

Export activities

We are the leading exporter of vodka in Russia with our key export markets of Ukraine (where we have set up our own import and distribution company), the Baltics and other CIS countries. In January 2012 CEDC has signed an exclusive distribution agreement with First Drinks Brands, part of William Grant & Sons, on distribution of Green Mark, Żubrówka and Kauffman Vodka in the United Kingdom. The agreement will strengthen presence of CEDC brands in the UK market, as First Drinks Brands is the leading distributor on the market, with expertise in development of premium spirit brands, cooperating with both of trade and on trade segment.

Sales Organization and Distribution

In Russia, we have a strong sales team that sells directly to the key retail accounts and primarily relies on third-party distribution through wholesalers to reach the small to medium sized outlets. For sales of our vodka brands we also have ESTs that were introduced in 2006. We staff ESTs that currently cover the majority of Russia. The mission of these teams is to maintain direct relationships with retailers and ensure that the Company’s products are properly positioned on the shelf. Members of ESTs are generally on the distributors’ payrolls, which are indirectly remunerated by us via discounts granted to distributors. ESTs exclusively deal with our vodka products and currently control deliveries to approximately 45,000 points-of-sale (which is about 37% of all points-of-sale in Russia).

The following table illustrates the breakdown of our sales in Russia:

 

Volume Sales Mix by Product Category

   2012      2011  

Vodka domestic

     69.0%         68.0%   

Vodka export

     13.0%         11.0%   

Ready to drink products

     12.0%         14.0%   

Wine and spirits other than vodka

     6.0%         7.0%   
  

 

 

    

 

 

 

Total

     100%         100%   
  

 

 

    

 

 

 

Employees

As of December 31, 2012 we directly employed 3,138 individuals in Russia.

Trademarks

With the acquisition of Parliament and Russian Alcohol we became the owners of vodka brand trademarks in Russia. The main trademarks we have are Parliament, Green Mark and Zhuravli vodka brands. We also have trademarks with other brands we own in Russia. See “Risk Factors—We may not be able to protect our intellectual property rights.”

Hungary

Brands

In July of 2006, we acquired the trademark for Royal Vodka, which we produce in Poland and which we currently sell in Hungary through our Bols Hungary subsidiary. Royal Vodka is the number one selling vodka in Hungary with market share of approximately 50.9%.

 

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Our exclusive import brands in Hungary include the following:

 

CEDC BRANDS

 

VERMOUTH &

BITTERS

 

LIQUEURS

 

WHITE SPIRITS

 

BROWN SPIRITS

Bols Vodka   Campari   Jaegermeister   Jose Cuervo   Remy Martin
Żubrówka   Cinzano   Bols Liqueurs   Calvados Boulard   Metaxa
Royal Vodka     Cointreau     St Remy
    Carolans     Grant’s
    Galliano     Glenfiddich
    Irish Mist     Tullamore Dew
        Old Smuggler

Sales Organization and Distribution

In Hungary, we employ approximately 23 sales people who cover primarily on-trade and key account customers throughout the country.

Employees

As of December 31, 2012, we employed 51 employees in Hungary including 49 persons employed on a full time basis.

Sources and Availability of Raw Materials for Spirits that We Produce

The principal components in the production of our distilled spirits are products of agricultural origin, such as rectified spirit, as well as flavorings, such as bison grass for Żubrówka, and packaging materials, such as bottles, labels, caps and cardboard boxes. We purchase raw materials by contractual arrangement and through purchases on the open market. Agreements with the suppliers of these raw materials are generally negotiated with indefinite terms, subject to each party’s right of termination upon six months’ prior written notice. Prices for these raw materials excluding spirits are negotiated on average every year. Spirit prices are influenced by underlying grain price trends which can fluctuate quickly and therefore tend to be purchased on short term or spot rate agreements.

We have several suppliers for each raw material in order to minimize the effect on our business if a supplier terminates its agreement with us or if disruption in the supply of raw materials occurs for any other reason. We have not experienced difficulty in satisfying our requirements with respect to any of the products needed for our spirit production and consider our sources of supply to be adequate at the present time. We do not believe that we are dependent on any one supplier in our production activities. In certain instances, primarily spirit in Russia, we purchase raw materials primarily from a single source which increases our risks for price increases and supply disruptions. See “Risk Factors—Reliance on single source suppliers could have a material adverse effect on our business and our financial results”.

Government Regulations

Alcohol and spirit markets are subject to extensive government regulations in Poland and Russia. We are subject to a range of regulations in the countries in which we operate including laws and regulations on the environment, trademark and brand registration, packaging and labeling, distribution methods and relationships, pricing and price changes, sales promotions and public relations. As explained below in “Risk Factors,” we may be required to obtain permits and licenses to operate our facilities. We are also subject to rules and regulations relating to changes in officers or directors, ownership or control.

On January 1, 2012, the Russian government increased excise taxes for spirits from 231 Ruble per liter of 100% spirit to 254 Ruble per liter of 100% spirit, a 10% increase. This was further increased to 300 Ruble per liter of 100% spirit on July 1, 2012, representing a total increase of 29.8% in excise during the year. The Russian government has drafted a proposal that this increase of 100 rubles per liter of 100% spirit will be at least repeated in January 2013 (400 Rubles per liter of 100% spirit), 2014 (500 Rubles per liter of 100% spirit) and 2015 (600 Rubles per liter of 100% spirit). This excise tax increase has also been matched by other government’s regulations imposed to curb the black market for spirits in Russia. Actions included the changing of the payment structure for excise taxes as well as requiring a bank guarantee for the excise value when purchasing spirits.

On January 1, 2013, the Russian government made two significant changes to laws that affect vodka sales. Firstly, sales in retail outlets was forbidden between the hours of 11pm and 8am. Secondly, the minimum shelf price of vodka increased from 125 Ruble per 0.5 liter bottle to 170 Ruble per 0.5 liter bottle, a 36% increase. This increase in one year was greater than the cumulative rise from years 2010-2012 and can be seen as a strong stance from the government in order to halve the vodka consumption by year 2020.

However, it should be noted that in Russia in 2012, vodka and liquor combined production increased by 13.0% and vodka and liquor retail sales increased by 0.9%. The RTD business is also impacted in 2012 by changes in the Russian government regulation which restrict the possibilities of advertising particular RTD products. As such, the Company plans to move to a wine based formulation for the majority of the RTD products which will be allowed to be advertised and sold in existing packaging formats.

 

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We believe we are in material compliance with all applicable governmental laws and regulations in the countries in which we operate and expect all material governmental permits and consents to be renewed by the relevant governmental authorities upon expiration, other than was already disclosed in Restatement on Form 10-K/A filed on October 5, 2012. We believe that the administration and compliance costs with the applicable laws and regulations, and our liability thereunder, do not and are not expected to have a material adverse impact on our financial condition, results of operations or cash flows.

Alcohol Advertising Restrictions

Polish and Russian regulations do not allow any form of “above-the-line advertising and promotion”, which is an advertising technique that is conventional in nature and impersonal to customers, using current traditional media such as television, newspapers, magazines, radio, outdoor, and internet mass media for alcoholic beverages with greater than 18% alcohol content.

We believe we are in material compliance with the government regulations regarding above-the-line advertising and promotion and we have not been notified of any violation of these regulations.

Environmental Matters

We are subject to a variety of laws and regulations relating to land use and environmental protection, including the Polish Environmental Protection Law of April 27, 2001 (Dz.U. 2006. 129.902, as amended), the Polish Waste Law of April 27, 2001 (Dz.U. 2001. 62.628 as amended), the Polish Water Management Law of April 18, 2001 (Dz.U.2005.239. 2019, as amended) and the Polish Act on Entrepreneurs’ obligations regarding the management of some types of waste and product charges of May 11, 2001 (Dz.U. 2001.63.639, as amended). We are not required to receive an integrated permit to operate our Białystok and Oborniki production plants. However, we receive certain permits for the economic use of the environment, including water permits, permits for production and storage of waste and permits for discharge of pollutants into the atmosphere. In addition, we have entered into certain agreements related to the servicing and disposal of our waste, including raw materials and products unsuitable for consumption or processing, paper, plastic, metal, glass and cardboard packaging, filtration materials (used water filter refills), used computer parts, unsegregated (mixed) residential waste, damaged thermometers and alcohol meters, used engine and transmission oils, batteries and other waste containing hazardous substances. In addition, we pay required environmental taxes and charges related primarily to packaging materials and fuel consumption and we believe we are in material compliance with our regulatory requirements in this regard. While we may be subject to possible costs, such as clean-up costs, fines and third-party claims for property damage or personal injury due to violations of or liabilities under environmental laws and regulations, we believe we are in material compliance with applicable requirements and are not aware of any material breaches of said laws and regulations.

Corporate Operations and Other

The Corporate Operations and Other division includes traditional corporate-related items including executive management, corporate finance, human resources, internal audit, investor relations, legal and public relations.

Taxes

We operate in the following tax jurisdictions: the United States, Poland, Hungary, Russia, Ukraine, Cyprus and Luxembourg. In Poland, Russia, Hungary and Ukraine we are primarily subject to value added tax (VAT), corporate income tax, payroll taxes, excise taxes and import duties. In the United States we are primarily subject to federal and New Jersey state income taxes, Delaware franchise tax and local municipal taxes. We believe we are in material compliance with all relevant tax regulations.

Excise taxes comprise significant portions of the price of alcohol and their calculations differ by country. In Poland and Russia, where our production takes place, the value of excise tax rates as at 31 December, 2012 amounted to PLN 49.6 ($15.63) and RUB 300 ($9.65) per liter of 100% alcohol.

Research and Development

We do not have a separate research and development unit, as new product developments are primarily performed by our marketing and production department. Our activity in this field is generally related to development of new brands as well as improvements in packaging and extensions to our existing brand portfolio or revised production processes leading to improved taste.

Geographic Data

Geographic data is reported in Note 27 to our consolidated financial statements in Part II, Item 8 “Financial Statements and Supplemental Data” of this Annual Report on Form 10-K.

Available Information

We maintain a website at http://www.cedc.com. Please note that our Internet address is included in this annual report as an inactive textual reference only. The information contained on our website is not incorporated by reference into this Annual Report and should not be considered part of this report.

 

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We currently file annual, quarterly and current reports with the SEC. We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and most of our other SEC filings available free of charge through our website as soon as reasonably practicable after we electronically file these materials with the SEC. You may read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C.20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. These filings are also available to the public at the SEC’s website at http://www.sec.gov. In addition, we provide paper copies of our SEC filings free of charge upon request. Please contact the Corporate Secretary of the Company at 1-856-273-6980 or at our address set forth on the cover page of this annual report.

We have adopted a code of ethics applicable to all of our officers, directors and employees, including our Chief Executive Officer and Chief Financial Officer (who is also our Principal Accounting Officer). The code of ethics is publicly available on the investor relations page of our website at http://www.cedc.com. We intend to disclose any amendment to, or waiver from, any provision in our code of ethics that applies to our Chief Executive Officer and Chief Financial Officer by posting such information in the investor relations section of our website and in any required SEC filings.

 

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Item 1A. Risk Factors.

Risks Related to Our Business

The Plan of Reorganization and the transactions related thereto, which included transactions that modified our capital structure, were based in large part upon assumptions and analyses developed by us. If these assumptions and analyses prove to be incorrect, our plan may be unsuccessful in its execution and we may be unable to continue as a going concern.

The Plan of Reorganization and the transactions related thereto, included transactions that modified our capital structure, which were based upon assumptions and analyses based on our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we considered appropriate under the circumstances. Whether actual future results and developments will be consistent with our expectations and assumptions depends on a number of factors, including but not limited to: (i) our ability to obtain adequate liquidity and financing sources and establish an appropriate level of debt, (ii) our ability to restore customers’ confidence in our viability as a continuing entity and to attract and retain sufficient customers; (iii) our ability to retain key employees in those businesses that we intend to continue to emphasize; (iv) our ability to obtain local credit support for our non-U.S. operating subsidiaries, and (v) the overall strength and stability of general economic conditions, both in the United States and in global markets and the other matters referred to under “Forward Looking Statements”. The failure of any of these factors could materially adversely affect the successful execution of the restructuring of our businesses.

In addition, the Plan of Reorganization relied upon financial forecasts, including with respect to revenue growth, improved earnings before interest, taxes, depreciation and amortization, improved interest margins, and growth in cash flow. Financial forecasts are necessarily speculative, and it is likely that one or more of the assumptions and estimates that are the basis of these financial forecasts will not be accurate. Accordingly, we expect that our actual financial condition and results of operations will differ, perhaps materially, from what we have anticipated. Consequently, there can be no assurance that the results or developments contemplated by the Plan of Reorganization will occur or, even if they do occur, that they will have the anticipated effects on us and our subsidiaries or our businesses or operations. The failure of any such results or developments to materialize as anticipated could materially adversely affect the successful execution of the transactions contemplated by the Plan of Reorganization.

We operate in highly competitive industries.

The alcoholic beverages production and distribution industries in our markets are intensely competitive. The principal competitive factors in these industries include product range, pricing, distribution capabilities and responsiveness to consumer preferences, with varying emphasis on these factors depending on the market and the product.

In Poland, we have seen significant growth of sales through the key account and discounters channels. These channels tend to operate on lower price levels from producers such as us and therefore can contribute to lower gross and operating profit margins.

In Russia, hypermarket and large retail chains continue to grow their share of the trade. Traditional trade outlets typically provide us with higher margins from sales as compared to hypermarkets and large retail chains. There is a risk that the expansion of hypermarkets and large retail chains will continue to occur in the future, thus reducing the margins that we may derive from sales to wholesalers that primarily serve the traditional trade. Additionally as our discount structure is a percent of our sales price to the customers as our prices increase to offset higher excise taxes the amount of rebate paid to our customers may continue to grow greater than what we can recover from the price increase if we cannot get the full price increase in place to offset this.

As a manufacturer of vodka in Poland and Russia, we face competition from other local producers. We compete with other alcoholic and nonalcoholic beverages for consumer purchases in general, as well as shelf space in retail stores, restaurant presence and distributor attention. In addition, we compete for customers on the basis of the brand strength of our products relative to our competitors’ products. Our success depends on maintaining the strength of our consumer brands by continuously improving our offerings and appealing to the changing needs and preferences of our customers and consumers. While we devote significant resources to the continuous improvement of our products and marketing strategies, it is possible that competitors may make similar improvements more rapidly or effectively, thereby adversely affecting our sales, margins and profitability.

 

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Changes in the prices of supplies and raw materials could have a material adverse effect on our business.

Prices for raw materials used for vodka production may take place in the future, and our inability to pass on these increases to our customers could reduce our margins and profits and have a material adverse effect on our business. We cannot assure you that the price of raw spirits will not continue to increase and cannot assure you that we will not lose the ability to maintain our inventory of raw spirits, either of which would have a material adverse effect on our financial condition and results of operations, as we may not be able to pass this cost on to the consumers. Over the last two years spirit prices have increased significantly in Russia resulting in approximately $16.0 million of higher annual cost of goods sold.

Reliance on single source suppliers could have a material adverse effect on our business and our financial results.

In Russia, because we purchase spirits primarily from a single source, we have increased risks for supply disruptions and price increases. If we experience supply disruptions, we may not be able to develop alternative sourcing in a timely manner. Any disruption of our production schedule caused by a shortage of raw materials could adversely affect our business. If raw material suppliers increase prices, we may not be able to find an economically feasible alternative. Any increased cost caused by an increase in raw materials could adversely affect our financial results.

If we are not able to hire and retain managers with the experience we need to run our businesses, it could have a material adverse effect on our financial condition and results of operations.

We have a management team that is limited in size, and in the event our financial condition does not improve, we may not have sufficient expertise or depth to address the issues that may arise in a timely manner or at all. In addition, we are seeking to fill important management vacancies in our Russian operations and we cannot assure you that we will be able to hire and retain managers and executives with the requisite experience and skills. Our inability to retain key management or fill important management vacancies, or to possess or obtain the requisite depth and experience necessary to confront the challenges we may face, would have a material adverse effect on our financial condition and our ability to run our business and execute our business plan.

We are exposed to exchange rate and interest rate movements that could have a material adverse effect on our financial results and comparability of our results between financial periods.

Our functional currencies are the Polish zloty, Russian ruble and Hungarian forint. Our reporting currency, however, is the U.S. dollar, and the translation effects of fluctuations in exchange rates of our functional currencies into U.S. dollars may materially impact our financial condition and net income and may affect the comparability of our results between financial periods.

In addition, our senior secured notes, our convertible senior notes as well as certain borrowings are denominated in euros and U.S. dollars and the proceeds of the note issuances have been on-lent to certain of our operating subsidiaries that have the Polish zloty and Russian ruble as their functional currency. Movements in the exchange rate of the euro and U.S. dollar to Polish zloty and Russian ruble could therefore increase the amount of cash, in Polish zloty and Russian ruble, that must be generated in order to pay principal and interest on our notes.

The impact of translation of our notes could have a material adverse effect on our reported earnings. The table below summarizes the pre-tax impact of a one percent movement in each of the exchange rates which could result in a significant impact in the results of our operations as of December 31, 2012.

 

Exchange Rate

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

USD-Polish zloty

     $386.9 million         $3.9 million gain/loss   

USD-Russian ruble

     $267.3 million         $2.7 million gain/loss   

EUR-USD

     €433.2 million or approximately $571.3 million         $5.7 million gain/loss   

EUR-Russian ruble

     €29.6 million or approximately $39.0 million         $0.4 million gain/loss   

Foreign exchange rates may be influenced by various factors, including changing supply and demand for a particular currency; government monetary policies (including exchange control programs, restrictions on local exchanges or markets and limitations on foreign investment in a country or on investment by residents of a country in other countries); changes in trade balances; trade restrictions; and currency devaluations and revaluations. Additionally, governments from time to time intervene in currency markets, directly or by regulation, in order to influence prices. These events and actions are unpredictable and could materially and adversely impact our business, results of operations and financial condition.

Weather conditions may have a material adverse effect on our sales or on the price of grain used to produce spirits.

We operate in an industry where performance is affected by the weather. Extreme changes in weather conditions may result in lower consumption of vodka and other alcoholic beverages. In particular, unusually cold spells in winter or high temperatures in the summer can result in temporary shifts in customer preferences and impact demand for the alcoholic beverages we produce and distribute. Similar weather conditions in the future may have a material adverse effect on our sales which could affect our business, financial condition and results of operations. In addition, inclement weather may affect the availability of grain used to produce raw spirit, which could result in a rise in raw spirit pricing that could negatively affect margins and sales.

 

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We are subject to extensive government regulation and are required to obtain and renew various permits and licenses; changes in or violations of laws or regulations or failure to obtain or renew permits and licenses could materially adversely affect our business and  profitability.

Our business of producing, importing and distributing alcoholic beverages in Poland and Hungary is subject to regulation by national and local governmental agencies and European Union authorities. In addition, our business in Russia is subject to extensive regulation by Russian authorities. These regulations and laws address such matters as licensing and permit requirements, regarding the production, storage and import of alcoholic products; competition and anti-trust matters; trade and pricing practices; taxes; distribution methods and relationships; required labeling and packaging; advertising; sales promotion; and relations with wholesalers and retailers. Loss of production capacity due to regulatory issues can negatively affect our sales and increase our operating costs as we attempt to increase production at other facilities during that time to offset the lost production. It is possible that these and other similar issues will adversely impact our sales and operating costs. Additionally, new or revised regulations or requirements or increases in excise taxes, customs duties, income taxes, or sales taxes could materially adversely affect our business, financial condition and results of operations.

In addition, we are subject to numerous environmental and occupational, health and safety laws and regulations in the countries in which we operate. We may incur significant costs to maintain compliance with evolving environmental and occupational, health and safety requirements, to comply with more stringent enforcement of existing applicable requirements or to defend against challenges or investigations, even those without merit. Future legal or regulatory challenges to the industry in which we operate or our business practices and arrangements could give rise to liability and fines, or cause us to change our practices or arrangements, which could have a material adverse effect on us, our revenues and our profitability.

Governmental regulation and supervision as well as future changes in laws, regulations or government policy (or in the interpretation of existing laws or regulations) that affect us, our competitors or our industry generally, strongly influence our viability and how we operate our business. Complying with existing laws, regulations and government policy is burdensome, and future changes may increase our operational and administrative expenses and limit our revenues.

Additionally, governmental regulatory and tax authorities have a high degree of discretion and may at times exercise this discretion in a manner contrary to law or established practice. Such conduct can be more prevalent in jurisdictions with less developed or evolving regulatory systems like Russia. Our business would be materially and adversely affected if there were any adverse changes in relevant laws or regulations or in their interpretation or enforcement. Our ability to introduce new products and services may also be affected if we cannot predict how existing or future laws, regulations or policies would apply to such products or services.

We are subject to Russian regulatory requirements that we obtain bank guarantees for the payment of statutory excise duties, the loss of which would have a material adverse impact on our business and financial condition.

Under Russian law, Russian manufacturers of alcohol and excisable ethanol containing products, prior to purchasing the ethanol for the purposes of manufacturing of alcohol and excisable ethanol containing products, are required to make an advance payment of the applicable statutory excise duty to the state budget in the Russian Federation. The statutory excise duty is to be made on the basis of the total volume of the alcohol / ethanol containing products to be purchased (transferred) by the manufacturers within the tax period following the current tax period.

In order to be exempted from making an advance payment of the applicable statutory excise duty, the manufacturers shall submit to the tax authority of the place of registration of the manufacturers a bank guarantee issued by the relevant bank on behalf of the manufacturer and notify such tax authority of the exemption from the obligation to make the advance payment of the applicable statutory excise duty. A bank guarantee and a notice of exemption from making an advance payment of excise duty, must be submitted to the tax authority not later than on the 18th day of the current tax period.

A bank guarantee must satisfy the following requirements:

 

  1. must be irrevocable and non-transferable;

 

  2. the duration of a bank guarantee must expire, at the earliest, three to six months following the tax period in which ethyl alcohol was purchased. If the duration of a bank guarantee ends before the expiry of the above time period, (i) exemption from the payment of an advance payment of excise duty shall not be granted, (ii) a note proving exemption from making an advance payment of excise duty shall not be made by the tax authority on the notice, and (iii) a notice of exemption from making an advance payment of excise duty shall not be forwarded by the manufacturer of alcoholic and/or excisable alcohol-containing products to the producer of ethyl alcohol. In the event of the discharge by a taxpayer that has presented a bank guarantee the duty of paying excise duty on the alcoholic and/or alcohol-containing products sold in Russia in the amount of the advance payment of excise duty mentioned in the submitted bank guarantee, the tax authority at the latest on the date following the end day of a desk audit of the tax declaration for excise tax shall notify the bank that has issued the guarantee of exemption thereof from the obligations under this guarantee;

 

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  3. the amount for which a bank guarantee is granted must secure the discharge of the obligation to pay in full the amount of excise duty in the amount of an advance payment; and

 

  4. a bank guarantee must allow for direct debiting of monetary assets from the guarantor’s account in case of its failure to satisfy in due time the demand for paying the monetary sum under the bank guarantee (in full or in part) forwarded before the end of the bank guarantee’s validity.

The loss of a bank guarantee to pay the statutory excise duty will prevent our ability to purchase ethanol, a key component of our manufactured products and, thus, would have a material adverse impact on our business operations and future prospects.

We may lose excise guarantee exemption in Poland

In order to be exempted from making an advance payment of the applicable statutory excise duty, the manufacturers shall submit to the tax authority a bank guarantee issued by the relevant bank on behalf of the manufacturer. We are currently exempt from providing bank guarantees up to the limit of 700 million PLN. To retain the exemption we are obliged to timely submit to the tax authority statutory financial statements of CEDC International Sp. z o.o. If we do not submit the financial statements on time we may have difficulties in obtaining required bank guarantees.

We may not be able to protect our intellectual property rights.

We own and license trademarks (for, among other things, our product names and packaging) and other intellectual property rights that are important to our business and competitive position, and we endeavor to protect them. However, we cannot assure you that the steps we have taken or will take will be sufficient to protect our intellectual property rights or to prevent others from seeking to invalidate our trademarks or block sales of our products as a violation of the trademarks and intellectual property rights of others. In addition, we cannot assure you that third parties will not infringe on or misappropriate our rights, imitate our products, or assert rights in, or ownership of, trademarks and other intellectual property rights of ours or in marks that are similar to ours or marks that we license or market. In some cases, there may be trademark owners who have prior rights to our marks or to similar marks. Moreover, Russia generally offers less intellectual property protection than in Western Europe or North America. We are currently involved in opposition and cancellation proceedings with respect to trademarks similar to some of our brands and other proceedings, both in the Poland and elsewhere. If we are unable to protect our intellectual property rights against infringement or misappropriation, or if others assert rights in or seek to invalidate our intellectual property rights, this could materially harm our future financial results and our ability to develop our business.

We have incurred, and may in the future incur, impairment charges on our other trademarks and goodwill

At December 31, 2012, the Company had goodwill and other intangible assets of $842.9 million which constituted 48% of our total assets. While we believe the estimates and judgments about future cash flows used in the goodwill impairment tests are reasonable, we cannot provide assurance that future impairment charges will not be required if the expected cash flow estimates as projected by management do not occur, especially if an economic recession occurs and continues for a lengthy period or becomes severe, or if acquisitions made by the Company fail to achieve expected returns. We incurred impairment charges in 2011 and each of the preceding two years and we recognized a significant impairment of goodwill and of other intangible assets for the fourth quarter of 2012. Additional impairment charges related to our goodwill and other intangible assets could have a material adverse effect on our financial position and results of operations.

Our import contracts and agency brands contracts and licenses may be terminated.

As a leading importer of major international brands of alcoholic beverages in Poland and Hungary, we have been working with the same suppliers in those countries for many years and either have verbal understandings or written distribution agreements with them. In addition, we have distribution contracts in Russia through Whitehall. Where a written agreement is in place, it is usually valid for between one and five years and is terminable by either party on three to six months’ notice.

Although we believe we are currently in compliance with the terms and conditions of our import and distribution agreements, there is no assurance that all our import agreements will continue to be renewed on a regular basis, or that, if they are terminated, we will be able to replace them with alternative arrangements with other suppliers. Moreover, our ability to continue to distribute imported products on an exclusive basis depends on some factors which are out of our control, such as ongoing consolidation in the wine, beer and spirit industry worldwide, or producers’ decisions from time to time to change their distribution channels, including in the markets in which we operate. Additionally, following the effectiveness of the Plan of Reorganization and the resulting change in control of the Company, import contract counterparties with our subsidiaries may seek to terminate such contracts due to such change of control.

 

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Further, following effectiveness of the Plan of Reorganization and the resulting change in control of the Company our agency brand contracts and licenses may be subject to termination by the counterparties. The termination of these agency brands contracts or licenses would have a material adverse impact on our business and results of operations.

Our business, results of operations and financial condition may be adversely affected if we undertake acquisitions of businesses that do not perform as we expect or that are difficult for us to integrate.

At any particular time, we may be in various stages of assessment, discussion and negotiation with regard to one or more potential acquisitions, not all of which will be consummated. We make public disclosure of pending and completed acquisitions when appropriate and required by applicable securities laws and regulations.

Acquisitions involve numerous risks and uncertainties. If we complete one or more acquisitions, our results of operations and financial condition may be affected by a number of factors, including the failure of the acquired businesses to achieve the financial results we have projected in either the near or long term; the assumption of unknown liabilities; the fair value of assets acquired and liabilities assumed; the difficulties of imposing adequate financial and operating controls on the acquired companies and their management and the potential liabilities that might arise pending the imposition of adequate controls; the challenges of preparing and consolidating financial statements of acquired companies in a timely manner; the difficulties in integration of the operations, technologies, services and products of the acquired companies; and the failure to achieve the strategic objectives of these acquisitions. In addition, we may acquire a significant, but non-controlling, stake in a business, which could expose us to the risk of decisions taken by the acquired business’ controlling shareholder. Acquisitions in developing economies, such as Russia, involve unique risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political, and regulatory risks associated with specific countries.

We have acquired businesses in Russia and have experienced some of these risks, including difficulties in obtaining relevant financial information, hiring and retaining key management, and incurring significant losses and impairment charges. We cannot assure you that we will not experience the same or similar issues in the future.

Future acquisitions or mergers may result in a need to issue additional equity securities, spend our cash, or incur debt, liabilities or amortization expenses related to intangible assets, any of which could reduce our profitability.

Sustained periods of high inflation in Russia may materially adversely affect our business

Russia has experienced periods of high levels of inflation since the early 1990s. Despite the fact that inflation has remained relatively stable in Russia during the past few years, our profit margins from our Russian business could be adversely affected if we are unable to sufficiently increase our prices to offset any significant future increase in the inflation rate.

The developing legal system in Russia creates a number of uncertainties that could have a materially adverse effect on our business

Russia is still developing the legal framework required to support a market economy, which creates uncertainty relating to our Russian business. We have limited experience operating in Russia, which could increase our vulnerability to the risks relating to these uncertainties. Risks related to the developing legal system in Russia include:

 

   

inconsistencies between and among the constitution, federal and regional laws, presidential decrees and governmental, ministerial and local orders, decisions, resolutions and other acts;

 

   

conflicting local, regional and federal rules and regulations;

 

   

the lack of judicial and administrative guidance on interpreting legislation;

 

   

the relative inexperience of judges and courts in interpreting legislation;

 

   

the lack of an independent judiciary;

 

   

a high degree of discretion on the part of governmental authorities, which could result in arbitrary or selective actions against us, including suspension or termination of licenses we need to operate in Russia;

 

   

poorly developed bankruptcy procedures that are subject to abuse; and

 

   

incidents of crime or corruption that could disrupt our ability to conduct our business effectively.

The recent nature of much of Russian legislation, the lack of consensus about the scope, content and pace of economic and political reform and the rapid evolution of this legal system in ways that may not always coincide with market developments place the enforceability and underlying constitutionality of laws in doubt and result in ambiguities, inconsistencies and anomalies. Any of these factors could have a material adverse effect on our Russian business.

The tax system in Russia is unpredictable and gives rise to significant uncertainties, which complicate our tax planning and decisions relating to our Russian businesses. Tax laws in Russia have been in force for a relatively short period of time as compared to tax laws in more developed market economies and we have less experience operating under Russian tax regulations than those of other countries.

 

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Russian companies are subject to a broad range of taxes imposed at the federal, regional and local levels, including but not limited to value added taxes, excise duties, profit taxes, payroll-related taxes, property taxes, and taxes or other liabilities related to transfer pricing and other taxes. Russia’s federal and local tax laws and regulations are subject to frequent change, varying interpretations and inconsistent or unclear enforcement. During the peak of our 2010 Christmas production season, we were unable to obtain excise stamps from Russian authorities to be used at our largest production plant in Russia due to an administrative issue, over usage of old stamps, that blocked us from obtaining new excise stamps. Excise stamps are typically purchased every two to three weeks from the Russian authorities and are required to be purchased prior to the production of any vodka. Without these stamps, which must be affixed to each container of an alcoholic beverage exceeding 9% alcohol by volume produced in Russia, this plant was unable produce vodka during the peak of our production season. This loss of production capacity negatively affected our sales and increased our costs as we attempted to increase production at other facilities to offset the lost production. It is possible that we could have similar issues in the future that will adversely impact our sales and costs.

In addition, it is not uncommon for differing opinions regarding legal interpretation to exist between companies subject to such taxes, ministries and organizations of the Russian government and different branches of the Russian government such as the Federal Tax Service and its various local tax inspectorates, resulting in uncertainties and areas of conflict. Tax declarations are subject to review and investigation by a number of tax authorities, which are enabled by law to impose penalties and interest charges. The fact that a tax declaration has been audited by tax authorities does not bar that declaration, or any other tax declaration applicable to that year, from a further tax review by a superior tax authority during a three-year period. As previous audits do not exclude subsequent claims relating to the audited period, the statute of limitations is not entirely effective. In some instances, even though it may potentially be considered unconstitutional, Russian tax authorities have applied certain taxes retroactively. Within the past few years the Russian tax authorities appear to be taking a more aggressive position in their interpretation of the legislation and assessments, and it is possible that transactions and activities that have not been challenged in the past may be challenged. As a result, significant additional taxes, penalties and interest may be assessed. In addition, our Russian business is and will be subject to periodic tax inspections that may result in tax assessments and additional amounts owed by us for prior tax periods. Uncertainty relating to Russian transfer pricing rules could lead tax authorities to impose significant additional tax liabilities as a result of transfer pricing adjustments or other similar claims, and could have a material adverse effect on our Russian businesses and our company as a whole.

Frequent changes in Polish tax regulations may have an adverse effect on our results of operations and financial conditions.

The Polish tax system is characterized by instability. Tax regulations are frequently amended, often to the disadvantage of taxpayers. Tax laws in Poland may also need to be amended in order to implement new European Union legislation. These frequent changes in tax regulations have had and may in the future have negative effects on our business, financial condition, results of operations and prospects. Further, the lack of stability in the Polish tax regulations may hinder our ability to effectively plan for the future and to implement our business plan. The instability of the Polish tax system stems not only from changes in law but also from reliance by tax regulators on court implementations, which are also subject to potential changes and reversal.

Continued significant increases in excise tax in Russia may either reduce overall demand for vodka or reduce our margins.

In January 2013, excise taxes for above 9% alcohol in Russia were increased by 33%. Excise taxes are scheduled to be increased by an additional 25% in July 2014. Excise tax increases require us to raise prices which could in turn reduce demand for our products as price-sensitive consumers shift to lower cost products. In addition, because our rebates to customers are based on a percentage of gross sales revenue, an increase in excise tax without a corresponding price increase will negatively impact our gross margins.

We may be required to seek additional financing to meet our future capital needs and our failure to raise capital when needed could harm our competitive position, business, financial condition and results of operations.

From time to time, our business may require additional capital. In the future, it is possible that we will be required to raise additional funds through public or private financings, collaborative relationships or other arrangements. Global credit markets and the financial services industry have been experiencing a period of unprecedented turmoil, characterized by the bankruptcy, failure or sale of various financial institutions and an unprecedented level of intervention from the U.S. and other governments. These events have led to unparalleled levels of volatility and disruption to the capital and credit markets and have significantly adversely impacted global economic conditions, resulting in additional, significant recessionary pressures and further declines in investor confidence and economic growth. Despite significant government intervention, global investor confidence remains low and credit remains relatively scarce. These disruptions in the financial markets, including the bankruptcy and restructuring of certain financial institutions, may adversely impact the current availability of credit and the availability and cost of credit in the future. Accordingly, if we need to seek additional funding, we may be significantly reduced in our ability to attract public or private financings or financial partners or relationships as a source of additional capital. In addition, this additional funding, if needed, may not be available on terms attractive to us, if at all. Furthermore, any additional debt financing, if available, may involve restrictive covenants that could restrict our ability to raise additional capital or operate our business. Our failure to raise capital when needed could harm our competitive position, business, financial condition and results of operations.

 

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The Company and certain of its former officers and directors were named as parties in class action lawsuits which could be costly,  protracted and divert management’s attention, and harm our business.

On October 24, 2011, a class action complaint titled Steamfitters Local 449 Pension Fund vs. Central European Distribution Corporation, et al., was filed in the United States District Court, District of New Jersey on behalf of a putative class of all purchasers of our common stock from August 5, 2010 through February 28, 2011 against us and certain of our officers. The complaint seeks unspecified money damages and alleges violations of federal securities law in connection with alleged materially false and misleading statements and/or omissions regarding our business, financial results and prospects in our public statements and public filings with the SEC for the second and third quarters of 2010, relating to declines in our vodka portfolio, our need to take an impairment charge relating to the deterioration in fair value of certain of our brands in Poland and negative financial results from the launch of Żubrówka Biała. Subsequent to the above complaint, a second, substantially similar class action complaint titled Tim Schuler v. Central European Distribution Corporation, et al., was filed in the same court. By court orders dated August 22, 2012, the Steamfitters action and the Schuler action were consolidated and are now proceeding in the District of New Jersey under the caption In re Central European Distribution Corp. Securities Litigation, 11-cv-6247 (JBS-KMW). The Arkansas Public Employees Retirement System and the Fresno County Employees’ Retirement Association have been named lead plaintiffs in this action. Pursuant to an Order of the Court, on February 19, 2013, Lead Plaintiffs filed a consolidated complaint on behalf of a purported class of all purchasers of the Company’s common stock between March 1, 2010, and February 28, 2011, advancing similar allegations to those contained in the original complaints concerning purported materially false and misleading statements and/or omissions relating principally to the purported negative financial results from the launch of Żubrówka Biała. On April 10, 2013, the Court stayed the action as to CEDC pursuant to section 362 of chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) as a result of its April 7, 2013 filing of a voluntary petition (the “Petition”) for relief under the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”).

On May 13, 2013, the Bankruptcy Court conducted a hearing (the “Confirmation Hearing”) on (i) the adequacy of the Amended and Restated Offering Memorandum, Consent Solicitation Statement and Disclosure Statement Soliciting Acceptances of a Prepackaged Plan of Reorganization, dated March 8, 2013, as supplemented by Supplement No. 1 to the Amended and Restated Offering Memorandum, Consent Solicitation, and Disclosure Statement Soliciting Acceptances of a Prepackaged Plan of Reorganization, dated March 18, 2013 (Docket No. 10) (the “Disclosure Statement”), and (ii) confirmation of the Company’s Second Amended and Restated Joint Prepackaged Chapter 11 Plan of Reorganization (Docket No. 126) (the “Plan”). After the Confirmation Hearing the Bankruptcy Court entered its Findings of Fact, Conclusions of Law and Order (I) Approving (A) the Disclosure Statement Pursuant to Sections 1125 and 1126(c) of the Bankruptcy Code, (B) the Prepetition Solicitation Procedures, and (C) the Forms of Ballots, and (II) Confirming the Second Amended and Restated Joint Prepackaged Chapter 11 Plan of Reorganization of Central European Distribution Corporation et al. (Docket No. 166) (the “Confirmation Order”). Upon entry of the Confirmation Order by the Bankruptcy Court, the Company’s obligations with respect to this action were discharged and pursuant to the Plan (as modified by the Confirmation Order) and section 524 of the Bankruptcy Code, continuation of this action is permanently enjoined as to the Company.

On June 8, 2012, a purported securities fraud class action titled Grodko v. Central European Distribution Corporation, et al., was filed against the Company in the United States District Court for the Southern District of New York. The plaintiff in the lawsuit, who is suing purportedly on behalf of a class of all purchasers of the Company’s common stock between March 1, 2010 and June 4, 2012, alleges that the Company made false and/or misleading statements related to and/or failed to disclose that (1) the Company’s reported net sales in the years ended December 31, 2010 and 2011 were materially inflated; (2) as a result of a failure to account for retroactive trade rebates provided to the customers of Russian Alcohol, the Company anticipates restating its reported consolidated net sales, operating profit and related accounts for these periods; and (3) as a result of the foregoing, the Company’s statements were materially false and misleading at all relevant times. On August 7, 2012 a second, substantially similar class action complaint titled Puerto Rico System of Annuities and Pension for Teachers v. Central European Distribution Corporation, et al., was filed in the same court. By court orders dated September 4, 2012, the Grodko action and the Puerto Rico System of Annuities and Pension for Teachers action were transferred to the United States District Court for the District of New Jersey, where the actions have been consolidated and are proceeding under the caption Grodko v. Central European Distribution Corporation, et. al, No. 12-cv-5530 (JBS-KMW). The Puerto Rico System of Annuities and Pensions for Teachers has been named Lead Plaintiff in this Action. On February 15, 2013, the Lead Plaintiff filed a consolidated amended complaint on behalf of a purported class of all purchasers of the Company’s common stock between March 1, 2010, and November 13, 2012, advancing similar allegations to those contained in the original complaints concerning purported materially false and misleading statements and/or omissions relating principally to accounting practices at CEDC’s Russian subsidiary Russian Alcohol Group, and the Company’s related restatements. On April 10, 2013, the Court stayed the action as to CEDC pursuant to section 362 the Bankruptcy Code, as a result of its April 7, 2013 filing of the Petition for relief under the Bankruptcy Code in the Bankruptcy Court.

Upon entry of the Confirmation Order by the Bankruptcy Court, the Company’s obligations with respect to this action were discharged and pursuant to the Plan (as modified by the Confirmation Order) and section 524 of the Bankruptcy Code, continuation of this action is permanently enjoined as to the Company.

By complaints dated December 13, 2012, a single plaintiff filed two separate “derivative” actions against seven current and former CEDC directors, and against CEDC as a “nominal” defendant. The seven current and former directors named as defendants are: William Carey, Christopher Biedermann, David Bailey, Marek E. Forysiak, Markus Sieger, N. Scott Fine, Robert P. Koch and William S. Shanahan. These two actions were filed in the Superior Court of New Jersey, Burlington County, Chancery Division. Both complaints allege breaches of fiduciary duty, waste of corporate assets, and unjust enrichment. One complaint deals with alleged violations of the Foreign Corrupt Practices Act. The other complaint deals with alleged GAAP violations resulting from the Russian Alcohol Group trade rebate issue. Plaintiff is still in the process of attempting to effectuate service of the complaints by defendants. By orders dated April 30, 2013, the Court dismissed these derivative actions without prejudice and subject to reinstatement if the bankruptcy proceedings do not fully dispose of the issues between the parties.

The Company intends to mount a vigorous defense to the claims asserted. Although we believe the allegations in the class and derivative complaints are without merit, these types of lawsuits can be protracted, time-consuming, distracting to management and expensive and, whether or not the claims are ultimately successful, could ultimately have an adverse effect on our business, operating results and cash flows.

        As noted in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2011, filed with the SEC on October 5, 2012, the Audit Committee, through its counsel, voluntarily notified the SEC of its internal investigation regarding the Company’s retroactive trade rebates, trade marketing refunds and related accounting issues. The Company has subsequently been contacted by the Fraud Division of the Criminal Division of the US Department of Justice (“DOJ”) regarding the disclosure in the Form 10-K/A for the year ended December 31, 2011, filed with the SEC on October 5, 2012 that there has been a breach of the books and records provisions of the Foreign Corrupt Practices Act (“FCPA”) of the United States and potentially other breaches of the FCPA. The Company has been asked to provide information about these matters on a voluntary basis to the SEC and DOJ. The Company is fully cooperating with the SEC and DOJ. Any action by the SEC or DOJ could result in criminal or civil sanctions against the Company and/or certain of its current or former officers, directors or employees. The Company cannot predict the duration, scope or ultimate outcome of the investigations and is unable to estimate the financial impact they may have, or predict the reporting periods in which any such financial impacts may be recorded.

Our results are linked to economic conditions and shifts in consumer preferences, including a reduction in the consumption of alcoholic beverages, which could have an adverse effect on our financial performance.

Our results of operations are affected by the overall economic trends in Poland, Russia, Hungary and other regions in which we operate and sell our products, including the level of consumer spending, the rate of taxes levied on alcoholic beverages and consumer confidence in future economic conditions. The current market environment including consumer trends, raw spirit price increases, excise increases, volatility in energy costs, diminished liquidity and credit availability, weakened consumer confidence and falling consumer demand, have contributed to lower levels of consumer spending, including consumption of alcoholic beverages. The effects of the global recession in many countries, including Russia and Hungary, have been quite severe, and it is possible that an economic recovery in those countries, and a related increase in consumer spending, will take longer to develop. While Poland’s GDP has increased in each of 2011 and 2012, the Polish economy as well as the global economy continues to be volatile and forecasted growth in Poland may fail to materialize.

 

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During the current period of volatility, reduced consumer confidence and spending may result in continued reduced demand for our products and may limit our ability to increase prices and finance marketing and promotional activities. These factors could have an adverse effect on our results of operations. For example, during 2012 the Company observed 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. As such, the Company updated its goodwill impairment testing during the fourth quarter of 2012 and took a charge of $327.8 million for goodwill impairment in Poland and Russia for the year. We also experienced the related underperformance of certain brands in Russia, primarily Kaufman, Zhuravli and Parliament. As a result, the Company also took an impairment charge for certain Russian trademarks, due to the continued lower performance as compared to our expectations in 2012. We cannot assure you that we will not recognize further asset impairments or experience further declines in our financial performance in connection with continued market instability. A continued recessionary environment would likely make it more difficult to forecast operating results and to make decisions about future investments, and a major shift in consumer preferences or a large reduction in sales of alcoholic beverages could have a material adverse effect on our business, financial condition and results of operations.

Our business is subject to seasonality that may affect our quarterly operating results.

Our business is dependent on weather conditions and subject to seasonality. Lower demand for vodka occurs during the first three fiscal quarters, which can result in seasonal financial results in certain markets in which we operate. Historically, sales in the fourth quarter have been significantly higher than in the other quarters of the year due to higher demand for vodka during the Christmas season. Results of a single financial quarter might therefore not be a reliable basis for the expectations of a full fiscal year and may not be comparable with the results in the other financial quarters. Seasonality effects may also increase our working capital requirements. In addition, any interruptions during our peak production season, such as those interruptions we experienced in the fourth quarter of 2010 in obtaining excise stamps from Russian authorities to produce and sell our product in Russia for a 14-day period, could materially adversely affect our business, financial condition and results of operations if they occur with unusual intensity or last for an extended period of time.

Risks related to Our Financial Reporting

We have identified material weaknesses in our internal controls over financial reporting.

As a result of management’s assessment of our internal control over financial reporting as of December 31, 2012, management concluded that there were nine material weaknesses in our internal control over financial reporting, specifically in relation to our financial statement closing process, the development of certain management estimates, our internal controls with respect to the recording of retroactive trade rebates and trade marketing refunds at Russian Alcohol Group, our internal control over financial reporting regarding the implementation of our policy on compliance with applicable laws, our internal control over the design of IT segregation of duties, our internal control over the proper design and communication of policies and procedures, our internal control over accounting for certain material executive compensations and over the contract management, controls over completeness and accuracy of the income tax calculation, tax provision and deferred income tax. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. While we have identified nine material weaknesses, we believe that our consolidated audited financial statements have been prepared in accordance with accounting principles generally accepted in the United States.

While we are taking action to remediate our identified material weaknesses, the decentralized nature of our operations and the manual nature of many of our controls increases our risk of control deficiencies. No evaluation can provide complete assurance that our internal controls will detect or uncover all failures of persons within our company to disclose material information otherwise required to be reported. The effectiveness of our controls and procedures could also be limited by simple errors or faulty judgments. We may in the future identify material weaknesses or significant deficiencies in connection with our internal controls over financial reporting. Any future material weaknesses in internal control over financial reporting could result in material misstatements in our financial statements. Moreover, any future disclosures of additional material weaknesses, or errors as a result of those weaknesses, could result in a negative reaction in the financial markets if there is a loss of confidence in the reliability of our financial reporting. Management continues to devote significant time and attention to improving our internal controls, and we will continue to incur costs associated with implementing appropriate processes, which could include fees for additional audit and consulting services, which could negatively affect our financial condition and operating results.

The Public Company Accounting Oversight Board, or PCAOB, is currently unable to inspect the audit work and practices of auditors operating in Poland, including our auditor.

Auditors of U.S. public companies are required by law to undergo periodic PCAOB inspections that assess their compliance with U.S. law and professional standards in connection with performance of audits of financial statements filed with the SEC. Certain European Union, or EU, countries do not permit the PCAOB to conduct inspections of accounting firms established and operating in

 

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EU countries, even if they are part of major international firms. Accordingly, because our auditor is located in Poland, the PCAOB is prevented from inspecting our auditor. As a result, unlike the stockholders of most U.S. public companies, our stockholders are deprived of the possible benefits of such inspections, including an evaluation of our auditor’s performance of audits and its quality control procedures.

 

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Following the effectiveness of the Plan of Reorganization, our remaining indebtedness may impair our financial condition and our ability to grow and compete; we may also incur additional debt.

As of December 31, 2012, our total consolidated debt was approximately $1.4 billion. After giving effect to the Plan of Reorganization, our total consolidated debt is approximately $798.7 million on a pro forma basis as of September 30, 2012. Though the Plan of Reorganization significantly lowered our consolidated debt, we still have substantial debt upon consummation of the Plan of Reorganization. Our debt has important consequences for our financial condition, including:

 

   

making it more difficult for us to satisfy the obligations under the New Notes;

 

   

making it more difficult to refinance our obligations as they come due;

 

   

having an inefficient tax structure;

 

   

increasing our vulnerability to general adverse economic, competitive and industry conditions;

 

   

limiting our ability to obtain additional financing to fund future working capital, capital expenditures, execute our business strategy, acquisitions, operations and other general corporate requirements;

 

   

limiting our ability to make strategic acquisitions or causing us to make non-strategic divestitures;

 

   

requiring a substantial portion of our cash flow from operations for the payment of principal and interest on our debt and reducing our ability to use our cash flow to fund working capital, capital expenditures, execution of our business strategy, acquisitions, operations, working capital and general corporate requirements;

 

   

limiting our ability to purchase raw materials on satisfactory credit terms, thereby limiting our sources of supply or increasing cash required to fund operations;

 

   

limiting our ability to retain and attract customers;

 

   

limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and

 

   

limiting our ability to receive trade credit from our vendors or otherwise placing us at a competitive disadvantage to other less-leveraged competitors.

We may incur additional debt in the future. The terms of the indentures that govern the New Notes restrict our ability to incur, but will not prohibit us from incurring, additional debt. If we were to incur additional debt, the related risks we now face could become greater.

Servicing our debt will require a significant amount of cash, and our ability to generate sufficient cash depends upon many factors, some of which are beyond our control.

Our ability to make payments on and refinance our debt, fund planned capital expenditures and execute our business strategy depends on our ability to generate cash flow in the future. To some extent, this is subject to general economic, financial, competitive and other factors that are beyond our control. There can be no assurance that our business will continue to generate cash flows at or above current levels or that we will be able to meet our cash needs, including with respect to the repayment of our indebtedness, including any cash payments due upon the maturity of such indebtedness, including the New Notes. If we are unable to service our debt or experience a significant reduction in our liquidity, we could be forced to reduce or delay planned capital expenditures and other initiatives, sell assets, restructure or refinance our debt or seek additional equity capital, and we may be unable to take any of these actions on satisfactory terms or in a timely manner, or at all. Further, any of these actions may not be sufficient to allow us to service our debt obligations or may have a materially adverse effect on our results of operations and financial condition. Our existing debt agreements, and the indentures governing the New Notes, limit our ability to take certain of these actions. Our failure to generate sufficient operating cash flows to pay our debts or refinance our indebtedness could have a material adverse effect on our results of operations and financial condition. If we cannot make scheduled payments on our debt, including the New Notes, we would be in default, and as a result, holders of such debt could declare all outstanding principal and interest to be due and payable and our existing and future lenders could, under certain circumstances, terminate their commitments to lend us money and foreclose against the assets securing our borrowings. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”.

 

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We may not be able to raise additional capital in the future.

We may need to obtain additional financing to fund our business, and we cannot assure you that such financing will be available in amounts or on terms acceptable to us, or at all. The current recessionary global market and economic conditions, as well as the continuing difficulties in the credit and capital markets, may make it even more difficult for companies to obtain additional financing in the future or refinance their obligations, particularly for companies with a credit profile similar to ours. The Plan of Reorganization, and the potential effects of this on our reputation could make it difficult or more expensive for us to raise additional funds. If we raise funds by incurring further debt, our operations and finances may become subject to further restrictions and we may be required to limit or cease our operations or capital expenditure activities, or otherwise modify our business strategy. If we fail to comply with financial or other covenants required in connection with any such financing or refinancing, our lenders may be able to exercise remedies that could substantially impair our ability to operate or have a material adverse effect on our results of operations or financial condition.

We have incurred significant costs in conducting the Plan of Reorganization.

The Plan of Reorganization will result in significant costs to us, including advisory and professional fees paid in connection with evaluating our alternatives with respect to our capital structure and pursuing the Plan of Reorganization.

 

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RTL is the controlling stockholder in CEDC.

Upon effectiveness of the Plan of Reorganization, RTL became the beneficial owner of 100% of our outstanding common stock. As a result, RTL will possess significant influence, giving it the ability, among other things, to control the composition of our board of directors. RTL’s ownership and control may also have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover or other business combination or discourage a potential acquirer from making a tender offer.

 

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Item 2. Properties.

Our significant properties can be divided into the following categories:

Production and rectification facilities. Our production facilities in Poland comprise two plants, one in Białystok, one in Oborniki Wielkopolskie. The Białystok facility is located on 78,665 square meters of land which is leased from the government on a perpetual usufruct basis. The production capacity of our plant in Bialystok is approximately 23.2 million liters of 100% alcohol per year and currently, we use approximately 70-75% of its production capacity. In the Białystok distillery we produce Żubrówka Bison Grass, Żubrówka Biała, Absolwent and its taste variations, Batory, Białowieska, Cytrynówka, Czekoladowa, Kompleet Vodka, Liberty Blue, Lider, Ludowa, Nalewka Wiśniowa, Nalewka Miodowa and Palace Vodka, Winiak Białostocki, Winiak Pałacowy, Wódka Imbirowa. The plot on which the Białystok facility is located has been pledged as part of the collateral to our Senior Secured Notes due 2016.

The Oborniki facility is located on 80,519 square meters of which 58,103 square meters are owned by us and 22,416 square meters are leased from the government on a perpetual usufruct basis. In the Oborniki distillery we produce, Bols Vodka and its taste variations, Soplica and its taste variations and Boss, Śląska, Niagara and Royal Vodka. The plot on which the Oborniki facility is located has been pledged as part of the collateral to our Senior Secured Notes due 2016.

Our production facilities in Russia comprise four active plants that we refer to as Topaz, Siberia, Parliament and Bravo Premium and one plant in Tula (“PKZ”) that is inactive.

The Topaz, distiller is the main vodka plant in Russia and is one of the most advanced enterprises in Russia. It is certified to be in compliance with ISO 9001 and HACCP. The factory has ten, modern, hi-tech filling lines, its own rectifying equipment for processing raw spirit, and a unique “stream” processor. The Topaz distillery produces, among others, the Green Mark, Zhuravli, Yamskaya and Kalinov Lug brands. The plant, which was founded in 1995, is located on 65,400 square meters and has a production capacity of over 136 million liters annually. Currently we use about 55% of the plant’s production capacity.

The Siberia facility is a modern vodka plant located in Novosibirsk. Due to the strategic location of the plant the Company is able to obtain transport costs efficiencies in order to serve the eastern part of Russia. The Siberia facility has the ability to produce almost all of the vodka brands in the CEDC portfolio. It is located on 55,000 square meters. The production capacity of the Siberia facility is 114 million liters per year, at the moment its usage is about 20%. The Siberia plant has been pledged as part of the collateral to our Senior Secured Notes due 2016.

The Parliament production plant uses an unique biological milk purification method. Milk, added at a certain stage of production, absorbs all impurities and harmful substances. The milk is then removed in a multistage filtration process, leaving pure vodka of the highest quality. The Parliament plant is located on the area of 25,400 square meters. It has a production capacity of 44 million liters of 100% alcohol annually, currently we use 47% of its capacity. The building is a security for a loan from Grand Invest Bank.

The Tula facility was shut down on July 28, 2011. The Company committed to look for a buyer or keep the plant idle as part of the ongoing restructuring process in Russia, in order to optimize efficiency. Starting in August 2011, all production activity has been suspended and all of the employees were terminated. In the year ended December 31, 2011 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 started to look for a buyer of Tula’s assets. In the consolidated balance sheet we presented in a separate line fixed assets of Tula as of December 31, 2011 of $0.7 million as assets held for sale. The Company was unsuccessful in looking for a buyer of Tula’s assets. The Company’s management expects no future benefits from these assets and as a result the impairment loss was recognized in the amount of RUR 21.7 million ($0.7 million). The value of the assets in the consolidated balance sheet as of December 31, 2012 is $0 million. The Tula facility has been pledged as part of the collateral to our Senior Secured Notes due 2016.

 

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The Bravo Premium distillery was the first in Russia to bottle alcoholic cocktails, beer and non-alcoholic beverages in aluminum cans. The company has been affiliated with Russian Alcohol since 2005 and became part of the CEDC Group in 2008. In recent years Bravo Premium has gone through an intensive modernization of the manufacturing process, purchased new pouring lines, built new plant facilities and expanded its distribution network. Today, Bravo Premium is a premier facility for the production of alcoholic cocktails, with three pouring lines for cans, plastic bottles and glass containers. The factory produces such cocktails as Amore, Elle and Bravo Classic. The factory is certified to be in compliance with ISO 9001. It is located on 12,061 square meters. We use about 36% of its 80 million liters production capacity.

Office, distribution, warehousing and retail facilities. We own three warehousing and distribution sites located in various regions of Poland as well as three retail facilities located in various regions of Poland. In Russia we own properties in the Balashika, Moscow region where the Parliament production site is located, the Mitishi, Moscow region where the Topaz production site is located, and Novosibirsk where the Siberian production site is located. In Ukraine we rent one warehouse and one office.

Leased Facilities. Our primary corporate office is located in Warsaw, Poland, and we have a rented corporate office in Budapest, Hungary. In addition we operate over three warehousing and distribution sites and four retail facilities located in various regions of Poland. In Russia we lease over 50 office, warehouse and retail locations primarily related to the RAG and Parliament business. The lease terms expire at various dates and are generally renewable.

 

Item 3. Legal Proceedings.

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

On October 24, 2011, a class action complaint titled Steamfitters Local 449 Pension Fund vs. Central European Distribution Corporation, et al., was filed in the United States District Court, District of New Jersey on behalf of a putative class of all purchasers of our common stock from August 5, 2010 through February 28, 2011 against us and certain of our officers. The complaint seeks unspecified money damages and alleges violations of federal securities law in connection with alleged materially false and misleading statements and/or omissions regarding our business, financial results and prospects in our public statements and public filings with the SEC for the second and third quarters of 2010, relating to declines in our vodka portfolio, our need to take an impairment charge relating to the deterioration in fair value of certain of our brands in Poland and negative financial results from the launch of Żubrówka Biała. Subsequent to the above complaint, a second, substantially similar class action complaint titled Tim Schuler v. Central European Distribution Corporation, et al., was filed in the same court. By court orders dated August 22, 2012, the Steamfitters action and the Schuler action were consolidated and are now proceeding in the District of New Jersey under the caption In re Central European Distribution Corp. Securities Litigation, 11-cv-6247 (JBS-KMW). The Arkansas Public Employees Retirement System and the Fresno County Employees’ Retirement Association have been named Lead Plaintiffs in this action. Pursuant to an Order of the Court, on February 19, 2013, Lead Plaintiffs filed a consolidated complaint on behalf of a purported class of all purchasers of the Company’s common stock between March 1, 2010 and February 28, 2011, advancing similar allegations to those contained in the original complaints concerning purported materially false and misleading statements and/or omissions relating principally to the purported negative financial results from the launch of Żubrówka Biała. On April 10, 2013, the Court stayed the action as to CEDC pursuant to section 362 of chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) as a result of its April 7, 2013 filing of a voluntary petition (the “Petition”) for relief under the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”).

On May 13, 2013, the Bankruptcy Court conducted a hearing (the “Confirmation Hearing”) on (i) the adequacy of the Amended and Restated Offering Memorandum, Consent Solicitation Statement and Disclosure Statement Soliciting Acceptances of a Prepackaged Plan of Reorganization, dated March 8, 2013, as supplemented by Supplement No. 1 to the Amended and Restated Offering Memorandum, Consent Solicitation, and Disclosure Statement Soliciting Acceptances of a Prepackaged Plan of Reorganization, dated March 18, 2013 (Docket No. 10) (the “Disclosure Statement”), and (ii) confirmation of the Company’s Second Amended and Restated Joint Prepackaged Chapter 11 Plan of Reorganization (Docket No. 126) (the “Plan”). After the Confirmation Hearing the Bankruptcy Court entered its Findings of Fact, Conclusions of Law and Order (I) Approving (A) the Disclosure Statement Pursuant to Sections 1125 and 1126(c) of the Bankruptcy Code, (B) the Prepetition Solicitation Procedures, and (C) the Forms of Ballots, and (II) Confirming the Second Amended and Restated Joint Prepackaged Chapter 11 Plan of Reorganization of Central European Distribution Corporation et al. (Docket No. 166) (the “Confirmation Order”). Upon entry of the Confirmation Order by the Bankruptcy Court, the Company’s obligations with respect to this action were discharged and pursuant to the Plan (as modified by the Confirmation Order) and section 524 of the Bankruptcy Code, continuation of this action is permanently enjoined as to the Company.

On June 8, 2012, a purported securities fraud class action titled Grodko v. Central European Distribution Corporation, et al., was filed against the Company in the United States District Court for the Southern District of New York. The plaintiff in the lawsuit, who is suing purportedly on behalf of a class of all purchasers of the Company’s common stock between March 1, 2010 and June 4, 2012, alleges that the Company made false and/or misleading statements related to and/or failed to disclose that (1) the Company’s reported net sales in the years ended December 31, 2010 and 2011 were materially inflated; (2) as a result of a failure to account for retroactive trade rebates provided to the customers of Russian Alcohol, the Company anticipates restating its reported consolidated net sales, operating profit and related accounts for these periods; and (3) as a result of the foregoing, the Company’s statements were materially false and misleading at all relevant times. On August 7, 2012 a second, substantially similar class action complaint titled Puerto Rico System of Annuities and Pension for Teachers v. Central European Distribution Corporation, et al., was filed in the same court. By court orders dated September 4, 2012, the Grodko action and the Puerto Rico System of Annuities and Pension for Teachers action were transferred to the United States District Court for the District of New Jersey, where the actions have been consolidated and are proceeding under the caption Grodko v. Central European Distribution Corporation, et. al, No. 12-cv-5530 (JBS-KMW). The Puerto Rico System of Annuities and Pensions for Teachers has been named Lead Plaintiff in this action. On February 15, 2013, the Lead Plaintiff filed a consolidated amended complaint on behalf of a purported class of all purchasers of the Company’s common stock between March 1, 2010 and November 13, 2012, advancing similar allegations to those contained in the original complaints concerning purported materially false and misleading statements and/or omissions relating principally to accounting practices at CEDC’s Russian subsidiary, Russian Alcohol Group, and the Company’s related restatements. On April 10, 2013, the Court stayed the action as to CEDC pursuant to section 362 the Bankruptcy Code, as a result of its April 7, 2013 filing of the Petition for relief under the Bankruptcy Code in the Bankruptcy Court.

Upon entry of the Confirmation Order by the Bankruptcy Court, the Company’s obligations with respect to this action were discharged and pursuant to the Plan (as modified by the Confirmation Order) and section 524 of the Bankruptcy Code, continuation of this action is permanently enjoined as to the Company.

By complaints dated December 13, 2012, a single plaintiff filed two separate “derivative” actions against seven current and former CEDC directors, and against CEDC as a “nominal” defendant. The seven current and former directors named as defendants

 

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are: William Carey, Christopher Biedermann, David Bailey, Marek E. Forysiak, Markus Sieger, N. Scott Fine, Robert P. Koch and William S. Shanahan. These two actions were filed in the Superior Court of New Jersey, Burlington County, Chancery Division. Both complaints allege breaches of fiduciary duty, waste of corporate assets, and unjust enrichment. One complaint deals with alleged violations of the Foreign Corrupt Practices Act. The other complaint deals with alleged GAAP violations resulting from the Russian Alcohol Group trade rebate issue. Plaintiff is still in the process of attempting to effectuate service of the complaints on defendants. By orders dated April 30, 2013, the Court dismissed these derivative actions without prejudice and subject to reinstatement if the bankruptcy proceedings do not fully dispose of the issues between the parties.

The Company intends to mount a vigorous defense to the claims asserted. Although we believe the allegations in the above complaints are without merit, these types of lawsuits can be protracted, time-consuming, distracting to management and expensive and, whether or not the claims are ultimately successful, could ultimately have an adverse effect on our business, operating results and cash flows.

As noted in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2011, filed with the SEC on October 5, 2012, the Audit Committee, through its counsel, voluntarily notified the SEC of its internal investigation regarding the Company’s retroactive trade rebates, trade marketing refunds and related accounting issues. The Company has subsequently been contacted by the Fraud Division of the Criminal Division of the US Department of Justice (“DOJ”) regarding the disclosure in the Form 10-K/A for the year ended December 31, 2011, filed with the SEC on October 5, 2012 that there has been a breach of the books and records provisions of the Foreign Corrupt Practices Act (“FCPA”) of the United States and potentially other breaches of the FCPA. The Company has been asked to provide information about these matters on a voluntary basis to the SEC and DOJ. The Company is fully cooperating with the SEC and DOJ. Any action by the SEC or DOJ could result in criminal or civil sanctions against the Company and/or certain of its current or former officers, directors or employees. The Company cannot predict the duration, scope or ultimate outcome of the investigations and is unable to estimate the financial impact they may have, or predict the reporting periods in which any such financial impacts may be recorded.

 

Item 4. Mine Safety Disclosures.

Not applicable

 

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.

Market Information

Following the effectiveness of our Plan of Reorganization our existing equity holders received no recovery under the Plan of Reorganization and the ordinary shares of CEDC were cancelled pursuant to the Plan of Reorganization. Following the effectiveness of our Plan of Reorganization RTL received new shares of common stock of the Company representing 100% of reorganized CEDC.

Prior to April 12, 2013 the Company’s stock was traded on the NASDAQ Global Select Market under the ticker symbol CEDC. The following table sets forth the high and low bid prices for the common stock, as reported on the NASDAQ Global Select Market, for each of the Company’s fiscal quarters in 2011 and 2012. These prices represent inter-dealer quotations, which do not include retail mark-ups, mark-downs or commissions and do not necessarily represent actual transactions.

 

     High      Low  

2011

     

First Quarter

   $ 26.25       $ 10.77   

Second Quarter

     13.13         10.00   

Third Quarter

     12.01         5.21   

Fourth Quarter

     7.50         2.75   

2012

     

First Quarter

   $ 6.38       $ 3.70   

Second Quarter

     5.77         2.52   

Third Quarter

     3.95         2.49   

Fourth Quarter

     3.04         1.46   

On April 12, 2013, the last reported sales price of our common stock was $0.09 per share.

Holders

As of April 12, 2013, there were approximately 45 shareholders of record of common stock.

 

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Dividends

CEDC has never declared or paid any dividends on its capital stock. The Company currently intends to retain future earnings for use in the operation and expansion of its business. Future dividends, if any, will be subject to approval by the Company’s board of directors and will depend upon, among other things, the results of the Company’s operations, capital requirements, surplus, general financial condition and contractual restrictions and such other factors as the board of directors may deem relevant. In addition, the indentures for the Company’s outstanding New Notes limit the payment amount of cash dividends on its common stock to amounts calculated in accordance with a formula based upon our net income and other factors.

The Company earns the majority of its cash in non-USD currencies and any potential future dividend payments would be impacted by foreign exchange rates at that time. Additionally the ability to pay dividends may be limited by local equity requirements, therefore retained earnings are not necessarily the same as distributable earnings of the Company.

Equity Compensation Plans

The following table provides information with respect to our equity compensation plans as of December 31, 2012:

Equity Compensation Plan Information

 

Plan Category

   Number of
Securities to
be Issued
Upon
Exercise of
Outstanding
Options,
Warrants
and Rights
     Weighted-
Average
Exercise
Price of
Outstanding
Options,
Warrants
and Rights
     Number of
Securities
Remaining
Available for
Future
Issuance
Under Equity
Compensation
Plans
(Excluding
Securities
Reflected in
Column (a))
 
     (a)      (b)      (c)  

Equity Compensation Plans Approved by Security Holders

     1,397,333       $ 17.65         363,411   

Equity Compensation Plans Not Approved by Security Holders

     0       $ 0.00         0   

Total

     1,397,333       $ 17.65         363,411   

 

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Table of Contents
Item 6. Selected Financial Data

The following table sets forth selected consolidated financial data for the periods indicated and should be read in conjunction with and is qualified by reference to “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the consolidated financial statements, the notes thereto and the other financial data contained in Items 7 and 8 of this report on Form 10-K.

 

     2008     2009     2010
(Restated,
see Note 2)
    2011
(Restated,
see Note 2)
    2012  

Statement of Operations and Comprehensive Income / Loss data:

          

Net sales

   $ 571,242      $ 689,414      $ 702,131      $ 829,566      $ 815,673   

Cost of goods sold

     321,274        340,482        392,461        530,495        488,281   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     249,968        348,932        309,670        299,071        327,392   

Operating expenses

     114,607        164,467        367,261        1,312,096        655,747   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income / (loss)

     135,361        184,465        (57,591     (1,013,025     (328,355

Non-operating income / (expense), net

          

Interest expense, net

     (47,810     (73,468     (101,325     (110,158     (106,584

Other financial income / (expense), net

     (123,801     25,193        3,024        (139,069     99,273   

Amortization of deferred charges

     0        (38,501     0        0        0   

Other income / (expense), net

     (488     (934     (13,879     (17,910     (15,875
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (36,738     96,755        (169,771     (1,280,162     (351,541
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax (expense)/benefit

     (1,382     (18,495     13,861        (37,512     (11,697

Equity in net earnings/(losses) of affiliates

     1,168        (5,583     13,386        (7,946     0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income / (loss) from continuing operations

   $ (36,952   $ 72,677      $ (142,524   $ (1,325,620   $ (363,238
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations

          

Income / (loss) from operations of distribution business

     27,203        9,410        (8,442     0        0   

Income tax benefit / (expense)

     (5,169     (1,050     37        0        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income / (loss) on discontinued operations

     22,034        8,360        (8,405     0        0   

Net income / (loss)

   $ (14,918   $ 81,037      $ (150,929   $ (1,325,620   $ (363,238
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Net income attributable to non-controlling interests in subsidiaries

     3,680        2,708        0        0        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income /(loss) attributable to the company

   $ (18,598   $ 78,329      $ (150,929   $ (1,325,620   $ (363,238
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (0.84   $ 1.35      $ (2.03   $ (18.37   $ (4.74
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 0.50      $ 0.16      $ (0.12   $ 0.00      $ 0.00   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (0.34   $ 1.51      $ (2.15   $ (18.37   $ (4.74
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (0.84   $ 1.35      $ (2.03   $ (18.37   $ (4.74
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 0.49      $ 0.15      $ (0.12   $ 0.00      $ 0.00   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (0.34   $ 1.50      $ (2.15   $ (18.37   $ (4.74
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

          

Foreign currency translation adjustments

     (192,619     129,182        (61,155     (32,514     (18,225
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income / (loss)

   $ (207,537   $ 210,219      $ (212,084   $ (1,358,134   $ (381,463
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average number of outstanding shares of common stock at year end

     44,088        53,772        70,058        72,172        76,649   

 

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Table of Contents
     2008      2009      2010
(Restated,
See note 2)
     2011
(Restated,
See note 2)
     2012  

Balance Sheet Data:

              

Cash and cash equivalents

   $ 84,639       $ 126,439       $ 122,116       $ 94,410       $ 84,729   

Restricted cash

     0         481,419         0         0         0   

Working capital

     169,061         357,078         345,424         191,205         (1,078,125

Total assets

     2,436,138         4,439,100         3,280,470         1,995,230         1,767,552   

Long-term debt and capital lease obligations, excluding current portion

     804,941         1,331,815         1,251,933         1,237,266         499   

Stockholders’ equity

     993,511         1,685,162         1,513,897         181,614         (196,909

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation

The following analysis should be read in conjunction with the Consolidated Financial Statements and the notes thereto appearing elsewhere in this report. All amounts presented in tables are expressed in thousands.

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

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

other statements that are not historical facts.

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

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

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

 

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Table of Contents

The following discussion and analysis should be read in conjunction with the 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. The Company continued to focus on developing sales volumes in its key markets of Poland and Russia.

Polish vodka market stabilized after decline in previous years, which resulted in Company’s sales volume growth by 6% for the year ending December 31, 2012. Soplica vodka and Soplica flavoured vodka strengthening, supported with launching Soplica Pigwowa, resulted in over 64% volume and sales value of Soplica brand growth in comparison to year ended December 31, 2011. Żubrówka Biała brand continued its success from 2011 and noted increase in volume by 19% comparing to year ended December 31, 2011 and increase in sales value by 21% respectively. This brought the brand to the third place on the market in its segment.

Total Russian volumes were down which was driven by lower domestic volumes partially offset by higher export volumes. On the domestic front, sales volumes for the year 2012 in Russia were down by 2.0% as compared to 2011. This was due to several factors including an overall weak spirit market. Spirit, which is the main ingredient in vodka production, continued to see higher price levels, average spirit price increased by 27% as compared to 2011 however significant price increases in Russia, especially for vodka, covered the above mentioned decreases. Total gross margin in Russia increased by $19.7 million in 2012 as compared to the prior year.

Reorganization and Emergence from Chapter 11

Chapter 11 Filing

On April 7, 2013, the Debtors filed Chapter 11 Cases under the Bankruptcy Code in the Bankruptcy Court in order to effectuate the Debtors’ prepackaged Plan of Reorganization. The Chapter 11 Cases were jointly administered under the caption “In re: Central European Distribution Corporation, et al.” Case No. 13-10738. The Plan of Reorganization was confirmed by the Bankruptcy Court on May 13, 2013. The Effective Date of the Plan was June 5, 2013.

The Company believes that this successful restructuring will improve its financial strength and flexibility and enable it to focus on maximizing the value of its strong brands and market position. The Chapter 11 Cases and the Plan of Reorganization which were approved by the Bankruptcy Court, eliminated approximately $665.2 million in debt from the Company’s balance sheet, did not involve the Company’s operating subsidiaries in Poland, Russia, Ukraine or Hungary and had no impact on their business operations. Operations in these countries are independently funded and continued to generate revenue during this process. All obligations to employees, vendors, credit support providers and government authorities were honored in the ordinary course without interruption.

Background to Chapter 11 Filing

Prior to filing the Chapter 11 cases, the management of the Company, in consultation with the Board and with the assistance of financial and legal advisors, reviewed the Company’s alternatives in light of its financial obligations, in particular the 2013 Notes. The Board and the management of the Company evaluated all available alternatives and the Company and its advisors worked to further develop those alternatives to address the maturity of the 2013 Notes, including a strategic alliance with Mr. Roustam Tariko and the Russian Standard Corporation, other possible strategic investments, the sale of certain assets and an exchange for the 2013 Notes.

Following this work and in light of the impending maturity of the 2013 Notes, on February 25, 2013, the Company launched (i) exchange offers in respect of its 2013 Notes and the 2016 Notes, (ii) a solicitation of consents to amendments to the indenture governing the 2016 Notes, and (iii) a solicitation of votes on a pre-packaged Chapter 11 Plan of Reorganization relating to the 2013 Notes and the 2016 Notes. These transactions were launched by the Company to begin a process of consensual restructuring of the Company’s obligations with the participation of RTL, the 2016 Steering Committee and the 2013 Steering Committee, however none of RTL, the 2016 Steering Committee or the 2013 Steering Committee supported these transactions as launched by the Company. Following the launch of these transactions on February 25, 2013, these stakeholders continued to negotiate the terms of a mutually agreeable restructuring of the Company’s obligations.

On March 11, 2013, the Company announced amended terms to these exchange offers, consent and vote solicitations to reflect terms agreed to and supported by the Company, RTL and the 2016 Steering Committee. Thereafter, on March 19, 2013, the Company announced the termination of its exchange offer in respect of the 2013 Notes and continued to solicit votes from the holders of the 2013 Notes on the Plan of Reorganization included in the Supplement. After extensive discussion with representatives of RTL, the 2016 Steering Committee and the 2013 Steering Committee and deliberation regarding the Company’s alternatives, the Board resolved unanimously to support the Restructuring Transactions.

Voting on the Plan of Reorganization closed on April 4, 2013. According to the official vote tabulation prepared by CEDC’s voting and information agent, impaired creditors voted overwhelmingly to accept the Plan of Reorganization. In particular, approximately 95% of all 2013 Notes were voted. The Plan of Reorganization was accepted by 99.13% in number and 99.00% in amount of those 2013 Notes that were voted on the Plan of Reorganization. Approximately 95% of all 2016 Notes were voted, and of those, 97.26% in number and 97.34% in amount voted to accept the Plan of Reorganization.

On April 7, 2013, CEDC announced that the Debtors had received overwhelming support from creditors for the Restructuring Transactions and the CEDC Board of Directors resolved to implement the Restructuring Transactions through the prepackaged Plan of Reorganization. Accordingly, the Company filed the Chapter 11 Cases in the Bankruptcy Court in order to effectuate the Plan of Reorganization.

CEDC and CEDC FinCo also announced the successful completion of the consent solicitation conducted with respect to the indenture governing the 2016 Notes, as the requisite consents were obtained to approve the Covenant Amendments, the Collateral and Guarantee Amendments and the Bankruptcy Waiver Amendments, each as defined in the Amended and Restated Offering Memorandum, Consent Solicitation Statement and Disclosure Statement dated March 8, 2013. Approximately 95% of the 2016 Notes by principal amount voted to approve those waivers and amendments.

Finally, CEDC and CEDC FinCo announced the termination of the exchange offer for the 2016 Notes. The exchange offer failed to meet the minimum tender condition necessary for the consummation of the offer.

On May 13, 2013, the Bankruptcy Court entered an order confirming the Plan. The Effective Date of the Plan was June 5, 2013.

Description of the Plan of Reorganization

The Plan of Reorganization included the following:

 

   

RTL made a $172.0 million cash investment and exchanged the RTL Credit Facility for new shares of common stock of the Company, with the proceeds of the RTL Investment used to fund the cash consideration in the exchange offer for 2016 Notes described below;

 

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all 2016 Notes were exchanged for (i) the New Secured Notes equal to $450 million plus the aggregate interest accrued but unpaid on the outstanding 2016 Notes not accepted for tender in the reverse “Dutch Auction” available to 2016 Noteholders (as described in the Offering Memorandum) in accordance with their existing terms in respect of the period from March 16, 2013 to the earlier of June 1, 2013 and the date preceding the date of issuance of the New Secured Notes, (ii) the New Convertible Secured Notes and (iii) $172 million in cash. This consideration afforded holders of 2016 Notes an estimated recovery of approximately 83.7%;

 

   

all 2013 Notes and the RTL Notes were exchanged for their pro rata share (based upon the approximate $282.0 million sum of aggregate principal amount of 2013 Notes and the RTL Notes outstanding and accrued interest calculated through March 15, 2013) of $16.9 million in cash, which was also funded by RTL; and

 

   

in exchange for the RTL Investment and funding the cash distribution to 2013 Noteholders, RTL and its affiliates received new shares of common stock of the Company representing 100% of reorganized CEDC. All of the Company’s shares of common stock outstanding prior to the Effective Date of the Plan were cancelled.

In addition, RTL made an offer (i) outside the United States in “offshore transactions” in compliance with Regulation S under the Securities Act; and (ii) to Accredited Investors to exchange, subject to certain conditions, 2013 Notes not held by RTL in exchange for the Cash Payment and RTL Offer Notes. Each accepting holder assigned to RTL all of its rights under such 2013 Notes, including the right to its distribution under the Plan of Reorganization included in the Supplement.

Holders of 2013 Notes other than RTL who participated in the RTL Offer received an estimated recovery of 34.9%. Holders of 2013 Notes that did not participate in the RTL Offer received their proportionate share of $16.9 million in cash under the Plan of Reorganization (shared with the RTL Notes). Holders of 2013 Notes that participated in the RTL Offer did not receive a distribution from CEDC or its U.S. subsidiaries under the Plan of Reorganization.

 

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Significant factors affecting our consolidated results of operations

Effect of Exchange Rate and Interest Rate Fluctuations

Substantially all of Company’s operating cash flows and assets are denominated in Polish zloty, Russian ruble and Hungarian forint. This means that the Company is exposed to translation movements both on its balance sheet and statement of operations. The impact on working capital items is demonstrated on the cash flow statement as the movement in exchange on cash and cash equivalents. The impact on the statement of operations results from to the movement of the average exchange rate used to translate 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.

As of December 31, 2012 the Company had borrowings including its Convertible Notes due 2013 and Senior Secured Notes due 2016 that are denominated in U.S. dollars and euros, which have been lent to its operations where the functional currency is the Polish zloty and Russian ruble. The effect of having debt denominated in currencies other than the Company’s functional currencies is to increase or decrease the value of the Company’s liabilities on that debt in terms of the Company’s functional currencies when those functional currencies depreciate or appreciate in value, respectively. As a result of this, the Company is exposed to gains and losses on the re-measurement of these liabilities. The table below summarizes the pre-tax impact of a one percent movement in each of the exchange rate which could result in a significant impact in the results of the Company’s operations.

 

Exchange Rate

   Value of notional amount with accrued interest
as of December 31, 2012
     Pre-tax impact of a
1% movement in
exchange rate
 

USD-Polish zloty

     $386.9 million         $3.9 million gain/loss   

USD-Russian ruble

     $267.3 million         $2.7 million gain/loss   

EUR-USD

     €433.2 million or approximately $571.3 million         $5.7 million gain/loss   

EUR-Russian ruble

     €29.6 million or approximately $39.0 million         $0.4 million gain/loss   

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 as well as alcohol excise increases in Russia. Resulting from the annual impairment test performed as of December 31, 2012, the Company has taken an impairment charge of $327.8 million that was required in relation to its core business in Poland and Russia Import unit. We also experienced related underperformance of certain brands in Russia, primarily Kaufman, Zhuravli and Urozhay. Therefore, the Company also took an impairment charge for trademarks during the fourth quarter of 2012 of $39.2 million. Moreover, the Company took an impairment charge for customer relationships during the fourth quarter of 2012 of $5.8 million.

We also have experienced impairment charges in prior periods, which affect our prior period to period comparability. The total impairment charges taken in prior periods are presented in the table below:

 

Year

   Trademarks
impairment
     Goodwill
impairment
 

2011

   $ 127.7       $ 930.1   

2010

     131.8         0   

2009

     20.3         0   
  

 

 

    

 

 

 
   $ 279.8       $ 930.1   
  

 

 

    

 

 

 

 

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We cannot assure you that we will not recognize further asset impairments or experience declines in our financial performance in connection with the ongoing challenges that we are facing in our core markets.

Year ended December 31, 2012 compared to year ended December 31, 2011

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

 

     Year ended December 31,  
     2012     2011
Restated
 

Sales

   $ 1,745,315      $ 1,737,996   

Excise taxes

     (929,642     (908,430

Net sales

     815,673        829,566   

Cost of goods sold

     488,281        530,495   
  

 

 

   

 

 

 

Gross profit

     327,392        299,071   
  

 

 

   

 

 

 

Selling, general and administrative expenses

     282,848        262,175   

Gain on remeasurement of previously held equity interests

     0        (7,898

Impairment charges(1)

     372,899        1,057,819   
  

 

 

   

 

 

 

Operating income / (loss)

     (328,355     (1,013,025
  

 

 

   

 

 

 

Non-operating income / (expense), net

    

Interest expense, net

     (106,584     (110,158

Other financial income / (expense), net

     99,273        (139,069

Other non-operating expenses, net

     (15,875     (17,910
  

 

 

   

 

 

 

Loss before taxes, equity in net income from unconsolidated investments

     (351,541     (1,280,162
  

 

 

   

 

 

 

Income tax benefit/(expense)

     (11,697     (37,512

Equity in net earnings/(losses) of affiliates

     0        (7,946
  

 

 

   

 

 

 

Loss from continuing operations

     (363,238     (1,325,620
  

 

 

   

 

 

 

Loss from continuing operations per share of common stock, basic

   $ (4.74   $ (18.37
  

 

 

   

 

 

 

Loss from continuing operations per share of common stock, diluted

   $ (4.74   $ (18.37
  

 

 

   

 

 

 

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

    

Foreign currency translation adjustments

     (18,225     (32,514
  

 

 

   

 

 

 

Comprehensive income / (loss) attributable to the Company

   $ (381,463   $ (1,358,134

 

(1) 

Impairment Charges for the year ended December 31, 2012 in this Annual Report are lower than those previously provided by the Company as preliminary unaudited estimates.

 

40


Table of Contents

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 decreased by approximately 1.7%, or $13.9 million, from $829.6 million for the year ended December 31, 2011 to $815.7 million for the year ended December 31, 2012.

The decrease was driven by the impact of foreign exchange translation of $49.9 million and lower local currency sales value of $15.1 million. Decrease was partially offset by the consolidation of Whitehall only for eleven months in 2011 comparing to full year 2012 of $6.5 million, increase in export sales in Russia of $5.2 million and increase of $39.4 million due to price mix. Our business split by segment, which represents our primary geographic locations of operations, Poland, Russia and Hungary, is shown below:

 

     Segment Net Sales
Twelve months ended
December 31,
 
     2012      2011  

Segment

     

Poland

   $ 237,602       $ 226,411   

Russia

     550,316         572,148   

Hungary

     27,755         31,007   
  

 

 

    

 

 

 

Total Net Sales

   $ 815,673       $ 829,566   

Sales for Poland increased by $11.2 million from $226.4 million for the year ended December 31, 2011 to $237.6 million for the year ended December 31, 2012. This increase was driven mainly by sales volume growth which increased our domestic sales by $14.6 million. The main drivers of our sales volume growth was the continued success of the Żubrówka Biała brand which grew by 19% from 2011 to reach 27 million liters as well as 122% increase in sales volume of Soplica flavored vodkas. Additionally improved product and channel mix contributed $16.1 million to the overall growth. Offsetting some of this growth was decline in Absolwent sales volume which was down by 37% and FX effect from weakening of the Polish zloty against the U.S. dollar which accounted for approximately $19.5 million reduction of sales in U.S. dollar terms.

Sales for Russia decreased by $21.8 million from $572.1 million for the year ended December 31, 2011 to $550.3 million for the year ended December 31, 2012. This decline resulted mainly from lower domestic sales by $29.3 million, which was due to decrease in vodka sales volume of 8% and RTD sales volume of 15%. Moreover weakening of the Russian ruble against the U.S. dollar accounted for $27.5 million decline. Offsetting this was mainly export sales which grew by of $5.2 million and price/channel mix which represents $23.3 million of the growth. Also consolidation of Whitehall in the twelve months in 2012 versus eleven months in 2011 resulted in $6.5 million growth.

Sales for Hungary decreased by $3.2 million from $31.0 million for the year ended December 31, 2011 to $27.8 million for the year ended December 31, 2012 which results from a $0.3 million decrease in volumes in domestic sales as well as decrease resulting from weakening of the Hungarian forint against the U.S. dollar which accounted for approximately $2.9 million of sales in U.S. dollar terms.

Gross Profit

Total gross profit increased by approximately 9.5%, or $28.3 million, to $327.4 million for the year ended December 31, 2012, from $299.1 million for the year ended December 31, 2011. Gross profit margins as a percentage of net sales increased by 4.0 percentage points from 36.1% to 40.1% for the year ended December 31, 2012 as compared to the year ended December 31, 2011. Increase of gross profit was mainly due to better price/channel mix which contributed $64.5 million of growth. Consolidation of Whitehall brought additional $2.0 million and export sales $1.4 million. Those increases were offset by higher spirit costs in Russia which resulted in a $13.7 million impact on gross margins for the year ended December 31, 2012 compared to the same period in 2011. Additionally the decline was driven by the lower domestic sales of $7.4 million driven mainly by decrease in Russia. Finally, influence of FX rates decreased gross profit by $18.5 million.

Operating Expenses

Operating expenses consist of selling, general and administrative, or “S,G&A” expenses, advertising expenses, non-production depreciation and amortization, provision for bad debts, fair value adjustments. Total operating expenses decreased by $656.4 million, from $1,312.1 million for the year ended December 31, 2011 to $655.7 million for the year ended December 31, 2012. This change is primarily driven by a lower non-cash impairment charge for Poland and Russia recorded as of December 31, 2012 of $372.9 million while as of December 31, 2011 impairment charge amounted to $1,057.8 million. Decrease in impairment charge was partially offset by one-time gain which was recognized in the year ended December 31, 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 these fair value adjustments are shown separately in the table below.

 

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Table of Contents

Operating expenses, excluding fair value adjustments, as a percent of net sales increased from 31.6% for the year ended December 31, 2011 to 34.7% for the year ended December 31, 2012. Operating expenses, net of fair value adjustments increased by $20.6 million, from $262.2 million for the year ended December 31, 2011 to $282.8 million for the year ended December 31, 2012. The increase resulted primarily from the restatement and restructuring process, conducted in the Company in 2012 giving additional $37.6 million and from the consolidation of the results of Whitehall of $4.0 million of costs. This was offset by weakening of our functional currencies against U.S. dollar which gave $14.5 million decrease and savings on costs, mainly in Russia, of $6.5 million. They included $2.5 million decrease in costs of provision for doubtful debts which were significantly higher in 2011 due to numerous bankruptcies of our contractors and weaker credit control. Transports and logistics costs decreased by $5.3 million as a result of lower volume sold. Whitehall’s and RAG’s redundancy in staff resulted in $3.0 million of savings. Those decreases were offset by increase in legal and professional costs of $2.0 million resulting from professionals engaged to help to improve operational activity of the Company and increase in other costs of $2.3 million.

The table below sets forth the items of operating expenses.

 

     Year Ended December 31,  
     2012      2011  

S,G&A, excluding marketing, depreciation and amortization

   $   244,919       $ 220,510   

Marketing

     28,932         30,828   

Depreciation and amortization

     8,997         10,837   
  

 

 

    

 

 

 

Sub-Total

     282,848         262,175   

Impairment charges

     372,899         1,057,819   

Gain on remeasurement of previously held equity interest

     0         (7,898
  

 

 

    

 

 

 

Total operating expense

   $   655,747       $ 1,312,096   
  

 

 

    

 

 

 

S,G&A consists of salaries, warehousing and transportation costs, administrative expenses and bad debt expense. S,G&A expenses increased by $24.4 million, from $220.5 million for the year ended December 31, 2011 to $244.9 million for the year ended December 31, 2012. This increase was primarily a result of restatement and restructuring costs which amounted to $37.6 million which were offset by cost savings described above and foreign exchange impact.

Marketing costs decreased by $1.9 million, from $30.8 million for the year ended December 31, 2011 to $28.9 million for the year ended December 31, 2012.

Depreciation and amortization decreased by $1.8 million, from $10.8 million for the year ended December 31, 2011 to $9.0 million for the year ended December 31, 2012, mainly due to reduction of investments in non-productive fixed assets.

As described further in Note 8 and Note 9 the Company performed an annual impairment test of goodwill and other intangible assets on December 31, 2012 which resulted in total impairment charge in the year of $327.8 million for goodwill and $45.1 million for intangible assets.

Operating Income/(loss)

Total operating loss decreased by $684.6 million, from $1,013.0 million loss for the year ended December 31, 2011 to $328.4 million loss for the year ended December 31, 2012, primarily driven by a lower impairment charge for Poland and Russia recorded as of December 31, 2012 by $684.9 million. The table below summarizes the segmental split of operating loss. Excluding the impact of fair value adjustments incurred in 2012 and corporate overheads, underlying operating income increased from $43.8 million to $83.5 million.

 

     Year ended December 31,  
     2012     2011  

Segment

    

Poland

   $ 33,995      $ 27,334   

Russia

   $ 44,935        10,982   

Hungary

   $ 4,604        5,448   
  

 

 

   

 

 

 

Sub-Total

   $ 83,534        43,764   

Impairment charges

     (372,899     (1,057,819

Gain on remeasurement of previously held equity interest

     0        7,898   

Corporate overhead

    

General corporate overhead

     (36,036     (4,263

Option expense

     (2,954     (2,605
  

 

 

   

 

 

 

Total operating loss

   $ (328,355   $ (1,013,025
  

 

 

   

 

 

 

 

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Table of Contents

The overall increase in operating income, excluding fair value adjustments and corporate overheads results primarily from better results in Russia and Poland as compared to last year offset by advisory costs incurred during restatement and restructuring process in 2012. Underlying operating income in Poland excluding fair value adjustments and corporate overheads, increased by approximately 24.5%, or $6.7 million, from $27.3 million for the year ended December 31, 2011 to $34.0 million for the year ended December 31, 2012. The operating income in Russia, excluding fair value adjustments and corporate overheads increased by 308.2%, or $33.9 million from the income of $11.0 million for the year ended December 31, 2011 to $44.9 million for the year ended December 31, 2012. The changes in operating income in both of these segments were driven by all of the factors described above.

Non-Operating Income and Expenses

Total interest expense decreased by approximately 3.3%, or $3.6 million, from $110.2 million for the year ended December 31, 2011 to $106.6 million for the year ended December 31, 2012. This decrease is mainly a result of a weaker euro as compared to the U.S. dollar, as a significant portion of the long-term borrowings are denominated in euros.

The Company recognized $99.3 million of other financial income in the year ended December 31, 2012, primarily related to the impact of movements in exchange rates on our U.S. dollar and euro denominated liabilities, as compared to $139.1 million of loss in the year ended December 31, 2011.

Total other non-operating expenses decreased by $2.0 million, from $17.9 million for the year ended December 31, 2011 to $15.9 million for the year ended December 31, 2012. Expenses in 2011 consisted of $7.4 million representing write-off of assets related to Tula facility to net realizable value. Additionally it included $5.7 million of other losses which primarily related to the costs of factoring in Poland and bank guarantees in Poland and Russia for customs and excise taxes. The Company began to factor receivables in 2011 which represent $2.9 million of expense for the year ended December 31, 2011. In Russia due to changes in legislation in 2011, the Russian business is required to have a bank guarantee to cover the excise tax related to six months of production at the time of spirit purchase, which resulted in $2.0 million of cost in 2011. In 2012 total balance primarily consists of $4.9 million costs of factoring in Poland and $6.0 million which is bank guarantees costs in Russia. Moreover $1.9 million represents cost of consent fee relating to late filing of Q2 2012 reporting, and $0.7 million represents write-off of assets related to Tula facility.

 

     Year
ended December 31,
 
     2012     2011  

Impairments related to assets held for sale

     (675     (7,355

Factoring costs and bank fees

     (10,869     (5,652

Bank waiver costs

     (1,867     0   

Other gains / (losses)

     (2,464     (4,903
  

 

 

   

 

 

 

Total other non-operating income / (expense), net

   $ (15,875   $ (17,910
  

 

 

   

 

 

 

Income Tax

Our tax charge for 2012 was $11.7 million which represents an effective tax rate for the year ended December 31, 2012 of (3.3%). The statutory tax rates in our key jurisdictions are 19% in Poland, 20% in Russia and 35% in the US. The net increase in the Company’s uncertain income tax position, excluding the related accrual for interest and penalties, for 2012 resulted from additions for prior year tax positions of $8.5 million and for current year tax positions of $5.6 while for 2011 resulted from additions for prior year tax positions of $5.0 million. As of December 31, 2012 and as of December 31, 2011, the uncertain income tax position balance was $18.9 million and $7.1 million respectively. Due to underperformance of certain of the Company’s subsidiaries the Company recognized in 2012 an additional impairment of goodwill amounting to $327.8, which has no impact on tax. This resulted in a net tax charge even though on a consolidated basis the Company incurred a pre-tax loss. Additionally in 2012, the Company recognized additional valuation allowance of $13.5 million related to tax losses and other deferred tax assets. In 2011 due to underperformance of certain of the Company’s subsidiaries the Company determined that an additional non cash valuation allowance for deferred tax assets of $61.3 million was required and took the charge during the year. Additionally in 2011, the Company did not recognize a tax asset for losses at these subsidiaries therefore the tax expense for the profitable entities was not offset by a tax benefit at loss making entities.

 

 

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Table of Contents

Year ended December 31, 2011 compared to year ended December 31, 2010

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

 

     Year ended December 31,  
     2011
Restated
    2010
Restated
 

Sales

   $ 1,737,996      $ 1,563,100   

Excise taxes

     (908,430     (860,969

Net sales

     829,566        702,131   

Cost of goods sold

     530,495        392,461   
  

 

 

   

 

 

 

Gross profit

     299,071        309,670   
  

 

 

   

 

 

 

Selling, general and administrative expenses

     262,175        235,412   

Gain on remeasurement of previously held equity interests

     (7,898     0   

Impairment charges

     1,057,819        131,849   
  

 

 

   

 

 

 

Operating loss

     (1,013,025     (57,591
  

 

 

   

 

 

 

Non-operating income / (expense), net

    

Interest expense, net

     (110,158     (101,325

Other financial income / (expense), net

     (139,069     3,024   

Other non-operating expenses, net

     (17,910     (13,879
  

 

 

   

 

 

 

Loss before taxes, equity in net income from unconsolidated investments

     (1,280,162     (169,771
  

 

 

   

 

 

 

Income tax benefit / (expense)

     (37,512     13,861   

Equity in net earnings / (losses) of affiliates

     (7,946     13,386   
  

 

 

   

 

 

 

Loss from continuing operations

     (1,325,620     (142,524
  

 

 

   

 

 

 

Discontinued operations

    

Loss from operations of distribution business

     0        (8,442

Income tax benefit

     0        37   
  

 

 

   

 

 

 

Loss on discontinued operations

     0        (8,405
  

 

 

   

 

 

 

Net loss

   $ (1,325,620   $ (150,929
  

 

 

   

 

 

 

Loss from continuing operations per share of common stock, basic

   $ (18.37   $ (2.03

Loss from discontinued operations per share of common stock, basic

   $ 0.00      $ (0.12
  

 

 

   

 

 

 

Loss from operations per share of common stock, basic

   $ (18.37   $ (2.15
  

 

 

   

 

 

 

Loss from continuing operations per share of common stock, diluted

   $ (18.37   $ (2.03

Loss from discontinued operations per share of common stock, diluted

   $ 0.00      $ (0.12
  

 

 

   

 

 

 

Loss from operations per share of common stock, diluted

   $ (18.37   $ (2.15

Other comprehensive loss, net of tax:

    

Foreign currency translation adjustments

     (32,514     (61,155
  

 

 

   

 

 

 

Comprehensive loss

   $ (1,358,134   $ (212,084
  

 

 

   

 

 

 

 

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Table of Contents

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 18.2%, or $127.5 million, from $702.1 million for the year ended December 31, 2010 to $829.6 million for the year ended December 31, 2011. The overall increase was driven primarily by the consolidation of Whitehall starting from February of 2011, as it was not consolidated in 2010, giving additional $154.6 million. Excluding the impact of sales increase from the consolidation of Whitehall our sales value decreased by $27.1 million which was primarily a function of lower domestic sales of $79.5 million in Russia due to lower domestic sales volume, higher trade marketing spend, decrease in sales due to higher market investments and product sales mix in total of $31.4 million as well as lower local currency sales in Hungary of $1.5 million. This was offset by higher local currency sales in Poland of $21.1 million and by higher sales from foreign exchange translation of $24.8 million and higher export sales in Russia of $39.4 million. Our business split by segment, which represents our primary geographic locations of operations, Poland, Russia and Hungary, is shown below:

 

     Segment Net Sales
Year ended December 31,
 
     2011      2010  

Segment

     

Poland

   $ 226,411       $ 225,281   

Russia

     572,148         446,329   

Hungary

     31,007         30,521   
  

 

 

    

 

 

 

Total Net Sales

   $ 829,566       $ 702,131   

Sales for Poland increased by $1.1 million from $225.3 million for the year ended December 31, 2010 to $226.4 million for the year ended December 31, 2011. This increase was driven mainly by a strengthening of the Polish zloty against the U.S. dollar which accounted for approximately $11.4 million of sales in U.S. dollar terms and higher volume sales of $21.1 million offset by a decrease in sales due to higher market investments and product sales mix in total of $31.4 million. The main drivers of our sales volume growth was the continued success of the Żubrówka Biała brand which grew by 473% from 2010 to reach 22 million liters. Offsetting some of this growth were declines in Bols and Absolwent which were down 27% and 30% respectively. Although overall net volumes were up, the mix impact of Bols decline had negative impact on overall gross margins in Poland when comparing to the prior year.

Sales for Russia increased by $125.8 million from $446.3 million for the year ended December 31, 2010 to $572.1 million for the year ended December 31, 2011. Included in the sales growth was a sales increase of $154.6 million from the consolidation of Whitehall into sales starting from February 2011. Additionally, sales increased by $11.3 million in U.S. dollar terms due to strengthening of the Russian ruble against the U.S. dollar. Export sales grew by $39.4 million; however export sales primarily to 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 $79.5 million including 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. Although overall vodka brands were down in 2011 as compared to 2010, the Company successfully launched the Talka brand during the year which reached over 5.2 million liters of volume sales during the year and is expected to be a key driver in 2012.

Sales for Hungary increased by $0.5 million from $30.5 million for the year ended December 31, 2010 to $31.0 million for the year ended December 31, 2011 which results in a $1.5 million decrease in volumes in local currency terms as well as an increase resulting from strengthening of the Hungarian forint against the U.S. dollar which accounted for approximately $2.0 million of sales in U.S. dollar terms.

Gross Profit

Total gross profit decreased by approximately 3.4%, or $10.6 million, to $299.1 million for the year ended December 31, 2011, from $309.7 million for the year ended December 31, 2010. Gross profit margins as a percentage of net sales declined by 8.0 percentage points from 44.1% to 36.1% for the year ended December 31, 2011 as compared to the year ended December 31, 2010. The overall impact of higher cost of goods which includes the higher spirit pricing resulted in a $26.0 million impact on gross margins for the year ended December 31, 2011 compared to the same period in 2010. In addition to higher spirit prices, higher trade marketing spend and lower sales volumes reduced the overall gross margin in Russia. Within the Polish market the main factor driving the lower gross profit margins is that the Polish market continues to experience a strong competitive environment from other producers and retailers, especially discounters, making it difficult to increase prices in line with the spirit cost increases.

 

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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, provision for bad debts and, fair value adjustments. Total operating expenses increased by $944.8 million, from $367.3 million for the year ended December 31, 2010 to $1,312.1 million for the year ended December 31, 2011. This change is primarily driven by a non-cash impairment charge for Poland and Russia recorded as of December 31, 2011 of $1,057.8 million, and one-time gain recognized in the year ended December 31, 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 these fair value adjustments are shown separately in the table below. Operating expenses, excluding fair value adjustments as a percent of net sales decreased from 33.5% for the year ended December 31, 2010 to 31.6% for the year ended December 31, 2011. Operating expenses, net of fair value adjustments increased by $26.8 million, from $235.4 million for the year ended December 31, 2010 to $262.2 million for the year ended December 31, 2011. The increase resulted primarily from the consolidation of the results of Whitehall giving additional $37.2 million of costs, relicensing and restructuring costs in Russia of $21.2 million, as well as strengthening of the Russian ruble and Polish zloty against the U.S. dollar which accounted for approximately $5.2 million of sales in U.S. dollar terms offset by cost savings achieved in Poland and Russia.

 

     Year Ended December 31,  
     2011     2010  

S,G&A

   $ 220,510      $ 192,261   

Marketing

     30,828        35,149   

Depreciation and amortization

     10,837        8,002   
  

 

 

   

 

 

 

Sub-Total

     262,175        235,412   

Impairment charges

     1,057,819        131,849   

Gain on remeasurement of previously held equity interest

     (7,898     0   
  

 

 

   

 

 

 

Total operating expense

   $ 1,312,096      $ 367,261   

S,G&A consists of salaries, warehousing and transportation costs, administrative expenses and bad debt expense. S,G&A expenses increased by $28.2 million, from $192.3 million for the year ended December 31, 2010 to $220.5 million for the year ended December 31, 2011. This increase was primarily a result of $32.9 million from the consolidation of Whitehall Group in 2011.

Depreciation and amortization increased by $2.8 million, from $8.0 million for the year ended December 31, 2010 to $10.8 million for the year ended December 31, 2011. Of this increase $1.7 million is from the consolidation of Whitehall Group in 2011.

The Company assessed recent events and current circumstances, including current and future performance, re-launch and rebranding plans in 2011 and 2012. Resulting from these events, the Company identified certain impairment indicators during third quarter of 2011 that would trigger the need for an impairment test of both goodwill and intangible assets. As a result the Company performed an impairment test on September 30, 2011 and annual impairment test on December 31, 2011 both of which resulted in a total impairment charge in the year of $930.1 million for goodwill and $127.7 million for intangible assets.

Operating Income

Total operating loss increased by $955.4 million, from $57.6 million loss for the year ended December 31, 2010 to $1,013.0 million loss for the year ended December 31, 2011, primarily driven by an impairment charge for Poland and Russia recorded as of December 31, 2011 of $1,057.8 million. The table below summarizes the segmental split of operating loss. Excluding the impact of fair value adjustments incurred in 2011 and corporate overheads, underlying operating income decreased from $82.7 million to $43.8 million. Fair value adjustments recorded in 2011 include a one-time gain on the re-measurement of previously held equity interests in Whitehall at the time of consolidation of $7.9 million and impairment charges of $213.7 million for Poland and $844.1 million for Russia.

 

     Year ended December 31,  
     2011      2010  

Segment

     

Poland

   $ 27,334       $ 28,478   

Russia

     10,982         48,805   

Hungary

     5,448         5,442   
  

 

 

    

 

 

 

Sub-Total

     43,764         82,725   

 

46


Table of Contents
     Year ended December 31,  
     2011     2010  

Impairment charges

     (1,057,819     (131,849

Gain on remeasurement of previously held equity interest

     7,898        0   

Corporate overhead

    

General corporate overhead

     (4,263     (5,261

Option expense

     (2,605     (3,206
  

 

 

   

 

 

 

Total operating loss

   $ (1,013,025   $ (57,591

Underlying operating income in Poland excluding fair value adjustments decreased by approximately 4.2%, or $1.2 million, from $28.5 million for the year ended December 31, 2010 to $27.3 million for the year ended December 31, 2011. The operating income in Russia excluding fair value adjustments decreased by 77.5%, or $37.8 million from the income of $48.8 million for the year ended December 31, 2010 to $11.0 million for the year ended December 31, 2011. The changes in operating income in both of these segments were driven by all of the factors described above.

Non-Operating Income and Expenses

Total interest expense increased by approximately 8.8%, or $8.9 million, from $101.3 million for the year ended December 31, 2010 to $110.2 million for the year ended December 31, 2011. This increase is mainly a result of a stronger euro during most of the year as compared to the U.S. dollar, as a significant portion of the long-term borrowings are denominated in euros.

The Company recognized $139.1 million of foreign exchange rate losses in the year ended December 31, 2011, primarily related to the impact of movements in exchange rates on our U.S. dollar and euro denominated liabilities, as compared to $3.0 million of gain in the year ended December 31, 2010. These losses resulted mainly from the depreciation of the Polish zloty and Russian ruble against the U.S. dollar and euro.

Total other non-operating expenses increased by $4.0 million, from $13.9 million for the year ended December 31, 2010 to $17.9 million for the year ended December 31, 2011. Expenses in 2010 consisted of a one-time charge of $14.1 million related to the early call premium when the Senior Secured Notes due 2012 were repaid early in January 2010. Moreover they included the write-off of the unamortized offering costs related to the Senior Secured Notes due 2012 of $4.1 million. This was offset by a final dividend of $7.6 million received prior to disposal of the distribution business. In 2011 total balance primarily consists of $7.4 million representing write-off of assets related to Tula facility to net realizable value. Additionally it includes $5.7 million of other losses which primarily related to the costs of factoring in Poland and bank guarantees in Poland and Russia for customs and excise taxes. The Company began to factor receivables in 2011 which represent $2.9 million of expense for the year ended December 31, 2011. In Russia due to changes in legislation in 2011, the Russian business is required to have a bank guarantee to cover the excise tax related to six months of production at the time of spirit purchase, which resulted in $2.0 million of cost in 2011.

 

     Year ended December 31,  
     2011     2010  

Early redemption call premium

   $ 0      $ (14,115

Write-off of unamortized offering costs

     0        (4,076

Dividend received

     0        7,642   

Professional service expenses related to the sale of the distribution

     0        (2,000

Impairment related to assets held for sale

     (7,355     0   

Factoring costs and bank fees

     (5,652     (2,267

Other gains / (losses)

     (4,903     937   
  

 

 

   

 

 

 

Total other non-operating income / (expense), net

   $ (17,910   $ (13,879

Income Tax

Our tax charge for 2011 was $37.5 million which represents an effective tax rate for the year ended December 31, 2011 of (2.9%). The statutory tax rates in our key jurisdictions are 19% in Poland, 20% in Russia and 35% in the US. However due to underlying performance of certain of the Company’s subsidiaries the Company determined that an additional non cash valuation allowance for deferred tax assets of $61.3 million was required and took the charge during the year. Additionally, the Company did not recognize a tax asset for losses at these subsidiaries therefore the tax expense for the profitable entities was not offset by a tax benefit at loss making entities. The net increase in the Company’s uncertain income tax position, excluding the related accrual for interest and penalties, for 2011 resulted from additions for prior year tax positions of $5.0 million. As of December 31, 2011, the uncertain income tax position balance was $7.1 million. This resulted in a net tax charge even though on a consolidated basis the Company incurred a pre-tax loss.

 

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Equity in Net Earnings

Equity in net losses for the year ended December 31, 2011 include the Company’s proportional share of net income from its investment in the Moet Hennessey Russia Joint Venture for the period from January 1, 2011 to March 30, 2011 and Whitehall for the period from January 1, 2011 to February 7, 2011.

Statement of Liquidity and Capital Resources

During the year ended December 31, 2012, the Company’s primary sources of liquidity were credit facilities. The Company’s primary uses of cash were to fund its working capital requirements, service indebtedness and finance capital expenditures. The following table sets forth selected information concerning the Company’s consolidated cash flow during the periods indicated.

 

     Twelve
months
ended
December 31,
2012
    Twelve
months
ended
December 31,
2011

Restated
    Twelve
months
ended
December 31,
2010

Restated
 

Cash flow from / (used) in operating activities

   $ (98,952   $ 29,986      $ (28,117

Cash flow from / (used) in investing activities

     (8,715     (56,873     464,921   

Cash flow from / (used) in financing activities

     93,225        10,091        (426,840

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

Fiscal year 2012 cash flow

Net cash flow from operating activities

Net cash flow from operating activities represents net cash from operations and interest. Overall cash flow from operating activities decreased from cash generation of $30.0 million for the year ended December 31, 2011 to cash outflow of $99.0 million for the year ended December 31, 2012. For the year ended December 31, 2012 the Company had $82.7 million of cash inflows from accounts receivable collection as compared to an inflow of $74.6 million for the year ended December 31, 2011.

Overall working capital movements of accounts receivable, inventory, prepayments, other current assets, other accrued liabilities and payables and trade accounts payable used approximately $43.4 million of cash during the year ended December 31, 2012. Days sales outstanding (“DSO”) as of December 31, 2012 amounted to 54 days. The number of days in inventory as of December 31, 2012 amounted to 45 days. As of December 31, 2011 inventory days amounted to 81 days. However, in 2012 we changed methodology of calculating inventory rotation, so that it is more adequate to the nature of our business. Using new methodology days of inventory as at 31 December, 2011 amounted to 30 days. In addition, the ratio of our current assets to current liabilities, net of inventories, amounted to 0.32 as of December 31, 2012.

Net cash flow used in investing activities

Net cash flows used in investing activities represent net cash used to acquire fixed assets. Net cash outflows for the year ended December 31, 2012 was $8.7 million as compared to an outflow of $56.9 million for the year ended December 31, 2011. Outflow for the year ended December 31, 2011 represented the cash obligations paid as a result of the February 2011 acquisition of Whitehall of $36.8 million, net of cash acquired on consolidation, payment for the acquisition of the Kauffman Vodka trademark of $17.5 million, and payment of the remaining part of deferred consideration for Russian Alcohol Group of $5 million offset by proceeds received from disposal of the Moet Hennessy Joint Venture of $17.7 million.

Net cash flow from financing activities

Net cash flow from financing activities represents cash used for servicing indebtedness, borrowings under credit facilities and cash inflows from private placements and exercise of options. Net cash provided by financing activities was $93.2 million for the year ended December 31, 2012 as compared to an inflow of $10.1 million for the year ended December 31, 2011. The primary inflow in the year ended December 31, 2012 was $100 million of cash invested by Roust Trading Limited and its affiliates offset by cash used for repayment of part of Convertible Senior Notes and loans by the Company.

 

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Fiscal year 2011 cash flow

Net cash flow from operating activities

Net cash flow from operating activities represents net cash from operations and interest. Overall cash flow from operating activities increased from cash utilization of $28.1 million for the year ended December 31, 2010 to cash generation of $30.0 million for the year ended December 31, 2011. The primary factors contributing to this higher cash generation in 2011 were due to the factoring program entered into in Poland which greatly improved the cash flow cycle. For the year ended December 31, 2011 the Company had $74.6 million of cash inflows from accounts receivable collection as compared to an inflow of $25.4 million for the year ended December 31, 2010.

Overall working capital movements of accounts receivable, inventory and accounts payable provided approximately $85.8 million of cash during the year ended December 31, 2011. Days sales outstanding (“DSO”) as of December 31, 2011 amounted to 79 days. The number of days in inventory as of December 31, 2011 amounted to 81 days. In addition, the ratio of our current assets to current liabilities, net of inventories, amounted to 1.15 as of December 31, 2011.

Net cash flow used in investing activities

Net cash flows used in investing activities represent net cash used to acquire subsidiaries and fixed assets. Net cash outflows for the year ended December 31, 2011 was $56.9 million as compared to an inflow of $464.9 million for the year ended December 31, 2010. This outflow primarily represents the cash obligations paid as a result of the February 2011 acquisition of Whitehall of $36.8 million, net of cash acquired on consolidation, payment for the acquisition of the Kauffman Vodka trademark of $17.5 million, and payment of the remaining part of deferred consideration for Russian Alcohol Group of $5 million offset by proceeds received from disposal of the Moet Hennessy Joint Venture of $17.7 million.

Net cash flow from financing activities

Net cash flow from financing activities represents cash used for servicing indebtedness, borrowings under credit facilities and cash inflows from private placements and exercise of options. Net cash generated in financing activities was $10.1 million for the year ended December 31, 2011 as compared to an outflow of $426.8 million for the year ended December 31, 2010. The primary use in the year ended December 31, 2011 was repayment of loans by the Company offset by certain loans drawn in Russia. For details see Note 13 to the Condensed Consolidated Financial Statements.

The Company’s Future Liquidity and Capital Resources

CEDC’s consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. As discussed further in Note 13 to CEDC’s consolidated financial statements, the Company failed to pay $257.9 million principal due on the 2013 Convertible Senior Notes (“2013 Notes”). Under the terms of the 2013 Notes Indenture, the failure to pay principal when due constituted an Event of Default.

Chapter 11 Filing

On April 7, 2013, the Debtors filed Chapter 11 Cases under the Bankruptcy Code in the Bankruptcy Court in order to effectuate the Debtors’ prepackaged Plan of Reorganization. The Chapter 11 Cases were jointly administered under the caption “In re: Central European Distribution Corporation, et al.” Case No. 13-10738. The Plan of Reorganization was confirmed by the Bankruptcy Code on May 13, 2013. The Effective Date of the Plan was June 5, 2013.

The Company believes that this successful restructuring will improve its financial strength and flexibility and enable it to focus on maximizing the value of its strong brands and market position. The Chapter 11 Cases and the Plan of Reorganization which were approved by the Bankruptcy Court, eliminated approximately $665.2 million in debt from the Company’s balance sheet, did not involve the Company’s operating subsidiaries in Poland, Russia, Ukraine or Hungary and had no impact on their business operations. Operations in these countries are independently funded and continued to generate revenue during this process. All obligations to employees, vendors, credit support providers and government authorities were honored in the ordinary course without interruption.

Maturity of 2013 Notes and defaults under the 2016 Notes

On March 15, 2013, the Company failed to pay $257.9 million principal due on the 2013 Notes. Under the terms of the 2013 Notes Indenture, the failure to pay principal when due constituted an Event of Default (as defined in the 2013 Notes Indenture).

On March 18, 2013, the Company failed to pay $20.0 million due under the RTL Notes. As described above, the exchange of the RTL Notes for cash constituted an integral part of the proposed Plan of Reorganization.

Under Section 6.1(5)(a) of the 2016 Notes Indenture, the failure to pay principal when due on the 2013 Notes constituted an Event of Default under the 2016 Notes Indenture. Under Section 6.2 of the 2016 Notes Indenture, if an Event of Default occurs and is continuing, then the Trustee or holders of not less than 25% of the aggregate principal amount of the outstanding 2016 Notes may, and the Trustee upon request of such holders shall, declare the principal plus any accrued and unpaid interest on the 2016 Notes to be immediately due and payable. As of December 31, 2012, the Company had $380 million and €430 million (or approximately $567.1 million) of 2016 Notes outstanding.

Under Section 6.1(11)(a)(i) of the 2016 Notes Indenture, the commencement of a voluntary case to be adjudicated bankrupt under the bankruptcy laws constituted an Event of Default. Under Section 6.2 of the 2016 Notes Indenture, if such an Event of Default occurs and is continuing, then the principal plus any accrued and unpaid interest on the 2016 Notes shall be immediately due and payable. On April 4, 2013, the Company and CEDC FinCo completed their solicitation of consents to the Covenant Amendments, the Collateral and Guarantee Amendments and the Bankruptcy Waiver Amendments, each as defined the Amended and Restated Offering Memorandum, Consent Solicitation Statement and Disclosure Statement, dated March 8, 2013, filed as an exhibit to a tender offer statement on Schedule TO-I/A on March 11, 2013, as amended and supplemented by Supplement No. 1 to the Offering Memorandum, dated March 18, 2013, filed as an exhibit to the Form 8-K filed on March 19, 2013. Holders of the requisite principal amount of 2016 Notes approved the Covenant Amendments, the Collateral and Guarantee Amendments and the Bankruptcy Waiver Amendments. The Bankruptcy Waiver Amendments provided that a Chapter 11 filing by the Debtors would not result in automatic acceleration of the obligations of the Subsidiary Guarantors of the 2016 Notes.

While the filing of the Chapter 11 Cases resulted in the automatic acceleration of payment of accrued interest and principal by the Company and CEDC FinCo, any efforts to enforce the payment obligations against the Debtors under the Accelerated Financial Obligations were stayed under the Bankruptcy Code as a result of the filing of the Chapter 11 Cases in the Bankruptcy Court. Further, as a result of the Bankruptcy Waiver Amendments, the filing of the Chapter 11 Cases did not result in the automatic acceleration of payment obligations by the Subsidiary Guarantors. Following the effectiveness of the Plan of Reorganization, the 2013 Notes and the 2016 Notes have been cancelled by order of the Bankruptcy Court and no amounts remain outstanding.

 

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Future Liquidity and Capital Resources

Notwithstanding the foregoing, we believe that cash on hand, cash from operations and available credit facilities will be sufficient to fund our anticipated cash requirements for working capital purposes and normal capital expenditures, and that we will remain in compliance with the financial covenants contained in our debt agreements, for at least the next twelve months. The Company’s cash flow forecasts used in making this determination include the assumption that certain credit and factoring facilities that are coming due in 2013 will be renewed to manage the Company’s working capital needs.

Financing Arrangements

Bank Facilities

As of December 31, 2012, the Company has outstanding liability of € 28.1 (€29.6 including accrued interest) million ($37.1 million) from the term loans from Alfa-Bank, Bank Zenit and Raiffeisenbank drawn by Whitehall:

 

   

The loan agreement with Alfa-Bank, dated July 22, 2008, matures on October 18, 2014. The credit limit under this agreement is €20.0 million ($26.4 million). The loan as of December 31, 2012 consists of eleven open tranches released between September 26, 2012 and December 27, 2012, and are repayable between March 26, 2013 and September 27, 2013. As of December 31, 2012, the Company had outstanding liability of €13.1 (€14.0 including accrued interest) million ($17.3 million) from this term loan.

 

   

The loan agreement with Bank Zenit, dated August 16, 2012, matures on April 25, 2014. The credit limit under this agreement is €10.0 million ($13.2 million). The loan as of December 31, 2012 consists of four open tranches released between August 16, 2012 and October 26, 2012, and are repayable between January 25, 2013 and March 15, 2013. These tranches were repaid and new tranches were released after year end. As of December 31, 2012, the Company had outstanding liability of €10.0 (€10.3 including accrued interest) million ($13.2 million) from this term loan.

 

   

The loan agreement with Raiffeisenbank, dated October 26, 2012, matures on September 30, 2013. The credit limit under this agreement is €5.0 million ($6.6 million). This loan has financial covenants that need to be met. These financial covenants will be calculated once statutory financial statements are completed. There is a risk that financial covenants related to this loan have not been met as of December 31, 2012. The loan as of December 31, 2012 consists of four open tranches released between October 26, 2012 and November 20, 2012, and are repayable on September 30, 2013. As of December 31, 2012, the Company had outstanding liability of €5.0 (€5.3 including accrued interest) million ($6.6 million) from this term loan.

The aforementioned loans drawn by Whitehall are guaranteed by Whitehall companies. The loan agreement with Alfa-Bank and with Bank Zenit are secured by the Company’s inventory. Total limit of bank debt for Whitehall companies under those loans is €28.0 ($36.9) million for Alfa-Bank and €30.0 ($39.6) for Raiffeisenbank. Limit for Alfa-Bank was exceeded by €0.1 ($0.13) million, however Alfa-Bank has not requested for payment of any part of this loan and the outstanding balance was reduced by Whitehall below the maximum allowable amount subsequent to December 31, 2012.

 

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As of December 31, 2012, the Company has outstanding term loans of 2,696.1 (2,702.0 including accrued interest) million Russian rubles ($88.7 million) from MKB Bank, Alfa-Bank, Sberbank and Grand Invest Bank, all drawn by Russian Alcohol Group, as well as, an overdraft facility from Nomos-Bank and an overdraft facility from Sberbank drawn by Bravo Premium:

 

   

The loan agreement with MKB Bank, dated July 19, 2012, matured on February 25, 2013 and was fully repaid. As of December 31, 2012, the Company had outstanding liability of 900.0 (903.5 including accrued interest) million Russian rubles ($29.6 million) from this term loan. This loan was secured by inventory.

 

   

The loan agreement with Alfa-Bank, dated July 25, 2012, matured on February 28, 2013 and was fully repaid. As of December 31, 2012, the Company has outstanding liability of 724.0 (725.6 including accrued interest) million Russian rubles ($23.8 million) from this term loan.

 

   

The two loan agreements with Grand Invest Bank, dated November 25, 2011 and December 19, 2012, mature on November 22, 2013. These loans have turnover clauses that need to be met. As of December 31, 2012, the Company has outstanding liability of 350.0 million Russian rubles ($11.5 million) from these term loans. Production plant of Parliament is a security for these loans.

 

   

The loan agreement with Sberbank dated November 23, 2012, matures on November 22, 2013. As of December 31, 2012 outstanding debt is 248.0 (248.8 including accrued interest) million Russian rubles ($8.2 million). This loan is secured by property, equipment, land, guarantees and inventory. There are financial covenants related to this loan, and they were all met.

 

   

The overdraft agreement with Nomos-Bank, dated December 24, 2012, matured on March 7, 2013 and was repaid. The credit limit under this agreement was 500.0 million Russian rubles ($16.4 million). As of December 31, 2012, the loan was utilized in the amount of 459.1 million Russian rubles ($15.1 million).

 

   

The overdraft agreement with Sberbank, dated February 6, 2012, matured on February 5, 2013 and was fully paid. The credit limit under this agreement is 60.0 million Russian rubles ($2.0 million). This loan is secured by fixed assets. As of December 31, 2012, the Company has outstanding liability in the amount of 15.0 million Russian rubles ($0.5 million).

As of December 31, 2012 Bols Hungary had overdraft facility dated August 2, 2012, matures on August 1, 2013. The credit limit under this agreement is 500.0 million Hungarian forint ($2.3 million). As of December 31, 2012, the loan was utilized in the amount 449.9 million Hungarian forint ($2.1 million). The loan is secured by inventory and receivables.

As of December 31, 2012, the liabilities from factoring with recourse amount to $8.6 million Polish zlotys ($2.8 million) and are included in the short term bank loan in the balance sheet described in Note 4.

Senior Secured Notes due 2016

On December 2, 2009, the Company issued and sold $380 million 9.125% Senior Secured Notes due 2016 and €380 million 8.875% Senior Secured Notes due 2016 (the “2016 Notes”) in an offering to institutional investors that was not required to be registered with the SEC. The Company used a portion of the net proceeds from the 2016 Notes to redeem the Company’s outstanding 2012 Notes, having an aggregate principal amount of €245,440,000 on January 4, 2010. The remainder of the net proceeds from the 2016 Notes was used to (i) purchase Lion Capital’s remaining equity interest in Russian Alcohol by exercising the Lion Option and the Co-Investor Option, pursuant to the terms and conditions of the Lion Option Agreement and the Co-Investor Option Agreement, respectively (ii) repay all amounts outstanding under the Russian Alcohol credit facilities; and (iii) repay certain other indebtedness.

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

The 2016 Notes are guaranteed on a senior basis by certain of the Company’s subsidiaries. We are required to ensure that subsidiaries representing at least 85% of our consolidated EBITDA, as defined in the indenture, guarantee the notes. The notes are secured, directly or indirectly, by a variety of our and our subsidiary’s assets, including shares of the issuer of the notes and subsidiaries in Poland, Cyprus, Russia and Luxembourg, certain intercompany loans made by the issuer of the notes and our Russian finance company in connection with the issuance of the notes, trademarks related to the Soplica brand registered in Poland and the European Union trademarks in the Parliament brand registered in Germany, and bank accounts over $5.0 million. We have also provided mortgages over our Polmos and Bols production plants and the Russian Alcohol Siberian and Topaz Distilleries. The indenture governing the 2016 Notes contains certain restrictive covenants, including covenants limiting the Company’s ability to: incur or guarantee additional debt; make certain restricted payments; transfer or sell assets; enter into transactions with affiliates; create certain liens; create restrictions on the ability of restricted subsidiaries to pay dividends or other payments; issue guarantees of indebtedness by restricted subsidiaries; enter into sale and leaseback transactions; merge, consolidate, amalgamate or combine with other entities; designate restricted subsidiaries as unrestricted subsidiaries; and engage in any business other than a permitted business. In addition, in the event of a change of control (as that term is used in our indenture), we would be required to offer to repay the outstanding indebtedness under the 2016 Notes at a price equal to 101% of the aggregate principal amount thereof.

 

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Under Section 6.1(5)(a) of the 2016 Notes Indenture, the failure to pay principal when due on the 2013 Notes constituted an Event of Default under the 2016 Notes Indenture. Under Section 6.2 of the 2016 Notes Indenture, if an Event of Default occurs and is continuing, then the Trustee or holders of not less than 25% of the aggregate principal amount of the outstanding 2016 Notes may, and the Trustee upon request of such holders shall, declare the principal plus any accrued and unpaid interest on the 2016 Notes to be immediately due and payable.

Under Section 6.1(11)(a)(i) of the 2016 Notes Indenture, the commencement of a voluntary case to be adjudicated bankrupt under the bankruptcy laws constituted an Event of Default. Under Section 6.2 of the 2016 Notes Indenture, if such an Event of Default occurs and is continuing, then the principal plus any accrued and unpaid interest on the 2016 Notes shall be immediately due and payable. On April 4, 2013, the Company and CEDC FinCo completed their solicitation of consents to the Covenant Amendments, the Collateral and Guarantee Amendments and the Bankruptcy Waiver Amendments. Holders of the requisite principal amount of 2016 Notes approved the Covenant Amendments, the Collateral and Guarantee Amendments and the Bankruptcy Waiver Amendments. The Bankruptcy Waiver Amendments provided that a Chapter 11 filing by the Debtors would not result in automatic acceleration of the obligations of the Subsidiary Guarantors of the 2016 Notes.

While the filing of the Chapter 11 Cases resulted in the automatic acceleration of payment of accrued interest and principal by the Company and CEDC FinCo, any efforts to enforce the payment obligations against the Debtors under the Accelerated Financial Obligations were under the Bankruptcy Code as a result of the filing of the Chapter 11 Cases in the Bankruptcy Court. Further, as a result of the Bankruptcy Waiver Amendments, the filing of the Chapter 11 Cases did not result in the automatic acceleration of payment obligations by the Subsidiary Guarantors.

The Company addressed this default under the 2016 Notes Indenture through the Plan of Reorganization, which cancelled all outstanding 2016 Notes.

Convertible Senior Notes due 2013

On March 15, 2013, the Company failed to pay $257.9 million principal due on the 2013 Notes. Under the terms of the 2013 Notes Indenture, the failure to pay principal when due constituted an Event of Default (as defined in the 2013 Notes Indenture). The Company addressed the maturity of the 2013 Notes through the Plan of Reorganization, which cancelled all outstanding 2013 Notes.

RTL Notes

On May 7, 2012, the Company issued $70 million principal amount of senior notes due March 18, 2013, bearing an interest rate of 3.00% to Russian Standard Bank, an affiliate of Russian Standard Corporation. The RTL Notes were not secured or guaranteed. Pursuant to the terms of the RTL Credit Facility $50 million of the $70 million of RTL Notes was converted into the RTL Credit Facility. Following conversion, $20 million remained outstanding under the remaining RTL Notes, which matured on March 18, 2013. The Company addressed the maturity of the RTL Notes through the Plan of Reorganization, which cancelled all outstanding RTL Notes.

RTL Credit Facility

CEDC and RTL entered into the RTL Credit Facility on March 1, 2013, with effect from February 25, 2013. Pursuant to the terms of the RTL Credit Facility, $50 million aggregate principal amount of the RTL Notes was converted into a new term loan from RTL to CEDC in an aggregate principal amount of $50 million.

The RTL Credit Facility was cancelled by the effectiveness of the Plan of Reorganization.

 

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Capital Expenditure

Our net capital expenditure on tangible fixed assets for the year ended December 31, 2012, 2011, and 2010 was $9.4 million, $15.1 million and $6.2 million, respectively. Capital expenditures during the year ended December 31, 2012, 2011 and 2010 were used primarily for production equipment and fleet.

We have estimated that capital expenditure for 2013 will be approximately $20 million, for 2014 approximately $15 million and approximately $9 million per year for next 3 years. Capital expenditure in 2013-2014 is expected to be used for SAP implementation and current maintenance of tangible fixed assets. A substantial portion of these future capital expenditure amounts are discretionary, and we may adjust spending in any period according to our needs. We currently intend to finance all of our capital expenditure through cash generated from operating activities.

Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2012:

 

     Payments due by period*  
     Total      Less than
1 year
     1-3
years
     3-5
years
     More than
5 years
 
     (unaudited)  
     ($ in thousands)  

Long-term debt obligations

   $ 0       $ 0       $ 0       $ 0       $ 0   

Interest on long-term debt

     0         0         0         0         0   

Short-term debt obligations

     1,405,640         1,405,640         0         0         0   

Interest on short-term debt

     26,473         26,473         0         0         0   

Operating leases

     63,046         14,882         26,782         18,602         2,780   

Capital leases

     1,228         729         499         0         0   

Contracts with suppliers

     8,274         8,274         0         0         0   

Short-term FIN 48 liabilities

     4,195         4,195         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,508,856       $ 1,460,193       $ 27,281       $ 18,602       $ 2,780   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Does not affect the cancellation of debt and issuance of New Notes pursuant to the Plan of Reorganization.

Remaining FIN 48 liabilities are excluded from the contractual obligations table because the Company cannot make a reasonably reliable estimate of the period of cash settlement with the respective taxing authority.

Effects of Inflation and Foreign Currency Movements

Actual inflation in Poland was 2.4% in 2012, compared to inflation of 4.6% in 2011. In Russia and Hungary respectively, the actual inflation for 2012 was at 6.6% and 5.0%, compared to actual inflation of 6.1% and 4.1% in 2011.

 

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

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.

As at December 31, 2012 the Company had borrowing including its Convertible Notes due 2013 and Senior Secured Notes due 2016 that are denominated in U.S. dollars and euros, which have been lent to its operations where the functional currency is the Polish zloty and Russian ruble. The effect of having debt denominated in currencies other than the Company’s functional currencies is to increase or decrease the value of the Company’s liabilities on that debt in terms of the Company’s functional currencies when those functional currencies depreciate or appreciate in value respectively. As a result of this, the Company is exposed to gains and losses on the remeasurement 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 with accrued interests
as at December 31, 2012
     Pre-tax impact of a
1% movement in
exchange rate
 

USD-Polish zloty

     $386.9 million         $3.9 million gain/loss   

USD-Russian ruble

     $267.3 million         $2.7 million gain/loss   

EUR-USD

     €433.2 million or approximately $571.3 million         $5.7 million gain/loss   

EUR-Russian ruble

     €29.6 million or approximately $39.0 million         $0.4 million gain/loss   

The 2013 Notes and 2016 Notes were cancelled pursuant to the Plan of Reorganization. The New Notes are denominated in U.S. dollars.

Critical Accounting Policies and Estimates

General

The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of net sales, expenses, assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions.

Revenue Recognition

Revenues of the Company include sales of its own produced spirit brands, imported wine, beer and spirit brands as well as other third party alcoholic products purchased locally, the sale of each of these revenues streams are all processed and accounted for in the same manner. For all of its sources of revenue, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery of product has occurred, the sales price charged is fixed or determinable and collectability is reasonably assured. This generally means that revenue is recognized when title to the products are transferred to our customers. In particular, title usually transfers upon shipment to or receipt at our customers’ locations, as determined by the specific sales terms of the transactions.

Sales are stated net of sales tax (VAT) and reflect reductions attributable to consideration given to customers in various customer incentive programs, including pricing discounts on single transactions, volume discounts, promotional listing fees and advertising allowances, cash discounts and rebates. Net sales revenue is presented net of excise tax.

Accounts Receivable

Accounts receivables are recorded based on the invoice price, inclusive of VAT (sales tax), and where a delivery note has been signed by the customer and returned to the Company. The allowances for doubtful accounts are based on our experience with past due accounts, collectability, history of write-offs, aging of accounts receivable, our analysis of customer data and our relationships with and the economic status of our customers. Individual trade receivables are provided against when management deems them not to be fully collectable. The Company typically does not provide for past due amounts due from large international retail chains (hypermarkets and supermarkets) as there have historically not been any issues with collectability of these amounts. When a trade account receivable is deemed uncollectible, the balance is charged off against the allowance for doubtful accounts.

 

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Revenue Dilution

As part of normal business terms with customers, the Company provides for additional discounts and rebates off our standard list price for all of the products we sell. These revenue reductions are typically associated with annual or quarterly purchasing levels as well as payment terms. These rebates are divided into on-invoice and off-invoice discounts. The on-invoice reductions are presented on the sales invoice and deducted from the invoice gross sales value. The off-invoice reductions are calculated based on the analysis performed by management and are provided for in the same period the related sales are recorded. Discounts or fees that are subject to contractual based term arrangements are amortized over the term of the contract. For the years ended December 31, 2012, 2011 and 2010, the Company recognized $112.1 million, $149.9 million and $184.2 million of off invoice rebates as a reduction to net sales, respectively.

Certain sales contain customer acceptance provisions that grant a right of return on the basis of either subjective criteria or specified objective criteria. Where appropriate a provision is made for product return, based upon a combination of historical data as well as depletion information received from our larger clients. The Company’s policy is to closely monitor inventory levels with key distribution customers to ensure that we do not create excess stock levels in the market which would result in a return of sales in the future. Historically sales returns from customers have averaged less than 1% of our net sales revenue.

Goodwill

Goodwill and certain intangible assets having indefinite lives are not subject to amortization. Their book values are tested annually for impairment, 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. Fair value measurement techniques, such as the discounted cash flow methodology, are utilized to assess potential impairments. The testing of goodwill is performed at each reporting unit level. The Company performs a two-step test to compare the carrying amount of an asset to its fair value. If the first stage does not indicate that the carrying values of the reporting unit exceed its fair values, the second stage is not required. When the first stage indicates potential impairment, the Company completes the second stage of the impairment test and compares the implied fair value of the reporting units’ goodwill to the corresponding carrying value of goodwill. See Note 9 to the Consolidated Financial Statements for further details.

Intangible assets other than goodwill

Intangible assets with an indefinite life are not amortized but are reviewed at least annually for impairment or more frequently, if facts and circumstances indicate such need. Intangible assets consist primarily of acquired trademarks. The Company has acquired trademark rights to various brands, which were capitalized as part of the purchase price allocation process in connection with acquisitions of Bols, Polmos Bialystok, Parliament and Russian Alcohol. These trademarks include Soplica, Żubrówka, Absolwent, Royal, Palace, Parliament, Green Mark, Zhuravli, Kauffman Vodka, Urozhay and the trademark rights to Bols Vodka in Poland and Hungary. 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 order to support value of trademarks the Company calculates the fair value of trademarks using a discounted cash flow approach based on five year forecast discounted to present value. See Note 8 for further details.

Additional intangible assets include the valuation of customer contracts arising as a result of acquisitions, these intangible assets are amortized over their estimated useful life.

Impairment of long lived assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows the asset is deemed to be impaired. An impairment charge is recognized for the amount by which the carrying amount of an asset exceeds its estimated fair value.

 

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Income Taxes and Deferred Taxes

The provision for income taxes is determined using the liability method. Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the financial reporting basis and the tax basis of existing assets and liabilities. The tax rate used to determine the deferred tax assets and liabilities is the enacted tax rate for the year and manner in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. Provision is made currently for taxes payable on remittances of overseas earnings; no provision is made for taxes on overseas retained earnings that are deemed to be permanently reinvested.

The Company uses a comprehensive model to recognize, measure, present and disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on an income tax return. The Company recognizes interest expense and penalties related to unrecognized tax benefits within income tax expense.

Legal Contingencies

We are involved in various lawsuits, claims, investigations and proceedings that arise in the ordinary course of business. We record a provision for a liability when we believe that it is both probable that a liability has been incurred and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. We review these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and updated information. Litigation is inherently unpredictable and is subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, it could have a material impact on our results of operations, financial position and cash flows. See Note 16 to the Consolidated Financial Statements for a further discussion of litigation and contingencies.

Accounting for Business Combinations

Effective January 1, 2009, all business combinations are accounted for in accordance with ASC Topic 805 “Business Combinations.”

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 was suspended and all of the employees were terminated. In 2011 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. In the consolidated balance sheet as of December 31, 2011 the fixed assets of Tula of $0.7 million were presented separately as assets held for sale.

The Company was unsuccessful in looking for a buyer of Tula’s assets. The Company’s management expects no future benefits from these assets and as a result the impairment loss was recognized in the amount of RUR 21.7 million ($0.7 million) The value of the assets in the consolidated balance sheet as of December 31, 2012 is $0 million.

Involvement of the Company in variable interest entities (“VIEs”) and continuing involvement with transferred financial assets.

As of 31 December, 2012 and 31 December 2011, the Company was not involved in any variable interest entities.

Share Based Payments

The Company recognizes stock-based compensation costs for its share-based options, measured at the fair value of each award at the time of grant, as an expense over the vesting period of the instrument. Determining the fair value of share-based awards at the grant date requires judgment, including estimating the expected term that 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.

See Note 17 to our Consolidated Financial Statements for more information regarding stock-based compensation.

Recently Issued Accounting Pronouncements

In March 2013 the FASB issued two Accounting Standards Updates (ASUs) on EITF consensuses it ratified at its 31 January 2013 meeting. ASU 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date, requires a reporting entity that is jointly and severally liable to measure the obligation as the sum of the amount the entity has agreed with co-obligors to pay and any additional amount it expects to pay on behalf of a co-obligor. ASU 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity, specifies that a cumulative translation adjustment (CTA) should be released into earnings when an entity ceases to have a controlling financial interest in a subsidiary or group of assets within a consolidated foreign entity and the sale or transfer results in the complete or substantially complete liquidation of the foreign entity. For sales of an equity method investment that is a foreign entity, a pro rata portion of CTA attributable to the investment would be recognized in earnings upon sale of the investment. When an entity sells either a part or all of its investment in a consolidated foreign entity, CTA would be recognized in earnings only if the sale results in the parent no longer having a controlling financial interest in the foreign entity. CTA would be recognized in earnings in a business combination achieved in stages (i.e., a step acquisition). The both ASU will be effective for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. The Company will analyze and implement requirements of ASU 2013-04 and 2013-05 for the first quarter of 2014.

In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income to improve the reporting of reclassifications out of AOCI. The ASU sets requirements for presentation for significant items reclassified to net income in their entirety during the period and for items not reclassified to net income in their entirety during the period (e.g., pension amounts that are capitalized in inventory). It requires companies to present information about reclassifications out of AOCI in one place because the FASB believes it’s important for users of the financial statements to have a road map about the effect of reclassifications on the financial statements. It also requires companies to present reclassifications by component when reporting changes in AOCI balances. The new guidance does not change the requirement to present for annual periods items of net income and other comprehensive income, and totals for net income, OCI and comprehensive income in a single continuous statement or two consecutive statements. It also does not change the requirement to report a total for comprehensive income in a single continuous statement or two consecutive statements in interim periods. Public companies must make the disclosures prospectively in fiscal years and interim periods within those years beginning after December 15, 2012. The Company will analyze and implement requirements of ASU 2013-02 for the first quarter of 2013.

In October 2012, the FASB issued ASU 2012-04, Technical Corrections and Improvements. The ASU makes certain technical corrections and clarifications and improvements to the Codification. Additionally, the ASU includes amendments that identify when the use of fair value should be linked to the definition of fair value in Topic 820. ASU 2012-04 is effective for fiscal periods beginning after December 15, 2012. The Company will analyze and implement requirements of ASU 2012-04 for the first quarter of 2013.

 

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In December 2011, the FASB issued ASU 2011-11—Disclosures about Offsetting Assets and Liabilities (ASC 210). It requires new disclosures for recognized financial instruments and derivative instruments that are either: (1) offset on the balance sheet in accordance with the offsetting guidance in ASC 210-20-45 or ASC 815-10-45 (collectively, the offsetting guidance) or (2) subject to an enforceable master netting arrangement or similar agreement, regardless of whether they are offset in accordance with the offsetting guidance. Recognized assets and liabilities within the scope of the ASU include financial instruments such as derivatives, repurchase agreements, reverse repurchase agreements and securities lending and borrowing arrangements subject to master netting arrangements. Financial instruments outside the scope of the ASU include loans and customer deposits at the same institution (unless they are offset in the statement of financial position) and financial instruments that are subject only to a collateral agreement (e.g., collateralized loans). Furthermore, in January 2013 the FASB issued ASU 2013-01 that clarifies provisions of ASU 2011-11. The Update clarifies that the scope of ASU 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. Both, ASU 2011-11 and ASU 2013-01 are effective for interim and annual reporting periods beginning after 1 January 2013. The Company does not expect the adoption to have a material impact on its results of operations, financial condition or disclosures.

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

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”), which is effective for annual reporting periods beginning after December 15, 2011. This guidance amends certain accounting and disclosure requirements related to fair value measurements. Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative

 

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discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. The Company adopted ASU 2011-04 during the first quarter of the current fiscal year. The adoption of ASU 2011-04 did not have a material impact on the Company’s consolidated financial statements other than disclosures related to fair value measurements.

In April 2011, the FASB issued ASU 2011-03 Transfers and Servicing (Topic 860), Reconsideration of Effective Control for Repurchase Agreements. It changes the rules for determining when these transactions should be accounted for as financings. The new rules eliminate from the assessment of effective control the requirement that the transferor has the ability to repurchase or redeem the financial asset that was transferred. Under the new rules, the amount of cash collateral received by the transferor will be irrelevant when determining if the repo should be accounted for as a sale. ASU 2011-03 is effective for annual reporting periods beginning after December 15, 2011. The Company adopted ASU 2011-03 during the current fiscal year. The adoption of ASU 2011-03 did not have a material impact on the Company’s consolidated financial statements.

 

Item 7A. Quantitative and Qualitative Disclosure about Market Risk

Foreign currency exchange rate risk

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

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

As at December 31, 2012 the Company borrowings including its Convertible Notes due 2013 and Senior Secured Notes due 2016 that are denominated in U.S. dollars and euros, which have been lent to its operations where the functional currency is the Polish zloty and Russian ruble. The effect of having debt denominated in currencies other than the Company’s functional currencies is to increase or decrease the value of the Company’s liabilities on that debt in terms of the Company’s functional currencies when those functional currencies depreciate or appreciate in value respectively. As a result of this, the Company is exposed to gains and losses on the remeasurement 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 with accrued interest
as at December 31, 2012
     Pre-tax impact of a
1% movement in
exchange rate
 

USD-Polish zloty

     $386.9 million         $3.9 million gain/loss   

USD-Russian ruble

     $267.3 million         $2.7 million gain/loss   

EUR-USD*

     €433.2 million or approximately $571.3 million         $5.7 million gain/loss   

EUR-Russian ruble

     €29.6 million or approximately $39.0 million         $0.4 million gain/loss   

 

* Reflects debt outstanding prior to giving effect to the Plan of Reorganization.

 

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Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements:

 

Reports of Independent Registered Public Accounting Firm—Ernst & Young Audit sp. z o.o .

     60   

Report of Independent Registered Public Accounting Firm—PricewaterhouseCoopers Sp. z o.o.

     62   

Consolidated Balance Sheets at December 31, 2012 and 2011

     63   

Consolidated Statements of Operations and Comprehensive Loss for the years ended December  31, 2012, 2011 and 2010

     64   

Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, 2012, 2011 and 2010

     65   

Consolidated Statements of Cash Flows for the years ended December  31, 2012, 2011 and 2010

     66   

Notes to Consolidated Financial Statements

     67   

1.

  

Organization and Significant Accounting Policies

     67   

2.

  

Restatement of consolidated financial statements

     75   

3.

  

Agreement with Roust Trading

     85   

4.

  

Sale of accounts receivable

     86   

5.

  

Allowances for Doubtful Accounts

     87   

6.

  

Inventory

     87   

7.

  

Other current assets

     87   

8.

  

Intangible Assets other than Goodwill

     88   

9.

  

Goodwill

     89   

10.

  

Property, plant and equipment

     90   

11.

  

Assets and liabilities of business held for sale

     90   

12.

  

Equity method investments in affiliates

     90   

13.

  

Borrowings

     90   

14.

  

Accrued liabilities

     93   

15.

  

Income Taxes

     94   

16.

  

Commitments and Contingent Liabilities

     96   

17.

  

Stock Option Plans and Warrants

     98   

18.

  

Stockholders’ Equity

     101   

19.

  

Related party transactions

     102   

20.

  

Interest income / (expense), net

     103   

21.

  

Other financial income / (expense), net

     103   

22.

  

Other non-operating income / (expense). net

     103   

23.

  

Earnings/(loss) per share

     103   

24.

  

Fair value measurements

     104   

25.

  

Operating segments

     105   

26.

  

Quarterly financial information (Unaudited)

     106   

27.

  

Geographic Data

     107   

28.

  

Subsequent events

     107   

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Central European Distribution Corporation

We have audited the accompanying consolidated balance sheets of Central European Distribution Corporation (“CEDC”) as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive loss, consolidated statement of changes in stockholders’ equity, and consolidated statements of cash flows for each of the two years in the period ended December 31, 2012. These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Central European Distribution Corporation as of December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, the consolidated financial statements included in the Form 10-K/A dated October 4, 2012 have been restated to correct certain errors resulting from improper accounting for deferred tax assets and liabilities relating to the acquisition of the Russian Alcohol Group in 2009.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Central European Distribution Corporation’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 17, 2013 expressed an adverse opinion thereon.

 

/s/ Ernst & Young Audit sp. z o.o.
Warsaw, Poland
June 17, 2013

 

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Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

The Board of Directors and Shareholders of Central European Distribution Corporation

We have audited Central European Distribution Corporation’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Central European Distribution Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment. Management has identified material weaknesses in controls related to the company’s financial statement close process, development of certain management estimates, controls over recording retroactive trade rebates and trade marketing refunds, implementation of the company’s policy on compliance with applicable laws, design of its segregation of users’ access to IT systems, controls over the communication of anti-fraud policies and procedures, controls over contract management, controls over tracking, maintaining and reconciling of executive compensation and controls over completeness and accuracy of the income tax calculations, tax provision and deferred income taxes.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2012 and 2011 consolidated financial statements of Central European Distribution Corporation. These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2012 and 2011 consolidated financial statements and this report does not affect our report dated June 17, 2013, which expressed an unqualified opinion on the 2011 financial statements and included an explanatory paragraph regarding Central European Distribution Corporation’s ability to continue as a going concern in 2012 and 2011.

In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Central European Distribution Corporation has not maintained effective internal control over financial reporting as of December 31, 2012, based on the COSO criteria.

/s/ Ernst & Young Audit sp. z o.o.

Warsaw, Poland

June 17, 2013

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Central European Distribution Corporation

In our opinion, the consolidated statements of operations and comprehensive loss, changes in stockholders’ equity and cash flows for year ended December 31, 2010 present fairly, in all material respects, the results of operations and cash flows of Central European Distribution Corporation (“CEDC” or the “Company”) and its subsidiaries, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

As discussed in Note 2, the Company has restated its 2010 financial statements to correct for errors.

 

/s/ PricewaterhouseCoopers Sp. z o.o.
Warsaw, Poland

March 1, 2011, except for the effects of the restatement discussed in Note 2 (not presented herein) to the consolidated financial statements appearing under Item 8 of the Company’s 2011 amended annual report on Form 10-K/A, as to which the date is October 4, 2012, and except for the effects of the restatement discussed in Note 2 to the consolidated financial statements presented herein, as to which the date is June 17, 2013.

 

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CENTRAL EUROPEAN DISTRIBUTION CORPORATION

CONSOLIDATED BALANCE SHEETS

Amounts in columns expressed in thousands

(except share and per share information)

 

     December 31,
2012
    December 31,
2011

(Restated
see Note 2)
 
ASSETS     

Current Assets

    

Cash and cash equivalents

   $ 84,729      $ 94,410   

Accounts receivable, net of allowance for doubtful accounts at December 31, 2012 of $25,250 and at December 31, 2011 of $24,510

     352,089        410,866   

Inventories

     174,714        117,690   

Prepaid expenses

     18,099        16,538   

Income taxes receivable

     13,828        10,035   

Other current assets

     92,421        12,985   

Deferred income taxes

     2,298        4,717   

Debt issuance costs

     13,645        2,962   
  

 

 

   

 

 

 

Total Current Assets

     751,823        670,203   

Intangible assets, net

     454,563        463,848   

Goodwill

     388,385        670,294   

Property, plant and equipment, net

     169,744        176,660   

Deferred income taxes

     3,037        0   

Debt issuance costs

     0        13,550   

Non-current assets held for sale

     0        675   
  

 

 

   

 

 

 

Total Non-Current Assets

     1,015,729        1,325,027   
  

 

 

   

 

 

 

Total Assets

   $ 1,767,552      $ 1,995,230   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Current Liabilities

    

Trade accounts payable

   $ 126,489      $ 144,797   

Bank loans and overdraft facilities

     130,655        85,762   

Obligations under Convertible Senior Notes

     256,922        0   

Obligations under Senior Secured Notes

     944,499        0   

Obligations under Debt Security

     70,000        0   

Deferred income taxes

     4,907        0   

Income taxes payable

     10,039        9,607   

Taxes other than income taxes

     197,135        189,515   

Other accrued liabilities

     88,573        48,208   

Current portions of obligations under capital leases

     729        1,109   
  

 

 

   

 

 

 

Total Current Liabilities

     1,829,948        478,998   

Long-term obligations under capital leases

     499        532   

Long-term obligations under Convertible Senior Notes

     0        304,645   

Long-term obligations under Senior Secured Notes

     0        932,089   

Long-term accruals

     700        2,000   

Long-term income taxes payable

     9,837        0   

Deferred income taxes

     94,034        95,352   

Commitments and contingent liabilities (Note 16)

    
  

 

 

   

 

 

 

Total Long-Term Liabilities

     105,070        1,334,618   

Temporary equity

     29,443        0   

Stockholders’ Equity

    

Common Stock ($0.01 par value, 120,000,000 shares authorized, 76,047,506 and 72,740,302 shares issued and outstanding at December 31, 2012 and December 31, 2011, respectively)

     760        727   

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

     0        0   

Additional paid-in-capital

     1,372,378        1,369,471   

Accumulated deficit

     (1,584,222     (1,220,984

Accumulated other comprehensive income

     14,325        32,550   

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

     (150     (150
  

 

 

   

 

 

 

Total Stockholders’ Equity

     (196,909     181,614   
  

 

 

   

 

 

 

Total Liabilities and Equity

   $ 1,767,552      $ 1,995,230   
  

 

 

   

 

 

 

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

 

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CENTRAL EUROPEAN DISTRIBUTION CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

Amounts in columns expressed in thousands

(except per share information)

 

     Year ended December 31,  
     2012     2011
(Restated
See Note 2)
    2010
(Restated
See Note 2)
 

Sales

   $ 1,745,315      $ 1,737,996      $ 1,563,100   

Excise taxes

     (929,642     (908,430     (860,969

Net sales

     815,673        829,566        702,131   

Cost of goods sold

     488,281        530,495        392,461   
  

 

 

   

 

 

   

 

 

 

Gross profit

     327,392        299,071        309,670   
  

 

 

   

 

 

   

 

 

 

Selling, general and administrative expenses

     282,848        262,175        235,412   

Gain on remeasurement of previously held equity interests

     0        (7,898     0   

Impairment charge

     372,899        1,057,819        131,849   
  

 

 

   

 

 

   

 

 

 

Operating loss

     (328,355     (1,013,025     (57,591
  

 

 

   

 

 

   

 

 

 

Non-operating income / (expense), net

      

Interest income / (expense), net

     (106,584     (110,158     (101,325

Other financial income / (expense), net

     99,273        (139,069     3,024   

Other non-operating income / (expense), net

     (15,875     (17,910     (13,879
  

 

 

   

 

 

   

 

 

 

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

     (351,541     (1,280,162     (169,771
  

 

 

   

 

 

   

 

 

 

Income tax benefit / (expense)

     (11,697     (37,512     13,861   

Equity in net income / (losses) of affiliates

     0        (7,946     13,386   
  

 

 

   

 

 

   

 

 

 

Net loss from continuing operations

     (363,238     (1,325,620     (142,524
  

 

 

   

 

 

   

 

 

 

Discontinued operations

      

Loss from operations

     0        0        (8,442

Income tax benefit

     0        0        37   
  

 

 

   

 

 

   

 

 

 

Loss on discontinued operations

     0        0        (8,405
  

 

 

   

 

 

   

 

 

 

Net loss attributable to the company

     (363,238     (1,325,620     (150,929
  

 

 

   

 

 

   

 

 

 

Net loss from operations per share of common stock, basic

   $ (4.74   $ (18.37   $ (2.03

Net loss from discontinued operations per share of common stock, basic

   $ 0.00      $ 0.00      $ (0.12
  

 

 

   

 

 

   

 

 

 

Net loss from operations per share of common stock, basic

   $ (4.74   $ (18.37   $ (2.15

Net loss from operations per share of common stock, diluted

   $ (4.74   $ (18.37   $ (2.03

Net loss from discontinued operations per share of common stock, diluted

   $ 0.00      $ 0.00      $ (0.12
  

 

 

   

 

 

   

 

 

 

Net loss from operations per share of common stock, diluted

   $ (4.74   $ (18.37   $ (2.15

Other comprehensive loss, net of tax:

      

Foreign currency translation adjustments

     (18,225     (32,514     (61,155
  

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to the company

   $ (381,463   $ (1,358,134   $ (212,084
  

 

 

   

 

 

   

 

 

 

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

 

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CENTRAL EUROPEAN DISTRIBUTION CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Amounts in columns expressed in thousands

(except per share information)

 

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

Balance at December 31, 2009 (As previously reported)

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

Cumulative effect of restatement of opening balance (see Note 2)

    0        0        0        0        0        (9,352     2,909        0        (6,443

Balance at December 31, 2009 (Restated)

    69,412      $ 694        246      $ (150   $ 1,296,391      $ 255,565      $ 85,903      $ 40,316      $ 1,678,719   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss for 2010

    0        0        0        0        0        (150,929     0        0        (150,929

Foreign currency translation adjustment

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss for 2010

    0        0        0        0        0        (150,929     (20,839     (40,316     (212,084

Common stock issued in connection with equity awards

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

Common stock issued in connection with acquisitions

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

Balance at December 31, 2010 (restated)

    70,753      $ 708        246      $ (150   $ 1,343,639      $ 104,636      $ 65,064      $ 0      $ 1,513,897   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss for 2011

    0        0        0        0        0        (1,325,620     0        0        (1,325,620

Foreign currency translation adjustments

    0        0        0        0        0        0        (32,514     0        (32,514
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss for 2011

    0        0        0        0        0        (1,325,620     (32,514     0        (1,358,134

Common stock issued in connection with equity awards

    90        1        0        0        2,676        0        0        0        2,677   

Common stock issued in connection with acquisitions

    1,897        18        0        0        23,156        0        0        0        23,174   

Balance at December 31, 2011 (restated)

    72,740      $ 727        246      $ (150   $ 1,369,471      $ (1,220,984   $ 32,550      $ 0      $ 181,614   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss for 2012

    0        0        0        0        0        (363,238     0        0        (363,238

Foreign currency translation adjustments

    0        0        0        0        0        0        (18,225     0        (18,225
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss for 2012

    0        0        0        0        0        (363,238     (18,225     0        (381,463

Common stock issued to Roust Trading Limited (see Note 3)

    3,000        30        0        0        0        0        0        0        30   

Common stock issued in connection with equity awards

    308        3        0        0        2,907        0        0        0        2,910   

Balance at December 31, 2012

    76,048      $ 760        246      $ (150   $ 1,372,378      $ (1,584,222   $ 14,325      $ 0      $ (196,909
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

65


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CENTRAL EUROPEAN DISTRIBUTION CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOW

Amounts in columns expressed in thousands

 

     Year ended December 31,  
     2012     2011
(Restated
see Note 2)
    2010
(Restated
see Note 2)
 

Cash flows from operating activities of continuing operations

      

Net loss

   $ (363,238   $ (1,325,620   $ (150,929

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

      

Net loss from discontinued operations

     0        0        8,405   

Depreciation and amortization

     20,377        19,718        16,947   

Deferred income taxes

     (3,605     39,042        (27,944

Unrealized foreign exchange (gains)/losses

     (93,772     138,845        (2,911

Cost of debt extinguishment

     0        0        14,114   

Stock options fair value expense

     2,953        2,605        3,206   

Dividends received

     0        0        10,859   

Equity (income) / loss in affiliates

     0        7,946        (13,386

Gain on fair value remeasurement of previously held equity interest

     0        (7,898     0   

Impairment charge

     372,899        1,057,819        131,849   

Impairments related to assets held for sale

     675        7,355        0   

Other non-cash items

     8,191        4,345        25,343   

Changes in operating assets and liabilities:

      

Accounts receivable

     82,651        74,606        25,399   

Inventories

     (46,155     (7,413     (4,024

Prepayments and other current assets

     (51,821     (2,357     1,966   

Trade accounts payable

     (32,526     16,519        (16,874

Other accrued liabilities and payables (including taxes)

     4,419        4,474        (50,137
  

 

 

   

 

 

   

 

 

 

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

     (98,952     29,986        (28,117

Cash flows from investing activities of continuing operations

      

Purchase of fixed assets

     (9,374     (15,094     (6,194

Proceeds from the disposal of fixed assets

     659        511        0   

Purchase of intangibles

     0        (693     0   

Changes in restricted cash

     0        0        481,419   

Purchase of trademarks

     0        (17,473     (6,000

Disposal of subsidiaries

     0        0        124,160   

Acquisitions of subsidiaries, net of cash acquired

     0        (24,124     (128,464
  

 

 

   

 

 

   

 

 

 

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

     (8,715     (56,873     464,921   

Cash flows from financing activities of continuing operations

      

Borrowings on bank loans and overdraft facility

     122,803        57,512        63,853   

Repayment of bank loans, overdraft facility and other borrowings

     (77,652     (47,417     (174,251

Repayment of long-term borrowings

     0        0        (19,098

Net borrowings of Senior Secured Notes

     0        0        67,561   

Repayment of Senior Secured Notes

     0        0        (367,954

Debt security, net of debt issuance cost of $838

     69,162        0        0   

Repayment of Convertible Senior Notes

     (50,392     0        0   

Issuance of shares in private placement

     29,870        0        0   

Decrease in short term capital leases payable

     (566     (76     (501

Proceeds from options exercised

     0        72        3,550   
  

 

 

   

 

 

   

 

 

 

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

     93,225        10,091        (426,840
  

 

 

   

 

 

   

 

 

 

Cash flows from discontinued operations

      

Net cash used in operating activities of discontinued operations

     0        0        2,806   

Net cash provided by investing activities of discontinued operations

     0        0        (330

Net cash used in, provided by financing activities of discontinued operations

     0        0        100   
  

 

 

   

 

 

   

 

 

 

Net cash used in discontinued operations

     0        0        2,576   
  

 

 

   

 

 

   

 

 

 

Adjustment to reconcile the change in cash balances of discontinued operations

     0        0        (2,576

Currency effect on brought forward cash balances

     4,761        (10,910     (14,287

Net decrease in cash

     (9,681     (27,706     (4,323

Cash and cash equivalents at beginning of period

     94,410        122,116        126,439   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 84,729      $ 94,410      $ 122,116   
  

 

 

   

 

 

   

 

 

 

Supplemental Schedule of Non-cash Investing Activities

      

Common stock issued in connection with investment in subsidiaries

   $ 0      $ 23,174      $ 41,344   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosures of cash flow information

      

Interest paid net of amount capitalized

   $ 101,633      $ 103,836      $ 111,535   

Income tax paid

   $ 5,750      $ 5,139      $ 29,544   
  

 

 

   

 

 

   

 

 

 

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

 

66


Table of Contents
1. Organization and Significant Accounting Policies

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 34.5 million nine-liter cases produced and distributed in 2012. 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 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.

Liquidity

These consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. As discussed further in Note 13 to CEDC’s consolidated financial statements, on March 15, 2013, the Company failed to pay $257.9 million principal due on the 2013 Convertible Senior Notes (“2013 Notes”). Under the terms of the 2013 Notes Indenture, the failure to pay principal when due constituted an Event of Default.

Under Section 6.1(5)(a) of the 2016 Notes Indenture, the failure to pay principal when due on the 2013 Notes constituted an Event of Default under the 2016 Senior Secured Notes (the “2016 Notes”) Indenture. Under Section 6.2 of the 2016 Notes Indenture, if an Event of Default occurs and is continuing, then the Trustee or holders of not less than 25% of the aggregate principal amount of the outstanding 2016 Notes may, and the Trustee upon request of such holders shall, declare the principal plus any accrued and unpaid interest on the 2016 Notes to be immediately due and payable.

On March 18, 2013, the Company failed to pay $20.0 million due under the RTL Notes (the “RTL Notes”).

Following the effectiveness of the Plan of Reorganization all amounts due by the Company under the 2013 Notes, the 2016 Notes, the RTL Notes and also $50.0 million of secured credit facility provided by RTL to CEDC pursuan