Form 10-Q

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

¨ (Do not check if a smaller reporting company)

Smaller Reporting Company

10-Q 1 d10q.htm FORM 10-Q Form 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009

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

FOR THE TRANSITION PERIOD FROM .

COMMISSION FILE NUMBER 0-24341

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.)


Two Bala Plaza, Suite #300, Bala Cynwyd, PA		19004
(Address of Principal Executive Offices)		(Zip code)

(610) 660-7817

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

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

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

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

The number of shares outstanding of each class of the issuer’s common stock as of November 6, 2009: Common Stock ($.01 par value) 58,211,236

INDEX


		PAGE
PART I	FINANCIAL INFORMATION

Item 1	Financial Statements

	Consolidated Condensed Balance Sheets as of September 30, 2009 (unaudited) and as of December 31, 2008	1

	Consolidated Condensed Statements of Income (unaudited) for the three and nine month periods ended September 30, 2009 and September 30, 2008	2

	Consolidated Condensed Statement of Changes in Stockholders’ Equity (unaudited) as of September 30, 2009 and as of December 31, 2008	3

	Consolidated Condensed Statements of Cash Flows (unaudited) for the nine month periods ended September 30, 2009 and September 30, 2008	4

	Notes to Consolidated Condensed Financial Statements (unaudited)	5-28

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3	Quantitative and Qualitative Disclosures about Market Risk	50

Item 4	Controls and Procedures	51

PART II	OTHER INFORMATION	52

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	52

Item 6	Exhibits	53

Signatures		54

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED)

Amounts in columns expressed in thousands

(except share information)


	September 30, 2009			December 31, 2008 (as adjusted)
ASSETS
Current Assets
Cash and cash equivalents	$	255,535		$	107,601
Accounts receivable, net of allowance for doubtful accounts of $52,597 and $22,156 respectively		408,948			430,683
Inventories		215,754			180,304
Prepaid expenses and other current assets		69,916			22,894
Deferred income taxes		30,361			24,386

Total Current Assets		980,514			765,868

Intangible assets, net		772,327			570,505
Goodwill, net		1,709,591			745,256
Property, plant and equipment, net		219,558			92,221
Deferred income taxes		48,897			12,886
Equity method investment in affiliates		63,164			189,243
Subordinated loans to affiliates		—			107,707

Total Non-Current Assets		2,813,537			1,717,818


Total Assets	$	3,794,051		$	2,483,686


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Trade accounts payable	$	191,621		$	234,948
Bank loans and overdraft facilities		161,350			109,552
Income taxes payable		5,302			7,227
Taxes other than income taxes		130,237			125,774
Other accrued liabilities		94,080			80,270
Current portions of obligations under capital leases		1,802			2,385
Deferred consideration		118,594			—

Total Current Liabilities		702,986			560,156

Long-term debt, less current maturities		364,573			170,510
Long-term obligations under capital leases		1,659			2,194
Long-term obligations under Senior Notes		649,973			633,658
Long-term deferred consideration		359,043			—
Long-term accruals		3,183			5,806
Deferred income taxes		209,589			106,485

Total Long Term Liabilities		1,588,020			918,653

Redeemable noncontrolling interests in Whitehall Group		22,705			33,642

Stockholders’ Equity
Common Stock ($0.01 par value, 80,000,000 shares authorized, 58,211,236 and 47,344,874 shares issued at September 30, 2009 and December 31, 2008, respectively)		582			473
Additional paid-in-capital		985,780			816,490
Retained earnings		359,799			186,588
Accumulated other comprehensive income / (loss)		112,070			(46,772	)
Less Treasury Stock at cost (246,037 shares at September 30, 2009 and December 31, 2008, respectively)		(150	)		(150	)

Total CEDC Stockholders’ Equity		1,458,081			956,629

Noncontrolling interests in subsidiaries		22,259			14,606

Total Equity		1,480,340			971,235


Total Liabilities and Stockholders’ Equity	$	3,794,051		$	2,483,686

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

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)

Amounts in columns expressed in thousands

(except per share information)


	Three months ended						Nine months ended
	September 30, 2009			September 30, 2008 (as adjusted)			September 30, 2009			September 30, 2008 (as adjusted)

Sales	$	577,287		$	586,038		$	1,407,475		$	1,536,964
Excise taxes		(187,188	)		(133,597	)		(437,379	)		(349,601	)
Net Sales		390,099			452,441			970,096			1,187,363
Cost of goods sold		260,269			336,609			659,408			901,577


Gross Profit		129,830			115,832			310,688			285,786


Operating expenses		80,040			62,992			198,664			164,635


Operating Income before fair value adjustments		49,790			52,840			112,024			121,151


Contingent consideration true-up		(15,000	)		—			(15,000	)		—
Gain on remeasurement of previously held equity interest		—			—			225,605			—
Impairment charge		—			—			(20,309	)		—

Operating Income		34,790			52,840			302,320			121,151


Non operating income / (expense), net
Interest (expense), net		(17,379	)		(16,550	)		(51,516	)		(42,822	)
Other financial income / (expense), net		58,112			(34,730	)		25,181			6,373
Amortization of deferred charges		(16,192	)		—			(27,423	)		—
Other non operating (expense), net		(319	)		(423	)		(8,961	)		(565	)


Income before taxes, equity in net income from unconsolidated investments and noncontrolling interests in subsidiaries		59,012			1,137			239,601			84,137

Income tax benefit / (expense)		(11,584	)		68			(46,359	)		(16,691	)
Equity in net earnings of affiliates		956			1,087			(17,013	)		1,989


Net income	$	48,384		$	2,292		$	176,229		$	69,435


Less: Net income attributable to noncontrolling interests in subsidiaries		47			657			2,185			2,486
Less: Net income attributable to redeemable noncontrolling interests in Whitehall Group		1,191			2,361			833			3,276


Net income /(loss) attributable to CEDC	$	47,146		($	726	)	$	173,211		$	63,673


Net income / (loss) per share of common stock, basic	$	0.85		($	0.02	)	$	3.41		$	1.48


Net income / (loss) per share of common stock, diluted	$	0.80		($	0.02	)	$	3.19		$	1.45

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

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN

STOCKHOLDERS’ EQUITY (UNAUDITED)

Amounts in columns expressed in thousands

(except per share information)


	Common Stock							Additional Paid-in Capital			Retained Earnings			Accumulated other comprehensive income			Non- controlling interest in subsidiaries			Total

	Common Stock			Treasury Stock

	No. of Shares	Amount		No. of Shares	Amount

Balance at December 31, 2008 (as reported)	47,345	$	473	246	($	150	)	$	803,703		$	188,595		($	46,772	)	$	14,606		$	960,455

Adoption of ASC 470-20	—		—	—		—			12,787			(2,007	)		—			—			10,780
Balance at December 31, 2008 (as adjusted)	47,345	$	473	246	($	150	)	$	816,490		$	186,588		($	46,772	)	$	14,606		$	971,235

Net income / (loss) for 2009	—		—	—		—			—			173,211			—			2,185			175,396
Foreign currency translation adjustment	—		—	—		—			—			—			158,842			(3,618	)		155,224

Comprehensive income for 2009	—		—	—		—			—			173,211			158,842			(1,433	)		330,620
Common stock issued in public placement	7,685		77	—		—			177,902			—			—			—			177,979
Common stock issued in connection with options	61		1	—		—			3,678			—			—			—			3,679
Common stock issued in connection with acquisitions	3,120		31	—		—			51,165			—			—			—			51,196
Acquisition of Russian Alcohol Group	—		—	—		—			—			—			—			50,000			50,000
Purchase of Russian Alcohol Group shares from noncontrolling interest	—		—	—		—			—			—			—			(30,000	)		(30,000	)
Purchase of Whitehall Group shares from noncontrolling interest	—		—	—		—			(20,195	)		—			—			—			(20,195	)
Gross up on trademarks in Parliament	—		—	—		—			—			—			—			15,993			15,993
Purchase of Parliament Group shares from noncontrolling interest	—		—	—		—			(43,260	)		—			—			(26,907	)		(70,167	)
Balance at September 30, 2009	58,211	$	582	246	($	150	)	$	985,780		$	359,799		$	112,070		$	22,259		$	1,480,340

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

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW (UNAUDITED)

Amounts in columns expressed in thousands


	Nine months ended September 30,
	2009			2008 (as adjusted)
Operating Activities
Net income	$	176,229		$	69,435
Adjustments to reconcile net income to net cash provided by / (used in) operating activities:
Depreciation and amortization		10,233			11,586
Deferred income taxes		(34,673	)		(6,051	)
Unrealized foreign exchange (gains) / losses		(30,021	)		(1,212	)
Cost of debt extinguishment		—			1,156
Stock options expense		2,862			2,798
Hedge revaluation		9,160			—
Equity income in affiliates		17,013			(1,989	)
Gain on remeasurement of previously held equity interest, net of impairment		(153,778	)		—
Other non cash items		6,121			(1,290	)
Changes in operating assets and liabilities:
Accounts receivable		163,863			45,352
Inventories		3,903			(24,784	)
Prepayments and other current assets		9,929			10,922
Trade accounts payable		(73,810	)		(20,113	)
Other accrued liabilities and payables		(12,365	)		(39,146	)

Net Cash provided by Operating Activities		94,666			46,664

Investing Activities
Investment in fixed assets		(8,155	)		(15,717	)
Proceeds from the disposal of fixed assets		3,186			7,628
Purchase of financial assets		—			(103,500	)
Acquisitions of subsidiaries, net of cash acquired		(40,764	)		(547,575	)

Net Cash used in Investing Activities		(45,733	)		(659,164	)

Financing Activities
Borrowings on bank loans and overdraft facility		26,134			95,219
Borrowings on long-term bank loans		—			43,192
Payment of bank loans, overdraft facility and other borrowings		(93,643	)		(31,935	)
Payment of long-term borrowings		(601	)		—
Payment of Senior Secured Notes		—			(20,197	)
Repayment of obligation to former shareholders		(28,814	)		—
Hedge closure		(1,940	)		—
Movements in capital leases payable		(1,015	)		1,408
Issuance of shares in public placement		179,579			233,845
Transactions with equity holders		(7,876	)		—
Net Borrowings on Convertible Senior Notes		—			304,403
Options exercised		817			1,293

Net Cash provided by Financing Activities		72,641			627,228

Currency effect on brought forward cash balances		26,360			(12,855	)
Net Increase / (Decrease) in Cash		147,934			1,873
Cash and cash equivalents at beginning of period		107,601			87,867

Cash and cash equivalents at end of period	$	255,535		$	89,740


Supplemental Schedule of Non-cash Investing Activities
Common stock issued in connection with investment in subsidiaries	$	51,196		$	86,532


Supplemental disclosures of cash flow information
Interest paid	$	64,158		$	40,161
Income tax paid	$	17,092		$	13,354

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

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Amounts in tables expressed in thousands, except per share information

1.	ORGANIZATION AND DESCRIPTION OF BUSINESS

Central European Distribution Corporation (“CEDC”), a Delaware corporation, and its subsidiaries (collectively referred to as “we,” “us,” “our,” or the “Company”) operate primarily in the alcohol beverage industry. The Company is Central Europe’s largest integrated spirit beverages business. The Company is also the largest vodka producer by value and volume in Poland and Russia and produces the Absolwent, Zubrowka, Bols, Parliament, Green Mark and Soplica brands, among others. In addition, it produces and distributes Royal Vodka, the number one selling vodka in Hungary. As well as sales and distribution of its own branded spirits, the Company is the leading distributor and the leading importer of spirits, wine and beer in Poland and a leading exclusive importer of wines and spirits in Poland, Russia and Hungary.

2.	BASIS OF PRESENTATION

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. Our Company consolidates all entities that we control by ownership of a majority voting interest. We also consolidate the Whitehall Group, in which the Company controls 49.9% of voting interest, and the Russian Alcohol Group, of which we do not have voting control. All inter-company accounts and transactions have been eliminated in the consolidated financial statements.

CEDC’s subsidiaries maintain their books of account and prepare their statutory financial statements in their respective local currencies. The subsidiaries’ financial statements have been adjusted to reflect accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary to fairly present our financial condition, results of operations and cash flows for the interim periods presented have been included. Operating results for the three and nine month periods ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

The balance sheet at December 31, 2008 has been derived from the audited financial statements at that date except for presentation and disclosure requirements resulting from the adoption of revised accounting standards described in the paragraphs below, which require retrospective application, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

The unaudited interim financial statements should be read with reference to the consolidated financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2008, as retrospectively adjusted by our Current Report on Form 8-K filed on July 10, 2009 to reflect our adoption of standards related to accounting for convertible debt instruments and the presentation of noncontrolling interests in consolidated financial statements.

In the three month period ended September 30, 2009 we have revised the presentation of Sales and Excise taxes in the Consolidated Condensed Statements of Income for the Russian Alcohol Group (“RAG”). For the second quarter of 2009 when we consolidated RAG’s results for the first time sales was presented net of excise tax. In order to apply a consistent approach throughout the whole CEDC Group, starting in the third quarter we present sales and excise tax separately in the Consolidated Condensed Statements of Income. We have applied this change in presentation retrospectively therefore our consolidated Sales and Excise taxes figures for the nine month period ended September 30, 2009 are higher by $81.3 million without any changes to the Net sales figures.

Effective January 1, 2009, we adopted the following pronouncements which require us to retrospectively restate previously disclosed condensed consolidated financial statements. As such, certain prior period amounts have been reclassified in the unaudited condensed consolidated financial statements to conform to the current period presentation.

•

We adopted the provisions of Accounting Standards Codification (“ASC”) Topic 810-10, “Consolidation”, which establishes and expands accounting and reporting standards for minority interests (which are recharacterized as noncontrolling interests) in a subsidiary and the deconsolidation of a subsidiary. As a result of our adoption of this standard, amounts previously reported as minority interests in other partnerships on our balance sheets are now presented as noncontrolling interests in other partnerships within equity. Minority interests in Whitehall Group continue to be included in the mezzanine section (between liabilities and equity) on the accompanying consolidated balance sheets because of the redemption feature of these units.

As a result of adoption of ASC Topic 810-10, as at December 31, 2008, NCI related to our shareholding in Parliament and Polmos Bialystok amounting to $14.6 million would be reported as part of equity and the amount of $33.6 million related to Whitehall Group would be disclosed in the mezzanine section.

ASC Topic 810-10 applies prospectively, except for presentation and disclosure requirements, which are applied retrospectively.

The changes in redeemable noncontrolling interests for the nine months ended September 30, 2009 are shown below:


Balance at December 31, 2008	$	33,642
Net income for 2009		833
Foreign currency translation adjustment		(1,948	)
JV Revaluation into RUR as a functional currency		(3,094	)
Purchase of shares from noncontrolling interests		(6,728	)

Balance at September 30, 2009	$	22,705

•

We adopted ASC Topic 470-20, “Debt with Conversion and Other Options” that is effective for our $310.0 million aggregate principal amount of 3.00% Convertible Senior Notes (“CSN”) and requires retrospective application for all periods presented. The ASC Topic 470-20 requires the issuer of convertible debt instruments with cash settlement features to separately account for the liability ($290.3 million as of the date of the issuance of the CSNs) and equity components ($19.7 million as of the date of the issuance of the CSNs) of the instrument. The debt component was recognized at the present value of its cash flows discounted using a 4.5% discount rate, our borrowing rate at the date of the issuance of the CSNs for a similar debt instrument without the conversion feature. The equity component, recorded as additional paid-in capital, was $12.8 million, which represents the difference between the proceeds from the issuance of the Debentures and the fair value of the liability, net of deferred taxes of $6.9 million as of the date of the issuance of the CSNs.

ASC Topic 470-20 also requires an accretion of the resultant debt discount over the expected life of the CSNs, which is March 7, 2008 to March 15, 2013. The condensed consolidated income statements were retroactively modified compared to previously reported amounts as follows (in thousands, except per share amounts):


	Nine months ended September 30, 2008			Three months ended September 30, 2008

Additional pre-tax non-cash interest expense		3,580			2,133
Additional deferred tax benefit		1,253			747
Retroactive change in net income and retained earnings		(2,327	)		(1,386	)
Change to basic earnings per share	($	0.05	)	($	0.03	)
Change to diluted earnings per share	($	0.05	)	($	0.03	)

For the three and nine months ended September 30, 2009, the additional pre-tax non-cash interest expense recognized in the condensed consolidated income statement was $2.1 million and $3.6 million respectively. Accumulated amortization related to the debt discount was $6.0 million and $3.1 million as of September 30, 2009 and December 31, 2008, respectively. The annual pre-tax increase in non-cash interest expense on our condensed consolidated statements of income to be recognized until 2013, the maturity date of the CSNs, is as follows (in thousands):


		Pre-tax increase in non-cash interest expense
2009		3,921
2010		4,098
2011		4,282
2012		4,285

The FASB has issued FASB Statement No. 168, The “FASB Accounting Standards Codification™” and the Hierarchy of Generally Accepted Accounting Principles codified as ASC Topic 105 “Generally Accepted Accounting Principles”. ASC

Topic 105 establishes the FASB Accounting Standards Codification™ (Codification or ASC) as the single source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. All other nongrandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative.

Following the Codification, the Board will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates, which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification.

GAAP is not intended to be changed as a result of the FASB’s Codification project, but it will change the way the guidance is organized and presented. As a result, these changes will have a significant impact on how companies reference GAAP in their financial statements and in their accounting policies for financial statements issued for interim and annual periods ending after September 15, 2009. CEDC adopted the Codification in this quarterly report by providing references to the Codification topics alongside references to the existing standards.

3.	ACQUISITIONS

Acquisitions made prior to December 31, 2008 were accounted for in accordance with SFAS No. 141, “Business Combinations”. Effective January 1, 2009, all business combinations are accounted for in accordance with FAS 141R that is codified as ASC Topic 805 “Business Combinations”.

On February 24, 2009, the Company and the seller amended the terms of the Stock Purchase Agreement governing the Whitehall acquisition to satisfy the Company’s obligations to the seller pursuant to a share price guarantee in the original Stock Purchase Agreement. Pursuant to the terms of this amendment, the Company paid to the seller $5,876,351 in cash, and issued to the seller 2,100,000 shares of its common stock, in settlement of a minimum share price guarantee by the Company. The Company also made an additional cash payment of $2,000,000 on March 15, 2009. The first portion of deferred payments already due under the original Stock Purchase Agreement amounting to €8,050,411 was settled August 4, 2009 and the remaining portion of €8,303,630 was paid on September 15, 2009. In consideration for these payments, the Company received an additional 375 Class B shares of Whitehall, which represents an increase in the Company’s economic stake from 75% to 80%.

The Company has consolidated the Whitehall Group as a business combination as of May 23, 2008, on the basis that the Whitehall Group is a Variable Interest Entity and the Company has been assessed as being the primary beneficiary. Included within the Whitehall Group is a 50/50 joint venture with Möet Hennessy. This joint venture is accounted for using the equity method and is recorded on the face of the balance sheet in investments with minority interest initially recorded at fair value on the face of the balance sheet. The current term of the joint venture is until June 2013 at which point Möet Hennessy will have the option to acquire the remaining shares of the entity.

Under requirements of ASC Topic 810-10 “Consolidation” a change in ownership interests that does not result in change of control is considered an equity transaction. The identifiable net assets remain unchanged and any difference between the amount by which the NCI is adjusted, and the fair value of the consideration paid is recognized directly in equity and attributed to the controlling interest. Thus we have recorded the 5% increase in ownership interests of Whitehall Group as transaction between equity and mezzanine equity. As a result of this transaction, NCI in Whitehall Group decreased by $6.7 million together with decrease in Additional Paid In Capital of $1.1 million, which was offset by cash outflow of $7.8 million.

On July 9, 2008, the Company completed an investment with Lion Capital LLP (“Lion Capital”) and certain of Lion’s affiliates (collectively with Lion Capital, “Lion”) and certain other investors (the “Minority Investors”), pursuant to which the Company, Lion and the Minority Investors acquired all of the outstanding equity of the Russian Alcohol Group (“RAG”). In connection with that investment, the Company acquired an indirect equity stake in RAG of approximately 42%, and Lion acquired substantially all of the remainder of the equity of RAG. The agreements governing that investment gave the Company the right to acquire, and gave Lion the right to require the Company to acquire, Lion’s equity stake in RAG (the “Prior Agreement”).

On April 24, 2009, the Company entered into new agreements (the “New Agreements”) with Lion to replace the Prior Agreement, which will permit the Company, through a multi-stage equity purchase, to acquire over the next five years (including 2009) all of the equity interests in RAG held by Lion (the “Acquisition”), including a Note Purchase and Share Subscription Agreement between the Company, Carey Agri International – Poland Sp. z o.o., a Polish limited liability company and subsidiary of the Company (“Carey Agri”), Lion/Rally Cayman 2, a company incorporated in the Cayman Islands and the acquisition vehicle used for the original investment (“Cayman 2”), and Lion/Rally Cayman 5, a company incorporated in the Cayman Islands and an affiliate of Lion (“Cayman 5,” and such agreement, the “Note Purchase Agreement”). As a result of this agreement, the Company has assessed RAG as a variable interest entity, with the Company being the primary beneficiary. Pursuant to this change, the Company has begun to consolidate RAG as of the second quarter of 2009 and recorded a non-controlling interest of 9.4% representing equity not held by the Company or Lion Capital.

Pursuant to the Note Purchase Agreement, on April 29, 2009, Carey Agri paid to Cayman 5 $13,500,000 in cash in exchange for certain indirect equity interests in RAG, sold to Cayman 2 the $110,639,000 subordinated exchangeable loan notes issued by an affiliate of Cayman 2 to Carey Agri in connection with the initial investment, and used the proceeds to acquire additional indirect equity of RAG. In addition, (1) the Company issued to Cayman 5 540,873 shares of common stock, par value $0.01, of the Company (“Common Stock”) on September 2, 2009, and (2) Carey Agri paid to Cayman 5 $4.25 million in cash on August 14, 2009. In exchange for this consideration, the Company received additional indirect equity interests in RAG. The Company has guaranteed all of the obligations of Carey Agri under the Note Purchase Agreement.

On May 7, 2009, the Company entered into an Option Agreement (the “Option Agreement”) with Cayman 4, Cayman 5, Lion/Rally Cayman 6, a Cayman Islands company that holds the restructured investment in RAG (“Cayman 6”), and Lion/Rally Cayman 7 L.P., a Cayman Exempted Limited Partnership, of which the Company and Cayman 2 are limited partners (“Cayman 7”). The Option Agreement was replaced with the New Option Agreement on substantially similar terms.

The New Option Agreement will govern the Company’s acquisition of the remaining equity interests in RAG held by Lion over the following four years.

Pursuant to the New Option Agreement, Cayman 4 and Cayman 5 granted to Cayman 7 a series of options entitling Cayman 7 to acquire, subject to the receipt of certain antitrust approvals, the remaining equity interests of RAG held by Lion through Cayman 4 and Cayman 5 (the “Cayman 7 Call Options”). In connection with the exercise of these options, Cayman 7 will receive certain equity interests in RAG, and has paid and will pay to Cayman 4 and Cayman 5 consideration as follows: (1) 1,000,000 shares of Common Stock issuable, and $6,000,000 paid in cash, on October 30, 2009, (2) 1,575,000 shares of Common Stock issuable on June 15, 2010 and $39,330,517 and €22,822,679 payable in cash on or within 30 days after June 30, 2010 (up to $14,000,000 of which may, at the Company’s election, be replaced with an equivalent amount of Common Stock), (3) $65,708,229 and €62,243,670 payable in cash on or within 60 days after May 31, 2011 (up to $15,000,000 of which may, at the Company’s election, be replaced with an equivalent amount of Common Stock), (4) 751,852 shares of Common Stock issuable, and $66,644,690 and €63,087,417 payable in cash, on or within 90 days after July 31, 2012, and (5) $69,083,229 and €62,243,670 payable in cash on or within 120 days after May 31, 2013 (subject to reduction by up to $10,000,000, and up to $20,000,000 of which may, at the Company’s election, be replaced with an equivalent amount of Common Stock, in each case based upon the date on which such Cayman 7 Call Option is exercised and consummated). The amounts of cash payable, and number of shares issuable, are subject to certain adjustments based on the price of one share of Common Stock, and reduction in the event of early payment by the Company, in each case over the course of the Acquisition. The Company also will be able to apply the value of any dividends from RAG, in respect of its and Lion’s equity stakes, to prepayment of the consideration. Upon the consummation of all of the transactions contemplated above, the Company will hold all of the equity interests in RAG previously held by Lion, and will hold substantially all of the equity interests in RAG.

As consideration for Cayman 4 and Cayman 5 granting to Cayman 7 the Cayman 7 Call Options, the Company granted to Cayman 4 and Cayman 5 warrants to acquire Common Stock as follows: (1) warrants to acquire, in the aggregate, 1,490,550 shares of Common Stock at an exercise price of $22.11, exercisable on May 31, 2011, (2) warrants to acquire, in the aggregate, 300,000 shares of Common Stock at an exercise prices of $26.00, exercisable on July 31, 2012, and (3) warrants to acquire, in the aggregate, 1,803,813 shares of Common Stock at an exercise prices of $26.00, exercisable on May 31, 2013 (all such warrants, the “Warrants”). Each of the Warrants may be settled, at the Company’s option, in cash or on a net shares basis.

As of the acquisition date, April 24, 2009, CEDC recorded at fair value all future payments due under the Option Agreement as a liability. The total present value of deferred consideration as of April 24, 2009 amounted to $447.2 million and was determined using a 14.5% discount rate. The present value of the liability is amortized over the period of time the liability is outstanding, until the last portion of the liability is settled in May 2013, with recognition of a non cash interest expense every quarter in the statement of income. The discounted amortization charge for the period from April 24, 2009 to September 30, 2009 amounted to $27.4 million.

On July 29, 2009, the Company entered into an agreement with Lion, pursuant to which Cayman 7 acquired additional indirect equity interests in RAG as a result of the acquisition by Cayman 6 of equity interests in RAG from certain of the Minority Investors (the “Selling Minority Investors”). The Company acquired such equity through a subscription for additional limited partnership interests in Cayman 7, of which it holds 100% of the economic interests and the general partner of which is an affiliate of Lion, pursuant to a Commitment Letter, dated July 29, 2009, between the Company, Cayman 6 and Cayman 7. Cayman 7 made a further investment in Cayman 6 as provided in the New Agreements and the Commitment Letter, as a result of which Cayman 6 acquired the equity interests in RAG from the Selling Minority Investors pursuant to a Sale and Purchase Agreement, dated July 29, 2009, between Cayman 6, Euro Energy Overseas Ltd., a British Virgin Islands company, Altek Consulting Inc., a British Virgin Islands company, Genora Consulting Inc., a Republic of Seychelles company, Lidstel Ltd., a British Virgin Islands company, Pasalba Limited, a company incorporated under the laws of Cyprus and Lion/Rally Lux 1, a company incorporated in Luxembourg. The Cayman 6 equity interests acquired by Cayman 7 will be subject to the same security as Cayman 7’s other interests in Cayman 6. On August 3, 2009, the parties to the Commitment Letter and the Sale and Purchase Agreement consummated this acquisition in exchange for $30,000,000 in cash funded by the Company, resulting in the acquisition of a 6% stake in RAG held by the Selling Minority Investors. After giving effect to this acquisition and the transactions contemplated by the Note Purchase Agreement, the Company holds approximately 58% of the equity interests in RAG.

Starting from the second quarter of 2009, the Company is consolidating all profit and loss results for Cayman 2 except for the share not held by the Company or Lion Capital, being initially 9.4% that decreased to 3.4% as a result of the 6% buyout described in the paragraph above. The Company accounts for the 3.4% of non-controlling interest being presented under the equity section in the consolidated balance sheet of CEDC.

In the event the Company does not exercise any of the Cayman 7 Call Options, Cayman 4 and Cayman 5 may require the Company to exercise and consummate all unexercised Cayman 7 Call Options. If the Company fails to exercise and consummate such Cayman 7 Call Option, Cayman 4 and Cayman 5 may require the Company, through Cayman 7, to sell to Cayman 4 and Cayman 5 all of the equity interests of RAG held by the Company. The Company has guaranteed all of the obligations of Cayman 7 under the Option Agreement, and granted Lion security rights over the equity of RAG against any default by, or change in control of, the Company.

Pursuant to the terms of the New Option Agreement, if any issuance of Common Stock pursuant to the New Option Agreement would cause Cayman 4, Cayman 5 and their affiliates to breach the Threshold, the issuance of such Common Stock will be deferred until it can be issued without breaching the Threshold.

Governance Agreement

On May 7th, 2009, the Company entered into a Governance and Shareholders Agreement with Cayman 4, Cayman 5, Cayman 6, Cayman 7, and Lion/Rally Cayman 8, a Cayman Islands company that is the general partner of Cayman 7 and an affiliate of Lion (the “Governance Agreement”). The Governance Agreement will govern the management of investments in, and ongoing operation of, Cayman 6, and, as a result, the overall management and governance of RAG. The Governance Agreement establishes the Company’s and the other parties’ rights and obligations with respect to their equity investments in Cayman 6, as well as the rights and obligations of Cayman 6, and establishes principles for the management of Cayman 6.

Beginning from the execution of the Governance Agreement, the Company has significantly enhanced minority rights in the management of RAG, including approval of dividends, RAG’s business plan and material contracts. The Company will have the right to additional governance rights subject to the receipt of certain antitrust approvals. Once the Company has paid consideration in the aggregate of $230,000,000 to Lion, the Company and Lion will jointly govern RAG as a 50-50 joint venture. Once the Company has paid consideration in the aggregate of $380,000,000 to Lion, the Company will gain sole management control of RAG, and Lion will be granted certain minority rights. The Company has the right to accelerate this process by accelerating the payments it is required to make, with any accelerated payments being reduced by an 8% per annum discount factor.

The fair value of the net assets acquired in connection with the 2009 Russian Alcohol Group Acquisition as of the acquisition date is:


	Russian Alcohol Group
ASSETS

Cash and cash equivalents		154,276
Accounts receivable		147,196
Inventory		40,902
Deferred tax asset		31,184
Taxes		14
Other current assets		52,296
Equipment		105,238
Intangibles, including Trademarks		175,334
Investments		25

Total Assets	$	706,465


LIABILITIES

Trade payables		42,895
Short term borrowings		44,368
Deferred tax		42,556
Other short term liabilities		91,416
Long term borrowings		386,907


Long term accruals		50,000

Total Liabilities	$	658,142


Net identifiable assets and liabilities		48,323

Goodwill on acquisition		865,352

Consideration paid, satisfied in cash		13,500
Consideration paid, satisfied in Notes		110,639
Fair value of previously held interest		292,289
Deferred consideration		447,247
Non-controlling interest		50,000

Cash (acquired)	$	154,276

Net Cash Inflow	($	140,776	)

The goodwill arising out of the Russian Alcohol Group acquisition is attributable to the expansion of our sales and distribution platform in Russia that it provides to the Company as well as expected synergies to be utilized from consolidation of our Russian operations.

The Company recorded a provision for contingent consideration that is provided for within the framework of transactions related to the acquisition of control over the Russian Alcohol Group. The fair value of this contingent consideration was recorded at $50 million as of the acquisition date. This consideration was settled in the three month period ended September 30, 2009 through a payment by the Company of $65 million, which included an additional $15 million in earn-out payments.

Resulting from the acquisition of the Russian Alcohol Group, the Company recognized a one-time gain on remeasurement of previously held equity interest in the six month period ended June 30, 2009. The fair value of this gain amounts to $225.6 million.

During the second quarter of 2009, the Russian Alcohol Group made payments related to pre-acquisition tax penalties amounting to $28.8 million. These costs are reimbursed by the sellers and has been netted off with loans from them.

The following table sets forth the unaudited pro forma results of operations of the Company for the three and nine month periods ending September 30, 2009 and 2008. The unaudited pro forma results of operations give effect to the Company’s acquisitions as if they occurred on January 1, 2009 and 2008. The unaudited pro forma results of operations are presented after giving effect to certain adjustments for depreciation, amortization of deferred financing costs, interest expense on the acquisition financing, and related income tax effects. The unaudited pro forma results of operations are based upon currently available information and certain assumptions that the Company believes are reasonable under the circumstances. The unaudited pro forma results of operations do not purport to present what the Company’s results of operations would actually have been if the aforementioned transactions had in fact occurred on such date or at the beginning of the period indicated, nor do they project the Company’s financial position or results of operations at any future date or for any future period.


	Three months ended September 30,					Nine months ended September 30,
	2009		2008			2009		2008
Net sales	$	390,099	$	707,780		$	1,050,886	$	1,680,644
Net income	$	47,146	($	14,696	)	$	106,496	$	251,652

Net income per share data:
Basic earnings per share of common stock	$	0.85	($	0.32	)	$	2.10	$	5.83
Diluted earnings per share of common stock	$	0.80	($	0.32	)	$	1.96	$	5.73

On March 11, 2008 the Company and certain of its affiliates entered into a Stock Purchase Agreement (the “Original SPA”) with White Horse Intervest Limited, a British Virgin Islands company (“Seller”) governing the company’s acquisition of 85% of the share capital of Copecresto Enterprises Limited, a Cypriot company, from Seller. On September 22, 2009, the Company and certain of its affiliates and Seller entered into (i) an amendment to the Original SPA (the “Amendment”) and (ii) a Share Sale and Purchase Agreement (the “Minority Acquisition SPA”),

Under the terms of the Amendment, certain post-closing obligations in the Original SPA regarding payment for certain assets were finalized in order to facilitate completion of the transactions contemplated by the Original SPA, in connection with the completion of the Company’s acquisition of Copecresto pursuant to the Minority Acquisition SPA. In connection with the Amendment, the Company is required to pay to Seller the remaining consideration for such assets of approximately $16.9 million. The Company paid $9.9 million of that amount on October 30, 2009 and the remaining amount is to be settled in November 2009.

Under the terms of the Minority Acquisition SPA, upon the closing thereof on September 22, 2009, the Company, through an affiliate, acquired the remaining 15% of the share capital of Copecresto from Seller for total cash consideration of $70,167,734. In addition, on September 25, 2009, in connection with the closing of the Minority Acquisition SPA, the Shareholders Agreement, dated March 13, 2008, by and among the Company, a subsidiary of the Company, Seller and Copecresto was terminated. The Minority Acquisition SPA contains certain customary representations, warranties and covenants for a transaction of this type.

Under requirements of ASC Topic 810-10 “Consolidation” a change in ownership interests that does not result in change of control is considered an equity transaction. The identifiable net assets remain unchanged and any difference between the amount by which the NCI is adjusted, and the fair value of the consideration paid is recognized directly in equity and attributed to the controlling interest. Thus we have recorded the 15% increase in ownership interests of Copecresto as transaction within equity. As a result of this transaction, NCI in Copecresto decreased by $26.9 million together with decrease in Additional Paid In Capital of $43.3 million, which was offset by cash outflow of $70.2 million.

4.	EXCHANGEABLE CONVERTIBLE NOTES

On July 9, 2008, the Company closed a strategic investment in the Russian Alcohol Group (“RAG”) and in addition to the equity investment, CEDC purchased exchangeable notes from Lion/Rally Lux 3 (“Lux 3”), a Luxembourg company and indirect subsidiary of a Cayman Islands company (“Cayman 2”) that served as the investment vehicle.

The Notes rank pari passu with the other unsecured obligations of Lux 3 represent a direct and unsecured obligation of Lux 3 and are structurally subordinated to indebtedness of subsidiaries of Lux 3, including Pasalba Limited (“Pasalba”), a company incorporated under the laws of the Republic of Cyprus that made the investment. The Notes have a principal amount of $103.5 million and accrued interest at a rate of 8.3% per annum, which interest may, at Lux’s 3 option, be paid in kind with additional Notes.

On April 24, 2009 the Company sold to Cayman 2 the subordinated exchangeable loan notes plus accrued interest for a total of $110.6 million, and used the proceeds to purchase an additional 100 million shares of Cayman 2, which resulted in an increase of the Company’s indirect equity interest in RAG from 41.97% to 52.86%. For detail please refer to Note 20.

5.	INTANGIBLE ASSETS OTHER THAN GOODWILL

The major components of intangible assets are:


	September 30, 2009			December 31, 2008
Non-amortizable intangible assets:
Trademarks	$	790,395		$	563,689
Impairment	($	22,979	)		—

Total		767,416			563,689
Amortizable intangible assets:
Trademarks		5,702			5,568
Customer relationships		7,788			7,749
Less accumulated amortization		(8,579	)		(6,501	)
Total		4,911			6,816

Total intangible assets	$	772,327		$	570,505

Management considers trademarks that are indefinite-lived assets to have high or market-leader brand recognition within their market segments 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. These trademarks include Soplica, Zubrowka, Absolwent, Royal, Parliament, Green Mark, Zhuravli and the rights for Bols Vodka in Poland, Hungary and Russia. Taking the above into consideration, as well as the evidence provided by analyses of vodka products life cycles, market studies, competitive and environmental trends, management believes that these brands will generate cash flows for an indefinite period of time, and that the useful lives of these brands are indefinite.

In accordance with ASC Topic 350-30 “General Intangibles other than Goodwill”, intangible assets with an indefinite life are not amortized but are reviewed at least annually for impairment. However, we decided to test these trademarks for impairment in the second quarter of 2009 due to current market conditions and lower than expected sales volumes.

Based on our revised outlook, the fair value of some of trademarks, as determined using the estimated present value of future cash flows, did not support the recorded value due to impact global economic downturn on consumer spendings. Accordingly, our second quarter 2009 results include impairment charge of $ 20.3 million to write down the trademarks. We used the same assumptions and methodologies as described in Critical Accounting Policies and Estimates section of the Management’s Discussion and Analysis. No further impairment charges were recognized in the three month period ended September 30, 2009.

6.	EQUITY METHOD INVESTMENTS IN AFFILIATES

We hold the following investments in unconsolidated affiliates:


		Carrying Value
	Type of affiliate	September 30, 2009		December 31, 2008
Moet Henessy JV	Equity-Accounted Affiliate	$	63,164	$	77,918
Russian Alcohol Group	Fully Consolidated Affiliate *		—		111,325

	Total Carrying value	$	63,164	$	189,243

As described in Note 3, from the second quarter of 2009, the Company began consolidating Russian Alcohol Group as a business combination. RAG was accounted for under the equity method in prior periods.

The Company has effective voting interest in Moet Hennessy JV of 25% and no voting control over Russian Alcohol Group.

On May 23, 2008, the Company and certain of its affiliates, entered into, and closed upon, a Share Sale and Purchase Agreement and certain other agreements whereby the Company acquired shares representing 50% minus one vote of the voting power, and 75% of the economic interests, in the Whitehall Group (the “Whitehall Acquisition”). The Whitehall Group is a leading importer of premium spirits and wines in Russia. The aggregate consideration paid by the Company was $200 million, paid in cash at the closing. In addition, on October 21, 2008 the Company issued to the Seller 843,524 shares of its common stock, par value $0.01 per share.

On February 24, 2009, the Company and the seller amended the terms of the Stock Purchase Agreement governing the Whitehall acquisition to satisfy the Company’s obligations to the seller pursuant to a share price guarantee in the original Stock Purchase Agreement. Pursuant to the terms of this amendment, the Company paid to the seller $5,876,351 in cash, and issued to the seller 2,100,000 shares of its common stock, in settlement of a minimum share price guarantee by the Company. The Company also made an additional cash payment of $2,000,000 on March 15, 2009. In consideration for these payments, the Company received an additional 375 Class B shares of Whitehall, which represents an increase in the Company’s economic stake from 75% to 80%. For further details please refer to Note 3.

The summarized financial information of investments in Moet Hennessy Joint Venture consolidated under the equity method as of September 30, 2009 is shown in the table below. The results for the nine months ended September 30, 2009 also include the results of the Russian Alcohol Group that were consolidated under the equity method until April 24, 2009.


	Total September 30, 2009
Current assets	$	49,891
Noncurrent assets		427
Current liabilities		30,069
Noncurrent liabilities		—


	Total Three months ended September 30, 2009		Total Nine months ended September 30, 2009
Net sales	$	16,195	$	111,159
Gross profit		6,051		54,656
Income from continuing operations		3,175		(36,770	)
Net income		1,911		(40,828	)

7.	COMPREHENSIVE INCOME/(LOSS)

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

As of September 30, 2009, our functional currencies (Polish Zloty, Russian Ruble and Hungarian Forint) used to translate the balance sheet strengthened against the U.S. dollar as compared to the exchange rate as of December 31, 2008, and as a result a comprehensive gain was recognized. Additionally, translation gains and losses with respect to long-term subordinated inter-company loans with the parent company are charged to other comprehensive income. No deferred tax benefit has been recorded on the comprehensive income/(loss) in regard to the long-term inter-company transactions with the parent company, as the repayment of any equity investment is not anticipated in the foreseeable future.

8.	EARNINGS PER SHARE

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


	Three months ended September 30,					Nine months ended September 30,
	2009		2008			2009		2008

Basic:
Net income attributable to CEDC shareholders	$	47,146	($	726	)	$	173,211	$	63,673

Weighted average shares of common stock outstanding		55,159		46,205			50,789		43,154
Basic earnings per share	$	0.85	($	0.02	)	$	3.41	$	1.48


Diluted:
Net income attributable to CEDC shareholders	$	47,146	($	726	)	$	173,211	$	63,673

Weighted average shares of common stock outstanding		55,159		46,205			50,789		43,154
Net effect of dilutive employee stock options based on the treasury stock method		341		—			171		784
Net effect of dilutive shares to be issued to Lion		3,327		—			3,327		—

Totals		58,827		46,205			54,287		43,938
Diluted earnings per share	$	0.80	($	0.02	)	$	3.19	$	1.45

In the three months ended September 30, 2008, the Company excluded 785 thousand shares from the above EPS calculation because they would have had an antidilutive impact for the 2008 period presented.

Employee stock options granted have been included in the above calculations of diluted earnings per share since the exercise price is less than the average market price of the common stock during the three and nine month periods ended September 30, 2008 and 2009. In addition there is no adjustment to fully diluted shares related to the Convertible Senior Notes as the average market price was below the conversion price for the periods.

Over three million shares of the Company’s common stock to be issued to Lion Capital in the future in connection with CEDC’s acquisition of Lion Capital’s remaining interest in RAG have been included in the above calculation of diluted earnings per share. These shares have not been issued yet.

9.	BORROWINGS

Bank Facilities

On July 10, 2008, a company comprising part of the Russian Alcohol Group entered into a Facility Agreement for a syndicated facility arranged by Goldman Sachs International, Bank Austria Creditanstalt AG, ING Bank N.V. London Branch and Raiffeisen Zentralbank Österreich AG, which provided for a term loan facility of $315 million. As of September 30, 2009, $256 million was outstanding under the facility, $35 million of which matures on July 1, 2013, $181 million of which matures on July 1, 2014 and the remaining $70 million of which matures on July 1, 2015. The term loan is guaranteed by Pasalba and Latchey Ltd., and certain other companies in the Russian Alcohol Group and is secured by all of the shares of capital stock of Russian Alcohol Group.

As of September 30, 2009, $45.7 million remained available under the Company’s overdraft facilities. These overdraft facilities are renewed on an annual basis.

As of September 30, 2009, the Company had utilized approximately $83.0 million of a multipurpose credit line agreement in connection with the 2007 tender offer in Poland to purchase the remaining outstanding shares of Polmos Bialystok S.A. The Company’s obligations under the credit line agreement are guaranteed through promissory notes by certain subsidiaries of the Company and are secured by 33.95% of the share capital of Polmos Białystok S.A. The indebtedness under the credit line agreement matures on February 24, 2011.

On April 24, 2008, the Company signed a credit agreement with Bank Zachodni WBK SA in Poland to provide up to $50 million of financing to be used to finance a portion of the Parliament and Whitehall acquisitions, as well as general working capital needs of the Company. The agreement provided for a $30 million five year amortizing term facility and a one year $20 million short term facility with annual renewal. In the second quarter of 2009 this facility was converted into Polish Zlotys. The maturity of term loan was extended to May 2013 and the maturity of the short term facility was extended to May 2010. The loan is guaranteed by the Company, Bols Sp. z o.o, a wholly owned subsidiary of the Company (“Bols”) and certain other subsidiaries of the Company, and is secured by all of the capital stock of Bols and 60% of the capital stock of Copecresto.

On July 2, 2008, the Company entered into a Facility Agreement with Bank Handlowy w Warszawie S.A., which provided for a term loan facility of $40 million. As of September 30, 2009, $33.3 million was outstanding under the term loan, which matures on July 4, 2011 and is guaranteed by CEDC, Carey Agri and certain other subsidiaries of the Company and is secured by all of the shares of capital stock of Carey Agri and subsequently will be further secured by shares of capital stock in certain other subsidiaries of CEDC.

Senior Secured Notes

In connection with the Bols and Polmos Bialystok acquisitions, on July 25, 2005 the Company completed the issuance of € 325 million 8% Senior Secured Notes due 2012 (the “Notes”). Interest is due semi-annually on the 25th of January and July, and the Notes are guaranteed on a senior basis by certain of the Company’s subsidiaries. The Indenture governing our Notes contains certain restrictive covenants, including covenants limiting the Company’s ability to: make certain payments, including dividends or other distributions, with respect to the share capital of the parent or its subsidiaries; incur or guarantee additional indebtedness or issue preferred stock; make certain investments; prepay or redeem subordinated debt or equity; create certain liens or enter into sale and leaseback transactions; engage in certain transactions with affiliates; sell assets or consolidate or merge with or into other companies; issue or sell share capital of certain subsidiaries; and enter into other lines of business.

As of September 30, 2009 and December 31, 2008, the Company had accrued interest of $5.2 million and $12.0 million respectively related to the Senior Secured Notes, with the next coupon due for payment on January 25, 2010. As of September 30, 2009 and December 31, 2008 accrued interest related to Senior Secured Notes is presented together with the Senior Secured Notes balance. Total obligations under the Senior Secured Notes are shown net of deferred finance costs, amortized over the life of the borrowings using the effective interest rate method and fair value adjustments from the application of hedge accounting as shown in the table below:


	September 30, 2009			December 31, 2008
Senior Secured Notes	$	363,794		$	357,934
Fair value bond mark to market		(319	)		(7,124	)
Unamortized portion of closed hedges		(2,165	)		(553	)
Unamortized issuance costs		(4,121	)		(5,223	)


Total	$	357,189		$	345,034

Convertible Senior Notes

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

Effective January 1, 2009, we adopted ASC Topic 470-20, “Debt with Conversion and Other Options” that is effective for our $310 million Convertible Notes and requires retrospective application for all periods presented. The ASC Topic 470-20 requires the issuer of convertible debt instruments with cash settlement features to separately account for the liability and equity components of the instrument. ASC Topic 470-20, “Debt with Conversion and Other Options” also requires an accretion of the resultant debt discount over the expected life of the Convertible Notes. For additional information, see Note 2.- Basis of Presentation. On July 10, 2009, we filed a Current Report on Form 8-K to reflect the retrospective effect of this adjustment to our financial statements, management’s discussion and analysis and other disclosure in our annual report on Form 10-K for the fiscal year ended December 31, 2008, filed on March 2, 2009, as subsequently amended.

As of December 31, 2008 accrued interest related to Convertible Senior Notes is presented in other accrued liabilities of $2.7 million. As of September 30, 2009 accrued interest is presented together with the Convertible Senior Notes balance of $0.4 million, with the next coupon due for payment on March 15, 2010. Total obligations under the Convertible Senior Notes are shown net of deferred finance costs, amortized over the life of the borrowings using the effective interest rate method as shown in the table below:


	September 30,			December 31,
	2009			2008
Convertible Senior Notes	$	310,385		$	310,000
Unamortized issuance costs		(3,973	)		(4,791	)
Debt discount related to Convertible Senior Notes		(13,628	)		(16,585	)


Total	$	292,784		$	288,624

Total borrowings as disclosed in the financial statements are:


	September 30,		December 31,
	2009		2008
Short term bank loans and overdraft facilities for working capital	$	140,589	$	109,552
Short term bank loans for share tender		20,761		—

Total short term bank loans and utilized overdraft facilities		161,350		109,552
Long term bank loans for share tender		62,284		81,081
Long term obligations under Senior Secured Notes		357,189		345,034
Long term obligations under Convertible Senior Notes		292,784		288,624
Other total long term debt, less current maturities		302,289		89,429


Total debt	$	1,175,896	$	913,720


	September 30, 2009
Principal repayments for the following years
2009	$	30,647
2010		159,093
2011		106,326
2012		383,732
2013 and beyond		496,098


Total	$	1,175,896

10.

INVENTORIES

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


	September 30,		December 31,
	2009		2008
Raw materials and supplies	$	36,374	$	18,352
In-process inventories		1,453		1,698
Finished goods and goods for resale		177,927		160,254


Total	$	215,754	$	180,304

Because of the nature of the products supplied by the Company, great attention is paid to inventory rotation. Where goods are estimated to be obsolete or unmarketable they are written down to a value reflecting the net realizable value in their relevant condition.

Cost includes customs duty (where applicable), and all costs associated with bringing the inventory to a condition for sale. These costs include importation, handling, storage and transportation costs, and exclude rebates received from suppliers, which are reflected as reductions to closing inventory. Inventories are comprised primarily of beer, wine, spirits, packaging materials and non-alcoholic beverages.

11.

INCOME TAXES

The Company operates in several tax jurisdictions primarily: the United States of America, Poland, Hungary and Russia. All subsidiaries file their own corporate tax returns as well as account for their own deferred tax assets and liabilities. The Company does not file a tax return in Delaware based upon its consolidated income, but does file a return in Delaware based on the income statement for transactions occurring in the United States of America.

The Company files income tax returns in the U.S., Poland, Hungary, Russia, as well as in various other countries throughout the world in which we conduct our business. The major tax jurisdictions and their earliest fiscal years that are currently open for tax examinations are 2004 in the U.S., 2003 in Poland and Hungary and 2006 in Russia.

12.

STOCKHOLDERS’ EQUITY

On July 20, 2009, the Company, in connection with the offer and sale (the “Offering”) of 8,350,000 shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), of which 6,850,000 shares of Common Stock were issued and sold by the Company and 1,500,000 shares of Common Stock were sold by Mark Kaoufman (the “Selling Stockholder”), entered into an Underwriting Agreement (the “Underwriting Agreement”) with the Selling Stockholder and Jefferies & Company, Inc. and UniCredit CAIB Securities UK Ltd., as representatives of the several underwriters named therein (the “Underwriters”). The Underwriting Agreement contains customary representations, warranties and agreements of the Company and the Selling Stockholder and customary closing conditions, indemnification rights, obligations of the parties and termination provisions. Pursuant to the Underwriting Agreement, the Company granted the Underwriters a 25-day over-allotment option to purchase up to an additional 835,000 shares of Common Stock from the Company at the same price in a public offering pursuant to a Registration Statement on Form S-3 and a related prospectus filed with the Securities and Exchange Commission. On July 22, 2009, the Underwriters notified the Company that they had exercised the over-allotment option in full. The Company consummated the Offering on July 24, 2009 and received net proceeds from the Offering, including the over-allotment shares, of $179.6 million, after deducting underwriting discounts and offering expenses payable by the Company.

On September 2, 2009, the Company filed a prospectus supplement with the Securities and Exchange Commission pursuant to a Registration Statement on Form S-3 registering for resale by Lion/Rally Cayman 5, a company incorporated in the Cayman Islands, the 540,873 shares of Common Stock issued to Cayman 5 on that same date in connection with the Russian Alcohol Group acquisition (see Note 3 for additional details). The Company did not receive any proceeds from the sale.

On September 15, 2009, the Company issued to Cirey Holdings, in connection with the Russian Alcohol Group acquisition, 479,499 shares of Common Stock. The Company did not receive any proceeds from the sale.

13.

OPERATING SEGMENTS

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


	Segment Net Sales
	Three months ended September 30,				Nine months ended September 30,
	2009		2008		2009		2008
Segment
Poland	$	232,558	$	356,065	$	616,262	$	1,003,189
Russia		149,180		84,948		330,418		154,521
Hungary		8,361		11,428		23,416		29,653


Total Net Sales	$	390,099	$	452,441	$	970,096	$	1,187,363


	Operating Income
	Three months ended September 30,						Nine months ended September 30,
	2009			2008			2009			2008
Segment
Poland	$	4,012		$	32,601		$	244,503		$	86,266
Russia		31,725			20,540			60,055			36,489
Hungary		1,683			2,362			3,519			5,172
Corporate Overhead
General corporate overhead		(1,692	)		(1,543	)		(2,896	)		(3,978	)
Option Expense		(938	)		(1,120	)		(2,861	)		(2,798	)


Total Operating Income	$	34,790		$	52,840		$	302,320		$	121,151


	Identifiable Operating Assets
	September 30, 2009		December 31, 2008
Segment
Poland	$	1,385,884	$	1,625,471
Russia		2,358,026		814,400
Hungary		26,579		37,842
Corporate		23,562		5,973

Total Identifiable Operating Assets	$	3,794,051	$	2,483,686


	Goodwill
	September 30, 2009		December 31, 2008
Segment
Poland	$	480,456	$	469,094
Russia		1,221,911		269,109
Hungary		7,224		7,053
Corporate		—		—

Total Goodwill	$	1,709,591	$	745,256

14.

INTEREST INCOME / (EXPENSE)

For the three and nine months ended September 30, 2009 and 2008 respectively, the following items are included in Interest income / (expense):


	Three months ended September 30,						Nine months ended September 30,
	2009			2008			2009			2008
Interest income	$	2,205		$	3,243		$	9,016		$	6,871
Interest expense		(19,584	)		(19,793	)		(60,532	)		(49,693	)

Total interest (expense), net	($	17,379	)	($	16,550	)	($	51,516	)	($	42,822	)

15.

OTHER FINANCIAL INCOME / (EXPENSE)

For the three and nine months ended September 30, 2009 and 2008, the following items are included in Other Financial Income / (Expense):


	Three months ended September 30,					Nine months ended September 30,
	2009		2008			2009		2008
Foreign exchange impact related to foreign currency financing	$	57,801	($	49,190	)	$	15,658	($	9,232	)
Foreign exchange impact related to long term Notes receivable		—		13,006			9,276		13,006
Write-off of hedge associated with retired debt		—		—			—		(305	)
Write-off of financing costs associated with retired debt		—		—			—		(851	)
Other gains / (losses)		311		1,454			247		3,755

Total other financial income / (expense), net	$	58,112	($	34,730	)	$	25,181	$	6,373

16.

FINANCIAL INSTRUMENTS

Financial Instruments and Their Fair Values

Financial instruments consist mainly of cash and cash equivalents, accounts receivable, accounts payable, bank loans, overdraft facilities and long-term debt. The monetary assets represented by these financial instruments are primarily located in Poland, Hungary and Russia. Consequently, they are subject to currency translation risk when reporting in U.S. Dollars.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

•

Cash and cash equivalents – The carrying amount approximates fair value because of the short maturity of those instruments.

•

Short term securities – This consists of FX options to protect against foreign exchange risk of payments related to term loans denominated in U.S. Dollars in years 2009 and 2010. At quarter end the change in fair value of options, based on the mark to market valuation, is recorded as a gain or loss in the consolidated statement of income.

•

Equity method investment in affiliates – The fair value of investment in joint venture with Möet Hennessy based on a independent valuation prepared on acquisition.

•

Bank loans, overdraft facilities and long-term debt – The fair value of the Corporation’s debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Corporation for debt of the same remaining maturities.

The estimated fair values of the Corporation’s financial instruments are as follows:


	September 30, 2009
	Carrying Amount			Fair Value
Cash and cash equivalents	$	255,535		$	255,535
Hedges included in Prepaid expenses and other current assets		485			485
Hedges included in Other accrued liabilities		(2,267	)		(2,267	)
Equity method investment in affiliates		63,164			63,164
Bank loans, overdraft facilities and long-term debt		1,175,896			1,175,896

Derivative financial instruments

The Company is exposed to market movements in foreign currency exchange rates that could affect the Company’s results of operations and financial condition. In accordance with ASC Topic 815 “Derivatives and Hedging”, the Company recognizes all derivatives as either assets or liabilities on the balance sheet and measures those instruments at fair value.

The fair values of the Company’s derivative instruments can change with fluctuations in interest rates and/or currency rates and are expected to offset changes in the values of the underlying exposures. The Company’s derivative instruments are held to hedge economic exposures. The Company follows internal policies to manage interest rate and foreign currency risks, including limitations on derivative market-making or other speculative activities.

To qualify for hedge accounting under ASC Topic 815, the details of the hedging relationship must be formally documented at the inception of the arrangement, including the risk management objective, hedging strategy, hedged item, specific risk that is being hedged, the derivative instrument, how effectiveness is being assessed and how ineffectiveness will be measured. The derivative must be highly effective in offsetting either changes in the fair value or cash flows, as appropriate, of the risk being hedged.

Effectiveness is evaluated on a retrospective and prospective basis based on quantitative measures. When it is determined that a derivative is not, or has ceased to be, highly effective as a hedge, the Company discontinues hedge accounting prospectively. The Company discontinues hedge accounting prospectively when (1) the derivative is no longer highly effective in offsetting

changes in the cash flows of a hedged item; (2) the derivative expires or is sold, terminated, or exercised; (3) it is no longer probable that the forecasted transaction will occur; or (4) management determines that designating the derivative as a hedging instrument is no longer appropriate.

Fair value hedges are hedges that offset the risk of changes in the fair values of recorded assets, liabilities and firm commitments. The Company records changes in the fair value of derivative instruments which are designated and deemed effective as fair value hedges, in earnings offset by the corresponding changes in the fair value of the hedged items.

In September 2005, the Company entered into a coupon swap arrangement which exchanges a fixed Euro based coupon of 8%, with a variable Euro based coupon (IRS) based upon the 6 month Euribor rate plus a margin. The hedge is accounted for as a fair value hedge according to ASC Topic 815 and is tested for effectiveness on a quarterly basis using the long haul method. Under this method, as long as the hedge is deemed highly effective both the fair value of the hedge and the hedge item are marked to market with the net impact recorded as gain or loss in the income statement.

In January 2009, the remaining portion of the IRS hedge related to the Senior Secured Notes was closed and written off with a net cash settlement of approximately $1.9 million.

As at September 30, 2009 the Company’s subsidiary, Russian Alcohol Group was part of the following hedge transactions:

•

U.S. Dollar to Russian Ruble foreign exchange rate hedge to protect against foreign exchange risk of payments related to term loans denominated in U.S. Dollars. The fair value as of the acquisition date equaled to total premium of $7.4 million and a fair value as of September 30, 2009 of $0.5 million.

•

Interest rate hedge to fix cost related to the term loans denominated in U.S. Dollars with floating interest rate. Based on the mark to market valuation fair value as of September 30, 2009 is $(2.3) million.

Both of these hedges are not qualified for hedging accounting with all changes in fair values at the end of each interim period being recorded as a gain or loss in the statement of income base on the mark to market valuation.

17.

FAIR VALUE MEASUREMENTS

The Company adopted ASC Topic 820 “Fair Value Measurements and Disclosures”, which defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:


Level 1	–	Quoted prices in active markets for identical assets or liabilities.

Level 2	–	Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3	–	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The Company’s adoption of ASC Topic 820 did not have a material impact on our consolidated financial statements.

We evaluate the position of each financial instrument measured at fair value in the hierarchy individually based on the valuation methodology we apply. As at September 30, 2009, we have no material financial assets or liabilities carried at fair value using significant level 1 or level 3 inputs and the only instruments we value using level 2 inputs are listed below:

As at September 30, 2009 the Company’s subsidiary, the Russian Alcohol Group, was part of the following hedge transactions:

•

Coupon Swap

fair value hedge according to ASC Topic 815 and is tested for effectiveness on a quarterly basis using the long haul method. Under this method, as long as the hedge is deemed highly effective both the fair value of the hedge and the hedged item are marked to market with the net impact recorded as gain or loss in the income statement.

In January 2009, the remaining portion of the IRS hedge related to the Senior Secured Notes was closed and written off with a net cash settlement of approximately $1.9 million.

18.

STOCK OPTION PLANS AND WARRANTS

The Company adopted ASC Topic 718 “Compensation – Stock Compensation” requiring the recognition of compensation expense in the Condensed Consolidated Statements of Income related to the fair value of its employee share-based options.

The Company recognizes the cost of all employee stock options on a straight-line attribution basis over their respective vesting periods, net of estimated forfeitures. The Company has selected the modified prospective method of transition; accordingly, prior periods have not been restated.

ASC Topic 718 requires the recognition of compensation expense in the Consolidated Statements of Income related to the fair value of employee share-based options. 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. Prior to adopting ASC Topic 718, the Company applied Accounting Principles Board (“APB”) Opinion No. 25, and related Interpretations, in accounting for its stock-based compensation plans. All employee stock options were granted at or above the grant date market price. Accordingly, no compensation cost was recognized for fixed stock option grants in prior periods.

The Company’s 2007 Stock Incentive Plan (“Incentive Plan”) provides for the grant of stock options, stock appreciation rights, restricted stock and restricted stock units to directors, executives, and other employees (“employees”) of the Company and to non-employee service providers of the Company. Following a shareholder resolution in April 2003 and the stock splits of May 2003, May 2004 and June 2006, the Incentive Plan authorizes, and the Company has reserved for future issuance, up to 1,397,333 shares of Common Stock (subject to an anti-dilution adjustment in the event of a stock split, re-capitalization, or similar transaction). The Compensation Committee of the Board of Directors of the Company administers the Incentive Plan.

The option exercise price for stock options granted under the Incentive Plan may not be less than fair market value but in some cases may be in excess of the closing price of the Common Stock on the date of grant. The Company uses the stock option price based on the closing price of the Common Stock on the day before the date of grant if such price is not materially different than the opening price of the Common Stock on the day of the grant. Stock options may be exercised up to 10 years after the date of grant except as otherwise provided in the particular stock option agreement. Payment for the shares must be in cash, which must be received by the Company prior to any shares being issued. Stock options granted to directors and officers as part of an employee employment contract vest after 2 years. Stock options granted to general employees as part of a loyalty program vest after three years. The Incentive Plan was approved by CEDC shareholders during the annual shareholders meeting on April 30, 2007 to replace the Company’s 1997 Stock Incentive Plan (the “Old Stock Incentive Plan”), which expired in November 2007. The Stock Incentive Plan will expire in November 2017. The terms and conditions of the Stock Incentive Plan are substantially similar to those of the Old Stock Incentive Plan.

Before January 1, 2006 CEDC, the holding company, realized net operating losses and therefore an excess tax benefit (windfall) resulting from the exercise of the awards and a related credit to Additional Paid-in Capital (APIC) of $2.2 million was not recorded in the Company’s books. The excess tax benefits and the credit to APIC for the windfall should not be recorded until the deduction reduces income taxes payable on the basis that cash tax savings have not occurred. The Company will recognize the windfall upon realization.

A summary of the Company’s stock option and restricted stock units activity, and related information for the nine months ended September 30, 2009 is as follows:


Total Options	Number of Options		Weighted- Average Exercise Price

Outstanding at January 1, 2009	1,350,252		$	28.16
Granted	132,125		$	19.79
Exercised	—		$	—
Forfeited	—		$	—

Outstanding at March 31, 2009	1,482,377		$	27.86
Exercisable at March 31, 2009	1,038,225		$	22.22

Outstanding at March 31, 2009	1,482,377		$	27.86
Granted	68,500		$	20.24
Exercised	(20,250	)	$	13.65
Forfeited	(9,500	)	$	60.92

Outstanding at June 30, 2009	1,521,127		$	27.50
Exercisable at June 30, 2009	1,089,550		$	22.87

Outstanding at June 30, 2009	1,521,127		$	27.50
Granted	—		$	—
Exercised	(38,000	)	$	14.23
Forfeited	—		$	—

Outstanding at September 30, 2009	1,483,127		$	27.84
Exercisable at September 30, 2009	1,053,125		$	23.18


Nonvested restricted stock units	Number of Restricted Stock Units		Weighted- Average Grant Date Fair Value
Nonvested at January 1, 2009	68,555		$	51.42
Granted	13,341		$	19.58
Vested	—		$	—
Forfeited	(458	)	$	74.15

Nonvested at March 31, 2009	81,438		$	46.08

Nonvested at March 31, 2009	81,438		$	46.08
Granted	1,743		$	19.69
Vested	(2,740	)	$	34.51
Forfeited	(3,229	)	$	46.71

Nonvested at June 30, 2009	77,212		$	45.87

Nonvested at June 30, 2009	77,212		$	45.87
Granted	7,640		$	27.64
Vested	—		$	—
Forfeited	(3,118	)	$	54.80

Nonvested at September 30, 2009	81,734		$	43.82

During 2009, the range of exercise prices for outstanding options was $1.13 to $60.92. During 2009, the weighted average remaining contractual life of options outstanding was 5.5 years. Exercise prices for options exercisable as of September 30, 2009 ranged from $1.13 to $44.15. The Company has also granted 7,640 restricted stock units to its employees at an average price of $27.64.

The Company has issued stock options to employees under stock based compensation plans. Stock options are issued at the current market price, subject to a vesting period, which varies from one to three years. As of September 30, 2009, the Company has not changed the terms of any outstanding awards.

During the nine months ended September 30, 2009, the Company recognized compensation cost of $2.86 million and a related deferred tax asset of $0.5 million.

As of September 30, 2009, there was $4.7 million of total unrecognized compensation cost related to non-vested stock options and restricted stock units granted under the Plan. The costs are expected to be recognized over a weighted average period of 26 months through 2009-2012.

For the nine month period ended September 30, 2009, the compensation expense related to all options was calculated based on the fair value of each option grant using the binomial distribution model. The Company has never paid cash dividends and does not currently have plans to pay cash dividends, and thus has assumed a 0% dividend yield. Expected volatilities are based on average of implied and historical volatility projected over the remaining term of the options. The expected life of stock options is estimated based on historical data on exercise of stock options, post-vesting forfeitures and other factors to estimate the expected term of the stock options granted. The risk-free interest rates are derived from the U.S. Treasury yield curve in effect on the date of grant for instruments with a remaining term similar to the expected life of the options. In addition, the Company applies an expected forfeiture rate when amortizing stock-based compensation expenses. The estimate of the forfeiture rates is based primarily upon historical experience of employee turnover. As individual grant awards become fully vested, stock-based compensation expense is adjusted to recognize actual forfeitures. The following weighted-average assumptions were used in the calculation of fair value:


	2009			2008
Fair Value	$	8.07		$	18.16
Dividend Yield		0	%		0	%
Expected Volatility		47.3% - 80.4	%		34.1% - 38.5	%
Weighted Average Volatility		57.6	%		37.5	%
Risk Free Interest Rate		0.4	%		1.5% -3.2	%
Expected Life of Options from Grant		3.2			3.2

19.

COMMITMENTS AND CONTINGENT LIABILITIES

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

As part of the Share Purchase Agreement related to the October 2005 Polmos Bialystok Acquisition, the Company is required to ensure that Polmos Bialystok will make investments of at least 77.5 million Polish Zloty during the five years after the acquisition was consummated. As of September 30, 2009, the Company had invested 68.3 million Polish Zloty (approximately $23.6 million) in Polmos Bialystok.

The first portion of deferred payments already due under the original Stock Purchase Agreement amounting to €8,050,411 was settled on August 4, 2009 and the remaining portion of €8,303,630 was paid on September 15, 2009. In consideration for these payments, the Company received an additional 375 Class B shares of Whitehall, which represents an increase in the Company’s economic stake from 75% to 80%.

As part of the Whitehall Acquisition, the Company entered into a shareholders’ agreement with the other shareholder pursuant to which the Company has the right to purchase, and the other shareholder has the right to require the Company to purchase, all (but not less than all) of the shares of Whitehall capital stock held by such shareholder. Either of these rights may be exercised at any time, subject, in certain circumstances, to the consent of third parties. The aggregate price that the Company would be required to pay in the event either of these rights is exercised will fall within a range, determined based on Whitehall’s EBIT as well as the EBIT of certain related businesses, during two separate periods: (1) the period from January 1, 2008 through the end of the year in which the right is exercised, and (2) the two full financial years immediately preceding the end of the year in which the right is exercised, plus, in each case, the time-adjusted value of any dividends paid by Whitehall. Subject to certain limited exceptions, the exercise price will be (A) no less than the future value as of the date of exercise of $32.0 million, and (B) no more than the future value as of the date of exercise of $89.0 million, plus, in each case, the time-adjusted value of any dividends paid by Whitehall.

20.

DEFERRED CONSIDERATION

The New Option Agreement will govern the Company’s acquisition of the remaining equity interests in RAG held by Lion over the following four years.

Pursuant to the New Option Agreement, Cayman 4 and Cayman 5 granted to Cayman 7 a series of options entitling Cayman 7 to acquire, subject to the receipt of certain antitrust approvals, the remaining equity interests of RAG held by Lion through Cayman 4 and Cayman 5 (the “Cayman 7 Call Options”). In connection with the exercise of these options, Cayman 7 will receive certain equity interests in RAG, has paid and will pay to Cayman 4 and Cayman 5 consideration as follows: (1) 1,000,000 shares of Common Stock issuable, and $6,000,000 paid in cash, on October 30, 2009, (2) 1,575,000 shares of Common Stock issuable on June 15, 2010 and $39,330,517 and €22,822,679 payable in cash on or within 30 days after June 30, 2010 (up to $14,000,000 of which may, at the Company’s election, be replaced with an equivalent amount of Common Stock), (3) $65,708,229 and €62,243,670 payable in cash on or within 60 days after May 31, 2011 (up to $15,000,000 of which may, at the Company’s election, be replaced with an equivalent amount of Common Stock), (4) 751,852 shares of Common Stock issuable, and $66,644,690 and €63,087,417 payable in cash, on or within 90 days after July 31, 2012, and (5) $69,083,229 and €62,243,670 payable in cash on or within 120 days after May 31, 2013 (subject to reduction by up to $10,000,000, and up to $20,000,000 of which may, at the Company’s election, be replaced with an equivalent amount of Common Stock, in each case based upon the date on which such Cayman 7 Call Option is exercised and consummated). The amounts of cash payable, and number of shares issuable, are subject to certain adjustments based on the price of one share of Common Stock, and reduction in the event of early payment by the Company, in each case over the course of the Acquisition. The Company also will be able to apply the value of any dividends from RAG, in respect of its and Lion’s equity stakes, to prepayment of the consideration. Upon the consummation of all of the transactions contemplated above, the Company will hold all of the equity interests in RAG previously held by Lion, and will hold substantially all of the equity interests in RAG.

outstanding, until the last portion of the liability is settled in May 2013, with recognition of a non cash interest expense every quarter in the statement of income. The discounted amortization charge for the period from April 24, 2009 to June 30, 2009 amounted to $27.4 million.

On July 29, 2009, the Company entered into an agreement with Lion, pursuant to which Cayman 7 acquired additional indirect equity interests in RAG as a result of the acquisition by Cayman 6 of equity interests in RAG from certain of the Minority Investors (the “Selling Minority Investors”). The Company acquired such equity through a subscription for additional limited partnership interests in Cayman 7, of which it holds 100% of the economic interests and the general partner of which is an affiliate of Lion, pursuant to a Commitment Letter (the “Commitment Letter”), dated July 29, 2009, between the Company, Cayman 6 and Cayman 7. Cayman 7 made a further investment in Cayman 6, as provided in the New Agreements and the Commitment Letter, as a result of which Cayman 6 acquired the equity interests in RAG from the Selling Minority Investors pursuant to a Sale and Purchase Agreement (the “Sale and Purchase Agreement”), dated July 29, 2009, between Cayman 6, Euro Energy Overseas Ltd., a British Virgin Islands company, Altek Consulting Inc., a British Virgin Islands company, Genora Consulting Inc., a Republic of Seychelles company, Lidstel Ltd., a British Virgin Islands company, Pasalba Limited, a company incorporated under the laws of Cyprus and Lion/Rally Lux 1, a company incorporated in Luxembourg. The Cayment 6 equity interests acquired by Cayman 7 will be subject to the same security as Cayman 7’s other interests in Cayman 6. On August 3, 2009, the parties to the Commitment Letter and the Sale and Purchase Agreement consummated the Acquisition in exchange for $30,000,000 in cash, funded by the Company, resulting in the acquisition of a 6% stake in RAG held by the Selling Minority Investors. After giving effect to this acquisition of minority interests and the transactions contemplated by the Note Purchase Agreement, the Company holds approximately 58% of the equity interests in RAG.

The Company expects that it would finance all or a portion of its obligations under the agreements described above through additional sources of debt or equity funding. We cannot provide assurances as to whether or on what terms such funding would be available.

21.

RELATED PARTY TRANSACTION

In January of 2005, the Company entered into a rental agreement for a facility located in northern Poland, which is 33% owned by the Company’s Chief Operating Officer. The monthly rent to be paid by the Company for this location is approximately $16,300 per month and relates to facilities to be shared by two subsidiaries of the Company.

During the nine months of 2009, the Company made sales and purchases transactions with ZAO Urozhay an entity partially owned by a CEDC Board Member, Sergey Kupriyanov. Urozhay is acting as a toll filler for the Company. All sales related mainly to raw materials for production and were made on normal commercial terms. Total sales for the nine months ended September 30, 2009 were approximately $7.1 million. Purchases of finished goods from ZAO Urozhay were approximately $19.0 million.

During the nine months of 2009, the Company made sales to a restaurant which is partially owned by the Chief Executive Officer of the Company. All sales were made on normal commercial terms, and total sales for the nine months ended September 30, 2009 and 2008 were approximately $74,300 and $56,100.

One of the Company’s subsidiaries has a loan denominated in Euro from Herodius Holdings Limited, a company owned by a co-owner of Whitehall Group. The loan balance including accrued interest as at September 30, 2009 is $2.0 million. The loan accrues interest at normal market rates.

As described in further detail in Note 3, on September 22, 2009, the Company acquired the remaining 15% of the share capital of Copecresto Enterprises Limited that it did not already hold. Mr. Sergey Kupriyanov, a member of the Board of Directors of the Company, had an indirect minority interest in Copecresto and as a result thereof had an approximate 22% interest in the $70,167,734 total consideration paid for the remaining 15% and the approximately $16.9 million to be paid by the Company in connection with the completion of the Company’s initial acquisition of 85% of the share capital of Copecresto (of which $9.9 million was paid on October 30, 2009 and the remainder is to be paid in November 2009). The price terms under those transactions were determined based on arms-length negotiations among the parties.

22.

SUBSEQUENT EVENTS

The Company has performed an evaluation of subsequent events through November 9, 2009, which is the date the financial statements were issued.

On October 30, 2009, the Company signed an amendment to the New Option Agreement with Cayman 4, Cayman 5, and Cayman 7. The parties to the New Option Agreement have agreed to amend it for the matter described below, effective on October 30, 2009.

In connection with the exercise of one of the Cayman 7 Call Options, instead of issuing 1,000,000 shares of Common Stock of the Company to Cayman 4 and Cayman 5 on October 30, 2009, the parties agreed that the Company will transfer $31,860,000 payable in cash prior to January 15, 2010 (provided, that if Cayman 7 does not make this payment prior to January 15, 2010, the Company will instead issue $32,510,000 in Common Stock to Cayman 4 and Cayman 5 on February 10, 2010).

23.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In August 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Accounting Standards Update No. 2009-05, Fair Value Measurements and Disclosures (“ASU 2009-05”), which is effective for financial statements issued for interim and annual periods ending after August 2009. ASU 2009-05 amends FASB Accounting Standards Codification (“FASB ASC”) Topic 820-10 (“FASB ASC 820-10”). The update provides clarification on the techniques for measurement of fair value required of a reporting entity when a quoted price in an active market for an identical liability is not available. This update had no impact on the Company’s financial position, results of operations or cash flows.

In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards Codification )™ and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FAS No. 162 (“SFAS No. 168”), which is effective for financial statements issued for interim and annual periods ending after September 15, 2009. SFAS No. 168 codified as ASC Topic 105-10 (“FASB ASC 105-10”). FASB ASC 105-10 identifies the sources of accounting principles and the framework for selecting principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with US GAAP (the GAAP hierarchy). This standard had no impact on the Company’s financial position, results of operations or cash flows.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”). SFAS 167 is a revision to FIN 46(R) and changes how a company determines whether an entity should be consolidated when such entity is insufficiently capitalized or is not controlled by the company through voting (or similar rights). The determination of whether a company is required to consolidate an entity is based on, among other things, the entity’s purpose and design and the company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. SFAS 167 retains the scope of FIN 46(R) but added entities previously considered qualifying special purpose entities, or QSPEs, since the concept of these entities is eliminated in SFAS 166. SFAS 167 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2009. The Company is evaluating potential effect of adoption of SFAS 167 on its consolidated financial position or results of operations.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS No. 165”), codified in FASB ASC Topic 855-10, which establishes accounting and disclosure standards for events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It defines financial statements as available to be issued, requiring the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, whether it be the date the financial statements were issued or the date they were available to be issued. FAS 165 is effective for our second quarter of 2009 and has not had a material impact on our Consolidated Financial Statements.

In April 2009, the FASB issued FASB Staff Position (“FSP”) No. SFAS 115-2 and SFAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP No. SFAS 115-2 and SFAS 124-2”), which is codified in FASB ASC Topic 320-10. FSP No. SFAS 115-2 and SFAS 124-2 provides guidance to determine whether the holder of an investment in a debt security for which changes in fair value are not regularly recognized in earnings should recognize a loss in earnings when the investment is impaired. This FSP also improves the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the consolidated financial statements. This guidance is effective for interim reporting periods ending after June 15, 2009. The adoption of FSP FAS 115-2 and FAS 124-2 did not have a material impact on our consolidated financial statements.

and APB 28-1, which is codified in FASB ASC Topic 825-10-50, require disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The Company adopted FSP No. SFAS 107-1 and APB 28-1 beginning April 1, 2009. This FSP had no impact on the Company’s financial position, results of operations or cash flows.

In April 2009, the FASB issued FSP No. SFAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP No. SFAS 157-4”). FSP No. SFAS 157-4, which is codified in FASB ASC Topics 820-10-35-51 and 820-10-50-2, provides additional guidance for estimating fair value and emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. The Company adopted FSP No. SFAS 157-4 beginning April 1, 2009. This FSP had no material impact on the Company’s financial position, results of operations or cash flows.

In December 2008, the FASB issued FSP No. SFAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets, (“FSP No. SFAS 132(R)-1”) which is codified in FASB ASC Topic 715-20-50. FSP No. SFAS 132(R)-1 requires enhanced disclosures about the plan assets of a Company’s defined benefit pension and other postretirement plans intended to provide financial statement users with a greater understanding of: 1) how investment allocation decisions are made; 2) the major categories of plan assets; 3) the inputs and valuation techniques used to measure the fair value of plan assets; 4) the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period; and 5) significant concentrations of risk within plan assets. The disclosure requirements are annual and do not apply to interim financial statements and are required by us in disclosures related to the year ended December 31, 2009. We do expect the adoption of FSP SFAS 132R-1 to result in additional annual financial reporting disclosures and we are continuing to assess the potential effects of this pronouncement.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

This report contains forward-looking statements, which provide our current expectations or forecasts of future events. These forward-looking statements may be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “intends,” “may,” “will” or “should” or, in each case, their negative, or other variations or comparable terminology, but the absence of these words does not necessarily mean that a statement is not forward-looking. These forward looking statements include all matters that are not historical facts. They appear in a number of places throughout this report and include, without limitation:

•

information concerning possible or assumed future results of operations, trends in financial results and business plans, including those relating to earnings growth and revenue growth, liquidity, prospects, strategies and the industry in which the Company and its subsidiaries operate;

•

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

•

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

•

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

•

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

•

other statements about the Company’s plans, objectives, expectations and intentions; and

•

other statements that are not historical facts.

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

We urge you to read and carefully consider the items of the other reports that we have filed with or furnished to the SEC for a more complete discussion of the factors and risks that could affect us and our future performance and the industry in which we operate, including the risk factors described in the Company’s Current Report on Form 8-K filed with the SEC on July 13, 2009. In light of these risks, uncertainties and assumptions, the forward-looking events described in this report may not occur as described, or at all.

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

The following discussion and analysis provides information which management believes is relevant to the reader’s assessment and understanding of the Company’s results of operations and financial condition and should be read in conjunction with the Consolidated Financial Statements and the notes thereto found elsewhere in this report.

Overview

We are the largest vodka producer by value and volume in the world with our primary operations in Poland, Hungary and Russia. In Poland, we produce the Absolwent, Zubrówka, Bols and Soplica brands, among others. In Russia, we produce and sell one of the leading vodkas in the premium segment, Parliament Vodka. Through our investment in the Russian Alcohol Group, referred to as RAG, we also produce and sell the number one selling vodka in Russia, Green Mark, a mainstream brand. In addition, we produce and distribute Royal Vodka, the number one selling vodka in Hungary. We also currently export our products to many markets around the world.

In 2008, the companies in our group produced and sold approximately 30.1 million nine-liter cases of vodka in the four main vodka segments: top—premium, premium, mainstream and economy (with over 85% of our sales in the mainstream and premium segments).

Starting at the end of 2008 and continuing into 2009, we have sustained our actions focused on cost control and working capital management, including re-evaluating our capital expenditure plans, continuing to consolidate distribution branches in Poland and reducing headcount both in Poland and Russia. In addition in Russia and Poland, spirit pricing has remained low from year end to September 2009, and labor costs continue to come down as well as other key cost components including but not limited to petrol costs and materials for packaging.

Significant factors affecting our consolidated results of operations

Effect of Acquisitions of Subsidiaries

During 2009, we have continued our acquisition strategy outside of Poland and Hungary with our investments into the production and importation of alcoholic beverages in Russia. Specifically, the Company agreed to amend the terms of the Stock Purchase Agreement governing its acquisition of equity interests in Whitehall to satisfy the Company’s obligation to the seller pursuant to a share price guarantee in the original Stock Purchase Agreement. In addition, the Company and Lion Capital LLP have entered into a new agreement to govern the Company’s acquisition of all of the equity interests in the Russian Alcohol Group held by Lion, which has resulted in the consolidation of the Russian Alcohol Group commencing in the second quarter of 2009.

The Whitehall Acquisition

On May 23, 2008, the Company and certain of its affiliates entered into, and closed upon, a Share Sale and Purchase Agreement and certain other agreements whereby the Company acquired shares representing 50% minus one vote of the voting power, and 75% of the economic interests in the Whitehall Group. The Whitehall Group is a leading importer of premium spirits and wines in Russia. The aggregate consideration paid by the Company was $200 million, paid in cash at the closing. In addition, on October 21, 2008 the Company issued 843,524 shares of its common stock to the seller. On February 24, 2009, the Company and the seller amended the terms of the Stock Purchase Agreement governing the Whitehall acquisition to satisfy the Company’s obligations to the seller pursuant to a share price guarantee in the original Stock Purchase Agreement, as described under “The Company’s Future Liquidity and Capital Resources,” below. As a result of this the economic interest of the Company in Whitehall Group increased from 75% to 80%.

The Company has consolidated the Whitehall Group as a business combination as of May 23, 2008, on the basis that the Whitehall Group is a Variable Interest Entity and the Company has been assessed as being the primary beneficiary. Included within the Whitehall Group is a 50/50 joint venture with Möet Hennessy. This joint venture is accounted for using the equity method and is recorded on the face of the balance sheet in investments with minority interest initially recorded at fair value on the face of the balance sheet. The current term of the joint venture is until June 2013 at which point the Möet Hennessy will have the option to acquire the remaining shares of the entity.

The Investment in the Russian Alcohol Group

On July 9, 2008, the Company completed an investment with Lion Capital LLP and certain of Lion’s affiliates and certain other investors, pursuant to which the Company, Lion and such other investors acquired all of the outstanding equity of the Russian Alcohol Group (“RAG”). In connection with that investment, the Company acquired an indirect equity stake in RAG of approximately 42%, and Lion acquired substantially all of the remainder of the equity of RAG. The agreements governing that investment gave the Company the right to acquire, and gave Lion the right to require the Company to acquire, Lion’s equity stake in RAG (the “Prior Agreement”). On April 24, 2009, the Company entered into new agreements with Lion to replace the Prior Agreement, which will permit the Company, through a multi-stage equity purchase, to acquire over the next five years (including 2009) all of the equity interests in RAG held by Lion, as described under “The Company’s Future Liquidity and Capital Resources,” below.

As a result of these agreements, the Company has assessed RAG as a variable interest entity, with the Company being the primary beneficiary. Pursuant to this change, the Company has begun to consolidate RAG as of the second quarter of 2009 and recorded a non-controlling interest of 9.4% representing equity not held by the Company or Lion Capital. From an accounting perspective the Company treated the acquisition of the RAG equity interests held by Lion as if this acquisition had happened on April 24, 2009. As of this date CEDC recorded at fair value all future payments due under these agreements as a liability. The total present value of deferred consideration as of April 24, 2009 amounted to $447.2 million and was determined using a 14.5% discount rate. The present value of the liability is amortized over the period of time ending on the date the last payment is made which is currently expected in 2013, with recognition of a non cash interest expense every quarter in the statement of income. The discount amortization charge for the period from April 24, 2009 to September 30, 2009 amounted to $27.4 million.

On July 29, 2009, the Company entered into an agreement with Lion, pursuant to which Lion/Rally Cayman 7 L.P., a Cayman Exempted Limited Partnership, of which the Company holds 100% of the economic interests and is a limited partner, acquired an additional 6% indirect equity interest in RAG from certain minority investors in RAG in exchange for $30,000,000 in cash funded by the Company. After giving effect to this acquisition, the Company holds approximately 58% of the equity interests in RAG.

Starting from the second quarter of 2009, the Company is consolidating all profit and loss results for Cayman 2 except for the share not held by the Company or Lion Capital, which was initially 9.4% but decreased to 3.4% as a result of the acquisition of a 6% interest from certain minority investors described in the paragraph above. The Company accounts for the 3.4% of non-controlling interest being presented under the equity section in the consolidated balance sheet of CEDC.

The impact of the consolidation of the Russian Alcohol Group includes the consolidation of the revenues and costs of the business which impact sales, gross margins, operating costs, operating profit and financial expenses as discussed in more detail below. In addition the amortization of the deferred acquisition charges is reflected in other non-operating expenses and the net income attributable to non-controlling interest in subsidiaries reflects the proportionate share of net income net held by either the Company or Lion Capital, which is 3.4% at present.

Effect of Exchange Rate Movements

During the first quarter of 2009 there was a significant depreciation of the Polish Zloty and the Russian Ruble against the U. S. Dollar and the Euro; however, during the second and third quarter the situation in emerging markets began to improve and both currencies began to strengthen against the U.S. Dollar. These exchange rate movements have had a material impact on our foreign currency translation in each reporting quarter. In addition, we recognized a material non cash foreign exchange translation loss in the first quarter, and a material non cash foreign exchange translation gain in the second and third quarter, in each case primarily due to our liabilities under the Senior Secured Notes and the Senior Convertible Notes, denominated in Euro and U.S. Dollars, respectively.

Basis of presentation

We adopted ASC Topic 470-20, “Debt with Conversion and Other Options” that is effective for our $310.0 million aggregate principal amount of 3.00% Convertible Senior Notes (“CSN”) and requires retrospective application for all periods presented. The ASC Topic 470-20 requires the issuer of convertible debt instruments with cash settlement features to separately account for the liability ($290.3 million as of the date of the issuance of the CSNs) and equity components ($19.7 million as of the date of the issuance of the CSNs) of the instrument. The debt component was recognized at the present value of its cash flows discounted using a 4.5% discount rate, our borrowing rate at the date of the issuance of the CSNs for a similar debt instrument without the conversion feature. The equity component, recorded as additional paid-in capital, was $12.8 million, which represents the difference between the proceeds from the issuance of the CSNs and the fair value of the liability, net of deferred taxes of $6.9 million as of the date of the issuance of the CSNs.


	Nine months ended September 30, 2008			Three months ended September 30, 2008

Additional pre-tax non-cash interest expense		3,580			2,133
Additional deferred tax benefit		1,253			747
Retroactive change in net income and retained earnings		(2,327	)		(1,386	)
Change to basic earnings per share	($	0.05	)	($	0.03	)
Change to diluted earnings per share	($	0.05	)	($	0.03	)

Results of Operations:

Three months ended September 30, 2009 compared to three months ended September 30, 2008

A summary of the Company’s operating performance (expressed in thousands except per share amounts) is presented below. The amounts for the three months ended September 30, 2008 have been adjusted from the previously disclosed amounts, as described above.


	Three months ended
	September 30, 2009			September 30, 2008 (as adjusted)

Sales	$	577,287		$	586,038
Excise taxes		(187,188	)		(133,597	)
Net Sales		390,099			452,441
Cost of goods sold		260,269			336,609


Gross Profit		129,830			115,832


Operating expenses		80,040			62,992


Operating Income before fair value adjustments		49,790			52,840


Contingent consideration true-up		(15,000	)		—
Gain on remeasurement of previously held equity interest		—			—
Impairment charge		—			—

Operating Income		34,790			52,840


Non operating income / (expense), net
Interest (expense), net		(17,379	)		(16,550	)
Other financial income / (expense), net		58,112			(34,730	)
Amortization of deferred charges		(16,192	)		—
Other non operating (expense), net		(319	)		(423	)


Income before taxes, equity in net income from unconsolidated investments and noncontrolling interests in subsidiaries		59,012			1,137

Income tax benefit / (expense)		(11,584	)		68
Equity in net earnings of affiliates		956			1,087

Net income	$	48,384		$	2,292


Less: Net income attributable to noncontrolling interests in subsidiaries		47			657
Less: Net income attributable to redeemable noncontrolling interests in Whitehall Group		1,191			2,361


Net income /(loss) attributable to CEDC	$	47,146		($	726	)


Net income / (loss) per share of common stock, basic	$	0.85		($	0.02	)


Net income / (loss) per share of common stock, diluted	$	0.80		($	0.02	)

Net Sales

Net sales represent total sales net of all customer rebates, excise tax on production and exclusive imports and value added tax. Total net sales decreased by approximately 13.8%, or $62.3 million, from $452.4 million for the three months ended September 30, 2008 to $390.1 million for the three months ended September 30, 2009. This decrease in sales is due to the following factors:


Net Sales for three months ended September 30, 2008	$	452,441
Increase from acquisitions		97,406
Reduction of low margin products and excise impact		(23,534	)
Existing business sales decline		(20,795	)
Impact of foreign exchange rates		(115,419	)

Net sales for three months ended September 30, 2009	$	390,099

Factors impacting our existing business sales for the three months ending September 30, 2009 include our program of reducing our wholesaling of lower margin SKUs, primarily beer (which sells in higher volumes during the summer as compared to other quarters), in Poland that we began at the end of 2008, which amounts to $23.5 million, including $1.6 million of excise tax reduction, for the three months ended September 30, 2009. As of January 2009, sales of products which we produce at Polmos Bialystok and Bols to certain key accounts were moved from our distribution companies to the producer, Polmos Bialystok and Bols, in order to reduce distribution costs. When a sale is reported directly from a producer, excise tax is eliminated from net sales and when a sale is made from a distribution company the sales are recorded gross with excise tax. Therefore the movement of the sales contracts from a distributor to the producer reduces the amount of net sales reported through the elimination of excise tax and also increases gross profit as a percent of sales. Our existing business sales growth was slightly lower in Poland and Russia, reflecting the soft consumer environment due to the global and regional economic crisis. The net sales increase from acquisitions is due to the inclusion of sales from the Russian Alcohol Group, which the Company has begun consolidating as of the second quarter of 2009.

Based upon average exchange rates for the three months ended September 30, 2009 and September 30, 2008, our functional currencies depreciated against the U.S. dollar, by approximately 26%. This resulted in a decrease of $115.4 million of sales in U.S. Dollar terms. Our business split by segment, which represents our primary geographic locations of operations, Poland, Russia and Hungary, is shown below:


	Segment Net Sales Three months ended September 30,
	2009		2008
Segment
Poland	$	232,558	$	356,065
Russia		149,180		84,948
Hungary		8,361		11,428


Total Net Sales	$	390,099	$	452,441

As noted above the decline in sales for Poland was primarily driven by the devaluation of the Polish Zloty against the U.S. dollar and the reduction in our lower margin third party distribution sales. Partially offsetting these items was growth in our imports and exports business.

The increase in sales in Russia was driven primarily by the consolidation of the sales of the Russian Alcohol Group, as discussed above.

The Hungarian sales decline was driven mainly by the devaluation of the Hungarian Forint to the U.S. dollar, as well as the soft consumer environment due to the global and regional economic crisis.

Gross Profit

Total gross profit increased by approximately 12.1%, or $14.0 million, to $129.8 million for the three months ended September 30, 2009, from $115.8 million for the three months ended September 30, 2008, reflecting the increase in gross profit margins percentage in the three months ended September 30, 2009. Gross margin increased from 25.6% of net sales for the three months ended September 30, 2008 to 33.3% of net sales for the three months ended September 30, 2009. The primary factor resulting

in the improved margin was the inclusion of the results of the Russian Alcohol Group, which, as producer, operates on a higher gross profit margin than the Polish distribution business, which is more significantly impacted by lower margin distribution operations. Margins were further improved by our reduced emphasis on lower margin third party distribution products, primarily beer, as described above, as well as lower input costs, including raw spirit, and a growth of our import/export business.

Operating Expenses

Operating expenses consist of selling, general and administrative, or “S,G&A” expenses, advertising expenses, non-production depreciation and amortization, and provision for bad debts. Operating expenses as a percent of net sales increased from 13.9% for the three months ended September 30, 2008 to 20.5% for the three months ended September 30, 2009. Total operating expenses increased by approximately 27.0%, or $17.0 million, from $63.0 million for the three months ended September 30, 2008 to $80.0 million for the three months ended September 30, 2009. Approximately $33.8 million of this increase resulted primarily from the effects of the consolidation of the Russian Alcohol Group. The cost base of our business was reduced by $0.7 million due to various cost cutting measures taken over in the last nine months.


Operating expenses for three months ended September 30, 2008	$	62,992
Increase from acquisitions		33,784
Decrease from existing business decline		(667	)
Impact of foreign exchange rates		(16,069	)

Operating expenses for three months ended September 30, 2009	$	80,040

The table below sets forth the items of operating expenses.


	Three Months Ended September 30,
	2009		2008
	($ in thousands)
S,G&A	$	66,134	$	48,927
Marketing		10,985		10,732
Depreciation and amortization		2,921		3,333

Total operating expense	$	80,040	$	62,992

S,G&A consists of salaries, warehousing and transportation costs, administrative expenses and bad debt expense. S,G&A increased by approximately 35.2%, or $17.2 million, from $48.9 million for the three months ended September 30, 2008 to $66.1 million for the three months ended September 30, 2009. Approximately $29.3 million of this increase resulted from the consolidation of the results of the Russian Alcohol Group partially offset by the devaluation of the Polish Zloty and cost savings.

Depreciation and amortization decreased by approximately 12.1%, or $ 0.4 million, from $3.3 million for the three months ended September 30, 2008 to $2.9 million for the three months ended September 30, 2009 due to the impact of foreign exchange translation.

Operating Income

Total operating income decreased by approximately 34.1%, or $18.0 million, from $52.8 million for the three months ended September 30, 2008 to $34.8 million for the three months ended September 30, 2009. This decrease resulted primarily from a $15.0 million post-closing cash payment made to the original sellers for the Russian Alcohol Group that was settled in the third quarter of 2009, as well as devaluation of the Polish Zloty against the U.S. Dollar. Because the $15.0 million payment was made after the acquisition closing date, the consideration is treated as an expense on the income statement. In addition, excluding the $15.0 million payment described above, operating profit margin as a percentage of net sales increased from 11.7% to 12.8% reflecting the impact of our own brands constituting a greater proportion of our total sales, including in Russia, as well as the reduction in lower third party distribution sales and cost cutting measures as mentioned above. The table below summarizes the segmental split of operating profit.


	Operating Income Three months ended September 30,
	2009			2008
Segment
Poland	$	4,012		$	32,601
Russia		31,725			20,540
Hungary		1,683			2,362
Corporate Overhead
General corporate overhead		(1,692	)		(1,543	)
Option Expense		(938	)		(1,120	)


Total Operating Income	$	34,790		$	52,840

Operating profit in Poland, excluding the $15.0 million payment described above, as a percent of net sales declined to 8.2% for the three months ended September 30, 2009 from 9.2% in the same period in 2008. This was due to the lower sales of our distribution business through the fixed-cost infrastructure.

The operating profit margin as a percent of net sales in Russia declined from 24.2% for the three months ended September 30, 2008 to 21.3% for the three months ended September 30, 2009. This is due primarily to the Russian Alcohol Group which was consolidated for the first time during the three months ending June 30, 2009 and which operates on lower operating profit margins, than our other businesses in Russia (Parliament and the Whitehall Group) due to the nature of its products. Approximately 7% of the sales of the Russian Alcohol Group represent sales of lower margin ready to drink alcohol-based products and its primary brand Green Mark, is sold at mainstream price points as compared to Parliament which is a sub-premium brand with a higher price point.

In Hungary operating profit margins remained stable as a percent of net sales at 20.7% for the three months ended September 30, 2008 as compared to 20.1% for the three months ended September 30, 2009.

The decline in our operating profit in all segments was also impacted by devaluation of our functional currencies against the U.S. Dollar.

Non Operating Income and Expenses

Total interest expense increased by approximately 4.8%, or $0.8 million, from $16.6 million for the three months ended September 30, 2008 to $17.4 million for the three months ended September 30, 2009. This increase is a result of the consolidation of the finance costs of the Russian Alcohol Group and the additional borrowings the Company made to finance its investment in the Russian Alcohol Group in July 2008.

The Company recognized $58.1 million of unrealized foreign exchange rate gains in the three months ended September 30, 2009, primarily related to the impact of movements in exchange rates on our USD and EUR denominated liabilities, as compared to $34.7 million of losses in the three months ended September 30, 2008.

The present value of the deferred consideration related to acquisition in the Russian Alcohol Group is amortized over the period of time ending on the date the last payment is made, which is currently expected in 2013, with recognition of a non cash interest expense every quarter in the statement of income. The discount amortization charge for the three month period ended September 30, 2009 amounted to $16.2 million.

Income Tax

Our effective tax rate for the three months ending September 30, 2009 was 19.6%, which is driven by the blended statutory tax rates rate of 19% in Poland and 20% in Russia.

Equity in Net Earnings

Equity in net earnings for the three months ending September 30, 2009 include CEDC’s proportional share of net income from its investments accounted for under the equity method.

Nine months ended September 30, 2009 compared to nine months ended September 30, 2008

A summary of the Company’s operating performance (expressed in thousands except per share amounts) is presented below. The amounts for the nine months ended September 30, 2008 have been adjusted from the previously disclosed amounts, as described above.


	Nine months ended
	September 30, 2009			September 30, 2008 (as adjusted)

Sales	$	1,407,475		$	1,536,964
Excise taxes		(437,379	)		(349,601	)
Net Sales		970,096			1,187,363
Cost of goods sold		659,408			901,577


Gross Profit		310,688			285,786


Operating expenses		198,664			164,635


Operating Income before fair value adjustments		112,024			121,152


Contingent consideration true-up		(15,000	)		—
Gain on remeasurement of previously held equity interest		225,605			—
Impairment charge		(20,309	)		—

Operating Income		302,320			121,151


Non operating income / (expense), net
Interest (expense), net		(51,516	)		(42,822	)
Other financial income / (expense), net		25,181			6,373
Amortization of deferred charges		(27,423	)		—
Other non operating income / (expense), net		(8,961	)		(565	)


Income / (loss) before taxes, equity in net income from unconsolidated investments and noncontrolling interests in subsidiaries		239,601			84,137

Income tax benefit / (expense)		(46,359	)		(16,691	)
Equity in net earnings of affiliates		(17,013	)		1,989

Net income / (loss)	$	176,229		$	69,435


Less: Net income / (loss) attributable to noncontrolling interests in subsidiaries		2,185			2,486
Less: Net income / (loss) attributable to redeemable noncontrolling interests in Whitehall Group		833			3,276


Net income /(loss) attributable to CEDC	$	173,211		$	63,673


Net income per share of common stock, basic	$	3.41		$	1.48


Net income per share of common stock, diluted	$	3.19		$	1.45

Net Sales

Total net sales decreased by approximately 18.3%, or $217.3 million, from $1,187.4 million for the nine months ended September 30, 2008 to $970.1 million for the nine months ended September 30, 2009. This decrease in sales is due to the following factors:


Net Sales for nine months ended September 30, 2008	$	1,187,363
Increase from acquisitions		229,710
Reduction of low margin products and excise impact		(62,312	)
Existing business sales decline		(29,726	)
Impact of foreign exchange rates		(354,939	)

Net sales for nine months ended September 30, 2009	$	970,096

Factors impacting our existing business sales for the nine months ending September 30, 2009 include our program of reducing our wholesaling of lower margin SKUs, primarily beer, in Poland, which we began at the end of 2008 and lower depletions during the first quarter of 2009 as a result of higher inventory levels in the market in Poland at the beginning of the quarter. These higher inventory levels in the market at the beginning of the year, which impacted primarily the first quarter of 2009, were driven by the nine percent excise tax increase in Poland on December 31, 2008 which prompted customers to purchase additional product prior to December 31, 2008 at the lower excise tax. This was the primary factor affecting our decline in existing business sales growth. Moreover, as of January 2009, sales of products which we produce at Polmos Bialystok and Bols to certain key accounts were moved from our distribution companies to the producer, Polmos Bialystok and Bols, in order to reduce distribution costs. When a sale is reported directly from a producer, excise tax is eliminated from net sales and when a sale is made from a distribution company the sales are recorded gross with excise tax. Therefore the movement of the sales contracts from a distributor to the producer reduces the amount of net sales reported through the elimination of excise tax and also increases gross profit as a percent of sales. These were the primary factors affecting the decline in our existing business sales of approximately 3%. However, as noted below, the reduction in lower margin of distributed products contributed to our positive growth in gross and operating margins as a percentage of sales. Based upon average exchange rates for the nine months ended September 30, 2009 and September 30, 2008, our functional currencies depreciated against the U.S. Dollar, by approximately 43%. This resulted in a decrease of $354.9 million of sales in U.S. Dollar terms. These decreases were partially offset by the consolidation of net sales of the Russian Alcohol Group, as discussed above.

Our business split by segment, which represents our primary geographic locations of operations, Poland, Russia and Hungary, is shown below:


	Segment Net Sales Nine months ended September 30,
	2009		2008
Segment
Poland	$	616,262	$	1,003,189
Russia		330,418		154,521
Hungary		23,416		29,653


Total Net Sales	$	970,096	$	1,187,363

As noted above the decline in sales for Poland were primarily driven by the devaluation of the Polish Zloty against the U.S. dollar, which resulted in a reduction of sales of $301.4 million, a $62.3 million reduction in our lower margin third party distribution sales, and the lower sales of our own products due to higher inventory levels in the market during the first quarter of 2009 as a result of the excise tax increase in Poland on December 31, 2008, which resulted in the bulk of the remainder of the decline. Partially offsetting these items was growth in our imports and exports business.

The increase in sales in Russia was driven primarily by the inclusion of a full quarter for the entities acquired in 2008, namely Parliament on March 13, 2008 and the Whitehall Group on May 23, 2008 as well as the consolidation of the results of the Russian Alcohol Group commencing in the second quarter of 2009.

The Hungarian sales decline was driven by the devaluation of the Hungarian Forint against the U.S. Dollar, whereas in local currency value terms sales were up by approximately one percent.

Gross Profit

Total gross profit increased by approximately 8.7%, or $24.9 million, to $310.7 million for the nine months ended September 30, 2009, from $285.8 million for the nine months ended September 30, 2008, reflecting the increase in gross profit margins percentage in the nine months ended September 30, 2009. Gross margin increased from 24.1% of net sales for the nine months ended September 30, 2008 to 32.0% of net sales for the nine months ended September 30, 2009. The primary factor resulting in the improved margin was the inclusion of the newly acquired businesses in Russia, Parliament and Whitehall, as well as the consolidation of the results of the Russian Alcohol Group, which, as producers and importers, operate on a higher gross profit margin than the Polish distribution business, which is more significantly impacted by lower margin distribution operations. Margins were further improved by our reduced emphasis on lower margin third party distribution products, primarily beer, as described above, as well as lower input costs, including raw spirit, and a growth of our import/export business.

Operating Expenses

Operating expenses as a percent of net sales increased from 13.9% for the nine months ended September 30, 2008 to 20.5% for the nine months ended September 30, 2009. Total operating expenses increased by approximately 20.7%, or $34.1 million, from $164.6 million for the nine months ended September 30, 2008 to $198.7 million for the nine months ended September 30, 2009. Approximately $84.2 million of this increase resulted primarily from the effects of the acquisition of Parliament Group in March 2008 and Whitehall Group in May 2008, as well as the consolidation of the results of the Russian Alcohol Group in July 2008. Approximately $0.6 million resulted from the cost increases in our business, which includes costs related to employee headcount reductions that were implemented during the first quarter of 2009. These increases were partially offset by the depreciation of the functional currencies against the U.S. Dollar.


Operating expenses for nine months ended September 30, 2008	$	164,635
Increase from acquisitions		84,213
Increase from existing business growth		573
Impact of foreign exchange rates		(50,757	)

Operating expenses for nine months ended September 30, 2009	$	198,664

The table below sets forth the items of operating expenses.


	Nine Months Ended September 30,
	2009		2008
	($ in thousands)
S,G&A	$	163,918	$	126,792
Marketing		26,905		29,395
Depreciation and amortization		7,841		8,448

Total operating expense	$	198,664	$	164,635

S,G&A increased by approximately 29.3%, or $37.1 million, from $126.8 million for the nine months ended September 30, 2008 to $163.9 million for the nine months ended September 30, 2009. Approximately $69.5 million of this increase resulted primarily from the effects of the acquisitions discussed above and the consolidation of the results of the Russian Alcohol Group, and the remainder of the increase resulted primarily from the growth of the business, which increases were fully offset by the depreciation of the Polish Zloty against the U.S. Dollar.

Depreciation and amortization decreased by approximately 7.1%, or $ 0.6 million, from $8.4 million for the nine months ended September 30, 2008 to $7.8 million for the nine months ended September 30, 2009 due to the impact of foreign exchange translation.

Operating Income

Total operating income increased by approximately 149.4%, or $181.1 million, from $121.2 million for the nine months ended September 30, 2008 to $302.3 million for the nine months ended September 30, 2009. This increase resulted primarily from the consolidation of the results of the Russian Alcohol Group, from which the Company recognized a one-time gain in the nine month period ended September 30, 2009, amounting to $225.6 million in operating income based on the remeasurement of previously held equity interests in RAG to fair value, which was partially offset by an impairment charge of $20.3 million, a $15.0 million post-closing cash payment made to the original sellers for the Russian Alcohol Group that was settled in the third quarter of 2009 and from the impact of the devaluation of our primary functional currencies (Polish Zloty, Russian Ruble and Hungarian Forint) against the

U.S. Dollar, as described above. However, as a percent of net sales, operating profit margin excluding fair value adjustments increased from 10.2% to 11.5% reflecting the impact of the newly acquired Russian businesses and the consolidation of the results of the Russian Alcohol Group, as well as the reduction in lower third party distribution sales and a growth of our import/export business. The table below summarizes the segmental split of operating profit.


	Operating Income Nine months ended September 30,
	2009			2008
Segment
Poland	$	244,503		$	86,266
Russia		60,055			36,489
Hungary		3,519			5,172
Corporate Overhead
General corporate overhead		(2,896	)		(3,978	)
Option Expense		(2,861	)		(2,798	)


Total Operating Income	$	302,320		$	121,151

Operating profit in Poland, after excluding the $20.3 million impairment, $225.6 million of gain on remeasurements of previously held equity interest and $15.0 million payment described above, as a percent of net sales increased to 8.8% for the nine months ended September 30, 2009 from 8.6% in the same period in 2008. This was due to the factors mentioned above, namely the trimming of lower margin distribution products from our sales mix.

The operating profit margin as a percent of net sales in Russia declined from 23.6% for the nine months ended September 30, 2008 to 18.2% for the nine months ended September 30, 2009. However due to the timing of the acquisitions in Russia, the first quarter of 2008 only includes two weeks of operations from Parliament which is not reflective of a normal first quarter in Russia. In addition, the seasonality of the business in Russia is much greater than in Poland, as generally the first quarter operating profit is approximately 5%-8% of the full year operating profit in Russia, as compared to 15%-16% in Poland. Therefore the first quarter in Russia tends to have a significantly lower operating profit as a percent of sales as compared to the rest of the year. In addition the Russian Alcohol Group which was consolidated for the first time during the three months ending June 30, 2009 operates on lower operating profit margins than our other businesses in Russia (Parliament and the Whitehall Group) due to the nature of its products. Approximately 9% of the sales of the Russian Alcohol Group represent sales of lower margin ready to drink alcohol-based products and its primary brand, Green Mark, is sold at mainstream price points as compared to Parliament’s primary brand, which is a sub-premium brand with a higher price point.

In Hungary there was a decline in operating profit as a percent of net sales from 17.4% for the nine months ended September 30, 2008 to 15.0% for the nine months ended September 30, 2009. This decline was due primarily to higher local currency import costs in the first quarter of 2009 as the Hungarian business sales constitute only imported spirits which have prices denominated primarily in Euro. However, we expect a price increase, which was taken at the end of the second quarter of 2009, together with the recent strengthening of the Hungarian Forint, to mitigate the impact of higher local currency import prices.

Non Operating Income and Expenses

Total interest expense increased by approximately 20.3%, or $8.7 million, from $42.8 million for the nine months ended September 30, 2008 to $51.5 million for the nine months ended September 30, 2009. This increase resulted from the consolidation of the financial results of the Russian Alcohol Group commencing in the second quarter of 2009 and additional borrowings to finance the investment in the Russian Alcohol Group in July 2008.

The Company recognized $25.2 million of unrealized foreign exchange rate gain in the nine months ended September 30, 2009, primarily related to the impact of movements in exchange rates on our USD and EUR denominated acquisition financing, as compared to $6.4 million of gains for the nine months ended September 30, 2008.

The present value of the deferred consideration related to acquisition in the Russian Alcohol Group is amortized over the period of time ending on the date the last payment is made, which is currently expected in 2013, with recognition of a non cash interest expense every quarter in the statement of income. The discount amortization charge for the nine month period ended September 30, 2009 amounted to $27.4 million.

Income Tax

Our effective tax rate for the nine months ending September 30, 2009 was 19.3%, which is driven by the blended statutory tax rates rate of 19% in Poland and 20% in Russia.

Equity in Net Earnings

Equity in net earnings for the nine months ending September 30, 2009 include CEDC’s proportional share of net loss from its investments accounted for under the equity method. This includes $17.7 million of losses from the investment in the Russian Alcohol Group for the first quarter 2009, primarily due to the devaluation of the Russian Ruble against the U.S. Dollar, while this investment was consolidated under the equity method, which was partially offset by $0.7 million of gain from the investment in the MHWH J.V. for nine months ended September 30, 2009.

Liquidity and Capital Resources

The Company’s primary uses of cash in the future will be to fund its working capital requirements, service indebtedness, finance capital expenditures and fund acquisitions including pursuant to existing arrangements described under “The Company’s Future Liquidity and Capital Resources”. The Company expects to fund these requirements in the future with cash flows from its operating activities, cash on hand, the financing arrangements described below, and other arrangements we may enter into from time to time.

Financing Arrangements

Existing Credit Facilities

On July 10, 2008, a company comprising part of the Russian Alcohol Group entered into a Facility Agreement for a syndicated facility arranged by Goldman Sachs International, Bank Austria Creditanstalt AG, ING Bank N.V. London Branch and Raiffeisen Zentralbank Österreich AG, which provided for a term loan facility of $315 million. $35 million of the term loan matures on July 1, 2013, $195 million of the term loan matures on July 1, 2014 and the remaining $70 million matures on July 1, 2015. The term loan is guaranteed by Pasalba and Latchey Ltd. and certain other companies in the Russian Alcohol Group and is secured by all of the shares of capital stock of Russian Alcohol Group.

As of September 30, 2009, $45.7 million remained available under the Company’s overdraft facilities. These overdraft facilities are renewed on an annual basis.

On April 24, 2008, the Company signed a credit agreement with Bank Zachodni WBK SA in Poland to provide up to $50 million of financing to be used to finance a portion of the Parliament and Whitehall acquisition, as well as general working capital needs of the Company. The agreement provides for a $30 million five year amortizing term facility and a one year $20 million short term facility with annual renewal. In the second quarter of 2009 this facility was converted into Polish Zlotys. The maturity of term loan was extended to May 2013 and the maturity of the short term facility was extended to May 2010. The loan is guaranteed by the Company, Bols Sp. z o.o, a wholly owned subsidiary of the Company (“Bols”) and certain other subsidiaries of the Company, and is secured by all of the capital stock of Bols and 60% of the capital stock of Copecresto.

On July 2, 2008, the Company entered into a Facility Agreement with Bank Handlowy w Warszawie S.A., which provided for a term loan facility of $40 million, of which $33.3 million was outstanding as at September 30, 2009. The term loan matures on July 4, 2011 and is guaranteed by CEDC, Carey Agri and certain other subsidiaries of the Company and is secured by all of the shares of capital stock of Carey Agri and subsequently will be further secured by shares of capital stock in certain other subsidiaries of CEDC.

Senior Secured Notes

In connection with the Bols and Polmos Bialystok acquisitions, on July 25, 2005 the Company completed the issuance of € 325 million 8% Senior Secured Notes due 2012 (the “Notes”), of which approximately €245 million remains payable. Interest is due semi-annually on the 25th of January and July, and the Notes are guaranteed on a senior basis by certain of the Company’s subsidiaries. The Indenture governing our Notes contains certain restrictive covenants, including covenants limiting the Company’s ability to: make certain payments, including dividends or other distributions, with respect to the share capital of the parent or its subsidiaries; incur or guarantee additional indebtedness or issue preferred stock; make certain investments; prepay or redeem subordinated debt or equity; create certain liens or enter into sale and leaseback transactions; engage in certain transactions with affiliates; sell assets or consolidate or merge with or into other companies; issue or sell share capital of certain subsidiaries; and enter into other lines of business.

Convertible Senior Notes

Equity Issuances

On July 24, 2009, the Company consummated the offer and sale of 8,350,000 shares of the Company’s common stock, of which 6,850,000 shares were issued and sold by the Company and 1,500,000 shares of common stock were sold by Mark Kaoufman. Pursuant to that offering, the Company granted the underwriters a 25-day over-allotment option to purchase up to an additional 835,000 shares of common stock from the Company at the same price in a public offering pursuant to a Registration Statement on Form S-3 and a related prospectus filed with the Securities and Exchange Commission, which option the underwriters exercised in full. The Company received $179.6 million from the Offering, including the over-allotment shares, after deducting underwriting discounts and estimated offering expenses payable by the Company.

On September 2, 2009, the Company filed a prospectus supplement with the Securities and Exchange Commission pursuant to a Registration Statement on Form S-3 registering for resale by Lion/Rally Cayman 5, a company incorporated in the Cayman Islands, the 540,873 shares of the Company’s common stock issued to Cayman 5 on that same date in connection with the Russian Alcohol Group acquisition. The Company did not receive any proceeds from the sale.

On September 15, 2009, the Company issued to Cirey Holdings, in connection with the Russian Alcohol Group acquisition, 479,499 shares of the Company’s common stock. The Company did not receive any proceeds from the sale.

Statement of Liquidity and Capital Resources

During the periods under review, the Company’s primary sources of liquidity were cash flows generated from operations, credit facilities, the equity offerings, the Convertible Senior Notes offering and proceeds from options exercised. The Company’s primary uses of cash were to fund its working capital requirements, service indebtedness, finance capital expenditures and fund acquisitions. The following table sets forth selected information concerning the Company’s consolidated cash flow during the periods indicated.


	Nine months ended September 30, 2009			Nine months ended September 30, 2008
	($ in thousands)
Cash flow from operating activities	$	94,666		$	46,664
Cash flow from investing activities	$	(45,733	)	$	(659,164	)
Cash flow from financing activities	$	72,641		$	627,228

Net cash flow from operating activities

Net cash flow from operating activities represents net cash from operations and interest. Net cash provided by operating activities for the nine months ended September 30, 2009 was $94.7 million as compared to $46.7 million for the nine months ended September 30, 2008. Working capital movements included $91.5 million of cash inflows for the nine months ended September 30, 2009 as compared to $27.8 million of cash outflows for the nine months ended September 30, 2008. The primary driver for this was the improvement in receivables collection process.

Net cash flow used in investing activities

Net cash flows used in investing activities represent net cash used to acquire subsidiaries and fixed assets as well as proceeds from sales of fixed assets. Net cash used in investing activities for the nine months ended September 30, 2009 was $45.7 million as compared to $659.2 million for the nine months ended September 30, 2008. The net cash outflow is mainly due to payments to buy the remaining 15% interest in Parliament for $70.0 million, to acquire an additional 6% interest in Russian Alcohol Group from certain minority investors for $30.0 million, to satisfy certain earn-out obligations to the original sellers of Russian Alcohol Group

totalling $54.3 million and to settle obligations to the sellers of Whitehall in accordance with share purchase agreements for $31.3 million, all of which was partially offset by the inflow resulting from the one-time consolidation of the opening cash balance of the Russian Alcohol Group of $140.8 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 earned in financing activities was $72.6 million for the nine months ended September 30, 2009 as compared to $627.2 million for the nine months ended September 30, 2008. Primary uses in the nine months ended September 30, 2009 were repayment of bank facilities and repayment of $28.7 million of pre-acquisition tax penalties in the Russian Alcohol Group, which is to be reimbursed by the sellers and has been netted off with loans from the sellers.

The Company’s Future Liquidity and Capital Resources

The Company’s primary uses of cash in the future will be to fund its working capital requirements, service indebtedness, finance capital expenditures and fund acquisitions, including pursuant to existing arrangements described below. The Company expects to fund these requirements in the future with cash flows from its operating activities, cash on hand, the financing arrangements described above and other financing arrangements it may enter into from time to time. However, recent significant changes in market liquidity conditions resulting in a tightening in the credit markets and a reduction in the availability of debt and equity capital could impact our access to funding and our related funding costs (and we cannot provide assurances as to whether or on what terms such funding would be available), which could materially and adversely affect our ability to obtain and manage liquidity, to obtain additional capital and to restructure or refinance any of our existing debt.

Acquisitions – Purchase/Sale Rights

On May 23, 2008, the Company’s subsidiary, Polmos Bialystok, closed on its acquisition of 50% minus one vote of the voting power and 75% of the economic interests in the Whitehall Group, a leading importer of premium spirits and wines in Russia, for $200 million in cash paid at closing, plus 843,524 shares of the Company’s common stock issued on October 21, 2008, plus an additional payment of $5,876,351 in cash and an additional issuance of 2,100,000 shares of the Company’s common stock, both made on February 24, 2009, plus further cash payments of $2,000,000 made on March 15, 2009, €8,050,411 made on August 4, 2009 and €8,303,630 made on September 15, 2009, plus potential further cash payments based on the per share price of the Company’s common stock on a go-forward basis. In consideration for these payments, the Company received an additional 375 Class B shares of Whitehall, which represents an increase in the Company’s economic stake from 75% to 80%.

The Company entered into a shareholders’ agreement with the other shareholders of Whitehall that include purchase and sale rights relating to the Company’s potential acquisition of the equity interests in Whitehall that are owned by the other shareholders thereof. The exercise of these rights, and the acquisition of the outstanding equity interests of RAG held by Lion, could affect the Company’s liquidity.

Whitehall Acquisition

On May 23, 2008, the Company and certain of its affiliates, entered into, and closed upon, a Share Sale and Purchase Agreement and certain other agreements whereby the Company acquired shares representing 50% minus one vote of the voting power, and 75% of the economic interests, in the Whitehall Group. The Whitehall Group is a leading importer of premium spirits and wines in Russia. The aggregate consideration paid by the Company was $200 million, paid in cash at the closing. In addition, on October 21, 2008 the Company issued to the Seller 843,524 shares of its common stock, par value $0.01 per share.

On February 24, 2009, the Company and the seller amended the terms of the Stock Purchase Agreement governing the Whitehall acquisition to satisfy the Company’s obligations to the seller pursuant to a share price guarantee in the original Stock Purchase Agreement. Pursuant to the terms of this amendment, the Company paid to the seller $5,876,351 in cash, and issued to the seller 2,100,000 shares of its common stock, in settlement of a minimum share price guarantee by the Company, and later made an additional cash payment of $2,000,000 on March 15, 2009. The first portion of deferred payments already due under the original Stock Purchase Agreement amounting to €8,050,411 was paid on August 4, 2009 and the remaining portion of €8,303,630 was paid on September 15, 2009. In consideration for these payments, the Company received an additional 375 Class B shares of Whitehall, which represents an increase in the Company’s economic stake from 75% to 80%.

Pursuant to the Whitehall shareholders’ agreement, Polmos Bialystok has the right to purchase, and the other shareholder has the right to require Polmos Bialystok to purchase, all (but not less than all) of the shares of Whitehall capital stock held by such shareholder. Either of these rights may be exercised at any time, subject, in certain circumstances, to the consent of third parties. The aggregate price that the Company would be required to pay in the event either of these rights is exercised will fall within a range determined based on Whitehall’s EBIT as well as the EBIT of certain related businesses, during two separate periods: (1) the period from January 1, 2008 through the end of the year in which the right is exercised, and (2) the two full financial years immediately

preceding the end of the year in which the right is exercised, plus, in each case, the time-adjusted value of any dividends paid by Whitehall. Subject to certain limited exceptions, the exercise price will be (A) no less than the future value as of the date of exercise of $32.0 million and (B) no more than the future value as of the date of exercise of $89.0 million, plus, in each case, the time-adjusted value of certain dividends paid by Whitehall.

Russian Alcohol Group Acquisition

On April 24, 2009, the Company entered into new agreements (the “New Agreements”) with Lion, to replace the Prior Agreement, which will permit the Company, through a multi-stage equity purchase, to acquire over the next five years (including 2009) all of the equity interests in RAG held by Lion (the “Acquisition”), including a Note Purchase and Share Subscription Agreement between the Company, Carey Agri International – Poland Sp. z o.o., a Polish limited liability company and subsidiary of the Company (“Carey Agri”), Lion/Rally Cayman 2, a company incorporated in the Cayman Islands and the acquisition vehicle used for the original investment (“Cayman 2”), and Lion/Rally Cayman 5, a company incorporated in the Cayman Islands and an affiliate of Lion (“Cayman 5,” and such agreement, the “Note Purchase Agreement”).

The New Option Agreement will govern the Company’s acquisition of the remaining equity interests in RAG held by Lion over the following four years.

Pursuant to the New Option Agreement, as subsequently amended on October 30, 2009, Cayman 4 and Cayman 5 granted to Cayman 7 a series of options entitling Cayman 7 to acquire, subject to the receipt of certain antitrust approvals, the remaining equity interests of RAG held by Lion through Cayman 4 and Cayman 5 (the “Cayman 7 Call Options”). In connection with the exercise of these options, Cayman 7 will receive certain equity interests in RAG, and has paid and will pay to Cayman 4 and Cayman 5 consideration as follows: (1) $6,000,000 paid in cash on October 30, 2009 and $31,860,000 payable in cash prior to January 15, 2010 (provided, that if Cayman 7 does not make this payment prior to January 15, 2010, the Company instead will issue $32,510,000 in Common Stock to Cayman 4 and Cayman 5 on February 10, 2010), (2) 1,575,000 shares of Common Stock issuable on June 15, 2010 and $39,330,517 and €22,822,679 payable in cash on or within 30 days after June 30, 2010 (up to $14,000,000 of which may, at the Company’s election, be replaced with an equivalent amount of Common Stock), (3) $65,708,229 and €62,243,670 payable in cash on or within 60 days after May 31, 2011 (up to $15,000,000 of which may, at the Company’s election, be replaced with an equivalent amount of Common Stock), (4) 751,852 shares of Common Stock issuable, and $66,644,690 and €63,087,417 payable in cash, on or within 90 days after July 31, 2012, and (5) $69,083,229 and €62,243,670 payable in cash on or within 120 days after May 31, 2013 (subject to reduction by up to $10,000,000, and up to $20,000,000 of which may, at the Company’s election, be replaced with an equivalent amount of Common Stock, in each case based upon the date on which such Cayman 7 Call Option is exercised and consummated). The amounts of cash payable, and number of shares issuable, are subject to certain adjustments based on the price of one share of Common Stock, and reduction in the event of early payment by the Company, in each case over the course of the Acquisition. The Company also will be able to apply the value of any dividends from RAG, in respect of its and Lion’s equity stakes, to prepayment of the consideration. Upon the consummation of all of the transactions contemplated above, the Company will hold all of the equity interests in RAG previously held by Lion, and will hold substantially all of the equity interests in RAG.

Lion and its affiliates currently exercise voting control over RAG, and for so long as Lion does so, RAG may not make any dividends or distributions on its outstanding equity without the consent of CEDC. Once the Company has paid consideration in the aggregate of $230 million to Lion and its affiliates in connection with the Acquisition, the Company and Lion will govern RAG as a 50/50 joint venture. During that time, RAG may not make any dividends or distributions on its outstanding equity without the consent of both the Company and Lion. Once the Company has paid consideration in the aggregate of $380 million to Lion and its affiliates in connection with the Acquisition, the Company will gain sole management control of RAG. From that time and for so long as Lion is a minority investor in RAG, the Company may make dividends or distributions on its outstanding equity with 30 days’ written notice to Lion, subject to all existing legal and contractual restrictions and certain financial covenant limitations. The value of any dividends paid by RAG, both to the Company and to Lion, will be credited as prepayment of the Company’s payment obligations in connection with the Acquisition, with any accelerated payments being reduced by an 8% per annum discount.

Effects of Inflation and Foreign Currency Movements

Inflation in Poland is projected at 3.2% for 2009, compared to actual inflation of 4.2% in 2008. In Russia and Hungary respectively, the projected inflation for 2009 is at 13.0% and 3.6%, compared to actual inflation of 13.3% and 6.8% in 2008.

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 income statement. 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 income statement is by the movement of the average exchange rate used to restate the income statement 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 income statement 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 the fluctuations in the exchange rate have impacted the Company’s financial condition and results of operations and have affected the comparability of our results between financial periods. The exchange rates of our functional currencies used to create our income statement depreciated by approximately 43% over the same period in 2008. The actual period end exchange rate used to create our balance sheet appreciated by approximately 2% as compared to December 31, 2008.

The Polish Zloty and Russian Ruble depreciated by approximately 20% and 16% respectively against the U.S. Dollar in the first quarter of 2009. In the second quarter of 2009 the trend reversed and the Polish Zloty and the Russian Ruble appreciated against the U.S. Dollar by 10% and 9%, respectively. In the third quarter of 2009 the trend continued and the Polish Zloty and the Russian Ruble further appreciated against the U.S. Dollar by 9% and 3%, respectively. Overall, during the period from December 31, 2008 to September 30, 2009, the Polish Zloty appreciated by approximately 2% against the U.S. Dollar, and the Russian Ruble depreciated by

approximately 2% against the U.S. Dollar. Should the Polish Zloty and the Russian Ruble continue to appreciate against the U.S. Dollar, our results of operations may be positively impacted due to an increase in revenue in U.S. Dollar terms from the currency translation effects of that appreciation. This may be partially offset by a similar increase in costs in U.S. Dollar terms. Conversely, should this trend reverse, our results of operating may be negatively impacted due to a decrease in revenue in U.S. Dollar terms from the currency translation effects of that depreciation.

As a result of the issuance of the Company’s Senior Secured Notes due 2012 of which €245 million in principal amount is currently outstanding, we are exposed to foreign exchange movements. Movements in the EUR-Polish Zloty exchange rate will require us to revalue our liability on the Senior Secured Notes accordingly, the impact of which will be reflected in the results of the Company’s operations. Every one percent movement in the EUR-Polish Zloty exchange rate as compared to the exchange rate applicable on September 30, 2009 will have an approximate $3.6 million change in the valuation of the liability with the offsetting pre-tax gain or losses recorded in the profit and loss of the Company. In order to manage the cash flow impact of foreign exchange changes, the Company previously has entered into certain hedge agreements. In January 2009, the remaining portion of the IRS hedge related to the Senior Secured Notes was closed and written off with a net cash settlement of approximately $1.9 million. As of September 30, 2009, the Company’s subsidiary, Russian Alcohol Group, was part of two hedge transactions. The first is a foreign exchange rate hedge to protect against foreign exchange risk of payments related to term loans of Russian Alcohol Group denominated in U.S. Dollars. The hedge has a fair value as of the acquisition date equal to total premium of $7.4 million and a fair value as of September 30, 2009 of $0.5 million. The second is an interest rate hedge to fix costs related to the term loans denominated in U.S. Dollars with a floating interest rate. Based on the mark to market valuation, the fair value of this hedge as of September 30, 2009 is ($2.3) million. Both of these hedges are not qualified for hedging accounting with all changes in fair values at the end of each interim period being recorded as a gain or loss in the statement of income based on the mark to market valuation.

The proceeds of our $310 million Senior Convertible Notes have been on-lent to subsidiaries that have the Polish Zloty as the functional currency. Movements in the USD-Polish Zloty exchange rate will require us to revalue our liability on the Senior Convertible Notes accordingly, the impact of which will be reflected in the results of the Company’s operations. Every one percent movement in the U.S. Dollar-Polish Zloty exchange rate as compared to the exchange rate applicable on September 30, 2009 will have an approximate $2.9 million change in the valuation of the liability with the offsetting pre-tax gain or losses recorded in the profit and loss of the Company.

The effect of having debt denominated in currencies other than the Company’s functional currencies (primarily the Company’s Senior Secured Notes and Senior Convertible Notes) 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 the Polish Zloty and Russian Ruble have increased in value during the three months ended September 30, 2009, the conversion of these U.S. Dollars or Euro liabilities in the subsidiaries of CEDC that have the Polish Zloty or Russian Ruble as their functional currency will require a decreased valuation of that liability in the functional currency. This revaluation impacts the Company’s results of operations through the recognition of unrealized non cash foreign exchange rate gains or losses in our results of operations. In the case of the Senior Secured Notes and Senior Convertible Notes the full principal amount is due in 2012 and 2013 respectively; therefore, final local currency obligations will only be recognized then as a realized gain or loss.

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 of America. 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 in Poland, 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 includes excise tax except in the case where the sales are made from the production unit, in which case it is recorded net of excise tax.

Goodwill and Intangibles

Following the adoption of ASC Topic 805 and ASC Topic 350, goodwill and certain intangible assets having indefinite lives are no longer subject to amortization. Their book values are tested annually for impairment, or more frequently, if facts and circumstances indicate the need. Fair value measurement techniques, such as the discounted cash flow methodology, are utilized to assess potential impairments. The testing is performed at each reporting unit level. In the discounted cash flow method, the Company discounts forecasted performance plans to their present value. The discount rate utilized is the weighted average cost of capital for the reporting unit. US GAAP requires the impairment test to be performed in two stages. If the first stage does not indicate that the carrying values of the reporting units exceed the fair values, the second stage is not required. When the first stage indicates potential impairment, the company has to complete the second stage of the impairment test and compare the implied fair value of the reporting units’ goodwill to the corresponding carrying value of goodwill.

Intangibles are amortized over their effective useful life. In estimating fair value, management must make assumptions and projections regarding such items as future cash flows, future revenues, future earnings, and other factors. The assumptions used in the estimate of fair value are generally consistent with the past performance of each reporting unit and are also consistent with the projections and assumptions that are used in current operating plans. Such assumptions are subject to change as a result of changing economic and competitive conditions. If these estimates or their related assumptions change in the future, the Company may be required to record an impairment loss for the assets. The fair values calculated have been adjusted where applicable to reflect the tax impact upon disposal of the asset.

In connection with the Bols, Polmos Bialystok, Parliament and Russian Alcohol Group acquisitions, the Company has acquired trademark rights to various brands, which were capitalized as part of the purchase price allocation process. As these brands are well established they have been assessed to have an indefinite life. These trademarks rights will not be amortized; however, management assesses them at least once a year for impairment.

We recorded an impairment charge of $20.3 million during the second quarter of 2009 that included an impairment to the carrying values of our trademarks.

As required by ASC Topic 350, we tested for impairment our unamortized intangible assets at June 30, 2009, between the required annual tests, because we believed events had occurred and circumstances changed that would more likely than not reduce the fair value of our trademarks and goodwill below their carrying amounts.

We used the income approach to test our trademarks and goodwill for impairments as of June 30, 2009 and we used the same assumptions as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008, except for the following adjustments:

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the discount rate for Poland was adjusted from 8.8% to 8.5%;

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the discount rate for Russia was adjusted from 14.2% to 10.2%;

We have tested goodwill for impairment separately for the following reporting units: Vodka Production, Domestic Distribution, Hungary Distribution, Parliament Group, Whitehall Group.

We estimated the growth rates in projecting cash flows for each of our reporting generating unit separately, based on a detailed five year plan related to each reporting unit.

Taking into account current estimations supporting our calculations under current market trends and conditions we believe that no further impairment charge is considered necessary through the date of the accompanying financial statements.

Accounting for Business Combinations

The acquisition of businesses is an important element of the Company’s strategy. Acquisitions made prior to December 31, 2008 were accounted for in accordance with SFAS No. 141, “Business Combinations” (“SFAS 141”). Effective January 1, 2009, all business combinations will be accounted for in accordance with ASC Topic 805 “Business Combinations”.

We account for our acquisitions made in 2008 under the purchase method of accounting in accordance with SFAS 141, Business Combinations, and allocate the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The determination of the values of the assets acquired and liabilities assumed, as well as associated asset useful lives, requires management to make estimates. The Company’s acquisitions typically result in goodwill and other intangible assets; the value and estimated life of those assets may affect the amount of future period amortization expense for intangible assets with finite lives as well as possible impairment charges that may be incurred.

The calculation of purchase price allocation requires judgment on the part of management in determining the valuation of the assets acquired and liabilities assumed.

The Company has consolidated the Whitehall Group as a business combination, on the basis that the Whitehall Group is a Variable Interest Entity in accordance with ASC Topic 810 “Consolidation” and the Company has been assessed as being the primary beneficiary.

Derivative Instruments

The Company is exposed to market movements from changes in foreign currency exchange rates that could affect the Company’s results of operations and financial condition. In accordance with ASC Topic 815 “Derivatives and Hedging”, the Company recognizes all derivatives as either assets or liabilities on the balance sheet and measures those instruments at fair value.

At the inception of a transaction the Company documents the relationship between the hedging instruments and hedged items, as well as its risk management objective. This process includes linking all derivatives designated to specific firm commitments or forecasted transitions. The Company also documents its assessment, both at the hedge inception and on an ongoing basis, of whether the derivative financial instruments that are used in hedging transactions are highly effective in offsetting changes in fair value or cash flows of hedged items.

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

Whitehall Group

On May 23, 2008, the Company and certain of its affiliates, entered into, and closed upon, a Share Sale and Purchase Agreement and certain other agreements whereby the Company acquired shares representing 50% minus one vote of the voting power, and 75% of the economic interests, in the Whitehall Group. In consideration for additional payments made to the seller on February 24, 2009, the Company received an additional 375 Class B shares of Whitehall, which represents an increase of the Company’s economic stake in Whitehall Group from 75% to 80%.

Transfers of Financial Assets

Except for the amount of $7.5 million that was lent at market rates as a working capital by the Company to the Whitehall Group there were no transfers of financial assets to VIE as the Whitehall Group is a self financing body. Including the $7.5 million transfer, the Company does not have any continuing involvement with transferred financial assets that allow the transferors to receive cash flows or other benefits from the assets or requires the transferors to provide cash flows or other assets in relation to the transferred financial assets.

Variable Interest Entities

CEDC consolidated the Whitehall Group as a business combination as of May 23, 2008, on the basis that the Whitehall Group is a Variable Interest Entity (“VIE”) and the Company has been assessed as being the primary beneficiary. Included within the Whitehall Group is a 50/50 joint venture with Möet Hennessy. This joint venture is accounted for using the equity method and is recorded on the face of the balance sheet in investments with minority interest initially recorded at fair value on the face of the balance sheet. The current term of the joint venture is until June 2013 at which point Möet Hennessy will have the option to acquire the remaining shares of the entity.

CEDC management has concluded that its interest in Peulla Enterprises, the special purpose vehicle (“SPV”), being a Cyprus company in which CEDC has 49.9% voting power, would not fall under any of scope exceptions. Therefore CEDC has evaluated whether the SPV is a variable interest entity and thus the SPV subject to consolidation accounting.

In determining the accounting treatment if the Whitehall Group is a VIE and needs to be consolidated by CEDC, we considered the respective conditions of ASC Topic 810.

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Equity Investment at Risk—We concluded that the SPV would not meet the requirement of a VIE based upon paragraph 5(a) as the interest would be classified as equity under US GAAP, the at risk equity is sufficient to permit the entity to finance its activities. Neither equity holder will provide any additional material capital into the SPV. The SPV will be utilized solely as a holding company with its economics determined by the underlying Whitehall Group.

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Controlling Financial Interests—Both shareholders, Mark Kaoufman acting through a Jersey trust (“the Trust”) and CEDC, are able to direct the activities and operations of the Whitehall Group through their roles on the Board of Directors and their responsibilities for selection of executive level officers. However, the ultimate obligation to absorb losses of the entity or right to receive the residual benefits will lie with CEDC at the time the put/call term ends. Should the business not perform, the Trust will have the right to put his shares to CEDC with a pre-agreed floor on the value of the put option. Thus the Company is at risk of absorbing a greater portion of losses upon the Trust’s exit than the Trust itself. Conversely at the end of the term, CEDC can call and if the business has over performed, the amount paid to the Trust on the call is capped at a pre-agreed amount. As such, because the Trust is both limited in its losses and returns through the terms of the put/call with caps and floors, this criterion is met and would cause Whitehall Group to be considered a VIE.

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Disproportionate Voting Rights—The voting rights of the Trust and CEDC (50.1% and 49.9%) are not proportionate to their economic interests (20% and 80%). In this structure, it appears CEDC has disproportionately fewer voting rights in relation to its economic rights.

Further, the below activities of the entity that are more closely associated with the activities of CEDC, thereby having substantially of the entity’s activities conducted on its behalf. As CEDC has disproportionately fewer rights while substantially all of Whitehall Group’s activities are for CEDC, this would indicate that Whitehall Group lacks characteristic:

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The operations of Whitehall Group are substantially similar in nature to the activities of CEDC;

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CEDC has a call option to purchase the interests of the other investors in the entity;

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The Trust has an option to put his interests to CEDC.

Both the Trust and CEDC are precluded from transferring its interests in the SPV to any third-party without consent from the other party. Transfers are subject to an absolute other party discretion standard, other than limited permitted transfers (i.e., to affiliates). As such, it appears a de facto relationship exists.

The primary factor to be considered here is the design and intent of the variable interest entity. The SPV that holds the Whitehall Group and the related shareholders agreement were created with the clear intent to maximize the financial exposure that CEDC has to the Whitehall Group business and to ultimately allow CEDC to take full control of the business in 2013. CEDC bears the greatest level of economic share of the entities performance, both in terms of profit allocation (80%) and valuation of the put/call option at the end with a clear floor and cap on payment. The put/call structure in place provides near assurance that at the end of the term CEDC will take full ownership of the business. Should the business perform at or above plan, CEDC valuation is capped therefore would elect to call, and should the business under perform, the Trust will put the shares receiving the guaranteed minimum valuation.

Russian Alcohol Group

On April 24, 2009, the Company entered into new agreements with Lion, to replace the Prior Agreement, which will permit the Company, through a multi-stage equity purchase, to acquire over the next five years (including 2009) all of the equity interests in RAG held by Lion (the “Acquisition”), including a Note Purchase and Share Subscription Agreement between the Company, Carey Agri, Cayman 2, and Cayman 5. For further details on the whole structure of this acquisition please refer to Note 3 of the accompanying financial statements attached herein.

At the lowest level of the existing structure, all of the Russian Alcohol Group companies up to the level of Lion/Rally Lux1 are consolidated based on the fact that these are 100% wholly-owned companies. Therefore, we have evaluated and considered Cayman 7 as a variable interest entity for CEDC in the structure.

Transfers of Financial Assets

There were no transfers of financial assets to a VIE as the Russian Alcohol Group is a self financing body. The Company does not have any continuing involvement with transferred financial assets that allow the transferors to receive cash flows or other benefits from the assets or requires the transferors to provide cash flows or other assets in relation to the transferred financial assets.

Variable Interest Entities

Cayman 7 is a company in which Cayman 2 and CEDC are the sole limited partners and an affiliate of Lion is the general partner. CEDC has 100% of the economic interests in Cayman 7, but Lion retains control of Cayman 7 through Cayman 2’s ownership of a single voting share with de minimis economic rights (the “Golden Share”) but voting control of Cayman 7. As Cayman 7 has the right to call capital from CEDC to settle obligations under the Option Agreement, CEDC has evaluated whether Cayman 7 is a variable interest entity under the provisions ASC Topic 810.

CEDC’s management has concluded that its direct interest in Cayman 7, as well as its indirect interest through Carey Agri and Cayman 2, would not fall under any of these scope exceptions. Therefore CEDC has evaluated whether Cayman 7 is a variable interest entity under the provisions of ASC Topic 810 and thus subject to consolidation accounting.

In determining the accounting treatment if Cayman 7 and, effectively, the whole Russian Alcohol Group is a VIE and needs to be consolidated by CEDC, we considered the conditions outlined in Paragraphs 5 (a), (b), or (c) of ASC Topic 810.

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Equity Investment at Risk—We concluded that as the contribution made by Cayman 2 was the only one that required substantial investment, Cayman 2 should be defined as having its equity at risk. Moreover as Cayman 7 is not able to finance its operations without funds received from CEDC, we believe that Cayman 7 would meet the requirement of a VIE based upon paragraph 5(a).

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Controlling Financial Interests—CEDC concluded that the equity investment at risk does not meet the requirements as all dividends from the business are passed to CEDC with CEDC not having its equity investment at risk. These dividends then reduce CEDC’s payment obligations to Lion (if dividends paid to CEDC by RAG exceed the call option price, Lion has to return the excess as CEDC’s call option obligations have been met). However, Lion is not entitled to receive any dividends from Cayman 7 directly as CEDC has 100% of the economic interests, with Lion having voting control through voting rights. Therefore we believe Cayman 7 is required to be treated as a VIE.

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Disportionate Voting Rights—We believe that both criteria, including lack of voting rights and the requirement that substantially all activities of Cayman 7 involve or are conducted on behalf of CEDC (as Cayman 7 is a company created solely to facilitate CEDC’s funding of the exercise of call options to purchase shares of Cayman 6), we believe that this would require Cayman 7 to be treated as a VIE.

The conclusion of CEDC management is that Cayman 7, including its interest in Cayman 6 and indirectly in RAG, is a VIE. CEDC, as the party most closely associated with Cayman 7 receiving all economic benefits from RAG thorough the chain of subsidiaries, would be considered the primary beneficiary of Cayman 7 and must therefore consolidate Cayman 7 together with all of RAG as a business combination under ASC Topic 805.

Share Based Payments

As of January 1, 2006, the Company adopted ASC Topic 718 “Compensation – Stock Compensation” requiring the recognition of compensation expense in the Condensed Consolidated Statements of Income related to the fair value of its employee share-based options.

Grant-date fair value of stock options is estimated using a lattice-binomial option-pricing model. We recognize compensation cost for awards over the vesting period. The majority of our stock options have a vesting period between one to three years.

See Note 19 to our Consolidated Financial Statements for more information regarding stock-based compensation.

Recently Issued Accounting Pronouncements

In April 2009, the FASB issued FSP No. SFAS 107-1 and Accounting Principles Board (“APB”) Opinion No. APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP No. SFAS 107-1 and APB 28-1”). FSP No. SFAS 107-1 and APB 28-1, which is codified in FASB ASC Topic 825-10-50, require disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The Company adopted FSP No. SFAS 107-1 and APB 28-1 beginning April 1, 2009. This FSP had no impact on the Company’s financial position, results of operations or cash flows.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our operations are conducted primarily in Poland and Russia and our functional currencies are primarily the Polish Zloty, Hungarian Forint and Russian Ruble and the reporting currency is the U.S. Dollar. Our financial instruments consist mainly 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. Consequently, they are subject to currency translation movements when reporting in U.S. Dollars.

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

The Polish Zloty and Russian Ruble have depreciated against the U.S. Dollar as compared to the prior year. Should this trend continue, our results of operations may be negatively impacted due to a reduction in revenue in U.S. Dollar terms from the currency translation effects of that depreciation. This may be partly offset by a similar decrease in costs in U.S. Dollar terms. Conversely if the trend reverses our results of operations may be positively impacted due to an increase in revenue in U.S. Dollar terms from the currency translation effects of that appreciation.

Our commercial foreign exchange exposure mainly arises from the fact that substantially all of our revenues are denominated in our functional currencies (Polish Zloty, Russian Ruble, and Hungarian Forint), our Senior Secured Notes are denominated in Euros and our Senior Convertible Notes are denominated in US Dollars. This debt has been on-lent to the operating subsidiary level in Poland, thus exposing the Company to movements in the EUR/Polish Zloty and USD/Polish Zloty exchange rate. Every one percent movement in the EUR-Polish Zloty exchange rate will have an approximate $3.5 million change in the valuation of the liability with the offsetting pre-tax gain or losses recorded in the profit and loss of the Company. Every one percent movement in the USD-Polish Zloty exchange rate will have an approximate $2.9 million change in the valuation of the liability with the offsetting pre-tax gain or losses recorded in the profit and loss of the Company.

As a result of the remaining outstanding €245.44 million Senior Secured Notes and our $310 million of Senior Convertible Notes which have been on-lent to Polish Zloty operating companies, we are exposed to foreign exchange movements. Movements in the EUR/Polish Zloty and USD/Polish Zloty exchange rate will require us to revalue our liability accordingly, the impact of which will be reflected in the results of the Company’s operations.

In order to manage the cash flow impact of foreign exchange changes, the Company is part of certain hedge agreements. In January 2009, the remaining portion of the IRS hedge related to the Senior Secured Notes was closed and written off with a net cash settlement of approximately $1.9 million. As of September 30, 2009, the Company’s subsidiary, Russian Alcohol Group, was part of two hedge transactions. The first is a foreign exchange rate hedge to protect against foreign exchange risk of payments related to term loans of Russian Alcohol Group denominated in U.S. Dollars. The hedge has a fair value as of the acquisition date equal to total premium of $7.4 million and a fair value as of September 30, 2009 of $0.5 million. The second is an interest rate hedge to fix costs related to the term loans denominated in U.S. Dollars with a floating interest rate. Based on the mark to market valuation, the fair value of this hedge as of September 30, 2009 is ($2.3) million. Both of these hedges are not qualified for hedging accounting with all changes in fair values at the end of each interim period being recorded as a gain or loss in the statement of income based on the mark to market valuation.

The effect of having debt denominated in currencies other than the Company’s functional currencies (as the Company’s Senior Secured Notes and Senior Convertible Notes or the Russian Alcohol Group’s credit facilities are) is to increase the value of the Company’s liabilities on that debt in terms of the Company’s functional currencies when those functional currencies depreciate in value. As the Polish Zloty and Russian Ruble have changed in value in recent months, the value of the Company’s liabilities on the Senior Secured Notes, Senior Convertible Notes and the Russian Alcohol Group credit facilities has also changed, which impacts the Company’s results of operations through the recognition of significant non cash unrealized foreign exchange rate gains or losses.

ITEM 4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934) refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) 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.

Based upon the evaluation of the Company’s disclosure controls and procedures as of the end of the period covered by this report, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

Inherent Limitations in Internal Control over Financial Reporting. The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Further, the design of any control system is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Accordingly, the Company’s disclosure controls and procedures are designed to provide reasonable assurance that the controls and procedures will meet their objectives.

Changes to Internal Control over Financial Reporting. The Chief Executive Officer and the Chief Financial Officer conclude that, during the most recent fiscal quarter, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

As previously disclosed, on September 2, 2009, the Company issued to Lion/Rally Cayman 5, a company incorporated in the Cayman Islands, 540,873 shares of the Company’s common stock, par value $0.01 per share (“Common Stock”), as partial consideration for the Company’s acquisition of additional equity interests in the Russian Alcohol Group. The Company received no cash proceeds in the issuance and relied on the exemption from the registration requirements of the Securities Act of 1933, as amended, (the “Securities Act”) set forth under Section 4(2) of the Securities Act and Regulation D thereunder.

On September 15, 2009, the Company issued to Cirey Holdings 479,499 shares of Common Stock as partial consideration for the Company’s acquisition of additional equity interests in the Russian Alcohol Group. The Company received no cash proceeds in the issuance. The offering of the Common Stock will be made only to persons who are not “U.S. Persons” as defined in Rule 902(k) of Regulation S under the Securities Act. The Company will rely on the exemption from the registration requirements of the Securities Act set forth under Regulation S promulgated under the Securities Act.

ITEM 6.

EXHIBITS

(a) Exhibits


Exhibit Number		Exhibit Description

1.1		Underwriting Agreement, dated as of July 20, 2009, among Central European Distribution Corporation, Mark Kaoufman and Jefferies & Company, Inc. and UniCredit CAIB Securities UK Ltd., as representatives of the underwriters listed on Schedule 1 thereto (filed as Exhibit 1.1 to the Periodic Report on Form 8-K filed with the SEC on July 23, 2009 and incorporated herein by reference).

2.1		Amendment to Share Sale and Purchase Agreement, dated September 22, 2009, by and among White Horse Intervest, Limited, William V. Carey, Central European Distribution Corporation and Bols Sp. z o.o (filed as Exhibit 2.1 to the Periodic Report on Form 8-K filed with the SEC on September 28, 2009 and incorporated herein by reference).

2.2		Share Sale and Purchase Agreement, dated September 22, 2009, by and among Bols Sp. z o.o and White Horse Intervest Limited (filed as Exhibit 2.2 to the Periodic Report on Form 8-K filed with the SEC on September 22, 2009 and incorporated herein by reference).

3.1		Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Quarterly Report on Form 10-Q filed with the SEC on August 8, 2006 and incorporated herein by reference).

3.2		Amended and Restated Bylaws (filed as Exhibit 99.3 to the Periodic Report on Form 8-K filed with the SEC on May 3, 2006 and incorporated herein by reference).

4.1		Agreement, dated October 30, 2009, between Central European Distribution Corporation, Lion/Rally Cayman 4 and Lion/Rally Cayman 5 (filed as Exhibit 4.1 to the Current Report on Form 8-K filed with the SEC on November 5, 2009 and incorporated herein by reference).

4.2*		Warrant to purchase shares of common stock, dated October 2, 2009, issued by Central European Distribution Corporation to Lion/Rally Cayman 4.

4.3*		Warrant to purchase shares of common stock, dated October 2, 2009, issued by Central European Distribution Corporation to Lion/Rally Cayman 5.

4.4*		Warrant to purchase shares of common stock, dated October 2, 2009, issued by Central European Distribution Corporation to Lion/Rally Cayman 4.

4.5*		Warrant to purchase shares of common stock, dated October 2, 2009, issued by Central European Distribution Corporation to Lion/Rally Cayman 5.

4.6*		Warrant to purchase shares of common stock, dated October 2, 2009, issued by Central European Distribution Corporation to Lion/Rally Cayman 4.

4.7*		Warrant to purchase shares of common stock, dated October 2, 2009, issued by Central European Distribution Corporation to Lion/Rally Cayman 5.

10.1		Commitment Letter, dated July 29, 2009, between Central European Distribution Corporation, Lion/Rally Cayman 6 and Lion/Rally Cayman 7 (filed as Exhibit 10.1 to the Periodic Report on Form 8-K filed with the SEC on August 4, 2009 and incorporated herein by reference).

10.2		Sale and Purchase Agreement, dated July 29, 2009, between Lion/Rally Cayman 6, Euro Energy Overseas Ltd., Altek Consulting Inc., Genora Consulting Inc., Lidstel Ltd., Pasalba Limited and Lion/Rally Lux 1 (filed as Exhibit 10.2 to the Periodic Report on Form 8-K filed with the SEC on August 4, 2009 and incorporated herein by reference).

10.3		New Option Agreement, dated October 2, 2009 (as amended on October 30, 2009), between Central European Distribution Corporation, Lion/Rally Cayman 4, Lion/Rally Cayman 5 and Lion/Rally Cayman 7 L.P. (filed as Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on November 5, 2009 and incorporated herein by reference).

31.1*		Certificate of the CEO pursuant to Rule 13a-15(e) or Rule 15d-15(e).

31.2*		Certificate of the CFO pursuant to Rule 13a-15(e) or Rule 15d-15(e).

32.1*		Certification of the CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification of the CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Filed herewith

SIGNATURES

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


	CENTRAL EUROPEAN DISTRIBUTION CORPORATION
	(registrant)

Date: November 9, 2009	By:	/S/ WILLIAM V. CAREY
		William V. Carey
		President and Chief Executive Officer

Date: November 9, 2009	By:	/S/ CHRIS BIEDERMANN
		Chris Biedermann
		Vice President and Chief Financial Officer