15. Borrowings

Bank Facilities

As of December 31, 2011, the Company had total bank overdraft facility of PLN 23.8 million ($7.0 million) from Bank Zachodni WBK S.A. and Bank Handlowy w Warszawie S.A. of which PLN 20.0 million ($5.9 million) was drawn and PLN 3.8 million ($1.1 million) was available in Poland. Based on the original agreement the overdraft was to be paid off on December 17, 2011. This term was extended until January 15, 2012 based on the amendment dated April 21, 2011. On January 15, 2012, this facility was fully repaid and closed.

As of December 31, 2011, the Company has outstanding liability of €28.5 million ($36.8 million) from the term loans from Zenit Bank, Alfa Bank and Raiffeisen Bank drawn by Whitehall.

The loan agreement with Zenit Bank dated March 29, 2011, matures on June 6, 2012. The credit limit under this loan agreement is €10 million ($12.9 million) and the loan is released in tranches maturing in 365 days, no later than March 29, 2012. The loan was released in six tranches between March 29, 2011, and September 13, 2011, repayable between February 17, 2012 and May 18, 2012. As of December 31, 2011, the Company has outstanding liability of €8.5 million ($11.0 million) from this term loan.

The loan agreement with Alfa Bank dated July 22, 2008, matures on November 16, 2013. The credit limit under this agreement is €15 million ($19.4 million) and the loan is released in tranches maturing within three, six or nine months, depending if they are pledged on inventory. The loan was released in eight tranches between April 6, 2011, and December 28, 2011, repayable between January 6, 2012 and May 7, 2012. As of December 31, 2011 €10 million ($12.9 million) of this limit was granted to the Company. The Company repaid the first three tranches amounting to €4 million ($5.2 million) in January 2012.

The loan agreement with Raiffeisen Bank dated July 6, 2010, matures on July 6, 2012. The credit limit under this agreement is €10 million ($12.9 million) and the loan is released in tranches maturing within five to six months. The loan was released in eight tranches between March 15, 2011, and December 26, 2011, repayable between March 15, 2012, and July 6, 2012. As of December 31, 2011, the Company has outstanding liability of €10 million ($12.9 million) from this term loan.

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

As of December 31, 2011, the Company also has outstanding total liability of 1,146.9 million Russian rubles ($35.6 million) from term loans from Unicredit and JSC Grand Invest Bank, as well as, an overdraft facility from Deutsche Bank drawn by Russian Alcohol.

The loan agreement with Unicredit dated May 24, 2011, matures on November 27, 2012. This loan has no financial covenants and is secured by goods up to 720 million Russian rubles ($22.4 million) and guarantees given by companies of Russian Alcohol. As of December 31, 2011, the Company has outstanding liability of 600.0 million Russian rubles ($18.7 million) from this term loan.

The loan agreement with JSC Grand Invest Bank dated November 25, 2011, matures on November 23, 2012. This loan has no financial covenants that need to be met. As of December 31, 2011, the Company has outstanding liability of 297.0 million Russian rubles ($9.2 million) from this term loan.

The overdraft agreement with Deutsche Bank dated November 10, 2011, matures on November 10, 2012 and was drawn primarily to service purchases made to satisfy the an import contract with Brown-Forman. The credit limit under this agreement is 250 million Russian rubles ($7.8 million). This loan has no financial covenants and is guaranteed by Brown-Forman. As of December 31, 2011, the Company has outstanding liability of 249.9 million Russian rubles ($7.8 million) from this overdraft.

As of December 31, 2011, the Company had available to use under existing overdraft facility in Hungary approximately 450.0 million Hungarian forints ($1.9 million) from an overdraft available in Hungary.

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

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


	December 31, 2011			December 31, 2010
Convertible Senior Notes	$	310,000		$	310,000
Unamortized debt discount		(1,070	)		(2,311	)
Debt discount		(4,285	)		(8,567	)

Total	$	304,645		$	299,122

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. 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. For the year ended December 31, 2011, December 31, 2010 and December 31, 2009, the additional pre-tax non-cash interest expense recognized in the consolidated statement of operations was $4.3 million, $4.1 million and $3.9 million, respectively. Accumulated amortization related to the debt discount was $15.4 million and $11.1 million as of December 31, 2011 and December 31, 2010, respectively. The annual pre-tax increase in non-cash interest expense on our consolidated statements of operations to be recognized until 2013, the maturity date of the CSNs, amounts to $4.3 million.

Senior Secured Notes due 2016

On December 2, 2009, the Company issued $380 million 9.125% Senior Secured Notes due 2016 and €380 million ($491.1 million) 8.875% Senior Secured Notes due 2016 (the “2016 Notes”) in an unregistered offering to institutional investors. The Company used a portion of the net proceeds from the 2016 Notes to redeem the Company’s outstanding 2012 Notes, having an aggregate principal amount of €245.4 million ($317.1 million) on January 4, 2010. The remainder of the net proceeds from the 2016 Notes was used to (i) purchase Lion Capital’s remaining equity interest in Russian Alcohol by exercising the Lion Option and the Co-Investor Option, pursuant to the terms and conditions of the Lion Option Agreement and the Co-Investor Option Agreement, respectively (ii) repay all amounts outstanding under Russian Alcohol credit facilities; and (iii) repay certain other indebtedness.

On December 9, 2010, the Company issued an additional €50.0 million ($64.6 million) 8.875% Senior Secured Notes due 2016 (the “2016 Notes”) in an unregistered offering to institutional investors. The Company used the net proceeds from the additional 2016 Notes to repay its term loans and overdraft facilities with Bank Handlowy w Warszawie S.A and Bank Zachodni WBK S.A.

As of December 31, 2011 and December 31, 2010 the Company had accrued interest of $7.0 million and $7.1 million respectively, related to the Senior Secured Notes due 2016, with the next coupon due for payment on June 1, 2012.


	December 31,			December 31,
	2011			2010
	(Restated, see note 2)
Senior Secured Notes due 2016	$	935,296			955,296
Unamortized debt discount		(3,207	)		(3,660	)

Total	$	932,089		$	951,636

The following table presents repayment schedule related to principal amounts of our Convertible Senior Notes, Senior Secured Notes and all bank loan facilities.


	December 31, 2011 (Restated, see note 2)
2012	$	78,504
2013		304,645
2014		0
2015		0
2016 and beyond		932,089

Total	$	1,315,238

16. Income Taxes

The Company operates in several tax jurisdictions primarily: the United States of America, Poland, Hungary, Russia and Ukraine. 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 United States of America based upon its consolidated income, but does file a return in the United States based on its income taxable in the United States of America.

Statutory rate reconciliation for continuing operations:


	Year ended December 31,
	2011			2010			2009
	(Restated, see note 2)			(Restated, see note 2)
Tax (benefit)/expense at statutory rate	$	(445,922	)	$	(56,582	)	$	33,864
Tax rate differences		201,837			22,293			(15,259	)
Valuation allowance for net operating losses		61,293			29,675			2,611
Permanent differences		218,068			(22,103	)		(2,721	)

Income tax (benefit)/expense	$	35,276		$	(26,717	)	$	18,495

The permanent differences for 2011 of $218.1 million are primarily the result of impairment charges recognized during the year of $1,057.8 million.

The Company’s significant components of the provision for income taxes from continuing operations were as follows:


	2011			2010			2009
Current (foreign)	$	(14,687	)	$	(17,391	)	$	(20,453	)
Deferred (domestic)		(1,499	)		3,367			(1,372	)
Deferred (foreign)		(19,090	)		40,741			3,330

	$	(35,276	)	$	26,717		$	(18,495	)

The Company is headquartered in the US. Pre-tax book income earned from continuing operations in the US (domestic) and outside the US (foreign) in 2011, 2010 and 2009 was as follows:


	2011			2010			2009
Pre-tax income - domestic	$	(9,394	)	$	(21,068	)	$	(68,365	)
Pre-tax income - foreign		(1,278,714	)		(135,317	)		159,537

	$	(1,288,108	)	$	(156,385	)	$	91,172

Total income tax payments during 2011, 2010 and 2009 were $5,139 thousand, $29,544 thousand and $16,270 thousand respectively. CEDC has paid no U.S. income taxes and has U.S. net operating loss carry-forward totaling $23,332 thousand.

The Company’s US Net Operating Loss (NOL) carry-forward may be restricted under Section 382 of the Internal Revenue Code (“IRC”). IRC Section 382 limits the use of NOLs to the extent there has been an ownership change of more than 50 percentage points. As a result, the taxable income for any post change year that may be offset by a pre-change NOL may not exceed the general IRC Section 382 limitation, which is the fair market value of the pre-change entity multiplied by the IRC long-term tax exempt rate. The Company has not completed an analysis to determine whether or to what extent limitations under IRC Section 382 apply to its US NOL carryforward.

Significant components of the Company’s deferred tax assets are as follows:


	December 31,
	2011			2010			2009
	(Restated, see note 2)			(Restated, see note 2)
Deferred tax assets
Accrued expenses, deferred income and prepaid	$	20,149		$	11,163		$	15,693
Allowance for doubtful accounts receivable		3,050			6,493			6,252
Fair value adjustments from acquisitions in Russia		23,152			66,797			42,769
Unrealized foreign exchange losses		29,224			8,510			13,386
Net operating loss carry-forward benefit		54,708			70,596			45,910
Valuation allowance		(86,118	)		(35,778	)		(4,380	)

Deferred tax asset, net of valuation allowance	$	44,165		$	127,781		$	119,630

Deferred tax liability
Trademarks		78,956			110,832			140,592
Unrealized foreign exchange gains		13,320			535			12,266
Remeasurement of previously held equity interest in subsidiaries		1,265			47,354			49,182
Property, plant and equipment revaluation		6,735			0			0
Customer relationships		1,425			0			0
Timing differences in finance type leases		339			349			0
Deferred income		1,265			276			563
ASC 470 impact		1,500			2,998			4,433
Other		4,283			9,771			1,036

Deferred tax liability		109,088		$	172,115		$	208,072

Total deferred tax asset, net of valuation allowance		44,165			127,781			119,630
Total deferred tax liability		109,088			172,115			208,072

Total net deferred tax		(64,923	)		(44,334	)		(88,442	)

Classified as
Current deferred tax asset		4,717			80,956			82,609
Non-current deferred tax asset		21,488			44,028			27,123
Non-current deferred tax liability		(91,128	)		(169,318	)		(198,174	)

Total net deferred tax	$	(64,923	)	$	(44,334	)	$	(88,442	)

The Company’s valuation allowance relates primarily to losses carried forward in Poland and Russia, that we believe it is more likely than not will not be utilized in the future.

During 2011 due to underlying performance of certain of the Company’s subsidiaries the Company determined that an additional non cash valuation allowance for deferred tax assets of $61.3 million was required and took the charge during the year. Additionally, the Company did not recognize a tax asset for losses at these subsidiaries therefore the tax expense for the profitable entities was not offset by a tax benefit at loss making entities.

Tax losses can be carried forward for the following periods:


Hungary*			Unrestricted period
U.S.			20 years
Russia			10 years
Poland			5 years

*	In some circumstances the Tax Office’s permission to carry the loss forward is required.

The Company adopted the provisions of ASC 740-10-25 “Income taxes.” ASC 740-10-25 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. ASC 740-10-25 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties.

The following table summarizes the changes in the accrual for unrecognized income tax benefits and related interest and penalties for the years ended December 31, 2011, 2010 and 2009:


	2011				2010				2009
	Unrecognized income tax benefits		Interest and penalties		Unrecognized income tax benefits		Interest and penalties		Unrecognized income tax benefits		Interest and penalties
Balance, beginning of the period	$	3,000	$	0	$	0	$	0	$	0	$	0
Amounts assumed at acquisitions		0		0		0		0		0		0
Additions based on tax positions related to the current year		0		0		0		0		0		0
Additions of tax positions of prior years		5,044		2,093		3,000		0		0		0
Reductions of tax positions of current year		0		0		0		0		0		0
Reductions of tax positions of prior year		3,000		0		0		0		0		0
Lapse of statute of limitations		0		0		0		0		0		0
Foreign currency translation adjustment		0		0		0		0		0		0

Balance, end of period	$	5,044	$	2,093	$	3,000	$	0	$	0	$	0

The Company records interest and penalties related to unrecognized tax benefits as a component of income tax expenses.

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

Tax liabilities (including corporate income tax, Value Added Tax (VAT), social security and other taxes) of the Company’s subsidiaries may be subject to examinations by the tax authorities for up to certain period from the end of the year the tax is payable, as follows:


Poland			5 years
Hungary			6 years
Russia			3 years

CEDC’s state and federal income tax returns are also subject to examination by the U.S. tax authorities. The IRS is auditing the Company’s 2009 and 2010 federal income tax returns. As the application of tax laws and regulations, and transactions are susceptible to varying interpretations, amounts reported in the consolidated financial statements could be changed at a later date upon final determination by the tax authorities.