Alliance One's 10Q (June 30, 2008)


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549

_______________________________

FORM 10-Q

_______________________________

 

 

 

[X]  

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

 

 

OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

FOR THE QUARTERLY PERIOD ENDED June 30, 2008

 

 

 

 

[  ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

 

 

OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM _______ TO _______.

 

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Alliance One International, Inc.

(Exact name of registrant as specified in its charter)


Virginia

001-13684

54-1746567

 

________________

_____________________________

____________________

 

(State or other jurisdiction of Incorporation)

(Commission File Number)

(I.R.S. Employer
Identification No.)

 

 

8001 Aerial Center Parkway
Morrisville, NC 27560-8417
(Address of principal executive offices)

 

(919) 379-4300
(Registrant’s telephone number, including area code)

 

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


Title of Each Class

Name of Exchange On Which Registered

Common Stock (no par value)

New York Stock Exchange

 

 

Securities registered pursuant to Section 12(g) of the Act:   None

 

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, and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]    No [  ]

 

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

Large accelerated filer [  ]                                                                    Accelerated filer    [X]                                                    

Non-accelerated filer    [  ]                                                                     Smaller reporting company  [  ]                                    

 

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

 

As of July 29, 2008, the registrant had 88,877,000 shares outstanding of Common Stock (no par value).





 

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Alliance One International, Inc. and Subsidiaries

 

 

 

Table of Contents

 

 

 

Page No.

Part I. 

Financial Information

 

 

 

 

Item 1. 

Financial Statements (Unaudited)

 

 

 

 

Condensed Consolidated Statements of Operations

 

 

Three Months Ended June 30, 2008 and 2007

3

 

 

 

Condensed Consolidated Balance Sheets – June 30, 2008 and 2007

 

 

and March 31, 2008

4

 

 

 

Condensed Consolidated Statements of Cash Flows

 

 

Three Months Ended June 30, 2008 and 2007

5

 

 

 

Notes to Condensed Consolidated Financial Statements

6 - 25

 

 

 

 

Item 2. 

Management's Discussion and Analysis

 

 

 

of Financial Condition and Results of Operations

26 – 33

 

 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

34

 

 

 

 

 

Item 4.

Controls and Procedures

34 - 36

 

 

Part II. 

Other Information

 

 

 

 

 

Item 1. 

Legal Proceedings

36 - 37

 

 

 

 

 

Item 1A.

Risk Factors

37

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

37

 

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

37

 

 

 

 

 

Item 5.

Other Information

37

 

 

 

 

 

Item 6. 

Exhibits

37

 

Signature

38

 

 

Index of Exhibits

39

 

 


 

 

 

 

Part I. Financial Information
Item 1. Financial Statements

 

 

 

 

 

Alliance One International, Inc. and Subsidiaries

 

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 






 

Three Months Ended June 30, 2008 and 2007

 

 

(Unaudited)

 

 

 

 

 

 

 

June 30,  

 

June 30,  

 

 

(in thousands, except per share amounts)

 

2008    

 

2007     

 

 

 

 

 

 

 

 

 

Sales and other operating revenues

 

$459,165 

 

$461,708 

 

 

Cost of goods and services sold

 

382,503 

 

389,886 

 

 

 

 

 

 

 

 

 

Gross profit

 

76,662 

 

71,822 

 

 

Selling, administrative and general expenses

 

38,234 

 

39,489 

 

 

Other income

 

2,273 

 

1,936 

 

 

Restructuring and asset impairment charges

 

495 

 

424 

 

 

Operating income

 

40,206 

 

33,845 

 

 

 

 

 

 

 

 

 

Debt retirement expense

 

 

1,930 

 

 

Interest expense (includes debt amortization cost of $941 in 2008 and $1,005 in 2007)

 

24,429 

 

24,893 

 

 

Interest income

 

937 

 

2,172 

 

 

 

 

 

 

 

 

 

Income before income taxes and other items

 

16,714 

 

9,194 

 

 

Income tax expense

 

1,792 

 

3,304 

 

 

Equity in net income of investee companies

 

 

 

 

Minority interests expense (income)

 

126 

 

(41)

 

 

Income from continuing operations

 

14,796 

 

5,931 

 

 

 

 

 

 

 

Income from discontinued operations, net of tax

 

509 

 

48 

 

 

Net income

 

$  15,305 

 

$    5,979 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

 

 

 

 

 

    Net income from continuing operations

 

$ .16 

 

$ .07 

 

 

    Income from discontinued operations

 

.01 

 

 

 

    Net income

 

$ .17 

 

$ .07 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

 

 

 

 

 

    Net income from continuing operations

 

$ .16 

 

$ .07 

 

 

    Income from discontinued operations

 

.01 

 

 

 

    Net income

 

$ .17 

 

$ .07 

 

 

 

 

 

 

 

Average number of shares outstanding:

 

 

 

 

 

 

    Basic

 

88,207 

 

87,872 

 

 

    Diluted

 

89,234 

 

89,786 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements

 

 

 

 


Alliance One International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

 

(in thousands)

June 30,   
2008      

 

June 30,   
2007     

 

March 31,  

2008      

 

ASSETS

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

   Cash and cash equivalents

$   179,542 

 

$   110,598 

 

$    112,214 

 

   Trade receivables, net

156,785 

 

175,053 

 

180,997 

 

   Inventories:

 

 

 

 

 

 

      Tobacco

855,827 

 

745,004 

 

649,555 

 

      Other

48,968 

 

35,711 

 

39,267 

 

   Advances on purchases of tobacco, net

151,516 

 

64,648 

 

112,989 

 

   Current deferred and recoverable income taxes

35,260 

 

30,948 

 

33,677 

 

   Prepaid expenses

60,258 

 

61,558 

 

50,668 

 

   Assets held for sale

4,015 

 

2,767 

 

4,885 

 

   Other current assets

14,619 

 

5,840 

 

7,382 

 

   Assets of discontinued operations

143 

 

11,330 

 

236 

 

         Total current assets

1,506,933 

 

1,243,457 

 

1,191,870 

 

Other assets

 

 

 

 

 

 

   Investments in unconsolidated affiliates

21,582 

 

20,754 

 

21,582 

 

   Goodwill and other intangible assets

41,182 

 

33,079 

 

37,999 

 

   Deferred tax assets

97,317 

 

72,232 

 

96,110 

 

   Other deferred charges

10,659 

 

15,605 

 

11,417 

 

   Other noncurrent assets

128,867 

 

128,988 

 

135,610 

 

 

299,607 

 

270,658 

 

302,718 

 

 

 

 

Property, plant and equipment

214,262 

 

255,818 

 

218,277 

 

 

$2,020,802 

 

$1,769,933 

 

$1,712,865 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

   Notes payable to banks

$   613,887 

 

$   373,691 

 

$   387,157 

 

   Accounts payable

158,373 

 

163,985 

 

158,471 

 

   Advances from customers

174,461 

 

172,318 

 

91,919 

 

   Accrued expenses

75,642 

 

50,867 

 

88,503 

 

   Income taxes

3,237 

 

5,934 

 

6,522 

 

   Long-term debt current

22,438 

 

5,193 

 

19,004 

 

   Liabilities of discontinued operations

55 

 

8,031 

 

81 

 

         Total current liabilities

1,048,093 

 

780,019 

 

751,657 

 

 

 

 

 

 

 

 

   Long-term debt

567,143 

 

634,758 

 

563,973 

 

   Deferred income taxes

10,388 

 

10,119 

 

10,527 

 

   Liability for unrecognized tax benefits

57,900 

 

55,122 

 

53,370 

 

   Pension, postretirement and other long-term liabilities

109,149 

 

86,472 

 

118,248 

 

 

744,580 

 

786,471 

 

746,118 

 

 

 

 

 

 

 

 

Minority interest in subsidiaries

3,389 

 

3,387 

 

3,623 

 

 

 

 

 

 

 


Commitments and contingencies

 

 

 

 

 

 

 

 

 


Stockholders’ equity

June 30,
2008   

 

June 30,
2007   

 

March 31,
2008   

 

 

 

 

 

 

 

   Common Stock—no par value:

 

 

 

 

 

 

 

 

 

 

 

 

      Authorized shares

250,000 

 

250,000 

 

250,000 

 

 

 

 

 

 

 

      Issued shares

96,730 

 

96,629 

 

96,467 

 

463,478 

 

461,138 

 

462,798 

 

   Retained deficit

(245,663)

 

(269,278)

 

(258,395)

 

   Accumulated other comprehensive income

6,925 

 

8,196 

 

7,064 

 

 

224,740 

 

200,056 

 

211,467 

 

 

$2,020,802 

 

$1,769,933 

 

$1,712,865 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements


 

Alliance One International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended June 30, 2008 and 2007
(Unaudited)

 

 

(in thousands)

 

June 30,   
2008     

 

June 30,  
2007     

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

   Net income

 

$  15,305 

 

$   5,979 

 

   Adjustments to reconcile net income to net cash used by operating activities

 

 

 

 

 

      Net income from discontinued operations

 

(509)

 

(48)

 

      Decrease in accounts receivable

 

29,695 

 

43,294 

 

      Increase in inventories and advances to suppliers

 

(258,993)

 

(114,953)

 

      Decrease in accounts payable and accrued expenses

 

(12,381)

 

(52,764)

 

      Increase in advances from customers

 

82,986 

 

46,681 

 

      Depreciation and amortization

 

7,134 

 

9,300 

 

      Debt amortization/interest

 

941 

 

2,934 

 

      Restructuring and asset impairment charges

 

85 

 

309 

 

      Deferred items

 

(8,460)

 

(1,038)

 

      Loss (gain) on foreign currency transactions

 

2,278 

 

(2,271)

 

      Stock-based compensation

 

556 

 

1,020 

 

      Changes in operating assets and liabilities

 

(18,053)

 

(9,420)

 

   Net cash used by operating activities of continuing operations

 

(159,416)

 

(70,977)

 

   Net cash provided (used) by operating activities of discontinued operations

 

576 

 

(871)

 

   Net cash used by operating activities

 

(158,840)

 

(71,848)

 

 

 

 

 

Investing activities

 

 

 

 

 

   Purchases of property and equipment

 

(4,185)

 

(3,516)

 

   Proceeds on sale of property and equipment

 

3,772 

 

1,771 

 

   Return of capital on investments in unconsolidated affiliates

 

 

1,744 

 

   Refinancing of Brazilian farmers

 

(823)

 

 

   Changes in other assets

 

(563)

 

1,085 

 

   Net cash provided (used) by investing activities of continuing operations

 

(1,799)

 

1,084 

 

   Net cash provided by investing activities of discontinued operations

 

 

27 

 

   Net cash provided (used) by investing activities

 

(1,799)

 

1,111 

 

 

 

 

 

Financing activities

 

 

 

 

 

   Repayment of short-term demand notes

 

(42,277)

 

 

   Proceeds from short-term demand notes

 

9,014 

 

 

   Net change in short-term borrowings

 

259,836 

 

192,967 

 

   Proceeds from long-term borrowings

 

11,307 

 

226 

 

   Repayment of long-term borrowings

 

(9,390)

 

(92,896)

 

   Debt issuance/retirement cost

 

(43)

 

(731)

 

   Proceeds from sale of stock

 

 

1,170 

 

   Net cash provided by financing activities

 

228,447 

 

100,736 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(480)

 

341 

 

 

 

 

 

Increase in cash and cash equivalents

 

67,328 

 

30,340 

 

Cash and cash equivalents at beginning of period

 

112,214 

 

80,258 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$ 179,542 

 

$ 110,598 

 

 

See notes to condensed consolidated financial statements

 

 

Alliance One International, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)



1.  BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES


Description of Business

The Company is principally engaged in purchasing, processing, storing, and selling leaf tobacco in North America, Africa, Europe, South America and Asia.


Basis of Presentation

The accounts of the Company and its consolidated subsidiaries are included in the condensed consolidated financial statements after elimination of intercompany accounts and transactions.  The Company uses the cost or equity method of accounting for its investments in affiliates; all of which are owned 50% or less, except for the Zimbabwe operations which are more fully discussed below.  Because of the seasonal nature of the Company’s business, the results of operations for any fiscal quarter will not necessarily be indicative of results to be expected for other quarters or a full fiscal year.  All adjustments necessary to state fairly the results for the period have been included and were of a normal recurring nature.  This Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2008.  The year ended March 31, 2008 is sometimes referred to herein as fiscal year 2008.



          The Company is accounting for its investment in the Zimbabwe operations on the cost method and has been reporting it in Investments in Unconsolidated Affiliates in the condensed consolidated balance sheet since March 31, 2006.  During fiscal year 2007, the Company wrote its investment in the Zimbabwe operations down to zero.


Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 157, Fair Value Measurements (“SFAS No. 157”), which defines fair value, establishes a new framework for measuring that value and expands disclosures about fair value measurements. SFAS No. 157 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 on the measurement date. SFAS No. 157 establishes market or observable inputs as the preferred source of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. SFAS No. 157 requires, among other things, expanded disclosure about fair value measurements that have a significant portion of the value determined using unobservable inputs (level 3 measurements). It also applies to fair value measurements of non-financial assets acquired and liabilities assumed in business combinations. In February 2008, the FASB issued final Staff Positions that (1) deferred the effective date of this Statement for one year for certain nonfinancial assets and nonfinancial liabilities (see below) and (2) removed certain leasing transactions from the scope of the Statement.  The Company applied this new accounting standard to all other fair value measurements effective April 1, 2008. The adoption of SFAS No. 157 did not have a material impact on its financial condition and results of operations.  See Note 16 “Fair Value Measurements” to the “Notes to Condensed Consolidated Financial Statements” for additional information.

          In February 2008, the FASB issued FASB Staff Position on Statement No. 157, Effective Date of FASB Statement No. 157 (“FSP 157-2”).  FSP 157-2 delays the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed on a recurring basis, to fiscal years beginning after November 15, 2008.  The Company is evaluating the impact of FSP 157-2 on its financial condition and results of operations.

          In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits companies to elect to report individual financial instruments and certain other items at fair value with changes in value reported in operations. Once made, this election is irrevocable for those items.  The Company adopted this new accounting standard on April 1, 2008 and it did not have a material impact on its financial condition and results of operations.

          In April 2007, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 06-10, Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements (“EITF 06-10”). This statement establishes that companies will be required to recognize a liability for the postretirement benefit obligation related to a collateral assignment arrangement — in accordance with SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions, (if deemed part of a postretirement plan) or Accounting Principles Board Opinion 12, Omnibus Opinion — 1967, (if not part of a plan) — if, based on the substantive agreement with the employee, the employer has agreed to maintain a life insurance policy during the postretirement period or provide a death benefit. The EITF also reached a consensus that an employer should recognize and measure the associated asset on the basis of the terms of the collateral assignment arrangement. The Company adopted EITF 06-10 on April 1, 2008 as a change in accounting principle through a cumulative effect adjustment to retained earnings totaling $2,572.

          In December 2007, the FASB issued SFAS No. 141R, Business Combinations (“SFAS No. 141R”). This standard will significantly change the accounting for business acquisitions both during the period of the acquisition and in subsequent periods. Among the more significant changes in the accounting for acquisitions are the following: (a) transaction costs will generally be expensed, (b) in-process research and development will be accounted for as an asset, with the cost recognized as the research and development is realized or abandoned, (c) contingencies, including contingent consideration, will generally be  recorded  at fair value with subsequent adjustments recognized in operations, and (d) decreases in valuation allowances on acquired deferred tax assets will be recognized in operations. SFAS No. 141R is effective for fiscal years beginning after December 15, 2008.  The Company is evaluating the impact of SFAS No. 141R on its financial condition and results of operations.

          In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS No. 160”). This standard will significantly change the accounting and reporting related to noncontrolling interests in a consolidated subsidiary. It will require noncontrolling interests (or minority interests) to be reported as a component of shareholders’ equity, which is a change from its current classification between liabilities and shareholders’ equity. It also requires earnings attributable to minority interests to be included in net earnings, although such earnings will continue to be deducted to measure earnings per share.  SFAS No. 160 is effective for the Company as of April 1, 2009. The Company is evaluating the impact of SFAS No. 160 on its financial condition and results of operations.

          In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, An Amendment of FASB Statement No. 133 (“SFAS No. 161”). SFAS No. 161 requires enhanced qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161 is effective for interim periods and fiscal years beginning after November 15, 2008. SFAS No. 161 is effective for the Company as of January 1, 2009. The Company is evaluating the impact of SFAS No. 161 on its financial condition and results of operations.


Equity and Cost Method Investments



The Company’s equity method investments and its cost method investments, which include its Zimbabwe operations, are in non-marketable securities. The Company reviews such investments for impairment whenever events or changes in circumstances indicate that the carrying amount of an investment may not be recovered.  In assessing the recoverability of equity or cost method investments, the Company uses discounted cash flow models. If the fair value of an equity investee is determined to be lower than its carrying value, an impairment loss is recognized.  Preparing discounted future operating cash flow analysis requires that Company management make significant judgments with respect to future operating earnings growth rates and selecting an appropriate discount rate. The use of different assumptions could increase or decrease estimated future operating cash flows, and the corresponding discounted value of those cash flows, and therefore could increase or decrease any impairment charge.


Taxes Collected from Customers

Certain subsidiaries are subject to value added taxes on local sales.  These amounts have been included in sales and were $13,470 and $10,477 for the three months ended June 30, 2008 and 2007, respectively.


2.  INCOME TAXES


FIN 48

As of June 30, 2008, the Company’s unrecognized tax benefits totaled $20,144, all of which would impact the Company’s effective tax rate if recognized.  

         The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense.  As of June 30, 2008, accrued interest and penalties totaled $25,025 and $13,733, respectively.

         The Company expects to continue accruing interest expenses related to the unrecognized tax benefits described above.  Additionally, the Company may be subject to fluctuations in the unrecognized tax liability due to currency exchange rate movements.

         Other than the expiration of an applicable statute of limitations pertaining to an international unrecognized tax benefit for the amount of $2,261, the Company does not foresee any reasonably possible significant changes in the unrecognized tax benefits in the next twelve months but must acknowledge circumstances can change due to unexpected developments in the law.

         The Company is subject to taxation in the United States, various states within the United States, and foreign jurisdictions. There are tax filings in major jurisdictions that are open to investigation by tax authorities; including in the United States from 2005, in Turkey from 2003, in Brazil from 2003, in Malawi from 2003, in Argentina from 2002, in Tanzania from 2002, and in Switzerland from 2006.

Alliance One International, Inc. and Subsidiaries


Provision for the Three Months Ended June 30, 2008

The effective tax rate used for the three months ended June 30, 2008 was 10.7% compared to 35.9% for the three months 0ended June 30, 2007.  The effective tax rates for these periods are based on the current estimate of full year results including the effect of taxes related to specific events which are recorded in the interim period in which they occur.  The Company forecasts the tax rate for the year ended March 31, 2009 will be 4.6% after absorption of discrete items.

         For the three months ended June 30, 2008, the company recorded a specific event adjustment expense of $1,280 bringing the effective tax rate estimated for the three months of 3.1% to 10.7%.  This specific event adjustment expense relates primarily to additional interest on liabilities for unrecognized tax benefits and net exchange losses on income tax accounts.  During the three months ended June 30, 2007, net expense adjustments of $1,928, primarily related to interest on liabilities for unrecognized tax benefits and changes in judgment regarding certain non-U.S. tax items, were recorded as specific events.  The net effect of these adjustments on the tax provision was to increase the effective tax rate for the three months ended June 30, 2007 from an expense of 15.0% to 35.9%.  The significant difference in the estimated effective tax rate for the three months ended June 30, 2008 from the statutory rate is primarily due to foreign tax rates lower than the statutory rate and benefits related to amortization and exchange effects.  During the three months ended June 30, 2008, the Company accrued an additional $4,530 of interest and exchange losses related to unrecognized tax benefits.


3.  RESTRUCTURING AND ASSET IMPAIRMENT CHARGES


The Company continues to execute the merger integration plan which began in fiscal 2006 and is expected to continue throughout fiscal 2009.  In addition, the Company records other restructuring and impairment charges as they occur in the normal course of business in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”) and SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS No. 146”).  The following table summarizes the restructuring and asset impairment charges recorded in the Company’s reporting segments during the three months ended June 30, 2008 and 2007:


 

Three Months Ended

 

June 30,

 

2008    

 

2007    

Restructuring and Asset Impairment Charges

 

 

 

Employee separation and other cash charges:

 

 

 

   Beginning balance

$     2,360 

 

$     2,747 

   Period charges:

 

 

 

      Severance charges

569 

 

69 

      Other cash charges (recovery)

(74)

 

63 

   Total period charges

495 

 

132 

   Payments through June 30

(1,704)

 

(1,181)

   Ending balance June 30

$     1,151 

 

$     1,698 

 

 

 

 

   Other non-cash charges

$             - 

 

$        292 

 

 

 

 

Total restructuring and asset impairment charges for the period

$        495 

 

$        424 


         The following table summarizes the employee separation and other cash charges recorded in the Company’s South America and Other Regions segments during the three months ended June 30, 2008 and 2007:


 

Three Months Ended

 

June 30,

Employee Separation and Other Cash Charges

2008 

 

2007   

 

 

 

 

Beginning balance:

$ 2,360 

 

$  2,747 

   South America

134 

 

30 

   Other regions

2,226 

 

2,717 

Period charges:

$    495 

 

$     132 

   South America

 

88 

   Other regions

495 

 

44 

Payments through June 30:

$(1,704)

 

$  (1,181)

   South America

 

(88)

   Other regions

(1,704)

 

(1,093)

Ending balance June 30:

$ 1,151 

 

$   1,698 

   South America

134 

 

30 

   Other regions

1,017 

 

1,668 


         All non-cash charges were related to the Other Regions segment during the three months ended June 30, 2008 and 2007.

         All restructuring costs are recorded in earnings as restructuring and asset impairment costs only when they are incurred or meet the criteria for recording in accordance with SFAS No. 144 or SFAS No. 146.


Assets Held for Sale

As of June 30, 2008, the Company reported assets held for sale of $4,015, related primarily to production and administrative facilities in Greece and Brazil, that are being actively marketed by the Company.


4.  GOODWILL AND INTANGIBLES


Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses.  Goodwill is not subject to systematic amortization, but rather is tested for impairment annually or whenever events and circumstances indicate that an impairment may have occurred.  The Company has chosen the first day of the last quarter of its fiscal year as the date to perform its annual goodwill impairment test.

          The Company has no intangible assets with indefinite useful lives.  It does have other intangible assets which are being amortized.  The following table summarizes the changes in the Company’s goodwill and other intangibles for the three months ended June 30, 2008 and 2007.


          Goodwill and Intangible Asset Rollforward:


 

 

 

Goodwill

 

Amortizable Intangibles

 

 

 

 

Other
Regions
Segment

 

Customer
Relationship
Intangible

 

Production
and Supply
Contract
Intangibles

 

Internally
Developed
Software
Intangible

 

Total

 

Weighted average remaining

 

 

 

 

 

 

 

 

 

 

 

    useful life in years as of
    March 31, 2008

 

 

17 

 

 

 

 

 

March 31, 2007 balance:

 

 

 

 

 

 

 

 

 

 

 

     Gross carrying amount

 

$   4,186 

 

$33,700 

 

$11,146 

 

$         - 

 

$ 49,032 

 

     Accumulated amortization

 

 

(3,159)

 

(10,764)

 

 

(13,923)

 

Net March 31, 2007

 

4,186 

 

30,541 

 

382 

 

 

35,109 

 

     Amortization expense and
        purchase accounting tax
        adjustments

 

(1,392)

 

(421)

 

(217)

 

 

(2,030)

 

Net June 30, 2007

 

2,794 

 

30,120 

 

165 

 

 

33,079 

 

     Additions

 

 

 

 

6,330 

 

6,330 

 

     Amortization expense

 

 

(1,264)

 

(146)

 

 

(1,410)

 

Net March 31, 2008

 

2,794 

 

28,856 

 

19 

 

6,330 

 

37,999 

 

     Additions

 

 

-

 

 

3,624 

 

3,624 

 

     Amortization expense

 

 

(422)

 

(19)

 

 

(441)

 

Net June 30, 2008

 

$   2,794 

 

$28,434 

 

$          - 

 

$  9,954 

 

$ 41,182


          Estimated Intangible Asset Amortization Expense:


 

 

 

Customer
Relationship
Intangible

 

Production and
Supply Contract
Intangibles

 

Internally    
Developed    
Software   
Intangible *

 

Total

 

 

For year ended 2009

 

$      1,685      

 

$     19   

 

$      1,244  

 

$      2,948  

 

 

For year ended 2010

 

1,685      

 

-   

 

1,991  

 

3,676  

 

 

For year ended 2011

 

1,685      

 

-   

 

1,991  

 

3,676  

 

 

For year ended 2012

 

1,685      

 

-   

 

1,991  

 

3,676  

 

 

For year ended 2013

 

1,685      

 

-   

 

1,991  

 

3,676  

 

 

Later years

 

20,431      

 

-   

 

746  

 

21,177  

 

 

 

 

$    28,856      

 

$     19   

 

$     9,954  

 

$    38,829  

 

 

 

 

 

 

 

 

 

 

 

 

 

*  Estimated amortization expense for the internally developed software intangible is based on costs accumulated
    as of June 30, 2008.  These estimates will change as new costs are incurred and until the software is placed into
    service.

 


5.  DISCONTINUED OPERATIONS


The Company continually evaluates its component operations to assure they are consistent with its business plan.  Results of operations and the assets and liabilities of our business reported as discontinued operations were as follows:


Summary of Results of Operations


Discontinued Operations, Other Regions Segment       

Three Months Ended June 30, 2008

Italy    

Mozambique

Wool     

Total     

Sales and other revenues

$          - 

$          - 

$        - 

$          - 

 

 

 

 

 

Income from discontinued operations, net of tax:

 

 

 

 

Income from discontinued operations, before tax

$          - 

$       86 

$   423 

$     509 

Income tax

 Income from discontinued operations, net of tax

$          - 

$       86 

$   423 

$     509 

 

 

Three Months Ended June 30, 2007

 

Sales and other revenues

$  4,254 

$  1,345 

$        - 

$  5,599 

 

 

 

 

 

Income (loss) from discontinued operations, net of tax:

 

 

 

 

Income (loss) from discontinued operations, before tax

$      (78)

$     126 

$        - 

$       48 

  Income tax

 Income (loss) from discontinued operations, net of tax

$      (78)

$     126 

$        - 

$       48 


Summary of Assets and Liabilities


Discontinued Operations, Other Regions Segment    

June 30, 2008

Italy  

Mozambique

Wool    

Total     

Assets of discontinued operations:

 

 

 

 

   Inventory

$            - 

$         143 

$         - 

$     143 

   Total assets of discontinued operations

$            - 

$         143 

$         - 

$     143 

 

 

 

 

 

Liabilities of discontinued operations:

 

 

 

 

   Accounts payable

$             - 

$           31 

$         - 

$       31 

   Accrued expenses

24 

24 

   Total liabilities of discontinued operations

$             - 

$           55 

$         - 

$       55 

 

 

 

 

 

June 30, 2007

 

 

 

 

Assets of discontinued operations:

 

 

 

 

   Trade receivables, net of allowances

$     4,664 

$         501 

$         - 

$  5,165 

   Inventory and advances

1,668 

562 

2,230 

   Net property, plant and equipment and other assets

36 

3,899 

3,935 

   Total assets of discontinued operations

$     6,368 

$      1,063 

$ 3,899 

$ 11,330 

 

 

 

 

 

Liabilities of discontinued operations:

 

 

 

 

   Accounts payable

$     6,932 

$           64 

$         - 

$   6,996 

   Accrued expenses

937 

98 

1,035 

   Total liabilities of discontinued operations

$     7,869 

$         162 

$         - 

$   8,031 

 

 

 

 

 

March 31, 2008

 

 

 

 

Assets of discontinued operations:

 

 

 

 

  Trade receivables , net of allowances

$             - 

$          61 

$         - 

$        61 

   Inventory

175 

175 

   Total assets of discontinued operations

$             - 

$        236 

$         - 

$      236 

 

 

 

 

 

Liabilities of discontinued operations:

 

 

 

 

   Accounts payable

$             - 

$          31 

$         - 

$        31 

   Accrued expenses

50 

50 

   Total liabilities of discontinued operations

$             - 

$          81 

$         - 

$        81 


Discontinued Italy Operations, Other Regions Segment

On September 30, 2004, concurrent with the sale of the Italian processing facility, the Company made a decision to discontinue all of its Italian operations as part of its ongoing plans to realign its operations to more closely reflect worldwide changes in the sourcing of tobacco.  The Company has completed the sale of the Italian operations.  


Discontinued Mozambique Operations, Other Regions Segment

On March 16, 2006, the Board of Directors of the Company made a decision to discontinue operations in Mozambique after the procurement of the 2006 crop due to its determination that it was not in the Company’s economic interest to remain in Mozambique after losing a concession for the 2007 crop year.  As of June 30, 2008, the Company has sold all assets except for inventory.  The Company anticipates completing the disposition of inventory in fiscal 2009.


Discontinued Wool Operations, Other Regions Segment

During fiscal 2008, the Company received the necessary governmental approvals and completed the sale of the remaining properties associated with its discontinued wool operations.  Gains on the sale of these properties reported in fiscal 2008 were $7,233.


6.  SEGMENT INFORMATION


The Company purchases, processes, sells and stores leaf tobacco.  Tobacco is purchased in more than 45 countries and shipped to more than 90 countries.  The sales, logistics and billing functions of the Company are primarily concentrated in service centers outside of the producing areas to facilitate access to our major customers.  Within certain quality and grade constraints, tobacco is fungible and, subject to these constraints, customers may choose to fulfill their needs from any of the areas where the Company purchases tobacco.

          Selling, logistics, billing, and administrative overhead, including depreciation, which originates primarily from the Company’s corporate and sales offices are allocated to the segments based upon segment operating income.  The Company



reviews performance data from purchase through sale based on the source of the product and all intercompany transactions are allocated to the region that either purchases or processes the tobacco.

          The following table presents the summary segment information for the three months ended June 30, 2008 and 2007:


 

 

Three Months Ended

 

 

June 30 ,

 

 

2008 

 

2007   

 

Sales and other operating revenues:

 

 

 

 

    South America

$   260,374 

 

$    265,940 

 

    Other regions

198,791 

 

195,768 

 

    Total revenue

$   459,165 

 

$    461,708 

 

 

 

 

 

 

Operating income:

 

 

 

 

    South America

$     25,888 

 

$      28,065 

 

    Other regions

14,318 

 

5,780 

 

Total operating income

40,206 

 

33,845 

 

    Debt retirement expense

 

1,930 

 

    Interest expense

24,429 

 

24,893 

 

    Interest income

937 

 

2,172 

 

Income before income taxes and other items

$     16,714 

 

$         9,194


Analysis of Segment Assets

June 30 , 2008

June 30 , 2007

March 31, 2008

Segment assets:

 

 

 

 

South America

$   993,405 

$   867,371 

$   844,053 

 

Other regions

1,027,397 

902,562 

868,812 

 

Total assets

$2,020,802 

$1,769,933 

$1,712,865 


7.  EARNINGS PER SHARE


Basic earnings per share are computed by dividing earnings by the weighted average number of common shares outstanding. The weighted average number of common shares outstanding is reported as the weighted average of the total shares of common stock outstanding net of shares of common stock held by a wholly-owned subsidiary.  Shares of common stock owned by the subsidiary were 7,853 at June 30, 2008 and 2007.  This subsidiary does not receive dividends on these shares and it does not have the right to vote.

          For the three months ended June 30, 2008 and 2007, the weighted average number of shares outstanding was increased by a total of 1,027 shares and 1,914 shares, respectively, of common stock equivalents for employee stock options and restricted shares outstanding for the computation of diluted earnings per share.  Certain potentially dilutive options were not included in the computation of earnings per diluted share because their exercise prices were greater than the average market price of the shares of common stock during the period and their effect would be antidilutive.  These shares totaled 1,743 at a weighted average exercise price of $7.39 per share at June 30, 2008 and 203 at a weighted average exercise price of $22.34 per share at June 30, 2007.


8.  COMPREHENSIVE INCOME


The components of comprehensive income were as follows:


 

 

Three Months Ended

 

 

 

June 30 ,

 

 

 

2008 

 

2007   

 

 

Net income

$   15,305 

 

$ 5,979  

 

 

Equity currency conversion adjustment

(139)

 

679  

 

 

Total comprehensive income

$   15,166 

 

$ 6,658  

 


9.  STOCK-BASED COMPENSATION


In accordance with generally accepted accounting principles, the Company expenses the fair value of grants of various stock-based compensation programs over the vesting period of the awards.  Awards are recognized as compensation expense based on the grant-date fair value.  

          For the three months ended June 30, 2008 and 2007, respectively, compensation expense for stock-based compensation plans was $556 and $1,020.  The corresponding income tax benefit recognized for stock-based compensation plans was $146 and $283 for the three months ended June 30, 2008 and 2007, respectively.



          The Company’s shareholders approved the 2007 Incentive Plan (the “2007 Plan”) at its Annual Meeting of Shareholders on August 16, 2007.  As with the Company’s prior equity compensation plans, the 2007 Plan is an omnibus plan that provides the flexibility to grant a variety of equity awards including stock options, stock appreciation rights, stock awards, stock units, performance awards and incentive awards to officers, directors and employees of the Company.  A maximum of 5,000 shares are reserved for issuance pursuant to awards under the 2007 Plan.  The 2007 Plan supercedes all prior equity compensation plans and no new equity awards can be granted from such prior plans.  As of June 30, 2008, 1,428 equity awards have been granted under the 2007 Plan, leaving 3,713 shares available for future awards under the 2007 Plan.  Total equity awards outstanding are 3,657 inclusive of 1,287 awards granted and outstanding under the 2007 Plan and 2,370 awards granted under prior plans.  Shares issued under both the 2007 Plan and earlier plans are new shares which have been authorized and designated for award under the plans.  Individual types of awards are discussed in greater detail below.


Stock Option Awards

Stock options allow for the purchase of common stock at a price determined at the time the option is granted.  This price has historically been the stock price on the date of grant.  Stock options generally vest ratably over four years and generally expire after ten years.  The fair value of these options is determined at grant date using the Black-Scholes valuation model and includes estimates of forfeiture based on historical experience.  The fair value is then recognized as compensation expense ratably over the vesting term of the options.  There were no grants of stock options during the three months ended June 30, 2008 and 2007, respectively.

          A summary of option activity for stock options follows:


 

Options

 

Shares

 

Weighted
Average
Exercise
Price

 

Weighted Average
Remaining Contractual
Term (Years)

 

Aggregate
Intrinsic
Value

 

 

Outstanding at March 31, 2008

 

3,155

 

6.28

 

6.86

 

$  1,864      

 

 

Forfeited

 

(155)

 

6.65

 

5.69

 

$     (36)     

 

 

Outstanding at June 30, 2008

 

3,000

 

6.26

 

6.66

 

$     979      

 

 

Vested and expected to vest

 

2,933

 

6.25

 

6.61

 

$     960      

 

 

Exercisable at June 30, 2008

 

1,551

 

6.03

 

4.71

 

$     515      

 


          The intrinsic values in the table above represent the total pre-tax intrinsic value which is the difference between the Company’s closing stock price and the exercise price multiplied by the number of options.  The closing price will be subject to the share price on the last trading day of the respective period ending dates, thus the amounts are not additive.  The expense related to stock option awards was $343 and $135 for the three months ended June 30, 2008 and 2007, respectively.  Cash received from the exercise of options was $0 and $1,170 for the three months ended June 30, 2008 and 2007, respectively.  

          The table below shows the movement in unvested shares from March 31, 2008 to June 30, 2008.


 

 

 

Shares

 

Weighted
Average Grant
Date Fair Value

 

Aggregate Grant
Date Fair Value

 

 

 

 

Unvested March 31, 2008

 

1,487

 

$3.45          

 

$  5,130       

 

 

 

 

Forfeited

 

(38)

 

3.51          

 

(133)      

 

 

 

 

Unvested June 30, 2008

 

1,449

 

$3.45          

 

$  4,997       

 

 

 


          As of June 30, 2008, there is $3,683 of unearned compensation related to stock option awards which will vest over a weighted average remaining life of 2.75 years.


Stock Options with Stock Appreciation Rights

Stock appreciation rights (SARs) have historically been granted in tandem with certain option grants under which the employee may choose to receive in cash the excess of the market price of the share on the exercise date over the market price on the grant date (the intrinsic value of the share) rather than purchase the shares.  The choice to receive cash is limited to five years after grant.  After the fifth year and up to the tenth year after grant, the employee will continue to be able to purchase shares under the award but no longer has the choice of receiving the intrinsic value of the shares.  Compensation expense for Stock Options with Stock Appreciation Rights is treated as a liability due to the express ability of the employee to make the choice of whether to receive cash or purchase shares.  The fair value of SARs is determined at each balance sheet date using a Black-Scholes valuation model multiplied by the cumulative vesting of each SAR award.


Options with Attached SARs

Shares

Weighted Average
Exercise Price

SAR Term

Aggregate
Intrinsic Value

Aggregate Fair
Value

Outstanding at March 31, 2008

166

$6.62

1.20

$    -         

$225          

Forfeited

-

-

-

-         

-           

Outstanding at June 30, 2008

166

$6.62

.95

$    -         

$101          

Vested and exercisable at June 30, 2008

166

$6.62

.95

$    -         

$101          


          All stock options with attached SARs became vested as of October 2007.  However, since actual compensation expense will be determined by the change in fair value of the SARs from period to period, actual compensation expense related to these awards may be different from this amount.  The Company recognized income of $124 and expense of $407 for the three months ended June 30, 2008 and 2007, respectively, related to stock options with attached SARs.  

          Assumptions used to determine the fair value of SARs as of June 30 included the following:


 

 

2008

2007

 

 

Stock Price

$5.11

$10.05

 

 

Exercise Price

$6.62

$6.54

 

 

Expected Life in Years

1.0

1.35

 

 

Annualized Volatility

39%

34%

 

 

Annual Dividend Rate

0%

0%

 

 

Discount Rate

2.3%

4.8%

 


          Because the exercise price of these SARs is above the current stock price, the expected life has been determined to be the maximum time period the SARs may be exercised.  The discount rate used is the risk free treasury bill rate consistent with the expected life.  Volatility is based on historical volatility of the Company’s stock price.


Restricted Stock

Restricted stock is common stock that is both nontransferable and forfeitable unless and until certain conditions are satisfied.  The fair value of restricted shares is determined on grant date and is amortized over the vesting period which is generally three years.  


 

Restricted Stock

Shares

Weighted
Average Grant Date
Fair Value

 

 

Restricted at March 31, 2008

690              

5.58

 

 

Vested

(20)             

5.18

 

 

Forfeited

(13)             

5.59

 

 

Restricted at June 30, 2008

657              

5.59

 


          As of June 30, 2008, there was $958 of remaining unamortized deferred compensation associated with restricted stock awards that will be expensed over the remaining service period through July 2011.  Expense recognized due to the vesting of restricted stock awards was $337 and $478 for the three months ended June 30, 2008 and 2007, respectively.


10.  CONTINGENCIES


Non-Income Tax

In September 2006, the Company’s Serbian operations were assessed for VAT and government pension liability for payments to farmers.  The Company has appealed the assessment from the tax authorities based upon favorable discussions with the Ministry of Finance and is awaiting the final decision from the Supreme Court.  As of June 30, 2008, the balance of the reserve is $243 and payments of $31 have been made during the three months ended June 30, 2008.

           The government in the Brazilian State of Parana (“Parana”) issued a tax assessment on October 26, 2007 with respect to local intrastate trade tax credits that result primarily from tobacco transferred between states within Brazil.  The assessment for intrastate trade tax credits taken is $8,192 and the total assessment including penalties and interest through June 30, 2008 is $14,663.  The Company believes it has properly complied with Brazilian law and will contest any assessment through the judicial process.  Should the Company lose in the judicial process, the loss of the intrastate trade tax credits would have a material impact on the financial statements of the Company.

           The assessment of $8,192 represents intrastate trade tax credit amounts which were offset against intrastate trade tax receivables. At June 30, 2008 the Company also has intrastate trade tax receivables from Parana of $12,037.  During fiscal 2008, the Company recorded an impairment charge of $7,143.  The impairment charge is based upon the estimated fair value of the asset taking into consideration the time it will take to appeal, market interest rates and uncertainty as to the outcome.  As the impairment charge pertains to costs of procurement of raw materials, $6,204 was charged to cost of goods and services sold and $835 was capitalized into inventory during fiscal 2008 and will be charged to cost of goods and services sold as the inventory is sold.  At June 30, 2008, $541 remains in inventory.

           The Company estimates a total 2008 crop impact of $6,300 from intrastate trade tax credits generated from purchases in the State of Parana and transferred to the State of Rio Grande do Sul and will capitalize this value in the 2008 crop cost.  The intrastate trade tax receivable as of June 30, 2008 of $5,452 has been capitalized into inventory and will be charged to cost of goods and services as the 2008 crop inventory is sold.

Alliance One International, Inc. and Subsidiaries


Other

In October 2001, the Directorate General for Competition (“DGCOMP”) of the European Commission (“EC”) began an administrative investigation into certain tobacco buying and selling practices alleged to have occurred within the leaf tobacco industry in some countries within the European Union, including Spain, Italy, Greece and potentially other countries.  The Company and its subsidiaries in Spain, Italy and Greece have been subject to these investigations. In respect of the investigation into practices in Spain, in 2004, the EC fined the Company and its Spanish subsidiaries €4,415 (US$5,641).  In respect of the investigation into practices in Italy, in October 2005, the EC announced that the Company and its Italian subsidiaries have been assessed a fine in the aggregate amount of €24,000 (US$28,800).  With respect to both the Spanish and Italian investigations, the fines imposed on the Company and its predecessors and subsidiaries were part of fines assessed on several participants in the applicable industry.  With respect to the investigation relating to Greece, the EC informed the Company in March 2005 it had closed its investigation in relation to the Greek leaf tobacco industry buying and selling practices.  The Company, along with its applicable subsidiaries, has appealed the decisions of the Commission with respect to Spain and Italy to the Court of First Instance of the European Commission for the annulment or modification of the decision, but the outcome of the appeals process as to both timing and results is uncertain.  The Company has fully recognized the impact of each of the fines set forth above and has paid all of such fines as part of the appeal process.

           The Company had previously disclosed that it had received notice from Mindo, S.r.l., the purchaser in June, 2004, of the Company’s Italian subsidiary Dimon Italia, S.r.l., of its intent to assert against the Company, or its subsidiaries, a claim arising out of that sale transaction.  That claim, which may be followed by additional claims, was filed before the Court of Rome on April 12, 2007.  The claim, allegedly arising from a guaranty letter issued by a consolidated subsidiary of the Company in connection with the sale transaction, seeks the recovery of €7,377 (US$11,648) plus interest and costs.  The Company believes the claim to be without merit and intends to vigorously defend it.  No amounts have been reserved with respect to such claim.

           In March 2004, the Company discovered potential irregularities with respect to certain bank accounts in southern Europe and central Asia.  The Audit Committee of the Company’s Board of Directors engaged an outside law firm to conduct an investigation of activity relating to these accounts.  That investigation revealed that, although the amounts involved were not material and had no material impact on the Company’s historical financial statements, there were payments from these accounts that may have violated the U.S. Foreign Corrupt Practices Act (the “FCPA”).  In May 2004, the Company voluntarily reported the matter to the U.S. Department of Justice (“Justice”).  Soon thereafter, the Company closed the accounts in question, implemented personnel changes and other measures designed to prevent similar situations in the future, including the addition of new finance and internal audit staff and enhancement of existing training programs, and disclosed these circumstances in its filings with the U.S. Securities and Exchange Commission (the “SEC”).  In August 2006, the Company learned that the SEC had issued a formal order of investigation of the Company and others to determine if these or other actions, including those in other countries in which the Company does business, may have violated certain provisions of the Securities Exchange Act of 1934 and rules thereunder.  The Company is cooperating fully with the SEC with respect to the investigation.  In May 2008, the Company learned that Justice is conducting an investigation into possible violations of federal law stemming from the same actions being investigated by the SEC.

           If the U.S. authorities determine that there have been violations of federal laws, they may seek to impose sanctions on the Company that may include, among other things, injunctive relief, disgorgement, fines, penalties and modifications to business practices.  It is not possible to predict at this time whether the authorities will determine that violations have occurred, and if they do, what sanctions they might seek to impose.  It is also not possible to predict how the government’s investigation or any resulting sanctions may impact the Company’s business, results of operations or financial performance, although any monetary penalty assessed may be material to the Company’s results of operations in the quarter in which it is imposed.

           On December 13, 2007, the Public Prosecutors’ offices in the States of Santa Catarina and Parana filed claims against the Company’s Brazilian subsidiary, Alliance One Brazil Exportadora de Tobaccos Ltda. and a number of other tobacco processors, on behalf of all tobacco farmers in those states.  The lawsuits primarily assert that there exists an employment relationship between tobacco processors and tobacco farmers.  The Company believes these claims to be without merit and intends to vigorously defend them.  Ultimate exposure if an unfavorable outcome is received is not determinable.

           At the initial hearing in Santa Catarina, on January 29, 2008, the Court granted the Company’s motion to have the case removed to the Labor Court in Brazilia.  No hearing date has yet been set.  Ultimate exposure if an unfavorable outcome is received is not determinable.

           In the state of Parana, the relief sought by the Public Prosecutor was granted by the local Labor Court.  The Company appealed that initial ruling and it was overturned in part and affirmed in part.  The Company has appealed from that part of the initial ruling which was affirmed and no ruling has yet been rendered on the appeal.  The Company has separately asserted, on April 11, 2008, a lack of jurisdiction motion similar to that which it asserted in the case in Santa Catarina which resulted in the transfer of that case to the Labor Court in Brazilia.  No hearing date for that motion has been set.

           The Company and certain of its foreign subsidiaries guarantee bank loans to growers to finance their crop.  Under longer-term arrangements, the Company may also guarantee financing on growers’ construction of curing barns or other tobacco production assets.  The Company also guarantees bank loans to certain tobacco cooperatives to assist with the financing of their growers’ crops.  Guaranteed loans are generally repaid concurrent with the delivery of tobacco to the Company.  The Company is obligated to repay any guaranteed loan should the grower or tobacco cooperative default.  If default occurs, the Company has recourse against the grower or cooperative.  At June 30, 2008, the Company was guarantor of an amount not to exceed $192,976 with $177,749 outstanding under these guarantees.

           In accordance with generally accepted accounting principles related to asset retirement obligations, the Company records all known asset retirement obligations for which the liability can be reasonably estimated. Currently, it has identified a known asset retirement obligation associated with one of its facilities that requires it to restore the land to its initial condition upon its vacating the facility. The Company has not recognized a liability under FIN 47 for this asset retirement obligation because the fair value of restoring the land at this site cannot be reasonably estimated since the settlement date is unknown at this time. The settlement date is unknown because the land restoration is not required until title is returned back to the government, and the Company has no current or future plans to return the title. The Company will recognize a liability in the period in which sufficient information is available to reasonably estimate its fair value.


11.  DEBT ARRANGMENTS


Senior Secured Credit Facility


On March 30, 2007, the Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”), with a syndicate of banks that amends and restates the Company’s prior credit agreement and provides for a senior secured credit facility (the “Credit Facility”) that consists of:


·

a three and one-half year $240,000 revolver (the “Revolver”) which initially accrues interest at a rate of LIBOR plus 2.75%; and

·

a four-year $145,000 term loan B (the “Term Loan B”) which accrues interest at a rate of LIBOR plus 2.25%.


         The interest rate for the Revolver may increase or decrease according to a consolidated interest coverage ratio pricing matrix as defined in the Credit Agreement.  Effective May 25, 2007, the Company increased the Revolver by $10,000 to $250,000 by adding additional Lenders thereto.  The $145,000 term loan B was repaid in full as of September 30, 2007.


Fourth Amendment.  On August 4, 2008, the Company closed the Fourth Amendment to the Credit Agreement which included the following modifications effective March 31, 2008:


·

Increased the permitted lien basket for foreign subsidiary debt from $150,000 to $275,000;

·

Increased the maximum uncommitted inventories basket from $150,000 to $225,000 through March 30, 2009;

·

Increased permitted foreign subsidiary indebtedness from $600,000 to $685,000 from April 1, 2008 through June 30, 2008, $840,000 from July 1, 2008 through December 31, 2008, $675,000 from January 1, 2009 through March 30, 2009 and as of March 31, 2009 and at all times thereafter $600,000;

·

Amended and restated the consolidated EBIT, committed inventories, confirmed order and uncommitted inventories definitions; and

·

Added new definition for “permitted allowance.”


         A copy of the Fourth Amendment is attached hereto as Exhibit 10.3 and incorporated herein by reference.


Borrowers and Guarantors.  One of the Company’s primary foreign holding companies, Intabex Netherlands B.V. (“Intabex”), is co-borrower under the Revolver, and the Company’s portion of the borrowings under the Revolver is limited to $150,000 outstanding at any one time.  One of the Company’s primary foreign trading companies, Alliance One International AG (“AOIAG”), is a guarantor of Intabex’s obligations under the Credit Agreement. Such obligations are also currently guaranteed by the Company and must be guaranteed by any of its material direct or indirect domestic subsidiaries.


Collateral.  The Company’s borrowings under the Credit Facility are secured by a first priority pledge of:


·

100% of the capital stock of any material domestic subsidiaries;

·

65% of the capital stock of any material first tier foreign subsidiaries;

·

U.S. accounts receivable and U.S. inventory owned by the Company or its material domestic subsidiaries (other than inventory the title of which has passed to a customer and inventory financed through customer advances); and

·

Intercompany notes evidencing loans or advances the Company makes to subsidiaries that are not guarantors.


          In addition, Intabex’s borrowings under the Credit Facility are secured by a pledge of 100% of the capital stock of Intabex, AOIAG, and certain of the Company’s and Intabex’s material foreign subsidiaries.


Financial Covenants.  The Credit Facility includes certain financial covenants and required financial ratios, including:


·

a minimum consolidated interest coverage ratio of not less than 1.70 to 1.00;

·

a maximum consolidated leverage ratio of not more than 5.50 to 1.00;

·

a maximum consolidated total senior debt to borrowing base ratio of not more than 0.80 to 1.00; and

·

a maximum amount of annual capital expenditures of $40,000 during any fiscal year of the Company.


          Certain of these financial covenants and required financial ratios adjust over time in accordance with schedules in the Credit Agreement.

          The Credit Agreement also contains certain customary affirmative and negative covenants, including, without limitation, restrictions on additional indebtedness, guarantees, liens and asset sales.

          The Company continuously monitors its compliance with these covenants and is not in default as of, or for the three months ended June 30, 2008.  If the Company was in default and was unable to obtain the necessary amendments or waivers under its Credit Facility, the lenders under that facility have the right to accelerate the loans thereby demanding repayment in full and extinguishment of their commitment to lend.  Certain defaults under the Credit Facility would result in a cross default under the indentures governing the Company’s senior notes and senior subordinated notes and could impair access to its seasonal operating lines of credit in local jurisdictions.  A default under the Company’s Credit Facility would have a material adverse effect on its liquidity and financial condition.


Senior Notes


On May 13, 2005, the Company issued $315,000 of 11% senior notes due 2012 and on March 7, 2007, the Company issued $150,000 of 8 ½% senior notes due 2012 at a 0.5% original issue discount to reflect an 8.6% yield to maturity.  During the twelve months ended March 31, 2008, the Company purchased $42,285 of its $315,000 11% Senior Note due May 2012 on the open market. All purchased securities were canceled leaving $272,715 of the 11% Senior Notes outstanding at March 31, 2008.  Associated cash premiums paid were $1,990 and non-cash deferred financing costs of $732 were accelerated. The Company did not purchase any senior notes during the fiscal quarter ended June 30, 2008. From time to time in the future the Company may purchase more of its debt securities in the open market or through a tender process.  The indentures governing each of the 11% senior notes and the 8 ½% senior notes contain certain covenants that, among other things, limit the Company’s ability to incur additional indebtedness; issue preferred stock; merge, consolidate or dispose of substantially all of its assets; grant liens on its assets; pay dividends, redeem stock or make other distributions or restricted payments; repurchase or redeem capital stock or prepay subordinated debt; make certain investments; agree to restrictions on the payment of dividends to the Company by its subsidiaries; sell or otherwise dispose of assets, including equity interests of its subsidiaries; enter into transactions with its affiliates; and enter into certain sale and leaseback transactions.  The Company continuously monitors its compliance with these covenants and is not in default as of, or for the three months ended June 30, 2008.


Senior Subordinated Notes


On May 13, 2005, the Company issued $100,000 of 12 3/4% senior subordinated notes due 2012 at a 10% original issue discount to reflect a 15% yield to maturity.  The indenture governing the senior subordinated notes contains covenants substantially identical to those contained in the indentures governing the 11% senior notes and the 8 ½% senior notes.   


Foreign Seasonal Lines of Credit


The Company has typically financed its non-U.S. operations with uncommitted unsecured short term seasonal lines of credit at the local level.  These operating lines are seasonal in nature, normally extending for a term of 180 to 270 days corresponding to the tobacco crop cycle in that location.  These facilities are typically uncommitted in that the lenders have the right to cease making loans and demand repayment of loans at any time.  These loans are typically renewed at the outset of each tobacco season.  As of June 30, 2008, the Company had approximately $613,887 drawn and outstanding on foreign seasonal lines with maximum capacity totaling $964,198. Additionally, against these lines there was $29,670 available in unused letter of credit capacity with $21,457 issued but unfunded.


         The following table summarizes our debt financing as of June 30, 2008:


 

 

June 30, 2008

 

 

 

Outstanding

Lines and

 

 

 

 

March 31,

June 30,    

Letters

Interest

 

Repayment Schedule (4)

 

2008    

2008       

Available

Rate

 

2009

2010

2011

2012

2013

Later

Senior secured credit facility:

 

 

 

 

 

 

 

 

 

 

 

    Revolver

$             -

$              - 

$250,000

 

 

 

 

 

 

 

 

    Term loan B

-

-

 

 

 

-

250,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior notes:

 

 

 

 

 

 

 

 

 

 

 

    11% senior notes due 2012

272,715

272,715 

-

11.0%

 

272,715 

    8 ½% senior notes due 2012

149,390

149,421 

-

8.5%

 

(98)

(142)

(155)

(169)

149,985 

    Other (1)

10,157

10,157 

-

 

 

3,437 

6,285 

435 

 

432,262

432,293 

-

 

 

(98)

(142)

(155)

3,268 

428,985 

435 

 

 

 

 

 

 

 

 

 

 

 

 

12 ¾% senior subordinated
    notes due 2012

92,647

92,932 

-

12.8%

 

(922)

(1,400)

(1,625)

(1,885)

98,764 

 

 

 

 

 

 

 

 

 

 

 

 

Other long-term debt

58,068

64,356 

31,588

8.8%

(2)

26,628 

13,538 

12,418 

11,381 

42 

349 

 

 

 

 

 

 

 

 

 

 

 

 

Notes payable to banks (3)

387,157

613,887 

299,184

5.6%

(2)

 

 

 

 

 

 

 

 

 

 

 

 

    Total debt

$  970,134

$1,203,468 

580,772

 

 

$25,608 

$11,996 

$10,638 

$12,764 

$527,791 

$784 

 

 

 

 

 

 

 

 

 

 

 

 

Short term

$  387,157

$   613,887 

 

 

 

 

 

 

 

 

 

Long term:

 

 

 

 

 

 

 

 

 

 

 

    Long term debt current

$    19,004

$     22,438 

 

 

 

 

 

 

 

 

 

    Long term debt

563,973

567,143 

 

 

 

 

 

 

 

 

 

 

$  582,977

$   589,581 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Letters of credit

$    22,151

$     21,457 

29,670

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Total credit available

 

 

$610,442

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)  Balance consists of legacy DIMON and Standard Senior Notes with balances and maturities as follows:
      $ 3,437    9 5/8% Senior Notes due 2011
            435    7 3/4% Senior Notes due 2013
         6,285    8% Senior Notes due 2012
     $10,157

 

(2)  Weighted average rate for the three months ended June 30, 2008

 

(3)  Primarily foreign seasonal lines of credit

 

(4)  Debt repayment classification is based on fiscal years ended March 31 for all years except the current year.  The current fiscal year
       excludes repayments made through June 30, 2008.


12.  DERIVATIVE FINANCIAL INSTRUMENTS


Forward Currency Contracts

The Company periodically enters into forward currency contracts to protect against volatility associated with certain non-U.S. dollar denominated forecasted transactions.  In accordance with SFAS No. 133, when these derivatives qualify for hedge accounting treatment, they are accounted for as cash flow hedges and are recorded in other comprehensive income, net of deferred taxes.  

          The Company has entered into forward currency contracts to hedge cash outflows in foreign currencies around the world for green tobacco purchases and processing costs as well as selling, administrative and general costs.  These contracts do not meet the requirements for hedge accounting treatment under SFAS No. 133, and as such, are reported in income. For the three months ended June 30, 2008 and 2007, income of $16,794 and $9,807, respectively, has been recorded in cost of goods and services sold.  For the three months ended June 30, 2008 and 2007, a loss of $63 and $0, respectively, has been recorded in selling, administrative and general expenses.


Fair Value of Derivative Financial Instruments

In accordance with SFAS No. 133, the Company recognizes all derivative financial instruments, such as interest rate swap contracts and foreign exchange contracts, at fair value regardless of the purpose or intent for holding the instrument.  Changes in the fair value of derivative financial instruments are either recognized periodically in income or in stockholders’ equity as a component of comprehensive income depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it qualifies as a fair value hedge or cash flow hedge.  Changes in fair values of derivatives accounted for as fair value hedges are recorded in income along with the portions of the changes in the fair values of the hedged items that relate to the hedged risk(s).  Changes in fair values of derivatives accounted for as cash flow hedges, to the extent they are effective as hedges, are recorded in other comprehensive income net of deferred taxes.  Changes in fair values of derivatives not qualifying as hedges are reported in income.  Fair value estimates are based on a model utilizing observable market data.  


13.  PENSION AND POSTRETIREMENT BENEFITS


The Company has a defined benefit plan that provides retirement benefits for substantially all U.S. salaried personnel based on years of service rendered, age and compensation.  The Company also maintains various other Excess Benefit and Supplemental Plans that provide additional benefits to (1) certain individuals whose compensation and the resulting benefits that would have actually been paid are limited by regulations imposed by the Internal Revenue Code and (2) certain individuals in key positions.  The Company funds these plans in amounts consistent with the funding requirements of Federal Law and Regulations.

          Additional non-U.S. defined benefit plans sponsored by certain subsidiaries cover certain full-time employees located in Germany, Greece, Turkey, Guatemala and Malawi.


Components of Net Periodic Benefit Cost

Net periodic pension cost for continuing operations consisted of the following:


 

Three Months Ended
June 30,

 

2008  

 

2007  

     Service cost

$  1,125 

 

$   700 

     Interest expense

2,284 

 

1,947 

     Expected return on plan assets

(1,622)

 

(1,706)

     Amortization of prior service cost

(71)

 

(36)

     Actuarial loss

(84)

 

162 

     Net periodic pension cost

$  1,632 

 

$1,067 


Employer Contributions

The Company’s investment objectives are to generate consistent total investment return to pay anticipated plan benefits, while minimizing long-term costs.  Financial objectives underlying this policy include maintaining plan contributions at a reasonable level relative to benefits provided and assuring that unfunded obligations do not grow to a level to adversely affect the Company’s financial health.  As of June 30, 2008, contributions of $2,384 were made to pension plans for fiscal 2009.  Additional contributions to pension plans of approximately $9,053 are expected during the remainder of fiscal 2009.  However, this amount is subject to change, due primarily to potential plan combinations, asset performance significantly above or below the assumed long-term rate of return on pension assets and significant changes in interest rates.


Postretirement Health and Life Insurance Benefits

The Company also provides certain health and life insurance benefits to retired employees, and their eligible dependents, who meet specified age and service requirements. The Company has amended the U.S. plan effective September 1, 2005 to limit benefits paid to retirees under the age of 65 to a maximum of two thousand five hundred dollars per year.  Employees joining after August 31, 2005 will not be eligible for any retiree medical benefits.  As of June 30, 2008, contributions of $242 were made to the plans for fiscal 2009.  Additional contributions of $726 to the plans are expected during the rest of fiscal 2009.  The Company retains the right, subject to existing agreements, to modify or eliminate the medical benefits.


Components of Net Periodic Benefit Cost

Net periodic benefit cost for postretirement health and life insurance benefit plans consisted of the following:


 

Three Months Ended
June 30,

 

2008 

 

2007  

     Service cost

$   32 

 

$   18 

     Interest expense

205 

 

141 

     Amortization of prior service cost

(405)

 

(405)

     Actuarial loss

94 

 

105 

     Net periodic pension cost

$ (74)

 

$(141)


14.  ADVANCES ON PURCHASES OF TOBACCO


The Company provides seasonal crop advances of, or for, seed, fertilizer, and other supplies. These advances are short term in nature, are repaid upon delivery of tobacco to the Company, and are reported in advances on purchases of tobacco in the condensed consolidated balance sheet. Primarily in Brazil and certain African countries, the Company has made long-term advances to tobacco farmers to finance curing barns and other farm infrastructure. In addition, due to low crop yields and other factors, in some years individual farmers may not deliver sufficient volumes of tobacco to fully repay their seasonal advances, and the Company may extend repayment of those advances into future crop years. Current advances of $151,516 at June 30, 2008 and $64,648 at June 30, 2007 are presented as advances on purchases of tobacco, net in the condensed consolidated balance sheet.  The long-term portion of advances of $54,851 at June 30, 2008 and $57,993 at June 30, 2007 are included in other non-current assets in the condensed consolidated balance sheet. Both the current and the long-term portion of advances on purchases of tobacco are reported net of allowances.  Allowances are recorded when the Company determines that amounts outstanding are not likely to be collected. Total allowances were $104,677 at June 30, 2008, and $61,865 at June 30, 2007, and were estimated based on the Company’s historical loss information and crop projections. The allowances were increased by provisions for estimated uncollectible amounts of approximately $24,035 and $24,329 for the three months ended June 30, 2008 and 2007, respectively.  Estimated bad debt expense on current year advances are capitalized into inventory.  As of June 30, 2008 and 2007, respectively, write-downs charged against the allowance were $6,981 and $2,206.

          In Brazil, farmers obtain government subsidized rural credit financing which is guaranteed by the Company.  The farmers borrow these funds from local banks.  Repayment of both Company advances and rural credit financing by the farmer is concurrent with delivery of tobacco to the Company.  Terms of rural credit financing are such that repayment is due only after tobacco deliveries are complete.  At fiscal year end, the Company will generally have accumulated balances from farmers for repayment to the local banks for the rural credit financing.  As of June 30, 2008 and 2007, respectively, the Company had balances of $43,430 and $70,519 that were due to local banks on behalf of farmers.  These amounts are included in accounts payable in the condensed consolidated balance sheet.  As of June 30, 2008 and 2007, respectively, the Company was guarantor for Brazilian farmer loans of $129,755 and $231,204 with outstanding amounts of $114,528 and $207,073.  The fair value of guarantees for rural credit financing was $13,334 and $12,424 as of June 30, 2008 and 2007, respectively, and is recorded as a liability.


15.  SALE OF RECEIVABLES


Alliance One International, A.G., a wholly owned subsidiary of the Company is engaged in a revolving trade accounts receivable securitization agreement to sell receivables to a third party limited liability company. The agreement was amended in March 2008 to increase the size of the facility and also reduce expenses. The agreement, which matures March 26, 2013, is funded through loans to the third party limited liability company which is committed up to a maximum of $100,000 in funding at any time.  To the extent that the balance of the loan is less than $100,000 the Company is subject to a 0.25% fee on the unused amount.  The Company retains servicing responsibilities and subordinated interests in the receivables sold. The Company receives annual service fees of 0.5% of the outstanding balance which approximates the fair value of services to be rendered at current funding levels. Historically, credit loss and prepayments of customer receivables have been negligible. Losses on sale of receivables are recorded as a component of other income (expense) in the statement of operations.

          The following table summarizes the Company’s accounts receivable securitization information as of June 30:


 

 

2008        

 

2007        

 

 

 

 

 

Receivables outstanding in facility:

 

 

 

 

   As of April 1

 

$   70,862   

 

$   31,282   

   Sold

 

142,704   

 

35,397   

   Collected

 

(155,519)  

 

(28,467)  

   As of June 30

 

$   58,047   

 

$ 38,212   

 

 

 

 

 

Retained interest as of June 30

 

$     5,127   

 

$   4,405   

 

 

 

 

 

Decreases in retained interest resulting from changes in discount rate:

 

 

 

 

   10%

 

$          50   

 

$        68   

   20%

 

$        100   

 

$      135   

 

 

 

 

 

Criteria to determine retained interest as of June 30:

 

 

 

 

   Weighted average life in days

 

61   

 

70   

   Discount rate (inclusive of 0.5% servicing fee)

 

5.2%

 

8.7%

   Unused balance fee

 

0.25%

 

0.3%

 

 

 

 

 

Cash proceeds for the three months ended June 30:

 

 

 

 

   Current purchase price

 

$   96,249   

 

$25,385   

   Deferred purchase price

 

43,745   

 

5,895   

   Service fees

 

120   

 

65   

      Total

 

$ 140,114   

 

$31,345   

 

 

 

 

 

Loss on sale of receivables:

 

$        357   

 

$     717   


          It is the Company’s intention to maximize the receivables sold under the revolving agreement meaning that amounts collected by the pool would be reinvested in the purchase of additional eligible receivables. Since April 1, 2008, the average outstanding balance of receivables sold has been $54,712 with a minimum outstanding balance of $45,310 and a maximum of $70,000.


16.  FAIR VALUE MEASUREMENTS


The Company adopted SFAS No. 157, Fair Value Measurements as of April 1, 2008 for all recurring financial assets and liabilities.  It utilized the deferral provision of FSP No. FAS 157-2 for all non-recurring non-financial assets and liabilities within its scope.  SFAS No. 157 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.  SFAS No. 157 also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques.  Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions.  In accordance with SFAS No. 157, fair value measurements are classified under the following hierarchy:


·

Level 1 – Quoted prices for identical instruments in active markets.  Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

·

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets.

·

Level 3 – Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.


          When available, the Company uses quoted market prices to determine fair value, and it classifies such measurements within Level 1.  In some cases where market prices are not available, it makes use of observable market based inputs to calculate fair value, in which case the measurements are classified within Level 2.  If quoted or observable market prices are not available, fair value is based upon internally developed models that use, where possible, current market-based parameters such as interest rates, yield curves, currency rates, etc.  These measurements are classified within Level 3.

          Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation.  A measurement may therefore be classified within Level 3 even though there may be significant inputs that are readily observable.


Derivative financial instruments

The fair value of foreign currency and interest rate swap contracts are based on third-party market maker valuation models that discount cash flows resulting from the differential between the contract rate and the market-based forward rate or curve capturing volatility and establishing intrinsic and carrying values.


Securitized retained interests

The fair value of securitized retained interests is based upon a valuation model that calculates the present value of future expected cash flows using key assumptions for credit losses, prepayment speeds and discount rates.  These assumptions are based on our historical experience, market trends and anticipated performance relative to the particular assets securitized.


          Assets measured at fair value included in the Condensed Consolidated Balance Sheet as of June 30, 2008 are summarized below:


 

June 30, 2008                                              

 

Level 1

Level 2

Level 3

Total Assets /
Liabilities,
at Fair Value

 

 

 

 

 

Assets

 

 

 

 

   Derivative financial instruments

$   -             

$  6,061         

$          -          

$   6,061         

   Securitized retained interests

-             

-         

5,127         

5,127         

   Total Assets

$   -             

$  6,061         

$    5,127         

$  11,188         

 

 

 

 

 


          Below is a roll-forward of assets and liabilities measured at fair value using Level 3 inputs for the three months ended June 30, 2008.  These instruments were valued using pricing models that, in management’s judgment, reflect the assumptions a marketplace participant would use.


 

 

Securitized
Retained Interests

 

Guarantees

 

 

 

 

 

Balance at March 31, 2008

 

$     15,207             

 

$  20,069             

   Total gains or losses (realized / unrealized)

 

 

 

 

      included in earnings

 

357             

 

-             

   Purchases, issuances, and settlements

 

(10,437)            

 

(5,199)            

Balance at June 30, 2008

 

$      5,127              

 

$  14,870             


          The amount of total losses for the three months ended June 30, 2008 included in earnings attributable to the change in unrealized losses relating to assets still held at June 30, 2008 was $540 on securitized retained interests.

          Gains and losses included in earnings are reported in Other Income.


17.  SUBSEQUENT EVENT


On August 4, 2008, the Company closed the

Fourth Amendment to the Credit Agreement. Absent this amendment, the Company would have violated the foreign subsidiary indebtedness covenant at June 30, 2008. This Amendment included the following modifications effective March 31, 2008:


·

Increased the permitted lien basket for foreign subsidiary debt from $150,000 to $275,000;

·

Increased the maximum uncommitted inventories basket from $150,000 to $225,000 through March 30, 2009;

·

Increased permitted foreign subsidiary indebtedness from $600,000 to $685,000 from April 1, 2008 through June 30, 2008, $840,000 from July 1, 2008 through December 31, 2008, $675,000 from January 1, 2009 through March 30, 2009 and as of March 31, 2009 and at all times thereafter $600,000;

·

Amended and restated the consolidated EBIT, committed inventories, confirmed order and uncommitted inventories definitions; and

·

Added new definition for “permitted allowance.”


          A copy of the Fourth Amendment is attached hereto as Exhibit 10.3 and incorporated herein by reference.



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


EXECUTIVE OVERVIEW


The following executive overview is intended to provide significant highlights of the discussion and analysis that follows.  


Financial Results


We are experiencing a unique operating year where uncommitted inventory availability has decreased substantially, the U.S. dollar is still weakening and costs across the world are rising.  Despite these challenges, we have been able to achieve improved gross profits, operating income and net income compared to the prior year.  This quarter is the last quarter in which our results will be significantly impacted by the increased costs associated with the Malawi 2007 burley crop.  While significant shipments expected in this quarter out of South America are delayed until next quarter, processing volumes have greatly increased in the United States and Asia.  Although selling, administrative and general expenses were reduced, they were negatively impacted by the strength of local currencies against the U.S. dollar.  As a result of our focus on debt reduction in the prior year, interest and other debt related costs are decreasing.


Liquidity


Our enterprise liquidity requirements are dynamic. As such we utilize various sources, which are continuously monitored and adjusted as required based on the seasonality of our business and include cash from operations, our $250.0 million revolving credit facility, short term credit lines throughout the world, sale of accounts receivable, active working capital management and advances from customers. As of June 30, 2008, we had $790.0 million of cash and available credit comprised of $179.5 million of cash and $610.5 million in available credit inclusive of our undrawn $250.0 million revolver, $32.6 million of other long term debt, $299.2 million of notes payable to banks, and $29.7 million exclusively for letters of credit. On an ongoing basis we continue to modify the composition of our available liquidity maximizing business flexibility and minimizing costs.


Outlook


As we begin the new fiscal year, we are entering into a marketplace where global supply and demand is very tight and uncommitted inventories are below historic levels.  While this market presents many opportunities, it also presents many challenges.  While decreased supply may translate to higher customer prices, it also translates to higher green costs for the tobacco and higher production costs.  These factors, coupled with the impact of a continued weak U.S. dollar and rising fuel and other costs, will challenge us to achieve appropriate returns while continuing to improve future performance.  We remain committed to our customer-focused strategy, and we are confident that we are positioned to meet these challenges, enhance our already strong customer relationships and allow us to grow with our customers. As such, we are continuing to focus our attention and resources on those origins that are growing in market importance, on delivering outstanding customer service and exercising expense discipline.


RESULTS OF OPERATIONS:


Condensed Consolidated Statement of Operations

 

Three Months Ended

 

June 30,

 

 

Change          

 

(in millions)

2008  

$     

%   

2007  

Sales and other operating revenues

$459.2  

$(2.5)  

(0.5)

$461.7  

Gross profit

76.7  

4.9   

6.8 

71.8  

Selling, administrative and general expenses

38.2  

(1.3)  

(3.3)

39.5  

Other income

2.3  

0.4   

 

1.9  

Restructuring and asset impairment charges

0.5  

0.1   

 

0.4  

Debt retirement expense

-  

(1.9)  

 

1.9  

Interest expense

24.4  

(0.5)  

 

24.9  

Interest income

0.9  

(1.3)  

 

2.2  

Income tax expense

1.8  

(1.5)  

 

3.3  

Equity in net income of investee companies

-  

-   

 

-  

Minority interests (income)

0.1  

(0.1)  

 

-  

Income from discontinued operations

0.5  

0.5   

 

-  

Net income

$  15.3*

$  9.3* 

 

$   6.0*

 

 

 

 

 

  *  Amounts do not equal column totals due to rounding


Sales and Other Operating Revenue Supplemental Information

 

Three Months Ended

 

June 30,

 

 

Change          

 

(in millions, except per kilo amounts)

2008  

$     

%   

2007    

Tobacco sales:

 

 

 

 

     Tobacco sales

$449.6 

$  (7.0)  

(1.5)

$456.6 

     Kilos

106.8 

(28.4)  

(21.0)

135.2 

     Average price per kilo

$  4.21 

$    .83   

24.6 

$  3.38 

Processing and other revenues

$    9.6 

$    4.5   

88.2 

$    5.1 

Total sales and other operating revenues

$459.2 

$  (2.5)  

(0.5)

$461.7 


Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007


Sales and other operating revenues.  The decrease of 0.5% from $461.7 million in 2007 to $459.2 million in 2008 is primarily the result of a 21.0% or 28.4 million kilo decrease in quantities sold substantially offset by a 24.6% or $0.83 per kilo increase in average sales prices.


South America Region.  Tobacco sales from the South America Region operating segment decreased $5.4 million or 2.0% resulting from a decrease in volumes of 16.1 million kilos that was substantially offset by an increase of $0.99 per kilo in average sales prices.  The decrease in volumes will be partially recovered in the next quarter due to the timing of shipments between first quarter and second quarter in 2008 compared to 2007.  Improved customer pricing significantly offset the impact of the reduced volumes.  


Other Regions.  Tobacco sales from the Other Regions operating segment decreased $1.6 million or 0.8% primarily as a result of a decrease in volumes of 12.3 million kilos that was essentially offset by an increase of $0.68 per kilo in average sales prices.  Volumes decreased across all regions with the primary impact in Africa due to lower volumes available from the previous quarter to be carried over into this quarter.  Average sales prices increased across all regions with the most significant price impact being attributable to Europe and the impact of Euro denominated sales prices.  Processing and other revenues increased 88.2% or $4.5 million from $5.1 million in 2007 to $9.6 million in 2008 primarily as a result of increased processing volumes and prices in the United States and in Asia.


Gross profit as a percentage of sales.  Gross profit increased 6.8% from $71.8 million in 2007 to $76.7 million in 2008 and gross profit as a percentage of sales increased from 15.6% in 2007 to 16.7% in 2008.


South America Region.  Gross profit in the South America Region operating segment increased $2.3 million primarily as a result of increased average sales prices, which were more than offset by a reduction in volumes for the quarter and increased gains on derivative financial instruments.  The increased average sales prices were further offset by higher green costs of tobacco as a result of the shortfall of tobacco available in the worldwide market.  In addition, the strengthening Brazilian real also continues to increase both green and tobacco processing costs.  Gross profit from sales of the 2007 crop still remains negatively impacted by the higher estimated grower bad debt provisions resulting from the decline in market conditions of the 2006 and 2007 crops.  Market conditions for the 2008 crop are much improved as a response to the global shortage of tobacco volumes available.    


Other Regions.  The increase in gross profit of $2.6 million is primarily attributable to the Asia region as a result of advanced shipments from Thailand and increased processing volumes in Indonesia.  The remaining volumes of the 2007 Malawi burley crop were substantially shipped this quarter which included the significantly higher green and processing costs of the crop that resulted from the reduced crop size and increased competition within the Malawi market.  The 2008 Malawi crop also includes increased green and processing costs as well.  The demand for tobacco in response to lower volumes available around the world is resulting in higher green costs.  In addition, green costs and processing costs have also increased as a result of the weak U.S. dollar and high fuel costs.  However, current conditions in the market are expected to yield sufficient price increases to offset the higher costs.  


Selling, administrative and general expenses decreased 3.3% from $39.5 million in 2007 to $38.2 million in 2008.  The decrease is primarily due to decreased taxes and licenses, travel costs and depreciation expense.


Other income of $2.3 million in 2008 relates primarily to gains on assets held for sale while the $1.9 million in 2007 relates primarily to gains on sales of fixed assets.


Debt retirement expense of $1.9 million in 2007 relates to accelerated amortization of debt issuance costs as a result of debt prepayment during the quarter.


Interest expense decreased $0.5 million from $24.9 million in 2007 to $24.4 million in 2008 primarily due to lower average rates during the quarter.


Interest income decreased from $2.2 million in 2007 to $0.9 million in 2008 primarily due to lower average cash balances.


Effective tax rates were 10.7% in 2008 and 35.9% in 2007.  The effective tax rates for these periods are based on the current estimate of full year results after the effect of taxes related to specific events which are recorded in the interim period in which they occur.  We forecast the tax rate for the year ended March 31, 2009 will be 4.6% after absorption of discrete items.  For the three months ended June 30, 2008, we recorded a specific event adjustment expense of $1.3 million bringing the effective tax rate estimated for the quarter from 3.1% to 10.7%.  This specific event adjustment expense relates primarily to additional interest on liabilities for unrecognized tax benefits and net exchange losses on income tax accounts.  During the quarter ended June 30, 2007, expense adjustments of $1.9 million, primarily related to interest on liabilities for unrecognized tax benefits and changes in judgment regarding certain non-U.S. tax items, were recorded as specific events.  The net effect of these adjustments on the tax provision was to increase the effective tax rate for the three months ended June 30, 2007 from 15.0% to 35.9%.


Income from discontinued operations.  Discontinued operations resulted in income of $0.5 million in 2008 compared to no income or loss in 2007.  The income in 2008 is primarily a result of the finalization of our exit from the discontinued wool operations.  See Note 5 “Discontinued Operations” to the “Notes to Condensed Consolidated Financial Statements” for further information.


LIQUIDITY AND CAPITAL RESOURCES:


Overview

Our business is seasonal, and purchasing, processing and selling activities have several associated peaks where cash on hand and outstanding indebtedness may be significantly greater or less than at fiscal year-end. We utilize capital in excess of cash flow from operations to finance accounts receivable, inventory and advances to farmers for pre-financing tobacco crops in foreign countries, including Argentina, Brazil, Guatemala, Malawi, Tanzania, Turkey and Zambia.  In addition, from time to time in the future, we may elect to purchase, redeem, repay, retire or cancel indebtedness prior to stated maturity under our various foreign credit lines, senior secured credit agreement or indentures, as permitted therein.

         As of June 30, 2008, we are approaching the seasonally adjusted high for our South American crop lines as we are completing purchasing and processing in these markets with shipping stepping into full mode. In Africa purchasing will continue through August in most sourcing areas whilst processing and consequently shipping will peak in the second and third quarters. In Asia the Thai crop is fully purchased, while some Chinese and Indian traditional are still left to purchase and process. The Indonesian purchasing season begins in August. Europe has completed purchases of the 2008 crop and is finishing processing with most shipping to come.  North America is preparing to begin flue cured purchasing in August with processing and shipping to follow, which will commence its seasonally elevated working capital needs. Further depreciation of the U.S. dollar versus many of the currencies in which we have costs may continue to have an impact on our working capital requirements, as such, we will monitor and hedge foreign currency costs prudently, and as needed on a currency by currency basis.


Working Capital

Our working capital increased from $440.2 million at March 31, 2008 to $458.8 million at June 30, 2008.  Our current ratio was 1.4 to 1 at June 30, 2008 compared to 1.6 to 1 at March 31, 2008.  The increase in working capital is primarily related to increases in cash and inventories and advances on purchases of tobacco partially offset by increases in notes payable to banks.  These changes are attributable to the purchasing and processing of tobacco in Malawi and South America as well as the financing of crops in other Africa areas and Europe.  

         The following table is a summary of items from the Condensed Consolidated Balance Sheet and Condensed Consolidated Statements of Cash Flows.


 

As of                             

 

 

 

 

June 30,            

 

March 31,

(in millions except for current ratio)

 

 

 

2008

 

2007 

 

2008   

Cash and cash equivalents

 

 

 

$    179.5 

 

$   110.6 

 

$    112.2

Net trade receivables

 

 

 

156.8 

 

175.1 

 

181.0

Inventories and advances on purchases of tobacco

 

 

 

1,056.3 

 

845.4 

 

801.8

Total current assets

 

 

 

1,506.9 

 

1,243.5 

 

1,191.9

Notes payable to banks

 

 

 

613.9 

 

373.7 

 

387.2

Accounts payable

 

 

 

158.4 

 

164.0 

 

158.5

Advances from customer

 

 

 

174.5 

 

172.3 

 

91.9

Total current liabilities

 

 

 

1,048.1 

 

780.0 

 

751.7

Current ratio

 

 

 

1.4 to 1 

 

1.6 to 1 

 

1.6 to 1

Working capital

 

 

 

458.8 

 

463.5 

 

440.2

Total long term debt

 

 

 

567.1 

 

634.8 

 

564.0

Stockholders’ equity

 

 

 

224.7 

 

200.1 

 

211.5

 

 

 

 

 

 

 

 

 

Net cash provided (used) by:

 

 

 

 

 

 

 

 

      Operating activities

 

 

 

(158.8)

 

(71.8)

 

 

      Investing activities

 

 

 

(1.8)

 

1.1 

 

 

      Financing activities

 

 

 

228.4 

 

100.7 

 

 


Operating Cash Flows

Net cash used by operating activities increased $87.0 million in 2008 compared to 2007.  The increase in cash used was primarily due to an increase of $144.0 million in inventories and advances to suppliers, $7.6 million in deferred items and $13.6 million in accounts receivable.  These increases in cash used were partially offset by increases of $40.4 million in accounts payable and accrued expenses and $36.3 million in advances from customers.


Investing Cash Flows

Net cash from investing activities was a use of cash of $1.8 million in 2008 compared to a provision of cash of $1.1 million in 2007.  The decrease in cash provided of $2.9 million is primarily attributable to increased purchases of property and equipment and less return of capital on investments in unconsolidated affiliates.


Financing Cash Flows

Net cash provided by financing activities increased $127.7 million in 2008 compared to 2007.  This increase is primarily due to $83.5 million less repayments of long term debt and a $42.3 million increase in repayments of short-term demand notes.


Debt Financing

We continue to finance our business with a combination of cash from operations, short-term seasonal credit lines, our revolving credit facility, long term debt securities, customer advances and cash from operations. At June 30, 2008 we had cash of $179.5 million and total debt outstanding of $1,203.5 million comprised of $613.9 million of notes payable to banks, $64.4 million of other long term debt, $272.7 million of 11% senior notes, $149.4 million of 8.5% senior notes, $92.9 million of senior subordinated notes and $10.2 million of other legacy company senior notes.  The $226.7 million seasonal increase in notes payable to banks from March 31, 2008 to June 30, 2008 is anticipated seasonal fluctuation to account for the current purchase of the higher cost Brazilian and African crops. Available credit as of June 30, 2008 was $610.5 million comprised of our $250.0 million revolver, $31.6 million of other long term debt, $299.2 million of notes payable to banks and $29.7 million of availability exclusively for letters of credit. We expect to incur $25 million of capital expenditures during fiscal year 2009 with $20.8 million anticipated through the remainder of the fiscal year. Our previously announced SAP software implementation is one of the prime drivers of capital expenditures in addition to regularly scheduled maintenance. No cash dividends were paid to stockholders or additional senior notes purchased during the quarter ended June 30, 2008. We believe that these sources of liquidity versus our requirements will be sufficient to fund our anticipated needs for fiscal year 2009.

         The following table summarizes our debt financing as of June 30, 2008:


 

 

 

June 30, 2008

 

 

Outstanding

Lines and

 

 

 

March 31,

June 30,   

Letters

Interest

 

Repayment Schedule (4)

(in millions except for interest rates)

2008    

2008       

Available

Rate

 

2009

2010

2011

2012

2013

Later

Senior secured credit facility:

 

 

 

 

 

 

 

 

 

 

 

     Revolver

$        -

$         -

$250.0

 

 

 

 

 

 

 

 

     Term loan B

-

-

-

 

 

 

-

-

250.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior notes:

 

 

 

 

 

 

 

 

 

 

 

     11% senior notes due 2012

272.7

272.7

-

11.0%

 

272.7 

     8 ½% senior notes due 2012

149.4

149.4

-

8.5%

 

(.1)

(.1)

(.2)

(.2)

150.0 

     Other (1)

10.2

10.2

-

 

 

3.5 

6.3 

0.4 

 

432.3

432.3

-

 

 

(.1)

(.1)

(.2)

3.3 

429.0 

0.4 

 

 

 

 

 

 

 

 

 

 

 

 

12 ¾% senior subordinated
       notes due 2012

92.6

92.9

-

12.8%

 

(.9)

(1.4)

(1.6)

(1.9)

98.7 

 

 

 

 

 

 

 

 

 

 

 

 

Other long-term debt

58.1

64.4

31.6

8.8%

(2)

26.6 

13.5 

12.4 

11.5 

0.4 

 

 

 

 

 

 

 

 

 

 

 

 

Notes payable to banks (3)

387.2

613.9

299.2

5.6%

(2)

 

 

 

 

 

 

 

 

 

 

 

 

     Total debt

$ 970.2

$ 1,203.5

580.8

 

 

$25.6 

$12.0 

$10.6 

$12.9 

$527.7 

$0.8 

 

 

 

 

 

 

 

 

 

 

 

 

Short term

$ 387.2

$  613.9

 

 

 

 

 

 

 

 

 

Long term:

 

 

 

 

 

 

 

 

 

 

 

     Long term debt current

$    19.0

$     22.4

 

 

 

 

 

 

 

 

 

     Long term debt

  564.0

567.1

 

 

 

 

 

 

 

 

 

 

$ 583.0

$  589.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Letters of credit

$   22.2

$    21.5

29.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Total credit available

 

 

$610.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)  Balance consists of legacy DIMON and Standard Senior Notes with balances and maturities as follows:
      $ 3.5    9 5/8% Senior Notes due 2011
         0.4    7 3/4% Senior Notes due 2013
         6.3    8% Senior Notes due 2012
     $10.2

 

(2)  Weighted average rate for the three months ended June 30, 2008

 

(3)  Primarily foreign seasonal lines of credit

 

(4)  Debt repayment classification is based on fiscal years ended March 31 for all years except the current year.  The current fiscal year
       repayments have been adjusted for payments made through June 30, 2008.


The following summarizes the material terms of each significant component of our debt financing.


Senior Secured Credit Facility


On March 30, 2007, the Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”), with a syndicate of banks that amends and restates the Company’s prior credit agreement and provides for a senior secured credit facility (the “Credit Facility”) that consists of:


·

a three and one-half year $240.0 million revolver (the “Revolver”) which initially accrues interest at a rate of LIBOR plus 2.75%; and

·

a four-year $145.0 million term loan B (the “Term Loan B”) which accrues interest at a rate of LIBOR plus 2.25%.


         The interest rate for the Revolver may increase or decrease according to a consolidated interest coverage ratio pricing matrix as defined in the Credit Agreement.  Effective May 25, 2007, the Company increased the Revolver by $10.0 million to $250.0 million by adding additional Lenders thereto.  The $145.0 million term loan B was repaid in full as of September 30, 2007.


Fourth Amendment.  On August 4, 2008, the Company closed the Fourth Amendment to the Credit Agreement which included the following modifications effective March 31, 2008:


·

Increased the permitted lien basket for foreign subsidiary debt from $150.0 million to $275.0 million;

·

Increased the maximum uncommitted inventories basket from $150.0 million to $225.0 million through March 30, 2009;

·

Increased permitted foreign subsidiary indebtedness from $600.0 million to $685.0 million from April 1, 2008 through June 30, 2008, $840.0 million from July 1, 2008 through December 31, 2008, $675.0 million from January 1, 2009 through March 30, 2009 and as of March 31, 2009 and at all times thereafter $600.0 million;

·

Amended and restated the consolidated EBIT, committed inventories, confirmed order and uncommitted inventories definitions; and

·

Added new definition for “permitted allowance.”


          A copy of the Fourth Amendment is attached hereto as Exhibit 10.3 and incorporated herein by reference.


Borrowers and Guarantors.  One of the Company’s primary foreign holding companies, Intabex Netherlands B.V. (“Intabex”), is co-borrower under the Revolver, and the Company’s portion of the borrowings under the Revolver is limited to $150.0 million outstanding at any one time.  One of the Company’s primary foreign trading companies, Alliance One International AG (“AOIAG”), is a guarantor of Intabex’s obligations under the Credit Agreement. Such obligations are also currently guaranteed by the Company and must be guaranteed by any of its material direct or indirect domestic subsidiaries.


Collateral.  The Company’s borrowings under the Credit Facility are secured by a first priority pledge of:


·

100% of the capital stock of any material domestic subsidiaries;

·

65% of the capital stock of any material first tier foreign subsidiaries;

·

U.S. accounts receivable and U.S. inventory owned by the Company or its material domestic subsidiaries (other than inventory the title of which has passed to a customer and inventory financed through customer advances); and

·

Intercompany notes evidencing loans or advances the Company makes to subsidiaries that are not guarantors.


          In addition, Intabex’s borrowings under the Credit Facility are secured by a pledge of 100% of the capital stock of Intabex, AOIAG, and certain of the Company’s and Intabex’s material foreign subsidiaries.


Financial Covenants.  The Credit Facility includes certain financial covenants and required financial ratios, including:


·

a minimum consolidated interest coverage ratio of not less than 1.70 to 1.00;

·

a maximum consolidated leverage ratio of not more than 5.50 to 1.00;

·

a maximum consolidated total senior debt to borrowing base ratio of not more than 0.80 to 1.00; and

·

a maximum amount of annual capital expenditures of $40.0 million during any fiscal year of the Company.


          Certain of these financial covenants and required financial ratios adjust over time in accordance with schedules in the Credit Agreement.

          The Credit Agreement also contains certain customary affirmative and negative covenants, including, without limitation, restrictions on additional indebtedness, guarantees, liens and asset sales.

          The Company continuously monitors its compliance with these covenants and is not in default as of, or for the three months ended June 30, 2008.  If the Company was in default and was unable to obtain the necessary amendments or waivers under its Credit Facility, the lenders under that facility have the right to accelerate the loans thereby demanding repayment in full and extinguishment of their commitment to lend.  Certain defaults under the Credit Facility would result in a cross default under the indentures governing the Company’s senior notes and senior subordinated notes and could impair access to its seasonal operating lines of credit in local jurisdictions.  A default under the Company’s Credit Facility would have a material adverse effect on its liquidity and financial condition.


Senior Notes


On May 13, 2005, the Company issued $315.0 million of 11% senior notes due 2012 and on March 7, 2007, the Company issued $150.0 million of 8 ½% senior notes due 2012 at a 0.5% original issue discount to reflect an 8.6% yield to maturity.  During the twelve months ended March 31, 2008, the Company purchased $42.3 million of its $315.0 million 11% Senior Note due May 2012 on the open market. All purchased securities were canceled leaving $272.7 million of the 11% Senior Notes outstanding at March 31, 2008.  Associated cash premiums paid were $2.0 million and non-cash deferred financing costs of $0.7 million were accelerated. The Company did not purchase any senior notes during the fiscal quarter ended June 30, 2008. From time to time in the future the Company may purchase more of its debt securities in the open market or through a tender process.  The indentures governing each of the 11% senior notes and the 8 ½% senior notes contain certain covenants that, among other things, limit the Company’s ability to incur additional indebtedness; issue preferred stock; merge, consolidate or dispose of substantially all of its assets; grant liens on its assets; pay dividends, redeem stock or make other distributions or restricted payments; repurchase or redeem capital stock or prepay subordinated debt; make certain investments; agree to restrictions on the payment of dividends to the Company by its subsidiaries; sell or otherwise dispose of assets, including equity interests of its subsidiaries; enter into transactions with its affiliates; and enter into certain sale and leaseback transactions.  The Company continuously monitors its compliance with these covenants and is not in default as of, or for the three months ended June 30, 2008.


Senior Subordinated Notes


On May 13, 2005, the Company issued $100.0 million of 12 3/4% senior subordinated notes due 2012 at a 10% original issue discount to reflect a 15% yield to maturity.  The indenture governing the senior subordinated notes contains covenants substantially identical to those contained in the indentures governing the 11% senior notes and the 8 ½% senior notes.


Foreign Seasonal Lines of Credit


The Company has typically financed its non-U.S. operations with uncommitted unsecured short term seasonal lines of credit at the local level.  These operating lines are seasonal in nature, normally extending for a term of 180 to 270 days corresponding to the tobacco crop cycle in that location.  These facilities are typically uncommitted in that the lenders have the right to cease making loans and demand repayment of loans at any time.  These loans are typically renewed at the outset of each tobacco season.  As of June 30, 2008, the Company had approximately $613.9 million drawn and outstanding on foreign seasonal lines with maximum capacity totaling $964.2 million.  Additionally against these lines there was $29.7 million available in unused letter of credit capacity with $21.5 million issued but unfunded.


FACTORS THAT MAY AFFECT FUTURE RESULTS:


Readers are cautioned that the statements contained herein regarding expectations for our performance are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations of future events. If underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results could vary materially from our expectations and projections. Risks and uncertainties include changes in the timing of anticipated shipments, changes in anticipated geographic product sourcing, political instability in sourcing locations, currency and interest rate fluctuations, shifts in the global supply and demand position for our tobacco products, and the impact of regulation and litigation on our customers.  A further list and description of these risks, uncertainties and other factors can be found in our Annual Report on Form 10-K for the fiscal year ended March 31, 2008 and other filings with the Securities and Exchange Commission.  We assume no obligation to update any forward-looking statements as a result of new information or future events or developments, except as required by law.

Alliance One International, Inc. and Subsidiaries



Item 3.    Quantitative and Qualitative Disclosures About Market Risk.


Derivatives policies: Hedging interest rate exposure using swaps and hedging foreign exchange exposure using forward contracts are specifically contemplated to manage risk in keeping with management’s policies. We may use derivative instruments, such as swaps or forwards, which are based directly or indirectly upon interest rates and currencies to manage and reduce the risks inherent in interest rate and currency fluctuations.  

          We do not utilize derivatives for speculative purposes, and we do not enter into market risk sensitive instruments for trading purposes. Derivatives are transaction specific so that a specific debt instrument, contract, or invoice determines the amount, maturity, and other specifics of the hedge.


Foreign exchange rates: Our business is generally conducted in U.S. dollars, as is the business of the tobacco industry as a whole.  However, local country operating costs, including the purchasing and processing costs for tobaccos, are subject to the effects of exchange fluctuations of the local currency against the U.S. dollar.  We attempt to minimize such currency risks by matching the timing of our working capital borrowing needs against the tobacco purchasing and processing funds requirements in the currency of the country where the tobacco is grown.  Also, in some cases, our sales pricing arrangements with our customers allow adjustments for the effect of currency exchange fluctuations on local purchasing and processing costs.  Fluctuations in the value of foreign currencies can significantly affect our operating results.  We have recognized exchange gains (losses) in our cost of goods and services sold of $(4.7) million and $2.3 million for the three months ended June 30, 2008 and 2007, respectively.  We have recognized exchange gains related to tax balances in our tax expense of $2.4 million for the three months ended June 30, 2008.

          Our consolidated selling, administrative and general expenses denominated in foreign currencies are subject to translation risks from currency exchange fluctuations.  These foreign denominated expenses are primarily denominated in the euro, sterling and Brazilian real.  The weakening U.S. dollar against the real may continue to significantly impact translated results.


Interest rates: We manage our exposure to interest rate risk through the proportion of fixed rate and variable rate debt in our total debt portfolio.  A 1% change in interest rates would increase or decrease our reported interest cost by approximately $2.8 million for the three months ended June 30, 2008.  A substantial portion of our borrowings are denominated in U.S. dollars and bear interest at commonly quoted rates.



Item 4.    Controls and Procedures


Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports we file under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.  Our Chief Executive Officer and Chief Financial Officer evaluated, with the participation of other members of management, the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)), as of the end of the period covered by this Quarterly Report on Form 10-Q.  Based on this evaluation, management concluded that our disclosure controls and procedures were not effective due to our failure to remedy by June 30, 2008 the material weaknesses in internal control over financial reporting that existed as of March 31, 2008 with respect to accounting for income taxes and financial reporting.

          A material weakness in internal controls over financial reporting is defined as “a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.”  In light of these material weaknesses, the Company performed additional analyses and other post-closing procedures to ensure the Company's condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly represent in all material respects the Company's financial condition, results of operations and cash flows for the periods presented.


Accounting for Income Taxes

The design of the Company’s internal controls over financial reporting lacked effective controls over the determination and reporting of its income taxes as it relates to income tax receivable and payable, deferred income tax assets and liabilities, the related valuation allowances and income tax expense. Specifically, effective controls were not designed and in place to: (i) ensure management maintained the appropriate level of personnel with adequate experience and expertise in the area of generally accepted accounting principles in the United States of America (“GAAP”) accounting for income taxes; (ii) ensure roles and responsibilities with respect to accounting for income taxes were clearly defined; (iii) identify and evaluate in a timely manner the tax implications of certain non-routine transactions; (iv) provide reasonable assurance as to the completeness and accuracy of the provision for income taxes and income taxes payable including tax reserves and return to provision adjustments; and (v) reconcile differences between the tax and financial reporting basis of its assets and liabilities with its deferred income tax assets and liabilities. During the second quarter of fiscal 2008, management identified certain misstatements which related to current and prior periods.  Management evaluated these errors and the correction of such errors and concluded that they were not material to the prior or current financial statements.  However, the Company has concluded that there is a material weakness related to the accounting for income taxes because there was a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements would not be prevented or detected on a timely basis.  As of June 30, 2008, the material weakness has not been remediated.


Financial Reporting

The Company did not maintain a sufficient complement of personnel in certain operating locations with an appropriate level of technical accounting knowledge, experience, or training to communicate to corporate financial reporting management or determine proper application of GAAP to various complex financial accounting and reporting requirements, including farmer advance financing, pensions and post retirement plans and other technical accounting matters.  Management evaluated these errors and the correction of such errors and concluded that they were not material to the prior or current financial statements.  However, the Company has concluded that there is a material weakness related to the proper application of GAAP because there was a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements would not be prevented or detected on a timely basis.  This material weakness was first identified as of March 31, 2008 and as of June 30, 2008, has not been remediated.


Changes in Internal Control Over Financial Reporting

As required by Rule 13a-15(d) under the Exchange Act, the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the Company’s internal control over financial reporting to determine whether any changes occurred during the quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

          As noted above, management identified material weaknesses related to accounting for income taxes and financial reporting at March 31, 2008.  In response to these material weaknesses, the Company has implemented (or, where noted, intends to implement) the remedial measures described below.  Notwithstanding these measures, these material weaknesses have not been remediated as of June 30, 2008.  Other than these remedial measures, there were no other changes that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting during the period covered by this report.

Management is actively engaged in the development and implementation of a remediation plan to address the material weaknesses in controls described herein.  The components of this remediation plan, once implemented, are intended to ensure that the key controls over the process are operating effectively and are sustainable. These components include:


Accounting for Income Taxes

·

Hiring additional internal tax staff members with appropriate qualifications and training in accounting for income taxes to establish a self sufficient tax department which coordinates all tax financial reporting matters and tax compliance processes;

·

Instituting and maintaining a formal program for training of internal staff members in accounting for income taxes;

·

Implementing supporting technology to help calculate the income tax provision and related balance sheet accounts; and

·

Initiating a thorough review of the design of the internal controls related to the preparation of income taxes on a quarterly basis.


Financial Reporting

·

Ensuring adherence with existing Company financial reporting policy;

·

Improving coordination and communication within corporate functions and with the worldwide financial reporting units to ensure timely identification and resolution of potential accounting issues in accordance with GAAP;

·

Formalizing requirements from the units in the form of check list and policies;

·

Developing an Accounting and Tax Policies and Procedures Manual to codify Company policy;

·

Hiring a Financial Reporting Manager at the corporate level;

·

Instituting and maintaining a formal program for training of internal staff members in new and existing financial accounting issues; and

·

Initiating a thorough review of the design of the procedures for the preparation of financial statements with emphasis on compliance with GAAP and ensuring all reporting unit requirements are appropriately supported in the form of check lists and policies.


          Management continues to assign the highest priority to the remediation efforts in these areas, with the goal of remediating these material weaknesses prior to March 31, 2009.



Part II.  Other Information

 

Item 1.    Legal Proceedings

 

In March 2004, the Company discovered potential irregularities with respect to certain bank accounts in southern Europe and central Asia.  The Audit Committee of the Company’s Board of Directors engaged an outside law firm to conduct an investigation of activity relating to these accounts.  That investigation revealed that, although the amounts involved were not material and had no material impact on the Company’s historical financial statements, there were payments from these accounts that may have violated the U.S. Foreign Corrupt Practices Act (the “FCPA”).  In May 2004, the Company voluntarily reported the matter to the U.S. Department of Justice (“Justice”).  Soon thereafter, the Company closed the accounts in question, implemented personnel changes and other measures designed to prevent similar situations in the future, including the addition of new finance and internal audit staff and enhancement of existing training programs, and disclosed these circumstances in its filings with the U.S. Securities and Exchange Commission (the “SEC”).  In August 2006, the Company learned that the SEC had issued a formal order of investigation of the Company and others to determine if these or other actions, including those in other countries in which the Company does business, may have violated certain provisions of the Securities Exchange Act of 1934 and rules thereunder.  The Company is cooperating fully with the SEC with respect to the investigation.  In May 2008, the Company learned that Justice is conducting an investigation into possible violations of federal law stemming from the same actions being investigated by the SEC.

          If the U.S. authorities determine that there have been violations of federal laws, they may seek to impose sanctions on the Company that may include, among other things, injunctive relief, disgorgement, fines, penalties and modifications to business practices.  It is not possible to predict at this time whether the authorities will determine that violations have occurred, and if they do, what sanctions they might seek to impose.  It is also not possible to predict how the government’s investigation or any resulting sanctions may impact the Company’s business, results of operations or financial performance, although any monetary penalty assessed may be material to the Company’s results of operations in the quarter in which it is imposed.

         The Company had previously disclosed that it had received notice from Mindo, S.r.l., the purchaser in June, 2004, of the Company’s Italian subsidiary Dimon Italia, S.r.l., of its intent to assert against the Company, or its subsidiaries, a claim arising out of that sale transaction.  That claim, which may be followed by additional claims, was filed before the Court of Rome on April 12, 2007.  The claim, allegedly arising from a guaranty letter issued by a consolidated subsidiary of the Company in connection with the sale transaction, seeks the recovery of €7.4 million (US$11.6 million) plus interest and costs.  The Company believes the claim to be without merit and intends to vigorously defend it.

           On December 13, 2007, the Public Prosecutors’ offices in the States of Santa Catarina and Parana filed claims against the Company’s Brazilian subsidiary, Alliance One Brazil Exportadora de Tobaccos Ltda. and a number of other tobacco processors, on behalf of all tobacco farmers in those states.  The lawsuits primarily assert that there exists an employment relationship between tobacco processors and tobacco farmers.  The Company believes these claims to be without merit and intends to vigorously defend them.

           At the initial hearing in Santa Catarina, on January 29, 2008, the Court granted the Company’s motion to have the case moved to the Labor Court in Brazilia.  No hearing date has yet been set.

           In the state of Parana, the relief sought by the Public Prosecutor was granted by the local Labor Court.  The Company appealed that initial ruling and it was overturned in part and affirmed in part.  The Company has appealed from that part of the initial ruling which was affirmed and no ruling has yet been rendered on the appeal.  The Company has separately asserted, on April 11, 2008, a lack of jurisdiction motion similar to that which it asserted in the case in Santa Catarina which resulted in the transfer of that case to the Labor Court in Brazilia.  No hearing date for that motion has been set.


Item 1A.    Risk Factors


None.


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

 

None.


Item 3.    Defaults Upon Senior Securities

 

None.


Item 4.    Submission of Matters to a Vote of Security Holders

 

None.


Item 5.    Other Information


None.


Item 6.    Exhibits.

 

3.1

 

Fourth Amended and Restated Bylaws of Alliance One International, Inc., incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K, filed June 3, 2008 (SEC File No. 1-3684).

 

 

 

 

 

10.1

 

Severance Election and Release, effective as of March 31, 2008, by and between James A. Cooley and Alliance One International, Inc., incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed April 17, 2008 (SEC File No. 1-3684).

 

 

 

 

 

10.2

 

Consulting Agreement, effective as of April 1, 2008, by and between James A. Cooley and Alliance One International, Inc., incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed April 17, 2008 (SEC File No. 1-3684).

 

 

 

 

 

10.3

 

Fourth Amendment to Amended and Restated Credit Agreement, dated August 4, 2008, by and among the Alliance One International, Inc. and Intabex Netherlands B.V., Alliance One International AG, the Lenders, Wachovia Bank, National Association, Deutsche Bank Securities Inc., and ING Bank N.V., London Branch, Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. “Rabobank Nederland”, New York Branch and Societe Generale (filed herewith).

 

 

 

 

 

31.01

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

 

 

 

 

31.02

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

 

 

 

 

32

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 


Alliance One International, Inc. and Subsidiaries

 

 

 

SIGNATURE

 

 

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.

 

 

 

Alliance One International, Inc.

 

 

 

/s/  Hampton R. Poole, Jr.                                           

Date: August 5, 2008

 

Hampton R. Poole, Jr.
Vice President - Controller
(Chief Accounting Officer)

 

 

 


INDEX OF EXHIBITS

 

 

Exhibits

 

 

 

 

 

3.1

 

Fourth Amended and Restated Bylaws of Alliance One International, Inc., incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K, filed June 3, 2008 (SEC File No. 1-3684).

 

 

 

 

 

10.1

 

Severance Election and Release, effective as of March 31, 2008, by and between James A. Cooley and Alliance One International, Inc., incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed April 17, 2008 (SEC File No. 1-3684).

 

 

 

 

 

10.2

 

Consulting Agreement, effective as of April 1, 2008, by and between James A. Cooley and Alliance One International, Inc., incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed April 17, 2008 (SEC File No. 1-3684).

 

 

 

 

 

10.3

 

Fourth Amendment to Amended and Restated Credit Agreement, dated August 4, 2008, by and among the Alliance One International, Inc. and Intabex Netherlands B.V., Alliance One International AG, the Lenders, Wachovia Bank, National Association, Deutsche Bank Securities Inc., and ING Bank N.V., London Branch, Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. “Rabobank Nederland”, New York Branch and Societe Generale (filed herewith).

 

 

 

 

 

31.01

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

 

 

 

 

31.02

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

 

 

 

 

32

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).