PYXUS INTERNATIONAL, INC. - Quarter Report: 2009 September (Form 10-Q)

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Alliance One International, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended September 30, 2009 and 2008 (Unaudited)
(in thousands)		September 30,    2009		September 30,   2008
Operating activities
Net income		$  13,500		$  35,907
Adjustments to reconcile net income to net cash used by operating             activities of continuing operations
Net income from discontinued operations, net of tax		-		(463)
Depreciation and amortization		14,642		14,524
Debt amortization/interest		5,341		2,521
Debt retirement cost		40,288		954
(Gain) loss on foreign currency transactions		17,137		(259)
Other, net		29		(2,966)
Changes in operating assets and liabilities, net		(232,200)		(313,785)
Net cash used by operating activities of continuing operations		(141,263)		(263,567)
Net cash provided by operating activities of discontinued operations		-		667
Net cash used by operating activities		(141,263)		(262,900)
Investing activities
Purchases of property and equipment		(6,218)		(10,735)
Proceeds on sale of property and equipment		6,716		3,931
Foreign currency derivatives		(5,026)		-
Refinancing of Brazilian Farmers		(9,315)		(5,678)
Other, net		2,920		7,212
Net cash used by investing activities of continuing operations		(10,923)		(5,270)
Net cash provided by investing activities of discontinued operations		-		-
Net cash used by investing activities		(10,923)		(5,270)
Financing activities
Repayment of short-term demand notes		-		(64,078)
Proceeds from short-term demand notes		-		9,014
Net change in short-term borrowings		108,060		336,748
Proceeds from long-term borrowings		1,040,803		-
Repayment of long-term borrowings		(906,070)		(36,804)
Debt issuance cost		(35,236)		(892)
Debt retirement cost		(23,394)		(73)
Proceeds from issuance of warrants		16,821		-
Purchase of call options		(39,418)		-
Dividends paid to noncontrolling interests		(360)		-
Net cash provided by financing activities		161,206		243,915
Effect of exchange rate changes on cash		839		(4,091)
Increase (decrease) in cash and cash equivalents		9,859		(28,346)
Cash and cash equivalents at beginning of period		87,665		112,214
Cash and cash equivalents at end of period		$ 97,524		$  83,868
See notes to condensed consolidated financial statements

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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

Alliance One International, Inc. (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 that are owned 50% or less.  The equity method is used when the Company exercises significant influence over an investment but not control.  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.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of financial position, results of operation and cash flows at the dates and for the periods presented have been included.  As part of the preparation of the condensed consolidated financial statements, the Company performed an evaluation of subsequent events occurring after the condensed consolidated balance sheet date of September 30, 2009, through November 9, 2009, the date the condensed consolidated financial statements were issued.  The unaudited information included in 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, 2009.  The year ended March 31, 2009 is sometimes referred to herein as fiscal year 2009.

          Certain prior year amounts have been reclassified to conform with the current year’s presentation, due to the adoption of a new accounting standard related to accounting for noncontrolling interests discussed below.

          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.

New Accounting Standards

Recently Adopted Accounting Pronouncements

On April 1, 2009, the Company adopted new accounting guidance on the accounting and reporting related to noncontrolling interests in a consolidated subsidiary. It requires 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.  This standard is to be applied prospectively, except for the presentation and disclosure requirements, which are applied retrospectively for all periods presented.  The Company adopted this new accounting guidance with no material impact to its financial condition or results of operations.

Recent Accounting Pronouncements Not Yet Adopted

In December 2008, the FASB issued new accounting guidance on employers’ disclosures about postretirement benefit plan assets. This accounting guidance relates to employers’ disclosures about plan assets of a defined benefit pension or other postretirement plan.  The disclosures about plan assets required by this accounting guidance are required for the Company in its fiscal year ending March 31, 2010.  The Company is evaluating the impact of this new accounting guidance on its financial condition and results of operations.

         In June 2009, the FASB issued new accounting guidance on accounting for transfers of financial assets. The objective of this accounting guidance is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. This accounting guidance will be effective for the Company on April 1, 2010. The Company is evaluating the impact of this new accounting guidance on its financial condition and results of operations.

         In June 2009, the FASB issued new accounting guidance on accounting for variable interest entities. The objective of this accounting guidance is to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements.  This accounting guidance will be effective for the Company on April 1, 2010. The Company is evaluating the impact of this new accounting guidance on its financial condition and results of operations.

         In October 2009, the FASB issued new accounting guidance on accounting for multiple-deliverable revenue arrangements. The objective of this accounting guidance is to address the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. This accounting guidance will be effective for the Company on April 1, 2011. The Company is evaluating the impact of this new accounting guidance on its financial condition and results of operations.

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Alliance One International, Inc. and Subsidiaries

1.  BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 $11,010 and $12,466 for the three months ended September 30, 2009 and 2008, respectively and $18,264 and $25,936 for the six months ended September 30, 2009 and 2008, respectively.

2.  INCOME TAXES

FIN 48

As of September 30, 2009, the Company’s unrecognized tax benefits totaled $24,175, 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 September 30, 2009, accrued interest and penalties totaled $33,245 and $15,217, respectively.

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

         The Company is currently pursuing various governmental tax programs in certain locations in an effort to resolve outstanding tax issues.  By participating in these programs, the Company’s liability for unrecognized tax benefits may be reduced.  However, at this time we are not able to estimate the amount.  The Company expects to recognize an unrecognized tax benefit, related to foreign taxes, for the amount of $5,582 due to the expiration of an applicable statute of limitations in the next twelve months.  Circumstances can change due to unexpected developments in the law and interpretation of the law which may ultimately affect the unrecognized tax benefit.

         The Company and its subsidiaries file a U.S. federal consolidated income tax return as well as returns in several U.S. states and a number of foreign jurisdictions.  As of September 30, 2009, the Company’s earliest open tax year for U.S. federal income tax purposes was its fiscal year ended March 31, 2006.  Open tax years in state and foreign jurisdictions generally range from three to six years.

Provision for the Six Months Ended September 30, 2009

The effective tax rate used for the six months ended September 30, 2009 was an expense of 41.7% compared to a benefit of 15.5% for the six months ended September 30, 2008.  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 expects the tax rate for the year ended March 31, 2010 to be 40.1% after absorption of discrete items.

         For the six months ended September 30, 2009, the Company recorded a specific event adjustment expense of $198 bringing the effective tax rate estimated for the six months from an expense of 40.9% to 41.7%.  This specific event adjustment expense relates to additional income tax, interest, and exchange losses related to liabilities for unrecognized tax benefits totaling an expense of $12,277, net exchange gains on income tax accounts totaling a benefit of $14,897 and other miscellaneous tax adjustments totaling an expense of $2,818.  For the six months ended September 30, 2008, the Company recorded a specific event adjustment expense of $956 bringing the effective tax rate estimated for the six months from a benefit of 18.7% to 15.5%.  This specific event adjustment relates primarily to additional income tax and interest related to liabilities for unrecognized tax benefits and net exchange gains on income tax accounts.  The significant difference in the estimated effective tax rate for the six months ended September 30, 2009 from the statutory rate is primarily due to expenses related to exchange effects.  During the six months ended September 30, 2009, the Company accrued an additional $14,501 of interest and exchange losses related to liabilities for unrecognized tax benefits.  

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Alliance One International, Inc. and Subsidiaries

3.  RESTRUCTURING AND ASSET IMPAIRMENT CHARGES

The Company records other restructuring and impairment charges as they occur in the normal course of business.  The following table summarizes the restructuring and asset impairment charges recorded in the Company’s reporting segments during the three months and six months ended September 30, 2009 and 2008:

         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 and six months ended September 30, 2009 and 2008:

         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 generally accepted accounting principles.

Assets Held for Sale

As of September 30, 2009, the Company reported assets held for sale of $4,395, related primarily to production and administrative facilities in Greece, Kyrgyzstan, Malawi and Brazil, that are being actively marketed by the Company.

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Alliance One International, Inc. and Subsidiaries

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 and six months ended September 30, 2009 and 2008.

          Goodwill and Intangible Asset Rollforward:

          Estimated Intangible Asset Amortization Expense:

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Alliance One International, Inc. and Subsidiaries

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 its business reported as discontinued operations were as follows:

Summary of Results of Operations

Discontinued Operations, Other Regions Segment       

Three Months Ended September 30, 2008	Mozambique	Wool	Total
Income (loss) from discontinued operations, net of tax:
Income (loss) from discontinued operations, before tax	$         9	$     (54)	$      (45)
Income tax	-	-	-
Income (loss) from discontinued operations, net of tax	$         9	$     (54)	$      (45)

Six Months Ended September 30, 2008
Income from discontinued operations, net of tax:
Income from discontinued operations, before tax	$       95	$    368	$     463
Income tax	-	-	-
Income from discontinued operations, net of tax	$       95	$    368	$     463

Summary of Assets and Liabilities

Discontinued Operations, Other Regions Segment    

September 30, 2008	Mozambique	Wool	Total
Liabilities of discontinued operations:
Accounts payable	$         31	$         -	$       31
Accrued expenses	18	-	18
Total liabilities of discontinued operations	$         49	$         -	$       49

*  As of March 31, 2009, the Company had completed the liquidation of its discontinued Mozambique and Wool Operations.

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 its 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 and six months ended September 30, 2009 and 2008:

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Alliance One International, Inc. and Subsidiaries

6.  SEGMENT INFORMATION (Continued)

Analysis of Segment Assets		September 30 , 2009	September 30 , 2008	March 31, 2009
Segment assets:
	South America	$   805,406	$    877,288	$   939,234
	Other regions	1,187,089	1,055,665	819,285
	Total assets	$1,992,495	$ 1,932,953	$1,758,519

7.  EARNINGS PER SHARE

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 September 30, 2009 and 2008.  This subsidiary waives its right to receive dividends and it does not have the right to vote.

          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 1,581 at a weighted average exercise price of $7.05 per share at September 30, 2009 and 1,876 at a weighted average exercise price of $7.00 per share at September 30, 2008.

          In connection with the offering of the Company’s 5 ½% Convertible Senior Subordinated Notes due 2014, issued on July 2, 2009 (the “Convertible Notes”), the Company entered into privately negotiated convertible note hedge transactions (the “convertible note hedge transactions”) equal to the number of shares that underlie the Company’s Convertible Notes.  These convertible note hedge transactions are expected to reduce the potential dilution of the Company’s common stock upon conversion of the Convertible Notes in the event that the value per share of common stock exceeds the initial conversion price of $5.0280 per share.  These shares were not included in the computation of earnings per diluted share because their inclusion would be antidilutive.  The Company also entered separately into privately negotiated warrant transactions relating to the same number of shares of the Company’s common stock as the convertible note hedge transactions.  The warrants have a strike price of $7.3325 per share.  The warrants expire in daily installments commencing on October 15, 2014 and ending on April 8, 2015.  See Note 11 “Debt Arrangements” to the “Notes to Condensed Consolidated Financial Statements” for further information.

          The following table summarizes the computation of earnings per share for the three months and six months ended September 30, 2009 and 2008, respectively.

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Alliance One International, Inc. and Subsidiaries

7.  EARNINGS PER SHARE (Continued)

8.  COMPREHENSIVE INCOME

The components of comprehensive income were as follows:

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Alliance One International, Inc. and Subsidiaries

9.  STOCK-BASED COMPENSATION

The Company recorded stock-based compensation expense related to stock-based awards granted under its various employee and non-employee stock incentive plans of $1,494 and $1,316 for the three months ended September 30, 2009 and 2008, respectively, and $3,410 and $1,872 for the six months ended September 30, 2009 and 2008, respectively.  

          The Company’s shareholders amended the 2007 Incentive Plan (the “2007 Plan”) at its Annual Meeting of Shareholders on August 6, 2009.  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.  

          During the six months ended September 30, 2009 and 2008, respectively, the Company made the following stock-based compensation awards:

          Under the terms of both the Performance Shares and Performance Based Restricted Stock Units, shares ultimately issued will be contingent upon specified business performance goals.  If minimum standards are not attained, compensation paid under these awards will be zero.  Alternatively, if the maximum performance levels described by the plan are attained, the awards may be 150% of the stated award.

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.  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.

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

		2009		2008
Stock Price		$4.48		$3.80
Exercise Price		$6.45		$6.45
Expected Life in Years		.1		1.1
Annualized Volatility		10%		64%
Annual Dividend Rate		0%		0%
Discount Rate		.1%		1.8%

          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.

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Alliance One International, Inc. and Subsidiaries

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 September 30, 2009, the balance of the reserve is $224.

           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 $7,410 and the total assessment including penalties and interest through September 30, 2009 is $14,752.  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 $7,410 represents intrastate trade tax credit amounts which were offset against intrastate trade tax payables. At September 30, 2009, the Company also has intrastate trade tax credits from Parana of $12,415.  During fiscal 2008, the Company recorded an impairment charge of $7,143.  After the assessment, the Company has treated new expenditures for intrastate trade taxes on tobacco acquisition as a cost of inventory procurement.

           The Company also has local intrastate trade tax credits in the Brazil State of Rio Grande do Sul (“Rio Grande”) of $59,672 and $47,482 at September 30, 2009 and 2008, respectively. Based on management’s expectations about future realization, the Company has recorded a valuation allowance on the Rio Grande intrastate trade tax credits of $8,384 and $8,832 at September 30, 2009 and 2008, respectively. The allowance on the Rio Grande intrastate trade tax credits may be adjusted in future periods based on market conditions and the Company’s ability to use the tax credits.

           In 2001, the Company’s subsidiary in Brazil won a claim related to certain excise taxes (“IPI credit bonus”) for the years 1983 through 1990.  The Company used this IPI credit bonus to offset federal income and other taxes until January 2005 when it received a Judicial Order to suspend the IPI compensation.  The Company appealed and the case is currently before the Supreme Court.  In addition, the Company received an assessment in 2006 for federal income taxes in 2005 that were offset by the IPI credit bonus.  The assessment is valued at $27,346 at September 30, 2009.   The Company appealed the assessment and believes it has properly utilized the IPI credit bonus.  No benefit for the utilization of the IPI credit bonus has been recognized as it has been recorded in pension, postretirement and other long term liabilities.  The Company understands a ruling by the Supreme Court may be rendered in the near future which will directly impact the outcome of the Company’s appeal of the tax assessment as well as its utilization of its remaining IPI credit bonus.  No benefit for any potential future utilization of IPI credit bonus has been recognized.

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 EC 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$10,763) 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.

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Alliance One International, Inc. and Subsidiaries

10.  CONTINGENCIES (Continued)

Other (Continued)

           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.  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 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.  In May 2008, the Company learned that Justice is conducting an investigation into possible violations of federal laws 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 and the appointment of a monitor.  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 possible, however, that any sanctions which might be imposed could materially adversely affect the Company’s results of operations.  Both of these investigations are ongoing as of the date of this report and the Company is fully cooperating with the SEC and Justice.

           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 Brasilia.  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 Brasilia.  No hearing date for that motion has been set.

           On July 23, 2009, the Company received notice that Sharpmind Enterprises, Ltd., a British Virgin Islands company, had filed in the United States District Court for the Eastern District of North Carolina, a claim against the Company seeking unspecified damages for an alleged breach of a sales representation agreement between the Company and Sharpmind.  Sharpmind has indicated that it would seek damages in excess of $2,000.  The Company views the claim as baseless and intends to vigorously defend it.

           The Company and certain of its foreign subsidiaries guarantee bank loans to growers to finance their crops.  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 September 30, 2009, the Company was guarantor of an amount not to exceed $159,512 with $156,461 outstanding under these guarantees.

           In accordance with generally accepted accounting principles, the Company records all known asset retirement obligations (“ARO”) for which the liability can be reasonably estimated. Currently, it has identified an ARO associated with one of its facilities that requires it to restore the land to its initial condition upon vacating the facility. The Company has not recognized a liability under generally accepted accounting principles for this ARO 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 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.  The Company has no additional material AROs.

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Alliance One International, Inc. and Subsidiaries

11.  DEBT ARRANGMENTS

During the three months ended September 30, the Company completed a number of refinancing transactions, which are described below.

Senior Secured Credit Facility

On July 2, 2009, the Company entered into a Credit Agreement (the “Credit Agreement”), with a syndicate of banks that replaced the Company’s $305,000 Amended and Restated Credit Agreement dated March 30, 2007 and provides for a senior secured credit facility (the “Credit Facility”) that consists of:

·

a three and one-quarter year $270,000 revolver (the “Revolver”) which initially accrues interest at a rate of LIBOR plus 2.50%.

        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.  The Credit Agreement permits the Company to add $55,000 in commitments from existing or additional lenders which would increase the amount of the Revolver to $325,000.

First Amendment.  On August 24, 2009, the Company closed the First Amendment to the Credit Agreement which included the following modifications effective August 24, 2009:

·

Amended the definition for Senior Notes to allow for the issuance of up to an additional $100,000 of Senior Notes due 2016 within 90 days of the First Amendment Effective Date;

·

Amended the definition of Consolidated Total Senior Debt to exclude the Existing Senior Notes 2005;

·

Amended the definition of Applicable Percentage to clarify the effective date of the change in the Applicable Percentage;

·

Modifications to several schedules within the Credit Agreement.

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 $200,000 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 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 domestic subsidiary held directly by the Company or by any material domestic subsidiary;

·

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

·

100% of the capital stock of any material foreign subsidiary held directly by the Company or any domestic subsidiary; provided that not more than 65% of the voting stock of any material foreign subsidiary is required to be pledged to secure obligations of the Company or any domestic subsidiary;

·

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 certain other exceptions); and

·

Intercompany notes evidencing loans or advances the Company makes to subsidiaries.

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

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

·

a minimum consolidated interest coverage ratio of not less than 1.90 to 1.00;

·

a maximum consolidated leverage ratio in an amount not more than a ratio specified for each fiscal quarter, which ratio is 5.50 to 1.00 for the fiscal quarter ended September 30, 2009;

·

a maximum consolidated total senior debt to working capital amount ratio of not more than 0.80 to 1.00; and

·

a maximum amount of annual capital expenditures of $75,000 during fiscal year ending March 31, 2010 and $40,000 during any fiscal year thereafter, with a one-year carry-forward for capital expenditures in any fiscal year below the maximum amount.

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Alliance One International, Inc. and Subsidiaries

11.  DEBT ARRANGMENTS (Continued)

Senior Secured Credit Facility (Continued)

          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.  If the Company fails to comply with any of these covenants and is unable to obtain the necessary amendments or waivers under the Credit Agreement, the lenders under the Credit Agreement have the right to accelerate the outstanding loans thereunder and demand repayment in full and to terminate their commitment to make any further loans under the Credit Facility.  Certain defaults under the Credit Facility would result in a cross default under the indentures governing the Company’s senior notes and convertible senior subordinated notes and could impair access to its seasonal operating lines of credit in local jurisdictions.  A default under the Credit Agreement would have a material adverse effect on the Company’s liquidity and financial condition.  The Company records all fees and third-party costs associated with the Credit Agreement, including amendments thereto, in accordance with accounting guidance for changes in line of credit or revolving debt arrangements.

          As a result of terminating the $305,000 Amended and Restated Credit Agreement dated March 30, 2007, the Company accelerated approximately $5,741 of deferred financing costs.

Senior Notes

On July 2, 2009, the Company issued $570,000 of 10% Senior Notes due 2016 (the “Senior Notes”). The Senior Notes were priced at 95.177% of the face value, for gross proceeds of approximately $542,509 and representing a yield to maturity of 11.0%. On August 26, 2009, the Company issued an additional $100,000 tranche of 10% Senior Notes due 2016.  The notes were priced at 97.500% of the face value, for gross proceeds of approximately $97,500 and representing a yield to maturity of 10.512%.  These additional notes form part of the same series as the Senior Notes issued on July 2, 2009.  The aggregate principal amount of the outstanding Senior Notes is $670,000.  The Senior Notes are required to be guaranteed by any “material domestic subsidiaries” of the Company as defined in the indenture governing the Senior Notes.  Because no subsidiary is, or has been at any relevant time, a “material domestic subsidiary,” the Senior Notes are not guaranteed by any subsidiaries of the Company, though such a guarantee would be required if any subsidiary subsequently qualifies as a “material domestic subsidiary.”  The indenture governing the Senior Notes contains 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.  If a change of control (as defined in the indenture governing the Senior Notes) occurs at any time, holders of the Senior Notes will have the right, at their option, to require the Company to repurchase all or a portion of the Senior Notes for cash at a price equal to 101% of the principal amount of Senior Notes being repurchased, plus accrued and unpaid interest.

Convertible Senior Subordinated Notes

On July 2, 2009, the Company issued $100,000 of 5 ½% Convertible Senior Subordinated Notes due 2014 (the “Convertible Notes”).  The Company granted the initial purchasers of the Convertible Notes an option to purchase up to an additional $15,000 of Convertible Notes solely to cover over-allotments. The initial purchasers exercised the option and purchased an additional $15,000 of the Convertible Notes on July, 15, 2009.  Holders may surrender their Convertible Notes, in integral multiples of $1,000 principal amount, for conversion into shares of the Company’s common stock at the then-applicable conversion rate until the close of business on the second scheduled trading day immediately preceding the maturity date.  The initial conversion rate for the Convertible Notes is 198.8862 shares of common stock per $1,000 principal amount of Convertible Notes.  The conversion rate is subject to adjustments based on certain events as described in the indenture governing the Convertible Notes. In addition, upon the occurrence of certain fundamental changes (as defined in the indenture governing the Convertible Notes), a holder that converts its notes in connection with such a fundamental change may be entitled to receive a make-whole premium in the form of an increase in the conversion rate.  In addition, if such a fundamental change occurs at any time, holders of the Convertible Notes will have the right, at their option, to require the Company to repurchase all or a portion of the Convertible Notes for cash at a price equal to 100% of the principal amount of the Convertible Notes to be repurchased plus accrued and unpaid interest.

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Alliance One International, Inc. and Subsidiaries

11.  DEBT ARRANGMENTS (Continued)

Convertible Note Hedge and Warrant Transactions

In connection with the offering of the Convertible Notes, the Company entered into privately negotiated convertible note hedge transactions (the “convertible note hedge transactions”) with three counterparties, one initial purchaser of the Convertible Notes and affiliates of two other initial purchasers (the “hedge counterparties”).  The convertible note hedge transactions cover, subject to customary anti-dilution adjustments, the number of shares of the Company’s common stock that initially underlie the Convertible Notes.  The Company also entered separately into privately negotiated warrant transactions (the “warrant transactions”) relating to the same number of shares of the Company’s common stock with the hedge counterparties.  The convertible note hedge transactions are expected to reduce the potential dilution with respect to the common stock of the Company upon conversion of the Convertible Notes in the event that the value per share of common stock, as measured under the convertible note hedge transactions, during the applicable valuation period, is greater than the strike price of the convertible note hedge transactions, which corresponds to the $5.0280 per share initial conversion price of the Convertible Notes and is similarly subject to customary anti-dilution adjustments.  If, however, the price per share of the Company’s common stock, as measured under the warrants, exceeds the strike price of the warrant transactions during the applicable valuation period, there would be dilution from the issuance of common stock pursuant to the warrants.  The warrants have a strike price of $7.3325 per share, which is subject to customary anti-dilution adjustments.  The warrants expire in daily installments commencing on October 15, 2014 and ending on April 8, 2015.

Tender of Existing Notes

On July 2, 2009, the Company applied a portion of the net proceeds from the issuance of the Senior Notes and Convertible Notes to fund the purchase $467,544 aggregate principal amount of its existing notes pursuant to an early settlement of a cash tender offer (the “Tender Offer”) for any and all of its 11% Senior Notes due 2012, 8 ½% Senior Notes due 2012, 12 ¾% Senior Subordinated Notes due 2012, 9 ⅝% Senior Notes due 2011, 7 ¾% Senior Notes due 2013 and 8% Senior Notes due 2012, Series B (collectively, the “Existing Notes”).  On July 9, 2009, the Company applied a portion of the remaining net proceeds to fund the purchase of an additional $1,127 aggregate principal amount of Existing Notes in connection with the final settlement of the Tender Offer.  The following table sets forth the principal amount of the Existing Notes outstanding at the commencement of the Tender Offer and the principal amount of the Existing Notes that the Company purchased:

Existing Notes	Issuer (1)	Principal Amount Outstanding	Principal Amount Purchased
11% Senior Notes due 2012 (2)	A	$264,381	$258,126
8 ½% Senior Notes due 2012	A	$150,000	$120,365
12 ¾% Senior Subordinated Notes due 2012 (2)	A	$  89,500	$  82,105
9 ⅝% Senior Notes due 2011	D	$    3,437	$    3,415
7 ¾% Senior Notes due 2013	D	$       435	$       375
8% Senior Notes due 2012, Series B	S	$    6,285	$    4,285
(1)  The issuer of a series of Existing Notes designated with an “A” is Alliance One International, Inc.  In 2005, Standard Commercial        Corporation (“Standard Commercial”) merged with and into DIMON Incorporated (“DIMON”), which changed its name to        Alliance One International, Inc.  The issuer of a series of Existing Notes designated with a “D” was originally DIMON and the        issuer of a series of Existing Notes designated with an “S” was originally Standard Commercial.
(2)  On July 31, 2009 funds were paid to the Trustee to defease the remaining outstanding principal and interest.  The Notes were        redeemed in full on August 3, 2009.

As a result of tendering the Existing Notes or a portion thereof, the Company accelerated approximately $5,591 of deferred financing costs and $5,563 of amortization of original issue discount.

Amendment of Certain Existing Notes

On July 2, 2009, in connection with the early settlement of the Tender Offer with respect to the Company’s 11% Senior Notes due 2012, 8 ½% Senior Notes due 2012 and 12 ¾% Senior Subordinated Notes due 2012 (the “Alliance One Notes”), certain amendments to the indentures governing the Alliance One Notes became operative and effective.  These amendments eliminated substantially all of the restrictive covenants, eliminated requirements for subsidiary guarantees and requirements to conduct repurchase offers following certain events, including a change in control, modified redemption notice periods from 30 days to three business days, eliminated or modified certain events of default and certain conditions to defeasance of the Alliance One Notes, and eliminated or modified related provisions contained in the indentures governing the Alliance One Notes.  

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Alliance One International, Inc. and Subsidiaries

11.  DEBT ARRANGMENTS (Continued)

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 September 30, 2009, the Company had approximately $382,493 drawn and outstanding on foreign seasonal lines with maximum capacity totaling $677,342 subject to limitations as provided for in the Credit Agreement.  Additionally, against these lines there was $19,880 available in unused letter of credit capacity with $11,448 issued but unfunded.

Summary of Debt

The carrying value and estimated fair value of the Company’s long-term debt are $825,840 and $892,702, respectively, as of September 30, 2009 and $670,426 and $613,336, respectively, as of March 31, 2009.

          The following table summarizes the Company’s debt financing as of September 30, 2009:

			September 30, 2009
	Outstanding		Lines and Letters	Interest
	March 31, 2009	September 30, 2009	Available	Rate
Senior secured credit facility:
Revolver	$120,000	$               -	$270,000
Senior notes:
10% senior notes due 2016	-	640,728	-	10.0%
11% senior notes due 2012	264,381	-	-	11.0%
8 ½% senior notes due 2012	149,520	29,554	-	8.5%
Other (1)	10,157	2,082	-
	424,058	672,364	-
5 ½% convertible senior     subordinated notes due 2014	-	115,000	-	5.5%
12 ¾% senior subordinated     notes due 2012	83,999	-	-	12.8%
Other long-term debt	42,369	38,476	9,911	9.1%	(2)
Notes payable to banks (3)	261,468	382,493	274,970	8.6%	(2)
Total debt	$931,894	$1,208,333	554,881
Short term	$261,468	$   382,493
Long term:
Long term debt current	$  17,842	$       1,794
Long term debt	652,584	824,046
	$670,426	$   825,840
Letters of credit	$    3,814	$     11,448	8,432
Total credit available			$563,313
(1)  Balance consists of legacy DIMON and Standard Commercial senior notes with balances and maturities as follows:        $     22    9 5/8% Senior Notes due 2011               60    7 3/4% Senior Notes due 2013          2,000    8% Senior Notes due 2012        $2,082
(2)  Weighted average rate for the six months ended September 30, 2009
(3)  Primarily foreign seasonal lines of credit

          Prior to the debt refinancing, the discount amortization and repayment of the senior notes and the senior subordinated notes by fiscal year was $(1,609) in 2011, $1,581 in 2012, $509,045 in 2013 and $435 in 2014.  After the debt refinancing, the discount amortization and repayment of the senior notes and convertible senior subordinated notes by fiscal year is $(3,308) in 2011, $(3,664) in 2012, $27,559 in 2013, $(4,480) in 2014 and $772,786 in later fiscal years.

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Alliance One International, Inc. and Subsidiaries

12.  DERIVATIVE FINANCIAL INSTRUMENTS

Fair Value of Derivative Financial Instruments

The Company recognizes all derivative financial instruments, such as interest rate swap contracts and foreign exchange contracts at fair value.  Changes in the fair value of derivative financial instruments are either recognized periodically in income or in shareholders’ equity as a component of other 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 a 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.  During the three months and six months ended September 30, 2009 and 2008, there were no qualified cash flow or fair value hedges.  Estimates of fair value were determined in accordance with generally accepted accounting principles. See Note 16 “Fair Value Measurements” to the “Notes to Condensed Consolidated Financial Statements” for further information of fair value methodology.  The following table summarizes the fair value of the Company’s derivatives by type at September 30, 2009.