PYXUS INTERNATIONAL, INC. - Quarter Report: 2010 December (Form 10-Q)

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Alliance One International, Inc. and Subsidiaries
CONDENSED STATEMENTS OF CONSOLIDATED STOCKHOLDERS’ EQUITY
(Unaudited)
	Attributable to Alliance One International, Inc.
			Accumulated Other Comprehensive Loss
(in thousands)	Common Stock	Retained Deficit	Currency Translation Adjustment	Pensions, Net of Tax	Noncontrolling Interests	Total Stockholders’ Equity
Balance, March 31, 2009	$  468,195	$ (128,409)	$   (1,870)	$  (11,255)	$   4,119	$   330,780
Net income	-	60,278	-	-	1,011	61,289
Stock warrants issued	16,821	-	-	-	-	16,821
Call option related to convertible     debentures, net of tax of $13,796	(25,622)	-	-	-	-	(25,622)
Restricted stock surrendered	(249)	-	-	-	-	(249)
Stock-based compensation	5,242	-	-	-	-	5,242
Adjustment in pensions	-	-	-	(359)	-	(359)
Noncontrolling interest dividend paid	-	-	-	-	(360)	(360)
Conversion of foreign currency     financial statements	-	-	2,144	-	18	2,162
Balance, December 31, 2009	$  464,387	$   (68,131)	$        274	$  (11,614)	$   4,788	$   389,704
Balance, March 31, 2010	$  460,971	$   (49,242)	$   (3,691)	$  (17,638)	$   4,522	$   394,922
Net income (loss)	-	32,112	-	-	(219)	31,893
Restricted stock surrendered	(585)	-	-	-	-	(585)
Exercise of employee stock options	106	-	-	-	-	106
Stock-based compensation	1,509	-	-	-	-	1,509
Shares purchased	(9,042)	-	-	-	-	(9,042)
Purchase of additional investment     in subsidiary	21	-	-	-	(234)	(213)
Noncontrolling interest dividend paid	-	-	-	-	(284)	(284)
Conversion of foreign currency     financial statements	-	-	795	-	(18)	777
Balance, December 31, 2010	$  452,980	$   (17,130)	$   (2,896)	$  (17,638)	$   3,767	$   419,083
See notes to condensed consolidated financial statements

 

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Alliance One International, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended December 31, 2010 and 2009 (Unaudited)
(in thousands)		December 31, 2010		December 31, 2009
Operating activities
Net income		$   31,893		$   61,289
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization		20,872		21,904
Debt amortization/interest		10,076		8,604
Debt retirement cost		4,584		40,351
Restructuring charges		11,547		-
Gain on foreign currency transactions		(10,116)		(3,782)
Gain on other sales of assets		(37,525)		-
Changes in operating assets and liabilities, net		(131,824)		(160,634)
Other, net		4,543		48
Net cash used by operating activities		(95,950)		(32,220)
Investing activities
Purchases of property, plant and equipment		(52,480)		(9,299)
Proceeds from sale of property, plant and equipment		2,882		7,673
Proceeds on other sales of assets		45,834		-
Foreign currency derivatives		-		(5,026)
Proceeds from notes receivable		1,270		6,558
Additional investment in notes receivable		(159)		(11,731)
Other, net		24		(1,093)
Net cash used by investing activities		(2,629)		(12,918)
Financing activities
Net proceeds from short-term borrowings		55,023		17,415
Proceeds from long-term borrowings		121,000		1,040,509
Repayment of long-term borrowings		(151,076)		(908,654)
Debt issuance cost		(3,717)		(36,095)
Debt retirement cost		(2,262)		(23,456)
Proceeds from issuance of warrants		-		16,821
Purchase of call options		-		(39,418)
Repurchase of common stock		(9,042)		-
Other, net		219		(360)
Net cash provided by financing activities		10,145		66,762
Effect of exchange rate changes on cash		97		229
Increase (decrease) in cash and cash equivalents		(88,337)		21,853
Cash and cash equivalents at beginning of period		129,738		87,665
Cash and cash equivalents at end of period		$   41,401		$ 109,518
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

Basis of Presentation

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.  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, 2010.

          The Company historically presented the current and noncurrent advances on purchases of tobacco (prepaid inventory) at contractually stated amounts on the face of its balance sheet. The Company changed its presentation of advances on purchases of tobacco as of March 31, 2010 to present the advances at the lower of its cost basis or estimated recoverable amounts instead of its contractually stated or notional amount. The Company believes this change in presentation provides a more transparent view of its application of an inventory model in accounting for its advances on purchases of tobacco. Historically, the Company reported deferred amounts including the mark-up, interest and unrecoverable provisions in inventories. The Company has reclassified these amounts from inventories to current and long term advances to tobacco suppliers. The amount reclassified from inventories to current advances to tobacco suppliers was a reduction of $33,857 and a reduction of $3,908 to long term advances to tobacco suppliers included in other noncurrent assets at December 31, 2009.

Taxes Collected from Customers

Certain subsidiaries are subject to value added taxes on local sales.  These amounts have been included in sales and were $6,868 and $6,833 for the three months ended December 31, 2010 and 2009, respectively and $25,538 and $25,124 for the nine months ended December 31, 2010 and 2009, respectively.

Other Deferred Charges

Other deferred charges are primarily deferred financing costs that are amortized over the life of the debt.

Sale of Brazilian Assets

On June 21, 2010, the Company’s subsidiary in Brazil announced it had entered into an agreement with Philip Morris Brasil Industria e Comercia Ltda (“PMB”), an affiliate of Philip Morris International, Inc. (“PMI”). In connection with the transaction, the Company assigned contracts with approximately 9,000 tobacco suppliers in Southern Brazil representing approximately 20% of current Brazilian volume and sold some of its related assets to PMB at September 30, 2010. The Company recorded a gain of $18,101 on the sale of these assets in Other Income in the condensed consolidated statements of operations at September 30, 2010. The Company sold the remaining related assets to PMB during the quarter ended December 31, 2010 and recorded a gain of $19,424 in Other Income in the condensed consolidated statements of operations at December 31, 2010. The Company expects to continue to supply processed tobacco to PMI and to process tobacco for PMB grown by PMB’s contracted suppliers under a long-term processing agreement.

New Accounting Standards

Recently Adopted Accounting Pronouncements

On April 1, 2010, the Company adopted 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.  The Company adopted this new accounting guidance with no material impact to its financial condition and results of operations.  See Note 16 “Sale of Receivables” for further details.

         On April 1, 2010, the Company adopted 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.  The Company adopted this new accounting guidance with no material impact to its financial condition and results of operations.  See Note 6 “Variable Interest Entities” for further details.

Recent Accounting Pronouncements Not Yet Adopted

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)

New Accounting Standards (Continued)

Recent Accounting Pronouncements Not Yet Adopted (Continued)

         In January 2010, the FASB issued new accounting guidance on fair value measurements and disclosures. This guidance requires reporting entities to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. It will also require reporting entities to present separately information about purchases, sales, issuances, and settlements in their Level 3 fair value reconciliations. The new disclosures and clarifications of existing disclosures (the Level 1 and Level 2 changes) were effective for the Company on January 1, 2010 with no material impact to the Company.  The disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements will be effective for the Company on April 1, 2011. The Company does not expect these new disclosure requirements to have a material impact on its financial condition or results of operations.

2.  INCOME TAXES

Accounting for Uncertainty in Income Taxes

As of December 31, 2010, the Company’s unrecognized tax benefits totaled $20,469, 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 December 31, 2010, accrued interest and penalties totaled $9,676 and $3,596, 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 international unrecognized tax benefits of $3,778, interest of $7,878, and penalties of $2,157, the Company does not foresee any reasonably possible changes in the unrecognized tax benefits in the next twelve months but must acknowledge circumstances can change due to unexpected developments in the law.  In certain jurisdictions, tax authorities have challenged positions that the Company has taken that resulted in recognizing benefits that are material to its financial statements.  The Company believes it is more likely than not that it will prevail in these situations and accordingly have not recorded liabilities for these positions.  The Company expects the challenged positions to be settled at a time greater than twelve months from its balance sheet date.

         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 December 31, 2010, the Company’s earliest open tax year for U.S. federal income tax purposes was its fiscal year ended March 31, 2007.  Open tax years in state and foreign jurisdictions generally range from three to six years.

         During the three months ended December 31, 2010, certain events led to a change in management’s judgment related to the recognition of tax benefits for certain U.S. foreign tax credit carryovers.  As a result, during the three months ended December 31, 2010, the Company recorded a $7,000 income tax expense for unrecognized tax benefits and the corresponding reduction of deferred tax asset for foreign tax credit carryovers.  During January 2011, the Company and U.S. Internal Revenue Service agreed to a resolution of the examination of its U.S. federal income tax returns for fiscal years March 31, 2007 and March 31, 2008, resulting in an adjustment to foreign tax credit carryovers.

Provision for the Nine Months Ended December 31, 2010

The effective tax rate used for the nine months ended December 31, 2010 was an expense of 30.1% compared to a benefit of 9.5% for the nine months ended December 31, 2009.  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, 2011 to be 25.6% after absorption of discrete items.

         For the nine months ended December 31, 2010, the Company recorded a specific event adjustment expense of $4,324, bringing the effective tax rate estimated for the nine months of 19.9% to 30.1%.  This specific event adjustment expense relates primarily to additional income tax, interest, and exchange losses related to liabilities for unrecognized tax benefits, reductions in foreign tax credit carryforwards and net exchange gains on income tax accounts.  For the nine months ended December 31, 2009, the Company recorded a specific event adjustment benefit of $22,089 bringing the effective tax rate estimated for the nine months of 30.8% to 9.5%.  This specific event adjustment benefit relates primarily to a reversal of income tax, interest, penalties, and exchange losses related to liabilities for unrecognized tax benefits, and to net exchange gains on income tax accounts.  The difference in the estimated effective tax rate for the nine months ended December 31, 2010 from the statutory rate is primarily due to foreign income tax rates lower than the U.S. rate, currency exchange and amortization of goodwill partially offset by increases in unrecognized tax benefits.   

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Alliance One International, Inc. and Subsidiaries

3.  GUARANTEES

The Company and certain of its foreign subsidiaries guarantee bank loans to suppliers to finance their crops.  Under longer-term arrangements, the Company may also guarantee financing on suppliers’ 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 suppliers’ 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 supplier or tobacco cooperative default.  If default occurs, the Company has recourse against the supplier or cooperative.  The following table summarizes amounts guaranteed and the fair value of those guarantees:

	December 31, 2010		December 31, 2009		March 31, 2010
Amounts guaranteed (not to exceed)	$   102,324		$   188,701		$   184,575
Amounts outstanding under guarantee	100,040		173,555		184,382
Fair value of guarantees	4,866		11,984		13,478

         Of the guarantees outstanding at December 31, 2010 approximately 82% expire within one year and the remainder within five years.  The fair value of guarantees is recorded in Accrued Expenses and Other Current Liabilities in the condensed consolidated balance sheets and included in crop costs.

         In Brazil, some suppliers obtain government subsidized rural credit financing from local banks that is guaranteed by the Company. The Company withholds amounts owed to suppliers related to the rural credit financing of the supplier upon delivery of tobacco to the Company. The Company remits payments to the local banks on behalf of the guaranteed suppliers. Terms of rural credit financing are such that repayment is due to local banks based on contractual due dates. As of December 31, 2010 and 2009 and March 31, 2010, respectively, the Company had balances of $301, $1,420 and $55,926 that were due to local banks on behalf of suppliers. These amounts are included in Accounts Payable in the condensed consolidated balance sheets.

4.  RESTRUCTURING CHARGES

In response to shifting supply and demand balances and the changing business models of the Company’s customers, the Company began implementing several strategic initiatives.  The first was to begin realigning the Company’s organization by transitioning the United Kingdom finance and logistics functions to the United States in October 2010 and closing the Netherlands office in November 2010.  In December 2010, new leadership was appointed to better position the Company for the future.  At December 31, 2010, other global initiatives were underway to increase operational efficiency and effectiveness.  The initiatives will continue over the coming quarters as the Company continues to define and execute the necessary changes to support core business functions.

          At December 31, 2010, the company has incurred $13,385 in employee separation and other charges, all related to the Other Regions segment, of which $1,838 has been paid.  The remaining balance will be paid primarily in the next twelve months and is recorded in Accrued Expenses and Other Current Liabilities on the condensed consolidated balance sheet.

5.  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.

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Alliance One International, Inc. and Subsidiaries

5.  GOODWILL AND INTANGIBLES (Continued)

          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 nine months ended December 31, 2010 and 2009:

         The following table summarizes the estimated intangible asset amortization expense for the next five years and beyond:

*  Estimated amortization expense for the internally developed software is based on costs accumulated as of December 31, 2010.  These estimates will change as new costs are incurred and until the software is placed into service in all locations.

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Alliance One International, Inc. and Subsidiaries

6.  VARIABLE INTEREST ENTITIES

On April 1, 2010, the Company adopted new accounting guidance on accounting for variable interest entities (“VIEs”). This accounting guidance amended the consolidation guidance applicable to VIEs and required additional disclosures concerning an enterprise’s continuing involvement with VIEs.

Consolidated Variable Interest Entities

The Company holds a variable interest in one joint venture in which the Company is the primary beneficiary because of its power to direct activities that most significantly impact the economic performance of the entity.  The joint venture is an enterprise that serves as a dedicated inventory supply source in Asia and the Company’s variable interest in this joint venture relate to working capital advances and guarantees of the joint venture’s borrowings.

          As the primary beneficiary of this VIE, the entity’s material assets, liabilities and results of operations are included in the Company’s consolidated financial statements. The following table summarizes the material carrying amounts of the entity’s assets, all of which are restricted, and liabilities included in the Company’s consolidated balance sheets at March 31, 2010 and December 31, 2010.

Assets of Consolidated VIE	March 31, 2010		December 31, 2010
Inventory	$ 12,069		$ 14,269
Advances to suppliers	3,746		3,694
Liabilities of Consolidated VIE
Notes payable to banks	-		4,764

          Amounts presented in the table above as restricted assets relating to the consolidated VIE are adjusted for intercompany eliminations.

Nonconsolidated Variable Interest Entities

The Company holds variable interests in four joint ventures that are accounted for under the equity method of accounting. These joint ventures procure inventory on behalf of the Company and the other joint venture partners. The variable interests relate to equity investments and advances made by the Company to the joint ventures.  In addition, the Company also guarantees one of its joint venture’s borrowings which also represent a variable interest in that joint venture.  The Company is not the primary beneficiary, as it does not have the power to direct the activities that most significantly impact the economic performance of the entities as a result of the entities’ management and board of directors structure. Therefore, these entities are not consolidated. At March 31, 2010 and December 31, 2010, the Company’s investment in these joint ventures was $22,878 and $25,144, respectively and is classified as Investments in Unconsolidated Affiliates in the condensed consolidated balance sheets. The Company’s advances to these joint ventures were $8,936 at March, 31, 2010 and December 31, 2010, and are classified as Accounts Receivable, Related Parties in the condensed consolidated balance sheets.  The Company’s guarantee to a joint venture was $17,121 and $16,921 at March 31, 2010 and December 31, 2010, respectively.  The investments, advances and guarantee in these joint ventures represent the Company’s maximum exposure to loss.

7.  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.

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Alliance One International, Inc. and Subsidiaries

7. SEGMENT INFORMATION (Continued)

          The following table presents the summary segment information for the three months and nine months ended December 31, 2010 and 2009:

Analysis of Segment Assets		December 31, 2010	December 31, 2009	March 31, 2010
Segment assets:
	South America	$    639,111	$    651,252	$    806,088
	Other regions	1,217,239	1,234,191	1,105,111
	Total assets	$ 1,856,350	$ 1,885,443	$ 1,911,199

8.  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 December 31, 2010 and 2009.  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 1,222 at a weighted average exercise price of $7.02 per share at December 31, 2010 and 1,626 at a weighted average exercise price of $7.02 per share at December 31, 2009.

          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.

          On July 28, 2010, the Company’s board of directors authorized the purchase up to $40,000 of its common stock through June 30, 2012.  As of December 31, 2010, the Company has purchased 2,380 shares of its common stock at a weighted average price paid per share of $3.78.

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Alliance One International, Inc. and Subsidiaries

8.  EARNINGS PER SHARE (Continued)

          The following table summarizes the computation of earnings per share for the three months and nine months ended December 31, 2010 and 2009, respectively.

9.  COMPREHENSIVE INCOME

The components of comprehensive income were as follows:

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Alliance One International, Inc. and Subsidiaries

10.  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 $644 and $1,823 for the three months ended December 31, 2010 and 2009, respectively, and $1,509 and $5,233 for the nine months ended December 31, 2010 and 2009, 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 three months and nine months ended December 31, 2010 and 2009, 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.

11.  CONTINGENCIES AND OTHER INFORMATION

Non-Income Tax

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 $7,908 and the total assessment including penalties and interest through December 31, 2010 is $17,275.  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 $7,908 represents intrastate trade tax credit amounts which were offset against intrastate trade tax payables as allowed under Brazilian law.  At December 31, 2010, the Company also has intrastate trade tax credits from Parana of $14,113.  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 $68,952 and $59,077 at December 31, 2010 and 2009, 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 $36,110 and $7,419 at December 31, 2010 and 2009, 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.

           The Company’s subsidiary in Brazil has constructed a new tobacco processing facility in the State of Santa Catarina with the annual production capacity of 70 million kilos. The Company will process the 2011 crop in the new facility.  As a result of moving production to Santa Catarina, the Company has excess intrastate tax credits. Therefore, the Company reached an agreement with the government of Santa Catarina to allow the Company to sell its excess credits (receivables) to third parties and recorded a valuation allowance of $3,500 in fiscal 2010.  The Company has Santa Catarina intrastate tax credits of $27,987 at December 31, 2010.  Based on management’s expectations about future realization, the Company has recorded a total valuation allowance on the Santa Catarina intrastate trade tax credits of $12,076 at December 31, 2010.

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Alliance One International, Inc. and Subsidiaries

11.  CONTINGENCIES AND OTHER INFORMATION (Continued)

Non-Income Tax (Continued)

As of January 1, 2011, a new government was elected in the State of Santa Catarina and they temporarily suspended the sale of excess intrastate tax credits.  The allowance on the Santa Catarina intrastate 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.  In addition, the Company received an assessment in 2006 for federal income taxes that were offset by the IPI credit bonus.  The assessment is valued at $29,184 at December 31, 2010.  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. As a result of various legislative and judicial actions, the Company does not expect a ruling in the near future, which would 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$9,776) plus interest and costs.  The Company believes the claim to be without merit and is vigorously defending it.  No amounts have been reserved with respect to such claim.

           On August 6, 2010, the Company entered into settlement agreements with the Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”) to resolve those agencies’ investigations of the Company relating to alleged violations under the Foreign Corrupt Practices Act (“FCPA”) which occurred prior to the merger that formed the Company in May, 2005.  Pursuant to the settlement negotiated with DOJ, two of the Company’s foreign subsidiaries, Alliance One Tobacco Osh, LLC and Alliance One International AG (successors to DIMON International (Kyrgyzstan) and DIMON International AG, respectively), agreed to plead guilty to FCPA violations committed by DIMON International (Kyrgyzstan) and DIMON International AG prior to the merger creating the Company, and to pay fines totaling $9,450.  Additionally, the Company entered into a non-prosecution agreement by the terms of which the DOJ will not prosecute the Company if, for a period of three years, the Company meets its obligations as set out in the agreement.  On October 21, 2010, the U.S. District Court for the Western District of Virginia in Danville, Virginia accepted these guilty pleas and entered a judgment consistent with the terms of the settlement agreement.  The settlement negotiated with the SEC includes the Company’s agreement to disgorge profits in the amount of $10,000 and to abide by an injunction against further FCPA violations.  On August 26, 2010, the U.S. District Court for the District of Columbia approved the terms of the settlement with the SEC and entered the injunction contemplated by the settlement agreement.  Both settlements require the Company to retain an independent compliance monitor for a term of three years.  The Company provided for these losses at March 31, 2010 and $10,000 was paid to the SEC on August 30, 2010 and $9,452 was paid to the U.S. District Court on October 28, 2010.

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Alliance One International, Inc. and Subsidiaries

11.  CONTINGENCIES AND OTHER INFORMATION (Continued)

Other (Continued)

           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. (“AOB”) and a number of other tobacco processors on behalf of all tobacco suppliers in those states.  The lawsuits primarily assert that there exists an employment relationship between tobacco processors and tobacco suppliers.  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 that 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 June 6, 2008, AOB and a number of other tobacco processors were notified of a class action initiated by the ALPAG - Associação Lourenciana de Pequenos Agricultrores ("Association of Small Farmers of São Lourenço”). The class action’s focus is a review of tobacco supplier contracts and business practices, specifically aiming to prohibit processors from notifying the national credit agency of producers in debt, prohibiting processors from deducting tobacco suppliers’ debt from payments for tobacco, and seeking the modification of other contractual terms historically used in the purchase of tobacco. The Company presented its defense locally and the case has been transferred to the Federal Court in Brasilia. No hearing date

has been set. The Company believes this claim to be without merit and intends to vigorously defend it. Ultimate exposure if an unfavorable outcome is received is not determinable.

            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.

          On December 24, 2010, a third-party warehouse in South Africa was destroyed by fire. This warehouse contained approximately $6,072 of the Company’s inventory.  The Company believes that its loss is fully insured and has recorded a receivable of the amount of loss for the probable recovery.

12.  DEBT ARRANGEMENTS

Senior Notes

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.  On July 2, 2009, the Company completed a number of refinancing transactions in which it purchased $120,365 aggregate principal amount of the existing notes pursuant to a cash tender offer.  During the three months ended June 30, 2010, the Company purchased $23,635 of the remaining notes on the open market.  All purchased securities were canceled leaving $6,000 of the 8 ½% senior notes outstanding at June 30, 2010.  Associated cash premiums and other costs paid were $650.  Deferred financing costs and amortization of original issue discount of $282 were accelerated.

           On July 2, 2009, the Company issued $570,000 of 10% Senior Notes due 2016 at a 4.823% original issue discount to reflect an 11.0% yield to maturity.  On August 26, 2009, the Company issued an additional $100,000 tranche of 10% Senior Notes due 2016 at a 2.5% original issue discount to reflect a 10.512% yield to maturity.  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 was $670,000.  During the three months ended September 30, 2010, the Company purchased $25,000 of these notes on the open market.  All purchased securities were canceled leaving $645,000 of the 10% senior notes outstanding at September 30, 2010.  Associated cash premiums and other costs paid were $1,038.  Deferred financing costs and amortization of original issue discount of $1,474 were accelerated.  During the three months ended December 31, 2010, the Company purchased $10,000 of these notes on the open market.  All purchased securities were canceled leaving $635,000 of the 10% senior notes outstanding at December 31, 2010.  Associated cash premiums and other costs paid were $575.  Deferred financing costs and amortization of original issue discount of $566 were accelerated.

           At December 31, 2010, the Company did not satisfy the fixed charge coverage ratio required under the Senior Notes indenture to permit the Company to access the restricted payments basket for the purchase of common stock and other actions under that basket.  The Company from time to time may not satisfy the required ratio.

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Alliance One International, Inc. and Subsidiaries

13.  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 nine months ended December 31, 2010 and 2009, there were no qualified cash flow or fair value hedges.  Estimates of fair value were determined in accordance with generally accepted accounting principles.  The following table summarizes the fair value of the Company’s derivatives by type at December 31, 2010 and 2009 and March 31, 2010.

Earnings Effects of Derivatives

Foreign Currency Contracts

The Company periodically enters into forward or option currency contracts to protect against volatility associated with certain non-U.S. dollar denominated forecasted transactions.  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 as the Company deems necessary. These contracts do not meet the requirements for hedge accounting treatment under generally accepted accounting principles, and as such, all changes in fair value are reported in income.

          The following table summarizes the earnings effects of derivatives in the condensed consolidated statements of operations for the three months and nine months ended December 31, 2010 and 2009.

Credit Risk

Financial instruments, including derivatives, expose the Company to credit loss in the event of non-performance by counterparties.  The Company manages its exposure to counterparty credit risk through specific minimum credit standards, diversification of counterparties, and procedures to monitor concentrations of credit risk.  If a counterparty fails to meet the terms of an arrangement, the Company’s exposure is limited to the net amount that would have been received, if any, over the

arrangement’s remaining life.  The Company does not anticipate non-performance by the counterparties and no material loss would be expected from non-performance by any one of such counterparties.

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Alliance One International, Inc. and Subsidiaries

14.  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, Turkey, Malawi and the United Kingdom.

Components of Net Periodic Benefit Cost

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

	Three Months Ended December 31,				Nine Months Ended December 31,
	2010		2009		2010			2009
Service cost	$    805		$    895		$ 2,417			$ 2,685
Interest expense	2,192		2,236		6,577			6,707
Expected return on plan assets	(1,428)		(1,114)		(4,284)			(3,340)
Amortization of prior service cost	6		(44)		17			(133)
Actuarial (gain) loss	335		(2)		1,004			(6)
Special termination benefits	204		-		204			-
Net periodic pension cost	$ 2,114		$ 1,971		$ 5,935			$ 5,913

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 December 31, 2010, contributions of $8,190 were made to pension plans for fiscal 2011.  Additional contributions to pension plans of approximately $2,580 are expected during the remainder of fiscal 2011.  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.  As of December 31, 2010, contributions of $530 were made to the plans for fiscal 2011.  Additional contributions of $386 to the plans are expected during the rest of fiscal 2011.  The Company retains the right, subject to existing agreements, to modify or eliminate the postretirement 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 December 31,				Nine Months Ended December 31,
	2010		2009			2010		2009
Service cost	$    20		$        16			$      60		$        48
Interest expense	166		189			499		564
Amortization of prior service cost	(410)		(415)			(1,232)		(1,245)
Actuarial loss	108		76			325		229
Curtailment gain recognized	-		(777)			-		(777)
Settlement gain recognized	-		(290)			-		(290)
Net periodic pension cost (benefit)	$ (116)		$ (1,201)			$   (348)		$ (1,471)

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Alliance One International, Inc. and Subsidiaries

15.  INVENTORIES

The following table summarizes the Company’s costs in inventory:

	December 31, 2010	December 31, 2009	March 31, 2010
Processed tobacco	$ 700,144	$ 549,926	$ 417,996
Unprocessed tobacco	79,765	140,198	354,155
Other	40,074	46,096	51,996
	$ 819,983	$ 736,220	$ 824,147

16.  SALE OF RECEIVABLES

On April 1, 2010, the Company adopted new accounting guidance on accounting for the transfers of financial assets. This new accounting guidance is intended to improve the information provided in financial statements concerning transfers of financial assets, including the effects of transfers on financial position, financial performance and cash flows, and any continuing involvement of the transferor with the transferred financial assets.

          The Company has entered into an accounts receivable securitization program whereby it sells certain of its trade accounts receivable to a third-party bankruptcy-remote special purpose entity (“SPE”) which, in turn, sells the receivables to a third-party commercial paper conduit.  The SPE was formed for the sole purpose of buying and selling receivables generated by the Company.

          The sales price consists of 90% of the face value of the receivable, less contractual dilutions which limit the amount that may be outstanding from any one particular customer and insurance reserves that also have the effect of limiting the risk attributable to any one customer.  Upon sale, the Company removes the carrying value of the receivable sold and records the fair value of its beneficial interest in the receivable in accounts receivable.  The fair value of the beneficial interest is calculated by applying the commercial paper rate and the servicing rate to the balance of the outstanding receivables in the facility.  The Company receives a 0.5% per annum servicing fee on receivables sold and outstanding which is recorded as a reduction of selling, administrative and general expenses.  This fee is compensatory and no servicing asset or liability has resulted from the sale.  The receivables sold are non-interest bearing.  This in conjunction with the short life of the receivables sold and outstanding causes the effects of any prepayments on the value of assets recorded to be inconsequential.

Losses on sale of receivables are recorded as a component of Other Income in the condensed consolidated statements of operations.

          The following table summarizes the Company’s accounts receivable securitization information as of December 31:

		2010		2009
Receivables outstanding in facility:
As of April 1		$  105,579		$  100,611
Sold		486,847		623,550
Collected		(519,784)		(638,221)
As of December 31		$    72,642		$    85,940
Beneficial interest as of December 31 (a)		$    23,350		$      8,084
Impact on beneficial interest resulting from increases in discount rate:
10%		$           33		$           50
20%		$           65		$         100
Criteria to determine beneficial interest as of December 31:
Weighted average life in days		71		70
Discount rate (inclusive of 0.5% servicing fee)		2.48%		3.1%
Unused balance fee		0.40%		0.25%
Cash proceeds for the nine months ended December 31:
Current purchase price		$  335,065		$  455,011
Deferred purchase price		163,097		158,197
Service fees		399		376
Total		$  498,561		$  613,584
Loss on sale of receivables
Three months ended December 31		$         715		$         791
Nine months ended December 31		$      1,662		$      1,957
(a) Beneficial interest as of March 31, 2010 was $25,125 and was determined using a weighted average life in days of 95,      a discount rate of 3.0% and an unused balance fee of 0.25%.

Alliance One International, Inc. and Subsidiaries

16.  SALE OF RECEIVABLES (Continued)

          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. The table below indicates the utilization of the revolving agreement:

	Nine Months Ended December 31,				Twelve Months Ended March 31, 2010
	2010		2009
Average outstanding balance	$ 63,553		$ 74,835		$  76,711
Maximum outstanding balance	99,113		96,365		99,712
Minimum outstanding balance	16,738		47,174		47,174

17.  FAIR VALUE MEASUREMENTS

The Company follows the current accounting guidance for fair value measurements for financial and non-financial assets and liabilities.  The financial assets and liabilities measured at fair value include derivative instruments, securitized beneficial interests and guarantees.  The non-financial assets and liabilities measured at fair value primarily include assessments of investments in subsidiaries, goodwill and other intangible assets and long-lived assets for potential impairment.  The carrying value and estimated fair value of the Company’s long term debt are shown in the table below.

	December 31, 2010	December 31, 2009	March 31, 2010
Long term debt
Carrying value	$ 763,052	$ 825,573	$ 789,337
Estimated fair value	796,213	912,291	845,642

          A three-level valuation hierarchy is used to determine fair value as follows:

·

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

·

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

·

Level 3 – Significant inputs to the valuation model are unobservable.

          The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis:

	Derivative financial instruments	Securitized beneficial interests	Total Assets		Derivative financial instruments	Guarantees	Total Liabilities
Level 1	$        -	$           -	$          -		$          -	$          -	$          -
Level 2	218	-	218		-	-	-
Level 3	-	23,350	23,350		-	4,866	4,866
Totals for December 31, 2010	$    218	$  23,350	$ 23,568		$          -	$   4,866	$   4,866
Level 1	$        -	$           -	$          -		$          -	$          -	$          -
Level 2	1,075	-	1,075		2,716	-	2,716
Level 3	-	8,084	8,084		-	11,984	11,984
Totals for December 31, 2009	$ 1,075	$    8,084	$   9,159		$   2,716	$ 11,984	$ 14,700
Level 1	$        -	$           -	$          -		$          -	$          -	$          -
Level 2	2,528	-	2,528		-	-	-
Level 3	-	25,125	25,125		-	13,478	13,478
Totals for March 31, 2010	$ 2,528	$  25,125	$ 27,653		$          -	$ 13,478	$ 13,478

          

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Alliance One International, Inc. and Subsidiaries

17.  FAIR VALUE MEASUREMENTS (Continued)

The following tables present the changes in Level 3 instruments measured on a recurring basis:

	Three Months Ended December 31, 2010		Nine Months Ended December 31, 2010
	Beneficial Interest in Securitized Receivables	Guarantees	Beneficial Interest in Securitized Receivables	Guarantees
Beginning Balance	$  25,528	$   4,830	$  25,125	$  13,478
Total losses (realized / unrealized       included in earnings)	(715)	-	(1,662)	-
Purchases, issuances, and settlements, net	(1,463)	36	(113)	(8,612)
Ending Balance	$  23,350	$   4,866	$  23,350	$    4,866

	Three Months Ended December 31, 2009		Nine Months Ended December 31, 2009
	Beneficial Interest in Securitized Receivables	Guarantees	Beneficial Interest in Securitized Receivables	Guarantees
Beginning Balance	$  11,893	$   7,019	$  26,833	$  14,584
Total losses (realized / unrealized       included in earnings)	791	-	1,957	-
Purchases, issuances, and settlements, net	(4,600)	4,965	(20,706)	(2,600)
Ending Balance	$    8,084	$ 11,984	$    8,084	$  11,984

          The amount of unrealized losses relating to assets still held December 31, 2010 and  2009  and  March 31, 2010 was $366, $524 and $826, respectively, all relating to securitized beneficial interests.  Gains and losses included in earnings are reported in Other Income in the condensed consolidated statements of operations.  The Company did not have any non-recurring fair value adjustments during the nine months ended December 31, 2010 or December 31, 2009.

Valuation methodologies

The fair value of derivative financial instruments is based on third-party market maker valuation models including amounts related to the Company’s own credit risk and counterparty credit risk.  The fair value of securitized beneficial interests is based upon a valuation model that calculates the present value of future expected cash flows using key assumptions based on the Company’s historical experience, market trends and anticipated performance relative to the particular assets securitized.  The fair value of guarantees is based upon the premium the Company would require to issue the same guarantee in a stand-alone arm’s-length transaction with an unrelated party based upon internally developed models. Internally developed models utilize historical loss data for similar guarantees to develop an estimate of future losses under the guarantees outstanding at the measurement date.

18.  RELATED PARTY TRANSACTIONS

The Company’s operating subsidiaries engage in transactions with related parties in the normal course of business. The following is a summary of balances and transactions with related parties of the Company:

	December 31, 2010	December 31, 2009	March 31, 2010
Balances:
Accounts receivable	$ 71,167	$ 33,116	$ 30,061
Accounts payable	13,581	11,546	20,275

	Three Months Ended December 31,			Nine Months Ended December 31,
	2010	2009		2010	2009
Transactions:
Purchases	$ 47,432	$ 69,294		$ 96,197	$ 99,003

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Alliance One International, Inc. and Subsidiaries

18.  RELATED PARTY TRANSACTIONS (Continued)

         The Company’s operating subsidiaries have entered into transactions with affiliates of the Company for the purpose of procuring inventory.

          The Company’s balances due to and from related parties are primarily with its deconsolidated Zimbabwe subsidiary.  The remaining related party balances and transactions relate to the Company’s equity basis investments in companies located in Asia which purchase and process tobacco.

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Alliance One International, Inc. and Subsidiaries

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

Revenues and gross profits continue to be impacted by Japan Tobacco Inc.’s vertical integration initiative.  In addition, increasing oversupply in certain markets and changes in customer buying patterns have reduced sales and margins.  As a result, lower processing volumes as well as higher local costs negatively impacted our gross profit percentage.  In response to the changes in the industry, we began several strategic initiatives this quarter to increase operational efficiency and effectiveness.  These initiatives will continue over future quarters as we define and execute necessary changes to support our core business functions.  Operating income did benefit this quarter due to the completion of the sale of assets in Brazil to Philip Morris International, Inc.  Our effective tax rate for the quarter increased from a benefit of 47.2% to an expense of 156.9% primarily due to the reversal of unrecognized tax benefit liabilities in the prior year compared to a reduction in foreign tax credit carryforwards and the related deferred tax asset this year.  The result of all these factors was a decrease in net income for the three months ending December 31, 2010 of $49.2 million compared to the three months ending December 31, 2009.

Liquidity

Liquidity requirements for our business are impacted by crop seasonality, foreign currency and interest rates, green tobacco prices, crop quality and other factors. We continuously monitor and adjust funding sources as required based on business dynamics, utilizing cash from operations, our revolving credit facility, short term credit lines throughout the world, sales of accounts receivable, active working capital management and advances from customers.  As of December 31, 2010, we had $789.5 million of cash and available credit comprised of $41.4 million of cash and $748.1 million in available credit inclusive of $262.0 million undrawn on our revolver, $475.8 million of notes payable to banks, and $10.3 million exclusively for letters of credit. We continually modify the makeup of our available liquidity to enhance business flexibility and reduce costs.

Outlook

Oversupply will likely continue to increase this coming crop year. Looking to the crop after that, we believe that lower prices paid for the coming crop, combined with the profitability of competing crops, may cause many suppliers to produce less tobacco and begin reversing the oversupply trend.  We are committed to the successful implementation of the required changes to our business model to reposition our business and we will continue to improve our capital structure while monitoring the market for both our debt and equity securities.

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Alliance One International, Inc. and Subsidiaries

RESULTS OF OPERATIONS: