Edgar Filing: CENTRAL EUROPEAN DISTRIBUTION CORP

Form 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-24341

CENTRAL EUROPEAN DISTRIBUTION

CORPORATION

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


Delaware		54-1865271
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

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

(610) 660-7817

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

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

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


Large Accelerated Filer	x	Accelerated Filer	¨
Non-Accelerated Filer	¨ (Do not check if a smaller reporting company)	Smaller Reporting Company	¨

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

The number of shares outstanding of each class of the issuer’s common stock as of August 4, 2010: Common Stock ($.01 par value) 70,669,370

INDEX


		PAGE

PART I	FINANCIAL INFORMATION

Item 1	Financial Statements

	Consolidated Condensed Balance Sheets as of June 30, 2010 (unaudited) and as of December 31, 2009	1

	Consolidated Condensed Statements of Operations (unaudited) for the three month and six month periods ended June 30, 2010 and June 30, 2009	2

	Consolidated Condensed Statement of Changes in Stockholders’ Equity for the six month period ended June 30, 2010 (unaudited)	3

	Consolidated Condensed Statements of Cash Flows (unaudited) for the six month periods ended June 30, 2010 and June 30, 2009	4

	Notes to Consolidated Condensed Financial Statements (unaudited)	5-20

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21-34

Item 3	Quantitative and Qualitative Disclosures about Market Risk	35

Item 4	Controls and Procedures	35

PART II	OTHER INFORMATION	36

Item 6	Exhibits	36

Signatures		37

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED)

Amounts in columns expressed in thousands

(except share information)


	June 30, 2010			December 31, 2009 (as adjusted see Note 2)
ASSETS

Current Assets
Cash and cash equivalents	$	125,560		$	126,439
Restricted cash		0			481,419
Accounts receivable, net of allowance for doubtful accounts of $38,283 and $37,630 respectively		294,485			475,126
Inventories		79,188			92,216
Prepaid expenses and other current assets		26,808			33,302
Loans granted		0			1,608
Loans granted to affiliates		0			7,635
Deferred income taxes		70,723			82,609
Current assets of discontinued operations		156,381			267,561

Total Current Assets		753,145			1,567,915

Intangible assets, net		696,974			773,222
Goodwill, net		1,376,968			1,484,072
Property, plant and equipment, net		215,431			215,916
Deferred income taxes		49,304			27,123
Equity method investment in affiliates		230,067			244,504
Non-current assets of discontinued operations		63,733			101,778

Total Non-Current Assets		2,632,477			2,846,615


Total Assets	$	3,385,622		$	4,414,530


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Trade accounts payable	$	60,790		$	113,006
Bank loans and overdraft facilities		122,795			81,053
Income taxes payable		3,027			3,827
Taxes other than income taxes		88,730			208,784
Other accrued liabilities		87,017			91,435
Short-term obligations under Senior Notes		0			358,943
Current portions of obligations under capital leases		374			481
Deferred consideration		5,000			160,880
Current liabilities of discontinued operations		119,176			194,761

Total Current Liabilities		486,909			1,213,170

Long-term debt, less current maturities		29,969			106,043
Long-term obligations under capital leases		676			480
Long-term obligations under Senior Notes		1,118,711			1,205,467
Long-term accruals		2,200			3,214
Deferred income taxes		174,304			198,174
Non-current liabilities of discontinued operations		696			2,820

Total Long Term Liabilities		1,326,556			1,516,198

Stockholders’ Equity
Common Stock ($0.01 par value, 120,000,000 shares authorized, 70,666,770 and 69,411,845 shares issued at June 30, 2010 and December 31, 2009, respectively)		707			694
Additional paid-in-capital		1,340,445			1,296,391
Retained earnings		163,557			264,917
Accumulated other comprehensive income of continuing operations		68,683			120,389
Accumulated other comprehensive income / (loss) of discontinued operations		(1,085	)		2,921
Less Treasury Stock at cost (246,037 shares at June 30, 2010 and December 31, 2009, respectively)		(150	)		(150	)

Total CEDC Stockholders’ Equity		1,572,157			1,685,162


Total Equity		1,572,157			1,685,162


Total Liabilities and Stockholders’ Equity	$	3,385,622		$	4,414,530

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

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

Amounts in columns expressed in thousands

(except per share information)


	Three months ended						Six months ended
	June 30, 2010			June 30, 2009 (as adjusted)			June 30, 2010			June 30, 2009 (as adjusted)

Sales	$	379,874		$	375,450		$	710,768		$	559,622
Excise taxes		(204,277	)		(199,559	)		(385,365	)		(312,959	)
Net Sales		175,597			175,891			325,403			246,663
Cost of goods sold		87,119			84,546			162,793			122,426


Gross Profit		88,478			91,345			162,610			124,237


Operating expenses		47,252			54,011			96,130			74,527
Gain on remeasurement of previously held equity interests		0			(225,605	)		0			(225,605	)
Impairment charge		0			20,309			0			20,309


Operating Income		41,226			242,630			66,480			255,006


Non operating income / (expense), net
Interest (expense), net		(26,423	)		(20,789	)		(52,099	)		(30,661	)
Other financial income / (expense), net		(111,698	)		61,532			(76,786	)		(28,810	)
Amortization of deferred charges		0			(11,231	)		0			(11,231	)
Other non operating income / (expense), net		6,638			(8,838	)		(11,352	)		(8,257	)


Income / (loss) before taxes, equity in net income from unconsolidated investments and noncontrolling interests in subsidiaries		(90,257	)		263,304			(73,757	)		176,047

Income tax benefit / (expense)		17,918			(51,663	)		14,748			(34,588	)
Less: Net income attributable to noncontrolling interests in subsidiaries		0			2,249			0			2,138
Equity in net earnings / (losses) of affiliates		2,265			2,013			444			(18,852	)

Net income /(loss) from continuing operations attributable to CEDC	($	70,074	)	$	211,405		($	58,565	)	$	120,469


Discontinued operations
Income / (loss) from operations of distribution business (including impairment charge of $28.2 million in 6 months ended June 30, 2010)		(7,963	)		2,664			(42,685	)		6,492
Income tax (expense) / benefit		41			(342	)		(110	)		(895	)

Income / (loss) on discontinued operations		(7,922	)		2,322			(42,795	)		5,597


Net income / (loss)	($	77,996	)	$	213,727		($	101,360	)	$	126,066


Net income / (loss) from continuing operations per share of common stock, basic	($	1.00	)	$	4.30		($	0.84	)	$	2.48

Net income / (loss) from discontinued operations per share of common stock, basic	($	0.11	)	$	0.05		($	0.61	)	$	0.12

Net income / (loss) from operations per share of common stock, basic	($	1.11	)	$	4.35		($	1.45	)	$	2.60

Net income / (loss) from continuing operations per share of common stock, diluted	($	1.00	)	$	4.28		($	0.84	)	$	2.47

Net income / (loss) from discontinued operations per share of common stock, diluted	($	0.11	)	$	0.05		($	0.61	)	$	0.11

Net income / (loss) from operations per share of common stock, diluted	($	1.11	)	$	4.33		($	1.45	)	$	2.58

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

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN

STOCKHOLDERS’ EQUITY (UNAUDITED)

Amounts in columns expressed in thousands

(except per share information)


	Common Stock												Accumulated			Accumulated
	Common Stock			Treasury Stock									other			other
	No. of Shares	Amount		No. of Shares	Amount			Additional Paid-in Capital		Retained Earnings			comprehensive income of continuing operations			comprehensive income of discontinued operations			Total

Balance at December 31, 2009 (as reported)	69,412	$	694	246	($	150	)	$	1,296,391	$	264,917		$	123,310		$	0		$	1,685,162

Impact of discontinued operations	0		0	0		0			0		0			(2,921	)		2,921			0
Balance at December 31, 2009 (as adjusted)	69,412		694	246		(150	)		1,296,391		264,917		$	120,389		$	2,921		$	1,685,162


Net (loss) for 2010	0		0	0		0			0		(101,360	)		0			0			(101,360	)
Foreign currency translation adjustment	0		0	0		0			0		0			(51,706	)		(4,006	)		(55,712	)
Common stock issued in connection with options	177		2	0		0			2,721		0			0			0			2,723

Common stock issued in connection with acquisitions	1,078		11	0		0			41,333		0			0			0			41,344
Balance at June 30, 2010	70,667	$	707	246	($	150	)	$	1,340,445	$	163,557		$	68,683		($	1,085	)	$	1,572,157

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

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW (UNAUDITED)

Amounts in columns expressed in thousands


	Six months ended June 30,
	2010			2009
				(as adjusted)
Cash flows from operating activities of continuing operations
Net income / (loss)	($	101,360	)	$	126,066
Adjustments to reconcile net income / (loss) to net cash provided by operating activities:
Net income / (loss) from discontinued operations		42,795			(5,597	)
Depreciation and amortization		8,389			5,626
Deferred income taxes		(20,305	)		(39,396	)
Unrealized foreign exchange / losses		82,679			29,265
Cost of debt extinguishment		14,114			0
Stock options expense		1,672			1,924
Dividends received		11,399			0
Hedge fair value revaluation		0			4,259
Equity income in affiliates		(444	)		18,852
Gain on fair value remeasurement of previously held equity interest, net of impairment		0			(151,893	)
Other non cash items		11,919			1,707
Changes in operating assets and liabilities:
Accounts receivable		149,610			107,976
Inventories		3,890			(6,666	)
Prepayments and other current assets		(4,750	)		3,215
Trade accounts payable		(42,918	)		(54,083	)
Other accrued liabilities and payables		(114,152	)		(4,764	)

Net cash provided by operating activities from continuing operations		42,538			36,491

Cash flows from investing activities of continuing operations
Investment in fixed assets		(1,306	)		(8,534	)
Proceeds from the disposal of fixed assets		0			2,124
Changes in restricted cash		481,419			0
Investment in trademarks		(6,000	)		0
Acquisitions of subsidiaries, net of cash acquired		(135,964	)		140,776

Net cash provided by investing activities from continuing operations		338,149			134,366

Cash flows from financing activities of continuing operations
Borrowings on bank loans and overdraft facility		18,568			5,505
Payment of bank loans, overdraft facility and other borrowings		(21,664	)		(58,676	)
Payment of Senior Secured Notes		(367,954	)		0
Hedge closure		0			(1,940	)
Repayment of short term capital leases		0			(1,159	)
Proceeds from short term capital leases		244			0
Transactions with equity holders		7,500			(7,876	)
Options exercised		1,976			276

Net cash (used in) financing activities from continuing operations		(361,330	)		(63,870	)


Cash flows from discontinued operations
Net cash provided by / (used in) operating activities of discontinued operations		1,625			5,638
Net cash provided by / (used in) investing activities of discontinued operations		(330	)		(85	)
Net cash provided by / (used in) financing activities of discontinued operations		(1,841	)		(3,296	)

Net cash provided by / (used in) discontinued operations		(546	)		2,257

Adjustment to reconcile the change in cash balances of discontinued operations		546			(2,257	)
Currency effect on brought forward cash balances		(20,236	)		6,984
Net Increase / (Decrease) in Cash		(879	)		113,971
Cash and cash equivalents at beginning of period		126,439			107,601

Cash and cash equivalents at end of period	$	125,560		$	221,572


Supplemental Schedule of Non-cash Investing Activities
Common stock issued in connection with investment in subsidiaries	$	41,344		$	19,047


Supplemental disclosures of cash flow information
Interest paid	$	75,051		$	19,939
Income tax paid	$	18,053		$	2,568

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

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Amounts in tables expressed in thousands, except per share information

1.	ORGANIZATION AND DESCRIPTION OF BUSINESS

Central European Distribution Corporation (“CEDC”), a Delaware corporation, and its subsidiaries (collectively referred to as “we,” “us,” “our,” or the “Company”) operate primarily in the alcohol beverage industry. The Company is Central Europe’s largest integrated spirit beverages business. The Company is also a leading vodka producer by value and volume in Poland and Russia and produces the Absolwent, Zubrowka, Bols, Parliament, Green Mark, Soplica and Zhuravli brands, among others. In addition, it produces and distributes Royal Vodka, the number one selling vodka in Hungary. As well as sales and distribution of its own branded spirits, the Company is a leading exclusive importer of wines and spirits in Poland, Russia and Hungary. As disclosed further in Note 2 and Note 5, due to the sale of its distribution business completed on August 2, 2010 the Company has presented the distribution business as a discontinued operation in these financial statements.

2.	BASIS OF PRESENTATION

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. Our Company consolidates all entities that we control by ownership of a majority voting interest.

CEDC’s subsidiaries maintain their books of account and prepare their statutory financial statements in their respective local currencies. The subsidiaries’ financial statements have been adjusted to reflect accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary to fairly present our financial condition, results of operations and cash flows for the interim periods presented have been included. Operating results for the three and six month periods ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

The balance sheet at December 31, 2009 has been derived from the audited financial statements at that date except for presentation and disclosure requirements resulting from discontinued operations described in the paragraphs below as well as the deconsolidation of Whitehall Group on the basis of requirements set forth in ASC 810 both of which resulted in retrospective application, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

The unaudited interim financial statements should be read with reference to the consolidated financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2009.

As a result of requirements set out in ASC 810, the Company changed the method of consolidation of Whitehall Group, in which the Company controls 49% of the voting interest from consolidation to the equity method of accounting. This change was applied retrospectively to all the periods presented in the financial statements. Please refer to Note 4 for details.

For the purpose of financial reporting Management analyzed the requirements of U.S. GAAP (mainly ASC 360-10 PP&E and ASC 205-20 Presentation of Financial Statements) and concluded that as of March 31, 2010, the Company’s activities met the required criteria and therefore it is necessary to present its distribution business, described below, as a component held for sale. As of June 30, 2010 there have not been any changes in that determination.

The table below presents the impact from the change in the presentation of the Company’s distribution business to discontinued operations as well as the impact of the adoption of ASC Topic 810 in relation to Whitehall Group on the Consolidated Statements of Operations and Consolidated Balance Sheet of the Company as of December 31, 2009 in comparison to information previously filed in the Company’s Form 10-K for 2009.


	December 31, 2009 (as adjusted)		Whitehall Group			Distribution business		December 31, 2009 (as reported)
Total Current Assets	$	1,567,915	$	(121,629	)	$	73,414	$	1,616,130
Total Non-Current Assets		2,846,615		13,502			2,350		2,830,763
Total Current Liabilities		1,213,170		(85,238	)		74,155		1,224,253
Total Long Term Liabilities		1,516,198		0			1,608		1,514,590
Redeemable noncontrolling interests in Whitehall Group		0		(22,888	)		0		22,888


	Three months ended June 30, 2009 (as adjusted)			Distribution business (-)			Whitehall Group (-)			Three months ended June 30, 2009 (as reported)

Net Sales	$	175,891		$	158,944		$	27,270		$	362,105
Gross Profit		91,345			17,256			11,094			119,696

Operating Income		242,630			3,244			1,350			247,224

Income before taxes, equity in net income from unconsolidated investments and noncontrolling interests in subsidiaries		263,304			2,664			2,436			268,404

Income tax (expense)		(51,663	)		(342	)		(334	)		(52,339	)
Less: Net income attributable to noncontrolling interests in subsidiaries		2,249			0			0			2,249
Less: Net income attributable to noncontrolling interests in Whitehall Group		0			0			543			543
Equity in net earnings / (losses) of affiliates		2,013			0			(1,560	)		453

Net income from continuing operations attributable to CEDC	$	211,405		$	2,322		$	0		$	213,726


Income / (loss) on discontinued operations		2,322			(2,322	)		0			0


Net income	$	213,727		$	0		$	0		$	213,726


	Six months ended June 30, 2009 (as adjusted)			Distribution business (-)			Whitehall Group (-)			Six months ended June 30, 2009 (as reported)

Net Sales	$	246,663		$	279,359		$	53,975		$	579,997
Gross Profit		124,237			35,415			21,206			180,858

Operating Income		255,006			8,061			4,463			267,530

Income / (loss) before taxes, equity in net income from unconsolidated investments and noncontrolling interests in subsidiaries		176,047			6,492			(1,951	)		180,588

Income tax benefit / (expense)		(34,588	)		(895	)		708			(34,775	)
Less: Net income attributable to noncontrolling interests in subsidiaries		2,138			0			0			2,138
Less: Net income attributable to noncontrolling interests in Whitehall Group		0			0			(358	)		(358	)
Equity in net earnings / (losses) of affiliates		(18,852	)		0			885			(17,967	)

Net income from continuing operations attributable to CEDC	$	120,469		$	5,597		$	0		$	126,066


Income / (loss) on discontinued operations		5,597			(5,597	)		0			0


Net income	$	126,066		$	0		$	0		$	126,066

3.	ACQUISITIONS

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

On April 22, 2010, in accordance with the terms the Option Agreement dated November 19, 2009, the Company exercised its right to issue to Cayman 4 and Cayman 5, in settlement of consideration owed under the Lion Option Agreement, 799,330 shares and 278,745 shares, respectively, of the Company’s common stock (the “Share Issuance”). The Company claimed the exemption from registration contained in Section 4(2) of the Securities Act of 1933, in connection with the Share Issuance as the Share Issuance was a transaction by the issuer that did not involve a public offering. The impact of the Share Issuance was to repay $45 million of the $50 million of deferred consideration recorded as a liability as of March 31, 2010.

4.	IMPACT OF ASC TOPIC 810 ON ACCOUNTING FOR WHITEHALL GROUP

In June 2009, the FASB issued new guidance on variable interest entities. ASU 2009-17, Consolidations (Topic 810) Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“VIE”), amended prior guidance requiring an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. Determining who consolidates a VIE is based on two requirements: (i) who has the power over key decisions, and (ii) who has obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. If one party has both, then that party consolidates the entity. Power is based on who controls the decisions that most significantly impact the economic activities of the entity.

Except for the amount of $7.6 million that was lent at market rates as working capital by the Company to the Whitehall Group, which was repaid in the first quarter of 2010, there were no transfers of financial assets to the VIE as the Whitehall Group is generally a self financing entity. The Company does not have any continuing involvement with transferred financial assets that allow the transferors to receive cash flows or other benefits from the assets or requires the transferors to provide cash flows or other assets in relation to the transferred financial assets.

According to the Whitehall Group shareholder’s agreement, Whitehall Group shall be under the sole effective control of its majority shareholder Mark Kaufman or one of his affiliates acting in the capacity of CEO. Mark Kaufman shall be responsible for the management and operations of Whitehall Group’s business, his actions in certain areas are, however, dependant on the consent of the board of directors.

ASU 2009-17 is effective for the Company from January 1, 2010. Due to the revision of ASC Topic 810, including the redefining of ‘control’, and because the day-to-day control over the business has been delegated to the CEO - Mark Kaufman and the list of activities for which the Company has overview is limited, the Company changed the accounting treatment for its 49% voting interest in Whitehall Group from consolidation to the equity method of accounting.

Adoption of the requirements of ASC Topic 810 resulted as of December 31, 2009 in net decrease in assets of $108 million, liabilities of $85 million and non-controlling interest of $23 million. Please refer to Note 2 for the disclosure impact of adoption of ASC Topic 810 on the consolidated financial statements of the Company as of December 31, 2009. As of June 30, 2010 we continue to hold 50% minus one vote of the voting power and 80% of the total economic shares of Whitehall.

5.	DISCONTINUED OPERATIONS

For the purpose of financial reporting we analyzed the requirements of US-GAAP (mainly ASC 360-10 PP&E and ASC 205-20 Presentation of Financial Statements) and concluded that as of March 31, 2010, the Company’s activities met the required criteria defined in these standards and therefore it is necessary to present its distribution business, described below, as a component held for sale. As of June 30, 2010 there have not been any changes in that determination.

On April 8, 2010, the Company, through its wholly owned subsidiary Carey Agri International Poland sp. z o.o. (“Carey Agri), entered into a Preliminary Agreement on Sale of Shares (the “Preliminary Agreement”) with Eurocash S.A. (“Eurocash”) pursuant to which (i) the Company agreed to sell all shares of Astor sp. z o.o., Dako-Galant Przedsiebiorstwo Handlowo Produkcyjne sp. z o.o., Damianex S.A., Delikates sp. z o.o., Miro sp. z o.o., MTC sp. z o.o., Multi-Ex S.A., Onufry S.A., Panta-Hurt sp. z o.o., Polskie Hurtownie Alkoholi sp. z o.o., Premium Distributors sp. z o.o., Przedsiebiorstwo Dystrybucji Alkoholi “Agis” S.A., Przedsiebiorstwo Handlu Spozywczego sp. z o.o. and Saol Dystrybucja sp. z o.o., representing 100% of the Company’s distribution business in Poland to Eurocash and (ii) Eurocash agreed to pay total consideration of 400 million Polish zlotys ($118 million) in cash, on a debt free, cash free basis, subject to potential price adjustments (if any) and Polish anti-trust approval (the “Total Consideration”). Under the terms of the Preliminary Agreement, the Total Consideration will be deposited into an escrow account to be released upon deletion of security by Eurocash; in any event, 75% of the Total Consideration will be released to the Company 90 days following the transaction closing date.

In addition, On April 8, 2010, the Company also entered into a Distribution Agreement with Eurocash pursuant to which Eurocash will distribute the Company’s portfolio of brands and exclusive import brands in Poland for a period of six years.

Closing of the transaction was completed on August 2, 2010.

During the six month period ended June 30, 2010 the Company recorded an impairment charge related to goodwill upon the sale of the distribution business of $28.2 million. The results of the distribution business are included in earnings from discontinued operations, net of taxes, for all periods presented. The net assets associated with the Polish distribution business, totaling approximately 400 million Polish zlotys ($118 million), were classified as assets and liabilities of discontinued operations as at June 30, 2010.

The Company will continue to generate cash flows with the distribution business after its sale to Eurocash as the Company has signed a six year agreement with Eurocash for the distribution of certain of CEDC’s portfolio of own brands and exclusive import brands in Poland. Management has concluded, however, that the significant portion of the sold distribution business was the sale of products other than CEDC’s. CEDC estimates that sales of its products through the distribution network being subject of sale will not exceed 10% of the sales of the Company, on a consolidated basis. Management does not consider the cash flows expected to be generated under the distribution agreement with Eurocash to be significant in the future. Results of discontinued operations were as follows:


	Three months ended June 30,						Six months ended June 30,
	2010			2009			2010			2009

Net sales	$	143,243		$	158,944		$	298,261		$	279,358

Earnings/(losses) from operations before taxes		(7,963	)		2,664			(14,517	)		6,492
Taxes on earnings — operations		41			(342	)		(110	)		(895	)
Goodwill Impairment		0			0			(28,168	)		0


Earnings/(losses) from discontinued operations	($	7,922	)	$	2,322		($	42,795	)	$	5,597

The following table includes the consolidated assets and liabilities of the distribution business that have been segregated and classified as assets held for sale and liabilities related to assets held for sale, as appropriate, in the consolidated condensed balance sheets as at June 30, 2010 and comparative data as at December 31, 2009. The amounts presented below were adjusted to exclude intercompany receivables and payables between the business held for sale and the Company, which were excluded from the divestiture.

The Company has taken the impairment charge of $ 28.2 million to goodwill on its distribution business in order to record the net assets at their estimated fair value.


	June 30, 2010		December 31, 2009
Cash	$	11,002	$	14,253
Trade receivables, less allowances		77,485		136,077
Inventories		59,077		104,391
Prepaid expenses and Other receivables		8,817		12,840

Total current assets		156,381		267,561

Plant and equipment, net		15,171		16,179
Goodwill		47,429		84,766
Intangible assets, net		1,133		833

Total noncurrent assets		63,733		101,778

Payables and accrued liabilities		108,451		178,902
Current portion long-term debt		10,725		15,859

Total current liabilities		119,176		194,761

Long-term debt		696		2,500
Other long term liabilities		0		320

Total noncurrent liabilities	$	696	$	2,820

6.	RESTRICTED CASH

On the balance sheet as of December 31, 2009 the Company disclosed restricted cash of $481 million that included €264 million (approximately US $381 million as of December 31, 2009) as repayment of Senior Secured Notes due 2012 to be settled in 2010 and $100 million funded into escrow and recorded as Restricted Cash for the remaining obligations under the Russian Alcohol acquisition.

On January 4, 2010 the Company completed the redemption of its Senior Secured Notes due 2012 with the final payment of all outstanding principle, accrued interest and the call premium, releasing the cash of €263.9 million (approximately $381 million) and on January 11, 2010, the Company paid $100 million to Lion to settle the Russian Alcohol acquisition.

7.	INTANGIBLE ASSETS OTHER THAN GOODWILL

The major components of intangible assets are:


	June 30, 2010			December 31, 2009
Non-amortizable intangible assets:
Trademarks	$	715,815		$	795,543
Impairment	($	18,991	)		(22,589	)

Total		696,824			772,954
Amortizable intangible assets:
Customer relationships		713			847
Less accumulated amortization		(563	)		(579	)

Total		150			268

Total intangible assets	$	696,974		$	773,222

Management considers trademarks that are indefinite-lived assets to have high or market-leader brand recognition within their market segments based on the length of time they have existed, the comparatively high volumes sold and their general market positions relative to other products in their respective market segments. These trademarks include Soplica, Zubrowka, Absolwent, Royal, Parliament, Green Mark, Zhuravli and the rights for Bols Vodka in Poland, Hungary and Russia. On February 8, 2010 the Company purchased the Urozhay brand rights for $6 million. Taking the above into consideration, as well

as the evidence provided by analyses of vodka products life cycles, market studies, competitive and environmental trends, we believes that these brands will generate cash flows for an indefinite period of time, and that the useful lives of these brands are therefore indefinite. In accordance with ASC Topic 350-30, intangible assets with an indefinite life are not amortized but are reviewed at least annually for impairment.

8.	EQUITY METHOD INVESTMENTS IN AFFILIATES

We hold the following investments in unconsolidated affiliates:


		Carrying Value
	Type of affiliate	June 30, 2010		December 31, 2009
Whitehall Group	Equity-Accounted Affiliate		230,067		244,504

	Total Carrying value	$	230,067	$	244,504

The Company has effective voting interests of 49% in Whitehall Group and 25% in Moet Hennessy JV that is included in Whitehall Group.

The summarized financial information of investments are shown in the below table with the balance sheet financial information reflecting Whitehall Group and its joint venture with Moet Hennessy consolidated under the equity method as of December 31, 2009. The results from operations for the six months ended June 30, 2009 include the results of Whitehall Group and its joint venture together with the results of Russian Alcohol that were consolidated under the equity method until April 24, 2009.


	Total June 30, 2010		Total December 31, 2009
Current assets	$	71,256	$	129,737
Noncurrent assets		93,310		93,137
Current liabilities		38,560		86,067
Noncurrent liabilities		0		7,635


	Total Three months ended June 30,				Total Six months ended June 30,
	2010		2009		2010		2009
Net sales	$	32,894	$	27,270	$	56,544	$	134,766
Gross profit		12,529		11,094		19,800		63,375
Income/(loss) from continuing operations		2,825		2,507		556		(42,914	)
Net income/(loss)		2,825		2,507		556		(42,914	)
Net income/(loss) attributable to the registrant		2,265		2,013		444		(18,852	)

9.	COMPREHENSIVE INCOME/(LOSS)

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

As of June 30, 2010, our functional currencies (Polish zloty, Russian ruble and Hungarian forint) used to translate the balance sheet weakened against the U.S. dollar as compared to the exchange rate as of December 31, 2009, and as a result a comprehensive loss was recognized.

10.

EARNINGS PER SHARE

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


	Three months ended June 30,					Six months ended June 30,
	2010			2009		2010			2009
Basic:
Net income / (loss) from continuing operations attributable to CEDC shareholders	($	70,074	)	$	211,405	($	58,565	)	$	120,469
Income / (loss) on discontinued operations		(7,922	)		2,322		(42,795	)		5,597

Net income/(loss)	($	77,996	)	$	213,727	($	101,360	)	$	126,066


Weighted average shares of common stock outstanding (used to calculate basic EPS)		70,135			49,213		69,667			48,568
Net effect of dilutive employee stock options based on the treasury stock method		286			217		345			127

Weighted average shares of common stock outstanding (used to calculate diluted EPS)		70,421			49,430		70,013			48,695

Net income / (loss) per common share - basic:
Continuing operations	($	1.00	)	$	4.30	($	0.84	)	$	2.48
Discontinued operations	($	0.11	)	$	0.05	($	0.61	)	$	0.12

	($	1.11	)	$	4.35	($	1.45	)	$	2.60


Net income / (loss) per common share - diluted:
Continuing operations	($	1.00	)	$	4.28	($	0.84	)	$	2.47
Discontinued operations	($	0.11	)	$	0.05	($	0.61	)	$	0.11

	($	1.11	)	$	4.33	($	1.45	)	$	2.58

Employee stock options granted have been included in the above calculations of diluted earnings per share since the exercise price is less than the average market price of the common stock during the three and six month periods ended June 30, 2010 and 2009. In addition there is no adjustment to fully diluted shares related to the Convertible Senior Notes as the average market price was below the conversion price for the periods.

11.

BORROWINGS

Bank Facilities

As of June 30, 2010, $36.8 million remained available under the Company’s overdraft facilities. These overdraft facilities are renewed on an annual basis.

As of June 30, 2010, the Company had utilized approximately $70.8 million of a multipurpose credit line agreement in connection with the 2007 tender offer in Poland to purchase the remaining outstanding shares of Polmos Bialystok S.A. The Company’s obligations under the credit line agreement are guaranteed through promissory notes by certain subsidiaries of the Company and are secured by 33.95% of the share capital of Polmos Bialystok S.A. The indebtedness under the credit line agreement of $53.1 million matures on February 24, 2011 and of $17.7 million on August 11, 2010.

On April 24, 2008, the Company signed a credit agreement with Bank Zachodni WBK SA in Poland to provide up to $50 million of financing to be used to finance a portion of the Parliament and Whitehall Group acquisitions, as well as general working capital needs of the Company. The agreement provides for a $30 million five year amortizing term facility and a one year $20 million short term facility with annual renewal. In the second quarter of 2009 this facility was converted into Polish zlotys. The maturity of the term loan was extended to May 2013 and the maturity of the short term facility was extended to May 2011. The loan is guaranteed by the Company, Bols Sp. z o.o, a wholly owned subsidiary of the Company (“Bols”) and certain other subsidiaries of the Company, and is secured by all of the capital stock of Bols and 60% of the capital stock of Copecresto.

On July 2, 2008, the Company entered into a Facility Agreement with Bank Handlowy w Warszawie S.A., which provided for a term loan facility of $40 million, of which $26.7 million was outstanding as at June 30, 2010. On July 2, 2010 the Company repaid $6.7 million of this loan. The term loan matures on July 4, 2011 and is guaranteed by CEDC, Carey Agri and certain other subsidiaries of the Company and is secured by all of the shares of capital stock of Carey Agri and subsequently will be further secured by shares of capital stock in certain other subsidiaries of CEDC.

Senior Secured Notes due 2012

In connection with the Bols and Polmos Bialystok acquisitions, on July 25, 2005 the Company completed the issuance of €325 million 8% Senior Secured Notes due 2012 (the “2012 Notes”), of which approximately €245 million remained payable as of December 31, 2009. On January 4, 2010 the Company completed the redemption of its Senior Secured Notes due 2012 with the final payment of all outstanding principal, accrued interest and call premium, releasing the cash of €263.9 million (approximately $380.4 million), recorded in Restricted Cash at year end, from the trustee thus relieving the Company of all of its remaining obligations under the Senior Secured Notes indenture.

As of December 31, 2009, the Company had accrued interest of $12.2 million respectively related to the 2012 Notes that was paid together with the principal amount and 4% premium on early repayment on January 4, 2010. Total obligations under the 2012 Notes are shown net of deferred finance costs, amortized over the life of the borrowings using the effective interest rate method as shown in the table below:


	June 30, 2010		December 31, 2009
Senior Secured Notes due 2012	$	0	$	365,989
Fair value bond mark to market		0		(301	)
Unamortized portion of closed hedges		0		(2,000	)
Unamortized issuance costs		0		(4,745	)


Total	$	0	$	358,943

Convertible Senior Notes due 2013

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

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


	June 30, 2010			December 31, 2009

Convertible Senior Notes	$	310,000		$	312,711
Unamortized issuance costs		(3,650	)		(4,209	)
Debt discount related to Convertible Senior Notes		(10,638	)		(12,665	)


Total	$	295,712		$	295,837

Senior Secured Notes due 2016

On December 2, 2009, the Company issued and sold $380 million 9.125% Senior Secured Notes due 2016 and €380 million 8.875% Senior Secured Notes due 2016 (collectively referred to as the “Senior Secured Notes due 2016”) in an offering to institutional investors that is exempt from registration under the U.S. Securities Act of 1933. The Company used a portion of the net proceeds from the Senior Secured Notes due 2016 to redeem the Company’s outstanding 8% Senior Secured Notes due 2012, having an aggregate principal amount of €245.4 million on January 4, 2010. The remainder of the net proceeds from the

Senior Secured Notes due 2016 was used to (i) purchase Lion Capital’s remaining equity interest in Russian Alcohol by exercising the Lion Option (described below) and the Co-Investor Option, pursuant to the terms and conditions of the Lion Option Agreement (described below) and the Co-Investor Option Agreement, respectively (ii) repay all amounts outstanding under Russian Alcohol credit facilities and (iii) repay certain other indebtedness.

As of June 30, 2010 and December 31, 2009 the Company had accrued interest of $6.3 million and $6.6 million respectively related to the Senior Secured Notes due 2016, with the next coupon due for payment on December 1, 2010. As of December 31, 2009, accrued interest related to the Senior Secured Notes due 2016 is presented together with the Senior Secured Notes balance. Total obligations under the Senior Secured Notes due 2016 are shown net of deferred finance costs, amortized over the life of the borrowings using the effective interest rate method as shown in the table below:


	June 30, 2010			December 31, 2009
Senior Secured Notes due 2016	$	845,021		$	934,410
Unamortized issuance costs		(22,022	)		(24,780	)


Total	$	822,999		$	909,630

Total borrowings as disclosed in the financial statements are:


	June 30, 2010		December 31, 2009

Short term bank loans and overdraft facilities for working capital	$	51,999	$	60,000
Short term obligations under Senior Secured Notes		0		358,943
Short term bank loans for share tender		70,796		21,053

Total short term bank loans and utilized overdraft facilities		122,795		439,996

Long term bank loans for share tender		0		63,158
Long term obligations under Senior Secured Notes		822,999		909,630
Long term obligations under Convertible Senior Notes		295,712		295,837
Other total long term debt, less current maturities		29,969		42,885


Total debt	$	1,271,475	$	1,751,506


	June 30, 2010
Principal repayments for the following years
2010	$	31,213
2011		107,608
2012		5,578
2013		304,078
2014 and beyond		822,998


Total	$	1,271,475

12.

INVENTORIES

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


	June 30, 2010		December 31, 2009

Raw materials and supplies	$	29,791	$	31,220
In-process inventories		3,020		2,914
Finished goods and goods for resale		46,377		58,082

Total	$	79,188	$	92,216

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

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

13.

INCOME TAXES

The Company operates in several tax jurisdictions primarily: the United States of America, Poland, Hungary and Russia. All subsidiaries file their own corporate tax returns as well as account for their own deferred tax assets and liabilities. The Company does not file a tax return in Delaware based upon its consolidated income, but does file a return in Delaware based on the statement of operations for transactions occurring in the United States of America. For income taxes accounted for on an interim basis, the Company estimates the annual effective tax rate and applies this rate to its pre-tax US GAAP income/(loss), unless a discrete event occurs that requires additional consideration.

The Company is currently recognizing tax loss carry forwards in the United States at a 35% tax rate, which has the effect of reducing the overall effective tax rate below the 19% Polish statutory rate.

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

14.

OPERATING SEGMENTS

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


	Segment Net Revenues
	Three months ended June 30,				Six months ended June 30,

	2010		2009		2010		2009
Segment:
Poland	$	52,394	$	57,348	$	100,832	$	104,347
Russia		117,595		110,585		212,923		127,262
Hungary		5,608		7,958		11,648		15,054

Total Net Sales	$	175,597	$	175,891	$	325,403	$	246,663


	Operating Profit
	Three months ended June 30,						Six months ended June 30,
	2010			2009			2010			2009
Segment
Poland before fair value adjustments	$	15,881		$	17,048		$	25,921		$	27,937
Gain on remeasurement of previously held equity interests		0			225,605			0			225,605
Impairment charge		0			(20,309	)		0			(20,309	)

Poland after fair value adjustments		15,881			222,344			25,921			233,233
Russia		26,806			20,722			42,973			23,868
Hungary		722			1,229			1,800			1,836
Corporate Overhead
General corporate overhead		(1,370	)		(706	)		(2,542	)		(2,008	)
Option Expense		(813	)		(959	)		(1,672	)		(1,923	)

Total Operating Profit	$	41,226		$	242,630		$	66,480		$	255,006


	Identifiable Operating Assets
	June 30, 2010		December 31, 2009

Segment:
Poland	$	1,014,975	$	1,348,131
Russia		2,116,482		2,269,098
Hungary		20,106		38,643
Corporate		13,945		389,319

Total Identifiable Assets	$	3,165,508	$	4,045,191

	Goodwill
	June 30, 2010		December 31, 2009

Segment:
Poland	$	338,329	$	402,433
Russia		1,032,481		1,074,314
Hungary		6,158		7,325
Corporate		0		0


Total Goodwill	$	1,376,968	$	1,484,072

15.

INTEREST INCOME / (EXPENSE)

For the three and six months ended June 30, 2010 and 2009 respectively, the following items are included in Interest income / (expense):


	Three months ended June 30,						Six months ended June 30,
	2010			2009			2010			2009

Interest income	$	1,067		$	3,418		$	2,372		$	6,811
Interest expense		(27,490	)		(24,207	)		(54,471	)		(37,472	)

Total interest (expense), net	($	26,423	)	($	20,789	)	($	52,099	)	($	30,661	)

16.

OTHER NON OPERATING INCOME / (EXPENSE)

For the three and six months ended June 30, 2010 and 2009, the following items are included in Other Non Operating Income / (Expense):


	Three months ended June 30,						Six months ended June 30,
	2010			2009			2010			2009

Early redemption call premium	$	0		$	0		($	14,115	)	$	0
Write-off of unamortized offering costs		0			0			(4,076	)		0
Dividend received		7,642			0			7,642			0
Other gains		(1,004	)		(8,838	)		(803	)		(8,257	)

Total other non operating income / (expense), net	$	6,638		($	8,838	)	($	11,352	)	($	8,257	)

17.

FAIR VALUE MEASUREMENTS

Financial Instruments and Their Fair Values

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

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

•

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

•

Short term securities—This consists of foreign exchange options to protect against foreign exchange risk of payments related to term loans denominated in U.S. dollars in 2009. As of June 30, 2009 the change in fair value of options, based on the mark to market valuation, is recorded as a gain or loss in the consolidated statement of operations. As of June 30, 2010 the Company was not part of any hedge agreements.

•

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

The carrying amounts of financial instruments as shown in the table below approximate their fair values.


	June 30, 2010
	Carrying Amount

Cash and cash equivalents	$	125,560
Equity method investment in affiliates		230,067
Bank loans, overdraft facilities and long-term debt		1,271,475
Current assets of discontinued operations		156,381
Non-current assets of discontinued operations		63,733
Current liabilities of discontinued operations		119,176
Non-current liabilities of discontinued operations		696

18.

STOCK OPTION PLANS AND WARRANTS

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

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

ASC Topic 718 requires the recognition of compensation expense in the Consolidated Condensed Statements of Operations related to the fair value of employee share-based options. Determining the fair value of share-based awards at the grant date requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise, the associated volatility and the expected dividends. Judgment is also required in estimating the amount of share-based awards expected to be forfeited prior to vesting. If actual forfeitures differ significantly from these estimates, share-based compensation expense could be materially impacted.

A summary of the Company’s stock option and restricted stock units activity, and related information for the six month period ended June 30, 2010 is as follows:


Total Options	Number of Options		Weighted- Average Exercise Price

Outstanding at January 1, 2010	1,481,550		$	27.85
Granted	82,000		$	28.70
Exercised	(65,025	)	$	18.66
Forfeited	0		$	0

Outstanding at March 31, 2010	1,498,525		$	28.29
Exercisable at March 31, 2010	1,156,900		$	28.04

Outstanding at April 1, 2010	1,498,525		$	28.29
Granted	0		$	0
Exercised	(47,125	)	$	16.16
Forfeited	0		$	0

Outstanding at June 30, 2010	1,451,400		$	28.68
Exercisable at June 30, 2010	1,168,775		$	30.18


Nonvested restricted stock units	Number of Restricted Stock Units		Weighted- Average Grant Date Fair Value

Nonvested at January 1, 2010	79,074		$	44.63
Granted	5,512		$	31.39
Vested	0		$	0
Forfeited	(1,681	)	$	41.35

Nonvested at March 31, 2010	82,905		$	43.85

Nonvested at April 1, 2010	82,905		$	43.85
Granted	18,135		$	28.13
Vested	(18,700	)	$	34.51
Forfeited	(12,059	)	$	39.26

Nonvested at June 30, 2010	70,281		$	43.07


Nonvested restricted stock	Number of Restricted Stock	Weighted- Average Grant Date Fair Value

Nonvested at January 1, 2010	0	$	0
Granted	36,835	$	28.41
Vested	0	$	0
Forfeited	0	$	0

Nonvested at March 31, 2010	36,835	$	28.41

Nonvested at April 1, 2010	36,835	$	28.41
Granted	9,166	$	35.59
Vested	0	$	0
Forfeited	0	$	0

Nonvested at June 30, 2010	46,001	$	29.84

During the six months ended June 30, 2010, the range of exercise prices for outstanding options was $1.13 to $60.92. During 2010, the weighted average remaining contractual life of options outstanding will be 5.1 years. Exercise prices for options exercisable as of June 30, 2010 ranged from $1.13 to $60.92. The Company has also granted 18,135 restricted stock units and 9,166 restricted stock to its employees at an average price of $28.13 and $35.59 respectively, during the second quarter of 2010.

The Company has issued stock options to employees under stock based compensation plans. Stock options are issued at the current market price, subject to a vesting period, which varies from one to three years. As of June 30, 2010, the Company has not changed the terms of any outstanding awards.

During the six months ended June 30, 2010, the Company recognized compensation cost of $0.81 million and a related deferred tax asset of $0.28 million.

As of June 30, 2010, there was $3.7 million of total unrecognized compensation cost related to non-vested stock options, restricted stock units and restricted stock granted under the Plan. The costs are expected to be recognized over a weighted average period of 30 months through 2010-2013.

Total cash received from exercise of options during the six months ended June 30, 2010 amounted to $2.0 million.

For the six month period ended June 30, 2010, the compensation expense related to all options was calculated based on the fair value of each option grant using a binomial distribution model. The Company has never paid cash dividends and does not currently have plans to pay cash dividends, and thus has assumed a 0% dividend yield. Expected volatilities are based on an average of implied and historical volatility projected over the remaining term of the options. The expected life of stock options is estimated based on historical data on exercise of stock options, post-vesting forfeitures and other factors to estimate the expected term of the stock options granted. The risk-free interest rates are derived from the U.S. Treasury yield curve in effect on the date of grant for instruments with a remaining term similar to the expected life of the options. In addition, the Company applies an expected forfeiture rate when amortizing stock-based compensation expenses. The estimate of the forfeiture rates is based primarily upon historical experience of employee turnover. As individual grant awards become fully vested, stock-based compensation expense is adjusted to recognize actual forfeitures. The following weighted-average assumptions were used in the calculation of fair value:


	Six months ended June 30,
	2010	2009
Fair Value	$12.57	$8.07
Dividend Yield	0%	0%
Expected Volatility	68.2%	47.3% - 80.4%
Weighted Average Volatility	68.2%	57.6%
Risk Free Interest Rate	0.3% - 0.5%	0.4%
Expected Life of Options from Grant	3.2	3.2

19.

COMMITMENTS AND CONTINGENT LIABILITIES

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

The Polmos Bialystok Acquisition

As part of the Share Purchase Agreement related to the October 2005 Polmos Bialystok Acquisition, the Company is required to ensure that Polmos Bialystok will make investments of at least 77.5 million Polish zloty during the six years after the acquisition was consummated. As of June 30, 2010, the Company had invested 72.3 million Polish zloty (approximately $25.2 million) in Polmos Bialystok.

The Whitehall Acquisition

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

In the event that the Company is required to refinance or retire the indebtedness described above, and/or acquires the capital stock of Whitehall Group, such transactions would be financed through additional sources of debt or equity funding. We cannot provide assurances as to whether or on what terms such funding would be available.

Supply Contracts

The Company has various agreements covering its sources of supply, which, in some cases, may be terminated by either party on relatively short notice. Thus, there is a risk that a portion of the Company’s supply of products could be curtailed at any time.

20.

RELATED PARTY TRANSACTIONS

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

During the six months of 2010, the Company made sales to a restaurant which is partially owned by the Chief Executive Officer of the Company. All sales were made on normal commercial terms, and total sales for the six months ended June 30, 2010 and 2009 were approximately $33,400 and $51,000, respectively.

21.

SUBSEQUENT EVENTS

On August 2, 2010 the Company closed the sale of 100% of its wholesale business in Poland to Eurocash SA for a purchase price of 400 million PLN in cash, on a debt free, cash free basis, subject to potential price adjustments (to be finalized within two weeks from closing). The Company intends to use the proceeds from this sale to pay down existing debt. The Company has also executed a six year agreement with Eurocash for the distribution of CEDC’s portfolio of own brands and exclusive import brands in Poland. The distribution agreement contains key provisions such as minimum inventory levels, commercial terms including pricing and discounts, and other promotional programs.

The subject of the transaction includes the sale of the fourteen companies which comprise the Company’s wholesale business: Astor, Dako-Galant, Damianex, Delikates, Miro, MTC, Multi-Ex, Onufry, Panta-Hurt, PHA, Premium Distributors, Agis, PHS, and Saol.

22.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This ASU amends disclosure requirements with respect to the credit quality of financing receivables and the related allowance for credit losses. Entities will be required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. Disclosures to be made as of the end of a reporting period will be effective for the Company’s reporting period ending December 31, 2010; the disclosures about activity that occurs during a reporting period will be effective for the Company’s reporting period ending March 31, 2011. Since this ASU will only amend disclosure requirements, not current accounting practice, the Company does not anticipate that adoption of this ASU will have any impact on the Company’s balance sheets, statements of income or statements of cash flows.

23.

OFF-BALANCE SHEET ARRANGEMENTS

None

ITEM 2.

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

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

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

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

•

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

•

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

•

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

•

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

•

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

•

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

•

other statements that are not historical facts.

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

We urge you to read and carefully consider the items of the other reports that we have filed with or furnished to the SEC for a more complete discussion of the factors and risks that could affect us and our future performance and the industry in which we operate, including the risk factors described in the Company’s Annual Report on Form 10-K filed with the SEC on March 1, 2010. In light of these risks, uncertainties and assumptions, the forward-looking events described in this report may not occur as described, or at all.

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

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

Overview

The Company is the world’s largest vodka producer and Central and Eastern Europe’s largest integrated spirit beverages business with its primary operations in Poland, Russia and Hungary. During 2009 the Company continued its investment strategy in Russia by restructuring its purchase agreement with Lion Capital in April, 2009 and subsequently buying out the remainder of Russian Alcohol in December, 2009. As a result, the Company began to consolidate the full activities of Russian Alcohol starting from the second quarter of 2009. Additionally the Company purchased the remaining minority interests in Parliament in Russia, thus acquiring full ownership of its vodka producing assets and brands.

In connection with the completion of these investments the Company completed three capital raising initiatives comprised of two public equity offerings, with net proceeds of approximately $491 million, and a notes offering with net proceeds of approximately $930 million. The primary use of the equity proceeds was to fund the remaining buyout of Parliament and to partially fund the remaining buyout of Russian Alcohol. The proceeds from the notes offering were used to (i) fund a portion of the buyout of Russian Alcohol, (ii) to refinance approximately $380.4 million of the Company’s outstanding Senior Secured Notes due in 2012, and (iii) to refinance approximately $264 million of debt in place in Russian Alcohol. As a result of the notes offering the Company has extended the maturities of a significant portion of its debt to 2016 and settled its payment obligations to Lion Capital for the purchase of Russian Alcohol.

Significant factors affecting our consolidated results of operations

Effect of Acquisitions of Production Subsidiaries

During 2008 and 2009, the Company continued its acquisition strategy outside of Poland and Hungary with its investments into the production and importation of alcoholic beverages in Russia, completing a number of acquisitions and investments, as described below, all of which have had an impact on our consolidated results of operations beginning in the periods in which we first acquired an interest in the relevant entities.

Changes in Accounting Treatment

As described in Note 2 of the Consolidated Financial Statements, in June 2009, the FASB issued new guidance on variable interest entities. ASU 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, amends current guidance requiring an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. ASU 2009-17 is effective for the Company from January 1, 2010. As a result of adoption ASC Topic 810, the Company changed from consolidation to the equity method of accounting for its 49% voting interest in Whitehall Group on May 23, 2008. As a result of requirements set out in ASC 810, the Company changed the method of consolidation of Whitehall Group, in which the Company controls 49% of voting interest from consolidation to the equity method of accounting. This change was applied retrospectively to all the periods presented in the financial statements. Adoption of requirements of ASC Topic 810 resulted as of December 31, 2009 in net decrease in assets of $108 million, liabilities of $85 million and non-controlling interest of $23 million. The following management discussion and analysis is prepared on the basis of the adjusted balances for 2009 and therefore does not include the consolidated results of operations for the Whitehall Group.

Also as described in Footnote number 4 of the Consolidated Financial Statements, on April 8, 2010 the Company entered into a binding agreement to sell the shares of its Polish alcohol distribution business and based upon the application of ASC 205-20, has presented these companies as a held for sale asset. As a result, the sales and costs of the Polish distribution business are no longer reflected in the results of operations above net income from continuing operations in 2010. For comparability purposes this has been applied retroactively to 2009 and is reflected in the below management discussion and analysis.

The Russian Alcohol Acquisition

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

As a result of these agreements, the Company assessed Russian Alcohol as a variable interest entity, with the Company being the primary beneficiary. Pursuant to this change, the Company began to consolidate Russian Alcohol as of the second quarter of 2009 and recorded a non-controlling interest of 9.4%, representing equity not held by the Company or Lion Capital. From the accounting perspective, the Company treated the acquisition of Russian Alcohol equity interests held by Lion Capital as if this acquisition had happened on April 24, 2009. As of this date CEDC recorded at fair value all future payments due under these agreements as a liability. The total present value of deferred consideration as of April 24, 2009, amounted to $447.2 million and was determined using a 14.5% discount rate. The present value of the liability was amortized over the period of time ending on the date the last payment is made which was initially expected to be in 2013, with recognition of a non cash interest expense every quarter in the statement of operations. The discount amortization charge for the period from April 24, 2009 to December 31, 2009 amounted to $38.5 million.

On December 9, 2009 the Company accelerated the terms set up in the Lion Option Agreement and the Co-Investor Option Agreement, each dated April 24, 2009, and completed the Lion Option and the Co-Investor Option, respectively, thereby purchasing the remaining indirect equity interests in Cayman 6, less the sole voting share of Cayman 6, comprising the remaining equity interest in Russian Alcohol that was not owned by the Company, from affiliates of Lion Capital.

On January 20, 2010, after the receipt of antimonopoly clearances for the acquisition from the FAS and the Antimonopoly Committee of the Ukraine, the Company purchased the sole voting share of Cayman 6 from an affiliate of Lion Capital and thereby acquired control of Russian Alcohol. The Company began consolidating all profit and loss results for Russian Alcohol beginning April 1, 2009.

During 2009 and continuing this year, we have been active in integrating the recently acquired production companies into our existing operations. The acquisition and integration of these businesses into our operations have had a significant effect on our results of operations. As discussed below, these acquisitions have impacted our net sales, cost of goods sold, operating profit and equity earnings from affiliates.

Effect of Debt Refinancing

In December 2009, the Company issued new euro and U.S. dollar Senior Secured Notes due in 2016 with net proceeds of approximately $930 million. Of these proceeds approximately $380.4 million was used to redeem our previously outstanding Senior Secured Notes due in 2012. Notice of redemption was given in December, 2009 and the proceeds were funded to the trustee, however the actual repayment of the notes did not take place until January, 2010. Therefore, as at December 31, 2009, the full amounts of the Senior Secured Notes due 2012 remained as a short term liability and the cash funded to the trustee was on the balance sheet as restricted cash. Additionally as a result of this the Company recognized interest expense in December, 2009 for both the new and old note issuances.

In the process of refinancing the debt of Russian Alcohol through the proceeds of the 2016 Notes, the Company recognized in 2009 a one-time charge of approximately $13.9 million related to the write-off of capitalized financing cost and net charge of $3 million related to the closure of hedges associated with the prior financing. These charges are reflected in Other Financial Expenses.

As these notes were funded in U.S. dollars and euro’s and lent to Polish zloty and Russian ruble reporting entities, the Company is exposed to exchange rate movements as described in the following section.

Effect of Exchange Rate and Interest Rate Fluctuations

Substantially all of Company’s operating cash flows and assets are denominated in Polish zloty, Russian ruble and Hungarian forint. This means that the Company is exposed to translation movements both on its balance sheet and statement of operations. The impact on working capital items is demonstrated on the cash flow statement as the movement in exchange on cash and cash equivalents. The impact on the statement of operations is by the movement of the average exchange rate used to restate the statement of operations from Polish zloty, Russian ruble and Hungarian forint to U.S. dollars. The amounts shown as exchange rate gains or losses on the face of the statement of operations relate only to realized gains or losses on transactions that are not denominated in Polish zloty, Russian ruble or Hungarian forint.

Because the Company’s reporting currency is the U.S. dollar, the translation effects of fluctuations in the exchange rate of our functional currencies have impacted the Company’s financial condition and results of operations and have affected the comparability of our results between financial periods.

The Company also has borrowings including its Convertible Notes due 2013 and Senior Secured Notes 2016 that are denominated in U.S. dollars and euro’s, which have been lent to its operations where the functional currency is the Polish zloty and Russian ruble. The effect of having debt denominated in currencies other than the Company’s functional currencies is to increase or decrease the value of the Company’s liabilities on that debt in terms of the Company’s functional currencies when those functional currencies depreciate or appreciate in value, respectively. As a result of this, the Company is exposed to gains and losses on the re-measurement of these liabilities. The table below summarizes the pre-tax impact of a one percent movement in each of the exchange rate which could result in a significant impact in the results of the Company’s operations.


Exchange Rate	Value of notional amount	Pre-tax impact of a 1% movement in exchange rate
USD-Polish zloty	$426 million	$4.3 million gain/loss
USD-Russian ruble	$264 million	$2.6 million gain/loss
EUR-Polish zloty	€380 million or approximately $465 million	$4.6 million gain/loss

Results of Operations:

Three months ended June 30, 2010 compared to three months ended June 30, 2009

A summary of the Company’s operating performance (expressed in thousands except per share amounts) is presented below.


	Three months ended
	June 30, 2010			June 30, 2009
				(as adjusted)
Sales	$	379,874		$	375,450
Excise taxes		(204,277	)		(199,559	)
Net Sales		175,597			175,891
Cost of goods sold		87,119			84,546

Gross Profit		88,478			91,345


Operating expenses		47,252			54,011
Gain on remeasurement of previously held equity interests		0			(225,605	)
Impairment charge		0			20,309

Operating Income		41,226			242,630


Non operating income / (expense), net
Interest (expense), net		(26,423	)		(20,789	)
Other financial income / (expense), net		(111,698	)		61,532
Amortization of deferred charges		0			(11,231	)
Other non operating income / (expense), net		6,638			(8,838	)

Income / (loss) before taxes, equity in net income from unconsolidated investments and noncontrolling interests in subsidiaries		(90,257	)		263,304

Income tax benefit / (expense)		17,918			(51,663	)
Less: Net income attributable to noncontrolling interests in subsidiaries		0			2,249
Equity in net earnings / (losses) of affiliates		2,265			2,013

Net income /(loss) from continuing operations attributable to CEDC	($	70,074	)	$	211,405


Discontinued operations
Income / (loss) from operations of distribution business		(7,963	)		2,664
Income tax (expense)		41			(342	)

Income / (loss) on discontinued operations		(7,922	)		2,322

Net income / (loss)		(77,996	)	$	213,727


Net income / (loss) from continuing operations per share of common stock, basic	($	1.00	)	$	4.30

Net income / (loss) from discontinued operations per share of common stock, basic	($	0.11	)	$	0.05

Net income / (loss) from operations per share of common stock, basic	($	1.11	)	$	4.35
Net income / (loss) from continuing operations per share of common stock, diluted	($	1.00	)	$	4.28

Net income / (loss) from discontinued operations per share of common stock, diluted	($	0.11	)	$	0.05

Net income / (loss) from operations per share of common stock, diluted	($	1.11	)	$	4.33

Net Sales

Net sales represent total sales net of all customer rebates, excise tax on production and exclusive imports and value added tax. Total net sales decreased by approximately 0.2%, or $0.3 million, from $175.9 million for the three months ended June 30, 2009 to $175.6 million for the three months ended June 30, 2010. Our business split by segment, which represents our primary geographic locations of operations, Poland, Russia and Hungary, is shown below:


	Segment Net Sales Three months ended June 30,
	2010		2009
Segment
Poland	$	52,394	$	57,348
Russia		117,595		110,585
Hungary		5,608		7,958

Total Net Sales	$	175,597	$	175,891

Sales for Poland decreased by $4.9 million from $57.3 million for the three months ending June 30, 2009 to $52.4 million for the three months ending June 30, 2010. This decrease was driven mainly by a decline in year on year sales of $7.0 million which was driven by the overall soft economic environment and lower consumer spending. The Company believes that the vodka market in Poland was adversely impacted by a number of factors, primarily the tragic accident involving the death of the Polish President followed by a few weeks of mourning, massive flooding which took place in the Southern part of Poland and record high temperatures beginning in June. This decrease was partially offset by strengthening of the Polish zloty against the U.S. dollar which resulted in an increase of approximately $2.0 million of sales in U.S. dollar terms. The reduced sales volume of domestic vodka in Poland was, also partially offset with growth of the Company’s import and export portfolio.

Sales for Russia increased by $7.0 million from $110.6 million for the three months ending June 30, 2009 to $117.6 million for the three months ending June 30, 2010. This increase was driven a combination of the strengthening of the Russian ruble against the U.S. dollar which accounted for approximately $6.4 million of the increase and the organic growth of approximately $0.6 million. The Company has begun to see more robust demand from the consumer in its core market of Russia with volumes up in vodka and imports. The bulk of the growth in demand for vodka was still coming from a lower price point as compared to prior year, resulting in lower gross margins, but the Company believes pricing seems to have stabilized. Also the Company saw Parliament Vodka distribution gains, post integration with the Russian Alcohol Group, in the second quarter with Parliament vodka up 14% in volume. The Company has also seen continued strong interest from the vodka consumer in Russia for the new mainstream/economy brands that was launched last fall and is still seeing continued new distribution gains for these brands. The core economy brand in Russia, Yamskaya, is ranked as one of the fastest growing brands in Russia today and is expected to achieve over three million nine liter cases in 2010.

The Hungarian sales decline was driven mainly by the soft consumer environment and an excise tax increase on January 1, 2010.

Gross Profit

Total gross profit decreased by approximately 3.1%, or $2.8 million, to $88.5 million for the three months ended June 30, 2010, from $91.3 million for the three months ended June 30, 2009, reflecting the decrease in gross profit margins percentage in the three months ended June 30, 2010. Gross margin decreased from 51.9% of net sales for the three months ended June 30, 2009 to 50.4% of net sales for the three months ended June 30, 2010. The primary drivers of this drop were lower margins generated in Russia with the growth of vodka with lower price points in the value and lower mainstream sector being greater than that in the sub-premium category as described above.

Operating Expenses

Operating expenses consist of selling, general and administrative, or “S,G&A” expenses, advertising expenses, non-production depreciation and amortization, and provision for bad debts. Total operating expenses increased by approximately $198.6 million, from net revenues of $151.3 million for the three months ended June 30, 2009 to net expenses of $47.3 million for the three months ended June 30, 2010. This increase resulted primarily from the consolidation of the results of the Russian Alcohol Group, from which the Company recognized a one-time gain in the three month period ended June 30, 2009, amounting to $225.6 million in operating income based on the remeasurement of previously held equity interests in RAG to fair value, which was partially offset by an impairment charge of $20.3 million. For comparability of costs between periods, operating expenses, after excluding these fair value adjustments shown separately in the table below, as a percent of net sales decreased from 30.7% for the three months ended June 30, 2009 to 26.9% for the three months ended June 30, 2010. Operating expenses net of fair value adjustments decreased by $6.7 million, from $54.0 million for the three months ended June 30, 2009 to $47.3 million for the three months ended June 30, 2010. Additionally, the 2010 cost base was decreased by approximately $9.7 million resulting from savings mainly in Russia and Poland offset by strengthening of the Polish zloty and Russian ruble against the U.S. dollar which resulted in an increase of approximately $3.0 million of sales in U.S. dollar terms. The table below sets forth the items of operating expenses.


	Three Months Ended June 30,
	2010		2009
	($ in thousands)
S,G&A	$	39,912	$	43,571
Marketing		5,376		8,466
Depreciation and amortization		1,964		1,974

Operating expense before fair value adjustments	$	47,252	$	54,011
Gain on remeasurement of previously held equity interests		0		(225,605	)
Impairment charge		0		20,309

Total operating expense	$	47,252	$	(151,285	)

S,G&A consists of salaries, warehousing and transportation costs, administrative expenses and bad debt expense. S,G&A expenses decreased by $3.7 million, from $43.6 million for the three months ended June 30, 2009 to $39.9 million for the three months ended June 30, 2010. The change in total SG&A was primarily caused by the factors mentioned above, namely impact of foreign exchange rates lowered by cost savings initiatives.

Depreciation and amortization remained at similar level of $2.0 million for the three months ended June 30, 2009 and 2010.

Operating Income

Total operating income decreased by approximately 83.0%, or $201.4 million, from $242.6 million for the three months ended June 30, 2009 to $41.2 million for the three months ended June 30, 2010, primarily driven by the consolidation of the results of the Russian Alcohol Group, from which the Company recognized a one-time gain in the three month period ended June 30, 2009, amounting to $225.6 million in operating income based on the remeasurement of previously held equity interests in RAG to fair value, which was partially offset by an impairment charge of $20.3 million. Although the product mix has had a slight negative impact on our gross margin percentages as described above this has been offset by a declining operating expenses resulting in operating profit margin increase from 21.2% to 23.5%, excluding the impact of the gain and the impairment described above, as a percent of net sales. This was driven by continued cost cutting programs in Poland as well as the cost savings from the integration of Parliament and Russian Alcohol in Russia. The table below summarizes the segmental split of operating income.


	Operating Income Three months ended June 30,
	2010			2009
Segment
Poland before fair value adjustments	$	15,881		$	17,048
Gain on remeasurement of previously held equity interests		0			225,605
Impairment charge		0			(20,309	)

Poland after fair value adjustments		15,881			222,344
Russia		26,806			20,722
Hungary		722			1,229
Corporate Overhead
General corporate overhead		(1,370	)		(706	)
Option Expense		(813	)		(959	)

Total Operating Income	$	41,226		$	242,630

Total operating income in Poland decreased by $206.5 million mainly driven by the consolidation of the results of the Russian Alcohol Group, from which the Company recognized a one-time gain in the three month period ended June 30, 2009, amounting to $225.6 million in operating income based on the remeasurement of previously held equity interests in RAG to fair value, which was partially offset by an impairment charge of $20.3 million. Excluding fair value adjustments operating income in Poland decreased by $1.1 million from $17.0 million to $15.9 million mainly due to lower sales and margins of $3.3 million offset by cost savings of $1.6 million and foreign exchange differences of $0.6 million.

The operating income in Russia increased by $6.1 million, driven by cost savings of $11.5 million and the appreciation of the Russian Ruble of $1.2 million for the three months ending June 30, 2010. These increases we partially offset by lower margins of $3.6 million and restructuring costs of $3.0 million.

Non Operating Income and Expenses

Total interest expense increased by approximately 26.9%, or $5.6 million, from $20.8 million for the three months ended June 30, 2009 to $26.4 million for the three months ended June 30, 2010. This increase is mainly a result of the additional interest from Senior Secured Notes due 2016. The incremental borrowings were used primarily to finance the remaining buy out of Russian Alcohol which was completed in January 2010.

The Company recognized $111.7 million of unrealized foreign exchange rate losses in the three months ended June 30, 2010, primarily related to the impact of movements in exchange rates on our U.S. dollar and euro denominated liabilities, as compared to $61.5 million of gains in the three months ended June 30, 2009. This loss resulted from the devaluation of the Polish Zloty and Russian Ruble against the U.S. dollar and Euro.

Income Tax

Our effective tax rate for the three months ending June 30, 2010 was 19.9%, which is driven by the blended statutory tax rates rate of 19% in Poland and 20% in Russia.

Equity in Net Earnings

Equity in net earnings for the three months ending June 30, 2010 include Company’s proportional share of net income from its investments in the Whitehall Group.

Six months ended June 30, 2010 compared to six months ended June 30, 2009

A summary of the Company’s operating performance (expressed in thousands except per share amounts) is presented below.


	Six months ended
	June 30, 2010			June 30, 2009
				(as adjusted)
Sales	$	710,768		$	559,622
Excise taxes		(385,365	)		(312,959	)
Net Sales		325,403			246,663
Cost of goods sold		162,793			122,426

Gross Profit		162,610			124,237


Operating expenses		96,130			74,527
Gain on remeasurement of previously held equity interests		0			(225,605	)
Impairment charge		0			20,309

Operating Income		66,480			255,006


Non operating income / (expense), net
Interest (expense), net		(52,099	)		(30,661	)
Other financial income / (expense), net		(76,786	)		(28,810	)
Amortization of deferred charges		0			(11,231	)
Other non operating income / (expense), net		(11,352	)		(8,257	)

Income / (loss) before taxes, equity in net income from unconsolidated investments and noncontrolling interests in subsidiaries		(73,757	)		176,047

Income tax benefit / (expense)		14,748			(34,588	)
Less: Net income attributable to noncontrolling interests in subsidiaries		0			2,138
Equity in net earnings / (losses) of affiliates		444			(18,852	)

Net income /(loss) from continuing operations attributable to CEDC	($	58,565	)	$	120,469


Discontinued operations
Income / (loss) from operations of distribution business (including impairment charge of $28.2 million)		(42,685	)		6,492
Income tax (expense)		(110	)		(895	)

Income / (loss) on discontinued operations		(42,795	)		5,597

Net income / (loss)	($	101,360	)	$	126,066


Net income / (loss) from continuing operations per share of common stock, basic	($	0.84	)	$	2.48

Net income / (loss) from discontinued operations per share of common stock, basic	($	0.61	)	$	0.12

Net income / (loss) from operations per share of common stock, basic	($	1.45	)	$	2.60
Net income / (loss) from continuing operations per share of common stock, diluted	($	0.84	)	$	2.47

Net income / (loss) from discontinued operations per share of common stock, diluted	($	0.61	)	$	0.11

Net income / (loss) from operations per share of common stock, diluted	($	1.45	)	$	2.58

Net Sales

Total net sales increased by approximately 31.9%, or $78.7 million, from $246.7 million for the six months ended June 30, 2009 to $325.4 million for the six months ended June 30, 2010. The increase was driven primarily by the consolidation of Russian Alcohol during the full period in 2010, as it was not consolidated in the first quarter of 2009, resulting in an increase of $80 million offset by reduction of sales from our vodka production units to our distribution companies and a decline in year on year sales was driven by the overall soft economic environment and lower consumer spending. Our business split by segment, which represents our primary geographic locations of operations, Poland, Russia and Hungary, is shown below:


	Segment Net Sales six months ended June 30,
	2010		2009
Segment
Poland	$	100,832	$	104,347
Russia		212,923		127,262
Hungary		11,648		15,054

Total Net Sales	$	325,403	$	246,663

Sales for Poland decreased by $3.5 million from $104.3 million for the six months ending June 30, 2009 to $100.8 million for the six months ending June 30, 2010. This decrease was driven mainly by reduction of sales from our vodka production units to our distribution companies and a decline in year on year sales of $14.8 million as well as lower sales volume driven by the overall soft economic environment and lower consumer spending. The Company believes that the vodka market in Poland was adversely impacted by a number of factors, primarily the tragic accident involving the death of the Polish President followed by a few weeks of mourning, massive flooding which took place in the Southern part of Poland and record high temperatures beginning in June. The reduced sales volume of domestic vodka in Poland was also partially offset with growth of the Company’s import and export portfolio. This decrease was partially offset by strengthening of the Polish zloty against the U.S. dollar which resulted in an increase of approximately $11.3 million of sales in U.S. dollar terms. In anticipation of the sale of this business we have reduced inventory levels during the first quarter of 2009, in the distribution companies to be more in line with our new distribution agreement with Eurocash.

Sales for Russia increased by $85.6 million from $127.3 million for the six months ending June 30, 2009 to $212.9 million for the six months ending June 30, 2010. This increase was driven a combination of the strengthening of the Russian ruble against the U.S. dollar which accounted for approximately $8.7 million of the increase and the organic growth of approximately $80.0 million due to the consolidation of Russian Alcohol which was completed in April 2009, which accounted for approximately $80.0 million of the increase. The remaining difference represents a decline in year on year sales of $3.1 million which was due to lower sales in the first quarter of 2010 driven by the overall economic slowdown that took place in Russia with consumers continuing to spend less and trade down to lower priced products. The Company has begun to see more robust demand from the consumer in its core market of Russia with volumes up in vodka and imports. The bulk of the growth in demand for vodka was still coming from a lower price point as compared to prior year, resulting in lower gross margins, but the Company believes pricing seems to have stabilized. Also the Company saw Parliament Vodka distribution gains, post integration with the Russian Alcohol Group, in the second quarter with Parliament vodka up 14% in volume. The Company has also seen continued strong interest from the vodka consumer in Russia for the new mainstream/economy brands that was launched last fall and is still seeing continued new distribution gains for these brands. The core economy brand in Russia, Yamskaya, is ranked as one of the fastest growing brands in Russia today and is expected to achieve over three million nine liter cases in 2010.

The Hungarian sales decline was driven mainly by the soft consumer environment and an excise tax increase on January 1, 2010.

Gross Profit

Total gross profit increased by approximately 30.9%, or $38.4 million, to $162.6 million for the six months ended June 30, 2010, from $124.2 million for the six months ended June 30, 2009. The primary factor resulting in the increase was the inclusion of the results of Russian Alcohol. Gross margin as a percent of sales remained relatively constant in both period with gross margins as percent of sales of 50.4% for the six months ended June 30, 2009 and 50.0% for the six months ended June 30, 2010.

Operating Expenses

Total operating expenses increased by approximately $226.9 million, from net revenues of $130.8 million for the three months ended June 30, 2009 to net expenses of $96.1 million for the three months ended June 30, 2010. This increase resulted primarily from the consolidation of the results of the Russian Alcohol Group, from which the Company recognized a one-time gain in the three month period ended June 30, 2009, amounting to $225.6 million in operating income based on the remeasurement of previously held equity interests in RAG to fair value, which was partially offset by an impairment charge of $20.3 million. For comparability of costs between periods, operating expenses, after excluding these fair value adjustments shown separately in the table below, as a percent of net sales decreased from 30.2% for the six months ended June 30, 2009 to 29.5% for the six months ended June 30, 2010. Operating expenses net of fair value adjustments increased by $26.1 million, from $74.5 million for the six months ended June 30, 2009 to $96.1 million for the six months ended June 30, 2010. The increase was mainly due to consolidation of Russian Alcohol starting from Q2 2009 partially offset by cost savings initiatives. The table below sets forth the items of operating expenses.


	Six Months Ended June 30,
	2010		2009
	($ in thousands)
S,G&A	$	81,725	$	57,923
Marketing		10,152		12,871
Depreciation and amortization		4,253		3,733

Operating expense before fair value adjustments	$	96,130	$	74,527
Gain on remeasurement of previously held equity interests		0		(225,605	)
Impairment charge		0		20,309

Total operating expense	$	96,130	$	(130,769	)

S,G&A increased by approximately 41.1%, or $23.8 million, from $57.9 million for the six months ended June 30, 2009 to $81.7 million for the six months ended June 30, 2010. The change in total SG&A was primarily caused by the factors mentioned above, namely the consolidation of Russian Alcohol and the impact of foreign exchange rates lowered by cost savings initiatives.

Depreciation and amortization increased by approximately 16.2%, or $0.6 million, from $3.7 million for the six months ended June 30, 2009 to $4.3 million for the six months ended June 30, 2010.

Operating Income

Total operating income decreased by approximately 73.9%, or $188.5 million, from $255.0 million for the six months ended June 30, 2009 to $66.5 million for the six months ended June 30, 2010, primarily driven by the consolidation of the results of Russian Alcohol, from which the Company recognized a one-time gain in the three month period ended June 30, 2009, amounting to $225.6 million in operating income based on the remeasurement of previously held equity interests in Russian Alcohol to fair value, which was partially offset by an impairment charge of $20.3 million. Although the product mix has had a slight negative impact on our gross margin percentages as described above this has been offset by a declining operating expenses resulting in operating profit margin increase from 20.2% to 20.4%, excluding the impact of the gain and the impairment described above, as a percent of net sales. This was driven by continued cost cutting programs in Poland as well as the cost savings from the integration of Parliament and Russian Alcohol in Russia. The table below summarizes the segmental split of operating income.


	Operating Income six months ended June 30,
	2010			2009
Segment
Poland before fair value adjustments	$	25,921		$	27,937
Gain on remeasurement of previously held equity interests		0			225,605
Impairment charge		0			(20,309	)

Poland after fair value adjustments		25,921			233,233
Russia		42,973			23,868
Hungary		1,800			1,836
Corporate Overhead
General corporate overhead		(2,542	)		(2,008	)
Option Expense		(1,672	)		(1,923	)

Total Operating Income	$	66,480		$	255,006

Total operating income in Poland decreased by approximately 88.9%, or $207.3 million, from $233.2 million for the six months ended June 30, 2009 to $25.9 million for the six months ended June 30, 2010 driven mainly by the consolidation of the results of Russian Alcohol, from which the Company recognized a one-time gain in the three month period ended June 30, 2009, amounting to $225.6 million in operating income based on the remeasurement of previously held equity interests in Russian Alcohol to fair value, which was partially offset by an impairment charge of $20.3 million. Excluding fair value adjustments operating income in Poland decreased by $2.0 million from $27.9 million to $25.9 million mainly due to lower sales and margins offset by cost savings and foreign exchange differences.

The operating income in Russia increased by $19.1 million, driven mainly by the restructuring and integration of Russian Alcohol, cost savings and the appreciation of the Russian ruble. These increases we partially offset by lower sales volume as described above, lower margins and restructuring costs.

In Hungary operating income margins remained constant with lower sales, as described above.

Non Operating Income and Expenses

Total interest expense increased by approximately 69.7%, or $21.4 million, from $30.7 million for the six months ended June 30, 2009 to $52.1 million for the six months ended June 30, 2010. This increase is mainly a result of the additional interest on Senior Secured Notes due. The incremental borrowings were used primarily to finance the remaining buy out of Russian Alcohol which was completed in January 2010.

The Company recognized $76.8 million of unrealized foreign exchange rate losses in the six months ended June 30, 2010, primarily related to the impact of movements in exchange rates on our U.S. dollar and euro denominated liabilities, as compared to $28.8 million in the six months ended June 30, 2009. This loss resulted from the devaluation of the Polish zloty and Russian ruble against the U.S. dollar and Euro.

Income Tax

Our effective tax rate for the six months ending June 30, 2010 was 20.0%, which is driven by the blended statutory tax rates rate of 19% in Poland and 20% in Russia.

Equity in Net Earnings

Equity in net earnings for the six months ending June 30, 2010 include Company’s proportional share of net income from its investments in the Whitehall Group.

Liquidity and Capital Resources

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

Financing Arrangements

Existing Credit Facilities

As of June 30, 2010, $36.8 million remained available under the Company’s overdraft facilities. These overdraft facilities are renewed on an annual basis.

Senior Secured Notes due 2012

In connection with the Bols and Polmos Bialystok acquisitions, on July 25, 2005 the Company completed the issuance of €325 million 8% Senior Secured Notes due 2012 (the “2012 Notes”), of which approximately €245 million remained payable as of December 31, 2009. On January 4, 2010 the Company completed the redemption of its Senior Secured Notes due 2012 with the final payment of all outstanding principal, accrued interest and call premium, when the trustee released the cash of €263.9 million (approximately $380.4 million), recorded in Restricted Cash at year end, thus the relieving the Company of all of its remaining obligations under the Senior Secured Notes indenture.

On January 4, 2010 the Company completed the redemption of its Senior Secured Notes due 2012 with the final payment of all outstanding principle, accrued interest and call premium, releasing the cash of €263.9 million (approximately $380.4 million).

Convertible Senior Notes due 2013

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

Senior Secured Notes due 2016

On December 2, 2009, the Company issued and sold $380 million 9.125% Senior Secured Notes due 2016 and €380 million 8.875% Senior Secured Notes due 2016 in an offering to institutional investors that is exempt from registration under the U.S. Securities Act of 1933. The Company used a portion of the net proceeds from the Senior Secured Notes due 2016 to redeem the Company’s outstanding 8% Senior Secured Notes due 2012. The remainder of the net proceeds from the Senior Secured Notes due

2016 was used to (i) purchase Lion Capital’s remaining equity interest in Russian Alcohol by exercising the Lion Option and the Co-Investor Option, pursuant to the terms and conditions of the Lion Option Agreement and the Co-Investor Option Agreement, respectively (ii) repay all amounts outstanding under Russian Alcohol credit facilities and (iii) repay certain other indebtedness.

Statement of Liquidity and Capital Resources

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


	Six months ended June 30, 2010			Six months ended June 30, 2009
	($ in thousands)
Cash flow from operating activities	$	42,538		$	36,491
Cash flow from investing activities	$	338,149		$	134,366
Cash flow used in financing activities	$	(361,330	)	$	(63,870	)

Net cash flow from operating activities

Net cash flow from operating activities represents net cash from operations and interest. Net cash provided by operating activities for the six months ended June 30, 2010 was $42.5 million as compared to $36.5 million for the six months ended June 30, 2009. Included in cash flow from operating activities for the six months period ended June 30, 2010, are interest payments made both in January 2010, on the retirement of the Senior Secured Notes of $26.6 million including $12.5 million of interest and $14.1 million of early repayment call premium as well as interest paid in June 2010 on the Senior Secured Notes due 2016 of $38.1 million. Thus in effect the Company incurred a double cash charge of interest during this period. Working capital movements included $8.3 million of cash outflows for the six months ended June 30, 2010 as compared to $45.7 million of cash inflows for the six months ended June 30, 2009.

Net cash flow used in investing activities

Net cash flows used in investing activities represent net cash used to acquire subsidiaries and fixed assets as well as the release of cash from escrow. Net cash inflows for the six months ended June 30, 2010 was $338.1 million. In December 2009, the Company funded into escrow a portion of the proceeds from the 2016 Senior Note issued to be used to repay the 2012 Senior Notes as well as the remaining cash portion of the deferred consideration to Lion Capital related to the acquisition of Russian Alcohol. These funds were then released in January 2010 resulting in a cash inflow from restricted cash of $481.3 million. The $135.9 million of cash out flow primarily represents the remaining cash obligations paid as a result of the final buy out of Russian Alcohol completed in January 2010, of which $100 million came from the release of restricted cash. Additionally $6 million of cash was used to purchase the Urozhay trade mark in Russia. Net cash inflows for the six months ended June 30, 2009 is due to the one-time consolidation of the opening cash balance of Russian Alcohol of $140.8 million.

Net cash flow from financing activities

Net cash flow from financing activities represents cash used for servicing indebtedness, borrowings under credit facilities and cash inflows from private placements and exercise of options. Net cash used in financing activities was $361.3 million for the six months ended June 30, 2010 as compared to $63.9 million for the six months ended June 30, 2009. The primary uses in the six months ended June 30, 2010 were repayment of 2012 Senior Notes for $367.9 million which includes $353.8 million of principle and 4% early redemption premium of $14.1 million. The cash inflow of $7.5 million represents the loan repayment from the Whitehall Group, an equity investment of the Company.

The Company’s Future Liquidity and Capital Resources

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

Whitehall Acquisition

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

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

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

Effects of Inflation and Foreign Currency Movements

Inflation in Poland is projected at 2.5% for 2010, compared to actual inflation of 3.5% in 2009. In Russia and Hungary respectively, the projected inflation for 2010 is at 6.5% and 4.7%, compared to actual inflation of 8.8% and 5.6% in 2009.

The Company has borrowings including its Convertible Notes due 2013 and Senior Secured Notes due 2016 that are denominated in U.S. dollars and euros, which have been lent to its operations where the functional currency is the Polish zloty and Russian ruble. The effect of having debt denominated in currencies other than the Company’s functional currencies is to increase or decrease the value of the Company’s liabilities on that debt in terms of the Company’s functional currencies when those functional currencies depreciate or appreciate in value respectively. As a result of this, the Company is exposed to gains and losses on the re-measurement of these liabilities. The table below summarizes the pre-tax impact of a one percent movement in each of the exchange rate which could result in a significant impact in the results of the Company’s operations.


Exchange Rate	Value of notional amount	Pre-tax impact of a 1% movement in exchange rate
USD-Polish zloty	$426 million	$4.3 million gain/loss
USD-Russian ruble	$264 million	$2.6 million gain/loss
EUR-Polish zloty	€380 million or approximately $465 million	$4.6 million gain/loss

Critical Accounting Policies and Estimates

General

The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of net sales, expenses, assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions.

Revenue Recognition

Revenues of the Company include sales of its own produced spirit brands, imported wine, beer and spirit brands as well as other third party alcoholic products purchased locally in Poland, the sale of each of these revenues streams are all processed and accounted for in the same manner. For all of its sources of revenue, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery of product has occurred, the sales price charged is fixed or determinable and collectability is

reasonably assured. This generally means that revenue is recognized when title to the products are transferred to our customers. In particular, title usually transfers upon shipment to or receipt at our customers’ locations, as determined by the specific sales terms of the transactions.

Sales are stated net of sales tax (VAT) and reflect reductions attributable to consideration given to customers in various customer incentive programs, including pricing discounts on single transactions, volume discounts, promotional listing fees and advertising allowances, cash discounts and rebates. Net sales revenue includes excise tax except in the case where the sales are made from the production unit, in which case it is recorded net of excise tax.

Goodwill and Intangibles

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

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

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

The Company tested goodwill for impairment Domestic Distribution that disclosed as discontinued operations in the financial statements as at March 31, 2010. In order to present the discontinued operations at fair value the Company recognized in the three month period ended March 31, 2010 an impairment charge of $28.2 million that was included in the results of the discontinued operations presented in the condensed consolidated statement of operations for the six months period ended June 30, 2010. No further impairment charge was recognized in the three month period ended June 30, 2010.

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

Accounting for Business Combinations

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

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

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

Derivative Instruments

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

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

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

Share Based Payments

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

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

See Note 18 to our Consolidated Financial Statements for more information regarding stock-based compensation.

Recently Issued Accounting Pronouncements

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our operations are conducted primarily in Poland and Russia and our functional currencies are primarily the Polish zloty, Hungarian forint and Russian ruble and the reporting currency is the U.S. dollar. Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, inventories, bank loans, overdraft facilities and long-term debt. All of the monetary assets represented by these financial instruments are located in Poland, Russia and Hungary. Consequently, they are subject to currency translation movements when reporting in U.S. dollars.

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

The Company has borrowings including its Convertible Notes due 2013 and Senior Secured Notes 2016 that are denominated in U.S. dollars and euros, which have been lent to its operations where the functional currency is the Polish zloty and Russian ruble. The effect of having debt denominated in currencies other than the Company’s functional currencies is to increase or decrease the value of the Company’s liabilities on that debt in terms of the Company’s functional currencies when those functional currencies depreciate or appreciate in value respectively. As a result of this, the Company is exposed to gains and losses on the re-measurement of these liabilities. The table below summarizes the pre-tax impact of a one percent movement in each of the exchange rate which could result in a significant impact in the results of the Company’s operations.


Exchange Rate	Value of notional amount	Pre-tax impact of a 1% movement in exchange rate
USD-Polish zloty	$426 million	$	4.3 million gain/loss
USD-Russian ruble	$264 million	$	2.6 million gain/loss
EUR-Polish zloty	€380 million or approximately $465 million	$	4.6 million gain/loss

ITEM 4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934) refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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

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

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

PART II. OTHER INFORMATION

ITEM 6.

EXHIBITS

(a)

Exhibits


Exhibit Number		Exhibit Description

3.1		Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Periodic Report on Form 8-K filed with the SEC on April 30, 2010 and incorporated herein by reference).

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

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

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

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

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

101*		The following financial statements from Central European Distribution Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, filed on August 9, 2010, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Income, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Cash Flows, (iv) Notes to Consolidated Financial Statements, tagged as blocks of text.

*	Filed herewith

SIGNATURES

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


	CENTRAL EUROPEAN DISTRIBUTION CORPORATION
	(registrant)

Date: August 9, 2010	By:	/s/ William V. Carey
		William V. Carey
		President and Chief Executive Officer

Date: August 9, 2010	By:	/s/ Chris Biedermann
		Chris Biedermann
		Vice President and Chief Financial Officer

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