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Alliance One International, Inc. and Subsidiaries
CONDENSED STATEMENTS OF CONSOLIDATED STOCKHOLDERS’ EQUITY
(Unaudited)
		Attributable to Alliance One International, Inc.
				Accumulated Other Comprehensive Income (Loss)
(in thousands, except per share amounts)		Common Stock	Retained Deficit	Currency Translation Adjustment	Pensions, Net of Tax	Noncontrolling Interests	Total Stockholders’ Equity
Balance, March 31, 2008		$462,798	$(258,395)	$   5,154	$   1,910	$ 3,623	$ 215,090
Net income		-	132,558	-	-	679	133,237
Restricted stock surrendered		(284)	-	-	-	-	(284)
Employee stock option related		40	-	-	-	-	40
Stock-based compensation		5,641	-	-	-	-	5,641
Conversion of foreign currency
	financial statements	-	-	(7,024)	-	(183)	(7,207)
Adjustment in pensions		-	-	-	(13,165)	-	(13,165)
Adoption of EITF 06-10		-	(2,572)	-	-	-	(2,572)
Balance, March 31, 2009		$468,195	$(128,409)	$  (1,870)	$ (11,255)	$ 4,119	$ 330,780
Net income		-	14,477	-	-	399	14,876
Restricted stock surrendered		(26)	-	-	-	-	(26)
Stock-based compensation		1,924	-	-	-	-	1,924
Conversion of foreign currency
	financial statements	-	-	3,245	-	22	3,267
Balance, June 30, 2009		$470,093	$(113,932)	$   1,375	$ (11,255)	$ 4,540	$ 350,821
See notes to consolidated financial statements.

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Alliance One International, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended June 30, 2009 and 2008 (Unaudited)
(in thousands)		June 30,    2009		June 30,   2008
Operating activities
Net income		$  14,876		$  15,431
Adjustments to reconcile net income to net cash used by operating             activities of continuing operations
Net income from discontinued operations, net of tax		-		(509)
Depreciation and amortization		7,342		7,134
Debt amortization/interest		1,852		941
Loss on foreign currency transactions		2,499		2,278
Changes in operating assets and liabilities, net:
Trade and other receivables		(4,565)		29,695
Inventories and advances to suppliers		(242,732)		(258,993)
Payables and accrued expenses		(14,080)		(12,381)
Advances from customers		77,577		82,986
Current derivative asset		(11,957)		(6,061)
Deferred items		11,753		(8,460)
Prepaid expenses		(7,725)		(3,798)
Other operating assets and liabilities		3,720		(3,642)
Other, net		2,072		(4,037)
Net cash used by operating activities of continuing operations		(159,368)		(159,416)
Net cash provided by operating activities of discontinued operations		-		576
Net cash used by operating activities		(159,368)		(158,840)
Investing activities
Purchases of property and equipment		(3,103)		(4,185)
Proceeds on sale of property and equipment		1,535		3,772
Foreign currency derivatives		(5,026)		-
Other, net		1,136		(1,386)
Net cash used by investing activities of continuing operations		(5,458)		(1,799)
Net cash provided by investing activities of discontinued operations		-		-
Net cash used by investing activities		(5,458)		(1,799)
Financing activities
Repayment of short-term demand notes		-		(42,277)
Proceeds from short-term demand notes		-		9,014
Net change in short-term borrowings		112,160		259,836
Proceeds from long-term borrowings		130,000		11,307
Repayment of long-term borrowings		(95,781)		(9,390)
Debt issuance/retirement cost		(2,268)		(43)
Net cash provided by financing activities		144,111		228,447
Effect of exchange rate changes on cash		680		(480)
(Decrease) increase in cash and cash equivalents		(20,035)		67,328
Cash and cash equivalents at beginning of period		87,665		112,214
Cash and cash equivalents at end of period		$ 67,630		$ 179,542
See notes to condensed consolidated financial statements

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

1.  BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Alliance One International, Inc. (the “Company”) is principally engaged in purchasing, processing, storing, and selling leaf tobacco in North America, Africa, Europe, South America and Asia.

Basis of Presentation

The accounts of the Company and its consolidated subsidiaries are included in the condensed consolidated financial statements after elimination of intercompany accounts and transactions.  The Company uses the cost or equity method of accounting for its investments in affiliates that are owned 50% or less.  Because of the seasonal nature of the Company’s business, the results of operations for any fiscal quarter will not necessarily be indicative of results to be expected for other quarters or a full fiscal year.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of financial position, results of operation and cash flows at the dates and for the periods presented have been included.  As part of the preparation of the condensed consolidated financial statements, the Company performed an evaluation of subsequent events occurring after the condensed consolidated balance sheet date of June 30, 2009, through August 4, 2009, the date the condensed consolidated financial statements were issued.  The unaudited information included in this Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2009.  The year ended March 31, 2009 is sometimes referred to herein as fiscal year 2009.

          Certain prior year amounts have been reclassified to conform with the current year’s presentation, due to the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS 160”), discussed below.

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

New Accounting Standards

Recently Adopted Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141R, Business Combinations (“SFAS No. 141R”). This standard significantly changed the accounting for business acquisitions both during the period of the acquisition and in subsequent periods. Among the more significant changes in the accounting for acquisitions are the following: (a) transaction costs are generally expensed, (b) in-process research and development is accounted for as an asset, with the cost recognized as the research and development is realized or abandoned, (c) contingencies, including contingent consideration, are generally recorded  at fair value with subsequent adjustments recognized in operations, and (d) decreases in valuation allowances on acquired deferred tax assets are recognized in operations.  The Company adopted SFAS No. 141R on April 1, 2009 with no material impact to the Company’s financial condition or results of operations.

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

          In December 2007, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 07-1, Accounting for Collaborative Arrangements (“EITF 07-1”). The objective of EITF 07-1 is to define collaborative arrangements and to establish reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. The Company adopted EITF 07-1 on April 1, 2009 with no material impact to the Company’s financial condition or results of operations.

          In April 2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”).  FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets.  The intent of FSP FAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141 (revised 2007), Business Combinations, and other U.S. GAAP. The Company adopted FSP FAS 142-3 on April 1, 2009 with no material impact to the Company’s financial condition or results of operations.

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Alliance One International, Inc. and Subsidiaries

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

New Accounting Standards (Continued)

Recently Adopted Accounting Pronouncements (Continued)

          In June 2008, the FASB ratified EITF Issue No. 08-3, Accounting by Lessees for Maintenance Deposits (“EITF 08-3”). The objective of EITF 08-3 is to clarify how a lessee shall account for a maintenance deposit under an arrangement accounted for as a lease. The Company adopted EITF 08-3 on April 1, 2009 with no material impact to the Company’s financial condition or results of operations.

          In June 2008, the FASB ratified EITF Issue No. 07-5, Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF 07-5”). The objective of EITF 07-5 is to provide guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity's own stock. The Company adopted EITF 07-5 on April 1, 2009 with no material impact to the Company’s financial condition or results of operations.

          In November 2008, the FASB ratified EITF Issue No. 08-6, Equity Method Investment Accounting Considerations (“EITF 08-6”). The objective of EITF 08-6 is to clarify the accounting for certain transactions and impairment considerations involving equity method investments. The Company adopted EITF 08-6 on April 1, 2009 with no material impact to the Company’s financial condition or results of operations.

          In April 2009, the FASB issued FSP FAS 141(R)-3, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (“FSP”). This FSP amends and clarifies FASB Statement No. 141R, Business Combinations, to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The Company adopted the FSP on April 1, 2009 with no material impact to the Company’s financial condition or results of operations.

          In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP”).  This FSP essentially expands the disclosure about fair value of financial instruments that were previously required only annually to also be required for interim period reporting. In addition, the FSP requires certain additional disclosures regarding the methods and significant assumptions used to estimate the fair value of financial instruments. The Company adopted the FSP on April 1, 2009 with no material impact to the Company’s financial condition or results of operations.

          In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS No. 165”). The objective of SFAS No. 165 is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, SFAS No. 165 sets forth: (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The Company adopted SFAS No. 165 on April 1, 2009 with no material impact to the Company’s financial condition or results of operations.

Recent Accounting Pronouncements Not Yet Adopted

In December 2008, the FASB issued FSP FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets (“FSP”).  This FSP amends FASB Statement No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits, to provide guidance on employers’ disclosures about plan assets of a defined benefit pension or other postretirement plan. The FSP also includes a technical amendment to Statement 132(R) that requires a nonpublic entity to disclose net periodic benefit cost for each annual period for which a statement of income is prepared. The disclosures about plan assets required by this FSP are required for the Company in its fiscal year ending March 31, 2010.  The Company is evaluating the impact of this FSP on its financial condition and results of operations.

          In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140 (“SFAS No. 166”). The objective of SFAS No. 166 is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. SFAS No. 166 will be effective for the Company on April 1, 2010. The Company is evaluating the impact of SFAS No. 166 on its financial condition and results of operations.

          In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”). The objective of SFAS No. 167 is to amend certain requirements of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. SFAS No. 167 will be effective for the Company on April 1, 2010. The Company is evaluating the impact of SFAS No. 167 on its financial condition and results of operations.

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Alliance One International, Inc. and Subsidiaries

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

Recent Accounting Pronouncements Not Yet Adopted (Continued)

          In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 (“SFAS No. 168”). The objective of SFAS No. 168 is to replace Statement 162 and to establish the FASB Accounting Standards Codification (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS No. 168 will be effective for the Company on July 1, 2009. The Company does not expect SFAS No. 168 to have a material impact on its financial condition and results of operations.

Equity and Cost Method Investments

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

Taxes Collected from Customers

Certain subsidiaries are subject to value added taxes on local sales.  These amounts have been included in sales and were $5,041 and $13,470 for the three months ended June 30, 2009 and 2008, respectively.

2.  INCOME TAXES

FIN 48

As of June 30, 2009, the Company’s unrecognized tax benefits totaled $22,673, all of which would impact the Company’s effective tax rate if recognized.  

         The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense.  As of June 30, 2009, accrued interest and penalties totaled $30,058 and $14,081, respectively.

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

         Other than the expiration of an applicable statute of limitations pertaining to an international unrecognized tax benefit for the amount of $5,048, the Company does not foresee any reasonably possible significant changes in the unrecognized tax benefits in the next twelve months but must acknowledge circumstances can change due to unexpected developments in the law and interpretation of the law.

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

Provision for the Three Months Ended June 30, 2009

The effective tax rate used for the three months ended June 30, 2009 was 45.2% compared to 10.7% for the three months ended June 30, 2008.  The effective tax rates for these periods are based on the current estimate of full year results including the effect of taxes related to specific events which are recorded in the interim period in which they occur.  The Company expects the tax rate for the year ended March 31, 2010 to be 38.4% after absorption of discrete items.

         For the three months ended June 30, 2009, the Company recorded a specific event adjustment expense of $2,565 bringing the effective tax rate estimated for the three months of 35.7% to 45.2%.  This specific event adjustment expense relates primarily to additional income tax, interest, and exchange losses related to liabilities for unrecognized tax benefits, net exchange gains on income tax accounts and a tax adjustment related to the foreign currency exchange account.  For the three months ended June 30, 2008, the Company recorded a specific event adjustment benefit of $1,280 bringing the effective tax rate estimated for the three months of 3.1% to10.7%.  This specific event adjustment relates primarily to additional interest on liabilities for unrecognized tax benefits and net exchange losses on income tax accounts.  The significant difference in the estimated effective tax rate for the three months ended June 30, 2009 from the statutory rate is primarily due to expenses related to exchange effects.  During the three months ended June 30, 2009, the Company accrued an additional $8,676 of interest and exchange losses related to liabilities for unrecognized tax benefits.

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Alliance One International, Inc. and Subsidiaries

3.  RESTRUCTURING AND ASSET IMPAIRMENT CHARGES

The Company records other restructuring and impairment charges as they occur in the normal course of business in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”) and SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS No. 146”).  The following table summarizes the restructuring and asset impairment charges recorded in the Company’s reporting segments during the three months ended June 30, 2009 and 2008:

	Three Months Ended
	June 30,
	2009		2008
Restructuring and Asset Impairment Charges
Employee separation and other cash charges:
Beginning balance	$    103		$     2,360
Period charges:
Severance charges	-		569
Other cash charges (recovery)	-		(74)
Total period charges	-		495
Payments through June 30	(103)		(1,704)
Ending balance June 30	$         -		$     1,151
Total restructuring and asset impairment charges for the period	$         -		$        495

         The following table summarizes the employee separation and other cash charges recorded in the Company’s South America and Other Regions segments during the three months ended June 30, 2009 and 2008:

	Three Months Ended
	June 30,
Employee Separation and Other Cash Charges	2009		2008
Beginning balance:	$   103		$ 2,360
South America	-		134
Other regions	103		2,226
Period charges:	$       -		$    495
South America	-		-
Other regions	-		495
Payments through June 30:	$  (103)		$(1,704)
South America	-		-
Other regions	(103)		(1,704)
Ending balance June 30:	$       -		$ 1,151
South America	-		134
Other regions	-		1,017

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

Assets Held for Sale

As of June 30, 2009, the Company reported assets held for sale of $4,947, related primarily to production and administrative facilities in Greece, Kyrgyzstan, Malawi and Brazil, that are being actively marketed by the Company.

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Alliance One International, Inc. and Subsidiaries

4.  GOODWILL AND INTANGIBLES

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

          The Company has no intangible assets with indefinite useful lives.  It does have other intangible assets which are being amortized.  The following table summarizes the changes in the Company’s goodwill and other intangibles for the three months ended June 30, 2009 and 2008.

          Goodwill and Intangible Asset Rollforward:

          Estimated Intangible Asset Amortization Expense:

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Alliance One International, Inc. and Subsidiaries

5.  DISCONTINUED OPERATIONS

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

Summary of Results of Operations

Discontinued Operations, Other Regions Segment       

Three Months Ended June 30, 2008	Mozambique	Wool	Total
Sales and other revenues	$          -	$         -	$          -
Income from discontinued operations, net of tax:
Income from discontinued operations, before tax	$       86	$    423	$     509
Income tax	-	-	-
Income from discontinued operations, net of tax	$       86	$    423	$     509

Summary of Assets and Liabilities

Discontinued Operations, Other Regions Segment    

June 30, 2008	Mozambique	Wool	Total
Assets of discontinued operations:
Inventory	$         143	$         -	$     143
Total assets of discontinued operations	$         143	$         -	$     143
Liabilities of discontinued operations:
Accounts payable	$           31	$         -	$       31
Accrued expenses	24	-	24
Total liabilities of discontinued operations	$           55	$         -	$       55

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

6.  SEGMENT INFORMATION

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

          Selling, logistics, billing, and administrative overhead, including depreciation, which originates primarily from the Company’s corporate and sales offices are allocated to the segments based upon segment operating income.  The Company reviews performance data from purchase through sale based on the source of the product and all intercompany transactions are allocated to the region that either purchases or processes the tobacco.   

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Alliance One International, Inc. and Subsidiaries

6.  SEGMENT INFORMATION (Continued)

          The following table presents the summary segment information for the three months ended June 30, 2009 and 2008:

Analysis of Segment Assets		June 30 , 2009	June 30 , 2008	March 31, 2009
Segment assets:
	South America	$ 1,136,688	$   993,405	$   939,234
	Other regions	868,076	1,027,397	819,285
	Total assets	$ 2,004,764	$2,020,802	$1,758,519

7.  EARNINGS PER SHARE

Basic earnings per share are computed by dividing earnings by the weighted average number of common shares outstanding. The weighted average number of common shares outstanding is reported as the weighted average of the total shares of common stock outstanding net of shares of common stock held by a wholly owned subsidiary.  Shares of common stock owned by the subsidiary were 7,853 at June 30, 2009 and 2008.  This subsidiary does not receive dividends on these shares and it does not have the right to vote.

          For the three months ended June 30, 2009 and 2008, the weighted average number of shares outstanding was increased by a total of 691 shares and 1,027 shares, respectively, of common stock equivalents for employee stock options and restricted stock units, and restricted shares outstanding for the computation of diluted earnings per share.  Certain potentially dilutive options were not included in the computation of earnings per diluted share because their exercise prices were greater than the average market price of the shares of common stock during the period and their effect would be antidilutive.  These shares totaled 1,707 at a weighted average exercise price of $7.01 per share at June 30, 2009 and 1,743 at a weighted average exercise price of $7.39 per share at June 30, 2008.

8.  COMPREHENSIVE INCOME

The components of comprehensive income were as follows:

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Alliance One International, Inc. and Subsidiaries

9.  STOCK-BASED COMPENSATION

The Company accounts for stock-based compensation under SFAS No. 123(R), Share-Based Payment (“SFAS No. 123(R)”). The Company recorded stock-based compensation expense related to stock-based awards granted under its various employee and non-employee stock incentive plans of $1,916 and $556 for the three months ended June 30, 2009 and 2008, respectively.  

          The Company’s shareholders approved the 2007 Incentive Plan (the “2007 Plan”) at its Annual Meeting of Shareholders on August 16, 2007.  As with the Company’s prior equity compensation plans, the 2007 Plan is an omnibus plan that provides the flexibility to grant a variety of equity awards including stock options, stock appreciation rights, stock awards, stock units, performance awards and incentive awards to officers, directors and employees of the Company.  

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

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

Stock Options with Stock Appreciation Rights

Stock appreciation rights (SARs) have historically been granted in tandem with certain option grants under which the employee may choose to receive in cash the excess of the market price of the share on the exercise date over the market price on the grant date (the intrinsic value of the share) rather than purchase the shares.  The choice to receive cash is limited to five years after grant.  The fair value of SARs is determined at each balance sheet date using a Black-Scholes valuation model multiplied by the cumulative vesting of each SAR award.

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

		2009		2008
Stock Price		$3.80		$5.11
Exercise Price		$6.45		$6.62
Expected Life in Years		.4		1.0
Annualized Volatility		33%		39%
Annual Dividend Rate		0%		0%
Discount Rate		.26%		2.3%

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

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Alliance One International, Inc. and Subsidiaries

10.  CONTINGENCIES

Non-Income Tax

In September 2006, the Company’s Serbian operations were assessed for VAT and government pension liability for payments to farmers.  The Company has appealed the assessment from the tax authorities based upon favorable discussions with the Ministry of Finance and is awaiting the final decision from the Supreme Court.  As of June 30, 2009, the balance of the reserve is $216.

           The government in the Brazilian State of Parana (“Parana”) issued a tax assessment on October 26, 2007 with respect to local intrastate trade tax credits that result primarily from tobacco transferred between states within Brazil.  The assessment for intrastate trade tax credits taken is $5,638 and the total assessment including penalties and interest through June 30, 2009 is $13,273.  The Company believes it has properly complied with Brazilian law and will contest any assessment through the judicial process.  Should the Company lose in the judicial process, the loss of the intrastate trade tax credits would have a material impact on the financial statements of the Company.

           The assessment of $5,638 represents intrastate trade tax credit amounts which were offset against intrastate trade tax receivables. At June 30, 2009, the Company also has intrastate trade tax receivables from Parana of $10,934.  During fiscal 2008, the Company recorded an impairment charge of $7,143.  After the assessment, the Company has treated new expenditures for intrastate trade taxes on tobacco acquisition as a cost of inventory procurement.

           The Company also has local intrastate trade tax credits in the Brazil State of Rio Grande do Sul (“Rio Grande”) of $57,325 and $66,874 at June 30, 2009 and 2008, respectively. Based on management’s expectations about future realization, the Company has recorded a valuation allowance on the Rio Grande intrastate trade tax credits of $8,303 and $12,082 at June 30, 2009 and 2008, respectively. The allowance on the Rio Grande intrastate trade tax credits may be adjusted in future periods based on market conditions and the Company’s ability to use the tax credits.

Other

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

           The Company had previously disclosed that it had received notice from Mindo, S.r.l., the purchaser in June 2004 of the Company’s Italian subsidiary Dimon Italia, S.r.l., of its intent to assert against the Company, or its subsidiaries, a claim arising out of that sale transaction.  That claim, which may be followed by additional claims, was filed before the Court of Rome on April 12, 2007.  The claim, allegedly arising from a guaranty letter issued by a consolidated subsidiary of the Company in connection with the sale transaction, seeks the recovery of €7,377 (US$10,362) plus interest and costs.  The Company believes the claim to be without merit and intends to vigorously defend it.  No amounts have been reserved with respect to such claim.

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

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Alliance One International, Inc. and Subsidiaries

10.  CONTINGENCIES (Continued)

Other (Continued)

           If the U.S. authorities determine that there have been violations of federal laws, they may seek to impose sanctions on the Company that may include, among other things, injunctive relief, disgorgement, fines, penalties and modifications to business practices and the appointment of a monitor.  It is not possible to predict at this time whether the authorities will determine that violations have occurred, and if they do, what sanctions they might seek to impose.  It is possible, however, that any sanctions which might be imposed could materially adversely affect the Company’s results of operations.  Both of these investigations are ongoing as of the date of this report and the Company is fully cooperating with the SEC and Justice.

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

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

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

           The Company and certain of its foreign subsidiaries guarantee bank loans to growers to finance their crops.  Under longer-term arrangements, the Company may also guarantee financing on growers’ construction of curing barns or other tobacco production assets.  The Company also guarantees bank loans to certain tobacco cooperatives to assist with the financing of their growers’ crops.  Guaranteed loans are generally repaid concurrent with the delivery of tobacco to the Company.  The Company is obligated to repay any guaranteed loan should the grower or tobacco cooperative default.  If default occurs, the Company has recourse against the grower or cooperative.  At June 30, 2009, the Company was guarantor of an amount not to exceed $145,810 with $140,963 outstanding under these guarantees.

           In accordance with FASB Statement No. 143, Accounting for Asset Retirement Obligations, the Company records all known asset retirement obligations (“ARO”) for which the liability can be reasonably estimated. Currently, it has identified an ARO associated with one of its facilities that requires it to restore the land to its initial condition upon vacating the facility. The Company has not recognized a liability under FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, An Interpretation of FASB Statement No. 143, for this ARO because the fair value of restoring the land at this site cannot be reasonably estimated since the settlement date is unknown at this time. The settlement date is unknown because the land restoration is not required until title is returned to the government, and the Company has no current or future plans to return the title. The Company will recognize a liability in the period in which sufficient information is available to reasonably estimate its fair value.  The Company has no additional material AROs.

11.  DEBT ARRANGMENTS

Senior Secured Credit Facility

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

·

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

·

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

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

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Alliance One International, Inc. and Subsidiaries

11.  DEBT ARRANGMENTS (Continued)

Senior Secured Credit Facility (Continued)

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

·

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

·

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

·

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

·

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

·

Added a new definition for “permitted allowance.”

Fifth Amendment.  On February 20, 2009, the Company closed the Fifth Amendment to the Credit Agreement which included the following modifications effective February 20, 2009:

·

Increased the revolving committed amount by $55,000 from $250,000 to $305,000;

·

Provided a waiver related to the Company’s Congo entity for potential Events of Default;

·

Amended and restated the consolidated EBIT, revolving commitment percentage and revolving lender definitions;

·

Increased the portion of the borrowings under the Revolver by the Company, as defined in the Credit Agreement, from $150,000 to $200,000;

·

Amended the maximum consolidated leverage ratio to 5.0 to 1.0 for the period October 1, 2008 through and including June 30, 2009; 4.75 to 1.0 for the period July 1, 2009 through and including September 30, 2009; 4.50 to 1.0 for the period October 1, 2009 through and including December 31, 2009; 4.25 to 1.0 for the period January 1, 2010 through and including March 31, 2010 and 4.0 to 1.0 for the period April 1, 2010 and thereafter;

·

Decreased permitted foreign subsidiary indebtedness from $600,000 to $545,000;

·

Decreased the permitted lien basket for foreign subsidiary debt from $275,000 to $200,000;

·

Amendment to the acquisitions, advances, investments and loans section to allow for a potential acquisition not to exceed $90,000, subject to certain terms and conditions, and investment in Delta Technology and Management Services Private Limited not to exceed $450;

·

Amendment to remove the Company’s ability to use the restricted basket to purchase all or any portion of the outstanding senior notes and/or senior subordinated notes; and

·

Amended the maximum uncommitted inventories basket to $225,000 for the fiscal quarter ended December 31, 2008; $150,000 for the fiscal quarter ended March 31, 2009; $225,000 for the fiscal quarters ended June 30, 2009, September 30, 2009 and December 31, 2009; $150,000 for the quarter ended March 31, 2010 and $225,000 at the end of each fiscal quarter thereafter.

Borrowers and Guarantors.  One of the Company’s primary foreign holding companies, Intabex Netherlands B.V. (“Intabex”), was co-borrower under the Revolver, and the Company’s portion, as defined in the Credit Agreement, of the borrowings under the Revolver was limited to $200,000 (per Amendment 5) outstanding at any one time.  One of the Company’s primary foreign trading companies, Alliance One International AG (“AOIAG”), was a guarantor of Intabex’s obligations under the Credit Agreement. Such obligations were also guaranteed by the Company and must be guaranteed by any of its material direct or indirect domestic subsidiaries.

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

·

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

·

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

·

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

·

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

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

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Alliance One International, Inc. and Subsidiaries

11.  DEBT ARRANGMENTS (Continued)

Senior Secured Credit Facility (Continued)

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

·

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

·

a maximum consolidated leverage ratio of not more than 5.00 to 1.00;

·

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

·

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

          Certain of these financial covenants and required financial ratios were subject to adjustment over time in accordance with schedules in the Credit Agreement.

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

          The Company was not in default of the covenants set forth in this facility as of, or for the three months ended June 30, 2009.  If the Company was in default and was unable to obtain the necessary amendments or waivers under its Credit Facility, the lenders under that facility would have had the right to accelerate the loans thereby demanding repayment in full and extinguishment of their commitment to lend.  Certain defaults under the Credit Facility would result in a cross default under the indentures governing the Company’s senior notes and senior subordinated notes and could impair access to its seasonal operating lines of credit in local jurisdictions.  A default under the Company’s Credit Facility would have a material adverse effect on the Company’s liquidity and financial condition.

          The Credit Facility was replaced July 2, 2009.  See Note 18 “Subsequent Event” to the “Notes to Condensed Consolidated Financial Statements” for further details.

Senior Notes

On May 13, 2005, the Company issued $315,000 of 11% senior notes due 2012 and on March 7, 2007, the Company issued $150,000 of 8 ½% senior notes due 2012 at a 0.5% original issue discount to reflect an 8.6% yield to maturity.  During the year ended March 31, 2008, the Company purchased $42,285 of its $315,000 11% Senior Note due May 2012 on the open market. All purchased securities were canceled leaving $272,715 of the 11% Senior Notes outstanding at March 31, 2008.  Associated cash premiums paid were $1,990 and non-cash deferred financing costs of $732 were accelerated.  During the year ended March 31, 2009, the Company purchased $8,334 of its $315,000 11% senior notes due 2012 on the open market.  All purchased securities were canceled leaving $264,381 of the 11% senior notes outstanding at March 31, 2009.  Associated cash premiums paid were $73 and non-cash deferred financing costs of $123 were accelerated.  The Company was not in default as of, or for the three months ended June 30, 2009 of the covenants under these notes.  All senior notes were refinanced July 2, 2009.  See Note 18 “Subsequent Event” to the “Notes to Condensed Consolidated Financial Statements” for further details.

Senior Subordinated Notes

On May 13, 2005, the Company issued $100,000 of 12 3/4% senior subordinated notes due 2012 at a 10% original issue discount to reflect a 15% yield to maturity.  During the year ended March 31, 2009, the Company purchased $10,500 of its $100,000 12 3/4% senior subordinated notes due 2012 on the open market.  All purchased securities were canceled leaving $89,500 of the 12 3/4% senior subordinated notes outstanding at March 31, 2009.  Associated non-cash deferred financing costs, net of discount, of $758 were accelerated.  At June 30, 2009, the indenture governing the senior subordinated notes contained covenants substantially identical to those contained in the indentures governing the 11% senior notes and the 8 ½% senior notes.  The senior subordinated notes were refinanced July 2, 2009.  See Note 18 “Subsequent Event” to the “Notes to Condensed Consolidated Financial Statements” for further details.

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Alliance One International, Inc. and Subsidiaries

11.  DEBT ARRANGMENTS (Continued)

Foreign Seasonal Lines of Credit

The Company has typically financed its non-U.S. operations with uncommitted unsecured short-term seasonal lines of credit at the local level.  These operating lines are seasonal in nature, normally extending for a term of 180 to 270 days corresponding to the tobacco crop cycle in that location.  These facilities are typically uncommitted in that the lenders have the right to cease making loans and demand repayment of loans at any time.  These loans are typically renewed at the outset of each tobacco season.  As of June 30, 2009, the Company had approximately $380,612 drawn and outstanding on foreign seasonal lines with maximum capacity totaling $678,949 subject to limitations as provided for in the Credit Agreement.  Additionally, against these lines there was $37,963 available in unused letter of credit capacity with $4,175 issued but unfunded.

Summary of Debt

The carrying value and estimated fair value of the Company’s long-term debt are $713,395 and $721,432, respectively, as of June 30, 2009 and $670,426 and $613,336, respectively, as of March 31, 2009.

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

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Alliance One International, Inc. and Subsidiaries

12.  DERIVATIVE FINANCIAL INSTRUMENTS

Fair Value of Derivative Financial Instruments

In accordance with SFAS No. 133, the Company recognizes all derivative financial instruments, such as interest rate swap contracts and foreign exchange contracts at fair value.  Changes in the fair value of derivative financial instruments are either recognized periodically in income or in shareholders’ equity as a component of other comprehensive income depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it qualifies as a fair value hedge or a cash flow hedge.  Changes in fair values of derivatives accounted for as fair value hedges are recorded in income along with the portions of the changes in the fair values of the hedged items that relate to the hedged risk(s).  Changes in fair values of derivatives accounted for as cash flow hedges, to the extent they are effective as hedges, are recorded in other comprehensive income net of deferred taxes.  Changes in fair values of derivatives not qualifying as hedges are reported in income.  During the three months ended June 30, 2009 and 2008, there were no qualified cash flow or fair value hedges.  Estimates of fair value were determined in accordance with SFAS No. 107, as amended by SFAS No. 157.  See Note 16 “Fair Value Measurements” to the “Notes to Condensed Consolidated Financial Statements” for further information of fair value methodology.  The following table summarizes the fair value of the Company’s derivatives by type at June 30, 2009.

Earnings Effects of Derivatives

Foreign Currency Contracts

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

          The Company has entered into forward currency contracts to hedge cash outflows in foreign currencies around the world for green tobacco purchases and processing costs as well as selling, administrative and general costs as the Company deems necessary. These contracts do not meet the requirements for hedge accounting treatment under SFAS No. 133, and as such, all changes in fair value are reported in income.

          The following table summarizes the earnings effects of derivatives in the condensed consolidated statements of operations for the three months ended June 30, 2009 and 2008.

Derivatives Not Designated as Hedging Instruments Under SFAS No. 133		Location of Gain (Loss) Recognized in Income		Gain (Loss) Recognized in Income for the Three Months Ending June 30,
				2009		2008
Foreign currency contracts		Cost of goods and services sold		$ 10,989		$ 16,794
Foreign currency contracts		Selling, administrative and general expenses		2,488		(63)
Total				$ 13,477		$ 16,731

Credit Risk

Financial instruments, including derivatives, expose the Company to credit loss in the event of non-performance by counterparties.  The Company manages its exposure to counterparty credit risk through specific minimum credit standards, diversification of counterparties, and procedures to monitor concentrations of credit risk.  If a counterparty fails to meet the terms of an arrangement, the Company’s exposure is limited to the net amount that would have been received, if any, over the arrangement’s remaining life.  The Company does not anticipate non-performance by the counterparties and no material loss would be expected from non-performance by any one of such counterparties.

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Alliance One International, Inc. and Subsidiaries

13.  PENSION AND POSTRETIREMENT BENEFITS

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

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

Components of Net Periodic Benefit Cost

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

	Three Months Ended June 30,
	2009		2008
Service cost	$     895		$  1,125
Interest expense	2,236		2,284
Expected return on plan assets	(1,114)		(1,622)
Amortization of prior service cost	(44)		(71)
Actuarial loss	(2)		(84)
Net periodic pension cost	$  1,971		$  1,632

Employer Contributions

The Company’s investment objectives are to generate consistent total investment return to pay anticipated plan benefits, while minimizing long-term costs.  Financial objectives underlying this policy include maintaining plan contributions at a reasonable level relative to benefits provided and assuring that unfunded obligations do not grow to a level to adversely affect the Company’s financial health.  As of June 30, 2009, contributions of $2,775 were made to pension plans for fiscal 2010.  Additional contributions to pension plans of approximately $6,895 are expected during the remainder of fiscal 2010.  However, this amount is subject to change, due primarily to potential plan combinations, asset performance significantly above or below the assumed long-term rate of return on pension assets and significant changes in interest rates.

Postretirement Health and Life Insurance Benefits

The Company also provides certain health and life insurance benefits to retired employees, and their eligible dependents, who meet specified age and service requirements. The Company amended the U.S. plan effective September 1, 2005 to limit benefits paid to retirees under the age of 65 to a maximum of two thousand five hundred dollars per year.  Employees joining after August 31, 2005 will not be eligible for any retiree medical benefits.  As of June 30, 2009, contributions of $203 were made to the plans for fiscal 2010.  Additional contributions of $716 to the plans are expected during the rest of fiscal 2010.  The Company retains the right, subject to existing agreements, to modify or eliminate the postretirement medical benefits.

Components of Net Periodic Benefit Cost

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

	Three Months Ended June 30,
	2009		2008
Service cost	$    16		$   32
Interest expense	188		205
Amortization of prior service cost	(415)		(405)
Actuarial loss	76		94
Net periodic pension cost (benefit)	$ (135)		$  (74)

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Alliance One International, Inc. and Subsidiaries

14.  ADVANCES ON PURCHASES OF TOBACCO

The Company provides seasonal crop advances of, or for, seed, fertilizer, and other supplies. These advances are short term in nature, are repaid upon delivery of tobacco to the Company, and are reported in advances on purchases of tobacco in the condensed consolidated balance sheet. Primarily in Brazil and certain African countries, the Company also has made long-term advances to tobacco farmers to finance curing barns and other farm infrastructure. In addition, due to low crop yields and other factors, in some years individual farmers may not deliver sufficient volumes of tobacco to fully repay their seasonal advances, and the Company may extend repayment of those advances into future crop years. Current advances of $128,899 at June 30, 2009 and $151,516 at June 30, 2008 are presented as advances on purchases of tobacco, net in the condensed consolidated balance sheet.  The long-term portion of advances of $60,282 at June 30, 2009 and $54,851 at June 30, 2008 are included in other non-current assets in the condensed consolidated balance sheet.  Both the current and the long-term portion of advances on purchases of tobacco are reported net of allowances.  Allowances are recorded when the Company determines that amounts outstanding are not likely to be collected. Total allowances were $111,147 at June 30, 2009, and $104,677 at June 30, 2008, and were estimated based on the Company’s historical loss information and crop projections. The allowances were increased by provisions for estimated uncollectible amounts of approximately $5,460 and $11,456 for the three months ended June 30, 2009 and 2008 respectively.  Estimated bad debt expense on current year advances are capitalized into inventory.  As of June 30, 2009 the allowance was written up $16,112, and as of June 30, 2008 the allowance was written down $6,981.

          In Brazil, some farmers obtain government subsidized rural credit financing which is guaranteed by the Company.  The farmers borrow these funds from local banks.  Repayment of both Company advances and rural credit financing by the farmer is concurrent with delivery of tobacco to the Company.  The Company remits payments to the local banks on behalf of guaranteed farmers.  Terms of rural credit financing are such that repayment is due to local banks based on contractual due dates.  As of June 30, 2009 and 2008, respectively, the Company had balances of $35,049 and $43,430 that were due to local banks on behalf of farmers.  These amounts are included in accounts payable in the condensed consolidated balance sheet.  As of June 30, 2009 and 2008, respectively, the Company was guarantor for Brazilian farmer loans of $88,051 and $129,755 with outstanding amounts of $83,204 and $114,528.  The fair value of guarantees for rural credit financing was $9,318 and $13,334 as of June 30, 2009 and 2008, respectively.

          In Malawi, guarantees were offered on crop input advances to farmers.  As of June 30, 2009, the Company in Malawi was guarantor for loans of $7,591 and the fair value of these guarantees is $417.

          In Argentina, as of June 30, 2009 and 2008, respectively, the Company was guarantor for farmer cooperative loans of $41,400 and $27,400.  The fair value of the Argentine guarantees was $1,614 and $1,069 as of June 30, 2009 and 2008, respectively.

          The fair value of all guarantees is recorded in accrued expenses and other current liabilities.

15.  SALE OF RECEIVABLES

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

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Alliance One International, Inc. and Subsidiaries

15.  SALE OF RECEIVABLES (Continued)

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

          It is the Company’s intention to maximize the receivables sold under the revolving agreement meaning that amounts collected by the pool would be reinvested in the purchase of additional eligible receivables. Since April 1, 2009, the average outstanding balance of receivables sold has been $69,913 with a minimum outstanding balance of $59,813 and a maximum of $87,621.

16.  FAIR VALUE MEASUREMENTS

Effective April 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, for all financial instruments and non-financial instruments accounted for at fair value on a recurring basis. Effective April 1, 2009, the Company adopted SFAS No. 157 for all non-financial instruments accounted for at fair value on a non-recurring basis. SFAS No. 157 establishes a new framework for measuring fair value and expands related disclosures. Broadly, the SFAS No. 157 framework requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.  

          SFAS No. 157 establishes a three-level valuation hierarchy based upon observable and non-observable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. Preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:

·

Level 1 – Quoted prices for identical instruments in active markets.

·

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

·

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

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

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Alliance One International, Inc. and Subsidiaries

16.  FAIR VALUE MEASUREMENTS (Continued)

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

          The following describes the valuation methodologies the Company uses to measure different instruments at fair value.

Derivative financial instruments

The fair value of foreign currency and interest rate swap contracts are based on third-party market maker valuation models that discount cash flows resulting from the differential between the contract rate and the market-based forward rate or curve capturing volatility and establishing intrinsic and carrying values. The amounts include fair value adjustments related to the Company’s own credit risk and counterparty credit risk.

Securitized retained interests

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

Guarantees

The fair value of guarantees is based upon the premium the Company would require to issue the same guarantee in a stand-alone arm’s-length transaction with an unrelated party. If quoted or observable market prices are not available, fair value is based upon internally developed models. Internally developed models utilize historical loss data for similar guarantees to develop an estimate of future losses under the guarantees outstanding at the measurement date.

Investments in subsidiaries

Upon a change in control that results in consolidation or deconsolidation of a subsidiary, a fair value measurement may be required if the Company held a noncontrolling investment in the entity and obtain control, or sell a controlling interest and retain a noncontrolling stake in the entity. Such investments are valued using a discounted cash flow model, comparative market multiples or a combination of both approaches as appropriate. In applying these methodologies, the Company relies on a number of factors, including actual operating results, future business plans, economic projections and market data.

Long-lived assets

Long-lived assets may be measured at fair value if such assets are held for sale or when there is a determination that the asset is impaired. The determination of fair value is based on the best information available, including internal cash flow estimates discounted at an appropriate interest rate, quoted market prices when available, market prices for similar assets and independent appraisals, as appropriate. For real estate, cash flow estimates are based on current market estimates that reflect current and projected lease profiles and available industry information about expected trends in rental, occupancy and capitalization rates.

Goodwill and Other Intangible Assets

Goodwill - May be adjusted to implied fair value when impaired. Impairment is recognized only if annual or periodic testing shows that (1) the carrying value of the reporting unit, including goodwill, is in excess of the fair value of the reporting unit and (2) the implied goodwill is less than the carrying value of the goodwill.

Intangible assets subject to amortization – May be adjusted to fair value when impaired. Impairment is recognized only if (1) the carrying value of the intangible is not recoverable and (2) the carrying value of the intangible exceeds its fair value.

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Alliance One International, Inc. and Subsidiaries

16.  FAIR VALUE MEASUREMENTS (Continued)

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

	June 30, 2009
	Level 1	Level 2	Level 3	Total Assets / Liabilities, at Fair Value
June 30, 2009
Assets
Derivative financial instruments	$   -	$12,932	$           -	$12,932
Securitized retained interests	-	-	2,466	2,466
Total Assets	$   -	$12,932	$   2,466	$15,398
Liabilities
Guarantees	$   -	$         -	$ 11,349	$11,349

          The following tables present the changes in Level 3 instruments measured on a recurring basis for the three months ended June 30, 2009.

Changes in Level 3 instruments for the three months ended June 30, 2009

		Securitized Retained Interests		Guarantees
Balance at March 31, 2009		$     26,833		$  14,584
Total losses (realized / unrealized
included in earnings)		352		-
Purchases, issuances, and settlements, net		(24,719)		(3,235)
Balance at June 30, 2009		$      2,466		$  11,349

          The amount of total losses for the three months ended June 30, 2009 included in earnings attributable to the change in unrealized losses relating to assets still held at June 30, 2009 was $508 on securitized retained interests.

          Gains and losses included in earnings are reported in Other Income (Expense).

Non-Recurring Fair Value Measurements

Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. Included in this category are cost and equity method investments that are written down to fair value when their declines are determined to be other-than-temporary, long-lived assets that are written down to fair value when they are held for sale or determined to be impaired, goodwill and other intangible assets that are written down to fair value when they are determined to be impaired, the remeasurement of retained investments in former consolidated subsidiaries, and the remeasurement of previous equity interests upon acquisition of a controlling interest.

          During the three months ended June 30, 2009, the Company did not have any non-recurring fair value adjustments.

17.  RELATED PARTY TRANSACTIONS

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

	June 30, 2009	June 30, 2008	March 31, 2009
Balances:
Accounts receivable	$43,067	$30,639	$29,765
Accounts payable	24,454	-	27,488

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Alliance One International, Inc. and Subsidiaries

17.  RELATED PARTY TRANSACTIONS (Continued)

		Three Months Ended June 30,
		2009	2008
Transactions:
Purchases		$8,117	$27,580

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

          The Company’s balances due to and from related parties are primarily with its deconsolidated Zimbabwe subsidiary.  As of March 31, 2006, the Company deconsolidated its operations in Zimbabwe in accordance with Accounting Research Bulletin 51, Consolidated Financial Statements (“ARB 51”). ARB 51 provides that when a parent does not have control over a subsidiary due to severe foreign exchange restrictions or governmentally imposed uncertainties, the subsidiary should not be consolidated. Therefore, the Company does not consolidate its Zimbabwe operations, but continues to provide advances to it for the purchase of tobacco.

          The remaining related party balances and transactions relate to the Company’s equity basis investments in companies located in Asia which purchase and process tobacco.

18.  SUBSEQUENT EVENT

On July 2, 2009, the Company completed a number of refinancing transactions, which are described below.

Senior Secured Credit Facility

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

·

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

        The interest rate for the Revolver may increase or decrease according to a consolidated interest coverage ratio pricing matrix as defined in the Credit Agreement.  The Credit Agreement permits the Company to add $55,000 in commitments from existing or additional lenders which would increase the amount of the Revolver to $325,000.

Borrowers and Guarantors.  One of the Company’s primary foreign holding companies, Intabex Netherlands B.V. (“Intabex”), is co-borrower under the Revolver, and the Company’s portion of the borrowings under the Revolver is limited to $200,000 outstanding at any one time.  One of the Company’s primary foreign trading companies, Alliance One International AG (“AOIAG”), is a guarantor of Intabex’s obligations under the Credit Agreement. Such obligations are also guaranteed by the Company and must be guaranteed by any of its material direct or indirect domestic subsidiaries.

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

·

100% of the capital stock of any domestic subsidiary held directly by the Company or by any material domestic subsidiary;

·

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

·

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

·

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

·

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

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

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Alliance One International, Inc. and Subsidiaries

18.  SUBSEQUENT EVENT (Continued)

Senior Secured Credit Facility (Continued)

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

·

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

·

a maximum consolidated leverage ratio in an amount not more than a ratio specified for each fiscal quarter, which ratio is 5.25 to 1.00 for the fiscal quarter ending June 30, 2009;

·

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

·

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

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

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

          The Company continuously monitors its compliance with these covenants.  If the Company fails to comply with any of these covenants and is unable to obtain the necessary amendments or waivers under the Credit Agreement, the lenders under the Credit Agreement have the right to accelerate the outstanding loans thereunder and demand repayment in full and to terminate their commitment to make any further loans under the Credit Facility.  Certain defaults under the Credit Facility would result in a cross default under the indentures governing the Company’s senior notes and convertible senior subordinated notes and could impair access to its seasonal operating lines of credit in local jurisdictions.  A default under the Credit Agreement would have a material adverse effect on the Company’s liquidity and financial condition.

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

Senior Notes

On July 2, 2009, the Company issued $570,000 of 10% Senior Notes due 2016 (the “Senior Notes”). The Senior Notes were priced at 95.177% of the face value, for gross proceeds of approximately $542,509 and representing a yield to maturity of 11.0%. The indenture governing the 10% Senior Notes contains covenants that, among other things, limit the Company’s ability to incur additional indebtedness; issue preferred stock; merge, consolidate or dispose of substantially all of its assets; grant liens on its assets; pay dividends, redeem stock or make other distributions or restricted payments; repurchase or redeem capital stock or prepay subordinated debt; make certain investments; agree to restrictions on the payment of dividends to the Company by its subsidiaries; sell or otherwise dispose of assets, including equity interests of its subsidiaries; enter into transactions with its affiliates; and enter into certain sale and leaseback transactions.  If a change of control (as defined in the indenture governing the Senior Notes) occurs at any time, holders of the Senior Notes will have the right, at their option, to require the Company to repurchase all or a portion of the Senior Notes for cash at a price equal to 101% of the principal amount of Senior Notes being repurchased, plus accrued and unpaid interest.

Convertible Senior Subordinated Notes

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

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Alliance One International, Inc. and Subsidiaries

18.  SUBSEQUENT EVENT (Continued)

Convertible Note Hedge and Warrant Transactions

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

Tender of Existing Notes

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

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

          As a result of tendering the Existing Notes or a portion thereof, the Company will accelerate approximately $5,591 of deferred financing costs and $5,651 of amortization of original issue discount.

Amendment of Certain Existing Notes

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

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Alliance One International, Inc. and Subsidiaries

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

EXECUTIVE OVERVIEW

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

Financial Results

For the quarter ended June 30, 2009, we reported net income of $14.5 million, or $0.16 per basic share, compared to net income of $15.3 million, or $0.17 per basic share, for the prior year quarter.  Sales for the quarter declined versus the prior year due to later southern hemisphere purchasing and processing driven by crop timing, while gross profit and operating income were improved. Net income remained strong with a modest $0.8 million decline due to an increased tax provision as anticipated.  Following the quarter end on July 2, 2009 we completed the refinancing of our capital structure, which extends debt maturities, permits early repayments and maintains the appropriate level of committed working capital lines. Additionally, the new terms and conditions provide enhanced business flexibility, which better positions our Company as we look forward.

Liquidity

Our enterprise liquidity requirements are dynamic. As such we utilize various sources, which are continuously monitored and adjusted as required based on the seasonality of our business and include cash from operations, our revolving credit facility, short term credit lines throughout the world, sales of accounts receivable, active working capital management and advances from customers. As of June 30, 2009, we had $517.1 million of cash and available credit comprised of $67.6 million of cash and $449.5 million in available credit inclusive of $150 million undrawn on our revolver, $5.3 million of other long-term debt, $260.4 million of notes payable to banks, and $33.8 million exclusively for letters of credit. On an ongoing basis we continue to modify the composition of our available liquidity maximizing business flexibility and minimizing costs.

Outlook

Flue cured tobacco remains in tighter global supply which continues to place upward pressure on green prices paid to farmers and in turn prices paid by our customers.  World supplies of burley tobacco that appeared to be in greater supply at the beginning of this season due to the larger Malawi crop have tightened some as the Malawi crop size estimates have reduced and with lower quality. Our burley purchases in various markets are selling through, while prices paid to farmers, and by customers are increasing.  We are proactively reaching out to our customer base regarding related cost increases and at the same time taking appropriate hedging actions. Improving operating efficiencies and evolving agronomy programs focused on increasing crop yields should also help to partially offset cost pressures going forward.

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Alliance One International, Inc. and Subsidiaries

RESULTS OF OPERATIONS: