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 MARCH 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD ______________ TO ________________ COMMISSION FILE NUMBER 0-24341 CENTRAL EUROPEAN DISTRIBUTION CORPORATION ------------------------------------------------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 54-18652710 ------------------------ --------------------------------- (STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.) 1343 MAIN ST., #100 SARASOTA, FLORIDA 34236 --------------------------------------- ---------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE) 941-330-1558 ------------------------------- (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 [ ] The number of shares outstanding of each class of the issuer's common stock as of March 31, 2000: Common Stock ($.01 par value)............................4,402,356 shares CENTRAL EUROPEAN DISTRIBUTION CORPORATION - -------------------------------------------------------------------------------- INDEX PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements 3 Consolidated Condensed Balance Sheet, March 31, 2000 (unaudited) 3 Consolidated Condensed Statements of Income (unaudited) for the three months ended March 31, 1999 and March 31, 2000 5 Consolidated Condensed Statements of Changes in Stockholders' Equity (unaudited) 6 Consolidated Condensed Statements of Cash Flows (unaudited) for the three months ended March 31, 1999 and 2000 7 Notes to Consolidated Condensed Financial Statements (unaudited) 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................14 PART II. OTHER INFORMATION Item 2. Changes in Securities and use of Proceeds..........................19 Item 5. Other Information..................................................19 Item 6. Exhibits and Reports on Form 8-K...................................19 Signatures..................................................................20 CENTRAL EUROPEAN DISTRIBUTION CORPORATION Amounts in columns expressed in thousands - -------------------------------------------------------------------------------- PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CENTRAL EUROPEAN DISTRIBUTION CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) DECEMBER 31, MARCH 31, 1999 2000 ------------ --------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 3,115 $ 3,724 Accounts receivable, net of allowance for doubtful accounts of $343,000 and $778,000, respectively 17,299 18,430 Inventories 7,610 7,647 Prepaid expenses and other current assets 2,208 2,854 Deferred income taxes 107 197 ------- ------- TOTAL CURRENT ASSETS 30,339 32,852 Equipment, net 1,618 2,501 Intangible assets, net 6,676 11,249 Deferred income taxes 194 205 Other assets 139 80 ------- ------- TOTAL ASSETS 38,966 46,887 ======= ======= See accompanying notes. CENTRAL EUROPEAN DISTRIBUTION CORPORATION Amounts in columns expressed in thousands - -------------------------------------------------------------------------------- CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) - CONTINUED DECEMBER 31, MARCH 31, 1999 2000 ----------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable $ 14,629 $ 16,080 Bank loans and overdraft facilities 4,930 6,978 Other current liabilities 1,172 2,660 -------- -------- TOTAL CURRENT LIABILITIES 20,731 25,718 Long term debt 3,622 5,472 STOCKHOLDERS' EQUITY Preferred stock ($0.01 par value, 1,000,000 shares authorized; no shares issued and outstanding) -- -- Common Stock ($0.01 par value, 20,000,000 shares authorized, 4,134,230 and 4,402,356 shares issued and outstanding at December 31, 1999 and March 31, 2000, respectively) 42 45 Additional paid-in-capital 12,900 14,175 Retained earnings 3,650 3,673 Accumulated other comprehensive (loss) (1,979) (2,196) -------- -------- TOTAL STOCKHOLDERS' EQUITY 14,613 15,697 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 38,966 46,887 ======== ======== See accompanying notes. CENTRAL EUROPEAN DISTRIBUTION CORPORATION Amounts in columns expressed in thousands - -------------------------------------------------------------------------------- CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED ---------------------- MARCH 31, MARCH 31, 1999 2000 -------- -------- NET SALES 14,241 18,720 Cost of goods sold 12,143 15,920 -------- -------- GROSS PROFIT 2,098 2,800 Sales, general and administrative expenses 1,538 2,553 -------- -------- OPERATING INCOME 560 247 Non-operating income (expense) Interest expense (26) (136) Interest income 85 56 Realized and unrealized foreign currency transaction (losses) gains, net (103) (91) Other income (expense), net 14 (42) -------- -------- INCOME BEFORE INCOME TAXES 530 34 Income tax expense (197) (11) -------- -------- NET INCOME $ 333 $ 23 ======== ======== NET INCOME PER COMMON SHARE, BASIC AND DILUTIVE $ 0.09 $ 0.01 ======== ======== See accompanying notes. CENTRAL EUROPEAN DISTRIBUTION CORPORATION Amounts in columns expressed in thousands - -------------------------------------------------------------------------------- CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) ACCUMULATED ADDITIONAL OTHER PAID-IN- RETAINED COMPREHENSIVE COMMON STOCK CAPITAL EARNINGS (LOSS) INCOME TOTAL --------------------- --------- -------- ------------- -------- NO. OF SHARES AMOUNT -------- -------- Balance at December 31, 1999 4,134 $ 42 $ 12,900 $ 3,650 $ (1,979) $ 14,613 Issue of shares for acquisition 268 3 1,275 1,278 Net income for the three months 23 23 ended March 31, 2000 Foreign currency translation (217) (217) adjustment ----------------------------------------------------------------------------- Comprehensive loss for the three 23 (217) (194) months ended March 31, 2000 ----------------------------------------------------------------------------- BALANCE AT MARCH 31, 2000 4,402 $ 45 $ 14,175 $ 3,673 $ (2,196) $ 15,697 ============================================================================= See accompanying notes. CENTRAL EUROPEAN DISTRIBUTION CORPORATION Amounts in columns expressed in thousands - -------------------------------------------------------------------------------- CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) THREE THREE MONTHS MONTHS ENDED ENDED MARCH 31, MARCH 31, 1999 2000 -------- -------- NET CASH PROVIDED BY (USED IN) OPERATING $ (764) $ 1,425 ACTIVITIES INVESTING ACTIVITIES Purchases of equipment (119) (288) Proceeds from the disposal of equipment 5 -- Acquisition of subsidiary (2,958) (3,855) ------- ------- NET CASH USED IN INVESTING ACTIVITIES (3,072) (4,143) FINANCING ACTIVITIES Borrowings on overdraft facility 1,094 -- Payment of overdraft facility (1,036) (171) Short-term borrowings 536 -- Payment of short term borrowings -- (502) Long-term borrowings 3,500 4,000 ------- ------- NET CASH PROVIDED BY FINANCING ACTIVITIES 4,094 3,327 ------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS 258 609 Cash and cash equivalents at beginning of period 3,628 3,115 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,886 $ 3,724 ======= ======= SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES Common stock issued in connection with acquisition of subsidiary $ 1,668 $ 1,278 ======= ======= See accompanying notes. CENTRAL EUROPEAN DISTRIBUTION CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. ORGANISATION AND DESCRIPTION OF BUSINESS Central European Distribution Corporation (CEDC) was organized as a Delaware Corporation in September 1997 to operate as a holding company through its sole subsidiary, Carey Agri International Poland Sp. z o.o. (Carey Agri). In 1999 CEDC formed two additional subsidiaries to make certain acquisitions and in 2000 acquired another company as disclosed in Note 5 below. CEDC and its subsidiaries as of the date of their organization are referred to herein as the Company. 2. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2000 are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. The balance sheet at December 31, 1999 has been derived from the audited financial statements at the date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in CEDC's annual report on Form 10-K for the year ended December 31, 1999. 3. COMPREHENSIVE INCOME (LOSS) During the three months ended March 31, 2000, the Company incurred a comprehensive loss of approximatelly $194,000 and reported an accumulated other comprehensive loss of $2,196,000 as of March 31, 2000. The loss is due to translation losses from fluctuations in the exchange rates of the U.S. Dollar and the Polish Zloty and Polish Zloty translation losses on U.S. Dollar transactions of a long term investment nature between CEDC and its Polish subsidiaries. 4. EARNINGS PER SHARE Net income per common share is calculated under the provisions of FAS No. 128, "Earnings per Share". The weighted average number of shares outstanding for the three months ended March 31, 2000 and 1999 were 4,137,176 and 3,831,939, respectively. The increase in 2000 gives effect to the acquisitions in 1999 and 2000. The following table sets forth the computation of basic and diluted earnings per share for the periods indicated. THREE MONTHS ENDED MARCH 31, ----------------------------------- 1999 2000 ------ ------ IN THOUSANDS, EXCEPT PER SHARE DATA Basic: Net income $ 333 $ 23 Average shares outstanding 3,832 4,137 ------ ------ Basic EPS $ 0.09 $ 0.01 ====== ====== CENTRAL EUROPEAN DISTRIBUTION CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Diluted: Net income $ 333 $ 23 Average shares outstanding 3,832 4,137 Net effect of dilutive stock options - based on the 22 0 treasury stock method ------ ------ Totals 3,854 4,137 ====== ====== Diluted EPS $ 0.09 $ 0.01 ====== ====== No stock options have been exercised in the first quarter of 2000. Warrants granted in connection with the IPO have been excluded from the above calculation of diluted shares since the exercise price is greater then the average market price of the common shares. 5. ACQUISITIONS As previously reported, in separate transactions in March 1999 and May 1999, the Company acquired certain assets, businesses and trademarks of Multi Trade Company S.C. and The Cellar of Fine Wines for a combination of cash and common stock. On March 31, 2000, the Company purchased 100% of the shares of Polskie Hurtownie Alkoholi Sp. z o.o. ("PHA" distributing alcoholic beverages in Western Poland) for $4 million cash and 268,126 shares of common stock. The stock cannot be sold for three years and it is unregistered. The pro forma unaudited results of operations for three months ended March 31,1999 and 2000, assuming consummation of these acquisitions and issuance of the common stock as of January 1, 1999 and January 1, 2000 are shown below. The pro forma results for the 1999 period include the results for all three companies referred to above. The pro forma results for the 2000 period reflect the results of PHA only. THREE MONTHS ENDED MARCH 31, ---------------------------------- 1999 2000 ------------ ----------- IN THOUSANDS, EXCEPT PER SHARE DATA Net sales $ 30,508 $ 28,193 Net income 124 (94) Net income per share data: Basic and diluted $ 0.03 $ (0.02) The allocation of the purchase price for the PHA acquisition reflected in the March 31, 2000 condensed consolidated balance sheet is preliminary and subject to revision upon expiration of the escrow period upon which certain adjustments of the purchase price may occur. Also, the Company has not obtained an independent valuation of PHA at this time. Consequently, the entire amount ( $5,228,000) of the excess cost over net assets acquired has been provisionally reported as goodwill in the accompanying balance sheet and for purposes of the pro forma disclosures noted above it is being amortized over a 20 year period. The escrow deposit of $ 250,000 will be paid in full to the seller if between March 31, 2000 and August 31, 2000 the gross margin on sales by PHA is not less than the gross margin on sales by PHA during the period from March 31, 1999 to August 31, 1999. Management expects to finalize the purchase price and related allocations later in the year 2000. CENTRAL EUROPEAN DISTRIBUTION CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 6. LONG-TERM DEBT AND SHORT-TERM BANK LOANS On March 21, 2000 the Company signed an agreement for a $700,000 loan for working capital for MTC. The interest rate is 3 months LIBOR plus 1.5% and it is repayable on March 31, 2001. On March 29, 2000 the Company signed an agreement for a long term loan of $4,000,000. This loan was used as part of the consideration in the acquisition of PHA. The annual interest rate is 3 months LIBOR plus 1.65%. The loan is repayable in installments of $500,000 commencing June 30, 2001. 7. INCOME TAXES Total income tax expense varies from expected income tax expense computed at Polish statutory rates (34% in 1999 and 30% in 2000) as follows: THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 1999 MARCH 31, 2000 ------------------ ------------------ Tax at Polish statutory rate 180 10 Increase (reduction) in deferred tax valuation allowance 12 -- Permanent differences 5 1 --- --- Income tax expense 197 11 === === The corporate income tax rates in Poland will be 30% in 2000 and 28% in 2001. Tax liabilities (including corporate income tax, Value Added Tax, social security, and other taxes) of the Company's Polish subsidiaries may be subject to examinations by Polish tax authorities for up to five years from the end of the year the tax is payable. CEDC's US federal income tax returns are also subject to examination by US tax authorities. Because the application of tax laws and regulations to many types of transactions is susceptible to varying interpretations, amounts reported in the financial statements could be changed at a later date upon final determination by the tax authorities. 8. CONTINGENT LIABILITIES The Company is involved in litigation and has claims against it for matters arising in the ordinary course of business. In the opinion of management, the outcome will not have a material adverse effect on the Company. The Company has signed an agreement to purchase a modern warehouse and distribution facility within Warsaw city limits. Consideration for the purchase will be $15 million and completion is expected in quarter 4. The Company has so far only been required to pay $50,000 as a contract signing fee. The next payment is scheduled for quarter 3. In order to manage its foreign currency exposures the Company has introduced a new hedging policy late in quarter 1. It is expected that this policy will minimize any adverse impact of currency fluctuations. CENTRAL EUROPEAN DISTRIBUTION CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis should be read in conjunction with the financial statements and the notes thereto appearing elsewhere in this report. OVERVIEW The Company's operating results are generally determined by the volume of alcoholic beverages that can be sold by the Company through its national distribution system, the gross profits on such sales and control of costs. The Company purchases the alcoholic beverages it distributes from producers as well as other importers and wholesalers. Almost all such purchases are made with the sellers providing a period of time, generally between 25 and 90 days, before the purchase price is to be paid by the Company. Since the initial public offering, the Company pays cash on delivery for its domestic vodka purchases in order to receive additional discounts in excess of the interest foregone. The Company sells the alcoholic beverages with a mark-up over its purchase price, which mark up reflects the market price for such individual product brands in the Polish market. The Company's bad debt ratio provision as a percentage of net sales was 0.17% in 1998, 0.28% in 1999 and 0.34% in the three-month period ended March 31, 2000. The following comments regarding variations in operating results should be read considering the rates of inflation in Poland during the period -- 8.5% in 1998, 9.8% in 1999 and 10.2% for the period to March 31, 2000. Consideration should also be given to the movements of the Polish zloty compared to the U.S. Dollar. In 1998 the zloty appreciated against the Dollar by 0.3%, in 1999 it depreciated by 18.6%. In the three months ended March 31, 2000 it has appreciated 0.1%. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31, 2000 Net sales increased $4.5 million, or 31.5% from $14.24 million in the three months ended March 31, 1999 to $18.72 million in the three months ended March 31, 2000. This increase is due to increased market penetration by the existing distribution system and increased sales following the acquisition of Multi Trade Company (MTC) in March 1999 and PWW in May 1999. The acquisition of MTC added $2.2 million to net sales during last half of March 1999. PWW sales for the quarter ended March 31, 2000 totaled to $495,000. Cost of goods sold increased $3.77 million, or 31.1%, from $12.14 million in the three months ended March 31, 1999 to $15.92 million in the three months ended March 31, 2000. As a percentage of net sales, cost of goods sold decreased from 85.3% to 85.0%. This decrease is mainly due to the better discounts the Company is able to obtain from its suppliers. Sales, general and administrative expense increased 66% from $1.54 million in the three months ended March 31, 1999 to $2.55 million in the three months ended March 31, 2000. This increase is mainly due to the inclusion of the two acquisitions mentioned above. As a percentage of net sales, sales, general and administrative expenses increased from 10.8% to 13.6%. These increases are due to three key reasons; firstly the inclusion of the S,G&A expense of the acquired subsidiaries for the first time (3.6%), secondly the inclusion of the associated amortization of goodwill (0.7%) and thirdly the additional provision for doubtful debts. Interest expense increased $110,000 or 423% from $26,000 in the three months ended March 31, 1999 to $136,000 in the three months ended March 31, 2000. This increase is mainly due to the use of bank financing for acquisitions. As a percentage of net sales, interest expense increased from 0.2% in 1999 to 0.7% in 2000. Interest income was $56,000 in the three months ended March 31, 2000 compared to $85,000 in the three months ended March 31, 1999. Net realized and unrealized foreign currency transactions resulted in losses of $103,000 in the three months ended March 31, 1999 and losses of $91,000 in the three months ended March 31, 2000. The net loss in 1999 is mainly due to the depreciation of the zloty, versus the U.S. dollar, in which a substantial portion of the Company's liabilities are denominated. Income tax expense decreased $186,000, from $197,000 in the three months ended March 31, 1999 to $11,000 in the three months ended March 31, 2000. This decrease is mainly due to the decrease in income before income taxes from $530,000 to CENTRAL EUROPEAN DISTRIBUTION CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- $34,000, respectively. The effective tax rate decreased from 37% in the three months ended March 31, 1999 to 32.4% in the three months ended March 31, 2000. This was due mainly to the reduction of statutory tax rates in Poland which decreased from 34% in 1999 to 30% in 2000. Net income decreased $310,000 from $333,000 in the three months ended March 31, 1999 to $23,000 in the three months ended March 31, 2000. This decrease is due to the factors noted above. STATEMENT OF LIQUIDITY AND CAPITAL RESOURCES The Company's net cash balance increased by $609,000 in the three months ended March 31, 2000. The increase in 2000 is partly due to the inclusion of PHA, whose balance sheet added $145,000. The balance, $464,000 results from tighter control of working capital. The net cash generated from operating activities was $1,425,000 in the first three months of 2000 compared to $764,000 used during the same period in 1999. The net cash used in investing activities amounted to $4.14 million in the three months ended March 31, 2000 compared to $3.07 million in the three months ended March 31, 1999. Investing activities consist primarily of the acquisition of PHA. The net cash provided by financing activities in the three months ended March 31, 2000 was $3.33 million compared to net cash of $4.09 million provided in the three months ended March 31, 1999. The net proceeds from borrowings in 2000 were accountable for this increase. The borrowings were used primarily for the acquisition of PHA. STATEMENT ON INFLATION AND CURRENCY FLUCTUATIONS Inflation in Poland is projected at 6.0% for 2000, though for the first quarter it was 10.2% slightly higher than last year. Whilst not material there has been an impact on the costs incurred by the Company especially in its overheads. The share of purchases denominated in foreign currencies has decreased resulting in lower foreign exchange exposure. However, the level of borrowing denominated in U.S. dollars has increased due to working capital requirements and the acquisitions of MTC and PWW. SEASONALITY The Company's sales have been historically seasonal with nearly 60% of sales occurring in the second half of the year and over 33% occurring in the last quarter. The first quarter is usually the slowest contributing around 20% to both sales and gross margin. The Company's working capital requirements are also seasonal and are normally highest in the months of December and January. Liquidity then normally improves as collections are made on the higher sales during the months of November and December. OTHER MATTERS The Company continues to be involved in litigation from time to time in the ordinary course of business. In management's opinion, the litigation in which the Company is currently involved, individually and in the aggregate, is not material to the Company's financial condition or results of operations. During March of 2000 the Company also finalized its acquisition of PHA paying approximately $4.0 million in cash and 268,126 shares of restricted stock. The transaction was completed on March 31, 2000 and therefore no recognition of PHA's earnings for the quarter ended March 31, 2000 has been made in this submission. PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. (c) All unregistered equity securities of the registrant sold during the first quarter of 2000 were sold in reliance on Regulation S. ITEM 5. OTHER INFORMATION On March 31, 2000, the Company purchased 100% of the shares of Polskie Hurtownie Alkoholi Sp. z o.o. for approximately $4 million in cash and 268,126 shares of common stock. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 10.1 Employment Agreement between Neil Crook and Carey Agri. 10.2 Employment Agreement between Neil Crook and CEDC 27 Financial Data Schedule (b) REPORTS ON FORM 8K No reports on Form 8K were filed during the first quarter of 2000. 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: May 15, 2000 BY: /s/ WILLIAM V. CAREY ------------------------ William V. Carey President and Chief Executive Officer Date: May 15, 2000 BY: /s/ NEIL A.M. CROOK ----------------------- Neil A.M. Crook Chief Financial Officer INDEX OF EXHIBITS EXHIBIT DESCRIPTION - -------- ----------- 10.1 Employment Agreement between Neil Crook and Carey Agri. 10.2 Employment Agreement between Neil Crook and CEDC 27 Financial Data Schedule