--------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
JANUARY 1, 2001 TO JUNE 30, 2001.
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 STREET, #301
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 June 30, 2001:
Common Stock ($.01 par value)............................... 4,433,620 shares
--------------------------------------------
INDEX
PAGE
---------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements ........................................................... 3
Consolidated Condensed Balance Sheets, June 30,
2001 (unaudited) and December 31, 2000 ......................................... 3
Consolidated Condensed Statements of Income (unaudited) for the
three and six month periods ended June 30, 2000 and June 30, 2001............... 5
Consolidated Condensed Statement of Changes in Stockholders'
Equity (unaudited) as of June 30, 2001.......................................... 6
Consolidated Condensed Statements of Cash Flows (unaudited) for
the six month periods ended June 30, 2000 and June 30, 2001.................... 7
Notes to Consolidated Condensed Financial Statements (unaudited)................ 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................................ 16
Item 3. Quantitative and Qualitative Disclosure About Market Risk....................... 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................ 20
Signatures................................................................................. 21
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
Amounts in columns expressed in thousands
December June 30,
31, 2000 2001
CURRENT ASSETS
Cash and cash equivalents $2,428 $ 1,220
Accounts receivable, (net of allowance for doubtful accounts of $1,230,000 and
$1,644,000, respectively) 30,983 27,591
Inventories 9,557 7,106
Prepaid expenses and other current assets 809 1,372
Deferred income taxes 416 680
------------------------
TOTAL CURRENT ASSETS $ 44,193 $ 37,969
Intangible assets, net 11,471 12,343
Equipment, net 3,031 3,579
Deferred income taxes 80 80
Other assets 536 812
------------------------
TOTAL ASSETS $ 59,311 $ 54,783
========================
See accompanying notes.
3
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) - CONTINUED
Amounts in columns expressed in thousands
December June 30,
31, 2000 2001
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 26,399 $ 18,974
Bank loans and overdraft facilities 1,383 3,729
Current portion of long term debt 5,400 5,054
Income taxes payable 35 85
Taxes other than income taxes 928 391
Other accrued liabilities 686 1,612
------------------------
TOTAL CURRENT LIABILITIES 34,831 29,845
Long term debt, less current maturities 7,988 6,858
COMMITMENTS AND CONTINGENCIES
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, 4,402,356 and 4,433,620
shares issued at December 31, 2000 and June 30, 2001, respectively) 45 45
Additional paid-in-capital 14,175 14,273
Retained earnings 4,635 5,485
Accumulated other comprehensive loss (2,243) (1,573)
Less Treasury Stock at cost (64,100 shares at December 31, 2000 and 72,900 shares at
June 30, 2001) (120) (150)
------------------------
TOTAL STOCKHOLDERS' EQUITY 16,492 18,080
------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 59,311 $ 54,783
========================
See accompanying notes.
4
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
Amounts in columns expressed in thousands
(except per share data)
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2000 2001 2000 2001
Net sales $31,323 $45,530 $50,043 $79,132
Cost of goods sold 27,226 39,662 43,146 68,713
Gross margin 4,097 5,868 6,897 10,419
Selling, general and administrative expenses 2,768 3,982 4,846 7,333
Depreciation of equipment 210 226 420 433
Amortization of goodwill and trademarks 199 214 348 411
Bad debt expense 70 116 186 328
Operating Income 850 1,330 1,097 1,914
Non operating income (expense)
Interest income 109 25 165 44
Interest expense (255) (353) (391) (650)
Realized and unrealized foreign exchange losses (415) (449) (506) (233)
Other (expense) income, net (113) 15 (155) 29
Income before taxes 176 568 210 1,104
Income tax expense 89 97 100 254
Net income $87 $471 $110 $850
Net income per share of common stock, basic $0.02 $0.11 $0.03 $0.20
Net income per share of common stock, diluted $0.02 $0.11 $0.03 $0.19
See accompanying notes.
5
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (UNAUDITED)
Amounts in columns expressed in thousands
(except per share data)
Capital Stock
Issued In Treasury
No. of Amount No. of Amount Additional Retained Accumulated Total
Shares Shares Paid-in- Earnings Other
Capital Comprehensive
Loss
Balance at December 31, 2000 4,402 $45 64 $(120) $14,175 $4,635 $(2,243) $16,492
Stock issued for acquisition 31 98 98
Net income for the six months
ended June 30, 2001 850 850
Foreign currency translation
adjustment 670 670
----------------------------------------------------------------------------------------
Comprehensive income for the six 850 670 1,520
months ended June 30, 2001
Treasury shares purchased 9 (30) (30)
----------------------------------------------------------------------------------------
Balance at June 30, 2001 4,433 $45 73 $(150) $14,273 $5,485 $(1,573) $18,080
========================================================================================
See accompanying notes.
6
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Amounts in columns expressed in thousands
Six months ended Six months ended
June 30, 2000 June 30, 2001
OPERATING ACTIVITES
Net income 110 850
Adjustments to reconcile net income to net cash provided by (used in)
operating activities
Depreciation and amortization 768 844
Deferred income tax benefit (152) (266)
Bad debt provisions 186 328
Foreign exchange losses 506 233
Changes in operating assets and liabilities
Accounts receivable 3,100 5,892
Inventories 1,998 3,155
Prepayments and other current assets (545) (839)
Trade accounts payable (7,078) (9,474)
Income and other taxes 50
Other accrued liabilities and other 320 926
-----------------------------------------
Net Cash Provided (Used) By Operating Activities (787) 1,699
INVESTING ACTIVITIES
Purchase of equipment (479) (836)
Acquisition of subsidiary (3,855) (1,344)
-----------------------------------------
Net Cash Used In Investing Activities (4,334) (2,180)
FINANCING ACTIVITIES
Borrowings on overdraft facility 679
Payments of overdraft facility (171)
Short term borrowings 1,914
Payment of short term borrowings (502) (346)
Long term borrowings 4,000 4,401
Payments of long term borrowings (5,431)
Purchase of treasury shares (30)
-----------------------------------------
Net Cash Provided By (Used In) Financing Activities 5,241 (727)
-----------------------------------------
Net Increase (Decrease) in Cash and cash equivalents 120 (1,208)
Cash and cash equivalents at beginning of period 3,115 2,428
-----------------------------------------
Cash and cash equivalents at end of period $ 3,235 $ 1,220
=========================================
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
Common stock issued in connection with investment in subsidiaries $ 1,278 $98
=========================================
Supplemental disclosures of cash flow information
Interest paid 387 645
Income tax paid 190 446
See accompanying notes.
7
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Amounts in tables expressed in thousands
(except per share data)
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 (MTC
and CFW) and in 2000 and in 2001 acquired two additional companies (PHA
and Astor) as disclosed in Note 5 below. CEDC and its subsidiaries are
referred to herein as the Company.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with US 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 and the disclosures herein are adequate to make the
information presented not misleading. Operating results for the six
month period ended June 30, 2001 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2001.
The balance sheet at December 31, 2000 has been derived from the
audited financial statements at that 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 the Registrant Company's annual
report on Form 10-K for the year ended December 31, 2000.
3. COMPREHENSIVE INCOME
During the six month period ended June 30, 2001, the Company recorded
foreign currency translation gains of $670,000, and reported an
accumulated other comprehensive loss of $1,573,000 as of June 30, 2001
as reflected in the Consolidated Condensed Statements of Changes in
Stockholder's Equity (unaudited). The gain was due to the currency
fluctuations, largely between the Polish Zloty and the US Dollar, and
local currency translation movements on USD transactions with the
parent Company of a long-term investment nature. No deferred tax
benefit is recorded on the accumulated other comprehensive loss as it
is CEDC's current intention to reinvest subsidiary earnings. The total
of the accumulated other comprehensive loss consist solely of currency
translation adjustments.
8
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Amounts in tables expressed in thousands
(except per share data)
4. EARNINGS PER SHARE
Net income per share of common stock is calculated under the provisions
of SFAS No. 128, "Earnings per Share". The increase in stock in 2001
gives effect to the acquisition of "PHA" in 2000, the share buy back
programme established in 2000 and the purchase of Astor in 2001.
The following table sets forth the computation of basic and diluted
earnings per share for the periods indicated.
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2000 2001 2000 2001
Basic:
Net income $87 $471 $110 $850
======================================================
Weighted Average shares of common
stock outstanding 4,402 4,362 4,267 4,348
======================================================
Basic EPS $ 0.02 $0.11 $ 0.03 $0.20
======================================================
Diluted:
Net Income $87 $471 $110 $850
======================================================
Weighted Average shares of common
stock outstanding 4,402 4,407 4,267 4,348
======================================================
Net effect of dilutive stock
options-based on the treasury
stock method
- - - 39
Totals 4,402 4,407 4,267 4,387
======================================================
Diluted EPS $0.02 $0.11 $0.03 $0.19
======================================================
No stock options have been exercised during the first half of 2001.
Warrants granted in connection with the 1998 Initial Public Offering
have been excluded from the above calculations of diluted shares since
the exercise price is equal to or greater than the average market price
of the common shares during 2000 and 2001. Approximately 48,000 and
39,000 employee stock options have been included in the calculation of
the diluted earnings per share for the three and six months ended as
the strike price was above the average stock price for the period.
9
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Amounts in tables expressed in thousands
(except per share data)
5. ACQUISITIONS
The Company completed the acquisition of Astor Sp. z o.o. effective
April 5, 2001, for a cash purchase price of $1,200,000 USD and 31,264
shares of CEDC stock. The shares issued may not be sold without the
Company's consent for three years subsequent to the acquisition date.
As part of the purchase agreement with Astor, a non-compete agreement
was established with the former stockholders for a period of three
years. The terms of the agreement allow for an additional payment of
both cash and Company stock, which are contingent upon Astor Sp. z o.o.
achieving certain profit targets. The contingent consideration has not
been included in the purchase equation, as the Company is not able to
determine if the target earnings will be realized. If the acquired
company is able to achieve the target earnings, the total acquisition
cost including contingent consideration is expected to be approximately
$1,900,000. Astor Sp. z o.o. is based in Olsztyn, Poland. Its primary
area of activity is the distribution of various spirits.
The Company acquired 97% of the voting shares of Astor Sp. z o.o..
Based on the purchase agreement the remaining 3% of the voting shares
will be received by the Company over the next three years. No payments
for this added interest is required.
The acquisition of Astor Sp. z o.o. will be accounted for as a
purchase, as a result the operating results of the acquired company
have been included in the consolidated condensed financial statements
from the date of acquisition. The acquired goodwill will be amortized
over the expected benefit period of 20 years.
The acquisition price was financed using the Company's loan facilities
and the issuance of Company stock as indicated above. The acquisition
is expected to be finalized during the first quarter of 2002.
The following un-audited pro forma results of operations of the Company
give effect to the acquisition of Astor Sp. z o.o. as though the
transaction had occurred on January 1, 2001. This pro-forma also
includes the effects of the PHA acquisition as reported previously.
Abridged notes are given below.
On March 31, 2000, the Company purchased 100% of the voting shares of
Polskie Hurtownie Alkoholi Sp. z o.o. (PHA) for $4.0 million cash and
268,126 shares of CEDC Stock. The shares issued may not be sold without
the Company's consent for three years subsequent to the acquisition. As
part of the purchase agreement with PHA, a non-compete agreement was
established with the former stockholders for a period of three years.
The Company obtained an independent valuation for this acquisition. The
cost of the acquisition was allocated to the tangible assets acquired
based on their fair values at the date of acquisition and estimated
values per the valuation report. The excess ($5,490,000) of the cost
over the amounts allocated as described above represents goodwill. The
purchase price allocations were finalized during the first quarter of
2001. No significant adjustments were recognized with respect to the
finalisation of the purchase price allocations.
10
The following unaudited pro forma results of operations of the Company
give effect to the acquisitions of Astor Sp.z o.o. and PHA Sp.z o.o. as
though the transactions had occurred on January 1, 2000 and January 1,
2001.
Three months ended Six months ended
June 30, June30, June 30, June 30,
2000 2001 2000 2001
In Thousands, except per share data
Net sales $31,323 $45,530 $64,683 $85,269
Net income (loss) 87 471 (7) 951
Net income per share data:
Basic EPS $0.02 $0.11 $0.00 $0.22
Diluted EPS $0.02 $0.11 $0.00 $0.21
The unaudited pro forma financial information presented is not
necessarily indicative of either the results of operations that would
have occurred had Astor's acquisition taken place on January 1, 2001 or
the future results of operations of the combined companies. Astor Sp.
z o.o. had no operating results in the three and six month periods of
2000.
6. LONG-TERM DEBT AND SHORT-TERM BANK LOANS
On March 21, 2001 the Company signed a loan agreement for $700,000 to
replace two loans repaid in March 2000. The interest rate is 1 month
LIBOR plus 0.8% and the loan is repayable on March 31, 2002. In June
2001 the Company redeemed $350,000 in principal.
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. This loan was re-negotiated in June 2001. The
annual interest rate is 3 month LIBOR plus 1.96%. The loan is repayable
in quarterly instalments of $350,000 commencing March 31, 2002 with
final payment due in December 2004.
On May 8, 2000 the Company signed a loan agreement for $1,500,000 to
replace the loan repaid in May 2000. The interest rate is 3 month LIBOR
plus 1.4% and the loan is repayable on April 30, 2002. On April 4, 2001
$500,000 of this loan was repaid as part of the general restructuring
relating to the Astor acquisition.
On April 4, 2001 the Company signed an agreement for $1,020,000. This
loan is payable in two years in 23 monthly instalments. The annual
interest rate is 3 month LIBOR plus 2.0%.
On April 4, 2001 the Company signed an agreement for $680,000. This
loan is payable in three years in 35 instalments. The annual interest
rate is 3 month LIBOR plus 2.0%.
On April 4, 2001 the Company signed an agreement for $500,000 to
replace an overdraft facility. The loan is subject to review in October
2001. The interest rate is 3 month LIBOR plus 1.7%.
On May 16, 2000 the Company signed an agreement for a long-term loan of
$850,000. The annual interest rate is 3 month LIBOR plus 1.5%. The loan
is repayable in instalments of $212,500 commencing August 20, 2001. In
the six months ended June 30, 2001 the Company repaid $212,500.
In June 2000, the Company signed an overdraft facility agreement of
$500,000 for financing the trade activities with JMB a new key account.
This facility was increased in August 2000 by an additional $500,000 to
cover the increased sales activity. On August 1, 2000, the Company
signed an agreement for a short- term loan amounting to $ 233,110. The
annual interest rate is 1 month LIBOR plus 0.8%. The interest is paid
monthly. The loan was repayable on June 16, 2001. In January 2001 both
of these loans were converted to a EURO loan of 734,982 with a review
date of January 2002. The interest rate is 3 month EURIBOR plus 0.8%.
In June 2001 this loan was repaid.
During 1999, the Company acquired a long term U.S. Dollar loan of
$3,500,000. The loan stipulated a principal repayment of $1,765,000
during 2000 with the balance payable in February 2001. In February
11
2001 the repayment date was extended to October 2001. During the six
months ended June 30, 2001 the Company repaid an additional $1,165,800
and Swiss Francs 169,000. The loan may be repaid in USD with an annual
interest rate of LIBOR plus 1.85%, or in DEM with an annual interest
rate of EURIBOR plus 1.95% or in Swiss Francs with an annual interest
rate of LIBOR plus 2.25%. The loan was collateralised by bill of
exchange issued by the Company.
During April 1999, the Company obtained a 1,380,000 EURO denominated
long-term loan. The interest on this loan is at 3 month EUROLIBOR plus
1.4%. This loan has been extended to April 2002 as part of a frame
agreement.
On June 20, 2001 the Company signed a loan agreement for 2,000,000
Polish zloty (US$500,000). The annual interest rate is 3 month WIBOR
plus 0.5%. This loan is subject to review in June 2002.
As part of the Astor Acquisition the Company inherited a facility
agreement dated January 18, 2001 for 6,000,000 Polish Zloty
(US$1,500,000). The annual interest rate is 1 month WIBOR plus 1.35%.
As at June 30, 2001 3,150,000 Polish Zloty was utilised under this
agreement. The agreement is due for review in January 2002.
12
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Amounts in tables expressed in thousands
(except per share data)
7. INCOME TAXES
Total income tax expense varies from expected income tax expense
computed at enacted Polish statutory rates (30% in 2000 and 28% in
2001) as follows:
Six months ended
June 30, 2000 June 30, 2001
----------------------- ---------------------
Tax at the Polish Statutory rate $63 $309
Permanent differences and other items 37 35
Temporary differences relating to (90)
restatement of unrealised foreign
exchange losses on hedging contracts
----------------------- ---------------------
Tax charge $100 $254
======================= =====================
As at June 30, 2001 the Company had greater than expected losses on its
forward foreign currency contracts as calculated at fair value. This
gave rise to a greater than expected adjustment to the deferred tax
asset value relating to these losses. These contracts mature in
September 2001 when this tax value will crystallize. The future value
of the contracts and hence their ultimate gain or loss cannot be
determined at this time and so the adjustment is shown as a temporary
difference.
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 in which the tax is payable. CEDC's US
federal income tax returns are also subject to examination by the US
tax authorities. As the application of tax laws and regulations for the
many types of transactions is susceptible to varying interpretations,
amounts reported in the financial statements may change at a later date
upon final determination by the tax authorities.
8. COMMITMENTS AND 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.
One of the Company's subsidiaries' articles of association states that
retained earnings must be distributed to the shareholders. The
subsidiary did not pay any dividends, but rather elected to retain its
profits. The Polish tax authorities may view the violation of the
articles of association as a form of a non-interest bearing loan and as
a result impute taxable interest based on the bank borrowing rate. This
imputed interest is taxable at the corporate income tax rate. The
additional amount of tax that maybe payable could amount to
approximately $144,000 USD. The subsidiary has revised its articles in
order to delete this requirement and believes that no provision for the
added tax expenses is necessary at this time.
13
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Amounts in tables expressed in thousands
(except per share data)
9. SHARE REPURCHASE PROGRAM
On November 27, 2000 the Company's Board of Directors authorized a
share repurchase program to purchase up to 200,000 shares in the open
market. In 2000, the Company purchased 64,100 shares in the open market
for $120,000 including costs. In the first three months of 2001, the
Company purchased an additional 8,800 shares for $30,000 including
costs. These shares have been treated as treasury stock. The Company
may purchase the remaining authorized shares over the next six months
on the open market.
10. DERIVATIVE FINANCIAL INSTRUMENTS
Effective January 1, 2001, the Company adopted SFAS 133, which
establishes accounting and reporting standards for derivative
instruments. All derivatives, whether designated as hedging
relationships or not, are required to be recorded on the balance sheet
at fair value. The Company uses derivatives to moderate the financial
market risks of its business operations. Derivative products such as
forward contracts are used to hedge the foreign currency market
exposures underlying certain liabilities with financial institutions.
The Company's accounting policies for these instruments is based on its
designation of these instruments as hedging transactions. An instrument
is designated as a hedge based in part on its effectiveness in risk
reduction and one-to-one matching of derivatives with the related
balance sheet risk.
The Company has designated forward contracts as fair value hedges
(i.e., hedging the exposure to changes in the fair value of the foreign
denominated bank loans), the gain or loss on the derivative instrument
as well as the offsetting gain or loss on the hedged item attributable
to the hedged risk are recognized in earnings in the current period.
The adoption of SFAS 133 on January 1, 2001, resulted in no cumulative
adjustment to the financial statements.
For currency forward contracts, effectiveness is measured by using the
forward-to-forward rate compared to the underlying economic exposure.
The ineffective portion recognized in non-operating income for the
three months ended March 31, 2001 and June 30, 2001 is a gain of
$70,000 and $46,000 respectively.
11. Recently issued accounting pronouncements
In June 2001, the FASB released SFASB 142 "Goodwill and other
intangible assets" . This Statement addresses financial accounting and
reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, Intangible Assets. It addresses how
intangible assets that are acquired individually or with a group of
other assets (but not those acquired in a business combination) should
be accounted for in financial statements upon their acquisition. This
Statement also addresses how goodwill and other intangible assets
should be accounted for after they have been initially recognized in
the financial statements. The provision of this Statement are required
to be applied starting with fiscal years beginning after December 15,
2001. Other than for goodwill amortisation, the Company does not
anticipate that this standard will have a material effect with respect
to the reporting of their financial statements.
In June 2001, the FASB released SFASB 141 "Business Combinations". This
Statement addresses combinations be accounted for by a single
method--the purchase method. This Statement also requires separate
recognition of intangible assets apart from goodwill if they meet the
prescribed criteria. In addition, disclosure of the primary reasons for
the business combination and the allocation of the
14
purchase price paid to the assets acquired and liabilities assumed by
major balance sheet caption. When the amounts of goodwill and
intangible assets acquired are significant in relation to the purchase
price paid, disclosure of other information about those assets is
required. The provisions of this Statement apply to all business
combinations initiated after June 30, 2001. Other than for goodwill
amortisation, the Company does not anticipate that this standard will
have a material effect with respect to the reporting of their financial
statements.
15
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in tables expressed in thousands
(except per share data)
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, in July 1998, the Company pays
cash on delivery for most of its domestic vodka purchases in order to
receive additional discounts. 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 0.37% in the six months period to June 30, 2000, and
0.41% for the six-month period ended June 30, 2001.
The following comments regarding variations in operating results
should be read considering the rates of inflation in Poland during
the period, 8.5% in 2000 and 6.2% for the six months ended June 30,
2001 - as well as the movement of the Polish Zloty compared to the
U.S. Dollar. The Zloty appreciated 0.1% against the U.S. Dollar in
2000. In the six-month period to June 30, 2001 the Zloty appreciated
3.8% against the U.S. Dollar.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH SIX MONTHS ENDED
JUNE 30, 2000
Net sales increased $29.1 million, or 58.2% from $50.0 million to
$79.1 million. This increase is partially due to acquisition growth
of $18.1 million or 36.2% following the acquisitions of PHA (March
31, 2000) and Astor (April 5, 2001). The other contributor to the
increased sales growth was an $11.0 million or 22.0% increase, which
was due to organic growth in the existing distribution network. This
organic growth was generated by increases in coverage, new key
accounts and improvements to product focus and penetration.
Cost of goods sold increased $25.6 million, or 59.4%, from $43.1
million in 2000 to $68.7 million in 2001. This increase is for the
same reasons as indicated above, $16.1 million or 37.4% is
attributable to acquisitions with the remainder of $9.5 million or
22.0% is attributable to the additional costs related to the
increased organic growth. As a percentage of net sales, cost of goods
sold increased from 86.2% to 86.8%. This increase is caused by the
higher proportion of low margin products in the total sales mix
brought about by the acquisition of Astor.
Sales, general and administrative expenses (which include
depreciation, amortization and bad debt expense) as a total,
increased $2.7 million, or 46.6% from $5.8 million in 2000 to $8.5
million in 2001. This increase is mainly due to the organic growth
indicated above whereas the acquisition of Astor added $0.2 million
to the periods' overheads. As a percentage of net sales, sales,
general and administrative expenses decreased from 11.6% to 10.7%.
Core cash based overheads as a percentage of sales improved from 9.6%
in 2000 to 9.2% in 2001.
Interest expense increased $259,000 from $391,000 in 2000 to $650,000
in 2001. This increase is
16
partially due to additional borrowings for the acquisitions, both for
PHA in 2000 and Astor in 2001. Additionally the Company made a
conscious decision to realign its currency mix from USD denominated
loans to those in local currency. This was done so as to reduce the
exposure to foreign exchange losses on loans used for working capital
support. Interest income decreased $121,000 from $165,000 in 2000 to
$44,000 in 2001. This other income was mainly due to cash invested in
short-term deposits.
Net realized and un-realized foreign currency transactions losses
decreased $273,000 from $506,000 in 2000 to $233,000 in 2001. All
foreign denominated loans have been fully hedged since the middle of
the first quarter this year and this has contributed to the improved
control over foreign exchange risk. However, the zlotys strength
during the six months ended June 30, 2001, where it appreciated 3.8%
against the U.S. Dollar meant that the Company incurred higher than
planned losses on its September contracts.
Income tax expense increased $154,000 from $100,000 in 2000 to
$254,000 in 2001. This increase is mainly due to the increase in
income before taxes from $210,000 to $1,104,000, respectively and was
less than expected due to the effects of an adjustment of the
deferred tax.
Net income increased $740,000 from $110,000 in 2000 to $850,000 in
2001. This increase is due to the factors noted above.
THREE MONTHS ENDED JUNE 30, 2001 COMPARED WITH THREE MONTHS ENDED
JUNE 30, 2000
Net sales increased $14.2 million, or 45.4% from $31.3 million to
$45.5 million. This increase is mainly due to organic growth of $9.8
million or 31.3%. This was achieved through improved coverage from
the existing distribution network. The acquisition of Astor from
April 5, 2001 added $4.4 million or 14.1% to group sales.
Cost of goods sold increased $12.5 million, or 46.0%, from $27.2
million in 2000 to $39.7 million in 2001. This increase is again
mainly due to the organic growth of the existing distribution network
which accounted for $8.4 million or 30.9% of the total. The
incorporation of Astor's cost of goods sold added $4.1 million or
15.1%. As a percentage of net sales, cost of goods sold increased
from 86.9% to 87.1%. This increase is caused by the higher proportion
of low margin products in the total sales mix brought about by the
acquisition of Astor.
Sales, general and administrative expenses (including depreciation,
amortization and bad debts expense) as a total, increased $1.3
million, or 40.6% from $3.2 million in 2000 to $4.5 million in 2001.
This increase is mainly due to the organic growth indicated above
whereas the acquisition of Astor added $0.2 million to the periods'
overheads. As a percentage of net sales, sales, general and
administrative expenses decreased from 10.4% to 10.0%. Core cash
backed operating costs as a percentage of sales improved from 8.8% in
2000 to 8.7% in 2001.
Interest expense increased $98,000 from $255,000 in 2000 to $353,000
in 2001. This increase is partially due to additional borrowings for
the acquisitions but also the Company made a conscious decision to
realign its currency mix from USD denominated loans to those in local
currency. This was done so as to reduce the exposure to foreign
exchange losses on loans used for working capital support. Interest
income decreased $84,000 from $109,000 in 2000 to $25,000 in 2001.
This other income was mainly due to cash invested in short-term
deposits.
Net realized and un-realized foreign currency transactions losses
increased $34,000 from $415,000 in 2000 to $449,000 in 2001. All
foreign denominated loans are fully hedged however, the zlotys
continuing strength during the three months ended June 30, 2001,
where it appreciated 2.7% against the U.S. Dollar, meant that the
Company incurred higher than planned losses on its September
contracts.
Income tax expense increased $8,000 from $89,000 in 2000 to $97,000
in 2001. This increase is mainly due to the increase in income before
taxes from $176,000 to $568,000, respectively and was less than
expected due to the effects of an adjustment of the deferred tax.
Net income increased $384,000 from $87,000 in 2000 to $471,000 in
2001. This increase is due to the factors noted above.
17
STATEMENT OF LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash balance decreased by $1.2 million in the first
six months of 2001 compared to an increase of $0.1 million in the
corresponding period of 2000, primarily as a result of the purchase
of Astor.
The net cash provided by operating activities increased by $2.5
million in 2001 to a positive $1.7 million compared to a negative
$0.8 million in 2000. The increase is due to increased profitability
and improved turnover of working capital.
The investing activities amount to $2.2 million in the 2001 period
and are primarily due to the acquisition of Astor whilst the balance
relates to expenditure in distribution depots, IT system upgrades and
vehicle replacements. During the 2000 period the investing activities
amounted to $4.3 million of which the largest part was the
acquisition of PHA.
Financing activities resulted in a decrease of $0.7 million mainly
due to the improved profitability which resulted in a decrease in
debt..
The Company began 2001 with debts of $14.8 million and in the first
six months of 2001 the Company has increased net borrowings by $0.8
million primarily from the additional loan taken for the acquisition
of Astor. As at June 30, 2001 the Company had total third party debts
of $15.6 million.
The amount of the Company's stockholders' equity is directly affected
by foreign currency translation adjustments. In the first six months
of 2001, such adjustments resulted in a cumulative comprehensive loss
of $1.6 million and decrease in stockholders' equity of a like
amount. See note 3 to the condensed consolidated financial statements
for further information.
STATEMENT ON INFLATION AND CURRENCY FLUCTUATIONS
Inflation in Poland is projected at 6.2% for the whole of 2001,
compared to 8.5% for 2000. For the first six months of 2001, the
inflation was 6.2%. The share of purchases denominated in non-Polish
currency has decreased resulting in lower foreign exchange exposure
for purchases. The Zloty has appreciated 3.8% against the US Dollar
in the first six months of 2001, and has appreciated 12.4% against
the EURO.
18
SEASONALITY
The Company's sales have been historically seasonal with around 20.0%
of the sales in 2000 occurring in the first quarter of the year and
over 30% occurred in the last quarter.
The Company expects to experience variability in sales and net income
on a quarterly basis.
The Company's working capital requirements are also seasonal, and are
normally highest in the months of November to December. Liquidity is
then normally improving when collections are made on the higher sales
during the month of January.
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 April of 2001 the Company finalized its acquisition of Astor
Sp. z o.o. ("Astor") paying approximately $1.2 million in cash and
31,264 shares of restricted common stock. The acquisition did not
have an effect on operating results for the first quarter of 2001
although it did effect the second quarter.
19
ITEM 3: Quantitative and Qualitative Disclosures About Marketable Securities
Foreign Currency Risk. Currently many of the Company's loans are
denominated in currencies other than its functional currency, the
Polish Zloty, as a result we have in the six months ended June 30,
2001 experienced significant foreign exchange exposures. To contain
these exposures the Company acquires fixed period forward exchange
contracts matched in denomination and value to the associated loans.
Where a loan is hedged then the net gain or loss on foreign exchange
is amortized over the remaining life of the loan by marking both the
related hedge instrument and hedged item to fair value. Where there
is no specific hedge then the impact on results is at the net fair
value of the transactions.
20
PART II. OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds
(c) On April 5, 2001, the Company issued 31,264 shares of its
common stock as part of the compensation paid in the
acquisition of Astor Sp. z o.o. Additionally $1.2 million
was paid as part of cost of this acquisition. See note 5 to
the financial statements.
These securities were issued without registration under the
Securities Act in reliance on the exemption provided by Regulation S. The
persons receiving the securities are all Polish citizens and restrictive legends
have been placed on the certificates reflecting applicable transfer
restrictions.
Item 4 Submission of Matters to a Vote of Security Holders
(a) The Company held is annual meeting of stockholders on April
30, 2001.
(b) At the meeting, directors were elected and independent
accountants approved for the 2001 fiscal year. The votes
cast for, against and withheld for each nominee for
director and the votes regarding the selection of the
independent accountants is as follows:
(i) Directors:
Nominees FOR Withhold Authority to Vote
William V. Carey 3,470,025 5,750
Alan Dickson 3,470,025 5,750
James T. Grossmann 3,470,025 5,750
Tony Housh 3,470,025 5,750
Jan W. Laskowski 3,470,025 5,750
Jeffrey Peterson 3,470,025 5,750
Joe M. Richardson 3,470,025 5,750
(ii) Independent Accountants
The selection of independent accounts was approved by a vote
of 3,464,615.
Item 5. Other Information
(a) On May 29, 2001, Alan Dickson resigned as a member of the Company's board of
directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibit
None
(b) Reports on Form 8-K
A report on Form 8K was filed during the second quarter of 2001 on
April 5, 2001 regarding the acquisition of ASTOR Sp z o.o.
21
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
(registrant)
Date: August 14, 2001 By: /s/ WILLIAM V. CAREY
----------------------------------------
William V. Carey
President and Chief Executive Officer
Date: August 14, 2001 By: /s/ NEIL A.M. CROOK
----------------------------------------
Neil A.M. Crook
Chief Financial Officer
22