- --------------------------------------------------------------------------------
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 SEPTEMBER 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 September 30, 2001:
Common Stock ($.01 par value)............................... 4,360,720 shares
-------------------------------------------------------------------------------
INDEX
PAGE
---------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements ....................................................................................... 3
Consolidated Condensed Balance Sheets, September 30,
2001 (unaudited) and December 31, 2000 ..................................................................... 3
Consolidated Condensed Statements of Income (unaudited) for the
three and nine month periods ended September 30, 2000 and September 30, 2001................................ 5
Consolidated Condensed Statement of Changes in Stockholders'
Equity (unaudited) as of September 30, 2001................................................................. 6
Consolidated Condensed Statements of Cash Flows (unaudited) for
the nine month periods ended September 30, 2000 and September 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 ........................................................................ 15
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 31, September 30,
2000 2001
CURRENT ASSETS
Cash and cash equivalents $ 2,428 $ 1,444
Accounts receivable, (net of allowance for doubtful accounts of $1,230,000 and
$1,676,000 respectively) 30,983 25,427
Inventories 9,557 7,013
Prepaid expenses and other current assets 809 1,377
Deferred income taxes 416 703
------------------------
TOTAL CURRENT ASSETS $44,193 $35,964
Intangible assets, net 11,471 11,934
Equipment, net 3,031 3,335
Deferred income taxes 80 80
Other assets 536 547
------------------------
TOTAL ASSETS $59,311 $51,860
========================
See accompanying notes.
3
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) - CONTINUED
Amounts in columns expressed in thousands
December 31, September 30,
2000 2001
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 26,399 $ 17,765
Bank loans and overdraft facilities 1,383 3,213
Current portion of long term debt 5,400 6,739
Income taxes payable 35 102
Taxes other than income taxes 928 414
Other accrued liabilities 686 948
------------------------
TOTAL CURRENT LIABILITIES 34,831 29,181
Long term debt, less current maturities 7,988 4,793
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 September 30, 2001, respectively) 45 45
Additional paid-in-capital 14,175 14,273
Retained earnings 4,635 5,932
Accumulated other comprehensive loss (2,243) (2,214)
Less Treasury Stock at cost (64,100 shares at December 31, 2000 and 72,900 shares at
September 30, 2001) (120) (150)
------------------------
TOTAL STOCKHOLDERS' EQUITY 16,492 17,886
------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 59,311 $ 51,860
========================
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 Nine months ended
September 30, September 30, September 30, September 30,
2000 2001 2000 2001
Net sales $32,103 $42,073 $82,146 $121,089
Cost of goods sold 27,906 36,621 71,052 105,335
------------------------- ---------------------------
Gross margin 4,197 5,452 11,094 15,754
Selling, general and administrative expenses 2,922 3,784 7,800 11,118
Depreciation of equipment 210 209 630 641
Amortization of goodwill and trademarks 193 209 509 620
Bad debt expense 381 110 567 438
------------------------- ---------------------------
Operating Income 491 1,140 1,588 2,937
Non operating income (expense)
Interest income 46 15 211 59
Interest expense (252) (368) (643) (1,019)
Realized and unrealized foreign exchange losses, net (236) (3) (742) (236)
Other (expense) income, net 61 (91) (94) 56
------------------------- ---------------------------
Income before taxes 110 693 320 1,797
Income tax expense (benefit) (9) 246 91 500
------------------------- ---------------------------
Net income $ 119 $ 447 $ 229 $ 1,297
------------------------- ---------------------------
Net income per share of common stock, basic $ 0.03 $ 0.10 $ 0.05 $ 0.30
Net income per share of common stock, diluted $ 0.03 $ 0.10 $ 0.05 $ 0.30
See accompanying notes.
5
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
CONSOLIDATED CONDENSED STATEMENT 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 nine months
ended September 30, 2001 1,297 1,297
Foreign currency translation
adjustment 29 29
----------------------------------------------------------------------------------------
Comprehensive income for the nine 1,297 29 1,326
months ended September 30, 2001
Treasury shares purchased 9 (30) (30)
----------------------------------------------------------------------------------------
Balance at September 30, 2001 4,433 $45 73 $(150) $14,273 $5,932 $(2,214) $17,886
========================================================================================
See accompanying notes.
6
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Amounts in columns expressed in thousands
Nine months Nine months
ended ended
September 30, September 30,
2000 2001
OPERATING ACTIVITES
Net income $ 229 $ 1,297
Adjustments to reconcile net income to net cash provided by (used in)
operating activities
Depreciation and amortization 1,139 1,261
Deferred income tax benefit (212) (287)
Bad debt provisions 567 438
Foreign exchange losses 742 236
Changes in operating assets and liabilities
Accounts receivable 2,206 6,343
Inventories 1,885 3,248
Prepayments and other current assets 787 (568)
Trade accounts payable (7,861) (10,683)
Income and other taxes (447)
Other accrued liabilities and other (239) 262
---------------------------------
Net Cash Provided by (Used in) Operating Activities (757) 1,100
INVESTING ACTIVITIES
Purchase of equipment (1,129) (684)
Acquisition of subsidiary (3,855) (1,344)
---------------------------------
Net Cash Used In Investing Activities (4,984) (2,028)
FINANCING ACTIVITIES
Short-term borrowings 1,939 2,580
Payments of short-term borrowings (1,498) (750)
Long term borrowings 5,600 4,510
Payments of long term borrowings (875) (6,366)
Purchase of treasury shares - (30)
---------------------------------
Net Cash Provided By (Used In) Financing Activities 5,166 (56)
---------------------------------
Net Decrease in Cash and Cash equivalents (575) (984)
Cash and cash equivalents at beginning of period 3,115 2,428
---------------------------------
Cash and cash equivalents at end of period $ 2,540 $ 1,444
=================================
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
Common stock issued in connection with investment in subsidiaries $ 1,278 $ 89
=================================
Supplemental disclosures of cash flow information
Interest paid $ 387 $ 1,017
Income tax paid
$ 190 $ 807
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
nine-month period ended September 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 nine month period ended September 30, 2001, the Company
recorded foreign currency translation gains of $29,000, and reported an
accumulated other comprehensive loss of $2,214,000 as of September 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 common stock
outstanding 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 Nine Months Ended
September 30, September 30, September 30, September 30,
2000 2001 2000 2001
Basic:
Net income $ 119 $ 447 $ 229 $1,297
============================================================
Weighted Average shares of common
stock outstanding 4,402 4,361 4,314 4,351
============================================================
Basic EPS $ 0.03 $ 0.10 $ 0.05 $ 0.30
============================================================
Diluted:
Net Income $119 $ 447 $ 229 $1,297
============================================================
Weighted Average shares of common
stock outstanding 4,402 4,361 4,314 4,351
Net effect of dilutive stock
options--based on the treasury
stock method - 45 - 20
------------------------------------------------------------
Totals 4,402 4,406 4,314 4,371
============================================================
Diluted EPS $ 0.03 $ 0.10 $ 0.05 $ 0.30
============================================================
No stock options have been exercised during the nine-months 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.
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 a certain profit target. 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
additional payment for this added interest is required.
The acquisition of Astor Sp. z o.o. has been accounted for as a
purchase, and 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 a 20
year period. The amortization of the acquired goodwill will cease as of
January 1, 2002 as discussed in note 11.
The acquisition was financed using the Company's loan facilities and
issuance of Company stock as indicated above. The contingency
consideration is expected to be finalized during the first quarter of
2002, 2003 and 2004.
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
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Amounts in tables expressed in thousands
(except per share data)
5. ACQUISITIONS - (continued)
The following unaudited pro forma results of operations of the
Company give effect to the acquisitions of Astor Sp. z o.o.
and PHA as though the transactions had occurred on January 1, 2000 and
January 1, 2001.
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2000 2001 2000 2001
In Thousands, except per share data
Net sales $32,103 $42,073 $91,614 $127,226
Net income 119 447 113 1,388
Net income per share data:
Basic $ 0.03 $ 0.10 $ 0.03 $ 0.32
Diluted $ 0.03 $ 0.10 $ 0.03 $ 0.32
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 nine month periods
of 2000.
6. LONG-TERM DEBT AND SHORT-TERM BANK LOANS
On July 21, 2000, the Company signed a loan agreement for $750,000. The
loan is repayable in instalments of $201,250 commencing August 20,
2001. This loan was repaid on July 3, 2001.
On July 2, 2001, the Company signed a loan agreement for 3,000,000
Polish zloty ($750,000USD) to replace the $750,000USD loan signed in
July 2000. This is part of the Company's strategy to re-align its debt
in order to minimize future foreign currency exposure. The agreement is
subject to review in July 2002.
11
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:
Nine months ended
September 30, 2000 September 30, 2001
---------------------- ---------------------
Tax at the Polish Statutory rate $96 $503
Permanent differences and other items (5) (3)
----------------------- ---------------------
Tax charge $91 $500
======================= =====================
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, including penalty interest
could amount to approximately $282,000 USD. The subsidiary has revised
its articles in order to delete this requirement and believes that no
provision for the possible added tax expense is necessary at this time.
12
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. During 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 are 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 September 30, 2001 is a $118,000 gain. The overall
ineffective portion for the nine months ended September 30, 2001 is a
$294,000 gain. There are no outstanding forward contracts as of
September 30, 2001.
11. Recently issued accounting prouncementS
In June 2001, the FASB released SFAS 141 "Business Combinations" . This
Statement requires that 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. Disclosure of the primary reasons for the business
combination is required and the allocation of the purchase price paid
to the assets acquired and liabilities assumed by major balance sheet
caption is necessary. 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. The Company does not anticipate that
this standard will have a material effect on their financial
statements.
13
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Amounts in tables expressed in thousands
(except per share data)
11. Recently issued accounting prouncementS (cONTINUED)
In June 2001, the FASB released SFAS 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 provisions of this Statement are required to be applied
starting with fiscal years beginning after December 15, 2001. Other
than goodwill amortization, the Company does not anticipate that this
standard will have a material effect on their financial statements.
In August 2001, the FASB released SFAS 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". This standard supersedes
SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be disposed of". This statement removes goodwill
from its scope, (addressed in SFAS 142) and addresses long-lived assets
to be held and used, to be disposed of other than sale and to be
disposed of by sale. The provisions of this statements are required to
be applied starting with fiscal years beginning after December 15,
2001. The Company does not anticipate that this statement will have a
material effect on their financial statements.
14
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, the 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 0.69% in the nine-month period to September 30, 2000, and
0.36% for the nine-month period ended September 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 4.3% for the nine months ended September 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 nine-month period to September 30, 2001 the Zloty
depreciated 2.2% against the U.S. Dollar.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 2000
Net sales increased $39.0 million, or 47.5% from $82.1 million to
$121.1 million. This increase is partially due to acquisition growth
of $24.5 million or 29.8% following the acquisitions of PHA (March 31,
2000) and Astor (April 5, 2001). The other contributor to increased
sales growth was an $14.5 million or 17.7% 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 $34.3 million, or 48.3%, from $71.1
million in 2000 to $105.3 million in 2001. This increase is for the
same reasons as indicated above, $21.8 million or 30.7% is
attributable to acquisitions with the remainder of $12.5 million or
17.6% is attributable to the additional costs related to the increased
organic growth. As a percentage of net sales, cost of goods sold
increased from 86.5% to 87.0%. This increase is caused by the higher
proportion of low margin products in the total sales mix brought about
by the acquisition of Astor.
Selling, general and administrative expenses (which include
depreciation, amortization and bad debt expense) as a total, increased
$3.3 million, or 34.7% from $9.5 million in 2000 to $12.8 million in
2001. This increase is mainly due to the organic growth indicated
above whereas the acquisition of Astor added $0.4 million to the
periods' overheads. As a percentage of net sales, sales, general and
administrative expenses decreased from 11.6% to 10.6%. Core cash based
overheads as a percentage of sales improved from 9.5% in 2000 to 9.2%
in 2001.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Interest expense increased $376,000 from $643,000 in 2000 to
$1,019,000 in 2001. This increase is 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 $152,000 from $211,000 in 2000 to $59,000 in 2001.
This other income was mainly due to cash invested in short-term
deposits.
Net realized and unrealized foreign currency transactions losses
decreased $506,000 from $742,000 in 2000 to $236,000 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.
Income tax expense increased $409,000 from $91,000 in 2000 to $500,000
in 2001. This increase is mainly due to the increase in income before
taxes from $320,000 to $1,797,000, respectively. The effective income
tax rate did not vary significantly between periods.
Net income increased $1,068,000 from $229,000 in 2000 to $1,297,000 in
2001. This increase is due to the factors noted above.
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 2000
Net sales increased $10.0 million, or 31.1% from $32.1 million to
$42.1 million. This increase is mainly due to organic growth of $5.6
million or 17.4%. This was achieved through improved coverage from the
existing distribution network. The acquisition of Astor from April 5,
2001 added $4.4 million or 13.7% to group sales.
Cost of goods sold increased $8.7 million, or 31.2%, from $27.9
million in 2000 to $36.6 million in 2001. This increase is again
mainly due to the organic growth of the existing distribution network
which accounted for $4.8 million or 17.2% of the total. The
incorporation of Astor's cost of goods sold added $3.9 million or
14.0%. As a percentage of net sales, cost of goods sold increased from
86.9% to 87.0%. This increase is caused by the higher proportion of
low margin products in the total sales mix brought about by the
acquisition of Astor.
Selling, general and administrative expenses (including depreciation,
amortization and bad debts expense) as a total, increased $0.6
million, or 16.2% from $3.7 million in 2000 to $4.3 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 11.5% to 10.2%. Core cash
backed operating costs as a percentage of sales decreased from 9.1% in
2000 to 9.0% in 2001.
Interest expense increased $115,000 from $252,000 in 2000 to $368,000
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 $31,000 from $46,000 in 2000 to $15,000 in 2001. This
other income was mainly due to cash invested in short-term deposits.
Net realized and unrealized foreign currency transactions losses
decreased $233,000 from $236,000 in 2000 to $3,000 in 2001.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Income tax expense increased $255,000 from a tax credit of $9,000 in
2000 to $246,000 in 2001. This increase is mainly due to the increase
in income before taxes from $110,000 to $693,000, respectively and was
less than expected due to the effects of an adjustment of the deferred
tax asset in 2000.
Net income increased $328,000 from $119,000 in 2000 to $447,000 in
2001. This increase is due to the factors noted above.
STATEMENT OF LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash balance decreased by $1.0 million in the first
nine months of 2001 compared to a decrease of $0.6 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 $1.8
million in 2001 to a positive $1.1 million compared to a negative $0.7
million in 2000. The increase is due to increased profitability and
improved turnover of working capital.
The investing activities amount to $2.0 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 $5.0 million of which the largest part was the acquisition
of PHA.
Financing activities resulted in a cash decrease of $0.1 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
nine months of 2001 the Company has increased net borrowings by $0.1
million primarily from the additional loans taken for the acquisition
of Astor. As at September 30, 2001 the Company had total third party
debts of $14.7 million.
The amount of the Company's stockholders' equity is directly affected
by foreign currency translation adjustments. Such adjustments resulted
in a cumulative comprehensive loss of $2.2 million and decrease in
stockholders' equity of a like amount through September 30, 2001. 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 nine months of 2001, the
inflation was 4.3%. The share of purchases denominated in non-Polish
currency has decreased resulting in lower foreign exchange exposure
for purchases. The Zloty has depreciated 2.2% against the US Dollar in
the first nine months of 2001, and has depreciated 0.8% against the
EURO.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SEASONALITY
The Company's sales have been historically seasonable with around
20.0% of the sales in 2000 occurring in the first quarter of the year
and over 30% occurring 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.
18
ITEM 3: Quantitative and Qualitative Disclosures About Marketable Securities
Foreign Currency Risk. Currently many of the Company's operating
subsidiaries loans are denominated in currencies other than their
functional currency, the Polish Zloty, as a result we have in the nine
months ended September 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. When a loan is hedged the net gain or
loss on the foreign exchange is recognized in the statement of income
in accordance with SFAS 133. Where there is no specific hedge then the
impact on results is at the net fair value of the transactions.
19
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibit
None
(b) Reports on Form 8-K
20
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: November 9, 2001 By: /s/ WILLIAM V. CAREY
------------------------------
William V. Carey
President and Chief Executive Officer
Date: November 9, 2001 By: /s/ NEIL A.M. CROOK
------------------------------
Neil A.M. Crook
Chief Financial Officer
21