-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fy2NlYwNpJkaymJoTYCmr9ZarSkMPpnKJ5eshHSoGDG4tGMHoYwMhxz8miVIAEk4 45m3Ylfpih36y01X13KLxg== 0001016843-99-001126.txt : 19991117 0001016843-99-001126.hdr.sgml : 19991117 ACCESSION NUMBER: 0001016843-99-001126 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTRAL EUROPEAN DISTRIBUTION CORP CENTRAL INDEX KEY: 0001046880 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-BEER, WINE & DISTILLED ALCOHOLIC BEVERAGES [5180] IRS NUMBER: 541865271 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24341 FILM NUMBER: 99752022 BUSINESS ADDRESS: STREET 1: PALM TOWER BUILDING STREET 2: 1343 MAIN STREET SUITE 301 CITY: SARASOTA STATE: FL ZIP: 34236 BUSINESS PHONE: 9413301558 MAIL ADDRESS: STREET 1: PALM TOWER BUILDING STREET 2: 1343 MAIN STREET SUITE 301 CITY: SARASOTA STATE: FL ZIP: 34236 10-Q 1 - -------------------------------------------------------------------------------- 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, 1999 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 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, 1999: Common Stock ($.01 par value)............................... 4,134,230 shares - -------------------------------------------------------------------------------- INDEX PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements ............................................. 3 Consolidated Condensed Balance Sheets, September 30, 1999 (unaudited) and December 31, 1998 ........................ 4 Consolidated Condensed Statements of Income (unaudited) for the three and nine months ended September 30, 1999 and 1998 ....... 5 Consolidated Condensed Statements of Changes in Stockholders' Equity (unaudited) ............................................ 6 Consolidated Condensed Statements of Cash Flows (unaudited) for the six months ended September 30, 1999 and 1998 .............. 7 Notes to Consolidated Condensed Financial Statements (unaudited).. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................... 13 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds ........................ 18 Item 6. Exhibits and Reports on Form 8-K ................................. 18 Signatures ................................................................. 19 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CENTRAL EUROPEAN DISTRIBUTION CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) Amounts in columns expressed in thousands (except per share data)
DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------ ------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 3,628 $ 5,126 Accounts receivable, net of allowance for doubtful accounts of $181,000 and $263,000, respectively 11,514 13,290 Inventories 4,837 5,786 Prepaid expenses and other current assets 423 498 Deferred income taxes 119 84 ------- ------- TOTAL CURRENT ASSETS 20,521 24,784 Equipment, net 1,345 1,717 Intangible assets, net -- 6,432 Other assets 60 1,047 ------- ------- TOTAL ASSETS $21,926 $33,980 ======= =======
See accompanying notes. 3 CENTRAL EUROPEAN DISTRIBUTION CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) - CONTINUED Amounts in columns expressed in thousands (except per share data)
DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------ ------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable $ 8,149 $ 9,914 Bank loans and overdraft facilities -- 2,096 Other current liabilities 1,450 1,097 Current portion of long-term debt -- 1,875 -------- -------- TOTAL CURRENT LIABILITIES 9,599 14,982 Long term debt, less current maturities -- 4,584 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, 3,780,000 and 4,134,230 shares issued and outstanding at December 31, 1998 and September 30, 1999, respectively) 38 42 Additional paid-in-capital 10,651 12,900 Retained earnings 1,748 3,138 Accumulated other comprehensive loss (110) (1,666) -------- -------- TOTAL STOCKHOLDERS' EQUITY 12,327 14,414 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,926 $ 33,980 ======== ========
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, 1998 1999 1998 1999 ------------- ------------- ------------- ------------- NET SALES $ 12,968 $ 25,676 $ 34,861 $ 63,450 Cost of goods sold 11,057 22,145 29,593 54,592 -------- -------- -------- -------- GROSS PROFIT 1,911 3,531 5,268 8,858 Sales, general and administrative expenses 1,507 2,380 3,913 6,388 -------- -------- -------- -------- OPERATING INCOME 404 1,151 1,355 2,470 Non-operating income (expense) Interest expense (75) (90) (180) (200) Interest income 99 99 99 256 Realized and unrealized foreign currency transaction (loss) gain, net 70 (394) 30 (377) Other income (expense), net 3 124 31 117 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 501 890 1,335 2,266 Income tax expense 172 480 475 876 -------- -------- -------- -------- NET INCOME 329 410 860 1,390 ======== ======== ======== ======== NET INCOME PER COMMON SHARE, BASIC AND DILUTIVE $ 0.10 $ 0.10 $ 0.38 $ 0.35 ======== ======== ======== ========
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)
ACCUMULATED ADDITIONAL OTHER PAID-IN RETAINED COMPREHENSIVE COMMON STOCK CAPITAL EARNINGS LOSS TOTAL ------------------------ ----------- ------------- ------------- ---------- NO. OF SHARES AMOUNT ---------- --------- Balance at December 31, 1998 3,780,000 $ 38 $ 10,651 $ 1,748 $ (110) $ 12,327 Issue of new shares 354,230 4 2,249 2,253 Net income for the nine months ended September 30, 1999 1,390 1,390 Foreign currency translation adjustment, net of tax (1,556) (1,556) ---------- --------- ----------- ----------- ----------- ---------- Comprehensive loss for the nine months ended September 30, 1999 -- -- -- 1,390 (1,556) (166) ---------- --------- ----------- ----------- ----------- ---------- BALANCE AT SEPTEMBER 30, 1999 4,134,230 $ 42 $ 12,900 $ 3,138 $ (1,666) $ 14,414 ========== ========= =========== =========== =========== ==========
See accompanying notes. 6 CENTRAL EUROPEAN DISTRIBUTION CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Amounts in columns expressed in thousands (except per share data)
NINE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1999 -------- -------- NET CASH USED IN OPERATING ACTIVITIES $ (5,178) $ (1,350) INVESTING ACTIVITIES Purchases of equipment (450) (1,030) Proceeds from the disposal of equipment -- 81 Acquisition of companies -- (4,758) Net increase in marketable securities (1,442) -- -------- -------- NET CASH USED IN INVESTING ACTIVITIES (1,892) (5,707) FINANCING ACTIVITIES Borrowings on overdraft facility 24,575 2,666 Payments of overdraft facility (24,875) (1,094) Payment of capital lease obligations (113) -- Short-term borrowings 725 524 Payments of short term borrowings (1,350) -- Long-term borrowings 139 6,459 Payments of long-term borrowings (422) -- Net proceeds from initial public offering 10,842 -- -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 9,521 8,555 -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 2,451 1,498 Cash and cash equivalents at beginning of period 1,053 3,628 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,504 $ 5,126 ======== ======== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES Common stock issued in connection with investment in subsidiaries (Note 5) $ -- $ 2,253 ======== ========
See accompanying notes. 7 CENTRAL EUROPEAN DISTRIBUTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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). CEDC has formed two additional subsidiaries for purposes of the acquisitions discussed in Note 5. CEDC, Carey Agri and the new subsidiaries as of the date of their organization are referred to herein as the Company. In July 1998, CEDC had an initial public offering of 2,000,000 shares (at $6.50 per share) receiving net proceeds of approximately $10.6 million. The shares are currently quoted on the Nasdaq National Market. 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 unaudited interim periods are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. The balance sheet at December 31, 1998 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 and Subsidiaries' annual report on Form 10-K for the year ended December 31, 1998. 3. COMPREHENSIVE INCOME During the nine months period ended September 30, 1999, the Company incurred foreign currency translation losses of 1,556,000 USD, net of taxes, and reported an accumulated other comprehensive loss of 1,666,000 USD as of 30 September, 1999. The translation losses were due to the currency fluctuations in the rate of US dollar and Polish zloty (PLN) and translation losses on USD transactions with the parent company of a long-term investment nature. 8 CENTRAL EUROPEAN DISTRIBUTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Amounts in tables expressed in thousands (except per share data) 4. EARNINGS PER SHARE Net income per common share is calculated under the provisions of FAS No. 128, "Earnings per Share". The average number of shares outstanding was 1,780,000 before the initial public offering during 1998 . Giving effect of the initial public offering on July 27, 1998 the weighted average number of shares outstanding for the three and nine months ended September 30, 1998 was 3,193,043 and 2,256,191, respectively. The weighted average number of shares outstanding after the effect of the acquisitions discussed in Note 5 for the three and nine months ended September 30, 1999 was 4,134,230 and 4,021,790, respectively. 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, 1998 1999 1998 1999 ------------- ------------- ------------- ------------- Basic: Net income $ 329 $ 410 $ 860 $1,390 ======= ======= ======= ====== Average shares outstanding 3,193 4,134 2,256 4,022 ======= ======= ======= ====== Basic EPS $ 0.10 $ 0.10 $ 0.38 $ 0.35 ======= ======= ======= ====== Diluted: Net income $ 329 $ 410 $ 860 $1,390 ======= ======= ======= ====== Average shares outstanding 3,193 4,134 2,256 4,022 Net effect of dilutive stock options - based on the treasury stock method -- -- -- -- ======= ======= ======= ====== Totals 3,193 4,134 2,256 4,022 ======= ======= ======= ====== Diluted EPS $ 0.10 $ 0.10 $ 0.38 $ 0.35 ======= ======= ======= ======
No stock options were exercised during the periods. Warrants granted in connection with the IPO and stock options 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 the periods. 9 CENTRAL EUROPEAN DISTRIBUTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Amounts in tables expressed in thousands (except per share data) 5. ACQUISITIONS On March 12,1999, the Company purchased certain assets and business (excluding manufacture of distilled products) and the trademark of Multi Trade Company ("MTC" - a Partnership distributing alcoholic beverages in Poland) for $2.9 million cash and 254,230 shares of Common Stock. The stock cannot be sold for three years without consent of the Company and is unregistered. On May 10, 1999, the Company purchased certain assets, business and trademark of The Cellar of Fine Wines Sp. z o.o. ("CFW" - a limited liability company distributing wine in Poland) for $ 1.8 million cash and 100,000 shares of Common Stock. The stock cannot be sold until July 1, 2000 without consent of the Company. The pro forma unaudited results of operations for three and nine months ended September 30, 1998 and 1999, assuming consummation of these two purchases and issuance of the common stock as of January 1, 1998, are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED ------------------------------- ------------------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1998 1999 1998 1999 ------------- ------------- ------------- ------------- Net sales $ 24,362 $ 25,676 $ 67,577 $ 70,919 Net income (loss) (378) 410 (21) 1,184 Net income per share data: Basic and diluted $ (.11) $ 0.10 $ (.01) $ 0.29
The allocation of the purchase price reflected in the September 30, 1999 condensed consolidated balance sheet is preliminary and subject to revision upon disposition of possible adjustments of the purchase price resulting from expiration of the MTC escrow period. The Company has obtained an independent valuation of MTC's equipment; the MTC and CFW trademarks acquired have been recorded at the estimated fair value of the shares issued adjusted for lack of marketability. The remainder of the excess cost over net assets acquired from MTC has been reported as goodwill and customer lists. Management expects to finalize the purchase price allocations during the last quarter of 1999 upon completion of an independent valuation of the companies. 6. LONG-TERM DEBT AND SHORT-TERM BANK LOANS In February 1999, the Company obtained from a bank an unsecured USD denominated long-term loan to make the MTC acquisition described above. The interest on this loan was at the three month USD LIBOR rate plus 1.85% until August 1, 1999 when it was changed to three month USD LIBOR rate plus 1.3% (7.37% at September 30, 1999) and is payable in three quarterly installments starting August 31, 2000. The amount payable under the loan was $3,500,000 at September 30, 1999. In March 1999, the Company obtained an EURO denominated short-term loan with another bank for its working capital needs. The interest on this loan is at one month EUROLIBOR rate plus 2% (4.57% at September 30, 1999) and is payable on March 22, 2000. The amount payable under the loan was 500,000 EURO (524,000 USD) at September 30, 1999. This loan is collaterized by inventory up to a value of 2,000,000 PLN. In March 1999, the Company signed an agreement with the same bank for a short-term overdraft facility with the maximum limit of 1,850,000 PLN (450,000 USD) at 10 CENTRAL EUROPEAN DISTRIBUTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Amounts in tables expressed in thousands (except per share data) September 30, 1999. The Company did not have any borrowings outstanding for this facility as of September 30, 1999. The interest on this credit facility is WIBOR rate plus 1% ( 15.64 % at September 30, 1999). This credit line is available until March 22, 2000 and it is collaterized by inventory up to a value of 1,900,000 PLN. In April 1999, the Company obtained from a bank a USD denominated long-term loan for the acquisition of CFW described above. The interest on this loan is at the three month USD LIBOR rate plus 1.4% (7.47% at September 30, 1999) 1,000,000 USD is payable in November 1999, and 500,000 USD in May 2001. This loan is collaterized by inventory up to a value of 3,500,000 PLN. In April 1999, the Company obtained from the same bank an EURO denominated long-term loan for the acquisition of CFW described above. The interest on this loan is at the three-month EUROLIBOR rate plus 1.4% (4.48% at September 30,1999). The amount payable under the loan was 1,380,000 EURO (1,459,000USD) at September 30, 1999 and the loan is due in May 2001. This loan is collaterized by inventory up to a value of 3,500,000 PLN. In May 1999, the Company signed an agreement with a bank for an unsecured short- term overdraft facility with the maximum limit of 1,500,000 EURO (1,572,000 USD) at September 30,1999 for its working capital needs. The interest on this credit facility is at the six month EUROLIBOR rate plus 0.8% (3.92% at September 30,1999). The amount payable under the credit faci1ity was 1,500,000 EURO (1,572,000 USD) as of September 30,1999. This credit line is available until May 13, 2000. 7. INCOME TAXES Total income tax expense varies from expected income tax expense computed at Polish statutory rates (36% in 1998 and 34% in 1999) as follows:
NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 1998 SEPTEMBER 30, 1999 ------------------ ------------------ Tax at Polish statutory rate $ 481 $ 770 Increase, (reduction) in deferred tax valuation allowance (24) 35 Permanent differences and other items 18 71 ------- ------- Income tax expense $ 475 $ 876 ======= =======
The corporate income tax rate in Poland will be 32% in 2000 based on the present legislation. 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. 11 CENTRAL EUROPEAN DISTRIBUTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Amounts in tables expressed in thousands (except per share data) 8. CONTINGENCIES 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. Additionally, one of the Company's customers has defaulted under the terms of a credit arrangement. The Company has initiated legal action against this customer and at this date does not anticipate an adverse result which would be material. Consequently, no bad debt allowance has been established for this event. 12 ITEM 2. MANGEMENT'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 costs 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 0.08% in 1996, 0.12% in 1997, 0.17% in 1998, and 0.12% in the nine-month period ended September 30, 1999. 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 and 6% for the nine months ended September 30, 1999 -- as well as the movement of the Polish zloty compared to the U.S. Dollar. The zloty appreciated 0.3% against the U.S. Dollar in 1998. In the nine-month period to September 30, 1999 the zloty depreciated 17% against the U.S. Dollar. RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 1998 Net sales increased $28.59 million, or 82.0% from $34.86 million in 1998 to $63.45 million in 1999. This increase is mainly due to increased market penetration by the existing distribution system, increased sales of domestic vodka and the effect of acquisitions. Cost of goods sold increased $25.0 million, or 84.5%, from $29.59 million in 1998 to $54.59 million in 1999. As a percentage of net sales cost of goods sold increased from 84.9% to 86.0%. This increase is mainly due to increased sales of domestic vodka as a portion of sales because domestic vodka sells at a lower gross margin than imported alcohol products. Sales, general and administrative expense increased 63.3% from $3.91 million in 1998 to $6.39 million in 1999. This increase is mainly due to the expansion of sales noted above. As a percentage of net sales, sales, general and administrative expenses decreased from 11.2% to 10.1%. This decrease is due to higher utilization of the existing distribution system. 13 Interest expense increased $20,000 or 11.1% from $180,000 in 1998 to $200,000 in 1999. This increase is mainly due to additional short-term credits to support the sales growth noted above and to make acquisitions. As a percentage of net sales, interest expense was 0.5% in 1998 and 0.3% in 1999. Net realized and unrealized foreign currency transactions resulted in gains of $30,000 in 1998 and a loss of $377,000 in 1999. The loss in 1999 is mainly due to the losses of the zloty versus the EURO and US Dollar in the third quarter. A substantial portion of the Company's assets are denominated in the zloty while borrowings denominated in EURO's and US Dollars were increased. Income tax expense increased $401,000 from $475,000 in 1998 to $876,000 in 1999. This increase is mainly due to the increase in income before income taxes from $1.34 million to $2.27 million, respectively and adjustments of the deferred tax asset valuation allowance in the third quarter. The effective tax rate increased from 36% in 1998 to 39% in 1999. Permanent differences (for items such as non-deductible interest, taxes, and depreciation) between financial and taxable income increased in the nine month period ended September 30, 1999 and the Company also adjusted the deferred tax valuation allowance as noted above. Consequently, the effective tax rate was higher in 1999. See notes to the consolidated condensed financial statements for further information on income taxes. Net income increased $530,000 from $860,000 in 1998 to $1.39 million in 1999. This increase is due to the factors noted above. THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED SETEMBER 30, 1998 Net sales increased $12.7 million, or 98% from $12.97 million to $25.68 million. This increase is mainly due to increased market penetration by the existing distribution system, increased sales of domestic vodka and acquisitions. Cost of goods sold increased $11.09 million, or 100%, from $11.06 million in 1998 to $22.15 million in 1999. As a percentage of net sales cost of goods sold increased from 85.3% to 86.2%. This increase is mainly due to higher sales of domestic vodka, which sells at a lower gross margin than imported products. Sales, general and administrative expense increased $873,000, or 58% from $1.51 million in 1998 to $2.38 million in 1999. This increase is mainly due to the expansion of sales noted above. As a percentage of net sales, sales, general and administrative expenses decreased from 11.6% to 9.3%. Interest expense increased $15,000 from $75,000 in 1998 to $90,000 in 1999. This increase is mainly due to additional borrowings for working capital and for the acquisitions. Interest income remained constant at $99,000 in 1998 and 1999. This other income was mainly due to cash invested in short-term deposits. 14 Net realized and unrealized foreign currency transactions decreased $464,000 from a gain of $70,000 in 1998 to a loss of $394,000 in 1999. During the three months ended September 30, 1999, the zloty, in which a substantial portion of the Company's assets are denominated, depreciated versus the U.S. Dollar by 5%. Income tax expense increased $308,000, from $172,000 in 1998 to $480,000 in 1999. This increase is mainly due to the increase in income before income taxes from $501,000 to $890,000, respectively and an adjustment of the deferred tax asset valuation allowance and calculations of the tax benefits applicable to translation differences. The effective tax rate increased from 34.3% in 1998 to 53.9% in 1999. Permanent differences (for items such as non-deductible interest, taxes, and depreciation) between financial and taxable income increased, and the deferred tax asset valuation allowance and tax benefits of translation differences arising in the second quarter were adjusted in the quarter ended September 30, 1999. For these reasons the effective tax rate was significantly higher in 1999. Net income increased $81,000 from $329,000 in 1998 to $410,000 in 1999. This increase is due to the factors noted above. STATEMENT OF LIQUIDITY AND CAPITAL RESOURCES The Company's net cash balance increased by $2.45 million in the first nine months of 1999 compared to an increase of $1.49 million in the corresponding period of 1998, primarily as a result of higher working capital provided from debt financing activities. The net cash used in operating activities decreased by $3.83 million in 1999 to a negative $1.35 million compared to a negative $5.18 million in 1998. The increase is due to higher working capital from operations and the effect of borrowings. The investing activities amount to $5.71 million in the 1999 period and are in most part related to the acquisitions as well as a substantial increase in vehicle purchases as leases expired. During the 1998 period the investing activities amounted to $1.82 million of which the largest part was invested in marketable securities. Financing activities resulted in an increase of $8.56 million due to EURO and U.S. Dollar denominated loans. The net change of the overdraft facility and short-term borrowings was an increase of borrowings of $2.1 million. The Company began 1999 debt free and in the first nine-months of 1999 the Company incurred short-term debts of $1.02 million and long-term debt of $5.93 million to facilitate the acquisitions and increase working capital. The amount of the Company's stockholders' equity is directly affected by foreign currency translation adjustments. In the first nine months of 1999, such adjustments resulted in a comprehensive loss of $1.56 million and a decrease in stockholders' equity of a like amount. See note 3 to the condensed consolidated financial statements for further information. 15 STATEMENT ON INFLATION AND CURRENCY FLUCTUATIONS Inflation in Poland is projected at 8.0% for the whole of 1999, substantially lower than in previous years and therefore the impact on the financial statements in the first nine months of the year is less material than in previous years. The share of purchases denominated in non-Polish currency has decreased resulting in lower foreign exchange exposure for purchases. However, the level of borrowing denominated in U.S. Dollars and EURO's has increased due to higher sales and the need to finance the acquisitions. The zloty has depreciated 17% against the US Dollar in the first nine months of 1999, and has depreciated 7% against the EURO. SEASONALITY The Company's sales have been historically seasonable with 60% of the sales in 1998 occurring in the second half of the year, of which over 35% occurred in the last quarter. The higher leveraging of the business and effectiveness result in larger share of net profits earned in the second half of the year. In fiscal 1998, over 63% of net profits were earned in the second half of the year with 41% in the last quarter. The Company expects to experience variability in the 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 December to January. Liquidity is then normally improving when collections are made on the higher sales during the month of December. OTHER MATTERS In March 1999 the Polish tax authorities in Warsaw assessed Value Added Tax ("VAT") of approximately $110,000 including penalties and penalty interest. The assessment was made on the basis of alleged improper treatment of input and output VAT on certain of the Company's transactions. The Company has appealed the decision. The Management believes that the Company's case is defensible. An accrual of $20,000 has been made in the financial statements however. 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 1999 the Company also finalized its acquisition of Multi Trade Company paying approximately $2.9 million in cash and 254,230 shares of restricted stock. The acquisition did not have a significant effect on operating results for the first quarter of 1999 although it did effect the second and third quarters. In May the Company finalized the acquisition of The Cellars of Fine Wines paying approximately $1.8 million and 100,000 shares of restricted stock. This acquisition had a minor effect on operating results for the second quarter and had an effect on the third quarter. 16 YEAR 2000 COMPLIANCE The Company's software systems are Year 2000 compliant and were tested in the fourth quarter of 1998. The compliance of the software systems is guaranteed by the manufacturer of the software. The Company is presently in the final stages of Year 2000 preparations. The Company has retained an independent consulting company to review the compliance of its hardware and operating systems. A final report confirms that all workstations are compliant. The Company has replaced hardware as a part of systems upgrade at a cost of $30,000. Further, the Year 2000 compliant upgrade to Novell, the operating system used by the Company, is commercially available and is being implemented at an estimated cost of $20,000. The Company estimates that the total cost of completing the Year 2000 compliance will not exceed $50,000. Given the relatively small size of the Company's business with any particular supplier or customer, the Company has not carried out compliance tests with its suppliers or customers. Although it does not anticipate serious problems, it cannot be certain about the effects on its business of the uncertainty surrounding the compliance efforts of suppliers and customers. The Company does not expect any disruptions in its operations as a result of any failure by the Company to be in compliance with Year 2000 requirements. 17 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. ITEM 6. EXHIBITS AND REPORTS ON FORM 8K (a) Exhibits 27 Financial Data Schedule PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. ITEM 6. EXHIBITS AND REPORTS ON FORM 8K (a) Exhibit Financial Data Schedule (b) Reports on Form 8-K No reports on form 8-K were filed during the third quarter of 1999. 18 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 14, 1999 By: /s/ WILLIAM V. CAREY ---------------------------------------- William V. Carey President and Chief Executive Officer Date: November 14, 1999 By: /s/ DOROTA ANTIONSIK ---------------------------------------- Dorota Antionsik Acting Chief Financial Officer 19 INDEX OF EXHIBITS EXHIBIT DESCRIPTION - -------- ----------- 27 Financial Data Schedule EX-27 2
5 This schedule contains summary information extracted from the Registrant Company Condensed Consolidated Balance Sheet (Unaudited) for September 30, 1999 and Condensed Consolidated Statement of Income (Unaudited) for the Six Months ended September 30, 1999 and is qualified in its entirety by reference to such financial statements. 9-MOS DEC-31-1998 DEC-31-1999 SEP-30-1999 5,126,000 0 13,290,000 263,000 5,786,000 24,784,000 1,717,000 377,000 33,980,000 14,982,000 0 0 0 42,000 14,372,000 33,980,000 63,450,000 63,450,000 54,592,000 60,980,000 0 0 200,000 2,226,000 876,000 1,390,000 0 0 0 1,390,000 0.35 0.35 F1 = indication of uncertainty in figures
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