SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
May 28, 1999
(Date of Report)
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 0-24341 54-1865271
(State or other jurisdiction (Commission file number) (IRS employer identification number)
of incorporation)
</TABLE>
1343 Main Street, Suite 301, Sarasota Florida 34236
(Address of Principal Executive Offices)
Registrants telephone number, including area code: (941) 330 1558
<PAGE>
ITEM 5 OTHER EVENTS
(a) YEAR 2000 COMPLIANCE
Central European Distribution Corporation's (the Company) 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 (see Form 10Q for quarter ended March 31, 1999).
The Company is currently integrating Multi Trade Company (MTC), which was
acquired on March 12, 1999 into its operating systems and retained an
independent consulting company to review the compliance of its hardware and
operating systems and those of MTC. A filing was made on Form 8-K with regard to
the consumation of the acquisition on April 5, 1999. Prior to the sale of the
major portion of its business and assets to the Company, MTC had a year 2000
compliance plan in place. The plan encompassed the assessment, development and
implementation of preventative measures and emergency procedures for addressing
risks in this area. MTC was reasonably confident that their plan would be
successful .
A preliminary report from the consulting company noted above confirms that only
a small number of the Company's and MTC's workstations are noncompliant. The
Company is planning to replace the hardware in mid 1999 as part of its overall
systems upgrading at the estimated cost of $65,000.
The Company estimates that the total cost of completing the Year 2000 compliance
will not exceed $100,000.
Given the relatively small size of the Company's and MTC's business with any
particular supplier or customer, the Company has not carried out compliance
tests with its suppliers or customers, or with suppliers and customers of MTC.
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, including its subsidiaries does not expect any disruptions in
operations as a result of any failure by the Company to be in compliance with
Year 2000 requirements. It has not yet developed a contingency plan, but plans
to by September 1999. The Company is reasonably confident that their compliance
plan will be successful but it cannot guarantee that all actions taken and
planned will effectively minimize exposure to Year 2000 related risks.
(b) RELEASE OF CERTAIN LOCKUP AGREEMENTS
In connection with the initial public offering of the Company in July 1998,
William V. Carey, the Company's Chairman, President and Chief Executive Officer,
and Jeffrey Peterson, the Company's Vice Chairman, Executive Vice President and
Secretary, entered into agreements with the Company's underwriters not to offer,
sell, contract to sell or otherwise dispose of their shares of Company common
stock or any securities convertible into, or exchangeable for, such shares of
common stock until July 2000, without the approval of one of the underwriters.
On May 19, 1999, this underwriter released Mr. Carey and Mr. Peterson from these
restrictions. Each of Mr. Carey and Mr. Peterson owns 592,740 shares of the
Company common stock that may now be sold, transferred, pledged or otherwise
disposed of in accordance with applicable law. In particular, these shares are
eligible for sale in accordance with the provisions of Rule
<PAGE>
144 promulgated by the Securities and Exchange Commission pursuant to the
Securities Act of 1933 .
(c) RESIGNATION OF CHIEF FINANCIAL OFFICER
As previously announced by the Company, Robert Bohojlo, the Company Vice
President and Chief Financial Officer, resigned in mid May, 1999. Ms. Dorota
Antionsik is acting Chief Financial Officer. Ms Antionsik has served as Chief
Accountant of the Company for the last four years.
<PAGE>
ITEM 7 FINANCIAL STATEMENTS and EXHIBITS
(a) Financial Statements of Business Acquired
INDEX
PAGE
Item 1. Report of Independent Auditors........................................5
Item 2. Financial Statements
Balance Sheets at December 31, 1997 and December 31, 1998.............6
Statements of Income for the years ended December 31, 1997,
and December 31, 1998...............................................7
Statements of Changes in Partners' Equity for the years ended,
December 31, 1998 and December 31, 1998.............................8
Statements of Cash Flows for the years ended, December 31, 1997 and
December 31, 1998...................................................9
Notes to Financial Statements.....................................10-16
(b) Pro forma financial information
Unaudited Pro Forma Condensed Consolidated Income Statement
information for the three month period Ended March 31, 1999 .........17
Unaudited Pro Forma Condensed Consolidated Income Statement
information for the year ended December 31, 1998 ....................18
Notes to Pro Forma Income Statements for the year ended December
31, 1998, and the three month period ended March 31, 1999 ........18-20
Signatures...........................................................21
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
Multi Trade Company S.C.
We have audited the accompanying balance sheets of Multi Trade Company S.C. as
of December 31, 1997 and 1998 and the related statements of income, changes in
Partners' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Multi Trade Company S.C. at
December 31, 1997 and 1998, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
/s/ Ernst & Young Audit Sp. z o.o.
Warsaw, Poland
March 19, 1999
5
<PAGE>
MULTI TRADE COMPANY S.C.
BALANCE SHEETS
AMOUNTS IN COLUMNS EXPRESSED IN THOUSANDS
- --------------------------------------------------------------------------------
DECEMBER 31,
---------------------
1997 1998
-------- ---------
ASSETS
CURRENT ASSETS
Cash $ 160 $ 124
Accounts receivable, net of allowance for doubtful
accounts of $236,000 and $474,000, respectively 5,827 6,554
Inventories 2,164 2,436
Prepaid expenses and other current assets 129 218
------ -------
TOTAL CURRENT ASSETS 8,280 9,332
Property, plant and equipment, net 1,308 1,583
====== =======
TOTAL ASSETS $9,588 $10,915
====== =======
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $8,298 $ 9,010
Overdraft facilities and bills of exchange -- 385
Taxes other than income taxes 17 6
Other accrued liabilities 35 307
Short-term debt 208 290
Current portion of long-term debt 101 175
------ -------
TOTAL CURRENT LIABILITIES 8,659 10,173
Long-term debt, less current maturities 615 611
PARTNERS' EQUITY 314 131
====== =======
TOTAL LIABILITIES AND PARTNERS' EQUITY $9,588 $10,915
====== =======
See accompanying notes.
6
<PAGE>
MULTI TRADE COMPANY S.C.
STATEMENTS OF INCOME
Amounts in columns expressed in thousands
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------
1997 1998
--------- ---------
Net sales $ 43,995 $ 43,067
Cost of goods sold 40,282 39,010
-------- --------
Gross profit 3,713 4,057
Sales, general and administrative expenses 3,108 3,510
-------- --------
Operating income 605 547
Non-operating income (expense)
Interest expense (6) (239)
Interest income 58 66
Realized and unrealized foreign currency
transaction losses, net (472) (90)
Other income, net 89 122
-------- --------
Net income $ 274 $ 406
======== ========
See accompanying notes.
7
<PAGE>
MULTI TRADE COMPANY S.C.
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
Amounts in columns expressed in thousands
- --------------------------------------------------------------------------------
Partners' Equity
Balance at December 31, 1996 $ 368
Net income and comprehensive income for 1997 274
Drawings by Partners (328)
-----
Balance at December 31, 1997 314
Net income and comprehensive income for 1998 406
Drawings by Partners (589)
=====
Balance at December 31, 1998 $ 131
=====
See accompanying notes.
8
<PAGE>
MULTI TRADE COMPANY S.C.
STATEMENTS OF CASH FLOWS
Amounts in columns expressed in thousands
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 274 $ 406
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 152 209
Gain on the disposal of equipment (31) (21)
Provision for doubtful accounts 129 306
Changes in operating assets and liabilities:
Accounts receivable (1,923) (1,033)
Inventories (711) (272)
Prepayments and other current assets (90) (89)
Trade accounts payable 2,476 712
Income and other taxes 4 (11)
Other accrued liabilities 8 272
-------- --------
Net Cash Provided By Operating Activities 288 479
-------- --------
INVESTING ACTIVITIES
Purchases of equipment (127) (491)
Proceeds from the disposal of equipment 48 28
-------- --------
Net Cash Used In Investing Activities (79) (463)
-------- --------
FINANCING ACTIVITIES
Borrowings on overdraft facility and bills of exchange -- 50,183
Payment of overdraft facility and bills of exchange -- (49,798)
Short-term borrowings 207 82
Long-term borrowings 77 105
Payment of long-term borrowings (49) (35)
Drawings by Partners (328) (589)
-------- --------
Net Cash Used In Financing Activities (93) (52)
-------- --------
Net Increase (Decrease) in Cash 116 (36)
Cash at beginning of period 44 160
-------- --------
Cash at end of period $ 160 $ 124
======== ========
</TABLE>
See accompanying notes.
9
<PAGE>
MULTI TRADE COMPANY S.C.
NOTES TO FINANCIAL STATEMENTS
Amounts in tables expressed in thousands
- --------------------------------------------------------------------------------
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Multi Trade Company S.C. (MTC or the Partnership) was organized as a general
partnership in Poland in 1990. MTC has two partners: Wojciech Wasilewski and
Wojciech Strzakowski. Each has a 50% interest in the Partnership.
MTC has its headquarters in Bia(3)ystok, Poland. It distributes alcoholic
beverages, mainly vodka, in Poland concentrating on the northeastern part of the
country. The Partnership's activities are substantially in one industry segment
- - the distribution of alcoholic beverages.
2. ACCOUNTING POLICIES
The significant accounting policies and practices followed by the Partnership
are as follows:
BASIS OF PRESENTATION
The Partnership maintains its books of account and prepares its financial
statements in Polish zloties (PLN) in accordance with Polish statutory
requirements and the Accounting Act of 29 September 1994. The exchange rate was
approximately 3.5 PLN per USD at December 31, 1997 and 1998. However, the USD
has strengthened to approximately 3.9 PLN per USD by March 1999.
The accompanying financial statements include adjustments, translations, and
reclassifications, which are appropriate to present the Partnerships' financial
statements in accordance with accounting principles generally accepted in the
United States of America (US GAAP).
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
As stated above, the Partnership maintains its books of account in Polish
zloties. The accompanying financial statements have been prepared in US Dollars.
For all periods prior to January 1, 1998, transactions and balances not already
measured in US Dollars (primarily Polish zloties) have been remeasured into US
Dollars in accordance with the relevant provisions of US Financial Accounting
Standard (FAS) No. 52 "Foreign Currency Translation" as applied to entities in
highly inflationary economies.
Under FAS No. 52, revenues, costs, capital and non-monetary assets and
liabilities are translated at historical exchange rates prevailing on the
transaction dates. Monetary assets and liabilities are translated at exchange
rates prevailing on the balance sheet date. Exchange gains and losses arising
from remeasurement of monetary assets and liabilities that are not denominated
in US Dollars are credited or charged to operations.
Effective January 1, 1998, the Partnership no longer considered Poland to be a
hyper-inflationary economy. Therefore, the Partnership has ceased accounting for
its activities using provisions applicable to hyper-inflationary economies on
January 1, 1998 and has treated the Polish zloty as its functional currency. See
the discussion below regarding the effect of this change on comprehensive
income.
10
<PAGE>
MULTI TRADE COMPANY S.C.
NOTES TO FINANCIAL STATEMENTS
Amounts in tables expressed in thousands
- --------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost, less accumulated depreciation.
Depreciation is computed by the straight-line method over the estimated useful
lives of depreciable assets.
REVENUE RECOGNITION
Revenue is recognized when goods are delivered to customers.
11
<PAGE>
MULTI TRADE COMPANY S.C.
NOTES TO FINANCIAL STATEMENTS
Amounts in tables expressed in thousands
- --------------------------------------------------------------------------------
ADVERTISING AND PROMOTION COSTS
Advertising and promotion costs are expensed as incurred. Advertising and
promotion costs not reimbursed by suppliers were approximately $80,000 and
$109,000 in 1997 and 1998, respectively.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Cost includes customs duty and transportation costs. Inventories are
comprised primarily of spirits.
ESTIMATES
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results may differ from
those estimates and such differences may be material to the financial
statements.
INCOME TAXES
The Partnership pays no income taxes as its operating results pass through and
are taxed to its partners.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board (FASB) issued its
Statement No. 130, "Reporting Comprehensive Income." This standard became
effective for the Partnership in 1998, and it requires the disclosure of
comprehensive income which is defined as all changes in equity during a period
except those resulting from investments by owners and distributions to owners.
Comprehensive income includes net income adjusted by, among other items, foreign
currency translation adjustments. As disclosed in this Note 2, until January 1,
1998, the Partnership remeasured its transactions and results of its operations
in accordance with FAS No. 52 as applied to entities in highly inflationary
economies. Therefore, exchange gains and losses arising from remeasurement of
these monetary assets and liabilities were credited or charged to net income.
However, in 1998 since Poland was no longer considered a highly inflationary
economy, these remeasurements were recorded as a separate component of equity
and, under FAS No. 130, included as the only component of other comprehensive
income. The net amount of such remeasurement was not material in 1998 and
therefore it is not separately shown.
12
<PAGE>
MULTI TRADE COMPANY S.C.
NOTES TO FINANCIAL STATEMENTS
Amounts in tables expressed in thousands
- --------------------------------------------------------------------------------
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, presented net of accumulated depreciation in the
balance sheets, consists of:
DECEMBER 31,
------------------------
1997 1998
--------- --------
Land $ 43 $ 60
Buildings 851 1,018
Machinery 116 265
Transportation equipment 347 534
Construction in progress 251 215
--------- --------
1,608 2,092
Less accumulated depreciation 300 509
========= =========
Property, plant and equipment, net $ 1,308 $ 1,583
========= =========
4. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
-------------------
1997 1998
------- ------
Loans denominated in Swiss francs $ - $ 610
Loans denominated in U.S. dollars - 105
Loans denominated in Polish zloty 716 71
Current portion of these loans (101) (175)
===== =====
Long-term portion $ 615 $ 611
===== =====
The Partnership has a Swiss franc (CHF) denominated loan which is due in equal,
quarterly installments of CHF 40,000 until December 2004. The interest on this
loan is at the three month CHF Libor rate plus 3.5% (4.9% at December 31, 1998)
and is payable monthly. This loan was granted in 1996 as a Polish zloty
denominated loan but was converted to CHF in July 1998. The amount payable under
the loan was PLN 2,240,000 (USD 640,000) and CHF 840,000 (USD 610,000) at
December 31, 1997 and 1998, respectively. This loan is collateralized by real
estate up to a value of CHF 900,000 and the assignment of certain insurance
policies. The loan is guaranteed by the wives of the partners. The exchange rate
was approximately 1.37 CHF per USD at December 31, 1998.
The Partnership's USD denominated loan is due in 12 equal, installments of
$8,750 from March 1999 to October 2001. The interest on this loan is at the 1
month USD Libor rate plus 2% (7.15% at December 31, 1998) and is payable
monthly. The amount payable under the loan was USD 105,000 at December 31,1998.
This loan is collateralized by real estate up to a value of $350,000 and a blank
bill of exchange.
The Partnership has a Polish zloty denominated loan which is due in 8 equal,
quarterly installments of PLN 33,750 from November 1998 to August 2000. The
amount payable under the loan was PLN 270,000 (USD 76,000) and PLN 236,250 (USD
71,000) at December 31, 1997 and 1998, respectively. The interest on this loan
is 53% of the National Bank of Poland's discount rate (9.6% at December 31,
1998) and is payable monthly. The lower interest rate is due to
13
<PAGE>
MULTI TRADE COMPANY S.C.
NOTES TO FINANCIAL STATEMENTS
Amounts in tables expressed in thousands
- --------------------------------------------------------------------------------
a subsidy by the Polish Agency for the Restructuring of Agriculture. This loan
is collateralized by real estate, the assignment of an insurance policy, blank
bill of exchange and equipment purchased with the loan proceeds.
Scheduled maturities of long-term debt for the next five years and thereafter
are as follows:
1999 $ 175
2000 161
2001 137
2002 111
2003 101
Thereafter 101
5. SHORT-TERM DEBT, OVERDRAFT FACILITIES AND BILLS OF EXCHANGE
The Partnership has a second CHF denominated loan due in full (and paid) in
March 1999. The amount payable under the loan was CHF 300,000 (USD 208,000) and
CHF 400,000 (USD 290,000) at December 31, 1997 and 1998, respectively. The
amount payable at December 31, 1997 was originally due on March 31, 1998. The
repayment was rescheduled until March 31, 1999 and the amount was increased to
CHF 400,000. The interest on this loan is at the three month CHF Libor rate plus
5% (6.84% and 6.4% and December 31, 1997 and 1998, respectively) and is payable
monthly. This loan is collateralized by real estate in Bia(3)ystok, the
assignment of an insurance policy on this real estate, an automobile and blank
bill of exchange.
The Partnership, beginning in May 1998, has an overdraft facility with a bank
for PLN 700,000 (USD 200,000). At December 31, 1998, the Partnership used PLN
394,000 (USD 113,000) of this amount. Interest was 27% in May 1998 and decreased
over time to 24.5% at December 31, 1998 and a scheduled 19% for the period from
February to May 1999, when the loan matures. The loan is collateralized by
inventory up to a value of PLN 4,100,000 (USD 1,173,000), the assignment of
certain insurance policies, and a blank bill of exchange.
The Partnership has bills of exchange with a bank used for the purchase of
vodka. These bills have a maturity of 90 days. The agreement with the bank
allows up to PLN 1,000,000 of credit through these bills. At December 31, 1998,
the Partnership had PLN 953,000 (USD 272,000) of bills outstanding, net of
unamortized discount, with maturity dates in March 1999. The average discount
rate arising from the bills outstanding at December 31, 1998 was 23% There were
no bills of exchange outstanding at December 31, 1997.
The weighted average interest rate on overdraft facilities and bills of exchange
(both denominated in Polish zloty) at December 31, 1998 was 21%.
Total interest paid in 1997 and 1998 is substantially equal to interest expense.
6. FINANCIAL INSTRUMENTS, COMMITMENTS AND CONTINGENT LIABILITIES
FINANCIAL INSTRUMENTS WITH ON-BALANCE SHEET RISK AND THEIR FAIR VALUES
Financial instruments with on-balance sheet risk include cash, accounts
receivable, certain other current assets, trade accounts payable, bank loans and
overdraft facilities, long-term debt and other payables. These financial
instruments are shown separately in the balance sheets and their carrying values
approximate their fair values. This is because substantially all of these
financial instruments have short maturity periods or carry interest at rates
which approximate current market rates.
14
<PAGE>
MULTI TRADE COMPANY S.C.
NOTES TO FINANCIAL STATEMENTS
Amounts in tables expressed in thousands
- --------------------------------------------------------------------------------
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Partnership to concentration
of credit risk consist primarily of accounts receivable from Polish companies.
The Partnership restricts temporary cash investments to financial institutions
with high credit standing. Credit is given to customers only after a thorough
review of their credit worthiness. The Partnership does not normally require
collateral with respect to credit sales. As of December 31, 1997 and 1998, the
Partnership had no significant concentrations of credit risk. The Partnership
has not experienced large credit losses in the past.
INFLATION AND CURRENCY RISK
Since the fall of Communist rule in 1989, Poland has experienced high levels of
inflation and significant fluctuations in the exchange rate for the zloty. The
Polish government has adopted policies that slowed the annual rate of inflation
from approximately 250% in 1990 to approximately 18% in 1996, 14% in 1997 and
8.5% in 1998. In addition, the exchange rate for the zloty has stabilized and
the rate of devaluation of the zloty has decreased since 1991. However,
inflation and currency exchange fluctuations have had, and may continue to have,
an adverse effect on the financial condition and results of operations of the
Partnership.
A significant portion of the Partnership's debt is denominated in or indexed to
non-Polish currencies. By contrast, substantially all of the Partnership's
revenue is denominated in zloty. Any devaluation of the zloty against the other
currencies that the Partnership is unable to offset through price adjustments
will require the Partnership to use a larger portion of its revenue to service
its non-zloty denominated obligations. Accordingly, shifts in currency exchange
rates may have an adverse effect on the ability of the Partnership to service
its non-zloty denominated obligations and, thus, on the Partnership's financial
condition and results of operations.
SUPPLY CONTRACTS
The Partnership has various agreements covering its sources of supply. Some of
them may be terminated by either party on relatively short notice. Thus, there
is a risk that some portion of the Partnership's supply of products could be
curtailed at any time.
CONTINGENT LIABILITIES
The Partnership 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 Partnership.
POTENTIAL TAX EXAMINATIONS
Tax liabilities (including Value Added Tax (VAT), social security and other
taxes) may be subject to examinations by Polish tax authorities for up to five
years from the end of the year the tax is payable. 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.
15
<PAGE>
7. RELATED PARTY TRANSACTIONS
The two partners pay themselves no salary; hence, the drawings charged to
Partners' equity represent distributions of Partnership earnings to the
partners. No salary expense applicable to the partners is charged to income.
8. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Changes in the allowance for doubtful accounts were as follows:
YEAR ENDED DECEMBER 31,
------------------------
1997 1998
------- -------
Balance, beginning of year $ 150 $ 236
Provision for doubtful accounts 129 306
Charge-offs, net of recoveries (43) (68)
------ ------
Balance, end of year $ 236 $ 474
====== ======
9. SUBSEQUENT EVENTS
In March 1999, the Partnership sold a significant portion of its assets and
liabilities to a new limited liability company named Multi Trade Company Sp. z
o.o. (MTC Sp. z o. o.) which was established by Carey Agri International Poland
Sp. z o.o. (Carey Agri) for this purchase. Assets and liabilities not sold
included land, buildings, receivables overdue for 90 days or more, and loans
mentioned in Note 4. The sales price was for approximately $2.3 million cash. In
addition, the Partnership will buy back, at face value, any receivables sold to
MTC Sp. z o. o. which have not been collected by June 12, 1999. Receivables sold
to MTC Sp. z o. o. amounted to $3,895,000 (calculated at the exchange rate of
approximately 3.94 PLN per USD).
In addition, the Partnership sold its trademark to Central European Distribution
Corporation (CEDC), a United States company, for 254,230 unregistered newly
issued shares of CEDC's common stock with a 3-year restriction on sale. The fair
value of this stock was estimated to be $1,668,000. CEDC is the parent company
of Carey Agri.
16
<PAGE>
(b) Pro Forma Financial Information
CENTRAL EUROPEAN DISTRIBUTION COMPANY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
INFORMATION
For the Year Ended December 31, 1998 and the Three Month Period Ended
March 31, 1999
(All amounts in thousands of USD except shares and per share data)
- --------------------------------------------------------------------------------
The unaudited pro forma condensed consolidated income statement information set
for below for Central European Distribution (CEDC) and Multi Trade Company S.C.
(MTC, a partnership doing business in Poland) gives effect to the purchase on
March 12, 1999 of MTC by CEDC as if it had been completed on January 1, 1998 and
the year ended December 31, 1998 and the three month period ended March 31,
1999. The data is subject to the assumptions and adjustments in the accompanying
notes to the pro forma income statements. CEDC has accounted for the acquisition
of MTC as a purchase.
The pro forma information should be read in conjunction with the historical
financial statements of CEDC included in its Annual 1998 Report on Form 10K and
its Quarterly Report on Form 10Q for the quarter ended March 31, 1999, which are
on file with the Securities and Exchange Commission; and the historical
financial statements of MTC for 1997 and 1998, included herein.
The pro forma adjustments do not reflect operating efficiencies and cost savings
that may be achievable with respect to the newly acquired company. The pro forma
adjustments do not include any adjustments to historical and operating data for
future changes in selling prices, or operating changes except for the
elimination of certain sales, costs and expenses applicable to a business unit
and buildings and certain other assets not acquired by CEDC.
The following information is not necessarily indicative of the operating results
that would have occurred had the purchase been consummated at the beginning of
each of the periods presented. The pro forma adjustments are based on the
purchase method of accounting and upon the assumptions set forth in the notes
hereto.
A final determination of required purchase accounting adjustments, including the
allocation of the purchase price to the assets acquired and liabilities assumed
based on their respective estimated fair values, will be made after completion
of the escrow period in June 1999. Accordingly, the purchase accounting
adjustments made in the March 31, 1999, Quarterly Report on Form 10Q and the
development of following the pro forma income statement information may be
revised. CEDC currently knows of no events that would require a substantial
change to the preliminary purchase price allocation.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
INFORMATION
For the Three Month Period Ended March 31, 1999
<TABLE>
<CAPTION>
TOTAL
PRO FORMA
HISTORICAL HISTORICAL PRO FORMA CEDC WITH
CEDC (1) MTC (1) ADJUSTMENTS MTC
---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 14,241 $ 6,121 $ (299)(3,4) $ 20,063
Cost of goods sold (12,143) (5,438) 286 (3,4) (17,295)
------------ ------------- ----------- ------------
GROSS PROFIT 2,098 683 (13) 2,768
Selling, general and administrative
expenses (1,538) (676) (77)(4,5,7) (2,291)
------------ ------------- ----------- ------------
OPERATING INCOME 560 7 (90) 477
Interest expense (26) (24) (36) (6) (86)
Other expense, net (4) (7) 0 (11)
------------ ------------- ----------- ------------
INCOME BEFORE INCOME TAXES 530 (24) (126) 380
INCOME TAX EXPENSE (197) - 12 (8) (185)
------------ ------------- ----------- ------------
NET INCOME $ 333 $ (24) $ (114) $ 195
============ ============= =========== ============
NET INCOME PER COMMON SHARE,
BASIC AND DILUTIVE $ 0.09 $ 0.05
============ ============
</TABLE>
17
<PAGE>
CENTRAL EUROPEAN DISTRIBUTION COMPANY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT INFORMATION
For the Year Ended December 31, 1998
(All amounts in thousands of USD except shares and per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL
PRO FORMA
HISTORICAL HISTORICAL PRO FORMA CEDC WITH
CEDC (1) MTC (1) ADJUSTMENTS MTC
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 54,011 $ 43,067 $ (832) (3,4) $ 96,246
Cost of goods sold (45,864) (39,010) 807 (3,4) (84,067)
------------ ------------ ---------- ----------
GROSS PROFIT 8,147 4,057 (25) 12,179
Selling, general and administrative
expenses (5,790) (3,510) (459) (4,5,7) (9,759)
------------ ------------ ----------- ------------
OPERATING INCOME 2,357 547 (484) 2,420
Interest expense (192) (239) (175) (6) (606)
Other income, net 164 98 0 262
------------ ------------ ----------- ------------
INCOME BEFORE INCOME TAXES 2,329 406 (659) 2,076
Income tax expense (861) 0 63 (8) (798)
------------ ------------ ----------- ------------
NET INCOME $ 1,468 $ 406 $ (596) $ 1,278
============ ============ =========== ============
NET INCOME PER COMMON SHARE,
BASIC AND DILUTIVE $ 0.56 $ 0.44
============ ============
</TABLE>
NOTES TO UNAUDITED PRO FORMA INCOME STATEMENTS
1. These columns represent historical results of operations as follows:
CEDC - consolidated results for 1998 and quarter ended March 31, 1999
(including MTC in 1999 from March 13, 1999 to March 31, 1999).
MTC - historical results for 1998 and period from January 1, 1999 to March
12, 1999.
2. On March 12, 1999 CEDC purchased certain assets and the business
(excluding the manufacture of distilled products), the trademark of MTC
and assumed certain liabilities of MTC. Assets not acquired were buildings
and certain motor vehicles; liabilities not assumed represented certain
debt and income taxes (as MTC was a partnership it paid no income taxes).
Total consideration for the acquisition consisted of the following:
Cash consideration to partners $ 2,331
254,230 shares of CEDC common stock 1,668
Acquisition costs (estimated) 159
========
$ 4,158
========
The CEDC common stock was valued at the average share price ($7.25) a few days
before and after March 12, 1999 (closing date). The shares issued may not be
sold without consent of CEDC for three years subsequent to the acquisition. The
average share price was reduced 10% (after discussing with CEDC investment
bankers) for lack of current marketability of this stock.
18
<PAGE>
CENTRAL EUROPEAN DISTRIBUTION COMPANY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
INFORMATION For the Year Ended December 31, 1998 and the Three Month
Period Ended March 31, 1999
(All amounts in thousands of USD except shares and per share data)
- --------------------------------------------------------------------------------
The calculation of the excess of cost of the acquisition over the estimated fair
value of the net assets acquired (goodwill) follows:
<TABLE>
<CAPTION>
<S> <C>
Cost of acquisition of MTC $ 4,158
Historical net asset deficit of MTC at March 12, 1999 71
Adjustment for assets not acquired and liabilities not assumed 539
Estimated fair value adjustments for assets acquired (including identified
intangible assets) (2,540)
========
Preliminary goodwill $ 2,228
========
</TABLE>
The estimated fair value adjustments shown above relate mainly to estimated
values for fixed assets in excess of net book values, customer lists and the MTC
trademark. The amounts were based on appraisals, discounted cash flows and, in
the case of the trademark, the value of the CEDC stock issued, which was
allocated to the trademark. Subsequent adjustments of the allocations may occur
when final valuation studies are completed. The intangible assets are to be
amortized over periods of 5 years for the customer lists; 10 years for the
trademark and 25 years for goodwill. The amortization period of intangible
assets, including goodwill, of 25 years is based upon the expected useful life
and other factors considered by management in determining the appropriate
amortization periods such as legal and regulatory issues, and anticipated market
demand and competition. CEDC will evaluate the periods of amortization
continually to determine whether later events and circumstances warrant revised
estimates of useful lives.
3. Reflects effect of elimination of sales and cost of sales between CEDC and
MTC during the periods ended -
December 31, 1998 $ 402
March 12, 1999 89
4. CEDC did not acquire the distillery division of MTC, buildings and certain
other assets owned by MTC. CEDC entered into a lease agreement with MTC's
partners to lease the building for a three year period. This pro forma
entry reflects the elimination of the operating results of the distillery
division, and costs of the building and certain other assets not acquired,
net of rent expense on the lease referred to above.
PERIOD ENDED
DECEMBER 31, MARCH 12,
1998 1999
------------ -----------
Sales (430) (210)
Cost of sales 405 197
Sales, general and administrative expenses: 114 41
5. Represents pro forma selling, general and administrative expenses from
added depreciation and amortization of the fair value adjustments of
equipment, preliminary goodwill, customer lists and trademark. The amounts
were $465 for the year ended December 31, 1998 and $96 for the period
ended March 12, 1999.
19
<PAGE>
CENTRAL EUROPEAN DISTRIBUTION COMPANY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
INFORMATION For the Year Ended December 31, 1998 and the Three Month
Period Ended March 31, 1999
(All amounts in thousands of USD except shares and per share data)
- --------------------------------------------------------------------------------
6. This entry represents recognition of interest expense on the additional
borrowings (USD 2,500,000) to fund the cash paid to MTC S.C. partners in
connection with the acquisition (see Note 2). Interest expense was
calculated using an interest rate of 7% for 1998 and for period ended
March 12, 1999. This rate approximates the actual rate (6.85%) of the
borrowing, which is a variable rate based on LIBOR.
7. MTC's partners paid themselves no salaries, consequently, no salary and
related expenses were charged to expenses in the periods prior to the
acquisition. A pro forma charge to selling, general and administrative
expense of $108 for 1998 and $22 for 1999 has been recorded. These amounts
are based on agreements signed with the partners upon closing.
8. The pro forma income tax entry takes into consideration the following
items. Tax expense on MTC pre tax income before pro forma adjustments for
1998 since MTC as a partnership, paid no corporate income taxes. This
amount was reduced to 0 in 1998 by the tax effect of the pro forma
adjustments applicable to the MTC activities. Additionally, the tax effect
of the pro forma entry for interest expense (see Note 6 above) incurred
was considered.
The tax effect of the pro forma entry for interest expense was considered.
Since MTC reported a loss during the period ended March 12, 1999, no pro
forma tax effects were calculated. Additionally, no pro forma deferred tax
benefit was assumed for the other pro forma adjustments applicable to MTC.
9. Pro forma adjustments have not been reflected for anticipated cost
reductions following the acquisition. CEDC management has made personnel
reductions of approximately 10 people and is assessing further reductions.
10. Pro forma net income per share information considers the effects of shares
issued in connection with the transaction and the dilutive effect of
options granted to the former MTC partners as though they were outstanding
or granted during the periods presented. The shares used for these
calculations were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
------------
DECEMBER 31, 1998 MARCH 31, 1999
------------------------ -------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
<S> <C> <C> <C> <C>
Basic 2,634,795 2,889,025 3,831,939 4,034,230
Dilutive 2,634,795 2,889,025 3,854,239 4,056,469
</TABLE>
20
<PAGE>
(c) Exhibits
23 Consent of Ernst and Young Audit Sp. z o.o.
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 hereunto duly authorized.
Central European Distribution
Corporation
(Registrant)
/s/ JEFFREY PETERSON
--------------------
Date: May 28, 1999 Jeffrey Peterson
Executive Vice-President
21
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
23 Consent of Ernst and Young Sp. z o.o.
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement on
Form S-8 of our report dated March 19, 1999 with respect to the financial
statements of Multi Trade Company S.C. included in this current report on Form
8-K being filed by Central European Distribution Company ("CEDC") on May 27,
1999.
/s/Ernst & Young Sp. z o.o.
Warsaw, Poland
May 26, 1999
