- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
<PAGE>
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
<PAGE>
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)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
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
======= =======
</TABLE>
See accompanying notes.
3
<PAGE>
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) - CONTINUED
Amounts in columns expressed in thousands
(except per share data)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
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
======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
Amounts in columns expressed in thousands
(except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
See accompanying notes.
5
<PAGE>
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (UNAUDITED)
Amounts in columns expressed in thousands
(except per share data)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
PAID-IN RETAINED COMPREHENSIVE
COMMON STOCK CAPITAL EARNINGS LOSS TOTAL
------------------------ ----------- ------------- ------------- ----------
NO. OF
SHARES AMOUNT
---------- ---------
<S> <C> <C> <C> <C> <C> <C>
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
========== ========= =========== =========== =========== ==========
</TABLE>
See accompanying notes.
6
<PAGE>
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Amounts in columns expressed in thousands
(except per share data)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
See accompanying notes.
7
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
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
======= ======= ======= ======
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
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
======= =======
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
INDEX OF EXHIBITS
EXHIBIT DESCRIPTION
- -------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,126,000
<SECURITIES> 0
<RECEIVABLES> 13,290,000
<ALLOWANCES> 263,000<F1>
<INVENTORY> 5,786,000
<CURRENT-ASSETS> 24,784,000
<PP&E> 1,717,000<F1>
<DEPRECIATION> 377,000<F1>
<TOTAL-ASSETS> 33,980,000
<CURRENT-LIABILITIES> 14,982,000
<BONDS> 0<F1>
0<F1>
0<F1>
<COMMON> 42,000
<OTHER-SE> 14,372,000<F1>
<TOTAL-LIABILITY-AND-EQUITY> 33,980,000
<SALES> 63,450,000
<TOTAL-REVENUES> 63,450,000
<CGS> 54,592,000
<TOTAL-COSTS> 60,980,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 200,000
<INCOME-PRETAX> 2,226,000
<INCOME-TAX> 876,000<F1>
<INCOME-CONTINUING> 1,390,000<F1>
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET-INCOME> 1,390,000
<EPS-BASIC> 0.35
<EPS-DILUTED> 0.35
<FN>
F1 = indication of uncertainty in figures
</FN>
</TABLE>
