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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended March 31, 2003

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-24341

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

(Exact Name of Registrant as Specified In Its Charter)

(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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No x

The number of shares outstanding of each class of the issuer’s common stock as of May 6, 2003:

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INDEX

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PART I
FINANCIAL INFORMATION

CENTRAL EUROPEAN DISTRIBUTION CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share and per share information)

The accompanying notes are an integral part of the consolidated condensed financial statements.

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CENTRAL EUROPEAN DISTRIBUTION CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except share and per share information)

The accompanying notes are an integral part of the consolidated condensed financial statements.

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CENTRAL EUROPEAN DISTRIBUTION CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN
STOCKHOLDERS’ EQUITY (UNAUDITED)
(in thousands)

The accompanying notes are an integral part of the consolidated condensed financial statements.

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CENTRAL EUROPEAN DISTRIBUTION CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW (UNAUDITED)
(in thousands)

The accompanying notes are an integral part of the consolidated condensed financial statements.

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Central European Distribution Corporation
Notes To Consolidated Condensed Financial Statements (Unaudited)
(amounts in tables expressed in thousands except per share information)

1.

Organization 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 then sole subsidiary, Carey Agri International Poland Sp. z o.o. (Carey Agri), which was formed in 1990. In 1999, CEDC formed two additional subsidiaries (MTC and PWW). CEDC also acquired PHA in 2000, Astor in 2001 and Damianex, AGIS and Onufry in 2002. CEDC and its subsidiaries are referred to herein as the Company.

2.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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 disclosures required by generally accepted accounting principles in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary to fairly present our financial condition, results of operations and cash flows for the interim periods presented have been included. Operating results for the three-month period ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

The balance sheet at December 31, 2002 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.

The unaudited interim financial statements should be read with reference to the consolidated financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2002.

3.

Comprehensive Loss

The Company’s equity investments are substantially all in Polish zloty and gains or losses resulting from the restatement of these equity investments into U.S. dollars are posted to the Comprehensive Loss Account. As a result of the depreciation of the Polish zloty against the U.S. dollar during the three-month period ended March 31, 2003, the Company incurred foreign currency translation losses of $808,000 on these equity investments. This movement means that the cumulative balance on the Comprehensive Loss Account was a loss of $2,179,000 as at March 31, 2003 and this has been reflected in the Consolidated Condensed Balance Sheet and Statements of Changes in Stockholders’ Equity (unaudited). The total of the accumulated other comprehensive loss consist solely of currency exchange adjustments. No tax benefit has been recorded.

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Central European Distribution Corporation
Notes To Consolidated Condensed Financial Statements (Unaudited)
(amounts in tables expressed in thousands except per share information)

4.

Earnings Per Share

Net income per share of common stock is calculated under the provisions of SFAS No. 128, “Earnings per Share”.

The following table sets forth the computation of basic and diluted earnings per share for the periods indicated.

During the three month period ended March 31, 2003, 105,500 stock options were exercised (55,000 non-employee stock options and 50,500 employee stock options).

5.

Acquisitions

Overview

The Company’s strategy and objectives regarding its acquisition policy are to acquire regionally strong alcohol distributors in order to build market share and construct a nationwide distribution network in order to attract and retain national clients and to strengthen its buying leverage. The price paid by the Company in making its acquisitions is based on earnings projections of the acquired company operating under the Company’s business model.

On April 22, 2002, the Company completed the acquisition of 100% of the voting shares of Damianex S.A., an alcohol distributor in south-eastern Poland. The purchase price of $9,139,880 (including expenses) consisted of $7,359,000 in cash and the issuance of 152,996 shares of common stock valued at $1,781,000 using an average

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Central European Distribution Corporation
Notes To Consolidated Condensed Financial Statements (Unaudited)
(amounts in tables expressed in thousands except per share information)

5.

Acquisitions (cont’d)

of the share price before and after the transaction date. The source of the funds consisted of a long-term loan of $2,500,000 from Bank Fortis in Warsaw, Poland and $4,638,000 from a private placement offering of common stock (gross proceeds $8,400,000) completed by the Company on March 28, 2002.

The Company has made provisions for certain re-organization costs which will be incurred following a detailed review of Damianex’s operations. These provisions amount to approximately $246,000 and these have been adjusted to the carrying value of goodwill.

Certain common stock issued in connection with the Damianex acquisition is subject to a put option, which allows the seller to require the Company to repurchase the shares at $12.00 per share during the period between April 25, 2003 and April 29, 2003. As at March 31, 2003, the common stock subject to this option has been classified as redeemable common stock at an amount of $12.00 per share ($1,781,000). This put option has not been exercised.

On April 24, 2002, the Company completed the acquisition of 100% of the voting stock of AGIS S.A., an alcohol distributor in northern Poland. The purchase price of $6,933,000 consisted of $4,762,000 (including expenses) in cash and the issuance of 172,676 shares of common stock valued at $2,171,000 using an average of the share price before and after the transaction date. The source of the funds was a long-term loan of $1,800,000 from Bank Fortis in Warsaw, Poland and $2,768,000 from a private placement offering of common stock (gross proceeds $8,400,000) completed by the Company on March 28, 2002.

On October 15, 2002, the Company completed the acquisition of 96.75% of the voting stock of Onufry S.A., an alcohol distributor based in Gdansk. The purchase price was $1,945,300 consisting of $1,565,000 (including expenses) in cash and 39,503 shares of common stock valued at $380,300 using an average of the share price before and after the transaction date. The cash element was funded by a $700,000 bank loan with the balance coming from the Company’s cash reserves. In February 2003, the Company acquired the remaining 3.25% of the voting stock of Onufry for cash consideration of $50,000.

Assuming consummation of the Damianex, AGIS and Onufry acquisitions and the issuance of common shares as of January 1, 2002, the unaudited pro-forma consolidated operating results for the three months ended March 31, 2002 was as follows:

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Central European Distribution Corporation
Notes To Consolidated Condensed Financial Statements (Unaudited)
(amounts in tables expressed in thousands except per share information)

6.

Long-Term Debt and Short-Term Bank Loans

The Company has banking facilities with six banks which are used to support both the Company’s acquisition strategy and its cash on delivery (COD) vodka purchasing requirements. The Company’s normal trade terms from its Polish vodka suppliers are on average 60 days, however, the Company is usually offered significant discounts from the invoice if goods are paid for when delivered. The discounts offered are in excess of the effective rates the Company would pay for the 60 day terms on its normal banking facilities.

The credit lines are denominated in various currencies as follows:

These facilities are disclosed in the financial statements as:

Within the total overdraft facilities agreed as at March 31, 2003, $4.0 million remains available. These overdraft facilities are subject to renewal between April and December 2003 and the Company has not encountered any difficulties in successfully renegotiating them.

7.

Lease Obligations

In November 2000, the Company entered into a non-cancelable five-year operating lease for its main warehouse and office in Warsaw, which stipulated monthly payments of $130,000. In February 2003, the Company renegotiated this lease by signing a seven-year agreement starting from May 1, 2003 at a lower rent of $90,000 per month. The following is a schedule by year of the future rental payments under the non-cancelable operating lease as of March 31, 2003:

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Central European Distribution Corporation
Notes To Consolidated Condensed Financial Statements (Unaudited)
(amounts in tables expressed in thousands except per share information)

7.

Lease Obligations (cont’d)

The Company also has rental agreements for all of the regional offices and warehouse space. Monthly rentals range from approximately $2,000 to $11,670. All of the regional office and warehouse leases can be terminated by either party within two or three months’ prior notice. The retail shop leases have no stated expiration date, but can be terminated by either party with three months to six months’ prior notice.

During 2002, the Company continued its policy of renewing its transportation fleet by way of capital leases. The future minimum lease payments for the assets under capital lease at March 31, 2003 are as follows:

8.

Income Taxes

Total income tax expense varies from expected income tax expense computed at enacted Polish statutory rates (27% in 2003 and 28% in 2002) as follows:

Tax liabilities (including corporate income tax, Value Added Tax (VAT), 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 U.S. federal income tax returns are also subject to examination by the U.S. tax authorities. As the application of tax laws and regulations, and transactions are susceptible to varying interpretations, amounts reported in the consolidated financial statements could be changed at a later date upon final determination by the tax authorities.

9.

Stock Option Plans and Warrants

The Company has elected to follow APB 25. Under APB 25, no compensation expense is recognized when the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant.

The Company’s 1997 Stock Incentive Plan (“Incentive Plan”) provides for the grant of stock options, stock appreciation rights, restricted stock and restricted stock units to directors, executives, and other employees (“employees”) of the Company and to non-employee service providers of the Company. The Incentive Plan authorizes, and the Company has reserved for future issuance, up to 1,750,000 shares of Common Stock (subject to anti-dilution adjustment in the event of a stock-split, recapitalization or similar transaction). The Compensation Committee of the Board of Directors of the Company administers the Incentive Plan.

The option exercise price for stock options granted under the Incentive Plan may not be less than fair market.

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Central European Distribution Corporation
Notes To Consolidated Condensed Financial Statements (Unaudited)
(Amounts in tables expressed in thousands except per share information)

9.

Stock Option Plans and Warrants (cont’d)

value but in some cases may be in excess of the market price of common stock on the date of grant. The Company sets the stock option price based on the closing price of the common stock on the day before the date of grant if such price is not materially different than the opening price of the common stock on the date of grant. Accordingly, there is no compensation expense recorded for options granted under the Incentive Plan to employees. Stock options may be exercised up to 10 years after the date of grant except as otherwise provided in the particular stock option agreement. Payment for the shares purchased under the Incentive Plan must be in cash, which must be received by the Company prior to any shares being issued.

Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of Statement 123. The fair value of these stock options were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 6.69%; dividend yields of 0.0%; volatility factors of the expected market price of the Company’s common stock of 1.57; and a weighted-average expected life of the option of 3.4 years.

The Black-Scholes option valuation method was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock option have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma information follows:

10.

Subsequent Events

On March 31, 2003, the Company completed a private placement by issuing 670,000 shares of common stock for a price of $23.25 per share less associated expenses. On April 2, 2003, the Company issued another 80,000 shares of common stock under the same agreement. The funds from both placements were received in early April. A registration statement on Form S-3 covering resales of the shares sold in the private placement was declared effective on May 1, 2003.

On April 15, 2003, the Company completed its acquisition of Dako Galant Sp. z o.o. The total purchase price was approximately $1.8 million and was financed by a combination of cash and common stock.

On April 29, 2003, the Company declared three-for-two stock dividend payable on May 30, 2003 to shareholders of record on May 19, 2003.

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11.

Reclassifications

Certain amounts in the 2002 consolidated condensed financial statements have been reclassified to be consistent with the 2003 financial statements. These reclassifications do not have a material effect on the financial statements.

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ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following analysis should be read in conjunction with the Consolidated Condensed Financial Statements and the notes thereto appearing elsewhere in this report.

This Form 10-Q, including, but not limited to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by forward-looking statements. Investors are cautioned that forward-looking statements are not guarantees of future performance and that undue reliance should not be placed on such statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements or to make any other forward-looking statements, whether as a result of new information, future events or otherwise unless required to do so by the securities laws.

The following discussion and analysis provides information which management believes is relevant to the reader’s assessment and understanding of the Company’s results of operations and financial condition and should be read in conjunction with the Consolidated Condensed Financial Statements and the notes thereto elsewhere in this report. Investors are also referred to the Risk Factors in the Company’s Form 10-K for the fiscal year ended December 31, 2002.

Overview

In order to aid understanding, we have prepared tables which segment our income statement information as presented in the financial statements into those elements which relate to operations acquired during the reporting period and those which relate to operations owned in both reporting periods. Key definitions are:

•

total operations: total results as stated in our financial statements, which includes the consolidated results for all subsidiaries for the period owned in the reporting period.

•

continuing operations: results for elements of the Company which were owned for the first quarter of each reported year.

•

core growth: growth rates achieved between results from continuing operations as reported in the first quarter of 2003 versus the continuing operations of the first quarter of 2002.

Readers will also find frequent references to the term cash on delivery (COD). Normal trade terms from our Polish vodka suppliers are 60 days; however, we are offered by some of these suppliers significant discounts off the invoice price if we pay for goods when delivered. The discounts offered are considerably in excess of the effective rate we would pay for 60 day terms under our bank facilities.

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Results of Operations

Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002

“Operations acquired in 2002” include the first quarter of 2003 results for Damianex (which was acquired on April 22, 2002), AGIS (which was acquired on April 24, 2002), and Onufry (which was acquired on October 15, 2002). Since these operations were not owned in the first quarter of 2002, these results have been excluded from continuing operations 2003 to show comparable operations in the first quarter of 2003 and 2002.