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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2003

For the transition period from                      to                     

Commission file number 0-24341

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (941) 330-1558

Securities registered pursuant to Section 12(b) of the Act:

Not applicable

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.01 per share

(Title of class)

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  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K.    x

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Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes  x    No  ¨

The aggregate market value of the voting stock held by non-affiliates of the registrant (based on the closing price of the registrant’s common stock on the NASDAQ National Stock Market) on March 11, 2004 was $283,446,016.*

As of March 11, 2004, the registrant had 10,798,429 shares of common stock outstanding.

Documents Incorporated by Reference

Portions of the proxy statement for the annual meeting of stockholders to be held on May 3, 2004 are incorporated by reference into Part III.

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THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN STATEMENTS THAT ARE NOT HISTORICAL FACTS AND MAY BE FORWARD-LOOKING. SUCH STATEMENTS INVOLVE ESTIMATES, ASSUMPTIONS, RISKS AND UNCERTAINTIES. THERE IS NO ASSURANCE THAT FUTURE RESULTS WILL NOT DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO BE MATERIALLY DIFFERENT FROM THE FORWARD-LOOKING STATEMENTS ARE DISCLOSED UNDER THE HEADING “BUSINESS—RISK FACTORS” AND THROUGHOUT THIS FORM 10-K.

PART I

The Company is one of the leading importers and distributors of alcoholic beverages in Poland. The Company operates the largest nationwide next-day alcoholic beverage delivery service in Poland through its nine distribution centers and 58 satellite branches located in Poland’s principal cities, including Warsaw, the Company’s central headquarters. The Company currently distributes approximately 850 brands in five categories: beer, spirits, wine, soft drinks and cigars. The Company is the exclusive importer and distributor in Poland for 15 international beers, including Guinness, Corona, Foster’s, Beck’s Pilsner, Bitburger and Budweiser Budvar. The Company is also one of the leading distributors of locally produced beers, distributing over 25 brands in selected regions. The Company currently distributes approximately 300 spirit products, including leading international brands of scotch, single malt and other whiskeys, rums, bourbons, Polish vodkas, tequilas, gins, brandy, cognacs, vermouths and specialty liquors, such as Johnnie Walker, Smirnoff, Absolut, Finlandia, Bacardi and Ballantines. In addition, the Company is the exclusive importer and distributor in Poland for approximately 380 wine brands, including B.Ph. de Rothschild, Torres, Bolla, Concha y Toro, Penfolds, Sutter Home, Georges Duboeuf, Mondavi, Veuve Clicquot and Codorniu. In addition to its distribution agreements with various alcoholic beverage suppliers, the Company is the exclusive importer in Poland for Dunhill Cigars, General Cigar products and Evian water.

The Company distributes its products throughout Poland to approximately 31,000 outlets, including off-trade establishments, such as small businesses, medium-size retail outlets, petrol stations, duty free stores, supermarkets and hypermarkets, and on-trade locations, such as bars, nightclubs, hotels and restaurants, where such products are consumed.

Industry Overview

Consumption. In 2003, Poland was the fourth largest consumer of vodka in the world according to Company estimates. The total retail market for alcoholic beverage products in Poland was approximately $4.0 billion in 2003. Traditionally, the population of Poland has primarily consumed domestic vodka, but in recent years there has been a continuing shift in the consumption habits from vodka to other types of alcohol, many of which are imported, such as beers, wines and spirits. The Company believes that in recent years the shift in consumption habits is a result of:

Distribution. The market for the distribution of alcoholic beverages in Poland remains highly fragmented. There are numerous alcohol distributors spread throughout the country, mainly delivering a range of beers, wines and spirits. Furthermore, distributors have been located regionally, rather than nationally, due to the difficulties in establishing a nationwide distribution system, including the capital required to set up such a system, and an extremely poor road infrastructure. Distributors of alcoholic beverages deliver to both off-trade sites and on-trade sites. Off-trade sites include Polish-owned and managed businesses, such as small grocery stores, as well as major chain stores. On-trade sites include bars, nightclubs, hotels and restaurants. There has been a trend to consolidate many off-trade sites, which are classified as “mom and pop” stores, as well as a trend toward expanding major chain stores. This consolidation of

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chain stores is also apparent in the rapid expansion of petrol stations, which are owned and operated by major international companies, such as Shell, BP and Statoil. Many of these petrol stations contain convenience stores, which sell all types of alcoholic beverages and in many areas serve as local convenience/liquor stores. The Company believes that it continues to be well-positioned to take advantage of both these trends in consumption and distribution.

Business Strategy

Expand Distribution Base. The Company plans to continue increasing its distribution capacity by expanding the number of its regional offices in Poland through the acquisition of existing wholesalers and expanding its own branch network, particularly in areas where the Company does not distribute directly or does not have a leading position in the region. The Company seeks to acquire successful wholesalers, which are primarily involved in the vodka distribution business and are among the leading wholesalers in their region. The Company would then add its higher margin imported brands to complement and enhance the existing product portfolio and margin of the acquired company. This strategy not only permits the Company to add geographic coverage and to increase its customer base, but also increases the Company’s leverage with its supply partners and its retail client base. The distribution base will also continue to increase through organic growth. The Company expects 7% to 8% organic sales growth in 2004. As a result of the successful implementation of this strategy over the last six years, the Company has increased its customer base from 7,500 in 1998 to approximately 31,000 in 2003.

In implementing this strategy, the Company completed its eighth, ninth and tenth acquisitions in 2003. On April 16, 2003, the Company acquired Dako Galant, which is located in the northwest of Poland. The Company acquired Panta Hurt, another distributor of alcoholic beverages, on September 5, 2003. The third acquisition occurred when the Company acquired Multi-Ex in November 2003. All three of the 2003 acquisitions continued to strengthen the Company’s position as the largest distributor of domestic vodka in Poland with a market share estimated by the Company of approximately 30%.

This strategy of acquiring dominant regional distributors in Poland has and is expected to continue to increase our buying and selling leverage in the market, as well as increase the amount of sales of the Company’s imported goods, which have higher margins, into distribution channels that were not previously serviced. The Company’s buying leverage with suppliers combined with its selling leverage to retail have and are expected to continue to contribute to improving its operating profit. The Company’s goal is to achieve approximately 40% market share in spirits over the next 12 to 18 months.

Increase Product Offerings. The Company’s strategy to attract new products to put through its next-day national distribution system is a key focus. Management focuses on products that fit its distribution model of higher value/margin products that would also add value to its current product mix. The Company is also interested in non-alcoholic products such as energy drinks and imported waters that remain growth opportunities in Poland.

Consolidation of Existing Offices/Warehouses. The Company is committed to consolidating the 58 satellite branches it currently operates in Poland. With ten acquisitions in the last five years, the Company believes it can consolidate certain smaller branches into larger branches without losing profitability. The Company estimates that it will consolidate approximately five to ten smaller branches into larger branches in 2004. It is expected that this consolidation would result in improved cash flow as inventory days are reduced and have minimal impact on the profit and loss as the Company expects to keep most of the sales revenue from the consolidation.

History

CEDC’s subsidiary Carey Agri was incorporated as a limited liability company in July 1990 in Poland. It was founded by William O. Carey, who died in early 1997, Jeffrey Peterson (who served as the Company’s Vice Chairman until February 2004) and William V. Carey, President and Chief Executive Officer of CEDC. In February 1991, Carey Agri was granted its first import beer license with which it started to import various beers, including Foster’s lager, Grolsch and products from Anheuser Busch, which it sold to wholesalers. With these beverages, Carey Agri sought to offer more products for which it had an exclusive import license and to market and to sell these products to the segment of the Polish population who were benefiting from the country’s market transformation. Because of Carey Agri’s initial success with Foster’s lager, for which it still holds the exclusive import license for Poland, it quickly diversified in 1992 by importing other quality brand beers from Europe and the United States. Sales during this period were typically in high volume consignments to other wholesalers.

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In 1993, with the acceleration of the opening of retail outlets in Poland, Carey Agri began to implement a direct delivery system in Warsaw, which could deliver alcoholic beverages to retail outlets on a reliable next-day basis. Carey Agri leased a warehouse, purchased trucks and hired and trained operational personnel and began to sell directly to convenience shops, small grocery stores and newly opened pubs. Because of this business experience, Carey Agri was prepared to take advantage of the opportunity to expand its import and delivery capacity in Warsaw when large foreign-owned supermarket chains began operations in 1993, creating a significant increase in the demand for the Company’s product line. The Warsaw model of desirable product lines and dependable prompt delivery of product was replicated by the Company in Krakow (1993), Wroclaw (1994), Szczecin (1994), Gdynia (1994), Katowice (1995), Torun (1995) and Poznan (1996).

CEDC was incorporated in Delaware in 1997. In July 1998, the Company issued 2,000,000 shares of its common stock in an initial public offering on the Nasdaq SmallCap Market raising net proceeds of approximately $10.6 million. In June 1999, the Company was accepted onto the Nasdaq National Market where it trades under the symbol “CEDC”.

The Company currently offers approximately 850 brands of beverages in five categories: (i) beers; (ii) spirits; (iii) wines; (iv) soft drinks and (v) cigars. The sales mix is outlined in the table below:

Beer

The Company distributes imported beer through each of its regional offices. Budweiser Budvar, Guinness, Corona, Foster’s Lager, Kilkenny, Beck’s Pilsner, Bitburger, Franziskaner, Labatts Ice, Amsterdam, Kostrizer, Grolsch, Leffe, Hoegaarden and Stella Artois are distributed and marketed throughout Poland on an exclusive basis.

Most of the Company’s distribution contracts for beer contain a minimum purchase requirement and typically permit termination if the Company breaches its agreements, such as failure to pay within a certain time period or to properly store and transport the product. Trade credit is extended to the Company for a period of time after delivery of products. The duration of these agreements differ but typically range from one to three years with an automatic extension period unless one of the parties chooses to terminate the agreement. Under the conditions of these contracts, the Company is responsible for the marketing that is to be done within the confines of the market. The Company contributes up to 50% of the marketing budget for each brand depending upon the length of the contract.

In the last year, the Company has increased the amount of Polish beer that it distributes. This decision to increase its distribution of Polish beer resulted from the nature of the market place in a few select regions of Poland where the Company has enjoyed and continues to enjoy a strong competitive advantage. As a result of the requests from the Company’s client base in these areas and as a way of protecting market share, the Company offers Polish beer. The Company has no immediate plans to increase its distribution of Polish beer on a national scale, but it will increase its distribution of Polish beer in those strategic areas where the Company decides it is prudent.

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Polish Vodka

The Company purchases all of its domestic vodka products from 14 local distilleries and carries approximately 127 different brands. Some of the leading domestic vodka brands the company distributes include the following:

The Company’s agreements with various state-owned Polish vodka producers may be terminated by either party without cause with one months prior written notice. The contracts are generally for one year with an automatic extension clause, which has been standard practice within the industry for the past 11 years. To date, the Company has never had a distribution contract terminated by any of the local vodka producers. The Company has no obligation to perform any marketing activities with or on behalf of any local vodka producer.

In 2003, over 5% of the Company’s net sales resulted from sales of products purchased from the following companies: Polmos Bialystok (17%), Sobieski Distribution (14%), Unicom Bols Group (13%) and Polmos Zielona Gora (6%).

Imported Spirits

The Company distributes all its imported spirit products through each of its offices, mostly on a non-exclusive basis. Some of the better known spirit products sold by the Company include the following (the Company is the exclusive importer of the products denoted by an * below):

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The products distributed on a non-exclusive basis are contracted for under substantially the same terms as those received from local vodka producers.

The contracts for distribution of the spirit brands the Company exclusively represents are generally one to three years in length and can be terminated with a minimum 90 days written notice by either party. The Company also shares in the local marketing costs up to a limit of 50% depending upon the length of the contract being served.

Wine

The Company represents approximately 55 wine suppliers and imports and distributes approximately 380 products through each of its offices on an exclusive basis. The wine importing company in the CEDC group is The Cellars of Fine Wines (“PWW”), which works directly with the suppliers listed below. Additionally, the Company distributes other various sparkling wines, vermouths and champagnes on a non-exclusive basis, including Moet & Chandon, Dom Perignon, Piper Heidseck, Martini and Cinzano.

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List of Exclusive Brands by Supplier

New Zealand Wines

Jackson Estate

The Company has been co-operating with the same suppliers for four years and has either verbal or written contracts. Where a written contract is in place, it is usually valid for between one and three years with a three to six month termination clause exercisable by either party. With selected contracts, the Company also shares in the local marketing costs on either a defined amount or revenue percentage basis. Where a label does not have sufficient demand, the Company will consolidate shipments abroad before receiving the goods into Poland where they are stored in the Company’s bonded warehouse until cleared by customs for sale.

Sales Organization

The Company employs approximately 310 salespeople who are assigned to one of its nine distribution centers and 58 satellite branches. Each distribution center and satellite branch has a sales manager, who meets with the salespeople on a twice weekly basis to review products and payments before the salespeople begin calling on customers. The sales force at each office is typically divided into two categories: traditional trade and key accounts. Salespeople work on a daily pre-order system, which is routed by region and take the sales force on approximately 20 calls per day. At the end of their day, they return to the office or telephone in their orders, which are processed and dispatched the next morning. The sales force work exclusively on a commission basis and are supplied with a company car and a mobile phone.

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Approved travel expenses are covered by the Company. The Company conducts periodic training to improve the salesmen’s knowledge of the Company’s products as well as improve the sales force’s skills.

Marketing

The Company has its own marketing department, which consists of ten people, including six brand managers, who manage the marketing support of the brands the Company imports exclusively into Poland. The Company manages a combined marketing budget for all exclusive brands of approximately $2 million, of which the Company contributes up to 50% of the total budget. The brand owners contribute the remaining part. The Company is responsible for all of the marketing efforts within Poland from point-of-sale production, below-the-line promotions, print work and public relation events, as well as overseeing the draft beer operations throughout Poland.

Distribution System

The Company’s headquarters are located in Warsaw, the capital of Poland. There are another eight distribution centers and 58 satellite branches spread across Poland.

In October 2000, the Company moved into a new distribution facility in Warsaw. The facility is approximately 9,765 square meters of warehouse (including bonded warehouse) and 2,230 square meters of office space currently used for the headquarters. Management believes the warehouse facility has enough space to permit the Company to expand for the next three to five years without any further major investment.

The Company has developed its own de-centralized, national, next-day distribution system for its alcoholic beverage products, and has the ability to leverage its distribution capacity to include other products that meet its product guidelines as regards to incremental gross margin and operating profit. For imported products, the distribution network begins with a central bonded warehouse in Warsaw. Products can remain in this warehouse without customs and other duties being paid until the product is needed for sale. At such point, the product is transferred to the Company’s consolidation warehouse at the same location and shipped directly to one of the eight regional office/warehouse facilities connected to each of the Company’s sales locations outside of Warsaw. Based on current sales projections, the regional distribution centers and satellite branches are provided with deliveries on a weekly or bi-weekly basis so that they are able to respond to their customers’ needs on a next-day basis. Because of the poor road infrastructure in Poland, the Company currently operates through nine distribution centers and 58 satellite branches. The Company expects to merge five to ten of the satellite branches during 2004, as there is current overlap with recently acquired companies.

For products the Company buys in Poland, the distribution chain begins with the importer/producer who ships product directly to each warehouse in Poland at the importer/producer’s cost. Once the product is entered into the branch inventory, it can be sold and delivered to customers within 24 hours.

Except at peak periods during the summer holidays and other peak times such as Christmas, all deliveries are made by Company-trained employees using Company-owned or leased vehicles. During busy periods, the Company uses independent contractors to supplement its own fleet. These contractors are usually small family-run businesses with which the Company has had relationships for several years. The Company has over 280 delivery trucks it uses for its direct deliveries in Poland. The Company replaces its fleet every three to five years, which is an ongoing process handled by its fleet management department.

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Market for Product Line

In 2003, approximately 94% of the Company’s total sales were through off-trade locations (including 12% through other wholesalers), where the alcoholic beverages are not consumed, and 6% through on-trade locations, where the alcoholic beverages are consumed. A breakdown by value of the off-trade and on-trade is provided below.

Off-Trade Market

There are two components of the Company’s sales to locations where alcoholic beverages are not consumed on premises. The most significant are small, usually Polish-owned and managed businesses, including small grocery stores. At December 31, 2003, the Company sold products to approximately 19,840 such business outlets, which typically stock and sell relatively few alcoholic beverage products and wish to have access to the most popular selling brands. The other components of the off-trade business are large supermarket chains, which are typically non-Polish-owned, as well as smaller multi-store retail outlets operated by major Western energy companies in connection with the sale of gasoline products. The large supermarket chains typically offer a wide selection of alcohol products, while the smaller retail outlets offer a more limited selection.

The Company also sells products throughout Poland through other wholesalers. There are a few written agreements with these wholesalers as this distribution channel is going through a major consolidation and the Company’s strategy is to go direct to retail bypassing this distribution channel.

On-Trade Market

There are three components to the Company’s sales to locations where alcoholic beverages are consumed: (i) bars and nightclubs; (ii) hotels and (iii) restaurants. Bars and nightclubs are usually locally managed businesses, although they may be owned and operated in major cities by a non-Polish national. Hotels include worldwide chains such as Marriott, Sheraton, Holiday Inn, Hyatt and Radisson, as well as the major Polish chain, Orbis. Restaurants are typically up-scale and located in major urban areas.

Financial Information about Geographic Access

During each of the last three years, all of the Company’s revenue has been derived from customers in Poland, where all of the Company’s customers are located, and all of the Company’s long-lived assets are located in Poland.

Control of Bad Debts

The Company believes that its close monitoring of customer accounts both at the relevant regional office and from Warsaw has contributed to its success in maintaining a low ratio of bad debts to net sales. During 2001, 2002 and 2003, bad debt expense as a percentage of net sales, were approximately 0.39%, 0.49% and 0.14% of net sales. Management believes the ongoing enhancement of computer systems for interoffice financial and administrative controls will assist in maintaining a low ratio of bad debts to net sales as the Company continues to expand. A more detailed explanation of the bad debts provision is available in “Management’s Discussion and Analysis and Financial Condition and Results of Operation.”

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Competition

The Company, as an early entrant in the post-Communist market in Poland, has over 11 years of experience in introducing, developing and refining sales, marketing and customer service practices in the diverse and rapidly developing Polish economy. The Company believes this experience gives it a competitive advantage in the alcoholic beverage distribution business. The Company believes that it is currently the only independent national distributor of an extensive and diversified alcoholic beverage line in Poland.

The Company competes with various regional distributors in all of its distribution centers and satellite branches. This competition is particularly vigorous with respect to domestic vodka brands. One of the largest, foreign-owned chain stores also sells to smaller retailers. The Company addresses this regional competition, in part, through offering to customers in the region a single source supply of more products than its regional competitors typically offer and the Company is able to leverage its market share to be price competitive while still maintaining its margins.

The brands of beers, wines and spirits distributed by the Company compete with other brands in each category, including some the Company itself distributes. The Company expects to see increased competition from Heineken, SAB and Carlsberg in the import beer sector while the Company believes that the import wine and import spirit categories will remain less competitive.

Employees

The Company had approximately 1,905 full-time employees as of December 31, 2003. Substantially all employees were employed in Poland and have agreements with the Company. The Polish Labor Code requires that certain benefits be provided to employees, such as the length of vacation time and maternity leave and a bonus paid upon retirement based upon years worked in the firm. This law also restricts the discretion of the Company’s management to terminate employees without cause and requires in most instances a severance payment of one to three months’ salary. The Company makes required monthly payments up to 19.83% of an employee’s salary to the governmental health and pension system. The Company’s employees are not unionized. The Company believes that its relations with its employees are good. The Company also grants other health benefits to selected key management personnel.

Regulation

The Company’s business of importing and distributing alcoholic beverages is subject to extensive regulation. The Company believes it is operating with all licenses and permits material to its business. The Company is not subject to any proceedings calling into question its operation in compliance with any licensing and permit requirements.

Import of Products

Import License

Import permits must be obtained for specific consignments of alcoholic beverages to be imported under the import license, as well as under customs quotas. See “— Customs Duties and Quotas.” The Company must obtain such permits for all its imported alcoholic beverages except for beer and wine. The application for a permit is usually made when products are ordered and must specify the customs code of the group of products, the quantity of products and the source country of the products. Permits are issued for four months, and the Company must demonstrate to appropriate officials that each consignment it imports is covered by a permit. Similar permits must be obtained for the importation of cigars.

Approval of Health Authorities

Local health authorities at the place of import must also be notified of all consumption goods being imported into Poland. This notification is typically given when a particular shipment of products arrives in Poland. In general, this notice permits the applicable health authorities to determine that no product is entering the Polish market without having been previously approved for sale in Poland. See “— Wholesale Activities — General Norms.”

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Wholesale Activities

The Company must have additional permits from the Minister of Economy and appropriate health authorities to operate its wholesale distribution business. Furthermore, it must comply with rules of general applicability with regard to packaging, labeling and transporting products.

General Permits

The Company is required to have permits for the wholesale trade for three of its product lines — beer, wine and spirits. The permit with regard to beer is issued for two years and the current permit will expire on March 28, 2005. The permit with regard to spirits is issued for one year and the current permit will expire on December 31, 2004. The permit for wine is issued for two years and the current permit will expire on March 28, 2005. One of the conditions of these permits is that the Company sells its products only to those who have appropriate permits to resell the products. A permit can be revoked or not renewed if the Company fails to observe laws applicable to its business as an alcohol wholesaler, fails to follow the requirements of a permit or if it introduces into the Polish market alcohol products that have not been approved for trade. The Company also obtained separate permits for each of its subsidiaries. The Company has never been denied any general permits and expects to receive these permits in due course.

Health Requirements

The Company must obtain the approval of the local health authorities to open and operate its warehouses. This approval is the basis for obtaining the permit for wholesale activities. The health authorities are primarily concerned with sanitation and proper storage of alcoholic beverages, as well as cigars. These authorities can monitor the Company’s compliance with health regulations. Similar regulations apply to the transport of alcoholic beverages and cigars, and the drivers of such transports must themselves submit health records to the appropriate authorities.

General Norms

The Company must comply with a set of rules, usually referred to generally as “Polish Norms,” which constitute legal regulations concerning, as applicable to the Company, standards according to which alcoholic beverages and cigars are packaged, stored, labeled and transported. These norms are established by the Polish Normalization Committee. In the case of alcoholic beverages, the committee is composed of academics working with relevant government ministries and agencies as well as experienced businessmen working in the alcoholic beverage industry. The Company received a certificate after an inspection by the Central Standardization Institute, which is part of the Ministry of Agriculture, indicating its compliance with applicable norms as of the date thereof. Such certification is needed to import alcoholic beverages. Compliance with these norms is also confirmed by health authorities when particular shipments of alcoholic beverages arrive in Poland. The Company is in compliance with the statutes of the Polish norms outlined above. See “— Import of Products — Approval of Health Authorities.”

Customs Warehouse

Since the Company operates a customs warehouse, further regulations apply, and a permit from the Director of the Regional Customs Office and the approval of health authorities were required to open and operate the customs warehouse. The applicable health concerns are the same as those discussed under “Wholesale Activities” with regard to non-custom warehouses. The Company received its most current permit on December 28, 1998, which is for an unspecified period of time. The continued effectiveness of the permit is conditioned on the Company’s complying with the requirements of the permit which are, in general, the proper payment of customs duties and maintenance of an insurance policy.

Customs Duties and Quotas

As a general rule, the import of alcoholic beverages and cigars into Poland is subject to customs duties and the rates of the duties are set by the Polish government acting through the Council of Ministers for particular types of products. In the Company’s case, the duties vary by product lines. Currently, the customs duty for beer is 6% for beer produced within the European Community, 30% for beer produced outside of the European Community and 21% for beer produced within CEFTA (Central European Fair Trade Agreement) countries. The current customs duty for wine is 20% for wine produced within the European Community, 30% for wine produced outside the European Community and 15% for wine produced within CEFTA countries. For imported spirits, the customs duties range from 75% to 105% irrespective of country of origin. However, as Poland is scheduled to join the European Union (EU) as of May 1,

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2004, the customs duties are scheduled to go to zero at that time for all EU-sourced products whereas for all products sourced outside the EU, duties will either go to zero or will be substantially reduced to be in line with existing signed agreements between the EU and the countries from which products are sourced.

Customs quotas for alcoholic beverages, as well as for cigars, are fixed annually, with the current quotas being applicable through December 31, 2004. There are no public guidelines on how the Minister of Economy has determined the current quotas or may determine future quotas. However, since January 2002, there have been no customs quotas for alcoholic beverages and cigars produced within the European Community, which represents approximately 80% of the Company’s import business, other than special quotas which have been granted for a limited number of EU-sourced spirits and wine, which have had previous tariffs reduced by 20%.

To import alcoholic beverages and cigars under the quotas, as well as outside the quotas, the Company must receive a permit, which is generally valid for four months and specifies what products and of what quality may be imported from what country or group of countries. It is the Company’s practice to apply for this import permit after concluding a contract for the import of a particular group of products. The Company has always received the import permits for which it has applied, although there can be no assurance that it will continue to do so in the future.

Advertising Ban

In 2001, the government introduced significant changes to the Alcohol Awareness Law by separating regulations concerning beer from regulations concerning other alcoholic beverages. Previously, the government had implemented a ban on advertising on all alcoholic beverages.

According to the new regulations, above-the-line activities for beer are allowed but are limited to the following: billboard advertising only if 20% of the surface of the billboard is dedicated to health warnings concerning alcohol consumption, advertising in the press is limited to the inside of a publication (no front or back cover advertising is allowed), television advertising is only allowed between the hours of 8:00 p.m. and 6:00 a.m. and no advertising can be associated with sexual attractiveness, relaxation, health, sport or incorporate children in any way in the advertisement. No other above-the-line activities for other alcoholic beverages are allowed at all.

The government regulations for below-the-line promotions remain the same as in previous years for all alcoholic beverages. The government allows direct mail campaigns, promotions such as game contests, the packaging of gifts with an alcoholic beverage (i.e., a free glass is attached to a bottle of spirits) and other similar promotions. However, incentive promotions have to be conducted within the alcohol section of each store. In the on-premise outlets, below-the-line activities are allowed by the government.

The Company strictly adheres to the government regulations regarding above-the-line and below-the-line advertising and promotion. To date, the Company has not been in violation of these regulations.

Regulation of Retail Sales

The Company operates four retail outlets for alcoholic beverages under the name “Fine Wine and Spirits”. Under Polish law, each of these outlets must have a retail permit to sell alcoholic beverages to potential clients. The length of such permits varies from one to three years and is renewable. Also, each new store needs to acquire a certificate from the local health authorities to sell its products. The Company, to obtain the above permits, must first have a lease agreement with the owner of the building. Furthermore, for each lease agreement, the Company requires a long term notice period in order to safeguard its investments. All present retail outlets operate with valid retail licenses, which can be renewed at the expiration date.

Available Information

The Company maintains an Internet website at http://www.ced-c.com. Please note that our Internet address is included in this annual report as an inactive textual reference only. The information contained on our website is not incorporated by reference into this annual report and should not be considered part of this report.

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). We make our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports and most of our other SEC filings available free of charge through our Internet website as soon as reasonably practicable after we electronically file these materials with

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the SEC. These filings are also available to the public over the Internet at the SEC’s website at http://www.sec.gov. In addition, we provide paper copies of our SEC filings free of charge upon request.

We have adopted a Code of Ethics applicable to all of our officers, directors and employees, including our Chief Executive Officer and Chief Financial Officer (who is also our Principal Accounting Officer). The Code of Ethics is publicly available on our website at http://www.ced-c.com. We intend to disclose any amendment to, or waiver from, any provision in our Code of Ethics that applies to our Chief Executive Officer and Chief Financial Officer by posting such information on our website at http://www.ced-c.com.

Risks Factors

The inability to adequately manage exchange-rate risk could affect our financial results and management’s ability to make financial projections.

The Company’s operations are conducted primarily in Poland. Our functional currency is the Polish zloty while our reporting currency is the U.S. dollar. The Company’s financial instruments consist mainly of cash and cash equivalents, accounts payable and receivable, inventories, bank loans, overdraft facilities and long-term debt. All of the monetary assets represented by these financial instruments are located in Poland; consequently, they are subject to currency translation risk when reporting in U.S. dollars.

If the U.S. dollar increases in value against the Polish zloty, the value in U.S. dollars of assets, liabilities, revenues and expenses originally recorded in the Polish zloty will decrease. Conversely, if the U.S. dollar decreases in value against the Polish zloty, the value in U.S. dollars of assets, liabilities, revenues and expenses originally recorded in Polish zloty will increase. Thus, increases and decreases in the value of the U.S. dollar can have an impact on the value in U.S. dollars of our non-U.S. dollar assets, liabilities, revenues and expenses, even if the value of these items has not changed in their original currency.

The following table sets forth, for the periods indicated, the average exchange rate (expressed in current zloty) quoted by the National Bank of Poland. Such rates are set forth as zloty per U.S. dollar. At March 11, 2004, the rate was PLN 3.91 = $1.00.

The inability to maintain and expand our senior management would threaten our ability to implement all of our business strategies.

The management of future growth will require the ability to retain qualified management personnel and to attract and train new personnel. Senior leadership is necessary to develop the financial and cost controls, information systems and marketing activities needed for us to prosper. Further, the successful integration of acquired companies requires substantial attention from our senior management team. Failure to successfully retain and hire needed personnel to manage our growth and development would have a material adverse effect on our ability to implement our business plan and grow our business.

A significant number of our largely short-term and non-exclusive supply contracts may be unexpectedly terminated, which would materially and adversely affect our ability to generate revenue and operating profits.

We distribute approximately 93% of the alcoholic beverages in our portfolio on a non-exclusive basis. Furthermore, most of our distribution agreements for these beverages have a term of approximately one year, although several of such agreements can be terminated by one party without cause on relatively short notice. For example, the distribution agreements with respect to domestic vodka (which accounted for approximately 71% of our net sales in 2003) can be terminated on one month notice. Any termination of a significant number of our supply contracts would

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adversely affect our ability to generate revenue and operating profits.

In 2003, we purchased over 5% of net sales from the following suppliers: Polmos Bialystok (17%), Sobieski Distribution (14%), Unicom Bols Group (13%) and Polmos Zielona Gora (6%). We have one-year supply contracts with each of these companies. The termination of our relationship with any of these entities could have a material adverse effect on our revenue and operating profits.

Risks Related to Growth Through Acquisitions

The failure to smoothly integrate the operations, management and other personnel of acquired companies could adversely affect our ability to maximize our business activities and financial performance.

Our growth will depend in part on our ability to acquire additional distribution capacity and effectively integrate these acquisitions into our existing operations and systems of management and financial controls. Risks associated with acquisitions include, but are not limited to, integration of sales personnel, retention of key management, standardization of management and controls, harmonization of sales and marketing strategies and procedures and implementation of group financial reports and controls. We may not be able to successfully integrate the operations of any acquisition, which could negatively impact our financial performance.

Furthermore, since we have a history of maintaining the operational independence of the companies we acquire, there are risks that our managers of our subsidiaries, who were once the owners of their own companies, will not successfully implement new business strategies and management and cost-control systems. Our senior management team residing in Warsaw may not be able to coordinate the business activities of the group’s various subsidiaries in order to maximize the group’s business potential as a nationwide distribution network.

The absence of suitable acquisition targets would undermine our continuing acquisition strategy.

We may not identify suitable acquisition candidates that are available on terms acceptable to us. In addition, acquired businesses may not be profitable at the time of their acquisition and may not achieve or maintain profitability levels that justify our investment. Therefore, our acquisitions may not be accretive to shareholder value.

The implementation of anti-monopoly regulations could threaten our basic business strategy of growing through acquisitions once the company reaches approximately a 35% to 40% market share.

Under the Polish Anti-Monopoly Act, acquisitions may be blocked or have conditions imposed upon them by the Polish Office for Protection of Competition and Consumers (the “Anti-Monopoly Office”) if the Anti-Monopoly Office determines that the acquisition has a negative impact on the competitiveness of the Polish market. The current body of Polish anti-monopoly law is not well established and, therefore, it can be difficult to predict how the Anti-Monopoly Office will act on an application. Generally, companies that obtain control of 40% or more of their market may face greater scrutiny from the Anti-Monopoly Office than those that control a lesser share. Additionally, several types of reorganizations, mergers and acquisitions and undertakings between business entities, including acquisitions of stock, under circumstances specified in the Anti-Monopoly Act, require prior notification to the Anti-Monopoly Office. Sanctions for failure to notify include fines imposed on parties to the transaction and members of their governing bodies. The Anti-Monopoly Office may not approve any or all of our proposed acquisitions, which action would negatively impact our ability to institute our business plan and grow our business.

Risks Related to Investments in Poland and Emerging Markets

Increased Polish regulations of the alcoholic beverage industry could make it difficult for us to operate in the industry profitably.

The importation and distribution of alcoholic beverages in Poland are subject to extensive regulation, requiring us to receive and renew various permits and licenses to import, warehouse, transport and sell alcoholic beverages. These permits and licenses often contain conditions with which we must comply in order to maintain the validity of such permits and licenses. Our import and sale of cigars are also subject to regulation. These various governmental regulations applicable to the alcoholic beverage industry may be changed so as to impose more stringent requirements on us. If we were to fail to be in compliance with applicable governmental regulations or the conditions of the licenses and permits we receive, such failure could cause our licenses and permits to be revoked and have a material adverse effect on our business, results of operations and financial condition. Further, the applicable Polish

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governmental authorities, in particular the Minister of Economy, have articulated only general standards for issuance, renewal and termination of the licenses and permits which we need to operate and, therefore, such governmental authorities retain considerable discretionary authority in making such decisions.

Deterioration in the market reforms undertaken by the Polish government could make it more difficult for management to operate our company and predict financial performance.

Poland has undergone significant political and economic change since 1989. Political, economic, social and similar developments in Poland could in the future have a material adverse effect on our business and operations. In particular, changes in laws or regulations (or in the interpretations of existing laws or regulations), whether caused by changes in the government of Poland or otherwise, could materially adversely affect our business and operations. Currently, there are no limitations on the repatriation of profits from Poland, for example, but there is no assurance that foreign exchange control restrictions or similar limitations will not be imposed in the future with regard to repatriation of earnings and investments from Poland. If such exchange control restrictions, or similar limitations are imposed, the ability of CEDC to receive dividends or other payments from its subsidiaries could be reduced, which would reduce our ability to pay dividends.

Emerging economies, such as Poland in which we operate, can be more volatile and perform differently than the United States due to increased risks of adverse political, regulatory or economic developments. The value of our common stock may be adversely affected by developments that would not affect other U.S. issuers without substantial operations in emerging markets.

In general, investing in the securities of issuers with substantial operations in foreign markets such as Poland involves a higher degree of risk than investing in the securities of issuers with substantial operations in the United States and similar jurisdictions. The Polish market could be subject to greater social, economic, regulatory and political uncertainties than the United States which could have an adverse effect on the market value and liquidity of our common stock.

Our stockholders could experience unusual expense and uncertainty in trying to enforce any judicial judgment against us.

We are organized under the laws of Delaware. Therefore, our stockholders are able to affect service of process in the United States upon CEDC and may be able to affect service of process upon our directors. However, we are a holding company, all of the operating assets of which are located outside the United States. As a result, it may not be possible for investors to enforce against our assets judgments of United States courts predicated upon the civil liability provisions of United States laws. We have been advised by our counsel that there is doubt as to the enforceability in Poland, in original actions or in actions for enforcement of judgments of U.S. courts, of civil liabilities predicated solely upon the laws of the United States. In addition, awards of punitive damages in actions brought in the United States or elsewhere may not be enforceable in Poland.

Customs and Consolidation Warehouse

The Customs and Consolidation Warehouse is a 9,765 square meter leased facility located in Warsaw. The lease is for seven years commencing May 1, 2003 and the monthly rental, denominated in U.S. dollars, is approximately $54,930 per month as of December 31, 2003.

Sales Offices and Warehouses

The Company has entered into leases for its Warsaw headquarters and most of its eight other distribution centers and 58 regional branches. The amount of office and warehouse space leased for each distribution center and satellite branch varies between 500 and 2,000 square meters depending on the size of the business. The monthly lease payments, which are denominated in Polish zloty, vary between $1,500 and $5,000 for the regional distribution centers and satellite branches and are approximately $96,000 per month in Warsaw ($54,930 for the customs and consolidation warehouse and $41,070 for the office space for Company headquarters). The Warsaw lease is for seven years, commencing May 1, 2003, without termination; most of the other leases can be terminated by either party on approximately three months’ prior notice.

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Retail Outlets

The Company has entered into a long term or indefinite term lease agreement for each of its five retail outlets. All the lease agreements can be terminated by mutual consent or by three to six months’ prior notice by either party. The lessor, however, has, in each case, waived its right to terminate the agreement for three years as long as we are performing our obligations thereunder. Lease payments, which are denominated in Polish zloty, currently range from $1,300 to $2,388 per month.

The Company is involved in litigation from time to time in the ordinary course of business. In management’s opinion, such litigation, individually and in the aggregate, is not material to the Company’s financial condition or results of operations.

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2003.

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PART II

Market Information

The Company’s Common Stock has been traded on the NASDAQ National Market (the “National Market”) under the symbol “CEDC” since June 1999. Prior thereto it traded on the NASDAQ Small Cap Market since our initial public offering in July 1998. The following table sets forth the high and low bid prices for the Common Stock, as reported on the NASDAQ National Market, for each of the Company’s fiscal quarters in 2002 and 2003. These prices represent inter-dealer quotations, which do not include retail mark-ups, mark-downs or commissions and do not necessarily represent actual transactions. The prices for 2002 have also been adjusted to reflect the impact of the Stock split in May 2003.

On March 11, 2004, the last reported sales price of the Common Stock was $33.70 per share.

Holders

As of March 11, 2004, there were approximately 4,200 beneficial owners and 62 shareholders of record of Common Stock.

Dividends

CEDC has never declared or paid any dividends on its capital stock. Future dividends will be subject to approval by CEDC’s board of directors and will depend upon, among other things, the results of the Company’s operations, capital requirements, surplus, general financial condition and contractual restrictions and such other factors as the board of directors may deem relevant.

The Company has instituted a policy of having all of its subsidiaries (except Carey Agri) pay dividends to their respective shareholders, either the Company or Carey Agri. The subsidiaries, except for Carey Agri, will distribute 50% of their respective current year after tax profits. Retained earnings prior to January 1, 2001 are not considered distributable. As at December 31, 2003, the Company’s subsidiaries will provide for dividends of approximately $5,395,500 to Carey Agri and the Company. Based upon on the Company’s shareholdings, CEDC will receive $925,900 and Carey Agri $4,469,600.

Theses dividends are being used initially to pay down acquisition debt and to fund the day-to-day operations of the CEDC holding company. At December 31, 2003, the subsidiaries had approximately $31.8 million of retained earnings of which $6.3 million is currently non-distributable.

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As CEDC is a holding company with no business operations of its own, its ability to pay dividends will be dependent upon either cash flows and/or earnings of its subsidiaries and the payment of funds by those subsidiaries to CEDC. As Polish limited liability companies, the subsidiaries are permitted to declare dividends only twice a year from their retained earnings, computed under Polish Accounting Regulations after the audited financial statements for that year have been provided to and approved by shareholders.

Sales of Unregistered Common Stock in 2003

On March 31, 2003, the Company completed a private placement of 750,000 shares of common stock and additional investment rights to purchase up to an additional 150,000 shares of common stock at a purchase price of $23.25 per share to five institutional accredited investors for gross proceeds of $17,437,500. All of the additional investment rights were exercised during 2003 for additional gross proceeds of $3,487,500. The principal underwriter was Banc of America Securities LLC, which was paid a commission of 6%. The private placement was made to institutional accredited investors in reliance on the exemption from registration provided by Regulation D under the Securities Act of 1933.

On April 1, 2003, the Company issued 25,083 shares of common stock valued at $417,760 to acquire the remaining 3.25% of the voting shares of Onufry S.A which had been completed in October 2002. On April 10, 2003, the Company issued 23,000 shares of common stock valued at $344,200 as part of its earn-out agreement for Astor Sp. z. o.o. which had been initiated in 2001. On May 15, 2003, the Company issued 10,853 shares of common stock valued at $233,094 in connection with its acquisition Dako-Galant S.A. and on December 12, 2003 an additional 9,228 shares of common stock valued at $266,800 were issued as final consideration once certain criteria had been met. On October 3, 2003, the Company issued 29,367 shares of common stock valued at $861,300 as partial consideration for the 100% voting rights of Panta Hurt. On November 24, 2003, the Company issued 25,000 shares of common stock valued at $741,700 as part consideration for acquiring the 100% voting rights to Multi-Ex S.A. These shares were issued pursuant to the exemption from registration provided by Regulation S under the Securities Act. The securities were issued in off-shore private placements in reliance on Regulation S to entities which are not “United States persons” as defined by Regulation S. The stock certificates for all such securities bear a legend indicating that the stock is restricted and may not be sold in the United States without registration or an exemption from such requirements. Further, the holders have agreed to a six-month lock-up period.

Equity Compensation Plans

The following table provided information with respect to our equity compensation plans as of December 31, 2003.

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The following table sets forth selected consolidated financial data for the periods indicated and should be read in conjunction with and is qualified by reference to “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” the consolidated financial statements, the notes thereto and the other financial data contained in Items 7 and 8 of this report on Form 10-K.

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

Overview

The following comments regarding variations in operating results should be read considering the rates of inflation in Poland during the periods presented — 2001 (3.6%), 2002 (1.1%) and 2003 (1.7%) — as well as the fluctuations of the Polish zloty compared to the U.S. Dollar. Using exchanges rates as at December 31, 2002 and 2003, the zloty in comparison to the U.S. Dollar appreciated by 2.6% in 2003 and 3.7% in 2002.

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

Total Operations 2003: This is the extract from the income statement for total operations for the fiscal year ended December 31, 2003.

Operations Acquired 2003: This is the elimination from total operations 2003 of activities acquired in 2003.

Operations Acquired 2002: These are the eliminations of the amounts generated in 2003 by subsidiaries acquired in 2002 for the corresponding pre-acquisition period of 2003 so as to present continuing operations 2003 based on comparable operations. For example, if we acquired a subsidiary on May 1, 2002, operations acquired 2002 includes the amounts generated by that subsidiary during the period January 1, 2003 to April 30, 2003 which represents the corresponding pre-acquisition period.

Continuing Operations 2003: The amounts for 2003 generated by the same subsidiaries owned in 2002 and for the same corresponding period.

Total Operations 2002: This is the extract from the income statement for total operations for the fiscal year ended December 31, 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 if we pay for goods when delivered. The discounts offered are considerably in excess of the effective rate we would pay for 60-day term borrowings under our bank facilities. We will later refer to COD in discussions regarding margin growth and short-term banking facilities.

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Results of Operations

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

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Net Sales

Total net sales for 2003 increased by 46.0%, or $135.1 million, to $429.1 million. Net sales from continuing operations increased 11.6%, or $34.2 million, to $328.2 million for 2003 from a base figure of $294.0 million for 2002. The increase in net sales from continuing operations was mainly due to two factors:

Gross Profit

Total gross profit on net sales increased by 45.2%, or $17.6 million, to $56.5 million in 2003. The growth in gross profit from continuing operations was 13.3%. As a percentage of net sales, total gross margins for 2003 and 2002 was 13.2%. The gross margins attributable to net sales from continuing operations increased from 13.2% to 13.4%. The increases in core gross margins can be attributed to the improved product mix being achieved in subsidiaries following operational reviews and implementation of marketing and sales coverage strategies.

Operating Expenses

Total selling, general and administrative (S,G&A) expenses increased 35.2% from $23.4 million in 2002 to $31.6 million in 2003. S,G&A attributable to continuing operations increased by 5.5% to $24.7 million. As a percentage of total net sales, total S,G&A was 7.4% for 2003, down from 7.9% for 2002. For S,G&A attributable to continuing operations for 2003, it was 7.5% of net sales.

Depreciation of equipment in total increased by 31.2% from $1,273,200 in 2002 to $1,671,800 in 2003. The increase is attributable to the Company’s investment in its logistics infrastructure (delivery vehicles and warehouse and IT facilities).

Bad debt expense in total decreased 58.6% from $1,431,000 in 2002 to $592,000 for 2003. This decrease has been achieved through consistent management of the age profile of our trade receivables and diligent review of acquisitions to ensure that all provisions are made as part of the fair value assessment. As a percentage of sales, the provision represents 0.1% for 2003 versus 0.5% for 2002.

Operating Income

Total operating income increased 75.7%, or $9.6 million, to $22.2 million for 2003. Expressed as a percentage of net sales, operating profit for 2003 was 5.2% as opposed to 4.3% for 2002. Operating income attributable to continuing operations increased 34.8%, or $4.4 million, to $17.0 million. The reasons for the increase of operating margins were due to the factors stated above.

Interest Expense

Total interest expense remained stable at $1.6 million for both 2002 and 2003. Interest cover increased from 7.9 times in 2002 to 13.6 times in 2003. Interest cover is the number of times that interest expense divides into operating profit.

Net Realized and Unrealized Foreign Currency Losses

The net charge relating to foreign exchange losses decreased to $92,000 for 2003 versus a net charge of $178,000 for 2002. Following the Company’s decision in November 2002 to convert all its loan obligations to Polish

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zloty, its functional currency, the Company has only been exposed to foreign currency translation risk on its net working capital.

Income Tax

The total tax charge for 2003 was $5.4 million, which represented 26.5% of pre-tax profits. For 2002, the charge was $2.8 million, which represented 25.0% of pre-tax profits. The 2003 tax charge was impacted by a write down of the deferred tax asset resulting from a reduction in the basic corporate income tax rate enacted in Poland from 27% down to 19%. This is a one off event and more details are available in note 4 to the financial statements.

Net Income

Total net income increased by 81.6%, or $6.8 million, to $15.1 million for 2003. The increase was due to the factors noted above.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

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

Total Operations 2002: This is the extract from the income statement for total operations for the fiscal year ended December 31, 2002.

Operations Acquired 2002: This is the elimination from total operations 2002 of activities acquired in 2002.

Operations Acquired 2001: These are the eliminations of the amounts generated in 2002 by subsidiaries acquired in 2001 for the corresponding pre-acquisition period of 2002 so as to present the continuing operations 2002 based on comparable operations. For example, operations acquired 2001 include the first quarter result for Astor Sp. z o.o. which was acquired on April 5, 2001. These results have been excluded from continuing operations for 2002 so as to show the impact of a common nine-month period of ownership of Astor in continuing operations in both years.

Continuing Operations 2002: The amounts for 2002 generated by the same subsidiaries owned in 2002 and for the same corresponding period.

Total Operations 2001: This is the extract from the income statement for total operations for the fiscal year ended December 31, 2001.

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Net Sales

Total net sales for 2002 increased by 64.9%, or $115.8 million, to $294.0 million. Net sales from continuing operations increased 5.1%, or $9.0 million, to $187.2 million from a base figure of $178.2 million for 2001. The change of excise rates on Polish vodka as of October 1, 2002 had an adverse effect on our third quarter sales as the supply change de-stocked in anticipation of the change. We had anticipated being able to recover these sales as the supply chain re-stocked in the fourth quarter and as sales, which had previously been lost to unofficial channels came through normal supply lines. As a result of both the restocking and the migration of unofficial sales to normal channels, total net sales for the three months ended December 31, 2002 was $113.4 million as compared to $57 million for the same period of 2001, an increase of 99%. Of the $113.4 million, $44.9 million relates to acquisitions and $68.5 million from continuing operations, which represents a 20.2% core growth rate year over year.

Gross Profit

Total gross profit on sales increased by 64.7% or $15.3 million. When expressed as a percentage of sales, gross margins were 13.2% for both years. While core gross margins have increased to 13.9%, the new businesses acquired in 2002 achieved a margin of 12.3%. Because these newly acquired businesses contributed 32% of the total gross margin, the lower margin achieved in these units had a dilutive effect on the whole. The improvement in the margins can be attributed to both the improved terms reached with suppliers following the acquisitions of Damianex and AGIS which, in turn, reflected back into the pre-acquisition group, and to the Company’s ongoing program of migrating its client base from second tier distributors towards retailers and on premise accounts.

Operating Expenses

Total selling, general and administrative (S,G&A) expenses increased 42.7% from $16.4 million in 2001 to $23.4 million in 2002. When expressed as a percentage of sales, total S,G&A decreased from 9.2% for 2001 to 7.9% for 2002. This improvement is attributable to both improvement in core S,G&A, which fell to 8.9%, and to the significantly lower cost basis achieved by the new acquisitions which operate in provincial areas. The reduction in core S,G&A has resulted from ongoing reviews of operations both in terms of staffing levels and in the choice of suppliers, and terms achieved on the delivery of goods and services to the whole group.

Depreciation of fixed assets and equipment increased by 51.4% from $841,000 in 2001 to $1.27 million in 2002. The increase is attributable to the amount of assets acquired with Damianex and AGIS. On core operations, depreciation has increased 12.6%, mainly due to the introduction of new business software in three of the subsidiaries.

Amortization of goodwill and trademarks has decreased by $560,000 from $762,000 for 2001 to $202,000 for 2002. This reduction is primarily the result of the application of the requirements of FSAB 142, which no longer allows the Company to amortize goodwill but instead require companies to perform regular impairment reviews. The Company has performed an impairment review and concluded that no adjustment is required. The Company amortizes trademarks over a 20-year period.

Bad debt expense in total increased 101.3% or $720,000 from $711,000 for 2001 to $1.43 million for 2002. This increase has mainly attributable to continuing operations as management has focused on the aging of its

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receivables in light of the current economic situation in Poland. As a percentage of sales, the provision represents 0.49% for 2002 compared to 0.4% for 2001, which is within management guidelines of 0.3% to 0.5% of sales.

Operating Income

Total operating income increased 159.8%, or $7.8 million, to $12.6 million for 2002. Expressed as a percentage of sales, total operating income for 2002 was at 4.3% as opposed to 2.7% for 2001. Core operating income increased 40.0% from $4.9 million for 2001 to $6.8 million for 2002. The significant increase in operating margins is a direct result of the Company’s ability to leverage its size from both the buy side and the sell side of its gross margins. In addition, the Company has also been able to leverage its position on overhead reduction through centralizing contracts for items such as gasoline, insurance, leasing, trucks, telecommunications, office and warehouse supplies.

During the fourth quarter of 2002, the Company refined its inventory valuation method to better estimate direct costs incurred in bringing the inventory to its existing condition and location. This change in estimate resulted in a net increase to operating profit of $449,000.

Interest Expense

Total net interest expense increased $241,000, or 17.9%, from $1.35 million for 2001 to $1.59 million for 2002. As a percentage of sales, total interest fell from 0.75% in 2001 to 0.5% in 2002. Interest cover has increased from 3.6 times in 2001 to 7.9 times in 2002. During 2002, interest rates fell significantly in Poland from an average of 16.1% in 2001 to 9.0% in 2002. The Company increased its debt level during 2002 primarily to fund its acquisitions of Damianex, AGIS and Onufry, which added approximately $5.0 million to long-term debt. As mentioned in the overview, the Company makes extensive use of COD rebates when the discount offered is significantly better than the effective rate of bank borrowing. While taking advantage of COD terms increases the Company’s short term borrowings and interest expense, we believe it also results in improved overall margins.

Net Realized and Unrealized Foreign Currency Losses

The net charge relating to foreign exchange losses increased to $176,000 for 2002 versus a net charge of $12,000 for 2001. Since 2000, the Company has tried to contain the foreign exchange risk on its non Polish zloty denominated debt through the use of hedging instruments which as a rule are expensive in Poland compared to more establish markets and it is this which was behind the increase. In November 2002, the Company made the decision to migrate virtually all of its long-term acquisition debt from U.S. Dollars and Euro into Polish zloty. The Company feels that the reduction in local interest rates justified this move as it also allowed the Company to eliminate the main source of potential foreign exchange movements.

Income Tax

The total tax charge for 2002 was $2.8 million, which represented 25.0% of pre-tax profits. For 2001, the charge was $1.1 million, which represented 30.9% of pre-tax profits. The monetary increase in income tax has been primarily due to the 202% increase in pre-tax profits from $3.7 million to $11.1 million.

During 2002, the Company has undergone an analysis of its bad debt provisions following a change in Polish tax law which became effective in 2002, allowing for the accelerated tax deductability on unpaid debts. Following this analysis, the Company was able to process more of its provisions through its statutory books and form a more definitive opinion on the recoverability of the amounts included within the deferred tax asset. As a result of this review, the Company has concluded that a valuation allowance is no longer appropriate which reduced the current year income tax charge by $307,000 and the effective rate by 2.8%.

Net Income

Total net income increased by 229%, or $5.8 million, to $8.3 million for 2002 compared to a total net income of $2.5 million for 2001. The increase was due to the factors noted above.

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Statement of Liquidity and Capital Resources

In 2003, the Company’s operating activities absorbed $8.3 million as opposed to absorbing $1.9 million in 2002. Operating cash flows are generated by or absorbed by:

In tabular form, the sources and uses of operating cash flows can be summarized as:

The need for additional working capital was at its highest at December 31, 2003 due to the strong seasonality of sales which resulted in December 2003 sales being 15% of full year sales. This working capital requirement was further affected by our acquisition of Multi-Ex in mid-November.

The net cash used in operating activities is affected by the Company’s use of COD terms. Use of COD, where the Company waives its 60-day payment terms in exchange for additional early settlement discounts, effectively replaces with bank funding the support a business would normally receive from suppliers in managing overall working capital needs. The effect of presenting the movement in COD would be to show an increase in funds generated by operations while showing a reduction in funding. The increased use of COD in 2003 has been driven both by increased activity and an increase in the percentage of purchases to which we attach COD terms. For 2003, the percentage of COD from domestic suppliers was 55% whereas for 2002 it was 47%.

The Company has paid particular attention to debtor management over the past two years driving down both debtor days and allowances for doubtful debts. Inventory rotation has remained stable at 12.8 times a year. Days payable is a function of the amount of COD purchases the Company decides to make, a point indicated in both of the above tables.

Investing activities amounted to $5.5 million in 2003 and are in most part related to the acquisitions of Dako-Galant, Panta-Hurt and Multi-Ex. In addition, the Company has been upgrading its IT systems as well as starting the construction of its new regional distribution center in the Southeast of Poland. During 2002, the investing activities amounted to $14.6 million which was primarily for the acquisitions of AGIS and Damianex.

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Financing activities generated a total of $17.1 million, of which $19.3 million was the net proceeds of the private placement of the Company’s common stock in March 2003. The Company also received $2.0 million as a result of option holders exercising their options during the year. The receipt of these funds enabled the Company to reduce its debt during the year, although this has returned to a similar level as the previous year following the recent acquisitions.

The nature of the Company’s business is that it has to invest in working capital, mainly Polish vodka on COD terms, towards the end of the calendar year, which is traditionally its busiest selling period. With this in mind, the Company arranged for various short-term funds to be available to it which increased total debt by approximately $2.9 million. At December 31, 2002, the Company had $4.5 million of unused credit facilities available to it under these short-term agreements.

Total forward contracted obligations are:

It should be noted that the $30.4 million bank repayment relates only to the expiry of the current short term overdraft and loan facilities. The Company does not foresee and problems in renewing these facilities.

Statement on Inflation and Currency Fluctuations

Inflation in Poland was 1.7% for 2003 as compared to 1.1% in 2002.

The Company’s operating cash flows and virtually all of its assets are denominated in Polish zloty. In November 2002, the Company migrated nearly all its term loan facilities from U.S. Dollar and Euro to Polish zloty denominated loans. The Company is exposed to translation risk arising from the restatement of its financial statements from Polish zloty to U.S. Dollars.

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Seasonality

The Company’s net sales have been historically seasonable with on average 30% of the net sales occurring in the fourth quarter. During 2003, net sales in the fourth quarter represented 33% of full year sales compared to 39% for the fourth quarter of 2002. The quarterly figure for 2002 was higher because of the recovery following the excise tax change on October 1, 2002. The table below demonstrates the movement and significance of seasonality on the income statement.