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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington D.C. 20549





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Form 10-K/A


(Amendment No. 2)





|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
|- |  | -----------------------------------------------------

| | SECURITIES |  | EXCHANGE ACT OF 1934
| | ---------- |  | --------------------




For the Fiscal Year Ended December 31, 2001





| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
|- |  | ---------------------------------------------------------

| | SECURITIES |  | EXCHANGE ACT OF 1934
| | ---------- |  | --------------------




For the transition period from  to





Commission File Number 0-24341





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CENTRAL EUROPEAN DISTRIBUTION CORPORATION


(Exact name of registrant as specified in its charter)





Delaware (State or other
jurisdiction of incorporation or organization)

54-1865271 (I.R.S.
employer Identification No.)





1343 Main Street, Suite 301, Sarasota Florida (Address of principal executive offices)

34236 (Zip
code)





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





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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.  ̈





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 8, 2002 was $34,813,761.*





As of March 8, 2002, the registrant had 4,490,901 shares of common stock outstanding.





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DOCUMENTS INCORPORATED BY REFERENCE





Portions of the proxy statement for the annual meeting of stockholders to be held on April 29, 2002 are incorporated by reference into
Part III.


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|* |  | Solely for purposes of this calculation, all directors and executive officials of the registrant and all stockholders beneficially owning more than 5% of the
registrants common stock are considered to be affiliates.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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EXPLANATORY NOTE





The registrant is amending Items 5, 7, 7A and 8 of Part II and the exhibit index of its Form 10-K for the fiscal year ending December 31, 2001. The amendments to Item 8 are
to several notes to the financial statements. There are no changes made to the financial statements themselves as previously filed.




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PART II





Item 5.Market for Registrants Common Equity and Related Stockholder Matters





Market Information





The Companys common stock, $0.01
per share (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 its initial public
offering in July 1998. Before such time, there was no established public trading market for the Common Stock. The following table sets forth the high and low sales prices for the Common Stock, as reported on the NASDAQ National Markets for each of
the Companys fiscal quarters in 2000 and 2001.





High

LowQuarter Ended 3/30/00

$
6.50

$
4.31Quarter Ended 6/30/00

$
5.44

$
3.56Quarter Ended 9/30/00

$
5.25

$
3.50Quarter Ended 12/31/00

$
3.88

$
1.06





High

LowQuarter Ended 3/30/01

$
4.06

$
1.88Quarter Ended 6/30/01

$
5.21

$
3.00Quarter Ended 9/30/01

$
7.00

$
3.93Quarter Ended 12/31/01

$
12.98

$
5.17





On March 8, 2002, the last reported sales price of the Common Stock
was $12.70 per share.





Holders





As of March 8, 2002, there were 1,394 recorded holders of the 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, the Companys 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 years after tax profits except for those
generated during the first year of ownership. The retained earnings prior to January 1, 2001 are not considered distributable. As at December 31, 2001, the Companys subsidiaries, will provide for dividends of approximately $1,100,000 to Carey
Agri and the Company. Based on the Companys shareholdings, CEDC will receive $154,000 and Carey Agri $946,000.





These 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, 2001, the subsidiaries had approximately $7.4 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 or 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.





Subsidiaries except for Carey Agri will distribute 50% of any current years after tax profit except for those generated during the first year of ownership. The
retained earnings prior to January 1, 2001 are not considered distributable. As at December 31, 2001, the Companys subsidiaries will provide for dividends of $1,137,000 to Carey Agri and CEDC. Based on the shareholdings CEDC is obligated to
receive $154,000 and Carey Agri $983,000.





Unregistered common stock issued in 2001





On April 5, 2001, the Company issued 31,264 shares of common stock in connection with its acquisition of 97% of the voting shares of Astor
Sp. z o.o. See note 10 to the consolidated financial statements contained in Item 8 of this Form 10-K. These shares were issued pursuant to the exemption from registration provided by Regulation S. The securities were issued in an off-shore private
placement in reliance on Regulation S to entities which are not United States persons, as defined by Section 902(k)(1) of 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 agreed to a twelve-month lock-up period.




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Item 7.Managements Discussion and Analysis of Financial
Condition and Results of Operation





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





Overview





The Companys operating results are generally determined by the volume of alcoholic beverages that can
be sold by the Company through its national distribution system, the gross profits on such sales and control of costs. The Company purchases the alcoholic beverages it distributes from producers as well as other importers. Normally purchases are
made with the sellers providing a period of credit, generally between 25 and 90 days, before the purchase price is to be paid by the Company. Since the Companys initial public offering in July 1998, however, the Company pays for a significant
portion of its domestic vodka purchases using cash on delivery terms in order to receive additional discounts. The Company sells the alcoholic beverages with a mark-up over its purchase price, which mark up reflects the market price for such
individual product brands in the Polish market. Additional margins are available for premium-imported brands.





The
following comments regarding variations in operating results should be read considering the rates of inflation in Poland during the period1999, 9.8% 2000, 10.1% and 2001, 3.6% as well as the fluctuations of the Polish zloty compared to
the U.S. Dollar. The zloty in comparison to the U.S. Dollar appreciated 0.1% in 2000 and appreciated 3.8% in 2001.





Results of
Operations





Year Ended December 31, 2001 Compared to Year Ended December 31, 2000





In the following Management, Discussion and Analysis section the reference to core operations means the 2001
historical financial results as adjusted by deducting the elements of Astor Company for the nine months ended December 31, 2001 and for PHA for the three months to March 31, 2001. The basis of preparation is still under US GAAP, the objective being
to allow the reader to assess the underlying condition of the Company excluding effects of acquisitions reported for less than a full calendar year.





Net sales increased $47.0 million or 35.8% from $131.2 million in 2000 to $178.2 million in 2001. The increase is attributable to:





Net sales for the year ended December 31, 2000

$131.2 millionIncrease in core sales

$  21.5 million / 16.4%Incremental sales from new acquisitions

$  25.5 million / 19.4%Net sales for the year ended December 31, 2001

$178.2 million





Of the increase due to acquisitions $14.3 million is attributable
to the acquisition of Astor Company. For the year ended December 31, 2001, core operations generated sales of $152.7 million, which represents a core growth rate of 16.4%. This core growth rate is mainly due to increased coverage whereby the Company
has been able to increase the geographical size of the area it services as well as increasing the number of clients serviced within those areas. Sales productivity, or the number of transactions per client/salesman has also increased.





Gross margin increased $6.1 million, or 34.9% from $17.5 million for the year ended December 31, 2001 to $23.6 million for the
year ended December 31, 2000. The increase can be attributable to:





Gross margin for the year ended December 31, 2000

$17.5 millionIncrease in margin resulting from core operations

$  3.5 million / 20.0%Incremental margin resulting from new acquisitions

$  2.6 million / 14.9%Gross margin for the year ended December 31, 2001

$23.6 million




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Gross margin as a percentage of sales for the year ended December 31, 2000

13.3
%Core gross margin as a percentage of core sales for fiscal year 2001

13.8
%Gross margin from acquisitions

10.2
%Total gross margin as a percentage of sales for year ended December 31, 2001

13.2
%





The increase in gross margin percentage on core operations is
primarily due to the better buying conditions that the Company is now able to leverage from its suppliers based on its increased size.





Operating overhead expenses (excluding depreciation, amortization and bad debt provision) increased $3.4 million or 26.0% from $13.1 million in 2000 to $16.5 million in 2001. The increase is attributable to:





SG&A for the year ended December 31, 2000

$13.1 millionIncrease in SG&A from core operations

$  2.1 million / 16.0%Incremental SG&A resulting from acquisitions

$  1.3 million / 10.0%SG&A for the year ended December 31, 2001

$16.5 million





As a percentage of sales operating overheads decreased from 10.0%
in 2000 to 9.2% in 2001. Within the total operating overhead, $0.6 million relates from the acquisition of Astor Company. The increase due to core operations is 16.0%. The increase is mainly due to the Company carrying a full years charge for its
new distribution and customs facility in Warsaw.





Depreciation of tangible fixed assets increased from $366,000 in
2000 to $841,000 in 2001 an increase of 129%. This increase is due to the Companys investment in its logistics infrastructure, that is, delivery vehicles and warehouse facilities. The increase due to the acquisition of Astor Company is not
material amounting to $15,000.





Amortization of intangibles increased $67,000 from $695,000 in 2000 to $762,000 in
2001. This increase is due to the acquisition of Astor Company and to the inclusion of a full year charge for the PHA acquisition of 2000.





The Companys bad debt provision is based on the ageing of its trade receivables. Currently the Company has a policy of making provisions for 100% of debtors over 365 days, 50% for debtors between 270 and 365 days, 25%
for debtors between 180 and 270 days and 12.5% for debtors between 90 and 180 days old. From this total a reduction of 7.5% is made to reflect current cash recovery rates. The trade receivables are recorded at a value including VAT (sales tax),
which is currently 22% of the net sales value. The charge to income is based on the movement in the total reserve between any two balance sheet dates. The charge for the year ended December 31, 2001 was $0.7 million, on both the full and core basis.
This represents an increase of 37.5% over the full year ended December 31, 2000. The increase is due to the increase sales activity during the year. As a percentage of sales for 2001 the charge for doubtful debts equaled 0.40% and for 2000 was
0.39%. The Companys experience is that this policy gives adequate coverage and it expects to be able to continue this policy in the immediate future and that the charge as a percentage of sales should remain in the 0.3 to 0.5 % range.





As a result of the factors mentioned above, the Company was able to improve its operating profit from $2.8
million in 2000 to $4.8 million in 2001, an increase of 71.4%. This increase is attributable to:





Operating profit for the year ended December 31, 2000

$2.8 millionIncrease in operating profit from core operations

$0.8 million / 28.6%Incremental operating profit from acquisitions

$1.2 million / 42.8%Operating profit for the year ended December 31, 2001

$4.8 million





Operating profit on core operations increased from $2.8 million, or
2.1% of sales for fiscal year 2000 to $3.6 million, or 2.4% of sales for fiscal year 2001. Total operating profit as a percentage of sales for 2001 was 2.7% and for 2000 was 2.1%.





In 2001, interest income was $77,000 compared to $261,000 in 2000. The decrease was a result of using the excess funds in the Company for operational purposes.





Interest expense increased $390,000 or 40.8% from $955,000 in 2000 to $1,345,000 in 2001. The increase due




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to core operations was 20.7%. This increase is mainly due to the Companys decision in November 2000 to migrate the majority of its non-acquisition loans to local Polish zloty denominated
loans. The non-acquisition loans, or working capital loans are used solely to facilitate the purchase of vodka on cash on delivery (COD) terms. This enables the Company to obtain significant rebates or early settlement discounts. While the coupon
charge is higher (see note 6 and 8 in the financial statements below) this policy means the Company reduces any exposure to foreign exchange risks on its working capital loan book thereby making the cost/benefit decision more transparent. As a
percentage of net sales, interest expense was 0.7% in 2000 and 0.8% in 2001.





Net realized and unrealized foreign
currency transactions arise from the restatement of non-Polish zloty assets and liabilities, which are primarily, bank loans and their compensating hedging instruments. For the year ended December 31, 2001, the Company incurred net foreign exchange
losses of $12,000, this compares to $494,000 loss for the year ended December 31, 2000, a reduction of 97.5%. For core operations the reduction was 79.1%.





In addition, the Company no longer considered Poland to be a hyperinflationary country since January 1, 1998 and made the Polish zloty the functional currency for the operations of its subsidiaries.
Therefore, translation losses are now accounted for in equity, in the determination of comprehensive income, rather than in the income statement. Such cumulative losses were $2.2 million in 2000 and $1.7 million in 2001.





The Company also had income from the sale of fixed assets during the year. For 2001, this amounted to an income of $83,000, for 2000, it
was a loss of $96,000. These items are non-operating and immaterial and therefore not reported further.





Income
tax expense increased $629,000 from $503,000 in 2000 to $1,132,000 in 2001. This increase is mainly due to the increase in income before income taxes from $1.5 million in 2000 to $3.6 million in 2001.





The effective Polish tax rate decreased from 33.8% in 2000 to 30.9% in 2001. Permanent differences (for items such as non-deductible
interest, taxes, and depreciation) between financial and taxable income normally make up a considerably lower percentage of income before income taxes when income before income taxes is higher, as it was in 2001. For this reason, as well as the
decrease in the statutory tax rate in Poland from 30% in 2000 to 28% in 2001, the effective tax rate was lower in 2001. The Company believes its US deferred tax asset of $197,000 will be recovered by virtue of interest and other income received from
loans and other services provided to its subsidiaries. The subsidiary Polish deferred tax asset of $633,000 is due to timing and should be recovered from future operating profits. See note 12 to the consolidated financial statements for further
information on income taxes.





Net income increased $1.5 million from $1.0 million in 2000 to $2.5 million in 2001.
This increase is attributable to:





Net earnings for the year ended December 31, 2000

$1.0 millionIncrease due from core operations

$0.6 million / 60.0%Increase due from acquisitions

$0.9 million / 90.0%Net earnings for the year ended December 31, 2001

$2.5 million





As a percentage of sales on core operations net earnings increased
from 0.8% in fiscal year 2000 to 0.9% in fiscal year 2001. Total net earnings as a percentage of sales for the year ended December 31, 2001 were 1.4%. The increase in net earnings was due to the factors noted above.





Year Ended December 31, 2000 Compared to Year Ended December 31, 1999





In the following Management, Discussion and Analysis section the reference to core operations means the 2000 historical financial results are adjusted by
deducting the elements of PHA for the nine months ended December 31, 2000 and for MTC for the three months to March 31, 2000. The basis of preparation is still under US GAAP; the objective is to allow the reader to access the underlying condition of
the Company, without regards to acquisitions reported for less than a full year.





Net sales increased $41.0
million, or 45% from $90.2 million in 1999 to $131.2 million in 2000. The increase




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is attributable to:





Net sales for the year ended December 31, 1999

$  90.2 millionIncrease in core sales

$    1.6 million /   1.8%Incremental sales from new acquisitions

$  39.4 million / 43.7%Net sales for the year ended December 31, 2000

$131.2 million





This increase is mainly due to increased sales of domestic vodka
due to the acquisition of PHA. From core operations the Company had sales of $91.8 million, which represents a core growth rate of 1.8%. As mentioned in the note in seasonality the Companys beer sales are mainly in the summer months. If the
summer months are not consistently warm then beer sales are adversely affected especially in the resort regions in the north of Poland.





Gross margin increased $4.7 million, or 36.7% from $12.8 million for the year ended December 31, 1999 to $17.5 million for the year ended December 31, 2000. The increase can be attributable to:





Gross margin for the year ended December 31, 1999

$12.8 millionIncrease in margin resulting from core operations

$  0.8 million /   6.2%Incremental margin resulting from new acquisitions

$  3.9 million / 30.5%Gross margin for the year ended December 31, 2000

$17.5 million





Gross margin as a percentage of sales for the year ended December 31, 1999

14.2
%Core gross margin as a percentage of core sales for fiscal year 2000

14.7
%Gross margin from acquisitions

10.2
%Total gross margin as a percentage of sales for year ended December 31, 2000

13.4
%





The increase in gross margin percentage on core operations is
primarily due to the better buying conditions that the Company is now able to leverage from its suppliers based on its increased size.





Core sales, general and administrative expenses increased $4.3 million or 54.7% from $9.5 million in 1999 to $14.7 million in 2000. As a percentage of sales core selling costs increased from 10.6% in 1999 to 11.2% in 2000.
As an absolute value this increase is mainly due to the additional costs consolidated because of the acquisition of PHA and as a percentage the increase was because of one off integration costs. On a core operations basis the increase was 18.9% to
$10.5 million, which as a percentage of sales from core operations was 11.4%.





Goodwill and trademark amortization
increased from $0.4 million in 1999 to $0.7 million in 2000, an increase of 75%. The increase was due to the full year charge for the 1999 acquisitions of MTC and PWW plus the nine-month charge following the acquisition of PHA.





Depreciation of tangible fixed assets increased from $120,000 in 1999 to $366,000 in 2000 an increase of 205%.





Provisions for doubtful debts increased from $254,000 in 1999 to $517,000 in 2000. As a percentage of net sales the provision
increased from 0.28% in 1999 to 0.39% in 2000. The reason for the increase was a change in policy for the year 2000. Whereas US accounting rules do permit the level of doubtful debt provisioning to be at the reasonable discretion of a companys
management, the Company has decided that because of the growth in sales it would be more prudent to apply a systematic approach to debtor provisioning. It is this change in method, which has brought about the increase in provision rates. The Company
expects this rate to be maintained in the 0.3-0.5% range for the future.




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As a result of the factors mentioned above, the Company suffered an overall
decrease in its operating profit from $3.2 million in 1999 to $2.8 million in 2000, a decrease of 12.5%. This decrease is attributable to:


Operating profit for the year ended December 31,1999

$  3.2 millionDecrease in operating profit from core operations

$(1.7)million / (53.1)%Incremental operating profit from acquisitions

$  1.3 million / 40.6%Operating profit for the year ended December 31, 2000

$  2.8 million





Operating profit on core operations increased from $3.2 million, or
3.5% of sales for fiscal year 1999 to $1.5 million, or 1.6% of sales for fiscal year 2000. Total operating profit as a percentage of sales was 2.1%.





Interest expense increased $0.6 million or 155% from $0.4 million in 1999 to $1.0 million in 2000. This increase is mainly due to additional borrowing required for financing the acquisitions and for
supporting the higher sales volume. On core operations, interest expense was $0.6 million as a percentage of net sales. Interest expense was 0.4% in 1999 and 0.7% in 2000.





In 2000, interest income was $0.3 million compared to $0.4 million in 1999.





Net realized and unrealized foreign currency transactions resulted in losses of $215,000 in 1999 and $494,000 in 2000. From core operations net realized and unrealized foreign currency transaction
losses were $0.6 million. In addition, the Company no longer considered Poland to be a hyperinflationary country since January 1, 1998 and made the Polish zloty the functional currency for the Companys operations. Therefore, translation losses
are accounted for in equity, in the determination of comprehensive income, rather than in the income statement. Such translation losses were $1.9 million in 1999 and $2.2 million in 2000.





Income tax expense decreased $0.6 million from $1.1 million in 1999 to $0.5 million in 2000. This decrease is mainly due to the decrease in income before income taxes from
$3.0 million in 1999 to $1.5 million in 2000.





The effective tax rate decreased from 36.8% in 1999 to 33.8% in
2000. Permanent differences (for items such as non-deductible interest, taxes, and depreciation) between financial and taxable income normally make up a considerably lower percentage of income before income taxes when income before income taxes is
higher, as it was in 1998. For this reason, as well as the decrease in the statutory tax rate in Poland from 32% in 1999 to 30% in 2000, the effective tax rate was slightly lower in 2000. See notes to the consolidated financial statements for
further information on income taxes.





Net income decreased $0.9 million from $1.9 million in 1999 to $1.0 million
in 2000. This decrease is attributable to:


Net earnings for the year ended December 31, 1999

$  1.9 millionDecrease due from core operations

$(1.7) millionIncrease due from acquisitions

$  0.8 millionNet earnings for the year ended December 31, 2000

$  1.0 million




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Statement of Liquidity and Capital Resources





The Companys net cash balance remained the same for 2001 as it was for 2000 compared to a decrease of $0.7 million in 2000. The
stabilization was a result of the tighter credit terms given to wholesalers in the last weeks of 2001 so as to reduce any exposure to future possible doubtful debts.





The Company was able to generate cash from operating activities in 2001 of $2.7 million as opposed to a cash usage of $1.1 million in 2000. The cash was generated from
cash earnings, defined as net income adjusted for non-cash income and expense items, of $4.4 million in 2001 compared to $2.4 million in 2000.





Against this a net $2.8 million which was absorbed into working capital for 2001 compared to a net $4.7 million in 2000. Working capital has been defined as the consolidated movements in trade
receivables, trade payables and inventories. The Company has been able to reduce its investment in working capital by improved management of inventories driven from its new consolidation warehouse, which resulted in inventory days decreasing by 33%
from 30.7 days in 2000 to 20.5 days in 2001. In addition, the Company was also able to reduce its outstanding debtor days from 89 in 2000 to 82 in 2001. It also reduced its outstanding creditor days from 85 in 2000 to 70 in 2001. The decrease in
creditor days is mainly due to the use of COD terms for purchases of domestic vodka in the last weeks of 2001. For comparison purposes readers should note that the trade receivables and payables figures include 22% VAT (sales tax).





In addition, funds were generated in net movements of accruals and prepayments of $0.9 million for 2001, compared to
$0.6 million in 2000.





Investing activities amounted to $2.4 million in 2001 and are in most part related to
the acquisition of Astor. During the 2000 period, the investing activities amounted to $5.6 million of which the largest part was the acquisition of PHA with the balance being investment in the new consolidation warehouse facility.





The Company received $539,000 in funds as a result of option holders exercising their options during the year. The Company was
able to reduce net borrowings by $0.8 million during the course of the year as opposed to increasing net borrowing by $6.1 million in 2000. The nature of the Companys business is that it has to invest heavily in working capital 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. At December 31, 2001 the Company had $1.3 million of unused facilities
available to it within these short-term agreements (see Note 8 of the Notes to the Consolidated Financial Statements for additional information).





Statement on Inflation and Currency Fluctuations





Inflation in Poland was 3.6% for the
whole of 2001, considerably lower than the 8.9% in 2000.





The percentage of aggregated purchases denominated in
foreign currencies has decreased resulting in lower foreign exchange exposure. However, the level of borrowings denominated in U.S. Dollars and Euros has increased due to the funding of the acquisitions. In 2001, the zloty appreciated 3.9% versus
the U.S. Dollar and appreciated 8.1% versus the Euro. Because of the volatility of exchange rates during the year loans were taken at weaker rates that those achieved at year-end.





Seasonality





The Companys sales
have been historically seasonable with on average 30% of the sales occurring in the fourth quarter. During 2001, sales in the fourth quarter were 32% of the full year, this compares to 37% for the fourth quarter of 2000. This movement is the result
of improvements in sales productivity initiated in 2000, which have resulted in a more balanced performance throughout the year.





The Companys working capital requirements are also seasonal, and are normally highest in the months of December and January. Liquidity then normally improves as collections are made on the higher sales during the months of
November and December.




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Other Matters





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





In March 2000, the Company completed it acquisition of 100% of PHA Sp. z. o.o. a distributor in the southwest of Poland with a 1999 turnover of approximately $43 million. The purchase price was
approximately $5.3 million and is a combination of cash and CEDC stock.





During April 2001, the Company completed
its acquisition of 97% of Astor Sp. z o.o. a distributor in the north of Poland with a 2001 turnover of approximately $20.0 million. The purchase price is approximately $1.15 million and 31,264 CEDC shares. The Company anticipates that the total
acquisition cost in regards to Astor Sp. z.o.o. will be approximately $4.0 million in cash and shares (if targeted profits are achieved over the next two years-contingent consideration).





During January and February 2002, the Company signed two purchase intents in regards to the acquisitions of Damianex S.A. (Polish spirit distributor) and AGIS S.A. (Polish
spirit distributor).




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Critical Accounting Policies and Estimates





General





The Companys discussion and
analysis of its financial condition and results of operations are based upon the Companys consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The
preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of revenues, expenses, assets and liabilities. The Company bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions.





Revenue and Margin Recognition





The Company only recognizes
revenue and margin when goods have been shipped to customers on the basis of a validated customer order and where a delivery acceptance note as signed by the customer has been returned to the Company. Sales are stated net of customer discounts and
sales tax. The Company does not operate a policy of goods shipped on consignment nor does it offer goods on a sale or return basis.





Expenses





The Company recognizes expenses in the period in which either the cost is
incurred or in the period in which the associated revenue and margin has been recognized.





Provisions For Doubtful Debts





The Company makes general provision for doubtful debt based on the aging of its trade receivables. Where
circumstances require it the Company will make specific provision for any excess not provided for under the general provision.





Inventory





Because of the nature of the products supplied by the Company great attention is
paid to inventory rotation. Where goods are estimated to be obsolete or unmarketable they are written down to a value reflecting the saleable value in their relevant condition.





Goodwill and Intangibles





Goodwill associated with the
excess purchase price over fair value of assets acquired and other identifiable intangibles are currently amortized on a straight line basis over their estimated useful lives.




13




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##### Table of Contents

Item 7A.Quantitative and Qualitative Disclosure about Market Risk





Exchange Rate Fluctuations





Translation Risks





The Companys operations are conducted primarily in Poland and its
functional currency is the Polish zloty and the reporting currency is the U.S. Dollar. The Companys financial instruments consist mainly of cash and cash equivalents, accounts receivable, accounts payable, 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. Dollar 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.





Transaction Risk





Commercial Exposure.    Our commercial foreign exchange exposure mainly arises from the purchase of imported alcoholic beverage in currencies
other than our functional currency of the Polish zloty. Thus, accounts payable for imported beverages are billed in various currencies and the Company is subject to short-term changes in the currency markets for product purchases. The Company also
operates a bonded warehouse where the inventory acquired from foreign suppliers is recorded in its source currency. Thus, any currency movement on trade payables resulting from either a strengthening or weakening of the Polish zloty against a
foreign suppliers currency is often compensated for by and opposite movement relating to inventories recorded in the imported currency. Below is a table indicating the respective trade payable and imported inventory in U.S. Dollar (USD), British
Pounds Sterling (GBP) and Euro (EUR). Please note that on January 1, 2002, the Euro became the functional currency across the Euro Zone, and therefore items disclosed as EUR may actually have been recorded in the base currency as of
December 31, 2001. These have been restated to EURO to reflect the actual settlement risk.





Short term trade
payables and inventory (all amounts are due in 2002):





Trade Payables

Local Currency


USD EquivalentUSD

181,088


181,088GBP

(6,924
)

(10,026
)EUR

1,010,425


892,7111,063,773





Inventory

Local Currency

USD EquivalentUSD

284,277

284,277GBP

16,326

23,639EUR

634,134

560,258868,174





Financial Exposure.    Our general
policy requires our subsidiaries to borrow funds and invest excess cash in the same currency as their functional currency, the Polish zloty, where these funds are needed for and generated by operations. Where funds are needed for investment and
acquisition purposes they are taken in U.S Dollar and Euro. The Companys exposure to various currencies on it bank funding for both 2002 and 2003 is given in the table below.





Year of Maturity2002

2003

Total(Thousands of USD)Bank loans payable in USD

$
2,275

$
5,256

$
7,531Bank loans payable in EURO

$
1,219




$
1,219Bank loans payable in Polish zloty

$
2,408




$
2,408Bank overdrafts payable in Polish zloty

$
3,959




$
3,959Total Bank Funding

$
9,861

$
5,256

$
15,117





Of the short-term bank loans 1.4 million Euro ($1.2 million
equivalent) and $1 million are revolving credits, which take the legal form of one-year borrowings. These loans have been automatically renewed in the past and the Company expects them to be renewed in the future. Bank loans and overdrafts
denominated in Polish zloty are also renewable after one-year and have been presented according to their legal form. More details of the repayments dates and conditions of both the short-term and long-term loans can be found in notes 6 and 8 of the
financial statements.




14




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##### Table of Contents

Bank borrowings are sensitive to interest and foreign currency market risks as they usually bear interest at variable rates and are denominated
in various currencies. In 2000 and 2001 it increased management of its currency risk through the use of forward contracts for periods between three and six months. The amount of open forward contracts as of December 31, 2000 was zero and as at
December 31, 2001 were 6 million U.S. Dollars and 1.8 million EURO, respectively. In tabular form the amounts of forward contracts as of December 31, for both 2000 and 2001 were:





2000

2001U.S. Dollar to Polish zloty

zero

$
6.0 millionEuro to Polish zloty (1.8 million Euro) U.S. Dollar equivalent

zero

$
1.6 million





Exchange rates against U.S. Dollar at

December 31, 2000

December 31, 2001Polish zloty

4.1432

3.9863EURO

3.8544

3.5219





Interest Rate Fluctuations





The Company may have an exposure to interest rate movements through its bank deposits and indebtedness. The Company does not enter into any hedging arrangements in
regards to its interest risk exposure i.e. interest rate swaps or forward rate agreements.





Because all of the
Companys debts are at floating rates, changes in interest rates may impact its net interest expense, positively by way of a reduction in base rates and adversely should base rates rise. The Companys sensitivity to interest rate movements
is expressed in the table below.





December 31, 2000


December 31, 2001Average bank debt (in $000s)

$
12,655


$
14,742Percentage subject to variable interest rates


100
%


100
%Impact on net interest charge from 1% change in base rates

$
126.6 +/-


$
147.4 +/-




15




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##### Table of Contents




Item 8.Financial Statements and Supplementary Data





Index to consolidated financial statements:Report of Independent Auditors

17Consolidated Balance Sheets at December 31, 2000 and 2001

18Consolidated Statements of Income for the years ended December 31, 1999, 2000 and 2001

19Consolidated Statements of Changes in Shareholders Equity for the years ended December 31, 1999, 2000 and 2001

20Consolidated Statements of Cash Flows for the years ended December 31, 1999, 2000 and 2001

21Notes to Consolidated Financial Statements

22-41




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##### Table of Contents

REPORT OF INDEPENDENT AUDITORS





The Board of Directors and Stockholders


Central European Distribution Corporation





We have audited the accompanying consolidated balance sheets of Central European Distribution Corporation as of December 31, 2001 and 2000 and the related consolidated statements of income, changes in
stockholders equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.





We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.





In our opinion, the financial statements
referred to above present fairly, in all material respects, the consolidated financial position of Central European Distribution Corporation at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States.





ERNST & YOUNG AUDIT Sp. z o.o.





Warsaw, Poland


March 1, 2002




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##### Table of Contents




CENTRAL EUROPEAN DISTRIBUTION CORPORATION





CONSOLIDATED BALANCE SHEETS


Amounts in columns expressed in thousands





December 31,2000


2001ASSETSCurrent AssetsCash and cash equivalents

$
2,428


$
2,466Accounts receivable, net of allowance for doubtful accounts of $1,230,000 and $1,930,000 respectively



30,983



38,102Inventories


9,557



9,001Prepaid expenses and other current assets


809



1,560Deferred income taxes


416



480Total Current Assets


44,193



51,609Intangible assets, net


3,269



3,002Goodwill, net


8,202



9,969Equipment, net


3,031



3,372Deferred income taxes


80



411Other assets


536



614Total Assets

$
59,311


$
68,977LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesTrade accounts payable

$
26,399


$
29,685Bank loans and overdraft facilities


1,383



9,861Income taxes payable


35



308Taxes other than income taxes


928



999Other accrued liabilities


686



1,692Current portions of obligations under capital leases






269Current portion of long-term debt


5,400



1,912Total Current Liabilities


34,831



44,726Long-term debt, less current maturities


7,988



3,344Long-term obligations under capital leases






151COMMITMENTS AND CONTINGENCIESStockholders EquityPreferred Stock ($0.01 par value, 1,000,000 shares authorized; no shares issued and outstanding)






Common Stock ($0.01 par value, 20,000,000 shares authorized, 4,402,356 and 4,503,801 shares issued at December 31, 2000
and 2001, respectively)


45



46Additional paid-in-capital


14,175



15,383Retained earnings


4,635



7,161Accumulated other comprehensive loss


(2,243
)


(1,684
)Less Treasury Stock at cost (64,100 shares at December 31, 2000 and 72,900 shares at December 31, 2001)


(120
)


(150
)Total Stockholders Equity


16,492



20,756Total Liabilities and Stockholders Equity

$
59,311


$
68,977





See accompanying notes.







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##### Table of Contents

CENTRAL EUROPEAN DISTRIBUTION CORPORATION





CONSOLIDATED STATEMENTS OF INCOME


Amounts in columns expressed in thousands


(except per share data)





Year ended December 31,1999


2000


2001Net sales

$
90,240


$
131,233


$
178,236Cost of goods sold


77,471



113,687



154,622Gross profit


12,769



17,546



23,614Selling, general and administrative expenses


8,795



13,120



16,445Bad debt provision


254



517



711Depreciation of tangible fixed assets


120



366



841Amortization of intangible assets


368



695



762Operating income


3,232



2,848



4,855Non-operating income (expense)Interest expense


(374
)


(955
)


(1,345
)Interest income


378



261



77Realized and unrealized foreign currency transaction losses, net


(215
)


(494
)


(12
)Other income (expense), net


(13
)


(172
)


83Income before income taxes


3,008



1,488



3,658Income tax expense


1,106



503



1,132Net income

$
1,902


$
985


$
2,526Net income per share of common stock, basic

$
0.47


$
0.23


$
0.58Net income per share of common stock, diluted

$
0.47


$
0.23


$
0.57





See accompanying notes.




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##### Table of Contents




CENTRAL EUROPEAN DISTRIBUTION CORPORATION





CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY


Amounts in columns expressed in thousands





Common StockIssued

In Treasury


Additional Paid-in- Capital

Retained Earnings

Accumulated other comprehensive loss


TotalNo. of shares

Amount

No. of Shares

AmountBalance at December 31, 1998

3,780

$
38







$
10,651

$
1,748

$
(110
)

$
12,327Net income for 1999
















1,902






1,902Foreign currency translation adjustment



















(1,869
)


(1,869
)Comprehensive income for 1999
















1,902


(1,869
)


33Common stock issued in connection with acquisitions

354


4








2,249









2,253Balance at December 31, 1999

4,134

$
42







$
12,900

$
3,650

$
(1,979
)

$
14,613Net income for 2000
















985






985Foreign currency translation adjustment



















(264
)


(264
)Comprehensive income for 2000
















985


(264
)


721Treasury shares purchased






64


(120
)












(120
)Common stock issued in connection with acquisitions

268


3








1,275









1,278Balance at December 31, 2000

4,402

$
45

64

$
(120
)

$
14,175

$
4,635

$
(2,243
)

$
16,492Net income for 2001
















2,526






2,526Foreign currency translation adjustment



















559



559Comprehensive income for 2001
















2,526


559



3,085Treasury shares purchased






9


(30
)












(30
)Common stock issued in connection with IPO options

70


1








611









612Common stock issued in connection with acquisition

32











597









597Balance at December 31, 2001

4,504

$
46

73

$
(150
)

$
15,383

$
7,161

$
(1,684
)

$
20,756





See accompanying notes.




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##### Table of Contents

CENTRAL EUROPEAN DISTRIBUTION CORPORATION





CONSOLIDATED STATEMENTS OF CASH FLOWS


Amounts in columns expressed in thousands





Year ended December 31,1999


2000


2001Operating ActivitiesNet income

$
1,902


$
985


$
2,526Adjustments to reconcile net income to net cash provided by (used in) operating activities:Depreciation and amortization


446



1,061



1,603Deferred income tax benefit


(162
)


(184
)


(395
)Bad debt provision


254



517



711Changes in operating assets and liabilities:Accounts receivable


(1,517
)


(14,307
)


(5,157
)Inventories


(354
)


(1,947
)


1,227Prepayments and other current assets


(1,737
)


1,002



(700
)Trade accounts payable


864



11,770



1,089Income and other taxes


(799
)


348



226Other accrued liabilities and other


(2,228
)


(390
)


1,612Net Cash (used in)/provided by Operating Activities


(3,331
)


(1,145
)


2,742Investing ActivitiesPurchases of equipment


(1,113
)


(1,898
)


(735
)Proceeds from the disposal of equipment


137



112



101Acquisitions of subsidiaries


(4,758
)


(3,855
)


(1,763
)Net Cash Used In Investing Activities


(5,734
)


(5,641
)


(2,397
)Financing ActivitiesBorrowings on bank loans and overdraft facility


10,114



5,567



8,653Payment of bank loans and overdraft facility


(7,949
)


(3,714
)


(1,335
)Long-term borrowings


6,387



8,280



1,827Payment of long-term borrowings






(3,914
)


(9,959
)IPO warrants exercised










537Purchase of treasury shares






(120
)


(30
)Net Cash provided by (used in) Financing Activities


8,552



6,099



(307
)Net Increase (Decrease) in Cash and Cash Equivalents


(513
)


(687
)


38Cash and cash equivalents at beginning of period


3,628



3,115



2,428Cash and cash equivalents at end of period

$
3,115


$
2,428


$
2,466Supplemental Schedule of Non-cash Investing ActivitiesCommon stock issued in connection with investment in subsidiaries (Note 10)

$
2,253


$
1,278


$
596Common stock issued to Consultants

$
138


$
48


$
74Capital leases









$
516Supplemental disclosures of cash flow informationInterest paid

$
354


$
865


$
1,241Income tax paid


1,313



532



1,216





See accompanying notes.




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##### Table of Contents



CENTRAL EUROPEAN DISTRIBUTION CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Monetary amounts in columns 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). CEDC, Carey Agri and the other subsidiaries referred to later in this note are referred to herein as the Company.





CEDCs authorized capital stock consists of 20.0 million shares of common stock, $0.01 par value, and 1.0 million shares of preferred
stock, $0.01 par value. No shares of preferred stock have been issued and its terms and conditions will be established by the Board of Directors at a later date.





In July 1998, CEDC had an initial public offering of 2,000,000 shares (at $6.50 per share) receiving net proceeds of approximately $10.6 million. The shares are currently quoted on the NASDAQ National
Market.





Carey Agri is a Polish limited liability company with headquarters in Warsaw, Poland. Carey Agri
distributes alcoholic beverages throughout Poland and all operating activities are conducted within that country. It currently has branches in the following Polish cities: Warsaw, Kraków, Szczecin, Gdynia, Wroclaw, Torun, Katowice, Poznan,
Zielona Gora, and Biaylstok.





In March 1999, the Company purchased a significant portion of the business assets,
of Multi Trade Company S.C. (MTC). MTC is a distributor of alcoholic beverages located in Biaylstok, Poland.





In
May 1999, the Company purchased a significant portion of the business assets, of the Cellar of Fine Wines S.C. (CFW). CFW is an importer and a distributor of wines located in Sulejówek near Warsaw, Poland.





In March 2000, the Company purchased 100% of the voting stock of Polskie Hurtownie Alkoholi Sp. z o.o. (PHA). PHA is a distributor of
alcoholic and non-alcoholic beverages located in Zielona Gora, Poland.





In April 2001, the Company purchased 97%
of the voting stock of Astor Sp. z o.o. (Astor). Astor is a distributor of alcoholic and non-alcoholic beverages in Olsztyn, Poland. The remaining 3% will be issued to the Company over three years with no added cost.





During August 2001, the Company created a new Polish subsidiaryFine Wines & Spirits Sp. z o.o. (FWS). The new subsidiary will
operate the Companys five retail outlets.





Pursuant to Polish statutory requirements, Carey Agri, MTC, CFW,
PHA, Astor and FWS may pay annual dividends, based on their audited Polish financial statements, to the extent of their retained earnings as defined. At December 31, 2001, approximately $ 7,400,000 was available for payment of dividends.





2.    Summary of Significant Accounting Policies





The significant accounting policies and practices followed by the Company are as follows:





Basis of Presentation





The
consolidated financial statements include the accounts of Central European Distribution Corporation and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in the consolidated financial statements.




22




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##### Table of Contents



CENTRAL EUROPEAN DISTRIBUTION CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


Monetary amounts in
columns expressed in thousands


(except per share information)




CEDCs subsidiaries maintain their books of account and prepare their statutory financial statements in
Polish zloties (PLN) in accordance with Polish statutory requirements and the Accounting Act of 29 September 1994. The subsidiaries financial statements have been adjusted to reflect generally accepted accounting principles in the United
States of America (US GAAP).





Foreign Currency Translation and Transactions





For all of the Companys subsidiaries the functional currency is the local currency. Assets and liabilities of these operations are
translated at the exchange rate in effect at each year-end. Income Statement accounts are translated at the average rate of exchange prevailing during the year. Translation adjustments arising from the use of differing exchange rates from period to
period are included as a component of shareholders equity. Gains and losses from foreign currency transactions are included in net income for the period.





The accompanying consolidated financial statements have been prepared in US Dollars.





The exchange rates used on Polish zloty denominated transactions and balances for translation purposes as of December 31, 2000 and 2001 for one US dollar were 4.14PLN and 3.98PLN, respectively. As of March 1, 2002 the rate
had changed to 4.21 PLN.





Equipment





Equipment is stated at cost, less accumulated depreciation. Depreciation of equipment is computed by the straight-line method over the following useful lives:





Type

Depreciation life in yearsTransportation equipment under capital leases

2Transportation equipment

6Beer dispensing and other equipment

2-10





Leased equipment meeting certain criteria is capitalized and the
present value of the related lease payments is recorded as a liability. Amortization of capitalized leased assets is computed on a straight-line method over the term of the lease.





The Company periodically reviews equipment, when indicators of impairment exist and if the value of the asset is impaired, an impairment loss is recognized.





Goodwill





Acquired goodwill is amortized on a straight-line basis over the period of the expected economic benefit (20 years). The Company assesses the recoverability of its goodwill whenever adverse events or changes in circumstances
or business climate indicate that expected future cash flows (undiscounted and without interest charges) for individual business units may not be sufficient to support the recorded goodwill. If undiscounted cash flows are not sufficient to support
the goodwill, an impairment charge would be recognized to reduce the carrying value of the goodwill based on the expected discounted cash flows of the business unit. No such charge has been considered necessary through the date of the accompanying
financial statements.




23




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##### Table of Contents



CENTRAL EUROPEAN DISTRIBUTION CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


Monetary amounts in
columns expressed in thousands


(except per share information)




Intangible assets





Intangibles consist primarily of acquired trademarks. The trademarks are amortized on a straight-line basis over the period of the expected economic benefits (20 years).
The Company assesses the recoverability of its trademarks whenever adverse events or changes in circumstances or business climate indicate that expected future cash flows (undiscounted and without interest charges) for individual business units may
not be sufficient to support the recorded trademarks. If undiscounted cash flows are not sufficient to support the recorded assets, an impairment charge would be recognized to reduce the carrying value of the trademarks. No such charge has been
considered necessary through the date of the accompanying financial statements.





The acquired trademarks in the
amount of $4,077,000 had accumulated amortization of $879,000 and $1,146,000 for 2000 and 2001 respectively.





Estimated aggregate future amortization expense for intangible assets is as follows:





2002

$
2042003


2042004


2042005


204Thereafter


2,115$
2,931





Revenue & Margin Recognition





Revenue and margin are recognized when goods are shipped to customers and where a delivery acceptance note as signed by the customer has
been returned to the Company. Sales are stated net of slotting fees, other turnover related customer discounts and sales tax.





Advertising and Promotion Costs





Advertising and promotion costs are expensed as incurred.
The Company does not involve itself in direct advertising but manages marketing and promotional budgets part of which are covered by suppliers. Marketing and promotion costs not covered by suppliers were:





1999

2000

2001Free promotional product

$
190,000

$
146,000

$
155,000Point of sale merchandise

$
169,000

$
132,000

$
144,900Total Key Marketing

$
359,000

$
278,000

$
299,900





These costs are recorded within selling, general and administration
costs.





Occasionally the Company will issue free product to retailers and wholesalers under sales incentive
programs. These are not material and have averaged $50,000 for each of the past three years. These costs are recorded within cost of goods sold.





Inventories





Inventories are stated at the lower of cost
(first-in, first-out method) or market. Cost includes customs duty and transportation costs. Inventories are comprised primarily of beer, wine, spirits, and non-alcoholic beverages.





Cash and Cash Equivalents





Short-term investments that have a maturity of three months or less from the date of purchase are classified as cash equivalents. Substantially all of these amounts were located in bank accounts in Poland at December 31, 2001.





Estimates




24




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##### Table of Contents



CENTRAL EUROPEAN DISTRIBUTION CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


Monetary amounts in
columns expressed in thousands


(except per share information)




The preparation of consolidated financial statements in conformity with US GAAP requires management to make
estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from those estimates and such differences may be material to the consolidated financial statements.





Income Taxes





The Company computes and records income taxes in accordance with the liability method.





Employee Stock-Based Compensation





As permitted by Statement of Financial
Accounting Standard (SFAS) No. 123, Accounting for Stock-Based Compensation, the Company accounts for its employee stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees. Accordingly, no compensation costs have been recognized for fixed stock options issued under the Companys employee stock incentive plan. The Company discloses pro forma net income and net income per share as if the fair
value method of SFAS No. 123 had been used (see Note 14).





Financial Instruments





The Company uses derivative financial instruments (forward foreign currency contracts) to hedge transactions denominated in foreign
currencies in order to reduce the currency risk associated with fluctuating exchange rates. Such contracts are used primarily to hedge certain foreign denominated obligations. The Companys policy is to maintain hedge coverage only on existing
obligations. The gains and losses on these contracts offset changes in the value of the related exposures in accordance with SFAS 133 as amended by SFAS 138, which was adopted by the Company in 2001. The adoption of SFAS 133/138, did not have a
material effect on the consolidated financial statements. The principal currencies hedged are the U.S. Dollars, and the Euro. The duration of the hedge contract typically does not exceed six months. The counter-parties to the contracts are large,
reputable commercial banks and accordingly, the Company expects all counter-parties to meet their obligations.





Comprehensive Income





Comprehensive income is defined as all changes in equity during a
period except those resulting from investments by owners and distributions to owners. Comprehensive income includes net income adjusted by, among other items, foreign currency translation adjustments. The foreign translation losses/gains on the
remeasurements from Polish zloties to US dollars are classified separately and the only component of the accumulated other comprehensive income included in shareholders equity.





During the period ended December 31, 2001, the Company incurred foreign currency translation gains of $559,000 and reported this amount as part of the accumulated
comprehensive loss in shareholders equity. During 2001, the Polish zloty strengthened during the second half of the year and as a result reduced the amount of the currency translation loss as compared to the previous year. Additionally
translation losses with respect to long-term inter-company transactions with the parent company are charged to other comprehensive loss. No deferred tax benefit has been recorded on the comprehensive loss in regards to the long-term inter-company
transactions with the parent company, as the repayment of the loan is not anticipated in the foreseeable future.




25




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##### Table of Contents



CENTRAL EUROPEAN DISTRIBUTION CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


Monetary amounts in
columns expressed in thousands


(except per share information)




Segment Reporting





The Company operates in one industry segment, the distribution of alcoholic and non-alcoholic beverages. These activities are conducted by Carey Agri, MTC, CFW, PHA, Astor and FWS in Poland.
Substantially all revenues, operating profits and assets relate to this business. CEDC assets (excluding inter-company loans and investments) located in the United States of America represent less than 1% of consolidated assets





Net Income Per Common Share





Net income per common share is calculated in accordance with SFAS No. 128, Earnings per Share. Basic earnings per share (EPS) are computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding for the year. The stock options and warrants discussed in Note 14 were included in the computation of diluted earnings per common share (Note 9).





Reclassifications





Certain amounts in the financial statements have been reclassified from prior years to conform to the current year presentation.





Recently Issued Accounting Pronouncements





In June 2001,
the FASB released SFAS 141 Business Combinations. This Statement requires that Combinations are accounted for by a single methodthe purchase method. This Statement also requires separate recognition of intangible assets apart from
goodwill if they meet the prescribed criteria. Disclosure of the primary reasons for the business combination is required and the allocation of the purchase price paid to the assets acquired and liabilities assumed by major balance sheet caption is
necessary. When the amounts of goodwill and intangible assets acquired are significant in relation to the purchase price paid, disclosure of other information about those assets is required. The provisions of this Statement apply to all business
combinations initiated after June 30, 2001. The Company does not anticipate any reclassifications of intangible assets from the application of SFAS 141.





In June 2001, the FASB released SFAS 142 Goodwill and other intangible assets. This Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets
and supersedes APB Opinion No. 17, Intangible Assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial
statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The provisions of this Statement are required to
be applied starting with fiscal years beginning after December 15, 2001. Upon adoption of the new standard, the Company anticipates that all amortization of goodwill as a charge to earnings will be eliminated. Goodwill amortization charged to
earnings during 2001 amounted to approximately $494,000.





In August 2001, the FASB released SFAS 144
Accounting for the Impairment or Disposal of Long-Lived Assets. This standard supersedes SFAS 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of. This statement removes goodwill
from its scope, (addressed in SFAS 142) and addresses long-lived assets to be held and used, to be disposed of other than sale and to be disposed of by sale. The provisions of this statements are required to be applied starting with fiscal years
beginning after December 15, 2001. The Company does not anticipate that this statement will have a material effect on their financial statements.




26




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CENTRAL EUROPEAN DISTRIBUTION CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


Monetary amounts in
columns expressed in thousands


(except per share information)






27




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CENTRAL EUROPEAN DISTRIBUTION CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


Monetary amounts in
columns expressed in thousands


(except per share information)




3.    Goodwill





Goodwill, presented net of accumulated amortization in the consolidated balance sheets, consist of:





December 31,2000


2001Goodwill

$
8,403


$
10,664Less accumulated amortization


(201
)


(695
)Goodwill, net

$
8,202


$
9,969





4.    Equipment





Equipment, presented net of accumulated depreciation in the consolidated balance sheets, consists of:





December 31,2000


2001Equipment under capital lease

$



$
516Transportation equipment


2,542



3,234Beer dispensing and other equipment


1,479



1,4794,021



5,229Less accumulated depreciation


(990
)


(1,857
)Equipment, net

$
3,031


$
3,372





In 2001, the Company recorded a depreciation expense related to
equipment under capital lease in the amount of $42,000. The accumulated depreciation for equipment under capital lease was $42,000.





5.    Allowances for Doubtful Accounts





Changes in the allowance for
doubtful accounts during each of the three years in the period ended December 31, 2001 were as follows:





Year ended December 31,1999


2000

2001Balance, beginning of year

$
181


$
343

$
1,230Provision for bad debts


254



517


711Charge-offs, net of recoveries


(92
)





(11
)Acquired allowance from purchase of PHA






370


Balance, end of year

$
343


$
1,230

$
1,930




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CENTRAL EUROPEAN DISTRIBUTION CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


Monetary amounts in
columns expressed in thousands


(except per share information)







6.    Long Term Loans





Long-term debt consists of the following;





December 31,2000

2001USD

$
9,813

$
5,256EUR

$
3,095


PLN

$
480


Total long-term debt

$
13,388

$
5,256Current Portion

$
5,400

$
1,912Long-term Portion

$
7,988

$
3,344





In March 2000, the Company signed a loan agreement for $4,000,000
USD denominated long-term loan. This loan was amended in March 2001 so that repayment will start in March 2002. The Company is obliged to repay installments of $1.15 million in 2002, 2003 and 2004 with the balance being repaid in 2005. The loan is
secured by the shares of PHA.





In April 2001, the Company signed a loan agreement for $1,826,972 with principal
repayments of $63,480 per month. The Company repaid $571,320 in 2001. The loan is secured by shares of Astor.





The
weighted average interest rate on these two loans was 7.8% in 2000 and 6.2% for 2001.





The principal repayments
for the following years are as follows:





20012002

$
1,9122003


1,6492004


1,1502005


545Thereafter


$
5,256





7.    Lease Obligations





The Company entered into a non cancelable operating lease, for its main warehouse and office in Warsaw, which stipulated monthly payments
of $130,000 for five years, this lease cannot be terminated. The Company has the option to renew the lease in five years. The following is a schedule by years of the future rental payments under the non-cancelable operating lease as of December 31,
2001.





2002

$
1,5602003


1,5602004


1,5602005


1,300Thereafter


$
5,980





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 lease has no stated
expiration date, but can be terminated by either party with three months prior notice.




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CENTRAL EUROPEAN DISTRIBUTION CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


Monetary amounts in
columns expressed in thousands


(except per share information)







7.    Lease Obligations(continued)





The rental expense incurred under operating leases during 1999, 2000 and 2001 was as follows:





1999

2000

2001Rent expense

$
754

$
1,442

$
2,583





During 2001, the Company entered into a number of capital leases
for transportation equipment. The future minimum lease payments for the assets under capital lease at December 31, 2001 are as follows:





2002

$
2802003


157Thereafter


$
437Less interest


(17
)$
420





8.    Bank Loans and Overdraft Facilities





The Company has banking facilities with six banks and the majority of the Companys credit lines are of a short-term
nature. The credit lines are denominated in various currencies as follows:





December 31,2000

2001USD

$
14

$
2,275EUR





1,219PLN


1,369


6,367$
1,383

$
9,861





The weighted average interest rate on all bank loans and overdraft
facilities was 8.2% and 8.7% for December 31, 2000 and 2001 respectively. This increase is due to the larger proportion of local currency debt within the debt portfolio.





In 1999, the Company obtained a long-term loan of $1,500,000 of which $1,000,000 was repaid in May 2001.





In April 1999, the Company obtained a EUR denominated long-term loan of 1,380,000 EUR which is due in May 2002. From May 2002 the loan will be subjected to annual review
and has therefore been reclassified as a short-term facility. This loan is collateralized by inventory up to a value of 3,500,000 PLN.





On May 16, 2000, the Company signed a loan agreement for $850,000. The loan is repayable in installments of $212,500 commencing August 20, 2001. As at December 31, 2001, $425,000 was outstanding of which $212,500 was repaid
in February 2002.





On July 21, 2000, the Company signed a loan agreement for $750,000. The loan was repaid in July
2001.




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CENTRAL EUROPEAN DISTRIBUTION CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


Monetary amounts in
columns expressed in thousands


(except per share information)







8.    Bank Loans and Overdraft Facilities(continued)





In April 2001, the Company signed an overdraft agreement for 7,600,000
Polish zloty (approximately $1,900,000) with an annual renewal option. As at December 31, 2001 the Company was using approximately 6,500,000 Polish zloty (approximately $1,625,000) of this facility.





In November 2001, the Company signed a short-term loan agreement for 3,000,000 Polish zloty (approximately $752,000) with an annual
renewal option.





In May 2001, the Company signed a loan agreement for 2,000,000 Polish zloty (approximately
$500,000) with an annual renewal option.





In May 2001, the Company signed a 5,000,000 Polish zloty (approximately
$1,250,000) overdraft facility with an annual renewal option.





In April 2001, when the Company acquired Astor it
acquired a 4,600,000 Polish zloty (approximately $1,122,000) short-term revolving credit facility. This facility was renewed in February 2002.





In November 2001, the Company signed a six-month revolving trade credit agreement for 3,500,000 Polish zloty (approximately $875,000). As at December 31, 2001, the Company had utilized 1,500,000 Polish
zloty (approximately $375,000) of this facility.





At December 31, 2001, the Company had unused facilities of
$1,300,000 within its agreed overdraft facilities denominated in Polish zloty.





9.    Earnings per share





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





1999

2000

2001Basic:Net income

$
1,902

$
985

$
2,526Weighted average shares of common stock outstanding


4,050


4,334


4,359Basic earnings per share

$
0.47

$
0.23

$
0.58Diluted:Net income

$
1,902

$
985

$
2,526Weighted average shares of common stock outstanding


4,050


4,334


4,359Net effect of dilutive employee stock options based on the treasury stock method








54Net effect of dilutive stock optionsbased on the treasury stock method in regards to IPO options/warrants,
contingent shares from acquisition and options issued to consultants








34Totals


4,050


4,334


4,447Diluted earnings per share

$
0.47

$
0.23

$
0.57




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CENTRAL EUROPEAN DISTRIBUTION CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


Monetary amounts in
columns expressed in thousands


(except per share information)




9.    Earnings per share (continued)





Warrants granted in connection with the 1998 Initial Public Offering, options compensation to consultants, contingent shares for acquisitions and employee stock options
granted have been included in the above calculations of diluted earnings per share since the exercise price is less than the average market price of the common stock during portions of 2001.





10.    Acquisitions





The
Company completed the acquisition of Astor Sp. z o.o. effective April 5, 2001, for a cash purchase price of $1,200,000 and 31,264 shares of CEDC stock (stock valued at approximately $98,000) The shares issued may not be sold without the
Companys consent for three years subsequent to the acquisition date. As part of the purchase agreement with Astor, a non-compete agreement was established with the former stockholders for a period of three years. The terms of the agreement
allow for an additional payment of both cash and Company stock, which are contingent upon Astor Sp. z o.o. achieving a certain profit target. As at December 31, 2001, Astor achieved their projected earnings and as a result the Company has accrued
$369,000 and 44,753 shares of CEDC stock (valued at approximately $498,000). If the acquired company is able to achieve the remaining targeted earnings, the total acquisition cost is expected to be approximately $4,000,000. Astor Sp. z o.o. is based
in Olsztyn, Poland. Its primary area of activity is the distribution of various spirits and non-alcoholic beverages.





The Company acquired 97% of the voting shares of Astor Sp. z o.o. Based on the purchase agreement the remaining 3% of the voting shares will be received by the Company over the next three years.





The acquisition of Astor Sp. z o.o. has been accounted for as a purchase, and the operating results of the acquired company have been
included in the consolidated condensed financial statements from the date of acquisition. The acquired goodwill will be amortized over a 20 year period. The amortization of the acquired goodwill will cease as of January 1, 2002 as discussed in
Summary of significant accounting policiesrecently issued accounting pronouncements.





The
acquisition was financed using the Companys loan facilities and issuance of Company stock as indicated above. The remaining contingent consideration if any, is expected to be finalized during the first quarter of 2003 and 2004.





The Company obtained an independent valuation for this acquisition. The cost of the acquisition was allocated to the tangible
assets acquired based on the underlying book values which approximated fair values at dates of acquisition and estimated values per the valuation report. Astor had commenced operations at the end of 2000 and thus no significant difference between
book values and estimated fair values existed. The excess ($2,245,000) of the cost over the amounts allocated as described above represents goodwill.





On March 31, 2000, the Company purchased 100% of the voting shares of Polskie Hurtownie Alkoholi Sp. z o.o. (PHA) for $4 million cash and 268,126 shares of Common Stock. The shares issued may not be
sold without the Companys consent for three years subsequent to the acquisition. As part of the purchase agreement with PHA a non-compete agreement was established with the former stockholders for a period of three years.





The Company obtained an independent valuation for this acquisition. The cost of the acquisition was allocated to the tangible
assets acquired based on the fair values at dates of acquisition and estimated values per the valuation report. The excess ($5,490,000) of the cost over the amounts allocated as described above represents goodwill.




32




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CENTRAL EUROPEAN DISTRIBUTION CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


Monetary amounts in
columns expressed in thousands


(except per share information)




10.    Acquisitions(continued)





Assuming consummation of the PHA and Astor acquisitions and the issuance of common shares as of January 1, 2000, the un-audited pro-forma
consolidated operating results for 2000 and 2001 are as follows:





2000

2001Net sales

$
140,706

$
184,426Net income


862


2,526Net income per share data:Basic earnings per share of common stock

$
0.19

$
0.58Diluted earnings per share of common stock

$
0.19

$
0.57





11.    Financial Instruments, Commitments and Contingent
Liabilities





Financial Instruments With On-Balance Sheet Risk and Their Fair Values





Financial instruments with on-balance sheet risk include cash and cash equivalents, accounts receivable, certain other current
assets, trade accounts payable, overdraft facilities, and other payables. These financial instruments are disclosed separately in the consolidated balance sheets and their carrying values approximate their fair market values. The Companies
on-balance sheet risk is minimal as the financial instruments are denominated in stable currencies and they are of a short-term nature whose interest rates approximate current market rates.





Concentrations of Credit Risk





Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of accounts receivable from Polish companies. The Company restricts temporary cash investments to financial institutions
with high credit standing. Credit is given to customers only after a thorough review of their credit worthiness. The Company does not normally require collateral with respect to credit sales. The Company routinely assesses the financial strength of
its customers. As of December 31, 2001 and 2000, the Company had no significant concentrations of credit risk. The Company has not experienced large credit losses in the past.





Inflation and Currency Risk





The Polish government has adopted policies that in recent years has lowered and made more predictable the countrys level of inflation. The annual rate of inflation was approximately 9.8% in 1999, 8.5% in 2000 and 3.6% in 2001.
The exchange rate for the zloty had stabilized and the rate of devaluation of the zloty had decreased for the last several years. During the first two quarters of 2001, the zloty decreased in value in respect to the US dollar, while in the latter
half of the year made a strong recovery against the US dollar. Inflation and currency exchange fluctuations have had, and may continue to have, an adverse effect on the financial condition and results of operations of the Company.




33




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CENTRAL EUROPEAN DISTRIBUTION CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


Monetary amounts in
columns expressed in thousands


(except per share information)




11.    Financial Instruments, Commitments and Contingent Liabilities(continued)





A portion of Carey Agris, CFWs, MTCs, and ASTORs loans and accounts payable and
operating expenses are expected to continue to be, denominated in or indexed to the U.S. Dollar or other non-Polish denominated currencies. By contrast, substantially all of the Companys revenue is denominated in Polish zloty. Any devaluation
of the zloty against the U.S. Dollar or other currencies that the Company is unable to offset through price adjustments will require the Company to use a larger portion of its revenue to service its non-zloty denominated obligations. While the
Company may enter into transactions to hedge the risk of exchange rate fluctuations, it is unlikely that the Company will be able to obtain hedging arrangements to completely eliminate the currency risk. Accordingly, shifts in the currency exchange
rates may have an adverse effect on the ability of the Company to service its non-zloty denominated obligations and, therefore may have an effect on the Companys financial condition and results of operations.





Supply contracts





The Company has various agreements covering its sources of supply, which, in some cases, may be terminated by either party on relatively short notice. Thus, there is a risk that a significant portion of the Companys
supply of products could be curtailed at any time. The Company has made payments to suppliers to secure longer-term sources of supply.





Contingent liabilities





The Company is involved in some litigation and has claims
against it for matters arising in the ordinary course of business. In the opinion of management, the outcome will not have a material adverse effect on the Companys operations.





12.    Income Taxes





Income tax expense
consists of the following:





Year ended December 31,1999


2000


2001Current Polish income tax expense

$
1,268


$
687


$
1,527Deferred Polish income tax benefit, net


(101
)


(195
)


(331
)Deferred US income tax (benefit)/expense


(61
)


11



(64
)Total income tax expense

$
1,106


$
503


$
1,132





Total Polish income tax payments (or amounts used as settlements
against other statutory liabilities) during 1999, 2000 and 2001 were $1,313,000, $532,000 and $1,216,000 respectively. CEDC has paid no U.S. income taxes and has net opening loss carry forwards totaling $579,000, of which $221,000 will expire in
2014 and $358,000 will expire in 2016.




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CENTRAL EUROPEAN DISTRIBUTION CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


Monetary amounts in
columns expressed in thousands


(except per share information)




12.    Income Taxes(continued)





Total income tax expense varies from expected income tax expense computed at Polish statutory rates (34% in 1999, 30% in 2000 and 28% in
2001) as follows:





Year ended December 31,1999


2000


2001Tax at Polish statutory rate

$
1,023


$
446


$
1,024Increase in deferred tax asset valuation allowance relating primarily to bad debt expense


46



124



134Effect of foreign currency exchange rate change on net deferred tax assets and reduction of deferred tax asset due to
changes in tax rates


14



(47
)


(40
)Permanent differences:Non-taxable interest


(15
)


(20
)


(8
)Non-deductible taxes


16







5Non-deductible transportation taxes


7







9Other non-deductible expenses


15







8Income tax expense

$
1,106


$
503


$
1,132





Significant components of the Companys deferred tax assets is
follows:





December 31,2000


2001Deferred tax assets:Allowance for doubtful accounts receivable

$
382


$
411Unrealized foreign exchange (losses)/gains, net


(75
)


18Accrued expenses, deferred income and prepaids, net


147



43Carey Agri operating loss carry forward expiring 2005


134



40Tax benefit derived from sales to subsidiaries






504CEDC operating loss carry-forward benefit, expiring in 20122016


81



182Total deferred tax assets

$
669


$
1,198Less valuation allowance


(173
)


(307
)Net deferred tax asset

$
496


$
891Shown as:Current deferred tax asset

$
416


$
480Non-current deferred tax asset


80



411$
496


$
891





Valuation allowances are provided when it is more likely that some
or all of the deferred tax assets will not be realized in the future. These evaluations are based on expected future taxable income and expected reversals of the various net deductible temporary differences. The valuation allowance relates primarily
to the future tax deductibility of the allowance for bad debts.




35




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CENTRAL EUROPEAN DISTRIBUTION CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


Monetary amounts in
columns expressed in thousands


(except per share information)




12.    Income Taxes(continued)





Prior to January 1, 2001, the Company had a policy to permanently reinvest their earnings. As of January 1,
2001, the Company instituted a policy of having all of its subsidiaries (except Carey Agri) pay dividends. Management intends to distribute 50% of the earnings from the Polish subsidiaries for 2001. The retained earnings prior to January 1, 2001 are
not considered distributable. Deferred taxes have been created for these distributable earnings.





No deferred
taxes have been created for the remaining undistributed earnings as the Company intends to permanently reinvest these earnings.





In November 1999, legislation was enacted which reduced the corporate income tax rates in Poland effective January 1, 2000. The expected tax rate of 32% was reduced to 30% in 2000, 28% in 2001 and 2002, 24% in 2003 and 22%
thereafter.





Carey Agris, MTCs, CFWs, PHAs, FWSs, and Astors tax liabilities
(including corporate income tax, Value Added Tax (VAT), social security and other taxes) may be subject to examinations by Polish tax authorities for up to five years from the end of the year the tax is payable. CEDCs US federal income tax
returns are also subject to examination by the US 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.





13.    Related Party Transactions





A director of CEDC is also the director of one of the Companys suppliers of wine. Purchases from this
company amounted to approximately $471,600, $630,600 and $705,000 in 1999, 2000 and 2001, respectively. This Company is owed $124,000 as at December 31, 2001 for purchases made during 2001.





The Company rents under a short-term rental agreement from the Companys president a retail unit. The rent is $2,200 per month. The total rental expense incurred
during 2000 and 2001 in regards to this premises was $26,400 per year.




36




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CENTRAL EUROPEAN DISTRIBUTION CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


Monetary amounts in
columns expressed in thousands


(except per share information)







14.    Stock Option Plans and Warrants





Incentive Plan





In November 1997, the CEDC 1997 Stock Incentive Plan (Incentive Plan) was created. This Incentive Plan provides for the grant of stock options, stock appreciation rights, restricted stock and restricted stock
units to directors, executives, and other employees of CEDC and any of its subsidiaries or of any service providers. The Incentive Plan authorizes the issuance of up to 750,000 shares of Common Stock (subject to anti-dilution adjustments in the
event of a stock split, recapitalization, or similar transaction). The compensation committee of the board of directors will administer the Incentive Plan. The Company has reserved 750,000 shares for future issuance in relation to the Incentive
Plan.





The option exercise price for incentive stock options granted under the Incentive Plan may not be less than
100% of the fair market value of the Common Stock on the date of grant of the option. Options may be exercised up to 10 years after grant, except as otherwise provided in the particular option agreement. Payment for shares purchased under the
Incentive Plan shall be made in cash or cash equivalents. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of stock of CEDC, however, the exercise price of any incentive stock option granted
must equal at least 110% of the fair market value on the grant date and the maximum term of an incentive stock option must not exceed five years.





Summaries of the Companys stock option activity, both in total and as regards employees and insiders specifically, along with other related information for the years ended December 31, 1999, 2000
and 2001 are in the tables below. The tables below do not include any information concerning the Companys outstanding warrants, which are discussed later in this note. Options are shown as outstanding in the year in which the exercise price
becomes determinable. The weighted-average exercise price data is included only for options that were vested and exercisable in the relevant period.





Employees and Insiders Only





Options

Weighted-Average Exercise
Price1999


2000

2001

1999

2000

2001Outstanding at January 1,

91,000


178,500

263,750








Granted

102,500


85,250

115,000

$
6.77

$
3.92

$
6.64Exercised












Forfeited

(15,000
)





$
6.50





Outstanding at December 31,

178,500


263,750

378,750

$
6.66

$
5.77

$
6.04Exercisable at December 31,

131,000


211,000

314,250

$
6.63

$
6.27

$
5.78Weighted-average fair value of options granted

102,500


85,250

115,000

$
2.45

$
1.71

$
2.24





Total Options





Options


Weighted-Average Exercise
Price1999


2000

2001


1999

2000

2001Outstanding at January 1,

141,000


303,500

388,750









Granted

177,500


85,250

130,000


$
6.69

$
3.92

$
6.81Exercised






(65,000
)







$
8.00Forfeited

(15,000
)






$
6.50





Outstanding at December 31,

303,500


388,750

453,750


$
7.02

$
6.13

$
6.02Exercisable at December 31,

181,000


336,000

439,250


$
6.43

$
6.60

$
6.50Weighted-average fair value of options granted

177,500


85,250

130,000


$
2.45

$
1.71

$
2.24




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CENTRAL EUROPEAN DISTRIBUTION CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


Monetary amounts in
columns expressed in thousands


(except per share information)







14.    Stock Option Plans and Warrants(continued)





Exercise prices for options outstanding as of December 31, 2001 ranged from
$3.78 to $8.00. The weighted-average remaining contractual life of those options is approximately 6 years as of December 31, 2001.





CEDC granted stock options in 1997 to members of the Board of Directors for 52,500 shares, which were conditional upon an effective initial public offering, which was subsequently completed in July 1998. The exercise price
of these options was the initial public offering price of $6.50. These options may be exercised over a ten-year period.





In 1998, the Company granted 5,000 options to an executive officer under a three-year employment agreement and with an exercise price to be the same as the initial public offering price, which was $6.50. These options were forfeited
in 1999 as they were not exercised during the 90-day period following termination of employment. On January 1, 1999, the Company granted an additional 10,000 options to the same executive officer at an exercise price of $5.82. These options had not
vested when the executive left his employment and were also forfeited.





The Company also in 1998 granted 12,500
options to members of the Board of Directors upon their re-election. These options were also conditional upon the completion of the initial public offering and have an exercise price of $6.50. On November 13, 1998 the Company also granted 21,000
options to certain employees under the Incentive Plan at an exercise price of $6.50.





In 1999, the Company granted
42,500 options to its employees under the Incentive Plan at an exercise price of $6.75, the market price on August 17, 1999. On May 26, 1999, the Company granted 40,000 options to members of it Board of Directors upon their re-election at an
exercise price of $6.88. On March 12, 1999, the Company granted 10,000 options to the former owners of MTC with an exercise price of $7.50.





On August 1, 2000, the Company granted 65,750 options to purchase its shares to certain employees under its Incentive Plan. These options have an exercise price of $3.78. On May 23, 2000, the Company
granted 14,500 options to members of its Board of Directors on their re-election at an exercise price of $4.00. On January 7, 2000, the Company granted 5,000 options to an executive officer as part of his employment agreement and the exercise price
was $4.88.





On February 7, 2001, the Company granted 10,000 options to one of its executive officers with an
exercise price of $3.50. On April 23, 2001, the Company granted 5,000 options to an executive officer with an exercise price of $4.10. On April 30 and May 1, 2001, the Company granted 28,000 options to members of its Board of Directors upon their
re-election at an average exercise price of $4.21. On October 1, 2001, the Company granted 20,000 options to an executive officer as part of his new employment agreement with an exercise price of $6.75. On November 1, 2001, the Company granted
37,000 options to certain employees under its Incentive Plan at an exercise price of $8.70. On November 19, 2001, the Company granted 15,000 options to one of its executive officers under its Incentive Plan at an exercise price of $9.10.





The tables above include all of the employee and insider options previously discussed.





The weighted average fair value was estimated at the date the exercise price of the options could be determined using a Black-Scholes
option pricing model. The following weighted-average assumptions were used for 1999, 2000 and 2001: risk-free interest rate of 5.5%, dividend yield of 0%, volatility factors of the expected market price of the Companys common stock of 0.68,
and a weighted-average expected life of the option of 10 years.





The Black-Scholes option valuation model 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. Since the Companys employee stock options 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.





Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its incentive stock options under the fair
value method of that Statement.




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##### Table of Contents



CENTRAL EUROPEAN DISTRIBUTION CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


Monetary amounts in
columns expressed in thousands


(except per share information)







14.    Stock Option Plans and Warrants(continued)





For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. The effect of any forfeiture is recognized when it occurs. The Companys pro forma information for 1999, 2000 and 2001 is as follows:





1999

2000

2001Net income as reported

$
1,902

$
985

$
2,526Pro forma net income

$
1,651

$
839

$
2,235Pro forma earnings per share:Basic

$
.41

$
.19

$
.51Diluted

$
.41

$
.19

$
.50





Options Given to Vendor





In late 1998, the Company granted options to a vendor for 50,000 shares of common stock in exchange for a three-year service contract.
These options are exercisable from March 1999 until September 2004 at the following prices: $5.90 until September 2002, $7.00 until September 2003, and $8.30 until September 2004. Under APB 25 and FASB 123, the fair value of options given to vendors
must be expensed over the service period. Using the Black Scholes method described above, with similar assumptions, the fair value of these options was $75,000. These options were exercised during January 2002.





In 1999, the Company granted options to a consulting firm for 75,000 shares of common stock in exchange for a one-year service contract
involving various acquisition consultations. The exercise price of the options is $8.00. These options are exercisable at any time during a period of nine years commencing March 5, 2000. Using the Black-Scholes method, 75 periods were used to
determine the volatility of the price. The value of the options is approximately $135,000. Based upon the 10 months of the service contracts which has run by December 31, 1999, costs of $112,500 were capitalized to the purchase of MTC and CFW or
deferred with respect to the other pending acquisitions. The remaining $22,500 was expensed to the statement of operations for the year ended December 2000. In December 2001, 65,000 options were exercised.





During October 2001, the Company granted 15,000 options to a consulting firm in exchange for a service contract not exceeding one-year
involving various consultations. The exercise price of the option is $7.71. These options become exercisable at different intervals during 2002. Using the Black-Scholes method, 150 periods were used to determine the volatility of the price. The
value of the options is approximately $128,000. Approximately $74,000 was deferred as a non-current asset. The balance of the value will be recognized when the services are determined and rendered.





All of these options were included in the calculation of diluted earnings per share and are included in the table referring to total
option activity given above.





IPO Warrants





In connection with the initial public offering, the Company agreed to sell to the Representatives or their designees (for nominal consideration) warrants to purchase
200,000 shares of Common Stock from the Company. The warrants are exercisable at any time during a period of four years commencing July 1999. The exercise price of the warrants is 130% of the initial public offering price ($8.45 per share).




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##### Table of Contents



CENTRAL EUROPEAN DISTRIBUTION CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


Monetary amounts in
columns expressed in thousands


(except per share information)







15.    Share repurchase program





On November 27, 2000, the Companys Board of Directors authorized a share repurchase program to buy up to 200,000 shares in the open
market The Company repurchased 64,100 shares in 2000 and 8,800 shares in the 2001 in open market for an aggregate cost of $150,000 through December 31, 2001. The Company may purchase the remaining authorized shares over the next twelve months in the
open market. These shares have been treated as treasury stock.





16.    Derivative financial instruments





Effective January 1, 2001, the Company adopted SFAS 133, which establishes accounting and reporting standards
for derivative instruments. All derivatives, whether designated as hedging relationships or not, are required to be recorded on the balance sheet at fair value. The Company uses derivatives to moderate the financial market risks of its business
operations. Derivative products such as forward contracts are used to hedge the foreign currency market exposures underlying certain liabilities with financial institutions. The Companys accounting policies for these instruments are based on
its designation of these instruments as hedging transactions. An instrument is designated as a hedge based in part on its effectiveness in risk reduction and one-to-one matching of derivatives with the related balance sheet risk.





The Company has designated forward contracts as fair value hedges (i.e., hedging the exposure to changes in the fair value of
the foreign denominated bank loans), the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings in the current period.





The adoption of SFAS 133 on January 1, 2001, resulted in no cumulative adjustment to the financial statements.





For currency forward contracts, effectiveness is measured by using the forward-to-forward rate compared to the underlying economic
exposure. The Companys hedging policy was considered highly effective during the nine month period ended September 30, 2001. The ineffective portion for the nine-month period ended of $294,000 (gain) was recognized in non-operating income.
During the fourth quarter, the Companys hedging policy was not considered highly effective. The Company recognized a $357,000 loss in non-operating income in regards to their forward contracts during the fourth quarter.





The amount of open forward contracts as at December 31, 2000 was nil and as at December 31, 2001 were:





Values in U.S. Dollars

U.S. Dollar

EuroMarch 2002 termination date

$
4,000,000

$
1,590,300June 2002 termination date

$
2,000,000

$
Unrealized losses as at December 31, 2002 (total)

$
230,450

$
127,200




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##### Table of Contents



CENTRAL EUROPEAN DISTRIBUTION CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


Monetary amounts in
columns expressed in thousands


(except per share information)







17.    Subsequent events





During February 2002, the Company signed two letters of intent regarding the purchases of Damianex S.A. (Polish spirit distributor) and
AGIS S.A. (Polish spirit distributor).





Agis S.A. sales for 2001 were approximately $76 million (un-audited). The
acquisition of Agis S.A. is scheduled for close by April 30, 2002.





Damianex S.A. sales for 2001 were
approximately $78 million (un-audited). The acquisition of Damianex S.A. is scheduled for close by March 31, 2002.





The acquisitions will be financed by a combination of cash obtained from financial institutions and shares.





18.    Quarterly financial information (Un-audited)





First Quarter

Second Quarter

Third Quarter

Fourth Quarter2000 (A)

2001

2000

2001 (B)

2000

2001

2000

2001Net Sales

$
18,720

$
33,602

$
31,323

$
45,530

$
32,103

$
42,073

$
49,087

$
57,031Gross Profit


2,800


4,551


4,097


5,868


4,197


5,452


6,452


7,743Operating Income


247


584


850


1,330


491


1,140


1,260


1,801Net Income

$
23

$
379

$
87

$
471

$
119

$
447

$
756

$
1,229Net Income per Common ShareBasic

$
0.01

$
0.09

$
0.02

$
0.11

$
0.03

$
0.10

$
0.17

$
0.28Net Income per Common ShareDiluted

$
0.01

$
0.09

$
0.02

$
0.11

$
.0.03

$
0.10

$
0.17

$
0.27


---

|(A) |  | Purchase of PHA
|--- |  | ---------------

|(B) |  | Purchase of ASTOR
|--- |  | -----------------



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##### Table of Contents

PART IV





Item 14.    Exhibits, Financial Statement Schedules, and Reports on Form 8K





(a)(1)  The following consolidated financial statements of the Company and report of independent auditors are included in Item 8 of this annual report on Form 10-K.





Report of Independent Auditors.Consolidated Balance Sheets at December 31, 2000 and 2001.Consolidated Statements of Income for the years ended December 31, 1999, 2000 and 2001.Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 1999, 2000, and
2001.Consolidated Statements of Cash Flows for the years ended December 31, 1999, 2000 and 2001.Notes to Consolidated Financial Statements.





(a)(2)  Schedules





All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission either have
been included in the Companys consolidated financial statements or the notes thereto, are not required under the related instructions or are inapplicable, and therefore have been omitted.





(a)(3)  The following exhibits are either provided with this Form 10-K or are incorporated herein by reference.





Exhibit Number

Exhibit Description2.1

Contribution Agreement among Central European Distribution Corporation and William V. Carry, William V. Carry Stock
Trust, Estate of William O. Carry and Jeffrey Peterson dated November 28, 1997 (Filed as Exhibit 2.1 to the Registration Statement on Form SB-2, File No. 333-42387, with the Commission on December 17, 1997 [the 1997 Registration
Statement] and incorporated herein by reference.)3.1

Certificate of Incorporation (Filed as Exhibit 3.1 to the 1997 Registration
Statement and incorporated herein by reference.)3.2

Bylaws (Filed as Exhibit 3.2 to the 1997 Registration Statement and incorporated herein by reference.)4.1

Form of Common Stock Certificate (Filed as Exhibit 4.1 to the 1997
Registration Statement and incorporated herein by reference.)4.2

Form of Warrant Agreement and attached form of Representatives Warrant
(Filed as Exhibit 4.2 to Amendment No. 1 on Form S-1 to Form SB-2 Registration Statement, File No. 333-42387, with the Commission on April 17, 1998 [the First 1998 Registration Statement] and incorporated herein by
reference.)




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##### Table of Contents




10.1

1997 Stock Incentive Plan as amended (Filed as Exhibit 10 to Amendment No. 1 to the Registration Statement on Form
S-3/A, File No. 333-89868, filed on July 23, 2002 and incorporated herein by reference.)10.2

Employment agreement with William V. Carey and CEDC dated as of August 1,
2001 (Filed as Exhibit 10.2 to the Companys annual report on Form 10-K filed on March 15, 2002 and incorporated herein by reference.)10.3

Employment agreement with Neil Crook and the Company (Filed as Exhibit 10.1
to the Companys quarterly report on Form 10-Q filed on May 15, 2000 and incorporated herein by reference.)10.4

Employment agreement with Neil Crook and Carey Agri International Poland Sp.
z o.o. (Filed as Exhibit 10.4 to the Companys annual report on Form 10-K filed on March 15, 2002 and incorporated herein by reference.)10.5

Employment agreement with Evangelos Evangelou and CEDC dated September 16,
2001 (Filed as Exhibit 10.5 to the Companys annual report on Form 10-K filed on March 15, 2002 and incorporated herein by reference.)10.6

Executive Bonus Plan (Filed as Exhibit 10.6 to the Companys annual
report on Form 10-K filed on March 15, 2002 and incorporated herein by reference.)10.7

Distribution contract with Polmos Bialystok (Filed as Exhibit 10.7 to the
Companys Form 10-K/A filed on March 22, 2002 and incorporated herein by reference.)10.8

Distribution contract with Polmos Poznan (Filed as Exhibit 10.8 to the
Companys Form 10-K/A filed on March 22, 2002 and incorporated herein by reference.)10.9

Distribution contract with Polmos Zielona Gora (Filed as Exhibit 10.9 to the
Companys Form 10-K/A filed on March 22, 2002 and incorporated herein by reference.)10.10

Distribution contract with UDV/Guiness Poland Sp. z.o.o dated October 16,
2000 (Filed as Exhibit 10.10 to the Companys Form 10-K/A filed on March 22, 2002 and incorporated herein by reference.)10.12

Distribution Agreement with Unicom Bols Group dated April 1, 1998. (Filed as
Exhibit 10.13 to the Companys annual report on Form 10-K filed on April 2, 2001 and incorporated herein by reference.)10.15

Lease Agreement for warehouse at Bokserska Street 66a, Warsaw, Poland (Filed
as Exhibit 10.15 in the Companys current report on Form 8-K filed on April 16, 2001 and incorporated herein by reference.)11

Statement re compensation of per share earnings (See Note 9, Notes to the
Consolidated Financials.)21

Subsidiaries of the Company (Filed as Exhibit 21 to the Companys annual
report on Form 10-K filed on March 15, 2002 and incorporated herein by reference.)23

Consent of Ernst & Young99

Written Statement of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.




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##### Table of Contents

(b)  Reports on form 8-K in the last quarter of 2001





No report on Form 8-K were filed by the Company in the last quarter of 2001





(c)  Exhibits





The response to this portion of Item 14 is submitted in the response to Item 14 (a) (3).





(d)  Financial Statement Schedules





None.




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##### Table of Contents

SIGNATURES





Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





CENTRAL EUROPEAN DISTRIBUTION CORPORATIONBy:

/s/    WILLIAM V. CAREYWilliam V. Carey Chairman,
President, and Chief Executive Officer





Date: September 4, 2002





Pursuant to the requirements of the Securities Exchange Act of 1933, this report has been signed by the following persons on behalf of
the registrant and in the capacities and on the dates indicated below.





Signature

Title

Date/s/    WILLIAM V. CAREY William V. Carey

Chairman, President and Chief Executive Officer (principal executive officer)

September 4, 2002/s/    JEFFREY PETERSON Jeffrey Peterson

Vice Chairman

September 4, 2002/s/    NEIL CROOK Neil Crook

Vice President and Chief Financial Officer (principal financial and accounting officer)

September 4, 2002/s/    JAMES T. GROSSMANN James T. Grossmann

Director

September 4, 2002/s/    TONY HOUSH Tony Housh

Director

September 4, 2002/s/    JAN W. LASKOWSKI Jan W. Laskowski

Director

September 4, 2002/s/    RICHARD S. ROBERTS Richard S. Roberts

Director

September 4, 2002







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##### Table of Contents

CERTIFICATIONS





I, William V. Carey, certify that:





1. I have reviewed this annual report on Form 10-K of Central
European Distribution Corporation;





2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and





3. Based on my knowledge, the financial statements, and other financial information included in this annual
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.





Date: September 4, 2002





/s/    WILLIAM V. CAREYWilliam V. Carey Chairman, President and Chief Executive Officer (Principal Executive Officer)





I, Neil A. M. Crook, certify that:





1. I have reviewed this annual report on Form 10-K of Central European Distribution Corporation;





2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and





3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this annual report.





Date: September 4, 2002





/s/    NEIL A. M.
CROOKNeil A. M. Crook Vice President and Chief Financial Officer (Principal Financial Officer)




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##### Table of Contents

EXHIBIT INDEX





|
|

Exhibit Number

Exhibit Description2.1

Contribution Agreement among Central European Distribution Corporation and William V. Carry, William V. Carry Stock
Trust, Estate of William O. Carry and Jeffrey Peterson dated November 28, 1997 (Filed as Exhibit 2.1 to the Registration Statement on Form SB-2, File No. 333-42387, with the Commission on December 17, 1997 [the 1997 Registration
Statement] and incorporated herein by reference.)3.1

Certificate of Incorporation (Filed as Exhibit 3.1 to the 1997 Registration Statement and incorporated herein by
reference.)3.2

Bylaws (Filed as Exhibit 3.2 to the 1997 Registration Statement and incorporated herein by reference.)4.1

Form of Common Stock Certificate (Filed as Exhibit 4.1 to the 1997 Registration Statement and incorporated herein by
reference.)4.2

Form of Warrant Agreement and attached form of Representatives Warrant (Filed as Exhibit 4.2 to Amendment No. 1
on Form S-1 to Form SB-2 Registration Statement, File No. 333-42387, with the Commission on April 17, 1998 [the First 1998 Registration Statement] and incorporated herein by reference.)10.1

1997 Stock Incentive Plan, as amended (Filed as Exhibit 10 to Amendment No. 1 to the Registration Statement on Form
S-3/A, File No. 333-89868, filed on July 23, 2002 and incorporated herein by reference.)10.2

Employment agreement with William V. Carey and CEDC dated as of August 1, 2001 (Filed as Exhibit 10.2 to the
Companys annual report on Form 10-K filed on March 15, 2002 and incorporated herein by reference.)10.3

Employment agreement with Neil Crook and the Company (Filed as Exhibit 10.1 to the Companys quarterly report on
Form 10-Q filed on May 15, 2000 and incorporated herein by reference.)10.4

Employment agreement with Neil Crook and Carey Agri International Poland Sp. z o.o. (Filed as Exhibit 10.4 to the
Companys annual report on Form 10-K filed on March 15, 2002 and incorporated herein by reference.)10.5

Employment agreement with Evangelos Evangelou and CEDC dated September 16, 2001 (Filed as Exhibit 10.5 to the
Companys annual report on Form 10-K filed on March 15, 2002 and incorporated herein by reference.)10.6

Executive Bonus Plan (Filed as Exhibit 10.6 to the Companys annual report on Form 10-K filed on March 15, 2002
and incorporated herein by reference.)10.7

Distribution contract with Polmos Bialystok (Filed as Exhibit 10.7 to the Companys Form 10-K/A filed on March
22, 2002 and incorporated herein by reference.)10.8

Distribution contract with Polmos Poznan (Filed as Exhibit 10.8 to the Companys Form 10-K/A filed on March 22,
2002 and incorporated herein by reference.)




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##### Table of Contents

10.9

Distribution contract with Polmos Zielona Gora (Filed as Exhibit 10.9 to the Companys Form 10-K/A filed on
March 22, 2002 and incorporated herein by reference.)10.10

Distribution contract with UDV/Guiness Poland Sp. z.o.o dated October 16, 2000 (Filed as Exhibit 10.10 to the
Companys Form 10-K/A filed on March 22, 2002 and incorporated herein by reference.)10.12

Distribution Agreement with Unicom Bols Group dated April 1, 1998. (Filed as Exhibit 10.13 to the Companys
annual report on Form 10-K filed on April 2, 2001 and incorporated herein by reference.)10.15

Lease Agreement for warehouse at Bokserska Street 66a, Warsaw, Poland (Filed as Exhibit 10.15 in the Companys
current report on Form 8-K filed on April 16, 2001 and incorporated herein by reference.)11

Statement re compensation of per share earnings (see Note 9, Notes to the Consolidated Financials.)21

Subsidiaries of the Company (Filed as Exhibit 21 to the Companys annual report on Form 10-K filed on
March 15, 2002 and incorporated herein by reference.)23

Consent of Ernst & Young99

Written Statement of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.




48