Edgar Filing: CENTRAL EUROPEAN DISTRIBUTION CORP

Form 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008

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

FOR THE TRANSITION PERIOD FROM .

COMMISSION FILE NUMBER 0-24341

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

Delaware

54-1865271

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)


Two Bala Plaza, Suite #300, Philadelphia, PA		19004
(Address of Principal Executive Offices)		(Zip code)

(610) 660-7817

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):

Large Accelerated Filer x Accelerated Filer ¨ Non-Accelerated Filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No x

The number of shares outstanding of each class of the issuer’s common stock as of May 6, 2008:

Common Stock ($.01 par value) 42,826,451

INDEX


		PAGE
PART I	FINANCIAL INFORMATION

Item 1	Financial Statements

	Consolidated Condensed Balance Sheets, March 31, 2008 (unaudited) and December 31, 2007	3

	Consolidated Condensed Statements of Income (unaudited) for the three month periods ended March 31, 2008 and March 31, 2007	4

	Consolidated Condensed Statement of Changes in Stockholders’ Equity (unaudited) as of March 31, 2008	5

	Consolidated Condensed Statements of Cash Flows (unaudited) for the three month periods ended March 31, 2008 and March 31, 2007	6

	Notes to Consolidated Condensed Financial Statements (unaudited)	7-18

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3	Quantitative and Qualitative Disclosures about Market Risk	28

Item 4	Controls and Procedures	28

PART II	OTHER INFORMATION

Item 6	Exhibits	30

Signatures		31

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED)

Amounts in columns expressed in thousands

(except share information)


	March 31, 2008			December 31, 2007
ASSETS
Current Assets
Cash and cash equivalents	$	260,826		$	87,867
Accounts receivable, net of allowance for doubtful accounts of $31,419 and $29,277 respectively		273,878			316,277
Inventories		150,163			141,272
Prepaid expenses and other current assets		17,779			16,536
Deferred income taxes		8,812			5,141

Total Current Assets		711,458			567,093

Intangible assets, net		757,526			545,697
Goodwill, net		745,931			577,282
Property, plant and equipment, net		115,348			79,979
Deferred income taxes		10,051			11,407
Other assets		629			710

Total Assets	$	2,340,943		$	1,782,168


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Trade accounts payable	$	154,940		$	172,340
Bank loans and overdraft facilities		183,219			42,785
Income taxes payable		6,933			5,408
Taxes other than income taxes		97,846			101,929
Other accrued liabilities		69,150			71,959
Current portions of obligations under capital leases		1,384			1,759

Total Current Liabilities		513,472			396,180

Long-term debt, less current maturities		—			122,952
Long-term obligations under capital leases		3,027			2,708
Long-term obligations under Senior Notes		669,627			344,298
Other long-term accrued liabilities		15,000			—
Deferred income taxes		145,783			100,113

Total Long Term Liabilities		833,437			570,071

Minority interests		7,040			481

Stockholders’ Equity
Common Stock ($0.01 par value, 80,000,000 shares authorized, 42,566,664 and 40,566,096 shares issued at March 31, 2008 and December 31, 2007, respectively)		426			406
Additional paid-in-capital		507,360			429,554
Retained earnings		223,718			205,186
Accumulated other comprehensive income		255,640			180,440
Less Treasury Stock at cost (246,037 shares at March 31, 2008 and December 31, 2007)		(150	)		(150	)

Total Stockholders’ Equity		986,994			815,436

Total Liabilities and Stockholders’ Equity	$	2,340,943		$	1,782,168

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

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)

Amounts in columns expressed in thousands

(except per share information)

PROFIT AND LOSS


	Three months ended
	March 31, 2008			March 31, 2007
Sales	$	408,080		$	288,996
Excise taxes		(94,460	)		(60,782	)
Net Sales		313,620			228,214
Cost of goods sold		247,404			181,897

Gross Profit		66,216			46,317

Operating expenses		40,748			27,402

Operating Income		25,468			18,915

Non operating income / (expense), net
Interest (expense), net		(11,528	)		(8,649	)
Other financial income / (expense), net		9,103			(15,400	)
Other non operating income / (expense), net		140			(343	)

Income before taxes		23,183			(5,477	)

Income tax expense		4,398			(1,030	)

Minority interests		253			729

Net income	$	18,532		$	(5,176	)

Net income per share of common stock, basic	$	0.46		$	(0.13	)

Net income per share of common stock, diluted	$	0.45		$	(0.13	)

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

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN

STOCKHOLDERS’ EQUITY (UNAUDITED)

Amounts in columns expressed in thousands

(except per share information)


	Common Stock							Additional Paid-in Capital		Retained Earnings		Accumulated other comprehensive income		Total
	Common Stock			Treasury Stock
	No. of Shares	Amount		No. of Shares	Amount
Balance at December 31, 2007	40,566	$	406	246	$	(150	)	$	429,554	$	205,186	$	180,440	$	815,436

Net income for 2008	—		—	—		—			—		18,532		—		18,532
Foreign currency translation adjustment	—		—	—		—			—		—		75,200		75,200

Comprehensive income for 2008	—		—	—		—			—		18,532		75,200		93,732
Contractual compensation	—		—						—		—		—		—
Common stock issued in public placement	—		—	—		—			—		—		—		—
Common stock issued in connection with options	12		0	—		—			958		—		—		958
Common stock issued in connection with acquisitions	1,989		20	—		—			76,848		—		—		76,868
Balance at March 31, 2008	42,567	$	426	246	$	(150	)	$	507,360	$	223,718	$	255,640	$	986,994

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

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW (UNAUDITED)

Amounts in columns expressed in thousands

CASH FLOW


	Three months ended March 31,
	2008			2007
Operating Activities
Net income	$	18,532		$	(5,176	)
Adjustments to reconcile net income to net cash provided by / (used in) operating activities:
Depreciation and amortization		3,198			2,434
Deferred income taxes		(1,131	)		(7,148	)
Bad debt provision		(174	)		188
Minority interests		253			729
Unrealized foreign exchange (gains) / losses		(8,915	)		3,364
Cost of debt extinguishment		1,156			11,869
Stock options expense		766			463
Other non cash items		(1,344	)		—
Changes in operating assets and liabilities:
Accounts receivable		71,550			44,461
Inventories		3,886			11,431
Prepayments and other current assets		6,344			6,807
Trade accounts payable		(33,920	)		(46,825	)
Other accrued liabilities and payables		(10,823	)		(20,192	)

Net Cash provided by Operating Activities		49,378			2,405

Investing Activities
Investment in fixed assets		(9,284	)		(5,410	)
Proceeds from the disposal of fixed assets		1,337			2,647
Refundable purchase price related to Botapol acquisition		—			5,000
Acquisitions of subsidiaries, net of cash acquired		(170,959	)		(90,917	)

Net Cash used in Investing Activities		(178,906	)		(88,680	)

Financing Activities
Borrowings on bank loans and overdraft facility		16,763			94,311
Payment of bank loans and overdraft facility		(14,869	)		(5,733	)
Payment of Senior Secured Notes		(14,445	)		(95,440	)
Movements in capital leases payable		(466	)		(160	)
Issuance of shares in public placement		—			42,354
Net Borrowings on Convertible Senior Notes		304,403			—
Options exercised		192			311

Net Cash provided by Financing Activities		291,578			35,643

Currency effect on brought forward cash balances		10,909			(56	)
Net Increase / (Decrease) in Cash		172,959			(50,632	)
Cash and cash equivalents at beginning of period		87,867			159,362

Cash and cash equivalents at end of period	$	260,826		$	108,674

Supplemental Schedule of Non-cash Investing Activities
Common stock issued in connection with investment in subsidiaries		76,848		$	—

Supplemental disclosures of cash flow information
Interest paid	$	19,361		$	18,124
Income tax paid	$	4,698		$	6,600

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

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Amounts in tables expressed in thousands, except per share information

1.	ORGANIZATION AND DESCRIPTION OF BUSINESS

Central European Distribution Corporation (“CEDC”), a Delaware corporation, and its subsidiaries (collectively referred to as “we,” “us,” “our,” or the “Company”) operate primarily in the alcohol beverage industry. The Company is Central Europe’s largest integrated spirit beverages business. The Company is the largest vodka producer by value and volume in Poland and produces the Absolwent, Zubrowka, Bols and Soplica brands, among others. The Company currently exports its products to many markets around the world. In addition, it produces and distributes Royal Vodka, the number one selling vodka in Hungary. The Company is the leading distributor and the leading importer of spirits, wine and beer in Poland and Hungary. In March 2008, the Company continued its expansion plans in the region by purchasing an 85% stake in Copecresto Enterprises Limited, which owns the leading premium vodka brand in Russia, Parliament Vodka.

2.	BASIS OF PRESENTATION

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. Our Company consolidates all entities that we control by ownership of a majority voting interest. All inter-company accounts and transactions have been eliminated in the consolidated financial statements.

CEDC’s subsidiaries maintain their books of account and prepare their statutory financial statements in their respective local currencies. The subsidiaries’ financial statements have been adjusted to reflect accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary to fairly present our financial condition, results of operations and cash flows for the interim periods presented have been included. Operating results for the three-month periods ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

The balance sheet at December 31, 2007 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

The unaudited interim financial statements should be read with reference to the consolidated financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2007.

3.	ACQUISITIONS

On March 11, 2008, the Company and certain of its affiliates entered into a Share Sale and Purchase Agreement and certain other agreements with White Horse Intervest Limited, a British Virgin Islands Company, and certain of White Horse’s affiliates, relating to the Company’s acquisition from White Horse of 85% of the share capital of Copecresto Enterprises Limited, a Cypriot company. In connection with this acquisition, the Company paid a consideration of approximately $180 million in cash and 2.2 million shares of common stock. The delivery of 250,000 shares of the Share Consideration and $15 million of the Cash Consideration was deferred pending the consummation of certain of the Reorganization Transactions, but ultimately the shares were issued on May 2, 2008.

On February 27, 2008, the Company announced that it has signed Heads of Terms outlining the main terms on which the Company would invest in the Whitehall Group in Russia. The Whitehall Group is one of the leading importers and distributors of premium wines and spirits in Russia.

The fair value of the net assets acquired in connection with the 2008 Parliament group acquisition as of the acquisition date is:


ASSETS

Cash and cash equivalents		1,347
Inventory		2
Prepayments		6,159
Deferred tax – current		10
Equipment		34,046
Trademarks		151,611
Other non-current assets		43

Total Assets	$	193,218

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Amounts in tables expressed in thousands, except per share information


LIABILITIES

Trade payables		435
Other Accrued liabilities		12
Long term debt		44
Deferred tax		36,163

Total Liabilities	$	36,654

Minority interests		—
Net identifiable assets and liabilities		156,565

Goodwill on acquisition		113,916

Consideration paid, satisfied in cash		172,306
Consideration paid, satisfied in shares		76,867

Cash (acquired)	$	1,347

Net Cash Outflow	$	170,959

The Company is in the process of completing its valuations and refining its purchase price adjustments for Parliament, which are expected to be finalized by September 30, 2008. As such, the allocation of the purchase price is subject to further adjustments.

The following table sets forth the unaudited pro forma results of operations of the Company for the three month periods ending March 31, 2008 and 2007. The unaudited pro forma results of operations give effect to the Company’s acquisitions as if they occurred on January 1, 2008 and 2007. The unaudited pro forma results of operations are presented after giving effect to certain adjustments for depreciation, amortization of deferred financing costs, interest expense on the acquisition financing, and related income tax effects. The unaudited pro forma results of operations are based upon currently available information and certain assumptions that the Company believes are reasonable under the circumstances. The unaudited pro forma results of operations do not purport to present what the Company’s results of operations would actually have been if the aforementioned transactions had in fact occurred on such date or at the beginning of the period indicated, nor do they project the Company’s financial position or results of operations at any future date or for any future period.


	Three months ended March 31,
	2008		2007
Net sales	$	351,798	$	276,762
Net income		23,156		(5,939	)

Net income per share data:
Basic earnings per share of common stock	$	0.54	$	(0.14	)
Diluted earnings per share of common stock	$	0.53	$	(0.14	)

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Amounts in tables expressed in thousands, except per share information

4.	INTANGIBLE ASSETS OTHER THAN GOODWILL

The major components of intangible assets are:


	March 31, 2008			December 31, 2007
Non-amortizable intangible assets:
Trademarks	$	754,992		$	543,123
Total		754,992			543,123
Amortizable intangible assets:
Trademarks	$	7,391		$	6,754
Customer relationships		2,056			1,913
Less accumulated amortization		(6,913	)		(6,093	)
Total		2,534			2,574

Total intangible assets	$	757,526		$	545,697

Management considers trademarks that are indefinite-lived assets to have high or market-leader brand recognition within their market segments based on the length of time they have existed, the comparatively high volumes sold and their general market positions relative to other products in their respective market segments. These trademarks include Soplica, Zubrówka, Absolwent, Royal and the rights for Bols Vodka in Poland, Hungary and Russia. Taking the above into consideration, as well as the evidence provided by analyses of vodka products life cycles, market studies, competitive and environmental trends, management believes that these brands will generate cash flows for an indefinite period of time, and that the useful lives of these brands are indefinite. In accordance with SFAS 142, intangible assets with an indefinite life are not amortized but are reviewed at least annually for impairment.

The Company has included in non-amortizable intangible assets the preliminary valuation of the Parliament trademark. A full purchase price allocation according to SFAS 141 is currently in progress and is expected to be completed by September 30, 2008.

5.	COMPREHENSIVE INCOME/(LOSS)

Comprehensive income/(loss) is defined as all changes in equity during a period except those resulting from investments by owners and distributions to owners. Comprehensive income/(loss) includes net income adjusted by, among other items, foreign currency translation adjustments. The foreign translation losses/gains on the re-measurements from foreign currencies to U.S. dollars are classified separately as a component of accumulated other comprehensive income included in stockholders’ equity.

As of March 31, 2008, the Polish Zloty exchange rate used to translate the balance sheet strengthened by approximately 8.6% as compared to the exchange rate as of December 31, 2007, and as a result a comprehensive income was recognized. Additionally, translation gains and losses with respect to long-term subordinated inter-company loans with the parent company are charged to other comprehensive income. No deferred tax benefit has been recorded on the comprehensive income/(loss) in regard to the long-term inter-company transactions with the parent company, as the repayment of any equity investment is not anticipated in the foreseeable future.

6.	EARNINGS PER SHARE

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


	Three months ended March 31,
	2008		2007
Basic:
Net income	$	18,532	$	(5,176	)

Weighted average shares of common stock outstanding		40,720		39,055
Basic earnings per share	$	0.46	$	(0.13	)

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Amounts in tables expressed in thousands, except per share information


Diluted:
Net income	$	18,532	$	(5,176	)

Weighted average shares of common stock outstanding		40,720		39,055
Net effect of dilutive employee stock options based on the treasury stock method		760		387
Totals		41,480		39,442
Diluted earnings per share	$	0.45	$	(0.13	)

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 the three months periods ended March 31, 2008 and 2007. The above calculation does not include the impact of contingent shares issued in relation to the Parliament acquisition as they were not material. In addition there is no adjustment to fully diluted shares related to the Convertible Senior Notes as the average market price was below the conversion price for the period.

7.	BORROWINGS

Bank Facilities

In June 2006, the Company consolidated all working capital facilities to three banks. These facilities are used primarily to support the Company’s working capital requirements. These credit lines are only denominated in Polish Zloty.

As of March 31, 2008, $77.5 million remained available under the Company’s overdraft facilities. These overdraft facilities are renewed on an annual basis.

As of March 31, 2008, the company had utilized approximately $134.5 million of a multipurpose credit line agreement in connection with the 2007 tender offer in Poland to purchase the remaining outstanding shares of Polmos Bialystok S.A. The Company’s obligations under the credit line agreement are guaranteed through promissory notes by certain subsidiaries of the Company. The indebtedness under the credit line agreement bears interest at a rate equal to the one month Warsaw Interbank Rate plus a margin of 1.2% and matures on March 31, 2009.

Senior Secured Notes

In connection with the Bols and Polmos Bialystok acquisitions, on July 25, 2005 the Company completed the issuance of €325 million 8% Senior Secured Notes due 2012 (the “Notes”). Interest is due semi-annually on the 25th of January and July, and the Notes are guaranteed on a senior basis by certain of the Company’s subsidiaries. The Indenture governing our Notes contains certain restrictive covenants, including covenants limiting the Company’s ability to: make certain payments, including dividends or other distributions, with respect to the share capital of the parent or its subsidiaries; incur or guarantee additional indebtedness or issue preferred stock; make certain investments; prepay or redeem subordinated debt or equity; create certain liens or enter into sale and leaseback transactions; engage in certain transactions with affiliates; sell assets or consolidate or merge with or into other companies; issue or sell share capital of certain subsidiaries; and enter into other lines of business.

During the three months ending March 31, 2008, the Company purchased €9.8 million of it outstanding Senior Secured Notes back on the open market and retired this debt as of March 31, 2008.

As of March 31, 2008 and December 31, 2007, the Company had accrued interest included in other accrued liabilities of $7.0 million and $15.8 million respectively related to the Senior Secured Notes, with the next coupon due for payment on July 25, 2008. Total obligations under the Senior Secured Notes are shown net of deferred finance costs, amortized over the life of the borrowings using the effective interest rate method and fair value adjustments from the application of hedge accounting as shown in the table below:


	March 31, 2008			December 31, 2007
Senior Secured Notes	$	395,649		$	381,689
Fair value bond mark to market		(20,624	)		(28,204	)
Unamortized portion of closed hedges		(888	)		(858	)
Unamortized issuance costs		(8,913	)		(8,329	)

Total	$	365,224		$	344,298

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Amounts in tables expressed in thousands, except per share information

Convertible Senior Notes

On March 7, 2008, the Company completed the issuance of $310 million of 3% Convertible Senior Notes due 2013 (the “Convertible Notes”). Interest is due semi-annually on the 15th of March and September, beginning on September 15, 2008. The Convertible Senior Notes are convertible in certain circumstances into cash and, if applicable, shares of our common stock, based on an initial conversion rate of 14.7113 shares per $1,000 principle amount, subject to certain adjustments. Upon conversion of the notes, the Company will deliver cash up to the aggregate principle amount of the notes to be converted and, at the election of the Company, cash or shares of common stock in respect to the remainder, if any, of the conversion obligation.

The proceeds from the Convertible Notes were used to fund the cash portion of the acquisition of Copecresto Enterprises Limited, with the remaining proceeds to be used for future potential acquisitions, including the potential Whitehall acquisition.

As of March 31, 2008 the Company had accrued interest included in other accrued liabilities of $0.6 million related to the Convertible Senior Notes, with the next coupon due for payment on September 15, 2008. Total obligations under the Convertible Senior Notes are shown net of deferred finance costs, amortized over the life of the borrowings using the effective interest rate method as shown in the table below:


	March 31, 2008			December 31, 2007
Convertible Senior Notes	$	310,000		$	—
Unamortized issuance costs		(5,597	)		—

Total	$	304,403		$	—

Total borrowings as disclosed in the financial statements are:


	March 31, 2008		December 31, 2007
Short term bank loans and overdraft facilities for working capital	$	48,689	$	42,785
Short term bank loans for share tender		134,530		—

Total short term bank loans and overdraft facilities		183,219		42,785

Long term bank loans for share tender		—		122,952
Long term obligations under Senior Secured Notes		365,224		344,298
Long term obligations under Convertible Senior Notes		304,403
Other total long term debt, less current maturities		—		—

Total debt	$	852,846	$	510,035

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Amounts in tables expressed in thousands, except per share information


	March 31, 2008
Principal repayments for the following years
2008	$	48,689
2009		134,530
2010		—
2011		—
2012 and beyond		669,627

Total	$	852,846

The amounts due in 2008 relate to normal working capital facilities which are typically renewed on an annual basis.

8.	INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out method) or market value. Elements of cost include materials, labor and overhead and are classified as follows:


	March 31, 2008		December 31, 2007
Raw materials and supplies	$	21,887	$	19,051
In-process inventories		6,204		2,479
Finished goods and goods for resale		122,072		119,742

Total	$	150,163	$	141,272

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 net realizable value in their relevant condition.

Cost includes customs duty (where applicable), and all costs associated with bringing the inventory to a condition for sale. These costs include importation, handling, storage and transportation costs, and exclude rebates received from suppliers, which are reflected as reductions to closing inventory. Inventories are comprised primarily of beer, wine, spirits, packaging materials and non-alcoholic beverages.

9.	INCOME TAXES

The Company operates in seven tax jurisdictions: the United States of America, Poland, The Netherlands, Hungary, Russia, Germany and Cyprus. All Polish subsidiaries file their own corporate tax returns as well as account for their own deferred tax assets and liabilities. The Company does not file a tax return in Delaware based upon its consolidated income, but does file a return in Delaware based on the income statement for transactions occurring in the United States of America.

The company is currently generating tax loss carry forwards in the United States at a 35% tax rate, which has the effect of reducing the overall effective tax rate below the 19% Polish statutory rate.

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Amounts in tables expressed in thousands, except per share information

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109”, effective January 1, 2007. Interpretation 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. Interpretation 48 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties. Adoption of Interpretation 48 did not have a significant impact on the Corporation’s financial statements.

The Company files income tax returns in the U.S., Poland, Hungary, Russia, as well as in various other countries throughout the world in which we conduct our business. The major tax jurisdictions and their earliest fiscal years that are currently open for tax examinations are 2003 in the U.S., 2002 in Poland and Hungary.

10.

INTEREST INCOME / (EXPENSE)

For the three months ended March 31, 2008 and 2007 respectively, the following items are included in Interest income / (expense):


	Three months ended March 31,
	2008			2007
Interest income	$	1,374		$	1,316
Interest expense		(12,902	)		(9,965	)

Total interest (expense), net	$	(11,528	)	$	(8,649	)

11.

OTHER FINANCIAL INCOME / (EXPENSE)

For the three months ended March 31, 2008 and 2007, the following items are included in Other Financial Income / (Expense):


	Three months ended March 31,
	2008			2007
Foreign exchange impact related to Senior Secured Notes financing	$	5,959		$	(3,364	)
Foreign exchange impact related to Convertible Notes	$	2,956			—
Premium for early debt retirement		—			(6,940	)
Write-off of hedge associated with retired debt		(305	)		(2,757	)
Write-off of financing costs associated with retired debt		(851	)		(2,167	)
Other gains / (losses)		1,344			(172	)

Total other financial income / (expense), net	$	9,103		$	(15,400	)

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Amounts in tables expressed in thousands, except per share information

12.

FINANCIAL INSTRUMENTS

Financial Instruments and Their Fair Values

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.

Derivative financial instruments

The Company is exposed to market movements in foreign currency exchange rates that could affect the Company’s results of operations and financial condition. In accordance with SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”, the Company recognizes all derivatives as either assets or liabilities on the balance sheet and measures those instruments at fair value.

The fair values of the Company’s derivative instruments can change with fluctuations in interest rates and/or currency rates and are expected to offset changes in the values of the underlying exposures. The Company’s derivative instruments are held to hedge economic exposures. The Company follows internal policies to manage interest rate and foreign currency risks, including limitations on derivative market-making or other speculative activities.

To qualify for hedge accounting under SFAS No. 133, the details of the hedging relationship must be formally documented at the inception of the arrangement, including the risk management objective, hedging strategy, hedged item, specific risk that is being hedged, the derivative instrument, how effectiveness is being assessed and how ineffectiveness will be measured. The derivative must be highly effective in offsetting either changes in the fair value or cash flows, as appropriate, of the risk being hedged.

Effectiveness is evaluated on a retrospective and prospective basis based on quantitative measures. When it is determined that a derivative is not, or has ceased to be, highly effective as a hedge, the Company discontinues hedge accounting prospectively. The Company discontinues hedge accounting prospectively when (1) the derivative is no longer highly effective in offsetting changes in the cash flows of a hedged item; (2) the derivative expires or is sold, terminated, or exercised; (3) it is no longer probable that the forecasted transaction will occur; or (4) management determines that designating the derivative as a hedging instrument is no longer appropriate.

Fair value hedges are hedges that offset the risk of changes in the fair values of recorded assets, liabilities and firm commitments. The Company records changes in the fair value of derivative instruments which are designated and deemed effective as fair value hedges, in earnings offset by the corresponding changes in the fair value of the hedged items.

In September 2005, the Company entered into a coupon swap arrangement which exchanges a fixed Euro based coupon of 8%, with a variable Euro based coupon (IRS) based upon the 6 month Euribor rate plus a margin. The hedge is accounted for as a fair value hedge according to SFAS 133 and is tested for effectiveness on a quarterly basis using the long haul method. Under this method, as long as the hedge is deemed highly effective both the fair value of the hedge and the hedge item are marked to market with the net impact recorded as gain or loss in the income statement. For the three months ended March 31, 2008, the company recorded a net gain of $414,500. In September 2005, the Company entered into a second hedge that exchanged the variable Euro coupon with a variable Polish Zloty coupon (CIRS). However, due to the continued strength of the Polish economy and currency the Company closed this swap contract. The hedge did not qualify for hedge accounting and therefore the changes in fair value were reflected in the results of operations.

In March 2008, a portion of the IRS hedge related to the repurchased Senior Secured Notes was closed and written off, and a new hedging relationship was created with the hedge match one for one the remaining outstanding Senior Secured Notes.

In February 2007 and December 2006, a portion of the IRS hedge was closed and a new hedging relationship was created. The mark to market valuation of the closed hedges at the time was frozen and is being amortized over the remaining useful life of the hedged item. The hedge closure in December 2006 was related to the part of the Senior Secured Notes repurchased in January 2007. Consequently, the amount was written off in January 2007 following the repurchase. As of March 31, 2008, there is an unamortized asset of $0.9 million recorded as an adjustment to the valuation of the Senior Secured Notes.

13.

FAIR VALUE MEASUREMENTS

Effective January 1, 2008, the Company adopted SFAS No. 157, which defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Amounts in tables expressed in thousands, except per share information

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The Company’s adoption of SFAS No. 157 did not have a material impact on our consolidated financial statements.

We evaluate the position of each financial instrument measured at fair value in the hierarchy individually based on the valuation methodology we apply. At March 31, 2008, we have no material financial assets or liabilities carried at fair value using significant level 1 or level 2 inputs and the only instruments we value using level 3 inputs are currency swap agreements as follows:

Coupon Swap

In September 2005, the Company entered into a coupon swap arrangement which exchanges a fixed Euro based coupon of 8%, with a variable Euro based coupon (IRS) based upon the 6 month Euribor rate plus a margin. The hedge is accounted for as a fair value hedge according to SFAS 133 and is tested for effectiveness on a quarterly basis using the long haul method. Under this method, as long as the hedge is deemed highly effective both the fair value of the hedge and the hedged item are marked to market with the net impact recorded as gain or loss in the income statement. In September 2005, the Company entered into a second hedge that exchanged the variable Euro coupon with a variable Polish Zloty coupon (CIRS). However, due to the continued strength of the Polish economy and currency the Company closed this swap contract. The hedge did not qualify for hedge accounting and therefore the changes in fair value were reflected in the results of operations.

The fair value of these instruments as at March 31, 2008, was a $20.6 million liability, which represented a $7.6 million decrease from the $28.2 million liability as at December 31, 2007 and was recognized as a gain in the consolidated statement of operations.

14.

STOCK OPTION PLANS AND RESTRICTED STOCK AWARDS

As of January 1, 2006, the Company adopted SFAS No. 123(R) “Share-Based Payment” requiring the recognition of compensation expense in the Condensed Consolidated Statements of Income related to the fair value of its employee share-based options. SFAS No. 123(R) revises SFAS No. 123 “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 “Accounting for Stock Issued to Employees”. SFAS No. 123(R) is supplemented by SEC Staff Accounting Bulletin (“SAB”) No. 107 “Share-Based Payment”. SAB No. 107 expresses the SEC staff’s views regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations including the valuation of share-based payments arrangements.

The Company recognizes the cost of all employee stock options on a straight-line attribution basis over their respective vesting periods, net of estimated forfeitures. The Company has selected the modified prospective method of transition; accordingly, prior periods have not been restated.

SFAS No. 123(R) “Share-Based Payment” requires the recognition of compensation expense in the Consolidated Statements of Income related to the fair value of employee share-based options. Determining the fair value of share-based awards at the grant date requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise, the associated volatility and the expected dividends. Judgment is also required in estimating the amount of share-based awards expected to be forfeited prior to vesting. If actual forfeitures differ significantly from these estimates, share-based compensation expense could be materially impacted. Prior to adopting SFAS No. 123(R), the Company applied Accounting Principles Board (“APB”) Opinion No. 25, and related Interpretations, in accounting for its stock-based compensation plans. All employee stock options were granted at or above the grant date market price. Accordingly, no compensation cost was recognized for fixed stock option grants in prior periods.

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Amounts in tables expressed in thousands, except per share information

The Company’s 2007 Stock Incentive Plan (“Incentive Plan”) provides for the grant of stock options, stock appreciation rights, restricted stock and restricted stock units to directors, executives, and other employees (“employees”) of the Company and to non-employee service providers of the Company. Following a shareholder resolution in April 2003 and the stock splits of May 2003, May 2004 and June 2006, the Incentive Plan authorizes, and the Company has reserved for future issuance, up to 1,397,333 shares of Common Stock (subject to an anti-dilution adjustment in the event of a stock split, re-capitalization, or similar transaction). The Compensation Committee of the Board of Directors of the Company administers the Incentive Plan.

The option exercise price for stock options granted under the Incentive Plan may not be less than fair market value but in some cases may be in excess of the closing price of the Common Stock on the date of grant. The Company uses the stock option price based on the closing price of the Common Stock on the day before the date of grant if such price is not materially different than the opening price of the Common Stock on the day of the grant. Stock options may be exercised up to 10 years after the date of grant except as otherwise provided in the particular stock option agreement. Payment for the shares must be in cash, which must be received by the Company prior to any shares being issued. Stock options granted to directors and officers as part of an employee employment contract vest after 2 years. Stock options granted to general employees as part of a loyalty program vest after three years. The Incentive Plan was approved by CEDC shareholders during the annual shareholders meeting on April 30, 2007 to replace the Company’s 1997 Stock Incentive Plan (the “Old Stock Incentive Plan”), which expired in November 2007. The Stock Incentive Plan will expire in November 2017. The terms and conditions of the Stock Incentive Plan are substantially similar to those of the Old Stock Incentive Plan.

Before January 1, 2006 CEDC, the holding company, realized net operating losses and therefore an excess tax benefit (windfall) resulting from the exercise of the awards and a related credit to Additional Paid-in Capital (APIC) of $2.2 million was not recorded in the Company’s books. The excess tax benefits and the credit to APIC for the windfall should not be recorded until the deduction reduces income taxes payable on the basis that cash tax savings have not occurred. The Company will recognize the windfall upon realization.

A summary of the Company’s stock option and restricted stock units activity, and related information for the three months ended March 31, 2008 is as follows:


Total Options	Number of Options		Weighted- Average Exercise Price
Outstanding at January 1, 2008	1,253,037		$	22.02
Granted	165,875		$	55.21
Exercised	(11,763	)	$	16.33
Forfeited	(8,362	)	$	25.87

Outstanding at March 31, 2008	1,398,787		$	35.12
Exercisable at March 31, 2008	966,512		$	19.69


Nonvested restricted stock units	Number of Restricted Stock Units		Weighted- Average Grant Date Fair Value
Nonvested at January 1, 2008	35,830		$	34.73
Granted	3,000		$	58.08
Vested	—		$	—
Forfeited	(490	)	$	34.51

Nonvested at March 31, 2008	38,340		$	36.56

During 2008, the range of exercise prices for outstanding options was $1.13 to $58.08. During 2008, the weighted average remaining contractual life of options outstanding was 5.8 years. Exercise prices for options exercisable as of March 31, 2008 ranged from $1.13 to $29.14. The Company has also granted 3,000 restricted stock units to its employees at an average price of $58.08.

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Amounts in tables expressed in thousands, except per share information

The Company has issued stock options to employees under stock based compensation plans. Stock options are issued at the current market price, subject to a vesting period, which varies from one to three years. As of March 31, 2008, the Company has not changed the terms of any outstanding awards.

During the three months ended March 31, 2008, the Company recognized compensation cost of $0.77 million and a related deferred tax asset of $0.26 million.

As of March 31, 2008, there was $4.6 million of total unrecognized compensation cost related to non-vested stock options and restricted stock units granted under the Plan. The costs are expected to be recognized over a weighted average period of 45 months through 2008-2010.

Total cash received from exercise of options during the three months ended March 31, 2008 amounted to $0.19 million.

For the three month period ended March 31, 2008, the compensation expense related to all options was calculated based on the fair value of each option grant using the binomial distribution model. The Company has never paid cash dividends and does not currently have plans to pay cash dividends, and thus has assumed a 0% dividend yield. Expected volatilities are based on average of implied and historical volatility projected over the remaining term of the options. The expected life of stock options is estimated based on historical data on exercise of stock options, post-vesting forfeitures and other factors to estimate the expected term of the stock options granted. The risk-free interest rates are derived from the U.S. Treasury yield curve in effect on the date of grant for instruments with a remaining term similar to the expected life of the options. In addition, the Company applies an expected forfeiture rate when amortizing stock-based compensation expenses. The estimate of the forfeiture rates is based primarily upon historical experience of employee turnover. As individual grant awards become fully vested, stock-based compensation expense is adjusted to recognize actual forfeitures. The following weighted-average assumptions were used in the calculation of fair value:


	2008		2007
Fair Value	$	17.89	$	10.03
Dividend Yield		0%		0%
Expected Volatility		37.8% - 38.5%		30.5 - 38.4%
Weighted Average Volatility		37.9%		37.1%
Risk Free Interest Rate		1.5% - 3.2%		4.7 - 5.1%
Expected Life of Options from Grant		3.2		3.2

15.

COMMITMENTS AND CONTINGENT LIABILITIES

The Company is involved in litigation from time to time and has claims against it in connection with matters arising in the ordinary course of business. In the opinion of management, the outcome of these proceedings will not have a material adverse effect on the Company’s operations.

As part of the Share Purchase Agreement related to the October 2005 Polmos Bialystok Acquisition, the Company is required to ensure that Polmos Bialystok will make investments of at least 77.5 million Polish Zloty during the five years after the acquisition was consummated. As of March 31, 2008, the Company has invested 51.2 million Polish Zloty (approximately $23.0 million) in Polmos Bialystok.

As of March 31, 2008, the Company has secured letters for credit for the construction of rectification lines with a cash deposit of $5.7 million. Moreover, custom liabilities with the local tax office for imported products have been secured by cash held by the bank for $2.7 million.

16.

RELATED PARTY TRANSACTION

In January of 2005, the Company entered into a rental agreement for a facility located in northern Poland, which is 33% owned by the Company’s Chief Operating Officer. The monthly rent to be paid by the Company for this location is approximately $16,300 per month and relates to facilities to be shared by two subsidiaries of the Company.

During the three months of 2008, the Company made sales to a restaurant which is partially owned by the Chief Executive Officer of the Company. All sales were made on normal commercial terms, and total sales for the three months ended March 31, 2008 and 2007 were approximately $28,500 and $26,000.

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Amounts in tables expressed in thousands, except per share information

17.

SUBSEQUENT EVENTS

On April 24, 2008, CEDC signed a credit agreement with Bank Zachodni WBK SA in Poland to provide up to $50 million of financing to be used to finance a portion of the Parliament and potential Whitehall acquisition. The agreement provides for a $30 million five year amortizing term facility and a one year $20 million short term facility with annual renewal. The facilities are to bear interest at 6 month LIBOR plus 1.65% for the five year facility and 1.45% for the short term facility. None of these facilities has yet been drawn.

18.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 “Fair Value Measurements” (“SFAS 157”). SFAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years, with early adoption permitted. The Company has implemented certain provisions of this pronouncement and is not expecting any material impact that the full implementation of SFAS 157 would have on the consolidated financial statements when adopted.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for our Company January 1, 2008. The implementation of SFAS 159, did not have any material impact on the consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141-R, “Business Combinations”. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, which is business combinations in the year ending November 30, 2010 for the Company. The objective of this Statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects.

In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51”. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, which for the Company is the year ending November 30, 2010 and the interim periods within the fiscal year. The objective of this Statement is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. This standard currently does not impact us as we have full controlling interest of all of our subsidiaries, however this standard may impact the treatment of future acquisitions.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – An Amendment of SFAS No. 133”. SFAS 161 seeks to improve financial reporting for derivative instruments and hedging activities by requiring enhanced disclosures regarding the impact on financial position, financial performance, and cash flows. To achieve this increased transparency, SFAS 161 requires (1) the disclosure of the fair value of derivative instruments and gains and losses in a tabular format; (2) the disclosure of derivative features that are credit risk-related; and (3) cross-referencing within the footnotes. SFAS 161 is effective for us on January 1, 2009. We are in the process of evaluating the new disclosure requirements under SFAS 161.

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Amounts in tables expressed in thousands, except per share information

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Regarding Forward-Looking Information.

This report contains forward-looking statements, which provide our current expectations or forecasts of future events. These forward-looking statements may be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “intends,” “may,” “will” or “should” or, in each case, their negative, or other variations or comparable terminology, but the absence of these words does not necessarily mean that a statement is not forward-looking. Those forward looking statements include all matters that are not historical facts. They appear in a number of places throughout this report and include, without limitation:

•

information concerning possible or assumed future results of operations, trends in financial results and business plans, including those relating to earnings growth and revenue growth, liquidity, prospects, strategies and the industry in which the Company and its subsidiaries operate;

•

statements about the level of our costs and operating expenses relative to the Company revenues, and about the expected composition of the Company’s revenues;

•

statements about consummation and integration of the Company’s acquisitions, including future acquisitions the Company may make;

•

information about the impact of Polish regulations on the Company business;

•

other statements about the Company’s plans, objectives, expectations and intentions; and

•

other statements that are not historical facts.

By their nature, forward-looking statements involve known and unknown risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, the development of the industry in which we operate, and the effects of acquisitions, on us may differ materially from those anticipated in or suggested by the forward-looking statements contained in this report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate, are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods.

We urge you to read and carefully consider the items of the other reports that we have filed with or furnished to the SEC for a more complete discussion of the factors and risks that could affect us and our future performance and the industry in which we operate, including the risk factors described in the Company’s Annual Report on Form 10-K for the year ended, December 31, 2007 filed with the SEC on February 29, 2008. In light of these risks, uncertainties and assumptions, the forward-looking events described in this report may not occur as described, or at all.

You should not unduly rely on these forward-looking statements, because they reflect our judgment only as of the date of this report. The Company undertakes no obligation to publicly update or revise any forward-looking statement to reflect circumstances or events after the date of this report, or to reflect on the occurrence of unanticipated events. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements referred to above and contained elsewhere in this report.

The following discussion and analysis provides information which management believes is relevant to the reader’s assessment and understanding of the Company’s results of operations and financial condition and should be read in conjunction with the Consolidated Financial Statements and the notes thereto found elsewhere in this report.

Overview

We are the largest vodka producer by value and volume in Poland, and one of the largest producers of vodka in the world. We produced and sold over 9.3 million nine-liter cases of vodka in 2007 in the four main vodka segments in Poland: top premium, premium, mainstream and economy. In addition, in our Bols plant, we produce the top selling vodka in Hungary, Royal Vodka, which we distribute through our Hungarian subsidiary, Bols Hungary.

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Amounts in tables expressed in thousands, except per share information

In March 2008, we closed our acquisition of 85% of the capital stock of the Parliament Group in Russia which owns various alcoholic beverage production and distribution assets, including the Parliament vodka brand. Parliament vodka is a top selling premium vodka brand in Russia. Parliament is expected to reach sales of over 3 million 9 liter cases in 2008. Parliament provides us our first platform in Russia where we can not only grow the Parliament brand domestically, but also add import brands into the mix, thereby leveraging the existing structure to take advantage of the premiumization of alcohol consumption taking place in the Russian market. For the three months ended March 31, 2008, the results from operations include approximately two weeks of activity related to the Parliament Group.

Results of Operations:

Three months ended March 31, 2008 compared to three months ended March 31, 2007

A summary of the Company’s operating performance (expressed in thousands except per share amounts) is presented below.

PROFIT AND LOSS


	Three months ended
	March 31, 2008			March 31, 2007
Sales	$	408,080		$	288,996
Excise taxes		(94,460	)		(60,782	)
Net Sales		313,620			228,214
Cost of goods sold		247,404			181,897

Gross Profit		66,216			46,317

Operating expenses		40,748			27,402

Operating Income		25,468			18,915

Non operating income / (expense), net
Interest (expense), net		(11,528	)		(8,649	)
Other financial income / (expense), net		9,103			(15,400	)
Other non operating income / (expense), net		140			(343	)

Income before taxes		23,183			(5,477	)

Income tax expense		4,398			(1,030	)

Minority interests		253			729

Net income	$	18,532		$	(5,176	)

Net income per share of common stock, basic	$	0.46		$	(0.13	)

Net income per share of common stock, diluted	$	0.45		$	(0.13	)

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Amounts in tables expressed in thousands, except per share information

Net Sales

Net sales represent total sales net of all customer rebates, excise tax on production and exclusive imports and value added tax. Total net sales increased by approximately 37.4%, or $85.4 million, from $228.2 million for the three months ended March 31, 2007 to $313.6 million for the three months ended March 31, 2008. This increase in sales is due to the following factors:


Net Sales for three months ended March 31, 2007	$	228,214
Increase from acquisitions		26,343
Existing business sales growth		16,070
Excise tax reduction		(15,028	)
Impact of foreign exchange rates		58,021

Net sales for three months ended March 31, 2008	$	313,620

Factors impacting our existing business sales for the three months ending March 31, 2008 include the growth of our key vodka brands, with Bols Vodka, our flagship premium vodka, growing by 17% in volume terms and Zubrowka by 13% in volume terms as compared to the three months ending March 31, 2007. Sales of our exclusive import brands in U.S. dollars grew by 44% in value terms for the three months ending March 31, 2008 as compared to the same period in 2007.

As of January 2008, sales of products which we produce at Polmos Bialystok and Bols to certain key accounts were moved from our distribution companies to the producer, Polmos Bialystok and Bols. When a sale is reported directly from a producer, excise tax is eliminated from net sales and when a sale is made from a distribution company the sales are recorded gross with excise tax. Therefore the movement of the sales contracts from a distributor to the producer reduces the amount of net sales reported through the elimination of excise tax and also increases gross profit as a percent of sales. The impact of this sales reduction for the three months ended March 31, 2008 was $15.0 million.

Based upon average exchange rates for the three months ended March 31, 2008 and 2007, the Polish Zloty appreciated by approximately 20%. This resulted in an increase of $58.0 million of sales in U.S. Dollar terms.

Gross Profit

Total gross profit increased by approximately 43.0%, or $19.9 million, to $66.2 million for the three months ended March 31, 2008, from $46.3 million for the three months ended March 31, 2007, reflecting sales growth for the factors noted above in the three months ended March 31, 2008. Gross margin increased from 20.3% of net sales for the three months ended March 31, 2007 to 21.1% of net sales for the three months ended March 31, 2008. Factors impacting our margins include improved sales mix, lower spirit costs, the impact of excise tax as described above as well as the consolidation of Parliament from the first quarter of 2008, which operates as a producer with higher margins.

Operating Expenses

Operating expenses consist of selling, general and administrative, or “S,G&A” expenses, advertising expenses, non-production depreciation and amortization, and provision for bad debts. Total operating expenses increased by approximately 48.5%, or $13.3 million, from $27.4 million for the three months ended March 31, 2007 to $40.7 million for the three months ended March 31, 2008. Approximately $2.0 million of this increase resulted primarily from the effects of the acquisition of PHS in July 2007, approximately $1.5 million of this increase resulted primarily from the effects of the acquisition of Parliament in March 2008 and the remainder of the increase resulted primarily from the growth of the business and the impact of foreign exchange expenses as detailed below.


Operating expenses for three months ended March 31, 2007	$	27,402
Increase from acquisitions		4,377
Increase from existing business growth		2,003
Impact of foreign exchange rates		6,966

Operating expenses for three months ended March 31, 2008	$	40,748

The table below sets forth the items of operating expenses.

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Amounts in tables expressed in thousands, except per share information


	Three Months Ended March 31,
	2008		2007
	($ in thousands)
S,G&A	$	32,808	$	23,025
Marketing		5,822		2,547
Depreciation and amortization		2,118		1,830

Total operating expense	$	40,748	$	27,402

S,G&A consists of salaries, warehousing and transportation costs, administrative expenses and bad debt expense. S,G&A increased by approximately 42.6%, or $9.8 million, from $23.0 million for the three months ended March 31, 2007 to $32.8 million for the three months ended March 31, 2008. Approximately $3.5 million of this increase resulted primarily from the effects of the acquisitions discussed above and the remainder of the increase resulted primarily from the growth of the business and the appreciation of the Polish Zloty against the U.S. Dollar. As a percent of sales, S,G&A has increased from 10.0% of net sales for the three months ended March 31, 2007 to 10.5% of net sales for the three months ended March 31, 2008.

Depreciation and amortization increased by approximately 15.7%, or $ 0.3 million, from $1.8 million for the three months ended March 31, 2007 to $2.1 million for the three months ended March 31, 2008. This increase resulted primarily from our existing business growth.

Operating Income

Total operating income increased by approximately 34.9%, or $6.6 million, from $18.9 million for the three months ended March 31, 2007 to $25.5 million for the three months ended March 31, 2008. This increase resulted primarily from the factors described under “Net Sales” above.

Income Tax

Our effective tax rate for the three months ending March 31, 2008 was 18.97%, which was driven primarily by the tax rate in Poland of 19%, where most of our income is generated and the tax loss carry forward generated in the U.S.

Non Operating Income and Expenses

Total interest expense increased by approximately 33.7%, or $2.9 million, from $8.6 million for the three months ended March 31, 2007 to $11.5 million for the three months ended March 31, 2008. This increase resulted from a combination of additional borrowings for the purchase of Polmos Bialystok shares completed in June 2007, the issuance of our Convertible Senior Notes to finance the Parliament acquisition and increased interest rates in 2008 as compared to 2007.

The Company recognized $8.9 million of unrealized foreign exchange rate gain related to the impact of movements in exchange rates on our Senior Notes.

Liquidity and Capital Resources

The Company’s primary uses of cash in the future will be to fund its working capital requirements, service indebtedness, finance capital expenditures and fund acquisitions. The Company expects to fund these requirements in the future with cash flows from its operating activities, cash on hand, the financing arrangements described below, and other arrangements we may enter into from time to time.

Financing Arrangements

Existing Credit Facilities

As of March 31, 2008, the Company had total short-term debt outstanding under existing credit facilities in the Polish Zloty equivalent of approximately $183.2 million. In order to fund working capital and other liquidity requirements, the Company also has available non-committed credit lines with various banks and credit institutions. As of March 31, 2008, the amount of available, unutilized and uncommitted credit facilities was the Polish Zloty equivalent of approximately $77.5 million. These existing credit facilities are subject to renewal on an annual basis.

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Amounts in tables expressed in thousands, except per share information

Additional Credit Agreements

On April 24, 2008, CEDC signed a credit agreement with Bank Zachodni WBK SA in Poland to provide up to $50 million of financing to be used to finance a portion of the Parliament acquisition. The agreement provides for a $30 million five year amortizing term facility and a one year $20 million short term facility with annual renewal. The facilities are to bear interest at the six month LIBOR plus 1.65% for the five year facility and 1.45% for the short term facility (subject to reduction in the event CEDC maintains certain financial ratios). None of these facilities has yet been drawn.

Senior Secured Notes

During the three months ending March 31, 2008, the Company purchased €9.8 million of it outstanding Senior Secured Notes back on the open market and retired this debt as of March 31, 2008.

Convertible Senior Notes

On March 7, 2008, the Company completed the issuance of $310 million of 3% Convertible Senior Notes due 2013 (the “Convertible Notes”). Interest is due semi-annually on the 15th of March and September, beginning on September 15, 2008. The Convertible Senior Notes are convertible in certain circumstances into cash and, if applicable, shares of our common stock, based on an initial conversion rate of 14.7113 shares per $1,000 principle amount, subject to certain adjustments. Upon conversion of the Convertible Notes, the Company will deliver cash up to the aggregate principle amount of the Convertible Notes to be converted and, at the election of the Company, cash or shares of common stock in respect to the remainder, if any, of the conversion obligation.

The proceeds from the Convertible Notes were used to fund the cash portion of the acquisition of 85% of the capital stock of Copecresto Enterprises Limited, with the remaining proceeds to be used for future potential acquisitions, including the potential Whitehall acquisition.

Equity Issuance

On March 11, 2008, the Company and certain of its affiliates entered into a Share Sale and Purchase Agreement and certain other agreements with White Horse Intervest Limited, a British Virgin Islands Company, and certain of White Horse’s affiliates, relating to the Company’s acquisition from White Horse of 85% of the share capital of Copecresto Enterprises Limited, a Cypriot company, owner of the Parliament group. In connection with this acquisition, the Company paid a consideration of approximately $180 million in cash and 2.2 million shares of common stock. According to the agreement the shares are to remain locked up and can not be sold for a period of one year from closing, subject to certain limited exceptions.

Statement of Liquidity and Capital Resources

During the periods under review, the Company’s primary sources of liquidity were cash flows generated from operations, credit facilities, the equity offerings, the Convertible Senior Notes offering and proceeds from options exercised. The Company’s primary uses of cash were to fund its working capital requirements, service indebtedness, finance capital expenditures and fund acquisitions. The following table sets forth selected information concerning the Company’s consolidated cash flow during the periods indicated.

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Amounts in tables expressed in thousands, except per share information


	Three months ended March 31, 2008			Three months ended March 31, 2007
	($ in thousands)
Cash flow from operating activities	$	49,378		$	2,405
Cash flow from investing activities	$	(178,906	)	$	(88,680	)
Cash flow from financing activities	$	291,578		$	35,643

Net cash flow from operating activities

Net cash flow from operating activities represents net cash from operations and interest. Net cash provided by operating activities for the three months ended March 31, 2008 was $49.4 million as compared to $2.4 million for the three months ended March 31, 2007. The primary driver for this change was working capital movements. Working capital movements utilized $37.0 million of cash inflows for the three months ended March 31, 2008 as compared to $4.3 million of cash outflows for the three months ended March 31, 2007. The primary drivers for the change in working capital movements include improved receivable collections after the peak holiday selling period in December 2007 and reduced excise tax payments in 2008 as compared to 2007. In 2007 the Company shipped product earlier into the market than in prior years, thus increasing excise payments in 2007, which provided a cash flow benefit during the first quarter of 2008.

Net cash flow used in investing activities

Net cash flows used in investing activities represents net cash used to acquire subsidiaries and fixed assets as well as proceeds from sales of fixed assets. Net cash used in investing activities for the three months ended March 31, 2008 was $178.9 million as compared to $88.7 million for the three months ended March 31, 2007. The primary cash outflows from investing activities for the three months ended March 31, 2008 were the cash consideration and expenses related to the Parliament acquisition, which was closed on March 11, 2008.

Net cash flow from financing activities

Net cash flow from financing activities represents cash used for servicing indebtedness, borrowings under credit facilities and cash inflows from private placements and exercise of options. Net cash provided by financing activities was $291.6 million for the three months ended March 31, 2008 as compared to $35.6 million for the three months ended March 31, 2007. The primary source of cash from financing activities was the Company’s offering of $310 million of Convertible Secured Notes to fund the Parliament acquisition and other planned acquisitions, which resulted in net proceeds of $304.4 million.

The Company’s Future Liquidity and Capital Resources

The Company’s primary uses of cash in the future will be to fund its working capital requirements, service indebtedness, finance capital expenditures and fund acquisitions. The Company expects to fund these requirements in the future with cash flows from its operating activities, cash on hand, the financing arrangements described above and other financing arrangements it may enter into from time to time.

Effects of Inflation and Foreign Currency Movements

Inflation in Poland is projected at 3.8% for 2008, compared to actual inflation of 2.5% in 2007.

Substantially all of Company’s operating cash flows and assets are denominated in Polish Zloty and Hungarian Forint. This means that the Company is exposed to translation movements both on its balance sheet and income statement. The impact on working capital items is demonstrated on the cash flow statement as the movement in exchange on cash and cash equivalents. The impact on the income statement is by the movement of the average exchange rate used to restate the income statement from Polish Zloty and Hungarian Forint to U.S. Dollars. The amounts shown as exchange rate gains or losses on the face of the income statement relate only to realized gains or losses on transactions that are not denominated in Polish Zloty or Hungarian Forint.

As a result of the issuance of the Company’s Senior Secured Notes due 2012, of which €250 million are currently outstanding, we are exposed to foreign exchange movements. Movements in the EUR-Polish Zloty exchange rate will require us to revalue our liability on the Senior Secured Notes accordingly, the impact of which will be reflected in the results of the Company’s operations. Every one percent movement in the EUR-Polish Zloty exchange rate will have an approximate $2.2 million change in the valuation of the liability with the offsetting pre-tax gain or losses recorded in the profit and loss of the Company.

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Amounts in tables expressed in thousands, except per share information

In order to manage the cash flow impact of foreign exchange changes, the Company has entered into certain hedge agreements. As of March 31, 2008, the Company had outstanding a hedge contract for a seven year interest rate swap agreement. The swap agreement exchanges a fixed Euro based coupon of 8%, with a variable Euro based coupon (IRS) based upon the six month Euribor rate plus a margin.

The average Zloty/Dollar exchange rate used to create our income statement appreciated by approximately 20% as compared to the same period in 2007. The actual period end Zloty/Dollar exchange rate used to create our balance sheet appreciated by approximately 9% as compared to the same period in 2007.

The proceeds of our $310 million Senior Convertible Notes have been on-lent to subsidiares that have the Polish Zloty as the functional currency. Movements in the USD-Polish Zloty exchange rate will require us to revalue our liability on the Senior Convertible Notes accordingly, the impact of which will be reflected in the results of the Company’s operations. Every one percent movement in the USD-Polish Zloty exchange rate will have an approximate $2.7 million change in the valuation of the liability with the offsetting pre-tax gain or losses recorded in the profit and loss of the Company.

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 of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of net sales, 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.

Goodwill and Intangibles

Following the introduction of SFAS 142, acquired goodwill is no longer amortized. Instead the Company assesses the recoverability of its goodwill at least once a year or 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. Intangibles are amortized over their effective useful life. In estimating fair value, management must make assumptions and projections regarding such items as future cash flows, future revenues, future earnings, and other factors. The assumptions used in the estimate of fair value are generally consistent with the past performance of each reporting unit and are also consistent with the projections and assumptions that are used in current operating plans. Such assumptions are subject to change as a result of changing economic and competitive conditions. If these estimates or their related assumptions change in the future, the Company may be required to record an impairment loss for the assets. The fair values calculated have been adjusted where applicable to reflect the tax impact upon disposal of the asset.

In connection with the Bols and Bialystok acquisitions, the Company has acquired trademark rights to various brands, which were capitalized as part of the purchase price allocation process. As these brands are well established they have been assessed to have an indefinite life. These trademarks rights will not be amortized; however, management assesses them at least once a year for impairment.

In connection with White Horse acquisition the Company has included in non-amortizable intangible assets the preliminary valuation of the Parliament trademark, which capitalized as part of the purchase price allocation process. As this brand is well established it has been assessed to have an indefinite life. This trademark right will not be amortized; however, management assesses it at least once a year for impairment.

The calculation of the impairment charge for goodwill and indefinite lived intangible assets, requires the use of estimates. The discount rate used for the calculation was 7.42%. Factoring in a deviation of 10% for the discount rate as compared to management’s estimate, there would still be no need for an impairment charge against goodwill.

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Amounts in tables expressed in thousands, except per share information

Accounting for Business Combinations

The acquisition of businesses is an important element of the Company’s strategy. We account for our acquisitions under the purchase method of accounting in accordance with SFAS 141, Business Combinations, and allocate the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The determination of the values of the assets acquired and liabilities assumed, as well as associated asset useful lives, requires management to make estimates. The Company’s acquisitions typically result in goodwill and other intangible assets; the value and estimated life of those assets may affect the amount of future period amortization expense for intangible assets with finite lives as well as possible impairment charges that may be incurred.

The calculation of purchase price allocation requires judgment on the part of management in determining the valuation of the assets acquired and liabilities assumed.

Derivative Instruments

The Company is exposed to market movements from changes in foreign currency exchange rates that could affect the Company’s results of operations and financial condition. In accordance with SFAS 133, Accounting for Derivative Instruments and Hedging Activities, the Company recognizes all derivatives as either assets or liabilities on the balance sheet and measures those instruments at fair value.

At the inception of a transaction the Company documents the relationship between the hedging instruments and hedged items, as well as its risk management objective. This process includes linking all derivatives designated to specific firm commitments or forecasted transitions. The Company also documents its assessment, both at the hedge inception and on an ongoing basis, of whether the derivative financial instruments that are used in hedging transactions are highly effective in offsetting changes in fair value or cash flows of hedged items.

Share Based Payments

Grant-date fair value of stock options is estimated using a lattice-binomial option-pricing model. We recognize compensation cost for awards over the vesting period. The majority of our stock options have a vesting period between one to three years.

See Note 14 to our Consolidated Financial Statements for more information regarding stock-based compensation.

Recently Issued Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 “Fair Value Measurements” (“SFAS 157”). SFAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years, with early adoption permitted. The Company has implemented certain provisions of this pronouncement and does not expect any material impact on the consolidated financial statements when SFAS 157 is fully implemented.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for the Company January 1, 2008. The implementation of SFAS 159, did not have any material impact on the consolidated financial statements.

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Amounts in tables expressed in thousands, except per share information

In December 2007, the FASB issued SFAS No. 141-R, “Business Combinations”. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, meaning business combinations in the year ending November 30, 2010 for the Company. The objective of this Statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects.

ITEM 3:

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our operations are conducted primarily in Poland and our functional currency is the Polish Zloty and the reporting currency is the U.S. Dollar. Our financial instruments consist mainly of cash and cash equivalents, accounts receivable, accounts payable, inventories, bank loans, overdraft facilities and long-term debt. All of the monetary assets represented by these financial instruments are located in Poland. Consequently, they are subject to currency translation risk when reporting in U.S. Dollars.

If the U.S. Dollar increases in value against the Polish Zloty, the value in U.S. Dollars of assets, liabilities, revenues and expenses originally recorded in 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 a material impact on the value in U.S. Dollars of our non-U.S. Dollar assets, liabilities, revenues and expenses, even if the value of these items has not changed in their original currency.

Our commercial foreign exchange exposure mainly arises from the fact that substantially all of our revenues are denominated in Polish Zloty, our Senior Secured Notes are denominated in Euros and our Senior Convertible Notes are denominated in US Dollars. This debt has been on-lent to the operating subsidiary level in Poland, thus exposing the Company to movements in the EUR/Polish Zloty and USD/Polish Zloty exchange rate. Every one percent movement in the EUR-Polish Zloty exchange rate will have an approximate $2.2 million change in the valuation of the liability with the offsetting pre-tax gain or losses recorded in the profit and loss of the Company. Every one percent movement in the USD-Polish Zloty exchange rate will have an approximate $2.7 million change in the valuation of the liability with the offsetting pre-tax gain or losses recorded in the profit and loss of the Company.

As a result of the remaining outstanding €250 million Senior Secured Notes and our $310 million of Senior Convertible Notes which have been on-lent to Polish Zloty operating companies, we are exposed to foreign exchange movements. Movements in the EUR/Polish Zloty and USD/Polish Zloty exchange rate will require us to revalue our liability accordingly, the impact of which will be reflected in the results of the Company’s operations.

In order to manage the cash flow impact of foreign exchange changes, the Company has entered into certain hedge agreements. As of March 31, 2008, the Company had outstanding a hedge contract for a seven year interest rate swap agreement hedging 250.2 million EUR of the Senior Secured Notes. The swap agreement exchanges a fixed Euro based coupon of 8%, with a variable Euro based coupon (IRS) based upon the 6 month Euribor rate plus a margin. Any changes in Euribor will result in a change in the interest expense. Each basis point move in Euribor will result in an increase or a decrease in annual interest expense of €25,020.

ITEM 4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934) refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Based upon the evaluation of the Company’s disclosure controls and procedures as of the end of the period covered by this report, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

Inherent Limitations in Internal Control over Financial Reporting. The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Further, the design of any control system is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Accordingly, the Company’s disclosure controls and procedures are designed to provide reasonable assurance that the controls and procedures will meet their objectives.

Changes to Internal Control over Financial Reporting. The Chief Executive Officer and the Chief Financial Officer conclude that, during the most recent fiscal quarter, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On March 11, 2008, the Company and certain of its affiliates entered into a Share Sale and Purchase Agreement and certain other agreements with White Horse Intervest Limited, a British Virgin Islands Company, and certain of White Horse’s affiliates, relating to the Company’s acquisition from White Horse of 85% of the share capital of Copecresto Enterprises Limited, a Cypriot company. In connection with this acquisition, the Company paid a consideration of $180,335,257 in cash and 2,238,806 shares of the Company’s common stock. The delivery of 250,000 shares of the Share Consideration and $15,000,000 of the Cash Consideration was deferred pending the consummation of certain of the Reorganization Transactions but ultimately the shares were issued on May 2, 2008.

The cash and share consideration described above was negotiated between the Company and White Horse in connection with the negotiation of the Share Sale and Purchase Agreement. The offering of the share consideration was made only to persons who are not “U.S. Persons” as defined in Rule 902 under Regulation S under the Securities Act of 1933, as amended. The share consideration has not been registered under the Securities Act or any state securities laws and may not be offered or sold in the United States in the absence of an effective registration statement or an exemption from the registration requirements of the Securities Act. The Company relied on the exemption from the registration requirements of the Securities Act set forth under Regulation S and the rules and regulations promulgated thereunder.

ITEM 6.

EXHIBITS

(a) Exhibits


Exhibit Number		Exhibit Description
3.1		Amended and Restated Certificate of Incorporation (Filed as Exhibit 3.1 to the Quarterly Report on Form 10-Q filed with the SEC on August 8, 2006 and incorporated herein by reference).

3.2		Amended and Restated Bylaws (filed as Exhibit 99.3 to the Periodic Report on Form 8-K filed with the SEC on May 3, 2006 and incorporated herein by reference).

10.1*		Facilities Agreement dated April 24, 2008 among Central European Distribution Corporation, Bols Sp. z o.o. and certain other subsidiaries of Central European Distribution Corporation, and Bank Zachodni WBK S.A. as lender.

31.1*		Certificate of the CEO pursuant to Rule 13a-15(e) or Rule 15d-15(e).

31.2*		Certificate of the CFO pursuant to Rule 13a-15(e) or Rule 15d-15(e).

32.1*		Certification of the CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification of the CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	CENTRAL EUROPEAN DISTRIBUTION CORPORATION
	(registrant)

Date: May 9, 2008	By:	/s/ William V. Carey
		William V. Carey
		President and Chief Executive Officer

Date: May 9, 2008	By:	/s/ Chris Biedermann
		Chris Biedermann
		Vice President and Chief Financial Officer

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents