-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GgN/KQ/ByzAkRRTNRKo8tIfB4VIDSf1CBishCYq/tVkNOK9UK3BM5YXgx+Tfjjyy /Yq1hxdc7OsTxFFonN3WTg== 0000928385-97-002056.txt : 19971217 0000928385-97-002056.hdr.sgml : 19971217 ACCESSION NUMBER: 0000928385-97-002056 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 21 FILED AS OF DATE: 19971216 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTRAL EUROPEAN DISTRIBUTION CORP CENTRAL INDEX KEY: 0001046880 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 541865271 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: SEC FILE NUMBER: 333-42387 FILM NUMBER: 97739330 BUSINESS ADDRESS: STREET 1: 211 NORTH UNION STREET CITY: ALEXANDRIA STATE: VA ZIP: 22314 MAIL ADDRESS: STREET 1: 211 NORTH UNION STREET CITY: ALEXANDRIA STATE: VA ZIP: 22314 SB-2 1 FORM SB-2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 16, 1997 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- CENTRAL EUROPEAN DISTRIBUTION CORPORATION (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER) DELAWARE 5182 54-1865271 (STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER) INCORPORATION OR ORGANIZATION) --------------- 211 NORTH UNION STREET, #100 UL. LUBELSKA 13 ALEXANDRIA, VIRGINIA 22314 03-802 WARSAW (703) 838-5568 POLAND (ADDRESS AND TELEPHONE NUMBER OF (ADDRESS OF PRINCIPAL PLACE OF PRINCIPAL EXECUTIVE OFFICES) BUSINESS OR INTENDED PRINCIPAL PLACE OF BUSINESS) --------------- WILLIAM V. CAREY CHAIRMAN AND CHIEF EXECUTIVE OFFICER CENTRAL EUROPEAN DISTRIBUTION CORPORATION 211 NORTH UNION STREET, #100 ALEXANDRIA, VIRGINIA 22314 (703) 838-5568 (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE) --------------- COPIES TO: STEVEN E. BALLEW, ESQ. MALCOLM I. ROSS, ESQ. JOSEPH G. CONNOLLY, JR., ESQ. BAKER & MCKENZIE HOGAN & HARTSON L.L.P. 805 THIRD AVENUE 555 THIRTEENTH STREET, N.W. NEW YORK, NEW YORK 10022 WASHINGTON, D.C. 20004 TEL: (212) 751-5700 TEL: (202) 637-5600 FAX: (212) 759-9133 FAX: (202) 637-5910 --------------- APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. --------------- If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the followng box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. [X] --------------- CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED PROPOSED MAXIMUM MAXIMUM AGGREGATE TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(1) REGISTRATION FEE - ------------------------------------------------------------------------------------------ Common Stock, par value $.01 per share.......... 1,322,500(2) $8.50 $11,241,250.00 $3,316.17 - ------------------------------------------------------------------------------------------ Redeemable Warrants...... 1,322,500 0.10 132,250.00 39.01 - ------------------------------------------------------------------------------------------ Common Stock par value, $.01 per share(3)....... 1,322,500 8.60 11,373,500.00 3,355.18 - ------------------------------------------------------------------------------------------ Unit Purchase Option(4)............... 115,000 0.0001 11.50 0.01 - ------------------------------------------------------------------------------------------ Common Stock, par value $.01 per share(5)....... 115,000 10.20 1,173,000.00 346.04 - ------------------------------------------------------------------------------------------ Nonredeemable Warrants(5)............. 115,000 0.12 13,800.00 4.07 - ------------------------------------------------------------------------------------------ Common Stock, per value $.01 per share(6)....... 115,000 8.60 989,000.00 291.76 - ------------------------------------------------------------------------------------------ Total(7)................ -- 24,922,811.00 $7,352.24
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Estimated solely for purposes of calculating the registration fee. (2) Includes 172,500 shares of Common Stock subject to the Underwriters' over- allotment options, the first 75,000 shares of which will be sold by the Selling Stockholders. (3) Issuable upon exercise of the Redeemable Warrants at a price equal to the offering price of the Common Stock and the Redeemable Warrants. (4) To be issued to the Underwriters. (5) Issuable upon exercise of the Underwriters' Unit Purchase Option at a price equal to 120% of the offering price of the Common Stock and the Redeemable Warrants. (6) Issuable upon exercise of the Nonredeemable Warrants underlying the Underwriters' Unit Purchase Option. (7) Pursuant to Rule 416, this registration statement also covers such indeterminable additional shares as may become issuable as a result of any future anti-dilution adjustments in accordance with the terms of the Unit Purchase Option and the Warrants as described in the Prospectus. --------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED DECEMBER 16, 1997 PROSPECTUS CENTRAL EUROPEAN DISTRIBUTION CORPORATION 1,150,000 SHARES OF COMMON STOCK 1,150,000 REDEEMABLE WARRANTS [LOGO] The securities offered hereby by Central European Distribution Corporation, a Delaware corporation (the "Company"), consist of 1,150,000 shares (the "Shares") of common stock, par value $.01 per share of the Company (the "Common Stock"), and 1,150,000 redeemable warrants (the "Warrants"), with one Warrant accompanying each share of Common Stock. The Shares and the Warrants are immediately separately transferable. Each Warrant entitles the holder to purchase, at an exercise price of $ (the aggregate initial Share and Warrant offering price) (subject to adjustment), one share of Common Stock, during the five year period commencing on the date of this Prospectus. The Warrants are subject to redemption by the Company commencing one year from the date of this Prospectus for $.05 per Warrant, on not less than 30 days' written notice, provided that the sales price of the Common Stock is at least $ (200% of the initial Share offering price) for 30 consecutive days ending on the day notice is given. Prior to this offering (the "Offering"), there has been no public market for the Company's securities, and there can be no assurance that such a market will develop. The initial public offering price of the Shares, which is estimated to be between $7.50 and $8.50, and the Warrants, which is estimated to be $0.10, and the exercise price and other terms of the Warrants have been determined by negotiation between the Company and Fine Equities Inc. and SouthWall Capital Corp. (the "Underwriters") and are not necessarily related to the Company's assets, book value, financial condition or any other recognized criteria of value. See "Underwriting." The Company has applied for quotation of the Common Stock and the Warrants on the Nasdaq SmallCap Market under the symbols "CEDC" and "CEDCW," respectively. THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK AND THE WARRANTS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
UNDERWRITING DISCOUNTS AND PROCEEDS TO PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2) - -------------------------------------------------------------------------------- Per Share........................... $ $ $ - -------------------------------------------------------------------------------- Per Warrant......................... $ $ $ - -------------------------------------------------------------------------------- Total(3).......................... $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Does not include additional compensation to be received by the Underwriters in the form of (i) a non-accountable expense allowance of $ (equal to 3% of the gross proceeds of the Offering), or $ per share of Common Stock ($ if the over-allotment option is exercised in full), (ii) unit purchase options (the "Unit Purchase Option") to purchase up to 115,000 Shares and 115,000 Warrants exercisable for a period of four years commencing one year from the date of this Prospectus at $ (120% of the aggregate initial Share and Warrant offering price) and (iii) a right of first refusal to act as underwriter or agent in connection with certain future offerings by the Company or its principal stockholders. The Company and the Selling Stockholders (as defined below) have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting estimated expenses of approximately $ payable by the Company, including the Underwriters' non-accountable expense allowance. (3) The Company has granted to the Underwriters a 45-day option to purchase up to an additional 97,500 shares of Common Stock and 172,500 Warrants on the same terms and conditions set forth above, solely to cover over-allotments, if any. The Selling Stockholders have granted to the Underwriters a 45-day option to purchase up to an additional 75,000 shares of the Common Stock at Price to Public less Underwriting Discounts and Commissions for the purpose of covering over-allotments, if any. If the Underwriters exercise such options, the first 75,000 shares will be sold by the Selling Stockholders. If such options are exercised in full, the total Price to Public, Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to Selling Stockholders will be $, $ , $ and $ , respectively. See "Principal and Selling Stockholders" and "Underwriting." The Shares and Warrants offered by this Prospectus are offered by the Underwriters subject to prior sale, to withdrawal, cancellation and modification of the offer without notice to, delivery to and acceptance by the Underwriters and to certain further conditions. It is expected that delivery of the certificates representing the Shares and Warrants will be made against payment therefor at the offices of Fine Equities, Inc., New York, New York, on or about , 1998. FINE EQUITIES, INC. SOUTHWALL CAPITAL CORP. The date of this Prospectus is , 1998 [GRAPHIC WITH BRAND TRADENAMES AND TRADEMARKS] The Company intends to furnish its stockholders with annual reports containing financial statements audited by its independent public accountants and will make available copies of quarterly reports for the first three quarters of each fiscal year containing unaudited financial information. All brand names or trademarks appearing in this Prospectus are the property of their respective holders. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AND THE WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." PROSPECTUS SUMMARY The following summary is qualified by, and should be read in conjunction with, the more detailed information and consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. Prospective investors should carefully consider the factors set forth herein under the caption "Risk Factors" and are urged to read this Prospectus in its entirety. Except as otherwise noted, all information in this Prospectus (i) reflects the completion of a reorganization (as defined in "The Reorganization") as of November 28, 1997 whereby Central European Distribution Corporation ("CEDC" or the "Company") became the new parent holding company of Carey Agri International Poland Sp. z o.o. ("Carey Agri"), (ii) assumes no exercise of the Underwriters' over-allotment option, the Unit Purchase Option, the Warrants or options granted under the Company's 1997 Stock Incentive Plan. As used in this Prospectus, unless the context otherwise requires, references to the "Company" means CEDC and its wholly owned subsidiary, Carey Agri. The Company prepares its consolidated financial statements in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") in U.S. Dollars. For the convenience of the reader, amounts in this Prospectus are expressed principally in U.S. Dollars. THE COMPANY The Company, formed in 1990, has become a leading importer and distributor of alcoholic beverages in Poland. The Company operates the largest nationwide next-day alcoholic beverage delivery service in Poland through its eight regional branch offices located in Poland's principal cities, including Warsaw, Crakow, Gdansk and Katowice. The Company currently distributes approximately 300 products in three categories: beer, spirits and wine. The Company imports and distributes eight international beers, including Guinness, Corona, Miller and Foster's, in addition to one domestically-produced beer. The Company currently distributes approximately 250 spirit products, including leading international brands of scotch, single malt and other whiskeys, rum, bourbon, vodkas, tequila, gins, brandy, cognacs, vermouths and specialty spirits, such as Jim Beam, Johnnie Walker, Ballantines, Smirnoff, Absolut, Finlandia, Bacardi, Gordon's London Dry and Tanqueray. In addition, the Company imports and distributes 45 wine products, including Sutter Home, Romanian Classics, Cinzano Asti, Martini Asti and Moet & Chandon. The Company's net sales for the nine-month period ended September 30, 1997 were approximately $27.5 million, as compared to $14.6 million for the nine-month period ended September 30, 1996, representing an increase of 89%. The Company distributes its products throughout Poland to approximately 3,000 outlets, including off-trade establishments, such as small businesses and multi-store retail outlets where alcoholic beverages are not consumed on premises, and on-trade locations, such as bars, nightclubs, hotels and restaurants, where such products are consumed on premises. The principal components of the Company's business strategy are as follows: EXPAND DISTRIBUTION CAPACITY. The Company plans to increase its distribution capacity by expanding the number of its branch offices in Poland through the acquisition of existing wholesalers, particularly in areas where the Company does not distribute directly. Cities currently under consideration are Lublin (1996 population--approximately 355,000), Lodz (1996 population--approximately 818,000) and Bialystok (1996 population--approximately 281,000). The Company will seek to acquire successful wholesalers which are involved in the vodka distribution business and are among the leading wholesalers in their region. The Company would then add its higher margin imported brands to complement and enhance the existing product portfolio. While the Company has identified potential wholesalers and has conducted exploratory talks about such acquisitions, it has not reached any definitive agreements regarding the terms and conditions of any such acquisition, including the purchase price to be paid to the sellers, and such acquisitions may not 1 be available to the Company on acceptable terms, if at all. In such case, the Company would seek to enter these markets with its own branch offices. INCREASE PRODUCT OFFERINGS. The Company plans to expand its strategic product offerings in Poland through the acquisition of a high quality wine importer which offers a wide selection of specialty wines and by entering into new supplier agreements to import additional products. The Company is in exploratory talks with such a wine importer, but no definitive agreement has been reached. The Company began importing Bulgarian red and white varietal wines in October 1997. The Company is also in exploratory talks with spirit producers to import additional spirit brands. ENTER RETAIL MARKET. The Company has implemented its retail business strategy in Warsaw, where one location has been leased, remodeled and is expected to open for business in mid-January, 1998. The Company believes that specialty retail sales of alcoholic beverages in Poland have yet to be developed. Currently, alcoholic beverages are sold in Poland through grocery stores, supermarkets, small shops and gas stations. These retail outlets sell, in general, fast moving items, primarily domestic beer and vodka, as well as a few of the more popular imported products, which are brands often imported by the Company. There are few stores that specialize in alcoholic beverages in Warsaw, a metropolitan area with a population of approximately 2.4 million. The Company also believes that high quality alcohol retail outlets will create an additional demand for the Company's current product portfolio, enhancing sales of products distributed, as well as provide a point of sale marketing opportunity for the Company's brands. The retail stores will stock additional products not currently distributed by the Company to complement the stores' appeal, such as cigars and other items associated with an alcohol retail outlet. The Company also intends to utilize the retail outlets as a training tool for its salesmen for product merchandising and promotions. In addition, the retail establishments will allow the Company's on-trade customers to have a supply point for immediate purchase at night and on Sundays when the Company's delivery system does not operate. ---------------- CEDC was incorporated in Delaware in September 1997 to facilitate this Offering. Its executive offices are located at 211 North Union Street, #100, Alexandria, Virginia 22314 and its telephone number is (703) 838-5568. The executive offices of Carey Agri are located at ul. Lubelska 13, 03-802 Warsaw, Poland and its telephone number is 48-22-618-0577. THE OFFERING Securities Offered.............. 1,150,000 Shares and 1,150,000 Warrants. Each Warrant entitles the holder to purchase one Share, at an exercise price of $ per Share (the aggregate initial Share and Warrant offering price), during the five year period commencing on the date of this Prospectus. The exercise price of the Warrants is subject to adjustment and the Warrants are subject to redemption in certain circumstances. See "Description of Securities--Warrants." Common Stock Outstanding........ Prior to this Offering--1,780,000 (1) After this Offering--2,930,000 (2)
2 Use of Proceeds............... Assuming an offering price of $8.00 per share of Common Stock (the midpoint of the estimated range specified on the cover page of the Prospectus) and $0.10 per Warrant, the net proceeds of the Offering are expected to be approximately $7.5 million. The Company intends to use approximately $2.0 million of the net proceeds to acquire existing wholesalers of alcoholic beverages, approximately $1.2 million to increase the number of brands distributed through the addition of new suppliers and the acquisition of existing importers and approximately $0.6 million to open retail stores. The Company intends to use net proceeds to retire bank financing (approximately $1.4 million as of November 30, 1997) and $0.9 million to purchase currently leased equipment. The remaining net proceeds of approximately $1.4 million will be used for general corporate purposes, including the purchase of computer upgrades and prepayments to suppliers in order to receive favorable discounts on both imported and Polish alcoholic beverages. See "Use of Proceeds." Risk Factors.................. This Offering involves a high degree of risk and immediate substantial dilution and should not be made by investors who cannot afford the loss of their entire investment. Proposed Nasdaq Symbols (3)... Common Stock--CEDC Warrants--CEDCW Dividend Policy............... The Company has never declared or paid any cash dividends on its capital stock. The Company does not anticipate paying cash dividends in the foreseeable future.
- -------- (1) Does not include 400,000 shares of Common Stock reserved for issuance in connection with the Company's 1997 Stock Incentive Plan (the "Plan"), of which options for 52,500 shares have been granted. See "Management-- Executive Compensation." (2) Does not include: (i) 97,500 shares of Common Stock issuable by the Company upon exercise of the Underwriters' over-allotment option or 172,500 shares of Common Stock underlying Warrants issuable upon exercise of the Underwriters' over-allotment option, (ii) 1,150,000 shares of Common Stock issuable upon exercise of the Warrants offered hereby, (iii) 230,000 shares of Common Stock issuable upon exercise of the Unit Purchase Option and the warrants included therein and (iv) 400,000 shares of Common Stock reserved for issuance under the Plan, of which options for 52,500 shares have been granted. See "Management--Executive Compensation" and "Underwriting." (3) There can be no assurance that an active trading market in the Company's securities will develop or, if developed, will be sustained. See "Risk Factors--Risks Related to the Offering--Possible Delisting of Securities from the Nasdaq Market." 3 SUMMARY CONSOLIDATED FINANCIAL DATA The following table sets forth summary consolidated financial data of the Company as of and for each of the two fiscal years in the period ended December 31, 1996, and as of and for the nine months ended September 30, 1996 and 1997. The statement of operations data for the years ended December 31, 1995 and 1996, and the balance sheet data as of December 31, 1995 and 1996 have been derived from the Company's consolidated financial statements, which were audited by Ernst & Young Audit Sp. z o.o., independent auditors. The statement of operations data for the nine months ended September 30, 1996 and 1997, and the "actual" balance sheet data as of September 30, 1997, are unaudited, but include, in the opinion of management, all adjustments considered necessary for a fair presentation of such data. The "as adjusted" balance sheet data as of September 30, 1997, is as described in note (2) below. The results for the nine months ended September 30, 1997 are not necessarily indicative of the results expected for the entire year. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto included elsewhere in this Prospectus.
YEAR ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------ ------------------------ 1995 1996 1996 1997 ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Net sales.................. $ 16,017 $ 23,942 $ 14,575 $ 27,499 Cost of goods sold......... 13,113 19,850 11,697 23,759 Sales, general and administrative expenses... 2,603 3,569 2,581 3,057 Operating income........... 301 523 297 683 Income before income taxes..................... 195 173 71 334 Net income................. 75 62 6 140 Net income per common share, primary and fully diluted (1)............... 0.04 0.03 0.00 0.08 OTHER FINANCIAL DATA: Bad debt expense to net sales ratio............... 0.21% 0.08% 0.08% 0.06%
DECEMBER 31, SEPTEMBER 30, 1997 ---------------------- ----------------------------- 1995 1996 ACTUAL AS ADJUSTED(2) ---------- ---------- ---------- ------------------ (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) BALANCE SHEET DATA: Cash........................ $ 339 $ 740 $ 240 $ 6,665 Current assets.............. 3,146 6,889 6,479 12,894 Total assets................ 3,264 7,335 7,165 13,328 Current liabilities......... 3,119 7,006 6,931 5,649 Long-term debt and capital lease obligations, less current portion............ 180 303 68 13 Stockholders' equity (deficit).................. (36) 26 166 7,666 Stockholders' equity (deficit) per common share...................... (0.02) 0.01 0.09 2.62
- -------- (1) Gives effect to the 1,780,000 shares issued in the Reorganization. See "The Reorganization." (2) Adjusted to give effect to the receipt of net proceeds of approximately $7.5 million from the sale of 1,150,000 shares of Common Stock offered hereby by the Company at the assumed initial public offering price of $8.00 (the midpoint of the estimated range specified on the cover page of this Prospectus) and 1,150,000 Warrants at $.10 per Warrant and assuming that a portion of the net proceeds would be used to prepay bank financing (approximately $1.4 million as of November 30, 1997) and to pay all accrued public offering costs. See "Use of Proceeds." 4 RISK FACTORS The Common Stock and Warrants offered hereby involve a high degree of risk. Prospective investors should consider carefully all the information contained in this Prospectus (including the consolidated financial statements and notes thereto) prior to purchasing Common Stock and Warrants in the Offering and in particular the factors set forth below under "--Risks Related to the Company,"""--Risks Related to Regulation," "--Risks Related to Investments in Poland and Emerging Markets" and "--Risks Related to the Offering." Prospective investors are cautioned that the statements in this Prospectus that are not historical facts may be forward-looking in nature and, accordingly, whether they prove to be accurate is subject to many risks and uncertainties. The actual results that the Company achieves may differ materially from any forward-looking statements in this Prospectus. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and those contained elsewhere in this Prospectus. RISKS RELATED TO THE COMPANY Limited Management Resources; Dependence on Key Persons The Company is relying on a small number of key individuals to implement its business and operations and, in particular, the services of William V. Carey, its Chairman, President and Chief Executive Officer, and Jeffrey Peterson, its Vice Chairman and Executive Vice President. Accordingly, the Company may not have sufficient managerial resources to successfully manage the increased business activity envisioned by its business strategy. In addition, the Company's future success depends in large part on the continued service of Messrs. Carey and Peterson. Mr. Carey has entered into a three-year employment agreement with the Company which commences on the closing of this Offering and which may be terminated by Mr. Carey only for "good reason," which includes CEDC's failure to perform its obligations under the agreement, or by CEDC for "cause," as defined, which includes Mr. Carey's willful refusal to follow written orders or willful engagement in conduct materially injurious to the Company or continued failure to perform his required duties. The Company has applied for a $2.5 million key man life insurance policy on the life of Mr. Carey. Mr. Peterson has entered into a two-year employment agreement with the Company which commences on the closing of this Offering and which may be terminated by CEDC, with or without cause, on three months' prior written notice. Mr. Peterson may terminate the employment agreement only for good reason. See "Management--Compensation Plans--Employment Agreements." The management of future growth will require, among other things, continued development of the Company's financial and management controls and management information systems, stringent control of costs, increased marketing activities, ability to attract and retain qualified management personnel and the training of new personnel. The Company is seeking to hire additional personnel, in particular a chief financial officer, in order to manage its growth and expansion. Failure to successfully hire such an officer and to manage its growth and development would have a material adverse effect on the Company's business, results of operations and financial condition. Nonexclusive, Short-Term Supply Contracts The Company has exclusive rights to distribute in Poland certain alcoholic beverages which during 1996 and the nine months ended September 30, 1997 constituted approximately $7.6 million and $7.5 million, respectively, or 31.7% and 27.0%, respectively, of its net sales. Furthermore, most of the Company's distribution agreements have a term of approximately one year, although many are automatically renewed unless one party gives notice of termination. Several of such agreements, however, can be terminated by one party without cause on relatively short notice. For example, the distribution agreements with respect to domestic vodka (which accounted for approximately 12.9% and 45.4% of the Company's net sales during 1996 and the nine months ended September 30, 1997, respectively) and products of International Drinks and Vintners (which accounted for approximately 5 17.1% and 11.0% of the Company's net sales during 1996 and the nine months ended September 30, 1997, respectively) can be terminated by either party on one month's notice and products distributed for United Distiller Finlandia Group ("United Distillers") (which accounted for approximately 15.1% and 12.9% of the Company's net sales during 1996 and the nine months ended September 30, 1997, respectively) can be terminated upon 90 days' notice. The termination of such agreements could have a material adverse effect on the business and operations of the Company. Risks Related to Acquisitions The Company's growth will depend in large part on its ability to acquire additional distributors, increase product offerings, manage expansion, control costs in its operations and consolidate effectively any acquisition into its existing operations and systems of management and financial controls. Unforeseen capital and operating expenses, or other difficulties, complications and delays frequently encountered in connection with the expansion and integration of acquired operations could inhibit the Company's growth. The full benefits of a significant acquisition will require the integration of operational, administrative, finance, sales and marketing organizations, as well as the coordination of common sales and marketing efforts and the implementation of appropriate operational, financial and management systems and controls. This effort will require substantial attention from the Company's senior management team. The diversion of management attention required by an acquisition could have an adverse effect on the net sales and operating results of the Company. There can be no assurance that the Company will identify suitable acquisition candidates, that acquisitions will be consummated on acceptable terms or that the Company will be able to successfully integrate the operations of any acquisition. The Company's ability to grow through the acquisition of additional companies will also be dependent upon the availability of capital to complete the acquisitions. The Company intends to finance acquisitions through a combination of the proceeds of the Offering, its available cash resources, bank borrowings and, in appropriate circumstances, the further issuance of equity and/or debt securities. Acquiring additional companies will have a significant effect on the Company's financial position, and could cause substantial fluctuations in the Company's quarterly and yearly operating results. Also, acquisitions could result in the recording of significant goodwill and intangible assets on the Company's financial statements, the amortization of which would reduce reported earnings in subsequent years. Dependence Upon Retailers The alcoholic beverages distributed by the Company in Poland have historically been sold to consumers by independent retailers. Accordingly, the Company is dependent on its independent retailers for the successful distribution of its products to the ultimate customer. The Company has no control over the independent retailers' operations, including such matters as retail price and marketing. One component of the Company's growth strategy is to enter the retail market. Implementation of this strategy may be construed by the Company's existing independent retailers as an effort to compete with them, which could adversely affect their relationship with the Company and cause them to decrease or cease their purchases of the Company's products. Limited Retail Experience One component of the Company's growth strategy is for the Company to enter the retail market for sales of alcoholic beverages. The Company has no prior significant retail experience, and, accordingly, is subject to the numerous risks of entering a new business. Such risks include, among others, unanticipated operating problems, lack of experience and significant competition from existing and new retailers. There can be no assurance that the Company will be able to conduct retail operations profitably. 6 Competition The brands of beer, spirits and wine distributed by the Company compete with other brands in each category, including some that the Company distributes. The Company expects this competition to increase as it adds more brands, as international drinks and brewery companies expand production and distribution in Poland, and as domestically produced products are distributed more efficiently. The Company competes with various regional distributors in all of its offices. This competition is particularly vigorous with respect to domestic vodka brands. Further, some of the international drink companies doing business in Poland, which import their own products but use the Company on a nonexclusive basis to distribute their products, could develop a nationwide distribution system, as could existing regional distributors, and may terminate their distribution arrangements with the Company. In addition, the international drinks companies with which the Company competes in the import segment of its business have substantially greater managerial, financial and other resources than the Company. See "Business--Competition." Dependence on Principal Suppliers United Distillers and International Drinks and Vintners alcoholic beverages accounted for 15.1% and 17.1%, respectively, of net sales in 1996, and for 12.9% and 11.0%, respectively, of net sales during the nine-month period ended September 30, 1997. United Distillers and Guinness are part of the same business enterprise, Guinness PLC, which has announced a proposed merger with International Drinks and Vintners. Alcoholic beverages purchased from these three companies accounted for 38.3% of the Company's net sales in 1996 and 27.8% during the nine-month period ended September 30, 1997. The termination of the Company's relationship with any of such entities could have a material adverse effect on the business and operations of the Company. Control By Existing Stockholders; Potential Anti-Takeover Provisions After completion of the Offering, and assuming no exercise of the Underwriters' over-allotment options, three of the Company's existing stockholders, William V. Carey, the William V. Carey Stock Trust, and Jeffrey Peterson, will own beneficially in the aggregate approximately 57.6% of the outstanding Common Stock. In the event that the Underwriters' over-allotment options are exercised in full, such stockholders will own beneficially in the aggregate approximately 53.5% of the outstanding Common Stock. As a result, these persons, acting together, will be able to elect all of the Company's directors and otherwise control the Company's operations. In addition, such concentration of ownership may have the effect of delaying or preventing transactions involving an actual or potential change in control of the Company, including transactions in which holders of Common Stock might receive a premium for their Common Stock over prevailing market prices. (Such stockholders as well as the estate of William O. Carey are referenced to herein as the "Selling Stockholders.") See "Principal and Selling Stockholders" and "Description of Securities." Certain provisions of CEDC's certificate of incorporation (the "Certificate of Incorporation") and bylaws (the "Bylaws") and of Delaware law could delay or make more difficult a merger, tender offer or proxy contest involving CEDC. These include Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years from the date the person became an interested stockholder unless certain conditions are met. The Certificate of Incorporation authorizes the issuance of 1.0 million shares of preferred stock, par value $.01 per share ("Preferred Stock"), on terms which may be fixed by CEDC's Board of Directors (the "Board of Directors") without further stockholder action. The terms of any series of Preferred Stock, which may include, among other things, priority claims to assets and dividends and special voting rights, could adversely affect the rights of holders of the Common Stock. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. 7 CEDC has no present plans to issue shares of Preferred Stock. In addition, the Certificate of Incorporation and Bylaws eliminate the right of stockholders to act by written consent without a meeting unless such written consent is unanimous, require advanced stockholder notice to nominate directors and raise matters at the annual stockholders' meeting, do not provide for cumulative voting in the election of directors, authorize the removal of directors only for cause by the affirmative vote of the holders of at least a majority of the outstanding shares of capital stock, require that at least 10% of the voting power of the issued and outstanding capital stock request a call of a special meeting before such a meeting can be called by the stockholders of CEDC, limit amendments to the Certificate of Incorporation to items that have been first proposed by the Board of Directors and thereafter approved by the affirmative vote of the holders of at least a majority (and in certain cases a supermajority) of the outstanding shares of capital stock and require at least a majority of the outstanding shares of capital stock for stockholders to amend the Bylaws. Finally, the acquisition of more than 10% of the outstanding voting stock of CEDC could require the approval of the Polish Office for Protection of Competition and Consumers (the "Anti-Monopoly Office"), provided that the total value of annual sales of the Company and the acquiror in the calendar year preceding the year of notification exceed 5.0 million ECU (approximately $5.7 million). See "--Risks Related to Regulation--Competition Law." All of the foregoing could have the effect of delaying, deferring or preventing a change in control of the Company and could limit the price that certain investors might be willing to pay in the future for shares of the Common Stock. See "Description of Securities." Holding Company Structure and Restrictions on Payment of Dividends CEDC is a holding company with limited assets of its own and conducts all of its business through its subsidiary, Carey Agri. The ability of CEDC to pay dividends on the Common Stock will be dependent upon either the cash flows and earnings of Carey Agri and the payments of funds by that subsidiary to CEDC in the form of repayment of loans, dividends or otherwise or CEDC's ability to otherwise realize economic benefits from its equity interests in its subsidiary. Carey Agri has no obligation, contingent or otherwise, to pay dividends to CEDC. The ability of Carey Agri to make payments to CEDC will be subject to, among other things, the availability of funds, as well as various business considerations and legal requirements. See "Dividend Policy." The transfer of equity interests in Carey Agri may be limited, due in part to regulatory and contractual restrictions. There can be no assurance of CEDC's ability to realize economic benefits through the sale of such equity interests. Accordingly, there can be no assurance that CEDC will receive dividend payments from its subsidiary, if at all, or other economic benefits from its equity interest in its subsidiary. No Intention to Pay Dividends Neither CEDC nor Carey Agri has ever declared or paid any dividends on its Common Stock, and the Company does not anticipate paying dividends in the foreseeable future. See "Dividend Policy." RISKS RELATED TO REGULATION Regulation of the Company's Business The importation and distribution of alcoholic beverages in Poland is subject to extensive regulation, requiring the Company to receive and renew various permits and licenses to import, warehouse, transport and sell alcoholic beverages. These permits and licenses often contain conditions with which the Company must comply in order to maintain the validity of such permits and licenses. The Company believes it is operating with all the licenses and permits material to its business, and the Company is not subject to any proceeding calling into question its operation in compliance with any licensing and permit requirements. 8 There can be no assurance that the various governmental regulations applicable to the alcoholic beverage industry will not be changed so as to impose more stringent requirements on the Company. If the Company were to fail to be in compliance with applicable governmental regulations or the conditions of the licenses and permits it receives, such failure could cause the Company's licenses and permits to be revoked and have a material adverse effect of the Company's business, results of operation and financial condition. Further, the applicable Polish governmental authorities, in particular the Minister of Economy, have articulated only general standards for issuance, renewal and termination of the licenses and permits which the Company needs to operate and, thus, such governmental authorities retain considerable discretionary authority in making such decisions. See "Regulation." Possibility of Increased Governmental Regulation The alcoholic beverage industry has become the subject of considerable societal and political attention generally in recent years due to increasing public concern over alcohol-related societal problems, including driving while intoxicated, underage drinking and health consequences from the abuse of alcohol. As an outgrowth of these concerns, the possibility exists for further regulation of the alcoholic beverage industry in Poland. If alcohol consumption in general were to come into disfavor among consumers in Poland, the Company's business operations could be materially adversely affected. Possible Increase in Governmental Taxation The import and sale of alcoholic beverages is a business that is highly regulated and subject to taxation in Poland. The Company's operations may be subject to increased taxation as compared with those of non-alcohol related businesses. In such case, the Company may have to raise prices on its imported products to maintain its profit margins. The actual effect on the Company's business operations of such an increase will depend on the amount of any such increase, general economic conditions and other factors, but could negatively impact sales of the products the Company distributes. See "Regulation--Import of Products" and "--Wholesale Activities." Customs Duties and Quotas As a general rule, the import of alcoholic beverages into Poland is subject to customs duties and the rates of the duties are set for particular types of products. The Minister of Economy is authorized to establish a schedule of quotas for alcoholic beverages for which the customs duties are substantially reduced. Customs quotas for alcoholic beverages are fixed annually, with the current quotas being applicable through December 31, 1997. There are no public guidelines on how the Minister of Economy has determined the current quotas or may determine future quotas. If such quotas were substantially reduced or eliminated, it would likely have an adverse impact on the Company's business operations since the retail price of its imported alcoholic beverages would likely increase. See "Regulation--Customs Duties and Quotas." Price and Margin Controls In general, Polish law does not regulate the prices charged or the margins earned by the Company on its imported liquor products. There are several sources of price and margin regulation, however, with regard to spirits produced in Poland, such as the domestic brand vodka distributed by the Company, which regulations have the effect of limiting the price which the Company is able to sell domestically produced spirits. See "Regulation--Price and Margin Controls" and "Business--Product Line--Spirits." 9 Competition Law Competition in Poland is governed by the Anti-Monopoly Act, which established the Anti-Monopoly Office to regulate monopolistic and other anti- competitive practices. The current body of Polish anti-monopoly law is not well-established. As a general rule, companies that obtain control of 40% or more of their market may face greater scrutiny from the Anti-Monopoly Office. Additionally, several types of reorganizations, mergers and acquisitions and undertakings between business entities, including acquisitions of stock, under circumstances specified in the Anti-Monopoly Act, require prior notification to the Anti-Monopoly Office. Sanctions for failure to notify include fines imposed on parties to the transaction and members of their governing bodies. Pursuant to the current interpretation of the Anti-Monopoly Office, transactions between non-Polish parties affecting market conditions in Poland may also require a notification to the Anti-Monopoly Office. According to the Anti-Monopoly Act, transactions made on a stock exchange do not require notification, but the Act does not stipulate whether this is applicable to stock exchanges outside Poland or only to those in Poland. Furthermore, the proposed draft Law on Public Trading in Securities, currently being debated by the Polish Parliament, provides for the amendment to the Anti-Monopoly Act to repeal the exemption of notification of transactions made on a stock exchange. There can be no assurance that the Anti-Monopoly Office will approve any future acquisition by the Company. RISK RELATED TO INVESTMENTS IN POLAND AND EMERGING MARKETS Political and Economic Environment; Enforcement of Foreign Judgments Poland has undergone significant political and economic change since 1989. Political, economic, social and other developments in Poland could in the future have a material adverse effect on the Company's business and operations. In particular, changes in laws or regulations (or in the interpretations of existing laws or regulations), whether caused by changes in the government of Poland or otherwise, could materially adversely affect the Company's business and operations. Currently there are no limitations on the repatriation of profits from Poland, but there can be no assurance that foreign exchange control restrictions, taxes or limitations will not be imposed or increased in the future with regard to repatriation of earnings and investments from Poland. If such exchange control restrictions, taxes or limitations are imposed, the ability of CEDC to receive dividends or other payments from Carey Agri, its Polish subsidiary, could be reduced, which may have a material adverse effect on the Company. Due to the many formalities required for compliance with the laws in Poland applicable to the Company's business and operations, the rapid changes that Polish laws and regulations have undergone in the 1990s, and numerous uncertainties regarding the interpretation of such laws and regulations, the Company may from time to time have violated, may be violating and may in the future violate, the requirements of certain Polish laws, including provisions of labor, foreign exchange, customs, tax and corporate laws and regulatory approvals. The Company does not believe that any such violations will have a material adverse effect upon the Company's business, results of operations or financial condition, but there can be no assurance that such will be the case. Poland is generally considered by international investors to be an emerging market. There can be no assurance that political, economic, social and other developments in other emerging markets will not have an adverse effect on the market value and liquidity of the Common Stock and Warrants. In general, investing in the securities of issuers with substantial operations in markets such as Poland involves a higher degree of risk than investing in the securities of issuers with substantial operations in the United States and other similar jurisdictions. CEDC is organized under the laws of the State of Delaware. Although purchasers of the Shares and Warrants will be able to effect service of process in the United States upon CEDC and may be able to effect service of process upon its directors, due to the fact that CEDC is primarily a holding 10 company which holds all of the outstanding securities of Carey Agri, substantially all of the assets of the Company are located outside the United States. As a result, it may not be possible for investors to enforce against the Company's assets judgments of United States courts predicated upon the civil liability provisions of United States laws. CEDC has been advised by its counsel that there is doubt as to the enforceability in Poland, in original actions or in actions for enforcement of judgments of U.S. courts, of civil liabilities predicated solely upon the laws of the United States. In addition, awards of punitive damages in actions brought in the United States or elsewhere may not be enforceable in Poland. Inflation; Currency Risk Since the fall of Communist rule in 1989, Poland has experienced high levels of inflation and significant fluctuations in the exchange rate for the zloty. The Polish government has adopted policies that slowed the annual rate of inflation from approximately 250% in 1990 to approximately 27% in 1995 and to approximately 18% in 1996. Inflational rates have continued to decrease in 1997. In addition, the exchange rate for the zloty has stabilized and the rate of devaluation of the zloty has decreased since 1991. However, the zloty exchange rate and rate of devaluation have increased in 1997. Inflation and currency exchange fluctuations have had, and may continue to have, an adverse effect on the financial condition and results of operations of the Company. Certain of the Company's operating expenses and capital expenditures are, and are expected to continue to be, denominated in or indexed to U.S. Dollars or other hard currencies. By contrast, substantially all of the Company's revenue is denominated in zloty. Any devaluation of the zloty against the U.S. Dollar that the Company is unable to offset through price adjustments will require the Company to use a larger portion of its revenue to service its U.S. Dollar-denominated obligations. While the Company may consider entering into transactions to hedge the risk of exchange rate fluctuations, it is unlikely that the Company will be able to obtain hedging arrangements on commercially satisfactory terms. Accordingly, shifts in currency exchange rates may have an adverse effect on the ability of the Company to service its U.S. Dollar denominated obligations and, thus, on the Company's financial condition and results of operations. RISKS RELATED TO THE OFFERING No Public Market for the Securities Prior to the Offering, there has not been any public market for the shares of Common Stock or the Warrants. Although the Company intends to seek quotation of the shares of Common Stock and the Warrants on the Nasdaq SmallCap Market, there can be no assurance that the Company will be successful in its efforts, and even if the Company is successful, there can be no assurance that an active trading market will develop or be sustained after the Offering. Arbitrary Determination of Offering Price; Possible Volatility of Stock Price The initial public offering price of the Common Stock and the Warrants and the terms of the Warrants will be determined by negotiation between the Company and the Underwriters and will not necessarily be related to the Company's asset value, net worth, results of operations or any other criteria of value and may not be indicative of the prices of the Common Stock and the Warrants that may prevail in the public market after the Offering. Subsequent to the Offering, prices for the Common Stock and the Warrants will be determined by the market and may be influenced by a number of factors, including the depth and liquidity of the market for the Common Stock and the Warrants, investor perception of the Company and other comparable companies and general economic and other conditions. 11 Immediate and Substantial Dilution The initial public offering price is substantially higher than the net tangible book value of the Company's outstanding Common Stock at September 30, 1997. Purchasers of shares of Common Stock in the Offering will therefore experience immediate and substantial dilution in net tangible book value per share, and existing stockholders will receive a material increase in the tangible book value per share of their shares of Common Stock. Assuming an initial public offering price of $8.00 per share (the midpoint of the range specified on the front cover of the Prospectus) and $0.10 per Warrant, the immediate dilution to new investors would be $5.38 per share. See "Dilution." Outstanding Warrants and Options Upon completion of the Offering, the Company will have issued 1,150,000 Warrants and Unit Purchase Options to purchase up to 115,000 shares of Common Stock and 115,000 Warrants. In addition, the Company has 400,000 shares of Common Stock reserved for issuance under the Plan, under which options to purchase 52,500 shares have been granted. Holders of such warrants and options are likely to exercise them when, in all likelihood, the Company could obtain additional capital on terms more favorable than those provided by the warrants and options. Further, while these warrants and options are outstanding, the Company's ability to obtain additional financing on favorable terms may be adversely affected. See "Management--1997 Stock Incentive Plan," "Description of Securities" and "Underwriting." Underwriters' Possible Ability to Dominate or Influence the Market for the Company's Securities A significant amount of the Common Stock and the Warrants offered hereby may be sold to customers of the Underwriters. This may adversely affect the market for and liquidity of the Common Stock and the Warrants if additional broker/dealers do not make a market in the Common Stock and the Warrants. Although they have no legal obligation to do so, the Underwriters may from time to time act as a market maker and otherwise effect transactions in the Common Stock and the Warrants. The Company cannot ensure that other broker/dealers besides the Underwriters will make a market in the Common Stock and the Warrants. In the event that other broker/dealers fail to make a market in the Common Stock and the Warrants, the possibility exists that the market for, and liquidity of, the Common Stock and the Warrants could be adversely affected, which in turn could affect stockholders' ability to trade the Common Stock and the Warrants. Possible Delisting of Securities from the Nasdaq Market While the Company's Common Stock and Warrants meet the current Nasdaq listing requirements and are expected to be initially quoted on the Nasdaq SmallCap Market, there can be no assurance that the Company will meet the criteria for continued listing. Continued inclusion on Nasdaq generally requires that (i) the Company maintain at least $2.0 million in net tangible assets or $35.0 million in market capitalization or $500,000 in net income (in the latest fiscal year or two of the last three fiscal years), (ii) the minimum bid price of the Common Stock be $1.00 per share (iii) there be at least 500,000 shares in the public float valued at $1,000,000 or more, (iv) the Common Stock have at least two active markets markers and (v) the Common Stock be held by at least 300 holders, each with 100 shares or more. In addition, to maintain its Nasdaq listing, the Company must adopt certain corporate governance requirements, such as the distribution of annual and interim reports, have a minimum of two independent directors serving on its Board of Directors, establish an audit committee with a majority of independent directors, and hold an annual stockholders' meeting. If the Company is unable to satisfy Nasdaq's maintenance requirements, the shares of Common Stock and the Warrants may be delisted from Nasdaq. In such event, trading, if any, in the Common 12 Stock and the Warrants would thereafter be conducted in the over-the-counter market in the so called "pink sheets" or the National Association of Securities Dealers' "Electronic Bulletin Board." Consequently, the liquidity of the Common Stock and the Warrants could be impaired, not only in the number of shares which could be bought and sold, but also through delays in the timing of transactions, and reduction in security analysts' and the news media's coverage, if any, of the Company. As a result, prices for shares of the Common Stock and the Warrants may be lower than might otherwise be attained. Risks of Low-Priced Stock If the Company's Common Stock and Warrants were delisted from the Nasdaq SmallCap Market (see previous risk factor), they could become subject to Rule 15g-9 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which imposes additional sales practice requirements on broker-dealers which sell such securities to persons other than established customers and "accredited investors" (generally, individuals with net worths in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouses). For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. Consequently, such rule may adversely affect the ability of broker-dealers to sell the Common Stock and the Warrants and may adversely affect the ability of purchasers in this Offering to sell any of the Common Stock and the Warrants acquired hereby in the secondary market. Securities and Exchange Commission ("SEC") regulations define a "penny stock" to be any equity security not listed on a national securities exchange or Nasdaq that has a market price (as therein defined) of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. The foregoing required penny stock restrictions will not apply to the Company's Common Stock and Warrants if such securities are listed on the Nasdaq SmallCap Market and have certain price and volume information provided on a current and continuing basis or meet certain minimum net tangible assets or average revenue criteria. There can be no assurance that the Company's Common Stock and Warrants will qualify for exemption from these restrictions. In any event, even if the Company's Common Stock and Warrants were exempt from such restrictions, it would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to prohibit any person that is engaged in unlawful conduct while participating in a distribution of a penny stock from associating with a broker-dealer or participating in a distribution of a penny stock, if the SEC finds that such a restriction would be in the public interest. If the Company's Common Stock and Warrants were subject to the rules on penny stocks, the market liquidity for the Company's Common Stock and Warrants could be severely adversely affected. Broad Discretion Over Use of Proceeds; Unspecified Acquisitions Because of the variability and number of factors that will determine the Company's use of proceeds from this Offering, the Company's management will retain a significant amount of discretion over the application of the net proceeds. Until the Company utilizes the net proceeds of the Offering, such funds will be invested in the United States in investment grade securities. Although the Company currently has no agreements or understandings to enter into any potential business combination, it does intend to actively seek and investigate such opportunities as they become available. The 13 Company may use a portion of the net proceeds from this Offering to finance such acquisitions. See "Use of Proceeds." Use of Proceeds to Benefit Insiders The Company intends to use net proceeds to prepay outstanding bank financing (approximately $1.4 million as of November 30, 1997), of which approximately $0.5 million has been personally guaranteed by Messrs. Carey and Peterson, each of whom is an executive officer, director and principal stockholder of the Company. Upon repayment of such indebtedness, each of such persons will be released from such guarantees. See "Use of Proceeds." Limited Offering Experience of Underwriters Fine Equities, Inc. and SouthWall Capital Corp. have been engaged in business since August 1995 and May 1996, respectively. Prior to this Offering, Fine Equities, Inc. has acted as an underwriter in one other offering of securities and has not acted as co-manager in any other offering of securities, and SouthWall Capital Corp. has only co-managed one other offering of securities and has acted as an underwriter in several other offerings. There can be no assurance that the Underwriters' limited offering experience and small size relative to other broker-dealers will not adversely affect this Offering or the subsequent development, if any, of a trading market for the Common Stock and Warrants. See "Underwriting." Possible Restrictions on Market-Making Activities in the Company's Securities The Underwriters have advised the Company that they intend to make a market in the Company's securities. Regulation M promulgated by the SEC under the Exchange Act may prohibit the Underwriters from engaging in any market making activities with regard to the Company's securities for the period from nine business days (or such other applicable period as Regulation M may provide) prior to any solicitation by the Underwriters of the exercise of Warrants until the later of the termination of such solicitation activity or the termination (by waiver or otherwise) of any right that the Underwriters may have to receive a fee for the exercise of Warrants following such solicitation. As a result, the Underwriters may be unable to provide a market for the Company's securities during certain periods while the Warrants are exercisable. Any temporary cessation of such market-making activities could have an adverse effect on the market price of the Company's securities. Potential Adverse Effect of Redemption of the Warrants During the four-year period commencing one year from the date of this Prospectus, the Warrants may be redeemed by the Company at a redemption price of $.05 per Warrant upon not less than 30 days' notice provided the sales price of the Common Stock is at least $ (which is 200% of the initial Share offering price) for 30 consecutive days ending on the date of notice of redemption. Redemption of the Warrants could force the holders to exercise the Warrants and pay the exercise price therefor at a time when it may be disadvantageous for the holders to do so, to sell the Warrants at the then current market price (which will likely be adversely affected by the impending redemption of the Warrants) when they might otherwise wish to hold the Warrants or to accept the redemption price, which, at the time the Warrants are called for redemption, is likely to be substantially less than the market value of the Warrants. See "Description of Securities--Warrants." Current Prospectus and State Registration Required to Exercise Warrants Holders of the Warrants will only be able to exercise the Warrants if (i) a current prospectus under the Securities Act of 1933, as amended (the "Securities Act") relating to the securities underlying the Warrants is then in effect and (ii) such securities are qualified for sale or exempt from qualification 14 under the applicable securities laws of the states in which the various holders of Warrants reside. Although the Company has undertaken to use its best efforts to maintain the effectiveness of a current prospectus covering the securities underlying the Warrants, there can be no assurance that the Company will be able to do so. There also can be no assurance that exemptions from the registration or qualification requirements of those states in which the Company's securities are not currently registered or qualified will be available at the time a Warrant holder wishes to exercise his or her Warrant. The value of the Warrants may be greatly reduced if a current prospectus, covering the securities issuable upon the exercise of the Warrants, is not kept effective or if such securities are not qualified, or exempt from qualification, in the states in which the holders of Warrants reside. See "Description of Securities--Warrants." Shares Eligible for Future Sale Future sales of Common Stock by existing stockholders pursuant to Rule 144 ("Rule 144") under the Securities Act or otherwise could have an adverse effect on the price of the Common Stock. Upon completion of the Offering, the Company will have 2,930,000 shares of Common Stock outstanding, including 1,150,000 shares of Common Stock offered hereby (without giving effect to 97,500 shares of Common Stock which may be issued by the Company upon exercise of the Underwriters' over-allotment option). The shares of Common Stock and Warrants offered hereby will be freely tradable without restriction or further registration under the Securities Act by persons other than "affiliates" of the Company within the meaning of Rule 144 promulgated under the Securities Act. In general, under Rule 144, a person (or persons whose shares are required to be aggregated) who has been deemed to have beneficially owned shares for at least one year, including an "affiliate", is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of 1% of the then outstanding number of shares of common stock or the average weekly trading volume in the shares of common stock during the four calendar weeks preceding the filing of the required notice of such sale. A person (or persons whose shares are required to be aggregated) who is not deemed to have been an affiliate of the Company during the three months preceding a sale, and who has beneficially owned shares within the definition of "restricted securities" under Rule 144 for at least two years is entitled to sell such shares under Rule 144(k) without regard to the volume limitation, manner of sale provisions, notice requirements or public information requirements of Rule 144. Affiliates continue to be subject to such limitations. The Company's directors and executive officers and principal stockholders do not own any shares of the Common Stock currently eligible for sale under Rule 144. Further, such persons have agreed with the Underwriters that they will not, for a 24-month period after the completion of the Offering, without the prior written consent of the Underwriters, offer, sell, contract to sell, or otherwise dispose of, any shares of Common Stock or any securities convertible into, or exchangeable for, shares of Common Stock. THE REORGANIZATION Before the Offering, all the holders of the shares of Carey Agri's common stock and CEDC entered into a contribution agreement dated as of November 28, 1997 (the "Contribution Agreement"). Pursuant to the Contribution Agreement, the holders of shares of Carey Agri's common stock transferred all their shares of Carey Agri common stock to CEDC receiving an aggregate of 1,780,000 shares of Common Stock in return (the "Share Exchange"). This transfer was designed to qualify as a tax-free exchange under section 351 of the Internal Revenue Code of 1986, as amended (the "Code"). As a result of the Share Exchange, Carey Agri became a wholly owned subsidiary of CEDC. The Share Exchange and the resulting corporate structure in which Carey Agri became a wholly owned subsidiary of CEDC is referred to herein as the "Reorganization." 15 USE OF PROCEEDS Assuming an offering price of $8.00 per share of Common Stock (the midpoint of the estimated range specified on the cover page of the Prospectus) and $0.10 per Warrant, the net proceeds from the sale of the Common Stock and Warrants are expected to be approximately $7.5 million (after deducting the underwriting discounts, the Underwriters' non-accountable expense allowance and other estimated expenses of the Offering). Of the net proceeds, approximately $2.0 million is expected to be used by the Company to acquire existing wholesale distributors of alcoholic beverages, particularly in markets in Poland where the Company does not distribute directly, approximately $1.2 million to increase the number of brands distributed by the addition of new suppliers and the acquisition of existing importers, and approximately $0.6 million to open retail stores. See "Business--Business Strategy." Although the Company currently has no agreements or understandings to enter any potential business combination, it does intend to actively seek and investigate such opportunities as they become available. The Company may use a portion of the net proceeds from this Offering to finance such acquisitions. The Company also intends to use $1.4 million of the net proceeds to prepay its expected level of bank financing (approximately $1.4 million as of November 30, 1997) and $0.9 million to purchase equipment, primarily vehicles. For the anticipated effects on the Company's operations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Overview." The remaining net proceeds of approximately $1.4 million will be used for general corporate purposes. Such purposes include computer upgrades for interoffice financial and administrative controls, the purchase of scanner equipment for warehouse operations, and prepayments to suppliers in order to receive favorable discounts on both imported and domestic alcoholic beverages. Because of the variability and number of factors that will determine the Company's use of proceeds from this Offering, the Company's management will retain a significant amount of discretion over the application of the net proceeds. Until the Company utilizes the net proceeds of the Offering, such funds will be invested in the United States in investment grade securities. The foregoing represents the Company's best estimate of the allocation of the net proceeds of the Offering based on the current status of its business. Future events, including changes in competitive conditions, the ability of the Company to identify appropriate acquisition candidates, the availability of other financing and funds generated from operations and the status of the Company's business from time to time, may make changes in the allocation of the net proceeds of this Offering necessary or desirable. DIVIDEND POLICY Neither CEDC nor Carey Agri has ever declared or paid any dividends on its capital stock. CEDC does not anticipate paying dividends in the foreseeable future. Future dividends, if any, will be subject to the discretion of CEDC's Board of Directors and will depend upon, among other things, the results of CEDC's operations, and CEDC's capital requirements and surplus, general financial condition, contractual restrictions and such other factors as the Board of Directors may deem relevant. In addition, CEDC is a holding company with no business operations of its own. Therefore, the ability of CEDC to pay dividends will be dependent upon either the cash flows and earnings of Carey Agri and the payments of funds by that subsidiary to CEDC. As a Polish limited liability company, Carey Agri is permitted to declare dividends only once a year from its retained earnings, computed under Polish Accounting Regulations after the audited financial statements for that year have been provided to and approved by shareholders and filed with a court. As of September 30, 1997, Carey Agri had available $8,000 which could be declared in dividends. 16 DILUTION The net tangible book value of the Company as of September 30, 1997 was $166,000 or approximately $0.09 per share of Common Stock, as adjusted to account for the Reorganization. Net tangible book value per share represents the amount of tangible assets of the Company less the amount of its liabilities divided by the number of shares of Common Stock outstanding. After giving effect to the sale by the Company of 1,150,000 of shares of Common Stock offered hereby at an assumed price of $8.00 per share (the midpoint of the range specified on the cover page of the Prospectus) and 1,150,000 Warrants at an assumed price of $.10 per Warrant and the application of the estimated net proceeds therefrom as set forth under "Use of Proceeds," the pro forma net tangible book value of the Company as of September 30, 1997 would have been approximately $7,666,000, or $2.62 per share of Common Stock. This represents an immediate increase in net tangible book value of $2.53 per share to the existing stockholders and an immediate dilution of $5.38 per share to persons purchasing shares of Common Stock and Warrants in this Offering. The following table illustrates this per share dilution: Assumed initial public offering price per share of Common Stock (the midpoint of the range specified on the cover of the Prospectus).................................................... $8.00 Net tangible book value per share of Common Stock at September 30, 1997........................................... $0.09 Increase in net tangible book value per share of Common Stock attributable to new investors................................ 2.53 ----- Pro forma net tangible book value per share of Common Stock after the Offering............................................. 2.62 ----- Dilution per share of Common Stock to new investors............. $5.38 =====
In the event that the Underwriters' over-allotment options are exercised in full, the pro forma net tangible book value of the Company after the Offering would be $2.70 per share of Common Stock, the immediate increase in pro forma net tangible book value of shares of Common Stock owned by the existing stockholders would be $2.61 per share and the immediate dilution to new investors would be $5.30 per share. The following table summarizes the difference between existing stockholders and new investors with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price paid per share of Common Stock based on an assumed initial public offering price of $8.00 per share (the midpoint of the estimated range specified on the cover page of the Prospectus).
SHARES PURCHASED TOTAL CONSIDERATION ----------------------- --------------------- AVERAGE PRICE NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE --------- ---------- ---------- ---------- ------------- Existing Stockholders... 1,780,000(1) 61 166,000 2 0.09 New Investors........... 1,150,000 39% $9,200,000 98% $8.00 --------- --- ---------- --- Total.................. 2,930,000(2) 100% $9,366,000 100% ========= === ========== ===
- -------- (1) Does not include the sale by the Selling Stockholders of up to 75,000 shares of Common Stock in the Offering as the initial shares sold upon exercise of the Underwriters' over-allotment option. (2) Excludes (i) 97,500 shares of Common Stock and 172,500 shares of Common Stock underlying warrants that the Underwriters have the option to purchase from the Company to cover over-allotments, if any, (ii) 1,150,000 shares of Common Stock issuable upon the conversion of the Warrants, (iii) 230,000 shares of Common Stock to be issued upon the exercise of the Unit Purchase Option and the warrants included therein, and (iv) 400,000 shares of Common Stock reserved of issuance under the Plan, under which options to purchase 52,500 shares have been granted and are outstanding. See "Management--1997 Stock Incentive Plan" and "Underwriting." 17 EXCHANGE RATE DATA In this Prospectus, references to "U.S. Dollars" or "$" are to the lawful currency of the United States, and references to "zloty" or "PLN" are to the lawful currency of the Republic of Poland. The Company prepares its consolidated financial statements in accordance with U.S. GAAP in U.S. Dollars. Amounts originally measured in zloty for all periods presented have been translated into U.S. Dollars in accordance with the methodology set forth in Statement of Financial Accounting Standards No. 52 ("SFAS No. 52"), including provisions applicable to companies operating in hyper-inflationary countries. For the convenience of the reader, this Prospectus contains conversion of certain zloty amounts into U.S. Dollars which should not be construed as a representation that such zloty amounts actually represent such U.S. Dollars amounts or could be, or could have been, converted into U.S. Dollars at the rates indicated or at any other rate. Unless otherwise stated, such U.S. Dollar amounts have been derived by converting from zloty to U.S. Dollars at historic rates of exchange for the applicable periods. The following table sets forth, for the periods indicated, the noon exchange rate (expressed in current zloty) quoted by the National Bank of Poland. Such rates are set forth as zloty per U.S. Dollar. At December 11, 1997, such rate was PLN 3.54 = $1.00.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------ ------------- 1992 1993 1994 1995 1996 1996 1997 ---- ---- ---- ---- ---- ------ ------ Exchange rate at end of period......... 1.58 2.13 2.44 2.47 2.88 2.81 3.42 Average exchange rate during period (1)............................ 1.39 1.81 2.27 2.42 2.70 2.65 3.21 Highest exchange rate during period.... 1.58 2.13 2.45 2.54 2.88 2.81 3.55 Lowest exchange rate during period..... 1.10 1.58 2.13 2.32 2.47 2.47 2.86
- -------- (1) The average of the exchange rates on the last day of each month during the applicable period. 18 CAPITALIZATION The following table sets forth, as of September 30, 1997, the capitalization of the Company and the capitalization of the Company as adjusted for the Offering (at an assumed initial public offering price of $8.00 per share of Common Stock (the mid-point of the estimated range as specified on the cover page of this Prospectus) and $0.10 per Warrant), including application of a portion of the net proceeds therefrom to prepay bank financing as set forth under "Use of Proceeds." This table should be read in conjunction with the consolidated financial statements of the Company, the notes thereto and the other financial data included elsewhere in this Prospectus.
SEPTEMBER 30, 1997 ------------------------- ADJUSTED AS HISTORICAL(1) ADJUSTED(2) ------------- ----------- (IN THOUSANDS) Long-term debt, less current maturities.............. $ 55 $ 0 ===== ======= Capital lease obligations, less current portion...... 13 13 ===== ======= Stockholders' equity: Preferred Stock, $.01 par value, 1,000,000 shares authorized; no shares issued and outstanding...... -- -- Common Stock, $.01 par value, 20,000,000 shares au- thorized; 1,780,000 shares issued and outstanding; 2,930,000 shares to be issued and outstanding (as adjusted)(2)...................................... 18 29 Additional paid in capital........................... 36 7,410 Warrants to acquire Common Stock..................... -- 115 Retained earnings.................................... 112 112 ----- ------- Total stockholders' equity......................... 166 7,666 ===== ======= Total capitalization............................... $ 234 $ 7,679 ===== =======
- -------- (1) Adjusted to give effect to the Reorganization. See "The Reorganization." (2) Excludes (i) 97,500 shares of Common Stock and 172,500 shares of Common Stock underlying warrants that the Underwriters have the option to purchase from the Company to cover over-allotments, if any, (ii) 1,150,000 shares of Common Stock issuable upon the conversion of the Warrants, (iii) 230,000 shares of Common Stock to be issued upon the exercise of the Unit Purchase Option and the Warrants included therein, and (iv) 400,000 shares of Common Stock reserved of issuance under the Plan, under which options to purchase 52,500 shares have been granted and are outstanding. See "Management--1997 Stock Incentive Plan" and "Underwriting." 19 SELECTED CONSOLIDATED FINANCIAL DATA The following tables set forth selected consolidated financial data of the Company as of and for each of the two fiscal years in the period ended December 31, 1996, and as of and for the nine months ended September 30, 1996 and 1997. The income statement data for the years ended December 31, 1995 and 1996, and the balance sheet data as of December 31, 1995 and 1996 have been derived from the Company's consolidated financial statements, which were audited by Ernst & Young Audit Sp. z o.o., independent auditors. The income statement data for the nine months ended September 30, 1996 and 1997, and the balance sheet data as of September 30, 1996 and 1997, are unaudited, but include, in the opinion of management, all adjustments considered necessary for a fair presentation of such data. The results for the nine months ended September 30, 1997 are not necessarily indicative of the results expected for the entire year. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------- ---------------------- 1995 1996 1996 1997 ------------ ------------ --------- --------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) INCOME STATEMENT DATA: Net sales............... $ 16,017 $ 23,942 $ 14,575 $ 27,499 Cost of goods sold...... 13,113 19,850 11,697 23,759 ------------ ------------ --------- --------- Gross profit............ 2,904 4,092 2,878 3,740 Sales, general and administrative expenses............... 2,603 3,569 2,581 3,057 ------------ ------------ --------- --------- Operating income........ 301 523 297 683 Non-operating income (expense) Interest expense...... (106) (124) (83) (106) Realized and unrealized foreign currency transaction gains and losses, net.................. (84) (232) (231) (278) Other income, net..... 84 6 88 35 ------------ ------------ --------- --------- Income before income taxes.................. 195 173 71 334 Income taxes............ (120) (111) (65) (194) ------------ ------------ --------- --------- Net income.............. $ 75 $ 62 $ 6 $ 140 ============ ============ ========= ========= Net income per common share, primary and fully diluted.......... $ 0.04(1) $ 0.03(1) $ 0.00(1) $ 0.08(1) ============ ============ ========= ========= OTHER FINANCIAL DATA: Bad debt expense to net sales ratio............ 0.21% 0.08% 0.08% 0.07% DECEMBER 31, SEPTEMBER 30, ---------------------------- ---------------------- 1995 1996 1996 1997 ------------ ------------ --------- --------- (IN THOUSANDS) BALANCE SHEET DATA: Cash.................... $ 339 $ 740 $ 642 $ 240 Current assets.......... 3,146 6,889 3,857 6,479 Total assets............ 3,264 7,335 4,486 7,165 Current liabilities..... 3,119 7,006 4,323 6,931 Long-term debt and capital lease obligations, less current portion........ 180 303 193 68 Stockholders' equity (deficit).............. (36) 26 (30) 166
- -------- (1) Gives effect to the 1,780,000 shares of Common Stock issued in the Reorganization. See "The Reorganization." 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and the notes thereto appearing elsewhere in this Prospectus. OVERVIEW The Company's operating results are generally determined by the volume of alcoholic beverages that can be sold by the Company through its national distribution system, the gross profits on such sales, and control of costs. The Company's bad debt ratio provision as a percentage of sales was 0.21% of net sales in 1995 and 0.08% in 1996. No significant bad debt expense has been incurred during the nine months ended September 30, 1996 and 1997. The following comments regarding variations in operating results should be read considering the rates of inflation in Poland during the period--1995, 21.6%; 1996, 18.5%; and the nine months ended September 30, 1997, 8.5%--as well as the devaluation of the Polish zloty compared to the U.S. Dollar, which was 1.2%, 16.6%, and 18.8% in 1995, 1996 and the nine months ended September 30, 1997, respectively. RESULTS OF OPERATIONS Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30, 1996 Net sales increased $12.92 million, or 88.7%, from $14.58 million in 1996 to $27.50 million in 1997. This increase is mainly due to the continued increase in sales of vodka produced in Poland, the addition of Seagrams and Allied Domecq products in January 1997, and increased market penetration by the existing distribution system resulting in new clients. Costs of goods sold increased $12.06 million, or 103.1%, from $11.70 million in 1996 to $23.76 million in 1997. This increase is mainly due to the increase in net sales noted above. As a percentage of net sales, cost of goods sold increased 80.3% in 1996 to 86.4% in 1997. The higher cost factor results from increases in sales of domestically produced vodka, which has a lower gross profit margin than the imported brands the Company distributes. Sales, general and administrative expenses increased $476,000, or 18.4%, from $2.58 million in 1996 to $3.06 million in 1997. This increase is mainly due to the increase in net sales discussed above. As a percentage of sales, sales, general, and administrative expenses decreased from 17.7% in 1996 to 11.1% in 1997. Increased sales levels result, to some extent, in improved utilization of personnel and capacity without a corresponding increase in sales, general and administrative expense. Interest expense increased $23,000, or 55.4%, from $83,000 in 1996 to $106,000 in 1997. This increase reflects the effects of additional short term credit lines utilized to support the sales volume increases. As a percentage of sales, interest expense decreased from 0.6% in 1996 to 0.4% in 1997. Net realized and unrealized foreign currency transaction losses increased $47,000, or 20.3%, from $231,000 in 1996 to $278,000 in 1997. The increase is mainly due to the continued strength of the U.S. Dollar versus the Polish zloty and the larger inventory, which is denominated in foreign currency, needed to support the increase in sales as discussed above. As a percentage of sales, realized and unrealized foreign currency transaction losses decreased from 1.6% in 1996 to 1.0% in 1997. Other income decreased $53,000 from $88,000 in 1996 to $35,000 in 1997. Income taxes increased $129,000, or 198.5%, from $65,000 in 1996 to $194,000 in 1997. This increase is mainly due to the increase in income before income taxes from $71,000 in 1996 to $334,000 in 1997. The effective tax rate was 91.5% in 1996 and 58.1% in 1997. This decrease in 21 effective tax rates is due mainly to the effect of permanent differences between financial and taxable income and the higher pre-tax income level. See notes to the consolidated financial statements for further information on income taxes. Net income increased $134,000 from $6,000 in 1996 to net income of $140,000 in 1997. This improvement is a result of the factors discussed above. Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 Net sales increased $7.92 million, or 49.5%, from $16.02 million in 1995 to $23.94 million in 1996. This increase is due to several factors including increasing the portfolio of imported brands offered to existing customers; opening the eighth branch office in Poznan, thereby gaining a new distribution territory from March 1996; introducing domestically produced vodka into the Warsaw, Cracow, and Szczecin offices in October 1996; and further penetration of local markets by the existing distribution network which resulted in an approximately 30% increase of the Company's customer base. Costs of goods sold increased $6.74 million, or 51.4%, from $13.11 million in 1995 to $19.85 million in 1996. This increase is mainly due to the increasing net sales noted above. As a percentage of net sales, costs of goods sold increased from 81.9% in 1995 to 82.9% in 1996. This small increase is mainly due to the introduction of Polish vodka in late 1996 which sells at a lower gross margin than the Company's imported alcohol products. Sales, general and administrative expense increased 37.1% from $2.60 million in 1995 to $3.57 million in 1996. This increase was mainly due to an increase in sales which required additional marketing campaigns, the hiring and training of additional staff, increased transport capability, and the restructuring of the office and warehouse facilities in Warsaw to provide additional room to support the expansion of sales. As a percentage of sales, sales, general and administrative expenses decreased from 16.3% in 1995 to 14.9% in 1996. Interest expense increased $18,000, or 17.0%, from $106,000 in 1995 to $124,000 in 1996. This increase is mainly due to additional short term credits taken to support the sales growth noted above. As a percentage of sales, interest expense decreased from 0.7% in 1995 to 0.5% in 1996. Net realized and unrealized foreign currency transaction losses increased $148,000, or 176.2%, from $84,000 in 1995 to $232,000 in 1996. This increase was mainly due to the weakness of the zloty, in which a substantial portion of the Company's assets are denominated, versus the U.S. Dollar. In 1996, the zloty depreciated 16.6% versus 1995 when it depreciated to only 1.2%. This factor resulted in higher losses. As a percentage of sales, realized and unrealized foreign currency transaction losses increased from 0.5% in 1995 to 1.0% in 1996. Other income decreased $78,000, or 92.9%, from $84,000 in 1995 to $6,000 in 1996. This decrease is mainly due to a decrease in sales of fixed assets. Income taxes decreased $9,000, or 7.5%, from $120,000 in 1995 to $111,000 in 1996. This decrease is mainly due to the decrease in income before income taxes from $195,000 in 1995 to $173,000 in 1996. See the notes to the consolidated financial statements for further information on income taxes. Net income decreased $13,000, or 17.3%, from $75,000 in 1995 to $62,000 in 1996. This decrease is a result of the factors discussed above. LIQUIDITY AND CAPITAL RESOURCES The Company has historically financed its operations and capital expenditures primarily through cash flow from operations, bank borrowings, and other short term credit facilities. Cash increased 22 $344,000 in 1995 versus an increase of $145,000 in 1996 and decreased $500,000 in the first nine months of 1997. Cash flow from operations was $(81,000) in 1995 compared to $32,000 in 1996 and $(324,000) for the nine months ended September 30, 1997. Operating cash requirements are supplemented primarily by short-term borrowings. See the consolidated statements of cash flows for a summary of cash movements. Bank borrowings totaled approximately $1.2 million on September 30, 1997 and are expected to increase to approximately $1.4 million at the time of the Offering. These are expected to be repaid in their entirety from the net proceeds of this Offering. See "Use of Proceeds." The Company's borrowing arrangements contain financial covenants and restrictions which are customarily found in similar arrangements and with which the Company has substantially complied. The Company has historically utilized leasing to maintain and increase its fleet of vehicles, including cars for salesman and delivery trucks. The Company intends to utilize approximately $900,000 of the net proceeds from the Offering to purchase vehicles as the leases expire and acquire new vehicles as needed for the Company's expansion. Currently, leases extend through 1999. The initial value of equipment currently under capital and operating leases is approximately $900,000. These leases in zloty normally have an annual interest factor built into the lease payments of 35-50%. This form of financing is much more expensive in Poland than traditional bank financing in zloty which normally costs the Company approximately 20-25% annually. By utilizing the portion of the proceeds discussed above to purchase vehicles, the Company's management expects to achieve significant savings in future interest and operating costs, as compared to continuing the leasing of such vehicles. The Company anticipates that the estimated net proceeds of the Offering, the interest earned on the unutilized proceeds of the Offering, together with its existing capital resources and anticipated cash flow from planned operations will be adequate to satisfy its anticipated capital and other requirements, including possible acquisitions for two to three years, depending on the rate of acquisitions. There can be no assurance, however, that the Company will sustain profitability or generate sufficient revenues for its future operations, including possible acquisitions, and it is possible that the Company may seek additional equity or debt financing in the future. INFLATION AND CURRENCY EXCHANGE FLUCTUATIONS Since the fall of Communist rule in 1989, Poland has experienced high levels of inflation and significant fluctuation in the exchange rate for the zloty. The Polish government has adopted policies that slowed the annual rate of inflation from approximately 250% in 1990 to approximately 18% in 1996. In addition, the exchange rate for the zloty has stabilized and the rate of devaluation of the zloty has decreased since 1991. However, the zloty exchange rate and the rate of devaluation have increased in 1997. Inflation and currency exchange fluctuations have had, and may continue to have, an adverse effect on the financial condition and results of operations of the Company. The exchange rate of the zloty to the U.S. dollar is tied by the National Bank of Poland to a basket of currencies. Due to the depreciation of the zloty against the U.S. Dollar in 1995, 1996 and through the first three quarters of 1997, the Company incurred realized and unrealized foreign exchange losses. The Polish currency futures market is not yet fully developed, and the Company does not have a reasonable and cost efficient way to adequately hedge its currency exposure, but may do so in the future when it becomes feasible. SEASONALITY Gross profits are affected by seasonal and competitive factors. Sales, general and administrative costs are semi-variable in nature as sales and distribution expenses are not directly impacted by all volume increases. Short term credits are arranged on a seasonal basis, historically in the summer vacation season and the Christmas holiday season in order to accomodate increased sales during these periods. 23 BUSINESS The Company, formed in 1990, has become a leading importer and distributor of alcoholic beverages in Poland. The Company operates the largest nationwide next-day alcoholic beverage delivery service in Poland through its eight regional branch offices located in Poland's principal cities, including Warsaw, Crakow, Gdansk and Katowice. The Company currently distributes approximately 300 products in three categories: beer, spirits and wine. The Company imports and distributes eight international beers, including Guinness, Corona, Miller and Foster's, in addition to one domestically produced beer. The Company currently distributes approximately 250 spirit products, including leading international brands of scotch, single malt and other whiskeys, rum, bourbon, vodkas, tequila, gins, brandy, cognacs, vermouths and specialty spirits, such as Jim Beam, Johnnie Walker, Ballantines, Smirnoff, Absolut, Finlandia, Bacardi, Gordon's London Dry and Tanqueray. In addition, the Company imports and distributes 45 wine products, including Sutter Home, Romanian Classics, Cinzano Asti, Martini Asti and Moet & Chandon. The Company's net sales for the nine-month period ended September 30, 1997 were approximately $27.5 million, as compared to $14.6 million for the nine-month period ended September 30, 1996, representing an increase of 88.7%. The Company distributes its products throughout Poland to approximately 3,000 outlets, including off-trade establishments, such as small businesses and multi-store retail outlets where alcoholic beverages are not consumed on premises, and on-trade locations, such as bars, nightclubs, hotels and restaurants, where such products are consumed. BUSINESS STRATEGY The principal components of the Company's business strategy are as follows: EXPAND DISTRIBUTION CAPACITY. The Company plans to increase its distribution capacity by expanding the number of its branch offices in Poland through the acquisition of existing wholesalers, particularly in areas where the Company does not distribute directly. Cities currently under consideration by the Company are Lublin (1996 population--approximately 355,000), Lodz (1996 population--approximately 818,000), and Bialystok (1996 population-- approximately 281,000). The Company will seek to acquire successful wholesalers which are involved in the vodka distribution business and are among the leading wholesalers in their region. The Company would then add its higher margin imported brands to complement and enhance the existing product portfolio. While the Company has identified potential wholesalers and has conducted exploratory talks about such acquisitions, it has not reached any definitive agreements regarding the terms and conditions of any such acquisition, including the purchase price to be paid to the sellers, and such acquisitions may not be available to the Company on acceptable terms, if at all. In such case, the Company would seek to enter these markets with its own branch offices. INCREASE PRODUCT OFFERINGS. The Company plans to expand its strategic product offerings in Poland through the acquisition of a high quality wine importer which offers a wide selection of specialty wines and by entering into new supplier agreements to import additional products. The Company is in exploratory talks with such a wine importer, but no definitive agreement has been reached. The Company began importing Bulgarian red and white varietal wines in the fall of 1997. The Company is also in exploratory talks to import additional spirit brands. ENTER RETAIL MARKET. The Company has implemented its retail business strategy in Warsaw, where one location has been leased, remodeled and is expected to open for business in mid-January 1998. The Company believes that specialty retail sales of alcoholic beverages in Poland have yet to be developed. Currently alcoholic beverages are sold through grocery stores, supermarkets, small shops, and gas stations. These retail outlets sell, in general, fast moving items, primarily domestic beer and vodka, as well as a few of the more popular selling imported products, which are brands often 24 imported by the Company. There are few stores that specialize in alcoholic beverages in Warsaw, a metropolitan area with a population of approximately 2.4 million. The Company also believes that high quality alcohol retail outlets will create an additional demand for the Company's current product portfolio, enhancing sales of products distributed, as well as providing a point of sale marketing opportunity for the Company's brands. The retail stores will stock additional products not currently distributed by the Company to complement the stores' appeal, such as cigars and other items associated with an alcohol retail outlet. The Company intends to utilize the retail outlets as a training tool for its salesmen for product merchandising and promotions. An additional benefit allows the Company's on-trade customers to have a supply point for immediate purchase at night and on Sundays when the Company's delivery system does not operate. HISTORY CEDC's subsidiary Carey Agri was incorporated as a limited liability company in July 1990 in Poland. It was founded by William O. Carey, who died in early 1997, and Jeffrey Peterson, the Company's Vice Chairman and Executive Vice President. Mr. Carey's son, William V. Carey, is the managing director of Carey Agri and the president and chief executive officer of CEDC. In February 1991, Carey Agri was granted its first import license for Foster's Lager, which it sold to wholesalers. With this beverage, Carey Agri sought to offer a desirable product for which it had an exclusive import license to the market segment of the Polish population who were benefiting from the country's market transformation. Because of Carey Agri's initial success with Foster's Lager, for which it still holds the exclusive import license for Poland, it quickly diversified in 1992 by importing other quality brand beers from Europe and the United States. Sales during this period were typically in high volume consignments to other wholesalers. In 1993, with the acceleration of the privatization of retail outlets in Poland, Carey Agri began to implement a systematic delivery system in Warsaw which could deliver alcoholic beverages to retail outlets on a reliable basis. Carey Agri leased a warehouse, purchased trucks and hired and trained operational personnel and began to sell directly to convenience shops, small grocery stores and newly opened pubs. Because of this business experience, Carey Agri was prepared to take advantage of the opportunity to expand its import and delivery capacity in Warsaw when a large, foreign-owned supermarket chain began operations in 1993, creating a significant increase in the demand for the Company's product line. The Warsaw model of desirable product lines and dependable prompt delivery of product was duplicated by the Company in Cracow (1993), Wroclaw (1994), Szczecin (1994), Gdansk (1994), Katowice (1995), Torun (1995) and Poznan (1996). PRODUCT LINE The Company currently offers over 300 alcoholic beverages in three categories: (a) beer, (b) spirits and (c) wine. Its eight brands of imported beer accounted for 22.1% of net sales revenues during the year ended December 31, 1996 and 18.3% during the nine months ended September 30, 1997. Brands of imported spirits and wines it distributed accounted for 29.5% and 12.9%, respectively, of net sales revenues for the year ended December 31, 1996 and 23.6% and 5.7%, respectively, for the nine month period ended September 30, 1997. Additionally, the Company offered one brand of Polish beer and multiple brands of Polish vodka, which accounted for 12.5% and 23.0%, respectively, of net sales revenues during the year ended December 31, 1996 and 7.0% and 45.4% for the nine months ended September 30, 1997. The Company has agreements, as described below, with many of the companies from which it acquires products for sale. Certain products, however, have never been covered by a written agreement. The Company does not believe that the absence of such written agreements is likely to result in an adverse financial effect on the Company because the Company has long-standing relationships with such suppliers. 25 Beer The Company distributes imported beer through each of its regional offices and domestic beer through two regional offices. Guinness, Budweiser Budvar, Corona, Foster's Lager, and Kilkenny are sold throughout Poland on an exclusive basis; Pilsner Urquell and Golden Pheasant on a nonexclusive basis. The Company does not have a written supply agreement for Miller Genuine Draft. The one domestic beer brand sold by the Company, Lech, is offered on a nonexclusive basis, except in Szczecin, where it is offered exclusively by the Company. Most of the Company's distribution contracts for beer contain a minimum purchase requirement and typically permit termination if the Company breaches its agreements, such as failure to pay within a certain time period or to properly store and transport the product. Trade credit is extended to the Company for a period of time after delivery of products. The duration of these agreements differ. No imported beers accounted for five percent or more of net sales for the nine months ended September 30, 1997. The agreement regarding distribution of Guinness Stout, which was entered into on July 31, 1997, has an initial term through December 31, 1997 for bottled products and through March 31, 1998 for draft products. After such date the agreement, in relevant part, may be terminated by either party on 60 days prior written notice. Pursuant to this agreement, the Company is the exclusive distributor of products subject to the agreement unless the Company is unable to satisfy customer demand and except for products sold directly by Guinness affiliates. The exclusive agreement covering Budweiser Budvar expires on December 31, 1999. Spirits The Company distributes all its imported spirit products through each of its offices, mostly on a nonexclusive basis. The spirit products sold by the Company include the following: SCOTCH WHISKY: Johnnie Walker, Black, Blue, Gold and Red Labels Black & White The Dimple Bell's Chivas Regal Haig Ballantines Finest VAT 69 Ballantines Gold Seal Teacher's Highland Cream J&B Rare Old Smuggler White Horse 100 Pipers Whyte and McKay Passport SINGLE MALT WHISKY: Dalmore Isle of Jura Bruichladdich Cragganmore Glenkinchie Dalwhinne Oban Lagavulan Talisker Cardhu RUM: Bacardi Light, Gold and Black Ron Rico, White and Gold Captain Morgan Malibu OTHER WHISKEY: Blenders Pride Crown Royal Seven Crown Black Velvet Canadian Mist BOURBON: Jack Daniel's Tennessee Whiskey Forester Early Times Jim Beam VODKAS: Smirnoff Absolut Blue Citron and Kurant Finlandia Tanqueray Polish Vodkas
26 TEQUILA: Jose Cuervo Pepe Lopez GINS: Gordon's London Dry Beefeater Tanqueray Gilbey's BRANDY: Metaxa Sandeman Capa Negra Raynal Stock COGNACS: Hennessy Courvoisier Martell VERMOUTHS: Stock Blanco, Rosa and Cinzano Blanco, Rosso, Rose, Extra Dry Martini Bianco, Extra Dry, Americano, Orancio Rosso, Rose, Extra Dry SPECIALTY SPIRITS: Bailey's Irish Cream Carolan's Irish Cream Kahlua Coffee Liqueur Grand Marnier Creme de Grand Marnier Pimm's Cup Jagermeister Archer's Campari Bitter Southern Comfort Mandarine Napolean
Only the Company's sales of Polish vodka and alcohol beverages distributed for United Distillers and International Drinks and Vintners exceeded five percent of the Company's net sales for the nine months ended September 30, 1997. The Company's non-exclusive contract with United Distillers, currently covers the products which United Distillers itself imports into Poland, including Finlandia and Johnnie Walker. The contract with United Distillers became effective on January 1, 1995 for an unspecified period. Each party, however, has a right to terminate it with 90 days' prior written notice. The contract imposes on the Company certain obligations, which if it fails to satisfy could lead to the contract's immediate termination, provided the Company did not cure the breach within a period specified by United Distillers. There are also sales goals and marketing plans to be met by the Company. The Company's agreements with various of the state-owned Polish vodka producers may be terminated by either party without cause on one month's prior written notice. Products are delivered based on the Company's standard order forms. The Company's non-exclusive contract with IDV Poland Sp. z o.o., a Polish limited liability company ("IDV"), currently covers the products which IDV itself imports into Poland, including Smirnoff and Bailey's Irish Cream. The contract with IDV became effective on July 3, 1997 and terminates on December 31, 1997. Each party, however, has a right to terminate it with one month's prior written notice. The Company agreed also to maintain sufficient stock of IDV's products to satisfy the client's demand and to deliver to IDV reports on the sale of IDV's products. There are also marketing goals to be met by the Company. Wine The Company offers two brands of wine on an exclusive basis: the Sutter Home Wines from the United States and Romanian Classic Wines from Romania. These wines, which include standard red and white varietals, are offered through all of the Company's branches. The Company also offers on a non-exclusive basis the following sparkling wines and champagnes: Cinzano Asti, Gran Cinzano, Gran Festa, Martini Asti, Martini Brut, Moet & Chandon Dom Perignon, Brut Imperial and Mumm Cordon Rouge. Only the Company's sales of Romanian wines exceeded five percent or more of net sales for the nine months ended September 30, 1997. The Company's distribution agreement for Romanian bottled wines is for a term ending December 31, 1997. 27 SALES AND MARKETING As an early entrant in the post-Communist market in Poland, the Company has over six years of experience in introducing, developing and refining marketing, sales and customer service practices in the diverse and rapidly developing Polish economy, which it believes is a competitive advantage in the alcoholic beverage distribution business. The Company employs approximately 70 salesmen who are assigned to one of its eight regional offices. Each regional office has a sales manager, who may also be the branch manager, who meets with the salesmen of that office on a daily basis to review products and payments before the salesmen begin calling on customers. The sales force at each office is typically divided into three categories: (a) vodka accounts, (b) import accounts and (c) key accounts. Salesmen, who are paid on commission, return to the office later in the day to process orders so that products can be dispatched the next morning. DISTRIBUTION SYSTEM The Company's headquarters are located in Warsaw, the capital of Poland, in and around which, as of December 31, 1996, 2.4 million people or 6.3% of the country's population, lived. Sales and service offices are presently located in seven major regional centers in central, north, south and western Poland where, as of the same date, another 8.3 million, or 21.5% of the population, lived. The branch sales and service centers deliver to surrounding cities covering an additional 6.0 million people or an additional 15.5% of the population. Thus, the Company reached 43.3% of Poland's population through direct sales and distribution as of December 31, 1996. Other areas in Poland are served through arrangements with wholesalers. See "--Business Strategy." [Graphic on Map of Poland showing regional locations.] The Company has developed its own centrally controlled, national next-day distribution system for its alcoholic beverages. The Company believes that it is the only privately owned business which currently has this capability in Poland. For imported products, the distribution network begins with a central bonded warehouse in Warsaw. Products can remain in this warehouse without customs and other duties being paid until the product is actually needed for sale. At such point, the product is transferred to the Company's consolidation warehouse at the same location or shipped directly to one of the regional office warehouses connected to each of the Company's sales locations outside of Warsaw. Based on current sales and projections, the branch offices are provided with deliveries on a weekly or bi-weekly basis so that they are able to respond to their customers' needs on a next-day basis. 28 For products which the Company delivers for others who themselves import the products into Poland, the distribution chain begins at the Company's consolidation warehouse in Warsaw. From there, the product is delivered to customers using the same procedures as described above. Except at peak periods during the summer holidays and other similar times such as Christmas, all deliveries are made by Company-trained employees using Company-owned or leased vehicles. During such busy periods, the Company relies on independent contractors, which are usually small family-run businesses with which the Company has had relationships for several years. Customs and Consolidation Warehouses The Customs and Consolidation Warehouses are a 2,815 square meter leased facility located near Warsaw. The leases are long term and the monthly rental, denominated in Polish currency, was approximately $10,000 per month as of September 30, 1997. Such monthly lease payments aggregated approximately $12,000 per month in 1996. Regional Sales Offices and Warehouses The Company also has entered into leases for each of its seven regional sales offices and warehouses. The amount of office and warehouse space leased varies between 278 square meters in Katowice up to 880 square meters in Szczecin. The monthly lease payments, which are denominated in Polish currency, vary between approximately $570 and $2,750. Five of the leases can be terminated by either party on three-month's prior notice; one can be terminated by either party on two-month's prior notice; the other lease terminates on December 31, 1998. Insurance The Company maintains insurance coverage against fire, flood and other similar events as well as coverage against theft of money from the Company's offices or during transportation to a financial institution for deposit. MARKET FOR PRODUCT LINE In both 1995 and 1996, and for the nine months ended September 30, 1997 approximately 65% of the Company's total sales were through so-called "off trade" locations where the alcoholic beverages are not consumed, another 25% through so-called "on-trade" locations where the alcoholic beverages are consumed, and the other 10% through other wholesalers. Off-Trade Market There are two components of the Company's sales to locations where alcoholic beverages are not consumed on premises. The most significant in 1995 and 1996 and the nine months ended September 30, 1997 were small, usually Polish-owned and managed businesses, including small grocery stores. At September 30, 1997, the Company sold products to approximately 3,000 such business outlets, which typically stock and sell relatively few alcohol products and wish to have access to the most popular selling brands. The other components of the off- trade business in 1995 and 1996 and the nine months ended September 30, 1997 were large supermarket chains, which are typically non-Polish-owned, as well as smaller multi-store retail outlets operated by major Western energy companies in connection with the sale of gasoline products. The large supermarket chains typically offer a wide selection of alcohol products, while the smaller retail outlets offer a more limited selection. 29 On-Trade Market There are three components to the Company's sales to locations where alcoholic beverages are consumed: sales to (1) bars and nightclubs, (2) hotels and (3) restaurants. Bars and nightclubs are usually locally managed businesses, although they may be owned and operated in major cities by a non- Polish national. Hotels include worldwide chains such as Marriott, Sheraton and Holiday Inn as well as the major Polish chain, Orbis. Restaurants are typically up-scale and located in major urban areas. This latter category also includes one major, United States based pizza chain which operates in Poland. Wholesale Trade The Company also sells products throughout Poland through other wholesalers. There are no written agreements with these wholesalers. Control of Bad Debts The Company believes that its close monitoring of customer accounts both at the relevant regional office and from Warsaw has contributed to its success in maintaining a low ratio of bad debts to net sales. During the years ended December 31, 1995 and 1996, bad debt expense as a percentage of net sales was 0.21% and 0.08% of net sales, respectively. No significant bad debt expense has been incurred during the nine months ended September 30, 1997. Both in 1996 and during the first nine months of 1997, approximately 3.0% of Company sales were on cash-on-delivery terms, which helps keep bad debt expense lower. Management believes the proposed acquisition of computer upgrades for interoffice financial and administrative controls will assist in maintaining a low ratio of bad debts to net sales as the Company continues to expand. See "Use of Proceeds." COMPETITION The Company, as an early entrant in the post-Communist market in Poland, has over six years of experience in introducing, developing and refining marketing, sales and customer service practices in the diverse and rapidly developing Polish economy, which it believes is a competitive advantage in the alcoholic beverage distribution business. The Company believes that it is currently the only privately owned national distributor of an extensive and diversified alcoholic beverage line in Poland. Some of the international drink companies doing business in Poland, who import their own products but use the Company on a nonexclusive basis to distribute their products, could develop nationwide distribution systems, but have not and the Company believes these companies will concentrate on expanding their sales organizations. These entities include United Distillers, Seagrams, IDV, Allied Domecq and Bacardi. The Company was the largest single distributor in 1996 for IDV and United Distillers products in Poland. The Company competes with various regional distributors in all of its offices. This competition is particularly vigorous with respect to domestic vodka brands. One of the larger, foreign-owed chain stores also sells directly to smaller retailers. The Company meets this regional competition, in part, through offering to customers in the region a single source supply of more products than its regional competitors typically offer. The brands of beer, spirits and wine distributed by the Company compete with other brands in each category, including some the Company itself distributes. The Company expects this competition to increase as it adds more brands, as international drinks and brewery companies expand production in Poland and as the Polish produced products are distributed more efficiently. In addition, the international drinks companies with which the Company competes in the import sector of its business have substantially greater managerial, financial and other resources than does the Company. 30 EMPLOYEES The Company had approximately 185 full-time employees as of September 30, 1997. Each employee was employed in Poland and, as required by Polish law, has a labor agreement with the Company. The Polish Labor Code, which applies to each of these agreements, requires that certain benefits be provided to employees, such as the length of vacation time and maternity leave. This law also restricts the discretion of the Company's management to terminate employees without cause and requires in most instances a severance payment of one- to three-months salary. The Company makes required monthly payments of 48% of an employee's salary to the governmental health and pension system and has established a Social Benefit Fund as required by Polish law, but does not provide other additional benefit programs. None of the Company's employees are unionized. The Company believes that its relations with its employees are good. LEGAL PROCEEDINGS The Company is involved in litigation from time to time in the ordinary course of business. In management's opinion, the litigation in which the Company is currently involved, individually and in the aggregate, is not material to the Company's financial condition or results of operations. 31 REGULATION The Company's business of importing and distributing alcoholic beverages is subject to extensive regulation. The Company believes it is operating with all licenses and permits material to its business. The Company is not subject to any proceedings calling into question its operation in compliance with any licensing and permit requirements. There can be no assurance that the various governmental regulations applicable to the alcoholic beverage industry will not be changed so as to impose more stringent requirements on the Company. If the Company were to fail to be in compliance with applicable governmental regulations or the conditions of the licenses and permits it receives, such failure could cause the Company's licenses and permits to be revoked and have a material adverse effect of the Company's business, results of operations and financial condition. Further, the applicable Polish governmental authorities, in particular the Minister of Economy, have articulated only general standards for issuance, renewal and termination of the licenses and permits which the Company needs to operate and, thus, such governmental authorities retain considerable discretionary authority in making such decisions. IMPORT OF PRODUCTS Import License The Company must receive a license from the Minister of Economy to be able to import all of its current product line except for the beer brands. The license is issued for one year, and the Company's current license expires on December 31, 1997. While the Minister of Economy has discretion with regard to the issuance, renewal and termination of an import license, in practice, the Company believes, such licenses are issued in the absence of exceptional circumstances and renewed as long as the licensee has complied with the conditions of the previous license, which include regular reporting to the Ministry of Economy. Import Permits Additionally, import permits must be obtained for specific consignments of alcoholic beverages to be imported under the import license as well as under customs quotas. See "--Customs Duties and Quotas". The Company must obtain such permits for all its imported alcoholic beverages. The application for a permit is usually made when products are ordered and specify the product, amount of product and source country. Permits are issued for three months, and the Company must demonstrate to appropriate officials that each consignment it imports is covered by a permit. Approval of Health Authorities Local health authorities at the place of import must also be notified of what alcoholic beverages are being imported into Poland. This notification is typically given when a particular shipment of products arrives in Poland. In general, this notice permits the applicable health authorities to determine that no product is entering the Polish market without having been previously approved for sale in Poland. See "Wholesale Activities--General Norms." WHOLESALE ACTIVITIES The Company must have additional permits from the Minister of Economy and appropriate health authorities to operate its wholesale distribution business. Furthermore, it must comply with rules of general applicability with regard to packaging, labeling and transporting products. General Permits The Company is required to have permits for the wholesale trade of each of its three product lines. The permit with regard to beer is issued for two years and the current permit expires on March 28, 1999. The permit with regard to spirits is issued for one year and the current permit expires on 32 December 31, 1997. The permit for wine is issued for two years and the current permit expires on March 28, 1999. One of the conditions of these permits is that the Company sells its products only to those who have appropriate permits to resell the products. A permit can be revoked or not renewed if the Company fails to observe laws applicable to its business as an alcohol wholesaler, fails to follow the requirements of a permit or if it introduces into the Polish market alcohol products that have not been approved for trade. The Company must also obtain separate permits for each of its warehouses. Health Requirements The Company must obtain the approval of the local health authorities to open and operate its warehouses. This approval is the basis for obtaining the permit for wholesale activities. The health authorities are primarily concerned with sanitation and proper storage of alcoholic beverages, especially those which must be refrigerated. These authorities can monitor the Company's compliance with health regulations. Similar regulations apply to the transport of alcoholic beverages, and the drivers of such transports must themselves submit health records to appropriate authorities. General Norms The Company must comply with a set of rules, usually referred to generally as "Polish Norms," which constitute legal regulations concerning, as applicable to the Company, standards according to which alcoholic beverages are packed, stored, labeled and transported. These norms are established by the Polish Normalization Committee, composed of specialists. In case of alcoholic beverages, the committee is composed of academics working with relevant government ministries and agencies as well as experienced businessmen working in the alcoholic beverage industry. The Company has received a certificate after an inspection by the Central Standardization Institute, which is part of the Ministry of Agriculture, indicating its compliance with applicable norms as of the date thereof. Such certification also is needed to import alcoholic beverages. Compliance with these norms also is confirmed by health authorities when particular shipments of alcoholic beverages arrive in Poland. See "--Import of Products--Approval of Health Authorities." CUSTOMS WAREHOUSE Since the Company operates a customs warehouse, further regulations apply, and a permit of the President of the Main Customs Office and the approval of health authorities are required to open and operate such a warehouse. The applicable health concerns are the same as those discussed under""--Wholesale Activities" with regard to non-custom warehouses. The Company has received the needed permit on October 19, 1995 from the President of the Main Customs Office, which is for an unspecified period of time. The continued effectiveness of the permit is conditioned on the Company's complying with the requirements of the permit which are, in general, the proper payment of customs duties and maintenance of an insurance policy. CUSTOMS DUTIES AND QUOTAS As a general rule, the import of alcoholic beverages into Poland is subject to customs duties and the rates of the duties are set by the Polish government acting through the Council of Ministers for particular types of products. In the Company's case, the duties vary by its products lines. The Minister of Economy is authorized, however, to establish a schedule of quotas for alcoholic beverages for which the customs duties are substantially reduced. For example, the basic customs duty on scotch whiskey imported by the Company is $30.43 per .75 liter bottle, or 328% higher than the $7.11 duty under the quota in 1996. The difference between the basic custom duties and the duty under the quota on other spirit products imported by the Company were only somewhat smaller than the difference on scotch. The difference between the basic custom duties and the duty under the quota 33 was considerably smaller for beer and wine products subject to customs duties and imported by the Company. For example, the average basic duty of $1.86 per case of beer was approximately 42% higher than the duty under the quota, and the basic customs duty of $0.15 per .75 liter bottle of wine was 100% higher than the duty under the quota. Customs quotas for alcoholic beverages are fixed annually, with the current quotas being applicable through December 31, 1997. There are no public guidelines on how the Minister of Economy has determined the current quotas or may determine future quotas. If such quotas were substantially eliminated, it would likely have an adverse impact on the Company's business since the retail price of its imported alcohol products would increase. To import alcoholic beverages under the quotas, the Company must receive a permit which is generally valid for three months and specifies what products and what quality thereof may be imported from what country or group of companies. It is the Company's practice to apply for this import permit after concluding a contract for the import of a particular group of products. The Company has always received the import permits for which it has applied, although there can be no assurance that it will always do so in the future. PRICE AND MARGIN CONTROLS In general, Polish law does not affect either the prices charged or the margins earned by the Company on its imported liquor products. Provisions of the tax law provide for a general ban on importing products at "dumping prices," generally defined as being at prices lower than for similar products in the country of origin. Fines could be imposed for such activity. There are several sources of price and margin regulation, however, with regard to spirits produced in Poland, such as the domestic brand vodka distributed by the Company. The Treasury Office, which is part of the Ministry of Finance, may order a reduction in the price of a product it determines to be "blatantly high." This standard is deemed met if (a) the price of a product exceeds the price of the same alcoholic beverage in another local jurisdiction by more than 25% or of a similar alcoholic beverage by 40%, or (b) the price quoted by the seller is higher than 10% of the price quoted to the same purchaser by another seller and the former seller cannot justify the higher price. The most important restriction on prices is a list of products produced by the Ministry of Finance which establishes the maximum retail price of such products. Furthermore, pursuant to a separate decision, this Ministry has limited the margin between the wholesale purchase price of domestic vodka and retail purchase price to no more than four percent. While there are some 400 items on the current list of the Ministry of Finance, the only products distributed by the Company are domestic vodka products. ADVERTISING BAN Pursuant to the Alcohol Awareness Law of October 26, 1982, as amended, there is an absolute ban on direct and indirect advertising of alcoholic beverages in Poland. The definition of "alcoholic beverage" under such law encompasses all the Company's products. Promotions at the point of sale and game contests are often used to limit the law's impact. The agency charged with enforcing this law has successfully brought numerous cases in the past few years alleging indirect advertising in the media. The Company has not been involved in any such proceedings and seeks to comply fully with this law. REGULATION OF RETAIL SALES As part of the Company's business strategy, it plans to operate retail outlets for alcoholic beverages. Polish law will require each such outlet to have a retail permit to sell the brands expected to be offered to the public. Typically, such permits are valid for two years and are renewable. The local health authorities must also approve the sale of alcoholic beverages for each location. 34 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of CEDC are set forth below. Directors and executive officers of CEDC are elected to serve until they resign or are removed, or are otherwise disqualified to serve, or until their successors are elected and qualified. All directors of CEDC are elected annually at the annual meeting of stockholders. Executive officers of CEDC generally are appointed at the board's first meeting after each annual meeting of stockholders.
NAME AGE POSITION(S) WITH COMPANY ---- --- ------------------------------------ William V. Carey...................... 33 Chairman, President, Chief Executive Officer, and Chief Financial Officer Jeffrey Peterson...................... 47 Vice Chairman and Executive Vice President James T. Grossmann.................... 57 Director James B. Kelly........................ 56 Director Jan W. Laskowski...................... 40 Director Joe M. Richardson..................... 44 Director
William V. Carey has served as Chairman, President, Chief Executive Officer and Chief Financial Officer of CEDC since its inception. In 1993, Mr. Carey instituted and supervised the direct delivery system for Carey Agri's nationwide expansion. Mr. Carey, a 1987 graduate of the University of Florida, played briefly on the professional golf circuit before joining the Company. Mr. Carey is a member of the American Chamber of Commerce in Poland. Jeffrey Peterson has served as Vice Chairman, Executive Vice President and director of CEDC since its inception. Mr. Peterson was co-founder of Carey Agri in 1990, and is a member of the management board of that entity. Prior thereto, Mr. Peterson contracted with African, Middle Eastern, South American and Asian governments and companies for the supply of American agricultural exports and selected agribusiness products, such as livestock, feed supplements and veterinary supplies. Mr. Peterson has worked with international banks and United States government entities to facilitate support for exports from the United States. James T. Grossmann, a retired United States foreign service officer, has served as a director of CEDC since its inception. With the United States Agency for International Development ("U.S.A.I.D."), during the years 1977 to 1996, Mr. Grossmann served in emerging markets in Central Europe, Latin America, Africa and Asia with a concentration on developing private sector trading and investment through United States government-sponsored aid programs. Immediately prior to his retirement in 1996, he managed a $300.0 million mass privatization and capital markets development program that assisted 14 former state-controlled countries in Central Europe transition to market economies. James B. Kelly, a former Deputy Assistant Secretary of Commerce of the United States specializing in international economic policy, has served as a director of CEDC since its inception. Mr. Kelly is currently the President of SynXis Corporation, a software development company, a position he has held since August 1996. From 1992 to August 1996, Mr. Kelly was the International Vice-President of BDM International, an international information technology company with sales in 1996 of over $1.0 billion, where he was in charge of penetrating foreign technology markets by acquisition, alliance and direct sales. Jan W. Laskowski has served as a director of CEDC since its inception. Mr. Laskowski has lived and worked in Poland since 1991. He is currently the Vice President and member of the management board of American Bank in Poland ("Amerbank"), a position he has held since 1996, where he is 35 responsible for business development. Before joining Amerbank, Mr. Laskowski worked in London for Bank Liechtenstein (UK) Ltd from 1989 to 1991. He began his career with Credit Suisse, also in London, where he worked for 11 years. Joe M. Richardson has served as a director of CEDC since its inception. Since October 1993, Mr. Richardson has served as the Director of Sales and Marketing Europe of Sutter Home Winery Inc., where he is responsible for developing and managing the importation, distribution and sales of Sutter Home Wines within Europe. Prior to joining Sutter Home, Mr. Richardson had 20 years experience in the wine industry distributing Gallo wine products. BOARD OF DIRECTORS The number of directors of the Company shall be such number as from time to time is fixed by and in the manner provided in the Bylaws and shall be between two to nine directors as is specified in the Certificate of Incorporation. Pursuant to the Bylaws, the number of directors within that range is determined by resolution duly adopted by a majority of the Board of Directors. The number of directors is currently fixed at six. The Underwriters have the right for five years from the date of the Offering to designate a person for election to the Board of Directors. In the event the Underwriters elect not to exercise this right, then they may designate one person to attend all meetings of the Board of Directors for such period of time. Such person will be entitled to receive all notices and other correspondence as if the person were a member of the Board of Directors and to be reimbursed for out-of-pocket expenses incurred in connection with attendance of meetings of the Board of Directors. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors currently has two committees, the Audit Committee and the Compensation Committee. The Audit Committee, among other things, recommends the firm to be appointed as independent accountants to audit the Company's financial statements, discusses the scope and results of the audit with the independent accountants, reviews with management and the independent accountants the Company's interim and year-end operating results, considers the adequacy of the internal accounting controls and audit procedures of the Company and reviews the non-audit services to be performed by the independent accountants. The current members of the Audit Committee are Messrs. Kelly and Laskowski. The Compensation Committee reviews and recommends the compensation arrangements for management of the Company and administers the Plan. The current members of the Compensation Committee are Messrs. Laskowski and Richardson. DIRECTOR COMPENSATION Mr. Carey and Mr. Peterson annually receive $10,000 and $5,000, respectively, for serving as Chairman and Vice-Chairman of the Board of Directors as well as annual directors' fees of $2,000 (which amount is payable to each director). Members of the Board of Directors have received grants of stock options under the stock incentive plan described below. The Company reimburses directors for out-of-pocket travel expenditures relating to their service on the Board of Directors. 36 EXECUTIVE COMPENSATION The following table shows, for the fiscal year ended December 31, 1996, compensation awarded or paid by the Company to its Chief Executive Officer (the highest compensated employee of the Company). SUMMARY COMPENSATION TABLE
BONUS AND OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION COMPENSATION(2) --------------------------- ---- ------- ------------- --------------- William V. Carey................... 1996 $60,000 (1) -- Chairman, President, Chief Executive Officer, and Chief Financial Officer
- -------- (1) During 1996, Carey Agri (i) provided Mr. Carey with the free use of an automobile valued at $35,000, (ii) paid approximately $4,000 for travel expenses, and (iii) provided an interest free loan of $30,000 which was used to remodel his home in Warsaw. This loan will be repaid in early 1998. See "Certain Transactions." (2) For options granted Mr. Carey, which will be effective only upon the closing of the Offering, see "--Compensation Plans--Employment Agreements." COMPENSATION PLANS Employment Agreements Mr. Carey, has entered into an employment contract with CEDC, which commences on the date of the completion of the Offering and ends three years thereafter. Mr. Carey will be paid an annual base salary at the rate of $140,000 per year, $76,000 payable by Carey Agri and $64,000 by CEDC. If Mr. Carey is not elected the Chairman of the Board of Directors in accordance with the Bylaws, his base salary paid by CEDC will be increased by $10,000. Mr. Carey's base salary is to be reviewed no less frequently than annually. Mr. Carey's base salary is to be increased by at least $25,000 one year after the effective date of his employment agreement and by an additional $25,000 two years after the effective date thereof and may be increased further at the discretion of the Board of Directors. Additionally, as partial consideration for the execution of the employment agreement, CEDC has granted to Mr. Carey options to purchase 25,000 shares of the Common Stock, to be exercisable at the initial public offering price. Such options are granted under the Plan and will vest and become exercisable two years from the effective date of the employment agreement. For options granted Mr. Carey, because of his work on the board of directors of the Company and Carey Agri, see "--1997 Stock Incentive Plan." Mr. Carey may terminate his employment agreement only for "good reason," which includes CEDC's failure to perform its obligations under the agreement. CEDC may terminate the agreement for "cause" as defined, which includes Mr. Carey's willful refusal to follow written orders or willful engagement in conduct materially injurious to CEDC or continued failure to perform his required duties. If CEDC terminates the agreement for cause or Mr. Carey terminates it without good reason, Mr. Carey's salary and benefits will be paid only through the date of termination. If CEDC terminates the employment agreement other than for cause or if Mr. Carey terminates it for good reason, CEDC will pay Mr. Carey his salary and benefits through the date of termination in a single lump sum payment and other amounts or benefits at the time such amounts would have been due. Pursuant to the agreement, Mr. Carey has agreed that during the term of employment, and for a one-year period following a termination of employment, he will not compete with the Company. The ownership by Mr. Carey of less than five percent of the outstanding stock of any corporation listed on a national securities exchange conducting any competitive business shall not be viewed as competition. 37 Jeffrey Peterson has entered into an employment contract with CEDC, which commences on the date of the completion of this Offering and ends two years thereafter. In the first year of his employment, Mr. Peterson will be paid $45,000 for serving as the Executive Vice President of CEDC and $48,000 for serving on the management board of Carey Agri. In the second year, Mr. Peterson will be paid $39,000 by CEDC and $36,000 by Carey Agri. CEDC may terminate this agreement, with or without cause, on three months' prior written notice; Mr. Peterson may terminate only for good reason. For options granted to Mr. Peterson as a member of the board of directors of CEDC and Carey Agri, see "--1997 Stock Incentive Plan." Mr. Grossmann, a director of CEDC and Carey Agri, is paid $4,000 monthly for his service on Carey Agri's board of directors where he has responsibilities for assisting Carey Agri to establish supplier relationships for alcohol and nonalcohol products, such as cigars. For options granted to Mr. Grossmann for his past work in establishing supplier relationships in Bulgaria, see "--1997 Stock Incentive Plan." 1997 Stock Incentive Plan CEDC's 1997 Stock Incentive Plan (the "Plan") provides for the grant of incentive stock options within the meaning of Section 422 of the Code, non- qualified options, stock appreciation rights, restricted stock and restricted stock units to directors, executives and other employees of CEDC and any of its subsidiaries or of any service provider, as defined, whose participation in the Plan is determined to be in the best interest of the Company. The Plan authorizes the issuance of up to 400,000 shares of Common Stock (subject to anti-dilution adjustments in the event of a stock split, recapitalization or similar transaction). The Board of Directors has the full power and authority to take all actions and to make all determinations required under the Plan, but has currently delegated that authority to its Compensation Committee, which has the authority to interpret the plan and to prescribe, amend, and rescind rules and regulations relating to the Plan. The Compensation Committee's interpretations of the Plan and its determinations pursuant to the Plan will be final and binding on all parties claiming an interest under the Plan. The Plan was adopted by the Board of Directors on November 27, 1997, which is the effective date of the Plan, and approved by CEDC's stockholders in December 1997. The term of the Plan is ten years from its effective date, and no grants may be made under the plan after that date. Automatic grants are made to outside directors of CEDC. The initial three outside members of the board of directors of CEDC were automatically awarded options to acquire 500 shares of the Common Stock at the initial public offering price when the Incentive Plan became effective. These options are immediately exercisable. Outside directors, including the initial outside directors of CEDC, shall also receive an option to acquire 500 shares upon their reelection to the Board of Directors. The option exercise price for incentive stock options granted under the Plan may not be less than 100% of the fair market value of the Common Stock on the date of grant of the option. Options may be exercised up to 10 years after grant, except as otherwise provided in the particular option agreement. Payment for shares purchased under the Plan shall be made in cash or cash equivalents. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of stock of CEDC, however, the exercise price of any incentive stock option granted must equal at least 110% of the fair market value on the grant date and the maximum term of an incentive stock option must not exceed five years. The Plan also authorizes the grant of stock appreciation rights whereby the grantee of a stock option may receive payment from CEDC of an amount equal to the excess of the fair market value of the shares of Common Stock subject to the option surrendered over the exercise price of such shares. A particular award agreement may permit payment by CEDC either in shares of Common Stock, cash or a combination thereof. 38 Options granted under the Plan are generally not transferable except that non-qualified options may, in certain circumstances, be transferred to family members of the grantee. If any optionee's employment with CEDC or a service provider terminates by reason of death, options will fully vest and may be exercised within 24 months after such death. If the optionee's employment terminates by reason of disability, options will continue to vest and shall be exercisable to the extent vested for a period of one year after the termination of employment. If the optionee's employment terminates for any other reason, options not vested will terminate and vested options held by such optionee will terminate 90 days after such termination. The Plan authorizes the grant also of restricted stock or restricted stock units, which are rights to receive shares of Common Stock in the future. Both the restricted stock and restricted stock units will be subject to restrictions and risk of forfeiture. Such restriction may include not only a period of time of further employment or service to CEDC or Carey Agri or a service provider but the satisfaction of individual or corporate performance objectives. Performance objectives may include, among others, the trading price of the shares of Common Stock, market share, sales, earnings per share, and return on equity. Unless the particular award agreement states otherwise, the holders of restricted stock shall have the right to vote such shares of Common Stock and the right to receive any dividends declared and paid with respect to such stock, but the holders of restricted stock units shall have no such rights. If the grantee's employment with CEDC or Carey Agri or a service provider terminates by reason of death, all restricted stock and restricted stock units granted under the Plan shall fully vest. If the grantee's employment terminates by reason of disability, the grantee's restricted stock or restricted stock units shall continue to vest for a period of one year. If the grantee's employment is terminated for any other reason, the restricted stock or restricted stock units shall be forfeited. In the event of the dissolution or liquidation of the Company or upon a merger, consolidation, or reorganization of the Company in which the Company is not the surviving entity, or upon a sale of substantially all of the assets of the Company or upon any transaction (including one in which the Company is the surviving entity) approved by the Board of Directors that results in any person or entity owning eighty percent or more of the combined voting power of all classes of securities of CEDC, outstanding restricted stock and restricted stock units shall vest and all options become immediately exercisable, within a stated period, unless provision is made in writing in connection with such transaction for the continuation of the Plan or the assumption or substitution of such options, restricted stock and restricted stock units. The Board of Directors may amend, suspend or terminate the Plan with respect to the shares of Common Stock as to which grants have not been made. However, CEDC's stockholders must approve any amendment that would cause the Plan not to comply with the Code. Stock options for 52,500 of the shares of the Common Stock have been granted in connection with the Offering. The exercise price of these options is the initial public offering price. Thus, if the Offering is not consummated, these options will be null and void. Options covering 500 shares were automatically granted to each of the three outside members of the Board of Directors. These options are immediately exercisable. Mr. Carey, Mr. Peterson and Mr. Grossmann received options covering 2,000, 1,000 and 500 shares, respectively. Additionally, as members of the board of management of Carey Agri, Messrs. Carey, Peterson and Grossmann received options covering 5,000, 2,000 and 500 shares, respectively. These options may be exercised one year after the completion of the Offering. In connection with his employment agreement, Mr. Carey was granted another option to purchase an additional 25,000 shares. These options may be exercised two years after the completion of the Offering. In connection with his past efforts in assisting the Company, Mr. Grossmann was granted an option to purchase an additional 15,000 shares. Options covering 12,500 of those shares are immediately exercisable and options covering the other 2,500 shares are exercisable one year after the completion of the Offering. 39 CERTAIN TRANSACTIONS Carey Agri has a non-interest bearing advance receivable for $24,000 (denominated in Polish zloty without interest) from Mr. Carey at September 30, 1997. It expects to receive repayment of the amount advanced in early 1998. Carey Agri has entered into a loan agreement in the principal amount of $205,000 with Amerbank, of which Mr. Laskowski, a director of CEDC, is a vice president and member of the management board. This loan is used as a revolving line of credit for certain business purposes. The loan is guaranteed, in part, by Mr. Carey and Mr. Peterson. The interest rate is LIBOR plus 3.5% and the maturity date is December 15, 1998. Installments of $17,000 are due monthly beginning January 15, 1998 with $18,000 due on December 15, 1998. Part of the proceeds of the Offering will be used to retire this debt. See "Use of Proceeds." Carey Agri has entered into another loan agreement and an amendment thereto with Amerbank in an amount not to exceed $300,000. This secured loan is to be used to pay certain of the costs of this Offering which have accrued to date. The interest rate is LIBOR (1 month) plus 2.25%; the last date on which funds can be drawn down is January 1, 1998; and the loan must be repaid by April 8, 1998. In connection with this loan, Carey Agri agreed to use Amerbank's Poznan branch for its business activities in Poznan and to transfer, as needed, the proceeds of this Offering into Poland through its Amerbank accounts. The Company distributes Sutter Home wines in Poland. Mr. Richardson, a director of CEDC, is Director of Sales and Marketing Europe of Sutter Home Winery, Inc. See "Business--Product Line--Wine." The total value of Sutter Home wines sold by the Company in 1996 and through the first nine months of 1997 was $566,000 and $429,000, respectively. 40 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the outstanding Common Stock as of the date hereof, and as adjusted to reflect the Offering: (i) by each person who is known by CEDC to beneficially own more than 5% of the Common Stock; (ii) by the Selling Stockholders; (iii) by each director of CEDC; (iv) by each of the executive officers of CEDC; and (v) by all directors and executive officers of CEDC as a group. Except as otherwise noted, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. See "Management--Director Compensation" regarding options granted to each director in connection with this Offering. See "Management--Executive Compensation" and "--1997 Stock Incentive Plan" for options granted to Mr. Carey, Mr. Peterson and Mr. Grossmann, as well as all other directors of the Company. Following completion of the Offering, Mr. Carey, Mr. Peterson and the Estate of William O. Carey will beneficially own in the aggregate 60.7% of the outstanding shares of Common Stock, assuming no exercise of the Underwriters' over-allotment option. As a result, such persons acting together will be able to elect all of the Company's directors and otherwise control the Company's operations. See "Risk Factors--Risks Related to the Company--Control By Existing Stockholders; Potential Anti-Takeover Provisions."
PERCENTAGES OF SHARES BENEFICIALLY OWNED NAME AND ADDRESS OF SHARES ------------------------------------------ BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE THE OFFERING AFTER THE OFFERING (3) ------------------- ------------------ ------------------- ---------------------- William V. Carey(1)..... 1,096,480 61.6% 37.4% 1602 Cottagewood Drive Brandon, FL 33511 William V. Carey Stock Trust(1)............... 503,740 28.3 17.2 1602 Cottagewood Drive Brandon, FL 33511 Jeffrey Peterson........ 592,740 33.3 20.2 1707 Waldemere Street Sarasota, FL 34239 Estate of William O. Ca- rey(2)................. 90,780 5.1 3.1 1602 Cottagewood Drive Brandon, FL 33511 James T. Grossmann...... 0 -- -- 805 S. Fairfax Street Alexandria, VA 22314 James B. Kelly.......... 0 -- -- 7606 Hamilton Spring Road Bethesda, MD 20817 Jan W. Laskowski........ 0 -- -- 115 ul. Marcinkowska 00-102 Warsaw, Poland Joe M. Richardson....... 0 -- -- P.O. Box 22154 Louisville, KY 40252 All Directors and Offi- cers as a Group (Six Persons)............... 1,689,220 94.9% 57.6%
- -------- (1) Includes 592,740 shares beneficially owned by Mr. Carey and 503,740 shares held in the name of the William V. Carey Stock Trust. Mr. Carey is the beneficiary of the shares of the Common 41 Stock held in the William V. Carey Stock Trust, and he will become the sole owner of these shares and may terminate the trust on December 11, 2005. Mr. Carey administers the trust, which includes the power to vote the securities held and make any investment decisions, with one other trustee, Remy Hermida, 1707 West Reynolds Street, Plant City, Florida 33567. The trust instrument permits one trustee to delegate any and all power, duties or discretions to the other trustee, although this action has not been taken. (2) Gertrude Carey, the mother of William V. Carey, is the sole personal representative of the Estate of William O. Carey and has sole investment authority over the Common Stock in this estate. (3) If the Underwriters' over-allotment options are exercised in full, the percentage of shares beneficially owned would be as follows: Mr. Carey (34.7%), William V. Carey Stock Trust (15.9%), Jeffrey Peterson (18.8%), Estate of William O. Carey (2.9%) and All Directors and Officers as a Group (53.5%). 42 DESCRIPTION OF SECURITIES GENERAL CEDC's authorized capital stock consists of 20,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock. Prior to this Offering, there were 1,780,000 shares of Common Stock outstanding held of record by four stockholders and no shares of Preferred Stock outstanding. The following summary of certain provisions of the Common Stock, Preferred Stock, the Warrants and the Unit Purchase Option does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of CEDC's Certificate of Incorporation, Bylaws, the Warrant Agreement, and the Unit Purchase Option and by the provisions of applicable law. A copy of the Certificate of Incorporation, Bylaws, the form of Warrant Agreement and form of Unit Purchase Option are included as exhibits to the registration statement of which this Prospectus is a part. COMMON STOCK Each holder of Common Stock is entitled to one vote for each share on all matters submitted to a vote of stockholders. The Certificate of Incorporation does not provide for cumulative voting, and accordingly, the holders of a majority of the shares of Common Stock entitled to vote in any election of directors may elect all of the directors. The Certificate of Incorporation provides that whenever there is paid, or declared and set aside for payment to the holders of the outstanding shares of any class of stock having preference over the Common Stock as to the payment of dividends, the full amount of dividends and of sinking fund or retirement fund or other retirement payments, if any, to which such holders are entitled, then dividends may be paid on the Common Stock out of any assets legally available therefore, but only when and as declared by the Board of Directors. The Certificate of Incorporation also provides that in the event of any liquidation, dissolution or winding up of CEDC, after there is paid to, or set aside for the holders of any class of stock having preference over the Common Stock, the full amount to which such holders are entitled, then the holders of the Common Stock, shall be entitled, after payment or provision for payment of all debts and liabilities of CEDC, to receive the remaining assets of CEDC available for distribution, in cash or in kind. The holders of Common Stock have no preemptive, subscription, redemption or conversion rights. The rights, privileges, preferences and priorities of holders of Common Stock will be subject to the rights of the holders of any shares of any series of Preferred Stock that CEDC may issue in the future. WARRANTS The holder of each Warrant is entitled, upon payment of the exercise price of $ (the aggregate initial Share and Warrant offering price), to purchase one share of Common Stock. Unless previously redeemed, the Warrants are exercisable at any time during the five year period commencing on the date of this Prospectus, provided that at such time a current prospectus relating the underlying Common Stock is in effect and the underlying shares of Common Stock are qualified for sale or exempt from qualification under applicable state securities laws. The Warrants are subject to redemption, as described below. Redemption Commencing one year from the date of this Prospectus, the Warrants, except for those underlying the Unit Purchase Option, are subject to redemption by the Company, on not less than 30 days' written notice, at a price of $.05 per Warrant, provided the sales price of the Common Stock is at least $ (or 200% of the initial Share offering price) for 30 consecutive days prior to the date on which the notice of redemption is given. Holders of Warrants will automatically forfeit their rights to purchase the shares of Common Stock issuable upon exercise of such Warrants unless the Warrants are exercised 43 before the close of business on the business day immediately prior to the date set for redemption. All of the outstanding Warrants, except for those underlying the Unit Purchase Option, must be redeemed if any of that class are redeemed. A notice of redemption shall be mailed to each of the registered holders of the Warrants, except for those underlying the Unit Purchase Option, by first class mail, postage prepaid. The notice of redemption shall specify the redemption price, the date fixed for redemption, the place where the Warrant certificates shall be delivered and the redemption price to be paid, and that the right to exercise the Warrants shall terminate at 5:00 p.m. (New York City time) on the business day immediately preceding the date fixed for redemption. General The Warrants may be exercised upon surrender of the certificate(s) therefor on or prior to the earlier of their expiration or the redemption date (as explained above) at the offices of the Company's warrant agent with the form of "Election to Purchase" on the reverse side of the certificate(s) filled out and executed as indicated, accompanied by payment (in the form of certified or cashier's check payable to the order of the Company) of the full exercise price for the number of Warrants being exercised. The Warrants contain provisions that protect the holders thereof against dilution by adjustment of the exercise price in certain events, such as stock dividends, stock splits, mergers, sale of substantially all of the Company's assets, and for other extraordinary events in order to enable the holders of the Warrants to obtain the same or equivalent rights which they would have obtained if the Warrants had been exercised prior to the event. The Company is not required to issue fractional shares of Common Stock, and in lieu thereof will make a cash payment based upon the current market value of such fractional shares. The holder of a Warrant will not possess any rights as a stockholder of the Company unless and until he exercises the Warrant. UNIT PURCHASE OPTION The Company has agreed to issue to the Underwriters, upon the closing of the Offering, the Unit Purchase Option to purchase up to 115,000 Shares and 115,000 Warrants. These Shares and Warrants will be identical to the Shares and Warrants offered hereby except that the Warrants included in the Unit Purchase Option will not be subject to redemption by the Company. The Unit Purchase Option cannot be transferred, sold, assigned or hypothecated for one year, except to any officer or partner of the Underwriters or members of the selling group. The Unit Purchase Option is exercisable during the four-year period commencing one year from the date of this Prospectus at an exercise price of $ per Share and Warrant (120% of the aggregate initial Share and Warrant offering price), subject to adjustment in certain events to protect against dilution. The holders of the Unit Purchase Option and underlying securities have certain demand and piggyback registration rights. The existence of the Unit Purchase Option and the inability of the Company to redeem the Warrants included therein may hinder the Company's future financing or business transactions. See "Underwriting." PREFERRED STOCK The Certificate of Incorporation provides that the Board of Directors is authorized to issue Preferred Stock in series and to fix and state the voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights of the shares of each such series and the qualifications, limitations and restrictions thereof. Such action may be taken by the Board of Directors without stockholder approval. Under the Certificate of Incorporation, each share of each series of Preferred Stock is to have the same relative rights as, and be identical in 44 all respects with, all other shares of the same series. While providing flexibility in connection with possible financings, acquisitions and other corporate purposes, the issuance of Preferred Stock, among other things, could adversely affect the voting power of the holders of Common Stock and, under certain circumstances, be used as a means of discouraging, delaying or preventing a change in control of CEDC. There will be no shares of Preferred Stock outstanding upon completion of the Offering and CEDC has no present plan to issue shares of its Preferred Stock. LIMITATION OF LIABILITY AND INDEMNIFICATION Limitations of Director Liability Section 102(b)(7) of the Delaware General Corporation Law ("DGCL") authorizes corporations to limit or eliminate the personal liability of directors to corporations and their stockholders for monetary damages for breach of directors' fiduciary duty of care. Although Section 102(b)(7) does not change the directors' duty of care, it enables corporations to limit available relief to equitable remedies such as injunction or rescission. The Certificate of Incorporation limits the liability of directors to the Company or its stockholders to the fullest extent permitted by Section 102(b)(7). Specifically, directors of CEDC are not personally liable for monetary damages to the Company or its stockholders for breach of the director's fiduciary duty as a director, except for liability: (a) for any breach of the director's duty of loyalty to the Company or its stockholders; (b) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (c) for unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the DGCL; or (d) for any transaction from which the director derived an improper personal benefit. Indemnification To the maximum extent permitted by law, the Bylaws provide for mandatory indemnification of directors and officers of CEDC against any expense, liability and loss to which they may become subject, or which they may incur as a result of being or having been a director or officer of CEDC. In addition, CEDC must advance or reimburse directors and officers for expenses incurred by them in connection with indemnifiable claims. CEDC also maintains directors' and officers' liability insurance. CERTAIN ANTI-TAKEOVER PROVISIONS The Certificate of Incorporation and the Bylaws contain, among other things, certain provisions described below that may reduce the likelihood of a change in the Board of Directors or voting control of CEDC without the consent of the Board of Directors. These provisions could have the effect of discouraging, delaying, or preventing tender offers or takeover attempts that some or a majority of the stockholders might consider to be in the stockholders' best interest, including offers or attempts that might result in a premium over the market price for the Common Stock. Filling Board Vacancies; Removal Any vacancy occurring in the Board of Directors, including any vacancy created by an increase in the number of directors, shall be filled by the vote of a majority of the directors then in office, whether or not a quorum, and any director so chosen shall hold office until such director's successor shall have been elected and qualified. Directors may only be removed with cause by the affirmative vote of the holders of at least a majority of the outstanding shares of capital stock then entitled to vote for the election of directors. 45 Stockholder Action by Unanimous Written Consent Any action required or permitted to be taken by the stockholders must be effected at a duly called annual or special meeting of such holders and may not be effected by any consent in writing by such holders, unless such consent is unanimous. Call of Special Meetings Special meetings of stockholders may be called at any time by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President, and shall be called by the President or the Secretary of CEDC at the request in writing of stockholders possessing at least 10% of the voting power of the issued and outstanding capital stock of CEDC entitled to vote generally in the election of directors. Such a request shall include a statement of the purpose or purposes of the proposed meeting. Bylaw Amendments The stockholders may amend the Bylaws by the affirmative vote of the holders of at least a majority of the outstanding shares of stock of CEDC entitled to vote thereon. Directors also may amend the Bylaws by an affirmative vote of at least a majority of the directors then in office. Certificate of Incorporation Amendments Except as set forth in the Certificate of Incorporation or as otherwise specifically required by law, no amendment of any provision of the Certificate of Incorporation shall be made unless such amendment has been first proposed by the Board of Directors upon the affirmative vote of at least a majority of the directors then in office and thereafter approved by the affirmative vote of the holders of at least a majority of the outstanding shares of stock of CEDC entitled to vote thereon; provided however, if such amendment is to the provisions in the Certificate of Incorporation relating to the authorized number of shares of Preferred Stock, board authority to issue Preferred Stock, number of directors, the limitation on directors' liability, amendment of Bylaws, or consent of stockholder in lieu of meetings, such amendment must be approved by the affirmative vote of the holders of at least two-thirds of the outstanding shares of stock entitled to vote thereon. Stockholder Nominations and Proposals With certain exceptions, the Bylaws require that stockholders intending to present nominations for directors or other business for consideration at a meeting of stockholders must notify CEDC's secretary not less than 60 days, and not more than 90 days, before the date of the meeting. Certain Statutory Provisions Section 203 of the DGCL provides, in general, that a stockholder acquiring more than 15% of the outstanding voting shares of a corporation subject to the DGCL (an "Interested Stockholder"), but less than 85% of such shares, may not engage in certain "Business Combinations" with such corporation for a period of three years subsequent to the date on which the stockholder became an Interested Stockholder unless (a) prior to such date the corporation's board of directors approved either the Business Combination or the transaction in which the stockholder became an Interested Stockholder or (b) the Business Combination is approved by the corporation's board of directors and authorized by a vote of at least two-thirds of the outstanding voting stock of the corporation not owned by the Interested Stockholder. Section 203 defines the term "Business Combination" to encompass a wide variety of transactions with or caused by an Interested Stockholder in which the Interested Stockholder receives or could 46 receive a benefit on other than a pro rata basis with other stockholders, including mergers, certain asset sales, certain issuances of additional shares to the Interested Stockholder, transactions with the corporation which increase the proportionate interest of the Interested Stockholder or a transaction in which the Interested Stockholder receives certain other benefits. Pursuant to a Board resolution, the Section 203 limits do not apply to any "Business Combination" between the Company and either Mr. Carey, Mr. Peterson, their "affiliates" or their estates. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is American Stock Transfer and Trust Company. 47 UNDERWRITING The Underwriters have agreed, subject to the terms and conditions of the Underwriting Agreement by and among the Company, the Selling Stockholders and the Underwriters (the "Underwriting Agreement"), to purchase severally, and the Company has agreed to sell to the Underwriters severally, the number of shares of Common Stock and the number of Warrants set forth opposite their respective names below:
UNDERWRITERS NUMBER OF SHARES NUMBER OF WARRANTS ------------ ---------------- ------------------ Fine Equities, Inc.......................... --------- --------- SouthWall Capital Corp...................... --------- --------- Total..................................... 1,150,000 1,150,000 ========= =========
In the Underwriting Agreement, the Underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all of the shares of Common Stock and Warrants offered hereby (other than those subject to the over-allotment options described below) if any such shares are purchased. In the event of a default by either of the Underwriters, the Underwriting Agreement provides that, in certain circumstances, the purchase commitments of the non-defaulting Underwriter may be increased or the Underwriting Agreement may be terminated. The Underwriters have advised the Company that they propose initially to offer the shares of Common Stock and the Warrants to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers who are members of the NASD at such price, less a concession not in excess of $ per Share, of which a sum not to exceed $ per Share may in turn be allowed by such dealers to other dealers who are members of the NASD. After the initial public offering, the public offering price, the concessions and the allowances may be changed. The Company has agreed to pay to the Underwriters a non-accountable expense allowance equal to 3% of the aggregate offering price of the Shares and Warrants offered hereby (including any shares of Common Stock and Warrants purchased pursuant to the over-allotment options). The Company has also agreed to pay all expenses in connection with qualifying the Shares and Warrants offered hereby for sale under the laws of such states as the Underwriters may designate, including expenses of counsel retained for such purpose by the Underwriters. The Company has granted the Underwriters an option, exercisable within 45 days after the date of this Prospectus, to purchase up to an aggregate of 97,500 additional shares of Common Stock and 172,500 Warrants from the Company at the initial public offering price per share of Common Stock and Warrants offered hereby, less underwriting discounts and commissions. The Selling Stockholders have granted the Underwriters an option, exercisable within 45 days of the date of this Prospectus, to purchase 75,000 shares of the Common Stock at the initial public offering price per share of Common Stock offered hereby, less underwriting discounts and commissions. The Underwriters may exercise such options only to cover over-allotments in the sale of shares of Common Stock and Warrants that the Underwriters have agreed to purchase. The initial Shares purchased upon exercising the over-allotment options will be purchased from the Selling Stockholders. To the extent that the Underwriters exercise such options, each Underwriter will have a firm commitment, subject to certain conditions, to purchase the number of option shares proportionate to its initial commitment. The Underwriting Agreement provides that the Company and the Selling Stockholders will indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or contribute to payments the Underwriters may be required to make in respect thereof. 48 The Company has agreed to issue and sell, upon the completion of the Offering, to the Underwriters for nominal consideration the Unit Purchase Option. The Unit Purchase Option is exercisable at any time during a period of four years commencing one year from the date of this Prospectus, at a price of $ (120% of the aggregate initial public offering price of the Shares and the Warrants). The Company has agreed that, for a period of seven years from the date of the completion of the Offering, if the Company intends to file a registration statement or statements for the public sale of securities for cash (other than Form S-8, S-4 or comparable registration statement), it will notify all of the holders of the Unit Purchase Option and/or underlying securities and if so requested it will include therein material to permit a public offering of the securities underlying said Unit Purchase Option at the expense of the Company (excluding fees and expenses of the holders' counsel and any underwriting or selling commissions). In addition, for a period of five years from the completion of the Offering upon the written demand of any majority holder, the Company agrees to promptly register the underlying securities at the expense of such holder. For the life of the Unit Purchase Option, the holders are given the opportunity to profit from a rise in the market price of the Common Stock and Warrants, with a resulting dilution in the interests of other stockholders. Further, the holders may be expected to exercise the Unit Purchase Option at a time when the Company would in all likelihood be able to obtain equity capital on terms more favorable than those provided under the Unit Purchase Option. Any profit realized by the Underwriters on the sale of the Warrants or Common Stock issuable upon exercise of such Unit Purchase Option may be deemed additional underwriter compensation. The Company also has granted the Underwriters the right of first refusal for a period of 18 months after the date of this Prospectus for any sale of securities to be made by the Company or any of its present or future affiliates or subsidiaries. The Underwriting Agreement also provides that, for five years following the date of this Prospectus, the Underwriters may designate a person, reasonably acceptable to the Company, for election to the Board of Directors. In the event the Underwriters elect not to exercise this right, then it may designate one person to attend all meetings of the Board of Directors for a period of five years. Such person would be entitled to attend all such meetings and to receive all notices and other correspondence and would be reimbursed for out-of-pocket expenses incurred in connection with attendance at Board of Directors meetings. The Underwriters have informed the Company that the Underwriters do not intend to make sales to any accounts over which they exercise discretionary authority in excess of 5% of the number of shares of Common Stock offered hereby. The Company and all of the existing stockholders, directors and officers of CEDC have agreed that, during the period beginning from the closing of this Offering and continuing to and including the date 24 months thereafter, they will not offer, sell, contract to sell or otherwise dispose of shares of Common Stock beneficially owned by them without the prior written consent of the Underwriters (except for the shares of Common Stock offered in this Offering and those underlying the Warrants, the Unit Purchase Option and options issued under the Plan). Prior to the Offering, there has been no public market for the Common Stock or the Warrants. The initial public offering price of the Common Stock and the Warrants and the terms of the Warrants will be determined by negotiation between the Company and the Underwriters and will not necessarily be related to the Company's asset value, net worth, results of operation or other established criteria of value. Among the factors to be considered in determining the initial public offering price of the Common Stock and the Warrants and the terms of the Warrants, in addition to prevailing market conditions, are the earnings and certain other financial and operating information of the Company in recent periods, the future prospects of the Company and its industry in general, an assessment of the management of the Company, the Company's capital structure, the general conditions of the securities market at the time of the Offering and the market prices of securities and certain financial and operating information of companies engaged in activities similar to those of the Company. There can, however, be no assurance that the prices at which the Common Stock and the Warrants will sell in the public market 49 after the Offering will not be lower than the price at which they are sold in the Offering by the Underwriters. In connection with the Offering, the Underwriters may purchase and sell the Common Stock and the Warrants in the open market. These transactions may include over-allotment and stabilizing transactions and purchases to cover syndicate short positions created in connection with the Offering. Stabilizing transactions consist of certain bids or purchases for the purpose of preventing or retarding a decline in the market price of the Common Stock and the Warrants, and syndicate short positions involve the sale by the Underwriters of a greater number of shares of Common Stock and the Warrants than they are required to purchase from the Company in the Offering. The Underwriters also may impose a penalty bid, whereby selling concessions allowed to syndicate members or other broker-dealers in respect of the securities sold in the Offering for their account may be reclaimed by the syndicate if such shares of Common Stock and the Warrants are repurchased by the syndicate in stabilizing or covering transactions. These activities may stabilize, maintain or otherwise affect the market price of the Common Stock and the Warrants, which may be higher than the price that might otherwise prevail in the open market; and these activities, if commenced, may be discontinued at any time. These transactions may be effected on the Nasdaq SmallCap Market, in the over-the-counter market or otherwise. The Company has agreed, in connection with the exercise of Warrants pursuant to solicitation by the Underwriters, to pay to the Underwriter a fee of 4% of the Warrant exercise price, a portion of which may be reallowed to any dealer who is a member of the National Association of Securities Dealers, Inc. ("NASD") who solicited the exercise (which may also be the Underwriters) for each Warrant exercised, if (i) the market price of the Common Stock of the Company at the time of exercise is higher than the exercise price of the Warrants; (ii) the Warrants are not held in any discretionary account; (iii) disclosure of compensation arrangements was made both at the time of this Offering and in documents provided to holders of the Warrants at the time of exercise; (iv) the exercise of the Warrants is solicited by a member of the NASD as designated in writing on the Warrant Certificate Subscription Form; and (v) the solicitation of exercise of the Warrants was not in violation of Regulation M promulgated under the Exchange Act. Regulation M of the SEC under the Exchange Act may prohibit the Underwriters from engaging in any market making activities with regard to the Company's securities for the period from nine business days (or such other applicable period as Regulation M may provide) prior to any solicitation by the Underwriters of the exercise of Warrants until the later of the termination of such solicitation activity or the termination (by waiver or otherwise) of any right that the Underwriters may have to receive a fee for the exercise of Warrants following such solicitation. As a result, the Underwriters may be unable to provide a market for the Company's securities during certain periods while the Warrants are exercisable. The Company will not receive any of the proceeds from the sale of the shares of Common Stock by the Selling Stockholders if the over-allotment option is exercised. The Company will pay all expenses incident to the offering and sale of the shares of Common Stock and the Warrants to the public, other than underwriting discounts and expenses, if any, of counsel and other advisors to the Selling Stockholders. The Company intends, to the extent practical, to seek registration or exemption from registration under the securities laws of the states designated by the Underwriters in which the shares of Common Stock and the Warrants will be offered and sold. There can be no assurance, however, that such registrations or exemptions can be obtained. Fine Equities has been in business since August 1995 and has acted as an underwriter in one other offering of securities and has not managed any other offering of securities. SouthWall has been in business since May 1996. Prior to this Offering, it has only co-managed one other offering of securities and has acted as an underwriter in several other offerings. There can be no assurance 50 that the Underwriters' limited offering experience and small size relative to other broker-dealers will not adversely affect this Offering or the subsequent development, if any, of a trading market for the Common Stock and Warrants. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the Company will have 2,930,000 shares of Common Stock outstanding (assuming no exercise of the Underwriters' over- allotment option). Of these shares, the 1,150,000 shares of Common Stock sold in the Offering will be freely transferable and tradable without restriction or further registration under the Securities Act except for any shares purchased by any "affiliate", as defined below, of the Company which will be subject to the resale limitations of Rule 144. All the remaining shares of Common Stock held by existing stockholders are "restricted" securities within the meaning of Rule 144 and may only be sold in the public market pursuant to an effective registration statement under the Securities Act or pursuant to an applicable exemption from registration, including Rule 144. Holders of the Warrants offered hereby will be entitled to purchase an aggregate of 1,150,000 additional shares of Common Stock upon exercise of the Warrants at any time during the five-year period commencing on the date of this Prospectus, provided that the Company satisfies certain securities registration and qualification requirements with respect to the securities underlying the Warrants. Any and all shares of Common Stock purchased upon exercise of the Warrants will be freely tradable, provided such registration requirements are met and except for any shares purchased by any "Affiliate," as defined below, of the Company. Up to 230,000 additional shares of Common Stock may be purchased by the Underwriters through the exercise of the Unit Purchase Option, and the warrants included therein. Until five years from the date of this Prospectus, holders of such securities will have the right, subject to certain conditions, to require the Company to register all or a portion of such securities at the Company's expense beginning one year after the date of this Prospectus. In general, under Rule 144 as currently in effect, a person (or persons whose shares are required to be aggregated) who has been deemed to have beneficially owned shares for at least one year, including an "affiliate", is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of 1% of the then outstanding number of shares of Common Stock or the average weekly trading volume in the shares of Common Stock during the four calendar weeks preceding the filing of the required notice of such sale. Sales under Rule 144 may also be subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. A person (or persons whose shares are required to be aggregated) who is not deemed to have been an affiliate of the Company during the three months preceding a sale, and who has beneficially owned shares within the definition of "restricted securities" under Rule 144 for at least two years is entitled to sell such shares under Rule 144(k) without regard to the volume limitation, manner of sale provisions, notice requirements or public information requirements of Rule 144. Affiliates continue to be subject to such limitations. As defined in Rule 144, an "affiliate" of an issuer is a person that directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, such issuer. Upon completion of the Offering, no shares of Common Stock held by the existing stockholders of the CEDC are currently eligible for sale under Rule 144. CEDC and all of the existing stockholders, directors and officers of CEDC have agreed that, during the period beginning from the closing of this Offering and continuing to and including the date 24 months thereafter, they will not offer, sell, contract to sell or otherwise dispose of shares of Common Stock beneficially owned by them without the prior written consent of the Representative (except for the shares of Common Stock offered in this Offering). 51 No prediction can be made as to the effect, if any, that future sales of Common Stock, or the availability of shares of Common Stock for future sale, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial numbers of shares of Common Stock, pursuant to a registration statement, Rule 144 or otherwise, or the perception that such sales may occur, could adversely affect the prevailing market price of the Common Stock. In addition, the availability for sale of Warrants or the Unit Purchase Option could adversely affect prevailing market prices for the Common Stock. The Company has reserved 400,000 shares of Common Stock for issuance upon the exercise of rights outstanding or to be granted pursuant to the Plan. As of the date hereof, options to purchase 52,500 shares of Common Stock were outstanding and unexercised. See "Management--Executive Compensation--1997 Stock Incentive Plan." The Company also has reserved 1,552,500 shares of Common Stock for issuance upon the exercise of the Warrants, including those issuable upon exercise of the over-allotment options and upon exercise of the Unit Purchase Option and the warrants included therein. See "Underwriting." LEGAL MATTERS The validity of the Common Stock being offering hereby will be passed upon for the Company by Hogan & Hartson L.L.P., Washington, D.C., and for the Underwriters by Baker & McKenzie, New York, New York. Certain matters of Polish law will be passed upon for the Company by Hogan & Hartson, Warsaw, Poland and for the Underwriters by Baker & McKenzie, Warsaw, Poland. EXPERTS The consolidated financial statements of the Company as of December 31, 1996 and for each of the two years in the period ended December 31, 1996 appearing in this Prospectus and Registration Statement, have been audited by Ernst & Young Audit Sp. z o.o., Warsaw, Poland, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of said firm as experts in accounting and auditing. ENFORCEABILITY OF CERTAIN CIVIL LIABILITIES CEDC is organized under the laws of the State of Delaware. Although investors in the Common Stock will be able to effect service of process in the United States upon CEDC and may be able to effect service of process upon its directors, due to the fact that CEDC is primarily a holding company which holds stock in Carey Agri in Poland, substantially all of the assets of CEDC are located outside the United States. As a result, it may not be possible for investors to enforce against CEDC's assets judgment of United States courts predicated upon the civil liability provisions of United States laws. CEDC has been advised by its counsel, Hogan & Hartson L.L.P., that there is doubt as to the enforceability in Poland, in original actions or in actions for enforcement of judgments of United States courts, of civil liabilities predicated solely upon the laws of the United States. In addition, awards of punitive damages in actions brought in the United States or elsewhere may be unenforceable in Poland. 52 AVAILABLE INFORMATION CEDC has filed with the SEC a registration statement (herein, together with all amendments, exhibits and schedules thereto, referred to as the "Registration Statement") under the Securities Act with respect to the Common Stock and Warrants offered hereby. This Prospectus, which is part of the Registration Statement, does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the SEC. For further information with respect to CEDC and the Common Stock and Warrants, reference is hereby made to the Registration Statement. As a result of the Offering, CEDC will become subject to the reporting requirements of the Exchange Act, and in accordance therewith, will file reports and other information with the SEC. CEDC intends to furnish its stockholders with annual reports containing financial statements audited by its independent public accountants. The Registration Statement, including the exhibits and schedules thereto, and reports and other information filed by the Company with the SEC can be inspected without charge and copied, upon payment of prescribed rates, at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the SEC located at 7 World Trade Center, 13th Floor, New York, New York 10048 and the Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material and any part thereof will also be available by mail from the Public Reference Section of the SEC, at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates, and via the SEC's address on the World Wide Web at http:/www.sec.gov. 53 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Auditors............................................ F-2 Consolidated Balance Sheets at December 31, 1996 and September 30, 1997 (unaudited).............................................................. F-3 Consolidated Statements of Income for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1996 and 1997 (unau- dited)................................................................... F-5 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997 (unaudited)......................................................... F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1996 and 1997 (un- audited)................................................................. F-7 Notes to Consolidated Financial Statements................................ F-8
F-1 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Central European Distribution Corporation We have audited the accompanying consolidated balance sheet of Central European Distribution Corporation as of December 31, 1996 and the related consolidated statements of income, stockholders' equity, and cash flows for the years ended December 31, 1996 and 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Central European Distribution Corporation at December 31, 1996, and the consolidated results of its operations and its cash flows for the years ended December 31, 1996 and 1995 in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young Audit Sp. z o.o. Ernst & Young Audit Sp. z o.o. Warsaw, Poland November 28, 1997 F-2 CENTRAL EUROPEAN DISTRIBUTION CORPORATION CONSOLIDATED BALANCE SHEETS AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS
DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ ------------- (UNAUDITED) ASSETS Current Assets Cash.............................................. 740 240 Accounts receivable, net of allowance for doubtful accounts of $49,000 and $58,000, respectively.... 4,211 3,744 Inventories....................................... 1,660 2,193 Prepaid expenses and other current assets......... 172 181 Deferred income taxes............................. 106 121 ----- ----- Total Current Assets............................ 6,889 6,479 Equipment, net...................................... 442 431 Deferred charges.................................... -- 252 Deferred income taxes............................... 4 3 ----- ----- Total Assets...................................... 7,335 7,165 ===== =====
See accompanying notes. F-3 CENTRAL EUROPEAN DISTRIBUTION CORPORATION CONSOLIDATED BALANCE SHEETS--(CONTINUED) AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS
DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ ------------- (UNAUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Trade accounts payable............................ 5,140 4,462 Bank loans and overdraft facilities............... 856 997 Income taxes payable.............................. 6 34 Taxes other than income taxes..................... 720 912 Accrued expenses and deferred income.............. 132 233 Current portion of long-term debt and capital lease obligations................................ 152 293 ----- ----- Total Current Liabilities....................... 7,006 6,931 Long-term debt, less current maturities............. 205 55 Capital lease obligations, less current portion..... 98 13 Stockholders' Equity Common Stock ($0.01 par value, 20,000,000 shares authorized, 1,780,000 shares issued and outstand- ing)............................................. 18 18 Additional paid-in-capital........................ 36 36 Retained earnings (accumulated deficit)........... (28) 112 ----- ----- Total Stockholders' Equity...................... 26 166 ----- ----- Total Liabilities and Stockholders' Equity...... 7,335 7,165 ===== =====
See accompanying notes. F-4 CENTRAL EUROPEAN DISTRIBUTION CORPORATION CONSOLIDATED STATEMENTS OF INCOME AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS (EXCEPT PER SHARE DATA)
NINE MONTHS NINE MONTHS YEAR ENDED YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1995 1996 1996 1997 ------------ ------------ ------------- ------------- (UNAUDITED) (UNAUDITED) Net sales................ 16,017 23,942 14,575 27,499 Cost of goods sold....... 13,113 19,850 11,697 23,759 ------ ------ ------ ------ Gross profit............. 2,904 4,092 2,878 3,740 Sales, general and administrative expenses................ 2,603 3,569 2,581 3,057 ------ ------ ------ ------ Operating income......... 301 523 297 683 Non-operating income (ex- pense) Interest expense....... (106) (124) (83) (106) Realized and unrealized foreign currency transaction losses, net................... (84) (232) (231) (278) Other income, net...... 84 6 88 35 ------ ------ ------ ------ Income before income tax- es...................... 195 173 71 334 Income tax expense....... (120) (111) (65) (194) ------ ------ ------ ------ Net income............... 75 62 6 140 ====== ====== ====== ====== Net income per common share, primary and fully diluted................. 0.04 0.03 0.00 0.08 ====== ====== ====== ======
See accompanying notes. F-5 CENTRAL EUROPEAN DISTRIBUTION CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS
RETAINED COMMON STOCK EARNINGS -------------------- ADDITIONAL PAID- (ACCUMULATED NO. OF SHARES AMOUNT IN-CAPITAL DEFICIT) ------------- ------ ---------------- ------------ Balance at December 31, 1994 (Note 1)..................... 1,780,000 18 36 (165) Net income for 1995........... -- -- -- 75 --------- --- --- ---- Balance at December 31, 1995.. 1,780,000 18 36 (90) Net income for 1996........... -- -- -- 62 --------- --- --- ---- Balance at December 31, 1996.. 1,780,000 18 36 (28) Net income for the nine months ended September 30, 1997 (un- audited)..................... -- -- -- 140 --------- --- --- ---- Balance at September 30, 1997 (unaudited)..................... 1,780,000 18 36 112 ========= === === ====
See accompanying notes. F-6 CENTRAL EUROPEAN DISTRIBUTION CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS
NINE MONTHS NINE MONTHS YEAR ENDED YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1995 1996 1996 1997 ------------ ------------ ------------- ------------- (UNAUDITED) (UNAUDITED) Operating Activities Net income.............. 75 62 6 140 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization........... 36 67 49 120 Deferred income taxes (benefit).............. 6 (18) (32) (14) Gain on the disposal of equipment.............. (5) (7) -- (10) Changes in operating assets and liabilities: Accounts receivable, net of allowances..... (1,074) (2,633) 69 467 Inventories............ (480) (612) (479) (533) Trade accounts payable............... 918 2,915 450 (678) Income and other taxes................. 80 613 358 220 Prepayments and other current assets........ 14 (84) (92) (9) Accrued expenses and deferred income....... 349 (271) (147) (27) ------ ------- ------- ------- Net Cash (Used In) Provided by Operating Activities........... (81) 32 182 (324) Investing Activities Purchases of equipment.. (62) (336) (213) (85) Proceeds from the disposal of equipment.. 23 264 90 32 ------ ------- ------- ------- Net Cash Used In Investing Activities........... (39) (72) (123) (53) Financing Activities Borrowings on overdraft facility............... 8,465 17,531 12,496 12,592 Payment of overdraft facility............... (8,210) (17,747) (12,461) (12,461) Payment of capital lease obligations............ -- (62) (34) (147) Short-term borrowings... 379 840 337 500 Payment of short-term borrowings............. (350) (402) (375) (490) Long-term borrowings.... 200 205 205 7 Payment of long-term borrowings............. (20) (180) (180) -- Costs paid in connection with planned public offering............... -- -- -- (124) ------ ------- ------- ------- Net Cash Provided by (Used In) Financing Activities........... 464 185 (12) (123) ------ ------- ------- ------- Net Increase (Decrease) in Cash................. 344 145 47 (500) Cash at beginning of period.................. 251 595 595 740 ------ ------- ------- ------- Cash at end of period.... 595 740 642 240 ====== ======= ======= =======
See accompanying notes. F-7 CENTRAL EUROPEAN DISTRIBUTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS 1. ORGANIZATION AND DESCRIPTION OF BUSINESS Central European Distribution Corporation (CEDC) was organized as a Delaware Corporation in September 1997 to operate as a holding company through its sole subsidiary, Carey Agri International--Poland Sp. z o.o. (Carey Agri). CEDC and Carey Agri are referred to herein as the Company. CEDC's authorized capital stock consists of 20 million shares of common stock, $0.01 par value, and 1 million shares of preferred stock, also $0.01 par value. No shares of preferred stock have been issued and its terms and conditions will be established by the Board of Directors at a later date. In November 1997, CEDC issued 1,780,000 shares of its common stock to the former stockholders of Carey Agri in exchange for all the issued and outstanding shares of Carey Agri. This reorganization resulted in no changes in relative equity interests among the stockholders and no adjustments of the underlying net assets of Carey Agri. The new capital structure has been reported in a manner comparable to a pooling of interests in the accompanying consolidated financial statements. All share and per share data have been presented in accordance with the new capital structure. Carey Agri is a Polish limited liability company with headquarters in Warsaw, Poland. Carey Agri distributes alcoholic beverages throughout Poland and all activities are conducted within that country. It currently has branches in the following Polish cities: Warsaw, Cracow, Szczecin, Gdynia, Wroclaw, Torun, Siemianowice and Poznan. Pursuant to Polish statutory requirements, Carey Agri may pay an annual dividend, based on its audited Polish financial statements, to the extent of its retained earnings as defined. At December 31, 1996, approximately $8,000 was available for payment of dividends. 2. ACCOUNTING POLICIES The significant accounting policies and practices followed by the Company are as follows: Basis of Presentation Since CEDC had no prior operations, the accompanying consolidated financial statements reflect the activities of Carey Agri. Carey Agri maintains its books of account and prepares its financial statements in Polish zloties (PLN) in accordance with Polish statutory requirements and the Accounting Act of 29 September 1994. The exchange rate was approximately 3.4 PLN per USD at September 30, 1997. The accompanying consolidated financial statements include adjustments, translations, and reclassifications, which are appropriate to present the Company's consolidated financial statements in accordance with accounting principles generally accepted in the United States (US GAAP). The consolidated financial statements (and notes thereto) as at September 30, 1997 and for the nine months ended September 30, 1997 and 1996 are unaudited, but include in the opinion of management, all adjustments considered necessary for a fair presentation of such data. The results for the unaudited interim periods are not necessarily indicative of the results expected for the entire year. Foreign Currency Translation and Transactions As stated above, Carey Agri maintains its books of account in Polish zloties. The accompanying consolidated financial statements have been prepared in US Dollars. Transactions and balances not F-8 CENTRAL EUROPEAN DISTRIBUTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS already measured in US Dollars (primarily Polish zloties) have been remeasured into US Dollars in accordance with the relevant provisions of US Financial Accounting Standard (FAS) No. 52 "Foreign Currency Translation" as applied to entities in highly inflationary economies. Under FAS No. 52, revenues, costs, capital and non-monetary assets and liabilities are translated at historical exchange rates prevailing on the transaction dates. Monetary assets and liabilities are translated at exchange rates prevailing on the balance sheet date. Exchange gains and losses arising from remeasurement of monetary assets and liabilities that are not denominated in US Dollars are credited or charged to operations. Equipment Equipment is stated at cost, less accumulated depreciation. Depreciation is computed by the straight-line method over the following useful lives:
TYPE DEPRECIATION LIFE IN YEARS ---- -------------------------- Transportation Equipment......................... 6 Beer Dispensing and Other Equipment.............. 2-10
Equipment under capital lease is depreciated over the shorter of the useful life or the lease term. Revenue Recognition Revenue is recognized when goods are shipped to customers. Advertising and Promotion Costs Advertising and promotion costs are expensed as incurred. Advertising and promotion expense was approximately $280,000 and $120,000 in 1996 and 1995, respectively ($314,000 for the nine months ended September 30, 1997). Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market. Inventories are comprised primarily of beer, wine, and spirits. Estimates The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates and such differences may be material to the financial statements. Income Taxes The Company computes and records income taxes in accordance with FAS No. 109. Effect of New Accounting Standards Not Yet Adopted In February 1997, the Financial Accounting Standards Board (FASB) issued its Statement No. 128, "Earnings per Share." Among other provisions, FAS No. 128 simplifies the standards for F-9 CENTRAL EUROPEAN DISTRIBUTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS computing earnings per share. The standard will be effective for the Company in the three months ending December 31, 1997. The Company does not expect the adoption of FAS No. 128 to have a material impact on its financial statements. In June 1997, the FASB issued its Statement No. 130, "Reporting Comprehensive Income." This standard will be effective for the Company in the three months ending March 31, 1998, and it requires the disclosure of comprehensive income which is defined as all changes in equity during a period except those resulting from investments by owners and distributions to owners. Comprehensive income will include net income adjusted by, among other items, foreign currency translation adjustments. As disclosed in this Note 2, the Company remeasures transactions and results of its Polish subsidiary in accordance with FAS No. 52 as applied to entities in highly inflationary economies. Therefore, exchange gains and losses arising from remeasurement of these monetary assets and liabilities are credited or charged to net income. However, if in future periods Poland is considered not to be a highly inflationary economy, these remeasurements will be recorded as a separate component of equity and, under FAS No. 130, included as part of comprehensive income. In June 1997, the FASB issued its Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information." The standard will be effective for the Company in the year ending December 31, 1998, and it requires, among other provisions, that a public business enterprise report financial and descriptive information about its reportable operating segments. The Company does not expect the adoption of FAS No. 131 to have a material impact on the disclosures contained in its financial statements. Net Income Per Common Share Net income per common share is calculated using the average shares outstanding during the periods (1,780,000 during each of the periods). There were no common stock equivalents. 3. EQUIPMENT Equipment, which is presented net of accumulated depreciation in the balance sheets, consists of:
DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ ------------- (UNAUDITED) Transportation Equipment.......................... 174 178 Beer Dispensing and Other Equipment............... 433 493 ---- ---- 607 671 Less accumulated depreciation..................... (165) (240) ---- ---- Equipment, net.................................... 442 431 ==== ====
F-10 CENTRAL EUROPEAN DISTRIBUTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS 4. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ ------------- (UNAUDITED) Loan denominated in US Dollars.................... 205 205 Car loan denominated in Polish zloty.............. -- 7 Current portion of these loans.................... -- (157) --- ---- Long-term portion................................. 205 55 === ====
The Company has a revolving credit line with a bank for $205,000 at December 31, 1996 and September 30, 1997. The line can be used for various purposes such as an overdraft facility, loan for letters of credit, or for loans for guarantees made by the Company. Currently, the loan is being used for working capital purposes with annual interest equal to the bank's dollar base rate (approximately 10% at December 31, 1996 and September 30, 1997). The loan is collateralized by a bill of exchange and personal guaranties by two officers and directors of the Company. Maturity was scheduled for March 15, 1997, but was extended through December 15, 1998 in accordance with an amendment dated October 14, 1997. The interest rate was changed to the bank's Amerbank LIBOR rate plus 3.5% (approximately 9.17% at September 30, 1997). Installments of $17,000 are due monthly beginning January 15, 1998 with $18,000 due on December 15, 1998. Therefore, the entire $205,000 is due in 1998. 5. LEASE OBLIGATIONS Certain non-cancelable leases are classified as capital leases, and the leased assets are included as part of equipment. Other leases are classified as operating leases and are not capitalized. The depreciation for assets under capital leases is included in depreciation expense. Details of the capitalized leased assets are as follows:
DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ ------------- (UNAUDITED) Transportation equipment.......................... 88 119 Beer dispensing equipment......................... 252 212 --- ---- 340 331 Less accumulated depreciation..................... (60) (142) --- ---- 280 189 === ====
F-11 CENTRAL EUROPEAN DISTRIBUTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS At December 31, 1996, the future minimum lease payments under operating and capital leases are as follows:
OPERATING CAPITAL LEASES LEASES --------- ------- 1997....................................................... 242 223 1998....................................................... 198 106 1999....................................................... 54 -- 2000....................................................... 54 -- 2001....................................................... 54 -- --- --- Total...................................................... 602 329 === Less amounts representing interest costs................... (79) --- Net present value.......................................... 250 Current portion............................................ 152 --- Long-term portion.......................................... 98 ===
Rent expense incurred under operating leases during 1996 and 1995 were as follows:
1996 1995 ---- ---- Rent expense....................................................... 301 183 === ===
Capitalized leases relate mainly to the leasing of transportation equipment and beer dispensing equipment. Each of these leases expires in 1997 or 1998. Under most of these leases, the Company may purchase the equipment at the end of the lease terms at a price below the expected market value. New capital leases caused non-cash additions to equipment of $312,000 and $46,000 in the year ended December 31, 1996 and the nine months ended September 30, 1997, respectively. These are not reflected in the Consolidated Statements of Cash Flows. Operating leases relate mainly to the leasing of the customs warehouse and the consolidation warehouse in Warsaw, and the 7 regional offices and warehouses. Monthly rentals range from approximately $570 to $6,000 per month. The customs and consolidation warehouses' leases expire in September 2001. Six of the regional office and warehouse leases can be terminated by either party with two or three months prior notice. The seventh regional office and warehouse lease expires in December 1998. 6. SHORT-TERM BANK LOANS AND OVERDRAFT FACILITIES The Company has an overdraft facility (in Polish zloty, shown in approximate USD equivalent) with a bank (other than the bank referred to in note 4) for $285,000. At December 31, 1996 and September 30, 1997 the Company used $16,000 and $147,000, respectively, of this amount. Interest is equal to PLN WIBOR (Warsaw InterBank Rate) plus 3.5% (24% and 28% at December 31, 1996 and September 30, 1997, respectively). The loan matured on July 14, 1997 and was extended through July 29, 1998. The loan is collateralized by a blank bill of exchange, the assignment of receivables from eight of the Company's largest customers (carrying value of $389,000 at December 31, 1996), and a pledge on inventory of $350,000. F-12 CENTRAL EUROPEAN DISTRIBUTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS The Company has two other USD short-term loans with this bank for $350,000 and $240,000 at December 31, 1996 ($350,000 and $0 at September 30, 1997). Interest on each is at LIBOR (1 month) plus 2.75% (8.3% and 8.4% at December 31, 1996 and September 30, 1997, respectively). The loans are collateralized by a blank bill of exchange, pledge on inventory of PLN 1,000,000, the assignment of receivables from eight of the Company's largest customers (carrying value of $389,000 at December 31, 1996) and the assignment of an insurance policy on inventory. The $350,000 loan was due on July 29, 1997 but was extended through July 30, 1998. The $240,000 loan was due in 6 monthly installments of $40,000 beginning January 31, 1997 and was fully paid in June 1997. The Company has short-term USD loans with another bank for $250,000 at December 31, 1996 and $500,000 at September 30, 1997. Interest on the loans is at LIBOR plus 1.5% (7.0% and 7.2% at December 31, 1996 and September 30, 1997, respectively). The loan outstanding at December 31, 1996 was paid in March 1997. A new loan for $250,000 was taken at the end of March 1997 and was due on September 30, 1997. Another $250,000 was borrowed on June 2, 1997 and was also due on September 30, 1997. The due date for both loans was extended to December 23, 1997. The Company's borrowing arrangements (including long-term debt described in Note 4) contain various financial and nonfinancial covenants and restrictions which the Company has complied with or have been waived by the lender. Total interest paid in 1996 and 1995 (and the nine months ended September 30, 1997) is substantially equal to interest expense. 7. DEFERRED CHARGES Costs incurred in connection with a planned public offering, totaling $252,000, are included in deferred charges in the September 30, 1997 balance sheet. The accrued portion of $128,000 at September 30, 1997 is not reflected in the Consolidated Statements of Cash Flows. If the offering is successful, this amount and other charges incurred subsequently will be charged to stockholders' equity. If the offering is not completed, this amount and other charges incurred subsequently will be charged to expense. 8. FINANCIAL INSTRUMENTS, COMMITMENTS AND CONTINGENT LIABILITIES Financial Instruments With On-Balance Sheet Risk and Their Fair Values Financial instruments with on-balance sheet risk include cash, accounts receivable, certain other current assets, trade accounts payable, bank loans and overdraft facilities, long-term debt, and other payables. These financial instruments are shown separately in the consolidated balance sheets and their carrying values approximate their fair values. This is because all of these financial instruments have short maturity periods or carry interest at rates which approximate current market rates. Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of accounts receivable from Polish companies. The Company restricts temporary cash investments to financial institutions with high credit standing. Credit is given to customers only after a thorough review of their credit worthiness. The Company does not normally require collateral with respect to credit sales. As of December 31, 1996 or September 30, 1997, the Company had no significant concentrations of credit risk. The Company has not experienced large credit losses in the past. F-13 CENTRAL EUROPEAN DISTRIBUTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS Inflation and Currency Risk Since the fall of Communist rule in 1989, Poland has experienced high levels of inflation and significant fluctuations in the exchange rate for the zloty. The Polish government has adopted policies that slowed the annual rate of inflation from approximately 250% in 1990 to approximately 18% in 1996. In addition, the exchange rate for the zloty has stabilized and the rate of devaluation of the zloty has decreased since 1991. However, inflation and currency exchange fluctuations have had, and may continue to have, an adverse effect on the financial condition and results of operations of the Company. A significant portion of the Company's debt obligations and operating expenses are, and are expected to continue to be, denominated in or indexed to U.S. Dollars or other non-Polish currency. By contrast, substantially all of the Company's revenue is denominated in zloty. Any devaluation of the zloty against the U.S. Dollar or other currencies that the Company is unable to offset through price adjustments will require the Company to use a larger portion of its revenue to service its non-zloty denominated obligations. While the Company may consider entering into transactions to hedge the risk of exchange rate fluctuations, it is unlikely that the Company will be able to obtain hedging arrangements on commercially satisfactory terms. Accordingly, shifts in currency exchange rates may have an adverse effect on the ability of the Company to service its non-zloty denominated obligations and, thus, on the Company's financial condition and results of operations. Supply contracts The Company has various agreements covering its sources of supply which, in some cases, may be terminated by either party on relatively short notice. Thus there is a risk that a significant portion of the Company's supply of products could be curtailed at any time. Contingent liabilities The Company is involved in litigation and has claims against it for matters arising in the ordinary course of business. In the opinion of management, the outcome will not have a material adverse effect on the Company. 9. INCOME TAXES Income tax expense consists of the following:
YEAR ENDED YEAR ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 1995 1996 1997 ------------ ------------ ----------------- (UNAUDITED) Current Polish income tax ex- pense......................... 114 129 208 Deferred Polish income tax (credit) expense, net......... 6 (18) (14) --- --- --- Total income tax expense..... 120 111 194 === === ===
Total Polish income tax payments (or amounts used as settlements against other statutory liabilities) during 1996 and 1995 were $130,000 and $112,000, respectively ($165,000 for the nine months ended September 30, 1997). F-14 CENTRAL EUROPEAN DISTRIBUTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS Total income tax expense varies from expected income tax expense computed at Polish statutory rates (40% in 1995 and 1996 and 38% in 1997) as follows:
NINE MONTHS YEAR ENDED YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 1995 1996 1997 ------------ ------------ ------------- (UNAUDITED) Tax at Polish statutory rate....... 78 69 127 Bad debt expense not expected to be tax deductible.................... 6 4 7 Effect of foreign currency exchange rate change on net deferred tax assets............................ 3 13 25 Permanent differences: Interest on overdue taxes........ 2 5 4 Non-deductible social taxes...... 5 7 7 Non-deductible depreciation...... 3 4 5 Non-deductible interest paid..... 13 -- -- Certain other non-deductible expenses........................ 10 9 19 --- --- --- Income tax expense................. 120 111 194 === === ===
Significant components of the Company's deferred tax liabilities and assets are as follows:
DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ ------------- (UNAUDITED) Deferred tax liabilities: Depreciation and other fixed asset basis dif- ferences..................................... 33 -- Prepaid expenses.............................. 7 -- --- --- Total deferred tax liabilities.................. 40 -- Deferred tax assets: Allowance for doubtful accounts receivable.... 19 22 Unrealized foreign exchange losses............ 31 50 Accrued expenses and deferred income.......... 50 40 Capital lease obligations..................... 69 34 --- --- Total deferred tax assets....................... 169 146 Less valuation allowance........................ (19) (22) --- --- Deferred tax assets, net of valuation allow- ance........................................... 150 124 --- --- Net deferred tax asset.......................... 110 124 === === Shown as: Current deferred tax asset.................... 106 121 Long-term deferred tax asset.................. 4 3 --- --- 110 124 === ===
F-15 CENTRAL EUROPEAN DISTRIBUTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS Valuation allowances are provided when it is more likely than not that some or all of the deferred tax assets will not be realized in the future. These evaluations are based on expected future taxable income and expected reversals of the various net deductible temporary differences. The corporate income tax rates in Poland were changed effective January 1, 1997 from 40% in 1995 and 1996 to 38% in 1997, 36% in 1998, 34% in 1999, and 32% in 2000. The Company's tax liabilities (including corporate income tax, Value Added Tax, social security, and other taxes) may be subject to examinations by Polish tax authorities for up to five years from the end of the year the tax is payable. Because the application of tax laws and regulations to many types of transactions is susceptible to varying interpretations, amounts reported in the financial statements could be changed at a later date upon final determination by the tax authorities. 10. RELATED PARTY TRANSACTIONS Loan to Officer The Company has an advance receivable (denominated in PLN without interest) from its President which has a balance at September 30, 1997 of $24,000. Bank Borrowing A director of CEDC is a vice president and member of the management board of the bank from which the Company has borrowings of $205,000 at September 30, 1997 (Notes 4 and 12). Supplier of Wine A director of CEDC is a director of one of the Company's suppliers of wine. Purchases from this company amounted to approximately $300,000 in 1996. 11. STOCK OPTION PLANS AND WARRANTS In October 1995, the United States Financial Accounting Standards Board issued FAS No. 123, "Accounting for Stock-Based Compensation." This standard defines a fair value based method of accounting for an employee stock option or similar equity instrument plan. This statement gives entities a choice of recognizing related compensation expense by adopting the fair value method or to measure compensation using the intrinsic value approach under Accounting Principles Board (APB) Opinion No. 25, the former standard. If APB No. 25 is elected, FAS No. 123 requires supplemental disclosure to show the effects of using the FAS No. 123 measurement criteria. The Company intends to follow APB No. 25. Incentive Plan In November 1997, the CEDC 1997 Stock Incentive Plan ("Incentive Plan") was created. This Incentive Plan provides for the grant of stock options, stock appreciation rights, restricted stock and restricted stock units to directors, executives, and other employees of CEDC and any of its subsidiaries or of any service provider. The Incentive Plan authorizes the issuance of up to 400,000 shares of Common Stock (subject to anti-dilution adjustments in the event of a stock split, recapitalization, or similar transaction). The compensation committee of the board of directors will administer the Incentive Plan. The Company has reserved 400,000 shares for future issuance in relation to the Incentive Plan. F-16 CENTRAL EUROPEAN DISTRIBUTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS The option exercise price for incentive stock options granted under the Incentive Plan may not be less than 100% of the fair market value of the Common Stock on the date of grant of the option. Options may be exercised up to 10 years after grant, except as otherwise provided in the particular option agreement. Payment for shares purchased under the Incentive Plan shall be made in cash or cash equivalents. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of stock of CEDC, however, the exercise price of any incentive stock option granted must equal at least 110% of the fair market value on the grant date and the maximum term of an incentive stock option must not exceed five years. Options granted under the Incentive Plan are generally not transferable and may be exercised within a specific number of months, depending on the reason, after the termination of the optionee's employment. CEDC'S board of directors may amend the Incentive Plan with respect to common shares as to which grants have not been made. However, CEDC's stockholders must approve any amendments in certain situations. In December 1997, CEDC granted stock options to its executive officers and members of the Board of Directors for 52,500 shares of Common Stock in connection with a planned public offering. The exercise price of these options is the initial public offering price. Thus if the public offering is not consummated, these options will be null and void. As indicated above, the Incentive Plan also authorizes the grant of stock appreciation rights, restricted stock, and restricted stock units. No such grants or awards have yet been made. Under APB 25, no expense will be recognized for options granted under the Incentive Plan as the exercise price is equal to the initial public offering price. Unit Purchase Option In connection with the planned public offering, the Company has agreed to issue (for a nominal consideration) a Unit Purchase Option for the purchase of up to 115,000 shares of Common Stock and 115,000 warrants to the underwriters. The Unit Purchase Option is exercisable at any time during a period of four years commencing at the beginning of the year after issuance. The exercise price of the Unit Purchase Option is 120% of the aggregate initial offering price of shares of Common Stock and the Warrants. The warrants included in the Unit Purchase Option are exercisable at any time during a period of four years commencing at the beginning of the year after the date of the public offering. The exercise price of the warrants included in the Unit Purchase Option is the initial public offering price. 12. SUBSEQUENT EVENTS Short-Term Debt On October 7, 1997 the Company signed with a bank (the same bank discussed in Note 10) an agreement for a revolving credit line of $200,000. The line is be used to finance the costs of the planned initial public offering. The loan is to be paid back in full using the proceeds from the planned initial public offering by April 8, 1998. The credit line is collateralized by a blank bill of exchange, a pledge on inventory of PLN 700,000, personal guarantee by two officers and directors of the Company and the assignment of an insurance policy on inventory. Interest F-17 CENTRAL EUROPEAN DISTRIBUTION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS on the loan is at LIBOR (1 month) plus 2.25% (7.9% at September 30, 1997). The amount of borrowings pursuant to the agreement was increased to $300,000 in December 1997. On October 27, 1997 the Company has signed an agreement with another bank for a short-term loan of $100,000. The proceeds of the loan are to be used to purchase Bulgarian wine. The annual interest rate equals LIBOR (1 month) plus 2.75% (8.4% at September 30, 1997) and the loan is to be repaid in two installments of $50,000 each due on January 15, 1998 and on February 17, 1998. The loan is collaterized by a blank bill of exchange. Long-Term Debt In October and November 1997, the Company entered into five loan agreements. These loans were used to purchase four cars and one truck. The loans are denominated in PLN and in total equaled a USD equivalent of $60,000. The loans are to be repaid in twenty-four equal installments through late 1999. The loans have an interest rate equal to WIBOR + 3% (27.9% at September 30, 1997). These loans are collateralized by blank bills of exchange, the car or truck financed, and the assignment of an insurance policy on the car or truck financed. F-18 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UN- LAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS. --------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary....................................................... 1 Risk Factors............................................................. 5 The Reorganization....................................................... 15 Use of Proceeds.......................................................... 16 Dividend Policy.......................................................... 16 Dilution................................................................. 17 Exchange Rate Data....................................................... 18 Capitalization........................................................... 19 Selected Consolidated Financial Data..................................... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 21 Business................................................................. 24 Regulation............................................................... 32 Management............................................................... 35 Certain Transactions..................................................... 40 Principal and Selling Stockholders....................................... 41 Description of Securities................................................ 43 Underwriting............................................................. 48 Shares Eligible for Future Sale.......................................... 50 Legal Matters............................................................ 52 Experts.................................................................. 52 Enforceability of Certain Civil Liabilities.............................. 52 Available Information.................................................... 53 Index to Consolidated Financial Statements............................... F-1
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPAT- ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIV- ERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PRO- SPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1,150,000 SHARES OF COMMON STOCK 1,150,000 REDEEMABLE WARRANTS CENTRAL EUROPEAN DISTRIBUTION CORPORATION [LOGO] FINE EQUITIES, INC. SOUTHWALL CAPITAL CORP. , 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS Under Section 145 of the Delaware General Corporation Law ("DGCL"), a corporation may indemnify its directors, officers, employees and agents and its former directors, officers, employees and agents and those who serve, at the corporation's request, in such capacities with another enterprise, against expenses (including attorneys' fees), as well as judgments, fines and settlements in nonderivative lawsuits, actually and reasonably incurred in connection with the defense of any action, suit or proceeding in which they or any of them were or are made parties or are threatened to be made parties by reason of their serving or having served in such capacity. The DGCL provides, however, that such person must have acted in good faith and in a manner such person reasonably believed to be in (or not opposed to) the best interests of the corporation and, in the case of a criminal action, such person must have had no reasonable cause to believe his or her conduct was unlawful. In addition, the DGCL does not permit indemnification in an action or suit by or in the right of the corporation, where such person has been adjudged liable to the corporation, unless, and only to the extent that, a court determines that such person fairly and reasonably is entitled to indemnity for costs the court deems proper in light of liability adjudication. Indemnity is mandatory to the extent a claim, issue or matter has been successfully defended. The Registrant's Certificate of Incorporation and Bylaws provide for the indemnification of directors and executive officers to the fullest extent permitted by the DGCL and authorize the indemnification by the Registrant of other officers, employees and other agents as set forth in the DGCL. The Underwriting Agreement provides for indemnification by the Underwriters of the directors, officers and controlling persons of the Company against certain liabilities, including liabilities under the Securities Act, under certain circumstances. Upon completion of the Offering, officers and directors of the Registrant will be covered by insurance which (with certain exceptions and within certain limitations) indemnifies them against losses and liabilities arising from any alleged "wrongful act" including any alleged error or misstatement or misleading statement, or wrongful act or omission or neglect or breach of duty. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following are the estimated expenses payable by the Company in connection with the distribution of the Common Stock and Warrants hereunder, not including the Underwriters' non-accountable expense allowance. SEC registration fee.............................................. $7,352.24 NASD filing fee................................................... 2,992.28 Nasdaq Stock Market listing fee................................... * Accounting fees and expenses...................................... * Legal fees and expenses........................................... * Printing and engraving expenses................................... * Blue Sky fees and expenses........................................ * Transfer Agent fees and expenses.................................. * Miscellaneous expenses............................................ * --------- Total........................................................... $ * =========
- -------- * To be furnished by amendment. The Selling Stockholders will not bear any of the expenses of the Offering. II-1 ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES All the holders of shares of common stock of Carey Agri International Poland Sp. z o.o ("Carey Agri") and the Registrant entered into a Contribution Agreement dated as of November 28, 1997 (the "Contribution Agreement"). Pursuant to the Contribution Agreement, all holders of shares of Carey Agri's common stock transferred all shares of common stock owned by them to the Registrant, receiving 1,780,000 shares of the Common Stock in return. All of these transfers were designed to qualify as a tax-free exchange under section 351 of the Internal Revenue Code of 1986, as amended. These transfers were made pursuant to Section 4(2) of the Securities Act of 1933, as amended. ITEM 27. EXHIBITS
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- 1 --Form of Underwriting Agreement. 2.1 --Contribution Agreement among Central European Distribution Corporation and William V. Carey, William V. Carey Stock Trust, Estate of William O. Carey and Jeffrey Peterson dated November 28, 1997. 3.1 --Certificate of Incorporation. 3.2 --Bylaws. 4.1 --Form of Common Stock Certificate. 4.2 --Warrant Agreement and attached form of Warrant. 4.3 --Form of Unit Purchase Option. *5 --Opinion of Hogan & Hartson L.L.P. 10.1 --1997 Stock Incentive Plan. 10.2 --Distribution contract between Carey Agri and Guinness Brewing Worldwide Ltd. dated July 31, 1997. 10.3 --Distribution contract between Carey Agri and Pilsner Urquell dated December 13, 1996. 10.4 --Distribution contract between Carey Agri and United Distillers Finlandia Group Sp. z o.o dated January 1, 1995. 10.5 --Form of distribution contract with Polmos vodka producers. 10.6 --Distribution contract with IDV Poland Sp. z o.o. dated July 3, 1997. *10.7 --Distribution contract for Lech beer. 10.8 --Employment agreement with William V. Carey. 10.9 --Employment agreement with Jeffrey Peterson. 10.10 --Form of Selling Shareholders' Power of Attorney. 10.11 --Form of Custody Agreement between Selling Shareholders and Custodian. 21 --Subsidiaries of the Registrant. 23.1 --Consent of Ernst & Young Audit Sp. z o.o. *23.2 --Consent of Hogan & Hartson L.L.P. (included in Exhibit 5). 24 --Power of Attorney (included on the signature page in Part II of this Registration Statement). 27 --Financial Data Schedule.
- -------- * To be filed by amendment. ITEM 28. UNDERTAKINGS The Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange II-2 Commission (the "Commission") such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby further undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time the Commission declared it effective. (2) For determining any liability under the Securities Act, each post- effective amendment that contains a form of prospectus shall be deemed to be a new registration statement for the securities offered in this Registration Statement, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) File, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (a) Include any prospectus required by section 10(a)(3) of the Securities Act; (b) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (c) Include any additional or changed material information on the plan of distribution. II-3 SIGNATURES IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE REQUIREMENTS OF FILING ON FORM SB-2 AND AUTHORIZED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, IN THE CITY OF ALEXANDRIA, COMMONWEALTH OF VIRGINIA, ON THIS 15TH DAY OF DECEMBER 1997. Central European Distribution Corporation /s/ William V. Carey By: _________________________________ WILLIAM V. CAREY CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS BELOW CONSTITUTES AND APPOINTS WILLIAM V. CAREY AND JEFFREY PETERSON, JOINTLY AND SEVERALLY, EACH IN HIS OWN CAPACITY, HIS TRUE AND LAWFUL ATTORNEYS-IN- FACT, WITH FULL POWER OF SUBSTITUTION, FOR HIM AND HIS NAME, PLACE AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS (INCLUDING POST- EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO SAID ATTORNEYS-IN-FACT AND AGENTS WITH FULL POWER AND AUTHORITY TO DO SO AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE IN AND ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT, OR THEIR SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF. IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT WAS SIGNED BY THE FOLLOWING PERSONS, IN THE CAPACITIES INDICATED BELOW, ON THIS 15TH DAY OF DECEMBER 1997. SIGNATURE TITLE /s/ William V. Carey Chairman, President, Chief Executive - ------------------------------------- Officer and Chief Financial Officer WILLIAM V. CAREY (Principal executive, financial and accounting officer) /s/ Jeffrey peterson Vice Chairman and Executive Vice - ------------------------------------- President JEFFREY PETERSON /s/ James T. Grossmann Director - ------------------------------------- JAMES T. GROSSMANN /s/ James B. Kelly Director - ------------------------------------- JAMES B. KELLY /s/ Jan W. Laskowski Director - ------------------------------------- JAN W. LASKOWSKI /s/ Joe M. Richardson Director - ------------------------------------- JOE M. RICHARDSON II-4 EX-1.1 2 CENTRAL EUROPEAN DISTRO CORP. CENTRAL EUROPEAN DISTRIBUTION CORPORATION 1,150,000 shares of Common Stock, par value $.01 per share and 1,150,000 redeemable Common Stock purchase warrants Underwriting Agreement [_____], 1998 Fine Equities, Inc. 600 Third Avenue New York, New York 100165 SouthWall Capital Corp. 110 Wall Street New York, New York 10005 Dear Sirs: Central European Distribution Corporation, a Delaware corporation (the "Company"), proposes to sell to Fine Equities, Inc. and SouthWall Capital Corp. (hereinafter collectively referred to as the "Underwriters") shares of the Company's common stock, par value $.01 per share (the "Common Stock") and redeemable warrants ("Warrants") to purchase such shares to be issued pursuant to a Warrant Agreement among the Company, the Underwriters and American Stock Transfer & Trust Company dated _______, 1998 (the "Warrant Agreement"). The aggregate number of such shares that the Company proposes to sell is 1,150,000 (the "Firm Shares") and the aggregate number of such warrants that the Company proposes to sell is 1,150,000 (the "Firm Warrants" and together with the Firm Shares, the "Firm Securities"). The respective amounts of the Firm Securities to be so purchased by the Underwriters are set forth opposite your respective names in Schedule I hereto. In addition, the Company and the Selling Shareholders (as hereinafter defined) propose to sell to the Underwriters, at the Underwriters' option, an aggregate of up to 172,500 additional shares and a like number of warrants (the "Option Shares" and "Option Warrants," respectively), of which the Company proposes to issue and sell 97,500 Option Shares and 172,500 Option Warrants and the Selling Shareholders propose to sell an aggregate of 75,000 Option Shares. Unless the context otherwise indicates: the Option Shares and the Option Warrants are herein collectively called the "Option Securities;" the Firm Shares and the Option Shares (to the extent the aforementioned option is exercised) are herein collectively called the "Shares;" and the Firm Warrants and the Option Warrants (to the extent the aforementioned option is exercised) are collectively called the "Warrants." You have advised the Company that you desire to purchase, severally, the number of Firm Securities set forth opposite your respective names in Schedule I hereto, plus your pro rata portion of the Option Securities if you elect to exercise the aforementioned option in whole or in part. In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereto, intending to be legally bound, agree as follows: 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to, and agrees with, each of the Underwriters that: (a) A registration statement (File No. 333-_____) on Form SB-2 relating to the public offering of the Shares and Warrants, including a form of prospectus subject to completion, copies of which have heretofore been delivered to the Underwriters, has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder, and has been filed with the Commission under the Act and one or more amendments to such registration statement may have been so filed. After the execution of this Agreement, the Company will file with the Commission either (i) if such registration statement, as it may have been amended, has been declared by the Commission to be effective under the Act, either (A) if the Company relies on Rule 434 under the Act, a Term Sheet (as hereinafter defined) relating to the Shares and Warrants that shall identify the Preliminary Prospectus (as hereinafter defined) that it supplements containing such information as is required or permitted by Rules 434, 430A and 424(b) under the Act or (B) if the Company does not rely on Rule 434 under the Act, a prospectus in the form most recently included in an amendment to such registration statement (or, if no such amendment shall have been filed, in such registration statement), with such changes or insertions as are required by Rule 430A under the Act or permitted by Rule 424(b) under the Act and, in the case of either clause (i)(A) or (i)(B) of this sentence, as have been provided to and approved by the Underwriters prior to the execution of this Agreement, or (ii) if such registration statement, as it may have been amended, has not been declared by the Commission to be effective under the Act, an amendment to such registration statement, including a form of prospectus, a copy of which amendment has been furnished to and approved by the Underwriters prior to the execution of this Agreement. As used in this Agreement, the term "Registration Statement" means such registration statement, as amended at the time when it was or is declared effective, including all financial schedules and exhibits thereto and including any information omitted therefrom pursuant to Rule 430A under the Act and including the Prospectus (as hereinafter defined); the term "Preliminary Prospectus" means each prospectus subject to completion filed with such registration statement or any amendment thereto (including the prospectus subject to completion, if any, included in the Registration Statement or any amendment thereto at the time it was or is declared effective); the term "Prospectus" means (A) if the Company relies on Rule 434 under the Act, the Term Sheet relating to the Shares and Warrants that is first filed pursuant to Rule 424(b)(7) under the Act, together with the Preliminary Prospectus identified therein that such Term Sheet supplements; (B) if the Company does not rely on Rule 434 under the Act, the prospectus first filed with the Commission pursuant to Rule 424(b) under the Act or (C) if the Company does not rely on Rule 434 under the Act and if no prospectus is required to be filed pursuant to said Rule 424(b), such term means the prospectus included in the Registration Statement; except that if such registration statement or prospectus is amended or such prospectus is supplemented, after the effective date of such registration statement and prior to the Option Closing Date (as defined in Section 3(b) hereof), the terms "Registration Statement" and "Prospectus" shall mean such registration statement and prospectus as so amended, and the term "Prospectus" shall mean the prospectus as so supplemented, or both, as the case may be; and the term "Term Sheet" means any term sheet that satisfies the requirements of Rule 434 under the Act. Any reference to the "date" of a Prospectus that includes a Term Sheet shall mean the date of such Term Sheet. (b) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus. At the time the Registration Statement becomes effective and at all times subsequent thereto up to and on the Closing Date (as hereinafter defined) or the Option Closing Date, as the case may be, (i) the Registration Statement and Prospectus will in all respects conform to the requirements of the Act and the Rules and Regulations; and (ii) neither the Registration Statement nor the Prospectus will include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make statements therein not misleading; provided, however, that the Company makes no representations, warranties or agreements as to information contained in or omitted from the Registration Statement or Prospectus in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of the Underwriters specifically for use in the preparation thereof. It is understood that the statements set forth in the Prospectus on page 2 with respect to stabilization, under the heading "Underwriting" and the identity of counsel to the Underwriters under the heading "Legal Matters" constitute the only information -2- furnished in writing by or on behalf of the several Underwriters for inclusion in the Registration Statement and Prospectus, as the case may be. (c) Each of the Company and Carey Agri International Poland Sp. z o. o., a corporation organized under the laws of Poland (the "Subsidiary"), has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with full power and authority corporate and other to own its properties and conduct its business as described in the Prospectus and is duly qualified to do business as a foreign corporation and is in good standing in all other jurisdictions in which the nature of its business or the character or location of its properties requires such qualification, except where failure to so qualify will not materially affect the Company's or the Subsidiary's business, properties or financial condition. (d) The authorized, issued and outstanding capital stock of the Company as of _____, 1997 is as set forth in the Prospectus under "Capitalization"; the shares of issued and outstanding capital stock of the Company set forth thereunder have been duly authorized, validly issued and are fully paid and non-assessable; except as set forth in the Prospectus, no options, warrants, or other rights to purchase, agreements or other obligations to issue, or agreements or other rights to convert any obligation into, any shares of capital stock of the Company have been granted or entered into by the Company; the capital stock conforms to all statements relating thereto contained in the Registration Statement and Prospectus; and neither the filing of the Registration Statement nor the offering or sale of the Shares and Warrants as contemplated by this Agreement gives rise to any registration rights or other rights, other than those which have been waived or satisfied, for or relating to the registration of any shares of Common Stock or other securities of the Company. (e) The Shares and Warrants to be issued and sold by the Company have been duly authorized, and when issued and delivered pursuant to this Agreement, will be duly authorized, validly issued, fully paid and non- assessable; the shares of Common Stock issuable upon exercise of the Warrants have been duly authorized and reserved for issuance upon exercise of the Warrants and will when issued as contemplated by the instrument evidencing the Warrants be validly issued, fully paid and non-assessable; and no preemptive rights of any security holder of the Company exist with respect to any shares of Common Stock or the issue and sale thereof. Neither the filing of the Registration Statement nor the offering or sale of the Shares and Warrants as contemplated in this Agreement gives rise to any rights, other than those which have been waived or satisfied, for or relating to the registration of any securities of the Company. The Warrant Agreement, which will be substantially in the form filed as an exhibit to the Registration Statement, and Warrants have been duly authorized; and when the Warrants are delivered and paid for pursuant to this Agreement, the Warrant Agreement and the Warrants will have been duly executed and delivered and will constitute the valid and legally binding obligations of the Company, enforceable in accordance with their terms. The shares of Common Stock and warrants (including the shares of Common Stock issuable upon exercise of such warrants) issuable upon exercise of the Underwriters' Unit Purchase Option (as defined in Section 13 hereof) have been reserved for issuance upon exercise of the Underwriters' Unit Purchase Option and, when issued and sold will be duly authorized, validly issued, fully paid and non-assessable and free of preemptive rights and no personal liability will attach to the ownership thereof. (f) This Agreement and the Underwriters' Unit Purchase Option have each been duly and validly authorized, executed and delivered by the Company. The Company has full power and lawful authority to authorize, issue and sell the Shares and Warrants to be sold by it hereunder on the terms and conditions set forth herein, and no consent, approval, authorization or other order of any governmental authority is required in connection with such authorization, execution and delivery or -3- with the authorization, issue and sale of the Shares and Warrants or the Underwriters' Unit Purchase Option, except such as may be required under the Act or state securities laws. (g) The Company does not own, directly or indirectly, any capital stock or other equity ownership or proprietary interests in any other corporation, association, trust, partnership, joint venture or other entity other than the Subsidiary. All of the outstanding shares of capital stock of the Subsidiary have been duly authorized and validly issued, are fully paid and nonassessable and free of any preemptive or similar rights, and are owned by the Company, free and clear of any lien, adverse claim, security agreement or other encumbrance and have been issued in compliance with all applicable federal and state securities laws, and no options, warrants, or other rights to purchase, agreements or other obligations to issue, or agreements or other rights to convert any obligation into, any shares of capital stock of the Subsidiary have been granted or entered into by the Company or the Subsidiary; (h) Except as described in the Prospectus, neither the Company nor the Subsidiary is in violation, breach of default of or under, and consummation of the transactions herein contemplated and the fulfillment of the terms of this Agreement will not conflict with, or result in a breach or violation of, any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any of the property or assets of the Company or the Subsidiary pursuant to the terms of any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or the Subsidiary is a party or by which the Company or the Subsidiary may be bound or to which any of the property or assets of the Company or the Subsidiary is subject, nor will such action result in any violation of the provisions of the articles of incorporation or the by-laws (or other organizational documents), as amended, of the Company or the Subsidiary, or any statute or any order, rule or regulation applicable to the Company or the Subsidiary of any court or of any regulatory authority or other governmental body having jurisdiction over the Company or the Subsidiary. (i) Each of the Company and the Subsidiary has good and marketable title to all properties and assets described in the Prospectus as owned by it, free and clear of all liens, charges, encumbrances or restrictions, except for such liens, charges, encumbrances or restrictions as are not materially significant or important in relation to its respective business; all of the material leases and subleases under which the Company or the Subsidiary is the lessor or sublessor of properties or assets or under which the Company or the Subsidiary hold properties or assets as lessee or sublessee as described in the Prospectus are in full force and effect, and, except as described in the Prospectus, neither the Company nor the Subsidiary is in default in any material respect with respect to any of the terms or provisions of any of such leases or subleases, and no claim has been asserted by anyone that is adverse to rights of the Company or the Subsidiary as lessor, sublessor, lessee or sublessee under any of the leases or subleases mentioned above, or affecting or questioning the right of either the Company or the Subsidiary to continued possession of the leased or subleased premises or assets under any such lease or sublease except as described or referred to in the Prospectus; and the Company and the Subsidiary own or lease all such properties described in the Prospectus as are necessary to their operations as now conducted and, except as otherwise stated in the Prospectus, as proposed to be conducted as set forth in the Prospectus. (j) Ernst & Young Audit Sp. z o. o., Warsaw, Poland, who has given its reports on certain financial statements filed and to be filed with the Commission as a part of the Registration Statement are with respect to the Company, independent public accountants as required by the Act and the Rules and Regulations. (k) The financial statements, together with related notes, set forth in the Prospectus (or if the Prospectus is not in existence, the most recent Preliminary Prospectus) present fairly the financial position and results of operations and changes in stockholders' equity and cash flow position -4- of the Company on the basis stated in the Registration Statement, at the respective dates and for the respective periods to which they apply. Said statements and related notes have been prepared in accordance with United States generally accepted accounting principles applied on a basis which is consistent during the periods involved. The information set forth under the captions "Dilution", "Capitalization", and "Selected Financial Data" in the Prospectus fairly present, on the basis stated in the Prospectus, the information included therein. (l) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), neither the Company nor the Subsidiary has incurred any liabilities or obligations, direct or contingent, not in the ordinary course of business, or entered into any transaction not in the ordinary course of business, which is material to the business of the Company or the Subsidiary, and there has not been any change in the capital stock of, or any incurrence of short- term or long-term debt by, the Company or the Subsidiary or any issuance of options, warrants or other rights to purchase the capital stock of the Company or the Subsidiary or any adverse change or any development involving, so far as the Company can now reasonably foresee a prospective adverse change in the condition (financial or other), net worth, results of operations, business, key personnel or properties of it which would be material to the business or financial condition of the Company or the Subsidiary and neither the Company nor the Subsidiary has become a party to, and neither the business nor the property of the Company or the Subsidiary has become the subject of, any material litigation, whether or not in the ordinary course of business. (m) Except as set forth in the Prospectus, there is not now pending or, to the knowledge of the Company, threatened, any action, suit or proceeding to which the Company or the Subsidiary is a party before or by any court or governmental agency or body, which might result in any material adverse change in the condition (financial or other), business prospects, net worth, or properties of the Company or the Subsidiary, nor are there any actions, suits or proceedings related to environmental matters or related to discrimination on the basis of age, sex, religion or race, and no labor disputes involving the employees of the Company or the Subsidiary exist or are imminent which might be expected to adversely affect the conduct of the business, property or operations or the financial condition or results of operations of the Company or the Subsidiary. (n) Except as disclosed in the Prospectus, the Company and the Subsidiary have filed all necessary income and franchise tax returns with all federal, state, local and foreign governmental agencies and have paid all taxes shown as due thereon; and there is no tax deficiency which has been or to the knowledge of the Company might be asserted against the Company or the Subsidiary. (o) The Company and the Subsidiary have sufficient licenses, permits and other governmental authorizations currently required for the conduct of their business or the ownership of their properties as described in the Prospectus and are in all material respects complying therewith. To the best knowledge of the Company, none of the activities or business of the Company or the Subsidiary are in violation of, or cause the Company or the Subsidiary to violate, any law, rule, regulation or order of the United States, Poland or any state, county or locality, or of any agency or body of the United States, Poland or of any state, county or locality, the violation of which would have a material adverse impact upon the condition (financial or otherwise), business, property, prospective results of operations, or net worth of the Company or the Subsidiary. (p) The Company and the Subsidiary own or possess the right to use all patents, trademarks, trademark registrations, service marks, service mark registrations, trade names, copyrights, licenses, inventions, trade secrets and rights described in the Prospectus as being necessary for the conduct of their respective businesses, and neither the Company nor the Subsidiary is aware of any claim to the contrary or any challenge by any other person to the rights of the Company and the Subsidiary with respect to the foregoing. The Company's and the Subsidiary's businesses as now -5- conducted do not and will not infringe or conflict with in any material respect, patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses or other intellectual property or franchise right of any other person. Except as described in the Prospectus, no claim has been made against the Company or the Subsidiary alleging the infringement by the Company or the Subsidiary of any patent, trademark, service mark, trade name, copyright, trade secret, license in or other intellectual property right or franchise right of any person. (q) The Company and the Subsidiary are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are customary in the businesses in which they are engaged; and neither the Company nor the Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue their respective businesses at a cost that would not have a material adverse effect upon the condition (financial or otherwise), business, property, prospective results of operations, or net worth of the Company or the Subsidiary. (r) Neither the Company nor the Subsidiary has, directly or indirectly, at any time (i) made any contributions to any candidate for political office, or failed to disclose fully any such contribution in violation of law, or (ii) made any payment to any state, federal or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments or contributions required or allowed by applicable law. The Company's and the Subsidiary's internal accounting controls and procedures are sufficient to cause the Company and the Subsidiary to comply in all material respects with the Foreign Corrupt Practices Act of 1977, as amended. (s) On the Closing Dates (hereinafter defined), all transfer or other taxes (including franchise, capital stock or other tax, other than income taxes, imposed by any jurisdiction), if any, which are required to be paid in connection with the sale and transfer of the Shares and Warrants to the Underwriters hereunder will have been fully paid or provided for by the Company and all laws imposing such taxes will have been fully complied with. (t) All contracts and other documents of the Company and the Subsidiary which are, under the Rules and Regulations, required to be filed as exhibits to the Registration Statement have been so filed. (u) Neither the Company nor the Subsidiary has taken nor will take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares and Warrants hereby. (v) Neither the Company nor the Subsidiary has entered into any agreement pursuant to which any person is entitled, either directly or indirectly, to compensation from the Company or the Subsidiary for services as a finder in connection with the proposed public offering. (w) Except as previously disclosed in writing by the Company to the Underwriters, no officer, director or stockholder of the Company or the Subsidiary has any affiliation or association with any member of the National Association of Securities Dealers, Inc. (the "NASD"). (x) Neither the Company nor the Subsidiary is, nor upon receipt of the proceeds from the sale of the Shares and Warrants will be, an "investment company" within the meaning of the Investment Company Act of 1940, as amended, and the rules and regulations thereunder. -6- (y) Neither the Company nor the Subsidiary has distributed, nor will they distribute prior to the First Closing Date (as defined in Section 3(a) hereof), any offering material in connection with the offering and sale of the Shares and Warrants other than the Preliminary Prospectus, Prospectus, the Registration Statement or the other materials permitted by the Act, if any. (z) There are no business relationships or related-party transactions of the nature described in Item 404 of Regulation S-B involving the Company or the Subsidiary and any person described in such Item that are required to be disclosed in the Prospectus and that have not been so disclosed. (aa) The Company and the Subsidiary have complied with all provisions of Section 517.075 Florida Statutes relating to doing business with the government of Cuba or with any person or affiliate located in Cuba. 2. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS. Each of the selling shareholders listed in Schedule II hereto (the "Selling Shareholders") severally represents and warrants to, and agrees with, each Underwriter that: (a) Such Selling Shareholder has duly executed and delivered a power of attorney (the "Power of Attorney") and custody agreement (the "Custody Agreement"), in the forms heretofore delivered to the Underwriters, appointing William V. Carey and Jeffrey Peterson (the "Attorneys-in-fact"), and either of them, as attorneys-in-fact with authority to execute and deliver this Agreement on behalf of such Selling Shareholder and to take certain other actions with respect hereto, and appointing American Stock Transfer & Trust Company as custodian (the "Custodian"). The Attorneys-in-fact are authorized to execute, deliver and perform the Power of Attorney and the Custody Agreement and this Agreement on behalf of such Selling Shareholder, including, without limitation, the authority to determine the purchase price to be paid to each Selling Shareholder by the Underwriters as set forth in Section 3 of this Agreement. Certificates in negotiable form representing the Option Shares to be sold by each Selling Shareholder hereunder have been deposited with the Custodian pursuant to the Custody Agreement for the purpose of delivery pursuant to this Agreement. Such Selling Shareholder agrees that the Option Shares represented by the certificates on deposit with the Custodian are subject to the interests of the Underwriters hereunder, that the arrangements made for such custody and the appointment of the Attorneys-in- fact are to that extent irrevocable, and that the obligations of such Selling Shareholder hereunder shall not be terminated, except as provided in this Agreement, by any act of such Selling Shareholder, by operation of law or otherwise, whether by the dissolution, reorganization, death or incapacity of such Selling Shareholder or the occurrence of any other event. If any such dissolution, reorganization, death, incapacity or other such event should occur before the delivery of the Option Shares to be sold by the affected Selling Shareholder hereunder, the certificates for such Option Shares shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement, as if such dissolution, reorganization, death, incapacity, or other event had not occurred, regardless of whether or not the Custodian or Attorneys-in-fact shall have received notice thereof. (b) Such Selling Shareholder has all requisite right, power and authority to enter into this Agreement and the Power-of-Attorney and the Custody Agreement, and to sell, transfer and deliver the Option Shares to be sold by such Selling Shareholder hereunder, and this Agreement, the Power-of-Attorney and the Custody Agreement have been duly authorized, executed and delivered by or on behalf of such Selling Shareholder and constitute the legal, valid and binding obligations of such Selling Shareholder enforceable in accordance with their respective terms. (c) The execution, delivery and performance, and the consummation of the transactions contemplated hereby and by the Prospectus, the Power- of-Attorney and the Custody Agreement, and the fulfillment of the terms hereof, do not and shall not, with or without the giving of notice or lapse -7- of time or both, (i) conflict with any term or provision of such Selling Shareholder's charter, bylaws or other organic or governing documents, if applicable, (ii) conflict with or result in a breach or a violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage or other agreements or instrument to which such Selling Shareholder is a party or by which such Selling Shareholder or any of his, her or its Option Shares is bound, or (iii) violate any existing, applicable law, rule, regulation, judgment, order or decree of any government, governmental instrumentality or court, domestic or foreign, having jurisdiction over such Selling Shareholder or any of his, her or its Option Shares. (d) All authorizations, approvals and consents necessary for the valid execution and delivery by such Selling Shareholder of the Power-of- Attorney and the Custody Agreement, and for the execution and delivery of this Agreement on behalf of such Selling Shareholder, have been duly given and received and are in full force and effect, and the sale and delivery of the Option Shares to be sold by such Selling Shareholder hereunder (other than, at the time of the execution hereof, the issuance of the order of the Commission declaring the Registration Statement effective and such authorization, approvals or consents as may be necessary under the state securities or blue sky laws and the bylaws, rules and pronouncements of the NASD, have been obtained and are in full force and effect. (e) Such Selling Shareholder now is, and on the Closing Date and any Option Closing Date will be, the lawful owner of the Option Shares to be sold by such Selling Shareholder pursuant to this Agreement. On the Closing Date and any Option Closing Date, such Selling Shareholder will have good and marketable title to such Option Shares, free and clear of all liens, pledges, encumbrances, security interests, equities, claims or other restrictions (other than those created under the Power-of-Attorney and the Custody Agreement). Upon proper delivery of, and payment for, such Option Shares as provided herein, the Underwriters will acquire good and marketable title thereto, free and clear of all liens, pledges, encumbrances, security interests, equities, claims and other restrictions and defects whatsoever, including any liability for estate or inheritance taxes, or any liability to or claims of any creditor, devisee, legatee or beneficiary of such Selling Shareholder. (f) Such Selling Shareholder is not prompted to sell the Option Shares to be sold by such Selling Shareholder hereunder by any information concerning the Company or the Subsidiary that is not set forth in the Prospectus. (g) Such Selling Shareholder has examined the Registration Statement and the Prospectus and the information relating to such Selling Shareholder set forth therein or otherwise furnished to the Company by such Selling Shareholder or on such Selling Shareholder's behalf for use in connection with the preparation of the Registration Statement and the Prospectus (including, without limiting the generality of the foregoing, all representations and warranties of such Selling Shareholder in the Power of Attorney) and, as to such information, neither the Registration Statement, the Prospectus nor the Power of Attorney contains any untrue or inaccurate statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (h) Such Selling Shareholder has not incurred any liability for any finder's fee or similar payment in connection with the sale of such Selling Shareholder's Option Shares hereunder. (i) Such Selling Shareholder has not distributed and will not distribute any offering material in connection with the offering and sale of the Shares and Warrants other than the Preliminary Prospectus and the Prospectus or other material, if any, permitted by the Act and the Rules and Regulations. Neither such Selling Shareholder nor any affiliate of such Selling Shareholder has taken or shall take any action designed, or that might be reasonably expected, to cause or result in -8- stabilization or manipulation of, or to facilitate the sale or resale of, any shares of the Common Stock or Warrants. (j) Such Selling Shareholder has no reason to believe that any of the representations and warranties of the Company set forth in Section 1 above is untrue or inaccurate in any material respect. 3. PURCHASE, SALE AND DELIVERY OF THE SHARES AND WARRANTS. (a) Subject to the terms and conditions set forth herein, and on the basis of the representations, warranties and agreements contained herein, the Company shall sell to the Underwriters, and each such Underwriter severally, and not jointly, shall purchase from the Company at a price of $_____ per Share and $.10 per Warrant, less an underwriting discount of 10% in each case, at the place and time hereinafter specified, the number of Firm Securities set forth opposite the names of the Underwriters in Schedule I hereto. Delivery of the Firm Securities against payment therefor shall take place at the offices of Fine Equities, Inc., 600 Third Avenue, New York, New York 10016 (or at such other place as may be designated by agreement between you and the Company) at 10:00 a.m., New York City time, on _____, 1998, or at such later time and date as you may designate, such time and date of payment and delivery for the Firm Securities being herein called the "First Closing Date." (b) In addition, subject to the terms end conditions set forth herein, and on the basis of the representations, warranties and agreements contained herein, the Company and each Selling Shareholder, severally and not jointly, hereby grants an option (the "Over-allotment Option") to the several Underwriters to purchase from the Company and the Selling Shareholders, respectively, at the price per Share and per Warrant as set forth in subsection (a) above, all or any part of the respective number of Option Securities determined as hereinafter provided, aggregating the number of Option Shares and Option Warrants set forth opposite the names of the Company and the Selling Shareholders in Schedule II hereto. The Over- allotment Option may be exercised within 45 days after the effective date of the Registration Statement upon notice by the Underwriters to the Company advising as to the amount of Option Shares and/or Option Warrants as to which the Underwriters are exercising such option, the names and denominations in which the certificates for such Option Shares and/or Option Warrants are to be registered and the time and date when such certificates are to be delivered. Such time and date (hereinafter, the "Option Closing Date") shall be determined by the Underwriters but shall not be earlier than four nor later than ten full business days after the exercise of the Over-allotment Option, nor in any event prior to the First Closing Date. Delivery of the Option Securities against payment therefor shall take place at the offices of Fine Equities, Inc., 600 Third Avenue, New York, New York 10016. The number of Option Shares and/or Option Warrants to be purchased by each Underwriter, if any, shall bear the same percentage to the total number of Option Securities being purchased by the several Underwriters pursuant to this subsection (b) as the respective numbers of Firm Shares and/or Firm Warrants being purchased by such Underwriter bears to the respective total numbers thereof, as adjusted, in each case by the Underwriters in such manner as the Underwriters may deem appropriate. If the Over-allotment Option is exercised with respect to fewer than all of the Option Securities, the Option Securities will be sold in the following order: (i) first, the Option Shares the Selling Shareholders propose to sell and (ii) second, the Option Shares and Option Warrants the Company proposes to sell. The Over-allotment Option may be exercised only to cover over-allotments in the sale by the Underwriters of Firm Shares and/or Firm Warrants referred to in subsection (a) above. In the event the Company declares or pays a dividend or distribution on its Common Stock, whether in the form of cash, shares of Common Stock or any other consideration, prior to the Option Closing Date, such dividend or distribution shall also be paid on the Option Securities on the Option Closing Date. -9- Certificates in negotiable form for the Option Shares to be sold by each of the Selling Shareholders hereunder have been placed in custody, for delivery under this Agreement pursuant to the Custody Agreement. Each Selling Shareholder agrees that the Option Shares represented by the certificates so held in custody are subject to the interests of the Underwriters hereunder, that the arrangements made by such Selling Shareholder for such custody are to that extent irrevocable and that the obligations of such Selling Shareholder hereunder shall not be terminated by the act of such Selling Shareholder or by operation of law, whether by the death or incapacity of such Selling Shareholder or the occurrence of any other event, except as specifically provided herein or in the Custody Agreement. If any Selling Shareholder should die or be incapacitated, or if any other such event should occur, before the delivery of the Option Shares hereunder, certificates for the Option Shares to be sold by such Selling Shareholder shall, except as specifically provided herein or in the Custody Agreement, be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such death, incapacity or other event has not occurred, regardless of whether the Custodian shall have received notice of such death, incapacity or other event. (c) The Company and the Selling Shareholders will make the certificates for the Shares and Warrants to be purchased by the Underwriters hereunder available to the Underwriters for review at least two full business days prior to the First Closing Date or the Option Closing Date (which are collectively referred to herein as the "Closing Dates"). The certificates shall be in such names and denominations as the Underwriters may request, at least two full business days prior to the Closing Dates. Time shall be of the essence and delivery at the time and place specified in this Agreement is a further condition to the obligations of each Underwriter. Definitive certificates in negotiable form for the Firm Securities to be purchased by the Underwriters hereunder will be delivered by the Company to the Underwriters against payment of the respective purchase prices by the several Underwriters, by certified or bank cashier's checks in New York Clearing House funds, payable to the order of the Company with regard to the Firm Securities to be purchased from the Company. In addition, in the event the Underwriters exercise the Over- allotment Option for all or any portion of the Option Securities pursuant to the provisions of subsection (b) above, payment for such Option Securities shall be made by certified or bank cashier's checks in New York Clearing House funds, payable to or upon the order of the Company with regard to the Option Shares and Option Warrants to be purchased from the Company and to the order of the Custodian for the respective accounts of the Selling Shareholders with regard to the Option Shares being purchased from such Selling Shareholders at the offices of Fine Equities, Inc., 600 Third Avenue, New York, New York 10016 (or such other place as may be designated by agreement between the Underwriters and the Company) at the time and date of delivery of such Option Securities as required by the provisions of subsection (b) above, against receipt of the certificates for such Option Securities by the Underwriters registered in such names and in such denominations as the Underwriters may request. It is understood that the several Underwriters propose to offer the Shares and Warrants (including the Option Securities) to be purchased hereunder to the public upon the terms and conditions set forth in the Registration Statement, after the Registration Statement becomes effective. 4. COVENANTS OF THE COMPANY. The Company covenants and agrees with the several Underwriters that: (a) The Company will use its best efforts to cause the Registration Statement to become effective as promptly as possible. If required, the Company will file the Prospectus or any Term Sheet that constitutes a part thereof and any amendment or supplement thereto with the Commission in the manner and within the time period required by Rules 434 and 424(b) under the Act. Upon notification from the Commission that the Registration Statement has become effective, the Company will so -10- advise the Underwriters and will not at any time, whether before or after the effective date, file the Prospectus, Term Sheet or any amendment to the Registration Statement or supplement to the Prospectus of which the Underwriters shall not previously have been advised and furnished with a copy or to which the Underwriters or the Underwriters' counsel shall have objected to in writing or which is not in compliance with the Act and the Rules and Regulations. At any time prior to the later of (A) the completion by all of the Underwriters of the distribution of the Shares and Warrants contemplated hereby (but in no event more than nine months after the date on which the Registration Statement shall have become or been declared effective) and (B) 25 days after the date on which the Registration Statement shall have become or been declared effective, the Company will prepare and file with the Commission, promptly upon the Underwriters' request, any amendments or supplements to the Registration Statement or Prospectus which, in the Underwriters' opinion, may be necessary or advisable in connection with the distribution of the Shares and Warrants. As soon as the Company is advised thereof, the Company will advise the Underwriters, and confirm such advice in writing, (i) when the Registration Statement or any post-effective amendment to the Registration Statement is filed with the Commission, (ii) of the receipt of any comments of the Commission, (iii) of the effectiveness of any post-effective amendment to the Registration Statement, (iv) of the filing of any supplement to the Prospectus or any amended Prospectus, (v) of any request made by the Commission for amendment of the Registration Statement or for supplementing of the Prospectus or for additional information with respect thereto, (vi) of the issuance by the Commission or any state or regulatory body of any stop order or other order or threat thereof suspending the effectiveness of the Registration Statement or any order preventing or suspending the use of any Preliminary Prospectus, or (vii) of the suspension of the qualification of the Shares and Warrants for offering in any jurisdiction, or of the institution of any proceedings for any of such purposes. The Company will use its best efforts to prevent the issuance of any such stop order or of any order preventing or suspending such use, and, if any such order is issued, to obtain as soon as possible the lifting thereof. The Company has caused to be delivered to the Underwriters copies of each Preliminary Prospectus, and the Company has consented and hereby consents to the use of such copies for the purposes permitted by the Act. The Company authorizes the several Underwriters and dealers to use the Prospectus in connection with the sale of the Shares and Warrants for such period as in the opinion of counsel to the several Underwriters the use thereof is required to comply with the applicable provisions of the Act and the Rules and Regulations. In case of the happening, at any time within such period as a Prospectus is required under the Act to be delivered in connection with sales by an underwriter or dealer of any event of which the Company has knowledge and which materially affects the Company or the securities of the Company, or which in the opinion of counsel for the Company or counsel for the Underwriters should be set forth in an amendment of the Registration Statement or a supplement to the Prospectus in order to make the statements therein not then misleading, in light of the circumstances existing at the time the Prospectus is required to be delivered to a purchaser of the Shares and Warrants or in case it shall be necessary to amend or supplement the Prospectus to comply with law or with the Rules and Regulations, the Company shall notify the Underwriters promptly and forthwith prepare and furnish to the Underwriters copies of such amended Prospectus or of such supplement to be attached to the Prospectus, in such quantities as the Underwriters may reasonably request, in order that the Prospectus, as so amended or supplemented, will not contain any untrue statement of a material fact or omit to state any material facts necessary in order to make the statements in the Prospectus, in the light of the circumstances under which they are made, not misleading. The preparation and furnishing of any such amendment or supplement to the Registration Statement or amended Prospectus or supplement to be attached to the Prospectus shall be without expense to the Underwriters, except that in case any Underwriter is required, in connection with the sale of the Shares and Warrants, to deliver a Prospectus nine months or more after the effective date of the Registration Statement, the Company will upon request of and at the expense of such -11- Underwriter, amend or supplement the Registration Statement and Prospectus and furnish the Underwriter with reasonable quantities of prospectuses complying with Section 10(a)(3) of the Act. The Company will comply with the Act, the Rules and Regulations and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder in connection with the offering and issuance of the Shares and Warrants. (b) The Company will use its best efforts to qualify to register the Shares and Warrants for sale under the securities or "blue sky" laws of such jurisdictions as the Underwriters may designate and will make such applications and furnish such information as may be required for that purpose and to comply with such laws, provided the Company shall not be required to qualify as a foreign corporation or a dealer in securities or to execute a general consent of service of process in any jurisdiction in any action other than one arising out of the offering or sale of the Shares and Warrants. The Company will, from time to time, prepare and file such statements and reports as are or may be required to continue such qualification in effect for so long a period as the Underwriters may reasonably request. (c) If the sale of the Shares and Warrants provided for herein is not consummated for any reason caused by the Company, the Company shall pay all costs and expenses incident to the performance of the Company's obligations hereunder, including but not limited to, all of the expenses itemized in Section 9, including the accountable expenses of the Underwriters. (d) The Company will use its best efforts to (i) cause a Registration Statement on Form 8-A under the Exchange Act to be declared effective concurrently with the completion of this offering and will notify the Underwriters in writing immediately upon the effectiveness of such registration statement, and (ii) if requested by the Underwriters, to obtain and keep current a listing in the Standard & Poor's or Moody's Industrial OTC Manual. (e) For so long as the Company is a reporting company under either Section 12(g) or 15(d) of the Exchange Act, the Company, at its expense, will furnish to its stockholders an annual report (including financial statements audited by independent public accountants), in reasonable detail, and at its expense will furnish to the Underwriters during the period ending five (5) years from the date hereof (i) as soon as practicable after the end of each fiscal year, a balance sheet of the Company and any of its subsidiaries as at the end of such fiscal year, together with statements of income, surplus and cash flow of the Company and any of its subsidiaries for such fiscal year, all in reasonable detail and accompanied by a copy of the certificate or report thereon of independent accountants; (ii) as soon as practicable after the end of each of the first three fiscal quarters of each fiscal year, consolidated summary financial information of the Company for such quarter in reasonable detail; (iii) as soon as they are available, a copy of all reports (financial or other) mailed to security holders; (iv) as soon as they are available, a copy of all non-confidential reports and financial statements furnished to or filed with the Commission or any securities exchange or automated quotation system on which any class of securities of the Company is listed; and (v) such other information as you may from time to time reasonably request. (f) In the event the Company has an active subsidiary or subsidiaries, such financial statements referred to in subsection (e) above will be on a consolidated basis to the extent the accounts of the Company and its subsidiary or subsidiaries are consolidated in reports furnished to its stockholders generally. (g) The Company will deliver to the Underwriters at or before the First Closing Date two signed copies of the Registration Statement, including all financial statements and exhibits filed therewith, and of all amendments thereto, and will deliver to the several Underwriters such number of conformed copies of the Registration Statement, including such financial statements but without -12- exhibits, and of all amendments thereto, as the several Underwriters may reasonably request. The Company will deliver to the Underwriters or upon the order of the several Underwriters, from time to time until the effective date of the Registration Statement, as many copies of any Preliminary Prospectus filed with the Commission prior to the effective date of the Registration Statement as such Underwriters may reasonably request. The Company will deliver to the several Underwriters on the effective date of the Registration Statement and thereafter for so long as a Prospectus is required to be delivered under the Act, from time to time, as many copies of the Prospectus, in final form, or as thereafter amended or supplemented, as such Underwriters may from time to time reasonably request. The Company, not later than (i) 5:00 p.m., New York City time, on the date of determination of the public offering price for the First Shares and Warrants, if such determination occurred at or prior to 12:00 noon, New York City time, on such date or (ii) 6:00 p.m., New York City time, on the business day following the date of determination of such offering price, if such determination occurred after 12:00 noon, New York City time, on such date, will deliver to the several Underwriters, without charge, as many copies of the Prospectus and any amendment or supplement thereto as such Underwriters may reasonably request for purposes of confirming orders that are expected to settle on the First Closing Date. (h) The Company will make generally available to its security holders and deliver to the Underwriters as soon as it is practicable to do so but in no event later than 90 days after the end of twelve months after its current fiscal quarter, an earnings statement (which need not be audited) covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which shall satisfy the requirements of Section 11(a) of the Act. (i) The Company will apply the net proceeds from the sale of the Shares and Warrants for the purposes set forth under "Use of Proceeds" in the Prospectus, and will file such reports with the Commission with respect to the sale of the Shares and Warrants and the application of the proceeds therefrom as may be required pursuant to Rule 463 under the Act. (j) The Company will, promptly upon your request, prepare and file with the Commission any amendments or supplements to the Registration Statement, Preliminary Prospectus or Prospectus and take any other action, which in the reasonable opinion of counsel to the several Underwriters, may be reasonably necessary or advisable in connection with the distribution of the Shares and Warrants, and will use its best efforts to cause the same to become effective as promptly as possible. (k) The Company will reserve and keep available that maximum number of its authorized but unissued securities which are issuable upon exercise of the Underwriters' Unit Purchase Option. (l) The Company will not, and will deliver to the Underwriters agreements to the effect that for a period of 24 months from the First Closing Date (the "Lock-Up Period"), no officer, director or existing stockholder or optionholder of the Company (such officers, directors and stockholders being herein referred to as the "Principal Stockholders") will, directly or indirectly, offer, sell (including any short sale), grant any option for the sale of, acquire any option to dispose of, transfer, pledge, assign, hypothecate or otherwise dispose of any securities of the Company. In order to enforce this covenant, the Company shall impose stop- transfer instructions with respect to the securities owned by the Principal Stockholders until the end of such period and an appropriate legend shall be marked on the face of stock certificates representing all of such securities. (m) Subject to subsection (q) of this Section 4, during the eighteen (18) month period from the effective date of the Registration Statement (the "Effective Date"), you shall have the right of first refusal (the "Right of First Refusal") to act as underwriter or agent for any and all public offerings or private placements of securities of the Company, or of any successor to or subsidiary of -13- the Company or other entity in which the Company has an equity interest (herein this paragraph (m) referred to collectively as the "Company"), by the Company (the "Subsequent Company Offering") or any secondary offering of the Company's securities by the Principal Stockholders (the "Secondary Offering"). Accordingly, if during such period the Company intends to make a Subsequent Company Offering or the Company receives notification from any of such Principal Stockholders of such holder's intention to make a Secondary Offering, the Company shall notify you in writing of such intention and of the proposed terms of the offering. The Company shall thereafter promptly furnish you with such information concerning the business, condition and prospects of the Company as you may reasonably request. If within thirty (30) business days of receipt of such notice of intention and statement of terms you do not accept in writing such offer to act as underwriter or agent with respect to such offering upon the terms proposed and, in the case of a Subsequent Company Offering, the Company has received your prior written consent to make such offering, the Company and each of the Principal Stockholders shall be free to negotiate terms with other underwriters or agents with respect to such offering and to effect such offering on such proposed terms within six months after the end of such thirty (30) business day period. Before the Company and/or any of the Principal Stockholders shall accept any modified proposal from such underwriter or agent, your preferential right shall be reinstated and the same procedure with respect to such modified proposal as provided above shall be adopted. The failure by you to exercise your Right of First Refusal in any particular instance shall not affect in any way such right with respect to any other Subsequent Company Offering or Secondary Offering. By execution and delivery of agreements in form and substance satisfactory to you, each of the Principal Stockholders agrees to be bound by the terms of this Section 4(m) concerning any proposed Secondary Offering. (n) Prior to completion of this offering, the Company will make all filings required, including registration under the Exchange Act, to obtain the listing of the Shares and Warrants on the Nasdaq SmallCap Market or the American Stock Exchange, and will effect and maintain such listing for at least seven years from the effective date of the Registration Statement. (o) The Company and each of the Selling Shareholders represents that he or it has not taken and agrees that he or it will not take, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result in the stabilization or manipulation of the price of the Shares or the Warrants or to facilitate the sale or resale of the Shares or the Warrants. (p) On the Closing Date and simultaneously with the delivery of the Shares and Warrants, the Company shall execute and deliver to the Underwriters the Underwriters' Unit Purchase Option. The Underwriters' Unit Purchase Option will be substantially in the form of the Underwriters' Unit Purchase Option filed as an exhibit to the Registration Statement. (q) During the twelve month period commencing on the date of this Agreement, the Company will not, without the prior written consent of the Underwriters, grant options to purchase shares of Common Stock at an exercise price less than the greater of (i) the initial public offering price of the Shares or (ii) the fair market value of the Common Stock on the date of grant. During the Lock-Up Period, the Company will not, without the prior written consent of the Underwriters, grant options to any current officer of the Company or sell or offer any securities of the Company, except pursuant to options and warrants outstanding on the date hereof. (r) The Company will not, without the prior written consent of the Underwriters, grant registration rights to any person which are exercisable sooner than __ months from the First Closing Date. (s) William V. Carey shall be Chairman of the Board, President and Chief Executive Officer of the Company on the Closing Dates. The Company has obtained key person life insurance -14- in an amount of not less than $2.5 million on the life of Mr. Carey and will use its best efforts to maintain such insurance during the three year period commencing from the First Closing Date. In the event that Mr. Carey's employment with the Company is terminated prior to such three year period, the Company will obtain a comparable policy on the life of his successor for the balance of such three year period. For a period of _____ months from the First Closing Date, the compensation of the executive officers of the Company shall not be increased from the compensation levels disclosed in the Prospectus. (t) So long as any Warrants are outstanding, the Company shall use its best efforts to cause post-effective amendments to the Registration Statement to become effective in compliance with the Act and without any lapse of time between the effectiveness of any such post-effective amendments and cause a copy of each Prospectus, as then amended, to be delivered to each holder of record of a Warrant and to furnish to each Underwriter and dealer as many copies of each such Prospectus as such Underwriter or dealer may reasonably request. The Company shall not call for redemption any of the Warrants unless a registration statement covering the securities underlying the Warrants has been declared effective by the Commission and remains current at least until the date fixed for redemption. In addition, for so long as any Warrant is outstanding, the Company will promptly notify the Underwriters of any material change in the business, financial condition or prospects of the Company or any subsidiary thereof. (u) Upon the exercise of any Warrant or Warrants after ________, 1999, the Company will pay the Underwriters, a fee of four percent (4%) of the aggregate exercise price of the Warrants, of which a portion may be reallowed to the dealer who solicited the exercise (which may also be either or both of the Underwriters) if (i) the market price of the Company's Common Stock is greater than the exercise price of the Warrants on the date of exercise; (ii) the exercise of the Warrant was solicited by a member of the NASD; (iii) the Warrant is not held in a discretionary account; (iv) the disclosure of compensation arrangements has been made in documents provided to customers, both as part of the original offering and at the time of exercise; and (v) the solicitation of the Warrant was not in violation of Rule 10b-6 promulgated under the Exchange Act. The Company agrees not to solicit the exercise of any Warrants other than through the Underwriters and will not authorized any other dealer to engage in such solicitation without the prior written consent of the Underwriters. (v) For a period of five years from the effective date of the Registration Statement, the Company (i) at its expense, shall cause its regularly engaged independent certified public accountants to review (but not audit) the Company's financial statements for each of the first three fiscal quarters prior to the announcement of quarterly financial information, the filing of the Company's Quarterly Report on Form 10-QSB (or 10-Q, as the case may be) and the mailing of quarterly financial information to stockholders and (ii) shall not change its accounting firm without the prior written consent of the Underwriters. (w) For a period of five years from the First Closing Date (i) the Underwriters shall have the right, but not the obligation, to (a) designate a director to the Board of Directors of the Company or (b) designate one person to attend all meetings of the Board of Directors, which person will be entitled to receive all notices and other correspondence as if such person were a member of the Board of Directors and to be reimbursed for out-of-pocket expenses incurred in connection with attendance of meeting of the Board of Directors, and (ii) the Company shall engage a public relations firm acceptable to the Underwriters. 5. CONDITIONS OF UNDERWRITERS' OBLIGATION. The obligations of the several Underwriters to purchase and pay for the Shares and Warrants which they have respectively agreed to purchase hereunder are subject to the accuracy (as of the date hereof, and as of the Closing Dates) of and compliance with the representations and warranties of the Company and the Selling Shareholders set forth herein, to the performance by the Company and the -15- Selling Shareholders of their respective obligations hereunder, and to the satisfaction (at or prior to the Closing Dates), of each of following conditions: (a) The Registration Statement shall have become effective and the Underwriters shall have received notice thereof not later than 10:00 a.m., New York City time, on the date on which the amendment to the Registration Statement originally filed with respect to the Shares and Warrants or to the Registration Statement, as the case may be, containing information regarding the initial public offering price of the Shares and Warrants has been filed with the Commission, or such later time and date as shall have been agreed to by the Underwriters; if required, the Prospectus or any Term Sheet that constitutes a part thereof and any amendment or supplement thereto shall have been filed with the Commission in the manner and within the time period required by Rule 434 and 424(b) under the Act; on or prior to the Closing Dates, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that or a similar purpose shall have been instituted or shall be pending or, to the Underwriters' knowledge or to the knowledge of the Company, shall be contemplated by the Commission; any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the several Underwriters; (b) At the First Closing Date, the Underwriters shall have received the opinion, addressed to the Underwriters, dated as of the First Closing Date, of Hogan & Hartson LLP, Washington, D.C. and Warsaw, Poland, counsel for the Company and the Selling Shareholders, in form and substance satisfactory to counsel for the Underwriters, to the effect that: (i) the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, with full corporate power and authority to own its properties and conduct its business as described in the Registration Statement and Prospectus and is duly qualified or licensed to do business as a foreign corporation and is in good standing in each jurisdiction in which the ownership or leasing of its properties or conduct of its business requires such qualification; (ii) the Subsidiary has been duly incorporated and is validly existing as a corporation in good standing under the laws of Poland, with full corporate power and authority to own its properties and conduct its business as described in the Registration Statement and Prospectus and is duly qualified or licensed to do business as a foreign corporation and is in good standing in each jurisdiction in which the ownership or leasing of its properties or conduct of its business requires such qualification; all of the outstanding shares of capital stock of the Subsidiary have been duly authorized and validly issued, are fully paid and nonassessable and free of preemptive or similar rights, and are owned by the Company, free and clear of any lien, adverse claim, security interest or other encumbrance; no options, warrants, or other rights to purchase, agreements or other obligations to issue, or agreements or other rights to convert any obligation into, any shares of capital stock of the Subsidiary have been granted or entered into by the Company or the Subsidiary; (iii) to the best knowledge of such counsel, (A) each of the Company and the Subsidiary has obtained, or is in the process of obtaining, all licenses, permits and other governmental authorizations necessary to the conduct of its business as described in the Prospectus, (B) such licenses, permits and other governmental authorizations obtained are in full force and effect, and (C) each of the Company and the Subsidiary are in all material respects complying therewith; (iv) the authorized capitalization of the Company as of _____,1997 is as set forth under the caption "Capitalization" in the Prospectus; all shares of the Company's outstanding stock requiring authorization for issuance by the Company's Board of Directors -16- have been duly authorized and validly issued, are fully paid and non- assessable and conform to the description thereof contained in the Prospectus; the outstanding shares of Common Stock have not been issued in violation of the preemptive rights of any shareholder and the shareholders of the Company do not have any preemptive rights or other rights to subscribe for or to purchase, nor are there any restrictions upon the voting or transfer of any of the shares of Common Stock; except as set forth in the Prospectus, no options, warrants, or other rights to purchase, agreements or other obligations to issue, or agreements or other rights to convert any obligation into, any shares of capital stock of the Company have been granted or entered into by the Company; the Common Stock, the Warrants, the Underwriters' Unit Purchase Option and the Warrant Agreement conform to the respective descriptions thereof contained in the Prospectus; the Shares have been, and the shares of Common Stock to be issued upon exercise of the Warrants and the Underwriters' Unit Purchase Option, upon issuance in accordance with the terms of such Warrants, the Warrant Agreement and the Underwriters' Unit Purchase Option, have been duly authorized and, when issued and delivered, will be duly and validly issued, fully paid, non-assessable, free of preemptive rights and no personal liability will attach to the ownership thereof; all prior sales by the Company of its securities have been made in compliance with or under exemption from registration under the Act and applicable state securities laws and no shareholders of the Company have any rescission rights with respect to securities of the Company; a sufficient number of shares of Common Stock has been reserved for issuance upon exercise of the Warrants and the Underwriters' Unit Purchase Option; and, to the best of such counsel's knowledge, neither the filing of the Registration Statement nor the offering or sale of the Shares and Warrants as contemplated by this Agreement gives rise to any registration rights or other rights, other than those which have been waived or satisfied, for or relating to the registration of any shares of Common Stock or other securities of the Company; (v) this Agreement and the Warrant Agreement have been duly and validly authorized, executed and delivered by the Company and by or on behalf of each of the Selling Shareholders, and the Underwriters' Unit Purchase Option has been duly and validly authorized, executed and delivered by the Company, and, assuming due execution by each other party hereto or thereto, each of such agreements constitutes a legal, valid and binding obligation of the Company and each of the Selling Shareholders, as the case may be, enforceable against the Company and each of the Selling Shareholders, as the case may be, in accordance with their respective terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting enforcement of creditors' rights and the application of equitable principles in any action, legal or equitable, and except as rights to indemnity or contribution may be limited by applicable law); (vi) the Powers of Attorney and the Custody Agreements have been duly and validly executed and delivered by or on behalf of each of the Selling Shareholders; upon delivery of certificates for the Option Shares to be sold by the Selling Shareholders under this Agreement and the payment therefor as contemplated by this Agreement, valid and marketable title to the Option Shares represented thereby will have been acquired by the Underwriters, free and clear of all security interests, liens, encumbrances, claims or equities whatsoever; and nothing has come to the attention of such counsel which caused them to believe that any Selling Shareholder does not have full legal right, power and authority to sell, transfer and deliver the Option Shares to be sold by him or her or it under this Agreement; (vii) the certificates evidencing the shares of Common Stock are in valid and proper legal form and conform to the requirements of the General Corporation Law of the State of Delaware; the Warrants will be exercisable for shares of Common Stock in -17- accordance with the terms of the Warrants and at the prices therein provided for; and the warrants underlying the Underwriters' Unit Purchase Option will be exercisable for shares of Common Stock in accordance with the terms of the Underwriters' Unit Purchase Option and at the prices therein provided for; (viii) such counsel knows of no pending or threatened legal or governmental proceedings to which either the Company or the Subsidiary is a party which could materially adversely affect the business, property, financial condition or operations of either the Company or the Subsidiary; or which question the validity of the Shares, the Warrants, this Agreement, the Warrant Agreement, the Underwriters' Unit Purchase Option, the Powers of Attorney or the Custody Agreements, or of any action taken or to be taken by either the Company or the Subsidiary pursuant to this Agreement, the Warrant Agreement, the Underwriters' Unit Purchase Option, the Powers of Attorney or the Custody Agreements; and no such proceedings are known to such counsel to be contemplated against either the Company or the Subsidiary; there are no governmental proceedings or regulations required to be described or referred to in the Registration Statement which are not so described or referred to; (viii) to the knowledge of such counsel, neither the Company nor the Subsidiary has received notice of any claim or challenge regarding its ownership of or its other rights to or under any patents, trademarks, service marks, trade names, licenses, inventions or any other rights described in the Prospectus; to the knowledge of such counsel, (i) no claim has been made against the Company or the Subsidiary alleging infringement by the Company or the Subsidiary of any patent, trademark, service mark, trade name, trade secret, license in or other intellectual property or franchise right of any person, (ii) no legal or governmental proceedings are pending relating to the foregoing and (iii) no such proceedings are currently threatened by governmental authorities or others; (ix) Neither the Company nor the Subsidiary is in violation of or default under, nor will the execution and delivery of this Agreement, the Warrant Agreement, the Underwriters' Unit Purchase Option, the Powers of Attorney or the Custody Agreements, and the incurrence of the obligations herein and therein set forth and the consummation of the transactions herein or therein contemplated, result in a breach or violation of, or constitute a default under the certificate or articles of incorporation or by-laws (or other organizational documents), in the performance or observance of any material obligations, agreement, covenant or condition contained in any bond, debenture, note or other evidence of indebtedness or in any contract, indenture, mortgage, loan agreement, lease, joint venture or other agreement or instrument to which the Company or the Subsidiary is a party or by which the Company's or the Subsidiary's properties may be bound or in violation of any material order, rule, regulation, writ, injunction, or decree of any government instrumentality or court, domestic or foreign; (x) the Registration Statement has become effective under the Act, and to the best of such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for that purpose have been instituted or are pending before or threatened by, the Commission; the Registration Statement and the Prospectus (except for the financial statements and other financial data contained therein, or omitted therefrom, as to which such counsel need express no opinion) comply as to form in all material respects with the applicable requirements of the Act and the Rules and Regulations; (xi) such counsel has participated in the preparation of the Registration Statement and the Prospectus and nothing has come to the attention of such counsel to cause -18- such counsel to have reason to believe that the Registration Statement or any amendment thereto at the time it became effective or as of the Closing Dates contained any untrue statement of a material fact required to be stated therein or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus or any supplement thereto contains any untrue statement of a material fact or omits to state a material fact necessary in order to make statements therein, in light of the circumstances under which they were made, not misleading (except, in the case of both the Registration Statement and any amendment thereto and the Prospectus and any supplement thereto, for the financial statements, notes thereto and other financial information and schedules contained therein, as to which such counsel need express no opinion); (xii) all descriptions in the Registration Statement and the Prospectus, and any amendment or supplement thereto, of contracts and other documents are accurate and fairly present the information required to be shown, and counsel is familiar with all contracts and other documents referred to in the Registration Statement and the Prospectus and any such amendment or supplement or exhibit to the Registration Statement, and such counsel does not know of any contracts or documents of a character required to be summarized or described therein or to be filed as exhibits thereto which are not so summarized, described or filed; (xiii) no authorization, approval, consent or license of any governmental or regulatory authority or agency is necessary in connection with the authorization, issuance, transfer, sale or delivery of the Shares or Warrants by the Company, in connection with the execution, delivery and performance of this Agreement, the Warrant Agreement, the Powers of Attorney or the Custody Agreements by the Company or the Subsidiary or in connection with the taking of any action contemplated herein, or the issuance of the Underwriters' Unit Purchase Option or the securities underlying the Underwriters' Unit Purchase Option, other than registrations or qualifications of the Shares and Warrants under applicable state or foreign securities or Blue Sky laws and registration under the Act; (xiv) the statements in the Registration Statement under the captions "Business", "Use of Proceeds", "Management", and "Description of Securities" have been reviewed by such counsel and insofar as they refer to descriptions of agreements, statements of law, descriptions of statutes, licenses, rules or regulations or legal conclusions, are correct in all material respects; (xv) the Shares and Warrants have been duly authorized for listing on the Nasdaq SmallCap Market [or] the American Stock Exchange; and (xvi) to such counsel's knowledge, there are no business relationships or related-party transactions of the nature described in Item 404 of Regulation S-B involving the Company or the Subsidiary and any person described in such Item that are required to be disclosed in the Prospectus and which have not been so disclosed. Such opinions shall also cover such matters incident to the transactions contemplated hereby as the Underwriters or counsel for the Underwriters shall reasonably request. In rendering such opinions, such counsel may rely upon certificates of any officer of the Company or the Subsidiary or public officials as to matters of fact. (c) All corporate proceedings and other legal matters relating to this Agreement, the Warrant Agreement, the Powers of Attorney, the Custody Agreements, the Registration Statement, the Prospectus and other related matters shall be satisfactory to or approved by Baker & McKenzie, counsel to the several Underwriters, and you shall have received from such counsel a signed opinion, -19- dated as of the First Closing Date, together with copies thereof for each of the other Underwriters, with respect to the validity of the issuance of the Shares and Warrants, the form of the Registration Statement and Prospectus (other than the financial statements and other financial data contained therein), the execution of this Agreement and other related matters as you may reasonably require. The Company, the Subsidiary and the Selling Shareholders shall have furnished to counsel for the several Underwriters such documents as it may reasonably request for the purpose of enabling them to render such opinion. (d) The Underwriters shall have received a letter prior to the effective date of the Registration Statement and again on and as of the First Closing Date from Ernst & Young Audit Sp. z o. o., Warsaw, Poland, independent public accountants for the Company, substantially in the form approved by the Underwriters, and including estimates of the Company's revenues and results of operations for the period ending at the end of the month immediately preceding the effective date and results of the comparable period during the prior fiscal year. (e) At the Closing Dates, (i) the representations and warranties of the Company contained in this Agreement shall be true and correct with the same effect as if made on and as of the Closing Dates and the Company and the Subsidiary shall have performed all of their respective obligations hereunder and satisfied all the conditions on their part to be satisfied at or prior to such Closing Date; (ii) the Registration Statement and the Prospectus and any amendments or supplements thereto shall contain all statements which are required to be stated therein in accordance with the Act and the Rules and Regulations, and shall in all material respects conform to the requirements thereof, and neither the Registration Statement nor the Prospectus nor any amendment or supplement thereto shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; (iii) there shall have been, since the respective dates as of which information is given, no material adverse change, or any development involving a prospective material adverse change, in the business, properties, condition (financial or otherwise), results of operations, capital stock, long-term or short-term debt or general affairs of the Company or the Subsidiary from that set forth in the Registration Statement and the Prospectus, except changes which the Registration Statement and Prospectus indicate might occur after the effective date of the Registration Statement, and the Company and each of the Subsidiary shall not have incurred any material liabilities or entered into any agreement not in the ordinary course of business other than as referred to in the Registration Statement and Prospectus; (iv) except as set forth in the Prospectus, no action, suit or proceeding at law or in equity shall be pending or threatened against the Company or the Subsidiary which would be required to be set forth in the Registration Statement, and no proceedings shall be pending or threatened against the Company or the Subsidiary before or by any commission, board or administrative agency in the United States, Poland or elsewhere, wherein an unfavorable decision, ruling or finding would materially and adversely affect the business, property, condition (financial or otherwise), results of operations or general affairs of the Company or the Subsidiary, and (v) the Underwriters shall have received, at the First Closing Date, a certificate signed by each of the Chief Executive Officer and the Executive Vice President of the Company, dated as of the First Closing Date, evidencing compliance with the provisions of this subsection (e). (f) Upon exercise of the Over-allotment Option, the obligations of the several Underwriters to purchase and pay for the Option Securities referred to therein will be subject (as of the date hereof and as of the Option Closing Date) to the following additional conditions: (i) the Registration Statement shall remain effective at the Option Closing Date, and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been instituted or shall be pending, or, to the Underwriters's knowledge or the knowledge of the Company, shall be contemplated by the Commission, and any reasonable request on the part of the Commission for additional -20- information shall have been complied with to the satisfaction of Baker & McKenzie, counsel to the several Underwriters; (ii) at the Option Closing Date, there shall have been delivered to the Underwriters the signed opinion of Hogan & Hartson LLP, Washington, D.C., and Warsaw, Poland, counsel for the Company, dated as of the Option Closing Date, in form and substance satisfactory to Baker & McKenzie, counsel to the several Underwriters, together with copies of such opinions for each of the other several underwriters, which opinion shall be substantially the same in scope and substance as the opinion furnished to the Underwriters at the First Closing Date pursuant to Section 5(b) hereof, except that such opinion, where appropriate, shall cover the Option Securities; (iii) at the Option Closing Date, there shall have been delivered to the Underwriters a letter in form and substance satisfactory to the Underwriters from Ernst & Young Audit Sp. z o. o., Warsaw, Poland, dated the Option Closing Date and addressed to the Underwriters confirming the information in their letter referred to in Section 5(d) hereof and stating that nothing has come to their attention during the period from the ending date of their review referred to in said letter to a date not more than five business days prior to the Option Closing Date, which would require any change in said letter if it were required to be dated the Option Closing Date; (iv) the Underwriters shall have received a certificate dated the Option Closing Date, from each Selling Shareholder to the effect that, as of the Option Closing Date: (A) the representations and warranties made by such Selling Shareholder are true and correct in all material respects as if made on and as of the Option Closing Date; and (B) such Selling Shareholder has complied with all of the obligations and satisfied all of the conditions which are to be performed or satisfied on his or her or its part at or prior to the Option Closing Date; (v) at the Option Closing Date, there shall have been delivered to the Underwriters a certificate of the Chief Executive Officer and Executive Vice President of the Company, dated the Option Closing Date, in form and substance satisfactory to Baker & McKenzie, counsel to the several Underwriters, substantially the same in scope and substance as the certificate, furnished to you at the First Closing Date pursuant to Section 5(e) hereof; (vi) all proceedings taken at or prior to the Option Closing Date in connection with the sale and issuance of the Option Securities shall be satisfactory in form and substance to the Underwriters, and the Underwriters and Baker & McKenzie, counsel to the several Underwriters, shall have been furnished with all such documents, certificates and opinions as the Underwriters may request in connection with this transaction in order to evidence the accuracy and completeness of any of the representations, warranties or statements of the Company and the Subsidiary or their compliance with any of the covenants or conditions contained herein. (g) No action shall have been taken by the Commission or the NASD, the effect of which would make it improper, at any time prior to the Closing Date, for members of the NASD to execute transactions (as principal or agent) in the Shares or the Warrants, and no proceedings for the taking of such action shall have been instituted or shall be pending, or, to the knowledge of the Underwriters or the Company, shall be contemplated by the Commission or the NASD. The Company represents that at the date hereof it has no knowledge that any such action is in fact contemplated by the Commission or the NASD. The Company and the Subsidiary shall have advised the Underwriters of any NASD affiliation of any of their officers, directors, stockholders or other affiliates. -21- (h) If any of the conditions herein provided for in this Section shall not have been fulfilled as of the date indicated, this Agreement and all obligations of the several Underwriters under this Agreement may be canceled at, or at any time prior to, each Closing Date by the Underwriters. Any such cancellation shall be without liability of the Underwriters to the Company. 6. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY AND THE SELLING SHAREHOLDERS. The obligations of the Company and the Selling Shareholders to sell and deliver the Shares and Warrants in the manner provided in this Agreement is subject to the condition that at the Closing Dates, no stop orders suspending the effectiveness of the Registration Statement shall have been issued under the Act or any proceedings therefor initiated or threatened by the Commission. If such condition has been satisfied on the First Closing Date, but is not satisfied after the First Closing Date and prior to the Option Closing Date, then only the obligation of the Company and the Selling Shareholders to sell and deliver the Option Securities upon any exercise of the Over-allotment Option hereof shall be affected. 7. INDEMNIFICATION. (a) The Company and each Selling Shareholder, severally and not jointly, shall indemnify and hold harmless each Underwriter, and each person, if any, who controls any Underwriter within the meaning of the Act, against any and all losses, claims, damages or liabilities, joint or several (which shall, for all purposes of this Agreement, include, but not be limited to, all reasonable costs of defense and investigation and all attorneys' fees), to which such Underwriter or such controlling person may become subject, under the Act or otherwise, and shall reimburse, as incurred, such Underwriters and such controlling persons for any legal or other expenses reasonably incurred in connection with investigating, defending against or appearing as a third party witness in connection with any losses, claims, damages or liabilities, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in (i) the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, (ii) any blue sky application or other document executed by the Company or the Subsidiary specifically for that purpose or based upon written information furnished by the Company or the Subsidiary filed in any state or other jurisdiction in order to qualify any or all of the Shares and Warrants under the securities laws thereof (any such application, document or information being hereinafter called a "Blue Sky Application"), or arise out of or are based upon the omission or alleged omission to state in the Registration Statement, any Preliminary Prospectus, Prospectus, or any amendment or supplement thereto, or in any Blue Sky Application, a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that neither the Company nor any Selling Shareholder will be liable in any such case to the extent, but only to the extent, that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company or the Subsidiary by or on behalf of the Underwriters specifically for use in the preparation of the Registration Statement or any such amendment or supplement thereof or any such Blue Sky Application or any such preliminary Prospectus or the Prospectus or any such amendment or supplement thereto. Notwithstanding the foregoing, no Selling Shareholder shall be required to indemnify and hold harmless any Underwriter until the Underwriters shall have pursued all remedies, including execution of judgment, reasonably available against the Company and shall have been unable, after reasonable effort, to execute such judgment against the Company. The obligations of the Company and the Selling Shareholders under this Section 7(a) will be in addition to any liability which the Company or the Selling Shareholders may otherwise have. (b) Each Underwriter, severally and not jointly, shall indemnify and hold harmless the Company, each of the directors of the Company, each nominee (if any) for any director named in the Prospectus, each of the officers of the Company who have signed the Registration Statement, each Selling Shareholder and each other person, if any, who controls the Company or a Selling Shareholder -22- within the meaning of the Act to the same extent as the foregoing indemnities from the Company and the Selling Shareholders to the several Underwriters, but only with respect to any loss, claim, damage, liability or expense resulting from statements or omissions, or alleged statements or omissions, if any, made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto (i) in reliance upon and in conformity with written information furnished to the Company by the Underwriters or by any Underwriter through the Underwriters expressly for use in the preparation thereof and (ii) relating to the transactions effected by the Underwriters in connection with the offer and sale of the Shares and Warrants contemplated hereby. The obligations of each Underwriter under this Section 7(b) will be in addition to any liability which the Underwriters may otherwise have. (c) If any action, inquiry, investigation or proceeding is brought against any person in respect of which indemnification may be sought pursuant to Section 7(a) or (b) hereof, such person (hereinafter called the "indemnified party") shall, promptly after notification of, or receipt of service of process for, such action, inquiry, investigation or proceeding, notify in writing the party or parties against whom indemnification is to be sought (hereinafter called the indemnifying party") of the institution of such action, inquiry, investigation or proceeding. The indemnifying party, upon the request of the indemnified party, shall assume the defense of such action, inquiry, investigation or proceeding, including, without limitation, the employment of counsel (reasonably satisfactory to such indemnified party) and payment of expenses. No indemnification provided for in this Section 7 shall be available to any indemnified party who shall fail to give such notice if the indemnifying party does not have knowledge of such action, inquiry, investigation or proceeding, to the extent that such indemnifying party has been materially prejudiced by the failure to give such notice, but the omission to so notify the indemnifying party shall not relieve the indemnifying party otherwise than under this Section 7. Such indemnified party or controlling person thereof shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel (other than reasonable costs of investigation) shall be at the expense of such indemnified party unless the employment of such counsel shall have been authorized in writing by the indemnifying party in connection with the defense of such action. If such indemnified party is an Underwriter or a person who controls such Underwriter within the meaning of the Act, who shall have been advised by counsel that there may be a conflict between the positions of the indemnifying party or parties and of the indemnified party or parties or that there may be legal defenses available to such indemnified party or parties different from or in addition to those available to the indemnifying party or parties, the indemnified party or parties shall be entitled to select separate counsel to conduct the defense to the extent determined by such counsel to be necessary to protect the interests of the indemnified party or parties, and the fees and expenses of such counsel shall be borne by the indemnifying party (it being understood, however, that the indemnifying party shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm for all Underwriters and controlling persons named as parties to such action or actions, which firm shall be designated in writing by the Underwriters). Expenses covered by the indemnification in this Section 7 shall be paid by the indemnifying party as they are incurred by the indemnified party. Anything in this Section 7 to the contrary notwithstanding, the indemnifying party shall not be liable for any settlement of any such claim effected without its written consent, which shall not be unreasonably withheld in light of all factors of importance to such indemnifying party. 8. CONTRIBUTION. In order to provide for just and equitable contribution under the Act in any case in which (i) any Underwriter makes any claim for indemnification pursuant to Section 7 hereof but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case, notwithstanding the fact that the express provisions of Section 7 provide for indemnification in such case, or (ii) contribution under the Act may be -23- required on the part of any Underwriter, then the Company and each person who controls the Company and each of the Selling Shareholders, on the one hand, and any such Underwriter, on the other hand, shall contribute to the amount paid or payable as a result of the aggregate losses, claims, damages or liabilities to which they may be subject (which shall, for all purposes of this Agreement, include, but not be limited to, all reasonable costs of defense and investigation and all reasonable attorneys' fees) in either such case (after contribution from others) in such proportions that all such Underwriters are responsible pro rata in the aggregate for that portion of such losses, claims, damages or liabilities represented by the percentage that the underwriting discount per Unit appearing on the cover page of the Prospectus bears to the public offering price appearing thereon, and the Company and each of the Selling Shareholders shall be responsible pro rata for the remaining portion determined by the proportion that the number of Shares and Warrants sold by the Company bears to the total number of Shares and Warrants sold hereunder and each Selling Shareholder is responsible for the percentage of such remaining portion determined by the proportion that the number of Option Shares being sold by such Selling Shareholder bears to the total number of [Shares plus Warrants] being sold hereunder; provided, however, that if such allocation is not permitted by applicable law, then the relative fault of the Company and the Selling Shareholders and the Underwriters and controlling persons, in the aggregate, in connection with the statements or omissions which resulted in such damages and other relevant equitable considerations, shall also be considered. The relative fault shall be determined by reference to, among other things, whether in the case of an untrue statement of a material fact or the omission to state a material fact, such statement or omission relates to information supplied by the Company, the Subsidiary, the Selling Shareholders or the Underwriters, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The Company, the Selling Shareholders and the Underwriters agree (a) that it would not be just and equitable if the respective obligations of the Company, the Selling Shareholders and the Underwriters to contribute pursuant to this Section 8 were to be determined by pro rata or per capita allocation of the aggregate damages (even if the Underwriters in the aggregate were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in the first sentence of this Section 8, (b) that the contribution of each contributing Underwriter shall not be in excess of its proportionate share (based on the ratio of the number of Shares and Warrants purchased by such Underwriter to the number of Shares and Warrants purchased by all contributing Underwriters) of the portion of such losses, claims, damages or liabilities for which the Underwriters are responsible, and (c) no Selling Shareholder shall be required to contribute any amount in excess of the proceeds of the sale of such Selling Shareholder's Option Shares. No person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. As used in this paragraph, the word "Company" includes any officer, director, or person who controls the Company within the meaning of Section 15 of the Act. If the full amount of the contribution specified in this paragraph is not permitted by law, then any Underwriter and each person who controls any Underwriter shall be entitled to contribution from the Company, its officers, directors and controlling persons and the Selling Shareholders to the full extent permitted by law. The foregoing contribution agreement shall in no way affect the contribution liabilities of any persons having liability under Section 11 of the Act other than the Company, the Selling Shareholders and the Underwriters. No contribution shall be requested with regard to the settlement of any matter from any party who did not consent to such settlement; provided, however, that such consent shall not be unreasonably withheld in light of all factors of importance to such party. 9. COSTS AND EXPENSES. (a) Whether or not this Agreement becomes effective or the sale of the Shares and Warrants to the Underwriters is consummated, the Company will pay all costs and expenses incident to the performance of this Agreement by the Company including, but not limited to, the fees and expenses of counsel to the Company and of the Company's accountants; the costs and expenses incident to the preparation, printing, filing and distribution under the Act of the Registration Statement (including the financial statements therein and all amendments and exhibits thereto), Preliminary Prospectus and the Prospectus, as amended or supplemented, or the Term Sheet; the fee of the NASD in connection with the filing required by the NASD relating to the offering of the Shares and Warrants contemplated hereby; the fees and expenses of investigative reports regarding the Company, the Subsidiary and certain officers and directors of the Company; all expenses, including reasonable fees and disbursements of counsel to the Underwriters, in connection with the qualification of the Shares and Warrants under the state securities or blue sky laws which the Underwriters shall designate; the -24- cost of printing and furnishing to the several Underwriters copies of the Registration Statement, each Preliminary Prospectus, the Prospectus, this Agreement, the Agreement Among Underwriters, Selling Agreement, Warrant Agreement, Underwriters' Questionnaire, Underwriters' Power of Attorney and the Blue Sky Memorandum; any fees relating to the listing of the Shares and Warrants on the Nasdaq SmallCap Market, American Stock Exchange or any other securities exchange; the cost of printing the certificates representing the Shares and Warrants; the fees of the transfer agent retained in connection with the sale of the Shares and Warrants; the cost of publication of at least three "tombstones" relating to the public offering of the Shares and Warrants (at least one of which shall be in national business newspaper and one of which shall be in a major New York newspaper) and the cost of preparing at least five hard cover "bound volumes" relating to such offering in accordance with the Underwriters' request. The Company shall pay any and all taxes (including any transfer, franchise, capital stock or other tax imposed by any jurisdiction) on sales to the Underwriters hereunder. The Company will also pay all costs and expenses incident to the furnishing of any amended Prospectus or of any supplement to be attached to the Prospectus as called for in Section 4(a) of this Agreement, except as otherwise set forth in said Section. (b) In addition to the foregoing expenses, the Company shall at the First Closing Date pay to the Underwriters a non-accountable expense allowance of $_____, of which $_____ has been paid. In the event the Over- allotment Option is exercised, the Company shall pay to the Underwriters at the Option Closing Date an additional amount equal to ___% of the gross proceeds received upon exercise of such option. In the event the transactions contemplated hereby are not consummated by reason of any action by the Underwriters (except if such prevention is based upon a breach by the Company or any Subsidiary of any covenant, representation or warranty contained herein or because any other condition to the Underwriters' obligations hereunder required to be fulfilled by the Company or the Subsidiary is not fulfilled), the Company shall be liable for only the amount (not less than $50,000) paid by the Company to the Underwriters prior to such determination. In the event the transactions contemplated hereby are not consummated by reason of any action of the Company or the Subsidiary or because of a breach by the Company or the Subsidiary of any covenant, representation or warranty herein, the Company shall be liable for the accountable expenses of the Underwriters, including legal fees, up to a maximum of $125,000. (c) No person is entitled either directly or indirectly to compensation from the Company, from the Underwriters or from any other person for services as a finder in connection with the proposed offering, and the Company agrees to indemnify and hold harmless the Underwriters against any losses, claims, damages or liabilities, joint or several (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), to which the Underwriters or such other person may become subject insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon the claim of any person (other than an employee of the party claiming an indemnity) or entity that he or it is entitled to a finder's fee in connection with the proposed offering by reason of such person's or entity's influence or prior contact with the indemnifying party. 10. SUBSTITUTION OF UNDERWRITERS. If any Underwriter shall for any reason not permitted hereunder cancel its obligations to purchase the Firm Shares and/or Firm Warrants hereunder, or shall fail to take up and pay for the number of Firm Shares and/or Firm Warrants set forth opposite its name in Schedule I hereto upon tender of such Firm Shares and/or Firm Warrants in accordance with the terms hereof, then: (a) If the aggregate number of First Shares and/or Firm Warrants which such Underwriter agreed but failed to purchase does not exceed 10% of the total number of Firm Shares and Firm Warrants, the other Underwriter shall be obligated severally, in proportion to its respective -25- commitments hereunder, to purchase the Firm Shares and/or Warrants which such defaulting Underwriter or Underwriters agreed but failed to purchase. (b) If any Underwriter so defaults and the agreed number of Firm Shares and/or Warrants with respect to which such default or defaults occurs is more than 10% of the total number of Firm Shares and Firm Warrants, the other Underwriter shall have the right to take up and pay for the Firm Shares and/or Firm Warrants which the defaulting Underwriter agreed but failed to purchase. If such other Underwriter does not, at the First Closing Date, take up and pay for the Firm Shares and/or Firm Warrants which the defaulting Underwriter agreed but failed to purchase, the time for delivery of the Firm Shares and Firm Warrants shall be extended to the next business day to allow the other Underwriter the privilege of substituting within twenty-four hours (including non-business hours) another Underwriter or Underwriters satisfactory to the Company. If no such Underwriter or Underwriters shall have been substituted as aforesaid, within such twenty-four hour period, the time of delivery of the Firm Shares and Firm Warrants may, at the option of the Company, be again extended to the next following business day, if necessary, to allow the Company the privilege of finding within twenty-four hours (including non- business hours) another Underwriter or Underwriters to purchase the Firm Shares and/or Firm Warrants which the defaulting Underwriter agreed but failed to purchase. If it shall be arranged for the other Underwriters or substituted Underwriters to take up the Firm Shares and/or Firm Warrants of the defaulting Underwriter as provided in this Section, (i) the Company or the Underwriters shall have the right to postpone the time of delivery for a period of not more than seven business days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees promptly to file any amendments to the Registration Statement or supplements to the Prospectus which may thereby be made necessary and (ii) the respective numbers of Firm Shares and Firm Warrants to be purchased by the other Underwriter or substituted Underwriters shall be taken as the basis of the underwriting obligation for all purposes of this Agreement. If in the event of a default by one Underwriter and the other Underwriter shall not take up and pay for all the Firm Shares and Firm Warrants agreed to be purchased by the defaulting Underwriter or substitute another Underwriter or Underwriters as aforesaid, or the Company shall not find or shall not elect to seek another Underwriter or Underwriters for such Firm Shares and Firm Warrants as aforesaid, then this Agreement shall terminate. If, following exercise of the Over-allotment Option, any Underwriter shall for any reason not permitted hereunder cancel its obligations to purchase Option Securities at the Option Closing Date, or shall fail to take up and pay for the number or type of Option Securities, which it becomes obligated to purchase at the Option Closing Date upon tender of such Option Securities in accordance with the terms hereof, then the other Underwriter or substituted Underwriters may take up and pay for the Option Securities of the defaulting Underwriter in the manner provided in Section 10(b) hereof. If the other Underwriter or substituted Underwriters shall not take up and pay for all such Option Securities, the non-defaulting Underwriter shall be entitled to purchase the number and type of Option Securities for which there is no default or, at its election, the Over-allotment Option shall terminate and the exercise thereof shall be of no effect. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section. In the event of termination of this Agreement, there shall be no liability on the part of any nondefaulting Underwriter to the Company, provided that the provisions of this Section 10 shall not in any event affect the liability of any defaulting Underwriter to the Company arising out of such default. -26- 11. EFFECTIVE DATE. This Agreement shall become effective upon its execution, except that the Underwriters may, at their option, delay such effectiveness until 11:00 a.m., New York City time on the first full business day following the effective date of the Registration Statement, or at such earlier time after the effective date of the Registration Statement as the Underwriters in their discretion shall first commence the initial public offering by the Underwriters of any of the Shares and/or Warrants. The time of the initial public offering shall mean the time of release by the Underwriters of the first newspaper advertisement with respect to the Shares and Warrants, or the time when the Shares and Warrants are first generally offered by the Underwriters to dealers by letter or telegram, whichever shall first occur. This Agreement may be terminated by the Underwriters at any time before it becomes effective as provided above, except that Sections 4(c), 7, 8, 9, 14, 15, 16 and 17 shall remain in effect notwithstanding such termination. 12. TERMINATION. (a) This Agreement, except for Sections 4(c), 7, 8, 9, 14, 15, 16 and 17 hereof, may be terminated at any time prior to the First Closing Date, and the Over-allotment Option, if exercised, may be canceled at any time prior to the Option Closing Date, by the Underwriters if in their judgment it is impracticable to offer for sale or to enforce contracts made by the Underwriters for the resale of the Shares and Warrants agreed to be purchased hereunder by reason of (i) the Company or the Subsidiary having sustained a material loss, whether or not insured, by reason of fire, earthquake, flood, accident or other calamity, or from any labor dispute or court or government action, order or decree; (ii) trading in securities on the New York Stock Exchange, the American Stock Exchange or the Nasdaq Stock Market having been suspended or limited; (iii) material governmental restrictions having been imposed on trading in securities generally (not in force and effect on the date hereof); (iv) a banking moratorium having been declared by federal or New York state authorities; (v) an outbreak of international hostilities or other national or international calamity or crisis or change in economic or political conditions having occurred; (vi) a pending or threatened legal or governmental proceeding or action relating generally to the Company's or the Subsidiary's business, or a notification having been received by either the Company or the Subsidiary of the threat of any such proceeding or action, which could materially adversely affect the Company or the Subsidiary; (vii) except as contemplated by the Prospectus, the Company or the Subsidiary is merged or consolidated into or acquired by another company or group or there exists a binding legal commitment for the foregoing or any other material change of ownership or control occurs; (viii) the passage by the Congress of the United States, governmental agency of Poland, or by any state legislative body or federal or state agency or other domestic or foreign authority of any act, rule or regulation, measure, or the adoption of any orders, rules or regulations by any governmental body or any authoritative accounting institute or board, or any governmental executive, which is reasonably believed likely by the Underwriters to have a material impact on the business, financial condition or financial statements of the Company or the market for the securities offered pursuant to the Prospectus; (ix) any adverse change in the financial or securities markets beyond normal market fluctuations having occurred since the date of this Agreement; or (x) any material adverse change having occurred, since the respective dates of which information is given in the Registration Statement and Prospectus, in the earnings, business prospects or general condition of the Company or any of its Subsidiary, financial or otherwise, whether or not arising in the ordinary course of business. (b) If the Underwriters elects to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section 12 or in Section 11, the Company shall be promptly notified by the Underwriters, by telephone or telegram, confirmed by letter. 13. UNDERWRITERS' UNIT PURCHASE OPTION. At or before the First Closing Date, the Company will sell to the Underwriters, or its designees, for a consideration of $11.50, and upon the terms and conditions set forth in the form of Underwriters' Unit Purchase Option -27- annexed as an exhibit to the Registration Statement, an Underwriters' Unit Purchase Option (the "Underwriters' Unit Purchase Option") to purchase an aggregate of 115,000 shares of Common Stock plus 115,000 warrants to purchase such number of shares of Common Stock. In the event of conflict in the terms of this Agreement and the Underwriters' Unit Purchase Option, the language of the Underwriters' Unit Purchase Option shall control. 14. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY. The respective indemnities, agreements, representations, warranties and other statements of the Company or the Selling Shareholders, where appropriate, and the undertakings set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of the Underwriters, the Company or any of its officers or directors or any controlling person or the Selling Shareholders and will survive delivery of and payment of the Shares and Warrants and the termination of this Agreement. 15. NOTICE. Any communications specifically required hereunder to be in writing, if sent to the Underwriters, will be mailed, delivered and confirmed to them at Fine Equities, Inc., 600 Third Avenue, New York, New York 10016, and at SouthWall Capital Corp., 110 Wall Street, New York, New York 10005, with a copy in each case sent to Baker & McKenzie, 805 Third Avenue, New York, New York 10022, attention: Malcolm I. Ross, Esq., or if sent to the Company, will be mailed, delivered and confirmed to it at 211 North Union Street, #100, Alexandria, Virginia 22314, with a copy sent to Hogan & Hartson LLP, Columbia Square, 555 13th Street, NW, Washington, D.C. 20004, attention: Steven E. Ballew, Esq. 16. PARTIES IN INTEREST. The Agreement herein set forth is made solely for the benefit of the several Underwriters, the Company, the Selling Shareholders, and, to the extent expressed, the Principal Stockholders, any person controlling the Company or any of the several Underwriters, and directors of the Company, nominees for directors (if any) named in the Prospectus, its officers who have signed the Registration Statement, and their respective executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include any purchaser, as such purchaser, from any of the several Underwriters of the Shares and Warrants. All of the obligations of the Underwriters hereunder are several and not joint. 17. APPLICABLE LAW. This Agreement will be governed by, and construed in accordance with, the laws of the State of New York applicable to agreements made and to be entirely performed within New York. -28- If the foregoing is in accordance with your understanding of our agreement, kindly sign and return this agreement, whereupon it will become a binding agreement between the Company and the several Underwriters in accordance with its terms. Very truly yours, CENTRAL EUROPEAN DISTRIBUTION CORPORATION By: ---------------------------------------- Name: William V. Carey Title: Chairman and Chief Executive Officer SELLING SHAREHOLDERS By: ---------------------------------------- Attorney-in-fact The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. FINE EQUITIES, INC. By: ---------------------------------------- Name: Title: SOUTHWALL CAPITAL CORP. By: ---------------------------------------- Name: Title: -29- SCHEDULE I Underwriter Number of Firm Securities to be Purchased - -------------------------------- ----------------------------------------- Fine Equities, Inc. SouthWall Capital Corp. Total Firm Shares Total Firm Warrants -30- SCHEDULE II Number of Firm Securities to be Sold ------------------------------------ Central European Distribution Corporation 1,150,000 Firm Shares 1,150,000 Firm Warrants Number of Option Securities to be Sold -------------------------------------- Central European Distribution Corporation 97,500 Option Shares 75,000 Option Warrants Selling Shareholders: [__________] [__________] [__________] [__________] [__________] [__________] 75,000 Option Shares -------------------------------------- Total ................................... 172,500 Option Shares 172,500 Option Warrants ====================================== -31- EX-2.1 3 CONTRIBUTION AGREEMENT Exhibit 2.1 CONTRIBUTION AGREEMENT AMONG ESTATE OF WILLIAM O. CAREY WILLIAM V. CAREY WILLIAM V. CAREY STOCK TRUST JEFFREY PETERSON AND CENTRAL EUROPEAN DISTRIBUTION CORPORATION DATED NOVEMBER 28, 1997 CONTRIBUTION AGREEMENT THIS CONTRIBUTION AGREEMENT (the "Agreement"), is made as of the 28th day of November 1997, by and among Estate of William O. Carey ("Carey Estate"), and William V. Carey ("W. Carey"), resident at 1602 Cottagewood Drive, Brandon, Florida 33511, William V. Carey Stock Trust, a trust organized under the laws of Florida ("Carey Trust"), Jeffrey Peterson, resident at 1502 Stonewall Road, Alexandria, VA 22302 ("J. Peterson") and Central European Distribution Corporation, a Delaware corporation ("CEDC"). Carey Estate, W. Carey, Carey Trust and J. Peterson shall hereinafter be referred to as the "Shareholders." WITNESSETH WHEREAS, 1,110 shares of common stock, par value 50 Polish zloty per share (the "Carey Agri Common Stock"), of Carey Agri International Poland Sp. z o.o., a Polish limited liability company, ("Carey Agri") have been issued; WHEREAS, there is no other class of capital stock of Carey Agri issued. WHEREAS, the only shares of capital stock of Carey Agri which have voting rights are the shares of Carey Agri Common Stock. WHEREAS, Carey Estate owns 56 shares of the Carey Agri Common Stock, W. Carey owns 370 shares of the Carey Agri Common Stock, Carey Trust owns 314 shares of the Carey Agri Common Stock and J. Peterson owns 370 shares of the Carey Agri Common Stock. WHEREAS, the Shareholders desire to contribute all of the Carey Agri Common Stock owned by them to CEDC, upon the terms and conditions and in exchange for the consideration herein specified in a tax-free exchange qualifying under Section 351 of the Internal Revenue Code of 1986, as amended. NOW, THEREFORE, in consideration of the foregoing, of the mutual promises hereinafter set forth, and of other good and valuable consideration, the parties, intending to be legally bound hereby, agree as follows: ARTICLE I THE CONTRIBUTION Each of the Shareholders hereby agrees to assign, transfer, and convey to CEDC at the Closing, hereinafter identified, for the consideration set forth in accordance with the provisions of Article II, all of the rights, title and interest in and to the Carey Agri Common Stock owned by such shareholder. At the Closing, each of the Shareholders shall execute a notice to Carey Agri informing Carey Agri of the transfer of ownership of the Carey Agri Common Stock and request Carey Agri to take all steps required under applicable law to reflect such change of ownership. ARTICLE II TERMS OF THE CONTRIBUTION As consideration for the contribution of shares of Carey Agri Common Stock to CEDC, the Shareholders shall receive 1,780,000 shares of common stock par value $0.01 per share (the ("CEDC Common Stock"), of CEDC for all their shares of Carey Agri Common Stock so contributed. ARTICLE III PARTY AUTHORIZATIONS Each of the Shareholders represents and warrants to CEDC and each of the other Shareholders that such Shareholder has obtained, by means in conformity with all applicable provisions of all applicable laws, the approval of such Shareholder's execution and delivery of this Agreement and the performance by such Shareholder of such Shareholder's obligations hereunder. ARTICLE IV CLOSING The actual consummation of the transactions contemplated by this Agreement (the "Closing") shall take place on the date on which the last of the parties hereto shall have executed this Agreement (the "Closing Date"). ARTICLE V OBLIGATIONS AT THE CLOSING 5.1 SHAREHOLDERS' OBLIGATIONS. At the Closing, each of the Shareholders shall deliver to CEDC: 1. If such Shareholder is not a natural person, a copy of certified resolutions adopted by the governing body or such other authority of such Shareholder authorizing or ratifying the execution and delivery of this Agreement, and the performance by such Shareholder of its obligations hereunder. 2. An executed letter in the form of Exhibit A to Carey Agri informing Carey Agri of the transfer of the shares of Carey Agri Common Stock and requesting that Carey Agri take all steps required under applicable law to reflect such change of ownership. 5.2 CEDC's OBLIGATIONS 1. At the Closing, CEDC shall issue CEDC Common Stock to the Shareholders listed below in the following amounts: 90,780 shares Carey Estate 592,740 shares W. Carey 503,740 shares Carey Trust 592,740 shares J. Peterson ARTICLE VI FURTHER COVENANTS OF THE PARTIES 6.1 FURTHER ASSURANCES WITH RESPECT TO CAREY AGRI COMMON STOCK. The Shareholders and CEDC agree that, from time to time and without further consideration, each of them shall execute and deliver such further documents and take such other action as CEDC may require more effectively to transfer to and vest in the CEDC all right and interest in the Carey Agri Common Stock. 2 6.2 FURTHER ASSURANCES WITH RESPECT TO CEDC's COMMON STOCK. The Shareholders and CEDC agree that, from time to time and without further consideration, each of them shall execute and deliver such further documents and take such other action as the Shareholders may require to issue to and vest in the Shareholders all right and interest in the shares of CEDC Common Stock referenced in Section 5.2 above. ARTICLE VII TAX MATTERS 7.1 TAX FREE TRANSACTION. The Shareholders and CEDC intend that the transfers described in Articles I and II, above, constitute a tax-free exchange pursuant to Section 351 of the Internal Revenue Code of 1986, as amended. 7.2 Each of the Shareholders agrees to file with such shareholders' federal income tax return for the taxable year in which the Closing occurs the statement required by Treasury Regulations Section 1.351-3(a). 7.3 CEDC agrees to file with its federal income tax return for the taxable year in which the Closing occurs the statement required by Treasury Regulations Section 1.351-3(b). ARTICLE VIII EFFECTIVENESS AND ASSIGNABILITY OF AGREEMENT This Agreement shall become effective when executed and delivered by CEDC and each of the Shareholders, and shall be binding in all respects upon the respective successors and permitted assigns of each of CEDC and the Shareholders. No party hereto may assign this Agreement in whole or in part without first obtaining the written consent of all other parties hereto. ARTICLE IX COMPLETENESS OF AGREEMENT This Agreement and the Exhibit hereto represent the entire agreement between CEDC and the Shareholders with respect to the subject matter hereof and supersede all offers, proposals, statements, representations and agreements with respect to the subject matter hereof. The Exhibit hereto is incorporated herein by reference, and shall be deemed to be included in any reference to this Agreement. This Agreement may not be amended except by action of CEDC and each of the Shareholders hereto set forth in an instrument in writing signed on behalf of CEDC and each of the Shareholders hereto. ARTICLE X CAPTIONS The captions to the Articles and Sections contained in this Agreement are for reference only, do not form a substantive part of this Agreement and shall not restrict nor enlarge any substantive provision of this Agreement. 3 ARTICLE XI APPLICABLE LAW This Agreement, and the Exhibit, and all other documents given in connection herewith, shall be construed in accordance with the laws of the State of Delaware, without regard to the principles of conflicts of laws. ARTICLE XII CHOICE OF FORUM; VENUE; SERVICE OF PROCESS Any suit, action, or proceeding among any or all of the parties hereto relating to this Agreement, to any document, instrument, or agreement delivered pursuant hereto, referred to herein, or contemplated hereby, or in any other manner arising out of or relating to the transactions contemplated by or referenced in this Agreement, shall be commenced and maintained exclusively in the Court of Chancery of the State of Delaware or, if that Court lacks jurisdiction over the subject matter, in a state court of competent subject matter jurisdiction sitting in New Castle County, Delaware. The parties hereto hereby submit themselves unconditionally and irrevocably to the personal jurisdiction of such courts. The parties hereto further agree that venue shall be in New Castle County, Delaware. The parties hereto irrevocably waive any objection to such personal jurisdiction or venue including, but not limited to, the objection that any suit, action, or proceeding brought in Delaware, has been brought in an inconvenient forum. The parties hereto irrevocably agree that process issuing from such courts may be served on them, either personally or by certified mail, return receipt requested, at the addresses on the books and records of the Company; and further irrevocably waive any objection to service of process made in such manner and at such addresses, including without limitation any objection that service in such manner and at such addresses is not authorized by the local or procedural laws of the State of Delaware. ARTICLE XIII COUNTERPARTS This Agreement may be executed in any number of counterparts, each of which shall be considered an original but all of which shall constitute but one and the same Agreement by and among CEDC and the Shareholders. ARTICLE XIV NO THIRD PARTY BENEFICIARY This Agreement is intended to inure to the benefit of CEDC and the Shareholders only; and no third party shall have any rights, express or implied, by reason of this Agreement. ARTICLE XV UNILATERAL RIGHT TO WAIVE FAILURES OF OTHER PARTIES 15.1 WAIVER. CEDC or any of the Shareholders may: a. Extend in writing the time for the performance of any of the obligations herein contained to be performed for the benefit of such entity; and 4 b. Waive in writing the failure in performance of any of the conditions herein expressed for its benefit. 15.2 EFFECT OF WAIVER. No such waiver or extension shall be valid unless in writing and signed by the entity granting the waiver or extension, and no such waiver or extension shall be construed to excuse or mitigate any subsequent breach or violation of this Agreement not specifically covered by such waiver. ARTICLE XVI SEVERABILITY The invalidity or unenforceability of any provision of this Agreement shall not affect the other provisions hereof, and the Agreement shall be construed in all respects as if such invalid or unenforceable provisions were omitted. Furthermore, upon the request of CEDC or any of the Shareholders, CEDC and the Shareholders shall add to this Agreement, in lieu of such invalid or unenforceable provisions, provisions as similar in terms to such invalid or unenforceable provisions as may be possible and legal, valid and enforceable. 5 IN WITNESS WHEREOF, CEDC and the Shareholders have caused this Agreement to be executed as of the day and year first above written. CENTRAL EUROPEAN DISTRIBUTION CORPORATION, a Delaware corporation By: /s/ William V. Carey ---------------------------------------- Name: William V. Carey Title: Chairman of the Board, President and Chief Executive Officer ESTATE OF WILLIAM O. CAREY By: /s/ Gertrude E. Carey ---------------------------------------- Name: Gertrude E. Carey Title: Personal Representative, and not individually or in any other capacity William V. Carey, individually /s/ William V. Carey ------------------------------------------- WILLIAM V. CAREY STOCK TRUST, a Florida trust By: /s/ William V. Carey ---------------------------------------- Name: William V. Carey Title: Trustee, and not individually or in any other capacity By: /s/ Remy Hermida ---------------------------------------- Name: Remy Hermida Title: Trustee, and not individually or in any other capacity Jeffrey Peterson, individually /s/ Jeffrey Peterson ------------------------------------------- 6 EXHIBIT A ---------- LETTER TO CAREY AGRI November __, 1997 Carey Agri International Poland Sp. z o.o. ul. Lubelska 13 Warsaw Acting pursuant to Article 187 of the Polish Commercial Code, I, the undersigned, domiciled at _____________ [insert address], advise Carey Agri International Poland Sp. z o.o. with its registered office in Warsaw ("Company") that all the Company shares held by me, i.e., _____________ [state number of shares*] shares par value PLN 50 each, have been transferred to Central European Distribution Corporation, a Delaware corporation whose executive offices are located at 211 North Union Street, # 100, Alexandria, Virginia 22314. Under Article 188 of the Polish Commercial Code, I hereby direct a request to the Management Board of the Company to update the Share Registry appropriately and submit a revised list of shareholders to the appropriate registration court. Furthermore, I request that the relevant notifications, as required by law, should be provided to the appropriate authorities. Very truly yours, ---------------------------- [signatures of stockholders] * Shares held are as follows: Estate of William O. Carey 56 William V. Carey 370 William V. Carey Trust 314 Jeffrey Peterson 370 EX-3.1 4 CERTIFICATE OF INCORPORATION Exhibit 3.1 CERTIFICATE OF INCORPORATION OF CENTRAL EUROPEAN DISTRIBUTION CORPORATION ARTICLE 1. NAME The name of this corporation is Central European Distribution Corporation (the "Corporation"). ARTICLE 2. REGISTERED OFFICE AND AGENT The registered office of the Corporation shall be located at 1013 Centre Road, Wilmington, New Castle County, Delaware 19805. The registered agent of the Corporation at such address shall be Corporation Service Company. ARTICLE 3. PURPOSE AND POWERS The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware (the "Delaware General Corporation Law"). The Corporation shall have all power necessary or convenient to the conduct, promotion or attainment of such acts and activities. ARTICLE 4. CAPITAL STOCK 4.1. Authorized Shares The total number of shares of all classes of stock that the Corporation shall have authority to issue is 21.0 million of which 20.0 million shall be Common Stock, having a par value of $.01 per share ("Common Stock"), and 1.0 million shall be Preferred Stock, having a par value of $.01 per share ("Preferred Stock"). 4.2. Common Stock 4.2.1. Relative Rights The Common Stock shall be subject to all of the rights, privileges, preferences and priorities of the Preferred Stock as set forth in the certificate(s) of designations filed to establish the respective series of Preferred Stock. Each share of Common Stock shall have the same relative rights as and be identical in all respects to all the other shares of Common Stock. 4.2.2. Dividends Whenever there shall have been paid, or declared and set aside for payment, to the holders of shares of any class of stock having preference over the Common Stock as to the payment of dividends, the full amount of dividends and of sinking fund or retirement payments, if any, to which such holders are respectively entitled in preference to the Common Stock, then dividends may be paid on the Common Stock and on any class or series of stock entitled to participate therewith as to dividends, out of any assets legally available for the payment of dividends thereon, but only when and as declared by the Board of Directors of the Corporation. 4.2.3. Dissolution, Liquidation, or Winding Up In the event of any dissolution, liquidation, or winding up of the Corporation, whether voluntary or involuntary, the holders of the Common Stock, and holders of any class or series of stock entitled to participate therewith, in whole or in part, as to the distribution of assets in such event, shall become entitled to participate in the distribution of any assets of the Corporation remaining after the Corporation shall have paid, or provided for payment of, all debts and liabilities of the Corporation and after the Corporation shall have paid, or set aside for payment, to the holders of any class of stock having preference over the Common Stock in the event of dissolution, liquidation or winding up the full preferential amounts (if any) to which they are entitled. 4.2.4. Voting Rights Each holder of shares of Common Stock shall be entitled to attend all special and annual meetings of the stockholders of the Corporation and, to cast one vote for each share of Common Stock held of record upon any matter or thing (including, without limitation, the election of one or more directors) properly considered and acted upon by the stockholders. 4.3. Preferred Stock The Board of Directors is authorized, subject to limitations prescribed by the Delaware General Corporation Law and the provisions of this Certificate of Incorporation, to provide, by resolution or resolutions from time to time and by filing a certificate(s) pursuant to the Delaware General Corporation Law, for the issuance of the shares of Preferred Stock in series, to establish from time to time the number of shares to be included in each such series, to fix the powers, designations, preferences and relative, participating, optional or other special rights of the shares of each such series and to fix the qualifications, limitations or restrictions thereof. -2- ARTICLE 5. INCORPORATOR 5.1 The name and mailing address of the incorporator (the "Incorporator") are Pamela L. Simpson, Corporation Service Company, 1013 Centre Road, Wilmington, Delaware 19805. The powers of the Incorporator shall terminate upon the filing of this Certificate of Incorporation. 5.2 The powers of the Incorporator shall terminate upon the filing of this Certificate of Incorporation. ARTICLE 6. BOARD OF DIRECTORS 6.1. Number and Election The number of directors of the Corporation shall be not less than two nor more than nine directors, the exact number of directors to be fixed from time to time by or in the manner provided in the bylaws of the Corporation. Upon the filing in the Office of the Secretary of State of Delaware of the Certificate of Incorporation of the Corporation, the following persons, having the indicated mailing addresses, shall serve as the initial directors of the Corporation until the first annual meeting of the stockholders of the Corporation or until their successors are elected and qualify:
Name Mailing Address ---- --------------- William V. Carey 1602 Cottagewood Drive, Brandon, FL 33511 James T. Grossman 805 S. Fairfax Street, Alexandria, VA 22314 James B. Kelly 7606 Hamilton Spring Road, Bethesda, MD 20817 Jan W. Laskowski 115 ul. Marcinkowska, 00102 Warsaw, Poland Jeffrey Peterson 1502 Stonewall Road, Alexandria, VA 22302 Joe M. Richardson P.O. Box 22154, Louisville, KY 40252
The terms of all other directors expire at the next annual stockholders' meeting following their election. Unless and except to the extent that the bylaws of the Corporation shall otherwise require, the election of directors of the Corporation need not be by written ballot. Any vacancy occurring in the Board of Directors, including any vacancy created by an increase in the number of directors, shall be filled by the vote of a majority of the directors then in office, whether or not a quorum, or by a sole remaining director, and any director so chosen shall hold office until the next -3- election of directors and until such director's successor shall have been elected and qualified, or until the director's earlier resignation or removal. No director may be removed except for cause and then only by an affirmative vote of the holders of at least a majority of the outstanding shares of stock of the Corporation entitled to vote thereon at a duly constituted meeting of stockholders called for such purpose. At least 30 days prior to such meeting of stockholders, written notice shall be sent to the director or directors whose removal shall be considered at such meeting. 6.2. Management of Business and Affairs of the Corporation The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. 6.3. Limitation of Liability No director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that this provision shall not eliminate or limit the liability of a director (a) for any breach of the director's duty of loyalty to the Corporation or its stockholders; (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (c) under Section 174 of the Delaware General Corporation Law; or (d) for any transaction from which the director derived an improper personal benefit. Any repeal or modification of this Article 6.3 shall be prospective only and shall not ----------- adversely affect any right or protection of, or any limitation on the liability of, a director of the Corporation existing at, or arising out of facts or incidents occurring prior to, the effective date of such repeal or modification. ARTICLE 7. COMPROMISE OR ARRANGEMENT Whenever a compromise or arrangement is proposed between the Corporation and its creditors or any class of them and/or between the Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the Corporation or any creditor or stockholder thereof, or on the application of any receiver or receivers appointed for the Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for the Corporation under the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of the Corporation as a consequence of such compromise or -4- arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of the Corporation, as the case may be, and also on the Corporation. ARTICLE 8. AMENDMENT OF BYLAWS The Board of Directors or the stockholders may from time to time adopt, amend or repeal the by-laws of the Corporation. Such action by the Board of Directors shall require the affirmative vote of at least a majority of the directors then in office at a duly constituted meeting of the Board of Directors called for such purpose. Such action by the stockholders shall require the affirmative vote of the holders of at least a majority of the outstanding shares of stock of the Corporation entitled to vote thereon at a duly constituted meeting of stockholders called for such purpose. ARTICLE 9. RESERVATION OF RIGHT TO AMEND CERTIFICATE OF INCORPORATION The Corporation reserves the right at any time, and from time to time, to amend, alter, change, or repeal any provision contained in this Certificate of Incorporation, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed by law; and all rights, preferences, and privileges of any nature conferred upon stockholders, directors, or any other persons by and pursuant to this Certificate of Incorporation in its present form or as hereafter amended are granted subject to the rights reserved in this Article 9. --------- ARTICLE 10. STOCKHOLDER MATTERS 10.1. Consent in Lieu of Meeting Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of such holders and may not be effected by any consent in writing by such holders, unless such consent is unanimous. 10.2. Call of Special Meetings Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute, may be called by the Board of Directors, the Chairman of the Board or the President of the Corporation, and shall be called by -5- the President or the Secretary of the Corporation at the request in writing of stockholders possessing at least 10 percent of the voting power of the issued and outstanding voting stock of the Corporation entitled to vote generally for the election of directors. Such request shall include a statement of the purpose or purposes of the proposed meeting. ARTICLE 11. AMENDMENT OF CERTIFICATE OF INCORPORATION Except as set forth in this Article 11 or as otherwise specifically ---------- required by law, no amendment of any provision of this Certificate of Incorporation shall be made unless such amendment has been first proposed by the Board of Directors of the Corporation upon the affirmative vote of at least a majority of the directors then in office at a duly constituted meeting of the Board of Directors called for such purpose and thereafter approved by stockholders of the Corporation by the affirmative vote of the holders of at least a majority of the outstanding shares of stock of the Corporation entitled to vote thereon; provided, however, if such amendment is to the provisions set forth in this clause of Article 11 or in Articles 4.1 (insofar as relating to ---------- ------------------------------------ the authorized number of shares of Preferred Stock), 4.3, 6.3, 8, or 10 hereof, - ---------------------------------------------------- ---- --- - -- such amendment must be approved by the affirmative vote of the holders of at least two-thirds of the outstanding shares of stock of the Corporation entitled to vote thereon rather than a majority of such shares. -6- IN WITNESS WHEREOF, the undersigned, being the Incorporator hereinabove named, for the purpose of forming a corporation pursuant to the Delaware General Corporation Law, hereby certifies that the facts herein above stated are truly set forth, and accordingly executes this Certificate of Incorporation this 4th day of September 1997. CORPORATION SERVICE COMPANY By: /s/ Pamela L. Simpson ------------------------------- Pamela L. Simpson, Incorporator -7- EX-3.2 5 BYLAWS Exhibit 3.2 BYLAWS OF CENTRAL EUROPEAN DISTRIBUTION CORPORATION 1. OFFICES 1.1. Registered Office The initial registered office of the Corporation shall be in Wilmington, Delaware, and the initial registered agent in charge thereof shall be Corporation Service Company, 1013 Centre Road, Wilmington, Delaware 19805. 1.2. Other Offices The Corporation may also have offices at such other places, both within and without the State of Delaware, as the Board of Directors may from time to time determine or as may be necessary or useful in connection with the business of the Corporation. 2. MEETINGS OF STOCKHOLDERS 2.1. Place of Meetings All meetings of the stockholders shall be held at such place as may be fixed from time to time by the Board of Directors, the Chairman of the Board or the President. 2.2. Annual Meetings The Corporation shall hold annual meetings of stockholders, commencing with the year 1998, on such date and at such time as shall be designated from time to time by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President, at which stockholders shall elect a Board of Directors and transact such other business as may properly be brought before the meeting. 2.3. Special Meetings Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute, may be called by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President of the Corporation, and shall be called by the President or the Secretary of the Corporation at the request in writing of stockholders possessing at least 25 percent of the voting power of the issued and outstanding voting stock of the Corporation entitled to vote generally for the election of directors. Such request shall include a statement of the purpose or purposes of the proposed meeting. 2.4. Notice of Meetings Notice of any meeting of stockholders, stating the place, date and hour of the meeting, and (if it is a special meeting) the purpose or purposes for which the meeting is called, shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting (except to the extent that such notice is waived or is not required as provided in the General Corporation Law of the State of Delaware (the "Delaware General Corporation Law") or these Bylaws). Such notice shall be given in accordance with, and shall be deemed effective as set forth in, Section 222 (or any successor section) of the Delaware General Corporation Law. 2.5. Waivers of Notice Whenever the giving of any notice is required by statute, the Certificate of Incorporation of the Corporation (which shall include any amendments thereto and shall be hereinafter referred to as so amended as the "Certificate of Incorporation") or these Bylaws, a waiver thereof, in writing and delivered to the Corporation, signed by the person or persons entitled to said notice, whether before or after the event as to which such notice is required, shall be deemed equivalent to notice. Attendance of a stockholder at a meeting shall constitute a waiver of notice (a) of such meeting, except when the stockholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting, and (b) (if it is a special meeting) of consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the stockholder objects to considering the matter at the beginning of the meeting. 2.6. Business at Special Meetings Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice (except to the extent that such notice is 2 waived or is not required as provided in the Delaware General Corporation Law or these Bylaws). 2.7. List of Stockholders After the record date for a meeting of stockholders has been fixed, at least ten days before such meeting, the officer who has charge of the stock ledger of the Corporation shall make a list of all stockholders entitled to vote at the meeting, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place in the city where the meeting is to be held, which place is to be specified in the notice of the meeting, or at the place where the meeting is to be held. Such list shall also, for the duration of the meeting, be produced and kept open to the examination of any stockholder who is present at the time and place of the meeting. 2.8. Quorum at Meetings Stockholders may take action on a matter at a meeting only if a quorum exists with respect to that matter. Except as otherwise provided by statute or by the Certificate of Incorporation, the holders of a majority of the shares entitled to vote at the meeting, and who are present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business. Where a separate vote by a class or classes is required, the holders of a majority of the outstanding shares of such class or classes, who are present in person or represented by proxy, shall constitute a quorum entitled to take action on that matter. Once a share is represented for any purpose at a meeting (other than solely to object (a) to holding the meeting or transacting business at the meeting, or (b) (if it is a special meeting) to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice), it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for the adjourned meeting. The holders of a majority of the voting shares represented at a meeting, whether or not a quorum is present, may adjourn such meeting from time to time. 3 2.9. Voting and Proxies Unless otherwise provided in the Delaware General Corporation Law or in the Corporation's Certificate of Incorporation, and subject to the other provisions of these Bylaws, each stockholder shall be entitled to one vote on each matter, in person or by proxy, for each share of the Corporation's capital stock that has voting power and that is held by such stockholder. No proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A duly executed appointment of proxy shall be irrevocable if the appointment form states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. 2.10. Required Vote When a quorum is present at any meeting of stockholders, all matters shall be determined, adopted and approved by the affirmative vote (which need not be by ballot) of the holders of a majority of the shares present in person or represented by proxy at the meeting and entitled to vote with respect to the matter, unless the proposed action is one upon which, by express provision of statutes or of the Certificate of Incorporation, a different vote is specified and required, in which case such express provision shall govern and control the decision of such question. Where a separate vote by a class or classes is required, the affirmative vote of the holders of a majority of the shares of such class or classes present in person or represented by proxy at the meeting shall be the act of such class, unless the proposed action is one upon which, by express provision of statutes or of the Certificate of Incorporation, a different vote is specified and required, in which case such express provision shall govern and control the decision of such question. Notwithstanding the foregoing, directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. 2.11. Action Without a Meeting Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of such stockholders and may not be effected by any consent in writing by such stockholders, unless such consent is unanimous. 2.12. Business at Annual Meeting At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly 4 brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, a stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days and not more than 90 days prior to the meeting; provided, however, that in the event that less than 75 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (c) the class and number of shares of the Corporation's stock which are beneficially owned by the stockholder, and (d) any material interest of the stockholder in such business. No later than the tenth day following the date of receipt of a stockholder notice pursuant to this Section 2.12, the Chairman of the Board of Directors of the Corporation shall, if the facts warrant, determine and notify in writing the stockholder submitting such notice that such notice was not made in accordance with the time limits and/or other procedures prescribed by the Bylaws. If no such notification is mailed to such stockholder within such ten- day period, such stockholder notice containing a matter of business shall be deemed to have been made in accordance with the provisions of this Section 2.12. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 2.12. 3. DIRECTORS 3.1. Powers The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things, subject to any limitation set 5 forth in the Certificate of Incorporation or as otherwise may be provided in the Delaware General Corporation Law. The Board of Directors shall annually elect a Chairman of the Board from among its members and shall designate, when present, either the Chairman of the Board or the President to preside at its meetings. If neither the Chairman of the Board nor the President is present, the Board of Directors may designate another officer to preside at such meeting. The Chairman of the Board and the President may be the same person. The Board of Directors may also annually elect one or more Vice Chairmen from among its members, with such duties as the Board of Directors shall from time to time prescribe. 3.2. Number and Election As of the closing of the Corporation's initial public offering of equity securities under the Securities Act of 1933, as amended, the total number of directors which shall constitute the entire Board of Directors shall be six. The term "entire Board of Directors" as used herein shall mean the total number of directors constituting the entire Board of Directors irrespective of the number of directors then in office or vacancies. Thereafter, the total number of directors constituting the entire Board of Directors shall be determined by resolution of the Board of Directors passed by the affirmative vote of at least two-thirds of the directors then in office, provided, that such number shall be consistent with the minimum and maximum number of directors set forth in the Certificate of Incorporation. Directors shall be elected at annual meetings of the stockholders, except as provided in Section 3.3 hereof, and each director elected shall hold office until his successor is elected and qualified or until his earlier death, resignation or removal. Directors need not be stockholders. 3.3. Vacancies Vacancies and newly created directorships resulting from any increase in the authorized number of directors shall be filled by a majority of the directors then in office, whether or not a quorum, or by a sole remaining director. Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the Certificate of Incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by the sole remaining director so elected. Each director so chosen shall hold office until the next election, and until such director's successor is elected and qualified, or until the director's earlier resignation or removal. In the event that one or more directors resigns from the Board, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have 6 power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office until the next election, and until such director's successor is elected and qualified, or until the director's earlier resignation or removal. 3.4. Meetings 3.4.1. Regular Meetings Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board of Directors. 3.4.2. Special Meetings Special meetings of the Board may be called by the Chairman of the Board or President on one day's notice to each director, either personally or by telephone, express delivery service (so that the scheduled delivery date of the notice is at least one day in advance of the meeting), telegram or facsimile transmission. The notice need not describe the purpose of a special meeting. 3.4.3. Telephone Meetings Members of the Board of Directors may participate in a meeting of the Board by any communication by means of which all participating directors can simultaneously hear each other during the meeting. A director participating in a meeting by this means is deemed to be present in person at the meeting. 3.4.4. Action Without Meeting Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting if the action is taken by all members of the Board. The action must be evidenced by one or more written consents describing the action taken, signed by each director, and delivered to the Corporation for inclusion in the minute book. 3.4.5. Waiver of Notice of Meeting A director may waive any notice required by statute, the Certificate of Incorporation or these Bylaws before or after the date and time stated in the notice. Except as set forth below, the waiver must be in writing, signed by the director entitled to the notice, and delivered to the Corporation for inclusion in the minute book. Notwithstanding the foregoing, a director's attendance at or participation in 7 a meeting waives any required notice to the director of the meeting unless the director at the beginning of the meeting objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. 3.5. Quorum and Vote at Meetings At all meetings of the Board, a quorum of the Board of Directors consists of the presence of a majority of the total number of directors constituting the entire Board of Directors. The affirmative vote of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute, the Certificate of Incorporation or these Bylaws. 3.6. Committees of Directors The Board of Directors may by resolution designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. If a member of a committee shall be absent from any meeting, or disqualified from voting thereat, the remaining member or members present and not disqualified from voting, whether or not such member or members constitute a quorum, may, by unanimous vote, appoint another member of the Board of Directors to act at the meeting in the place of such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors pursuant to Section 151(a) of the Delaware General Corporation Law, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation or fix the number of shares of any series of stock or authorize the increase or decrease of any shares of any series), adopting an agreement of merger or consolidation pursuant to Sections 251, 252, 257, 258, 263 or 264 of the Delaware General Corporation Law, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution 8 of the Corporation or a revocation of a dissolution, or amending the Bylaws; and unless the resolutions, these Bylaws or the Certificate of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the Delaware General Corporation Law. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Unless otherwise specified in the resolution of the Board of Directors designating the committee, at all meetings of each such committee of directors, a majority of the members of the committee shall constitute a quorum for the transaction of business, and the affirmative vote of a majority of the members of the committee present at any meeting at which there is a quorum shall be the act of the committee. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors, when required. 3.7. Compensation of Directors The Board of Directors shall have the authority to fix the compensation of directors. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. 3.8. Nomination of Directors Only persons who are nominated in accordance with the procedures set forth in this Section 3.8 shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the Corporation entitled to vote for the election of directors at the meeting who complies with notice procedures set forth in this Section 3.8. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder notice shall be delivered to or mailed and received at the principal executive office of the Corporation not less than 60 days and not more than 90 days prior to the meeting; provided, however, that in the event that less than 75 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of 9 shares of the Corporation's stock which are beneficially owned by such person, and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including without limitation such person's written consent to be named in the proxy statement as a nominee and to serving as a director if elected); and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the Corporation's books, of such stockholder and (ii) the class and number of shares of the Corporation's stock which are beneficially owned by such stockholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. No later than the tenth day following the date of receipt of a stockholder nomination submitted pursuant to this Section 3.8, the Chairman of the Board of Directors of the Corporation shall, if the facts warrant, determine and notify in writing the stockholder making such nomination that such nomination was not made in accordance with the time limits and/or other procedures prescribed by the bylaws. If no such notification is mailed to such stockholder within such ten-day period, such nomination shall be deemed to have been made in accordance with the provisions of this Section 3.8. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 3.8. 4. OFFICERS 4.1. Positions The officers of the Corporation shall be a Chairman of the Board, a President, a Chief Executive Officer, a Chief Financial Officer, a Secretary and a Treasurer, and such other officers as the Board of Directors from time to time may appoint, including one or more Vice Chairpersons, a Chief Operating Officer, Executive Vice Presidents, a General Counsel, Senior Vice Presidents, Vice Presidents, Assistant Secretaries and Assistant Treasurers. Each such officer shall exercise such powers and perform such duties as shall be set forth below and such other powers and duties as from time to time may be specified by the Board of Directors or by any officer(s) authorized by the Board of Directors to prescribe the duties of such other officers. Any number of offices may be held by the same person, except that in no event shall the President and the Secretary be the same person. Each of the Chairman of the Board, the President and Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer, and/or any Executive Vice President or Senior Vice President may execute bonds, mortgages and other 10 documents under the seal of the Corporation, except where required or permitted by law to be otherwise executed and except where the authorization therefor shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. 4.2. Chairman of the Board The Chairman of the Board shall (when present) preside at all meetings of the Board of Directors and stockholders and shall ensure that all orders and resolutions of the Board of Directors are carried into effect. Unless the Board shall designate a person other than the Chairman as the President and Chief Executive Officer, the Chairman of the Board shall also be the President and Chief Executive Officer of the Corporation, and as such shall have overall executive responsibility and authority for management of the business, affairs and operations of the Corporation (subject to the authority of the Board of Directors). As President and Chief Executive Officer, the Chairman of the Board shall, in general, perform all duties incident to the office of a president and chief executive officer of a corporation, including those duties customarily performed by persons holding such offices, and shall perform such other duties as, from time to time, may be assigned to him or her by the Board of Directors. 4.3. Chief Executive Officer Subject to the authority of the Board of Directors, the Chief Executive Officer shall have overall executive responsibility and authority for management of the business, affairs and operations of the Corporation, and, in general, shall perform all duties incident to the office of a chief executive officer of a corporation, including those duties customarily performed by persons holding such office, and shall perform such other duties as, from time to time, may be assigned to him or her by the Board of Directors. 4.4. President The President shall be the chief operating officer of the Corporation and shall have responsibility and authority for management of the day-to-day operations of the Corporation, subject to the authority of the Chief Executive Officer and the Board of Directors and, in general, shall perform all duties incident to the office of a president of a corporation including those duties customarily performed by persons holding such office and shall perform such other duties as, from time to time, may be assigned to him or her by the Board of Directors. 11 4.5. Chief Financial Officer The Chief Financial Officer of the Corporation shall have general charge and supervision of the financial affairs of the Corporation, including budgetary, accounting and statistical methods, and shall approve payment, or designate others serving under him to approve for payment, all vouchers and warrants for disbursements of funds, and, in general, shall perform such other duties as are incident to the office of a chief financial officer of a corporation, including those duties customarily performed by persons occupying such office, and shall perform such other duties as, from time to time, may be assigned to him or her by the Board of Directors, the President or Chief Executive Officer. 4.6. Chief Operating Officer The Chief Operating Officer of the Corporation shall have general charge and supervision of the day to day operations of the Corporation (subject to the direction of the President and the authority of the Board of Directors), and, in general, shall perform such other duties as are incident to the office of a chief operating officer of a corporation, including those duties customarily performed by persons occupying such office, and shall perform such other duties as, from time to time, may be assigned to him or her by the Board of Directors, or the President or Chief Executive Officer. 4.7. General Counsel The General Counsel of the Corporation shall be responsible for supervising the legal affairs of the Corporation, and, in general, shall perform such other duties as are incident to the office of a general counsel of a corporation, including those duties customarily performed by persons occupying such office, and shall perform such other duties as, from time to time, may be assigned to him or her by the Board of Directors, the President or Chief Executive Officer. 4.8. Vice President In the absence of the President or in the event of the President's failure or refusal to act, the Vice President (or in the event there be more than one Vice President, the Vice Presidents in the order designated, or in the absence of any designation, then in the order of their election) shall perform the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President and Chief Executive Officer. The Vice President or Vice Presidents, in general, shall perform such other duties as are incident to the office of a vice president of a corporation, including those duties customarily 12 performed by persons occupying such office, and shall perform such other duties as, from time to time, may be assigned to him or her or them by the Board of Directors, the President or Chief Executive Officer. The Board of Directors may designate one or more Vice Presidents as Executive Vice Presidents or Senior Vice Presidents. 4.9. Secretary The Secretary, or an Assistant Secretary, shall attend all meetings of the Board of Directors and all meetings of the stockholders, and shall record all the proceedings of the meetings of the stockholders and of the Board of Directors in a book to be kept for that purpose, and shall perform like duties for the standing committees, when required. The Secretary shall have custody of the corporate seal of the Corporation, and the Secretary, or an Assistant Secretary, shall have authority to affix the same to any instrument requiring it, and when so affixed it may be attested by the signature of the Secretary or by the signature of such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by such officer's signature. The Secretary or an Assistant Secretary may also attest all instruments signed by the President and Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer or any Vice President. The Secretary, or an Assistant Secretary, shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and, in general, shall perform all duties as are incident to the office of a secretary of a corporation, including those duties customarily performed by persons occupying such office, and shall perform such other duties as, from time to time, may be assigned to him or her by the Board of Directors, the President, Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer or any Executive Vice President. 4.10. Assistant Secretary The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order determined by the Board of Directors (or if there shall have been no such determination, then in the order of their election), shall, in the absence of the Secretary or in the event of the Secretary's inability or refusal to act or when requested by the Chairman of the Board, the President and Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer or any Executive Vice President, perform the duties and exercise the powers of the Secretary, and, in general, shall perform all duties as are incident to the office of an assistant secretary of a corporation, including those duties customarily performed by persons holding such office, and shall perform such other duties as, from time to time, may be assigned to him or her or them by the Board of Directors, the President, Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer, any Executive Vice President or the Secretary. An 13 Assistant Secretary may or may not be an officer, as determined by the Board of Directors. 4.11. Treasurer The Treasurer shall have responsibility for the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation, and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall also render to the President and Chief Executive Officer and the Chief Operating Officer, upon request, and to the Board of Directors at its regular meetings, or when the Board of Directors so requires, an account of all financial transactions and of the financial condition of the Corporation and, in general, shall perform such duties as are incident to the office of a treasurer of a corporation, including those customarily performed by persons occupying such office, and shall perform all other duties as, from time to time, may be assigned to him or her by the Board of Directors, the President, Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer or any Executive Vice President. 4.12. Assistant Treasurer The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors (or if there shall have been no such determination, then in the order of their election), shall, in the absence of the Treasurer or in the event of the Treasurer's inability or refusal to act, perform the duties and exercise the powers of the Treasurer, and, in general, shall perform all duties as are incident to the office of an assistant treasurer of a corporation, including those duties customarily performed by persons occupying such office, and shall perform such other duties as, from time to time, may be assigned to him or them by the Board of Directors, the President, Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer, any Executive Vice President or by the Treasurer. An Assistant Treasurer may or may not be an officer, as determined by the Board of Directors. 4.13. Term of Office The officers of the Corporation shall hold office until their successors are chosen and qualify or until their earlier resignation or removal. Any officer may resign at any time upon written notice to the Corporation. Any officer elected or appointed by the Board of Directors may be removed at any time, with or without cause, by the affirmative vote of a majority of the directors constituting the entire Board of Directors. 14 4.14. Compensation The compensation of officers of the Corporation shall be fixed by the Board of Directors or by any officer(s) authorized by the Board of Directors to prescribe the compensation of such other officers. 4.15. Fidelity Bonds The Corporation may secure the fidelity of any or all of its officers or agents by bond or otherwise. 5. CAPITAL STOCK 5.1. Certificates of Stock; Uncertificated Shares The shares of the Corporation shall be represented by certificates, provided that the Board of Directors may provide by resolution that some or all of any or all classes or series of the Corporation's stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock represented by certificates, and upon request every holder of uncertificated shares, shall be entitled to have a certificate (representing the number of shares registered in certificate form) signed in the name of the Corporation by the Chairman of the Board, President or any Vice President, and by the Treasurer, Secretary or any Assistant Treasurer or Assistant Secretary of the Corporation. Any or all the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar whose signature or facsimile signature appears on a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. 5.2. Lost Certificates The Board of Directors, Chairman of the Board, President, Chief Executive Officer, Chief Financial Officer or Secretary may direct a new certificate of stock to be issued in place of any certificate theretofore issued by the Corporation and alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming that the certificate of stock has been lost, stolen or destroyed. When authorizing such issuance of a new certificate, the Board or any such officer may, as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or such owner's legal representative, to advertise the same in such manner as the Board or such officer shall require and/or to give the Corporation a bond or indemnity, in such sum or on 15 such terms and conditions as the Board or such officer may direct, as indemnity against any claim that may be made against the Corporation on account of the certificate alleged to have been lost, stolen or destroyed or on account of the issuance of such new certificate or uncertificated shares. 5.3. Record Date 5.3.1. Actions by Stockholders In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty days nor less than ten days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting, unless the Board of Directors fixes a new record date for the adjourned meeting. In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by the Delaware General Corporation Law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation in the manner prescribed by Section 213(b) of the Delaware General Corporation Law. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by the Delaware General Corporation Law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. 16 5.3.2. Payments In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. 5.3.3. Stockholders of Record The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, to receive notifications, to vote as such owner, and to exercise all the rights and powers of an owner. The Corporation shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise may be provided by the Delaware General Corporation Law. 6. INDEMNIFICATION 6.1. Authorization of Indemnification Each person who was or is a party or is threatened to be made a party to or is involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether by or in the right of the Corporation or otherwise (a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee, partner (limited or general) or agent of another corporation or of a partnership, joint venture, limited liability company, trust or other enterprise, including service with respect to an employee benefit plan, shall be (and shall be deemed to have a contractual right to be) indemnified and held harmless by the Corporation (and any successor to the Corporation by merger or otherwise) to the fullest extent authorized by, and subject to the conditions and (except as provided herein) procedures set forth in the Delaware General Corporation Law, as the same exists or may hereafter be amended (but any such amendment shall not be deemed to limit or prohibit the rights of indemnification 17 hereunder for past acts or omissions of any such person insofar as such amendment limits or prohibits the indemnification rights that said law permitted the Corporation to provide prior to such amendment), against all expenses, liabilities and losses (including attorneys' fees, judgments, fines, ERISA taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith; provided, however, that the --------- ------- Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person (except for a suit or action pursuant to Section 6.2 hereof) only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. Persons who are not directors or officers of the Corporation may be similarly indemnified in respect of such service to the extent authorized at any time by the Board of Directors of the Corporation. The indemnification conferred in this Section 6.1 also shall include the right to be paid by the Corporation (and such successor) the expenses (including attorneys' fees) incurred in the defense of or other involvement in any such proceeding in advance of its final disposition; provided, however, that, if and to the extent the Delaware General --------- ------- Corporation Law requires, the payment of such expenses (including attorneys' fees) incurred by a director or officer in advance of the final disposition of a proceeding shall be made only upon delivery to the Corporation of an undertaking by or on behalf of such director or officer to repay all amounts so paid in advance if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Section 0 or otherwise; and provided -------- further, that, such expenses incurred by other employees and agents may be so - ------- paid in advance upon such terms and conditions, if any, as the Board of Directors deems appropriate. 6.2. Right of Claimant to Bring Action Against the Corporation If a claim under Section 6.1 is not paid in full by the Corporation within sixty days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring an action against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the Corporation to indemnify the claimant for the amount claimed or is otherwise not entitled to indemnification under Section 6.1 but the burden of proving such defense shall be on the Corporation. The failure of the Corporation (in the manner provided under the Delaware General Corporation Law) to have made a determination prior to or after the commencement of such action that indemnification of the claimant is 18 proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law shall not be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Unless otherwise specified in an agreement with the claimant, an actual determination by the Corporation (in the manner provided under the Delaware General Corporation Law) after the commencement of such action that the claimant has not met such applicable standard of conduct shall not be a defense to the action, but shall create a presumption that the claimant has not met the applicable standard of conduct. 6.3. Non-exclusivity The rights to indemnification and advance payment of expenses provided by Section 6.1 hereof shall not be deemed exclusive of any other rights to which those seeking indemnification and advance payment of expenses may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office. 6.4. Survival of Indemnification The indemnification and advance payment of expenses and rights thereto provided by, or granted pursuant to, Section 6.1 hereof shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee, partner or agent and shall inure to the benefit of the personal representatives, heirs, executors and administrators of such person. 6.5. Insurance The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, partner (limited or general )or agent of another corporation or of a partnership, joint venture, limited liability company, trust or other enterprise, against any liability asserted against such person or incurred by such person in any such capacity, or arising out of such person's status as such, and related expenses, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of the Delaware General Corporation Law. 19 7. GENERAL PROVISIONS 7.1. Inspection of Books and Records Any stockholder, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the Corporation's stock ledger, a list of its stockholders, and its other books and records, and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent shall be the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing which authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the Corporation at its registered office or at its principal place of business. 7.2. Dividends The Board of Directors may declare dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation and the laws of the State of Delaware. 7.3. Reserves The directors of the Corporation may set apart, out of the funds of the Corporation available for dividends, a reserve or reserves for any proper purpose and may abolish any such reserve. 7.4. Execution of Instruments All checks, drafts or other orders for the payment of money, and promissory notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. 7.5. Fiscal Year The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. 20 7.6. Seal The corporate seal shall be in such form as the Board of Directors shall approve. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or otherwise reproduced. 7.7. Pronouns All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural, as the identity of the person or entity may require. 7.8. Amendments The Board of Directors or the stockholders may from time to time adopt, amend or repeal the Bylaws of the Corporation. Such action by the Board of Directors shall require the affirmative vote of at least a majority of the directors then in office at a duly constituted meeting of the Board of Directors called for such purpose. Such action by the stockholders shall require the affirmative vote of the holders of at least a majority of the outstanding shares of stock of the Corporation entitled to vote thereon at a duly constituted meeting of stockholders called for such purpose. * * * * * 21 EX-4.1 6 INCORPORATED UNDER THE LAWS EXHIBIT 4.1 NUMBER SHARES C O INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE CENTRAL EUROPEAN DISTRIBUTION CORPORATION See Reverse for Certain Definitions 20,000,000 SHARES PAR VALUE $.01 EACH COMMON STOCK THIS IS TO CERTIFY THAT IS THE OWNER OF ---------------------------------------- - -------------------------------------------------------------------------------- FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF CENTRAL EUROPEAN DISTRIBUTION CORPORATION transferable on the books of the Corporation by the holder hereof in person or by duly authorized Attorney upon surrender of this Certificate properly endorsed. Witness, the seal of the Corporation and the signatures of its duly authorized officers. Dated - --------------------------------------- --------------------------------------- SECRETARY PRESIDENT THE FOLLOWING ABBREVIATIONS, WHEN USED IN THE INSCRIPTION ON THE FACE OF THIS CERTIFICATE, SHALL BE CONSTRUED AS THOUGH THEY WERE WRITTEN OUT IN FULL ACCORDING TO APPLICABLE LAWS OR REGULATIONS: TEN COM -as tenants in common UNIF GIFT MIN ACT- ......... CUSTODIAN ......... (CUST) (MINOR) TEN ENT -AS TENANTS BY THE ENTIRETIES UNDER UNIFORM GIFTS TO MINORS ACT................................... JT TEN - AS JOINT TENANTS WITH RIGHT OF (STATE) SURVIVORSHIP AND NOT AS TENANTS IN COMMON ADDITIONAL ABBREVIATIONS MAY ALSO BE USED THROUGH NOT IN THE ABOVE LIST
For value received hereby sell, assign and transfer unto -------------------- PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE) - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ Shares - ------------------------------------------------------------------------ represented by the within Certificate, and do hereby irrevocably constitute and appoint Attorney - --------------------------------------------------------------------- to transfer the said Shares on the books of the within named Corporation with full power of substitution in the premises. Dated 19 ------------------------------- -- In presence of ------------------------------- - ------------------------------- NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. EX-4.2 7 WARRANT AGREEMENT WARRANT AGREEMENT AGREEMENT, dated as of this __ th day of _____, 1998, by and among Central European Distribution Corporation, a Delaware corporation, having its principal executive office at 211 North Union Street, #100, Alexandria, Virginia 22314 (the "Company"), American Stock Transfer & Trust Company, as Warrant Agent (the "Warrant Agent"), Fine Equities, Inc., having its principal executive office at 600 Third Avenue, New York, New York 10016 ("Fine Equities"), and SouthWall Capital Corp., having its principal executive office at 110 Wall Street, New York, New York 10005 ("SouthWall" and together with Fine Equities, the "Underwriters"). W I T N E S S E T H: WHEREAS, in connection with (i) a public offering (the "Public Offering") of up to 1,322,500 shares of the Company's common stock, par value $.01 per share ("Common Stock"), and 1,322,500 redeemable warrants accompanying the shares of Common Stock, pursuant to an underwriting agreement (the "Underwriting Agreement") dated ______, 1998 among the Company, certain of the Company's shareholders and the Underwriters, and (ii) the issuance to the Underwriters or their designees of Unit Purchase Options to purchase an aggregate of 115,000 additional shares of Common Stock and 115,000 additional warrants, to be dated as of _______, 1998 (the "Unit Purchase Options"), the Company may issue up to 1,437,500 warrants (collectively, the "Warrants"), subject to the terms and conditions set forth herein; and WHEREAS, each Warrant initially entitles the Registered Holder thereof to purchase one share of Common Stock; and WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing to so act, in connection with the issuance, registration, transfer, exchange and redemption of the Warrants, the issuance of certificates representing the Warrants, the exercise of the Warrants and the rights of the Registered Holders thereof; NOW THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth and for the purpose of defining the terms and provisions of the Warrants and the certificates representing the Warrants and the respective rights and obligations thereunder of the Company, the holders of certificates representing the Warrants and the Warrant Agent, the parties hereto agree as follows: 1. DEFINITIONS. As used herein, the following terms shall have the following meanings, unless the context shall otherwise require: (a) "Common Stock" shall mean stock of the Company of any class, whether now or hereafter authorized, which has the right to participate in the distribution of earnings and assets of the Company without limit as to amount or percentage, which at the date hereof consists of 20,000,000 shares of Common Stock, $.01 par value. (b) "Corporate Office" shall mean the office of the Warrant Agent (or its successor) at which at any particular time its principal business shall be administered, which office is located at the date hereof at 40 Wall Street, New York, New York 10005. (c) "Exercise Date" shall mean, as to any Warrant, the date on which the Warrant Agent shall have received both (a) the warrant certificate representing such Warrant (the "Warrant Certificate"), with the exercise form thereon duly executed by the Registered Holder thereof or his attorney duly authorized in writing, and (b) payment in cash, or by official bank or certified check made payable to the Company, of an amount in lawful money of the United States of America equal to the applicable Purchase Price. (d) Subject to the provisions of paragraph 2(f) hereof, "Purchase Price" shall mean the purchase price to be paid upon exercise of each Warrant in accordance with the terms hereof and, which price shall be $____, subject to adjustment from time to time pursuant to the provisions of Section 9 hereof, and subject to the Company's right to reduce the Purchase Price upon notice to all Registered Holders of Warrants. (e) "Redemption Price" shall mean the price at which the Company may, at its option in accordance with the terms hereof, redeem the Warrants, which price shall be $.05 per Warrant. (f) "Registered Holder" shall mean as to any Warrant and as of any particular date, the person in whose name the certificate representing the Warrant shall be registered on that date on the books maintained by the Warrant Agent pursuant to Section 6. (g) "Transfer Agent" shall mean American Stock Transfer & Trust Company, as the Company's transfer agent, or its authorized successor, as such. (h) "Warrant Expiration Date" shall mean 5:00 P.M. (New York time) on ______, 2003 or, with respect to Warrants which are outstanding as of the applicable Redemption Date (as defined in Section 8) and specifically excluding Warrants issuable upon exercise of the Unit Purchase Options if the Unit Purchase Options have not been exercised, the Redemption Date, whichever is earlier; provided that if such date shall in the State of New York be a holiday or a day on which banks are authorized or required to close, then 5:00 P.M. (New York time) on the next following day which in the State of New York is not a holiday or a day on which banks are authorized or required to close. Upon notice to all Registered Holders, the Company shall have the right to extend the Warrant Expiration Date. 2. WARRANTS AND ISSUANCE OF WARRANT CERTIFICATES. (a) A Warrant initially shall entitle the Registered Holder of the Warrant Certificate representing such Warrant to purchase one share of Common Stock upon the exercise thereof, in accordance with the terms hereof, subject to modification and adjustment as provided in Section 9. (b) The Warrants will be immediately detachable and transferable separately from the Common Stock. (c) Upon execution of this Agreement, Warrant Certificates representing the number of Warrants sold pursuant to the Underwriting Agreement shall be executed by the Company and delivered to the Warrant Agent. Upon written order of the Company signed by its President or Chairman or a Vice President and by its Secretary, the Warrant Certificates shall be countersigned, issued and delivered by the Warrant Agent as part of the Units. (d) From time to time, up to the Warrant Expiration Date, the Transfer Agent shall countersign and deliver stock certificates in required whole number denominations representing up to an aggregate of 1,437,500 shares of Common Stock, subject to adjustment as described herein, upon the exercise of Warrants in accordance with this Agreement. (e) From time to time, up to the Warrant Expiration Date, the Warrant Agent shall countersign and deliver Warrant Certificates in required whole number denominations to the persons entitled thereto in connection with any transfer or exchange permitted under this Agreement; provided that no Warrant Certificates shall be issued except (i) those initially issued hereunder, (ii) those issued upon the exercise of fewer than all Warrants represented by any Warrant Certificate, to evidence any unexercised Warrants held by the exercising Registered Holder, (iii) those issued upon any transfer or exchange pursuant to Section 6; (iv) those issued in replacement of lost, stolen, destroyed or mutilated Warrant Certificates pursuant to Section 7; (v) those issued pursuant to the Unit Purchase Options; and (vi) those issued at the option of the Company, in such form as may 2 be approved by its Board of Directors, to reflect any adjustment or change in the Purchase Price, the number of shares of Common Stock purchasable upon exercise of the Warrants or the Target Price(s) therefor made pursuant to Section 9 hereof. (f) Pursuant to the terms of the Unit Purchase Options, the Underwriters or their designees may purchase up to 115,000 Units, which include up to 115,000 Warrants. Notwithstanding anything to the contrary contained herein, the Warrants underlying the Unit Purchase Options shall not be subject to redemption by the Company and the purchase price to be paid upon exercise of each such warrant shall be as set forth in the Unit Purchase Options. 3. FORM AND EXECUTION OF WARRANT CERTIFICATES (a) The Warrant Certificates shall be substantially in the form annexed hereto as Exhibit A (the provisions of which are hereby incorporated herein) and may have such letters, numbers or other marks of identification or designation and such legends, summaries or endorsements printed, lithographed or engraved thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Warrants may be listed, or to conform to usage or to the requirements of Section 2. The Warrant Certificates shall be dated the date of issuance thereof (whether upon initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen, or destroyed Warrant Certificates) and issued in registered form. Warrant Certificates shall be numbered serially with the letter W on Warrants of all denominations. (b) Warrant Certificates shall be executed on behalf of the Company by its Chairman of the Board, President or any Vice President and by its Secretary, by manual signatures or by facsimile signatures printed thereon, and shall have imprinted thereon a facsimile of the Company's seal. Warrant Certificates shall be manually countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any of the Warrant Certificates shall cease to be an officer of the Company or to hold the particular office referenced in the Warrant Certificate before the date of issuance of the Warrant Certificates or before countersignature by the Warrant Agent and issue and delivery thereof, such Warrant Certificates may nevertheless be countersigned by the Warrant Agent, issued and delivered with the same force and effect as though the person who signed such Warrant Certificates had not ceased to be an officer of the Company or to hold such office. After countersignature by the Warrant Agent, Warrant Certificates shall be delivered by the Warrant Agent to the Registered Holder without further action by the Company, except as otherwise provided by Section 4(a) hereof. 4. EXERCISE (a) Each Warrant may be exercised by the Registered Holder thereof at any time on or after the date of issuance, but not after the Warrant Expiration Date, upon the terms and subject to the conditions set forth herein and in the applicable Warrant Certificate. A Warrant shall be deemed to have been exercised immediately prior to the close of business on the Exercise Date and the person entitled to receive the securities deliverable upon such exercise shall be treated for all purposes as the holder of those securities upon the exercise of the Warrant as of the close of business on the Exercise Date. As soon as practicable on or after the Exercise Date, the Warrant Agent shall deposit the proceeds received from the exercise of a Warrant and shall notify the Company in writing of the exercise of the Warrants. Promptly following, and in any within five days after the date of such notice from the Warrant Agent, the Warrant Agent, on behalf of the Company, shall cause to be issued and delivered by the Transfer Agent, to the person or persons entitled to receive the same, a certificate or certificates for the securities deliverable upon such exercise (plus a Warrant Certificate for any remaining unexercised Warrants of the Registered Holder), unless prior to the date of issuance of such certificates the Company shall instruct the Warrant Agent to refrain from causing such issuance of certificates pending clearance of checks received in payment of the Purchase Price pursuant to such Warrants. 3 Notwithstanding the foregoing, in the case of payment made in the form of a check drawn on an account of either of the Underwriters or such other investment banks and brokerage houses as the Company shall approve in writing to the Warrant Agent, certificates shall immediately be issued without prior notice to the Company or any delay. Upon the exercise of any Warrant and clearance of the funds received, the Warrant Agent shall promptly remit the payment received for the Warrant (the "Warrant Proceeds") to the Company or as the Company may direct in writing. (b) If, at the Exercise Date in respect of the exercise of any Warrant after ______, 1999, (i) the market price of the Common Stock is greater than the then Purchase Price of the Warrant, (ii) the exercise of the Warrant was solicited by a member of the National Association of Securities Dealers, Inc. ("NASD") as designated in writing on the Warrant Certificate Subscription Form, (iii) the Warrant was not held in a discretionary account, (iv) disclosure of compensation arrangements was made both at the time of the original offering and at the time of exercise and (v) the solicitation of the exercise of the Warrant was not in violation of Rule 10b-6 (as such rule or any successor rule may be in effect as of such time of exercise) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), then the Warrant Agent, simultaneously with the distribution of the Warrant Proceeds to the Company shall, on behalf of the Company, pay from the Warrant Proceeds, a fee of four percent (4%) (the "Solicitation Fee") of the Purchase Price to the Underwriters (of which a portion may be reallocated by the Underwriters to the dealer who solicited the exercise). In the event the Solicitation Fee is not received within five days of the date on which the Company receives Warrant Proceeds, then the Solicitation Fee shall begin accruing interest at an annual rate of prime plus four percent (4%), payable by the Company to the Underwriters at the time the Underwriters receive the Solicitation Fee. Within five days after exercise the Warrant Agent shall send to each of the Underwriters a copy of the reverse side of each Warrant exercised. The Underwriters shall reimburse the Warrant Agent, upon request, for its reasonable expenses relating to compliance with this Section 4(b). In addition, the Underwriters and the Company may, at any time during business hours, examine the records of the Warrant Agent, including its ledger of original Warrant Certificates returned to the Warrant Agent upon exercise of the Warrants. The provisions of this paragraph may not be modified, amended or deleted without the prior written consent of each of the Underwriters. (c) In order to enforce the provisions of Section 4(b) above, in the event there is any dispute or question as to the amount or payment of the Solicitation Fee, the Warrant Agent is hereby expressly authorized to withhold payment to the Company of the Warrant Proceeds unless and until the Company establishes an escrow account for the purpose of depositing the entire amount of the Solicitation Fee, which amount will be deducted from the net Warrant Proceeds to be paid to the Company. The funds placed in the escrow account may not be released to the Company without a written agreement from each of the Underwriters that the required Solicitation Fee has been received by the Underwriters. 5. RESERVATION OF SHARES; LISTING; PAYMENT OF TAXES; ETC. (a) The Company covenants that it will at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issue upon exercise of Warrants, such number of shares of Common Stock as shall then be issuable upon the exercise of all outstanding Warrants. The Company covenants that all shares of Common Stock which shall be issuable upon exercise of the Warrants shall, at the time of delivery, be duly and validly issued, fully paid, nonassessable and free from all taxes, liens and charges with respect to the issue thereof, and that upon issuance such shares shall be listed on each national securities exchange on which the other shares of outstanding Common Stock of the Company are then listed or shall be eligible for inclusion in the Nasdaq Stock Market if the other shares of outstanding Common Stock of the Company are so included. (b) The Company covenants that if any securities to be reserved for the purpose of exercise of Warrants hereunder require registration with, or approval of, any governmental authority under any federal securities law before such securities may be validly issued or delivered upon such exercise, then the Company 4 will in good faith and as expeditiously as reasonably possible, endeavor to secure such registration or approval. The Company will use its best efforts to obtain appropriate approvals or registrations under state "blue sky" securities laws. With respect to any such securities, however, Warrants may not be exercised by, or shares of Common Stock issued to, any Registered Holder in any state in which such exercise or issuance would be unlawful. (c) The Company shall pay all documentary, stamp or similar taxes and other governmental charges that may be imposed with respect to the issuance of Warrants, or the issuance or delivery of any shares upon exercise of the Warrants; provided, however, that if the shares of Common Stock, are to be delivered in a name other than the name of the Registered Holder of the Warrant Certificate representing any Warrant being exercised, then no such delivery shall be made unless the person requesting the same has paid to the Warrant Agent the amount of transfer taxes or charges incident thereto, if any. (d) The Warrant Agent is hereby irrevocably authorized to requisition the Company's Transfer Agent from time to time for certificates representing shares of Common Stock issuable upon exercise of the Warrants, and the Company will authorize the Transfer Agent to comply with all such proper requisitions. The Company will file with the Warrant Agent a statement setting forth the name and address of the Transfer Agent of the Company for shares of Common Stock issuable upon exercise of the Warrants. 6. EXCHANGE AND REGISTRATION OF TRANSFER. (a) Warrant Certificates may be exchanged for other Warrant Certificates representing an equal aggregate number of Warrants of the same class or may be transferred, in whole or in part. Warrant Certificates to be exchanged shall be surrendered to the Warrant Agent at its Corporate Office and, upon satisfaction of the terms and provisions hereof, the Company shall execute and the Warrant Agent shall countersign, issue and deliver in exchange therefor the Warrant Certificate or Certificates which the Registered Holder making the exchange shall be entitled to receive. (b) The Warrant Agent shall keep at its office books in which, subject to such reasonable regulations as it may prescribe, it shall register Warrant Certificates and the transfer thereof in accordance with its regular practice. Upon due presentment for registration of transfer of any Warrant Certificate at such office, the Company shall execute and the Warrant Agent shall issue and deliver to the transferee or transferees a new Warrant Certificate or Certificates representing an equal aggregate number of Warrants. (c) With respect to all Warrant Certificates presented for registration or transfer, or for exchange or exercise, the subscription form on the reverse thereof shall be duly endorsed, or be accompanied by a written instrument or instruments of transfer and subscription, in form satisfactory to the Company and the Warrant Agent, duly executed by the Registered Holder or his attorney-in-fact duly authorized in writing. (d) A service charge may be imposed by the Warrant Agent for any exchange or registration of transfer of Warrant Certificates. In addition, the Company may require payment by such holder of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. (e) All Warrant Certificates surrendered for exercise or for exchange in case of mutilated Warrant Certificates shall be promptly cancelled by the Warrant Agent and thereafter retained by the Warrant Agent until termination of this Agreement or resignation as Warrant Agent, or, with the prior written consent of SouthWall, disposed of or destroyed, at the direction of the Company. (f) Prior to due presentment for registration of transfer thereof, the Company and the Warrant Agent may deem and treat the Registered Holder of any Warrant Certificate as the absolute owner thereof and of each Warrant represented thereby (notwithstanding any notations of ownership or writing thereon made by 5 anyone other than a duly authorized officer of the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary. 7. LOSS OR MUTILATION. Upon receipt by the Company and the Warrant Agent of evidence satisfactory to them of the ownership of and loss, theft, destruction or mutilation of any Warrant Certificate and (in case of loss, theft or destruction) of indemnity satisfactory to them, and (in the case of mutilation) upon surrender and cancellation thereof, the Company shall execute and the Warrant Agent shall (in the absence of notice to the Company and/or Warrant Agent that the Warrant Certificate has been acquired by a bona fide purchaser) countersign and deliver to the Registered Holder in lieu thereof a new Warrant Certificate of like tenor representing an equal aggregate number of Warrants. Applicants for a substitute Warrant Certificate shall comply with such other reasonable regulations and pay such other reasonable charges as the Warrant Agent may prescribe. 8. REDEMPTION. (a) Subject to the provisions of paragraph 2(f) hereof, on not less than thirty (30) days notice given at any time after _____, 1999 (the "Redemption Notice") to Registered Holders of the Warrants, the Warrants may be redeemed, at the option of the Company, at a redemption price of $.05 per Warrant, provided that the Market Price of the Common Stock receivable upon exercise of such Warrants shall exceed $____ per share with respect to the Warrants (the "Target Price"), subject to adjustment as set forth in Section 8(f), below. "Market Price" shall mean (i) the average closing bid price of the Common Stock, for thirty (30) consecutive business days ending on the Calculation Date, as reported by Nasdaq, if the Common Stock is traded on the Nasdaq SmallCap Market, or (ii) the average last reported sale price of the Common Stock, for thirty (30) consecutive business days ending on the Calculation Date, as reported by the primary exchange on which the Common Stock is traded, if the Common Stock is traded on a national securities exchange, or by Nasdaq, if the Common Stock is traded on the Nasdaq National Market. For purposes of this Section 8, the "Calculation Date" shall mean the date of the mailing of the Redemption Notice. The date fixed for redemption of the Warrants is referred to herein as the "Redemption Date". (b) If the conditions set forth in Section 8(a) are met, and the Company desires to exercise its right to redeem the Warrants, it shall request the Underwriters to mail a Redemption Notice to each of the Registered Holders of the Warrants to be redeemed, first class, postage prepaid, not later than the thirtieth day before the date fixed for redemption, at their last address as shall appear on the records maintained pursuant to Section 6(b). Any notice mailed in the manner provided herein shall be conclusively presumed to have been duly given whether or not the Registered Holder receives such notice. (c) The Redemption Notice shall specify (i) the Redemption Price, (ii) the Redemption Date, (iii) the place where the Warrant Certificates shall be delivered and the redemption price paid, (iv) that the Underwriters will assist each Registered Holder of a Warrant in connection with the exercise thereof and (v) that the right to exercise the Warrant shall terminate at 5:00 P.M. (New York time) on the business day immediately preceding the Redemption Date. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity of the proceedings for such redemption except as to a Registered Holder to whom notice was not mailed or whose notice was defective. An affidavit of the Warrant Agent or of the Secretary of either of the Underwriters or the Company that notice of redemption has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. (d) Any right to exercise a Warrant shall terminate at 5:00 P.M. (New York time) on the business day immediately preceding the Redemption Date. On and after the Redemption Date, Registered Holders of the Warrants shall have no further rights except to receive, upon surrender of the Warrant, the Redemption Price. 6 (e) From and after the Redemption Date, the Company shall, at the place specified in the Redemption Notice, upon presentation and surrender to the Company by or on behalf of the Registered Holder thereof of one or more Warrant Certificates evidencing Warrants to be redeemed, deliver or cause to be delivered to or upon the written order of such Registered Holder a sum in cash equal to the Redemption Price of each such Warrant. From and after the Redemption Date and upon the deposit or setting aside by the Company of a sum sufficient to redeem all the Warrants called for redemption, such Warrants shall expire and become void and all rights hereunder and under the Warrant Certificates, except the right to receive payment of the Redemption Price, shall cease. (f) If the shares of the Company's Common Stock are subdivided or combined into a greater or smaller number of shares of Common Stock, the Target Prices shall be proportionally adjusted by the ratio which the total number of shares of Common Stock outstanding immediately prior to such event bears to the total number of shares of Common Stock to be outstanding immediately after such event. 9. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES OF COMMON STOCK OR WARRANTS. (a) Subject to the exceptions referred to in Section 9(g) below, in the event the Company shall, at any time or from time to time after the date hereof, sell any shares of Common Stock for a consideration per share less than the Market Price of the Common Stock (as defined in Section 8, except that for purposes of Section 9, the Calculation Date shall mean the date of the sale or other transaction referred to in this Section 9) on the date of the sale or issue any shares of Common Stock as a stock dividend to the holders of Common Stock, or subdivide or combine the outstanding shares of Common Stock into a greater or lesser number of shares (any such sale, issuance, subdivision or combination being herein called a "Change of Shares"), then, and thereafter upon each further Change of Shares, the Purchase Price in effect immediately prior to such Change of Shares shall be changed to a price (including any applicable fraction of a cent) determined by multiplying the Purchase Price in effect immediately prior thereto by a fraction, the numerator of which shall be the sum of the number of shares of Common Stock outstanding immediately prior to the issuance of such additional shares and the number of shares of Common Stock which the aggregate consideration received (determined as provided in subsection 9(f)(vi) below) for the issuance of such additional shares would purchase at the Market Price and the denominator of which shall be the sum of the number of shares of Common Stock outstanding immediately after the issuance of such additional shares. Such adjustment shall be made successively whenever such an issuance is made. Upon each adjustment of the Purchase Price pursuant to this Section 9, the total number of shares of Common Stock purchasable upon the exercise of each Warrant, shall (subject to the provisions contained in Section 9(b) hereof) be such number of shares (calculated to the nearest tenth) purchasable at the Purchase Price in effect immediately prior to such adjustment multiplied by a fraction, the numerator of which shall be the Purchase Price in effect immediately prior to such adjustment and the denominator of which shall be the Purchase Price in effect immediately after such adjustment. (b) The Company may elect, upon any adjustment of the Purchase Price hereunder, to adjust the number of Warrants outstanding, in lieu of the adjustment in the number of shares of Common Stock purchasable upon the exercise of each Warrant as hereinabove provided, so that each Warrant outstanding after such adjustment shall represent the right to purchase one share of Common Stock. Each Warrant held of record prior to such adjustment of the number of Warrants shall become that number of Warrants (calculated to the nearest tenth) determined by multiplying the number one by a fraction, the numerator of which shall be the Purchase Price in effect immediately prior to such adjustment and the denominator of which shall be the Purchase Price in effect immediately after such adjustment. Upon each adjustment of the number of Warrants pursuant to this Section 9, the Company shall, as promptly as practicable, cause to be distributed to each Registered Holder of Warrant Certificates on the date of such adjustment Warrant Certificates evidencing, subject to Section 10 hereof, the number of additional Warrants to which such Holder shall be entitled as a result of such adjustment or, at the option of the Company, cause to be distributed to such Holder in substitution 7 and replacement for the Warrant Certificates held by him prior to the date of adjustment (and upon surrender thereof, if required by the Company) new Warrant Certificates evidencing the number of Warrants to which such Holder shall be entitled after such adjustment. (c) In case of any reclassification, capital reorganization or other change of outstanding shares of Common Stock, or in case of any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the continuing corporation and which does not result in any reclassification, capital reorganization or other change of outstanding shares of Common Stock), or in case of any sale or conveyance to another corporation of the property of the Company as, or substantially as, an entirety (other than a sale/leaseback, mortgage or other financing transaction), the Company shall cause effective provision to be made so that each holder of a Warrant then outstanding shall have the right thereafter, by exercising such Warrant, to purchase the kind and number of shares of stock or other securities or property (including cash) receivable upon such reclassification, capital reorganization or other change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock that might have been purchased upon exercise of such Warrant immediately prior to such reclassification, capital reorganization or other change, consolidation, merger, sale or conveyance. Any such provision shall include provision for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 9. The Company shall not effect any such consolidation, merger or sale unless prior to or simultaneously with the consummation thereof the successor (if other than the Company) resulting from such consolidation or merger or the corporation purchasing assets or other appropriate corporation or entity shall assume, by written instrument executed and delivered to the Warrant Agent, the obligation to deliver to the holder of each Warrant such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holders may be entitled to purchase and the other obligations of the Company under this Agreement. The foregoing provisions shall similarly apply to successive reclassifications, capital reorganizations and other changes of outstanding shares of Common Stock and to successive consolidations, mergers, sales or conveyances. (d) Irrespective of any adjustments or changes in the Purchase Price or the number of shares of Common Stock purchasable upon exercise of the Warrants, the Warrant Certificates theretofore and thereafter issued shall, unless the Company shall exercise its option to issue new Warrant Certificates pursuant to Section 2(e) hereof, continue to express the Purchase Price per share, the number of shares purchasable thereunder and the Redemption Price therefor as the Purchase Price per share, and the number of shares purchasable and the Redemption Price therefor were expressed in the Warrant Certificates when the same were originally issued. (e) After each adjustment of the Purchase Price pursuant to this Section 9, the Company will promptly prepare a certificate signed by the Chairman or President, and by the Treasurer or the Secretary of the Company setting forth: (i) the Purchase Price as so adjusted, (ii) the number of shares of Common Stock purchasable upon exercise of each Warrant after such adjustment and, if the Company shall have elected to adjust the number of Warrants, the number of Warrants to which the Registered Holder of each Warrant shall then be entitled, and the adjustment in Redemption Price resulting therefrom, and (iii) a brief statement of the facts accounting for such adjustment. The Company will promptly file such certificate with the Warrant Agent and cause a brief summary thereof to be sent by ordinary first class mail to SouthWall and to each Registered Holder of Warrants at his last address as it shall appear on the registry books of the Warrant Agent. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity thereof except as to the holder to whom the Company failed to mail such notice, or except as to the holder whose notice was defective. The affidavit of an officer of the Warrant Agent or the Secretary of the Company that such notice has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. (f) For purposes of Section 9(a) and 9(b) hereof, the following provisions (i) to (vi) shall also be applicable: 8 (i) The number of shares of Common Stock outstanding at any given time shall include shares of Common Stock owned or held by or for the account of the Company and the sale or issuance of such treasury shares or the distribution of any such treasury shares shall not be considered a Change of Shares for purposes of said sections. (ii) No adjustment of the Purchase Price shall be made unless such adjustment would require an increase or decrease of at least $.05 in the Purchase Price; provided that any adjustments which by reason of this clause (ii) are not required to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment(s) so carried forward, shall require an increase or decrease of at least $.05 in the Purchase Price then in effect hereunder. (iii) In case of (A) the sale by the Company for cash (or as a component of a unit being sold for cash) of any rights or warrants to subscribe for or purchase, or any options for the purchase of, Common Stock or any securities convertible into or exchangeable for Common Stock without the payment of any further consideration other than cash, if any (such securities convertible, exercisable or exchangeable into Common Stock being herein called "Convertible Securities"), or (B) the issuance by the Company, without the receipt by the Company of any consideration therefor, of any rights or warrants to subscribe for or purchase, or any options for the purchase of, Common Stock or Convertible Securities, in each case, if (and only if) the consideration payable to the Company upon the exercise of such rights, warrants or options shall consist of cash, whether or not such rights, warrants or options, or the right to convert or exchange such Convertible Securities, are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities (determined by dividing (x) the minimum aggregate consideration payable to the Company upon the exercise of such rights, warrants or options, plus the consideration, if any, received by the Company for the issuance or sale of such rights, warrants or options, plus, in the case of such Convertible Securities, the minimum aggregate amount of additional consideration, other than such Convertible Securities, payable upon the conversion or exchange thereof, by (y) the total maximum number of shares of Common Stock issuable upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities issuable upon the exercise of such rights, warrants or options) is less than the Market Price of the Common Stock on the date of the issuance or sale of such rights, warrants or options, then the total maximum number of shares of Common Stock issuable upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities (as of the date of the issuance or sale of such rights, warrants or options) shall be deemed to be outstanding shares of Common Stock for purposes of Sections 9(a) and 9(b) hereof and shall be deemed to have been sold for cash in an amount equal to such price per share. (iv) In case of the sale by the Company for cash of any Convertible Securities, whether or not the right of conversion or exchange thereunder is immediately exercisable, and the price per share for which Common Stock is issuable upon the conversion or exchange of such Convertible Securities (determined by dividing (x) the total amount of consideration received by the Company for the sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, other than such Convertible Securities, payable upon the conversion or exchange thereof, by (y) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of such Convertible Securities) is less than the Market Price of the Common Stock on the date of the sale of such Convertible Securities, then the total maximum number of shares of Common Stock issuable upon the conversion or exchange of such Convertible Securities (as of the date of the sale of such Convertible Securities) shall be deemed to be outstanding shares of Common Stock for purposes of Sections 9(a) and 9(b) hereof and shall be deemed to have been sold for cash in an amount equal to such price per share. 9 (v) In case the Company shall modify the rights of conversion, exchange or exercise of any of the securities referred to in (iii) or (iv) above or any other securities of the Company convertible, exchangeable or exercisable for shares of Common Stock, for any reason other than an event that would require adjustment to prevent dilution, so that the consideration per share received by the Company after such modification is less than the Market Price on the date prior to such modification, the Purchase Price to be in effect after such modification shall be determined by multiplying the Purchase Price in effect immediately prior to such event by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding on the date prior to the modification plus the number of shares of Common Stock which the aggregate consideration receivable by the Company for the securities affected by the modification would purchase at the Market Price and of which the denominator shall be the number of shares of Common Stock outstanding on such date plus the number of shares of Common Stock to be issued upon conversion, exchange or exercise of the modified securities at the modified rate. Such adjustment shall become effective as of the date upon which such modification shall take effect. On the expiration of any such right, warrant or option or the termination of any such right to convert or exchange any such Convertible Securities referred to in sub-paragraph (iii) or (iv) above, the Purchase Price then in effect hereunder shall forthwith be readjusted to such Purchase Price as would have obtained (A) had the adjustments made upon the issuance or sale of such rights, warrants, options or Convertible Securities been made upon the basis of the issuance of only the number of shares of Common Stock theretofore actually delivered (and the total consideration received therefor) upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities and (B) had adjustments been made on the basis of the Purchase Price as adjusted under clause (A) for all transactions (which would have affected such adjusted Purchase Price) made after the issuance or sale of such rights, warrants, options or Convertible Securities. (vi) In case of the sale for cash of any shares of Common Stock, any Convertible Securities, any rights or warrants to subscribe for or purchase, or any options for the purchase of, Common Stock or Convertible Securities, the consideration received by the Company therefore shall be deemed to be the gross sales price therefor without deducting therefrom any expense paid or incurred by the Company or any underwriting discounts or commissions or concessions paid or allowed by the Company in connection therewith. (g) No adjustment to the Purchase Price of the Warrants or to the number of shares of Common Stock purchasable upon the exercise of each Warrant will be made, however, (i) upon the exercise of any of the options presently outstanding under the Company's 1997 Stock Option Plan (the "Plan") for officers, directors and certain other key personnel of the Company; or (ii) upon the issuance or exercise of any other securities which may hereafter be granted or exercised under the Plan; or (iii) upon the sale or exercise of the Warrants, including without limitation the sale or exercise of any of the Warrants comprising the Unit Purchase Options or upon any sale or exercise of the Unit Purchase Options; or (iv) upon the sale of any shares of Common Stock or Convertible Securities in a firm commitment underwritten public offering, including, without limitation, shares sold upon the exercise of any overallotment option granted to the underwriters in connection with such offering; or (v) upon the issuance or sale of Common Stock or Convertible Securities upon the exercise of any rights or warrants to subscribe for or purchase, or any options for the purchase of, 10 Common Stock or Convertible Securities, whether or not such rights, warrants or options were outstanding on the date of the original sale of the Warrants or were thereafter issued or sold; or (vi) upon the issuance or sale of Common Stock upon conversion or exchange of any Convertible Securities, whether or not any adjustment in the Purchase Price was made or required to be made upon the issuance or sale of such Convertible Securities and whether or not such Convertible Securities were outstanding on the date of the original sale of the Warrants or were thereafter issued or sold. (h) As used in this Section 9, the term "Common Stock" shall mean and include the Company's Common Stock authorized on the date of the original issue of the Units and shall also include any capital stock of any class of the Company thereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends and in the distribution of assets upon the voluntary liquidation, dissolution or winding up of the Company; provided, however, that the shares issuable upon exercise of the Warrants shall include only shares of such class designated in the Company's Certificate of Incorporation as Common Stock on the date of the Public Offering or (i), in the case of any reclassification, change, consolidation, merger, sale or conveyance of the character referred to in Section 9(c) hereof, the stock, securities or property provided for in such section or (ii), in the case of any reclassification or change in the outstanding shares of Common Stock issuable upon exercise of the Warrants as a result of a subdivision or combination or consisting of a change in par value, or from par value to no par value, or from no par value to par value, such shares of Common Stock as so reclassified or changed. (i) Any determination as to whether an adjustment in the Purchase Price in effect hereunder is required pursuant to Section 9, or as to the amount of any such adjustment, if required, shall be binding upon the holders of the Warrants and the Company if made in good faith by the Board of Directors of the Company. (j) If and whenever the Company shall grant to the holders of Common Stock, as such, rights or warrants to subscribe for or to purchase, or any options for the purchase of, Common Stock or securities convertible into or exchangeable for or carrying a right, warrant or option to purchase Common Stock, the Company shall concurrently therewith grant to each Registered Holder as of the record date for such transaction of the Warrants then outstanding, the rights, warrants or options to which each Registered Holder would have been entitled if, on the record date used to determine the stockholders entitled to the rights, warrants or options being granted by the Company, the Registered Holder were the holder of record of the number of whole shares of Common Stock then issuable upon exercise of his Warrants. Such grant by the Company to the holders of the Warrants shall be in lieu of any adjustment which otherwise might be called for pursuant to this Section 9. 10. FRACTIONAL WARRANTS AND FRACTIONAL SHARES. (a) If the number of shares of Common Stock purchasable upon the exercise of each Warrant is adjusted pursuant to Section 9 hereof, the Company nevertheless shall not be required to issue fractions of shares, upon exercise of the Warrants or otherwise, or to distribute certificates that evidence fractional shares. With respect to any fraction of a share called for upon the exercise of any Warrant, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the current market value of such fractional share, determined as follows: (i) If the Common Stock is listed on a national securities exchange or admitted to unlisted trading privileges on such exchange or is traded on the Nasdaq National Market, the current market value shall be the last reported sale price of the Common Stock on such exchange or market on the last business day prior to the date of exercise of this Warrant or if no such sale is made on such day, the average of the closing bid and asked prices for such day on such exchange or market; or 11 (ii) If the Common Stock is not listed or admitted to unlisted trading privileges on a national securities exchange or is not traded on the Nasdaq National Market, the current market value shall be the mean of the last reported bid and asked prices reported by the Nasdaq SmallCap Market or, if not traded thereon, by the National Quotation Bureau, Inc. on the last business day prior to the date of the exercise of this Warrant; or (iii) If the Common Stock is not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the current market value shall be an amount determined in such reasonable manner as may be prescribed by the Board of Directors of the Company. 11. WARRANT HOLDERS NOT DEEMED STOCKHOLDERS. Except as provided herein, no holder of Warrants shall, as such, be entitled to vote or to receive dividends or be deemed the holder of Common Stock that may at any time be issuable upon exercise of such Warrants for any purpose whatsoever, nor shall anything contained herein be construed to confer upon the holder of Warrants, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issue or reclassification of stock, change of par value or change of stock to no par value, consolidation, merger or conveyance or otherwise), or to receive notice of meetings, or to receive dividends or subscription rights, until such holder shall have exercised such Warrants and been issued shares of Common Stock in accordance with the provisions hereof. 12. RIGHTS OF ACTION. All rights of action with respect to this Agreement are vested in the respective Registered Holders of the Warrants, and any Registered Holder of a Warrant, without consent of the Warrant Agent or of the holder of any other Warrant, may, in his own behalf and for his own benefit, enforce against the Company his right to exercise his Warrants for the purchase of shares of Common Stock in the manner provided in the Warrant Certificate and this Agreement. 13. AGREEMENT OF WARRANT HOLDERS. Every holder of a Warrant, by his acceptance thereof, consents and agrees with the Company, the Warrant Agent and every other holder of a Warrant that: (a) The Warrants are transferable only on the registry books of the Warrant Agent by the Registered Holder thereof in person or by his attorney duly authorized in writing and only if the Warrant Certificates representing such Warrants are surrendered at the office of the Warrant Agent, duly endorsed or accompanied by a proper instrument of transfer satisfactory to the Warrant Agent and the Company in their sole discretion, together with payment of any applicable transfer taxes; and (b) The Company and the Warrant Agent may deem and treat the person in whose name the Warrant Certificate is registered as the holder and as the absolute, true and lawful owner of the Warrants represented thereby for all purposes, and neither the Company nor the Warrant Agent shall be affected by any notice or knowledge to the contrary, except as otherwise expressly provided in Section 7 hereof. 14. CANCELLATION OF WARRANT CERTIFICATES. If the Company shall purchase or acquire any Warrant or Warrants, the Warrant Certificate or Warrant Certificates evidencing the same shall thereupon be delivered to the Warrant Agent and cancelled by it and retired. The Warrant Agent shall also cancel the Warrant Certificate or Warrant Certificates following exercise of any or all of the Warrants represented thereby or delivered to it for transfer or exchange. 12 15. CONCERNING THE WARRANT AGENT. The Warrant Agent acts hereunder as agent and in a ministerial capacity for the Company, and its duties shall be determined solely by the provisions hereof. The Warrant Agent shall not, by issuing and delivering Warrant Certificates or by any other act hereunder be deemed to make any representations as to the validity, value or authorization of the Warrant Certificates or the Warrants represented thereby or of any securities or other property delivered upon exercise of any Warrant or whether any stock issued upon exercise of any Warrant is fully paid and nonassessable. The Warrant Agent shall not at any time be under any duty or responsibility to any holder of Warrant Certificates to make or cause to be made any adjustment of the Purchase Price or the Redemption Price provided in this Agreement, or to determine whether any fact exists which may require any such adjustments, or with respect to the nature or extent of any such adjustment, when made, or with respect to the method employed in making the same. It shall not be (i) liable for any recital or statement of facts contained herein or for any action taken, suffered or omitted by it in reliance on any Warrant Certificate or other document or instrument believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties, (ii) responsible for any failure on the part of the Company to comply with any of its covenants and obligations contained in this Agreement or in any Warrant Certificate, or (iii) liable for any act or omission in connection with this Agreement except for its own negligence or wilful misconduct. The Warrant Agent may at any time consult with counsel satisfactory to it (who may be counsel for the Company) and shall incur no liability or responsibility for any action taken, suffered or omitted by it in good faith in accordance with the opinion or advice of such counsel. Any notice, statement, instruction, request, direction, order or demand of the Company shall be sufficiently evidenced by an instrument signed by the Chairman of the Board, President, any Vice President, or its Secretary (unless other evidence in respect thereof is herein specifically prescribed). The Warrant Agent shall not be liable for any action taken, suffered or omitted by it in accordance with such notice, statement, instruction, request, direction, order or demand believed by it to be genuine. The Company agrees to pay the Warrant Agent reasonable compensation for its services hereunder and to reimburse it for its reasonable expenses hereunder; it further agrees to indemnify the Warrant Agent and save it harmless against any and all losses, expenses and liabilities, including judgments, costs and counsel fees, for anything done or omitted by the Warrant Agent in the execution of its duties and powers hereunder except losses, expenses and liabilities arising as a result of the Warrant Agent's negligence or wilful misconduct. The Warrant Agent may resign its duties and be discharged from all further duties and liabilities hereunder (except liabilities arising as a result of the Warrant Agent's own negligence or wilful misconduct), after giving 30 days' prior written notice to the Company. At least 15 days prior to the date such resignation is to become effective, the Warrant Agent shall cause a copy of such notice of resignation to be mailed to the Registered Holder of each Warrant Certificate at the Company's expense. Upon such resignation, or any inability of the Warrant Agent to act as such hereunder, the Company shall appoint a new warrant agent in writing. If the Company shall fail to make such appointment within a period of 15 days after it has been notified in writing of such resignation by the resigning Warrant Agent, then the Registered Holder of any Warrant Certificate may apply to any court of competent jurisdiction for the appointment of a new warrant agent. Any new warrant agent, whether appointed by the Company or by such a court, shall be a bank or trust company having a capital and surplus, as shown by its last published report to its stockholders, of not less than $10,000,000 or a stock transfer company that is a registered transfer agent under the Exchange Act. After acceptance in writing of such appointment by the new warrant agent is received by the Company, such new warrant agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named herein as the Warrant Agent, without any further assurance, conveyance, act or deed; but if for any reason it shall be necessary or expedient to execute and deliver any further assurance, conveyance, act or deed, the same shall be done at the expense 13 of the Company and shall be legally and validly executed and delivered by the resigning Warrant Agent. Not later than the effective date of any such appointment the Company shall file notice thereof with the resigning Warrant Agent and shall forthwith cause a copy of such notice to be mailed to the Registered Holder of each Warrant Certificate. Any corporation into which the Warrant Agent or any new warrant agent may be converted or merged or any corporation resulting from any consolidation to which the Warrant Agent or any new warrant agent shall be a party or any corporation succeeding to the trust business of the Warrant Agent shall be a successor warrant agent under this Agreement without any further act, provided that such corporation is eligible for appointment as successor to the Warrant Agent under the provisions of the preceding paragraph. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed to the Company and to the Registered Holder of each Warrant Certificate. The Warrant Agent, its subsidiaries and affiliates, and any of its or their officers or directors, may buy and hold or sell Warrants or other securities of the Company and otherwise deal with the Company in the same manner and to the same extent and with like effects as though it were not Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. 16. MODIFICATION OF AGREEMENT Subject to the provisions of Section 4(b), the parties hereto and the Company may by supplemental agreement make any changes or corrections in this Agreement (i) that they shall deem appropriate to cure any ambiguity or to correct any defective or inconsistent provision or manifest mistake or error herein contained; (ii) to reflect an increase in the number of Warrants which are to be governed by this Agreement resulting from a subsequent public offering of Company securities which includes Warrants having the same terms and conditions as the Warrants, respectively, originally covered by or subsequently added to this Agreement under this Section 16; or (iii) that they may deem necessary or desirable and which shall not adversely affect the interests of the holders of Warrant Certificates; provided, however, that this Agreement shall not otherwise be modified, supplemented or altered in any respect except with the consent in writing of the Registered Holders of Warrant Certificates representing not less than 50% of the Warrants then outstanding; and provided, further, that no change in the number or nature of the securities purchasable upon the exercise of any Warrant, or the Purchase Price therefor, or the acceleration of the Warrant Expiration Date, shall be made without the consent in writing of the Registered Holder of the Warrant Certificate representing such Warrant, other than such changes as are specifically prescribed by this Agreement as originally executed or are made in compliance with applicable law. 17. NOTICES. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made when delivered or mailed first class registered or certified mail, postage prepaid as follows: if to the Registered Holder of a Warrant Certificate, at the address of such holder as shown on the registry books maintained by the Warrant Agent; if to the Company, at 211 North Union Street, #100, Alexandria, Virginia 22314, or at such other address as may have been furnished to the Warrant Agent in writing by the Company, with a copy to Hogan & Hartson LLP, Columbia Square, 555 13th Street, NW, Washington, D.C. 20004, attention: Steven E. Ballew, Esq.; if to the Warrant Agent, at its Corporate Office; and if to Fine Equities, at Fine Equities, Inc., 600 Third Avenue, New York, New York 10016 or if to SouthWall, at SouthWall Capital Corp., 110 Wall Street, New York, New York 10005, with a copy in each case to Baker & McKenzie, 805 Third Avenue, New York, New York 10022, attention: Malcolm I. Ross, Esq. 18. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without reference to principles of conflict of laws. 14 19. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the Company, the Warrant Agent and their respective successors and assigns, and the Registered Holders from time to time of Warrant Certificates. Nothing in this Agreement is intended or shall be construed to confer upon any other person any right, remedy or claim, in equity or at law, or to impose upon any other person any duty, liability or obligation. 20. TERMINATION. This Agreement shall terminate at the close of business on the earlier of the Warrant Expiration Date or the date upon which all Warrants (including the Warrants issuable upon exercise of the UPOs) have been exercised, except that the Warrant Agent shall account to the Company for cash held by it and the provisions of Section 15 hereof shall survive such termination. 21. COUNTERPARTS. This Agreement may be executed in several counterparts, which taken together shall constitute a single document. 15 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. CENTRAL EUROPEAN DISTRIBUTION CORPORATION By: ----------------------------------- Name: William V. Carey Title: Chairman of the Board, President and Chief Executive Officer AMERICAN STOCK TRANSFER & TRUST COMPANY By: ----------------------------------- Name: Title: FINE EQUITIES, INC. By: ----------------------------------- Name: Title: SOUTHWALL CAPITAL CORP. By: ----------------------------------- Name: Title: 16 EXHIBIT A [FORM OF FACE OF WARRANT CERTIFICATE] No. W _____ Warrants VOID AFTER _______, 2003 WARRANT CERTIFICATE FOR PURCHASE OF COMMON STOCK CENTRAL EUROPEAN DISTRIBUTION CORPORATION This certifies that FOR VALUE RECEIVED _____________ or registered assigns (the "Registered Holder") is the owner of the number of Warrants ("Warrants") specified above. Each Warrant represented hereby initially entitles the Registered Holder to purchase, subject to the terms and conditions set forth in this Warrant Certificate and the Warrant Agreement (as hereinafter defined), one fully paid and nonassessable share of common stock, par value $.01 per share ("Common Stock"), of Central European Distribution Corporation, a Delaware corporation (the "Company") at any time prior to the Expiration Date (as hereinafter defined), upon the presentation and surrender of this Warrant Certificate with the Subscription Form on the reverse hereof duly executed, at the corporate office of American Stock Transfer & Trust Company as Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment of $____ (the "Purchase Price") in lawful money of the United States of America in cash or by official bank or certified check made payable to Central European Distribution Corporation. This Warrant Certificate and each Warrant represented hereby are issued pursuant to and are subject in all respects to the terms and conditions set forth in the Warrant Agreement (the "Warrant Agreement"), dated _____, 1998, by and among the Company, the Warrant Agent, Fine Equities, Inc. and SouthWall Capital Corp. In the event of certain contingencies provided for in the Warrant Agreement, the Purchase Price and the number of shares of Common Stock subject to purchase upon the exercise of each Warrant represented hereby are subject to modification or adjustment. Each Warrant represented hereby is exercisable at the option of the Registered Holder, but no fractional shares of Common Stock will be issued. In the case of the exercise of less than all the Warrants represented hereby, the Company shall cancel this Warrant Certificate upon the surrender hereof and shall execute and deliver a new Warrant Certificate or Warrant Certificates of like tenor, which the Warrant Agent shall countersign, for the balance of such Warrants. The term "Expiration Date" shall mean 5:00 P.M. (New York time) on _____, 2003 or such earlier date as the Warrants shall be redeemed. If such date shall in the State of New York be a holiday or a day on which banks are authorized to close, then the Expiration Date shall mean 5:00 P.M. (New York time) the next following day which in the State of New York is not a holiday or a day on which banks are authorized to close. The Company shall not be obligated to deliver any securities pursuant to the exercise of the Warrants represented hereby unless a registration statement under the Securities Act of 1933, as amended, with respect to such securities is effective. The Company has covenanted and agreed that it will file a registration statement and will use its best efforts to cause the same to become effective and to keep such registration statement current while any of the Warrants are outstanding. The Warrants represented hereby shall not be exercisable by a Registered Holder in any state where such exercise would be unlawful. 17 This Warrant Certificate is exchangeable, upon the surrender hereof by the Registered Holder at the corporate office of the Warrant Agent, for a new Warrant Certificate or Warrant Certificates of like tenor representing an equal aggregate number of Warrants, each of such new Warrant Certificates to represent such number of Warrants as shall be designated by such Registered Holder at the time of such surrender. At any time prior to the Expiration Date, upon due presentment with a $___ transfer fee per certificate in addition to any tax or other governmental charge imposed in connection therewith, for registration of transfer of this Warrant Certificate at such office, a new Warrant Certificate or Warrant Certificates representing an equal aggregate number of Warrants will be issued to the transferee in exchange therefor, subject to the limitations provided in the Warrant Agreement. Prior to the exercise of any Warrant represented hereby, the Registered Holder shall not be entitled to any rights of a stockholder of the Company, including, without limitation, the right to vote or to receive dividends or other distributions, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided in the Warrant Agreement. The Warrants represented hereby may be redeemed at the option of the Company, at a redemption price of $.05 per Warrant at any time after _____, 1999, provided that the Market Price (as defined in the Warrant Agreement) for the Common Stock shall exceed $____ per share. Notice of redemption shall be given not later than the thirtieth day before the date fixed for redemption, all as provided in the Warrant Agreement. On and after the date fixed for redemption, the Registered Holder shall have no rights with respect to the Warrants represented hereby except to receive the $.05 per Warrant upon surrender of this Warrant Certificate. Prior to due presentment for registration of transfer hereof, the Company and the Warrant Agent may deem and treat the Registered Holder as the absolute owner hereof and of each Warrant represented hereby (notwithstanding any notations of ownership or writing hereon made by anyone other than a duly authorized officer of the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary. The Company has agreed to pay a fee of four percent (4%) of the Purchase Price upon certain conditions as specified in the Warrant Agreement upon the exercise of the Warrants represented hereby. This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of New York without reference to principles of conflict of laws. This Warrant Certificate is not valid unless countersigned by the Warrant Agent. 18 IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed, manually or in facsimile, by two of its officers thereunto duly authorized and a facsimile of its corporate seal to be imprinted hereon. CENTRAL EUROPEAN DISTRIBUTION CORPORATION Dated: By: ----------------------------------------- By: ----------------------------------------- [seal] Countersigned: - ---------------------------------------- as Warrant Agent By: ------------------------------------- Authorized Officer 19 [FORM OF REVERSE OF WARRANT CERTIFICATE] TRANSFER FEE: $___ PER CERTIFICATE ISSUED SUBSCRIPTION FORM To Be Executed by the Registered Holder in Order to Exercise Warrants The undersigned Registered Holder hereby irrevocably elects to exercise_________ Warrants represented by this Warrant Certificate, and to purchase the securities issuable upon the exercise of such Warrants, and requests that certificates for such securities shall be issued in the name of PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER ------------------------------- ------------------------------- ------------------------------- ------------------------------- [please print or type name and address] and be delivered to ------------------------------- ------------------------------- ------------------------------- ------------------------------- [please print or type name and address] and if such number of Warrants shall not be all the Warrants evidenced by this Warrant Certificate, that a new Warrant Certificate for the balance of such Warrants be registered in the name of, and delivered to, the Registered Holder at the address stated below. 20 The undersigned represents that the exercise of the Warrants evidenced hereby was solicited by a member of the National Association of Securities Dealers, Inc. If not solicited by an NASD member, please write "unsolicited" in the space below. Unless otherwise indicated by listing the name of another NASD member firm, it will be assumed that the exercise was solicited by Fine Equities, Inc. ------------------------------------ (Name of NASD Member) Dated: X ----------------------------- ----------------------------- ----------------------------- Address ----------------------------- Taxpayer Identification Number ----------------------------- Signature Guaranteed ----------------------------- THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY A MEMBER OF THE MEDALLION STAMP PROGRAM. 21 ASSIGNMENT To Be Executed by the Registered Holder in Order to Assign Warrants FOR VALUE RECEIVED, _____________________ hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF TRANSFEREE ----------------------------- ----------------------------- ----------------------------- ----------------------------- [please print or type name and address] ______ of the Warrants represented by this Warrant Certificate, and hereby irrevocably constitutes and appoints _____________ Attorney to transfer this Warrant Certificate on the books of the Company, with full power of substitution in the premises. Dated: X ------------------ ---------------------------------- Signature Guaranteed ---------------------------------- THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY A MEMBER OF THE MEDALLION STAMP PROGRAM. 22 EX-4.3 8 OPTION TO PURCHASE Option to Purchase 115,000 Units Central European Distribution Corporation Unit Purchase Option Dated: ______, 1998 . THIS CERTIFIES THAT ________________ (herein sometimes called the "Holder") is entitled to purchase from Central European Distribution Corporation, a Delaware corporation (hereinafter called the "Company"), at the prices and during the periods as hereinafter specified, up to one hundred fifteen thousand (115,000) Units ("Units"), each Unit consisting of one share of the Company's common stock, $.01 par value, as now constituted ("Common Stock"), and one warrant ("Warrants"). Each Warrant is exercisable to purchase one share of Common Stock at an exercise price of $____ from ______, 1998 to ______, 2003. The Units have been registered under a Registration Statement on Form SB-2 (File No. 333-______) declared effective by the Securities and Exchange Commission on _____ 1998 (the "Registration Statement"). This Option, together with options of like tenor, constituting in the aggregate options (the "Options") to purchase 115,000 Units, subject to adjustment in accordance with Section 8 of this Option (the "Option Units"), was originally issued pursuant to an underwriting agreement among the Company, certain shareholders of the Company, Fine Equities, Inc. and SouthWall Capital Corp. as underwriters (the "Underwriters") in connection with a public offering (the "Offering") of 1,150,000 shares of Common Stock and 1,150,000 redeemable warrants (collectively, the "Public Securities") through the Underwriters, in consideration of $11.50 received for the Options. Except as specifically otherwise provided herein, the Common Stock and the Warrants issued pursuant to the option herein granted (the "Option") shall bear the same terms and conditions as described under the caption "Description of Securities" in the Registration Statement, and the Warrants shall be governed by the terms of the Warrant Agreement dated as of ________, 1998, executed in connection with such public offering (the "Warrant Agreement"), except that (i) the holder shall have registration rights under the Securities Act of 1933, as amended (the "Act"), for the Option, the Common Stock and the Warrants included in the Option Units, and the shares of Common Stock underlying the Warrants, as more fully described in Section 6 of this Option and (ii) the Warrants issuable upon exercise of the Option will not be subject to redemption by the Company. The Company will list the Common Stock underlying this Option and, at the Holder's request the Warrants, on the Nasdaq SmallCap Market or such other exchange or market as the Common Stock or warrants included in the Public Securities (the "Public Warrants") may then be listed or quoted. In the event of any extension of the expiration date or reduction of the exercise price of the Public Warrants, the same changes to the Warrants included in the Option Units shall be simultaneously effected. 1. The rights represented by this Option shall be exercised at the prices, subject to adjustment in accordance with Section 8 of this Option ("the "Exercise Price"), and during the periods as follows: (a) During the period from ______, 1998 to ______, 1999 inclusive, the Holder shall have no right to purchase any Option Units hereunder, except that in the event of any merger, consolidation or sale of all or substantially all the capital stock or assets of the Company or in the case of any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of another corporation into the Company) subsequent to ______, 1999, the Holder shall have the right to exercise this Option and the Warrants included herein at such time and receive the kind and amount of shares of stock and other securities and property (including cash) which a holder of the number of shares of Common Stock underlying this Option and the Warrants included in this Option would have owned or been entitled to receive had this Option been exercised immediately prior thereto. (b) Between ______, 1999 and ______, 2003 inclusive, the Holder shall have the option to purchase Option Units hereunder at a price of $____ per Unit. For purposes of the adjustments under Section 8 hereof, the Per Share Exercise Price shall be deemed to be $_____, subject to further adjustment as provided in such Section 8. (c) After _________, 2003 the Holder shall have no right to purchase any Units hereunder. 2. (a) The rights represented by this Option may be exercised at any time within the period above specified, in whole or in part, by (i) the surrender of this Option (with the purchase form at the end hereof properly executed) at the principal executive office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Company); and (ii) payment to the Company of the exercise price then in effect for the number of Option Units specified in the above-mentioned purchase form together with applicable stock transfer taxes, if any. This Option shall be deemed to have been exercised, in whole or in part to the extent specified, immediately prior to the close of business on the date this Option is surrendered and payment is made in accordance with the foregoing provisions of this Section 2, and the person or persons in whose name or names the certificates for shares of Common Stock and Warrants shall be issuable upon such exercise shall become the holder or holders of record of such Common Stock and Warrants at that time and date. The certificates for the Common Stock and Warrants so purchased shall be delivered to the Holder as soon as practicable but not later than ten (10) days after the rights represented by this Option shall have been so exercised. (b) At any time during the period above specified, during which this Option may be exercised, the Holder may, at its option, exchange this Option, in whole or in part (an "Option Exchange"), into the number of Option Units determined in accordance with this Section (b), by surrendering this Option at the principal office of the Company or at the office of its stock transfer agent, accompanied by a notice stating such Holder's intent to effect such exchange, the number of Option Units into which this Option is to be exchanged and the date on which the Holder requests that such Option Exchange occur (the "Notice of Exchange"). The Option Exchange shall take place on the date specified in the Notice of Exchange or, if later, the date the Notice of Exchange is received by the Company (the "Exchange Date"). Certificates for the shares of Common Stock and Warrants issuable upon such Option Exchange and, if applicable, a new Option of like tenor evidencing the balance of the Option Units remaining subject to this Option, shall be issued as of the Exchange Date and delivered to the Holder within seven (7) days following the Exchange Date. In connection with any Option Exchange, this Option shall represent the right to subscribe for and acquire the number of Option Units (rounded to the next highest integer) equal to (x) the number of Option Units specified by the Holder in its Notice of Exchange up to the maximum number of Option Units subject to this option (the "Total Number") less (y) the number of Option Units equal to the quotient obtained by dividing (A) the product of the Total Number and the existing Exercise Price by (B) the Fair Market Value. "Fair Market Value" shall mean first, if there is a trading market as indicated in Subsection (i) below for the Units, such Fair Market Value of the Units and if there is no such trading market in the Units, then Fair Market Value shall have the meaning indicated in Subsections (ii) through (v) below for the aggregate value of all shares of Common Stock and Warrants which comprise a Unit: (i) If the Units are listed on a national securities exchange or listed or admitted to unlisted trading privileges on such exchange or listed for trading on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value shall be the average of the last reported sale prices or the average of the means of the last reported bid and asked prices, respectively, of the Units on such exchange or market for the twenty (20) business days ending on the last business day prior to the Exchange Date; or (ii) If the Common Stock or Warrants are listed on a national securities exchange or admitted to unlisted trading privileges on such exchange or listed for trading on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value shall be the average of the last reported sale prices or the average of the means of the last reported bid and asked prices, respectively, of Common Stock or Warrants, respectively, on such exchange or market for the twenty (20) business days ending on the last business day prior to the Exchange Date; or -2- (iii) If the Common Stock or Warrants are not so listed or admitted to unlisted trading privileges, the Fair Market Value shall be the average of the means of the last reported bid and asked prices of the Common Stock or Warrants, respectively, for the twenty (20) business days ending on the last business day prior to the Exchange Date; or (iv) If the Common Stock is not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the Fair Market Value shall be an amount, not less than book value thereof as at the end of the most recent fiscal year of the Company ending prior to the Exchange Date, determined in such reasonable manner as may be prescribed by the Board of Directors of the Company; or (v) If the Warrants are not so listed or admitted to unlisted trading privileges, and bid and asked prices are not so reported for Warrants, then Fair Market Value for the Warrants shall be an amount equal to the difference between (x) the Fair Market Value of the shares of Common Stock and Warrants which may be received upon the exercise of the Warrants, as determined herein, and (y) the Warrant Exercise Price. 3. Neither this Option nor the underlying securities shall be transferred, sold, assigned, or hypothecated for a period of one year commencing on the effective date of the Registration Statement except that they may be transferred to successors of the Holder, and may be assigned in whole or in part to any person who is an officer of the Holder, any member participating in the selling group relating to the Offering or any officer of such selling group member. Any such assignment shall be effected by the Holder (i) executing the form of assignment at the end hereof and (ii) surrendering this Option for cancellation at the office or agency of the Company referred to in Section 2 hereof, accompanied by a certificate (signed by an officer of the Holder if the Holder is a corporation), stating that each transferee is a permitted transferee under this Section 3 hereof; whereupon the Company shall issue, in the name or names specified by the Holder (including the Holder) a new Option or Options of like tenor and representing in the aggregate rights to purchase the same number of Option Units as are purchasable hereunder. 4. The Company covenants and agrees that all shares of Common Stock which may be issued as part of the Option Units purchased hereunder and the Common Stock which may be issued upon exercise of the Warrants will, upon issuance, be duly and validly issued, fully paid and nonassessable and no personal liability will attach to the holder thereof. The Company further covenants and agrees that during the periods within which this Option may be exercised, the Company will at all times have authorized and reserved a sufficient number of shares of its Common Stock to provide for the exercise of this Option and that it will have authorized and reserved a sufficient number of shares of Common Stock for issuance upon exercise of the Warrants included in the Option Units. 5. This Option shall not entitle the Holder to any voting rights or any other rights, or subject to the Holder to any liabilities, as a stockholder of the Company. 6. (a) The Company shall advise the Holder or its transferee, whether the Holder holds the Option or has exercised the Option and holds Option Units or any of the securities underlying the Option Units, by written notice at least four weeks prior to the filing of any post-effective amendment to the Registration Statement or of any new registration statement or post-effective amendment thereto under the Act covering any securities of the Company, for its own account or for the account of others, and will for a period of seven years from the effective date of the Registration Statement, upon the request of the Holder, include in any such post-effective amendment or registration statement, such information as may be required to permit a public offering of the Option, all or any of the Option Units, the Common Stock or Warrants included in the Option Units or the Common Stock issuable upon the exercise of the Warrants (the "Registrable Securities"). (b) If any 50% holder (as defined below) shall give notice to the Company at any time to the effect that such holder desires to register under the Act this Option, the Option Units or any of the underlying securities contained in the Option Units under such circumstances that a public distribution (within the meaning of the Act) of any such securities will be involved then the Company will promptly, but no later than two weeks after receipt of such notice, -3- file a post-effective amendment to the current Registration Statement or a new registration statement on Form S-1 or such other form as the 50% holder requests pursuant to the Act, to the end that the Option, the Option Units and/or any of the securities underlying the Option Units may be publicly sold under the Act as promptly as practicable thereafter and the Company will use its best efforts to cause such registration to become and remain effective (including the taking of such steps as are necessary to obtain the removal of any stop order); provided, that such 50% holder shall furnish the Company with appropriate information in connection therewith as the Company may reasonably request in writing. The 50% holder may, at its option, request the filing of a post-effective amendment to the current Registration Statement or a new registration statement under the Act on one occasion during the four year period beginning one year from the effective date of the Registration Statement. The 50% holder may, at its option request the registration of the Option and/or any of the securities underlying the Option in a registration statement made by the Company as contemplated by Section 6(a) or in connection with a request made pursuant to this Section 6(b) prior to acquisition of the Option Units issuable upon exercise of the Option and even though the 50% holder has not given notice of exercise of the Option. The 50% holder may, at its option, request such post-effective amendment or new registration statement during the described period with respect to the Option, the Option Units as a unit, or separately as to the Common Stock and/or Warrants included in the Option Units and/or the Common Stock issuable upon the exercise of the Warrants, and such registration rights may be exercised by the 50% holder prior to or subsequent to the exercise of the Option. Within ten (10) days after receiving any such notice pursuant to this Section 6(b), the Company shall give notice to the other holders of the Options, advising that the Company is proceeding with such post-effective amendment or registration statement and offering to include therein the securities underlying the Options of the other holders, provided that they shall furnish the Company with such appropriate information (relating to the intentions of such holders) in connection therewith as the Company shall reasonably request in writing. In the event the registration statement is not filed within the period specified herein and in the event the registration statement is not declared effective under the Act prior to _______, 2003, then, at the holders' request, the Company shall purchase the Options from the holder for a per option price equal to the difference between (i) the Fair Market Value of the Common Stock on the date of notice multiplied by the number of shares of Common Stock issuable upon exercise of the Option and the underlying Warrants and (ii) the average per share purchase price of the Option and each share of Common Stock underlying the Option. All costs and expenses of the first such post-effective amendment or new registration statement under this paragraph 6(b) shall be borne by the Company, except that the holders shall bear the fees of their own counsel and any underwriting discounts or commissions applicable to any of the securities sold by them. If the Company determines to include securities to be sold by it in any registration statement originally requested pursuant to this Section 6(b), such registration shall instead be deemed to have been a registration under Section 6(a) and not under this Section 6(b). The Company will maintain such registration statement or post- effective amendment current under the Act for a period of at least six months (and for up to an additional three months if requested by the Holder) from the effective date thereof. (c) The term "50% holder" as used in this Section 6 shall mean the holder of at least 50% of the Common Stock and the Warrants underlying the Options (considered in the aggregate) and shall include any owner or combination of owners of such securities, which ownership shall be calculated by determining the number of shares of Common Stock held by such owner or owners as well as the number of shares then issuable upon exercise of the Warrants. (d) Whenever pursuant to Section 6 a registration statement relating to any Registrable Securities is filed under the Act, amended or supplemented, the Company shall (i) supply prospectuses and such other documents as the Holder may request in order to facilitate the public sale or other disposition of the Registrable Securities, (ii) use its best efforts to register and qualify any of the Registrable Securities for sale in such states as such Holder designates, (iii) furnish indemnification in the manner provided in Section 7 hereof, (iv) notify each Holder of Registrable Securities at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, contains an untrue statement of a material fact or omits to state a material fact required to -4- be stated therein or necessary to make the statements therein not misleading and, at the request of any such Holder, prepare and furnish to such Holder a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not included an untrue statement of a material fact or omit to state material fact required to be stated therein or necessary to make the statements therein not misleading and (v) do any and all other acts and things which may be necessary or desirable to enable such Holders to consummate the public sale or other disposition of the Registrable Securities. The Holder shall furnish appropriate information in connection therewith and indemnification as set forth in Section 7. (e) The Company shall not permit the inclusion of any securities other than the Registrable Securities to be included in any registration statement filed pursuant to Section 6(b) hereof without the prior written consent of the 50% holder. (f) The Company shall furnish to each Holder participating in the offering and to each underwriter, if any, a signed counterpart, addressed to such Holder or underwriter, of (i) an opinion of counsel to the Company, dated the effective date of such registration statement (or, if such registration includes an underwritten public offering, an opinion dated the date of the closing under the underwriting agreement), and (ii) if such registration includes an underwritten public offering, a "cold comfort" letter dated the effective date of such registration statement and dated the date of the closing under the underwriting agreement signed by the independent public accountants who have issued a report on the Company's financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities. (g) The Company shall deliver promptly to each Holder participating in the offering requesting the correspondence and memoranda described below and to the managing underwriter copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the registration statement and permit each Holder and underwriter to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonable necessary to comply with applicable securities laws or rules of the National Association of Securities Dealers, Inc. ("NASD"). Such investigation shall include access to non- confidential books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times as any such Holder shall reasonably request. 7. (a) Whenever pursuant to Section 6 a registration statement relating to the Registrable Securities is filed under the Act, amended or supplemented, the Company will indemnify and hold harmless each holder of the Registrable Securities covered by such registration statement, amendment or supplement (such holder being hereinafter called the "Distributing Holder"), and each person, if any, who controls (within the meaning of the Act) the Distributing Holder, and each underwriter (within the meaning of the Act) of such securities and each person, if any, who controls (within the meaning of the Act) any such underwriter, against any losses, claims, damages or liabilities, joint or several, to which the Distributing Holder, any such controlling person or any such underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any such registration statement or any preliminary prospectus or final prospectus constituting a part thereof or any amendment or supplement thereto, or arise out of or are based upon the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse the Distributing Holder and each such controlling person and underwriter for any legal or other expenses reasonably incurred by the Distributing Holder or such controlling person or underwriter in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of -5- or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in said registration statement, said preliminary prospectus, said final prospectus or said amendment or supplement in reliance upon and in conformity with written information furnished by such Distributing Holder specifically for use in the preparation thereof. (b) If requested by the Company prior to the filing of any registration statement covering the Registrable Securities, each Distributing Holder will agree, severally but not jointly, to indemnify and hold harmless the Company against any losses, claims, damages or liabilities to which the Company may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in said registration statement, said preliminary prospectus, said final prospectus, or said amendment or supplement, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in said registration statement, said preliminary prospectus, said final prospectus or said amendment or supplement in reliance upon and in conformity with written information furnished by such Distributing Holder specifically for use in the preparation thereof; except that the maximum amount which may be recovered from the Distributing Holder pursuant to this Section 7 or otherwise shall be limited to the amount of net proceeds received by the Distributing Holder from the sale of the Registrable Securities. (c) Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party, give the indemnifying party notice of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 7. (d) In case any such action is brought against any indemnified party, and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section 7 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. 8. In addition to the provisions of Section 1(a) of this Option, the Exercise Price in effect at any time and the number and kind of securities purchasable upon the exercise of the Options shall be subject to adjustment from time to time upon the happening of certain events as follows: (a) In case the Company shall (i) declare a dividend or make a distribution on its outstanding shares of Common Stock in shares of Common Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into a greater number of shares, or (iii) combine or reclassify its outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination or reclassification shall be adjusted so that it shall equal the price determined by multiplying the Exercise Price by a fraction, the denominator of which shall be the number of shares of Common Stock outstanding after giving effect to such action, and the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such action. Such adjustment shall be made successively whenever any event listed above shall occur. (b) Whenever the Exercise Price payable upon exercise of each Option is adjusted pursuant to Subsection (a) above, (i) the number of shares of Common Stock included in an Option Unit shall simultaneously be adjusted by multiplying the number of shares of Common Stock included in such Option Unit immediately prior to such -6- adjustment by the Exercise Price in effect immediately prior to such adjustment and dividing the product so obtained by the Exercise Price, as adjusted and (ii) the number of shares of Common Stock or other securities issuable upon exercise of the Warrants included in the Option Units and the exercise price of such Warrants shall be adjusted in accordance with the applicable terms of the Warrant Agreement. (c) No adjustment in the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least five cents ($0.05) in such price; provided, however, that any adjustments which by reason of this Subsection (c)(i) are not required to be made shall be carried forward and taken into account in any subsequent adjustment required to be made hereunder. All calculations under this Section 8 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. Anything in this Section 8 to the contrary notwithstanding, the Company shall be entitled, but shall not be required, to make such changes in the Exercise Price, in addition to those required by this Section 8, as it shall determine, in its sole discretion, to be advisable in order that any dividend or distribution in shares of Common Stock, or any subdivision, reclassification or combination of Common Stock, hereafter made by the Company shall not result in any Federal Income tax liability to the holders of Common Stock or securities convertible into Common Stock (including Warrants issuable upon exercise of this Option). (d) Whenever the Exercise Price is adjusted, as herein provided, the Company shall promptly but no later than 10 days after any request for such an adjustment by the Holder, cause a notice setting forth the adjusted Exercise Price and adjusted number of Option Units issuable upon exercise of each Option and, if requested, information describing the transactions giving rise to such adjustments, to be mailed to the Holders, at the address set forth herein, and shall cause a certified copy thereof to be mailed to its transfer agent, if any. The Company may retain a firm of independent certified public accountants selected by the Board of Directors (who may be the regular accountants employed by the Company) to make any computation required by this Section 8, and a certificate signed by such firm shall be conclusive evidence of the correctness of such adjustment. (e) In the event that at any time, as a result of an adjustment made pursuant to Subsection (a) above, the Holder of this Option thereafter shall become entitled to receive any shares of the Company, other than Common Stock, thereafter the number of such other shares so receivable upon exercise of this Option shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in Subsections (a) to (d), inclusive above. (f) In case any event shall occur as to which the other provisions of this Section 8 or Section 1(a) hereof are not strictly applicable but as to which the failure to make any adjustment would not fairly protect the purchase rights represented by this Option in accordance with the essential intent and principles hereof then, in each such case, the Holders of Options representing the right to purchase a majority of the Option Units may appoint a firm of independent public accountants reasonably acceptable to the Company, which shall give their opinion as to the adjustment, if any, on a basis consistent with the essential intent and principles established herein, necessary to preserve the purchase rights represented by the Options. Upon receipt of such opinion, the Company will promptly mail a copy thereof to the Holder of this Option and shall make the adjustments described therein. The fees and expenses of such independent public accountants shall be borne by the Company. 9. This Agreement shall be governed by and in accordance with the laws of the State of New York, without giving effect to the principles of conflicts of law thereof. -7- IN WITNESS WHEREOF, Central European Distribution Corporation has caused this Option to be signed by its duly authorized officers under its corporate seal, and this Option to be dated __________, 1998. CENTRAL EUROPEAN DISTRIBUTION CORPORATION By: ------------------------------------------------------ William V. Carey, Chairman and Chief Executive Officer (Corporate Seal) Attest: - ------------------------------ Jeffrey Peterson, Secretary -8- PURCHASE FORM (To be signed only upon exercise of the Option) The undersigned, the holder of the foregoing Option, hereby irrevocably elects to exercise the purchase rights represented by such Option for, and to purchase thereunder, Units of Central European Distribution Corporation, each Unit consisting of one share of $.01 par value Common Stock and one Warrant to purchase one share of Common Stock and herewith makes payment of $___ therefor. Dated: __________ INSTRUCTIONS FOR REGISTRATION OF STOCK AND WARRANTS Name --------------------------------------- (Please type or print in block letters) Address ----------------------------------- Signature ---------------------------------- -9- OPTION EXCHANGE The undersigned, pursuant to the provisions of the foregoing Option, hereby elects to exchange its Option for ________Units of Central European Distribution Corporation, each Unit consisting of one share of $.01 par value Common Stock and one Warrant to purchase one share of Common Stock, pursuant to the Option Exchange provisions of the Option. Dated: -------------- ------------------------------------------------- Print Name ------------------------------------------------- Address ------------------------------------------------- Signature -10- TRANSFER FORM (To be signed only upon transfer of the Option) For value received, the undersigned hereby sells, assigns, and transfers unto the right to purchase Units represented by the foregoing Option to the extent of ______ Units , and appoints __________ attorney to transfer such rights on the books of Central European Distribution Corporation, with full power of substitution in the premises. Dated: ------------------ ----------------------------------- By: -------------------------------- -------------------------------- Address In the presence of: -11- EX-10.1 9 STOCK INCENTIVE PLAN EXHIBIT 10.1 CENTRAL EUROPEAN DISTRIBUTION CORPORATION 1997 STOCK INCENTIVE PLAN -1- CENTRAL EUROPEAN DISTRIBUTION CORPORATION 1997 STOCK INCENTIVE PLAN TABLE OF CONTENTS Page ---- 1. PURPOSE...................................................................1 2. DEFINITIONS...............................................................1 3. ADMINISTRATION OF THE PLAN................................................4 4. STOCK SUBJECT TO THE PLAN.................................................5 5. EFFECTIVE DATE AND TERM OF THE PLAN.......................................6 6. DISCRETIONARY GRANTS......................................................6 7. GRANTS TO OUTSIDE DIRECTORS...............................................6 8. LIMITATIONS ON GRANTS.....................................................7 9. AWARD AGREEMENT...........................................................7 10. OPTION PRICE.............................................................7 11. VESTING, TERM AND EXERCISE OF OPTIONS....................................8 12. STOCK APPRECIATION RIGHTS (SARS).........................................10 13. TRANSFERABILITY OF OPTIONS...............................................12 14. RESTRICTED STOCK.........................................................12 15. PARACHUTE LIMITATIONS....................................................15 16. REQUIREMENTS OF LAW......................................................16 17. AMENDMENT AND TERMINATION OF THE PLAN....................................17 18. EFFECT OF CHANGES IN CAPITALIZATION......................................17 19. DISCLAIMER OF RIGHTS.....................................................19 20. NONEXCLUSIVITY OF THE PLAN...............................................19 -i- 21. WITHHOLDING TAXES........................................................20 22. CAPTIONS.................................................................20 23. OTHER PROVISIONS.........................................................20 24. NUMBER AND GENDER........................................................20 25. SEVERABILITY.............................................................21 26. GOVERNING LAW............................................................21 ii Exhibit 10.1 CENTRAL EUROPEAN DISTRIBUTION CORPORATION 1997 STOCK INCENTIVE PLAN Central European Distribution Corporation, a Delaware corporation (the "Company"), sets forth herein the terms of its 1997 Stock Incentive Plan (the "Plan") as follows: 1. PURPOSE The Plan is intended to enhance the Company's ability to attract and retain highly qualified officers, key employees, outside directors, and other persons to advance the interests of the Company by providing such persons with stronger incentives to continue to serve the Company and its affiliates (as defined herein) and to expend maximum effort to improve the business results and earnings of the Company. The Plan is intended to accomplish this objective by providing to eligible persons an opportunity to acquire or increase a direct proprietary interest in the operations and future success of the Company. To this end, the Plan provides for the grant of stock options, stock appreciation rights, restricted stock and restricted stock units in accordance with the terms hereof. Stock options granted under the Plan may be non-qualified stock options or incentive stock options, as provided herein, except that stock options granted to outside directors shall in all cases be non-qualified stock options. 2. DEFINITIONS For purposes of interpreting the Plan and related documents (including Award Agreements), the following definitions shall apply: 2.1 "affiliate" of, or person "affiliated" with, a person means any company or other trade or business that controls, is controlled by or is under common control with such person within the meaning of Rule 405 of Regulation C under the 1933 Act (as defined herein). 2.2 "Award Agreement" means the stock option agreement, stock appreciation rights agreement, restricted stock agreement, restricted stock unit agreement or other written agreement between the Company and a Grantee that evidences and sets out the terms and conditions of a Grant. 2.3 "Benefit Arrangement" shall have the meaning set forth in Section 15 hereof. 2.4 "Board" means the Board of Directors of the Company. 2.5 "Code" means the Internal Revenue Code of 1986, as now in effect or as hereafter amended. 2.6 "Committee" means a Committee of, and designated from time to time by resolution of, the Board, which shall consist of no fewer than two members of the Board, none of whom shall be an officer or other salaried employee of the Company or any affiliate, and each of whom shall qualify in all respects as a "non-employee director" within the meaning of Rule 16b-3 under the Exchange Act or any successor rule or regulation. Commencing on the Effective Date, and until such time as the Board shall determine otherwise, the Committee shall be the Compensation Committee of the Board. 2.7 "Company" means Central European Distribution Corporation. 2.8 "Effective Date" means November 27, 1997, the date on which the Plan was adopted by the Board. 2.9 "Exchange Act" means the Securities Exchange Act of 1934, as now in effect or as hereafter amended. 2.10 "Fair Market Value" means the value of a share of Stock, determined as follows: if on the Grant Date or other determination date the Stock is listed on an established national or regional stock exchange, is admitted to quotation on a Nasdaq market, or is publicly traded on an established securities market, the Fair Market Value of a share of Stock shall be the closing price of the Stock on such exchange or in such market (the highest such closing price if there is more than one such exchange or market) on the Grant Date or such other determination date (or if there is no such reported closing price, the Fair Market Value shall be the mean between the highest bid and lowest asked prices or between the high and low sale prices on such trading day) or, if no sale of Stock is reported for such trading day, on the next preceding day on which any sale shall have been reported. If the Stock is not listed on such an exchange, quoted on such system or traded on such a market, Fair Market Value shall be the value of the Stock as determined by the Committee in good faith. 2.11 "Grant" means an award of an Option, Stock Appreciation Rights, Restricted Stock or Restricted Stock Units under the Plan. 2.12 "Grant Date" means (a) for Grants other than Grants to Outside Directors, the later of (i) the date as of which the Committee approves the Grant or (ii) the date as of which the Grantee and the Company or Service Provider enter into the relationship resulting in the Grantee's becoming eligible to receive a Grant, and (b) for Grants to Outside Directors, the date on which such Grant is made in accordance with Section 7 hereof. 2 2.13 "Grantee" means a person who receives or holds an Option, Stock Appreciation Rights, Restricted Stock or Restricted Stock Units under the Plan. 2.14 "Incentive Stock Option" means an "incentive stock option" within the meaning of Section 422 of the Code, or the corresponding provision of any subsequently enacted tax statute, as amended from time to time. 2.15 "Option" means an option to purchase one or more shares of Stock pursuant to the Plan. 2.16 "Option Period" means the period during which Options may be exercised as set forth in Section 11 hereof. 2.17 "Option Price" means the purchase price for each share of Stock subject to an Option or Stock Appreciation Rights. 2.18 "Other Agreement" shall have the meaning set forth in Section 15 hereof. 2.19 "Outside Director" means a member of the Board who is not an officer or employee of the Company. 2.20 "Plan" means the Central European Distribution Corporation 1997 Stock Incentive Plan. 2.21 "Reporting Person" means a person who is required to file reports under Section 16(a) of the Exchange Act. 2.22 "Restricted Period" means the period during which Restricted Stock or Restricted Stock Units are subject to restrictions or conditions pursuant to Section 14.2 hereof. 2.23 "Restricted Stock" means shares of Stock, awarded to a Grantee pursuant to Section 14 hereof, that are subject to restrictions and to a risk of forfeiture. 2.24 "Restricted Stock Unit" means a unit awarded to a Grantee pursuant to Section 14 hereof, which represents a conditional right to receive a share of Stock in the future, and which is subject to restrictions and to a risk of forfeiture. 2.25 "Securities Act" means the Securities Act of 1933, as now in effect or as hereafter amended. 2.26 "Service Provider" means a consultant or adviser to the Company, a manager of the Company's properties or affairs, or other similar service provider or 3 affiliate of the Company, and employees of any of the foregoing, as such persons may be designated from time to time by the Committee pursuant to Section 6 hereof. 2.27 "Stock" means the common stock, par value $0.01 per share, of the Company. 2.28 "Stock Appreciation Right" means a right granted pursuant to Section 15 hereof to receive a payment by the Company of an amount equal to the excess of the fair market value of the shares of Stock subject to such Grant, or portion thereof, so surrendered over the Option Price of such shares. 2.28 "Subsidiary" means any "subsidiary corporation" of the Company within the meaning of Section 425(f) of the Code. 2.29 "Termination Date" shall be the date upon which an Option shall terminate or expire, as set forth in Section 11.2 hereof. 3. ADMINISTRATION OF THE PLAN 3.1 General. The Plan shall be administered by the Board, which shall ------- have the full power and authority to take all actions and to make all determinations required or provided for under the Plan, any Option granted or any Award Agreement entered into hereunder. The Board shall have full power and authority to take all such other actions and determinations not inconsistent with the specific terms and provisions of the Plan, which the Board deems to be necessary or appropriate to the administration of the Plan, any Option granted hereunder or any Award Agreement entered into hereunder. The Board's interpretation and construction of any provision of the Plan, any Option granted hereunder or any Award Agreement entered into hereunder shall be final, binding and conclusive. 3.2 Committee. The Board, in its sole discretion, may provide that --------- the role of the Committee shall be limited to making recommendations to the Board concerning any determinations to be made and actions to be taken by the Board pursuant to or with respect to the Plan, or the Board may delegate to the Committee such powers and authorities related to the administration of the Plan, as set forth in Section 3.1 above, as the Board shall determine, consistent with the Certificate of Incorporation and By-laws of the Corporation and applicable law. In the event that the Plan or any Option granted or Award Agreement entered into hereunder provides for any action to be taken by or determination to be made by the Board, such action may be taken by or such determination may be made by the Committee if the power and authority to do so has been delegated to the Committee by the Board as provided for in this Section. Unless otherwise expressly determined by the Board, any such action or determination by the Committee shall be final and conclusive. 4 3.3 Discretionary Grants. Subject to Section 3.4 hereof and to the other -------------------- terms and conditions of the Plan, the Committee shall have full and final authority to designate Grantees, (i) to determine the type or types of Grant to be made to a Grantee, (ii) to determine the number of shares of Stock to be subject to a Grant, (iii) to establish the terms and conditions of each Grant (including, but not limited to, the exercise price of any Option, the nature and duration of any restriction or condition (or provision for lapse thereof) relating to the vesting, exercise, transfer, or forfeiture of a Grant or the shares of Stock subject thereto, and any terms or conditions that may be necessary to qualify Options as Incentive Stock Options), (iv) to prescribe the form of each Award Agreement evidencing a Grant, and (v) to amend, modify, or supplement the terms of any outstanding Grant. Such authority specifically includes the authority, in order to effectuate the purposes of the Plan but without amending the Plan, to modify Grants to eligible individuals who are foreign nationals or are individuals who are employed outside the United States to recognize differences in local law, tax policy, or custom. As a condition to any subsequent Grant, the Committee shall have the right, at its discretion, to require Grantees to return to the Company Grants previously awarded under the Plan. Subject to the terms and conditions of the Plan, any such new Grant shall be upon such terms and conditions as are specified by the Committee at the time the new Grant is made. 3.4 Grants to Outside Directors. With respect to Grants of Options to ---------------------------- Outside Directors pursuant to Section 7 hereof, the Committee's responsibilities under the Plan shall be limited to taking all legal actions necessary to document the Options so granted, to interpret the Award Agreements evidencing such Options, to maintain appropriate records and reports regarding such Options, and to take all acts authorized by this Plan or otherwise reasonably necessary to effect the purposes hereof. 3.5 No Liability. No member of the Board or of the Committee shall be ------------ liable for any action or determination made in good faith with respect to the Plan or any Grant or Award Agreement. 3.6 Applicability of Rule 16b-3. Those provisions of the Plan that make --------------------------- express reference to Rule 16b-3 under the Exchange Act shall apply only to Reporting Persons. 4. STOCK SUBJECT TO THE PLAN Subject to adjustment as provided in Section 17 hereof, the number of shares of Stock available for issuance under the Plan shall be 400,000. Stock issued or to be issued under the Plan shall be authorized but unissued shares. If any shares covered by a Grant are not purchased or are forfeited, or if a Grant otherwise terminates without delivery of any Stock subject thereto, then the number of shares of Stock counted against the aggregate number of shares available under the Plan with 5 respect to such Grant shall, to the extent of any such forfeiture or termination, again be available for making Grants under the Plan. 5. EFFECTIVE DATE AND TERM OF THE PLAN 5.1 Effective Date. The Plan shall be effective as of the Effective Date, -------------- subject to approval of the Plan within one year of the Effective Date, by a majority of the votes cast on the proposal at a meeting of shareholders, provided that the total votes cast represent a majority of all shares entitled to vote. Upon approval of the Plan by the shareholders of the Company as set forth above, all Grants made under the Plan on or after the Effective Date shall be fully effective as if the shareholders of the Company had approved the Plan on the Effective Date. If the shareholders fail to approve the Plan within one year after the Effective Date, any Grants made hereunder shall be null and void and of no effect. 5.2 Term. The Plan shall terminate on the tenth anniversary of the ---- Effective Date. 6. DISCRETIONARY GRANTS 6.1 Company or Subsidiary Employees. Grants (including Grants of Incentive ------------------------------- Stock Options) may be made under the Plan to any employee of the Company or of any Subsidiary, including any such employee who is an officer or director of the Company or of any Subsidiary, as the Committee shall determine and designate from time to time. 6.2 Service Providers. Grants may be made under the Plan to any Service ----------------- Provider whose participation in the Plan is determined by the Committee to be in the best interests of the Company and is so designated by the Committee; provided, however, that Grants to Service Providers who are not employees of the - -------- Company or of any Subsidiary shall not be Incentive Stock Options. 6.3 Successive Grants. An eligible person may receive more than one Grant, ----------------- subject to such restrictions as are provided herein. 7. GRANTS TO OUTSIDE DIRECTORS 7.1 Initial Grants of Options. Each Outside Director who is initially ------------------------- elected to the Board on or after the Effective Date shall, upon the date of his or her initial election by the Board or the shareholders of the Company, automatically be awarded a Grant of an Option, which shall not be an Incentive Stock Option, to purchase 500 shares of Stock (which amount shall be subject to adjustment as provided in Section 17 hereof). 7.2 Subsequent Grants of Options. Immediately following each Annual ---------------------------- Meeting of Shareholders of the Company held after the Effective Date, each Outside 6 Director then duly elected and serving (other than an Outside Director initially elected to the Board at such Annual Meeting of Shareholders) shall automatically be awarded a Grant of an Option, which shall not be an Incentive Stock Option, to purchase 500 shares of Stock (which amount shall be subject to adjustment as provided in Section 17 hereof); provided, however, that no Outside ----------------- Director shall be eligible to receive a Grant of Options under this Section 7.2 unless such person attended, in person or by telephone, at least seventy-five percent of the meetings held by the Board during the immediately preceding calendar year (or such portion thereof during which the Outside Director served on the Board). 8. LIMITATIONS ON GRANTS 8.1 Limitation on Shares of Stock Subject to Grants. The maximum number of ------------------------------------------------ shares of Stock subject to Options that can be awarded under the Plan to any person eligible for a Grant under Section 6 hereof is 60,000 per year. The maximum number of shares of Restricted Stock that can be awarded under the Plan (including for this purpose any shares of Stock represented by Restricted Stock Units) to any person eligible for a Grant under Section 6 hereof is 60,000 per year. 8.2 Limitations on Incentive Stock Options. An Option shall constitute an --------------------------------------- Incentive Stock Option only (i) if the Grantee of such Option is an employee of the Company or any Subsidiary of the Company; (ii) to the extent specifically provided in the related Award Agreement; and (iii) to the extent that the aggregate Fair Market Value (determined at the time the Option is granted) of the shares of Stock with respect to which all Incentive Stock Options held by such Grantee become exercisable for the first time during any calendar year (under the Plan and all other plans of the Grantee's employer and its affiliates) does not exceed $100,000. This limitation shall be applied by taking Options into account in the order in which they were granted. 9. AWARD AGREEMENT Each Grant pursuant to the Plan shall be evidenced by an Award Agreement, to be executed by the Company and by the Grantee, in such form or forms as the Committee shall from time to time determine. Award Agreements granted from time to time or at the same time need not contain similar provisions but shall be consistent with the terms of the Plan. Each Award Agreement evidencing a Grant of Options shall specify whether such Options are intended to be non-qualified stock options or Incentive Stock Options. 10. OPTION PRICE The Option Price of each Option shall be fixed by the Committee and stated in the Award Agreement evidencing such Option. The Option Price shall be the aggregate Fair Market Value on the Grant Date of the shares of Stock subject to the Option; provided, however, that in the event that a Grantee would otherwise -------- ------- be ineligible to receive an Incentive Stock Option by reason of the provisions of Sections 7 422(b)(6) and 424(d) of the Code (relating to ownership of more than ten percent of the Company's outstanding Stock), the Option Price of an Option granted to such Grantee that is intended to be an Incentive Stock Option shall be not less than the greater of the par value of a share of Stock or 110 percent of the Fair Market Value of a share of Stock on the Grant Date. In no case shall the Option Price of any Option be less than the par value of a share of Stock. 11. VESTING, TERM AND EXERCISE OF OPTIONS 11.1 Vesting and Option Period. Each Option granted under the Plan shall ------------------------- be exercisable, in whole or in part, at any time and from time to time over a period commencing on or after the Grant Date and ending upon the expiration or termination of the Option, as the Committee shall determine and set forth in the Award Agreement relating to such Option; provided, however, that each Option -------- ------- granted to an Outside Director shall be exercisable, in whole or in part, at any time and from time to time over the period commencing on the Grant Date and ending upon the expiration or termination of the Option. Without limiting the foregoing, the Committee, subject to the terms and conditions of the Plan, may in its sole discretion provide that an Option granted to persons other than Outside Directors may not be exercised in whole or in part for a stated period or periods of time during which such Option is outstanding. For purposes of this Section 11.1, fractional numbers of shares of Stock subject to an Option shall be rounded down to the next nearest whole number. The period during which any Option shall be exercisable in accordance with the foregoing schedule shall constitute the "Option Period" with respect to such Option. 11.2 Term. Each Option granted under the Plan shall terminate, and all ---- rights to purchase shares of Stock thereunder shall cease, upon the expiration of ten years from the date such Option is granted, or, with respect to Options granted to persons other than Outside Directors, under such circumstances and on such date prior thereto as is set forth in the Plan or as may be fixed by the Committee and stated in the Award Agreement relating to such Option (the "Termination Date"); provided, however, that in the event that the Grantee would -------- ------- otherwise be ineligible to receive an Incentive Stock Option by reason of the provisions of Sections 422(b)(6) and 424(d) of the Code (relating to ownership of more than ten percent of the outstanding Stock), an Option granted to such Grantee that is intended to be an Incentive Stock Option shall not be exercisable after the expiration of five years from its Grant Date. 11.3 Acceleration. Any limitation on the exercise of an Option contained in ------------ any Award Agreement may be rescinded, modified or waived by the Committee, in its sole discretion, at any time and from time to time after the Grant Date of such Option, so as to accelerate the time at which the Option may be exercised. Notwithstanding any other provision of the Plan, no Option shall be exercisable in whole or in part prior to the date the Plan is approved by the shareholders of the Company as provided in Section 5.1 hereof. 8 11.4 Termination of Employment or Other Relationship. Upon the termination ----------------------------------------------- (i) of the employment of a Grantee with the Company or a Service Provider, (ii) of a Service Provider's relationship with the Company, or (iii) of an Outside Director's service to the Company, other than, in the case of individuals, by reason of death or "permanent and total disability" (within the meaning of Section 22(e)(3) of the Code), any Option or portion thereof held by such Grantee that has not vested in accordance with the provisions of Section 11.1 hereof shall terminate immediately, and any Option or portion thereof that has vested in accordance with the provisions of Section 11.1 hereof but has not been exercised shall terminate at the close of business on the ninetieth day following the Grantee's termination of service, employment, or other relationship, unless the Committee, in its discretion, extends the period during which the Option may be exercised (which period may not be extended beyond the original term of the Option). Upon termination of an Option or portion thereof, the Grantee shall have no further right to purchase shares of Stock pursuant to such Option or portion thereof. Whether a leave of absence or leave on military or government service shall constitute a termination of employment for purposes of the Plan shall be determined by the Committee, which determination shall be final and conclusive. For purposes of the Plan, a termination of employment, service or other relationship shall not be deemed to occur if the Grantee is immediately thereafter employed with an affiliate of the Company or any other Service Provider, or is engaged as a Service Provider or an Outside Director of the Company. Whether a termination of a Service Provider's or an Outside Director's relationship with the Company shall have occurred shall be determined by the Committee, which determination shall be final and conclusive. 11.5 Rights in the Event of Death. If a Grantee dies while employed by the ---------------------------- Company or a Service Provider, or while serving as a Service Provider or an Outside Director, all Options granted to such Grantee shall fully vest on the date of death, and the executors or administrators or legatees or distributees of such Grantee's estate shall have the right, at any time within two years after the date of such Grantee's death (or such longer period as the Committee, in its discretion, may determine prior to the expiration of such one-year period) and prior to termination of the Option pursuant to Section 11.2 above, to exercise any Option held by such Grantee at the date of such Grantee's death. 11.6 Rights in the Event of Disability. If a Grantee terminates employment --------------------------------- with the Company or a Service Provider, or (if the Grantee is a Service Provider who is an individual or is an Outside Director) ceases to provide services to the Company, in either case by reason of the "permanent and total disability" (within the meaning of Section 22(e)(3) of the Code) of such Grantee, such Grantee's Options shall continue to vest, and shall be exercisable to the extent that they are vested, for a period of one year after such termination of employment or service (or such longer period as the Committee, in its discretion, may determine prior to the expiration of such one-year period), subject to earlier termination of the Option as provided in Section 11.2 9 above. Whether a termination of employment or service is to be considered by reason of "permanent and total disability" for purposes of the Plan shall be determined by the Committee, which determination shall be final and conclusive. 11.7 Limitations on Exercise of Option. Notwithstanding any other provision --------------------------------- of the Plan, in no event may any Option be exercised, in whole or in part, prior to the date the Plan is approved by the shareholders of the Company as provided herein, or after ten years following the date upon which the Option is granted, or after the occurrence of an event referred to in Section 17 hereof which results in termination of the Option. 11.8 Method of Exercise. An Option that is exercisable may be exercised by ------------------ the Grantee's delivery to the Company of written notice of exercise on any business day, at the Company's principal office, addressed to the attention of the Committee. Such notice shall specify the number of shares of Stock with respect to which the Option is being exercised and shall be accompanied by payment in full of the Option Price of the shares for which the Option is being exercised. The minimum number of shares of Stock with respect to which an Option may be exercised, in whole or in part, at any time shall be the lesser of (i) 100 shares or such lesser number set forth in the applicable Award Agreement and (ii) the maximum number of shares available for purchase under the Option at the time of exercise. Payment of the Option Price for the shares purchased pursuant to the exercise of an Option shall be made in cash or in cash equivalents. An attempt to exercise any Option granted hereunder other than as set forth above shall be invalid and of no force and effect. Unless otherwise stated in the applicable Award Agreement, an individual holding or exercising an Option shall have none of the rights of a shareholder (for example, the right to receive cash or dividend payments or distributions attributable to the subject shares of Stock or to direct the voting of the subject shares of Stock ) until the shares of Stock covered thereby are fully paid and issued to him. Except as provided in Section 18 hereof, no adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date of such issuance. 11.9 Delivery of Stock Certificates. Promptly after the exercise of an ------------------------------ Option by a Grantee and the payment in full of the Option Price, such Grantee shall be entitled to the issuance of a stock certificate or certificates evidencing his or her ownership of the shares of Stock subject to the Option. 12. STOCK APPRECIATION RIGHTS (SARS) 12.1 In General. Subject to the terms and conditions of the Plan, the ---------- Committee may, in its sole and absolute discretion, grant to a Grantee rights to receive payment by the Company of an amount equal to the excess of the fair market value of the shares of Stock subject to such Award Agreement, or portion thereof, so surrendered (determined in the manner described in Section 2.10 above as of the date the SARs are exercised) over the Option Price of such shares. 10 Such payment may be made, as determined by the Committee in accordance with Sections 12.4 and 12.5 below and set forth in the Award Agreement, either in shares of Stock or in cash or in any combination thereof. All SARs shall be evidenced by provisions in an Award Agreement, which provisions shall comply with and be subject to the terms and conditions set forth in this Section 12. 12.2 Grant. Each SAR shall relate to a specific number of shares of Stock. ----- The number of SARs held by a Grantee shall be reduced by the number of SARs exercised for Stock or cash under the provisions of the Award Agreement. 12.3 Exercise. SARs that are exercisable hereunder and under the Award -------- Agreement may be exercised by delivering to the Company on any business day, at its principal office, addressed to the attention of the Committee, written notice of exercise, which notice shall specify the number of SARs being exercised. The date upon which such written notice is received by the Company shall be the exercise date of the SARs. Except to the extent that SARs are exercised for cash as provided in Section 12.5 below, the individual exercising SARs shall receive, without payment therefor to the Company, the number of shares of Stock determined under Section 12.4 below. Promptly after the exercise of SARs, the individual exercising the SARs shall be entitled to the issuance of a Stock certificate or certificates evidencing ownership of such shares. An individual holding or exercising SARs shall have none of the rights of a shareholder with respect to any shares of Stock covered by the SARs until shares of Stock are issued to him or her, and, except as provided in Section 19 below, no adjustment shall be made for dividends or other rights for which the record date is prior to the date of such issuance. 12.4 Number of Shares of Stock. The number of shares of Stock which shall ------------------------- be issued pursuant to the exercise of SARs shall be determined by dividing (i) the total number of SARs being exercised, multiplied by the amount by which the fair market value (determined in the manner described in Section 2.10 above) of a share of Stock on the exercise date exceeds the Option Price of the shares of Stock subject to the Award Agreement by (ii) the fair market value (determined in the manner described in Section 2.10 above) of a share of Stock on the exercise date of the SARs; provided, however, that no fractional share shall be -------- ------- issued on exercise of SARs, and that cash shall be paid by the Company to the individual exercising SARs in lieu of any such fractional share. 11 12.5 Exercise of SARs for Cash. The Committee shall have sole discretion to ------------------------- determine whether, and shall set forth in the Award Agreement the circumstances under which, payment in respect of SARs granted to any Grantee shall be made in shares of Stock, or in cash, or in a combination thereof. Promptly after the exercise of an SAR for cash, the individual exercising the SAR shall receive in respect of said SAR an amount of money equal to the difference between the fair market value (determined in the manner described in Section 2.10 above) of a share of Stock on the exercise date and the Option Price. 12.6 Limitations. SARs shall be exercisable at such times and under such ----------- terms and conditions as the Committee, in its sole and absolute discretion, shall determine and set forth in the Award Agreements; provided, however, that -------- ------- an SAR may be exercised only at such times and by such individuals as the Award Agreement provides; and provided, further, that an SAR may be exercised only at -------- ------- such times as the fair market value (determined in the manner described in Section 2.10 above) of a share of Stock on the exercise date exceeds the Option Price. Adjustments in the number, kind, or Option Price of shares of Stock for which Awards are granted pursuant to Section 19 below shall be made as necessary to the related SARs held by each Grantee. Any amendment, suspension or termination of the Plan pursuant to Section 18 below shall be deemed an amendment, suspension or termination of SARs to the same extent. 13. TRANSFERABILITY OF OPTIONS During the lifetime of an Optionee, only such Optionee (or, in the event of legal incapacity or incompetency, the guardian or legal representative of the Optionee) may exercise the Option, except as otherwise specifically permitted by this Section 13. No Option shall be assignable or transferable other than by will or in accordance with the laws of descent and distribution; provided, -------- however, to the extent permitted under the applicable Award Agreement, and to - ------- the extent the transfer is in compliance with any applicable restrictions on transfers, an Optionee may transfer a non-qualified stock option to a family member of the Optionee (defined as an individual who is related to the Optionee by blood or adoption), to a trust established and maintained for the benefit of the Optionee or a family member of the Optionee (as determined under applicable state law and the Code) or to a partnership in which family members are the only partners, provided that (x) there may be no consideration for any such transfer, and (y) subsequent transfers of transferred Options are prohibited except those in accordance with this Section 13 or by will or the laws of descent and distribution. 14. RESTRICTED STOCK 14.1 Grant of Restricted Stock or Restricted Stock Units. The Committee may --------------------------------------------------- from time to time grant Restricted Stock or Restricted Stock Units to persons eligible 12 to receive such Grants as set forth in Section 6 hereof, subject to such restrictions, conditions and other terms as the Committee may determine. 14.2 Restrictions. At the time a Grant of Restricted Stock or Restricted ------------ Stock Units is made, the Committee shall establish a period of time (the "Restricted Period") applicable to such Restricted Stock or Restricted Stock Units. Each Grant of Restricted Stock or Restricted Stock Units may be subject to a different Restricted Period. The Committee may, in its sole discretion, at the time a Grant of Restricted Stock or Restricted Stock Units is made, prescribe restrictions in addition to or other than the expiration of the Restricted Period, including the satisfaction of corporate or individual performance objectives, which may be applicable to all or any portion of the Restricted Stock or Restricted Stock Units. Such performance objectives shall be established in writing by the Committee prior to the ninetieth day of the year in which the Grant is made and while the outcome is substantially uncertain. Performance objectives shall be based on Stock price, market share, sales, earnings per share, return on equity or costs. Performance objectives may include positive results, maintaining the status quo or limiting economic losses. The Committee also may, in its sole discretion, shorten or terminate the Restricted Period or waive any other restrictions applicable to all or a portion of the Restricted Stock or Restricted Stock Units. Neither Restricted Stock nor Restricted Stock Units may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of during the Restricted Period or prior to the satisfaction of any other restrictions prescribed by the Committee with respect to such Restricted Stock or Restricted Stock Units. 14.3 Restricted Stock Certificates. The Company shall issue, in the name of ----------------------------- each Grantee to whom Restricted Stock has been granted, stock certificates representing the total number of shares of Restricted Stock granted to the Grantee, as soon as reasonably practicable after the Grant Date. The Secretary of the Company shall hold such certificates for the Grantee's benefit until such time as the Restricted Stock is forfeited to the Company, or the restrictions lapse. 14.4 Rights of Holders of Restricted Stock. Unless the Committee otherwise ------------------------------------- provides in an Award Agreement, holders of Restricted Stock shall have the right to vote such Stock and the right to receive any dividends declared or paid with respect to such Stock. The Committee may provide that any dividends paid on Restricted Stock must be reinvested in shares of Stock, which may or may not be subject to the same vesting conditions and restrictions applicable to such Restricted Stock. All distributions, if any, received by a Grantee with respect to Restricted Stock as a result of any stock split, stock dividend, combination of shares, or other similar transaction shall be subject to the restrictions applicable to the original Grant. 14.5 Rights of Holders of Restricted Stock Units. Unless the Committee ------------------------------------------- otherwise provides in an Award Agreement, holders of Restricted Stock Units shall have no rights as stockholders of the Company. The Committee may provide in an Award Agreement evidencing a Grant of Restricted Stock Units that the holder of 13 such Restricted Stock Units shall be entitled to receive, upon the Company's payment of a cash dividend on its outstanding Stock, a cash payment for each Restricted Stock Unit held equal to the per-share dividend paid on the Stock. Such Award Agreement may also provide that such cash payment will be deemed reinvested in additional Restricted Stock Units at a price per unit equal to the Fair Market Value of a share of Stock on the date that such dividend is paid. 14.6 Termination of Employment or Other Relationship. Upon the termination ----------------------------------------------- of the employment of a Grantee with the Company or a Service Provider, or of a Service Provider's relationship with the Company, in either case other than, in the case of individuals, by reason of death or "permanent and total disability" (within the meaning of Section 22(e)(3) of the Code), any Restricted Stock or Restricted Stock Units held by such Grantee that has not vested, or with respect to which all applicable restrictions and conditions have not lapsed, shall immediately be deemed forfeited, unless the Committee, in its discretion, determines otherwise. Upon forfeiture of Restricted Stock or Restricted Stock Units, the Grantee shall have no further rights with respect to such Grant, including but not limited to any right to vote Restricted Stock or any right to receive dividends with respect to shares of Restricted Stock or Restricted Stock Units. Whether a leave of absence or leave on military or government service shall constitute a termination of employment for purposes of the Plan shall be determined by the Committee, which determination shall be final and conclusive. For purposes of the Plan, a termination of employment, service or other relationship shall not be deemed to occur if the Grantee is immediately thereafter employed with the Company or any other Service Provider, or is engaged as a Service Provider. Whether a termination of a Service Provider's relationship with the Company shall have occurred shall be determined by the Committee, which determination shall be final and conclusive. 14.7 Rights in the Event of Death. If a Grantee dies while employed by the ---------------------------- Company or a Service Provider or while serving as a Service Provider, all Restricted Stock or Restricted Stock Units granted to such Grantee shall fully vest on the date of death, and the shares of Stock represented thereby shall be deliverable in accordance with the terms of the Plan to the executors, administrators, legatees or distributees of the Grantee's estate. 14.8 Rights in the Event of Disability. If a Grantee terminates employment --------------------------------- with the Company or a Service Provider, or (if the Grantee is a Service Provider who is an individual) ceases to provide services to the Company, in either case by reason of the "permanent and total disability" (within the meaning of Section 22(e)(3) of the Code) of such Grantee, such Grantee's Restricted Stock or Restricted Stock Units shall continue to vest in accordance with the applicable Award Agreement for a period of one year after such termination of employment or service (or such longer period as the Committee, in its discretion, may determine prior to the expiration of such one-year period), subject to the earlier forfeiture of such Restricted Stock or Restricted Stock Units in accordance with the terms of the applicable Award 14 Agreement. Whether a termination of employment or service is to be considered by reason of "permanent and total disability" for purposes of the Plan shall be determined by the Committee, which determination shall be final and conclusive. 14.9 Delivery of Stock and Payment Therefor. Upon the expiration or -------------------------------------- termination of the Restricted Period and the satisfaction of any other conditions prescribed by the Committee, the restrictions applicable to shares of Restricted Stock or Restricted Stock Units shall lapse, and, upon payment by the Grantee to the Company, in cash or by check, of the aggregate par value of the shares of Stock represented by such Restricted Stock or Restricted Stock Units, a stock certificate for such shares shall be delivered, free of all such restrictions, to the Grantee or the Grantee's beneficiary or estate, as the case may be. 15. PARACHUTE LIMITATIONS Notwithstanding any other provision of this Plan or of any other agreement, contract, or understanding heretofore or hereafter entered into by a Grantee with the Company or any Subsidiary, except an agreement, contract, or understanding hereafter entered into that expressly modifies or excludes application of this paragraph (an "Other Agreement"), and notwithstanding any formal or informal plan or other arrangement for the direct or indirect provision of compensation to the Grantee (including groups or classes of participants or beneficiaries of which the Grantee is a member), whether or not such compensation is deferred, is in cash, or is in the form of a benefit to or for the Grantee (a "Benefit Arrangement"), if the Grantee is a "disqualified individual," as defined in Section 280G(c) of the Code, any Option, Restricted Stock or Restricted Stock Unit held by that Grantee and any right to receive any payment or other benefit under this Plan shall not become exercisable or vested (i) to the extent that such right to exercise, vesting, payment, or benefit, taking into account all other rights, payments, or benefits to or for the Grantee under this Plan, all Other Agreements, and all Benefit Arrangements, would cause any payment or benefit to the Grantee under this Plan to be considered a "parachute payment" within the meaning of Section 280G(b)(2) of the Code as then in effect (a "Parachute Payment") and (ii) if, as a result of --- receiving a Parachute Payment, the aggregate after-tax amounts received by the Grantee from the Company under this Plan, all Other Agreements, and all Benefit Arrangements would be less than the maximum after-tax amount that could be received by the Grantee without causing any such payment or benefit to be considered a Parachute Payment. In the event that the receipt of any such right to exercise, vesting, payment, or benefit under this Plan, in conjunction with all other rights, payments, or benefits to or for the Grantee under any Other Agreement or any Benefit Arrangement would cause the Grantee to be considered to have received a Parachute Payment under this Plan that would have the effect of decreasing the after-tax amount received by the Grantee as described in clause (ii) of the preceding sentence, then the Grantee shall have the right, in the Grantee's sole discretion, to designate those rights, payments, or benefits under this Plan, any Other Agreements, and any Benefit Arrangements that should be reduced 15 or eliminated so as to avoid having the payment or benefit to the Grantee under this Plan be deemed to be a Parachute Payment. 16. REQUIREMENTS OF LAW 16.1 General. The Company shall not be required to sell or issue any shares ------- of Stock under any Grant if the sale or issuance of such shares would constitute a violation by the Grantee, any other individual exercising an Option, or the Company of any provision of any law or regulation of any governmental authority, including without limitation any United States federal or state securities laws or regulations. If at any time the Company shall determine, in its discretion, that the listing, registration or qualification of any shares subject to a Grant upon any securities exchange or under any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the issuance or purchase of shares hereunder, no shares of Stock may be issued or sold to the Grantee or any other individual exercising an Option pursuant to such Grant unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company, and any delay caused thereby shall in no way affect the date of termination of the Grant. Specifically, in connection with the Securities Act, upon the exercise of any Option or the delivery of any shares of Restricted Stock or Stock underlying Restricted Stock Units, unless a registration statement under such Act is in effect with respect to the shares of Stock covered by such Grant, the Company shall not be required to sell or issue such shares unless the Committee has received evidence satisfactory to it that the Grantee or any other individual exercising an Option may acquire such shares pursuant to an exemption from registration under the Securities Act. Any determination in this connection by the Committee shall be final, binding, and conclusive. The Company may, but shall in no event be obligated to, register any securities covered hereby pursuant to the Securities Act. The Company shall not be obligated to take any affirmative action in order to cause the exercise of an Option or the issuance of shares of Stock pursuant to the Plan to comply with any law or regulation of any governmental authority. As to any jurisdiction that expressly imposes the requirement that an Option shall not be exercisable until the shares of Stock covered by such Option are registered or are exempt from registration, the exercise of such Option (under circumstances in which the laws of such jurisdiction apply) shall be deemed conditioned upon the effectiveness of such registration or the availability of such an exemption. 16.2 Rule 16b-3. It is the intent of the Company that Grants pursuant to ---------- the Plan and the exercise of Options granted hereunder will qualify for the exemption provided by Rule 16b-3 under the Exchange Act. To the extent that any provision of the Plan or action by the Committee does not comply with the requirements of Rule 16b-3, it shall be deemed inoperative to the extent permitted by law and deemed advisable by the Committee, and shall not affect the validity of the Plan. In the event that Rule 16b-3 is revised or replaced, the Board may exercise its discretion to modify 16 this Plan in any respect necessary to satisfy the requirements of, or to take advantage of any features of, the revised exemption or its replacement. 17. AMENDMENT AND TERMINATION OF THE PLAN The Board may, at any time and from time to time, amend, suspend, or terminate the Plan as to any shares of Stock as to which Grants have not been made; provided, however, that the Board shall not, without approval of the -------- ------- Company's shareholders, amend the Plan such that it does not comply with the Code. The Company may retain the right in an Award Agreement to cause a forfeiture of the gain realized by a Grantee on account of the Grantee taking actions in "competition with the Company," as defined in the applicable Award Agreement. Furthermore, the Company may annul a Grant if the Grantee is an employee of the Company or an affiliate and is terminated "for cause" as defined in the applicable Award Agreement. Except as permitted under this Section 17 or Section 18 hereof, no amendment, suspension, or termination of the Plan shall, without the consent of the Grantee, alter or impair rights or obligations under any Grant theretofore awarded under the Plan. 18. EFFECT OF CHANGES IN CAPITALIZATION 18.1 Changes in Stock. If the number of outstanding shares of Stock is ---------------- increased or decreased or the shares of Stock are changed into or exchanged for a different number or kind of shares or other securities of the Company on account of any recapitalization, reclassification, stock split, reverse split, combination of shares, exchange of shares, stock dividend or other distribution payable in capital stock, or other increase or decrease in such shares effected without receipt of consideration by the Company occurring after the Effective Date, the number and kinds of shares for which Grants of Options, Restricted Stock and Restricted Stock Units may be made under the Plan shall be adjusted proportionately and accordingly by the Company. In addition, the number and kind of shares for which Grants are outstanding shall be adjusted proportionately and accordingly so that the proportionate interest of the Grantee immediately following such event shall, to the extent practicable, be the same as immediately before such event. Any such adjustment in outstanding Options shall not change the aggregate Option Price payable with respect to shares that are subject to the unexercised portion of the Option outstanding but shall include a corresponding proportionate adjustment in the Option Price per share. 18.2 Reorganization in Which the Company Is the Surviving Entity and in ------------------------------------------------------------------ Which No Change of Control Occurs. Subject to Section 18.3 hereof, if the - --------------------------------- Company shall be the surviving entity in any reorganization, merger, or consolidation of the Company with one or more other entities, any Option theretofore granted pursuant to the Plan shall pertain to and apply to the securities to which a holder of the number of shares of Stock subject to such Option would have been entitled immediately following such reorganization, merger, or consolidation, with a corresponding proportionate adjustment of the Option Price per share so that the aggregate Option 17 Price thereafter shall be the same as the aggregate Option Price of the shares remaining subject to the Option immediately prior to such reorganization, merger, or consolidation. Subject to any contrary language in an Award Agreement evidencing a Grant of Restricted Stock, any restrictions applicable to such Restricted Stock shall apply as well to any replacement shares received by the Grantee as a result of the reorganization, merger or consolidation. 18.3 Dissolutions, Sale of Assets, Etc. Upon the dissolution or --------------------------------- liquidation of the Company or upon a merger, consolidation, or reorganization of the Company with one or more other entities in which the Company is not the surviving entity, or upon a sale of substantially all of the assets of the Company to another entity, or upon any transaction (including, without limitation, a merger or reorganization in which the Company is the surviving entity) that results in any person or entity (or person or entities acting as a group or otherwise in concert) owning eighty percent or more of the combined voting power of all classes of securities of the Company, (i) all outstanding shares of Restricted Stock and Restricted Stock Units shall be deemed to have vested, and all restrictions and conditions applicable to such shares of Restricted Stock and Restricted Stock Units shall be deemed to have lapsed, immediately prior to the occurrence of such event, and (ii) all Options outstanding hereunder shall become immediately exercisable for a period of fifteen days immediately prior to the scheduled consummation of the event, except to the extent provision is made in writing in connection with such transaction for the continuation of the Plan or the assumption of such Options, Restricted Stock and Restricted Stock Units theretofore granted, or for the substitution for such Options, Restricted Stock and Restricted Stock Units of new options, restricted stock and restricted stock units covering the stock of a successor Company, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kinds of shares or units and exercise prices, in which event the Plan and Options, Restricted Stock and Restricted Stock Units theretofore granted shall continue in the manner and under the terms so provided. Any exercise of an Option during such fifteen-day period shall be conditioned upon the consummation of the event and shall be effective only immediately before the consummation of the event. Upon consummation of any such event, the Plan and all outstanding but unexercised Options shall terminate, except to the extent the Plan is continued or of the assumption of or substitution for such Options theretofore granted. The Committee shall send written notice of an event that will result in such a termination to all individuals who hold Options not later than the time at which the Company gives notice thereof to its shareholders. 18.4 Adjustments. Adjustments under this Section 18 related to shares of ----------- Stock or securities of the Company shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. No fractional shares or other securities shall be issued pursuant to any such adjustment, and any fractions resulting from any such adjustment shall be eliminated in each case by rounding downward to the nearest whole share. 18 18.5 No Limitations on Company. The making of Grants pursuant to the Plan ------------------------- shall not affect or limit in any way the right or power of the Company to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure or to merge, consolidate, dissolve, or liquidate, or to sell or transfer all or any part of its business or assets. 19. DISCLAIMER OF RIGHTS No provision in the Plan or in any Grant or Award Agreement shall be construed to confer upon any individual the right to remain in the employ or service of the Company or any affiliate, or to interfere in any way with any contractual or other right or authority of the Company or any Service Provider either to increase or decrease the compensation or other payments to any individual at any time, or to terminate any employment or other relationship between any individual and the Company or a Service Provider. No provision in the Plan or in any Grant awarded or Award. Agreement entered into pursuant to the Plan shall be construed to confer upon any individual the right to remain in the service of the Company as a director (including as an Outside Director), or shall interfere with or restrict in any way the rights of the Company's shareholders to remove any director pursuant to the provisions of the Delaware General Corporation Law, as from time to time amended. In addition, notwithstanding anything contained in the Plan to the contrary, unless otherwise stated in the applicable Award Agreement, no Grant awarded under the Plan shall be affected by any change of duties or position of the Optionee (including a transfer to or from the Company or a Service Provider), so long as such Grantee continues to be a director, officer, consultant, employee, or independent contractor (as the case may be) of the Company or a Service Provider. The obligation of the Company to pay any benefits pursuant to this Plan shall be interpreted as a contractual obligation to pay only those amounts described herein, in the manner and under the conditions prescribed herein. The Plan shall in no way be interpreted to require the Company to transfer any amounts to a third party trustee or otherwise hold any amounts in trust or escrow for payment to any participant or beneficiary under the terms of the Plan. No Grantee shall have any of the rights of a shareholder with respect to the shares of Stock subject to an Option except to the extent the certificates for such shares of Stock shall have been issued upon the exercise of the Option. 20. NONEXCLUSIVITY OF THE PLAN Neither the adoption of the Plan nor the submission of the Plan to the shareholders of the Company for approval shall be construed as creating any limitations upon the right and authority of the Board to adopt such other incentive compensation arrangements (which arrangements may be applicable either generally to a class or classes of individuals or specifically to a particular individual or particular individuals) as the Board in its discretion determines desirable, including, without limitation, the granting of stock options otherwise than under the Plan. 19 21. WITHHOLDING TAXES The Company, a Subsidiary or a Service Provider, as the case may be, shall have the right to deduct from payments of any kind otherwise due to a Grantee any taxes of any kind required by applicable law to be withheld with respect to the vesting of or other lapse of restrictions applicable to Restricted Stock or Restricted Stock Units or upon the issuance of any shares of Stock upon the exercise of an Option. At the time of such vesting, lapse, or exercise, the Grantee shall pay to the Company, the Subsidiary or the Service Provider, as the case may be, any amount that the Company, the Subsidiary or the Service Provider may reasonably determine to be necessary to satisfy such withholding obligation. Subject to the prior approval of the Company, the Subsidiary or the Service Provider, which may be withheld by the Company, the Subsidiary or the Service Provider, as the case may be, in its sole discretion, the Grantee may elect to satisfy such obligations, in whole or in part, (i) by causing the Company, the Subsidiary or the Service Provider to withhold shares of Stock otherwise issuable pursuant to the Grantee or (ii) by delivering to the Company, the Subsidiary or the Service Provider shares of Stock already owned by the Grantee. The shares of Stock so delivered or withheld shall have an aggregate Fair Market Value equal to such withholding obligations. The Fair Market Value of the shares of Stock used to satisfy such withholding obligation shall be determined by the Company, the Subsidiary or the Service Provider as of the date that the amount of tax to be withheld is to be determined. A Grantee who has made an election pursuant to this Section 21 may satisfy his or her withholding obligation only with shares of Stock that are not subject to any repurchase, forfeiture, unfulfilled vesting, or other similar requirements. 22. CAPTIONS The use of captions in this Plan or any Award Agreement is for the convenience of reference only and shall not affect the meaning of any provision of the Plan or such Award Agreement. 23. OTHER PROVISIONS Each Grant awarded under the Plan may contain such other terms and conditions not inconsistent with the Plan as may be determined by the Committee, in its sole discretion. 24. NUMBER AND GENDER With respect to words used in this Plan, the singular form shall include the plural form, the masculine gender shall include the feminine gender, etc., as the context requires. 20 25. SEVERABILITY If any provision of the Plan or any Award Agreement shall be determined to be illegal or unenforceable by any court of law in any jurisdiction, the remaining provisions hereof and thereof shall be severable and enforceable in accordance with their terms, and all provisions shall remain enforceable in any other jurisdiction. 26. GOVERNING LAW The validity and construction of this Plan and the instruments evidencing the Grants awarded hereunder shall be governed by the laws of the State of Delaware. * * * The Plan was duly adopted and approved by the Board of Directors of the Company as of the 27th day of November, 1997. /s/ Jeffrey Peterson ---------------------------------------- Secretary of the Company The Plan was duly approved by the shareholders of the Company on the 27th day of November, 1997. /s/ Jeffrey Peterson ---------------------------------------- Secretary of the Company 21 EX-10.2 10 GUINESS BREWING WORLDWIDE Exhibit 10.2 GUINNESS BREWING WORLDWIDE LTD. 31st July, 1997 Carey Agri International Poland Sp. z o. o. ul (Pounds)ubelska 13 03-802 Warszawa POLAND Attention: Mr. Bill Carey By post and by facsimile Fax no. 0048-22-6180238 Dear Sirs, POLISH DISTRIBUTION ARRANGEMENTS -------------------------------- Guinness Brewing Worldwide Ltd ("GBW") hereby offers to Carey Agri International Poland Sp. z o.o. ("Carey Agri") exclusive distribution in Poland on the following basis: 1. Products The Guinness products to be imported, distributed and sold by Carey Agri ("the Products") will be as follows: (i) draught and bottled GUINNESS ES71 Stout; (ii) GUINNESS Foreign Extra Stout; (iii) Canned Draught GUINNESS; (iv) draught and bottled KILKENNY Irish Beer; (v) draught CASHEL'S Cider; and (vii) such other beverages as may be agreed between the parties in writing from time to time. 2. Term and Termination 2.1 The initial term of this arrangement will be: (i) in relation to draught product - nine (9) months from 1st July, 1997 until 31st March, 1998; and (ii) in relation to all packaged products - six (6) months from 1st July, 1997 until 31st December, 1997, provided that the arrangement will continue thereafter unless and until terminated by either party upon 60 days written notice (such notice to expire on or at any time after 31st March, 1998 in the case of draught Products, or on or at any time after 31st December, 1997 in the case of packaged Products.). 2.2 Either party will be entitled to terminate this arrangement with immediate effect by written notice to the other if that other party commits any breach of the terms of this arrangement which is not remedied within 30 days after the receipt of written notice giving particulars of the breach and requiring it to be remedied. 3. Terms of Sale 3.1 The Products will be supplied by GBW to Carey Agri on the Guinness Terms & Conditions of Sale for the time being in force ("the Guinness Terms"). A copy of the current Guinness Terms is attached to this letter as Annexure "A". Any changes to the Guinness Terms will be communicated to Carey Agri from time to time. 3.2 The Guinness Terms will apply to the exclusion of all other terms and conditions of sale whether implied by law or otherwise. 4. Carey Agri's Obligations At all times during the term of this arrangement Carey Agri will: (i) use its best endeavours to develop the market for and promote the sales of the Products in Poland; (ii) not manufacture or distribute any stout, ale or cider which in the reasonable opinion of Guinness competes with the Products in Poland; (iii) refrain from any marketing or distribution activities outside Poland in relation to the Products; (iv) maintain sufficient stocks of the Products to meet demand in Poland; (v) only import and distribute the Products or allow them to be distributed in good and unadulterated condition; and (vi) provide GBW with a monthly written report in a form acceptable to GBW within 10 working days after each month end. 2 5. GBW's Obligations At all times during the term of this arrangement GBW will: (i) refrain from selling or supplying the Products to any customer or person in Poland other than Carey Agri, unless Carey Agri cannot satisfy demand for the Products from customers in Poland (provided that GBW will retain the right to supply the Products direct to any GBW affiliate in Poland which owns and operates retail premises); and (ii) be solely responsible for the formulae and specifications according to which the Products are brewed. 6. Proper Law This arrangement will be governed by the laws of England and the parties agree to submit to the non-exclusive jurisdiction of the English Courts. *** If you wish to accept this offer, would you kindly sign and return the attached acknowledgment copy of this letter. Yours faithfully, GUINNESS BREWING WORLDWIDE LIMITED [illegible signature] - --------------------------------- (Authorised signatory) 3 ON CONFIRMATION COPY ONLY: Acknowledged and agreed for and on behalf of CAREY AGRI INTERNATIONAL POLAND Sp. z o. o. by: [illegible signature] ----------------------------- (Authorised signatory) Name: ------------------- Date: ------------------- 4 EX-10.3 11 CONTRACT FOR SALE OF.... Exhibit 10.3 Contract for Sale of beer or other Products No.: PL 002160096/96/0002 concluded between: 1) CAREY AGRI - International Poland, ul. Lubelska 13, 03-802 Warszawa, Poland (hereinafter referred to as the "Buyer") and 2) PLZENSKY PRAZDROJ, a.s. (PILSNER URQUELL a.s.), U Prazdroje 7, 304 97 Plzeu Czech Republic (hyereinafter referred to as the "Seller") Preamble - -------- Whereas, the Buyer is engaged in the import, distribution, sale and marketing of beverages in the Territory as hereinafter defined, Whereas, the Seller wishes to increase volumes and quality of sales of Products in the Territory as hereinafter defined, Whereas, the Buyer is able and wishes to extend the sales, look for and find new gaps in the Territory's market for Products with his import and distribution services and contracts, Whereas, both parties are prepared and willing to use their best commercial endeavours to fulfill the aforementioned targets, the two parties have agreed as follows: Purpose of the Contract - ----------------------- This contract is concluded with the aim to settle the conditions under which the individual contracts of sale and purchase shall be concluded between the parties within the duration hereof and under which the further commercial cooperation between the parties or the parties' activities concerning the Products shall occur. 1. Definitions and Interpretations - ----------------------------------- "The Products" means Pilsner Urquell beer. "The Territory" means all existing trade sectors of POLAND. For the avoidance of doubt the Territory does not include any overseas territories and/or duty free market which shall be subject to an individual agreement of the parties; "The Trade Marks" means those marks, trade marks, trade names, appellations of origin, designs or other means of identification used in connection with the production, advertising promotion, sale and distribution of the Products; "Contractual Year" means the period between Commencement Date and 31.12.1997; "Writing" includes cable, telex, facsimile transmission or comparable means of communication;
2. The Products and their prices - --------------------------------- Pilsner Urquell 12% pale Carton 20 Euro- bottles 0,50L USD 6,8_ Pilsner Urquell 12% pale Carton 20 ALE- bottles 0,50L USD 7,00 Pilsner Urquell 12% pale Carton 24 bottles 0,33L USD 6,5_ Pilsner Urquell 12% pale Carton 24 bottles 0,33L, 6 Pack USD 7,88 Pilsner Urquell 12% pale Carton 24 bottles 0,33L, 4 Pack USD 7,88 Pilsner Urquell 12% pale Carton 12 bottles 0,66L USD 5,67 Pilsner Urquell 12% pale Carton 24 cans 0,33L USD 6,41 Pilsner Urquell 12% pale Carton 24 cans 0,50L USD 8,90 Pilsner Urquell 12% pale KEG casks 100L USD 36,00 Pallet (Size Euro) USD 10,00
The prices are valid since 1st April 1997. The prices are constructed upon EX WORKS Plzen (Incoterms 1990) basis. The prices can be altered by the Seller in accordance with economic changes, price changes in the beer market or changes in the sphere of raw materials, energy etc. Such alteration comes into force 15 days after the date of Buyer's coming into attention of such notice of price alteration. The price of the transport with 22 tons truck: Plzen - Pruzkow 1.000, - USD -"- izo truck: Plzen - Pruzkow 1.300, - USD 3. Quantity - ------------ The Buyer undertakes to buy the following minimum quantity of the contractual goods in the first contractual year: 10.000 hl. -2- The minimum quantity for the following contractual years shall be subject to negotiations at least 2 months prior to the last day of any calendar year. In case no agreement is reached the minimum quantity shall be increased for each subsequent Contractual Year by 5% of the minimum quantity valid in the previous Contractual Year. 4. Quality - ----------- The guarantee period: - bottled and canned 12% beer Products ------ 6 months - bottled and canned 10% beer Products ------ 3 months - draft beer 12%----------------------------- 3 months from the date of production under condition and only in that case, that the Products will be stored by the Buyer and its customers in a regular way. The Products must be stored at a dark place protected against sunlight. The Products must not be exposed to bigger changes of temperature. Storage temperature is within the interval between +4 to +20 Celsius grade. 5. Returnable package - ---------------------- 1. The Buyer grants the Seller returning of empty package (i.e. KEG casks) as soon as possible in the same state, quality and quantity not later than 4 months from the time of delivery. 2. The Buyer and the Seller will keep the balance of the package and will balance the quantity of the package at the Buyer's side twice a year, i.e. 28th February and 15th September. When finding the balance of the package not balanced from the Buyer's side, the Seller is entitled to require returning the package within 30 days. In case the Buyer does not meet this time limit, the Buyer is obliged to pay the value of the package within next 15 days. 6. Terms of payment - -------------------- The payment for the deliveries shall be performed by the Buyer according to the invoice issued by the Seller 60 days after the date of issue to the bank of the Seller: Ceskoslovenska obehodni banka, pobocka (branch) Plzen, account no. 042 41 0301 0300. The moment of the payment means the date of bank transfer. -3- 7. Other Buyer's obligations - ----------------------------- Buyer shall during the continuance of this Contract: a) notify the Seller, forthwith upon coming to its attention in relation to the Products: . of any fact, matter or event that involves potential liability of the Seller to any third Territory . of any complaint arising in the Territory whether or not such complaint could give rise to a liability of the Seller . of any infringement, threatened infringement or other improper or wrongful use in the Territory of any Seller's trade marks, trade names, copyright or other intellectual property and/or any of their parts and shall use its best endeavour to protect and guard the Seller's rights; b) provide the Seller with a report of the state of the market for the Products in the Territory every six months. 8. Purchase orders - ------------------- Purchase orders shall be sent in writing and served to the Seller not later than on Tuesday every week so that the Products could be dispatched in the following week. Any order for the delivery of the Products shall be performed in accordance with this Contract and is a separate contract of sale and purchase after the order is confirmed or the Products are dispatched by the Seller. 9. Trade marks - --------------- . Buyer shall distribute the Products in the Territory only under the Trade Marks, in packaging and under the name and description previously approved by Pilsner Urquell a.s. in written and under no other trade marks, names and descriptions. Buyer shall not alter or allow the Trade Marks to be altered and acknowledges Pilsner Urquell a.s. the proprietor of the Trade Marks in the Territory. . Buyer shall perform at its own cost after appropriate consultation with the Seller an efficient marketing and advertising support for the Products with the aim to increase demand for the Products in the Territory. Buyer shall promote and/or advertise the Products exclusively in the form and manner previously agreed by the Seller in -4- writing. (This includes also visit cards, inscriptions on the cards etc. which contain the Seller's Trade Marks.) 10. Time of delivery - --------------------- The delivery time (the date of the dispatch from the Seller's brewery) is in the period within 7 days after the date of receiving the payment of the contract price for the Products. The Products will be delivered upon EX WORKS Plzen (Incoterms 1990). The Seller shall assert the respective delivery basis on the proforma-invoice. 11. Territory - -------------- The deliveries of the Products are allowed and destined for the consumption only in the Territory. Re-export in prohibited, unless the legislation states otherwise. The Buyer shall secure that his customers shall not re-sell the Products outside the Territory. In case re-export is performed the Buyer shall pay to the Seller the penalty in the amount of USD 10.000, - for each case of any re-export delivery. 12. Confidentiality - -------------------- At no time the parties shall communicate to any third party any confidential trade or company matters which without prejudice to the foreign generality shall include inter-alia, know-how, processes, ingredients, equipment and prices, and other information coming to their attention in consequence of their having entered into this Contract. This obligation shall continue after the termination of this Contract without limit in point of time. 13. Waiver - ----------- Neither party may assign its rights or obligations under this Contract except on the basis of the other's prior written consent. 15. Prior agreements - --------------------- This Contract represents the entire agreement between the parties and supersedes any prior agreements or understandings relating to the same subject, whether written or oral. 16. Severance - -------------- Should any provision of this Contract be discovered or declared by both parties or by any competent authority to be legally void or unenforceable, -5- then that provision shall be severed from all other provisions of this Contract, which other provisions shall continue in force unaffected. Such severed provision shall be replaced by the legal provision closest by its contents to the purpose that the parties wanted to reach, or the parties shall conduct negotiations in good faith with a view to reaching a new legal, valid and enforceable provision containing the closest understanding to that severed provision. 17. Duration - ------------- This Contract is valid from the date of subscription and its validity will expire on 31.12.1997. Before the date of expiry of this Contract either party may terminate the Contract forthwith by written notice in the event that: . the other party commits substantial (material) breach of any of its obligations hereunder and/or fails to remedy such breach within 30 days of written notice specifying the breach and requiring it to be remedied if the breach or fault is capable of remedy (for the avoidance of doubt breach of any of the obligations herein are considered as substantial/material breach), or . the other suffers any receivership, bankruptcy or liquidation of itself or any of its assets or subsidiaries or enters into composition or arrangement with its creditors or ceases to carry on its business, or . the other party is at the rate of more than 50% acquired by or merges with another firm or company or group and the party at its reasonable discretion considers the acquisition of such equity interests. Any notice given hereunder must be given within 6 months of the respective party's coming into attention of such fact. 18. Amendments - --------------- All modifications of and amendments to the Contract must be performed in the written form and accepted and undersigned by both parties, otherwise they are void. 19. Choice of Law and Arbitration - ---------------------------------- This Contract and any contract for sale and purchase made hereunder shall be governed by and construed in accordance with the laws of Czech Republic. Any dispute arising out of or in connection with this Contract, which cannot be settled by conciliation, shall be referred to and finally resolved by the Court of Arbitration attached to The Economic Chamber -6- of Czech Republic and The Agricultural Chamber of Czech Republic in Prague. 13.12.96 - ------------------------------ ------------------------------------ Place and Date Place and Date Carey Agri International-Poland Pilsner Urquell, a.s. Sp. Z.O.O. Marketing and Export Department 03-802 Warszawa, ul. Lubelska 13 tel 6185025, 6180577, 6186017 fax 6180238 /s/ William Carey Dyrektor Zarzadu CAREY POLAND Sp. Z.O.O. [illegible signature] - ------------------------------ ------------------------------------ In the name and on behalf In the name and on behalf of of the Buyer the Seller -7- EX-10.4 12 AGREEMENT Exhibit 10.4 AGREEMENT This Agreement, hereinafter referred to as the "Agreement", is entered into on January 1, 1995, in Warsaw by and between: United Distillers Finlandia Group Sp. z o.o., with its seat in Warsaw, represented by Maxwell Johnston, General Director, Central Europe, hereinafter referred to as the "Firm"; and, Carey Agri-International, with its seat in Warsaw, represented by Bill Carey, hereinafter referred to as the "Wholesaler." WHEREAS, the Firm sells the Products also in the Territory, as set forth in Section 1 of this Agreement; and, WHEREAS, the Firm seeks to increase its volume of sale in Poland in a controlled and secured way; and, WHEREAS, the Wholesaler has a well-developed commercial network and also considerable experience in the liquor trade, SO, the parties to this Agreement have decided the following: Agreed Terminology (S) 1 1. Throughout the Agreement, the following terms shall have the following meaning: 1.1. "Products" shall mean the products placed on the Price List which are available (F.C.A.) in the Firm's Warehouse in Warsaw for sale by the Firm to the Wholesaler at prices inclusive of customs and importation fees; 1.2. "Territory" shall mean the territory of the Republic of Poland serviced by the Wholesaler's commercial network; and, 1.3 "Parties" shall mean either the Firm, the Wholesaler or both, as the context requires. Object of the Agreement (S) 2 1. With effect from January 1, 1995 the Firm appoints the Wholesaler as an "Authorized Wholesaler of UNITED DISTILLERS' Products" hereinafter referred to as "An Authorized Wholesaler" for the Products in the Territory. The Wholesaler can use this term or its abbreviations in its commercial and promotional activities solely while it possesses this status and for Products sold within the Territory. 2. The Wholesaler will be An Authorized Wholesaler for a period of unlimited period. 3. The Firm can also grant the status of "An Authorized Wholesaler of United Distillers' Products" to other economic entities which sell the Products within the Territory. An Authorized Wholesaler (S) 3 During the period of being An Authorized Wholesaler, the Wholesaler agrees to the following: 1. Not to purchase products which are the same as the Products but sold by third persons competing with the Firm; 2. To make all efforts and take all necessary organizational and legal actions for promotional purposes to increase the sale of the Products within the Territory; 3. To comply with the Firm's belief that it is essential to develop joint annual Marketing plans in co-operation with each Authorized Wholesaler in order to properly promote the Firm's Products. Accordingly: a. The Wholesaler shall agree a joint Sales Plan with the Firm within no more than six weeks after the Execution Date; and, b. If agreement on a joint Sales Plan cannot be reached, the Firm shall have the right, at its sole discretion, to terminate the Agreement. 4. To maintain sufficient stocks of the Products to satisfy the Wholesaler's clients' current and anticipated demand for the Products; 5. To drain and deliver to the Firm reports ("Wholesaler Depletion Report") including information on the sale of the Products: 2 a. These reports will be drafted according to a sample provided by the Firm; and, b. These reports will be delivered within the period of time prescribed by the Firm, but which will not exceed one month; 6. To deliver to the Firm for its review and approval at least two copies of all advertising materials about the Products prior to their distribution; 7 To deliver written estimates on the anticipated and planned sales volume of the respective Products within the Territory, during the period of four consecutive quarters, at least three months before the commencement of each calendar quarter (each such estimate containing an update of the estimates previously made); 8. Not to use sales methods for or promotion and advertising of the Products which might harm the Firm's good name or the trademarks of the respective Products. Firm's Intellectual Property Protection (S) 4 1. None of tile provisions of this Agreement can be understood to mean or construed as the basis for transferring to the Wholesaler any trademark rights, product names, advertising slogans or copyrights related to the Products and belonging to the Firm. 2. The Wholesaler shall also be liable in relation to the Firm for any third party's violation of the Firm's rights mentioned in Point 1 and other rights to the protection of its intellectual property during and in connection specifically with the promotion and sale of the Products by the Wholesaler. Liabilities and Remedies (S) 5 I. If the Wholesaler fails to observe or to perform the provisions of this Agreement, the Firm shall have the right to: 1. Deliver a written notice to the Wholesaler requiring it to stop its breaching activities and remedy its failure, including stopping the Wholesaler making public statements with specified contents and in a specified manner, and/or set a term for the Wholesaler for taking these actions; 3 2. If the Wholesaler fails to provide injunctive relief or to remedy its failure within the term specified by the Firm, the Firm shall have the right to terminate the Agreement immediately and to withdraw the status of an "Authorized Wholesaler" from the Wholesaler; 3. If a violation of this Agreement causes damage to the Firm or to a third Party and/or violation of the Firm's or a third person's personal rights, the Firm may also require the Wholesaler to remedy such violation, compensate sustained losses and make an appropriate statement; and, Miscellaneous (S) 6 1. This Agreement is entered into for unlimited period with 90 days notice. 2. Each Party has the right to terminate this Agreement with 90 days notice by written notice sent to the other Party via registered mail letter, confirmed by a subsequent letter sent by fax on the same day as the date of the registered mail letter. 3. If this Agreement is terminated or any Party withdraws from it, the Wholesaler shall immediately cease using the phrase "Carey Agri-Intentional is an Authorized Wholesaler of United Distiller's Products" and similar phrases. The Wholesaler shall also, at its own cost, withdraw from public circulation all materials, announcements, advertising or information programs, including information and slogans or graphic signs whose contents could suggest that the Wholesaler is "An Authorized Wholesaler." 4. The Firm reserves the right to change the prices for Products during the period of this Agreement with 14 days unless the change is caused as a result of circumstances outside of the Firm's control. 5. Both Parties declare that they have all necessary licenses for trading of spirit beverages. The Wholesaler agrees to provide the Firm with a valid copy of their wholesalers' spirit license. Trading Terms (S) 7 1. The Wholesaler agrees to make payments to the Firm within 30 days from the invoice date, i.e. from the collection date of the Products from the Firm's warehouse. The payments will be done on the Firm's bank account. 4 2. Late payments may result charging the Wholesaler with penalty interest rate by the Firm according to the official interest rates. 3. The Wholesaler is authorized to 10% discount on net selling prices placed in Price List for imported products. 4. The Wholesaler agrees to provide the Firm with the following documents every six months: a. confirmation from the Tax Office regarding tax payment status b. bank opinion including credit information, if any. Arbitration and Choice of Law (S) 8 1. Any disputes arising out of the execution of this Agreement which cannot be resolved amicably by the Parties shall be resolved through arbitration. The place of the arbitration shall be in Warsaw, Poland, at the Arbitration Court of the National Chamber of Commerce. The procedures of the Arbitration Court shall apply and the language of the proceedings shall be Polish. The decision of the Arbitration Court shall be final and binding for the Parties. 2. In matters not regulated by this Agreement, the provisions of the Polish Civil Code and the provisions of the Polish Commercial Law shall apply. 3. This Agreement has been made in Polish, in two identical copies, one for each Party, and has been duly read and duly executed by the Parties' authorized representatives. For: United Distillers Group Sp. z o.o. For: Carey Agri-International: By: /s/ William Carey Dyrektor Zarzadu By: /s/ Maxwell Johnston CAREY POLAND Sp. Z.O.O. ------------------------------ ------------------------------ Name: Maxwell Johnston Name: Bill Carey Title: General Director, Central Europe Title: CAREY AGRI INTERNATIONAL-POLAND Sp. z.o.o. Warszawa, Al. Solidarnosci 117 tel. 620 52 25, 24 62 09 620 57 45, fax 620 58 53 5 EX-10.5 13 AGREEMENT Certified translation from the Polish language ================================================================================ Exhibit 10.5 The document consists of four pages. AGREEMENT concluded on September 16th, 1996, by and between Przedsiebiorstwo Przemyslu Spirytusowego "POLMOS" in Bialystok, ul. Elewatorska 20, hereinafter called "the Seller", represented by: 1. Deputy Manager of the Enterprise - Jan Malachowski 2. Deputy Commercial Manager - Henryk Wnorowski and "CAREY AGRI INTERNATIONAL POLAND" Ltd. 03-802 Warsaw ul. Lubelska 13 hereinafter called "the Purchaser", represented by: 1. Willian Vernon Carey. 2. (no name written) 3. (no name written) (S) 1 The subject of the Agreement includes sales of spirit products by the Seller to the Purchaser, as well as a resale of returnable packagings by the Purchaser to the Seller. Certified translation from the Polish language ================================================================================ (S) 2 The presentation of the following documents by the Purchaser is a condition for initiating the co-operation: . a set of documents required by the Seller, specified in details in the Enclosure to the Agreement; . a proper security for liabilities for the benefit of the Seller for the obtained spirit goods. (S) 3 Detailed orders for spirit goods shall be submitted by the Purchaser by telephone or in writing to the Marketing and Sales Department of the Seller. (S) 4 1. The Seller shall undertake the obligation to supply to the Purchaser spirit goods at his own cost and in quantities and assortment agreed upon with the Purchaser. 2. The Purchaser shall be obliged to ensure a return load for the truck - returnable packagings (bottles with transporters). 3. The value of returned packagings shall be included into the oldest overdue invoices. (S) 5 2 Certified translation from the Polish language ================================================================================ 1. Returnable packagings shall be collected by the truck supplying spirit goods on its way back. The cost of the transportation of the return trip with packagings shall be covered by the Seller. 2. The following bottles and plastic boxes only after spirit goods shall be subject to returns: . "sztarser" bottles 0.5 1, 0.25 1, 0.75 1; . "Polonez" bottles 0.5 1; . "Katowki" bottles 0.5 1; . plastic boxes for monopoly bottles 0.5 and 0.25 1; . plastic boxes for monopoly bottles a' 0.751, "for water" with the inscription: "POLISH SPAS". 3. The bottles should be supplied in plastic boxes adjusted to their sizes and segregated according to their types. There cannot be put bottles of various sizes in one box. Supplies not meeting these requirements shall not be accepted. 4. Resold packagings should meet the following quality requirements: . the bottles should be clean, whole, without dents, foreign scents, remnants of taps, rings, . they cannot be bottles filled previously with oil and chemical products; . plastic boxes should be clean, without dents, and cracks. 5. A quality receipt of the bottles and boxes shall take place in the warehouse of the Seller. Bottles and boxes not meeting requirements 3 Certified translation from the Polish language ================================================================================ according to items 2, 3, 4 shall be deposited in the Seller's warehouse, which the Purchaser shall be informed about. The deposit shall be collected within 1 month. Otherwise it shall be liquidated, without any payment for the bottles, and glass breakage. 6. Prices of returnable packagings shall be determined by the Seller. The Seller shall inform the Purchaser about every change in the prices in separate letters. (S) 6 Spirit goods shall be invoiced according to the producer's prices. (S) 7 The date of realising the Agreement shall be considered to be the date of transferring spirit goods to the carrier or to an authorised representative of the Purchaser in the case of a collection by the Purchaser's own transportation means. (S) 8 1. The transfer of goods to the Purchaser shall take place against a VAT invoice. 2. In the case of noticing any discrepancies between the supplied goods and the contents of the invoice during the deloading, the Purchaser shall make a protocol at the presence of the carrier and shall send it by registered mail to the Seller. 4 Certified translation from the Polish language ================================================================================ 3. In the case of a glass breakage noticed during the deloading, the carrier shall make a protocol on damages at the presence of the Purchaser. The settlement of the transportation loss shall take place between the Purchaser and the carrier. Thus the Purchaser shall be obliged to complete necessary documents, i.e. the original copy of the damage protocol, the waybill, and bill/note issued for the carrier and specifying the calculated damage, as well as to send them immediately to the address of the carrier mentioned in the damage protocol. (S) 9 The Seller shall be obliged to accept returns of faulty goods noticed during their transfer to the Purchaser. The returns shall refer only to originally closed products with damaged excise bands, or without them, as well as products with undamaged excise bands, but possessing the following defects: 1. products with damaged label bands, or without them; 2. products with impurities or with a changed colour of the liquid; 3. bottles with factory damaged taps; 4. bottles with leaks of the liquid along seams (joints of two opposite halves of the bottles); 5. empty bottles and not completely filled ones, originally closed with untouched excise bands. 5 Certified translation from the Polish language ================================================================================ Returns of faulty goods shall take place during the return transportation or during the subsequent supply on the basis of an outcome protocol of the Purchaser. The protocol should specify the number of the VAT invoice on the basis of which the products were supplied, the name, content, and quality of faulty products, as well as their fault. (S) 10 1. The payment of the due sum for spirit goods should take place within the deadline indicated in the VAT invoice into the account of PPS "POLMOS" in Bialystok in: . Bank Inicjatyw Gospodarczych S.A., Division in Bialystok, ul. Szosa Polnocno-Obwodowa 5; No. of the account: 420404-01889001-2511-1; or in: . Polski Bank Inwestycyjny S.A., Division in Bialystok, ul. Warszawska 14, No. of the account: 708010-148018-2511 from the Purchaser's account in: . Bank Rozwoju Exportu S.A., Division in Warsaw, No. of the account 40002- 282953-2511-1. 2. Payments due to realised purchases of spirit goods shall be "automatically added" to the oldest overdue invoices, unless they are realised by means of remittance documents printed by the Seller. 6 Certified translation from the Polish language ================================================================================ 3. The fact of not paying or a late paying of the due sums by the Purchaser shall empower the Seller to suspend further supplies of spirit goods without bearing the responsibility for not realising the Agreement. 4. An unpuctual payment of invoices by the Purchaser shall 5. result in his burden with statutory interests calculated by the Seller. (S) 11 1. The Purchaser shall be obliged to inform the Seller about decisions and facts that have an influence upon his financial situation and to make available an access to documents, reports, and information rendering the economic and financial situation to a Seller's employee. 2. The Purchaser shall undertake the obligation to immediately inform the Seller about every change in the surname, address, name, and head office of the company, as well as about all changes in his legal status. (S) 12 In all cases not regulated by the present Agreement there shall be applied provisions of the Civil Code. (S) 13 1. The present Agreement has been concluded for an unlimited period of time with a one-month-long notice period for every party. 2. The present Agreement shall be immediately terminated in the case documents empowering the Purchaser to realise purchases of spirit goods 7 Certified translation from the Polish language ================================================================================ become invalid, as well as in the case when the Seller is informed about an insolvency of the Purchaser. (S) 14 Disputes resulting from the present Agreement shall be solved by the Economic Court in Bialystok. (S) 15 The present Agreement has been made in two equal copies, one copy for every party. The present Agreement shall be valid since September 16th, 1996. Seller: Partially illegible rectangular seal: "... of the Commercial Manager. Henryk Wnorowski" (-) illegible signature Rectangular seal: "Director. Jan Malachowski" (-) illegible signature Rectangular seal: "Polmos. Przedsiebiorstowo Przemyslu Spirytusowego in Bialystok. 15-950 Bialystok, ul. (illegible name of the street and number of the building". Purchaser: Rectangular seal: "William Carey. President of the Board of Directors Carey I. Poland Sp. z o.o." (-) illegible signature Rectangular seal: "Carey Agri International-Poland Sp. z o.o. 03-802 Warszawa, ul. Lubelska 13, tel. 618-50-25, 618-05-77, 618-60-17, fax 618-02-38. 8 Certified translation from the Polish language ================================================================================ REPERTORY NO. 125/97 I, Monika Ewa Rybak-Ruiz M.A., the undersigned Court-commissioned Sworn Translator and Interpreter in Warsaw, do hereby certify the conformity of this present translation with the original of the document written in Polish. Collected: net fee: PLN 125.20 VAT (22%): PLN 27.54 Gross sum: PLN 152.74 Warsaw, September 19th, 1997 Monika Rybak Ruiz TLUMACZ PRZYSIEGLY jezyka angielskiego ul. Filmowa 56a, 04-929 Warszawa tel./fax 12-49-37 tel. kom. 0-90-22-00-17 9 EX-10.6 14 DISTRIBUTION AGREEMENT Certified translation from the Polish language ================================================================================ Exhibit 10.6 The document consists of four pages. DISTRIBUTION AGREEMENT hereinafter called "The Agreement", concluded in Warsaw on July 3rd, 1997, by and between: 1. IDV Poland Sp. z o.o., based in Warsaw at 16, Woloska Street, represented by Marek Rozycki, General Manager, hereinafter called "the Company", and "CAREY AGRI INTERNATIONAL POLAND" Ltd. based in Warsaw, 13, Lubelska Steet, represented by William V. Carey, hereinafter called "the Distributor". IDV Poland, a company functioning in the Polish market since 1993, owner of world-class alcohol beverages, as well as a Distributor of alcohol beverages, shall undertake a co-operation aimed at strengthening the position of IDV products in the Polish market, with mutual benefits for both Parties. For the purpose of realise the said Agreement, the Parties decided the following: I. Agreed terms 1. PRODUCTS - they are products placed in the price-list of the Company, available from the Company's warehouse in Warsaw, and sold by the Company to the Distributor at prices containing customs fees and other Certified translation from the Polish language ================================================================================ importation fees. The price-list containing prices valid on the day of the supply of the goods shall be valid. 2. THE PARTIES - they are the Company and the Distributor, or one of these subjects. 3. THE TERRITORY - it is the territory of the Republic of Poland serviced by a commercial network of the Distributor. II. Subject of the Agreement 1. The Company grants the right to use the name of Authorised Distributor of Products of IDV Poland as of July 3rd, 1997. 2. The status of the Authorised Distributor shall be valid only during the validity of the present Agreement. 3. IDV Company may also grant the status of the Authorised Distributor to other subjects selling Products within the Territory. The Distributor shall not be entitled to any claims towards the Company in such a case. 4. There shall not be determined a close regionalisation of the territory for activities of the Distributor. III. Liabilities of the Distributor During the validity of the Agreement, the Distributor shall be obliged to: 1. purchase the Products only in the Company's warehouse; 2 Certified translation from the Polish language ================================================================================ 2. making all necessary steps aimed at increasing sales of Products within the Territory covered by the Distributor according to the distribution system of Products by the Company; 3. conductance of joint promotional and marketing activities, at a close co-operation with the Company and according to the marketing policy of the Company. All activities of this type have to be previously accepted by the Company; 4. maintaining the stock of Products within a level allowing us to satisfy the current and predicted level of sales; 5. supplying current reports on sales of the Products, warehouse stock, and predicted purchases at every request of the Company; 6. not undertaking any activities that could threaten the good image of the Company and its brands. IV. Protection of the Intellectual Properties of the Company 1. No provision of the present Agreement can be a basis to transfer to the Distributor any rights for trademarks, names of products, advertisement slogans, or copyright connected with the Products, which are covered by an exclusive right of the Company. 2. The Distributor shall be obliged to keep secret information and documents obtained in any way from the Company. A usage, disclosure, or transfer of information and/or documents constituting the Company secrets, shall constitute a basis of an immediate 3 Certified translation from the Polish language ================================================================================ termination of the co-operation and a presentation of respective claims aimed at a satisfaction for the occurred losses. 4 Certified translation from the Polish language ================================================================================ V. General provisions 1. The present Agreement shall be concluded for the period of time till December 31, 1997. The Agreement can be prolonged for subsequent periods at a consent of both Parties. 2. The parties shall be entitled to a withdrawal from the Agreement at any time against a written notification of the other Party by means of a registered letter, whose sending shall be confirmed by fax sent on the same day in which the registered letter is sent. There shall be agreed a one- month-long notice period. The Distributor shall lose all his rights of an Authorized Distributor of IDVP in the moment of terminating the Agreement. VI. Procedures 1. In the moment of signing the Agreement, the Distributor shall be obliged to present the following documents to the Company; - - permission to conduct economic activities; - - permission of the Ministry of Industry and Trade to conduct whole-sales of spirit articles; - - certificate of the Fiscal Office about not possessing any overdue fiscal liabilities; - - a decision on granting the NIP number and a statement on the VAT status; - - current opinion of the mother bank. 5 Certified translation from the Polish language ================================================================================ 2. The Distributor shall be obliged to effect due payments for the Company within 28 days after the respective invoice is issued, into the bank account of the Company. 3. The fact of not realising the payment or a delay in its realisation shall authorised the Company to burden the Distributor delay interests according to statutory interest rates valid in Poland. 4. The Company shall receive an in blanco bill of exchange from the Distributor with a bill of exchange declaration as a form of a security in the case the Distributor does not fulfil his payment liabilities. 5. The Company shall specify the minimal value of the order. 6. The ownership title for the Products shall be transferred into the Distributor in the moment of a written confirmation of a receipt of the goods by the Distributor. He shall be responsible for possible damages or faults in Products since that moment. VI. Applicable law and Arbitration 1. The present Agreement is an agreement valid for both Parties and it overrides all previous agreements reached between the Parties. 2. All disputes resulting from its application, which cannot be solved in an amicable way by the Parties, shall be solved by means of an arbitration. The Arbitration Court in Warsaw at the National Chamber of Commerce shall be competent in the field of the said arbitration. Judgements of the Arbitration Court shall be treated as final and binding for the Parties. 6 Certified translation from the Polish language ================================================================================ 3. In cases not regulated by the present Agreement there shall be applied provisions of the Civil Code and the Polish Economic Law. 4. The present Agreement has been made in two equal copies, one copy for every party and legally signed by authorised representatives of both Parties. IDV Poland Sp. z o.o. A rectangular seal: "IDV Poland Sp. z o.o. Marek Rozycki General Manager" (-) illegible signature A rectangular seal: "IDV Poland Sp. z o.o. ul, Woloska 16, 02-675 Warsaw, tel. 640-92-00, fax. 640-92-01" Distributor: A rectangular seal: "William Carey. President of the Board of Directors Carey Poland Sp. z o.o." (-) illegible signature A rectangular seal: "Carey Agri International-Poland Sp. z o.o. 03-802 Warszawa, ul. Lubelska 13, tel. 618-50-25, 618-05-77, 618-60-17, fax 618-02-38. Certified translation from the Polish language ================================================================================ REPERTORY NO. 126/97 I, Monika Ewa Rybak-Ruiz M.A., the undersigned Court-commissioned Sworn Translator and Interpreter in Warsaw, do hereby certify the conformity of this present translation with the original of the document written in Polish. Collected: net fee: PLN 93.90 VAT (22%): PLN 20.66 Gross sum: PLN 114.56 Warsaw, September 19th, 1997 Monika Rybak Ruiz TLUMACZ PRZYSIEGLY jezyka angielskiego ul. Filmowa 56a, 04-929 Warszawa tel./fax 12-49-37 tel. kom. 0-90-22-00-17 8 EX-10.8 15 EMPLOYMENT AGREEMENT Exhibit 10.8 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of this ___ day of _________, 1997, by and between Central European Distribution Corporation, Inc., a Delaware corporation (the "Company"), and William V. Carey (the "Executive"). WHEREAS, the Company desires to employ the Executive, and the Executive desires to be employed by the Company, on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereto agree as follows: 1. Employment. On the terms and conditions set forth in this ---------- Agreement, the Company agrees to employ the Executive and the Executive agrees to be employed by the Company for the term set forth in Section 2 hereof and in the position and with the duties set forth in Section 3 hereof. 2. Term. The employment of the Executive by the Company as provided ---- in Section 1 hereof shall commence on the date of the first closing of the initial public offering of common stock, par value $.01 per share (the "Common Stock"), of the Company and end three (3 ) years thereafter (the "Expiration Date"). 3. Position and Duties. The Executive shall serve as President and ------------------- chief executive officer of the Company as well as the president and chief executive officer of the Company's subsidiary, Carey-Agri International Sp. z o.o (the "Subsidiary") with such duties and responsibilities as the board of directors of the Company (the "Board") may from time to time determine and assign to the Executive. In this later position, Employee will have the titles of chairman of the management board and managing director of the Subsidiary. The Executive shall devote the Executive's reasonable best efforts and substantially full business time to the performance of the Executive's duties and the advancement of the business and affairs of the Company and the Subsidiary. Executive acknowledges that it is the intent of the Company that his primary responsibilities shall be in connection with the business of the Subsidiary. 4. Place of Performance. In connection with the Executive's -------------------- employment by the Company, the Executive shall be based at the principal executive office of the Subsidiary, which the Company retains the right to change in its discretion, or such other place as the Company and the Executive mutually agree, except for required travel on Company business. 5. Compensation. ------------ 5(a). Base Salary. The Executive shall be paid an annual ----------- base salary (the "Base Salary") at the rate of $140,000 per year, $76,000 payable by the Subsidiary (of which amount $38,000 shall be paid for his services as chairman of the management board and $38,000 as the managing director of the Subsidiary) and $64,000 by the Company. If the Executive is not elected chairman of the board of directors of the Company in accordance with the by-laws of the Company, his Base Salary paid by the Company shall be increased by $10,000. The Base Salary shall be reviewed no less frequently than annually. The Base Salary shall be increased no less than $25,000 one year after the effective date of this Agreement and by another $25,000 two years after the effective date of this Agreement and may be increased further at the discretion of the Board. If the Executive's Base Salary is increased, the increased amount shall be the Base Salary for the remainder of the employment term hereunder, except that the Company may reduce the Executive's Base Salary at any time as part of a general salary reduction applied to all employees of the Company with annual salaries in excess of $60,000 (the "Senior Executive Group") in which case the Executive's reduced Base Salary shall be the Base Salary for the remainder of the employment term hereunder. Any such reduction in the Executive's Base Salary shall be no more than the lesser of the median percentage salary reduction applied to the Senior Executive Group or 20%. The Base Salary shall be payable biweekly or in such other installments as shall be consistent with the Company's payroll procedures. 5(b). Stock Options. As part of the consideration for ------------- entering into this Agreement and performing services hereunder, the Company grants to the Executive stock options for 25,000 shares of the Common Stock to be exercisable at the selling price to the public in the Company's initial public offering. Such options are granted under the Company's 1997 Stock Incentive Plan, and shall vest and become exercisable two years from the effective date of this Agreement. This grant shall be documented in a stock option agreement to be provided to the Executive by the Company. 5(c). Other Benefits. The Executive shall be entitled to -------------- receive disability salary continuation and life insurance coverage in accordance with policies in effect for senior executives of the Company. The Executive also shall be entitled to participate in such plans and to receive such bonuses, incentive compensation and fringe benefits as may be granted or established by the Company from time to time, including the use of an automobile. Nothing contained in this Agreement shall prevent the Company from changing carriers or from affecting modifications in insurance coverage for the Executive. 5(d). Vacation; Holidays. The Executive shall be entitled to ------------------ all public holidays observed by the Subsidiary and vacation days in accordance with 2 the applicable vacation policies for senior executives of the Company, which shall be taken at a reasonable time or times. 5(e). Withholding Taxes and Other Deductions. To the extent -------------------------------------- required by law, the Company and the Subsidiary shall withhold from any payments due Executive under this Agreement any applicable federal, state or local taxes and such other deductions as are prescribed by law or Company or Subsidiary policy. 6. Expenses. The Company and the Subsidiary shall reimburse -------- the Executive for all reasonable expenses incurred by the Executive (in accordance with the policies and procedures in effect for senior executives of the Company and the Subsidiary) in connection with the Executive's services under this Agreement. The Executive shall account to the Company or the Subsidiary, as the case may be, for such expenses in accordance with policies and procedures established by the Company or the Subsidiary. 7. Confidential Information. ------------------------ 7(a). The Executive covenants and agrees that the Executive will not ever, without the prior written consent of the Board or a person authorized by the Board, publish or disclose to any unaffiliated third party or use for the Executive's personal benefit or advantage any confidential information with respect to any of the Company's or Subsidiary's products, services, subscribers, suppliers, marketing techniques, methods or future plans disclosed to the Executive as a result of the Executive's employment with the Company, to the extent such information has heretofore remained confidential (except for unauthorized disclosures) and except as otherwise ordered by a court of competent jurisdiction. 7(b). The Executive acknowledges that the restrictions contained in Section 7(a) hereof are reasonable and necessary, in view of the nature of the Company's business, in order to protect the legitimate interests of the Company, and that any violation thereof would result in irreparable injury to the Company. Therefore, the Executive agrees that in the event of a breach or threatened breach by the Executive of the provisions of Section 7(a) hereof, the Company shall be entitled to obtain from any court of competent jurisdiction, preliminary or permanent injunctive relief restraining the Executive from disclosing or using any such confidential information. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies available to it for such breach or threatened breach, including, without limitation, recovery of damages from the Executive. 7(c). The Executive shall deliver promptly to the Company on termination of employment, or at any other time the Company may so request, all confidential memoranda, notes, records, reports and other documents (and all copies 3 thereof) relating to the Company's and its affiliates' businesses which the Executive obtained while employed by, or otherwise serving or acting on behalf of, the Company or which the Executive may then possess or have under his or her control. 8. Non-Competition. --------------- 8(a). Non-Competition. The Executive covenants and agrees that --------------- the Executive will not, during the Executive's employment hereunder and for a period of one (1) year thereafter (to the extent permitted by law), at any time and in any state or other jurisdiction in which the Company or Subsidiary is engaged or has reasonably firm plans to engage in business, (i) compete with the Company or Subsidiary on behalf of the Executive or any third party; (ii) participate as a director, agent, representative, stockholder or partner or have any direct or indirect financial interest in any enterprise which engages in the alcohol product distribution business or any other business in which the Company or Subsidiary is engaged; or (iii) participate as an employee or officer in any enterprise in which the Executive's responsibility relates to the alcohol product distribution business or any other business in which the Company or Subsidiary is engaged. The ownership by the Executive of less than five percent (5%) of the outstanding stock of any corporation listed on a national securities exchange conducting any such business shall not be deemed a violation of this Section 8(a). 8(b). Injunctive Relief. In the event the restrictions against ----------------- engaging in a competitive activity contained in Section 8(a) hereof shall be determined by any court of competent jurisdiction to be unenforceable by reason of their extending for too great a period of time or over too great a geographical area or by reason of their being too extensive in any other respect, Section 8(a) hereof shall be interpreted to extend only over the maximum period of time for which it may be enforceable and over the maximum geographical area as to which it may be enforceable and to the maximum extent in all other respects as to which it may be enforceable, all as determined by such court in such action. 8(c). Non-Solicitation. The Executive covenants and agrees ---------------- that the Executive will not, during the Executive's employment hereunder and for a period of one (1) year thereafter induce or attempt to induce any employee of the Company or the Subsidiary to render services for any other person, firm, or corporation. 9. Termination of Employment. ------------------------- 9(a). Death. The Executive's employment hereunder shall ----- terminate upon the Executive's death. 9(b). By the Company. The Company may terminate the -------------- Executive's employment hereunder under the following circumstances: 4 (i) If the Executive shall have been unable to perform all of the Executive's duties hereunder by reason of illness, physical or mental disability or other similar incapacity, which inability shall continue for more than three (3) consecutive months, the Company may terminate the Executive's employment hereunder. (ii) The Company may terminate the Executive's employment hereunder for "Cause." For purposes of this Agreement, "Cause" shall mean (A) willful refusal by the Executive to follow a written order of the Chairman of the Board or the Board of Directors, (B) the Executive's willful engagement in conduct materially injurious to the Company, (C) dishonesty of a material nature that relates to the performance of the Executive's duties under this Agreement, (D) the Executive's conviction for any felony involving moral turpitude, and (E) the Executive's continued failure to perform his duties under this Agreement (except due to the Executive's incapacity as a result of physical or mental illness) to the satisfaction of the Board of Directors of the Company for a period of at least forty-five (45) consecutive days after written notice is delivered to the Executive specifically identifying the manner in which the Executive has failed to perform his duties. In addition, the Company may terminate the Executive's employment for "Cause" if the normal business operations of the Company are rendered commercially impractical as a consequence of an act of God, accident, fire, labor controversy, riot or civil commotion, act of public enemy, law, enactment, rule, order, or any act of government or governmental instrumentality, failure of facilities, or other cause of a similar or dissimilar nature that is not reasonably within the control of the Company or which the Company could not, by reasonable diligence, have avoided. 9(c). By the Executive. The Executive may terminate the ---------------- Executive's employment hereunder for "Good Reason." For purposes of this Agreement, "Good Reason" shall mean (i) the Company's failure to perform or observe any of the material terms or provisions of this Agreement, and the continued failure of the Company to cure such default within thirty (30) days after written demand for performance has been given to the Company by the Executive, which demand shall describe specifically the nature of such alleged failure to perform or observe such material terms or provisions; or (ii) a material reduction in the scope of the Executive's responsibilities and duties. 9(d). Notice of Termination. Any termination of the --------------------- Executive's employment by the Company or the Executive (other than pursuant to Section 9(a) hereof) shall be communicated by written "Notice of Termination" to the other party hereto in accordance with Section 11 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon, if any, and shall set forth in 5 reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. 9(e). Date of Termination. For purposes of this Agreement, the ------------------- "Date of Termination" shall mean (i) if the Executive's employment is terminated by the Executive's death, the date of the Executive's death; (ii) if the Executive's employment is terminated pursuant to Section 9(b)(i) hereof, thirty (30) days after Notice of Termination, provided that the Executive shall not have returned to the performance of the Executive's duties on a full-time basis during such 30-day period; (iii) if the Executive's employment is terminated pursuant to Section 9(b)(ii) or 9(c) hereof, the date specified in the Notice of Termination; and (iv) if the Executive's employment is terminated for any other reason, the date on which Notice of Termination is given. 10. Compensation Upon Termination. ----------------------------- 10(a). If the Executive's employment is terminated by the Executive's death, the Company shall pay to the Executive's estate, or as may be directed by the legal representatives of such estate, the Executive's full Base Salary through the Date of Termination and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination in connection with any fringe benefits or under any incentive compensation plan or program of the Company pursuant to Sections 5(b) and (c) hereof, at the time such payments are due and the Company shall have no further obligations to the Executive under this Agreement. 10(b). During any period that the Executive fails to perform the Executive's duties hereunder as a result of incapacity due to physical or mental illness ("disability period"), the Executive shall continue to receive (i) the Executive's full Base Salary through the Date of Termination and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination in connection with any fringe benefits or under any incentive compensation plan or program of the Company pursuant to Sections 5(b) and (c) hereof, at the time such payments are due; provided, that payments so made to -------- the Executive during the disability period shall be reduced by the sum of the amounts, if any, payable to the Executive at or prior to the time of any such payment under disability benefit plans of the Company and which amounts were not previously applied to reduce any such payment and the Company shall have no further obligations to the Executive under this Agreement. 10(c). If the Company terminates the Executive's employment for Cause as provided in Section 9(b)(ii) hereof, the Company shall pay the Executive the Executive's full Base Salary through the Date of Termination and all other unpaid amounts, if any, to which Executive is entitled as of the Date of Termination in connection with any fringe benefits or under any incentive compensation plan or program of the Company pursuant to Sections 5(b) and (c) 6 hereof, and the Company shall have no further obligations to the Executive under this Agreement. 10(d). If the Executive terminates the Executive's employment other than for Good Reason, the Company shall pay the Executive the Executive's full Base Salary through the Date of Termination and all other unpaid amounts, if any, to which Executive is entitled as of the Date of Termination in connection with any fringe benefits or under any incentive compensation plan or program of the Company pursuant to Sections 5(b) and 5(c) hereof, and the Company shall have no further obligations to the Executive under this agreement. 10(e). If the Company terminates the Executive's employment other than for Cause, disability or death, or the Executive terminates the Executive's employment for Good Reason as provided in Section 9(c) hereof, the Company shall pay the Executive (i) the Executive's full Base Salary through the Date of Termination and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination in connection with any fringe benefits or under any incentive compensation plan or program of the Company pursuant to Sections 5(b) and (c) hereof, at the time such payments are due; and (ii) subject to Section 10(g), the full Base Salary, bonuses and incentive compensation that would have been payable to the Executive under Sections 5(a) and 5(c) from the Date of Termination through the Expiration Date in a single lump sum payment within five (5) business days of his Date of Termination and any other amounts or benefits that would have been received under Section 5(c) hereof, at the time such amounts or benefits would otherwise have been due in accordance with the Company's normal payroll practices, and the Company shall have no further obligations to the Executive under this Agreement. For purposes of Section 10(e)(ii), the Executive will be considered to be entitled to an annual cash bonus equal to the average dollar bonus earned by the Executive during the Company's two fiscal years immediately prior to Executive's Date of Termination. 10(f). Parachute Limitations. Notwithstanding any other --------------------- provision of this Agreement or of any other agreement, contract or understanding heretofore or hereafter entered into by the Executive with the Company or any subsidiary or affiliate thereof, except an agreement, contract or understanding hereafter entered into that expressly modifies or excludes application of this Section 10(f) (the "Other Agreements"), and notwithstanding any formal or informal plan or other arrangement heretofore or hereafter adopted by the Company (or any subsidiary or affiliate thereof) for the direct or indirect compensation of the Executive (including groups or classes of participants or beneficiaries of which the Executive is a member), whether or not such compensation is deferred, is in cash, or is in the form of a benefit to or for the Executive (a "Benefit Plan"), if the Executive is a "disqualified individual" (as defined in Section 280G(c) of the Internal Revenue Code of 1986, as amended (the "Code")), any right to receive any payment or benefit under this Agreement shall not become exercisable (i) to the extent that such right 7 to payment or benefit, taking into account all other rights, payments or benefits to or for the Executive under this Agreement, all Other Agreements and all Benefit Plans, would cause any payment or benefit to the Executive under this Agreement to be considered a "parachute payment" within the meaning of Section 280G(b)(2) of the Code as then in effect (a "Parachute Payment") and --- (ii) if, as a result of receiving a Parachute Payment, the aggregate after-tax amount received by the Executive from the Company under this Agreement, all Other Agreements and all Benefit Plans would be less than the maximum after-tax amount that could be received by the Executive without causing any such payment or benefit to be considered a Parachute Payment. In the event that the receipt of any such right to payment or benefit under this Agreement, any Other Agreement or any Benefit Plan would cause the Executive to be considered to have received a Parachute Payment under this Agreement that would have the effect of decreasing the after-tax amount received by the Executive as described in clause (ii) of the preceding sentence, then the Executive shall have the right, in the Executive's sole discretion, to designate those rights, payments or benefits under this Agreement, any Other Agreements and any Benefit Plans that should be reduced or eliminated so as to avoid having the payment or benefit to the Executive under this Agreement be deemed to be a Parachute Payment. 10(g). Mitigation. The Executive shall not be required to ---------- mitigate amounts payable pursuant to Section 10 hereof by seeking other employment provided, however, that any sums earned by the Executive pursuant to ----------------- any subsequent employment shall be offset against any remaining obligation the Company may have to pay by virtue of termination under this Agreement and, further provided that, the Company's obligation to continue to provide the Executive with fringe benefits pursuant to Section 10(e), above, shall cease if the Executive becomes eligible to participate in fringe benefits substantially similar to those provided for in this Agreement as a result of the Executive's employment during the period that the Executive is entitled to such fringe benefits. 11. Notices. All notices, demands, requests or other communications ------- required or permitted to be given or made hereunder shall be in writing and shall be delivered, telecopied or mailed by first class registered or certified mail, postage prepaid, addressed as follows: (a) If to the Company: Central European Distribution Corporation 211 North Union Street, #110 Alexandria, Virginia 22314 Telecopier: 703-683-4707 Attention: William V. Carey President 8 (b) If to the Executive: William V. Carey 1602 Cottagewood Drive Brandon, Florida 33511 Telecopier: 813-689-5472 or to such other address as may be designated by either party in a notice to the other. Each notice, demand, request or other communication that shall be given or made in the manner described above shall be deemed sufficiently given or made for all purposes at such time as it is delivered to the addressee (with the return receipt, the delivery receipt, the answer back or the affidavit of messenger being deemed conclusive evidence of such delivery) or at such time as delivery is refused by the addressee upon presentation. 12. Severability. The invalidity or unenforceability of any one ------------ or more provisions of this Agreement shall not affect the validity or enforceability of the other provisions of this Agreement, which shall remain in full force and effect. 13. Survival. It is the express intention and agreement of the -------- parties hereto that the provisions of Sections 7 and 8 hereof shall survive the termination of employment of the Executive. In addition, all obligations of the Company to make payments hereunder shall survive any termination of this Agreement on the terms and conditions set forth herein. 14. Assignment. The rights and obligations of the parties to ---------- this Agreement shall not be assignable, except that the rights and obligations of the Company hereunder shall be assignable in connection with any subsequent merger, consolidation, sale of all substantially all of the assets of the Company or similar reorganization of a successor corporation. 15. Binding Effect. Subject to any provisions hereof -------------- restricting assignment, this Agreement shall be binding upon the parties hereto and shall inure to the benefit of the parties and their respective heirs, devisees, executors, administrators, legal representatives, successors and assigns. 16. Amendment; Waiver. This Agreement shall not be amended, ----------------- altered or modified except by an instrument in writing duly executed by the parties hereto. Neither the waiver by either of the parties hereto of a breach of or a default under any of the provisions of this Agreement, nor the failure of either of the parties, on one or more occasions, to enforce any of the provisions of this Agreement or to exercise any right or privilege hereunder, shall thereafter be construed as a waiver of any subsequent breach or default of a similar nature, or as a waiver of any such provisions, rights or privileges hereunder. 9 17. Headings. Section and subsection headings contained in this -------- Agreement are inserted for convenience of reference only, shall not be deemed to be a part of this Agreement for any purpose, and shall not in any way define or affect the meaning, construction or scope of any of the provisions hereof. 18. Governing Law. This Agreement, the rights and obligations ------------- of the parties hereto, and any claims or disputes relating thereto, shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia (but not including the choice of law rules thereof). 19. Action of Behalf of the Subsidiary. The Company is ---------------------------------- executing this Agreement also on behalf of its Subsidiary and agrees to cause the Subsidiary to fulfill its obligations hereunder, though the appointment and removal, if necessary, of members of the management board of the Subsidiary. 20. Entire Agreement. This Agreement constitutes the entire ---------------- agreement between the parties hereto with respect to the subject matter hereof, and it supersedes all prior oral or written agreements, commitments or understandings with respect to the matters provided for herein. 21. Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be an original and all of which shall be deemed to constitute one and the same instrument. 10 IN WITNESS WHEREOF, the undersigned have duly executed this Agreement, or have caused this Agreement to be duly executed on their behalf, as of the day and year first hereinabove written. CENTRAL EUROPEAN DISTRIBUTION CORPORATION By: -------------------------------- Name: Jeffery Peterson Title: Vice Chairman THE EXECUTIVE: ----------------------------------- William V. Carey 11 EX-10.9 16 EMPLOYMENT AGREEMENT Exhibit 10.9 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of this ___ day of _________, 1997, by and between Central European Distribution Corporation, Inc., a Delaware corporation (the "Company"), and Jeffrey Peterson (the "Executive"). WHEREAS, the Company desires to employ the Executive, and the Executive desires to be employed by the Company, on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereto agree as follows: 1. Employment. On the terms and conditions set forth in this ---------- Agreement, the Company agrees to employ the Executive and the Executive agrees to be employed by the Company for the term set forth in Section 2 hereof and in the position and with the duties set forth in Section 3 hereof. 2. Term. The employment of the Executive by the Company as provided ---- in Section 1 hereof shall commence on the date of the first closing of the initial public offering of common stock, par value $.01 per share (the "Common Stock"), of the Company and end two (2) years thereafter (the "Expiration Date"). 3. Position and Duties. The Executive shall serve as executive vice- ------------------- president of the Company as well as a member of the management board of the Company's subsidiary, Carey Agri International Poland Sp. z o.o (the "Subsidiary"), with such duties and responsibilities as the board of directors of the Company (the "Board") may from time to time determine and assign to the Executive. The Executive shall devote the Executive's reasonable best efforts and substantial business time to the performance of the Executive's duties and the advancement of the business and affairs of the Company and the Subsidiary. Executive acknowledges that it is the intent of the Company that his primary responsibilities shall be in connection with the business of the Subsidiary. 4. Place of Performance. In connection with the Executive's -------------------- employment by the Company, the Executive shall be based at the principal executive office of the Company, which the Company retains the right to change in its discretion, or such other place as the Company and the Executive mutually agree, except for required travel on Company business. 5. Compensation. ------------ 5(a). Salary. During the first year of this agreement, the ------ Executive shall be paid an annual salary at the rate of $93,000, $48,000 payable by the Subsidiary and $45,000 by the Company. During the second year of this agreement, the Executive shall be paid an annual salary of $75,000, $39,000 payable by the Subsidiary and $36,000 by the Company. The salary payable hereunder shall be payable biweekly or in such other installments as shall be consistent with the Company's payroll procedures. 5(b). Withholding Taxes and Other Deductions. To the extent -------------------------------------- required by law, the Company and the Subsidiary shall withhold from any payments due Executive under this Agreement any applicable federal, state or local taxes and such other deductions as are prescribed by law or Company or Subsidiary policy. 6. Expenses. The Company and the Subsidiary shall reimburse the -------- Executive for all reasonable expenses incurred by the Executive (in accordance with the policies and procedures in effect for senior executives of the Company and the Subsidiary) in connection with the Executive's services under this Agreement. The Executive shall account to the Company or the Subsidiary, as the case may be, for such expenses in accordance with policies and procedures established by the Company or the Subsidiary. 7. Confidential Information. ------------------------ 7(a). The Executive covenants and agrees that the Executive will not ever, without the prior written consent of the Board or a person authorized by the Board, publish or disclose to any unaffiliated third party or use for the Executive's personal benefit or advantage any confidential information with respect to any of the Company's or Subsidiary's products, services, subscribers, suppliers, marketing techniques, methods or future plans disclosed to the Executive as a result of the Executive's employment with the Company, to the extent such information has heretofore remained confidential (except for unauthorized disclosures) and except as otherwise ordered by a court of competent jurisdiction. 7(b). The Executive acknowledges that the restrictions contained in Section 7(a) hereof are reasonable and necessary, in view of the nature of the Company's business, in order to protect the legitimate interests of the Company, and that any violation thereof would result in irreparable injury to the 2 Company. Therefore, the Executive agrees that in the event of a breach or threatened breach by the Executive of the provisions of Section 7(a) hereof, the Company shall be entitled to obtain from any court of competent jurisdiction, preliminary or permanent injunctive relief restraining the Executive from disclosing or using any such confidential information. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies available to it for such breach or threatened breach, including, without limitation, recovery of damages from the Executive. 7(c). The Executive shall deliver promptly to the Company on termination of employment, or at any other time the Company may so request, all confidential memoranda, notes, records, reports and other documents (and all copies thereof) relating to the Company's and its affiliates' businesses which the Executive obtained while employed by, or otherwise serving or acting on behalf of, the Company or which the Executive may then possess or have under his or her control. 8. Non-Competition. --------------- 8(a). Non-Competition. The Executive covenants and agrees that --------------- the Executive will not, during the Executive's employment hereunder and for a period of one (1) year thereafter (to the extent permitted by law), at any time and in any state or other jurisdiction in which the Company or Subsidiary is engaged or has reasonably firm plans to engage in business, (i) compete with the Company or Subsidiary on behalf of the Executive or any third party; (ii) participate as a director, agent, representative, stockholder or partner or have any direct or indirect financial interest in any enterprise which engages in the alcohol product distribution business or any other business in which the Company or Subsidiary is engaged; or (iii) participate as an employee or officer in any enterprise in which the Executive's responsibility relates to the alcohol product distribution business or any other business in which the Company or Subsidiary is engaged. The ownership by the Executive of less than five percent (5%) of the outstanding stock of any corporation listed on a national securities exchange conducting any such business shall not be deemed a violation of this Section 8(a). 8(b). Injunctive Relief. In the event the restrictions against ----------------- engaging in a competitive activity contained in Section 8(a) hereof shall be determined by any court of competent jurisdiction to be unenforceable by reason of their extending for too great a period of time or over too great a geographical area or by reason of their being too extensive in any other respect, Section 8(a) hereof shall be interpreted to extend only over the maximum period of time for which it may be enforceable and over the maximum geographical area as to which it may be enforceable and to the maximum extent in all other respects as to which it may be enforceable, all as determined by such court in such action. 3 8(c). Non-Solicitation. The Executive covenants and agrees that ---------------- the Executive will not, during the Executive's employment hereunder and for a period of one (1) year thereafter induce or attempt to induce any employee of the Company or the Subsidiary to render services for any other person, firm, or corporation. 9. Termination of Employment. ------------------------- 9(a). Death. The Executive's employment hereunder shall terminate ----- upon the Executive's death. 9(b). By the Company. The Company may terminate the Executive's -------------- employment hereunder with or without cause upon three months' prior written notice. 9(c). By the Executive. The Executive may terminate the ---------------- Executive's employment hereunder for "Good Reason." For purposes of this Agreement, "Good Reason" shall mean (i) the Company's failure to perform or observe any of the material terms or provisions of this Agreement, and the continued failure of the Company to cure such default within thirty (30) days after written demand for performance has been given to the Company by the Executive, which demand shall describe specifically the nature of such alleged failure to perform or observe such material terms or provisions; or (ii) a material reduction in the scope of the Executive's responsibilities and duties. 9(d). Notice of Termination. Any termination of the Executive's --------------------- employment by the Company or the Executive (other than pursuant to Section 9(a) hereof) shall be communicated by written "Notice of Termination" to the other party hereto in accordance with Section 11 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon, if any, and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. 9(e). Date of Termination. For purposes of this Agreement, the ------------------- "Date of Termination" shall mean (i) if the Executive's employment is terminated by the Executive's death, the date of the Executive's death; (ii) if the Executive's employment is terminated pursuant to Section 9(b) hereof, ninety (90) days after Notice of Termination is received by the Executive; (iii) if the Executive's employment is terminated pursuant to Section 9(c) hereof, the date specified in the Notice of Termination; and (iv) if the Executive's employment is terminated for any other reason, the date on which Notice of Termination is given. 10. Compensation Upon Termination. ----------------------------- 4 10(a). If the Executive's employment is terminated by the Executive's death, the Company shall pay to the Executive's estate, or as may be directed by the legal representatives of such estate, the Executive's full Base Salary through the Date of Termination and the Company shall have no further obligations to the Executive under this Agreement. 10(b). If the Company terminates the Executive's employment as provided in Section 9(b) hereof, the Company shall pay the Executive the Executive's full Base Salary through the Date of Termination, and the Company shall have no further obligations to the Executive under this Agreement. 10(c). If the Executive terminates the Executive's employment other than for Good Reason, the Company shall pay the Executive the Executive's full Base Salary through the Date of Termination and the Company shall have no further obligations to the Executive under this agreement. 10(d). If the Executive terminates the Executive's employment for Good Reason as provided in Section 9(c) hereof, the Company shall pay the Executive (i) the Executive's full Base Salary through the Date of Termination and (ii) subject to Section 10(f), the full Base Salary, that would have been payable to the Executive under Section 5(a) from the Date of Termination through the Expiration Date in a single lump sum payment within five (5) business days of his Date of Termination and the Company shall have no further obligations to the Executive under this Agreement.. 10(e). Parachute Limitations. Notwithstanding any other provision of --------------------- this Agreement or of any other agreement, contract or understanding heretofore or hereafter entered into by the Executive with the Company or any subsidiary or affiliate thereof, except an agreement, contract or understanding hereafter entered into that expressly modifies or excludes application of this Section 10(f) (the "Other Agreements"), and notwithstanding any formal or informal plan or other arrangement heretofore or hereafter adopted by the Company (or any subsidiary or affiliate thereof) for the direct or indirect compensation of the Executive (including groups or classes of participants or beneficiaries of which the Executive is a member), whether or not such compensation is deferred, is in cash, or is in the form of a benefit to or for the Executive (a "Benefit Plan"), if the Executive is a "disqualified individual" (as defined in Section 280G(c) of the Internal Revenue Code of 1986, as amended (the "Code")), any right to receive any payment or benefit under this Agreement shall not become exercisable (i) to the extent that such right to payment or benefit, taking into account all other rights, payments or benefits to or for the Executive under this Agreement, all Other Agreements and all Benefit Plans, would cause any payment or benefit to the Executive under this Agreement to be considered a "parachute payment" within the meaning of Section 280G(b)(2) of the Code as then in effect (a "Parachute Payment") and (ii) if, as a result of receiving a Parachute Payment, --- the aggregate after-tax amount received by the 5 Executive from the Company under this Agreement, all Other Agreements and all Benefit Plans would be less than the maximum after-tax amount that could be received by the Executive without causing any such payment or benefit to be considered a Parachute Payment. In the event that the receipt of any such right to payment or benefit under this Agreement, any Other Agreement or any Benefit Plan would cause the Executive to be considered to have received a Parachute Payment under this Agreement that would have the effect of decreasing the after- tax amount received by the Executive as described in clause (ii) of the preceding sentence, then the Executive shall have the right, in the Executive's sole discretion, to designate those rights, payments or benefits under this Agreement, any Other Agreements and any Benefit Plans that should be reduced or eliminated so as to avoid having the payment or benefit to the Executive under this Agreement be deemed to be a Parachute Payment. 10(f). Mitigation. The Executive shall not be required to mitigate ---------- amounts payable pursuant to Section 10 hereof by seeking other employment provided, however, that any sums earned by the Executive pursuant to any - ----------------- subsequent employment shall be offset against any remaining obligation the Company may have to pay by virtue of termination under this Agreement. 11. Notices. All notices, demands, requests or other communications ------- required or permitted to be given or made hereunder shall be in writing and shall be delivered, telecopied or mailed by first class registered or certified mail, postage prepaid, addressed as follows: (a) If to the Company: Central European Distribution Corporation 211 North Union Street, #110 Alexandria, Virginia 22314 Telecopier: 703-683-4707 Attention: William V. Carey President (b) If to the Executive: Jeffrey Peterson 1502 Stonewall Road Alexandria, Virginia 22302 Telecopier: 703-684-7680 or to such other address as may be designated by either party in a notice to the other. Each notice, demand, request or other communication that shall be given or 6 made in the manner described above shall be deemed sufficiently given or made for all purposes at such time as it is delivered to the addressee (with the return receipt, the delivery receipt, the answer back or the affidavit of messenger being deemed conclusive evidence of such delivery) or at such time as delivery is refused by the addressee upon presentation. 12. Severability. The invalidity or unenforceability of any one or ------------ more provisions of this Agreement shall not affect the validity or enforceability of the other provisions of this Agreement, which shall remain in full force and effect. 13. Survival. It is the express intention and agreement of the parties -------- hereto that the provisions of Sections 7 and 8 hereof shall survive the termination of employment of the Executive. In addition, all obligations of the Company to make payments hereunder shall survive any termination of this Agreement on the terms and conditions set forth herein. 14. Assignment. The rights and obligations of the parties to this ---------- Agreement shall not be assignable, except that the rights and obligations of the Company hereunder shall be assignable in connection with any subsequent merger, consolidation, sale of all substantially all of the assets of the Company or similar reorganization of a successor corporation. 15. Binding Effect. Subject to any provisions hereof restricting -------------- assignment, this Agreement shall be binding upon the parties hereto and shall inure to the benefit of the parties and their respective heirs, devisees, executors, administrators, legal representatives, successors and assigns. 16. Amendment; Waiver. This Agreement shall not be amended, altered or ----------------- modified except by an instrument in writing duly executed by the parties hereto. Neither the waiver by either of the parties hereto of a breach of or a default under any of the provisions of this Agreement, nor the failure of either of the parties, on one or more occasions, to enforce any of the provisions of this Agreement or to exercise any right or privilege hereunder, shall thereafter be construed as a waiver of any subsequent breach or default of a similar nature, or as a waiver of any such provisions, rights or privileges hereunder. 17. Headings. Section and subsection headings contained in this -------- Agreement are inserted for convenience of reference only, shall not be deemed to be a part of this Agreement for any purpose, and shall not in any way define or affect the meaning, construction or scope of any of the provisions hereof. 18. Governing Law. This Agreement, the rights and obligations of the ------------- parties hereto, and any claims or disputes relating thereto, shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia (but not including the choice of law rules thereof). 7 19. Action of Behalf of the Subsidiary. The Company is executing this ---------------------------------- Agreement also on behalf of its Subsidiary and agrees to cause the Subsidiary to fulfill its obligations hereunder, though the appointment and removal, if necessary, of members of the management board of the Subsidiary. 20. Entire Agreement. This Agreement constitutes the entire agreement ---------------- between the parties hereto with respect to the subject matter hereof, and it supersedes all prior oral or written agreements, commitments or understandings with respect to the matters provided for herein. 21. Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be an original and all of which shall be deemed to constitute one and the same instrument. 8 IN WITNESS WHEREOF, the undersigned have duly executed this Agreement, or have caused this Agreement to be duly executed on their behalf, as of the day and year first hereinabove written. CENTRAL EUROPEAN DISTRIBUTION CORPORATION By: ------------------------------- Name: William V. Carey Title: President and Chief Executive Officer THE EXECUTIVE: ---------------------------------- Jeffery Peterson 9 EX-10.10 17 CENTRAL EUROPEAN DISTRO Exhibit 10.10 CENTRAL EUROPEAN DISTRIBUTION CORPORATION COMMON STOCK SELLING SHAREHOLDER'S POWER OF ATTORNEY Central European Distribution Corporation 211 North Union Street, #100 Alexandria, Virginia 22314 Attention: William V. Carey, President Gentlemen: It is contemplated that the undersigned (being hereinafter sometimes referred to as the "Selling Shareholder"), along with Central European Distribution Corporation, a Delaware corporation (the "Company"), and other shareholders of the Company (such shareholders and the undersigned being hereinafter sometimes collectively referred to as the "Selling Shareholders") will offer to sell shares of common stock, par value $.01 per share, of the Company (the "Common Stock") to Fine Equities, Inc., Southwall Capital Corp. and certain other underwriters (the "Underwriters") represented by them who may offer such shares to the public. The undersigned understands that, in connection with such offering, the Company has filed a Registration Statement ("Registration Statement") on Form SB-2 under the Securities Act of 1933, as amended (the "Securities Act"). Concurrently with the execution and delivery of this Power of Attorney, the undersigned is also executing and delivering a Custody Agreement (the "Custody Agreement") pursuant to which certificates for shares of Common Stock registered in the name of the undersigned are being deposited with _________ as custodian (the "Custodian"). 1. In connection with the foregoing, the undersigned hereby makes, constitutes and appoints William V. Carey and _________, and each of them, the true and lawful attorneys-in-fact of the undersigned (individually, the "Attorney-in Fact" and collectively, the "Attorneys-in-Fact"), with full power and authority, in the name of and for and on behalf of the undersigned: (a) To sell to the Underwriters up to that number of shares of Common Stock registered in the name of the undersigned as set forth at Instruction 3 at the end of this Power of Attorney (subject to possible reduction as provided in paragraph l(b) below), at the price per share specified in the Underwriting Agreement (as defined hereinafter). (b) To make a pro rata cutback of the number of shares proposed to be sold by the Selling Shareholder if the aggregate number of such shares exceeds the number of shares the Underwriters are willing to commit to purchase from all Selling Shareholders, whereby each of the Selling Shareholders will be allowed to sell only that number of full shares of the Common Stock which is determined by multiplying the number of shares of Common Stock which each such Selling Shareholder has proposed to sell, as set forth at said Instruction 3 at the end of this Power of Attorney, by a fraction, the numerator of which is the number of shares the Underwriters are willing to commit to purchase from all Selling Shareholders and the denominator of which is the aggregate number of shares proposed to be sold by all Selling Shareholders, and to make such other adjustments and allocations as are necessary and appropriate to facilitate the offering and to avoid the sale of any fractional shares. (c) To agree to and determine the purchase price to be paid by the Underwriters to the Selling Shareholders as provided in Section ___ of the Underwriting Agreement (as defined hereinafter) and as provided in paragraph l(a) hereof. (d) For the purpose of effecting such sale, to execute and deliver an Underwriting Agreement among the Company, the Selling Shareholders and the Underwriters (the "Underwriting Agreement") which includes representations and warranties by the undersigned in substantially the form of the preliminary copy of the Underwriting Agreement (draft of ________, 1997) heretofore received by the undersigned containing such terms and conditions as the Attorneys-in-Fact, or either of them, in their or his sole discretion, shall determine and, if necessary, a stock power(s) evidencing the transfer of the shares to be sold by the undersigned in accordance with the Underwriting Agreement. (e) To give such orders and instructions to the Custodian consistent with the terms of the Custody Agreement and the Underwriting Agreement and with respect to (i) the payment to the Company by the Custodian on behalf of the undersigned of the proceeds from any sale of the shares being sold by the undersigned less the Underwriters' discount and commission and the non-accountable expense allowance to be paid to the Underwriters and (ii) the return to the undersigned of new certificates representing the number of shares (if any) of Common Stock represented by certificates deposited with the Custodian which are in excess of the number of shares to be sold by the undersigned to the Underwriters or in the event the Underwriting Agreement is not executed or is terminated pursuant to the terms thereof. (f) To make, execute, acknowledge and deliver all such other contracts, stock powers, orders, receipts, notices, instructions, certificates, letters and other writings, including, without limitation, a request to the Securities and Exchange Commission that said Registration Statement be made effective, amendments to the Underwriting Agreement, and in general, to do all things and to take all actions which the Attorneys- in-Fact, in their sole discretion, may consider necessary or proper in connection with, or to carry out, the sale of the shares to the Underwriters, as fully as could the undersigned if personally present and acting. 2 (g) To make, acknowledge, verify and file on behalf of the undersigned, applications, consents to service of process and such other undertakings or reports as may be required by law with state commissioners or officers administering state securities laws. 2. This Power of Attorney and all authority conferred hereby are granted and conferred subject to and in consideration of the interests of the Company, the Underwriters and the other Selling Shareholders who may become parties to the Underwriting Agreement, and, for the purposes of completing the transactions contemplated by the Underwriting Agreement and this Power of Attorney, this Power of Attorney and all authority conferred hereby shall be irrevocable until ______ 1998, and shall not be terminated by any act of the undersigned or by operation of law, whether by the death or incapacity of the undersigned (or either or any of them) or by the occurrence of any other event or events (including, without limiting the foregoing, the termination of any trust or estate for which the undersigned is acting as a fiduciary or fiduciaries), and if after the execution hereof the undersigned shall die or become incapacitated, or if any other such event or events shall occur before the completion of the transactions contemplated by the Underwriting Agreement and this Power of Attorney, certificates representing the shares of Common Stock registered in the name of the undersigned shall be delivered by or on behalf of the undersigned in accordance with the terms and conditions of the Underwriting Agreement and of the Custody Agreement and actions taken by the Attorneys-in-Fact hereunder shall be as valid as if such death, incapacity or other event or events had not occurred regardless of whether or not the Custodian, Attorneys-in-Fact, or any of them, shall have received notice of such death, incapacity or other event. 3. Each of the Attorneys-in-Fact shall have full power to make and substitute any attorney-in-fact in his place and stead, and the undersigned hereby ratifies and confirms all that the Attorneys-in-Fact or their respective substitutes shall do by virtue of these presents. All actions hereunder may be taken by each Attorney-in-Fact or his substitutes. The term "Attorney-in-Fact" as used herein shall include such substitutes. 4. The undersigned hereby represents, warrants and agrees that: (a) He has full right, power and authority to enter into this Power of Attorney, the Custody Agreement and the Underwriting Agreement. (b) He has and, at the time of delivery of any shares on the Option Closing Date (as such term is defined in the Underwriting Agreement) to the Underwriters, will have, full right, power and authority to sell, assign, transfer and deliver the shares to be sold by him pursuant to the Underwriting Agreement. (c) He is and, at the time of the delivery of the shares to the Underwriters on the Option Closing Date (as such term is defined in the Underwriting Agreement) under the Underwriting Agreement, will be, the lawful owner of and has, or will then have, valid and unencumbered title to such shares and, upon delivery of and payment for such shares in 3 accordance with the terms of the Underwriting Agreement, the several Underwriters will acquire valid and unencumbered title thereto. (d) Neither the execution and delivery of the Underwriting Agreement, the Custody Agreement, this Power of Attorney, the fulfillment of the terms therein or herein set forth, nor the consummation of the transactions therein or herein contemplated will conflict with or constitute a breach of or default under any agreement or other instrument to which he is a party, by which he is bound, or to which his property or assets is subject, or any statute, order, rule, regulation, judgment or decree applicable to him or his property or assets. (e) The certificates representing the shares to be sold by him under the Underwriting Agreement are, and on the Option Closing Date (as such term is defined in the Underwriting Agreement) will be, genuine and valid and he has no knowledge of any fact which would impair the validity of the certificates; the shares to be sold by him under the Underwriting Agreement have been duly and validly authorized and issued and are fully paid and nonassessable; and upon delivery of such shares and payment therefor pursuant to the Underwriting Agreement he will convey valid and unencumbered title to such shares. (f) He has caused a certificate or certificates for the number of shares proposed to be sold by him under the Underwriting Agreement to be delivered to the Custodian named in the Custody Agreement in proper form for good delivery, with blank stock powers duly executed and signatures appropriately guaranteed, and has granted the Custodian irrevocable authority to purchase all requisite stock transfer tax stamps and to hold such certificate or certificates for good delivery, or for exchange for other certificates for delivery, pursuant to the provisions of the Underwriting Agreement, on the Option Closing Date on his behalf, and he has duly executed and delivered to this Custodian the Custody Agreement and has duly executed and delivered this Power of Attorney appointing the respective persons named herein, and each of them, with full power of substitution, as such Selling Shareholder's Attorneys-in-Fact. (g) On the Option Closing Date (as such term is defined in the Underwriting Agreement), all transfer or other taxes (other than income taxes) which are required to be paid by him in connection with the sale and transfer to the several Underwriters under the Underwriting Agreement of the shares to be sold and delivered by him thereunder, will have been fully paid, or provided for to the satisfaction of the representatives of the Underwriters, and all laws imposing such taxes will have been fully complied with. (h) He has not taken and will not take, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the shares to be sold by him. 4 (i) All information furnished to the Company by or on behalf of the undersigned for the use in connection with the preparation of the Registration Statement, including all information contained in the Instructions at the end of this Power of Attorney, shall be true and correct in all material respects and will not omit any material fact necessary to make such information not misleading. (j) He has carefully reviewed the preliminary prospectus dated ______, 1997 (the "Preliminary Prospectus") and will carefully review each amendment thereto upon receipt thereof from the Company and will promptly advise the Attorneys-in-Fact in writing if: (i) The name and address of the undersigned is not properly set forth in the Preliminary Prospectus and the prospectus (the "Prospectus") contained in the Registration Statement at the time it becomes effective; (ii) Except as set forth in the Preliminary Prospectus, (A) either the undersigned or any of his associates* has an interest adverse to the Company or any of its subsidiaries* in any pending legal proceeding, (B) either the undersigned or any of his associates is a party to any contract with the Company or any of its subsidiaries, other than a contract which has been disclosed and the material terms of which have been fully and accurately described in the Preliminary Prospectus, (C) either the undersigned or any of his directors, officers or partners has a material relationship* with the Company or any of its officers or directors, (D) the undersigned has any information pertaining to underwriting compensation and arrangements or any dealings with any "underwriter or related person,"* "member"* of the National Association of Securities Dealers, Inc. ("NASD") or a "person associated with the member"* and the Company or any parent, subsidiary or controlling shareholder thereof since the beginning of the Company's last fiscal year other than information relating to the proposed Underwriting Agreement; or (E) the undersigned is a member of the NASD, a person associated with a member or an underwriter or related person with respect to the proposed offering. (iii) He knows of any reason why he cannot represent that (A) all information furnished to the Company by or on behalf of the undersigned for use in connection with the Registration Statement or the Prospectus or any Preliminary Prospectus is true and complete; (B) each Preliminary Prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto complied when so filed in all material respects with the Securities Act and the applicable rules and regulations thereunder; (C) the Registration Statement and any amendments thereto will comply in all material respects with the Securities Act and the applicable rules and regulations thereunder, and will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; and (D) the Preliminary 5 Prospectus and Prospectus and any supplements thereto will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made not misleading; except that these representations and warranties do not apply to statements or omissions in the Preliminary Prospectus and the Prospectus or any amendments or supplements thereto based upon information furnished to the Company in writing by any of the Underwriters specifically for use therein; (iv) He knows of any material adverse information with regard to the current or prospective operations of the Company or any of its subsidiaries, which is not disclosed in the Preliminary Prospectus; or (v) Except as indicated in the Preliminary Prospectus, the undersigned knows of any arrangements made or to be made by any person, or of any transaction already affected, (A) to limit or restrict the sale of the [Shares] or the [Warrants] (as such terms are defined in the Underwriting Agreement) during the period of the public distribution; (B) to stabilize the market for the [Shares] or the [Warrants] (as such terms are defined in the Underwriting Agreement), or (C) for withholding commissions, or otherwise to hold the Underwriters or anyone else responsible for the distribution of his participation. (k) He will promptly notify the Company in writing of any material adverse information with regard to the current or prospective operations of the Company or its subsidiaries of which he learns after the date hereof and which is not disclosed in the Registration Statement or the most recent amendment thereto received by the undersigned. (1) Except as indicated in Instruction 8 below and except as indicated in a letter signed by the undersigned dated on or about the date hereof, the principal reason for the proposed sale by the undersigned of his shares of Common Stock in the proposed public offering is in order to provide sufficient stock for a broad and orderly public market and to enable the undersigned to obtain greater liquidity. (m) Except as indicated in Instruction 9 below, neither the undersigned, nor to the best of his knowledge, any associate of his, is affiliated with any firm directly or indirectly engaged in the securities business as a broker or dealer or underwriter, as an employee acting in any capacity including that of an officer or registered representative, as a director or partner, or as an equity investor or debt investor, other than debt arising as a result of trading activities. [One need not include or disclose investments in publicly held corporations which in turn have investments in firms in the securities business if one's investment in the publicly held corporation is of the same class of security as is publicly held and does not exceed 5% of such class] 6 (n) He has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the [Shares] and the [Warrants] (as such terms are defined in the Underwriting Agreement) other than the Preliminary Prospectus and the prospectus or other material permitted by the Securities Act. (o) He has read Section [___] [indemnification] of the Underwriting Agreement and understands that as a Selling Shareholder he agrees pursuant to that Section to indemnify and hold harmless the Company and the Underwriters, to the extent provided therein. (p) The undersigned will notify the Company in writing immediately of any changes in the foregoing information which should be made as a result of developments occurring after the date hereof and prior to the Option Closing Date (as such term is defined in the Underwriting Agreement). The Attorneys-in-Fact may consider that there has not been any such development unless advised to the contrary. 5. The Attorneys-in-Fact shall be entitled to act and rely upon any statement, request, notice or instructions respecting this Power of Attorney given by the undersigned, not only as to the authorization, validity and effectiveness thereof, but also as to the truth and acceptability of any information contained therein; provided, however, that any statement or notice to the Attorneys-in-Fact with respect to the date of delivery under the Underwriting Agreement or with respect to the non-effectiveness or termination of the Underwriting Agreement, or advice that the Underwriting Agreement has not been executed and delivered, shall have been confirmed in writing to the Attorneys-in-Fact by the representatives of the Underwriters. It is understood that the Attorneys-in-Fact assume no responsibility or liability to any person other than to deal with the certificates deposited with the Custodian and the proceeds from the sale of securities represented thereby in accordance with the provisions hereof. The Attorneys-in-Fact (in such capacity) make no representations with respect to and shall have no responsibility for the Registration Statement or the Prospectus nor, except as herein expressly provided, for any aspect of the offering of Units (as such term is defined in the Underwriting Agreement), and no Attorney-in-Fact shall be liable for any error of judgment or for any act done or omitted or for any mistake of fact or law except for his own negligence or bad faith. The undersigned agrees to indemnify each of the Attorneys-in-Fact for and to hold each of the Attorneys-in-Fact harmless against any loss, claim, damage, liability or expense incurred on the part of such Attorney-in-Fact arising out of or in connection with his acting as Attorney-in-Fact under this Power of Attorney, as well as the cost and expense of defending against any claim of liability in the premises, and not due to such Attorney-in-Fact's own negligence or bad faith. The undersigned agrees that such Attorney-in-Fact may consult with counsel of his own choice (who may be counsel for the Company) and such Attorney-in-Fact shall have full and complete authorization and protection for any action taken or suffered by him hereunder in good faith and in accordance with the opinion of such counsel. 6. It is understood that the Attorneys-in-Fact shall serve entirely without compensation. 7 7. The indemnities, agreements, representations, warranties and other statements of the undersigned herein shall remain in full force and effect, regardless of any investigation or statement as to the results thereof, made by or on behalf of any Underwriter or the Company or any of its officers and directors or any controlling person, and will survive delivery of and payment for any shares sold by the undersigned. If the offering at any time is terminated pursuant to a right given to either the Company or the Underwriters in the Underwriting Agreement, the Selling Shareholders will have no obligation to pay any registration expenses, but the obligations of the Selling Shareholders to indemnify the Company and the Underwriters, as described in Section 4(o) above, shall remain in effect. This Power of Attorney shall terminate if the Registration Statement is withdrawn or if it shall not have become effective on or prior to ______, 1998. Witness the due execution of the foregoing Power of Attorney as of the date written below. INSTRUCTIONS TO PARTICIPATE IN THE OFFERING, THIS POWER OF ATTORNEY MUST BE RETURNED TO THE COMPANY DULY COMPLETED BY _____, 1998.
1. Fill in Date. ------------------------------------------- 2. Fill in number of shares of Common Stock beneficially* owned prior to the closing of the public offering. ------------------------------------------- 3. Fill in number of shares of Common The undersigned agrees to sell up to ____ Stock proposed to be sold. shares of Common Stock of Central European Distribution Corporation. 4. Sign exactly as name or names appear ------------------------------------------- on stock certificate. If certificate is ------------------------------------------- held in more than one name, all must sign. ------------------------------------------- 5. Fill in your address. ------------------------------------------- 6. Have this Power of Attorney notarized in the appropriate form on the next page(s).
8 7. Return this Power of Attorney, the Custody Agreement, the stock power(s) and your stock certificate(s) in the enclosed envelope. 8. Please specify any reasons (other than those stated in Section 4(l) above) for selling your Common Stock: 9. Please specify any exceptions to the representation contained in Section 4(m) above: 10. Notice to all Selling Shareholders who are custodians, trustees and/or guardians: Please enclose copies of all documentation demonstrating your authority to enter into and be bound by this Power of Attorney and the Custody Agreement (e.g., enclose appropriate trust agreement, etc.). _________________ *See Exhibit A attached hereto. 9 ACKNOWLEDGMENT FOR INDIVIDUAL STATE OF . . . . . . . . . . . . . . ) ) SS. COUNTY OF . . . . . . . . . . . . . .) On this __th day of _______ in the year 1997, before me, a Notary Public in and for the State of __________, personally appeared _________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to this instrument, and acknowledged that he executed it. (SEAL) ____________________________________________ Notary Public State of____________________________________ ACKNOWLEDGMENT FOR ATTORNEY-IN-FACT STATE OF . . . . . . . . . . . . . . ) ) SS. COUNTY OF . . . . . . . . . . . . . ) On this __th day of _______ in the year 1997, before me, a Notary Public in and for the State of _______, personally appeared ______________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to this instrument as the attorney-in- fact of _______________________ , and acknowledged to me that he subscribed the name of _____________________________ thereto as principal, and his (her) own name as attorney-in-fact. (SEAL) ____________________________________________ Notary Public State of____________________________________ 10 EXHIBIT A DEFINITIONS For purpose of the representations made in the Power of Attorney, the following definitions shall be applicable: "Associate" means (a) any corporation or organization (other than the Company or any of its subsidiaries) of which the party executing the Power of Attorney is an officer, director or partner or of which such party is, directly or indirectly, the beneficial owner of 5% or more of any class of equity securities, (b) any trust or other estate in which such party has a substantial beneficial interest or as to which such party serves as trustee or in a similar capacity, (c) his spouse, (d) any relative of his spouse or any relative of his who has the same home as such party or who is a director or officer or key executive of the Company or any of its subsidiaries, or (e) any partner, syndicate member or person with whom such party agreed to act in concert with respect to the acquisition, holding, voting or disposition of shares of the Company's securities. "Beneficially" when used in connection with the ownership of securities, means (a) any interest in a security which entitles a party to any of the rights or benefits of ownership even though such party may not be the owner of record or (b) securities owned by such party directly or indirectly, including those held by him for his own benefit (regardless of how registered) and securities held by others for his benefit (regardless of how registered), such as by custodians, brokers, nominees, pledges, etc., and including securities held by an estate or trust in which such party has an interest as legatee or beneficiary, securities owned by a partnership or which such party is a partner, securities held by a personal holding company of which such party is a stockholder, etc., and securities held in the name of such party's spouse, minor children and any relative (sharing the same home). A "beneficial owner" of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has or shares: (1) Voting power which includes the power to vote, or to direct the voting of, such security; and/or (2) investment power which includes the power of dispose, or to direct the disposition of such security. "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise. "Family Relationship" means any relationship by blood, marriage or adoption, not more remote than first cousin. 11 "Material" when used to qualify a requirement for the furnishing of information as to any subject, limits the information required to those matters as to which an average prudent investor ought reasonably to be informed before purchasing [Shares] or [Warrants] (as such terms are defined in the Underwriting Agreement). "Material Relationship" has not been defined by the Securities and Exchange Commission. However, the Commission has indicated that it will probably construe as a "material relationship" any relationship which tends to prevent arm's- length bargaining in dealings with a company, whether arising from a close business connection or family relationship, a relationship of control or otherwise. It seems prudent, therefore, to consider that a party would have such a relationship, for example, with any organization of which he is an officer, director, trustee or partner or in which he owns, directly or indirectly, 10% or more of the outstanding voting stock, or in which he has some other substantial interest, and with any person or organization with whom he has, and with whom any relative or spouse (or any other person or organization as to which he has any of the foregoing other relationships) has, a contractual relationship. The NASD defines a "Member" as being either any broker or dealer admitted to membership in the NASD or any officer or partner of such a member, or the executive representative of such a member or the substitute for such a representative. The NASD defines a "Person Associated with a Member" as being every sole proprietor, partner, officer, director or branch manager of any member, or any natural person occupying a similar status or performing similar functions, or any natural person engaged in the investment banking or securities business who is directly, or indirectly controlling or controlled by such member (for example, any employee), whether or not any such person is registered or exempt from registration with the NASD. The NASD defines an "Underwriter or a Related Person" with respect to a proposed offering as being underwriters, underwriter's counsel, financial consultants and advisors, finders, members of the selling or distribution group, and any and all other persons associated with or related to any of such persons. 12 EX-10.11 18 CUSTODY AGREEMENT Exhibit 10.11 CUSTODY AGREEMENT BETWEEN SELLING SHAREHOLDERS AND CUSTODIAN , 1998 ----- [Name of Custodian] [Address] Ladies and Gentlemen: There are delivered to you herewith one or more certificates, in negotiable and proper deliverable form (with signatures guaranteed by a national or state bank or trust company or by a member firm of the New York or American Stock Exchange and accompanied by a duly executed stock power or powers, in blank, bearing the signature of the undersigned so guaranteed), representing no less than the number of issued and outstanding shares of common stock, par value $.01 per share (the "Common Stock") of Central European Distribution Corporation, a Delaware corporation (the "Company"), set forth below the signature of the undersigned at the end of this letter. If applicable, the undersigned has also delivered the following documents with the certificates: if acting as a trustee or in any other fiduciary or representative capacity, duly certified copies of each trust agreement, will, letters testamentary or other instrument pursuant to which the undersigned is authorized to act as a Selling Shareholder (as hereinafter defined). The undersigned agrees to deliver to the Attorneys-in-Fact (as hereinafter defined) or to you such additional documentation as the Attorneys-in-Fact, or any one of them, or the Company, or the Representative (as hereinafter defined), or you, or any of their or your respective counsel, may request to effectuate or confirm compliance with any of the provisions hereof or of the Underwriting Agreement (as hereinafter defined), all of the foregoing to be in form and substance satisfactory in all respects to the Attorneys-in-Fact and you. These certificates are to be held by you as Custodian for the account of the undersigned and are to be disposed of by you in accordance with this Custody Agreement. Concurrently with the execution and delivery of this Custody Agreement, the undersigned has executed a power of attorney (the "Power of Attorney") to William V. Carey and or their duly designated substitutes -------- (individually, the "Attorney-in-Fact" and collectively, the "Attorneys-in- Fact"), authorizing the Attorneys-in-Fact, or any one of them, to sell from the number of shares represented by the certificate(s) deposited with you hereunder that number of shares indicated below the signature of the undersigned at the end of this letter, or such lesser number as the Attorneys-in-Fact, or any one of them, may determine, and for that purpose to enter into and perform an underwriting agreement (the "Underwriting Agreement"), among the Company, certain shareholders of the Company, including the undersigned (collectively, the "Selling Shareholders"), and (the "Representative"), on behalf ------------- of itself and as the representative of the other underwriters named in the Underwriting Agreement (together with the Representative, the "Underwriters"). You are authorized and directed to hold the certificates deposited with you hereunder in your custody, and on the Option Closing Date (as defined in the Underwriting Agreement) you shall (i) take all necessary action to cause the number of shares which are to be sold by the undersigned on such date to be transferred on the books of the Company to such names as the Representative shall have instructed you and to surrender the certificates representing such shares to , as transfer agent for the Common Stock of the Company, in ----------- exchange for new certificates for such shares registered in such names and in such denominations as the Representative shall have instructed you, (ii) upon the instruction of the Attorneys-in-Fact, or any one of them, deliver such new certificates to the Representative, for the accounts of the Underwriters, against payment for such shares as specified in the Underwriting Agreement, and (iii) give receipt for such payment, deposit the same to your account as custodian, drain upon such accounts to pay such expenses as you may be instructed to pay by the Attorneys-in-Fact, or any one of them, and, when instructed by an Attorney-in-Fact to do so, remit to the undersigned the balance, after deducting such expenses, of the amount received by you as payment for such shares. With such remittance you shall also return to the undersigned new certificates representing the number of shares of Common Stock, if any, represented by the certificates deposited which are in excess of the number of shares sold by the undersigned to the Underwriters. If the Underwriting Agreement shall not be entered into prior to , ----- 1998, or if it shall be terminated, or shall be prevented from becoming effective pursuant to the provisions thereof, then, upon the written request of the undersigned to you or when instructed by the Attorneys-in-Fact, or any one of them, you are to return to the undersigned the certificates and stock powers deposited with you hereunder. Under the terms of the Power of Attorney the authority conferred thereby is granted, made and conferred subject to and in consideration of the interests of the Attorneys-in-Fact, the Company, the Underwriters and other Selling Shareholders and, prior to , 1998, is an agency coupled with an interest ----- and is therefore irrevocable and not subject to termination by the undersigned or by operation of law, whether by the death or incapacity of the undersigned, the termination of any trust or estate, the dissolution or liquidation of any corporation or partnership or the occurrence of any other event, and the obligations of the undersigned under the Underwriting Agreement are similarly not subject to termination and shall remain in full force and effect until such date. Accordingly, the certificates deposited with you hereunder and this Custody Agreement and your authority hereunder are subject to the interests of the Company, the Underwriters, and the other Selling Shareholders, and this Custody Agreement and your authority hereunder is irrevocable and is not subject to termination by the undersigned or by operation of law, whether by the death or incapacity of the undersigned, the termination of any trust or estate, the dissolution or liquidation of any corporation or partnership or the occurrence of any other event. If the undersigned should die or become incapacitated, if any trust or estate should be terminated, if any corporation or partnership should be dissolved or liquidated, or if any other such event should occur, before delivery of the shares to be sold by the undersigned under the Underwriting Agreement, certificates for such shares shall be delivered by you on behalf of the undersigned in accordance with the terms and conditions of the Underwriting Agreement and this Custody Agreement, and action taken by you pursuant to this 2 Custody Agreement shall be as valid as if such death or incapacity, termination, dissolution, liquidation or other event had not occurred, regardless of whether or not either you or either or both of the Attorneys-in-Fact shall have received notice of such death, incapacity, termination, dissolution, liquidation or other event. Until payment of the purchase price for the shares to be sold by the undersigned to the Underwriters has been made to you pursuant to the Underwriting Agreement by or for the account of the Underwriters, the undersigned shall remain the owner of such shares and shall have the right to vote such shares and all other shares, if any, represented by the certificates deposited with you hereunder and to receive all dividends and distributions thereon. You shall be entitled to act and rely upon any statement, request, notice or instructions respecting this Custody Agreement given to you by the Attorneys- in-Fact, or any one of them. In taking any action required by the Underwriters, you may rely upon a writing by representatives of . --------------- It is understood that you assume no responsibility or liability to any person other than to deal with the certificate(s) deposited with you hereunder and the proceeds from the sale of all or a portion of the shares represented thereby in accordance with the provisions of this Custody Agreement, and the undersigned agrees to indemnify and hold you harmless with respect to anything done by you in good faith in accordance with the foregoing instructions. This Custody Agreement constitutes a representation and warranty to the other Selling Shareholders, the Company, the Attorneys-in-Fact, the Underwriters, and the counsel of any such person, for purposes of rendering their opinion to the Underwriters called for by the Underwriting Agreement, for which purpose this Custody Agreement shall constitute a certificate, that: 1. The undersigned now has, and at the date of delivery of the Common Stock to be sold by him to the Underwriters pursuant to the terms of the Underwriting Agreement will have, good and marketable title to such stock, free and clear of all liens, encumbrances, security interests, community property rights, restrictions on transfer, equities and claims whatsoever (other than pursuant to this Custody Agreement and the Underwriting Agreement), and the undersigned now has and at such date will have full legal right and power and all authorizations and approvals required by law and will have taken all actions necessary to sell, transfer and deliver such stock under the Underwriting Agreement. Upon the delivery of and payment for such stock under the Underwriting Agreement, the Underwriters will receive good and marketable title thereto, free and clear of all liens, encumbrances, security interests, community property rights, restrictions on transfer, equities and adverse claims whatsoever. 2. The undersigned has, and at all times through the Option Closing Date under the Underwriting Agreement will have, full legal right and power and all authorizations and approvals required by law to enter into this Custody Agreement, the Power of Attorney and the Underwriting 3 Agreement, and to carry out all the applicable terms and provisions hereof and thereof, and this Custody Agreement, the Power of Attorney and the Underwriting Agreement have been (or, upon execution by the Attorneys-in-Fact, or any one of them, will be) duly executed and delivered and are, and at all times through the Option Closing Date under the Underwriting Agreement will be, valid and binding obligations of the undersigned, except as rights to indemnity hereunder may be limited under applicable law. The consummation of the transactions contemplated in the Underwriting Agreement will not result in a breach, violation or contravention of any of the terms and provisions of, or constitute a default under, any statute, any indenture, mortgage, will, deed of trust, note agreement, or other agreement or instrument to which the undersigned is a party or by which the undersigned is bound or to which any of the property of the undersigned is subject, or any order, writ, injunction, decree, rule or regulation of any court or governmental agency or body having jurisdiction over the undersigned or any of the undersigned's properties and no consent, approval, authorization or order of any court or governmental agency or body is required for the performance of the Underwriting Agreement by the undersigned, except such as are to have been obtained under the Securities Act of 1933, as amended, and such as may be required under state securities laws in connection with the purchase and distribution of shares by the Underwriters. As of the Option Closing Date under the Underwriting Agreement, the sale, transfer and delivery of the shares by the undersigned to the Underwriters is not subject to any right of first refusal or other contractual restriction. 3. The undersigned has carefully reviewed the representations, warranties, statements and agreements to be made by the undersigned as a Selling Shareholder as contained in the Underwriting Agreement, including specifically the indemnity agreement contained in the Underwriting Agreement, and does hereby represent, warrant and agree that (a) such representations, warranties, statements, and agreements insofar as they relate to the undersigned are true and correct as of the date hereof and will be true and correct at all times through the Closing Date under the Underwriting Agreement and (b) such agreements, insofar as they relate to the undersigned, have been complied with as of the date hereof and will be complied with on and after the Closing Date. 4. The undersigned has received a copy of a Registration Statement, including a Preliminary Prospectus, for the offer and sale of 1,150,000 shares of Common Stock and 1,150,000 redeemable warrants (the "Warrants") accompanying each share of Common Stock (not including the shares and shares which may be sold pursuant to the Underwriters' over-allotment option). To the best of the undersigned's knowledge after reasonable investigation, there is no untrue statement of a material fact included in the Registration Statement nor is there an omission from the Registration Statement of any material fact required to be stated therein or necessary to make the statements therein not misleading. The undersigned will promptly notify the Attorneys-in-Fact of any facts coming to his attention which would cause the preceding sentence not to be true. 5. The undersigned has not taken and will not take, directly or indirectly, any action designed to or which has constituted or which might in the future reasonably be expected to cause or result in stabilization or manipulation of the price of the Company's Common Stock or the Warrants. 4 6. The undersigned is 18 years of age or older, is of sound mind and is not presently adjudged to be incompetent or otherwise to lack the capacity to contract. No legal guardian has been appointed for the undersigned. The foregoing representations, warranties and agreements, as well as those contained in the Directors', Officers' and Selling Shareholders' Questionnaire completed by the undersigned and submitted to the Company and those contained in the Underwriting Agreement, are made for the benefit of, and may be relied upon by, the other Selling Shareholders, the Custodian, the Attorneys-in-Fact, the Company, the Underwriters, and the representatives, agents and counsel of any such person. This Custody Agreement shall be governed by the laws of the State of New York, without regard to the conflict of law principles thereof. Please acknowledge your acceptance hereof as Custodian, and receipt of the certificates deposited with you hereunder, by executing and returning to the undersigned the enclosed copy hereof. Dated: , 1998 -------- Very truly yours, ------------------------------------------- ------------------------------------------- Signature(s) *To be signed in exactly the same manner as the shares are registered. ------------------------------------------- ------------------------------------------- (Note: The signature(s) must be guaranteed by a bank or trust company having an office or a correspondent in New York City or by a broker which is a member firm of the New York or American Stock Exchanges.) Number of shares of Common Stock Maximum number of shares of Common Stock represented by certificate(s) deposited to be sold to Underwriters pursuant to the Power of Attorney: shares shares - ---------- ---------
5 I am the spouse of . On behalf of myself, my heirs and legatees, ---------- I hereby join in and consent to the terms of the foregoing Custody Agreement and agree to the sale of the shares of the Common Stock of Central European Distribution Corporation registered in the name of my spouse or otherwise registered, which my spouse proposes to sell pursuant to the Underwriting Agreement (as defined therein). Dated: , 1998 ---------- -------------------------------- (Signature of Spouse) 6
Number of Shares of Common Number of Shares to be Sold from Stock Represented by Each Certificates If Less Than all Shares Stock Certificate Numbers Certificate Represented Thereby Are to be Sold* - -------------------------- ----------------------------- ------------------------------------ - -------------------------- ----------------------------- ------------------------------------ - -------------------------- ----------------------------- ------------------------------------ - -------------------------- ----------------------------- ------------------------------------ - -------------------------- ----------------------------- ------------------------------------ TOTAL NUMBER OF SHARES TO BE SOLD ------------------------------------
- -------------------------- * If no indication is made, selection to be at the Custodian's discretion. The total for this column must equal the maximum number of shares of Common Stock to be sold to the Underwriters, as indicated in the table on page [__]. 7 CUSTODIAN'S ACKNOWLEDGE AND RECEIPT [___________], as Custodian, acknowledges acceptance of the duties of Custodian under the foregoing Custody Agreement and receipt of the certificates referred to therein. Dated: , 1998 ------ [__________________] By: -------------------------- Name: Title: 8 PAYMENT INSTRUCTIONS Please choose one of the methods of payment described below and provide the requested information as indicated. 1. Direct deposit to a [ ] account: ----- --------- Branch and Account Number: ------------------------------------------------ - -------------------------------------------------------------------------------- 2. Wire funds to the following bank (you must contact your ----- bank to make sure they can accept wire transfers and to obtain any other information they may require as to accepting wire transfers): Account Name: -------------------------------------------------------------- Bank: ---------------------------------------------------------------------- Account Number: ------------------------------------------------------------ 3. Cashier's check to be mailed or otherwise delivered in ----- my name to: Central European Distribution Corporation for the delivery ----- to me ----- Directly to me at the following address: --------------------------------------------------------------------------- --------------------------------------------------------------------------- --------------------------------------------------------------------------- 9 EX-21 19 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 SUBSIDIARIES OF THE REGISTRANT ------------------------------ Name Jurisdiction of Organization - ---- ---------------------------- Carey Agri International Poland Sp. z o.o. Poland EX-23 20 CONSENT OF INDEPENDENT AUDITORS CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated November 28, 1997, in the Registration Statement (Form SB-2) and related Prospectus of Central European Distribution Corporation for the registration of 2,875,000 shares of its common stock and various related warrants. Warsaw, Poland Ernst & Young Audit Sp. z o.o. December 16, 1997 EX-27 21 FINANCIAL DATA SCHEDULE
5 "THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF CENTRAL EUROPEAN DISTRIBUTION CORPORATION FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS." 1,000 YEAR 9-MOS DEC-31-1996 DEC-31-1997 JAN-01-1996 JAN-01-1997 DEC-31-1996 SEP-30-1997 740 240 0 0 4,260 3,802 49 58 1,660 2,193 6,889 6,479 607 671 165 240 7,335 7,165 7,006 6,931 0 0 0 0 0 0 18 18 8 148 7,335 7,165 23,942 27,499 23,942 27,499 19,850 23,759 19,850 23,759 3,919 3,406 0 0 124 106 173 334 111 194 62 140 0 0 0 0 0 0 62 140 0.03 0.08 0.03 0.08 All sales took place in the country of Poland. All income taxes are for the country of Poland.
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