10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005

OR

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

FOR THE TRANSITION PERIOD FROM             .             

COMMISSION FILE NUMBER 0-24341

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE	54-18652710
(STATE OF INCORPORATION)	(IRS EMPLOYER IDENTIFICATION NO.)

TWO BALA PLAZA, SUITE 300 BALA CYNWYD, PENNSYLVANIA	19004
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)	(ZIP CODE)

(REGISTRANT’S TELEPHONE NUMBER,

INCLUDING AREA CODE)

(610)–660–7817

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

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

The number of shares outstanding of the issuer’s common stock as of July 29, 2005:

Common Stock ($.01 par value) 16,922,652

INDEX

		PAGE
PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements
	Consolidated Condensed Balance Sheets, June 30, 2005 (unaudited) and December 31, 2004	3
	Consolidated Condensed Statements of Income (unaudited) for the three and six month periods ended June 30, 2005 and June 30, 2004	4
	Consolidated Condensed Statement of Changes in Stockholders’ Equity (unaudited) as of June 30, 2005	5
	Consolidated Condensed Statements of Cash Flows (unaudited) for the six month periods ended June 30, 2005 and June 30, 2004	6
	Notes to Consolidated Condensed Financial Statements (unaudited)	7-12
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13-22
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	23
Item 4.	Controls and Procedures	23
PART II.	OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 4.	Submission of Matters to a Vote of Security Holders	25
Item 6.	Exhibits	26
Signatures		27

2

PART I

FINANCIAL INFORMATION

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

(in thousands, except share and per share information)

	June 30, 2005			December 31, 2004
	(unaudited)
CURRENT ASSETS
Cash and cash equivalents	$	18,497		$	10,491
Accounts receivable (net of allowance for doubtful accounts of $8,684 and $10,038 respectively)		102,373			131,799
Inventories		52,182			64,372
Prepaid expenses and other current assets		9,305			10,801
Deferred income taxes		916			822
TOTAL CURRENT ASSETS	$	183,273		$	218,285
Intangible assets, net		1,954			2,543
Goodwill, net		53,994			51,370
Tangible fixed assets, net		14,580			17,387
Deferred income taxes		1,669			1,684
Other assets		1,868			435
TOTAL ASSETS	$	257,338		$	291,704
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Trade accounts payable	$	88,295		$	115,678
Short term bank loans and overdraft facilities		30,048			37,396
Current portion of long term debt		209			234
Current portion of obligations under capital leases		2,495			2,970
Income taxes payable		968			651
Taxes other than income taxes		1,781			3,108
Other accrued liabilities		4,632			7,338
TOTAL CURRENT LIABILITIES		128,428			167,375
Long-term debt, less current maturities		1,674			1,873
Long-term obligations under capital leases		1,240			2,140
STOCKHOLDERS’ EQUITY
Preferred Stock ($0.01 par value, 1,000,000 shares authorized; no shares issued and outstanding)		—			—
Common Stock ($0.01 par value, 40,000,000 shares authorized, 17,040,177 and 16,677,045 shares issued at June 30, 2005 and December 31, 2004, respectively)		170			166
Additional paid-in-capital		58,296			55,663
Retained earnings		62,586			52,366
Accumulated other comprehensive loss		5,094			12,271
Less Treasury Stock at cost (164,025 shares at June 30, 2005 and December 31, 2004)		(150	)		(150	)
TOTAL STOCKHOLDERS’ EQUITY		125,996			120,316
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	257,338		$	291,704

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

3

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except share and per share information)

	Three months ended						Six months ended
	June 30, 2005 (unaudited)			June 30, 2004 (unaudited)			June 30, 2005 (unaudited)			June 30, 2004 (unaudited)
Net Sales	$	164,249		$	133,004		$	314,251		$	243,481
Cost of goods sold		143,342			116,368			273,663			213,079
Gross Profit		20,907			16,636			40,588			30,402
Selling, general and administrative expenses, excluding amortization and depreciation		12,365			9,818			24,034			18,703
Depreciation of tangible fixed assets		842			618			1,724			1,204
Amortization of goodwill and trademarks		130			123			260			242
Bad debt provision		95			186			349			252
Operating Income		7,475			5,891			14,221			10,001
Non operating income /(expense)
Interest income		238			44			304			87
Interest expense		(770	)		(535	)		(1,691	)		(996	)
Realized and unrealized foreign currency transaction gains/(losses)		29			104			(64	)		58
Other income/(expense), net		(60	)		34			(112	)		54
Income before taxes		6,912			5,538			12,658			9,204
Income tax expense		1,312			1,022			2,438			1,578
Net income	$	5,600		$	4,516		$	10,220		$	7,626
Net income per share of common stock, basic	$	0.33		$	0.28		$	0.61		$	0.47
Net income per share of common stock, diluted	$	0.33		$	0.28		$	0.60		$	0.46

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

4

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN

STOCKHOLDERS’ EQUITY (UNAUDITED)

(in thousands)

	Capital Stock							Additional Paid-in- Capital		Retained Earnings		Accumulated Other Comprehensive Profit/Loss			Total Stock- holders Equity
	Issued Shares			In Treasury Shares
	Shares	Amount		Shares	Amount
Balance at December 31, 2004	16,677	$	166	164	$	(150	)	$	55,663	$	52,366	$	12,271		$	120,316
Net income for the Six Month ended June 30, 2005											10,220					10,220
Foreign currency translation adjustment													(7,177	)		(7,177	)
Comprehensive income for the Six Month ended June 30, 2005																3,043
Common stock issued in connection with acquisitions	15		1						521							522
Common stock issued in connection with options	348		3						2,112							2,115
Balance at June 30, 2005	17,040	$	170	164	$	(150	)	$	58,296	$	62,586	$	5,094		$	125,996

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

5

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW (UNAUDITED)

(in thousands)

	Six Month ended June 30, 2005			Six Month ended June 30, 2004
	(unaudited)			(unaudited)
OPERATING ACTIVITIES
Net income	$	10,220		$	7,626
Adjustments to reconcile net income to net cash provided by / (used in) operating activities:
Depreciation and amortization		1,985			1,446
Deferred income tax benefit		(225	)		549
Bad debt provision		349			252
Changes in operating assets and liabilities:
Accounts receivable		21,423			8,677
Inventories		9,906			4,843
Prepayments and other current assets		1,186			(1,785	)
Trade accounts payable		(22,550	)		(11,739	)
Income taxes and other taxes payable		(792	)		(233	)
Other accrued liabilities and other assets		(3,755	)		(377	)
Net Cash Provided By Operating Activities		17,747			9,259
INVESTING ACTIVITIES
Acquisition of business and subsidiaries (net of cash)		(2,004	)		(3,352	)
Purchase of fixed assets		(1,034	)		(1,403	)
Proceeds from sales of fixed assets		1,321			302
Net Cash (Used in) / Provided By Investing Activities		(1,717	)		(4,453	)
FINANCING ACTIVITIES
(Repayments) / Borrowings of short-term borrowings and overdraft facilities		(5,176	)		(5,882	)
(Repayments) / Proceeds from long-term borrowings		(102	)		1,355
Capital lease repayments		(1,078	)		(657	)
Stock options exercised		2,115			778
Net Cash (Used in) / Provided By Financing Activities		(4,241	)		(4,406	)
Effect of exchange rate changes on cash and cash equivalents		(3,783	)		244
Net increase / (decrease) in cash and cash equivalents		8,006			644
Cash and cash equivalents at beginning of period		10,491			6,229
Cash and cash equivalents at end of period	$	18,497		$	6,873
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
Common stock issued for acquisitions	$	521		$	163
Capital leases amounts advanced	$	606		$	1,060
Supplemental disclosures of cash flow information
Interest paid	$	1,691		$	996
Income tax paid	$	2,707		$	2,269

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

6

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(amounts in tables expressed in thousands except per share information)

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

Central European Distribution Corporation (CEDC), a Delaware corporation, and its subsidiaries (collectively referred to as the Company) operates primarily as a wholesale distributor of fine wines, beers and liquors across Poland. Based in Warsaw and operating through 14 distribution centers and 86 satellite branches the Company offers a 24 hour delivery service of alcoholic beverages. Since its incorporation in September 1997, CEDC has acquired 100% of the outstanding common stock or 100% of the voting rights of its 16 subsidiaries.

CEDC through its various subsidiaries derives all its revenues in Poland.

2. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements include the accounts of CEDC and its subsidiaries all of which the Company wholly owns or owns 100% of the voting rights. All inter-company accounts and transactions have been eliminated in the consolidated financial statements.

CEDC’s subsidiaries maintain their books of account and prepare their statutory financial statements in Polish Zloties (PLN) in accordance with Polish statutory requirements and the Accounting Act of 29 September 1994. The subsidiaries’ financial statements have been adjusted to reflect accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary to fairly present our financial condition, results of operations and cash flows for the interim periods presented have been included. Operating results for the three and six month period ended June 30, 2005, are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

The balance sheet at December 31, 2004, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

The unaudited interim financial statements should be read with reference to the consolidated financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2004.

3. COMPREHENSIVE INCOME/(LOSS)

The Company’s financial statements are substantially all in Polish Zloty and gains or losses resulting from the restatement of these balances into U.S. Dollars are posted to the Comprehensive Loss Account. As a result of the devaluation of the Polish Zloty against the U.S. Dollar during the six month period ended June 30, 2005, the Company incurred a foreign currency translation loss of $7.2 million. The total of the accumulated other comprehensive loss consists solely of currency exchange adjustments. No tax benefit has been recorded.

4. EARNINGS PER SHARE

Net income per share of common stock is calculated under the provisions of SFAS No. 128, “Earnings per Share”. The following table sets forth the computation of basic and diluted earnings per share for the periods indicated.

	Three months ended				Six months ended
	June 30, 2005		June 30, 2004		June 30, 2005		June 30, 2004
Basic:
Net income	$	5,600	$	4,516	$	10,220	$	7,626
Weighted average shares of common stock outstanding		16,759		16,243		16,695		16,214
Basic Earnings Per Share	$	0.33	$	0.28	$	0.61	$	0.47
Diluted:
Net Income	$	5,600	$	4,516	$	10,220	$	7,626
Weighted average shares of common stock outstanding		16,759		16,243		16,695		16,214
Net effect of diluted stock options-based on the treasury stock method		357		115		342		243
Totals shares outstanding – fully diluted		17,116		16,358		17,037		16,457
Diluted Earnings Per Share	$	0.33	$	0.28	$	0.60	$	0.46

During the three month period ended June 30, 2005, 208,125 stock options were exercised.

7

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(amounts in tables expressed in thousands except per share information)

5. ACQUISITIONS

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

On April 28, 2005, the Company acquired 100% of the outstanding capital stock of Delikates, an alcohol distributor in the center of Poland, for a purchase price of approximately $2.4 million, of which $1.9 million was paid in cash and $0.5 million was paid in shares of common stock of the Company. The transaction received anti-trust approval from the Polish Anti-Monopoly Office during June of 2005. The shares of the Company’s common stock that were issued as part of the purchase price are subject to a one-year lock-up period.

In January of 2005, the Company acquired additional branches in Northern Poland from Vinex in exchange for $126,912 and 1,749 shares of common stock, which were accounted for as a business combination. During 2004, the Company made a series of acquisitions also accounted for as a business combination. Assuming consummation of these acquisitions and the issuance of common shares as of January 1, 2004 and 2005, the unaudited pro-forma consolidated operating results for the three and six months ended June 30, 2004 were as follows:

	Three months ended				Six months ended
	June 30, 2005		June 30, 2004		June 30, 2005		June 30, 2004
Net sales	$	167,283	$	157,119	$	326,387	$	293,605
Net income		5,613		4,835		10,272		8,381
Net income per share data:
Basic earnings per share of common stock	$	0.33	$	0.30	$	0.62	$	0.52
Diluted earnings per share of common stock	$	0.33	$	0.29	$	0.60	$	0.51

During 2005, the Company has expanded its acquisition strategy to vertically integrate into production of alcoholic beverages by targeting top selling profitable distilleries in Poland. As of result of following this strategy, the Company has entered into two share purchase agreements as described further below and in Note 10.

6. BORROWINGS

The Company has banking facilities with six banks which are used to support both the Company’s acquisition strategy and its cash on delivery (COD) vodka purchasing requirements. The credit lines are only denominated in Polish Zloty.

8

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(amounts in tables expressed in thousands except per share information)

The amounts drawn down on the facilities as disclosed in the financial statements are:

	June 30, 2005		December 31, 2004
Short term bank loans and overdraft facilities	$	30,048	$	37,396
Current portion of long term debt		209		234
Total long term debt, less current maturities		1,674		1,873
Total	$	31,931	$	39,503

Principal repayments for the followings years	June 31, 2005		December 31, 2004
2005	$	30,257	$	37,630
2006		209		234
2007		209		234
2008		209		234
2009 and beyond		1,047		1,171
Total	$	31,931	$	39,503

Within the total overdraft facilities agreed as at June 30, 2005, $45.2 million remains available. These overdraft facilities are subject to renewal between April and December 2005 and the Company has not historically encountered any difficulties in successfully renegotiating them.

As discussed further in Note 10, on July 25, 2005, CEDC completed the issuance of €325 million 8% Senior Secured notes due 2012.

7. LEASE OBLIGATIONS

In November 2000, the Company entered into a non-cancelable five-year operating lease, for its main warehouse and office in Warsaw, which stipulated monthly payments of $130,000. In February 2003, the Company renegotiated this lease by signing a seven-year agreement starting from May 1, 2003, at a lower rent of $96,000 per month. The following is a schedule by years of the future rental payments under the non-cancelable operating lease as of June 30, 2005:

2005	$	576
2006		1,152
2007		1,152
2008		1,152
2009		1,152
Thereafter		384
	$	5,568

The Company also has rental agreements for all of the regional offices and warehouse space. Monthly rentals range from approximately $67 to $23,362. All of the regional office and warehouse leases can be terminated by either party within two or three month’s prior notice. The retail shop leases have no stated expiration date, but can be terminated by either party with six months prior notice.

9

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(amounts in tables expressed in thousands except per share information)

The Company continues its policy of renewing its transportation fleet by way of capital leases. The future minimum lease payments for the assets under capital lease at June 30, 2005, are as follows:

2005	$	2,327
2006		1,408
	$	3,735
Less interest		(251	)
	$	3,484

8. INCOME TAXES

Total income tax expense varies from expected income tax expense computed at enacted Polish statutory rates (19% in 2004 and 2005) as follows:

	Three months ended						Six months ended
	June 30 2005			June 30 2004			June 30 2005		June 30 2004
Tax at Polish statutory rate	$	1,292		$	1,052		$	2,384	$	1,749
Tax rate differences		104			(137	)		54		(184	)
Permanent differences		(84	)		107			—		13
Total income tax expense	$	1,312		$	1,022		$	2,438	$	1,578

Tax liabilities (including corporate income tax, Value Added Tax (VAT), social security and other taxes) of the Company’s Polish subsidiaries may be subject to examinations by Polish tax authorities for up to five years from the end of the year in which the tax is payable. CEDC’s U.S. federal income tax returns are also subject to examination by the U.S. tax authorities. As the application of tax laws and regulations, and transactions are susceptible to varying interpretations, amounts reported in the consolidated financial statements could be changed at a later date upon final determination by the tax authorities.

9. STOCK OPTION PLANS AND WARRANTS

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

The Company’s 1997 Stock Incentive Plan (Incentive Plan) provides for the grant of stock options, stock appreciation rights, restricted stock and restricted stock units to directors, executives, and other employees (“employees”) of the Company and to non-employee service providers of the Company. The Incentive Plan authorizes, and the Company has reserved for future issuance, up to 1,350,238 shares of Common Stock (subject to an anti-dilution adjustment in the event of a stock-split, recapitalization, or similar transaction). The Compensation Committee of the Board of Directors of the Company administers the Incentive Plan.

Employee options to purchase a total of 348,125 shares were exercised during the first six month of 2005.

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

Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of Statement 123. The fair value of these stock options were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 3.00% in 2005 and 1.90% in 2004, dividend yields of 0.0% in both 2005 and 2004; volatility factors of the expected market price of the Company’s common stock of 1.15 in 2005 and 1.25 in 2004; and a weighted-average expected life of the option of 3.4 years in both 2005 and 2004.

10

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(amounts in tables expressed in thousands except per share information)

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

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

	Three months ended				Six months ended
	June 30 2005		June 30 2004		June 30 2005		June 30 2004
Income as reported	$	5,600	$	4,516	$	10,220	$	7,626
Pro forma net income	$	5,459	$	4,181	$	9,544	$	7,079
Pro forma earnings per share:
Basic	$	0.33	$	0.26	$	0.57	$	0.44
Diluted	$	0.32	$	0.25	$	0.56	$	0.43

10. SUBSEQUENT EVENTS

On July 5, 2005, the Company acquired two additional branches in Northwestern Poland from Fenniks in exchange for $191,045, which will be accounted for as a business combination.

On July 11, 2005, the Company entered into a definitive share purchase agreement with the Polish Treasury Ministry to purchase 61% of the outstanding capital stock of Polmos Bialystok S.A. for a total purchase price of PLN 1.06 billion ($315.4 million based on the exchange rate as of July 29, 2005). The acquisition is subject to approvals from the Polish Anti-Monopoly Office and the Polish Securities and Stock Exchange Commission. We expect the acquisition to close in the third quarter of 2005. For the preparation of these financial statements, Polmos Bialystok S.A. has not been consolidated into the Company’s results of operations as of June 30, 2005.

The Share Purchase Agreement provides that the Company is to make investment commitments of at least PLN 77.5 million (approximately $23 million based on the exchange rate as of July 29, 2005) during the five years after the acquisition is consummated and to render technical support and pass on necessary know-how to Bialystok.

On July 15, 2005, the Company entered into an agreement with the trade unions of Polmos Bialystok S.A. regarding a social package for the employees of Polmos Bialystok S.A. The social package provides for, among other items, a guarantee of employment for 10 years for existing employees and payment by the Company of a privatization bonus for approximately PLN 17 million (approximately $5.1 million based on the exchange rate as of July 29, 2005).

On July 25, 2005, in connection with the planned acquisition of Botapol B.V. and Polmos Bialystok S.A., CEDC completed the issuance of €325 million 8% Senior Secured notes (“Notes”) due 2012. The Notes are guaranteed on a senior basis by certain of CEDC’s subsidiaries. On or shortly following the Bols Acquisition, Bols and its parent holding company, Botapol, will become guarantors. Polmos Bialystok S.A. will not become a guarantor following the Polmos Bialystok S.A. acquisition. The Notes are senior obligations that will rank (a) pari passu in right of payment to all existing and future senior indebtedness of CEDC, and (b) senior in right of payment to all existing and future obligations of CEDC that are expressly subordinated to the Notes. The Indenture contains certain customary events of default and customary covenants, limitations and requirements with respect to indebtedness, restricted payments, dividends and other payments affecting our subsidiaries, transactions with affiliates, liens, asset sales, sale and leaseback transactions, consolidations and mergers, and the provision of financial statements and reports.

On August 2, 2005, the Company entered into a purchase agreement for the private placement of 3,360,000 shares of its common stock at $34.69 per share, for gross proceeds of approximately $116.5 million. The per share price represents a 7% discount to the trailing 15-day closing average share price. The closing of the private placement is subject to the completion by CEDC of its acquisition from the Polish Treasury of 61% of the outstanding shares of Polmos Bialystok S.A., the second largest vodka producer in Poland. That acquisition, which will be completed upon obtaining Polish anti-monopoly approval, is anticipated to occur during September 2005. The CEDC shares which will be issued in the private placement are subject to customary registration rights granted to the investors for the resale of the shares.

11

CENTRAL EUROPEAN DISTRIBUTION CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(amounts in tables expressed in thousands except per share information)

On August 3, 2005, the Company obtained approval from the Polish Anti-Monopoly Office for the acquisition of Botapol Holding B.V. On June 27, 2005, the Company entered into a definitive share sale agreement with Takirra Investment Corporation, Rémy Cointreau S.A. (“Remy”), and Botapol Management B.V. (an indirect subsidiary of Rémy) to acquire 100% of the outstanding capital stock of Botapol Holding B.V. (“Botapol”), which itself owns 100% of the outstanding capital stock of both Bols, its principal operating subsidiary, and Hillcroft Sp. z o.o. (collectively referred to as “Bols”). The purchase price for the Bols acquisition is $270.0 million, of which the Bols share sale agreement permits the Company to pay between 45% and 55% of the purchase price in cash and between 45% and 55% of the purchase price in shares of our common stock, provided that the maximum number of shares issued is less than 20% of our outstanding shares of common stock. Based on the number of shares of common stock outstanding on July 29, 2005, assuming the maximum number of shares of common stock is issued and the number of outstanding shares does not increase, the Company would issue 3.38 million shares of our common stock (based on an agreed per share price of $36.22), and pay $147.9 million in cash. For the preparation of these financial statements, neither Botapol nor its subsidiaries have been consolidated into the results of the Company’s operations as of June 30, 2005.

As part of the Bols acquisition, if the weighted average of the closing price of our common stock over the four weeks immediately preceding the first anniversary of the closing date of the Bols Acquisition is below $32.59 per share, the Company will pay Rémy and Takirra an additional amount in cash equal to the difference multiplied by the total number of shares issued to them in the Bols Acquisition (the “Share Floor Payment Amount”). The closing price of our common stock on August 3, 2005, was $38.95.

11. COMMITMENTS AND CONTINGENT LIABILITIES

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

12. RELATED PARTY TRANSACTION

In January 2005, the Company entered into a rental agreement for a facility located in the North of Poland, in which the Chief Operating Officer of the Company has a 33% ownership. The monthly rental to be paid by the Company for this location is approximately $18,000 per month and relates to facilities to be shared by two subsidiaries of the Company.

During the second quarter of 2005, the Company made sales to a restaurant, of which the CEO of the Company has partial ownership. All sales were made on normal commercial terms, and total sales for the 6 months ending June 30, 2005 were approximately $36,000.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

• information concerning possible or assumed future results of operations, trends in financial results and business plans, including those relating to earnings growth and revenue growth, liquidity, prospects, strategies and the industry in which we, Bols, and Bialystok operate, as well as the completion of the acquisitions of Bols and Bialystok and the effect of such acquisitions on us;

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

• statements about the Company’s integration of its acquisitions;

• information about the Polish regulations on the Company’s business;

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

• other statements that are not historical facts.

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

We urge you to read and carefully consider the items of the other reports that we have filed with or furnish to the SEC for a more complete discussion of the factors and risks that could affect our future performance and the industry in which we operate, including the risk factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and the risk factors described in our Current Report on Form 8-K furnished to the SEC on July 5, 2005. In light of these risks, uncertainties and assumptions, the forward-looking events described in this report may not occur.

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

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

Certain Terms Used Herein

• “Financial First Half 2004” refers to the six months ended June 30, 2004;

• “Financial First Half 2005” refers to the six months ended June 30, 2005;

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• “Financial First Quarter 2004” refers to the three months ended March 31, 2004;

• “Financial First Quarter 2005” refers to the three months ended March 31, 2005;

• “Financial Second Quarter 2004” refers to the three months ended June 30, 2004;

• “Financial Second Quarter 2005” refers to the three months ended June 30, 2005;

Significant Factors Affecting Our Results of Operations

As a distributor of alcoholic beverages in Poland, our results of operations are significantly affected by the overall economic trends of Poland, as well as changes in consumer preferences, consumer spending, tax rates and consumer confidence, each of which impacts our volume of sales and the prices of our products. Over the past three years, we have succeeded in increasing our consolidated revenues. This resulted primarily from our acquisitions of distributors. In addition to the acquisitions, our results of operations were affected by the translation effects of fluctuations in the exchange rate of Polish Zloty versus U.S. Dollar because our functional currency is Polish Zloty but our reporting currency is U.S. Dollar during the periods covered.

Effect of Acquisitions of Distributors

As part of our strategy to increase distribution capacity, we acquire existing distributors particularly in regions where we do not have a leading position. We acquire successful distributors, which are primarily involved in the vodka distribution business and are among the leading distributors in their regions. Over the past six years, we have acquired 15 distributors throughout Poland. Typically, we purchase these distributors with cash and shares of our common stock. The acquisition and integration of these businesses into our operations have had a significant effect on our results of operations. These acquisitions have increased our net sales, costs of goods sold and operating expense. The following table sets forth our acquisitions of distributors for the periods covered in this analysis.

Name of Acquired Distributor Date of Acquisition

Saol Sp. z o.o	May 21, 2004
Miro Sp. z o.o	June 6, 2004
Polnis Sp. z o.o	October 11, 2004
Delikates Sp. z o.o	April 28, 2005

Effect of Exchange Rate Fluctuations

Because our functional currency is the Polish Zloty while our reporting currency is the U.S. Dollar, the translation effects of fluctuations in the exchange rate has materially impacted our financial condition and results of operations and has affected the comparability of our results between financial periods. Using average National Bank of Poland exchange rates for the full year, the exchange rate for the Polish Zloty at June 30, 2005, was 3.35 Polish Zloty per U.S. Dollar, compared to 3.72 Polish Zloty per U.S. Dollar at June 30, 2004.

In November 2000, we converted all of our loan obligations to Polish Zloty. Accordingly, during the periods under review our operations were not materially exposed to exchange rate risk. We will be exposed to foreign exchange risk, however, by having issued and sold the Notes (which are denominated in euros) and by incurring other debt in the future (including notes or borrowings to finance other acquisitions) that is not denominated in Polish Zloty. If the Polish Zloty decreases in value against the currencies in which we have to make payments, we could have increased cash requirements for debt service, higher leverage levels, greater levels of risk in relation to repaying or refinancing such debt when due, and significant costs incurred in order to hedge these part or all of these risks if we decided to enter hedge agreements.

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Effects of the Bols Acquisition and the Bialystok Acquisition

The potential acquisitions of the two most profitable vodka distilleries in Poland, Bols and Bialystok will have different requirements of management expertise as well as new reporting requirements as compared to our current distribution business:

• Managing trademark and marketing issues surrounding brand ownership.

• Managing export agreements throughout the world.

• Managing technical aspects of producing owned branded products.

• Managing synergies to complement production and distribution businesses, including aspects of human resource integration.

• Managing additional financial reporting requirements due to a business operating in multiple segments.

• A higher level of intangible assets, including goodwill and brand rights, as compared to historical levels. In accordance with U.S. GAAP, goodwill will not be amortized, but instead the recoverability of the goodwill will be assessed at least once a year.

• We will incur debt as a result of the acquisitions and our interest expense in future periods will exceed our historical levels.

Overview

The Company is the leading distributor by volume and a leading importer by value of alcoholic beverages in Poland. The Company operates the largest nationwide next-day alcoholic beverage delivery service with distribution centers and satellite branches located throughout Poland. The Company distributes over 700 brands of alcoholic beverages consisting of a wide range of alcoholic products. In addition to importing and distributing alcoholic beverages, we are the exclusive importer and distributor for certain tobacco and water products in Poland.

The strategy of the Company has been to grow profitability by growing sales both through acquisitions and organically, improving profit margins through sales of higher margin products, and tightly controlling costs. A large part of this strategy has been implemented through acquisitions of distributors. In order to aid understanding of our results, we have prepared tables which segment the income statement information as presented in the financial statements into those elements of the income statement which relate to operations acquired by the Company during the reporting period and those which relate to operations owned in both reporting periods. Key definitions are:

Total Operations 2005: This represents actual reported results for the six months ended June 30, 2005.

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Operations Acquired: These are the eliminations of the amounts generated by the 2005 and the 2004 acquired subsidiaries for the equivalent pre-acquisition period of 2004 (the equivalent pre-acquisition period for 2004 is defined as the period from January 1, 2004 through the date of the acquisition of the entity acquired) so as to present the 2005 continuing operations results for the same year on year periods.

Continuing Operations 2005: The amounts for 2005 generated by the same subsidiaries owned in 2004 and for the same period of time as in 2004.

Total Operations 2004: This is the extract from the income statement for total operations for the six months ended June 30, 2004.

As described in Notes 5 and 10, the Company has begun vertical expansion through the planned acquisition of two of Poland’s leading producers of vodka: Bols and Polmos Bialystok S.A.. These acquisitions are expected to be completed during the third quarter of 2005, as such the results of operations for the three months and six months ended June 30, 2004 do not include any effects from these acquisitions.

Results of Operations

Six month ended June 30, 2005 compared to six month ended June 30, 2004

	Six months ended June 30
	Total operations 2005			Operations acquired		Continuing operations 2005		Total operations 2004			Growth % from continuing operations
	($ in thousands)
Net Sales	$	314,251		30,657		283,594		$	243,481		16.5	%
Cost of goods sold, including excise taxes		273,663		27,727		245,936			213,079		15.4	%
Gross profit		40,588		2,930		37,658			30,402		23.9	%
as a percentage of sales		12.9	%	9.6	%	13.3	%		12.5	%
Operating expense		26,367		2,151		24,216			20,401		18.7	%
Operating income		14,221		779		13,442			10,001		34.4	%
as a percentage of sales		4.5	%	2.5	%	4.7	%		4.1	%
Non operating income / (expense)
Interest income		304		20		284			87		226.4	%
Interest expense		(1,691	)	(243	)	(1,448	)		(996	)	45.4	%
Realized and unrealized foreign exchange losses		(64	)	—		(64	)		58		(210.3	)%
Other income / (expense), net		(112	)	(4	)	(108	)		54		(300.0	)%
Income before taxes		12,658		552		12,106			9,204		31.5	%
as a percentage of sales		4.0	%	1.8	%	4.3	%		3.8	%
Income tax expense		2,438		125		2,313			1,578		46.6	%
Net income		10,220		427		9,793			7,626		28.4	%
as a percentage of sales		3.3	%	1.4	%	3.5	%		3.1	%

Net Sales

Net sales represent total sales net of all customer rebates and value added tax. Total net sales increased by approximately 29.1%, or $70.7 million, from $243.5 million in Financial First Half 2004 to $314.3 million in Financial First Half 2005. This increase resulted primarily from the effects of the acquisitions in 2004 and 2005. Total net sales from continuing operations increased by approximately 16.5%, or $40.1 million, from $243.5 million in Financial First Half 2004 to $283.6 million in Financial First Half 2005. This increase resulted primarily from:

• increased sales of imported products. The net sales of imported products increased by approximately 29.3%, or $3.5 million, from $12.1 million in Financial First Half 2004 to $15.7 million in Financial First Half 2005. This increase resulted primarily from Poland’s accession to the European Union on May 1, 2004, which eliminated customs duty for products imported from other European Union countries. This elimination of customs duty reduced the price of the imported products, increasing net sales. The table below breaks down the value of our imported products by product category over Financial First Half 2005.

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• Increases in sales per existing outlets and sales from new outlets.

• the strength of the Polish Zloty versus the U.S. Dollar in Financial First Half 2005 as compared to the strength of the Polish Zloty versus the U.S. Dollar in Financial First Half 2004. The exchange rate for the Polish Zloty at June 30, 2005, was 3.35 Polish Zloty per U.S. Dollar, compared to 3.72 Polish Zloty per U.S. Dollar at June 30, 2004.

Sales of exclusive imported beers, sprites and wines for the Financial First Half 2004 and 2005 are highlighted below. This table does not include imported products that are not directly imported on an exclusive basis by CEDC.

Six Month to June 30, (Sales in $000’s)	Financial First Half 2005		Financial First Half 2004		%
Imported Beers	$	3,507	$	3,173	10.5
Imported Spirits		4,097		2,749	49.0
Imported Wines		8,058		6,187	30.2
Total Imported Product	$	15,662	$	12,109	29.3

Partially offsetting the positive sales growth was the impact of the death of Pope John Paul II in April of 2005. During this period, many stores in Poland were closed and the Company estimates that an equivalent of up to 3-5 days or approximately $7 to $10 million of sales were lost.

Gross Profit

Total gross profit increased by approximately 33.5%, or $10.2 million, from $30.4 million in Financial First Half 2004 to $40.6 million in Financial First Half 2005 reflecting the effect of acquisitions, higher gross margins and sales growth in the Financial First Half 2005. Gross margin increased from 12.5% in Financial First Half 2004 to 12.9% in Financial First Half 2005. This increase in gross margin resulted from changes in sales mix including the increased sales of higher margin imported products and the higher margin earned on Vodka sales during the first quarter of 2005. In connection with an excise tax increase in January 2005, the Company purchased vodka at lower pricing, during the end of 2004 and beginning of 2005, which was sold in Financial First Quarter 2005 at the higher (post-excise tax increase) prices.

Operating Expenses

Operating expenses consist of selling, general and administrative expenses (“S,G&A”), depreciation, amortization, and bad debt provision. Total operating expenses increased by approximately 29.2%, or $6.0 million, from $20.4 million in Financial Half 2004 to $26.4 million in Financial First Half 2005. This increase resulted primarily from the effects of the acquisitions in 2004 and 2005, and the overall growth of the business. As a percent of net sales, operating expenses remain stable on 8.4%. The table below sets forth the items of operating expenses.

	Financial First Half 2005		Financial First Half 2004
	($ in thousands)
S,G&A	$	24,034	$	18,703
Depreciation and amortization		1,984		1,446
Bad debt provision		349		252
	$	26,367	$	20,401

S,G&A consists of salaries, warehousing and transportation costs and administrative expenses. S,G&A increased by approximately 28.5%, or $5.3 million, from $18.7 million in Financial First Half 2004 to $24.0 million in Financial First Half 2005. This increase is in line with the growth in net sales.

Depreciation and amortization increased by approximately 37.2%, or $ 0.6 million, from $1.4 million in Financial First Half 2004 to $2.0 million in Financial First Half 2005. This increase resulted primarily from the effect of acquisitions. The increase also reflected our continued investment in information technology systems upgrades and normal vehicle rotation.

Bad debt expense remained stable at approximately 0.1% of net sales.

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Operating Income

Total operating income increased by approximately 42.2%, or $4.2 million, from $10.0 million in Financial First Half 2004 to $14.2 million in Financial First Half 2005. Operating margin increased from 4.1% for Financial First Half 2004 to 4.5% for Financial First Half 2005. Operating income from continuing operations increased by approximately 34.4%, or $3.4 million, from $10.0 million in Financial First Half 2004 to $13.4 million in Financial First Half 2005. Operating margin from continuing operations increased from 4.1% in Financial First Quarter 2004 to 4.7% in Financial First Half 2005. These increases resulted primarily from higher gross profit margins described above.

Interest Expense

Total interest expense increased by approximately 69.8%, or $0.7 million, from $1.0 million in Financial First Half 2004 to $1.7 million in Financial First Half 2005. This increase resulted primarily from higher inventory purchased (primarily with credit) during the end of Financial Year 2004 beginning of 2005 to take advantage of lower prices related to an excise tax increase, as well as the overall growth in the business during the Financial First Half 2005.

Income Tax

The total tax charge for Financial First Half 2005 was $2.4 million, or 19.3% of pre-tax profits. For Financial First Half 2004, the total tax charge was $1.6 million, or 17.1% of pre-tax profits. The primary reason for the variance to the Polish statutory tax rate of 19% was due to an additional provision made for the deferred tax asset in Financial First Half 2005

Three months ended June 30, 2005 Compared to three months ended June 30, 2004

	Three months ended June 30
	Total operations 2005			Operations acquired		Continuing operations 2005		Total operations 2004			Growth % from continuing operations
	($ in thousands)
Net Sales	$	164,249		10,724		153,525		$	133,004		15.4	%
Cost of goods sold, including excise taxes		143,342		9,690		133,652			116,368		14.9	%
Gross profit		20,907		1,034		19,873			16,636		19.5	%
as a percentage of sales		12.7	%	9.6	%	12.9	%		12.5	%
Operating expense		13,432		696		12,736			10,745		18.5	%
Operating income		7,475		338		7,137			5,891		21.2	%
as a percentage of sales		4.6	%	3.2	%	4.6	%		4.4	%
Non operating income / (expense)
Interest income		238		6		232			44		427.3	%
Interest expense		(770	)	(53	)	(717	)		(535	)	34.0	%
Realized and unrealized foreign exchange losses		29		—		29			104		(72.1	)%
Other income / (expense), net		(60	)	2		(62	)		34		(282.4	)%
Income before taxes		6,912		293		6,619			5,538		19.5	%
as a percentage of sales		4.2	%	2.7	%	4.3	%		4.2	%
Income tax expense		1,312		66		1,246			1,022		23.1	%
Net income		5,600		227		5,373			4,516		19.0	%
as a percentage of sales		3.4	%	2.1	%	3.5	%		3.4	%

Net Sales

Net sales represent total sales net of all customer rebates and value added tax. Total net sales increased by approximately 23.5%, or $31.2 million, from $133.0 million in Financial Second Quarter 2004 to $164.2 million in Financial Second Quarter 2005. This increase resulted primarily from the effects of the acquisitions in 2004 and 2005. Total net sales from continuing operations increased by approximately 15.4%, or $20.5 million, from $133.0 million in Financial Second Quarter 2004 to $153.5 million in Financial Second Quarter 2005. This increase resulted primarily from:

• increased sales of imported products. The net sales of imported products increased by approximately 21.1%, or $1.5 million, from $7.2 million in Financial Second Quarter 2004 to $8.7 million in Financial Second Quarter 2005. This increase resulted

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primarily from Poland’s accession to the European Union on May 1, 2004, which eliminated customs duty for products imported from other European Union countries. This elimination of customs duty reduced the price of the imported products, increasing net sales. The table below breaks down the value of our imported products by product category over Financial Second Quarter 2005.

• Increases in sales per existing outlets and sales from new outlets.

• the strength of the Polish Zloty versus the U.S. Dollar in Financial Second Quarter 2005 as compared to the strength of the Polish Zloty versus the U.S. Dollar in Financial Second Quarter 2004. The exchange rate for the Polish Zloty at June 30, 2005, was 3.35 Polish Zloty per U.S. Dollar, compared to 3.72 Polish Zloty per U.S. Dollar at June 30, 2004.

Sales of exclusive imported beers, sprites and wines for the Financial Second Quarter 2004 and 2005 are highlighted below. This table does not include imported products that are not directly imported on an exclusive basis by CEDC.

Three Months to June 30, (Sales in $000’s)	Financial Second Quarter 2005		Financial Second Quarter 2004		%
Imported Beers	$	2,048	$	1,874	9.3
Imported Spirits		2,218		1,582	40.2
Imported Wines		4,423		3,722	18.8
Total Imported Product	$	8,689	$	7,178	21.1

Partially offsetting the positive sales growth was the impact of the death of Pope John Paul II in April of 2005. During this period, many stores in Poland were closed and the Company estimates that an equivalent of up to 3-5 days or approximately $7 to $10 million of sales were lost.

Gross Profit

Total gross profit increased by approximately 25.7%, or $4.3 million, from $16.6 million in Financial Second Quarter 2004 to $20.9 million in the Financial Second Quarter 2005 primarily reflecting the effect of acquisitions, higher gross margins and sales growth. Gross margin increased from 12.5% in Financial Second Quarter 2004 to 12.7% in Financial Second Quarter 2005. This increase in gross margin resulted primarily from changes in sales mix including the increased sales of higher margin imported products.

Operating Expenses

Operating expenses consist of selling, general and administrative expenses (“S,G&A”), depreciation, amortization, and bad debt provision. Total operating expenses increased by approximately 25.0%, or $2.7 million, from $10.7 million in Financial Second Quarter 2004 to $13.4 million in Financial Second Quarter 2005. This increase resulted primarily from the effects of the acquisitions in 2004 and 2005, and the overall growth in the business. As a percent of net sales, operating expenses slightly increased from 8.1% in Financial Second Quarter 2004 to 8.2% in Financial Second Quarter 2005.

	Financial Second Quarter 2005		Financial Second Quarter 2004
	($ in thousands)
S,G&A	$	12,365	$	9,818
Depreciation and amortization		972		741
Bad debt provision		95		186
	$	13,432	$	10,745

S,G&A consists of salaries, warehousing and transportation costs and administrative expenses. S,G&A increased by approximately 25.9%, or $2.5 million, from $9.8 million in Financial Second Quarter 2004 to $12.4 million in Financial Second Quarter 2005. This increase is in line with the growth in net sales.

Depreciation and amortization increased by approximately 31.2%, or $0.3 million, from $0.7 million in Financial Second Quarter 2004 to $1.0 million in Financial Second Quarter 2005. This increase resulted primarily from the effect of acquisitions. The increase also reflected our continued investment in information technology systems upgrades and normal vehicle rotation.

Bad debt expense remained stable at approximately 0.1% of net sales.

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Operating Income

Total operating income increased by approximately 26.9%, or $1.6 million, from $5.9 million in Financial Second Quarter 2004 to $7.5 million in Financial Second Quarter 2005. Operating margin increased from 4.4% for Financial Second Quarter 2004 to 4.6% for Financial Second Quarter 2005. Operating income from continuing operations increased by approximately 21.2%, or $1.2 million, from $5.9 million in Financial Second Quarter 2004 to $7.1 million in Financial Second Quarter 2005. Operating margin from continuing operations increased from 4.4% in Financial Second Quarter 2004 to 4.6% in Financial Second Quarter 2005.

Interest Expense

Total interest expense increased by approximately 43.9%, or $0.2 million, from $0.5 million in Financial Second Quarter to $0.7 million in Financial Second Quarter 2005. This increase resulted primarily from higher inventory purchased (primarily with credit) during the end of Financial Year 2004 beginning of 2005 to take advantage of lower prices related to an excise tax increase, as well as the overall growth in the business during the Financial First Half 2005.

Income Tax

The total tax charge for Financial Second Quarter 2005 was $1.3 million, or 19.0% of pre-tax profits. For Financial Second Quarter 2004, the total tax charge was $1.0 million, or 18.5% of pre-tax profits.

Statement of Liquidity and Capital Resources

During the periods under review, our primary sources of liquidity were cash flows generated from operations, credit facilities and proceeds from options exercised. Our primary uses of cash were to fund our working capital requirements, service indebtedness, finance capital expenditures and fund acquisitions. The following table sets forth selected information concerning our consolidated cash flow during the periods indicated.

	Financial First Half 2005		Financial First Half 2004
	($ in thousands)
Cash flow from operating activities	17,747		9,259
Cash flow from investing activities	(1,717	)	(4,453	)
Cash flow from financing activities	(4,241	)	(4,406	)

Net cash flow from operating activities

Net cash provided by operating activities for the Financial First Half 2005 was $17.7 million as compared to $9.3 million for the Financial First Half 2004. The primary drivers for the increase were due to overall business growth and improved working capital measures. Net cash flow from working capital was an inflow of $5.4 million for the Financial First Half 2005 as compared to outflow of $0.6 million for the Financial First Half 2004. During the end of 2004 and early 2005, the Company purchased additional inventory to take advantage of lower prices prior to an excise tax increase. The reduction of these inventory levels during the Financial Half 2005 generated a $9.9 million inflow in changes in working capital.

Net cash flow from investing activities

Net cash used by investing activities for the Financial First Half 2005 was $1.7 million as compared to $4.5 million for the Financial First Half 2004. The primary drivers for the reduction were due to higher sales of fixed assets and lower amounts spent for acquisitions. During the Financial First Half 2004, the Company sold old or obsolete fixed assets from the acquired subsidiaries generating $1.3 million in cash inflows. Amounts spent for distributor acquisitions for the Financial First Half 2005 was $2.0 million as compared to $3.4 million for the Financial First Half 2004.

Net cash flow from financing activities

Net cash used by investing activities was $4.2 million for the Financial First Half 2005 and $4.4 million for the Financial First Half 2004. The primary use of cash flow from financing activities was repayment of overdraft facilities for both periods.

Our Future Liquidity and Capital Resources

Our primary uses of cash in the future will be to fund our working capital requirements, service indebtedness, finance capital expenditures and fund acquisitions. We expect to fund these requirements in the future with cash flows from our operating activities, cash on hand, and the financing arrangements described below.

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Financing Arrangements

Existing Credit Facilities

As at June 30, 2005, the Company had total debt outstanding under existing credit facilities in the Polish Zloty equivalent of approximately $31.9 million. The credit facilities are available at the subsidiary level and not at the parent company level for working capital purposes only. In order to fund working capital and other liquidity requirements, we also have available non-committed credit lines with various banks and credit institutions. As of June 30, 2005, the amount of available, unutilized and uncommitted credit facilities was the Polish Zloty equivalent of approximately $45.2 million. These existing credit facilities are subject to renewal on an annual basis.

Notes

On July 25, 2005 the Company completed the issuance of €325 million 8% Senior Secured notes due 2012. The Indenture contains certain customary events of default and customary covenants, limitations and requirements with respect to indebtedness, restricted payments, dividends and other payments affecting our subsidiaries, transactions with affiliates, liens, asset sales, sale and leaseback transactions, consolidations and mergers, and the provision of financial statements and reports.

Equity Offering

On August 2, 2005, the Company entered into a purchase agreement for the private placement of 3,360,000 shares of its common stock at $34.69 per share, for gross proceeds of approximately $116,558,400. The per share price represents a 7% discount to the trailing 15-day closing average share price. The closing of the private placement is subject to the completion by CEDC of its acquisition from the Polish Treasury of 61% of the outstanding shares of Polmos Bialystok S.A., the second largest vodka producer in Poland. That acquisition, which will be completed upon obtaining Polish anti-monopoly approval, is anticipated to occur during September 2005. The CEDC shares which will be issued in the private placement are subject to customary registration rights granted to the investors for the resale of the shares.

We currently believe that the Company’s operating cash flow and available cash, together with financing arrangements described above, will be sufficient to fund our working capital needs, anticipated capital expenditure and debt service requirements for at least the next several years, although we cannot assure you that will be case.

STATEMENT ON INFLATION AND CURRENCY FLUCTUATIONS

Inflation in Poland is projected at 2.1% for 2005, compared to actual inflation of 3.5% in 2004. For the first six months of 2005, the yearly inflation was 2.9%.

The Company’s operating cash flows and substantially all of its assets are denominated in Polish Zloty. This means that the Company is exposed to translation risk both on its balance sheet and income statement. The impact on working capital items is demonstrated on the cash flow statement as the movement in exchange on cash and cash equivalents. The impact on the income statement is by the movement of the average exchange rate used to restate the income statement from Polish Zloty to U.S. Dollars. The amounts shown as exchange rate gains or losses on the face of the income statement relate only to realized gains or losses on non Polish Zloty denominated transactions.

During the six months ended June 30, 2005, the exchange rate for the Polish Zloty versus the U.S. Dollar weakened from 2.99 to 3.35 or 12.0%.

Critical Accounting Policies and Estimates

General

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

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Provisions for Doubtful Debts

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

Inventory

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

Goodwill and Intangibles

Following the introduction of FASB 142, acquired goodwill is no longer amortized. Instead the Company assesses the recoverability of its goodwill at least once a year or whenever adverse events or changes in circumstances or business climate indicate that expected future cash flows (undiscounted and without interest charges) for individual business units may not be sufficient to support the recorded goodwill. If undiscounted cash flows are not sufficient to support the goodwill, an impairment charge would be recognized to reduce the carrying value of the goodwill based on the expected discounted cash flows of the business unit. No such charge has been considered necessary through the date of the accompanying financial statements. Intangibles (trademarks) are amortized over 10 years.

The calculation of the impairment charge for goodwill requires use of estimates. Factoring in a deviation of +/- 10% for estimated gross profit of the acquired entities, or the discount rate as compared to managements estimate, there would still be no need for an impairment charge of goodwill.

Purchase Price Allocation

We account for our acquisitions under the purchase method of accounting in accordance with SFAS No. 141, Business Combinations, and allocate the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The determination of the values of the assets acquired and liabilities assumed, as well as associated asset useful lives, will require management to make estimates.

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

Recently issued accounting pronouncements

In December 2004, the FASB issued FASB Statement No. 123(R), Share Based Payments, a revision of the prior FASB Statement No. 123, Accounting for Stock Based Compensation. This statements requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. The statement offers a number of possibilities for implementation. The SEC has provided an extension of this to allow implementation during the first quarter of 2006. The Company has elected to implement the modified prospective application, which will require the Company to begin to recognize the impact of the change in January 2006 and will not restate any prior periods. The expected impact during 2006 is approximately $850,000, based upon current market conditions. Management of the Company is still in process of evaluating what forms of compensation may be introduced in future periods in lieu of the existing option program.

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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

Our commercial foreign exchange exposure mainly arises from the purchase of imported alcoholic beverage in currencies other than our functional currency of the Polish Zloty. Thus, accounts payable for imported beverages are billed in various currencies and we are subject to short-term changes in the currency markets for product purchases. We also operate a bonded warehouse where the inventory acquired from foreign suppliers is recorded in its source currency. Therefore, any currency movement on trade payables resulting from either a strengthening or weakening of the Polish Zloty against a foreign supplier’s currency is often compensated for by an opposite movement relating to inventories recorded in the imported currency. Because substantially all of our operations are conducted in Poland using the local currency, the impact of fluctuations in the exchange rate of the Zloty versus the U.S. Dollar on transactions using a currency different from the Zloty has been minimal.

In addition, because substantially all of our revenues are denominated in Polish Zloty, we will be exposed to foreign exchange risk by issuing and selling the Notes as described in Note 10, which are denominated in euros. If the Polish Zloty decreases in value against the currencies in which we have to make payments, we could have increased cash requirements for debt service, higher leverage levels, greater levels of risk in relation to repaying or refinancing such debt when due. We currently have not entered into hedging arrangements with respect to this risk. If we decide to enter into hedge agreements in the future, we could incur additional costs in order to hedge some or all of these risks.

The Company is exposed to interest rate fluctuations as our bank borrowings usually bear interest at variable rates based upon the Warsaw Interbank rate (WIBOR).

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Internal Controls. The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934. These rules refer to the controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 (such as this quarterly report), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Internal controls over financial reporting refer to a process that are designed to provide reasonable assurance that the Company’s transactions are properly authorized, recorded and reported and that the Company’s assets are safeguarded from improper use to permit the preparation of the Company’s financial statements in conformity with generally accepted accounting principles.

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

Changes to Internal Controls. In accordance with the SEC’s requirements, the CEO and the CFO note that, during the most recent fiscal quarter, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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Conclusions regarding Disclosure Controls . Based upon the required evaluation of the Company’s disclosure controls and procedures as of the end of the period covered by this report, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

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PART II. OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Pursuant to an agreement dated April 18, 2005, the Company issued 13,258 shares of common stock, valued at $469,466, as partial consideration for the acquisition of 100% of the outstanding capital stock of Delikates Sp. z o.o. The shares were delivered by the Company on May 24, 2005. These shares were issued pursuant to the exemption from registration provided by Regulation S under the Securities Act. The securities were issued in off-shore private placements in reliance on Regulation S to entities which are not “United States persons” as defined by Regulation S. The stock certificates for all such securities bear a legend indicating that the stock is restricted and may not be sold in the United States without registration or an exemption from such requirements. Further, the holders have agreed to a one-year lock-up period.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company held its annual meeting of stockholders on May 2, 2005. At the meeting, directors were elected and the Company’s selection of independent public auditors for the 2005 fiscal year was ratified.

The votes cast for, against and withheld for each nominee for director were as follows:

Nominees	FOR	AGAINST	WITHHOLD AUTHORITY TO VOTE
William. V Carey	15,732,960	0	58,401
David Bailey	15,721,091	0	70,270
N. Scott Fine	15,713,140	0	78,221
Tony Housh	15,720,891	0	70,470
Bobby Koch	15,716,711	0	74,650
Jan Laskowski	15,721,431	0	69,930
Richard Roberts	13,415,809	0	2,375,552

The selection of independent public auditors was ratified by a vote of 15,709,945 (94.3% of the total eligible votes) in favor and 64,251 votes (.4% of the total eligible votes) against with 17,165 votes abstaining and no broker non-votes.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

Exhibit number	Exhibit description
2.11	Conditional Share Sale Agreement for Delikates Sp. z o.o. dated April 28, 2005 by and among Carey Agri International Poland Sp. z o.o., Central European Distribution Corporation, Barbara Jernas, Szymon Jernas, Magdalena Namysl and Karol Jaskula (filed as Exhibit 2.1 to the Current Report on Form 8-K filed with the SEC on May 4, 2005 and incorporated herein by reference).
2.2	Share Sale Agreement, dated June 27, 2005, by and among Rémy Cointreau S.A., Botapol Management B.V., Takirra Investment Corporation N.B., Central European Distribution Corporation and Carey Agri International Poland Sp. z o.o. (filed as Exhibit 2.1 to the Current Report on Form 8-K filed with the SEC on July 1, 2005 and incorporated herein by reference)
2.3	Share Purchase Agreement, dated July 11, 2005, by and among the State Treasury of the Republic of Poland, Carey Agri International-Poland Sp. z o.o. and Central European Distribution Corporation (filed as Exhibit 2.1 to the Current Report on Form 8-K filed with the SEC on July 15, 2005 and incorporated herein by reference)
4.1	Indenture, dated July 25, 2005, by and among Central European Distribution Corporation, Carey Agri International-Poland Sp. z o.o., Onufry S.A., Multi-Ex S.A., Astor Sp. z o.o., Polskie Hurtownie Alkoholi Sp. z o.o., MTC Sp. z o.o., Przedsiebiorstwo Dystrybucji Alkoholi Agis S.A., Dako-Galant Przedsiebiorstwo Handlowo Produkcyjne Sp. z o.o., Damianex S.A., PWW Sp. z o.o. and Miro Sp. z o.o., as Guarantors, The Bank of New York, as Trustee, Principal Paying Agent, Registrar and Transfer Agent, and ING Bank N.V., London Branch, as Note Security Agent (filed as Exhibit 4.1 to the Current Report on Form 8-K filed with the SEC on July 25, 2005 and incorporated herein by reference)
10.1*	Social guarantee package for the employees of Polmos Bialystok S.A.
10.2*	Loan Agreement, dated June 23, 2005, by and between Carey Agri International-Poland Sp. z o.o. and Fortis Bank Polska S.A.
10.3*	Annex to Loan Agreement, dated June 26, 2005, by and between Carey Agri International-Poland Sp. z o.o. and BRE Bank S.A.
31.1*	Certificate of the CEO pursuant to Rule 13a-15(e) or Rule 15d-15(e)
31.2*	Certificate of the CFO pursuant to Rule 13a-15(e) or Rule 15d-15(e)
32.1*	Certification of the CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*	Certification of the CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Filed herewith

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SIGNATURES

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

	CENTRAL EUROPEAN DISTRIBUTION CORPORATION (registrant)
Date: August 8, 2005	By:	/s/ William V. Carey
		William V. Carey President and Chief Executive Officer
Date: August 8, 2005	By:	/s/ Chris Biedermann
		Chris Biedermann Vice President and Chief Financial Officer

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Exhibit Index

Exhibit Number	Exhibit Description
2.1	Conditional Share Sale Agreement for Delikates Sp. z o.o. dated April 28, 2005 by and among Carey Agri International Poland Sp. z o.o., Central European Distribution Corporation, Barbara Jernas, Szymon Jernas, Magdalena Namysl and Karol Jaskula (filed as Exhibit 2.1 to the Current Report on Form 8-K filed with the SEC on May 4, 2005 and incorporated herein by reference).
2.2	Share Sale Agreement, dated June 27, 2005, by and among Rémy Cointreau S.A., Botapol Management B.V., Takirra Investment Corporation N.B., Central European Distribution Corporation and Carey Agri International Poland Sp. z o.o. (filed as Exhibit 2.1 to the Current Report on Form 8-K filed with the SEC on July 1, 2005 and incorporated herein by reference)
2.3	Share Purchase Agreement, dated July 11, 2005, by and among the State Treasury of the Republic of Poland, Carey Agri International-Poland Sp. z o.o. and Central European Distribution Corporation (filed as Exhibit 2.1 to the Current Report on Form 8-K filed with the SEC on July 15, 2005 and incorporated herein by reference)
4.1	Indenture, dated July 25, 2005, by and among Central European Distribution Corporation, Carey Agri International-Poland Sp. z o.o., Onufry S.A., Multi-Ex S.A., Astor Sp. z o.o., Polskie Hurtownie Alkoholi Sp. z o.o., MTC Sp. z o.o., Przedsiebiorstwo Dystrybucji Alkoholi Agis S.A., Dako-Galant Przedsiebiorstwo Handlowo Produkcyjne Sp. z o.o., Damianex S.A., PWW Sp. z o.o. and Miro Sp. z o.o., as Guarantors, The Bank of New York, as Trustee, Principal Paying Agent, Registrar and Transfer Agent, and ING Bank N.V., London Branch, as Note Security Agent (filed as Exhibit 4.1 to the Current Report on Form 8-K filed with the SEC on July 25, 2005 and incorporated herein by reference)
10.1*	Social guarantee package for the employees of Polmos Bialystok S.A.
10.2*	Loan Agreement, dated June 23, 2005, by and between Carey Agri International-Poland Sp. z o.o. and Fortis Bank Polska S.A.
10.3*	Annex to Loan Agreement, dated June 26, 2005, by and between Carey Agri International-Poland Sp. z o.o. and BRE Bank S.A.
31.1*	Certificate of the CEO pursuant to Rule 13a-15(e) or Rule 15d-15(e)
31.2*	Certificate of the CFO pursuant to Rule 13a-15(e) or Rule 15d-15(e)
32.1*	Certification of the CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of the CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* - filed herewith

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EX-10.1

Exhibit 10.1

SOCIAL GUARANTEES PACKAGE

FOR EMPLOYEES OF

POLMOS BIALYSTOK S.A.

WITH SEAT IN BIALYSTOK

of July 15, 2005

1

SOCIAL GUARANTEES PACKAGE

FOR EMPLOYEES OF

POLMOS BIALYSTOK S.A. with SEAT in BIALYSTOK

Concluded between:

I. Trade Union Organizations active in Polmos Bialystok S.A.:

1) The Company Commission of the Independent Self-governing Trade Union “Solidarnosc” operating in Polmos Bialystok S.A., represented by Mr. Bogdan Filipczuk and Mr. Stefan Binkiewicz, pursuant to documents enclosed to this Package as Annex 1.

2) The Independent Self-governing Trade Union “Lider” of Polmos Bialystok S.A. Employees represented by Mr. Jan Zalewski and Mr. Miroslaw Hryszko, pursuant to documents enclosed to this Package as Annex 2.

                and

II. the following Investor:

Carey Agri International Poland Sp. z o.o., a limited liability company under the Polish law, with seat in Warsaw at ul. Bokserska 66a, entered in the National Court Register under the number 0000051098, represented by Mr. Evangelos Evangelou and Mrs. Elzbieta Kusnierek, pursuant to documents enclosed to this Package as Annex 3.

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PREAMBLE

The Investor and the Trade Unions herein express their will to agree upon proper employment and social conditions to guarantee correct operation of the Company.

The Parties acknowledge that the Company operates in a highly competitive branch and that to ensure its proper growth the Investor and the Trade Unions express their will to undertake joint efforts to create conditions, under which the competitiveness of the Company may raise.

The Investor, being aware that the Trade Unions and the Company concluded numerous legally-binding agreements and that the Company, out of a custom, provided specific benefits to its Employees and the Trade Unions, shall aim at ensuring correct conditions of cooperation between the Trade Unions and the Company to guarantee their observance and realization.

The Social Guarantees Package contains obligations of the Parties related to the protection of the employee interests with regard to privatization of Polmos Bialystok S.A. . The Parties shall with due diligence make this Package a part of the privatization agreement.

By way of negotiations held on the basis of article 72 of the Civil Code, acting in good faith and sharing mutual trust pursuant to article 56 of the Civil Code in connection to articles 4, 7 and 21 of the Act on Trade unions as well as other provisions of the law, the Parties herein conclude this Social Guarantees Package and at the same time, under the currently binding law, conclude a collective agreement that defines the rights and obligations of the employees and the employer mentioned in article 9 § 1 of the Code of Labor, and the following is governed:

DEFINITIONS

a) “Share Purchase Agreement” means the agreement under which the shares of Polmos Bialystok S.A. are sold, concluded on July 11, 2005 between the State Treasury, represented by the Minister of Treasury, and the Investor on the basis of a procedure initiated due to a public invitation for negotiations announced on December 16, 2004;

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b) “Investor” means Carey Agri International Poland Sp. z o.o. with seat in Warsaw and it legal successors;

c) “Company” or “Employer” means Polmos Bialystok S.A. with seat in Bialystok and its legal successors;

d) “Trade Unions” mean professional organizations listed in the Preamble, i.e. the Company Commission of the Independent Self-governing Trade Union “Solidarnosc” active in Polmos Bialystok S.A. and the Independent Self-governing Trade Union “Lider” of Polmos Bialystok S.A. Employees, which operate in the Company on the day of concluding the Social Guarantees Package;

e) “Period of Guarantee” means a period, which the Employment Guarantee is valid for. The Employment Guarantee, described in detail in § 3, is understood as an obligation of the Investor to preserve employment of the Employees and a guarantee that the conditions of employment and pay are not terminated or changed unilaterally by the Investor;

f) “Social Guarantees Package” or “Social Package” means this Social Guarantees Package for the Employees of Polmos Bialystok S.A.;

g) “Organizational Unit” means an organizational unit of the Company, in particular its branch, facility, any organized part of the corporation, which may be distinguished in such a way that the Employees are transferred to it on the basis of article 23 of the Code of Labor;

h) “Employees” means:

i. persons that on the day of concluding this Social Guarantees Package are employed in the Company under the employment agreements for an unspecified term, if the employment agreements are not subject to the notice of termination or are not cancelled or expired before the day of the Purchase of Shares, and;

ii. persons that on the day of concluding this Social Guarantees Package are employed in the Company under the employment

4

agreements for an unspecified term, if the employment agreements are not subject to the notice of termination and are not cancelled or expired before the day of the Purchase of Shares, however, the Employment Guarantee as well as other provisions of this Package apply to persons employed under the employment agreements for a specified term only until termination of such agreements, pursuant to their provisions, but no longer than for a period of 6 months from the day of the Purchase of Shares;

iii. Term “Employees” also includes Employees who on the day of concluding this Package are employed under the employment agreements for a specified term, which are changed to agreements for an unspecified term in the course of the period between conclusion and coming into force of the Social Guarantees Package. In such case these Employees shall be subject to the Social Guarantees Package similarly to the Employees hired for an unspecified term.

The term “Employees” does not include the members of the Management Board. The members of the Management Board have the right to obtain the Privatization Bonus (§ 4 clause 9) and the Incentive Bonus (§ 4 clause 10) and to that regard only the provisions of this Package apply to them.

A list of Employees conforming with the definition of “Employees” is enclosed as Annex 4.

i) “Privatization Bonus” means a one-time financial benefit paid by the Investor in two installments to the Employees, mentioned in § 4 clause 9;

j) “Company Collective Labor Agreement” means the Collective Labor Agreement of Polmos Bialystok S.A. Employees concluded for an unspecified term and entered in the Register of the Collective Labor Agreements on July 16, 2003 under the number CDXXVI together with supplement protocols that were effectively registered prior to conclusion of the Social Guarantees Package, with reservation of the expiry of the Supplement Protocol no. 3 of March 11, 2005, pursuant to clause IV.2 of this protocol, and the Supplement Protocol no. 4 of July 5, 2005;

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k) “Purchase of Shares” means purchase of Company shares by the Investor on the basis of the Share Purchase Agreement, pursuant to provisions of the Code of commercial companies and the Share Purchase Agreement;

l) “Employment Guarantee” means the Employment Guarantee for Polmos Bialystok S.A. Employees mentioned in § 3 clause 1.

§ 1

INTRODUCTORY PROVISIONS

1. Obligations of the Investor and the Company

Where this Social Guarantees Package refers to obligations or guarantees of the Investor or obligations of the Company, it means that the Investor, being the shareholder, shall use his entitlements when executing the rights in the Company shares to enforce the provisions of the Social Guarantees Package on behalf of the Company.

2. Obligations of the Investor

The Parties agree that in the event of failure to perform the provisions of the Package by the Company, the concerned Employee or Trade Unions have the right to request that the obligations imposed by the Package are performed by the Company, and request the Investor as follows:

(i) request the Investor (not the Company) to provide the benefit of the Privatization Bonus mentioned in § 4 clause 9, as well as the Incentive Bonus mentioned in § 4 clause 10;

(ii) if the Company does not perform the obligation to pay the indemnity mentioned in § 3 clause 3 in relation to a breach of the Social Guarantees Package with regard to the Employment Guarantee, the concerned Employee may notify the Investor about such fact and request him to conclude the payment within a period of 30 days of the notification, after which the Investor is liable for the Company’s obligation shall the Company not perform it beforehand;

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(iii) the Company is liable for breach of other provisions of the Social Guarantees Package, however shall the Company not perform a legally valid verdict that requests payment of adjudged sum, the Investor may be requested to perform such verdict. In such case the Investor is obliged to pay the adjudged sum within 14 days of receiving the legally valid verdict. The payment made to the concerned Employee or the Trade union releases the Company from the related obligation.

3. Execution of rights in shares to implement the Package

The Investor obliges to perform the provisions of this Social Guarantees Package by executing his right of vote resulting from the possessed shares in a manner that is effective and appropriate to the provisions and to impact the contents of resolutions of the General Assembly of Company Shareholders as well as to execute observance of the Social Guarantees Package by the Company.

4. Legal Successors

If the legal form of the Investor becomes changed (i.e. transformation into another commercial partnership, merger), then all rights and obligations resulting from the Social Package shall remain in force and on behalf of the new entity.

5. Sale of shares

Sale of shares by the Investor does not release him from the responsibilities under this agreement.

6. Other entities under the Package

a) The Investor obliges not to separate new entities (organizational units) from the Company in a manner that would cause the Employees to move to these entities on the basis of article 23 prim

7

of the Code of Labor. As a consequence, the Employees shall remain to be employed by the Company, unless a specific Employee or a group thereof express prior consent for transfer on the basis of article 23 prim of the Code of Labor, issued at least 30 days prior to the transfer of the facility or its part to a new employer. In such event the Company shall ensure that the Employees may use the rights under this Social Package also with the new employer.

b) On 30 days prior to the transfer of the Employees to a new employer, pursuant to point a) above, the Company shall enclose this Social Guarantees Package as an annex to the employment agreements of the transferred employees.

c) The Employees may be transferred as above solely within the administrative municipal district of Bialystok, unless an Employee expresses his consent for another location.

§ 2

GUARANTEES REGARDING LEGAL ACTS

1. The Investor undertakes, with reservation of clause 2, to guarantee that the Employer observes the following legal acts binding in the Company on the day of concluding the Social Guarantees Package:

a) Company Collective Labor Agreement;

b) Rules of Labor binding in the Company;

c) Rules of the Company Social Benefits Fund;

d) Other internal standardization acts, i.e. ZUE of December 12, 2004 and the Rules of the Mutual Assistance and Loan Fund at Polmos Bialystok S.A.

2. Changes to the internal legal acts mentioned in clause 1 above shall be made by way of negotiations, which shall be held with the Trade Unions in good faith, and upon their consent. The Trade Unions oblige to incorporate latest regulations of the labor law to these negotiations.

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3. The Parties oblige to supplement the Company Collective Labor Agreement within 3 months of the Social Guarantees Package becoming effective in the following manner:

a) provisions of the Social Guarantees Package, related to the Employment Guarantee and defined in Annex 5, shall be introduced to the Company Collective Labor Agreement by way of a supplement protocol; however, introduction of these provisions does not cause the sanction for breach of any of the Package provisions, which are transferred to the Company Collective Labor Agreement, to be doubled (in which event the entitlements towards the Investor shall be executed on the basis of rules defined in § 1 clause 2 points (ii) and (iii) of this Package),

b) provisions defined in point a) above shall be present in the supplement protocol in a form of an obligation limited in time and expiring with expiry of the Social Guarantees Package, i.e. upon 120 months of the date of the Purchase of Shares.

c) The Parties herein agree that during the term of the Social Guarantees Package neither of the parties of the Company Collective Labor Agreement may unilaterally terminate the said Agreement binding on the day of concluding this Package. The Company Collective Labor Agreement shall contain a provision that shall govern the notice of termination of the Agreement in such a manner that the period of notice shall vary and decrease in proportion to the number of months remaining from the moment of the notice until the expiry of the Social Package (i.e. if 60 months are remaining until expiry of the Social Package, the period of notice shall count 60 months from the issue of the notice), with reservation of the minimum period of notice governed by the currently binding Company Collective Labor Agreement (6 months).

9

§ 3

EMPLOYMENT GUARANTEE

1. Employment Guarantee

The Investor undertakes that the Company will maintain employment of each of the Employee, listed in Annex 4 to this Social Guarantees Package, under the conditions of employment and pay that shall be no worse than the hitherto conditions, without terminating the employment agreements for reasons not on behalf of the Employees, with regard to:

a) Employees hired for an unspecified term – for a period of 120 months from the Purchase of the Shares, and

b) Employees hired for a specified term – for a period from the Purchase of the Shares until expiry of their employment agreements, however no longer than for 6 months,

hereinafter referred to as “the Employment Guarantee”.

Within 7 days of the Purchase of Shares the Company shall present to the Investor and the Trade Unions a list of Employees, whose employment agreements were terminated, are within the period of termination or expired prior to the Purchase of Shares.

2. Extension of the Employment Guarantee to dependent companies

In case of reorganization of the Company by establishing its dependent companies or separating other commercial entities, the Investor and the Company shall ensure that the Employees of the Company, who are subject to the Employment Guarantee, maintain all entitlements resulting from that Guarantee unchanged, which shall be governed in their individual employment agreements concluded with the new dependent companies or separated commercial entities, and transfer of an Employee to such company requires consent of this Employee. To guarantee the above entitlements for the Employees, the Company shall guarantee implementation of such legal instruments that will enable the Employees to take advantage of this Social Guarantees Package, and in particular shall guarantee implementation of the instrument defined in § 1 clause 6 point

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b) of the Social Package (i.e. enclosure of the Package as an annex to the employment agreement).

3. Indemnity for breach of the Employment Guarantee

a) If an employment agreement is terminated in the course of the Period of Guarantee for reasons other than those listed in clause 4 below, then such breach of the Employment Guarantee shall result in an obligation to pay a one-time indemnity in the amount of the product of individual monthly wage (equivalent of wage for a vacation leave binding on the day of termination for a specific Employee) multiplied by the number of months remaining from the day of employment termination until the expiry of the Period of Guarantee. The indemnity for the breach of the Employment Guarantee must not be lower than the equivalent of twelve-months’ wage – calculated as for a vacation leave granted to the Employee on the moment of termination.

b) The Employees are entitled to the above indemnity regardless of any other gratuities or benefits provided by the law and in particular the Act on specific conditions of terminating the employment agreement for reasons not related to employees, article 92 prim of the Code of Labor (retirement or pension gratuity) or article 93 of the Code of Labor (posthumous gratuity). The Parties underline that the transfer of an Employee to pension, retirement or posthumous benefits does not entitle to the said indemnity.

c) The indemnity paid by the Company for breach of the Employment Guarantee shall not be considered when calculating raise of average wage in the Company. If a similar payment is done on the basis of an agreement, which is concluded between the Parties to terminate the employment agreement of an Employee, then such payment also must not be considered when calculating raise of average wage in the Company.

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4. Exclusions from the Employment Guarantee

The Employment Guarantee does not include the following cases of termination of the employment agreement with an Employee who is protected under the Guarantee:

a) an Employee acquires retirement rights,

b) the employment agreement is terminated by mutual agreement,

c) an Employee terminates the employment agreement with or without the notice, with reservation of clause 5 below,

d) an Employee dissolves the employment agreement under the procedure of article 23 prim § 4 of the Code of Labor, under the condition that the Company guarantees to the Employee, who is transferred to another employer, the use of the rights set forth in the Social Guarantees Package, in particular the Employment Guarantee, for the new employing entity for the Period of Guarantee, with § 1 clause 6 of the Social Package retained,

e) the employment agreement is terminated without prior notice on the basis of article 52 of the Code of Labor,

f) the employment agreement is terminated without prior notice on the basis of article 53 of the Code of Labor, if it conforms to the binding provisions of law, with exclusion of cases, when the incapacity of the Employee to work is caused by an accident at work and the Employee is not at fault; in this case the Employer may terminate the employment agreement no earlier than on one year of the accident,

g) the employment agreement is terminated due to rights to pension for incapacity to work acquired by the Employee,

h) the employment agreement is terminated due to failure of the Employee to accept the notice of change of location, if the Employee was offered employment that complied with Employee’s qualifications and maintained at least equal wage, with reservation that upon the notice of change work would be performed within the administrative municipal district of Bialystok,

i) situation described in clause 6 below.

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5. Termination on the basis of article 55 § 1 prim of the Code of Labor

The Parties agree that if an Employee terminates the employment agreement on the basis of article 55 § 1 prim of the Code of Labor, the Employee shall be entitled to indemnity related to breach of the Employment Guarantee provided that there occur the indications mentioned in article 55 § 1 prim of the Code of Labor, which the Employee notified the Company about in writing and indicated a time limit for the Company to discontinue the gross violation of the fundamental obligations towards the Employee, and the time limit is not observed and the repetitive and gross violation of obligations towards the Employee continues. This provision does not violate the right of the Employee to immediately terminate the employment agreement on the basis of article 55 § 1 prim without the need to fulfill the above procedure. However, in this case the Employee is not entitled to indemnity due to breach of the Employment Guarantee.

6. Termination in case of acquired pre-retirement benefits

It is allowed for the Employer to terminate the employment agreement for reasons related to the facility and defined in the Act of April 20, 2004 on promotion of employment and employment institutions, in cases where the Employee meets the conditions allowing him the pre-retirement benefits, defined in appropriate laws, and agrees in writing to accept a related notice of termination of employment. In such event the Company undertakes to pay an indemnity to the Employee, which shall be calculated as a product of number of months remaining to acquire the retirement benefits multiplied by the difference between the average basic wage in the Company (defined in the Company Collective Labor Agreement for jubilee awards) and the sum of the pre-retirement benefit for the period, when it is received. If the Company does not agree to such indemnity, the Employee is entitled to the indemnity governed in § 3 clause 3 of the Social Guarantees Package (i.e. due to breach of the Employment Guarantee).

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7. Extension of the Employment Guarantee to persons on leave

The Employment Guarantee shall also include the Employees who are on maternity and post-maternity leaves, unpaid leaves and serving the compulsory or temporary military service, if they return to work in the Company in accordance with the binding provisions of law. However, in such case the Employment Guarantee shall be valid from the day of return to work until the end of the Period of Guarantee.

8. Priority of employment

The Investor undertakes to preserve the customs related to the priority of employment that are currently used in the Company, which the Investor is notified about.

9. Indemnity for breach of the Employment Guarantee

a) The indemnity mentioned in clause 3 of the Package shall be paid no later than on the last day of employment (if termination is connected with the notice of termination). In other instances the indemnity is required within 14 days of termination of the employment agreement.

b) The Parties uniformly agree that the entitlements under the Employment Guarantee govern a one-time payment of the indemnity, defined in § 3 clause 3 of the Package, for breach of the Employment Guarantee, with reservation that if an Employee, who received the indemnity, brings an action to return to work in the Company and a court accepts the action as justified and legally valid, upon return to work the Employee is deprived of the right to the indemnity under the Social Guarantees Package due to breach of the Employment Guarantee for that Employee. In such case the Employee shall be entitled to other remaining provisions of the Social Guarantees Package.

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10. Ban on changes to the employment agreement

The Employer shall not change the employment agreement concluded for an unspecified term to the employment agreement for a specified term.

11. Special protection for Employees in pre-retirement period

The Employer may not terminate the employment agreement of an Employee, who has no more than 4 years remaining until the retirement age, if the period of employment entitles the Employee to the retire at that age. However, if on the day of signing this Social Package an Employee has been uninterruptedly working in the Company for 10 years, then the pre-retirement protection shall be valid for up to six years provided that on the day of expiry of the Employment Guarantee, mentioned in § 3 clause 1 of the Package, the Employee lacks 6 years to reach the retirement age.

§ 4

GUARANTEES ON PAY

1. Pay obligations under the Company Collective Labor Agreement

a) The Employees are entitled to wages for their work as well as other benefits related to the employment agreement as defined in this chapter and in the generally binding regulations.

b) Wages of the Employees of the Company are based on time worked and bonuses.

c) The Employees of the Company who are employed for a specified or unspecified term are entitled to a bonus in the amount and based on rules defined in the rules of awarding bonuses, which are enclosed as annex 1 to the Company Collective Labor Agreement.

d) When assigning duties, an Employee is classified under a category in accordance with the qualifications scale, which is enclosed to the Company Collective Labor Agreement, and is classified with a current table of wages that is uniform for physical laborers and other employees.

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e) For a period of one year, newly hired employees may be classified under categories that are lower than those in the qualifications scale for the specific job position.

f) If an Employee hired on a position does not meet the requirements of the qualifications scale, then it is allowed to classify such Employee under the relevant category provided that his knowledge, experience and competences guarantee proper performance of duties on that position.

Qualifications of an Employee that are higher than those in the qualifications scale corresponding to a specific position does not result in classification to a higher category.

An Employee may move to a higher category by way of promotion to a higher position or in case of significant changes to requirements for a specific position that are related to organizational, technological or legal changes.

g) If the Company hires a new Employee for a new position, which is not present in the qualification scale, the Management Board of the Company shall provide this position with an appropriate classification category that shall conform with the requirements of the qualifications scale.

h) The Employees hired as physical laborers or other employees shall receive a base lump-sum wage defined as a monthly pay.

The qualifications scale and the extended table of wages shall be the basis for awarding specific monthly pay for the said Employees.

The table of wages of the base lump-sum wage is enclosed to the Company Collective Labor Agreement as annex 4.

The remaining components of wage, bonuses and awards are governed by the Company Collective Labor Agreement.

i) If an Employee is requested to perform duties other than those defined in his employment agreement, pursuant to article 42 point 4 of the Code of Labor, the Employee is entitled to wage for such work that shall be no lower than the wage defined in his employment agreement.

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j) An Employee working part-time is entitled to the base wage and other components of wage in proportion to the amount of time spent in work and defined in his employment agreement.

k) Wages shall be paid to the personal accounts of the Employees.

Confirmation of pay for an Employee shall be the slip from the payroll.

The Employees hired for a specified term may receive wages personally in cash at the banking facility on the territory of the Company.

l) The Employees hired in the Company for a specified term shall receive wages with reservation of point e) above, pursuant to the qualifications scale and the table of employment categories enclosed to the Company Collective Labor Agreement.

2. Components of wage

a) The Employees of the Company are entitled to the following components of wage, bonuses and supplements:

• base wage pursuant to rules defined in point 1 above,

• bonus pursuant to the rules of awarding bonuses,

• bonus for nightshift,

• wage for downtime,

• additional wage for overtime,

• components of wage governed by the laws on labor, separate regulations and regulations on social insurance,

• jubilee awards,

• retirement and pension gratuities,

• awards from the Management Board Prize Fund,

• awards for profits.

b) Each hour of nightshift entitles an Employee to an additional wage in the amount of 25% of hourly pay calculated as 250% of the minimum wage.

c) If an Employee is ready to work, but encounters obstacles on behalf of the Employer, then the Employee is entitled to a wage for the duration of the downtime appropriate to his individual classification and monthly pay.

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If the downtime is caused by the Employee, the wage is not granted. Depravation of wage for reasons mentioned in this point must be justified in writing.

During the downtime the Employer may assign different duties to the Employee, for which the Employee is entitled to a wage no lower than the wage resulting from individual classification of the Employee.

d) The Employees who perform overtime work are entitled to wages defined in the Code of Labor. The Employer may allow leisure time for the overtime upon such request from an Employee – in proportion of one leisure hour to one overtime hour- or upon Employer’s own initiative – in proportion of one and a half leisure hour to one overtime hour.

The Management Board of the Company and the managers of organizational units shall perform overtime work as needed without the right to additional wages. With exception of the Management Board, the above-mentioned Employees are entitled to additional wages for overtime work performed upon request of a supervisor as follows:

• on Sundays and holidays as well as on days that are free due to a five-day long working week,

• beyond usual working hours, if the requested work is not within the scope of duties of an Employee.

e) Apart from the components of wage defined above, the Employees are also entitled to the following wage components: wages for periods of leave, wages and benefits for periods of sickness and other benefits from social insurances as well as wages defined in separate regulations.

3. Jubilee awards

a) The Employees are entitled to jubilee awards defined in the Company Collective Labor Agreement in the following amounts:

• 150% after 15 years of employment,

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• 200% after 20 years of employment,

• 300% after 25 years of employment,

• 400% after 30 years of employment,

• 500% after 35 years of employment,

• 600% after 40 years of employment,

• 700% after 45 years of employment,

• 800% after 50 years of employment.

b) The awards defined above may be granted for the first time solely upon 5 years of employment for the Employer, regardless of the period of employment with other employers.

c) The following shall be included to evaluate eligibility for the jubilee award:

• all periods of previous employment with exclusion of those terminated without prior notice due to faults on behalf of the Employee,

• periods of compulsory or temporary military service provided the Employee was later hired in accordance with the time allowed by the law,

• other periods defined in the ordinance of the Ministry of Labor and Social Policy of December 23, 1989 (Monitor Polski official gazette no. 89.44.358).

d) The right to a jubilee award is acquired on the day of expiry of a documented period that entitles to the award.

e) The value of the award depends on the date, on which the right to the award is acquired, not on the day of payment.

f) The Employees hired part-time are entitled to the jubilee award in proportion to the duration of work defined in the employment agreement.

g) The Employees, who acquire the right to the jubilee award during a post-maternity leave, shall receive the award after the leave and in the amount appropriate to the gross wage defined on the first day of employment.

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h) The Employees, who acquire rights to two or more awards in the Company, are paid only the highest of the awards.

i) The Employees, who acquire the right to an award and within next 12 months acquire another right to a higher award, shall be paid the lower award when the related right is acquired and shall be paid the difference between the higher and the lower award when the right to the higher award is acquired.

j) If during 12 months after termination of the employment agreement an Employee should acquire the right to a jubilee award, then the Company shall pay such award on the day of termination of the agreement.

k) The Employees, who retire, transfer to pension for incapacity to work due to accident at work or pension for incapacity to work for other reasons, or to a permanent pre-retirement benefit, are paid the jubilee award, if there are no more than 12 months from the date of termination of the employment agreement to the date of acquiring the right to the award.

l) The following shall be the basis for calculation of the jubilee awards:

• for work in Polmos Bialystok S.A., wage is counted as for a vacation leave without other additional benefits,

• for work outside Polmos Bialystok S.A. with previous employers – average base wage in the Company (without additional benefits, valorized upon each raise of the base wage).

If the average base wage in the Company (which is the basis of the award) is higher for the entitled Employee than his base wage, then the base wage- resulting from the employment- shall be the basis for calculating the award for periods of employment outside the Company.

To calculate the jubilee award, the share of the period of employment with the Employer and periods of employment with other employers shall be defined with respect to the overall period of employment. The shares of periods of employment

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shall be used to calculate the percent proportion of the jubilee award corresponding to the period of employment with the Employer and other employers.

m) If the documents presented by an Employee to confirm his right to a jubilee award are questionable, evaluation of their reliability and the decision to grant the award is subject to the Employer.

n) An Employee, whose employment agreement becomes terminated during the Employment Guarantee due to causes not on behalf of the Employee, shall be paid the jubilee award under the Company Collective Labor Agreement, if there are no more than 12 months from the date of termination of the employment agreement to the date of acquiring the right to the award.

4. Retirement and pension gratuities

a) The Employees are entitled to a one-time gratuity in connection to retirement, transfer onto a pension for incapacity to work or to a permanent pre-retirement benefit in the following amounts:

• 100% of one-months’ wage for employment up to 15 years,

• 150% after 15 years of employment,

• 200% after 20 years of employment,

• 300% after 25 years of employment,

• 400% after 30 years of employment,

• 500% after 35 years of employment,

• 600% after 40 years of employment,

• 700% after 45 years of employment,

• 800% after 50 years of employment.

b) The periods that entitle to gratuities are governed by similar rules as the jubilee awards.

c) The Employees hired part-time are entitled to gratuities in proportion to the duration of work defined in their employment agreement.

d) The value of the gratuities for Employees, who retire, transfer onto pensions for incapacity to work or to permanent pre-retirement benefits, are governed by similar rules as the jubilee awards.

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e) This type of wage must not be lower than one-months’ wage of a concerned Employee.

f) An Employee, who received a gratuity, may not acquire another right to this gratuity.

5. The Management Board Prize Fund

The Management Board may create, within the means possessed for Employee wages, a prize fund in the maximum amount of 0.3% of the planned employee wage fund. The fund shall be devoted to award prizes to the Employees of the Company for performance of additional, urgent, important and special tasks.

6. Awards for profit

The Employees are entitled to awards for generated profit that is at the disposal of the Company upon its approval by the General Assembly of Shareholders. The rules of awarding are defined in the rules of awarding benefits enclosed as annex 2 to the Company Collective Labor Agreement.

7. Raise of 2005 wage

a) The Company undertakes to raise the individual monthly base wage of each Employee by 4.5% beginning on July 1, 2005. If the raise is not effective with wage for July, then the Investor shall ensure that it is paid in full with the next or the soonest wage after the Purchase of the Shares as though it was paid on July 1, 2005 (and that sum is due to the specific Employee no sooner than on the moment, when the Company officially commits the raise, and no interest may be claimed for payment done later than with the wage for July 2005).

b) The Investor, being the shareholder of the Company, shall ensure that point 1 of the Agreement of February 28, 2005 concluded between the Management Board and the Trade

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Unions is executed. In particular, if the raise in wage mentioned above in point a) does not reach the index mentioned in point 1 of the Agreement of February 28, 2005, then the Investor shall cause the index to be reached.

8. Other raises of wage

a) The Company undertakes to maintain raises of wage in the future during the term of the Employment Guarantee under the binding system of negotiations (article 4 of the Act of December 16, 1994 on the negotiation system as regards raises of average wages at entrepreneurs establishments and on amendment of certain acts). Under this system, beginning on March 1 of each year, the average wage in the Company shall be raised at least by the value resulting form the goods and services inflation index published by the Main Statistical Office for a previous calendar year. The Parties may negotiate a higher raise of the monthly wage. The Parties agree that, in order to calculate the basis for the said raise of the average monthly wage for a specific year beginning on 2005, the following income accounted for in a previous year shall not be considered: (i) wages (all components resulting from generally binding regulations, the Company Collective Labor Agreement, the Social Package, including any gratuities) for persons, who retired in the previous year, and neither the wage or the person itself shall be considered when calculating the total number of employees, (ii) wages paid to the members of the Management Board, (iii) paid jubilee awards, (iv) paid damages for breach of the Social Guarantees Package.

The Parties confirm that the raise of the average wage mentioned above replaced the index mentioned in article 4 of the Act of December 16, 1994 on the negotiation system as regards raises of average wages at entrepreneurs establishments and on amendment of certain acts (two types of raise shall not be performed: one resulting from the Social Guarantees Package, the other under article 4 of the Act of

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December 16, 1994 on the negotiation system as regards raises of average wages at entrepreneurs establishments and on amendment of certain acts; instead, the one described above shall replace them). The average individual wage of the Employee does not include paid Privatization Bonus, which shall not be considered in calculation of the basis for raise of the average wage.

b) The Management Board of the Company performs reclassification and promotion of Employees within the possessed means.

c) The Management Board may raise the base wage as a result of the following:

• change of a job position,

• significant change to the scope of duties for a job position due to raise in this scope,

• significant improvement in professional qualifications of an Employee, by initiative or consent of the Employer,

• due to assessment of Employee’s work,

• by way of raising the wages.

d) Dates and sums of raised wages shall be defined by the Company in agreement with the Trade Unions.

e) The sum of the raise shall be the product of the average raise per one Employee defined by the Management Board and the number of Employees subject to that raise.

f) Sums for specific departments shall be defined on the basis of indexes from the remuneration scale.

g) Individual raise of wage, within means allotted to specific departments, are performed by the direct supervisor on the basis of assessment of Employee’s work.

h) The Management Board defines the wage rise for managers of the organizational units and independent Employees.

i) If a job position is changed due to restructurization, the Employee is entitled to a compensation for potential decrease in his wage up to the level from the previous job position. This compensation is valid during whole term of the Employment Guarantee.

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9. Privatization Bonus

a) The Investor undertakes to pay the Privatization Bonus on the basis of the below rules. The Privatization Bonus may be granted to the Employees as well as persons employed on the day of concluding the Package as the members of the Management Board (for the purpose of this clause no. 9, all persons described above are referred to collectively as the Employees). The Privatization Bonus shall be equal for each Employee regardless of his job position. The Privatization Bonus in gross value shall be paid after performing all deductions governed by the law, in two installments: first paid within 30 days from the Purchase of the Shares, second paid within 1 year from the Purchase of the Shares. For each Employee the first installment shall be equal to six average monthly wages gross valid in the Company on the day of concluding the Social Guarantees Package. The second installment shall be equal to four average monthly wages gross valid in the Company on the day of concluding the Social Guarantees Package.

b) The Privatization Bonus may be granted to persons, who on the day of concluding the Package are the Employees of the Company hired for an unspecified term or for a specified term provided that on the day of signing the Package they have been working in the Company uninterruptedly for more than twelve months.

10. Incentive Bonus

a) The Investor undertakes to pay the Incentive Bonus from Investor’s means on the basis of the below rules. The Incentive Bonus may be granted to the Employees as well as persons employed on the day of concluding the Package as the members of the Management Board (for the purpose of this

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clause no. 10, all persons described above are referred to collectively as the Employees). The Incentive Bonus shall be equal for each Employee regardless of his job position. The Incentive Bonus in gross value shall be paid after performing all deductions governed by the law, within sixty days from the Purchase of the Shares. The total sum allotted by the Investor to the Incentive Bonus shall be PLN 800,000 (eight hundred thousand) gross and shall be distributed equally to all entitled Employees.

b) The Incentive Bonus may be granted to persons, who on the day of concluding the Package are the Employees of the Company are hired for an unspecified term or for a specified term provided that on the day of signing the Package they have been working in the Company uninterruptedly for more than twelve months.

§ 5

SOCIAL GUARANTEES

1. Company Social Benefits Fund

The Investor undertakes to maintain the present Company Social Benefits Fund, pursuant to regulations binding on the day of concluding the Social Package.

2. Subsidies for the Social Benefits Fund

The Investor undertakes to maintain the subsidies for the Company Social Benefits Fund on the basis of rules binding on the day of concluding the Social Package.

3. Accident aid

The Investor guarantees to maintain Employee insurances on at least equivalent level as on the day of concluding the Social Package.

If an Employee dies in the course of his employment or a benefit granted for incapacity to work due to sickness, then the family of the Employee

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shall be paid a posthumous gratuity according to rules defined in the Code of Labor, regardless of any benefits resulting from Employee’s insurance policies.

The posthumous gratuity shall be paid to the family regardless of any funeral-related gratuities from the social insurance.

4. Mutual Assistance and Loan Fund

The Mutual Assistance and Loan Fund shall be maintained under the same rules as those of the day of concluding the Social Package.

The Company shall provide previous facilities and technology to enable operation of the Mutual Assistance and Loan Fund within its statutory activity, on the territory of the Company.

5. Periodical examinations

Periodical examinations shall be maintained under the same rules as those of the day of concluding the Social Package.

6. Employee Retirement Program

The Employees may enter the Employee Retirement Program, which is financed by the Company. The rules of additional retirement-related benefits were defined in the Company Retirement Agreement of December 20, 2004 concluded by the Company and the Trade Unions. Changes to this agreement may be made only, if the resulting conditions for the Employees under the Employee Retirement Program are no worse than the conditions prior to the changes.

7. Other social guarantees

a) The Company shall finance monthly tickets (transportation outside the administrative border of the city) up to the value of 60% of a ticket price for the Employees commuting from outside the city.

b) The Company shall maintain the Employee canteen and buffet as previously.

c) The Company shall provide free-of-charge parking spaces for the Employees on the facility’s parking lot.

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§ 6

WORK HEALTH AND SAFETY

1. Work Health and Safety Policy

The Company undertakes to design, implement and observe a policy that would aim at improving safety and conditions of work. The key objective shall be to eliminate or, if not possible, to minimize the risk of accidents at work and occupational diseases.

a) The Employer is obliged to guarantee to the Employees safe and hygienic conditions of work and protection against threats for health and life resulting from conditions of performed work, as well as provide fire protection in the facility.

b) Detailed rules related to the said conditions of work and compliance with provisions on work health and safety as well as protection of life and health of the Employees, including the fire protection, are published in special regulations, the Rules of Labor and other internal acts.

2. Improvement of Work Health and Safety

The Company in cooperation with the Trade Unions and the Social Labor Inspector undertake, if required in specific case, to act towards improvement in the level of work health and safety, protection of Employee health and regular improvement of conditions of work, by using appropriate means and methods available on the market.

3. Work Health and Safety equipment

a) According to general regulations and those binding in the Company, the Employees are entitled to the following:

• means of individual protection,

• protective and work outfit (Employee provides laundry services),

• preventive meals (gratuitous in full or part),

• cool and warm beverages (water, coffee, tea and milk),

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• means of personal hygiene (towels, soap, etc.),

in quantities proportionate to the binding specification tables.

Uniforms and equipment of the internal security service are governed by separate regulations. The Employee refunds the costs of laundry.

b) If hiring women to work, the Employee shall ensure appropriate conditions that comply with separate regulations on protection of women at work. The list of works, where women are not allowed, is contained in the rules of labor. Maternity and pregnancy-related protection of women is governed by the Code of Labor and the Rules of Labor.

4. Current Company Collective Labor Agreement

Regardless of the above provisions, the Investor shall maintain the provisions of the Company Collective Labor Agreement that are valid on the day of concluding the Social Package.

§ 7

EDUCATION and RETRAINING

1. Training objectives

The following are the objectives, for which the Company shall carry out training:

a) improve qualifications of the Employees considering needs of the Company,

b) create reserve of professional competences of Employee necessary to realize objectives of the Company,

c) improve effectiveness of work,

d) acquire skills enabling improvement of competitiveness and organization of the Company.

2. Employee retraining

If due to organizational, technical or technological changes in the Company, including changes aimed at improving the natural environment, there occurs a need to liquidate or restructure a job position and the

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related Employee is proposed a new or modified position, but the Employee is not qualified to it, then the Company shall enable the Employee to retrain or learn to work under the new conditions. In case of a need to fill new positions in the Company, the already working Employees shall be considered as a priority to fill these positions, while the costs of retraining shall be covered by the Company, if such employment and retraining of a specific Employee suggests proper execution of duties of the position by the Employee and is justified with economic reasons.

3. Costs of retraining and learning

The costs of retraining and learning to a position are covered by the Company.

4. Period of retraining and learning

Retraining and learning to a job position may not last longer than needed to retrain an Employee. In cases justified by the training program, this period may be extended upon consent of the Company.

5. Training schedule

Retraining and learning to a job position, if possible, should be organized beyond the time of regular work. If training takes place during work, the Employee is entitled to wage on the basis of rules binding in the Company.

6. Decision on retraining

Within justified scope, the Company shall enable the Employees to improve their education and shall redirect to training, if an Employee expresses his will to raise the professional qualifications or it is necessary to retrain an Employee due to change of job position in the Company.

7. Continued training

The Company, by the obligation to subsidy higher education, shall enable the Employees to continue and finish their learning. The Company shall cover costs of language courses for Employees at least as previously.

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8. Cost refund

If the Company redirects an Employee to graduate or postgraduate studies or redirects to other training within 3 years from conclusion or during these studies or training and if the Employee terminated the employment agreement or is dismissed on disciplinary grounds, then the Employee is obliged to return the related costs borne by the Company.

§ 8

TRADE UNIONS

1. Freedoms of the Trade Unions

The Trade Unions that operate in the Company are guaranteed the freedom of operation within the scope provided in the Act of May 23, 1991 on trade unions, other regulations of general law on labor and the provisions of the Company Collective Labor Agreement as well as this Social Guarantees Package, and the Investor shall ensure observance of these regulations by the Company.

2. Freedom of assembly of statutory bodies

a) The Company shall ensure the freedom of assembly of the statutory bodies of the Trade Unions during the working hours, rights to remuneration retained, in the quantity no less than twelve meetings per each year under the Package for each body of each Trade Union, with reservation that such meetings must not take place in December.

b) The Parties agree for the right of the Trade Unions to organize monthly meetings of the Trade Unions members on the territory of the Company, up to 3 hours of duration, within the working hours, with the right to remuneration retained for the participants, under the condition that the Company is notified about the date and place of such meeting three days prior, with reservation that such meetings must not take place in December.

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c) The Parties agree that each of the Trade Unions have the right to training in the amount and under the scope defined annually, maximum of 3 days of training five times per year for a group of 5 persons from each Trade Union (maximum of 10 persons per training). The costs of training shall be covered by the Company, however these costs must first agreed upon. The costs shall be returned on the basis of previously binding rules, in particular the mileage-related costs shall be refunded for commuting to training, costs of first class rail tickets and costs of accommodation in 3-star hotels.

d) The Parties agree to the right of the Trade Unions to organize assemblies and elections to the statutory bodies within the working hours, with the right to remuneration retained for the participants.

e) The Investor shall ensure the above rights with trust for the Trade Unions that the rights will be used in accordance with their purposes and not to the detriment of the Company. In particular the Trade Unions should underline that the meeting do not collide with performance of urgent duties for the Company.

3. Property performance for the Trade Unions

a) The Trade Unions shall be guaranteed with the right to gratuitous access to technical devices in possession of the Company as needed for the unions to operate, pursuant to procedures and customs at the Company, in particular the Company shall provide the following: personal computer with printer, one telephone line, one daily and one weekly register, right to gratuitous telephone and fax connections. Maximum value of property performances for each Trade Union for each month shall not exceed Pln 1,000.

b) The Parties agree that the Company shall cover the costs of business travel and allowances of the Trade Union members due for travel related to the operation of the unions, and in particular shall cover for participation in conferences,

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workshops, conventions and elections of national authorities, on the basis of rules at least equivalent to the rules binding in the Company on the day of concluding the Social Guarantees Package.

4. Implementation of the Social Guarantees Package

The Trade Unions have the right to contact the Investor regarding issues related to implementation of the Social Guarantees Package. Upon request of the Trade Unions, the Investor shall join talks held between the Trade Unions and the Company within 7 days of receiving such request, provided the need to further explain those provisions of the Social Guarantees Package, which were not agreed upon with the Company during previous efforts or for other controversial issues related to the Package.

5. Subsidies for the Trade Unions

The Company shall subsidize operation of the Trade Unions up to the sum of Pln 30,000 (thirty thousand) annually for both Trade Unions, beginning on the year of concluding the Social Guarantees Package. The subsidy shall be paid no later than until March 31 of each calendar year with exception of 2005, then the subsidy shall be paid within 14 days of the day, when the Social Guarantees Package comes into force, in proportion to the number of Trade Union members on that day (total number of all Trade Union members on that day is 100%). Beginning on 2006, the subsidy shall be divided between the two Trade Unions according to the proportion of members on the last day of February of a year, whereas the total number of all Trade Union members on that day is 100%.

6. Trade Unions and retraining

The Trade Union shall support the Company in retraining of the Employees according to the needs of the Company. The Management Board shall notify the Trade Unions about training plans and the group of Employees to be trained. Opinion of the Trade Unions shall be obtained in order to retrain any Employees, unless an Employee expresses his own consent to be retrained.

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7. Disclosure of information on the Company

a) Management Board representatives shall meet with the Trade Unions at least quarterly with regard to implementation of the Social Guarantees Package. Such meeting may be more frequent, if a need arises, upon request of either the Trade Unions or the Company.

b) This point related to obligations on disclosure of information shall start binding, if the Company ceases to be a public company with information disclosure procedures governed by the law. Each party may request the following documents within 7 days of a meeting devoted to explanation of the economic policy of the Company, during which the following documents are presented by the Company:

a) F01, F02, annual balance and profit and loss account, internal standardization acts of the Company,

b) Information on average gross wage in the Company,

c) Information on organizational and restructurization plans,

d) Information regarding employment levels in the Company at the end of each quarter with specification for all organizational units,

e) Other information, which may be disclosed to the Trade Unions with reservations set forth in the law.

c) Regardless of all other provisions, performance of the above shall comply with all relevant regulations, in particular regulations on protection of trade secrets and public trading in securities.

8. Additional protection for Trade Union negotiators of the Package

a) The Parties agree to an additional protection for stability of employment of those Employees, who undertook the effort to negotiate this Social Guarantees Package under the work of the Trade Union Negotiation Team, who are listed at the end of this Package.

34

b) Special protection for the Employee members of the Trade Union Negotiation Team is an obligation to pay indemnity for breach of the Employment Guarantee defined in § 3.3 of the Social Package in the amount increased by 12 wages of particular Negotiation Team member counted as an equivalent of wage for a vacation leave.

§ 9

OBLIGATIONS OF THE TRADE UNIONS

1. Implementation of the Social Guarantees Package

The Trade Unions undertake to act to the benefit of the provisions of the Social Guarantees Package as well as the Company and its Employees.

2. Discipline and order

The Trade Unions undertake to cooperate in creation of due climate enabling observance of work discipline and order and improvement of professional qualifications of the Employees.

3. Preservation of public peace

The Trade Unions undertake to prevent escalation of Employee requests in the course of the term of the Social Guarantees Package and shall show due diligence to ensure public peace, if the Investor and the Company perform the provisions of the Social Guarantees Package and comply with norms of labor.

4. Cooperation with the Company

The Trade Unions are aware that on the highly competitive market all actions of the Company must aim at production standards under the European requirements, provide decent conditions of work and pay, respect the rights of the Employees and Trade Unions, as well as improve quality and efficiency through appropriate rationalization of operation and

35

motivation of Employees in order to meet the demand of the market. To that regard the Trade Unions acknowledge the need and agree to actively cooperate with the Management Board, within the law, in operation aiming at the above objectives and mutual respect. The Company shall ask for opinion of the Trade Unions in relation to termination of the employment agreements, significant employment issues, changes to work-time system and reorganization of the Company.

§ 10

EMPLOYEE ACTIONS

1. Repurchase of shares from the Employees

a) If the Company is withdrawn from public circulation, provided the person (“the Entitled Person”) who acquired the shares of the company as described in articles 36-38b of the Act of August 30, 1996 on commercialization and privatization (“the Act”) places such request within 6 months of expiry of the ban to sell the shares, mentioned in article 38 clause 3 of the Act, then the Investor undertakes to repurchase, independently or with mediation of another entity, the shares of the Company, which were assigned to every Entitled Person (“Repurchase”), for the highest of the following prices:

(i) price paid by the Investor in the final subscription for the Company shares before their withdrawal from public circulation,

(ii) price paid by the Investor in any stock exchange transaction (with exclusion of transaction within the Investor’s capital group) conducted within 3 months before withdrawal from public circulation.

Sale of the shares by the Repurchase and related payment shall be done within 3 months from the day of request issued by the Entitled Person.

b) The above right is given to the Entitled Persons individually and must not be assigned to other persons or entities or disposed of or charged in any other way by the Entitled Persons.

36

c) The Repurchase includes solely the shares that were acquired as described in point a) above and does not include shares acquired by the Entitled Persons in any other manner, in particular through stock exchange.

d) This provision is to guarantee that the Entitled Persons may sell the shares of the Companies owned by them in the event of withdrawal of the Company from public circulation in connection to the legal ban on the Employees to sell the shares before. This provision is not a declaration of the Investor that would indicate any plans to withdraw the Company from public trade and must not be perceived in that way.

2. Availability of Shares

The Company shall support in term of organization and technology the procedure of providing the shares to those entitled to acquire them gratuitously.

3. Employee representation in the Supervisory Board

The Act of August 30, 1996 on commercialization and privatization shall be applied with regard to representation of the Employees in the Supervisory Board of the Company.

§ 11

FINAL PROVISIONS

1. Language of the Company

Polish shall be the binding language in the Company.

2. Changes to the Social Guarantees Package

Any and all changes to the Social Guarantees Package shall be invalid unless made in writing.

37

3. Term of the Social Guarantees Package

a) This Social Guarantees Package is concluded for the term of 10 years counted from the day it becomes effective (term of the Social Package and the Period of Guarantee are equal, i.e. 10 years or 120 months).

b) The Social Guarantees Package may not be terminated by either of the Parties unilaterally prior to its expiry.

c) The Parties establish a ban for the duration of the term on unilateral termination of the Company Collective Labor Agreement, which binds on the day of concluding the Social Guarantees Package, by either of the Parties of the said Agreement.

4. Claims

a) If the provisions of this Social Guarantees Package are infringed, both the Investor and the Trade Unions reserve the right to undertake actions aimed at execution of the provisions in accordance with the binding law.

b) With regard to individual cases of the Employees related to a breach of their entitlements under the Social Guarantees Package, the concerned Employee may direct his claim to perform his entitlements to the Company, or, if the Company does not respond in accordance with the Social Package, the Employee has a right to request the Investor to react upon non-fulfillment of all deadlines by the Company, pursuant to § 1 clause 1 and 2 of the Social Guarantees Package.

5. Disputes

a) All disputes related to the concluded Social Guarantees Package shall be settled by the court competent for the city of Bialystok. However, in the event of a dispute the Parties undertake to negotiate the issue first.

b) Upon consent of the Parties, the Company may also participate in the negotiations mentioned in point a) above.

c) With regard to individual claims of the Employees related to implementation of the Social Guarantees Package, in particular in relation to failure to pay the indemnity for breach of the Employment Guarantee, the Parties agree that the decision to immediately apply a court proceeding, as in clause 5 point a) above, or use the option mentioned in the same point, depends on the concerned Employee.

38

6. Contractual fines for the Company

a) The Company shall pay within 14 days and to the account of the Company Social Benefits Fund a contractual fine of Pln 5,000 (five thousand) for breach of the following provisions of the Social Guarantee Package:

• obligation to bind the dependent companies (if established) with the Social Guarantees Package,

• obligation to comply with the legal acts mentioned in § 2 claue 1, under the condition that the Company or the Investor does not perform their respective obligations under the Social Guarantees Package within 14 days of a written request to perform the provisions of the Social Guarantees Package issued by either of the Trade Unions,

• obligation to supplement the Company Collective Labor Agreement in accordance with § 2 clause 3;

• the Employment Guarantee defined in § 3 infringed by failure to timely pay the indemnity for breach of the Employment Guarantee;

• obligation to seek the opinion of the Trade Unions as governed by the Social Guarantees Package,

• obligations to subsidize the Company Social Benefits Fund, pay accident aid and provide spaces and technology to the Mutual Assistance and Loan Fund, in case of failure to perform respective obligations under the Social Guarantees Package within 14 days of a written request to perform the provisions of the Social Guarantees Package issued by either of the Trade Unions,

• obligations towards the Trade Unions defined in § 8 clause 2, under the condition that the Company or the Investor does not perform their respective obligations under the Social Guarantees Package within 14 days of a written request to perform the provisions of the Social Guarantees Package issued by either of the Trade Unions.

39

b) Payment of any of the above contractual fines does not release the Company or the Investor, whichever applicable, from payment of the indemnity for breach of the Employment Guarantee defined in § 3 clause 3 or performance of any other provisions of the Social Guarantees Package.

7. Contractual fines for the Investor

The Investor shall pay within 14 days and to the account of the Company Social Benefits Fund a contractual fine of Pln 5,000 (five thousand), under the condition that the Company or the Investor does not perform their respective obligations under the Social Guarantees Package within 14 days of a written request to perform the provisions of the Social Guarantees Package issued by either of the Trade Unions. Payment of the contractual fine does not release the obligation of payment mentioned in § 4 clause 9.

8. Relations after expiry of the Social Guarantees Package

The Parties state in agreement that on 3 months prior to expiry of the term of this Social Guarantees Package they will commence talks regarding rules of further cooperation.

9. Coming into force of the Social Guarantees Package

This Social Guarantees Package shall come into form on the day of Purchase of the Shares.

10. Gross values

All pecuniary sums are stated in gross values and shall be paid upon compulsory deductions governed by the currently binding provisions of the law.

/handwriting/	Proxy of the bound Party
	Piotr Wujec
	Warsaw, July 17, 2005

40

/seal/	mgr Piotr Wujec /signature illegible/
	Legal Counsel/ Negotiator
	OMNI Institute
/seal/	OMNI Institute
	03-312 Warsaw, ul. Andrzejowska 6/8
	/remaining inscription is illegible/

41

For the Investor:

Carey Agri International Poland sp. z o.o., with seat in Warsaw, ul. Bokserska 66a

/seal/	Carey Agri International Poland Sp. z o.o.
	ul. Bokserska 66A, 02-690 Warsaw
	Tel: (022) 455 18 00 Fax: (022) 455 18 10

/illegible signatures/

/seal/ Evangelos Evangelou, Vice President

/handwriting/ Elzbieta Kusnierek, Board Member

For the Trade Unions:

Company Commission of the Independent Self-governing Trade Union “Solidarnosc” at Polmos Bialystok S.A. with seat in Bialystok, ul. Elewatorska 20

/seal/	Deputy Chairman
	KZ NSZZ “Solidarnosc”
	At “Polmos” Bialystok S.A
	Stefan Binkiewicz
/illegible signature/
/seal/	Chairman
	KZ NSZZ “Solidarnosc”
	At “Polmos” Bialystok S.A
	Bogdan Filipczuk
/illegible signature/

Independent Self-governing Trade Union “Lider” of Polmos Bialystok S.A. Employees with seat in Bialystok, ul. Elewatorska 20

/seal/	Deputy Chairman
	NSZZ “Lider”
	Miroslaw Hryszko
/illegible signature/
/seal/	Chairman
	NSZZ “Lider”
	Jan Zalewski
/illegible signature/

42

Trade Union Negotiations Team: Bogdan Filipczuk, Stefan Binkiewicz, Leon Wasilewski, Lech Bednarz, Waldemar Kiszkiel, Marek Sianko, Jan Zalewski, Miroslaw Hryszko, Pawel Holdakowski.

Proxy/negotiator of the Trade Unions, not an Employee: Piotr Wujec.

43

EX-10.2

Exhibit 10.2

AGREEMENT FOR A NON-RENEWABLE LOAN

No. WAR/3010/05/200/CB

On 23 June 2005an Agreement was concluded between:

Fortis Bank Polska SA with head offices in Warsaw, on ul. Postepu 15, registered in the Warsaw Regional Court, XX Commercial Department of the National Court Register under KRS number 6421, later called “Bank”, represented by:

1. Magdalena Mucha – Proxy

2. Romana Grusa – Proxy

and

“Carey Agri International Poland Sp. z o.o.” with head offices in Warsaw, 02-690 Warsaw, ul. Bokserska 66A, registered in the Warsaw Regional Court, XX Commercial Department of the National Court Register under KRS number 51098, later called Borrower, represented by:

1. William V. Carey

Of the contents defined below and the “Loan and collateral transaction Regulations of Fortis Bank Polska SA” /translated title/ in the wording established by resolution no. 35 of the Fortis Bank Polska SA Management Board of 19 May 2004 (“Regulations”):

1. Loan sum: zl 50.000.000,- (in words: fifty million zloty).

2. Loan term: until 30 July 2005.

3. Loan designation: financing current activity of the Borrower.

4. Interest on the loan is variable and comprise: the variable base percentage rate comprising WIBOR for 1 month deposits increased by: 1 (in words: one percentage point).

5. The loan granting charge: not applicable

6. Charge on unused loan sum: not applicable

7. Charge on overdue loan repayment: not applicable

8. Tranche: not applicable

9. Grace period in loan repayment: not applicable

10. Number of monthly repayment installments: the loan shall be repaid in a lump sum on the last date of the loan term.

11. Bank account to which amounts due should be paid: 86 1600 1068 0003 0102 0115 2001.

12. Collateral for amounts due: not applicable

13. Additional provisions of the Agreement:

a) the first initiation of the loan sum shall take place once and without a separate order of the Borrower, upon the signing of this Agreement, to the current account of the Borrower maintained at Fortis Bank Polska SA,

b) the Borrower commits itself to provide the Bank the following documents:

• financial report F-01- every quarter,

• the balance sheet and income statement – at the end of the fiscal year

14. The Borrower states that it has received the Regulations, reviewed their contents and confirms the authorizations (powers of attorney) contained therein for the Bank and states that all statements and assurances or references thereto contained therein are true, complete and accurate on the date of signing the agreement as well as any day in which it submits an order to initiate the loan.

15. The Regulations comprise an integral part of the Agreement. To notions not defined in the Agreement the definitions contained in the Regulations shall apply. In the event of a discrepancy between the Agreement and the Regulations, the provisions of the Agreement are binding.

16. The Court of relevant jurisdiction for the head offices of the Bank shall resolve any disputes concerning the Agreement.

17. The Borrower declares that in the scope of amounts due resulting from the Agreement and the Regulations it submits to enforcement by the procedure of art. 97 of Bank law to the indebtedness sum of zl 75.000.000,- (in words: seventy five million zloty). The Bank may petition for the granting of an enforcement clause to the bank enforcement title until 30 July 2008.

18. The Agreement was drafted in two identical copies, one each for the Borrower and Bank.

The Borrower consents to the conveyance by the Bank to its stockholder Fortis Bank with head offices in Brussels and Fortis Lease Polska Sp. z o.o. with head offices in Warsaw and Fortis Securities Polska SA with head offices in Warsaw as well as other subjects of the Fortis Group, information concerning the loan and the Borrower obtained during negotiation and associated with conclusion of the Agreement as well as its realization, the Bank is authorized to convey the above referenced information both during the validity of the Agreement and after its expiration.

The Bank informs the Borrower of the possibility to convey information concerning the loan to the Interbank Commercial Information system – Bank Register (MIG-BR), whose data administrator is the Polish Banking Association and the possibility to making data collected in the MIG-BR system to offices of commercial information, acting on the basis of the legal act of 14 February 2003 on granting commercial

information (Dz. U. no. 50 pos. 424 with amendments) based on requests by these offices and in the scope defined therein.

*) information on subjects of the Fortis Group are available at www.fortisbank.com.pl

/Stamp and signatures for the Bank

Company stamp and signatures of persons authorized to incur asset liabilities in the name of the Borrower

The Borrower signed in my presence.

Senior Client Advisor

First and last name of Bank employee Signature of Bank employee

Warsaw, 24 June 2005

Fortis Bank Polska SA

Ul. Postepu 15

02-676 Warsaw

Despite the provision in Loan Agreement no. WAR/3010/05/200/CB section 13 point a), I would like initiation of the loan referred to in the aforementioned agreement to take place upon my separate written request.

William V. Carey

Carey Agri International Sp. z o.o.

EX-10.3

Exhibit 10.3

ANNEX NO. 9

TO THE LOAN AGREEMENT NO. 02/512/00/Z/VV

For current account loan

Concluded on 22.6.2005 in Warsaw by BRE Bank Spólka Akcyjna with head offices in Warsaw, Warsaw Regional Branch, 00-950 Warsaw, ul. Królewska 14, registered in the Warsaw Regional Court, XIX Commercial Department of the National Court Register, business register KRS 0000025237, later called Bank, represented by:

1. Barbara Krakowiak – Associate Director

2. Marzanna Tobiasz – Proxy

and

Carey Agri International Poland Sp. z o.o. with head offices in Warsaw, 02-690 Warsaw, ul. Bokserska 66A, registered in the Warsaw Regional Court, XX Commercial Department of the National Court Register under KRS number 0000051098, later called Borrower, represented by:

1. William Vernon Carey

§ 1

The parties agree that in connection with extension of the term of validity and increase in the loam sum in the current account granted on the basis of § 13 par. 1 of the Loan Agreement no. 02/512/00/Z/VV for a current account loan, concluded on 8 November 2002, together with later amendments, the following changes are introduced:

1. § 1 par. 1 of the Loan Agreement now reads:

“The Bank grants the Borrower at conditions defined in this loan agreement in current account no. 78 1140 1010 0000 2829 5300 2003, later called loan, in an amount not exceeding:

• PLN 3.000.000,- (in words: three million zloty) in a time frame from 13.11.2000 to 30.11.2000,

• PLN 5.000.000,- (in words: five million zloty) in a time frame from 1.12.2000 to 24.01.2001,

• PLN 7.600.000,- (in words: seven million six hundred thousand zloty) in the time frame from 25.01.2001 to 22.06.2005,

• PLN 50.000.000,- (in words: fifty million zloty) from 23.06.2005”

2. § 2 par. 1 of the Loan Agreement now reads:

The borrower may indebt itself by virtue of the granted loan, without the need to submit separate loan applications, subject to provisions of § 1, in the period from 13.11.2000 to 29.06.2006.

3. § 3 par. 1 of the Loan Agreement now reads:

“The Bank shall collect interest on the granted loan according to a variable interest rate calculated on an annual basis on the loan sum used. The interest rate shall equal the variable WIBOR rate for 1-month deposits, listed two workdays before the date of making the funds available and before each following date it is updated, increased by:

• 1,25 percentage points from 13.11.2000 to 30.10.2001,

• 1,76 percentage points from 31.10.2001 to 29.04.2002,

• 1,7 percentage points from 30.04.2002 to 29.04.2003,

• 1,2 percentage points from 30.04.2003 to 29.04.2004,

• 0,9 percentage points from30.04.2004 to 29.04.2005,

• 0,7 percentage points from 30.04.2005

by virtue of the Bank margin. Interest is assessed at monthly periods and payable on the last day of each month in the loan term as well as on the date of the last repayment of the loan. The update of the variable rate shall be performed on the 10^th, 20^th, and last day of each month. If the date of updating the variable rate falls on a non-workday at the Bank, the variable rate shall be updated with the currency date of the first workday following the non-workday.

In the event the Borrower does not meet the conditions referred to in § 9 of this agreement, the Bank shall increase the margin to WIBOR 1M interest – 1% on an annual basis and a front-end charge to 0,2% on an annual basis from the next workday starting the following month, according to the above schedule, which does not preclude the application of sanctions resulting from § 12 of this agreement”.

4. § 4 of the Loan Agreement now reads:

“The Borrower shall pay the Bank:

a) a front-end charge calculated on the unused loan sum in the validity period of the right to become indebted, referred to in § 2 par. 1, equal to:

• 0,85% (in words: eighty-five hundredths of a percent) annually from 13.11.2000 to 29.04.2002,

• 0,4% (in words: four tenths of a percent) annually from 30.04.2002 to 29.04.2003,

• 0,3% (in words: three tenths of a percent) annually from 30.04.2003 to 29.04.2004,

• 0,1% (in words: one tenth of a percent) annually from 30.04.2004.

The front-end charge is payable at times of interest payments, by means of charging the Borrower’s current account.

b) loan extension and loan increase fee, equal to PLN 5,000,-(in words: five thousand zloty) payable immediately upon extension of the loan by means of charging the Borrower’s current account,.

c) the Bank Guarantee Fund (BGF) charge incurred by the Bank by virtue of the granted loan, payable by means of charging the Borrower’s current account; this charge is assessed by the procedure defined by the BGF on the indebtedness sum of the Borrower towards the Bank according to the state on the date indicated by the BGF,

d) fee for issuing a certificate of loan repayment, payable by means of charging the Borrower’s current account”.

5. § 5 par. 3 of the Loan Agreement now reads:

“The Borrower commits itself to make final repayment of the debit balance of the current account by 30.06.2006”.

6. § 5 par. 9 of the Loan Agreement now reads:

“The Borrower shall pay interest equal to 75% of the rate defined above in § 3 from the date overdue indebtedness arises by virtue of unpaid capital, charges or fees to the date of actual repayment of liabilities towards the Bank, on the sum of overdue indebtedness”.

7. § 8 par. 3 of the Loan Agreement now reads:

“The Borrower states that it voluntarily submits to enforcement and authorizes the Bank to issue a bank enforcement title, to the sum of PLN 57.500.000 (in words: fifty seven million five hundred thousand zloty) in the event of failure to fulfill the comments resulting from this loan agreement, and to appear in court with a motion to grant an enforcement clause to this title until 31.12.2006 at the latest.

8. § 9 of the Loan Agreement now reads:

“1. The Borrower commits itself to maintain monthly proceeds to the current account referred to in § 1, according to the following schedule:

• until 30 September 2005 in the sum of PLN 3.000.000 (in words: three million zloty),

• until 31 October 2005 in the sum of PLN 7.000.000 (in words: seven million zloty),

• until 30 November 2005 in the sum of PLN 8.500.000 (in words: eight million five hundred thousand zloty),

• until 31 December 2005 in the sum of PLN 11.000.000 (in words: eleven million zloty),

• starting 1 January 2006 – maintaining proceeds at a level of PLN 11.000.000 monthly (in words: eleven million zloty monthly)

2. The Bank shall verify the level of receipts on each last workday of a given month, according to the above schedule.

3. If it is determined that the above conditions were not maintained the Bank may increase the interest rate according the provisions of § 3 par. 1 and /or impose sanctions referred to in § 12 of this agreement.”

9. § 10 point 3 of the Loan Agreement now reads:

“not grant pledges or warranties exceeding the total value of 15% of net assets shown in the annual financial report, after auditing by a chartered accountant, to the extent such audit is required by relevant regulations”.

10. In § 12 par. 1 the first sentence after the colon now reads:

“1. If the Bank determines that the loan granting conditions were not maintained, especially including conditions referred to in § 9 par. 1, or if timely repayment of the loan is threatened due to the poor asset status of the Borrower, the Bank may:

11. § 14. of the Loan Agreement reads as follows:

“In connection with implementation of a new IT system at the Bank the parties agree that upon implementation of this system, after prior notification of this fact by the Bank, the following changes are made to Loan Agreement no. 02/512/00/Z/VV for a current account loan, concluded on 8 November 20000, according to § 13 par. 1 of this Agreement:

1. § 2 par. 1 of the Loan Agreement now reads:

“The Borrower may indebt itself by virtue of the granted loan, without the need to submit separate loan applications, in the period from 13.11.2000 to 29.06.2006.”

2. § 3 par. 1 of the Loan Agreements now reads:

“The Bank shall collect interest on the granted loan according to the variable percentage rate calculated on an annual basis on the loan sum used. The interest rate shall equal the variable WIBOR rate for 1-month deposits from listings two workdays before the date of making funds available and before each following update date, increased by:

- 0,7 percentage points

by virtue of the Bank’s margin. Interest is assessed on monthly periods and payable on the last workday of each month in the loan term as well as on the date of final repayment of the loan.

The update of the variable rate shall take place on the 1^st, 10^th and 20^th of each month. If the date of updating the variable rate falls on a non-workday at the Bank, the variable rate shall be updated with the currency date of the first workday following the non-workday.”

3. The first sentence in § 3 par. 2 of the Loan Agreement is deleted.

4. § 4 point b of the Loan Agreement now reads:

“the front-end charge calculated on the unused loan sum in the validity period of the right to become indebted, referred to in § 2 par. 1, equal to 0,1% (in words: one tenth of a percent) on an annual basis. The front-end charge is payable at times of interest payments, by means of charging the Borrower’s current account.”

5. § 5 par. 3 of the Loan Agreement now reads:

“The Borrower commits itself to make final repayment of the debit balance of the current account by 30.06.2006.

6. § 5 par. 9 of the Loan Agreement now reads:

“The Borrower shall pay interest equal to 80% of the statutory rate from the date overdue indebtedness arises by virtue of unpaid capital, charges or fees to the date preceding the actual repayment of liabilities towards the Bank on the sum of overdue indebtedness”.

12. Remaining conditions of the Agreement remain unchanged.

13. The Annex was drafted in two identical copies, one for each of the parties.

In the name of the Borrower In the name of the Bank

I confirm the identity of the signing parties:

Advisor for Corporate Banking : Agnieszka Krauze –Niemaczek

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, William V. Carey, President and Chief Executive Officer of Central European Distribution Corporation, certify that:

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

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

c) Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial data; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2005

By:	/s/ William V. Carey
	William V. Carey President and Chief Executive Officer (principal executive officer)

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Chris Biedermann, Chief Financial Officer of Central European Distribution Corporation, certify that:

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

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

c) Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial data; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2005

By:	/s/ Chris Biedermann
	Chris Biedermann Vice President and Chief Financial Officer (principal financial officer)

EX-32.1

Exhibit 32.1

Written Statement of Chief Executive Officer

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

The undersigned, the Chief Executive Officer of Central European Distribution Corporation (the “Company”), hereby certifies that, to his knowledge on the date hereof:

(a) the Form 10-Q of the Company for the quarterly period ended June 30, 2005, filed on the date hereof with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(b) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ WILLIAM V. CAREY

William V. Carey

Chairman, President and Chief Executive Officer

August 8, 2005

EX-32.2

Exhibit 32.2

Written Statement of Chief Financial Officer

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

The undersigned, the Chief Financial Officer of Central European Distribution Corporation (the “Company”), hereby certifies that, to his knowledge on the date hereof:

(a) the Form 10-Q of the Company for the quarterly period ended June 30, 2005, filed on the date hereof with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(b) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Chris Biedermann

Chris Biedermann

Vice President and Chief Financial Officer

August 8, 2005