Registration of Securities by a Small-Business Issuer — Form SB-2
Filing Table of Contents
Document/Exhibit Description Pages Size
1: SB-2 Registration of Securities by a Small-Business 79 436K
Issuer
2: EX-1.1 Central European Distro Corp. 31 172K
3: EX-2.1 Contribution Agreement 8 27K
4: EX-3.1 Certificate of Incorporation 7 26K
5: EX-3.2 Bylaws 21 69K
6: EX-4.1 Incorporated Under the Laws 2 11K
7: EX-4.2 Warrant Agreement 22 102K
8: EX-4.3 Option to Purchase 11 51K
9: EX-10.1 Stock Incentive Plan 24 98K
17: EX-10.10 Central European Distro 12 51K
18: EX-10.11 Custody Agreement 9 33K
10: EX-10.2 Guiness Brewing Worldwide 4 13K
11: EX-10.3 Contract for Sale Of.... 7 27K
12: EX-10.4 Agreement 5 20K
13: EX-10.5 Agreement 9 21K
14: EX-10.6 Distribution Agreement 8 21K
15: EX-10.8 Employment Agreement 11 47K
16: EX-10.9 Employment Agreement 9 36K
19: EX-21 Subsidiaries of the Registrant 1 7K
20: EX-23 Consent of Independent Auditors 1 8K
21: EX-27 Financial Data Schedule 2 12K
SB-2 — Registration of Securities by a Small-Business Issuer
Document Table of Contents
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 16, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CENTRAL EUROPEAN DISTRIBUTION CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 5182 54-1865271
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
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211 NORTH UNION STREET, #100 UL. LUBELSKA 13
ALEXANDRIA, VIRGINIA 22314 03-802 WARSAW
(703) 838-5568 POLAND
(ADDRESS AND TELEPHONE NUMBER OF (ADDRESS OF PRINCIPAL PLACE OF
PRINCIPAL EXECUTIVE OFFICES) BUSINESS OR INTENDED PRINCIPAL PLACE
OF BUSINESS)
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WILLIAM V. CAREY
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
211 NORTH UNION STREET, #100
ALEXANDRIA, VIRGINIA 22314
(703) 838-5568
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
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COPIES TO:
STEVEN E. BALLEW, ESQ. MALCOLM I. ROSS, ESQ.
JOSEPH G. CONNOLLY, JR., ESQ. BAKER & MCKENZIE
HOGAN & HARTSON L.L.P. 805 THIRD AVENUE
555 THIRTEENTH STREET, N.W. NEW YORK, NEW YORK 10022
WASHINGTON, D.C. 20004 TEL: (212) 751-5700
TEL: (202) 637-5600 FAX: (212) 759-9133
FAX: (202) 637-5910
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
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If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the followng box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
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CALCULATION OF REGISTRATION FEE
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PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(1) REGISTRATION FEE
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Common Stock, par value
$.01 per share.......... 1,322,500(2) $8.50 $11,241,250.00 $3,316.17
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Redeemable Warrants...... 1,322,500 0.10 132,250.00 39.01
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Common Stock par value,
$.01 per share(3)....... 1,322,500 8.60 11,373,500.00 3,355.18
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Unit Purchase
Option(4)............... 115,000 0.0001 11.50 0.01
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Common Stock, par value
$.01 per share(5)....... 115,000 10.20 1,173,000.00 346.04
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Nonredeemable
Warrants(5)............. 115,000 0.12 13,800.00 4.07
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Common Stock, per value
$.01 per share(6)....... 115,000 8.60 989,000.00 291.76
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Total(7)................ -- 24,922,811.00 $7,352.24
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(1) Estimated solely for purposes of calculating the registration fee.
(2) Includes 172,500 shares of Common Stock subject to the Underwriters' over-
allotment options, the first 75,000 shares of which will be sold by the
Selling Stockholders.
(3) Issuable upon exercise of the Redeemable Warrants at a price equal to the
offering price of the Common Stock and the Redeemable Warrants.
(4) To be issued to the Underwriters.
(5) Issuable upon exercise of the Underwriters' Unit Purchase Option at a
price equal to 120% of the offering price of the Common Stock and the
Redeemable Warrants.
(6) Issuable upon exercise of the Nonredeemable Warrants underlying the
Underwriters' Unit Purchase Option.
(7) Pursuant to Rule 416, this registration statement also covers such
indeterminable additional shares as may become issuable as a result of any
future anti-dilution adjustments in accordance with the terms of the Unit
Purchase Option and the Warrants as described in the Prospectus.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 16, 1997
PROSPECTUS
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
1,150,000 SHARES OF COMMON STOCK
1,150,000 REDEEMABLE WARRANTS
[LOGO]
The securities offered hereby by Central European Distribution Corporation, a
Delaware corporation (the "Company"), consist of 1,150,000 shares (the
"Shares") of common stock, par value $.01 per share of the Company (the "Common
Stock"), and 1,150,000 redeemable warrants (the "Warrants"), with one Warrant
accompanying each share of Common Stock. The Shares and the Warrants are
immediately separately transferable. Each Warrant entitles the holder to
purchase, at an exercise price of $ (the aggregate initial Share and Warrant
offering price) (subject to adjustment), one share of Common Stock, during the
five year period commencing on the date of this Prospectus. The Warrants are
subject to redemption by the Company commencing one year from the date of this
Prospectus for $.05 per Warrant, on not less than 30 days' written notice,
provided that the sales price of the Common Stock is at least $ (200% of the
initial Share offering price) for 30 consecutive days ending on the day notice
is given.
Prior to this offering (the "Offering"), there has been no public market for
the Company's securities, and there can be no assurance that such a market will
develop. The initial public offering price of the Shares, which is estimated to
be between $7.50 and $8.50, and the Warrants, which is estimated to be $0.10,
and the exercise price and other terms of the Warrants have been determined by
negotiation between the Company and Fine Equities Inc. and SouthWall Capital
Corp. (the "Underwriters") and are not necessarily related to the Company's
assets, book value, financial condition or any other recognized criteria of
value. See "Underwriting." The Company has applied for quotation of the Common
Stock and the Warrants on the Nasdaq SmallCap Market under the symbols "CEDC"
and "CEDCW," respectively.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS
FOR A DISCUSSION OF CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON
STOCK AND THE WARRANTS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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[Download Table]
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
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Per Share........................... $ $ $
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Per Warrant......................... $ $ $
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Total(3).......................... $ $ $
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(1) Does not include additional compensation to be received by the Underwriters
in the form of (i) a non-accountable expense allowance of $ (equal to 3%
of the gross proceeds of the Offering), or $ per share of Common Stock
($ if the over-allotment option is exercised in full), (ii) unit purchase
options (the "Unit Purchase Option") to purchase up to 115,000 Shares and
115,000 Warrants exercisable for a period of four years commencing one year
from the date of this Prospectus at $ (120% of the aggregate initial
Share and Warrant offering price) and (iii) a right of first refusal to act
as underwriter or agent in connection with certain future offerings by the
Company or its principal stockholders. The Company and the Selling
Stockholders (as defined below) have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of approximately $ payable by the
Company, including the Underwriters' non-accountable expense allowance.
(3) The Company has granted to the Underwriters a 45-day option to purchase up
to an additional 97,500 shares of Common Stock and 172,500 Warrants on the
same terms and conditions set forth above, solely to cover over-allotments,
if any. The Selling Stockholders have granted to the Underwriters a 45-day
option to purchase up to an additional 75,000 shares of the Common Stock at
Price to Public less Underwriting Discounts and Commissions for the purpose
of covering over-allotments, if any. If the Underwriters exercise such
options, the first 75,000 shares will be sold by the Selling Stockholders.
If such options are exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to
Selling Stockholders will be $, $ , $ and $ , respectively. See
"Principal and Selling Stockholders" and "Underwriting."
The Shares and Warrants offered by this Prospectus are offered by the
Underwriters subject to prior sale, to withdrawal, cancellation and
modification of the offer without notice to, delivery to and acceptance by the
Underwriters and to certain further conditions. It is expected that delivery of
the certificates representing the Shares and Warrants will be made against
payment therefor at the offices of Fine Equities, Inc., New York, New York, on
or about , 1998.
FINE EQUITIES, INC. SOUTHWALL CAPITAL CORP.
The date of this Prospectus is , 1998
[GRAPHIC WITH BRAND TRADENAMES AND TRADEMARKS]
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent public accountants
and will make available copies of quarterly reports for the first three
quarters of each fiscal year containing unaudited financial information. All
brand names or trademarks appearing in this Prospectus are the property of
their respective holders.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AND THE WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH STABILIZING, IF COMMENCED MAY BE DISCONTINUED AT ANY TIME.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
PROSPECTUS SUMMARY
The following summary is qualified by, and should be read in conjunction
with, the more detailed information and consolidated financial statements and
notes thereto appearing elsewhere in this Prospectus. Prospective investors
should carefully consider the factors set forth herein under the caption "Risk
Factors" and are urged to read this Prospectus in its entirety. Except as
otherwise noted, all information in this Prospectus (i) reflects the completion
of a reorganization (as defined in "The Reorganization") as of November 28,
1997 whereby Central European Distribution Corporation ("CEDC" or the
"Company") became the new parent holding company of Carey Agri International
Poland Sp. z o.o. ("Carey Agri"), (ii) assumes no exercise of the Underwriters'
over-allotment option, the Unit Purchase Option, the Warrants or options
granted under the Company's 1997 Stock Incentive Plan. As used in this
Prospectus, unless the context otherwise requires, references to the "Company"
means CEDC and its wholly owned subsidiary, Carey Agri. The Company prepares
its consolidated financial statements in accordance with generally accepted
accounting principles in the United States ("U.S. GAAP") in U.S. Dollars. For
the convenience of the reader, amounts in this Prospectus are expressed
principally in U.S. Dollars.
THE COMPANY
The Company, formed in 1990, has become a leading importer and distributor of
alcoholic beverages in Poland. The Company operates the largest nationwide
next-day alcoholic beverage delivery service in Poland through its eight
regional branch offices located in Poland's principal cities, including Warsaw,
Crakow, Gdansk and Katowice. The Company currently distributes approximately
300 products in three categories: beer, spirits and wine. The Company imports
and distributes eight international beers, including Guinness, Corona, Miller
and Foster's, in addition to one domestically-produced beer. The Company
currently distributes approximately 250 spirit products, including leading
international brands of scotch, single malt and other whiskeys, rum, bourbon,
vodkas, tequila, gins, brandy, cognacs, vermouths and specialty spirits, such
as Jim Beam, Johnnie Walker, Ballantines, Smirnoff, Absolut, Finlandia,
Bacardi, Gordon's London Dry and Tanqueray. In addition, the Company imports
and distributes 45 wine products, including Sutter Home, Romanian Classics,
Cinzano Asti, Martini Asti and Moet & Chandon. The Company's net sales for the
nine-month period ended September 30, 1997 were approximately $27.5 million, as
compared to $14.6 million for the nine-month period ended September 30, 1996,
representing an increase of 89%.
The Company distributes its products throughout Poland to approximately 3,000
outlets, including off-trade establishments, such as small businesses and
multi-store retail outlets where alcoholic beverages are not consumed on
premises, and on-trade locations, such as bars, nightclubs, hotels and
restaurants, where such products are consumed on premises.
The principal components of the Company's business strategy are as follows:
EXPAND DISTRIBUTION CAPACITY. The Company plans to increase its distribution
capacity by expanding the number of its branch offices in Poland through the
acquisition of existing wholesalers, particularly in areas where the Company
does not distribute directly. Cities currently under consideration are Lublin
(1996 population--approximately 355,000), Lodz (1996 population--approximately
818,000) and Bialystok (1996 population--approximately 281,000).
The Company will seek to acquire successful wholesalers which are involved in
the vodka distribution business and are among the leading wholesalers in their
region. The Company would then add its higher margin imported brands to
complement and enhance the existing product portfolio. While the Company has
identified potential wholesalers and has conducted exploratory talks about such
acquisitions, it has not reached any definitive agreements regarding the terms
and conditions of any such acquisition, including the purchase price to be paid
to the sellers, and such acquisitions may not
1
be available to the Company on acceptable terms, if at all. In such case, the
Company would seek to enter these markets with its own branch offices.
INCREASE PRODUCT OFFERINGS. The Company plans to expand its strategic product
offerings in Poland through the acquisition of a high quality wine importer
which offers a wide selection of specialty wines and by entering into new
supplier agreements to import additional products. The Company is in
exploratory talks with such a wine importer, but no definitive agreement has
been reached. The Company began importing Bulgarian red and white varietal
wines in October 1997. The Company is also in exploratory talks with spirit
producers to import additional spirit brands.
ENTER RETAIL MARKET. The Company has implemented its retail business strategy
in Warsaw, where one location has been leased, remodeled and is expected to
open for business in mid-January, 1998. The Company believes that specialty
retail sales of alcoholic beverages in Poland have yet to be developed.
Currently, alcoholic beverages are sold in Poland through grocery stores,
supermarkets, small shops and gas stations. These retail outlets sell, in
general, fast moving items, primarily domestic beer and vodka, as well as a few
of the more popular imported products, which are brands often imported by the
Company. There are few stores that specialize in alcoholic beverages in Warsaw,
a metropolitan area with a population of approximately 2.4 million.
The Company also believes that high quality alcohol retail outlets will
create an additional demand for the Company's current product portfolio,
enhancing sales of products distributed, as well as provide a point of sale
marketing opportunity for the Company's brands. The retail stores will stock
additional products not currently distributed by the Company to complement the
stores' appeal, such as cigars and other items associated with an alcohol
retail outlet. The Company also intends to utilize the retail outlets as a
training tool for its salesmen for product merchandising and promotions. In
addition, the retail establishments will allow the Company's on-trade customers
to have a supply point for immediate purchase at night and on Sundays when the
Company's delivery system does not operate.
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CEDC was incorporated in Delaware in September 1997 to facilitate this
Offering. Its executive offices are located at 211 North Union Street, #100,
Alexandria, Virginia 22314 and its telephone number is (703) 838-5568. The
executive offices of Carey Agri are located at ul. Lubelska 13, 03-802 Warsaw,
Poland and its telephone number is 48-22-618-0577.
THE OFFERING
[Download Table]
Securities Offered.............. 1,150,000 Shares and 1,150,000 Warrants. Each
Warrant entitles the holder to purchase one
Share, at an exercise price of $ per Share
(the aggregate initial Share and Warrant
offering price), during the five year period
commencing on the date of this Prospectus. The
exercise price of the Warrants is subject to
adjustment and the Warrants are subject to
redemption in certain circumstances. See
"Description of Securities--Warrants."
Common Stock Outstanding........ Prior to this Offering--1,780,000 (1)
After this Offering--2,930,000 (2)
2
[Download Table]
Use of Proceeds............... Assuming an offering price of $8.00 per share of
Common Stock (the midpoint of the estimated
range specified on the cover page of the
Prospectus) and $0.10 per Warrant, the net
proceeds of the Offering are expected to be
approximately $7.5 million. The Company intends
to use approximately $2.0 million of the net
proceeds to acquire existing wholesalers of
alcoholic beverages, approximately $1.2 million
to increase the number of brands distributed
through the addition of new suppliers and the
acquisition of existing importers and
approximately $0.6 million to open retail
stores. The Company intends to use net proceeds
to retire bank financing (approximately $1.4
million as of November 30, 1997) and $0.9
million to purchase currently leased equipment.
The remaining net proceeds of approximately $1.4
million will be used for general corporate
purposes, including the purchase of computer
upgrades and prepayments to suppliers in order
to receive favorable discounts on both imported
and Polish alcoholic beverages. See "Use of
Proceeds."
Risk Factors.................. This Offering involves a high degree of risk and
immediate substantial dilution and should not be
made by investors who cannot afford the loss of
their entire investment.
Proposed Nasdaq Symbols (3)... Common Stock--CEDC
Warrants--CEDCW
Dividend Policy............... The Company has never declared or paid any cash
dividends on its capital stock. The Company does
not anticipate paying cash dividends in the
foreseeable future.
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(1) Does not include 400,000 shares of Common Stock reserved for issuance in
connection with the Company's 1997 Stock Incentive Plan (the "Plan"), of
which options for 52,500 shares have been granted. See "Management--
Executive Compensation."
(2) Does not include: (i) 97,500 shares of Common Stock issuable by the Company
upon exercise of the Underwriters' over-allotment option or 172,500 shares
of Common Stock underlying Warrants issuable upon exercise of the
Underwriters' over-allotment option, (ii) 1,150,000 shares of Common Stock
issuable upon exercise of the Warrants offered hereby, (iii) 230,000 shares
of Common Stock issuable upon exercise of the Unit Purchase Option and the
warrants included therein and (iv) 400,000 shares of Common Stock reserved
for issuance under the Plan, of which options for 52,500 shares have been
granted. See "Management--Executive Compensation" and "Underwriting."
(3) There can be no assurance that an active trading market in the Company's
securities will develop or, if developed, will be sustained. See "Risk
Factors--Risks Related to the Offering--Possible Delisting of Securities
from the Nasdaq Market."
3
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth summary consolidated financial data of the
Company as of and for each of the two fiscal years in the period ended December
31, 1996, and as of and for the nine months ended September 30, 1996 and 1997.
The statement of operations data for the years ended December 31, 1995 and
1996, and the balance sheet data as of December 31, 1995 and 1996 have been
derived from the Company's consolidated financial statements, which were
audited by Ernst & Young Audit Sp. z o.o., independent auditors. The statement
of operations data for the nine months ended September 30, 1996 and 1997, and
the "actual" balance sheet data as of September 30, 1997, are unaudited, but
include, in the opinion of management, all adjustments considered necessary for
a fair presentation of such data. The "as adjusted" balance sheet data as of
September 30, 1997, is as described in note (2) below. The results for the nine
months ended September 30, 1997 are not necessarily indicative of the results
expected for the entire year. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this Prospectus.
[Download Table]
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
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1995 1996 1996 1997
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS
DATA:
Net sales.................. $ 16,017 $ 23,942 $ 14,575 $ 27,499
Cost of goods sold......... 13,113 19,850 11,697 23,759
Sales, general and
administrative expenses... 2,603 3,569 2,581 3,057
Operating income........... 301 523 297 683
Income before income
taxes..................... 195 173 71 334
Net income................. 75 62 6 140
Net income per common
share, primary and fully
diluted (1)............... 0.04 0.03 0.00 0.08
OTHER FINANCIAL DATA:
Bad debt expense to net
sales ratio............... 0.21% 0.08% 0.08% 0.06%
[Download Table]
DECEMBER 31, SEPTEMBER 30, 1997
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1995 1996 ACTUAL AS ADJUSTED(2)
---------- ---------- ---------- ------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
BALANCE SHEET DATA:
Cash........................ $ 339 $ 740 $ 240 $ 6,665
Current assets.............. 3,146 6,889 6,479 12,894
Total assets................ 3,264 7,335 7,165 13,328
Current liabilities......... 3,119 7,006 6,931 5,649
Long-term debt and capital
lease obligations, less
current portion............ 180 303 68 13
Stockholders' equity
(deficit).................. (36) 26 166 7,666
Stockholders' equity
(deficit) per common
share...................... (0.02) 0.01 0.09 2.62
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(1) Gives effect to the 1,780,000 shares issued in the Reorganization. See "The
Reorganization."
(2) Adjusted to give effect to the receipt of net proceeds of approximately
$7.5 million from the sale of 1,150,000 shares of Common Stock offered
hereby by the Company at the assumed initial public offering price of $8.00
(the midpoint of the estimated range specified on the cover page of this
Prospectus) and 1,150,000 Warrants at $.10 per Warrant and assuming that a
portion of the net proceeds would be used to prepay bank financing
(approximately $1.4 million as of November 30, 1997) and to pay all accrued
public offering costs. See "Use of Proceeds."
4
RISK FACTORS
The Common Stock and Warrants offered hereby involve a high degree of risk.
Prospective investors should consider carefully all the information contained
in this Prospectus (including the consolidated financial statements and notes
thereto) prior to purchasing Common Stock and Warrants in the Offering and in
particular the factors set forth below under "--Risks Related to the
Company,"""--Risks Related to Regulation," "--Risks Related to Investments in
Poland and Emerging Markets" and "--Risks Related to the Offering."
Prospective investors are cautioned that the statements in this Prospectus
that are not historical facts may be forward-looking in nature and,
accordingly, whether they prove to be accurate is subject to many risks and
uncertainties. The actual results that the Company achieves may differ
materially from any forward-looking statements in this Prospectus. Factors
that could cause or contribute to such differences include, but are not
limited to, those discussed below and those contained elsewhere in this
Prospectus.
RISKS RELATED TO THE COMPANY
Limited Management Resources; Dependence on Key Persons
The Company is relying on a small number of key individuals to implement its
business and operations and, in particular, the services of William V. Carey,
its Chairman, President and Chief Executive Officer, and Jeffrey Peterson, its
Vice Chairman and Executive Vice President. Accordingly, the Company may not
have sufficient managerial resources to successfully manage the increased
business activity envisioned by its business strategy. In addition, the
Company's future success depends in large part on the continued service of
Messrs. Carey and Peterson. Mr. Carey has entered into a three-year employment
agreement with the Company which commences on the closing of this Offering and
which may be terminated by Mr. Carey only for "good reason," which includes
CEDC's failure to perform its obligations under the agreement, or by CEDC for
"cause," as defined, which includes Mr. Carey's willful refusal to follow
written orders or willful engagement in conduct materially injurious to the
Company or continued failure to perform his required duties. The Company has
applied for a $2.5 million key man life insurance policy on the life of Mr.
Carey. Mr. Peterson has entered into a two-year employment agreement with the
Company which commences on the closing of this Offering and which may be
terminated by CEDC, with or without cause, on three months' prior written
notice. Mr. Peterson may terminate the employment agreement only for good
reason. See "Management--Compensation Plans--Employment Agreements."
The management of future growth will require, among other things, continued
development of the Company's financial and management controls and management
information systems, stringent control of costs, increased marketing
activities, ability to attract and retain qualified management personnel and
the training of new personnel. The Company is seeking to hire additional
personnel, in particular a chief financial officer, in order to manage its
growth and expansion. Failure to successfully hire such an officer and to
manage its growth and development would have a material adverse effect on the
Company's business, results of operations and financial condition.
Nonexclusive, Short-Term Supply Contracts
The Company has exclusive rights to distribute in Poland certain alcoholic
beverages which during 1996 and the nine months ended September 30, 1997
constituted approximately $7.6 million and $7.5 million, respectively, or
31.7% and 27.0%, respectively, of its net sales. Furthermore, most of the
Company's distribution agreements have a term of approximately one year,
although many are automatically renewed unless one party gives notice of
termination. Several of such agreements, however, can be terminated by one
party without cause on relatively short notice. For example, the distribution
agreements with respect to domestic vodka (which accounted for approximately
12.9% and 45.4% of the Company's net sales during 1996 and the nine months
ended September 30, 1997, respectively) and products of International Drinks
and Vintners (which accounted for approximately
5
17.1% and 11.0% of the Company's net sales during 1996 and the nine months
ended September 30, 1997, respectively) can be terminated by either party on
one month's notice and products distributed for United Distiller Finlandia
Group ("United Distillers") (which accounted for approximately 15.1% and 12.9%
of the Company's net sales during 1996 and the nine months ended September 30,
1997, respectively) can be terminated upon 90 days' notice. The termination of
such agreements could have a material adverse effect on the business and
operations of the Company.
Risks Related to Acquisitions
The Company's growth will depend in large part on its ability to acquire
additional distributors, increase product offerings, manage expansion, control
costs in its operations and consolidate effectively any acquisition into its
existing operations and systems of management and financial controls.
Unforeseen capital and operating expenses, or other difficulties,
complications and delays frequently encountered in connection with the
expansion and integration of acquired operations could inhibit the Company's
growth. The full benefits of a significant acquisition will require the
integration of operational, administrative, finance, sales and marketing
organizations, as well as the coordination of common sales and marketing
efforts and the implementation of appropriate operational, financial and
management systems and controls. This effort will require substantial
attention from the Company's senior management team. The diversion of
management attention required by an acquisition could have an adverse effect
on the net sales and operating results of the Company. There can be no
assurance that the Company will identify suitable acquisition candidates, that
acquisitions will be consummated on acceptable terms or that the Company will
be able to successfully integrate the operations of any acquisition.
The Company's ability to grow through the acquisition of additional
companies will also be dependent upon the availability of capital to complete
the acquisitions. The Company intends to finance acquisitions through a
combination of the proceeds of the Offering, its available cash resources,
bank borrowings and, in appropriate circumstances, the further issuance of
equity and/or debt securities. Acquiring additional companies will have a
significant effect on the Company's financial position, and could cause
substantial fluctuations in the Company's quarterly and yearly operating
results. Also, acquisitions could result in the recording of significant
goodwill and intangible assets on the Company's financial statements, the
amortization of which would reduce reported earnings in subsequent years.
Dependence Upon Retailers
The alcoholic beverages distributed by the Company in Poland have
historically been sold to consumers by independent retailers. Accordingly, the
Company is dependent on its independent retailers for the successful
distribution of its products to the ultimate customer. The Company has no
control over the independent retailers' operations, including such matters as
retail price and marketing. One component of the Company's growth strategy is
to enter the retail market. Implementation of this strategy may be construed
by the Company's existing independent retailers as an effort to compete with
them, which could adversely affect their relationship with the Company and
cause them to decrease or cease their purchases of the Company's products.
Limited Retail Experience
One component of the Company's growth strategy is for the Company to enter
the retail market for sales of alcoholic beverages. The Company has no prior
significant retail experience, and, accordingly, is subject to the numerous
risks of entering a new business. Such risks include, among others,
unanticipated operating problems, lack of experience and significant
competition from existing and new retailers. There can be no assurance that
the Company will be able to conduct retail operations profitably.
6
Competition
The brands of beer, spirits and wine distributed by the Company compete with
other brands in each category, including some that the Company distributes.
The Company expects this competition to increase as it adds more brands, as
international drinks and brewery companies expand production and distribution
in Poland, and as domestically produced products are distributed more
efficiently. The Company competes with various regional distributors in all of
its offices. This competition is particularly vigorous with respect to
domestic vodka brands. Further, some of the international drink companies
doing business in Poland, which import their own products but use the Company
on a nonexclusive basis to distribute their products, could develop a
nationwide distribution system, as could existing regional distributors, and
may terminate their distribution arrangements with the Company. In addition,
the international drinks companies with which the Company competes in the
import segment of its business have substantially greater managerial,
financial and other resources than the Company. See "Business--Competition."
Dependence on Principal Suppliers
United Distillers and International Drinks and Vintners alcoholic beverages
accounted for 15.1% and 17.1%, respectively, of net sales in 1996, and for
12.9% and 11.0%, respectively, of net sales during the nine-month period ended
September 30, 1997. United Distillers and Guinness are part of the same
business enterprise, Guinness PLC, which has announced a proposed merger with
International Drinks and Vintners. Alcoholic beverages purchased from these
three companies accounted for 38.3% of the Company's net sales in 1996 and
27.8% during the nine-month period ended September 30, 1997. The termination
of the Company's relationship with any of such entities could have a material
adverse effect on the business and operations of the Company.
Control By Existing Stockholders; Potential Anti-Takeover Provisions
After completion of the Offering, and assuming no exercise of the
Underwriters' over-allotment options, three of the Company's existing
stockholders, William V. Carey, the William V. Carey Stock Trust, and Jeffrey
Peterson, will own beneficially in the aggregate approximately 57.6% of the
outstanding Common Stock. In the event that the Underwriters' over-allotment
options are exercised in full, such stockholders will own beneficially in the
aggregate approximately 53.5% of the outstanding Common Stock. As a result,
these persons, acting together, will be able to elect all of the Company's
directors and otherwise control the Company's operations. In addition, such
concentration of ownership may have the effect of delaying or preventing
transactions involving an actual or potential change in control of the
Company, including transactions in which holders of Common Stock might receive
a premium for their Common Stock over prevailing market prices. (Such
stockholders as well as the estate of William O. Carey are referenced to
herein as the "Selling Stockholders.") See "Principal and Selling
Stockholders" and "Description of Securities."
Certain provisions of CEDC's certificate of incorporation (the "Certificate
of Incorporation") and bylaws (the "Bylaws") and of Delaware law could delay
or make more difficult a merger, tender offer or proxy contest involving CEDC.
These include Section 203 of the Delaware General Corporation Law, which
prohibits a Delaware corporation from engaging in any business combination
with any interested stockholder for a period of three years from the date the
person became an interested stockholder unless certain conditions are met. The
Certificate of Incorporation authorizes the issuance of 1.0 million shares of
preferred stock, par value $.01 per share ("Preferred Stock"), on terms which
may be fixed by CEDC's Board of Directors (the "Board of Directors") without
further stockholder action. The terms of any series of Preferred Stock, which
may include, among other things, priority claims to assets and dividends and
special voting rights, could adversely affect the rights of holders of the
Common Stock. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future.
7
CEDC has no present plans to issue shares of Preferred Stock. In addition, the
Certificate of Incorporation and Bylaws eliminate the right of stockholders to
act by written consent without a meeting unless such written consent is
unanimous, require advanced stockholder notice to nominate directors and raise
matters at the annual stockholders' meeting, do not provide for cumulative
voting in the election of directors, authorize the removal of directors only
for cause by the affirmative vote of the holders of at least a majority of the
outstanding shares of capital stock, require that at least 10% of the voting
power of the issued and outstanding capital stock request a call of a special
meeting before such a meeting can be called by the stockholders of CEDC, limit
amendments to the Certificate of Incorporation to items that have been first
proposed by the Board of Directors and thereafter approved by the affirmative
vote of the holders of at least a majority (and in certain cases a
supermajority) of the outstanding shares of capital stock and require at least
a majority of the outstanding shares of capital stock for stockholders to
amend the Bylaws. Finally, the acquisition of more than 10% of the outstanding
voting stock of CEDC could require the approval of the Polish Office for
Protection of Competition and Consumers (the "Anti-Monopoly Office"), provided
that the total value of annual sales of the Company and the acquiror in the
calendar year preceding the year of notification exceed 5.0 million ECU
(approximately $5.7 million). See "--Risks Related to Regulation--Competition
Law." All of the foregoing could have the effect of delaying, deferring or
preventing a change in control of the Company and could limit the price that
certain investors might be willing to pay in the future for shares of the
Common Stock. See "Description of Securities."
Holding Company Structure and Restrictions on Payment of Dividends
CEDC is a holding company with limited assets of its own and conducts all of
its business through its subsidiary, Carey Agri. The ability of CEDC to pay
dividends on the Common Stock will be dependent upon either the cash flows and
earnings of Carey Agri and the payments of funds by that subsidiary to CEDC in
the form of repayment of loans, dividends or otherwise or CEDC's ability to
otherwise realize economic benefits from its equity interests in its
subsidiary. Carey Agri has no obligation, contingent or otherwise, to pay
dividends to CEDC. The ability of Carey Agri to make payments to CEDC will be
subject to, among other things, the availability of funds, as well as various
business considerations and legal requirements. See "Dividend Policy."
The transfer of equity interests in Carey Agri may be limited, due in part
to regulatory and contractual restrictions. There can be no assurance of
CEDC's ability to realize economic benefits through the sale of such equity
interests. Accordingly, there can be no assurance that CEDC will receive
dividend payments from its subsidiary, if at all, or other economic benefits
from its equity interest in its subsidiary.
No Intention to Pay Dividends
Neither CEDC nor Carey Agri has ever declared or paid any dividends on its
Common Stock, and the Company does not anticipate paying dividends in the
foreseeable future. See "Dividend Policy."
RISKS RELATED TO REGULATION
Regulation of the Company's Business
The importation and distribution of alcoholic beverages in Poland is subject
to extensive regulation, requiring the Company to receive and renew various
permits and licenses to import, warehouse, transport and sell alcoholic
beverages. These permits and licenses often contain conditions with which the
Company must comply in order to maintain the validity of such permits and
licenses. The Company believes it is operating with all the licenses and
permits material to its business, and the Company is not subject to any
proceeding calling into question its operation in compliance with any
licensing and permit requirements.
8
There can be no assurance that the various governmental regulations
applicable to the alcoholic beverage industry will not be changed so as to
impose more stringent requirements on the Company. If the Company were to fail
to be in compliance with applicable governmental regulations or the conditions
of the licenses and permits it receives, such failure could cause the
Company's licenses and permits to be revoked and have a material adverse
effect of the Company's business, results of operation and financial
condition. Further, the applicable Polish governmental authorities, in
particular the Minister of Economy, have articulated only general standards
for issuance, renewal and termination of the licenses and permits which the
Company needs to operate and, thus, such governmental authorities retain
considerable discretionary authority in making such decisions. See
"Regulation."
Possibility of Increased Governmental Regulation
The alcoholic beverage industry has become the subject of considerable
societal and political attention generally in recent years due to increasing
public concern over alcohol-related societal problems, including driving while
intoxicated, underage drinking and health consequences from the abuse of
alcohol. As an outgrowth of these concerns, the possibility exists for further
regulation of the alcoholic beverage industry in Poland. If alcohol
consumption in general were to come into disfavor among consumers in Poland,
the Company's business operations could be materially adversely affected.
Possible Increase in Governmental Taxation
The import and sale of alcoholic beverages is a business that is highly
regulated and subject to taxation in Poland. The Company's operations may be
subject to increased taxation as compared with those of non-alcohol related
businesses. In such case, the Company may have to raise prices on its imported
products to maintain its profit margins. The actual effect on the Company's
business operations of such an increase will depend on the amount of any such
increase, general economic conditions and other factors, but could negatively
impact sales of the products the Company distributes. See "Regulation--Import
of Products" and "--Wholesale Activities."
Customs Duties and Quotas
As a general rule, the import of alcoholic beverages into Poland is subject
to customs duties and the rates of the duties are set for particular types of
products. The Minister of Economy is authorized to establish a schedule of
quotas for alcoholic beverages for which the customs duties are substantially
reduced. Customs quotas for alcoholic beverages are fixed annually, with the
current quotas being applicable through December 31, 1997. There are no public
guidelines on how the Minister of Economy has determined the current quotas or
may determine future quotas. If such quotas were substantially reduced or
eliminated, it would likely have an adverse impact on the Company's business
operations since the retail price of its imported alcoholic beverages would
likely increase. See "Regulation--Customs Duties and Quotas."
Price and Margin Controls
In general, Polish law does not regulate the prices charged or the margins
earned by the Company on its imported liquor products. There are several
sources of price and margin regulation, however, with regard to spirits
produced in Poland, such as the domestic brand vodka distributed by the
Company, which regulations have the effect of limiting the price which the
Company is able to sell domestically produced spirits. See "Regulation--Price
and Margin Controls" and "Business--Product Line--Spirits."
9
Competition Law
Competition in Poland is governed by the Anti-Monopoly Act, which
established the Anti-Monopoly Office to regulate monopolistic and other anti-
competitive practices. The current body of Polish anti-monopoly law is not
well-established. As a general rule, companies that obtain control of 40% or
more of their market may face greater scrutiny from the Anti-Monopoly Office.
Additionally, several types of reorganizations, mergers and acquisitions and
undertakings between business entities, including acquisitions of stock, under
circumstances specified in the Anti-Monopoly Act, require prior notification
to the Anti-Monopoly Office. Sanctions for failure to notify include fines
imposed on parties to the transaction and members of their governing bodies.
Pursuant to the current interpretation of the Anti-Monopoly Office,
transactions between non-Polish parties affecting market conditions in Poland
may also require a notification to the Anti-Monopoly Office. According to the
Anti-Monopoly Act, transactions made on a stock exchange do not require
notification, but the Act does not stipulate whether this is applicable to
stock exchanges outside Poland or only to those in Poland. Furthermore, the
proposed draft Law on Public Trading in Securities, currently being debated by
the Polish Parliament, provides for the amendment to the Anti-Monopoly Act to
repeal the exemption of notification of transactions made on a stock exchange.
There can be no assurance that the Anti-Monopoly Office will approve any
future acquisition by the Company.
RISK RELATED TO INVESTMENTS IN POLAND AND EMERGING MARKETS
Political and Economic Environment; Enforcement of Foreign Judgments
Poland has undergone significant political and economic change since 1989.
Political, economic, social and other developments in Poland could in the
future have a material adverse effect on the Company's business and
operations. In particular, changes in laws or regulations (or in the
interpretations of existing laws or regulations), whether caused by changes in
the government of Poland or otherwise, could materially adversely affect the
Company's business and operations. Currently there are no limitations on the
repatriation of profits from Poland, but there can be no assurance that
foreign exchange control restrictions, taxes or limitations will not be
imposed or increased in the future with regard to repatriation of earnings and
investments from Poland. If such exchange control restrictions, taxes or
limitations are imposed, the ability of CEDC to receive dividends or other
payments from Carey Agri, its Polish subsidiary, could be reduced, which may
have a material adverse effect on the Company.
Due to the many formalities required for compliance with the laws in Poland
applicable to the Company's business and operations, the rapid changes that
Polish laws and regulations have undergone in the 1990s, and numerous
uncertainties regarding the interpretation of such laws and regulations, the
Company may from time to time have violated, may be violating and may in the
future violate, the requirements of certain Polish laws, including provisions
of labor, foreign exchange, customs, tax and corporate laws and regulatory
approvals. The Company does not believe that any such violations will have a
material adverse effect upon the Company's business, results of operations or
financial condition, but there can be no assurance that such will be the case.
Poland is generally considered by international investors to be an emerging
market. There can be no assurance that political, economic, social and other
developments in other emerging markets will not have an adverse effect on the
market value and liquidity of the Common Stock and Warrants. In general,
investing in the securities of issuers with substantial operations in markets
such as Poland involves a higher degree of risk than investing in the
securities of issuers with substantial operations in the United States and
other similar jurisdictions.
CEDC is organized under the laws of the State of Delaware. Although
purchasers of the Shares and Warrants will be able to effect service of
process in the United States upon CEDC and may be able to effect service of
process upon its directors, due to the fact that CEDC is primarily a holding
10
company which holds all of the outstanding securities of Carey Agri,
substantially all of the assets of the Company are located outside the United
States. As a result, it may not be possible for investors to enforce against
the Company's assets judgments of United States courts predicated upon the
civil liability provisions of United States laws. CEDC has been advised by its
counsel that there is doubt as to the enforceability in Poland, in original
actions or in actions for enforcement of judgments of U.S. courts, of civil
liabilities predicated solely upon the laws of the United States. In addition,
awards of punitive damages in actions brought in the United States or
elsewhere may not be enforceable in Poland.
Inflation; Currency Risk
Since the fall of Communist rule in 1989, Poland has experienced high levels
of inflation and significant fluctuations in the exchange rate for the zloty.
The Polish government has adopted policies that slowed the annual rate of
inflation from approximately 250% in 1990 to approximately 27% in 1995 and to
approximately 18% in 1996. Inflational rates have continued to decrease in
1997. In addition, the exchange rate for the zloty has stabilized and the rate
of devaluation of the zloty has decreased since 1991. However, the zloty
exchange rate and rate of devaluation have increased in 1997. Inflation and
currency exchange fluctuations have had, and may continue to have, an adverse
effect on the financial condition and results of operations of the Company.
Certain of the Company's operating expenses and capital expenditures are,
and are expected to continue to be, denominated in or indexed to U.S. Dollars
or other hard currencies. By contrast, substantially all of the Company's
revenue is denominated in zloty. Any devaluation of the zloty against the U.S.
Dollar that the Company is unable to offset through price adjustments will
require the Company to use a larger portion of its revenue to service its U.S.
Dollar-denominated obligations. While the Company may consider entering into
transactions to hedge the risk of exchange rate fluctuations, it is unlikely
that the Company will be able to obtain hedging arrangements on commercially
satisfactory terms. Accordingly, shifts in currency exchange rates may have an
adverse effect on the ability of the Company to service its U.S. Dollar
denominated obligations and, thus, on the Company's financial condition and
results of operations.
RISKS RELATED TO THE OFFERING
No Public Market for the Securities
Prior to the Offering, there has not been any public market for the shares
of Common Stock or the Warrants. Although the Company intends to seek
quotation of the shares of Common Stock and the Warrants on the Nasdaq
SmallCap Market, there can be no assurance that the Company will be successful
in its efforts, and even if the Company is successful, there can be no
assurance that an active trading market will develop or be sustained after the
Offering.
Arbitrary Determination of Offering Price; Possible Volatility of Stock Price
The initial public offering price of the Common Stock and the Warrants and
the terms of the Warrants will be determined by negotiation between the
Company and the Underwriters and will not necessarily be related to the
Company's asset value, net worth, results of operations or any other criteria
of value and may not be indicative of the prices of the Common Stock and the
Warrants that may prevail in the public market after the Offering. Subsequent
to the Offering, prices for the Common Stock and the Warrants will be
determined by the market and may be influenced by a number of factors,
including the depth and liquidity of the market for the Common Stock and the
Warrants, investor perception of the Company and other comparable companies
and general economic and other conditions.
11
Immediate and Substantial Dilution
The initial public offering price is substantially higher than the net
tangible book value of the Company's outstanding Common Stock at September 30,
1997. Purchasers of shares of Common Stock in the Offering will therefore
experience immediate and substantial dilution in net tangible book value per
share, and existing stockholders will receive a material increase in the
tangible book value per share of their shares of Common Stock. Assuming an
initial public offering price of $8.00 per share (the midpoint of the range
specified on the front cover of the Prospectus) and $0.10 per Warrant, the
immediate dilution to new investors would be $5.38 per share. See "Dilution."
Outstanding Warrants and Options
Upon completion of the Offering, the Company will have issued 1,150,000
Warrants and Unit Purchase Options to purchase up to 115,000 shares of Common
Stock and 115,000 Warrants. In addition, the Company has 400,000 shares of
Common Stock reserved for issuance under the Plan, under which options to
purchase 52,500 shares have been granted. Holders of such warrants and options
are likely to exercise them when, in all likelihood, the Company could obtain
additional capital on terms more favorable than those provided by the warrants
and options. Further, while these warrants and options are outstanding, the
Company's ability to obtain additional financing on favorable terms may be
adversely affected. See "Management--1997 Stock Incentive Plan," "Description
of Securities" and "Underwriting."
Underwriters' Possible Ability to Dominate or Influence the Market for the
Company's Securities
A significant amount of the Common Stock and the Warrants offered hereby may
be sold to customers of the Underwriters. This may adversely affect the market
for and liquidity of the Common Stock and the Warrants if additional
broker/dealers do not make a market in the Common Stock and the Warrants.
Although they have no legal obligation to do so, the Underwriters may from
time to time act as a market maker and otherwise effect transactions in the
Common Stock and the Warrants. The Company cannot ensure that other
broker/dealers besides the Underwriters will make a market in the Common Stock
and the Warrants. In the event that other broker/dealers fail to make a market
in the Common Stock and the Warrants, the possibility exists that the market
for, and liquidity of, the Common Stock and the Warrants could be adversely
affected, which in turn could affect stockholders' ability to trade the Common
Stock and the Warrants.
Possible Delisting of Securities from the Nasdaq Market
While the Company's Common Stock and Warrants meet the current Nasdaq
listing requirements and are expected to be initially quoted on the Nasdaq
SmallCap Market, there can be no assurance that the Company will meet the
criteria for continued listing. Continued inclusion on Nasdaq generally
requires that (i) the Company maintain at least $2.0 million in net tangible
assets or $35.0 million in market capitalization or $500,000 in net income (in
the latest fiscal year or two of the last three fiscal years), (ii) the
minimum bid price of the Common Stock be $1.00 per share (iii) there be at
least 500,000 shares in the public float valued at $1,000,000 or more, (iv)
the Common Stock have at least two active markets markers and (v) the Common
Stock be held by at least 300 holders, each with 100 shares or more.
In addition, to maintain its Nasdaq listing, the Company must adopt certain
corporate governance requirements, such as the distribution of annual and
interim reports, have a minimum of two independent directors serving on its
Board of Directors, establish an audit committee with a majority of
independent directors, and hold an annual stockholders' meeting.
If the Company is unable to satisfy Nasdaq's maintenance requirements, the
shares of Common Stock and the Warrants may be delisted from Nasdaq. In such
event, trading, if any, in the Common
12
Stock and the Warrants would thereafter be conducted in the over-the-counter
market in the so called "pink sheets" or the National Association of
Securities Dealers' "Electronic Bulletin Board." Consequently, the liquidity
of the Common Stock and the Warrants could be impaired, not only in the number
of shares which could be bought and sold, but also through delays in the
timing of transactions, and reduction in security analysts' and the news
media's coverage, if any, of the Company. As a result, prices for shares of
the Common Stock and the Warrants may be lower than might otherwise be
attained.
Risks of Low-Priced Stock
If the Company's Common Stock and Warrants were delisted from the Nasdaq
SmallCap Market (see previous risk factor), they could become subject to Rule
15g-9 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), which imposes additional sales practice requirements on broker-dealers
which sell such securities to persons other than established customers and
"accredited investors" (generally, individuals with net worths in excess of
$1,000,000 or annual income exceeding $200,000, or $300,000 together with
their spouses). For transactions covered by this rule, a broker-dealer must
make a special suitability determination for the purchaser and have received
the purchaser's written consent to the transaction prior to sale.
Consequently, such rule may adversely affect the ability of broker-dealers to
sell the Common Stock and the Warrants and may adversely affect the ability of
purchasers in this Offering to sell any of the Common Stock and the Warrants
acquired hereby in the secondary market.
Securities and Exchange Commission ("SEC") regulations define a "penny
stock" to be any equity security not listed on a national securities exchange
or Nasdaq that has a market price (as therein defined) of less than $5.00 per
share, subject to certain exceptions. For any transaction involving a penny
stock, unless exempt, the rules require delivery, prior to any transaction in
a penny stock, of a disclosure schedule prepared by the SEC relating to the
penny stock market. Disclosure is also required to be made about commissions
payable to both the broker-dealer and the registered representative and
current quotations for the securities. Finally, monthly statements are
required to be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
The foregoing required penny stock restrictions will not apply to the
Company's Common Stock and Warrants if such securities are listed on the
Nasdaq SmallCap Market and have certain price and volume information provided
on a current and continuing basis or meet certain minimum net tangible assets
or average revenue criteria. There can be no assurance that the Company's
Common Stock and Warrants will qualify for exemption from these restrictions.
In any event, even if the Company's Common Stock and Warrants were exempt from
such restrictions, it would remain subject to Section 15(b)(6) of the Exchange
Act, which gives the SEC the authority to prohibit any person that is engaged
in unlawful conduct while participating in a distribution of a penny stock
from associating with a broker-dealer or participating in a distribution of a
penny stock, if the SEC finds that such a restriction would be in the public
interest. If the Company's Common Stock and Warrants were subject to the rules
on penny stocks, the market liquidity for the Company's Common Stock and
Warrants could be severely adversely affected.
Broad Discretion Over Use of Proceeds; Unspecified Acquisitions
Because of the variability and number of factors that will determine the
Company's use of proceeds from this Offering, the Company's management will
retain a significant amount of discretion over the application of the net
proceeds. Until the Company utilizes the net proceeds of the Offering, such
funds will be invested in the United States in investment grade securities.
Although the Company currently has no agreements or understandings to enter
into any potential business combination, it does intend to actively seek and
investigate such opportunities as they become available. The
13
Company may use a portion of the net proceeds from this Offering to finance
such acquisitions. See "Use of Proceeds."
Use of Proceeds to Benefit Insiders
The Company intends to use net proceeds to prepay outstanding bank financing
(approximately $1.4 million as of November 30, 1997), of which approximately
$0.5 million has been personally guaranteed by Messrs. Carey and Peterson,
each of whom is an executive officer, director and principal stockholder of
the Company. Upon repayment of such indebtedness, each of such persons will be
released from such guarantees. See "Use of Proceeds."
Limited Offering Experience of Underwriters
Fine Equities, Inc. and SouthWall Capital Corp. have been engaged in
business since August 1995 and May 1996, respectively. Prior to this Offering,
Fine Equities, Inc. has acted as an underwriter in one other offering of
securities and has not acted as co-manager in any other offering of
securities, and SouthWall Capital Corp. has only co-managed one other offering
of securities and has acted as an underwriter in several other offerings.
There can be no assurance that the Underwriters' limited offering experience
and small size relative to other broker-dealers will not adversely affect this
Offering or the subsequent development, if any, of a trading market for the
Common Stock and Warrants. See "Underwriting."
Possible Restrictions on Market-Making Activities in the Company's Securities
The Underwriters have advised the Company that they intend to make a market
in the Company's securities. Regulation M promulgated by the SEC under the
Exchange Act may prohibit the Underwriters from engaging in any market making
activities with regard to the Company's securities for the period from nine
business days (or such other applicable period as Regulation M may provide)
prior to any solicitation by the Underwriters of the exercise of Warrants
until the later of the termination of such solicitation activity or the
termination (by waiver or otherwise) of any right that the Underwriters may
have to receive a fee for the exercise of Warrants following such
solicitation. As a result, the Underwriters may be unable to provide a market
for the Company's securities during certain periods while the Warrants are
exercisable. Any temporary cessation of such market-making activities could
have an adverse effect on the market price of the Company's securities.
Potential Adverse Effect of Redemption of the Warrants
During the four-year period commencing one year from the date of this
Prospectus, the Warrants may be redeemed by the Company at a redemption price
of $.05 per Warrant upon not less than 30 days' notice provided the sales
price of the Common Stock is at least $ (which is 200% of the initial Share
offering price) for 30 consecutive days ending on the date of notice of
redemption. Redemption of the Warrants could force the holders to exercise the
Warrants and pay the exercise price therefor at a time when it may be
disadvantageous for the holders to do so, to sell the Warrants at the then
current market price (which will likely be adversely affected by the impending
redemption of the Warrants) when they might otherwise wish to hold the
Warrants or to accept the redemption price, which, at the time the Warrants
are called for redemption, is likely to be substantially less than the market
value of the Warrants. See "Description of Securities--Warrants."
Current Prospectus and State Registration Required to Exercise Warrants
Holders of the Warrants will only be able to exercise the Warrants if (i) a
current prospectus under the Securities Act of 1933, as amended (the
"Securities Act") relating to the securities underlying the Warrants is then
in effect and (ii) such securities are qualified for sale or exempt from
qualification
14
under the applicable securities laws of the states in which the various
holders of Warrants reside. Although the Company has undertaken to use its
best efforts to maintain the effectiveness of a current prospectus covering
the securities underlying the Warrants, there can be no assurance that the
Company will be able to do so. There also can be no assurance that exemptions
from the registration or qualification requirements of those states in which
the Company's securities are not currently registered or qualified will be
available at the time a Warrant holder wishes to exercise his or her Warrant.
The value of the Warrants may be greatly reduced if a current prospectus,
covering the securities issuable upon the exercise of the Warrants, is not
kept effective or if such securities are not qualified, or exempt from
qualification, in the states in which the holders of Warrants reside. See
"Description of Securities--Warrants."
Shares Eligible for Future Sale
Future sales of Common Stock by existing stockholders pursuant to Rule 144
("Rule 144") under the Securities Act or otherwise could have an adverse
effect on the price of the Common Stock. Upon completion of the Offering, the
Company will have 2,930,000 shares of Common Stock outstanding, including
1,150,000 shares of Common Stock offered hereby (without giving effect to
97,500 shares of Common Stock which may be issued by the Company upon exercise
of the Underwriters' over-allotment option). The shares of Common Stock and
Warrants offered hereby will be freely tradable without restriction or further
registration under the Securities Act by persons other than "affiliates" of
the Company within the meaning of Rule 144 promulgated under the Securities
Act.
In general, under Rule 144, a person (or persons whose shares are required
to be aggregated) who has been deemed to have beneficially owned shares for at
least one year, including an "affiliate", is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1%
of the then outstanding number of shares of common stock or the average weekly
trading volume in the shares of common stock during the four calendar weeks
preceding the filing of the required notice of such sale. A person (or persons
whose shares are required to be aggregated) who is not deemed to have been an
affiliate of the Company during the three months preceding a sale, and who has
beneficially owned shares within the definition of "restricted securities"
under Rule 144 for at least two years is entitled to sell such shares under
Rule 144(k) without regard to the volume limitation, manner of sale
provisions, notice requirements or public information requirements of Rule
144. Affiliates continue to be subject to such limitations.
The Company's directors and executive officers and principal stockholders do
not own any shares of the Common Stock currently eligible for sale under Rule
144. Further, such persons have agreed with the Underwriters that they will
not, for a 24-month period after the completion of the Offering, without the
prior written consent of the Underwriters, offer, sell, contract to sell, or
otherwise dispose of, any shares of Common Stock or any securities convertible
into, or exchangeable for, shares of Common Stock.
THE REORGANIZATION
Before the Offering, all the holders of the shares of Carey Agri's common
stock and CEDC entered into a contribution agreement dated as of November 28,
1997 (the "Contribution Agreement"). Pursuant to the Contribution Agreement,
the holders of shares of Carey Agri's common stock transferred all their
shares of Carey Agri common stock to CEDC receiving an aggregate of 1,780,000
shares of Common Stock in return (the "Share Exchange"). This transfer was
designed to qualify as a tax-free exchange under section 351 of the Internal
Revenue Code of 1986, as amended (the "Code"). As a result of the Share
Exchange, Carey Agri became a wholly owned subsidiary of CEDC. The Share
Exchange and the resulting corporate structure in which Carey Agri became a
wholly owned subsidiary of CEDC is referred to herein as the "Reorganization."
15
USE OF PROCEEDS
Assuming an offering price of $8.00 per share of Common Stock (the midpoint
of the estimated range specified on the cover page of the Prospectus) and
$0.10 per Warrant, the net proceeds from the sale of the Common Stock and
Warrants are expected to be approximately $7.5 million (after deducting the
underwriting discounts, the Underwriters' non-accountable expense allowance
and other estimated expenses of the Offering). Of the net proceeds,
approximately $2.0 million is expected to be used by the Company to acquire
existing wholesale distributors of alcoholic beverages, particularly in
markets in Poland where the Company does not distribute directly,
approximately $1.2 million to increase the number of brands distributed by the
addition of new suppliers and the acquisition of existing importers, and
approximately $0.6 million to open retail stores. See "Business--Business
Strategy."
Although the Company currently has no agreements or understandings to enter
any potential business combination, it does intend to actively seek and
investigate such opportunities as they become available. The Company may use a
portion of the net proceeds from this Offering to finance such acquisitions.
The Company also intends to use $1.4 million of the net proceeds to prepay
its expected level of bank financing (approximately $1.4 million as of
November 30, 1997) and $0.9 million to purchase equipment, primarily vehicles.
For the anticipated effects on the Company's operations, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview." The remaining net proceeds of approximately $1.4 million will be
used for general corporate purposes. Such purposes include computer upgrades
for interoffice financial and administrative controls, the purchase of scanner
equipment for warehouse operations, and prepayments to suppliers in order to
receive favorable discounts on both imported and domestic alcoholic beverages.
Because of the variability and number of factors that will determine the
Company's use of proceeds from this Offering, the Company's management will
retain a significant amount of discretion over the application of the net
proceeds. Until the Company utilizes the net proceeds of the Offering, such
funds will be invested in the United States in investment grade securities.
The foregoing represents the Company's best estimate of the allocation of
the net proceeds of the Offering based on the current status of its business.
Future events, including changes in competitive conditions, the ability of the
Company to identify appropriate acquisition candidates, the availability of
other financing and funds generated from operations and the status of the
Company's business from time to time, may make changes in the allocation of
the net proceeds of this Offering necessary or desirable.
DIVIDEND POLICY
Neither CEDC nor Carey Agri has ever declared or paid any dividends on its
capital stock. CEDC does not anticipate paying dividends in the foreseeable
future. Future dividends, if any, will be subject to the discretion of CEDC's
Board of Directors and will depend upon, among other things, the results of
CEDC's operations, and CEDC's capital requirements and surplus, general
financial condition, contractual restrictions and such other factors as the
Board of Directors may deem relevant.
In addition, CEDC is a holding company with no business operations of its
own. Therefore, the ability of CEDC to pay dividends will be dependent upon
either the cash flows and earnings of Carey Agri and the payments of funds by
that subsidiary to CEDC. As a Polish limited liability company, Carey Agri is
permitted to declare dividends only once a year from its retained earnings,
computed under Polish Accounting Regulations after the audited financial
statements for that year have been provided to and approved by shareholders
and filed with a court. As of September 30, 1997, Carey Agri had available
$8,000 which could be declared in dividends.
16
DILUTION
The net tangible book value of the Company as of September 30, 1997 was
$166,000 or approximately $0.09 per share of Common Stock, as adjusted to
account for the Reorganization. Net tangible book value per share represents
the amount of tangible assets of the Company less the amount of its
liabilities divided by the number of shares of Common Stock outstanding. After
giving effect to the sale by the Company of 1,150,000 of shares of Common
Stock offered hereby at an assumed price of $8.00 per share (the midpoint of
the range specified on the cover page of the Prospectus) and 1,150,000
Warrants at an assumed price of $.10 per Warrant and the application of the
estimated net proceeds therefrom as set forth under "Use of Proceeds," the pro
forma net tangible book value of the Company as of September 30, 1997 would
have been approximately $7,666,000, or $2.62 per share of Common Stock. This
represents an immediate increase in net tangible book value of $2.53 per share
to the existing stockholders and an immediate dilution of $5.38 per share to
persons purchasing shares of Common Stock and Warrants in this Offering. The
following table illustrates this per share dilution:
[Download Table]
Assumed initial public offering price per share of Common Stock
(the midpoint of the range specified on the cover of the
Prospectus).................................................... $8.00
Net tangible book value per share of Common Stock at
September 30, 1997........................................... $0.09
Increase in net tangible book value per share of Common Stock
attributable to new investors................................ 2.53
-----
Pro forma net tangible book value per share of Common Stock
after the Offering............................................. 2.62
-----
Dilution per share of Common Stock to new investors............. $5.38
=====
In the event that the Underwriters' over-allotment options are exercised in
full, the pro forma net tangible book value of the Company after the Offering
would be $2.70 per share of Common Stock, the immediate increase in pro forma
net tangible book value of shares of Common Stock owned by the existing
stockholders would be $2.61 per share and the immediate dilution to new
investors would be $5.30 per share.
The following table summarizes the difference between existing stockholders
and new investors with respect to the number of shares of Common Stock
purchased from the Company, the total consideration paid to the Company and
the average price paid per share of Common Stock based on an assumed initial
public offering price of $8.00 per share (the midpoint of the estimated range
specified on the cover page of the Prospectus).
[Download Table]
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- --------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
--------- ---------- ---------- ---------- -------------
Existing Stockholders... 1,780,000(1) 61 166,000 2 0.09
New Investors........... 1,150,000 39% $9,200,000 98% $8.00
--------- --- ---------- ---
Total.................. 2,930,000(2) 100% $9,366,000 100%
========= === ========== ===
--------
(1) Does not include the sale by the Selling Stockholders of up to 75,000
shares of Common Stock in the Offering as the initial shares sold upon
exercise of the Underwriters' over-allotment option.
(2) Excludes (i) 97,500 shares of Common Stock and 172,500 shares of Common
Stock underlying warrants that the Underwriters have the option to
purchase from the Company to cover over-allotments, if any, (ii) 1,150,000
shares of Common Stock issuable upon the conversion of the Warrants, (iii)
230,000 shares of Common Stock to be issued upon the exercise of the Unit
Purchase Option and the warrants included therein, and (iv) 400,000 shares
of Common Stock reserved of issuance under the Plan, under which options
to purchase 52,500 shares have been granted and are outstanding. See
"Management--1997 Stock Incentive Plan" and "Underwriting."
17
EXCHANGE RATE DATA
In this Prospectus, references to "U.S. Dollars" or "$" are to the lawful
currency of the United States, and references to "zloty" or "PLN" are to the
lawful currency of the Republic of Poland. The Company prepares its
consolidated financial statements in accordance with U.S. GAAP in U.S.
Dollars. Amounts originally measured in zloty for all periods presented have
been translated into U.S. Dollars in accordance with the methodology set forth
in Statement of Financial Accounting Standards No. 52 ("SFAS No. 52"),
including provisions applicable to companies operating in hyper-inflationary
countries. For the convenience of the reader, this Prospectus contains
conversion of certain zloty amounts into U.S. Dollars which should not be
construed as a representation that such zloty amounts actually represent such
U.S. Dollars amounts or could be, or could have been, converted into U.S.
Dollars at the rates indicated or at any other rate. Unless otherwise stated,
such U.S. Dollar amounts have been derived by converting from zloty to U.S.
Dollars at historic rates of exchange for the applicable periods.
The following table sets forth, for the periods indicated, the noon exchange
rate (expressed in current zloty) quoted by the National Bank of Poland. Such
rates are set forth as zloty per U.S. Dollar. At December 11, 1997, such rate
was PLN 3.54 = $1.00.
[Download Table]
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ -------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ------ ------
Exchange rate at end of period......... 1.58 2.13 2.44 2.47 2.88 2.81 3.42
Average exchange rate during
period (1)............................ 1.39 1.81 2.27 2.42 2.70 2.65 3.21
Highest exchange rate during period.... 1.58 2.13 2.45 2.54 2.88 2.81 3.55
Lowest exchange rate during period..... 1.10 1.58 2.13 2.32 2.47 2.47 2.86
--------
(1) The average of the exchange rates on the last day of each month during the
applicable period.
18
CAPITALIZATION
The following table sets forth, as of September 30, 1997, the capitalization
of the Company and the capitalization of the Company as adjusted for the
Offering (at an assumed initial public offering price of $8.00 per share of
Common Stock (the mid-point of the estimated range as specified on the cover
page of this Prospectus) and $0.10 per Warrant), including application of a
portion of the net proceeds therefrom to prepay bank financing as set forth
under "Use of Proceeds." This table should be read in conjunction with the
consolidated financial statements of the Company, the notes thereto and the
other financial data included elsewhere in this Prospectus.
[Download Table]
SEPTEMBER 30, 1997
-------------------------
ADJUSTED AS
HISTORICAL(1) ADJUSTED(2)
------------- -----------
(IN THOUSANDS)
Long-term debt, less current maturities.............. $ 55 $ 0
===== =======
Capital lease obligations, less current portion...... 13 13
===== =======
Stockholders' equity:
Preferred Stock, $.01 par value, 1,000,000 shares
authorized; no shares issued and outstanding...... -- --
Common Stock, $.01 par value, 20,000,000 shares au-
thorized; 1,780,000 shares issued and outstanding;
2,930,000 shares to be issued and outstanding (as
adjusted)(2)...................................... 18 29
Additional paid in capital........................... 36 7,410
Warrants to acquire Common Stock..................... -- 115
Retained earnings.................................... 112 112
----- -------
Total stockholders' equity......................... 166 7,666
===== =======
Total capitalization............................... $ 234 $ 7,679
===== =======
--------
(1) Adjusted to give effect to the Reorganization. See "The Reorganization."
(2) Excludes (i) 97,500 shares of Common Stock and 172,500 shares of Common
Stock underlying warrants that the Underwriters have the option to
purchase from the Company to cover over-allotments, if any, (ii) 1,150,000
shares of Common Stock issuable upon the conversion of the Warrants, (iii)
230,000 shares of Common Stock to be issued upon the exercise of the Unit
Purchase Option and the Warrants included therein, and (iv) 400,000 shares
of Common Stock reserved of issuance under the Plan, under which options
to purchase 52,500 shares have been granted and are outstanding. See
"Management--1997 Stock Incentive Plan" and "Underwriting."
19
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth selected consolidated financial data of the
Company as of and for each of the two fiscal years in the period ended
December 31, 1996, and as of and for the nine months ended September 30, 1996
and 1997. The income statement data for the years ended December 31, 1995 and
1996, and the balance sheet data as of December 31, 1995 and 1996 have been
derived from the Company's consolidated financial statements, which were
audited by Ernst & Young Audit Sp. z o.o., independent auditors. The income
statement data for the nine months ended September 30, 1996 and 1997, and the
balance sheet data as of September 30, 1996 and 1997, are unaudited, but
include, in the opinion of management, all adjustments considered necessary
for a fair presentation of such data. The results for the nine months ended
September 30, 1997 are not necessarily indicative of the results expected for
the entire year. The information set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations," and the consolidated Financial Statements and Notes thereto
included elsewhere in this Prospectus.
[Download Table]
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- ----------------------
1995 1996 1996 1997
------------ ------------ --------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Net sales............... $ 16,017 $ 23,942 $ 14,575 $ 27,499
Cost of goods sold...... 13,113 19,850 11,697 23,759
------------ ------------ --------- ---------
Gross profit............ 2,904 4,092 2,878 3,740
Sales, general and
administrative
expenses............... 2,603 3,569 2,581 3,057
------------ ------------ --------- ---------
Operating income........ 301 523 297 683
Non-operating income
(expense)
Interest expense...... (106) (124) (83) (106)
Realized and
unrealized foreign
currency transaction
gains and losses,
net.................. (84) (232) (231) (278)
Other income, net..... 84 6 88 35
------------ ------------ --------- ---------
Income before income
taxes.................. 195 173 71 334
Income taxes............ (120) (111) (65) (194)
------------ ------------ --------- ---------
Net income.............. $ 75 $ 62 $ 6 $ 140
============ ============ ========= =========
Net income per common
share, primary and
fully diluted.......... $ 0.04(1) $ 0.03(1) $ 0.00(1) $ 0.08(1)
============ ============ ========= =========
OTHER FINANCIAL DATA:
Bad debt expense to net
sales ratio............ 0.21% 0.08% 0.08% 0.07%
DECEMBER 31, SEPTEMBER 30,
---------------------------- ----------------------
1995 1996 1996 1997
------------ ------------ --------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash.................... $ 339 $ 740 $ 642 $ 240
Current assets.......... 3,146 6,889 3,857 6,479
Total assets............ 3,264 7,335 4,486 7,165
Current liabilities..... 3,119 7,006 4,323 6,931
Long-term debt and
capital lease
obligations, less
current portion........ 180 303 193 68
Stockholders' equity
(deficit).............. (36) 26 (30) 166
--------
(1) Gives effect to the 1,780,000 shares of Common Stock issued in the
Reorganization. See "The Reorganization."
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and the notes thereto appearing
elsewhere in this Prospectus.
OVERVIEW
The Company's operating results are generally determined by the volume of
alcoholic beverages that can be sold by the Company through its national
distribution system, the gross profits on such sales, and control of costs.
The Company's bad debt ratio provision as a percentage of sales was 0.21% of
net sales in 1995 and 0.08% in 1996. No significant bad debt expense has been
incurred during the nine months ended September 30, 1996 and 1997.
The following comments regarding variations in operating results should be
read considering the rates of inflation in Poland during the period--1995,
21.6%; 1996, 18.5%; and the nine months ended September 30, 1997, 8.5%--as
well as the devaluation of the Polish zloty compared to the U.S. Dollar, which
was 1.2%, 16.6%, and 18.8% in 1995, 1996 and the nine months ended September
30, 1997, respectively.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Net sales increased $12.92 million, or 88.7%, from $14.58 million in 1996 to
$27.50 million in 1997. This increase is mainly due to the continued increase
in sales of vodka produced in Poland, the addition of Seagrams and Allied
Domecq products in January 1997, and increased market penetration by the
existing distribution system resulting in new clients.
Costs of goods sold increased $12.06 million, or 103.1%, from $11.70 million
in 1996 to $23.76 million in 1997. This increase is mainly due to the increase
in net sales noted above. As a percentage of net sales, cost of goods sold
increased 80.3% in 1996 to 86.4% in 1997. The higher cost factor results from
increases in sales of domestically produced vodka, which has a lower gross
profit margin than the imported brands the Company distributes.
Sales, general and administrative expenses increased $476,000, or 18.4%,
from $2.58 million in 1996 to $3.06 million in 1997. This increase is mainly
due to the increase in net sales discussed above. As a percentage of sales,
sales, general, and administrative expenses decreased from 17.7% in 1996 to
11.1% in 1997. Increased sales levels result, to some extent, in improved
utilization of personnel and capacity without a corresponding increase in
sales, general and administrative expense.
Interest expense increased $23,000, or 55.4%, from $83,000 in 1996 to
$106,000 in 1997. This increase reflects the effects of additional short term
credit lines utilized to support the sales volume increases. As a percentage
of sales, interest expense decreased from 0.6% in 1996 to 0.4% in 1997.
Net realized and unrealized foreign currency transaction losses increased
$47,000, or 20.3%, from $231,000 in 1996 to $278,000 in 1997. The increase is
mainly due to the continued strength of the U.S. Dollar versus the Polish
zloty and the larger inventory, which is denominated in foreign currency,
needed to support the increase in sales as discussed above. As a percentage of
sales, realized and unrealized foreign currency transaction losses decreased
from 1.6% in 1996 to 1.0% in 1997.
Other income decreased $53,000 from $88,000 in 1996 to $35,000 in 1997.
Income taxes increased $129,000, or 198.5%, from $65,000 in 1996 to $194,000
in 1997. This increase is mainly due to the increase in income before income
taxes from $71,000 in 1996 to $334,000 in 1997. The effective tax rate was
91.5% in 1996 and 58.1% in 1997. This decrease in
21
effective tax rates is due mainly to the effect of permanent differences
between financial and taxable income and the higher pre-tax income level. See
notes to the consolidated financial statements for further information on
income taxes.
Net income increased $134,000 from $6,000 in 1996 to net income of $140,000
in 1997. This improvement is a result of the factors discussed above.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net sales increased $7.92 million, or 49.5%, from $16.02 million in 1995 to
$23.94 million in 1996. This increase is due to several factors including
increasing the portfolio of imported brands offered to existing customers;
opening the eighth branch office in Poznan, thereby gaining a new distribution
territory from March 1996; introducing domestically produced vodka into the
Warsaw, Cracow, and Szczecin offices in October 1996; and further penetration
of local markets by the existing distribution network which resulted in an
approximately 30% increase of the Company's customer base.
Costs of goods sold increased $6.74 million, or 51.4%, from $13.11 million
in 1995 to $19.85 million in 1996. This increase is mainly due to the
increasing net sales noted above. As a percentage of net sales, costs of goods
sold increased from 81.9% in 1995 to 82.9% in 1996. This small increase is
mainly due to the introduction of Polish vodka in late 1996 which sells at a
lower gross margin than the Company's imported alcohol products.
Sales, general and administrative expense increased 37.1% from $2.60 million
in 1995 to $3.57 million in 1996. This increase was mainly due to an increase
in sales which required additional marketing campaigns, the hiring and
training of additional staff, increased transport capability, and the
restructuring of the office and warehouse facilities in Warsaw to provide
additional room to support the expansion of sales. As a percentage of sales,
sales, general and administrative expenses decreased from 16.3% in 1995 to
14.9% in 1996.
Interest expense increased $18,000, or 17.0%, from $106,000 in 1995 to
$124,000 in 1996. This increase is mainly due to additional short term credits
taken to support the sales growth noted above. As a percentage of sales,
interest expense decreased from 0.7% in 1995 to 0.5% in 1996.
Net realized and unrealized foreign currency transaction losses increased
$148,000, or 176.2%, from $84,000 in 1995 to $232,000 in 1996. This increase
was mainly due to the weakness of the zloty, in which a substantial portion of
the Company's assets are denominated, versus the U.S. Dollar. In 1996, the
zloty depreciated 16.6% versus 1995 when it depreciated to only 1.2%. This
factor resulted in higher losses. As a percentage of sales, realized and
unrealized foreign currency transaction losses increased from 0.5% in 1995 to
1.0% in 1996.
Other income decreased $78,000, or 92.9%, from $84,000 in 1995 to $6,000 in
1996. This decrease is mainly due to a decrease in sales of fixed assets.
Income taxes decreased $9,000, or 7.5%, from $120,000 in 1995 to $111,000 in
1996. This decrease is mainly due to the decrease in income before income
taxes from $195,000 in 1995 to $173,000 in 1996. See the notes to the
consolidated financial statements for further information on income taxes.
Net income decreased $13,000, or 17.3%, from $75,000 in 1995 to $62,000 in
1996. This decrease is a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations and capital
expenditures primarily through cash flow from operations, bank borrowings, and
other short term credit facilities. Cash increased
22
$344,000 in 1995 versus an increase of $145,000 in 1996 and decreased $500,000
in the first nine months of 1997. Cash flow from operations was $(81,000) in
1995 compared to $32,000 in 1996 and $(324,000) for the nine months ended
September 30, 1997. Operating cash requirements are supplemented primarily by
short-term borrowings. See the consolidated statements of cash flows for a
summary of cash movements.
Bank borrowings totaled approximately $1.2 million on September 30, 1997 and
are expected to increase to approximately $1.4 million at the time of the
Offering. These are expected to be repaid in their entirety from the net
proceeds of this Offering. See "Use of Proceeds." The Company's borrowing
arrangements contain financial covenants and restrictions which are
customarily found in similar arrangements and with which the Company has
substantially complied.
The Company has historically utilized leasing to maintain and increase its
fleet of vehicles, including cars for salesman and delivery trucks. The
Company intends to utilize approximately $900,000 of the net proceeds from the
Offering to purchase vehicles as the leases expire and acquire new vehicles as
needed for the Company's expansion. Currently, leases extend through 1999. The
initial value of equipment currently under capital and operating leases is
approximately $900,000. These leases in zloty normally have an annual interest
factor built into the lease payments of 35-50%. This form of financing is much
more expensive in Poland than traditional bank financing in zloty which
normally costs the Company approximately 20-25% annually. By utilizing the
portion of the proceeds discussed above to purchase vehicles, the Company's
management expects to achieve significant savings in future interest and
operating costs, as compared to continuing the leasing of such vehicles.
The Company anticipates that the estimated net proceeds of the Offering, the
interest earned on the unutilized proceeds of the Offering, together with its
existing capital resources and anticipated cash flow from planned operations
will be adequate to satisfy its anticipated capital and other requirements,
including possible acquisitions for two to three years, depending on the rate
of acquisitions. There can be no assurance, however, that the Company will
sustain profitability or generate sufficient revenues for its future
operations, including possible acquisitions, and it is possible that the
Company may seek additional equity or debt financing in the future.
INFLATION AND CURRENCY EXCHANGE FLUCTUATIONS
Since the fall of Communist rule in 1989, Poland has experienced high levels
of inflation and significant fluctuation in the exchange rate for the zloty.
The Polish government has adopted policies that slowed the annual rate of
inflation from approximately 250% in 1990 to approximately 18% in 1996. In
addition, the exchange rate for the zloty has stabilized and the rate of
devaluation of the zloty has decreased since 1991. However, the zloty exchange
rate and the rate of devaluation have increased in 1997. Inflation and
currency exchange fluctuations have had, and may continue to have, an adverse
effect on the financial condition and results of operations of the Company.
The exchange rate of the zloty to the U.S. dollar is tied by the National
Bank of Poland to a basket of currencies. Due to the depreciation of the zloty
against the U.S. Dollar in 1995, 1996 and through the first three quarters of
1997, the Company incurred realized and unrealized foreign exchange losses.
The Polish currency futures market is not yet fully developed, and the Company
does not have a reasonable and cost efficient way to adequately hedge its
currency exposure, but may do so in the future when it becomes feasible.
SEASONALITY
Gross profits are affected by seasonal and competitive factors. Sales,
general and administrative costs are semi-variable in nature as sales and
distribution expenses are not directly impacted by all volume increases.
Short term credits are arranged on a seasonal basis, historically in the
summer vacation season and the Christmas holiday season in order to accomodate
increased sales during these periods.
23
BUSINESS
The Company, formed in 1990, has become a leading importer and distributor
of alcoholic beverages in Poland. The Company operates the largest nationwide
next-day alcoholic beverage delivery service in Poland through its eight
regional branch offices located in Poland's principal cities, including
Warsaw, Crakow, Gdansk and Katowice. The Company currently distributes
approximately 300 products in three categories: beer, spirits and wine. The
Company imports and distributes eight international beers, including Guinness,
Corona, Miller and Foster's, in addition to one domestically produced beer.
The Company currently distributes approximately 250 spirit products, including
leading international brands of scotch, single malt and other whiskeys, rum,
bourbon, vodkas, tequila, gins, brandy, cognacs, vermouths and specialty
spirits, such as Jim Beam, Johnnie Walker, Ballantines, Smirnoff, Absolut,
Finlandia, Bacardi, Gordon's London Dry and Tanqueray. In addition, the
Company imports and distributes 45 wine products, including Sutter Home,
Romanian Classics, Cinzano Asti, Martini Asti and Moet & Chandon. The
Company's net sales for the nine-month period ended September 30, 1997 were
approximately $27.5 million, as compared to $14.6 million for the nine-month
period ended September 30, 1996, representing an increase of 88.7%.
The Company distributes its products throughout Poland to approximately
3,000 outlets, including off-trade establishments, such as small businesses
and multi-store retail outlets where alcoholic beverages are not consumed on
premises, and on-trade locations, such as bars, nightclubs, hotels and
restaurants, where such products are consumed.
BUSINESS STRATEGY
The principal components of the Company's business strategy are as follows:
EXPAND DISTRIBUTION CAPACITY. The Company plans to increase its distribution
capacity by expanding the number of its branch offices in Poland through the
acquisition of existing wholesalers, particularly in areas where the Company
does not distribute directly. Cities currently under consideration by the
Company are Lublin (1996 population--approximately 355,000), Lodz (1996
population--approximately 818,000), and Bialystok (1996 population--
approximately 281,000).
The Company will seek to acquire successful wholesalers which are involved
in the vodka distribution business and are among the leading wholesalers in
their region. The Company would then add its higher margin imported brands to
complement and enhance the existing product portfolio. While the Company has
identified potential wholesalers and has conducted exploratory talks about
such acquisitions, it has not reached any definitive agreements regarding the
terms and conditions of any such acquisition, including the purchase price to
be paid to the sellers, and such acquisitions may not be available to the
Company on acceptable terms, if at all. In such case, the Company would seek
to enter these markets with its own branch offices.
INCREASE PRODUCT OFFERINGS. The Company plans to expand its strategic
product offerings in Poland through the acquisition of a high quality wine
importer which offers a wide selection of specialty wines and by entering into
new supplier agreements to import additional products. The Company is in
exploratory talks with such a wine importer, but no definitive agreement has
been reached. The Company began importing Bulgarian red and white varietal
wines in the fall of 1997. The Company is also in exploratory talks to import
additional spirit brands.
ENTER RETAIL MARKET. The Company has implemented its retail business
strategy in Warsaw, where one location has been leased, remodeled and is
expected to open for business in mid-January 1998. The Company believes that
specialty retail sales of alcoholic beverages in Poland have yet to be
developed. Currently alcoholic beverages are sold through grocery stores,
supermarkets, small shops, and gas stations. These retail outlets sell, in
general, fast moving items, primarily domestic beer and vodka, as well as a
few of the more popular selling imported products, which are brands often
24
imported by the Company. There are few stores that specialize in alcoholic
beverages in Warsaw, a metropolitan area with a population of approximately
2.4 million.
The Company also believes that high quality alcohol retail outlets will
create an additional demand for the Company's current product portfolio,
enhancing sales of products distributed, as well as providing a point of sale
marketing opportunity for the Company's brands. The retail stores will stock
additional products not currently distributed by the Company to complement the
stores' appeal, such as cigars and other items associated with an alcohol
retail outlet. The Company intends to utilize the retail outlets as a training
tool for its salesmen for product merchandising and promotions. An additional
benefit allows the Company's on-trade customers to have a supply point for
immediate purchase at night and on Sundays when the Company's delivery system
does not operate.
HISTORY
CEDC's subsidiary Carey Agri was incorporated as a limited liability company
in July 1990 in Poland. It was founded by William O. Carey, who died in early
1997, and Jeffrey Peterson, the Company's Vice Chairman and Executive Vice
President. Mr. Carey's son, William V. Carey, is the managing director of
Carey Agri and the president and chief executive officer of CEDC. In February
1991, Carey Agri was granted its first import license for Foster's Lager,
which it sold to wholesalers. With this beverage, Carey Agri sought to offer a
desirable product for which it had an exclusive import license to the market
segment of the Polish population who were benefiting from the country's market
transformation. Because of Carey Agri's initial success with Foster's Lager,
for which it still holds the exclusive import license for Poland, it quickly
diversified in 1992 by importing other quality brand beers from Europe and the
United States. Sales during this period were typically in high volume
consignments to other wholesalers.
In 1993, with the acceleration of the privatization of retail outlets in
Poland, Carey Agri began to implement a systematic delivery system in Warsaw
which could deliver alcoholic beverages to retail outlets on a reliable basis.
Carey Agri leased a warehouse, purchased trucks and hired and trained
operational personnel and began to sell directly to convenience shops, small
grocery stores and newly opened pubs. Because of this business experience,
Carey Agri was prepared to take advantage of the opportunity to expand its
import and delivery capacity in Warsaw when a large, foreign-owned supermarket
chain began operations in 1993, creating a significant increase in the demand
for the Company's product line. The Warsaw model of desirable product lines
and dependable prompt delivery of product was duplicated by the Company in
Cracow (1993), Wroclaw (1994), Szczecin (1994), Gdansk (1994), Katowice
(1995), Torun (1995) and Poznan (1996).
PRODUCT LINE
The Company currently offers over 300 alcoholic beverages in three
categories: (a) beer, (b) spirits and (c) wine. Its eight brands of imported
beer accounted for 22.1% of net sales revenues during the year ended December
31, 1996 and 18.3% during the nine months ended September 30, 1997. Brands of
imported spirits and wines it distributed accounted for 29.5% and 12.9%,
respectively, of net sales revenues for the year ended December 31, 1996 and
23.6% and 5.7%, respectively, for the nine month period ended September 30,
1997. Additionally, the Company offered one brand of Polish beer and multiple
brands of Polish vodka, which accounted for 12.5% and 23.0%, respectively, of
net sales revenues during the year ended December 31, 1996 and 7.0% and 45.4%
for the nine months ended September 30, 1997.
The Company has agreements, as described below, with many of the companies
from which it acquires products for sale. Certain products, however, have
never been covered by a written agreement. The Company does not believe that
the absence of such written agreements is likely to result in an adverse
financial effect on the Company because the Company has long-standing
relationships with such suppliers.
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Beer
The Company distributes imported beer through each of its regional offices
and domestic beer through two regional offices. Guinness, Budweiser Budvar,
Corona, Foster's Lager, and Kilkenny are sold throughout Poland on an
exclusive basis; Pilsner Urquell and Golden Pheasant on a nonexclusive basis.
The Company does not have a written supply agreement for Miller Genuine Draft.
The one domestic beer brand sold by the Company, Lech, is offered on a
nonexclusive basis, except in Szczecin, where it is offered exclusively by the
Company.
Most of the Company's distribution contracts for beer contain a minimum
purchase requirement and typically permit termination if the Company breaches
its agreements, such as failure to pay within a certain time period or to
properly store and transport the product. Trade credit is extended to the
Company for a period of time after delivery of products. The duration of these
agreements differ. No imported beers accounted for five percent or more of net
sales for the nine months ended September 30, 1997. The agreement regarding
distribution of Guinness Stout, which was entered into on July 31, 1997, has
an initial term through December 31, 1997 for bottled products and through
March 31, 1998 for draft products. After such date the agreement, in relevant
part, may be terminated by either party on 60 days prior written notice.
Pursuant to this agreement, the Company is the exclusive distributor of
products subject to the agreement unless the Company is unable to satisfy
customer demand and except for products sold directly by Guinness affiliates.
The exclusive agreement covering Budweiser Budvar expires on December 31,
1999.
Spirits
The Company distributes all its imported spirit products through each of its
offices, mostly on a nonexclusive basis. The spirit products sold by the
Company include the following:
[Download Table]
SCOTCH WHISKY: Johnnie Walker, Black, Blue,
Gold and Red Labels Black & White
The Dimple Bell's
Chivas Regal Haig
Ballantines Finest VAT 69
Ballantines Gold Seal Teacher's Highland Cream
J&B Rare Old Smuggler
White Horse 100 Pipers
Whyte and McKay Passport
SINGLE MALT WHISKY: Dalmore Isle of Jura Bruichladdich
Cragganmore Glenkinchie
Dalwhinne Oban
Lagavulan Talisker
Cardhu
RUM: Bacardi Light, Gold and Black Ron Rico, White and Gold
Captain Morgan Malibu
OTHER WHISKEY: Blenders Pride Crown Royal
Seven Crown Black Velvet
Canadian Mist
BOURBON: Jack Daniel's Tennessee Whiskey Forester
Early Times Jim Beam
VODKAS: Smirnoff Absolut Blue
Citron and Kurant Finlandia
Tanqueray Polish Vodkas
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[Download Table]
TEQUILA: Jose Cuervo Pepe Lopez
GINS: Gordon's London Dry Beefeater
Tanqueray Gilbey's
BRANDY: Metaxa Sandeman Capa Negra
Raynal Stock
COGNACS: Hennessy Courvoisier
Martell
VERMOUTHS: Stock Blanco, Rosa and Cinzano Blanco, Rosso, Rose,
Extra Dry Martini Bianco, Extra Dry, Americano, Orancio
Rosso, Rose, Extra Dry
SPECIALTY SPIRITS: Bailey's Irish Cream Carolan's Irish Cream
Kahlua Coffee Liqueur Grand Marnier
Creme de Grand Marnier Pimm's Cup
Jagermeister Archer's
Campari Bitter Southern Comfort
Mandarine Napolean
Only the Company's sales of Polish vodka and alcohol beverages distributed
for United Distillers and International Drinks and Vintners exceeded five
percent of the Company's net sales for the nine months ended September 30,
1997. The Company's non-exclusive contract with United Distillers, currently
covers the products which United Distillers itself imports into Poland,
including Finlandia and Johnnie Walker. The contract with United Distillers
became effective on January 1, 1995 for an unspecified period. Each party,
however, has a right to terminate it with 90 days' prior written notice. The
contract imposes on the Company certain obligations, which if it fails to
satisfy could lead to the contract's immediate termination, provided the
Company did not cure the breach within a period specified by United
Distillers. There are also sales goals and marketing plans to be met by the
Company.
The Company's agreements with various of the state-owned Polish vodka
producers may be terminated by either party without cause on one month's prior
written notice. Products are delivered based on the Company's standard order
forms.
The Company's non-exclusive contract with IDV Poland Sp. z o.o., a Polish
limited liability company ("IDV"), currently covers the products which IDV
itself imports into Poland, including Smirnoff and Bailey's Irish Cream. The
contract with IDV became effective on July 3, 1997 and terminates on December
31, 1997. Each party, however, has a right to terminate it with one month's
prior written notice. The Company agreed also to maintain sufficient stock of
IDV's products to satisfy the client's demand and to deliver to IDV reports on
the sale of IDV's products. There are also marketing goals to be met by the
Company.
Wine
The Company offers two brands of wine on an exclusive basis: the Sutter Home
Wines from the United States and Romanian Classic Wines from Romania. These
wines, which include standard red and white varietals, are offered through all
of the Company's branches. The Company also offers on a non-exclusive basis
the following sparkling wines and champagnes: Cinzano Asti, Gran Cinzano, Gran
Festa, Martini Asti, Martini Brut, Moet & Chandon Dom Perignon, Brut Imperial
and Mumm Cordon Rouge.
Only the Company's sales of Romanian wines exceeded five percent or more of
net sales for the nine months ended September 30, 1997. The Company's
distribution agreement for Romanian bottled wines is for a term ending
December 31, 1997.
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SALES AND MARKETING
As an early entrant in the post-Communist market in Poland, the Company has
over six years of experience in introducing, developing and refining
marketing, sales and customer service practices in the diverse and rapidly
developing Polish economy, which it believes is a competitive advantage in the
alcoholic beverage distribution business.
The Company employs approximately 70 salesmen who are assigned to one of its
eight regional offices. Each regional office has a sales manager, who may also
be the branch manager, who meets with the salesmen of that office on a daily
basis to review products and payments before the salesmen begin calling on
customers. The sales force at each office is typically divided into three
categories: (a) vodka accounts, (b) import accounts and (c) key accounts.
Salesmen, who are paid on commission, return to the office later in the day to
process orders so that products can be dispatched the next morning.
DISTRIBUTION SYSTEM
The Company's headquarters are located in Warsaw, the capital of Poland, in
and around which, as of December 31, 1996, 2.4 million people or 6.3% of the
country's population, lived. Sales and service offices are presently located
in seven major regional centers in central, north, south and western Poland
where, as of the same date, another 8.3 million, or 21.5% of the population,
lived. The branch sales and service centers deliver to surrounding cities
covering an additional 6.0 million people or an additional 15.5% of the
population. Thus, the Company reached 43.3% of Poland's population through
direct sales and distribution as of December 31, 1996. Other areas in Poland
are served through arrangements with wholesalers. See "--Business Strategy."
[Graphic on Map of Poland showing regional locations.]
The Company has developed its own centrally controlled, national next-day
distribution system for its alcoholic beverages. The Company believes that it
is the only privately owned business which currently has this capability in
Poland. For imported products, the distribution network begins with a central
bonded warehouse in Warsaw. Products can remain in this warehouse without
customs and other duties being paid until the product is actually needed for
sale. At such point, the product is transferred to the Company's consolidation
warehouse at the same location or shipped directly to one of the regional
office warehouses connected to each of the Company's sales locations outside
of Warsaw. Based on current sales and projections, the branch offices are
provided with deliveries on a weekly or bi-weekly basis so that they are able
to respond to their customers' needs on a next-day basis.
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For products which the Company delivers for others who themselves import the
products into Poland, the distribution chain begins at the Company's
consolidation warehouse in Warsaw. From there, the product is delivered to
customers using the same procedures as described above.
Except at peak periods during the summer holidays and other similar times
such as Christmas, all deliveries are made by Company-trained employees using
Company-owned or leased vehicles. During such busy periods, the Company relies
on independent contractors, which are usually small family-run businesses with
which the Company has had relationships for several years.
Customs and Consolidation Warehouses
The Customs and Consolidation Warehouses are a 2,815 square meter leased
facility located near Warsaw. The leases are long term and the monthly rental,
denominated in Polish currency, was approximately $10,000 per month as of
September 30, 1997. Such monthly lease payments aggregated approximately
$12,000 per month in 1996.
Regional Sales Offices and Warehouses
The Company also has entered into leases for each of its seven regional
sales offices and warehouses. The amount of office and warehouse space leased
varies between 278 square meters in Katowice up to 880 square meters in
Szczecin. The monthly lease payments, which are denominated in Polish
currency, vary between approximately $570 and $2,750. Five of the leases can
be terminated by either party on three-month's prior notice; one can be
terminated by either party on two-month's prior notice; the other lease
terminates on December 31, 1998.
Insurance
The Company maintains insurance coverage against fire, flood and other
similar events as well as coverage against theft of money from the Company's
offices or during transportation to a financial institution for deposit.
MARKET FOR PRODUCT LINE
In both 1995 and 1996, and for the nine months ended September 30, 1997
approximately 65% of the Company's total sales were through so-called "off
trade" locations where the alcoholic beverages are not consumed, another 25%
through so-called "on-trade" locations where the alcoholic beverages are
consumed, and the other 10% through other wholesalers.
Off-Trade Market
There are two components of the Company's sales to locations where alcoholic
beverages are not consumed on premises. The most significant in 1995 and 1996
and the nine months ended September 30, 1997 were small, usually Polish-owned
and managed businesses, including small grocery stores. At September 30, 1997,
the Company sold products to approximately 3,000 such business outlets, which
typically stock and sell relatively few alcohol products and wish to have
access to the most popular selling brands. The other components of the off-
trade business in 1995 and 1996 and the nine months ended September 30, 1997
were large supermarket chains, which are typically non-Polish-owned, as well
as smaller multi-store retail outlets operated by major Western energy
companies in connection with the sale of gasoline products. The large
supermarket chains typically offer a wide selection of alcohol products, while
the smaller retail outlets offer a more limited selection.
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On-Trade Market
There are three components to the Company's sales to locations where
alcoholic beverages are consumed: sales to (1) bars and nightclubs, (2) hotels
and (3) restaurants. Bars and nightclubs are usually locally managed
businesses, although they may be owned and operated in major cities by a non-
Polish national. Hotels include worldwide chains such as Marriott, Sheraton
and Holiday Inn as well as the major Polish chain, Orbis. Restaurants are
typically up-scale and located in major urban areas. This latter category also
includes one major, United States based pizza chain which operates in Poland.
Wholesale Trade
The Company also sells products throughout Poland through other wholesalers.
There are no written agreements with these wholesalers.
Control of Bad Debts
The Company believes that its close monitoring of customer accounts both at
the relevant regional office and from Warsaw has contributed to its success in
maintaining a low ratio of bad debts to net sales. During the years ended
December 31, 1995 and 1996, bad debt expense as a percentage of net sales was
0.21% and 0.08% of net sales, respectively. No significant bad debt expense
has been incurred during the nine months ended September 30, 1997. Both in
1996 and during the first nine months of 1997, approximately 3.0% of Company
sales were on cash-on-delivery terms, which helps keep bad debt expense lower.
Management believes the proposed acquisition of computer upgrades for
interoffice financial and administrative controls will assist in maintaining a
low ratio of bad debts to net sales as the Company continues to expand. See
"Use of Proceeds."
COMPETITION
The Company, as an early entrant in the post-Communist market in Poland, has
over six years of experience in introducing, developing and refining
marketing, sales and customer service practices in the diverse and rapidly
developing Polish economy, which it believes is a competitive advantage in the
alcoholic beverage distribution business. The Company believes that it is
currently the only privately owned national distributor of an extensive and
diversified alcoholic beverage line in Poland. Some of the international drink
companies doing business in Poland, who import their own products but use the
Company on a nonexclusive basis to distribute their products, could develop
nationwide distribution systems, but have not and the Company believes these
companies will concentrate on expanding their sales organizations. These
entities include United Distillers, Seagrams, IDV, Allied Domecq and Bacardi.
The Company was the largest single distributor in 1996 for IDV and United
Distillers products in Poland.
The Company competes with various regional distributors in all of its
offices. This competition is particularly vigorous with respect to domestic
vodka brands. One of the larger, foreign-owed chain stores also sells directly
to smaller retailers. The Company meets this regional competition, in part,
through offering to customers in the region a single source supply of more
products than its regional competitors typically offer.
The brands of beer, spirits and wine distributed by the Company compete with
other brands in each category, including some the Company itself distributes.
The Company expects this competition to increase as it adds more brands, as
international drinks and brewery companies expand production in Poland and as
the Polish produced products are distributed more efficiently. In addition,
the international drinks companies with which the Company competes in the
import sector of its business have substantially greater managerial, financial
and other resources than does the Company.
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EMPLOYEES
The Company had approximately 185 full-time employees as of September 30,
1997. Each employee was employed in Poland and, as required by Polish law, has
a labor agreement with the Company. The Polish Labor Code, which applies to
each of these agreements, requires that certain benefits be provided to
employees, such as the length of vacation time and maternity leave. This law
also restricts the discretion of the Company's management to terminate
employees without cause and requires in most instances a severance payment of
one- to three-months salary. The Company makes required monthly payments of
48% of an employee's salary to the governmental health and pension system and
has established a Social Benefit Fund as required by Polish law, but does not
provide other additional benefit programs. None of the Company's employees are
unionized. The Company believes that its relations with its employees are
good.
LEGAL PROCEEDINGS
The Company is involved in litigation from time to time in the ordinary
course of business. In management's opinion, the litigation in which the
Company is currently involved, individually and in the aggregate, is not
material to the Company's financial condition or results of operations.
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REGULATION
The Company's business of importing and distributing alcoholic beverages is
subject to extensive regulation. The Company believes it is operating with all
licenses and permits material to its business. The Company is not subject to
any proceedings calling into question its operation in compliance with any
licensing and permit requirements.
There can be no assurance that the various governmental regulations
applicable to the alcoholic beverage industry will not be changed so as to
impose more stringent requirements on the Company. If the Company were to fail
to be in compliance with applicable governmental regulations or the conditions
of the licenses and permits it receives, such failure could cause the
Company's licenses and permits to be revoked and have a material adverse
effect of the Company's business, results of operations and financial
condition. Further, the applicable Polish governmental authorities, in
particular the Minister of Economy, have articulated only general standards
for issuance, renewal and termination of the licenses and permits which the
Company needs to operate and, thus, such governmental authorities retain
considerable discretionary authority in making such decisions.
IMPORT OF PRODUCTS
Import License
The Company must receive a license from the Minister of Economy to be able
to import all of its current product line except for the beer brands. The
license is issued for one year, and the Company's current license expires on
December 31, 1997. While the Minister of Economy has discretion with regard to
the issuance, renewal and termination of an import license, in practice, the
Company believes, such licenses are issued in the absence of exceptional
circumstances and renewed as long as the licensee has complied with the
conditions of the previous license, which include regular reporting to the
Ministry of Economy.
Import Permits
Additionally, import permits must be obtained for specific consignments of
alcoholic beverages to be imported under the import license as well as under
customs quotas. See "--Customs Duties and Quotas". The Company must obtain
such permits for all its imported alcoholic beverages. The application for a
permit is usually made when products are ordered and specify the product,
amount of product and source country. Permits are issued for three months, and
the Company must demonstrate to appropriate officials that each consignment it
imports is covered by a permit.
Approval of Health Authorities
Local health authorities at the place of import must also be notified of
what alcoholic beverages are being imported into Poland. This notification is
typically given when a particular shipment of products arrives in Poland. In
general, this notice permits the applicable health authorities to determine
that no product is entering the Polish market without having been previously
approved for sale in Poland. See "Wholesale Activities--General Norms."
WHOLESALE ACTIVITIES
The Company must have additional permits from the Minister of Economy and
appropriate health authorities to operate its wholesale distribution business.
Furthermore, it must comply with rules of general applicability with regard to
packaging, labeling and transporting products.
General Permits
The Company is required to have permits for the wholesale trade of each of
its three product lines. The permit with regard to beer is issued for two
years and the current permit expires on March 28, 1999. The permit with regard
to spirits is issued for one year and the current permit expires on
32
December 31, 1997. The permit for wine is issued for two years and the current
permit expires on March 28, 1999. One of the conditions of these permits is
that the Company sells its products only to those who have appropriate permits
to resell the products. A permit can be revoked or not renewed if the Company
fails to observe laws applicable to its business as an alcohol wholesaler,
fails to follow the requirements of a permit or if it introduces into the
Polish market alcohol products that have not been approved for trade. The
Company must also obtain separate permits for each of its warehouses.
Health Requirements
The Company must obtain the approval of the local health authorities to open
and operate its warehouses. This approval is the basis for obtaining the
permit for wholesale activities. The health authorities are primarily
concerned with sanitation and proper storage of alcoholic beverages,
especially those which must be refrigerated. These authorities can monitor the
Company's compliance with health regulations. Similar regulations apply to the
transport of alcoholic beverages, and the drivers of such transports must
themselves submit health records to appropriate authorities.
General Norms
The Company must comply with a set of rules, usually referred to generally
as "Polish Norms," which constitute legal regulations concerning, as
applicable to the Company, standards according to which alcoholic beverages
are packed, stored, labeled and transported. These norms are established by
the Polish Normalization Committee, composed of specialists. In case of
alcoholic beverages, the committee is composed of academics working with
relevant government ministries and agencies as well as experienced businessmen
working in the alcoholic beverage industry. The Company has received a
certificate after an inspection by the Central Standardization Institute,
which is part of the Ministry of Agriculture, indicating its compliance with
applicable norms as of the date thereof. Such certification also is needed to
import alcoholic beverages. Compliance with these norms also is confirmed by
health authorities when particular shipments of alcoholic beverages arrive in
Poland. See "--Import of Products--Approval of Health Authorities."
CUSTOMS WAREHOUSE
Since the Company operates a customs warehouse, further regulations apply,
and a permit of the President of the Main Customs Office and the approval of
health authorities are required to open and operate such a warehouse. The
applicable health concerns are the same as those discussed under""--Wholesale
Activities" with regard to non-custom warehouses. The Company has received the
needed permit on October 19, 1995 from the President of the Main Customs
Office, which is for an unspecified period of time. The continued
effectiveness of the permit is conditioned on the Company's complying with the
requirements of the permit which are, in general, the proper payment of
customs duties and maintenance of an insurance policy.
CUSTOMS DUTIES AND QUOTAS
As a general rule, the import of alcoholic beverages into Poland is subject
to customs duties and the rates of the duties are set by the Polish government
acting through the Council of Ministers for particular types of products. In
the Company's case, the duties vary by its products lines.
The Minister of Economy is authorized, however, to establish a schedule of
quotas for alcoholic beverages for which the customs duties are substantially
reduced. For example, the basic customs duty on scotch whiskey imported by the
Company is $30.43 per .75 liter bottle, or 328% higher than the $7.11 duty
under the quota in 1996. The difference between the basic custom duties and
the duty under the quota on other spirit products imported by the Company were
only somewhat smaller than the difference on scotch. The difference between
the basic custom duties and the duty under the quota
33
was considerably smaller for beer and wine products subject to customs duties
and imported by the Company. For example, the average basic duty of $1.86 per
case of beer was approximately 42% higher than the duty under the quota, and
the basic customs duty of $0.15 per .75 liter bottle of wine was 100% higher
than the duty under the quota.
Customs quotas for alcoholic beverages are fixed annually, with the current
quotas being applicable through December 31, 1997. There are no public
guidelines on how the Minister of Economy has determined the current quotas or
may determine future quotas. If such quotas were substantially eliminated, it
would likely have an adverse impact on the Company's business since the retail
price of its imported alcohol products would increase.
To import alcoholic beverages under the quotas, the Company must receive a
permit which is generally valid for three months and specifies what products
and what quality thereof may be imported from what country or group of
companies. It is the Company's practice to apply for this import permit after
concluding a contract for the import of a particular group of products. The
Company has always received the import permits for which it has applied,
although there can be no assurance that it will always do so in the future.
PRICE AND MARGIN CONTROLS
In general, Polish law does not affect either the prices charged or the
margins earned by the Company on its imported liquor products. Provisions of
the tax law provide for a general ban on importing products at "dumping
prices," generally defined as being at prices lower than for similar products
in the country of origin. Fines could be imposed for such activity.
There are several sources of price and margin regulation, however, with
regard to spirits produced in Poland, such as the domestic brand vodka
distributed by the Company. The Treasury Office, which is part of the Ministry
of Finance, may order a reduction in the price of a product it determines to
be "blatantly high." This standard is deemed met if (a) the price of a product
exceeds the price of the same alcoholic beverage in another local jurisdiction
by more than 25% or of a similar alcoholic beverage by 40%, or (b) the price
quoted by the seller is higher than 10% of the price quoted to the same
purchaser by another seller and the former seller cannot justify the higher
price.
The most important restriction on prices is a list of products produced by
the Ministry of Finance which establishes the maximum retail price of such
products. Furthermore, pursuant to a separate decision, this Ministry has
limited the margin between the wholesale purchase price of domestic vodka and
retail purchase price to no more than four percent. While there are some 400
items on the current list of the Ministry of Finance, the only products
distributed by the Company are domestic vodka products.
ADVERTISING BAN
Pursuant to the Alcohol Awareness Law of October 26, 1982, as amended, there
is an absolute ban on direct and indirect advertising of alcoholic beverages
in Poland. The definition of "alcoholic beverage" under such law encompasses
all the Company's products. Promotions at the point of sale and game contests
are often used to limit the law's impact. The agency charged with enforcing
this law has successfully brought numerous cases in the past few years
alleging indirect advertising in the media. The Company has not been involved
in any such proceedings and seeks to comply fully with this law.
REGULATION OF RETAIL SALES
As part of the Company's business strategy, it plans to operate retail
outlets for alcoholic beverages. Polish law will require each such outlet to
have a retail permit to sell the brands expected to be offered to the public.
Typically, such permits are valid for two years and are renewable. The local
health authorities must also approve the sale of alcoholic beverages for each
location.
34
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of CEDC are set forth below. Directors
and executive officers of CEDC are elected to serve until they resign or are
removed, or are otherwise disqualified to serve, or until their successors are
elected and qualified. All directors of CEDC are elected annually at the
annual meeting of stockholders. Executive officers of CEDC generally are
appointed at the board's first meeting after each annual meeting of
stockholders.
[Download Table]
NAME AGE POSITION(S) WITH COMPANY
---- --- ------------------------------------
William V. Carey...................... 33 Chairman, President, Chief Executive
Officer, and Chief Financial
Officer
Jeffrey Peterson...................... 47 Vice Chairman and Executive Vice
President
James T. Grossmann.................... 57 Director
James B. Kelly........................ 56 Director
Jan W. Laskowski...................... 40 Director
Joe M. Richardson..................... 44 Director
William V. Carey has served as Chairman, President, Chief Executive Officer
and Chief Financial Officer of CEDC since its inception. In 1993, Mr. Carey
instituted and supervised the direct delivery system for Carey Agri's
nationwide expansion. Mr. Carey, a 1987 graduate of the University of Florida,
played briefly on the professional golf circuit before joining the Company.
Mr. Carey is a member of the American Chamber of Commerce in Poland.
Jeffrey Peterson has served as Vice Chairman, Executive Vice President and
director of CEDC since its inception. Mr. Peterson was co-founder of Carey
Agri in 1990, and is a member of the management board of that entity. Prior
thereto, Mr. Peterson contracted with African, Middle Eastern, South American
and Asian governments and companies for the supply of American agricultural
exports and selected agribusiness products, such as livestock, feed
supplements and veterinary supplies. Mr. Peterson has worked with
international banks and United States government entities to facilitate
support for exports from the United States.
James T. Grossmann, a retired United States foreign service officer, has
served as a director of CEDC since its inception. With the United States
Agency for International Development ("U.S.A.I.D."), during the years 1977 to
1996, Mr. Grossmann served in emerging markets in Central Europe, Latin
America, Africa and Asia with a concentration on developing private sector
trading and investment through United States government-sponsored aid
programs. Immediately prior to his retirement in 1996, he managed a $300.0
million mass privatization and capital markets development program that
assisted 14 former state-controlled countries in Central Europe transition to
market economies.
James B. Kelly, a former Deputy Assistant Secretary of Commerce of the
United States specializing in international economic policy, has served as a
director of CEDC since its inception. Mr. Kelly is currently the President of
SynXis Corporation, a software development company, a position he has held
since August 1996. From 1992 to August 1996, Mr. Kelly was the International
Vice-President of BDM International, an international information technology
company with sales in 1996 of over $1.0 billion, where he was in charge of
penetrating foreign technology markets by acquisition, alliance and direct
sales.
Jan W. Laskowski has served as a director of CEDC since its inception. Mr.
Laskowski has lived and worked in Poland since 1991. He is currently the Vice
President and member of the management board of American Bank in Poland
("Amerbank"), a position he has held since 1996, where he is
35
responsible for business development. Before joining Amerbank, Mr. Laskowski
worked in London for Bank Liechtenstein (UK) Ltd from 1989 to 1991. He began
his career with Credit Suisse, also in London, where he worked for 11 years.
Joe M. Richardson has served as a director of CEDC since its inception.
Since October 1993, Mr. Richardson has served as the Director of Sales and
Marketing Europe of Sutter Home Winery Inc., where he is responsible for
developing and managing the importation, distribution and sales of Sutter Home
Wines within Europe. Prior to joining Sutter Home, Mr. Richardson had 20 years
experience in the wine industry distributing Gallo wine products.
BOARD OF DIRECTORS
The number of directors of the Company shall be such number as from time to
time is fixed by and in the manner provided in the Bylaws and shall be between
two to nine directors as is specified in the Certificate of Incorporation.
Pursuant to the Bylaws, the number of directors within that range is
determined by resolution duly adopted by a majority of the Board of Directors.
The number of directors is currently fixed at six.
The Underwriters have the right for five years from the date of the Offering
to designate a person for election to the Board of Directors. In the event the
Underwriters elect not to exercise this right, then they may designate one
person to attend all meetings of the Board of Directors for such period of
time. Such person will be entitled to receive all notices and other
correspondence as if the person were a member of the Board of Directors and to
be reimbursed for out-of-pocket expenses incurred in connection with
attendance of meetings of the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors currently has two committees, the Audit Committee and
the Compensation Committee. The Audit Committee, among other things,
recommends the firm to be appointed as independent accountants to audit the
Company's financial statements, discusses the scope and results of the audit
with the independent accountants, reviews with management and the independent
accountants the Company's interim and year-end operating results, considers
the adequacy of the internal accounting controls and audit procedures of the
Company and reviews the non-audit services to be performed by the independent
accountants. The current members of the Audit Committee are Messrs. Kelly and
Laskowski. The Compensation Committee reviews and recommends the compensation
arrangements for management of the Company and administers the Plan. The
current members of the Compensation Committee are Messrs. Laskowski and
Richardson.
DIRECTOR COMPENSATION
Mr. Carey and Mr. Peterson annually receive $10,000 and $5,000,
respectively, for serving as Chairman and Vice-Chairman of the Board of
Directors as well as annual directors' fees of $2,000 (which amount is payable
to each director). Members of the Board of Directors have received grants of
stock options under the stock incentive plan described below. The Company
reimburses directors for out-of-pocket travel expenditures relating to their
service on the Board of Directors.
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EXECUTIVE COMPENSATION
The following table shows, for the fiscal year ended December 31, 1996,
compensation awarded or paid by the Company to its Chief Executive Officer
(the highest compensated employee of the Company).
SUMMARY COMPENSATION TABLE
[Download Table]
BONUS AND
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION COMPENSATION(2)
--------------------------- ---- ------- ------------- ---------------
William V. Carey................... 1996 $60,000 (1) --
Chairman, President, Chief
Executive Officer, and Chief
Financial Officer
--------
(1) During 1996, Carey Agri (i) provided Mr. Carey with the free use of an
automobile valued at $35,000, (ii) paid approximately $4,000 for travel
expenses, and (iii) provided an interest free loan of $30,000 which was
used to remodel his home in Warsaw. This loan will be repaid in early
1998. See "Certain Transactions."
(2) For options granted Mr. Carey, which will be effective only upon the
closing of the Offering, see "--Compensation Plans--Employment
Agreements."
COMPENSATION PLANS
Employment Agreements
Mr. Carey, has entered into an employment contract with CEDC, which
commences on the date of the completion of the Offering and ends three years
thereafter. Mr. Carey will be paid an annual base salary at the rate of
$140,000 per year, $76,000 payable by Carey Agri and $64,000 by CEDC. If Mr.
Carey is not elected the Chairman of the Board of Directors in accordance with
the Bylaws, his base salary paid by CEDC will be increased by $10,000. Mr.
Carey's base salary is to be reviewed no less frequently than annually. Mr.
Carey's base salary is to be increased by at least $25,000 one year after the
effective date of his employment agreement and by an additional $25,000 two
years after the effective date thereof and may be increased further at the
discretion of the Board of Directors.
Additionally, as partial consideration for the execution of the employment
agreement, CEDC has granted to Mr. Carey options to purchase 25,000 shares of
the Common Stock, to be exercisable at the initial public offering price. Such
options are granted under the Plan and will vest and become exercisable two
years from the effective date of the employment agreement. For options granted
Mr. Carey, because of his work on the board of directors of the Company and
Carey Agri, see "--1997 Stock Incentive Plan."
Mr. Carey may terminate his employment agreement only for "good reason,"
which includes CEDC's failure to perform its obligations under the agreement.
CEDC may terminate the agreement for "cause" as defined, which includes Mr.
Carey's willful refusal to follow written orders or willful engagement in
conduct materially injurious to CEDC or continued failure to perform his
required duties. If CEDC terminates the agreement for cause or Mr. Carey
terminates it without good reason, Mr. Carey's salary and benefits will be
paid only through the date of termination. If CEDC terminates the employment
agreement other than for cause or if Mr. Carey terminates it for good reason,
CEDC will pay Mr. Carey his salary and benefits through the date of
termination in a single lump sum payment and other amounts or benefits at the
time such amounts would have been due.
Pursuant to the agreement, Mr. Carey has agreed that during the term of
employment, and for a one-year period following a termination of employment,
he will not compete with the Company. The ownership by Mr. Carey of less than
five percent of the outstanding stock of any corporation listed on a national
securities exchange conducting any competitive business shall not be viewed as
competition.
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Jeffrey Peterson has entered into an employment contract with CEDC, which
commences on the date of the completion of this Offering and ends two years
thereafter. In the first year of his employment, Mr. Peterson will be paid
$45,000 for serving as the Executive Vice President of CEDC and $48,000 for
serving on the management board of Carey Agri. In the second year, Mr.
Peterson will be paid $39,000 by CEDC and $36,000 by Carey Agri. CEDC may
terminate this agreement, with or without cause, on three months' prior
written notice; Mr. Peterson may terminate only for good reason. For options
granted to Mr. Peterson as a member of the board of directors of CEDC and
Carey Agri, see "--1997 Stock Incentive Plan."
Mr. Grossmann, a director of CEDC and Carey Agri, is paid $4,000 monthly for
his service on Carey Agri's board of directors where he has responsibilities
for assisting Carey Agri to establish supplier relationships for alcohol and
nonalcohol products, such as cigars. For options granted to Mr. Grossmann for
his past work in establishing supplier relationships in Bulgaria, see "--1997
Stock Incentive Plan."
1997 Stock Incentive Plan
CEDC's 1997 Stock Incentive Plan (the "Plan") provides for the grant of
incentive stock options within the meaning of Section 422 of the Code, non-
qualified options, stock appreciation rights, restricted stock and restricted
stock units to directors, executives and other employees of CEDC and any of
its subsidiaries or of any service provider, as defined, whose participation
in the Plan is determined to be in the best interest of the Company. The Plan
authorizes the issuance of up to 400,000 shares of Common Stock (subject to
anti-dilution adjustments in the event of a stock split, recapitalization or
similar transaction). The Board of Directors has the full power and authority
to take all actions and to make all determinations required under the Plan,
but has currently delegated that authority to its Compensation Committee,
which has the authority to interpret the plan and to prescribe, amend, and
rescind rules and regulations relating to the Plan. The Compensation
Committee's interpretations of the Plan and its determinations pursuant to the
Plan will be final and binding on all parties claiming an interest under the
Plan. The Plan was adopted by the Board of Directors on November 27, 1997,
which is the effective date of the Plan, and approved by CEDC's stockholders
in December 1997. The term of the Plan is ten years from its effective date,
and no grants may be made under the plan after that date.
Automatic grants are made to outside directors of CEDC. The initial three
outside members of the board of directors of CEDC were automatically awarded
options to acquire 500 shares of the Common Stock at the initial public
offering price when the Incentive Plan became effective. These options are
immediately exercisable. Outside directors, including the initial outside
directors of CEDC, shall also receive an option to acquire 500 shares upon
their reelection to the Board of Directors.
The option exercise price for incentive stock options granted under the Plan
may not be less than 100% of the fair market value of the Common Stock on the
date of grant of the option. Options may be exercised up to 10 years after
grant, except as otherwise provided in the particular option agreement.
Payment for shares purchased under the Plan shall be made in cash or cash
equivalents. With respect to any participant who owns stock possessing more
than 10% of the voting power of all classes of stock of CEDC, however, the
exercise price of any incentive stock option granted must equal at least 110%
of the fair market value on the grant date and the maximum term of an
incentive stock option must not exceed five years.
The Plan also authorizes the grant of stock appreciation rights whereby the
grantee of a stock option may receive payment from CEDC of an amount equal to
the excess of the fair market value of the shares of Common Stock subject to
the option surrendered over the exercise price of such shares. A particular
award agreement may permit payment by CEDC either in shares of Common Stock,
cash or a combination thereof.
38
Options granted under the Plan are generally not transferable except that
non-qualified options may, in certain circumstances, be transferred to family
members of the grantee. If any optionee's employment with CEDC or a service
provider terminates by reason of death, options will fully vest and may be
exercised within 24 months after such death. If the optionee's employment
terminates by reason of disability, options will continue to vest and shall be
exercisable to the extent vested for a period of one year after the
termination of employment. If the optionee's employment terminates for any
other reason, options not vested will terminate and vested options held by
such optionee will terminate 90 days after such termination.
The Plan authorizes the grant also of restricted stock or restricted stock
units, which are rights to receive shares of Common Stock in the future. Both
the restricted stock and restricted stock units will be subject to
restrictions and risk of forfeiture. Such restriction may include not only a
period of time of further employment or service to CEDC or Carey Agri or a
service provider but the satisfaction of individual or corporate performance
objectives. Performance objectives may include, among others, the trading
price of the shares of Common Stock, market share, sales, earnings per share,
and return on equity. Unless the particular award agreement states otherwise,
the holders of restricted stock shall have the right to vote such shares of
Common Stock and the right to receive any dividends declared and paid with
respect to such stock, but the holders of restricted stock units shall have no
such rights.
If the grantee's employment with CEDC or Carey Agri or a service provider
terminates by reason of death, all restricted stock and restricted stock units
granted under the Plan shall fully vest. If the grantee's employment
terminates by reason of disability, the grantee's restricted stock or
restricted stock units shall continue to vest for a period of one year. If the
grantee's employment is terminated for any other reason, the restricted stock
or restricted stock units shall be forfeited.
In the event of the dissolution or liquidation of the Company or upon a
merger, consolidation, or reorganization of the Company in which the Company
is not the surviving entity, or upon a sale of substantially all of the assets
of the Company or upon any transaction (including one in which the Company is
the surviving entity) approved by the Board of Directors that results in any
person or entity owning eighty percent or more of the combined voting power of
all classes of securities of CEDC, outstanding restricted stock and restricted
stock units shall vest and all options become immediately exercisable, within
a stated period, unless provision is made in writing in connection with such
transaction for the continuation of the Plan or the assumption or substitution
of such options, restricted stock and restricted stock units.
The Board of Directors may amend, suspend or terminate the Plan with respect
to the shares of Common Stock as to which grants have not been made. However,
CEDC's stockholders must approve any amendment that would cause the Plan not
to comply with the Code.
Stock options for 52,500 of the shares of the Common Stock have been granted
in connection with the Offering. The exercise price of these options is the
initial public offering price. Thus, if the Offering is not consummated, these
options will be null and void. Options covering 500 shares were automatically
granted to each of the three outside members of the Board of Directors. These
options are immediately exercisable. Mr. Carey, Mr. Peterson and Mr. Grossmann
received options covering 2,000, 1,000 and 500 shares, respectively.
Additionally, as members of the board of management of Carey Agri, Messrs.
Carey, Peterson and Grossmann received options covering 5,000, 2,000 and 500
shares, respectively. These options may be exercised one year after the
completion of the Offering. In connection with his employment agreement, Mr.
Carey was granted another option to purchase an additional 25,000 shares.
These options may be exercised two years after the completion of the Offering.
In connection with his past efforts in assisting the Company, Mr. Grossmann
was granted an option to purchase an additional 15,000 shares. Options
covering 12,500 of those shares are immediately exercisable and options
covering the other 2,500 shares are exercisable one year after the completion
of the Offering.
39
CERTAIN TRANSACTIONS
Carey Agri has a non-interest bearing advance receivable for $24,000
(denominated in Polish zloty without interest) from Mr. Carey at September 30,
1997. It expects to receive repayment of the amount advanced in early 1998.
Carey Agri has entered into a loan agreement in the principal amount of
$205,000 with Amerbank, of which Mr. Laskowski, a director of CEDC, is a vice
president and member of the management board. This loan is used as a revolving
line of credit for certain business purposes. The loan is guaranteed, in part,
by Mr. Carey and Mr. Peterson. The interest rate is LIBOR plus 3.5% and the
maturity date is December 15, 1998. Installments of $17,000 are due monthly
beginning January 15, 1998 with $18,000 due on December 15, 1998. Part of the
proceeds of the Offering will be used to retire this debt. See "Use of
Proceeds."
Carey Agri has entered into another loan agreement and an amendment thereto
with Amerbank in an amount not to exceed $300,000. This secured loan is to be
used to pay certain of the costs of this Offering which have accrued to date.
The interest rate is LIBOR (1 month) plus 2.25%; the last date on which funds
can be drawn down is January 1, 1998; and the loan must be repaid by April 8,
1998. In connection with this loan, Carey Agri agreed to use Amerbank's Poznan
branch for its business activities in Poznan and to transfer, as needed, the
proceeds of this Offering into Poland through its Amerbank accounts.
The Company distributes Sutter Home wines in Poland. Mr. Richardson, a
director of CEDC, is Director of Sales and Marketing Europe of Sutter Home
Winery, Inc. See "Business--Product Line--Wine." The total value of Sutter
Home wines sold by the Company in 1996 and through the first nine months of
1997 was $566,000 and $429,000, respectively.
40
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the outstanding Common Stock as of the date hereof, and as
adjusted to reflect the Offering: (i) by each person who is known by CEDC to
beneficially own more than 5% of the Common Stock; (ii) by the Selling
Stockholders; (iii) by each director of CEDC; (iv) by each of the executive
officers of CEDC; and (v) by all directors and executive officers of CEDC as a
group. Except as otherwise noted, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock shown
as beneficially owned by them. See "Management--Director Compensation"
regarding options granted to each director in connection with this Offering.
See "Management--Executive Compensation" and "--1997 Stock Incentive Plan" for
options granted to Mr. Carey, Mr. Peterson and Mr. Grossmann, as well as all
other directors of the Company.
Following completion of the Offering, Mr. Carey, Mr. Peterson and the Estate
of William O. Carey will beneficially own in the aggregate 60.7% of the
outstanding shares of Common Stock, assuming no exercise of the Underwriters'
over-allotment option. As a result, such persons acting together will be able
to elect all of the Company's directors and otherwise control the Company's
operations. See "Risk Factors--Risks Related to the Company--Control By
Existing Stockholders; Potential Anti-Takeover Provisions."
[Enlarge/Download Table]
PERCENTAGES OF SHARES BENEFICIALLY OWNED
NAME AND ADDRESS OF SHARES ------------------------------------------
BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE THE OFFERING AFTER THE OFFERING (3)
------------------- ------------------ ------------------- ----------------------
William V. Carey(1)..... 1,096,480 61.6% 37.4%
1602 Cottagewood Drive
Brandon, FL 33511
William V. Carey Stock
Trust(1)............... 503,740 28.3 17.2
1602 Cottagewood Drive
Brandon, FL 33511
Jeffrey Peterson........ 592,740 33.3 20.2
1707 Waldemere Street
Sarasota, FL 34239
Estate of William O. Ca-
rey(2)................. 90,780 5.1 3.1
1602 Cottagewood Drive
Brandon, FL 33511
James T. Grossmann...... 0 -- --
805 S. Fairfax Street
Alexandria, VA 22314
James B. Kelly.......... 0 -- --
7606 Hamilton Spring
Road
Bethesda, MD 20817
Jan W. Laskowski........ 0 -- --
115 ul. Marcinkowska
00-102 Warsaw, Poland
Joe M. Richardson....... 0 -- --
P.O. Box 22154
Louisville, KY 40252
All Directors and Offi-
cers as a Group (Six
Persons)............... 1,689,220 94.9% 57.6%
--------
(1) Includes 592,740 shares beneficially owned by Mr. Carey and 503,740 shares
held in the name of the William V. Carey Stock Trust. Mr. Carey is the
beneficiary of the shares of the Common
41
Stock held in the William V. Carey Stock Trust, and he will become the sole
owner of these shares and may terminate the trust on December 11, 2005. Mr.
Carey administers the trust, which includes the power to vote the
securities held and make any investment decisions, with one other trustee,
Remy Hermida, 1707 West Reynolds Street, Plant City, Florida 33567. The
trust instrument permits one trustee to delegate any and all power, duties
or discretions to the other trustee, although this action has not been
taken.
(2) Gertrude Carey, the mother of William V. Carey, is the sole personal
representative of the Estate of William O. Carey and has sole investment
authority over the Common Stock in this estate.
(3) If the Underwriters' over-allotment options are exercised in full, the
percentage of shares beneficially owned would be as follows: Mr. Carey
(34.7%), William V. Carey Stock Trust (15.9%), Jeffrey Peterson (18.8%),
Estate of William O. Carey (2.9%) and All Directors and Officers as a
Group (53.5%).
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DESCRIPTION OF SECURITIES
GENERAL
CEDC's authorized capital stock consists of 20,000,000 shares of Common
Stock and 1,000,000 shares of Preferred Stock. Prior to this Offering, there
were 1,780,000 shares of Common Stock outstanding held of record by four
stockholders and no shares of Preferred Stock outstanding.
The following summary of certain provisions of the Common Stock, Preferred
Stock, the Warrants and the Unit Purchase Option does not purport to be
complete and is subject to, and qualified in its entirety by, the provisions
of CEDC's Certificate of Incorporation, Bylaws, the Warrant Agreement, and the
Unit Purchase Option and by the provisions of applicable law. A copy of the
Certificate of Incorporation, Bylaws, the form of Warrant Agreement and form
of Unit Purchase Option are included as exhibits to the registration statement
of which this Prospectus is a part.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share on all
matters submitted to a vote of stockholders. The Certificate of Incorporation
does not provide for cumulative voting, and accordingly, the holders of a
majority of the shares of Common Stock entitled to vote in any election of
directors may elect all of the directors. The Certificate of Incorporation
provides that whenever there is paid, or declared and set aside for payment to
the holders of the outstanding shares of any class of stock having preference
over the Common Stock as to the payment of dividends, the full amount of
dividends and of sinking fund or retirement fund or other retirement payments,
if any, to which such holders are entitled, then dividends may be paid on the
Common Stock out of any assets legally available therefore, but only when and
as declared by the Board of Directors. The Certificate of Incorporation also
provides that in the event of any liquidation, dissolution or winding up of
CEDC, after there is paid to, or set aside for the holders of any class of
stock having preference over the Common Stock, the full amount to which such
holders are entitled, then the holders of the Common Stock, shall be entitled,
after payment or provision for payment of all debts and liabilities of CEDC,
to receive the remaining assets of CEDC available for distribution, in cash or
in kind. The holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. The rights, privileges, preferences and
priorities of holders of Common Stock will be subject to the rights of the
holders of any shares of any series of Preferred Stock that CEDC may issue in
the future.
WARRANTS
The holder of each Warrant is entitled, upon payment of the exercise price
of $ (the aggregate initial Share and Warrant offering price), to purchase
one share of Common Stock. Unless previously redeemed, the Warrants are
exercisable at any time during the five year period commencing on the date of
this Prospectus, provided that at such time a current prospectus relating the
underlying Common Stock is in effect and the underlying shares of Common Stock
are qualified for sale or exempt from qualification under applicable state
securities laws. The Warrants are subject to redemption, as described below.
Redemption
Commencing one year from the date of this Prospectus, the Warrants, except
for those underlying the Unit Purchase Option, are subject to redemption by
the Company, on not less than 30 days' written notice, at a price of $.05 per
Warrant, provided the sales price of the Common Stock is at least $ (or
200% of the initial Share offering price) for 30 consecutive days prior to the
date on which the notice of redemption is given. Holders of Warrants will
automatically forfeit their rights to purchase the shares of Common Stock
issuable upon exercise of such Warrants unless the Warrants are exercised
43
before the close of business on the business day immediately prior to the date
set for redemption. All of the outstanding Warrants, except for those
underlying the Unit Purchase Option, must be redeemed if any of that class are
redeemed. A notice of redemption shall be mailed to each of the registered
holders of the Warrants, except for those underlying the Unit Purchase Option,
by first class mail, postage prepaid. The notice of redemption shall specify
the redemption price, the date fixed for redemption, the place where the
Warrant certificates shall be delivered and the redemption price to be paid,
and that the right to exercise the Warrants shall terminate at 5:00 p.m. (New
York City time) on the business day immediately preceding the date fixed for
redemption.
General
The Warrants may be exercised upon surrender of the certificate(s) therefor
on or prior to the earlier of their expiration or the redemption date (as
explained above) at the offices of the Company's warrant agent with the form
of "Election to Purchase" on the reverse side of the certificate(s) filled out
and executed as indicated, accompanied by payment (in the form of certified or
cashier's check payable to the order of the Company) of the full exercise
price for the number of Warrants being exercised.
The Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price in certain events, such as stock
dividends, stock splits, mergers, sale of substantially all of the Company's
assets, and for other extraordinary events in order to enable the holders of
the Warrants to obtain the same or equivalent rights which they would have
obtained if the Warrants had been exercised prior to the event.
The Company is not required to issue fractional shares of Common Stock, and
in lieu thereof will make a cash payment based upon the current market value
of such fractional shares. The holder of a Warrant will not possess any rights
as a stockholder of the Company unless and until he exercises the Warrant.
UNIT PURCHASE OPTION
The Company has agreed to issue to the Underwriters, upon the closing of the
Offering, the Unit Purchase Option to purchase up to 115,000 Shares and
115,000 Warrants. These Shares and Warrants will be identical to the Shares
and Warrants offered hereby except that the Warrants included in the Unit
Purchase Option will not be subject to redemption by the Company. The Unit
Purchase Option cannot be transferred, sold, assigned or hypothecated for one
year, except to any officer or partner of the Underwriters or members of the
selling group. The Unit Purchase Option is exercisable during the four-year
period commencing one year from the date of this Prospectus at an exercise
price of $ per Share and Warrant (120% of the aggregate initial Share and
Warrant offering price), subject to adjustment in certain events to protect
against dilution. The holders of the Unit Purchase Option and underlying
securities have certain demand and piggyback registration rights. The
existence of the Unit Purchase Option and the inability of the Company to
redeem the Warrants included therein may hinder the Company's future financing
or business transactions. See "Underwriting."
PREFERRED STOCK
The Certificate of Incorporation provides that the Board of Directors is
authorized to issue Preferred Stock in series and to fix and state the voting
powers, full or limited, or no voting powers, and such designations,
preferences and relative, participating, optional or other special rights of
the shares of each such series and the qualifications, limitations and
restrictions thereof. Such action may be taken by the Board of Directors
without stockholder approval. Under the Certificate of Incorporation, each
share of each series of Preferred Stock is to have the same relative rights
as, and be identical in
44
all respects with, all other shares of the same series. While providing
flexibility in connection with possible financings, acquisitions and other
corporate purposes, the issuance of Preferred Stock, among other things, could
adversely affect the voting power of the holders of Common Stock and, under
certain circumstances, be used as a means of discouraging, delaying or
preventing a change in control of CEDC. There will be no shares of Preferred
Stock outstanding upon completion of the Offering and CEDC has no present plan
to issue shares of its Preferred Stock.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Limitations of Director Liability
Section 102(b)(7) of the Delaware General Corporation Law ("DGCL")
authorizes corporations to limit or eliminate the personal liability of
directors to corporations and their stockholders for monetary damages for
breach of directors' fiduciary duty of care. Although Section 102(b)(7) does
not change the directors' duty of care, it enables corporations to limit
available relief to equitable remedies such as injunction or rescission. The
Certificate of Incorporation limits the liability of directors to the Company
or its stockholders to the fullest extent permitted by Section 102(b)(7).
Specifically, directors of CEDC are not personally liable for monetary damages
to the Company or its stockholders for breach of the director's fiduciary duty
as a director, except for liability: (a) for any breach of the director's duty
of loyalty to the Company or its stockholders; (b) for acts or omissions not
in good faith or that involve intentional misconduct or a knowing violation of
law; (c) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the DGCL; or (d) for any transaction
from which the director derived an improper personal benefit.
Indemnification
To the maximum extent permitted by law, the Bylaws provide for mandatory
indemnification of directors and officers of CEDC against any expense,
liability and loss to which they may become subject, or which they may incur
as a result of being or having been a director or officer of CEDC. In
addition, CEDC must advance or reimburse directors and officers for expenses
incurred by them in connection with indemnifiable claims.
CEDC also maintains directors' and officers' liability insurance.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Certificate of Incorporation and the Bylaws contain, among other things,
certain provisions described below that may reduce the likelihood of a change
in the Board of Directors or voting control of CEDC without the consent of the
Board of Directors. These provisions could have the effect of discouraging,
delaying, or preventing tender offers or takeover attempts that some or a
majority of the stockholders might consider to be in the stockholders' best
interest, including offers or attempts that might result in a premium over the
market price for the Common Stock.
Filling Board Vacancies; Removal
Any vacancy occurring in the Board of Directors, including any vacancy
created by an increase in the number of directors, shall be filled by the vote
of a majority of the directors then in office, whether or not a quorum, and
any director so chosen shall hold office until such director's successor shall
have been elected and qualified. Directors may only be removed with cause by
the affirmative vote of the holders of at least a majority of the outstanding
shares of capital stock then entitled to vote for the election of directors.
45
Stockholder Action by Unanimous Written Consent
Any action required or permitted to be taken by the stockholders must be
effected at a duly called annual or special meeting of such holders and may
not be effected by any consent in writing by such holders, unless such consent
is unanimous.
Call of Special Meetings
Special meetings of stockholders may be called at any time by the Board of
Directors, the Chairman of the Board, the Chief Executive Officer or the
President, and shall be called by the President or the Secretary of CEDC at
the request in writing of stockholders possessing at least 10% of the voting
power of the issued and outstanding capital stock of CEDC entitled to vote
generally in the election of directors. Such a request shall include a
statement of the purpose or purposes of the proposed meeting.
Bylaw Amendments
The stockholders may amend the Bylaws by the affirmative vote of the holders
of at least a majority of the outstanding shares of stock of CEDC entitled to
vote thereon. Directors also may amend the Bylaws by an affirmative vote of at
least a majority of the directors then in office.
Certificate of Incorporation Amendments
Except as set forth in the Certificate of Incorporation or as otherwise
specifically required by law, no amendment of any provision of the Certificate
of Incorporation shall be made unless such amendment has been first proposed
by the Board of Directors upon the affirmative vote of at least a majority of
the directors then in office and thereafter approved by the affirmative vote
of the holders of at least a majority of the outstanding shares of stock of
CEDC entitled to vote thereon; provided however, if such amendment is to the
provisions in the Certificate of Incorporation relating to the authorized
number of shares of Preferred Stock, board authority to issue Preferred Stock,
number of directors, the limitation on directors' liability, amendment of
Bylaws, or consent of stockholder in lieu of meetings, such amendment must be
approved by the affirmative vote of the holders of at least two-thirds of the
outstanding shares of stock entitled to vote thereon.
Stockholder Nominations and Proposals
With certain exceptions, the Bylaws require that stockholders intending to
present nominations for directors or other business for consideration at a
meeting of stockholders must notify CEDC's secretary not less than 60 days,
and not more than 90 days, before the date of the meeting.
Certain Statutory Provisions
Section 203 of the DGCL provides, in general, that a stockholder acquiring
more than 15% of the outstanding voting shares of a corporation subject to the
DGCL (an "Interested Stockholder"), but less than 85% of such shares, may not
engage in certain "Business Combinations" with such corporation for a period
of three years subsequent to the date on which the stockholder became an
Interested Stockholder unless (a) prior to such date the corporation's board
of directors approved either the Business Combination or the transaction in
which the stockholder became an Interested Stockholder or (b) the Business
Combination is approved by the corporation's board of directors and authorized
by a vote of at least two-thirds of the outstanding voting stock of the
corporation not owned by the Interested Stockholder.
Section 203 defines the term "Business Combination" to encompass a wide
variety of transactions with or caused by an Interested Stockholder in which
the Interested Stockholder receives or could
46
receive a benefit on other than a pro rata basis with other stockholders,
including mergers, certain asset sales, certain issuances of additional shares
to the Interested Stockholder, transactions with the corporation which
increase the proportionate interest of the Interested Stockholder or a
transaction in which the Interested Stockholder receives certain other
benefits.
Pursuant to a Board resolution, the Section 203 limits do not apply to any
"Business Combination" between the Company and either Mr. Carey, Mr. Peterson,
their "affiliates" or their estates.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer and Trust Company.
47
UNDERWRITING
The Underwriters have agreed, subject to the terms and conditions of the
Underwriting Agreement by and among the Company, the Selling Stockholders and
the Underwriters (the "Underwriting Agreement"), to purchase severally, and
the Company has agreed to sell to the Underwriters severally, the number of
shares of Common Stock and the number of Warrants set forth opposite their
respective names below:
[Download Table]
UNDERWRITERS NUMBER OF SHARES NUMBER OF WARRANTS
------------ ---------------- ------------------
Fine Equities, Inc..........................
--------- ---------
SouthWall Capital Corp......................
--------- ---------
Total..................................... 1,150,000 1,150,000
========= =========
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the shares of
Common Stock and Warrants offered hereby (other than those subject to the
over-allotment options described below) if any such shares are purchased. In
the event of a default by either of the Underwriters, the Underwriting
Agreement provides that, in certain circumstances, the purchase commitments of
the non-defaulting Underwriter may be increased or the Underwriting Agreement
may be terminated.
The Underwriters have advised the Company that they propose initially to
offer the shares of Common Stock and the Warrants to the public at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers who are members of the NASD at such price, less a concession not in
excess of $ per Share, of which a sum not to exceed $ per Share may in
turn be allowed by such dealers to other dealers who are members of the NASD.
After the initial public offering, the public offering price, the concessions
and the allowances may be changed.
The Company has agreed to pay to the Underwriters a non-accountable expense
allowance equal to 3% of the aggregate offering price of the Shares and
Warrants offered hereby (including any shares of Common Stock and Warrants
purchased pursuant to the over-allotment options). The Company has also agreed
to pay all expenses in connection with qualifying the Shares and Warrants
offered hereby for sale under the laws of such states as the Underwriters may
designate, including expenses of counsel retained for such purpose by the
Underwriters.
The Company has granted the Underwriters an option, exercisable within 45
days after the date of this Prospectus, to purchase up to an aggregate of
97,500 additional shares of Common Stock and 172,500 Warrants from the Company
at the initial public offering price per share of Common Stock and Warrants
offered hereby, less underwriting discounts and commissions. The Selling
Stockholders have granted the Underwriters an option, exercisable within 45
days of the date of this Prospectus, to purchase 75,000 shares of the Common
Stock at the initial public offering price per share of Common Stock offered
hereby, less underwriting discounts and commissions. The Underwriters may
exercise such options only to cover over-allotments in the sale of shares of
Common Stock and Warrants that the Underwriters have agreed to purchase. The
initial Shares purchased upon exercising the over-allotment options will be
purchased from the Selling Stockholders. To the extent that the Underwriters
exercise such options, each Underwriter will have a firm commitment, subject
to certain conditions, to purchase the number of option shares proportionate
to its initial commitment.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act, or contribute to payments the
Underwriters may be required to make in respect thereof.
48
The Company has agreed to issue and sell, upon the completion of the
Offering, to the Underwriters for nominal consideration the Unit Purchase
Option. The Unit Purchase Option is exercisable at any time during a period of
four years commencing one year from the date of this Prospectus, at a price of
$ (120% of the aggregate initial public offering price of the Shares and
the Warrants). The Company has agreed that, for a period of seven years from
the date of the completion of the Offering, if the Company intends to file a
registration statement or statements for the public sale of securities for
cash (other than Form S-8, S-4 or comparable registration statement), it will
notify all of the holders of the Unit Purchase Option and/or underlying
securities and if so requested it will include therein material to permit a
public offering of the securities underlying said Unit Purchase Option at the
expense of the Company (excluding fees and expenses of the holders' counsel
and any underwriting or selling commissions). In addition, for a period of
five years from the completion of the Offering upon the written demand of any
majority holder, the Company agrees to promptly register the underlying
securities at the expense of such holder. For the life of the Unit Purchase
Option, the holders are given the opportunity to profit from a rise in the
market price of the Common Stock and Warrants, with a resulting dilution in
the interests of other stockholders. Further, the holders may be expected to
exercise the Unit Purchase Option at a time when the Company would in all
likelihood be able to obtain equity capital on terms more favorable than those
provided under the Unit Purchase Option. Any profit realized by the
Underwriters on the sale of the Warrants or Common Stock issuable upon
exercise of such Unit Purchase Option may be deemed additional underwriter
compensation.
The Company also has granted the Underwriters the right of first refusal for
a period of 18 months after the date of this Prospectus for any sale of
securities to be made by the Company or any of its present or future
affiliates or subsidiaries. The Underwriting Agreement also provides that, for
five years following the date of this Prospectus, the Underwriters may
designate a person, reasonably acceptable to the Company, for election to the
Board of Directors. In the event the Underwriters elect not to exercise this
right, then it may designate one person to attend all meetings of the Board of
Directors for a period of five years. Such person would be entitled to attend
all such meetings and to receive all notices and other correspondence and
would be reimbursed for out-of-pocket expenses incurred in connection with
attendance at Board of Directors meetings.
The Underwriters have informed the Company that the Underwriters do not
intend to make sales to any accounts over which they exercise discretionary
authority in excess of 5% of the number of shares of Common Stock offered
hereby.
The Company and all of the existing stockholders, directors and officers of
CEDC have agreed that, during the period beginning from the closing of this
Offering and continuing to and including the date 24 months thereafter, they
will not offer, sell, contract to sell or otherwise dispose of shares of
Common Stock beneficially owned by them without the prior written consent of
the Underwriters (except for the shares of Common Stock offered in this
Offering and those underlying the Warrants, the Unit Purchase Option and
options issued under the Plan).
Prior to the Offering, there has been no public market for the Common Stock
or the Warrants. The initial public offering price of the Common Stock and the
Warrants and the terms of the Warrants will be determined by negotiation
between the Company and the Underwriters and will not necessarily be related
to the Company's asset value, net worth, results of operation or other
established criteria of value. Among the factors to be considered in
determining the initial public offering price of the Common Stock and the
Warrants and the terms of the Warrants, in addition to prevailing market
conditions, are the earnings and certain other financial and operating
information of the Company in recent periods, the future prospects of the
Company and its industry in general, an assessment of the management of the
Company, the Company's capital structure, the general conditions of the
securities market at the time of the Offering and the market prices of
securities and certain financial and operating information of companies
engaged in activities similar to those of the Company. There can, however, be
no assurance that the prices at which the Common Stock and the Warrants will
sell in the public market
49
after the Offering will not be lower than the price at which they are sold in
the Offering by the Underwriters.
In connection with the Offering, the Underwriters may purchase and sell the
Common Stock and the Warrants in the open market. These transactions may
include over-allotment and stabilizing transactions and purchases to cover
syndicate short positions created in connection with the Offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of
preventing or retarding a decline in the market price of the Common Stock and
the Warrants, and syndicate short positions involve the sale by the
Underwriters of a greater number of shares of Common Stock and the Warrants
than they are required to purchase from the Company in the Offering. The
Underwriters also may impose a penalty bid, whereby selling concessions
allowed to syndicate members or other broker-dealers in respect of the
securities sold in the Offering for their account may be reclaimed by the
syndicate if such shares of Common Stock and the Warrants are repurchased by
the syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Common Stock
and the Warrants, which may be higher than the price that might otherwise
prevail in the open market; and these activities, if commenced, may be
discontinued at any time. These transactions may be effected on the Nasdaq
SmallCap Market, in the over-the-counter market or otherwise.
The Company has agreed, in connection with the exercise of Warrants pursuant
to solicitation by the Underwriters, to pay to the Underwriter a fee of 4% of
the Warrant exercise price, a portion of which may be reallowed to any dealer
who is a member of the National Association of Securities Dealers, Inc.
("NASD") who solicited the exercise (which may also be the Underwriters) for
each Warrant exercised, if (i) the market price of the Common Stock of the
Company at the time of exercise is higher than the exercise price of the
Warrants; (ii) the Warrants are not held in any discretionary account; (iii)
disclosure of compensation arrangements was made both at the time of this
Offering and in documents provided to holders of the Warrants at the time of
exercise; (iv) the exercise of the Warrants is solicited by a member of the
NASD as designated in writing on the Warrant Certificate Subscription Form;
and (v) the solicitation of exercise of the Warrants was not in violation of
Regulation M promulgated under the Exchange Act.
Regulation M of the SEC under the Exchange Act may prohibit the Underwriters
from engaging in any market making activities with regard to the Company's
securities for the period from nine business days (or such other applicable
period as Regulation M may provide) prior to any solicitation by the
Underwriters of the exercise of Warrants until the later of the termination of
such solicitation activity or the termination (by waiver or otherwise) of any
right that the Underwriters may have to receive a fee for the exercise of
Warrants following such solicitation. As a result, the Underwriters may be
unable to provide a market for the Company's securities during certain periods
while the Warrants are exercisable.
The Company will not receive any of the proceeds from the sale of the shares
of Common Stock by the Selling Stockholders if the over-allotment option is
exercised. The Company will pay all expenses incident to the offering and sale
of the shares of Common Stock and the Warrants to the public, other than
underwriting discounts and expenses, if any, of counsel and other advisors to
the Selling Stockholders. The Company intends, to the extent practical, to
seek registration or exemption from registration under the securities laws of
the states designated by the Underwriters in which the shares of Common Stock
and the Warrants will be offered and sold. There can be no assurance, however,
that such registrations or exemptions can be obtained.
Fine Equities has been in business since August 1995 and has acted as an
underwriter in one other offering of securities and has not managed any other
offering of securities. SouthWall has been in business since May 1996. Prior
to this Offering, it has only co-managed one other offering of securities and
has acted as an underwriter in several other offerings. There can be no
assurance
50
that the Underwriters' limited offering experience and small size relative to
other broker-dealers will not adversely affect this Offering or the subsequent
development, if any, of a trading market for the Common Stock and Warrants.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 2,930,000 shares of
Common Stock outstanding (assuming no exercise of the Underwriters' over-
allotment option). Of these shares, the 1,150,000 shares of Common Stock sold
in the Offering will be freely transferable and tradable without restriction
or further registration under the Securities Act except for any shares
purchased by any "affiliate", as defined below, of the Company which will be
subject to the resale limitations of Rule 144. All the remaining shares of
Common Stock held by existing stockholders are "restricted" securities within
the meaning of Rule 144 and may only be sold in the public market pursuant to
an effective registration statement under the Securities Act or pursuant to an
applicable exemption from registration, including Rule 144.
Holders of the Warrants offered hereby will be entitled to purchase an
aggregate of 1,150,000 additional shares of Common Stock upon exercise of the
Warrants at any time during the five-year period commencing on the date of
this Prospectus, provided that the Company satisfies certain securities
registration and qualification requirements with respect to the securities
underlying the Warrants. Any and all shares of Common Stock purchased upon
exercise of the Warrants will be freely tradable, provided such registration
requirements are met and except for any shares purchased by any "Affiliate,"
as defined below, of the Company.
Up to 230,000 additional shares of Common Stock may be purchased by the
Underwriters through the exercise of the Unit Purchase Option, and the
warrants included therein. Until five years from the date of this Prospectus,
holders of such securities will have the right, subject to certain conditions,
to require the Company to register all or a portion of such securities at the
Company's expense beginning one year after the date of this Prospectus.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who has been deemed to have
beneficially owned shares for at least one year, including an "affiliate", is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the then outstanding number of shares of
Common Stock or the average weekly trading volume in the shares of Common
Stock during the four calendar weeks preceding the filing of the required
notice of such sale. Sales under Rule 144 may also be subject to certain
manner of sale provisions, notice requirements and the availability of current
public information about the Company. A person (or persons whose shares are
required to be aggregated) who is not deemed to have been an affiliate of the
Company during the three months preceding a sale, and who has beneficially
owned shares within the definition of "restricted securities" under Rule 144
for at least two years is entitled to sell such shares under Rule 144(k)
without regard to the volume limitation, manner of sale provisions, notice
requirements or public information requirements of Rule 144. Affiliates
continue to be subject to such limitations. As defined in Rule 144, an
"affiliate" of an issuer is a person that directly or indirectly, through one
or more intermediaries, controls, or is controlled by, or is under common
control with, such issuer.
Upon completion of the Offering, no shares of Common Stock held by the
existing stockholders of the CEDC are currently eligible for sale under Rule
144. CEDC and all of the existing stockholders, directors and officers of CEDC
have agreed that, during the period beginning from the closing of this
Offering and continuing to and including the date 24 months thereafter, they
will not offer, sell, contract to sell or otherwise dispose of shares of
Common Stock beneficially owned by them without the prior written consent of
the Representative (except for the shares of Common Stock offered in this
Offering).
51
No prediction can be made as to the effect, if any, that future sales of
Common Stock, or the availability of shares of Common Stock for future sale,
will have on the market price of the Common Stock prevailing from time to
time. Sales of substantial numbers of shares of Common Stock, pursuant to a
registration statement, Rule 144 or otherwise, or the perception that such
sales may occur, could adversely affect the prevailing market price of the
Common Stock. In addition, the availability for sale of Warrants or the Unit
Purchase Option could adversely affect prevailing market prices for the Common
Stock.
The Company has reserved 400,000 shares of Common Stock for issuance upon
the exercise of rights outstanding or to be granted pursuant to the Plan. As
of the date hereof, options to purchase 52,500 shares of Common Stock were
outstanding and unexercised. See "Management--Executive Compensation--1997
Stock Incentive Plan."
The Company also has reserved 1,552,500 shares of Common Stock for issuance
upon the exercise of the Warrants, including those issuable upon exercise of
the over-allotment options and upon exercise of the Unit Purchase Option and
the warrants included therein. See "Underwriting."
LEGAL MATTERS
The validity of the Common Stock being offering hereby will be passed upon
for the Company by Hogan & Hartson L.L.P., Washington, D.C., and for the
Underwriters by Baker & McKenzie, New York, New York. Certain matters of
Polish law will be passed upon for the Company by Hogan & Hartson, Warsaw,
Poland and for the Underwriters by Baker & McKenzie, Warsaw, Poland.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1996
and for each of the two years in the period ended December 31, 1996 appearing
in this Prospectus and Registration Statement, have been audited by Ernst &
Young Audit Sp. z o.o., Warsaw, Poland, independent auditors, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of said firm as experts in
accounting and auditing.
ENFORCEABILITY OF CERTAIN CIVIL LIABILITIES
CEDC is organized under the laws of the State of Delaware. Although
investors in the Common Stock will be able to effect service of process in the
United States upon CEDC and may be able to effect service of process upon its
directors, due to the fact that CEDC is primarily a holding company which
holds stock in Carey Agri in Poland, substantially all of the assets of CEDC
are located outside the United States. As a result, it may not be possible for
investors to enforce against CEDC's assets judgment of United States courts
predicated upon the civil liability provisions of United States laws.
CEDC has been advised by its counsel, Hogan & Hartson L.L.P., that there is
doubt as to the enforceability in Poland, in original actions or in actions
for enforcement of judgments of United States courts, of civil liabilities
predicated solely upon the laws of the United States. In addition, awards of
punitive damages in actions brought in the United States or elsewhere may be
unenforceable in Poland.
52
AVAILABLE INFORMATION
CEDC has filed with the SEC a registration statement (herein, together with
all amendments, exhibits and schedules thereto, referred to as the
"Registration Statement") under the Securities Act with respect to the Common
Stock and Warrants offered hereby. This Prospectus, which is part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the SEC. For further information with respect to
CEDC and the Common Stock and Warrants, reference is hereby made to the
Registration Statement.
As a result of the Offering, CEDC will become subject to the reporting
requirements of the Exchange Act, and in accordance therewith, will file
reports and other information with the SEC. CEDC intends to furnish its
stockholders with annual reports containing financial statements audited by
its independent public accountants. The Registration Statement, including the
exhibits and schedules thereto, and reports and other information filed by the
Company with the SEC can be inspected without charge and copied, upon payment
of prescribed rates, at the public reference facilities maintained by the SEC
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the SEC located at 7 World Trade Center, 13th Floor, New
York, New York 10048 and the Northwest Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such material and any part
thereof will also be available by mail from the Public Reference Section of
the SEC, at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates, and via the SEC's address on the World Wide Web at http:/www.sec.gov.
53
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
[Download Table]
PAGE
----
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets at December 31, 1996 and September 30, 1997
(unaudited).............................................................. F-3
Consolidated Statements of Income for the years ended December 31, 1995
and 1996 and the nine months ended September 30, 1996 and 1997 (unau-
dited)................................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1995 and 1996 and the nine months ended September 30,
1997 (unaudited)......................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31,
1995 and 1996 and the nine months ended September 30, 1996 and 1997 (un-
audited)................................................................. F-7
Notes to Consolidated Financial Statements................................ F-8
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Central European Distribution Corporation
We have audited the accompanying consolidated balance sheet of Central
European Distribution Corporation as of December 31, 1996 and the related
consolidated statements of income, stockholders' equity, and cash flows for
the years ended December 31, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Central
European Distribution Corporation at December 31, 1996, and the consolidated
results of its operations and its cash flows for the years ended December 31,
1996 and 1995 in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young Audit Sp. z o.o.
Ernst & Young Audit Sp. z o.o.
Warsaw, Poland
November 28, 1997
F-2
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
CONSOLIDATED BALANCE SHEETS
AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS
[Download Table]
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
ASSETS
Current Assets
Cash.............................................. 740 240
Accounts receivable, net of allowance for doubtful
accounts of $49,000 and $58,000, respectively.... 4,211 3,744
Inventories....................................... 1,660 2,193
Prepaid expenses and other current assets......... 172 181
Deferred income taxes............................. 106 121
----- -----
Total Current Assets............................ 6,889 6,479
Equipment, net...................................... 442 431
Deferred charges.................................... -- 252
Deferred income taxes............................... 4 3
----- -----
Total Assets...................................... 7,335 7,165
===== =====
See accompanying notes.
F-3
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS
[Download Table]
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable............................ 5,140 4,462
Bank loans and overdraft facilities............... 856 997
Income taxes payable.............................. 6 34
Taxes other than income taxes..................... 720 912
Accrued expenses and deferred income.............. 132 233
Current portion of long-term debt and capital
lease obligations................................ 152 293
----- -----
Total Current Liabilities....................... 7,006 6,931
Long-term debt, less current maturities............. 205 55
Capital lease obligations, less current portion..... 98 13
Stockholders' Equity
Common Stock ($0.01 par value, 20,000,000 shares
authorized, 1,780,000 shares issued and outstand-
ing)............................................. 18 18
Additional paid-in-capital........................ 36 36
Retained earnings (accumulated deficit)........... (28) 112
----- -----
Total Stockholders' Equity...................... 26 166
----- -----
Total Liabilities and Stockholders' Equity...... 7,335 7,165
===== =====
See accompanying notes.
F-4
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS
(EXCEPT PER SHARE DATA)
[Download Table]
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1996 1997
------------ ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
Net sales................ 16,017 23,942 14,575 27,499
Cost of goods sold....... 13,113 19,850 11,697 23,759
------ ------ ------ ------
Gross profit............. 2,904 4,092 2,878 3,740
Sales, general and
administrative
expenses................ 2,603 3,569 2,581 3,057
------ ------ ------ ------
Operating income......... 301 523 297 683
Non-operating income (ex-
pense)
Interest expense....... (106) (124) (83) (106)
Realized and unrealized
foreign currency
transaction losses,
net................... (84) (232) (231) (278)
Other income, net...... 84 6 88 35
------ ------ ------ ------
Income before income tax-
es...................... 195 173 71 334
Income tax expense....... (120) (111) (65) (194)
------ ------ ------ ------
Net income............... 75 62 6 140
====== ====== ====== ======
Net income per common
share, primary and fully
diluted................. 0.04 0.03 0.00 0.08
====== ====== ====== ======
See accompanying notes.
F-5
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS
[Download Table]
RETAINED
COMMON STOCK EARNINGS
-------------------- ADDITIONAL PAID- (ACCUMULATED
NO. OF SHARES AMOUNT IN-CAPITAL DEFICIT)
------------- ------ ---------------- ------------
Balance at December 31, 1994
(Note 1)..................... 1,780,000 18 36 (165)
Net income for 1995........... -- -- -- 75
--------- --- --- ----
Balance at December 31, 1995.. 1,780,000 18 36 (90)
Net income for 1996........... -- -- -- 62
--------- --- --- ----
Balance at December 31, 1996.. 1,780,000 18 36 (28)
Net income for the nine months
ended September 30, 1997 (un-
audited)..................... -- -- -- 140
--------- --- --- ----
Balance at September 30, 1997
(unaudited)..................... 1,780,000 18 36 112
========= === === ====
See accompanying notes.
F-6
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS
[Download Table]
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1996 1997
------------ ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
Operating Activities
Net income.............. 75 62 6 140
Adjustments to reconcile
net income to net cash
(used in) provided by
operating activities:
Depreciation and
amortization........... 36 67 49 120
Deferred income taxes
(benefit).............. 6 (18) (32) (14)
Gain on the disposal of
equipment.............. (5) (7) -- (10)
Changes in operating
assets and
liabilities:
Accounts receivable,
net of allowances..... (1,074) (2,633) 69 467
Inventories............ (480) (612) (479) (533)
Trade accounts
payable............... 918 2,915 450 (678)
Income and other
taxes................. 80 613 358 220
Prepayments and other
current assets........ 14 (84) (92) (9)
Accrued expenses and
deferred income....... 349 (271) (147) (27)
------ ------- ------- -------
Net Cash (Used In)
Provided by Operating
Activities........... (81) 32 182 (324)
Investing Activities
Purchases of equipment.. (62) (336) (213) (85)
Proceeds from the
disposal of equipment.. 23 264 90 32
------ ------- ------- -------
Net Cash Used In
Investing
Activities........... (39) (72) (123) (53)
Financing Activities
Borrowings on overdraft
facility............... 8,465 17,531 12,496 12,592
Payment of overdraft
facility............... (8,210) (17,747) (12,461) (12,461)
Payment of capital lease
obligations............ -- (62) (34) (147)
Short-term borrowings... 379 840 337 500
Payment of short-term
borrowings............. (350) (402) (375) (490)
Long-term borrowings.... 200 205 205 7
Payment of long-term
borrowings............. (20) (180) (180) --
Costs paid in connection
with planned public
offering............... -- -- -- (124)
------ ------- ------- -------
Net Cash Provided by
(Used In) Financing
Activities........... 464 185 (12) (123)
------ ------- ------- -------
Net Increase (Decrease)
in Cash................. 344 145 47 (500)
Cash at beginning of
period.................. 251 595 595 740
------ ------- ------- -------
Cash at end of period.... 595 740 642 240
====== ======= ======= =======
See accompanying notes.
F-7
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Central European Distribution Corporation (CEDC) was organized as a Delaware
Corporation in September 1997 to operate as a holding company through its sole
subsidiary, Carey Agri International--Poland Sp. z o.o. (Carey Agri). CEDC and
Carey Agri are referred to herein as the Company.
CEDC's authorized capital stock consists of 20 million shares of common
stock, $0.01 par value, and 1 million shares of preferred stock, also $0.01
par value. No shares of preferred stock have been issued and its terms and
conditions will be established by the Board of Directors at a later date.
In November 1997, CEDC issued 1,780,000 shares of its common stock to the
former stockholders of Carey Agri in exchange for all the issued and
outstanding shares of Carey Agri. This reorganization resulted in no changes
in relative equity interests among the stockholders and no adjustments of the
underlying net assets of Carey Agri. The new capital structure has been
reported in a manner comparable to a pooling of interests in the accompanying
consolidated financial statements. All share and per share data have been
presented in accordance with the new capital structure.
Carey Agri is a Polish limited liability company with headquarters in
Warsaw, Poland. Carey Agri distributes alcoholic beverages throughout Poland
and all activities are conducted within that country. It currently has
branches in the following Polish cities: Warsaw, Cracow, Szczecin, Gdynia,
Wroclaw, Torun, Siemianowice and Poznan. Pursuant to Polish statutory
requirements, Carey Agri may pay an annual dividend, based on its audited
Polish financial statements, to the extent of its retained earnings as
defined. At December 31, 1996, approximately $8,000 was available for payment
of dividends.
2. ACCOUNTING POLICIES
The significant accounting policies and practices followed by the Company
are as follows:
Basis of Presentation
Since CEDC had no prior operations, the accompanying consolidated financial
statements reflect the activities of Carey Agri.
Carey Agri maintains its books of account and prepares its financial
statements in Polish zloties (PLN) in accordance with Polish statutory
requirements and the Accounting Act of 29 September 1994. The exchange rate
was approximately 3.4 PLN per USD at September 30, 1997.
The accompanying consolidated financial statements include adjustments,
translations, and reclassifications, which are appropriate to present the
Company's consolidated financial statements in accordance with accounting
principles generally accepted in the United States (US GAAP).
The consolidated financial statements (and notes thereto) as at September
30, 1997 and for the nine months ended September 30, 1997 and 1996 are
unaudited, but include in the opinion of management, all adjustments
considered necessary for a fair presentation of such data. The results for the
unaudited interim periods are not necessarily indicative of the results
expected for the entire year.
Foreign Currency Translation and Transactions
As stated above, Carey Agri maintains its books of account in Polish
zloties. The accompanying consolidated financial statements have been prepared
in US Dollars. Transactions and balances not
F-8
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS
already measured in US Dollars (primarily Polish zloties) have been remeasured
into US Dollars in accordance with the relevant provisions of US Financial
Accounting Standard (FAS) No. 52 "Foreign Currency Translation" as applied to
entities in highly inflationary economies.
Under FAS No. 52, revenues, costs, capital and non-monetary assets and
liabilities are translated at historical exchange rates prevailing on the
transaction dates. Monetary assets and liabilities are translated at exchange
rates prevailing on the balance sheet date. Exchange gains and losses arising
from remeasurement of monetary assets and liabilities that are not denominated
in US Dollars are credited or charged to operations.
Equipment
Equipment is stated at cost, less accumulated depreciation. Depreciation is
computed by the straight-line method over the following useful lives:
[Download Table]
TYPE DEPRECIATION LIFE IN YEARS
---- --------------------------
Transportation Equipment......................... 6
Beer Dispensing and Other Equipment.............. 2-10
Equipment under capital lease is depreciated over the shorter of the useful
life or the lease term.
Revenue Recognition
Revenue is recognized when goods are shipped to customers.
Advertising and Promotion Costs
Advertising and promotion costs are expensed as incurred. Advertising and
promotion expense was approximately $280,000 and $120,000 in 1996 and 1995,
respectively ($314,000 for the nine months ended September 30, 1997).
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventories are comprised primarily of beer, wine, and spirits.
Estimates
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results may differ
from those estimates and such differences may be material to the financial
statements.
Income Taxes
The Company computes and records income taxes in accordance with FAS No.
109.
Effect of New Accounting Standards Not Yet Adopted
In February 1997, the Financial Accounting Standards Board (FASB) issued its
Statement No. 128, "Earnings per Share." Among other provisions, FAS No. 128
simplifies the standards for
F-9
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS
computing earnings per share. The standard will be effective for the Company
in the three months ending December 31, 1997. The Company does not expect the
adoption of FAS No. 128 to have a material impact on its financial statements.
In June 1997, the FASB issued its Statement No. 130, "Reporting
Comprehensive Income." This standard will be effective for the Company in the
three months ending March 31, 1998, and it requires the disclosure of
comprehensive income which is defined as all changes in equity during a period
except those resulting from investments by owners and distributions to owners.
Comprehensive income will include net income adjusted by, among other items,
foreign currency translation adjustments. As disclosed in this Note 2, the
Company remeasures transactions and results of its Polish subsidiary in
accordance with FAS No. 52 as applied to entities in highly inflationary
economies. Therefore, exchange gains and losses arising from remeasurement of
these monetary assets and liabilities are credited or charged to net income.
However, if in future periods Poland is considered not to be a highly
inflationary economy, these remeasurements will be recorded as a separate
component of equity and, under FAS No. 130, included as part of comprehensive
income.
In June 1997, the FASB issued its Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The standard will be
effective for the Company in the year ending December 31, 1998, and it
requires, among other provisions, that a public business enterprise report
financial and descriptive information about its reportable operating segments.
The Company does not expect the adoption of FAS No. 131 to have a material
impact on the disclosures contained in its financial statements.
Net Income Per Common Share
Net income per common share is calculated using the average shares
outstanding during the periods (1,780,000 during each of the periods). There
were no common stock equivalents.
3. EQUIPMENT
Equipment, which is presented net of accumulated depreciation in the balance
sheets, consists of:
[Download Table]
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
Transportation Equipment.......................... 174 178
Beer Dispensing and Other Equipment............... 433 493
---- ----
607 671
Less accumulated depreciation..................... (165) (240)
---- ----
Equipment, net.................................... 442 431
==== ====
F-10
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS
4. LONG-TERM DEBT
Long-term debt consists of the following:
[Download Table]
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
Loan denominated in US Dollars.................... 205 205
Car loan denominated in Polish zloty.............. -- 7
Current portion of these loans.................... -- (157)
--- ----
Long-term portion................................. 205 55
=== ====
The Company has a revolving credit line with a bank for $205,000 at December
31, 1996 and September 30, 1997. The line can be used for various purposes
such as an overdraft facility, loan for letters of credit, or for loans for
guarantees made by the Company. Currently, the loan is being used for working
capital purposes with annual interest equal to the bank's dollar base rate
(approximately 10% at December 31, 1996 and September 30, 1997). The loan is
collateralized by a bill of exchange and personal guaranties by two officers
and directors of the Company. Maturity was scheduled for March 15, 1997, but
was extended through December 15, 1998 in accordance with an amendment dated
October 14, 1997. The interest rate was changed to the bank's Amerbank LIBOR
rate plus 3.5% (approximately 9.17% at September 30, 1997). Installments of
$17,000 are due monthly beginning January 15, 1998 with $18,000 due on
December 15, 1998. Therefore, the entire $205,000 is due in 1998.
5. LEASE OBLIGATIONS
Certain non-cancelable leases are classified as capital leases, and the
leased assets are included as part of equipment. Other leases are classified
as operating leases and are not capitalized. The depreciation for assets under
capital leases is included in depreciation expense. Details of the capitalized
leased assets are as follows:
[Download Table]
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
Transportation equipment.......................... 88 119
Beer dispensing equipment......................... 252 212
--- ----
340 331
Less accumulated depreciation..................... (60) (142)
--- ----
280 189
=== ====
F-11
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS
At December 31, 1996, the future minimum lease payments under operating and
capital leases are as follows:
[Download Table]
OPERATING CAPITAL
LEASES LEASES
--------- -------
1997....................................................... 242 223
1998....................................................... 198 106
1999....................................................... 54 --
2000....................................................... 54 --
2001....................................................... 54 --
--- ---
Total...................................................... 602 329
===
Less amounts representing interest costs................... (79)
---
Net present value.......................................... 250
Current portion............................................ 152
---
Long-term portion.......................................... 98
===
Rent expense incurred under operating leases during 1996 and 1995 were as
follows:
[Download Table]
1996 1995
---- ----
Rent expense....................................................... 301 183
=== ===
Capitalized leases relate mainly to the leasing of transportation equipment
and beer dispensing equipment. Each of these leases expires in 1997 or 1998.
Under most of these leases, the Company may purchase the equipment at the end
of the lease terms at a price below the expected market value. New capital
leases caused non-cash additions to equipment of $312,000 and $46,000 in the
year ended December 31, 1996 and the nine months ended September 30, 1997,
respectively. These are not reflected in the Consolidated Statements of Cash
Flows.
Operating leases relate mainly to the leasing of the customs warehouse and
the consolidation warehouse in Warsaw, and the 7 regional offices and
warehouses. Monthly rentals range from approximately $570 to $6,000 per month.
The customs and consolidation warehouses' leases expire in September 2001. Six
of the regional office and warehouse leases can be terminated by either party
with two or three months prior notice. The seventh regional office and
warehouse lease expires in December 1998.
6. SHORT-TERM BANK LOANS AND OVERDRAFT FACILITIES
The Company has an overdraft facility (in Polish zloty, shown in approximate
USD equivalent) with a bank (other than the bank referred to in note 4) for
$285,000. At December 31, 1996 and September 30, 1997 the Company used $16,000
and $147,000, respectively, of this amount. Interest is equal to PLN WIBOR
(Warsaw InterBank Rate) plus 3.5% (24% and 28% at December 31, 1996 and
September 30, 1997, respectively). The loan matured on July 14, 1997 and was
extended through July 29, 1998. The loan is collateralized by a blank bill of
exchange, the assignment of receivables from eight of the Company's largest
customers (carrying value of $389,000 at December 31, 1996), and a pledge on
inventory of $350,000.
F-12
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS
The Company has two other USD short-term loans with this bank for $350,000
and $240,000 at December 31, 1996 ($350,000 and $0 at September 30, 1997).
Interest on each is at LIBOR (1 month) plus 2.75% (8.3% and 8.4% at December
31, 1996 and September 30, 1997, respectively). The loans are collateralized
by a blank bill of exchange, pledge on inventory of PLN 1,000,000, the
assignment of receivables from eight of the Company's largest customers
(carrying value of $389,000 at December 31, 1996) and the assignment of an
insurance policy on inventory. The $350,000 loan was due on July 29, 1997 but
was extended through July 30, 1998. The $240,000 loan was due in 6 monthly
installments of $40,000 beginning January 31, 1997 and was fully paid in June
1997.
The Company has short-term USD loans with another bank for $250,000 at
December 31, 1996 and $500,000 at September 30, 1997. Interest on the loans is
at LIBOR plus 1.5% (7.0% and 7.2% at December 31, 1996 and September 30, 1997,
respectively). The loan outstanding at December 31, 1996 was paid in March
1997. A new loan for $250,000 was taken at the end of March 1997 and was due
on September 30, 1997. Another $250,000 was borrowed on June 2, 1997 and was
also due on September 30, 1997. The due date for both loans was extended to
December 23, 1997.
The Company's borrowing arrangements (including long-term debt described in
Note 4) contain various financial and nonfinancial covenants and restrictions
which the Company has complied with or have been waived by the lender.
Total interest paid in 1996 and 1995 (and the nine months ended September
30, 1997) is substantially equal to interest expense.
7. DEFERRED CHARGES
Costs incurred in connection with a planned public offering, totaling
$252,000, are included in deferred charges in the September 30, 1997 balance
sheet. The accrued portion of $128,000 at September 30, 1997 is not reflected
in the Consolidated Statements of Cash Flows. If the offering is successful,
this amount and other charges incurred subsequently will be charged to
stockholders' equity. If the offering is not completed, this amount and other
charges incurred subsequently will be charged to expense.
8. FINANCIAL INSTRUMENTS, COMMITMENTS AND CONTINGENT LIABILITIES
Financial Instruments With On-Balance Sheet Risk and Their Fair Values
Financial instruments with on-balance sheet risk include cash, accounts
receivable, certain other current assets, trade accounts payable, bank loans
and overdraft facilities, long-term debt, and other payables. These financial
instruments are shown separately in the consolidated balance sheets and their
carrying values approximate their fair values. This is because all of these
financial instruments have short maturity periods or carry interest at rates
which approximate current market rates.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of accounts receivable from Polish companies.
The Company restricts temporary cash investments to financial institutions
with high credit standing. Credit is given to customers only after a thorough
review of their credit worthiness. The Company does not normally require
collateral with respect to credit sales. As of December 31, 1996 or September
30, 1997, the Company had no significant concentrations of credit risk. The
Company has not experienced large credit losses in the past.
F-13
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS
Inflation and Currency Risk
Since the fall of Communist rule in 1989, Poland has experienced high levels
of inflation and significant fluctuations in the exchange rate for the zloty.
The Polish government has adopted policies that slowed the annual rate of
inflation from approximately 250% in 1990 to approximately 18% in 1996. In
addition, the exchange rate for the zloty has stabilized and the rate of
devaluation of the zloty has decreased since 1991. However, inflation and
currency exchange fluctuations have had, and may continue to have, an adverse
effect on the financial condition and results of operations of the Company.
A significant portion of the Company's debt obligations and operating
expenses are, and are expected to continue to be, denominated in or indexed to
U.S. Dollars or other non-Polish currency. By contrast, substantially all of
the Company's revenue is denominated in zloty. Any devaluation of the zloty
against the U.S. Dollar or other currencies that the Company is unable to
offset through price adjustments will require the Company to use a larger
portion of its revenue to service its non-zloty denominated obligations. While
the Company may consider entering into transactions to hedge the risk of
exchange rate fluctuations, it is unlikely that the Company will be able to
obtain hedging arrangements on commercially satisfactory terms. Accordingly,
shifts in currency exchange rates may have an adverse effect on the ability of
the Company to service its non-zloty denominated obligations and, thus, on the
Company's financial condition and results of operations.
Supply contracts
The Company has various agreements covering its sources of supply which, in
some cases, may be terminated by either party on relatively short notice. Thus
there is a risk that a significant portion of the Company's supply of products
could be curtailed at any time.
Contingent liabilities
The Company is involved in litigation and has claims against it for matters
arising in the ordinary course of business. In the opinion of management, the
outcome will not have a material adverse effect on the Company.
9. INCOME TAXES
Income tax expense consists of the following:
[Download Table]
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -----------------
(UNAUDITED)
Current Polish income tax ex-
pense......................... 114 129 208
Deferred Polish income tax
(credit) expense, net......... 6 (18) (14)
--- --- ---
Total income tax expense..... 120 111 194
=== === ===
Total Polish income tax payments (or amounts used as settlements against
other statutory liabilities) during 1996 and 1995 were $130,000 and $112,000,
respectively ($165,000 for the nine months ended September 30, 1997).
F-14
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS
Total income tax expense varies from expected income tax expense computed at
Polish statutory rates (40% in 1995 and 1996 and 38% in 1997) as follows:
[Download Table]
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
Tax at Polish statutory rate....... 78 69 127
Bad debt expense not expected to be
tax deductible.................... 6 4 7
Effect of foreign currency exchange
rate change on net deferred tax
assets............................ 3 13 25
Permanent differences:
Interest on overdue taxes........ 2 5 4
Non-deductible social taxes...... 5 7 7
Non-deductible depreciation...... 3 4 5
Non-deductible interest paid..... 13 -- --
Certain other non-deductible
expenses........................ 10 9 19
--- --- ---
Income tax expense................. 120 111 194
=== === ===
Significant components of the Company's deferred tax liabilities and assets
are as follows:
[Download Table]
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
Deferred tax liabilities:
Depreciation and other fixed asset basis dif-
ferences..................................... 33 --
Prepaid expenses.............................. 7 --
--- ---
Total deferred tax liabilities.................. 40 --
Deferred tax assets:
Allowance for doubtful accounts receivable.... 19 22
Unrealized foreign exchange losses............ 31 50
Accrued expenses and deferred income.......... 50 40
Capital lease obligations..................... 69 34
--- ---
Total deferred tax assets....................... 169 146
Less valuation allowance........................ (19) (22)
--- ---
Deferred tax assets, net of valuation allow-
ance........................................... 150 124
--- ---
Net deferred tax asset.......................... 110 124
=== ===
Shown as:
Current deferred tax asset.................... 106 121
Long-term deferred tax asset.................. 4 3
--- ---
110 124
=== ===
F-15
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS
Valuation allowances are provided when it is more likely than not that some
or all of the deferred tax assets will not be realized in the future. These
evaluations are based on expected future taxable income and expected reversals
of the various net deductible temporary differences.
The corporate income tax rates in Poland were changed effective January 1,
1997 from 40% in 1995 and 1996 to 38% in 1997, 36% in 1998, 34% in 1999, and
32% in 2000.
The Company's tax liabilities (including corporate income tax, Value Added
Tax, social security, and other taxes) may be subject to examinations by
Polish tax authorities for up to five years from the end of the year the tax
is payable. Because the application of tax laws and regulations to many types
of transactions is susceptible to varying interpretations, amounts reported in
the financial statements could be changed at a later date upon final
determination by the tax authorities.
10. RELATED PARTY TRANSACTIONS
Loan to Officer
The Company has an advance receivable (denominated in PLN without interest)
from its President which has a balance at September 30, 1997 of $24,000.
Bank Borrowing
A director of CEDC is a vice president and member of the management board of
the bank from which the Company has borrowings of $205,000 at September 30,
1997 (Notes 4 and 12).
Supplier of Wine
A director of CEDC is a director of one of the Company's suppliers of wine.
Purchases from this company amounted to approximately $300,000 in 1996.
11. STOCK OPTION PLANS AND WARRANTS
In October 1995, the United States Financial Accounting Standards Board
issued FAS No. 123, "Accounting for Stock-Based Compensation." This standard
defines a fair value based method of accounting for an employee stock option
or similar equity instrument plan. This statement gives entities a choice of
recognizing related compensation expense by adopting the fair value method or
to measure compensation using the intrinsic value approach under Accounting
Principles Board (APB) Opinion No. 25, the former standard. If APB No. 25 is
elected, FAS No. 123 requires supplemental disclosure to show the effects of
using the FAS No. 123 measurement criteria. The Company intends to follow APB
No. 25.
Incentive Plan
In November 1997, the CEDC 1997 Stock Incentive Plan ("Incentive Plan") was
created. This Incentive Plan provides for the grant of stock options, stock
appreciation rights, restricted stock and restricted stock units to directors,
executives, and other employees of CEDC and any of its subsidiaries or of any
service provider. The Incentive Plan authorizes the issuance of up to 400,000
shares of Common Stock (subject to anti-dilution adjustments in the event of a
stock split, recapitalization, or similar transaction). The compensation
committee of the board of directors will administer the Incentive Plan. The
Company has reserved 400,000 shares for future issuance in relation to the
Incentive Plan.
F-16
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS
The option exercise price for incentive stock options granted under the
Incentive Plan may not be less than 100% of the fair market value of the
Common Stock on the date of grant of the option. Options may be exercised up
to 10 years after grant, except as otherwise provided in the particular option
agreement. Payment for shares purchased under the Incentive Plan shall be made
in cash or cash equivalents. With respect to any participant who owns stock
possessing more than 10% of the voting power of all classes of stock of CEDC,
however, the exercise price of any incentive stock option granted must equal
at least 110% of the fair market value on the grant date and the maximum term
of an incentive stock option must not exceed five years.
Options granted under the Incentive Plan are generally not transferable and
may be exercised within a specific number of months, depending on the reason,
after the termination of the optionee's employment.
CEDC'S board of directors may amend the Incentive Plan with respect to
common shares as to which grants have not been made. However, CEDC's
stockholders must approve any amendments in certain situations.
In December 1997, CEDC granted stock options to its executive officers and
members of the Board of Directors for 52,500 shares of Common Stock in
connection with a planned public offering. The exercise price of these options
is the initial public offering price. Thus if the public offering is not
consummated, these options will be null and void.
As indicated above, the Incentive Plan also authorizes the grant of stock
appreciation rights, restricted stock, and restricted stock units. No such
grants or awards have yet been made.
Under APB 25, no expense will be recognized for options granted under the
Incentive Plan as the exercise price is equal to the initial public offering
price.
Unit Purchase Option
In connection with the planned public offering, the Company has agreed to
issue (for a nominal consideration) a Unit Purchase Option for the purchase of
up to 115,000 shares of Common Stock and 115,000 warrants to the underwriters.
The Unit Purchase Option is exercisable at any time during a period of four
years commencing at the beginning of the year after issuance. The exercise
price of the Unit Purchase Option is 120% of the aggregate initial offering
price of shares of Common Stock and the Warrants. The warrants included in the
Unit Purchase Option are exercisable at any time during a period of four years
commencing at the beginning of the year after the date of the public offering.
The exercise price of the warrants included in the Unit Purchase Option is the
initial public offering price.
12. SUBSEQUENT EVENTS
Short-Term Debt
On October 7, 1997 the Company signed with a bank (the same bank discussed
in Note 10) an agreement for a revolving credit line of $200,000. The line is
be used to finance the costs of the planned initial public offering. The loan
is to be paid back in full using the proceeds from the planned initial public
offering by April 8, 1998. The credit line is collateralized by a blank
bill of exchange, a pledge on inventory of PLN 700,000, personal guarantee by
two officers and directors of the Company and the assignment of an insurance
policy on inventory. Interest
F-17
CENTRAL EUROPEAN DISTRIBUTION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF US DOLLARS
on the loan is at LIBOR (1 month) plus 2.25% (7.9% at September 30, 1997). The
amount of borrowings pursuant to the agreement was increased to $300,000 in
December 1997.
On October 27, 1997 the Company has signed an agreement with another bank
for a short-term loan of $100,000. The proceeds of the loan are to be used to
purchase Bulgarian wine. The annual interest rate equals LIBOR (1 month) plus
2.75% (8.4% at September 30, 1997) and the loan is to be repaid in two
installments of $50,000 each due on January 15, 1998 and on February 17, 1998.
The loan is collaterized by a blank bill of exchange.
Long-Term Debt
In October and November 1997, the Company entered into five loan agreements.
These loans were used to purchase four cars and one truck. The loans are
denominated in PLN and in total equaled a USD equivalent of $60,000. The loans
are to be repaid in twenty-four equal installments through late 1999. The
loans have an interest rate equal to WIBOR + 3% (27.9% at September 30, 1997).
These loans are collateralized by blank bills of exchange, the car or truck
financed, and the assignment of an insurance policy on the car or truck
financed.
F-18
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--------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UN-
LAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS
GIVEN IN THIS PROSPECTUS.
---------------
TABLE OF CONTENTS
[Download Table]
PAGE
----
Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
The Reorganization....................................................... 15
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Dilution................................................................. 17
Exchange Rate Data....................................................... 18
Capitalization........................................................... 19
Selected Consolidated Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 24
Regulation............................................................... 32
Management............................................................... 35
Certain Transactions..................................................... 40
Principal and Selling Stockholders....................................... 41
Description of Securities................................................ 43
Underwriting............................................................. 48
Shares Eligible for Future Sale.......................................... 50
Legal Matters............................................................ 52
Experts.................................................................. 52
Enforceability of Certain Civil Liabilities.............................. 52
Available Information.................................................... 53
Index to Consolidated Financial Statements............................... F-1
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIV-
ERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PRO-
SPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
1,150,000 SHARES OF
COMMON STOCK
1,150,000 REDEEMABLE
WARRANTS
CENTRAL EUROPEAN
DISTRIBUTION
CORPORATION
[LOGO]
FINE EQUITIES, INC.
SOUTHWALL CAPITAL CORP.
, 1998
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law ("DGCL"), a
corporation may indemnify its directors, officers, employees and agents and
its former directors, officers, employees and agents and those who serve, at
the corporation's request, in such capacities with another enterprise, against
expenses (including attorneys' fees), as well as judgments, fines and
settlements in nonderivative lawsuits, actually and reasonably incurred in
connection with the defense of any action, suit or proceeding in which they or
any of them were or are made parties or are threatened to be made parties by
reason of their serving or having served in such capacity. The DGCL provides,
however, that such person must have acted in good faith and in a manner such
person reasonably believed to be in (or not opposed to) the best interests of
the corporation and, in the case of a criminal action, such person must have
had no reasonable cause to believe his or her conduct was unlawful. In
addition, the DGCL does not permit indemnification in an action or suit by or
in the right of the corporation, where such person has been adjudged liable to
the corporation, unless, and only to the extent that, a court determines that
such person fairly and reasonably is entitled to indemnity for costs the court
deems proper in light of liability adjudication. Indemnity is mandatory to the
extent a claim, issue or matter has been successfully defended.
The Registrant's Certificate of Incorporation and Bylaws provide for the
indemnification of directors and executive officers to the fullest extent
permitted by the DGCL and authorize the indemnification by the Registrant of
other officers, employees and other agents as set forth in the DGCL.
The Underwriting Agreement provides for indemnification by the Underwriters
of the directors, officers and controlling persons of the Company against
certain liabilities, including liabilities under the Securities Act, under
certain circumstances.
Upon completion of the Offering, officers and directors of the Registrant
will be covered by insurance which (with certain exceptions and within certain
limitations) indemnifies them against losses and liabilities arising from any
alleged "wrongful act" including any alleged error or misstatement or
misleading statement, or wrongful act or omission or neglect or breach of
duty.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the estimated expenses payable by the Company in
connection with the distribution of the Common Stock and Warrants hereunder,
not including the Underwriters' non-accountable expense allowance.
[Download Table]
SEC registration fee.............................................. $7,352.24
NASD filing fee................................................... 2,992.28
Nasdaq Stock Market listing fee................................... *
Accounting fees and expenses...................................... *
Legal fees and expenses........................................... *
Printing and engraving expenses................................... *
Blue Sky fees and expenses........................................ *
Transfer Agent fees and expenses.................................. *
Miscellaneous expenses............................................ *
---------
Total........................................................... $ *
=========
--------
* To be furnished by amendment.
The Selling Stockholders will not bear any of the expenses of the Offering.
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
All the holders of shares of common stock of Carey Agri International Poland
Sp. z o.o ("Carey Agri") and the Registrant entered into a Contribution
Agreement dated as of November 28, 1997 (the "Contribution Agreement").
Pursuant to the Contribution Agreement, all holders of shares of Carey Agri's
common stock transferred all shares of common stock owned by them to the
Registrant, receiving 1,780,000 shares of the Common Stock in return. All of
these transfers were designed to qualify as a tax-free exchange under section
351 of the Internal Revenue Code of 1986, as amended. These transfers were
made pursuant to Section 4(2) of the Securities Act of 1933, as amended.
ITEM 27. EXHIBITS
[Download Table]
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
1 --Form of Underwriting Agreement.
2.1 --Contribution Agreement among Central European Distribution
Corporation and William V. Carey, William V. Carey Stock Trust,
Estate of William O. Carey and Jeffrey Peterson dated November 28,
1997.
3.1 --Certificate of Incorporation.
3.2 --Bylaws.
4.1 --Form of Common Stock Certificate.
4.2 --Warrant Agreement and attached form of Warrant.
4.3 --Form of Unit Purchase Option.
*5 --Opinion of Hogan & Hartson L.L.P.
10.1 --1997 Stock Incentive Plan.
10.2 --Distribution contract between Carey Agri and Guinness Brewing
Worldwide Ltd. dated July 31, 1997.
10.3 --Distribution contract between Carey Agri and Pilsner Urquell dated
December 13, 1996.
10.4 --Distribution contract between Carey Agri and United Distillers
Finlandia Group Sp. z o.o dated January 1, 1995.
10.5 --Form of distribution contract with Polmos vodka producers.
10.6 --Distribution contract with IDV Poland Sp. z o.o. dated July 3, 1997.
*10.7 --Distribution contract for Lech beer.
10.8 --Employment agreement with William V. Carey.
10.9 --Employment agreement with Jeffrey Peterson.
10.10 --Form of Selling Shareholders' Power of Attorney.
10.11 --Form of Custody Agreement between Selling Shareholders and
Custodian.
21 --Subsidiaries of the Registrant.
23.1 --Consent of Ernst & Young Audit Sp. z o.o.
*23.2 --Consent of Hogan & Hartson L.L.P. (included in Exhibit 5).
24 --Power of Attorney (included on the signature page in Part II of this
Registration Statement).
27 --Financial Data Schedule.
--------
* To be filed by amendment.
ITEM 28. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange
II-2
Commission (the "Commission") such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time the Commission declared it effective.
(2) For determining any liability under the Securities Act, each post-
effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement for the securities offered in this
Registration Statement, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(a) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(b) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table
in the effective registration statement; and
(c) Include any additional or changed material information on the
plan of distribution.
II-3
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL OF THE REQUIREMENTS OF FILING ON FORM SB-2 AND AUTHORIZED THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, IN THE
CITY OF ALEXANDRIA, COMMONWEALTH OF VIRGINIA, ON THIS 15TH DAY OF DECEMBER
1997.
Central European
Distribution Corporation
/s/ William V. Carey
By: _________________________________
WILLIAM V. CAREY
CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS WILLIAM V. CAREY AND JEFFREY PETERSON, JOINTLY
AND SEVERALLY, EACH IN HIS OWN CAPACITY, HIS TRUE AND LAWFUL ATTORNEYS-IN-
FACT, WITH FULL POWER OF SUBSTITUTION, FOR HIM AND HIS NAME, PLACE AND STEAD,
IN ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS (INCLUDING POST-
EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT, AND TO FILE THE SAME,
WITH ALL EXHIBITS THERETO AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH
THE SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO SAID ATTORNEYS-IN-FACT
AND AGENTS WITH FULL POWER AND AUTHORITY TO DO SO AND PERFORM EACH AND EVERY
ACT AND THING REQUISITE AND NECESSARY TO BE DONE IN AND ABOUT THE PREMISES, AS
FULLY TO ALL INTENTS AND PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY
RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT, OR THEIR SUBSTITUTE
OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT WAS SIGNED BY THE FOLLOWING PERSONS, IN THE CAPACITIES
INDICATED BELOW, ON THIS 15TH DAY OF DECEMBER 1997.
SIGNATURE TITLE
/s/ William V. Carey Chairman, President, Chief Executive
------------------------------------- Officer and Chief Financial Officer
WILLIAM V. CAREY (Principal executive, financial and
accounting officer)
/s/ Jeffrey peterson Vice Chairman and Executive Vice
------------------------------------- President
JEFFREY PETERSON
/s/ James T. Grossmann Director
-------------------------------------
JAMES T. GROSSMANN
/s/ James B. Kelly Director
-------------------------------------
JAMES B. KELLY
/s/ Jan W. Laskowski Director
-------------------------------------
JAN W. LASKOWSKI
/s/ Joe M. Richardson Director
-------------------------------------
JOE M. RICHARDSON
II-4
Dates Referenced Herein and Documents Incorporated by Reference
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