SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REPORT ON FORM 10-KSB
Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998.
Transition Report pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the transition period from ___________________ to ___________________.
Commission File No. 0-13181
CAPITAL BEVERAGE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3878747
(State of or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1111 East Tremont Avenue, Bronx, New York 10460
- ------------------------------------------ -----
(Address of Principal Executive Officers) (Zip Code)
Registrant's telephone number, including area code: (718) 409-2337
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of Class)
Unitsconsisting of one (1) share of Common Stock, par value
$.001 per share and one-half (1/2) Class A Redeemable
Common Stock Purchase Warrant
(Title of Class)
Class A Redeemable Common Stock Purchase Warrant
(Title of Class)
<PAGE>
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of the Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year were $8,572,985.
The aggregate market value of the voting stock held by non- affiliates
of the Registrant, computed by reference to the closing price of such stock as
of April 6, 1999, was approximately $12,657,000.
Number of shares outstanding of the issuer's Common Stock as of April
6, 1999 was 2,378,409.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE:
PART I
Item 1. BUSINESS.
Statements in this Form 10-K that are not statements of historical or
current fact constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other unknown
factors that could cause the actual results of the Company to be materially
different from the historical results or from any future results expressed or
implied by such forward-looking statements. In addition to statements that
explicitly describe such risks and uncertainties, readers are urged to consider
statements labeled with the terms "believes," "belief," "expects," "intends,"
"anticipates" or "plans" to be uncertain and forward-looking. The
forward-looking statements contained herein are also subject generally to other
risks and uncertainties that are described from time to time in the Company's
reports and registration statements filed with the Securities and Exchange
Commission.
General
Capital Beverage Corporation ("Capital" and the "Company")was
incorporated under the laws of the State of Delaware on December 5, 1995. In
January 1996, the Company acquired from Consolidated Beverage Corporation, the
right to become the exclusive distributor ("Pabst Distribution Rights") for
certain beer and malt liquor products ("Pabst Products") manufactured by Pabst
Brewing Company ("Pabst"). The consideration paid by the Company for the Pabst
Distribution Rights was One Million Six Hundred Thousand Dollars ($1,600,000),
payable Eight Hundred Thousand Dollars ($800,000) in cash at or prior to
closing, and the balance by delivery of a series of 120 promissory notes, each
in the amount of Ten Thousand Dollars ($10,000) (collectively, the "Pabst
Notes"). The Pabst Notes bear interest at 9% per annum, which interest is
included in the monthly $10,000 payments. If the Company defaults in payment of
any of the Pabst Notes, such default may result in a re-conveyance of the Pabst
Distribution Rights to Consolidated Beverage Corporation. Any such loss of the
Pabst Distribution Rights may have a materially adverse effect on the Company's
financial condition and results of operations.
Subject to the conditions set forth in the agreement pursuant to which
the Company acquired the Pabst Distribution Rights, the Company became the
exclusive distributor of the following Pabst Products in the following areas
(collectively, the "Territory"):
Borough of Manhattan: Pabst Blue Ribbon Beer, Pabst Extra Light Beer,
Pabst Light Beer, Pabst Genuine Draft Beer, Pabst 10E Draft Beer, Pabst Non Ala
Beer, Andeker Beer, Hamm's Beer, Hamm's Special Light Beer, Hamm's Genuine Draft
Beer, Big Bear Malt Liquor, Olde English "800" Malt Liquor, Olde English "800"
Genuine Draft Malt Liquor, "800" Ice Malt Liquor and Old Tankard Ale.
<PAGE>
Borough of the Bronx: Hamm's Beer, Hamm's Special Light Beer, Hamm's
Genuine Draft Beer, Olde English "800" Malt Liquor, Olde English "800" Genuine
Draft Malt Liquor and "800" Ice Malt Liquor.
Borough of Queens: In that portion of Queens County situated west and
north of the following described boundary lines: starting at a point in Flushing
Bay at the boat basin; thence southerly along Grand Central Parkway to the
intersection of Union Turnpike and Interborough Parkway to the western boundary
of Queens County, thence northerly along the western boundary of Queens County
to the East River, being the terminal of Queens County: Olde English "800" Malt
Liquor, Olde English "800" Genuine Draft Malt Liquor and "800" Ice Malt Liquor.
Borough of Staten Island: Pabst Blue Ribbon Beer, Pabst Extra Light
Beer, Pabst Light Beer, Pabst Genuine Draft Beer, Pabst 10E Draft Beer, Pabst
Non Ala Beer, Andeker Beer, Hamm's Beer, Hamm's Special Light Beer, Hamm's
Genuine Draft Beer, Big Bear Malt Liquor, Olde English "800" Malt Liquor, Olde
English "800" Genuine Draft Malt Liquor, "800" Ice Malt Liquor and Old Tankard
Ale.
Westchester County: In that portion of Westchester County situated
south of Interstate Highway No. 287, but not including the Towns of Ardsley and
Dobbs Ferry: Hamm's Beer, Hamm's Special Light Beer and Hamm's Genuine Draft
Beer.
State of New York: Old Tankard Ale.
Distributorship Agreement with Pabst
Duties and Responsibilities: At the time the Company acquired the Pabst
Distribution Rights, it simultaneously entered into an agreement with Pabst (the
"Distributorship Agreement") to become the exclusive distributor for Pabst
Products within the Territory. Pursuant to the Distributorship Agreement, the
Company is required to solicit and seek to service every retail account within
the Territory and to use its best efforts to market, promote and sell the Pabst
Products within such Territory. The Company is prohibited under the
Distributorship Agreement from selling or supplying Pabst Products to customers
located outside the Territory.
The responsibilities of the Company under the Distributorship Agreement
include, but are not limited to: (i) establishment and maintenance of a planned
overall sales and contact program on a continuing basis; (ii) establishment and
maintenance of a place of business within the Territory, including distribution
and warehouse facilities; (iii) establishment and maintenance of stock rotation
procedures for the Pabst Products in the warehouse, on trucks and in retail
accounts to the extent permitted by law and adherence to all stated policies of
Pabst in regard to overage Pabst Products (with the cost of replacing overage
products to be absorbed by the Company); (iv) establishment and maintenance of a
fleet of trucks; (v) cooperation with Pabst in the distribution of point-of-sale
materials necessary to support Pabst Products; (vi) personal involvement of
management of the Company in maintaining satisfactory contact with all accounts;
(vii) maintenance of adequate capital and cash flow to insure competitive
strength in facilities, inventory, equipment, personnel, advertising and
promotions; (viii) maintenance of a continuous in-house training program where
practicable and attendance at sales meetings and training schools scheduled by
Pabst; and (ix) maintenance of sufficient inventories and mix of package types
as reasonably requested by Pabst and justified by market conditions existing in
the Territory.
<PAGE>
Terms of Sale. Any orders for the Pabst Products placed by the Company
will be subject to the written approval of Pabst, and Pabst shall not be
obligated to fill such order. Sales made by Pabst to the Company shall be upon
such terms and prices as are approved by the Pabst Credit and Pricing
Departments from time to time in their discretion. The Company is required under
the Distributorship Agreement to grant to Pabst a security interest in the Pabst
Products to secure the performance of all obligations owed by it to Pabst.
Termination. Pabst may terminate the Distributorship Agreement
immediately upon the occurrence of any of the following events: (i) assignment
or attempted assignment for the benefit of creditors by the Company or
insolvency of the Company; (ii) institution of voluntary or involuntary
bankruptcy proceedings or for receivership or dissolution; (iii) non-payment by
the Company of sums past due and owing to Pabst, which sums continue to remain
owing upon the expiration of twenty (20) days after written notice of
non-payment to the Company by Pabst; (iv) fraudulent conduct of the Company; (v)
loss by the Company of any federal, state or local license required by law or
necessary in order to carry out the Company's duties as a distributor of Pabst
Products; (vi) attempted assignment of the Distributorship Agreement by the
Company or change in control of the Company's business without the prior written
consent of Pabst; (vii) violation by the Company of its obligations to sell and
distribute the Pabst's Products only within the Territory and/or its obligation
to solicit every retail account within the Territory and to use its best efforts
to market and promote Pabst Products and protect their quality.
Deficiency Termination. Pabst may also terminate the Distributorship
Agreement if any of the following occurs: (i) the Company fails to perform its
duties and responsibilities in the reasonable judgment of Pabst; or (ii) other
breaches by the Company of its obligations contained in the Distributorship
Agreement (a "deficiency termination"). In the case of any such default, Pabst
has agreed to provide the Company with notice of the manner in which such
default has occurred and to allow the Company not less than ninety (90) days to
cure such default. Moreover, in the event of any such deficiency termination,
Pabst will pay the Company an amount equal to twice the Company's pre-tax net
earnings arising from the sale and distribution of the Pabst Products during the
immediate preceding annual accounting period of the Company. In addition, Pabst
will purchase from the Company its entire inventory of saleable Pabst Products
at an amount equal to the cost of such inventory plus a handling charge of $.10
per case, $.50 per half-barrel and $5.25 per quarter-barrel. Upon request by the
Company, Pabst will purchase from the Company, at the then fair market value,
those local delivery vehicles regularly used by the Company in the sale and
distribution of Pabst Products.
Uniform Termination. Pabst also has the right to terminate the
Distributorship Agreement if Pabst simultaneously terminates all other
agreements that are substantially similar to the Distributorship Agreement
between the Company and Pabst.
<PAGE>
Partial Termination. Pabst has the right to assign any individual brand
of beer listed as a Pabst Product to another distributor if, in the reasonable
judgment of Pabst, the Company cannot or does not adequately promote and/or
market such brand of beer. Pabst also has the right to effect a termination of
the part of the Company's Territory if, in its reasonable judgment, the Company
does not adequately promote and market Pabst Products in that part of the
Territory.
Change of Control Termination. Pabst also has the right to terminate
the Distributorship Agreement if there is a change in ownership or control in
the Company's business which occurs without the prior written consent of Pabst
(which consent may not be unreasonably withheld). For purposes of the
Distributorship Agreement, the term "control" means record or beneficial
ownership of (i) thirty-three percent (33%) or more of the Company's voting
stock; (ii) thirty-three percent (33%) or more of its business; or (iii)
thirty-three percent (33%) or more interest in an entity which owns fifty-one
percent (51%) or more of the Company's voting stock.
Strategy
Management of the Company believes it has developed a strategy to
effectively market, sell and distribute beer Products throughout its marketing
Territory. This strategy includes plans to expand the Company's customer base;
to increase sales and marketing efforts; and to develop a distribution network
utilizing independent licensed distributor wholesalers ("Wholesalers") that will
result in reduced costs.
The Company has also finalized a new distribution agreement for the
brands of Pittsburgh Brewery. Based on this agreement the Company has
established a driver-sales program to market and distribute these brands
directly to our customers. Driver-sales are a proven method for building
distribution and creating consumer awareness. This program will allow the
Company to effectively generate demand for new and relatively unknown brands in
the marketplace without enormous expenditures in advertising dollars in contrast
to the major brand competitors.
The Company is also seeking to acquire other competing brand
wholesalers in order to achieve greater economics of scale and synergy. The
Company believes that such acquisitions would significantly lower the cost of
doing business and would also achieve the Company's goal of expanding retail
account access and obtaining brands that would complement rather than compete
with the Company's products.
Expanding Customer Base
In an effort to expand its customer base, the Company entered into an
agreement with the Pittsburgh Brewery in the last quarter of 1998. As a result
of this agreement the Company became the exclusive distributor for the
Pittsburgh Brewery brands in New York State.
<PAGE>
The Company has also utilized a federal excise tax credit available
through a relationship called an "alternating proprietorship" for a brand called
"Prime Time." This tax relief allows the Company to go to market at a lower
price and assist in competing with the major brands.
Based on initial results and the Company's belief in the long-term
growth potential of the "alternating proprietorship" concept, the Company has
filed for the federal and state approvals necessary to produce a similarly
priced beverage. Capital intends to own the label and contract with Pittsburgh
Brewing to produce the product.
At this time the federal government has approved both the permit and
the brand label and New York state approval is pending.
Upon receipt of state approval, Capital intends to distribute this
product on an exclusive basis throughout New York State. In addition, and for
the first time, Capital intends to commence distribution into adjacent states in
the Northeastern portion of the country and build a distribution network for the
new brand. The Company believes that this expansion into new territory will take
place some time in the second quarter of 1999.
Sales and Marketing
The Company employs sales people to obtain new accounts for beer
distribution and to increase sales of beverages to existing accounts for such
products in their marketing Territory. In addition to employing a sales staff,
the Company employs sales supervisors who recommend sales policies and incentive
programs to the Wholesalers in order to motivate these Wholesalers and their
sales personnel to sell products within the Territory. The Company also creates
promotional materials and has formulated marketing plans to increase sales by
the Company and the other Wholesalers within their marketing Territory. The
Company's sales personnel receive formal training both at Company and brewery
related seminars. The Company also intends to hire a training coordinator to
conduct seminars, covering such topics as draft technology, brewing processes
and role-playing. Sales personnel are responsible for preparing weekly
schematics on key store resets (both shelf and cooler) to secure the most
visible positions for maximum consumer exposure. Shelf allocations are
periodically reviewed under the supervision of the Vice-President of Sales and
Marketing to assure that space allocations and placement comply with retailer
policies, distribution philosophies, and recommendations from suppliers. The
Company has also implemented merchandising services to handle trade problems and
seek future sales opportunities.
The Company offers bonuses to sales personnel who market and sell
additional products to existing customers and maintain established goals on
reorders of products. This incentive program is designed to achieve long and
steady growth for additional product placements.
Consistent with the Company's plan to expand its customer base, it
expects to incur additional selling and marketing costs of approximately
$150,000 in the next fiscal year. Such estimates have been derived from
management's plans and budgets for 1999.
<PAGE>
Distribution
The Company has implemented a strategy to achieve effective
distribution of their products in the Territory. Under this strategy, the
Company acts as an exclusive distributor for their products, subject to policies
and procedures determined by the breweries, so that all orders for products come
through the Company. The products are sold into the marketplace in a variety of
ways. The Company has its existing pre-sell sales force. With the addition of
the brands of the Pittsburgh, Brewery the Company has added a driver-sales team
to its distribution and sales efforts. Beyond that and because of the size of
the Territory, the Company also relies on independent, licensed beverage
wholesalers that are responsible for hiring and maintaining their own staffs,
maintaining trucking fleets to distribute their products to the wholesale and/or
retail customers.
The Company's objective in utilizing these alternate means of
distribution to service each sector within the Territory is to increase
effective sales and distribution of all products while not incurring the total
expense of such sales and distribution efforts. Specific strategies include:
developing sales incentives with the cooperation of brewery representatives for
wholesalers that meet sales goals for both "on-premises" and "off-premises"
accounts; establishing a method of monitoring accounts within the Territory that
do not purchase the Company's products and establishing incentives for
wholesalers who reverse such pattern; scheduling monthly promotions for all
on-premises accounts; and utilizing and promoting "Brewery Rebate" programs.
Advertising
The Company intends to present to the trade and the consumer an ongoing
marketing campaign. To achieve this, the Company will establish and maintain an
advertising and marketing budget. Such budget will be used primarily to
participate in cooperative radio and billboard advertising programs established
by the breweries. A proposed budget of $.05 per case based upon monthly
estimated sales during Fiscal 1999 of 60,000 cases will enable the Company to
allocate $3,000 per month toward this advertising.
Employees
As of April 14, 1999, the Company employed a staff of 42, including two
(2) sales supervisors, one (1) sales manager, nine (9) sales people, and thirty
(30) managerial/administrative and distribution employees. The Company does not
have any collective bargaining agreements and has not experienced any work
stoppages as a result of labor disputes. The Company considers its employee
relations to be good.
Competition
The business conducted by the Company is highly competitive. As of
December 31, 1998, the Company competed with approximately ten (10) other
companies in the metropolitan New York area that are engaged in businesses that
are substantially similar to that engaged in by the Company. Some of the
Company's competitors are better capitalized, better financed, more established
and more experienced than the Company and may offer beer, beverage and related
products at lower prices or concessions than the Company. Should the Company not
be able to compete effectively, its results of operations and financial
condition could be materially adversely affected.
<PAGE>
Sources of Supply
In addition to purchasing Pabst Products directly from Pabst and
Pittsburgh products directly from Pittsburgh Brewery, the Company intends to
purchase products from a number of nationally known beer and beverage companies.
Since there are other manufacturers of alcoholic and non-alcoholic products sold
by the Company, the Company does not anticipate difficulty in obtaining such
products if its relationship with one or more of its suppliers terminates.
Management of the Company believes that except for Pabst and Pittsburgh, the
loss of any supplier will not adversely affect the Company's business.
Termination of the Company's Distributorship Agreement with Pabst and Pittsburgh
could have a materially adverse effect on the business of the Company.
Seasonality
The Company's business is subject to substantial seasonal variations.
Historically, a significant portion of the Company's net sales and net earnings
have been realized during the month of December and the months of May through
September, and levels of net sales and net earnings have generally been
significantly lower during the period from October through April (excluding
December). The Company believes that this is the general pattern associated with
other beverage distributors with which it competes. If for any reason the
Company's sales were to be substantially below seasonal norms during the month
of December and/or the months of May through September, the Company's
anticipated revenues and earnings could be materially and adversely affected.
Government Regulation
Wholesale and retail distribution of alcoholic beverages is regulated
by federal and state law. The Company's business is highly regulated by federal,
state and local laws and regulations. The company must comply with extensive
laws and regulations regarding such matters as state and regulatory approval and
licensing requirements, trade and pricing practices, permitted and required
labeling, advertising, promotion and marketing practices, relationships with
distributors and related matters. Since the Company intends to distribute such
alcoholic beverages in New York State, the Company is required to obtain
authorization from the Federal Bureau of Alcohol, Tobacco and Firearms (BATF)
and the New York State Liquor Authority (SLA). The Company has received from the
BATF and SLA its required licenses. In the experience of management, although
such agencies may impose conditions on the grant of such licenses, such licenses
are ordinarily granted. In the event, either the SLA or the BATF should impose
conditions on the grant of such licenses, the Company intends to take all steps
necessary to satisfy such conditions. There can be no assurance that the various
governmental regulations applicable to the beverage industry will not be changed
so as to impose more stringent requirements on the Company. If the Company was
to fail to be in compliance with any applicable governmental regulation, such
failure could cause the Company's licenses to be revoked and have a material
adverse effect on the business of the Company. The Company's beer operations may
be subject to increased taxation by federal, state and local governmental
agencies as compared with those of non-alcohol related business. In addition, if
federal or state excise taxes are increased, the Company may have to raise
prices to maintain present profit margins. The Company does not believe that a
price increase due to increased taxes will reduce unit sales, but the actual
effect will depend on the amount of any such increase, general economic
conditions and other factors. Higher taxes may reduce overall demand for beer,
and thus negatively impact sales of the Company's beer products.
<PAGE>
Item 2. PROPERTIES.
In 1998 the Company amended its lease with East Tremont Partners. The
lease amendment provides for a reduction in the leased area at its two
facilities located at 1111 East Tremont Avenue and 415 Devoe Avenue in the Bronx
from approximately 22,000 square feet at a rental of $10,000 per month to 10,000
square feet at 1111 East Tremont Avenue for $4,000 per month. East Tremont
Partners is a New York partnership in which Mr. Stella holds a one-sixth
interest. Management of the Company believes that the rent paid by the Company
under this lease is less than what it would be required to pay for similar
premises within the area in which the Company's administrative offices are
located.
The Company has also entered into an agreement to utilize the premises
at 425 Devoe Avenue which they feel will better serve their distributor needs.
The premises, 425 Devoe Avenue in the Bronx, have some 15,000 square feet which
cost the Company $7,000 per month. Management of the Company believes that the
rent paid by it under this lease is also less than the fair market value of
similar premises within the area in which such premises are located.
Management believes that the facilities used by it in the operation of
its business are adequately covered by insurance and are suitable and adequate
for their respective purposes.
Item 3. LEGAL PROCEEDINGS.
Management is not aware of any material legal proceedings pending
against the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) On November 10, 1998, the Company held its annual meeting of
Shareholders.
(b) At said meeting, the following five individuals were elected
by the following vote to serve as directors until the next
annual meeting of stockholders and until their successors are
elected and qualified:
<PAGE>
FOR AGAINST
Carmine Stella 2,160,062 6,602
Carol Russell 2,158,312 8,352
Robert A. Vessa 2,159,312 7,352
Dawn A. Collins 2,158,312 8,352
Joseph M. Luzzi 2,158,312 8,352
(c) At said meeting 2,161,164 shares of Common Stock were voted
in favor of and 4,700 shares of Common Stock were voted against a proposal to
ratify the appointment of Feldman, Sherb, Ehrlich & Co. to serve as the
independent certified public accountants for the 1999 fiscal year.
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Units, Common Stock and Class A Warrants commenced
trading on the Nasdaq SmallCap Market on the effectiveness of the Company's
Initial Public Offering on July 17, 1997 under the symbols "CBEVU," "CBEV" and
"CBEVW," respectively. The Common Stock and Warrants are regularly quoted and
traded on the Nasdaq SmallCap Market. The Company's Units were de-listed from
trading on August 29, 1997
The following table indicates the high and low prices for the Company's
Units, Common Stock and Class A Warrants for the period from July 17, 1997 to
December 31, 1998 based upon information supplied by the NASDAQ system. Prices
represent quotations between dealers without adjustments for retail markups,
markdowns or commissions, and may not represent actual transactions.
Units
1997 Fiscal Year Quoted Price
- ---------------- ------------
High Low
---- ---
First Quarter DID NOT TRADE
Second Quarter DID NOT TRADE
Third Quarter 9 7/8 61/2
Fourth Quarter DID NOT TRADE
1998 Fiscal Year Quoted Price
- ---------------- ------------
High Low
---- ---
First Quarter DID NOT TRADE
Second Quarter DID NOT TRADE
Third Quarter DID NOT TRADE
Fourth Quarter DID NOT TRADE
Common Stock
1997 Fiscal Year Quoted Price
- ---------------- ------------
High Low
---- ---
First Quarter DID NOT TRADE
Second Quarter DID NOT TRADE
Third Quarter 8 3/8 4 3/8
Fourth Quarter 61/2 5
<PAGE>
1998 Fiscal Year Quoted Price
- ---------------- ------------
High Low
---- ---
First Quarter 7 4.5
Second Quarter 7.47 6.37
Third Quarter 7.5 4.87
Fourth Quarter 6 4.5
Class A Warrants
1997 Fiscal Year Quoted Price
- ---------------- ------------
High Low
---- ---
First Quarter DID NOT TRADE
Second Quarter DID NOT TRADE
Third Quarter 3 3/8 3/4
Fourth Quarter 1 7/8 7/8
1998 Fiscal Year Quoted Price
- ---------------- ------------
High Low
---- ---
First Quarter 1.62 .62
Second Quarter 2.94 1.12
Third Quarter 3 1
Fourth Quarter 2 .75
On April 6, 1999 the closing price of the Common Stock as reported on
NASDAQ SmallCap Market was $6.69. On April 6, 1999 the closing price for the
Class A Warrant reported on NASDAQ SmallCap was $2.25. The Units did not trade.
On April 6, 1999 there were 13 holders of record of Common Stock.
Item 6. CAPITAL BEVERAGE CORPORATION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial operations and financial
conditions. This discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere herein.
Results of Operations
Year ended December 31, 1998 ("fiscal 1998") as compared to year ended December
31, 1997 ("fiscal 1997")
Net sales for the year ended December 31, 1998 were $8,572,985
reflecting a decrease of $5,114,649 or 37% from the $13,687,634 of net sales for
the year ended December 31, 1997. Net sales for 1998 were unfavorably impacted
primarily for the following two (2) reasons:
<PAGE>
1. Management's decision to eliminate its multi-brand sales and
concentrate solely on its contractual brands that it has
obtained from each supplier; and
2. Management also decided to decrease its sales to its largest
wholesale customers which they feel protects the Company from
a risk associated with such concentration, Capital has
subsequently bypassed these customers and increased its direct
selling relationship with its retail customer base.
Cost of sales was $7,984,408 or 93% of net sales, for fiscal 1998, as
compared to $12,400,645 or 90% of net sales, for fiscal 1997. The decrease in
dollar terms, of $4,416,237 in cost of sales from 1997 to fiscal 1998 reflects
the significantly lower net sales in fiscal 1998 as compared to fiscal 1997,
The Company's gross margin was $588,577 or 6.9% of net sales, in 1998
as compared to $1,286,989 or 9.4% of net sales in fiscal 1997. The decrease in
gross margin is due to the lower selling prices reflected to compete in its
marketing area of distribution. The gross margin was also negatively impacted by
the increase in redemption of used beverage containers, which the Company feels
it has not initiated deposit for. (Under the NYS returnable container act,
Capital has the responsibility under law to redeem all brands of containers
which it sells in its marketing territory.) Management expects an improvement in
both net sales and gross margin in the year 1999. Due to changes currently
implemented as well as the introduction of new product lines associated with our
relationship with Pittsburgh Brewery, Capital increased its control over these
new labels as well as its marketing territory. Management can give no assurance
that these conditions will maintain themselves over a guaranteed period, as a
result of increased competition and other risk factors.
Selling and delivery expenses were $310,410 in fiscal 1998 as compared
to $371,603 for fiscal 1997 reflecting a decrease due to its significant lower
net sales in 1998.
General and administrative expenses were $1,518,959 for fiscal 1998 as
compared to $1,455,264 for fiscal 1997. This represents an increase of $63,695
or 4% from fiscal 1997 to fiscal 1998. Amortization of intangible assets was
$160,000 in fiscal 1998, as compared to $160,000 in fiscal 1997. The cost of the
license is being amortized over ten (10) years. The increase in general and
administrative is due primarily to fees associated with being a public company
as well as additional costs associated with the due diligence process incurred
by management in reviewing potential acquisitions.
Interest expense was $57,522 for 1998, as compared to $97,245 for 1997.
This represents a decrease of $39,723. The decrease in interest expense is a
result of paying off debt.
<PAGE>
CAP Communications Ltd. was formed in November 1998 to explore, as an
ancillary to beverage sales, the rapidly expanding prepaid phone card market.
Within New York City, the bulk of phone cards sales occur within ethnic
neighborhoods, with major sales occurring within the Hispanic based communities.
Given Capital Beverage's well established position in local Hispanic retail
markets and its' connection with the business owners, phone cards may serve as a
significant source of new revenues to Capital's expanding beverage sales. The
synergism of the two, beer sales and phone cards, may prove to be the catalyst,
which sparks continued revenue growth for Capital Beverage. Working in
conjunction with Orion Telecommunications Corporation, with offices in New York,
Capital Beverage has begun an infrastructure development to explore this new
potential market. Orion has agreed to provide funding to Capital Beverage
through April 1999 which will allow Capital Beverage to determine what course of
action to take to make their card a success here in New York.
Material Change in Financial Condition, Liquidity and Capital Resources
The Company's working capital decreased from $3,706,851 at December 31,
1997 to $2,457,022 at December 31, 1998. The decrease of $1,249,829 was due to
direct result of the 1998 losses incurred in operations.
At December 31, 1998, the Company's primary resources of liquidity were
$2,088,741 in cash, $341,769 in accounts receivable and $579,099 in inventories.
Year 2000
The Company recognizes that a challenging problem exists in that many
computer systems worldwide do not have the capability of recognizing the year
2000 or the years thereafter. No easy technological "quick fix" has yet been
developed for this problem. While the issue is not of significance for the
Company because of its minimal reliance on computers, this "Year 2000 Computer
Problem" creates risk for the Company from unforeseen problems in its own
computer systems and from third parties with whom the Company deals. Such
failures of third parties' computer systems could have a material adverse effect
on the Company and its ability to conduct its business in the future.
Item 7. FINANCIAL STATEMENTS.
See financial statements following Item 13 of this Annual Report on
Form 10-KSB.
Item 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT.
Directors and Executive Officers
The names and ages of the directors, executive officers and significant
employees, and promoters of the Company are set forth below.
Name Age Position Held
Carmine N. Stella 46 President, Chief Executive Officer,
Chairman of the Board of Directors
Robert A. Vessa 48 Director
Anthony Stella 47 Vice President of Sales and Managing
Director
Carol Russell 42 Secretary, Treasurer and Director
Dawn A. Collins 29 Director
Joseph M. Luzzi 50 Director
- -----------------------
Carmine N. Stella - Mr. Stella has served as President, Chief Executive
Officer and Chairman of the Board of Directors of the Company since its
inception in December 1995. From 1991 to the present, Mr. Stella has been the
sole officer, director and shareholder of VSI, a wholesale and retail seller of
alcoholic and nonalcoholic beverages with $12,000,000 of sales during fiscal
1994 and $7,000,000 of sales during fiscal 1995. From 1986 to 1990, Mr. Stella
served as President and a director of Gotham Wholesale Beer Distributors, a beer
and non-alcoholic beverage wholesaler with annual sales in excess of
$20,000,000. Mr. Stella served as a President and Director of the Empire State
Beer Distributors Association from 1984 to 1988. Mr. Stella received a B.B.A. in
Accounting from Bernard M. Baruch College, New York, New York in 1973.
Robert A. Vessa - Mr. Vessa has served as Vice President - Sales and
Marketing since February 1996, and has been a Director of the Company since
October 29, 1997. From 1984, Mr. Vessa has acted as Business Affairs Coordinator
and a member of the Board of Directors of the Empire State Beer Distributors
Association. Mr. Vessa received a B.B.A. degree in Marketing and Advertising
from Bernard M. Baruch College, City University of New York in 1973.
<PAGE>
Anthony Stella. Mr. Stella has served as Vice President - Sales and
Marketing and an employee of the Company since inception. Mr. Stella has acted
as executive sales manager for Vito Santoro, Inc., Gotham Wholesale Beer, Inc.,
Miller Home Service, Inc. and College Point Beer Distributors over the past 15
years . Anthony Stella is the brother of Carmine Stella.
Carol Russell - Mrs. Russell has served as Secretary, Treasurer and a
Director of the Company since February 1996. From 1991. Mrs. Russell has also
served as Comptroller and Operations Manager of VSI from 1991 to the present.
Mrs. Russell graduated from Central Commercial High School in New York City in
1973.
Dawn A. Collins - Ms. Collins has been a Director of the Company since
October 29, 1997. Ms. Collins has also served as an accountant for Restaurant
Systems International, Inc. since 1995. From 1993 to 1995, Ms. Collins served as
an accountant for Ocean View Management. From 1991 to 1993, Ms. Collins was an
accountant with Barr Beatty Devlin & Co., Inc. Ms. Collins received a B.B.A. in
accounting from Baruch College in 1992.
Joseph M. Luzzi - Mr. Luzzi has been a Director of the Company since
October 29, 1997. Mr. Luzzi has also served as President, Chief Executive
Officer and Chairman of the Board of Directors of Boro Recycling, Inc. since its
inception in December 1980. From 1973 to 1980, Mr. Luzzi was the New York City
sales manager for the Sunshine Biscuit Company, a subsidiary of American Brands,
Inc. Mr. Luzzi attended New York City Community College from 1967 to 1969.
Compliance with Section 16(a) of The Securities Exchange Act of 1934
- ---------------------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent (10%) of a registered class of the Company's equity securities, to file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Except as provided below, to the Company's knowledge, based solely on
its review of the copies of such reports furnished to the Company during the
year ended December 31, 1998, all Section 16(a) filing requirements applicable
to its officers, directors and greater than ten percent beneficial owners were
satisfied.
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth the compensation paid to the Named
Executive Officers for the fiscal year ending December 31, 1998.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Awards Long-Term Compensation
______________________________________________________________ ______________________
(a) (b) (c) (d) (e) (f)
Other Annual Restricted Stock Option
Name and Principal Position Year Salary Compensation Award Grants
<S> <C> <C> <C> <C> <C>
Carmine N. Stella 1998 $307,799.19 -0- -0- -0-
President, Chief Executive Officer, 1997 $291,763.68 -0- -0- -0-
Chairman of the Board
Anthony Stella 1998 $175,579.19 -0- -0- -0-
Vice President of Sales 1997 $161,648.68 -0- -0- -0-
and Managing Director
Carol Russell 1998 $112,115.67 -0- -0- -0-
1997 $105,846.24 -0- -0- -0-
</TABLE>
The following table sets forth certain information with respect to
options granted during the last fiscal year to the Company's Chief Executive
Officer and the other executive officers named in the above Summary Compensation
Table.
<TABLE>
<CAPTION>
Option/SAR Grants In Last Fiscal Year
------------------------------------------
<S> <C> <C> <C> <C>
Name Number of Securities Percent of Total Exercise or
Underlying Options/SARS Granded to BaseePriceFiscal Year
Options/SARS Employees in Fiscal Year ($/Sh) Expiration Sate
Granted (#)
-0- -0- -0- -0-
</TABLE>
- ----------------------------------
(1) Options are exercisable for shares of Common Stock.
The following table sets forth certain information with respect to
options exercised during the last fiscal year by the Company's Chief Executive
Officer and the executive officers named in the Summary Compensation Table, and
with respect to unexercised options held by such persons at the end of the last
fiscal year:
<TABLE>
<CAPTION>
Aggregate Option/SAR Exercises In Last Fiscal Year And Fiscal Year-End Option/SAR Values
<S> <C> <C> <C> <C>
Shares Number of Securities Value of Unexercised in the Money
Name Acquired on Exercise(#)(1) Value1Realized $ Underlying Unexercised Options/SARs at
- ---------- -------------------------- ---------------- Options/SARS at FY-End (#) FY-End ($) (2)
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- ------------
-0- -0- -0- -0- -0- -0-
</TABLE>
<PAGE>
Each director of the Company is entitled to receive reasonable
out-of-pocket expenses incurred in attending meetings of the Board of Directors
of the Company. The members of the Board of Directors meet at least quarterly
during the Company's fiscal year, and at such other times duly
called.
Employment Agreements
The Company entered into an employment agreement with Mr. Stella on
October 1, 1996 which provides for a three-year term and includes annual
compensation of $300,000, plus certain fringe benefits including health and life
insurance.
Stock Option Plans and Agreements
The Company's 1996 Incentive Stock Option Plan was approved by the Board
of Directors and holders of Common Stock of the Company on June 19, 1996 to
provide for the grant of incentive stock options within the meaning of Section
422 of the Internal Revenue Code of 1986 to officers and employees of the
Company. A total of 350,000 shares of Common Stock has been authorized and
reserved for issuance under the 1996 Incentive Stock Option Plan, subject to
adjustment to reflect changes in the Company's capitalization in the case of a
stock split, stock dividend or similar event. No options have been granted under
the Company's 1996 Incentive Stock Option Plan. The 1996 Incentive Stock Option
Plan will be administered by the Compensation Committee, which has the sole
authority to interpret the 1996 Incentive Stock Option Plan, to determine the
persons to whom options will be granted, to determine the basis upon which the
options will be granted, and to determine the exercise price, duration and other
terms of options to be granted under the 1996 Incentive Stock Option Plan;
provided that, (i) the exercise price of each option granted under the 1996
Incentive Stock Option Plan may not be less than the fair market value of the
Common Stock on the day of the grant of the option, (ii) the exercise price must
be paid in cash and or stock upon exercise of the option, (iii) no option may be
exercisable for more than 10 years after the date of grant, and (iv) no option
is transferable other than by will or the laws of descent and distribution. No
option is exercisable after an optionee ceases to be employed by the Company or
a subsidiary of the Company, subject to the right of the Compensation Committee
to extend the exercise period for not more than 90 days following the date of
termination of an optionee's employment. If an optionee's employment is
terminated by reason of disability, the Compensation Committee has the authority
to extend the exercise period for not more than one year following the date of
termination of the optionee's employment. If an optionee dies holding options
that were not fully exercised, such options may be exercised in whole or in part
within one year of the optionee's death by the executors or administrators of
the optionee's estate or by the optionee's heirs. The vesting period, if any,
specified for each option will be accelerated upon the occurrence of a change of
control or threatened change of control of the Company
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth as of April 6, 1999, certain information
with respect to the beneficial ownership of Common Stock and Preferred Stock by
each person or entity known by the Company to be the beneficial owner of 5% or
more of such shares, each officer and director of the Company, and all officers
and directors of the Company as a group:
- --------------------------------------------------------------------------------
Name and Address of Beneficial Owner (1) Shares of Common Percentage (%) of
Stock Owned Common Stock
- --------------------------------------------------------------------------------
Carmine Stella(2) 409,091 17.2%
- --------------------------------------------------------------------------------
Anthony Stella(3) 77,273 3.3%
- --------------------------------------------------------------------------------
Carol Russell 0 0
- --------------------------------------------------------------------------------
Dawn Collins 0 0
- --------------------------------------------------------------------------------
Joseph Luzzi 0 0
- --------------------------------------------------------------------------------
Robert Vessa 0 0
- --------------------------------------------------------------------------------
All officers and directors as a group (six (6) persons)
486,364 20.5%
- --------------------------------------------------------------------------------
(1) The address of each Stockholder shown above except as otherwise
indicated is c/o Capital Beverage Corporation, 1111 East Tremont
Avenue, Bronx, New York 10460.
(2) Does not include (i) 300,000 shares of Common Stock that may be
acquired by Mr. Stella upon conversion of the 300,000 shares of Series
B Preferred Stock that were issued to Mr. Stella upon consummation of
the Merger; or (ii) 333,600 shares of Common stock that may be acquired
by Mr. Stella beginning July 17, 1998 upon exercise of 333,600
additional Class A Warrants held by Mr. Stella.
(3) Does not include 83,400 shares of Common Stock that may be acquired by
Mr. Anthony Stella beginning July 17, 1998 upon exercise of 83,400
Class A Warrants held by him.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In 1998 the Company amended its lease with East Tremont Partners. The
lease amendment provides for a reduction in the leased area at its two
facilities located at 1111 East Tremont Avenue and 415 Devoe Avenue in the Bronx
from approximately 22,000 square feet at a rental of $10,000 per month to 10,000
square feet at 1111 East Tremont Avenue for $4,000 per month. East Tremont
Partners is a New York partnership in which Mr. Stella holds a one-sixth
interest. Management of the Company believes that the rent paid by the Company
under this lease is less than what it would be required to pay for similar
premises within the area in which the Company's administrative offices are
located.
In 1998 the Company's carting and recycling services were provided by
an entity whose principal shareholder, Joseph Luzzi, is also a director of the
Company. Such services approximated $200,000.
<PAGE>
Although the Company has no present intention of entering into any
affiliated transactions, the Company believes that material affiliated
transactions between the Company and its directors, officers, principal
shareholders or any affiliates thereof should be in the future on terms no less
favorable than could be obtained from unaffiliated third parties.
With respect to each of the foregoing transactions, the Company
believes that the terms of such transactions were as fair to the Company as
could be obtained from an unrelated third party. Future transactions with
affiliates will be on terms no less favorable than could be obtained from
unaffiliated parties and will be approved by a majority of the independent
and/or disinterested members of the board of directors.
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Item a. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) Financial Statements.
Index
Independent Auditors' Report F - 2
Consolidated Financial Statement
Balance Sheet F - 3
Statements of Operations F - 4
Statements of Stockholders' Equity F - 5
Statements of Cash flows F - 6
Notes to Financial Statements F - 7 -10
(a) (2) Exhibits
A list and description of exhibits filed as part of this Form 10-KSB is
provided in the attached Exhibit Index.
Item 27. Exhibits.
1.1 Form of Underwriting Agreement.*
1.2 Form of Agreement Among Underwriters.*
1.3 Form of Selected Dealer Agreement.*
3.1 Certificate of Incorporation.*
3.2 Certificate of Designations, As Amended, Relating to Series A
Preferred Stock.*
3.3 Form of Certificate of Designations Relating to Series B Preferred
Stock.*
3.4 ByLaws.*
4.1 Specimen Common Stock Certificate.*
4.2 Specimen Series A Preferred Stock Certificate.*
4.3 Specimen Series B Preferred Stock Certificate.*
4.4 Specimen Class A Warrant Certificate.*
4.5 Form of Convertible Bridge Note.*
4.6 Form of Class A Warrants Issued to Certain Members of Management.*
4.7 Form of Class A Warrants Issued in 1996 Private Placement Financing.*
4.8 Form of Representative's Unit Purchase Option Agreement.*
4.9 Form of Warrant Agreement.*
10.1 Agreement with Consolidated Beverage Corp. relating to Pabst
Distribution Rights *
10.2 Form of Series of Promissory Notes to Consolidated Beverage
Corporation *
10.3 Bill of Sale from Consolidated Beverage Corp. to Registrant.*
10.4 Distributorship Agreement with Pabst Brewing Company *
<PAGE>
10.5 Agency Agreement with Vito Santoro, Inc.*
10.6 Employment Agreement between Registrant and Carmine N. Stella.*
10.7 1996 Incentive Stock Option Plan.*
10.8 Agreement with Carmine N. Stella relating to Option to acquire Vito
Santoro, Inc.*
10.9 Merger Agreement relating to Vito Santoro, Inc.*
* Incorporated by reference to Registrant's Registration Statement on
Form SB-2, and amendments thereto, Registration No. 333-9995 declared
effective on July 17, 1997.
(b) Reports on Form 8-K.
None.
. . . . . . . . . . . . . . .
<PAGE>
CAPITAL BEVERAGE CORPORATION
FINANCIAL STATEMENTS
INDEX
Page
Number
-------------------
INDEPENDENT AUDITORS' REPORT F - 2
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheet F - 3
Statements of Operations F - 4
Statements of Stockholders' Equity F - 5
Statements of Cash Flows F - 6
Notes to Financial Statements F - 7-10
F - 1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Capital Beverage Corporation
We have audited the accompanying consolidated balance sheet of Capital
Beverage Corporation as of December 31, 1998 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1998 and 1997. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, the consolidated financial position of Capital Beverage Corporation as
of December 31, 1998 and the consolidated results of its operations and its cash
flows for the years ended December 31, 1998 and 1997 in conformity with
generally accepted accounting principles.
Feldman Sherb Ehrlich & Co., P.C.
New York, New York
March 8, 1999
F - 2
<PAGE>
<TABLE>
<CAPTION>
CAPITAL BEVERAGE CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
ASSETS
<S> <C>
CURRENT ASSETS:
Cash $ 2,088,741
Accounts receivable - trade, net of allowance for doubtful
accounts of $60,000 341,769
Inventories 579,099
Prepaid expenses and other 156,599
-----------------
TOTAL CURRENT ASSETS 3,166,208
PROPERTY AND EQUIPMENT, less accumulated depreciation
of $21,890 53,859
DISTRIBUTION LICENSE, less accumulated amortization $480,000 1,120,000
OTHER ASSETS 75,662
-----------------
$ 4,415,729
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 214,739
Accrued expenses and taxes 156,203
Current portion of long-term debt 68,131
Accrued dividends on preferred stock 270,113
-----------------
TOTAL CURRENT LIABILITIES 709,186
-----------------
LONG-TERM DEBT 559,544
-----------------
STOCKHOLDERS' EQUITY:
7% Cumulative Series B Preferred Stock, par value $.01;
issued and outstanding 300,000 shares (Liquidation value $1,200,000) 3,000
Common stock, $ .001 par value; authorized 20,000,000 shares;
issued and outstanding 2,378,409 shares 2,379
Additional paid-in capital 5,365,573
Accumulated deficit (2,223,953)
-----------------
TOTAL STOCKHOLDERS' EQUITY 3,146,999
-----------------
$ 4,415,729
=================
See notes to financial statements.
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CAPITAL BEVERAGE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-----------------------------------
1998 1997
---------------- ---------------
<S> <C> <C>
NET SALES $ 8,572,985 $ 13,687,634
COST OF SALES 7,984,408 12,400,645
---------------- ---------------
GROSS PROFIT 588,577 1,286,989
---------------- ---------------
COSTS AND EXPENSES:
Selling and delivery 310,410 371,603
General and administrative 1,518,959 1,455,264
---------------- ---------------
1,829,369 1,826,867
---------------- ---------------
LOSS FROM OPERATIONS (1,240,792) (539,878)
INTEREST EXPENSE (57,522) (97,245)
INTEREST INCOME 116,790 63,101
---------------- ---------------
NET LOSS (1,181,524) (574,022)
PREFERRED STOCK DIVIDENDS (84,000) (49,613)
---------------- ---------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (1,265,524) $ (623,635)
================ ===============
LOSS PER SHARE - BASIC AND DILUTED $ (0.53) $ (0.35)
================ ===============
WEIGHTED AVERAGE NUMBER OF SHARES
USED IN CALCULATION OF BASIC AND
DILUTED LOSS PER SHARE 2,378,409 1,762,263
================ ===============
See notes to financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CAPITAL BEVERAGE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Total
Preferred Stock Common Stock Paid-In Accumulated Stockholders'
---------------------- -------------------
Shares Amount Shares Amount Capital Deficit Equity
---------- ----------- ---------- ------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1997 637,500 $1,218,000 1,240,909 $ 1,241 $ 348,333 $ (334,794)$ 1,232,780
Net loss - - - - - (574,022) (574,022)
Dividends payable to preferred shareholders - - - - - (49,613) (49,613)
Conversion of Series A Preferred Stock (337,500) (1,215,000) 337,500 338 1,214,662 -
Proceeds from issuance of units, less related costs - - 800,000 800 3,802,578 3,803,378
---------- --------- ---------- ------- --------- --------- -----------
Balance December 31, 1997 300,000 3,000 2,378,409 2,379 5,365,573 (958,429) 4,412,523
Net loss - - - - - (1,181,524) (1,181,524)
Dividends payable to preferred shareholders - - - - - (84,000) (84,000)
---------- --------- ---------- ------ -------- ---------- ------------
Balance December 31, 1998 300,000 $ 3,000 2,378,409 $ 2,379 $5,365,573 $(2,223,953)$ 3,146,999
========== ========= ========== ======= ========= ========== ============
</TABLE>
See notes to financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
CAPITAL BEVERAGE CORPORATION
STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,181,524) $ (574,022)
----------------- -----------------
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 164,925 167,292
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 441,331 (358,993)
(Increase) in inventories (152,809) (82,946)
(Increase) decrease in prepaid expenses (147,051) (8,027)
(Decrease) increase in accounts payable and accrued expenses 275,206 (49,870)
----------------- -----------------
581,602 (332,544)
----------------- -----------------
NET CASH USED IN OPERATING ACTIVITIES (599,922) (906,566)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment (8,726) (7,023)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock - 3,803,378
(Repayment) proceeds of bridge loan - (250,000)
Decrease (Increase) in deferred registration costs - 130,783
Decrease (Increase) in due from affiliate - 57,837
Distributions to stockholders (84,000) (49,613)
Payments of long-term debt (62,481) (61,853)
----------------- -----------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (146,481) 3,630,532
----------------- -----------------
INCREASE (DECREASE) IN CASH (755,129) 2,716,943
CASH - BEGINNING OF YEAR 2,843,870 126,927
----------------- -----------------
CASH - END OF YEAR $ 2,088,741 $ 2,843,870
================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 57,522 $ 117,245
================= =================
SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES:
Common Stock issued upon conversion of Series "A" Preferred Stock $ - $ 1,215,000
================= =================
See notes to financial statements.
F-6
</TABLE>
<PAGE>
CAPITAL BEVERAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1. DESCRIPTION OF BUSINESS
Capital Beverage Corporation (the "Company") was formed in December
1995 to operate as a wholesale distributor of beer and other beverages
in New York City. In December 1998, CAP communications, Ltd. ("Cap
Comm"), a wholly-owned subsidiary, was organized to market domestic and
long distance prepaid telephone calling cards to distributors and to
the general public. Cap Comm was in the development stage at December
31, 1998.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The financial statements include the
accounts of the Company and Cap Comm, its wholly-owned subsidiary. All
significant intercompany balances and transactions have been eliminated
in consolidation.
Inventories - Inventories of beer, other beverage products and prepaid
calling cards are stated at the lower of cost, determined by the
first-in, first-out method, or market.
Property and Equipment - Property and equipment are stated at cost and
are depreciated over the estimated useful lives of the related assets,
ranging from 5 to 39 years. Depreciation is computed on the
straight-line and accelerated methods for both financial reporting and
income tax purposes.
Income Taxes - The Company follows Statement of Financial Accounting
Standards No. 109 - Accounting for Income Taxes, which requires
recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax
assets and liabilities are based on the differences between the
financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are
expected to reverse.
F - 7
<PAGE>
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments - The Company considers its
financial instruments, which are carried at cost, to approximate fair
value due to their near-term maturities.
Distribution License - The Company's license to distribute certain
beverage products in New York City, is recorded at cost. Amortization
is provided on a straight-line basis over ten years.
Revenue Recognition - Wholesale sales are recognized at the time goods
are shipped.
Loss per Common Share - Net loss per common share is based on the
weighted average number of shares outstanding. Potential common shares
includable in the computation of fully diluted per share results are
not presented in the financial statements as their effect would be
anti-dilutive.
3. DISTRIBUTION LICENSE
The Company has acquired an exclusive license to distribute Pabst
Products within the "territory", as defined in the licensing agreement.
The Company paid $1,600,000, of which $800,000 was paid at the closing
and the balance in a note payable in 120 monthly installments of
$10,000 each, inclusive of interest at 9% per annum.
Maturities of the notes over the next five years are: 1999 - $68,131;
2000 - $74,292; 2001 - $81,011; 2002 - $88,338; 2003 - $96,327.
4. WARRANTS
In July 1997, the Company sold 800,000 units for $3,803,000 after
expenses. The units consisted of one share of Common Stock and one half
Class A Redeemable Common Stock Purchase Warrant. Two Class A warrants
entitle the holder to purchase one share of Common Stock at $6.25 per
share. The warrants are exercisable commencing July 17, 1998 and expire
on July 16, 2002. The warrants are redeemable by the Company at $.001
per warrant under terms as defined in the warrant agreement. At
December 31, 1998, 1,659,000 Class A warrants were issued and
outstanding.
F - 8
<PAGE>
The Company issued a unit purchase warrant to the underwriter for $100,
enabling the underwriter to purchase up to 80,000 units at an exercise
price of at least 120 percent of the initial offering price of the
units. The Company has reserved 120,000 shares of Common Stock to cover
the exercise of such warrant.
5. INCOME TAXES
At December 31, 1998, the Company had a net operating loss carryover of
$1,700,000 available as offsets against future taxable income, if any,
which expire at various dates through 2013. The Company has a deferred
tax asset of $700,000 arising from such net operating loss deductions
and has recorded a valuation allowance for the full amount of such
deferred tax asset.
The difference between the recorded income tax benefits and the
computed tax benefits using a 40 percent effective rate are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
<S> <C> <C>
Computed expected income tax (benefit) $ (473,000) $ (229,600)
Non-deductible items 17,000 19,600
Temporary differences ( 2,000) 6,000
Benefits not recorded 458,000 204,000
------------ ----------
$ - $ -
--------------- ----------
</TABLE>
6. LEASE COMMITMENTS
The Company renegotiated the lease of its warehouse and administrative
facilities in April 1998 thereby reducing its monthly rental payments
from $10,000 to $4,000 for the remainder of its lease term, which
expires in 2001. A principal shareholder in the company has a one-sixth
interest in the lessor. Additional warehouse space was acquired from a
customer on a month-to-month basis commencing October 1998. Rental
payments of $7,000 per month are offsettable against amounts due from
the customer until the balance is liquidated. Rent expense for 1998 and
1997 was $83,000 and $120,000, respectively.
F - 9
<PAGE>
7. CONCENTRATION OF CREDIT RISK
The Company is subject to credit risk through trade receivables and
short-term cash investments. Credit risk with respect to trade
receivables is mitigated to a degree because of management's knowledge
of the local marketplace and the relative creditworthiness of the
customers to which it extends credit. Short-term cash investments are
placed with high credit quality financial institutions, thereby
limiting the amount of credit exposure.
The Company's operations, and therefore its revenues are concentrated
in the New York City Metropolitan area. Additionally, the majority of
the Company's revenues are derived from the sale of alcoholic
beverages. Downturns in New York City's economic activities and/or
negative changes in the publics perception of the consumption of
alcoholic beverages may adversely affect the Company's operations.
8. MAJOR CUSTOMER AND SUPPLIER INFORMATION
Sales to a single customer in 1998 were 13% of net sales. Sales to
three customers were 51% of net sales in 1997. Purchases of Pabst
products were approximately $3,200,000 and $4,600,000 in 1998 and 1997,
respectively.
9. OTHER MATTERS
The Company's carting and recycling services are provided by an entity
whose principle shareholder is also a director of the Company. Such
services approximated $200,000 in 1998.
F - 10
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly executed on this 9th day of April, 1999.
CAPITAL BEVERAGE CORPORATION
By:/s/ Carmine Stella
Carmine Stella
President, Chief Executive Officer
and Chairman of the Board of Directors
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant in the capacities and on the dates
indicated
Signature Title Date
/s/ Carmine Stella Chief Executive Officer, April 9, 1999
- --------------------------
Carmine Stella President and Chairman of
the Board of Directors
/s/ Robert Vessa Director April 9, 1999
- ---------------------------
Robert Vessa
/s/Carol Russell Secretary and Treasurer April 9, 1999
- -----------------------------
Carol Russell and Director
/s/ Dawn Collins Director April 9, 1999
- ------------------------------
Dawn Collins
/s/ Joseph Luzzi Director April 9, 1999
- ------------------------------
Joseph Luzzi
/s/ Anthony Stella Vice President of Sales April 9, 1999
- -----------------------------
Anthony Stella and Managing Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0001020186
<NAME> CAPITAL BEVERAGE CORP.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 2,088,741
<SECURITIES> 0
<RECEIVABLES> 401,769
<ALLOWANCES> 60,000
<INVENTORY> 579,099
<CURRENT-ASSETS> 3,166,208
<PP&E> 75,749
<DEPRECIATION> 21,890
<TOTAL-ASSETS> 4,415,729
<CURRENT-LIABILITIES> 709,186
<BONDS> 0
0
3,000
<COMMON> 2,379
<OTHER-SE> 3,141,620
<TOTAL-LIABILITY-AND-EQUITY> 4,415,729
<SALES> 8,572,985
<TOTAL-REVENUES> 8,572,985
<CGS> 7,984,408
<TOTAL-COSTS> 7,984,408
<OTHER-EXPENSES> 1,829,369
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57,522
<INCOME-PRETAX> (1,181,524)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,181,524)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,181,524)
<EPS-PRIMARY> (.53)
<EPS-DILUTED> (.53)
</TABLE>
