UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______ to ________
Commission File Number: 0-13181
CAPITAL BEVERAGE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3878747
(State or other jurisdiction of (I.R.S. Employer)
incorporation or organization) Identification No.)
700 Columbia Street, Erie Basin, Building # 302, Brooklyn, New York 11231
(Address of principal executive offices) (Zip Code)
(718) 488-8500
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The number of shares common stock, $.001 par value, outstanding as of May 24,
2004 was 3,792,045.
CAPITAL BEVERAGE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited)
as of March 31, 2004 and December 31, 2003 3
Consolidated Statements of Operations
(unaudited) for the three month periods
ended March 31, 2004 and 2003 4
Consolidated Statements of Cash Flows (unaudited)
for the three month periods
ended March 31, 2004 and 2003 5
Notes to Consolidated
Financial Statements (unaudited) 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-11
Item 3. Quantitative and Qualitative Disclosures
About Market Risks 11
Item 4. Controls and Procedures 11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
Item 1. Financial Statements
CAPITAL BEVERAGE CORPORATION AND SUBSIDIARY
d/b/a DIVERSIFIED DISTRIBUTORS NETWORK
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
2004 2003
-------------- ---------------
(Unaudited)
CURRENT ASSETS:
Cash $ 191,438 $ 189,276
Accounts receivable - net of allowance for doubtful
accounts of $60,842 1,124,814 550,142
Inventories 3,171,483 2,500,218
Prepaid expenses and other current assets 22,627 35,473
-------------- ---------------
TOTAL CURRENT ASSETS 4,510,362 3,275,109
PROPERTY AND EQUIPMENT 145,292 155,825
DISTRIBUTION LICENSE 4,402,462 4,402,462
OTHER ASSETS 310,723 319,746
-------------- ---------------
$ 9,368,839 $ 8,153,142
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,330,222 $ 2,651,416
Accrued expenses and taxes 88,862 133,216
Revolving loans 1,534,128 1,882,185
Loan payable 2,500,000 2,500,000
Current portion of long-term debt 106,567 104,738
Current portion of capital lease obligations 36,847 31,876
Deposits payable 15,000 -
-------------- ---------------
TOTAL CURRENT LIABILITIES 8,611,626 7,303,431
-------------- ---------------
CAPITAL LEASE OBLIGATIONS 47,214 58,950
LONG-TERM DEBT 87,596 114,838
STOCKHOLDERS' EQUITY:
Preferred stock, no shares issued and outstanding - -
Common stock, $ .001 par value; authorized 20,000,000 shares;
issued and outstanding 3,792,045 shares 3,793 3,793
Additional paid-in capital 5,986,249 5,986,249
Deferred compensation - (91,724)
Accumulated deficit (5,367,639) (5,222,395)
-------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 622,403 675,923
-------------- ---------------
$ 9,368,839 $ 8,153,142
============== ===============
See notes to consolidated financial statements.
3
CAPITAL BEVERAGE CORPORATION AND SUBSIDIARY
d/b/a DIVERSIFIED DISTRIBUTORS NETWORK
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31,
-------------------------------
2004 2003
-------------- --------------
(Unaudited) (Unaudited)
NET SALES $ 7,749,854 $ 6,419,213
COST OF SALES 5,845,680 4,624,939
-------------- --------------
GROSS PROFIT 1,904,174 1,794,274
-------------- --------------
COSTS AND EXPENSES:
Selling and delivery 377,832 324,439
General and administrative 1,353,937 1,285,925
Non-cash compensation 91,724
Amortization and depreciation 37,648 20,924
-------------- --------------
1,861,141 1,631,288
-------------- --------------
INCOME FROM OPERATIONS 43,033 162,986
INTEREST EXPENSE, net (188,276) (145,635)
-------------- --------------
NET INCOME (LOSS) $ (145,243) $ 17,351
============== ==============
INCOMES (LOSS) PER SHARE - BASIC AND DILUTED $ (0.04) $ 0.00
============== ==============
WEIGHTED AVERAGE NUMBER OF SHARES
USED IN CALCULATION OF BASIC AND
DILUTED INCOME (LOSS) PER SHARE 3,792,045 3,792,045
============== ==============
See notes to consolidated financial statements.
4
CAPITAL BEVERAGE CORPORATION AND SUBSIDIARY
d/b/a DIVERSIFIED DISTRIBUTORS NETWORK
STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
---------------------------------
2004 2003
-------------- ----------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (145,243) $ 17,351
-------------- ----------------
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 129,372 20,924
Changes in assets and liabilities:
Accounts receivable (574,672) 70,914
Inventories (671,265) (378,924)
Prepaid expenses 12,846 (2)
Other assets 9,023 10,399
Deposits payable (15,000) -
Accounts payable and accrued expenses 1,634,452 550,030
Deferred sales - 43,636
-------------- ----------------
Total adjustments 524,756 316,977
-------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 379,513 334,328
-------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES - -
-------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Revolving loans (348,057) 31,121
Principal payments of capital lease obligations (3,881) (21,224)
Payment of accrued dividends on preferred stock - (25,000)
Payments of long-term debt (25,413) (428,896)
-------------- ----------------
NET CASH USED IN FINANCING ACTIVITIES (377,351) (443,999)
-------------- ----------------
NET INCREASE (DECREASE) IN CASH 2,162 (109,671)
CASH - BEGINNING OF PERIOD 189,276 120,242
-------------- ----------------
CASH - END OF PERIOD $ 191,438 $ 10,571
============== ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 144,113 $ 145,635
============== ================
See notes to consolidated financial statements.
5
CAPITAL BEVERAGE CORPORATION AND SUBSIDIARY
(d/b/a Diversified Distributors Network)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying financial statements reflect all adjustments which, in
the opinion of management, are necessary for a fair presentation of the
financial position and the results of operations for the interim
periods presented.
Certain financial information which is normally included in financial
statements prepared in accordance with generally accepted accounting
principles, but which is not required for interim reporting purposes
has been condensed or omitted. The accompanying financial statements
should be read in conjunction with the financial statements and notes
thereto contained in the Company's Annual Report on Form 10-KSB.
2. GOING CONCERN
The accompanying financial statements have been prepared on a
going-concern basis, which presumes that the Company will be able to
continue to meet its obligations and realize its assets in the normal
course of business.
As shown in the accompanying financial statements, the Company has a
history of losses with an accumulated deficit of $5,367,639 and
$5,222,395 at March 31, 2004 and December 31, 2003, respectively. The
Company also has a working capital deficiency of $4,101,264 and
$4,028,322 at March 31, 2004 and December 31, 2003, respectively. These
conditions raise substantial doubt about the Company's ability to
continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to ultimately attain profitable
operations, generate sufficient cash flow to meet its obligations, and
obtain additional financing as may be required.
6
3. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The financial statements include the
accounts of the Company and Cap Com, its wholly-owned subsidiary. All
significant intercompany balances and transactions have been eliminated
in consolidation.
Inventories - Inventories of beer and other beverage products are
stated at the lower of cost, determined by the first-in, first-out
method, or market.
Shipping and handling costs - The Company accounts for shipping and
handling costs as a component of "Cost of Sales". 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. Depreciation expense for the three months ended
March 31, 2004 and 2003 was $10,533 and $20,924, respectively.
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.
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. The license
has an indefinite life and is tested annually for impairment under SFAS
142. Pursuant to SFAS 142 the Company took an impairment of the
distribution license in the first quarter of 2002 in the amount of
$860,000 which was recorded as a cumulative effect of change in
accounting principle. It was determined that a further impairment of
the distribution license was not necessary during the year ended
December 31, 2003.
Revenue Recognition - Wholesale sales are recognized at the time goods
are shipped.
Income (loss) per Common Share - Net income (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.
7
Stock based compensation - Financial Accounting Statement No. 123,
Accounting for Stock Based Compensation, encourages, but does not
require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to
account for stock-based compensation using the intrinsic method
prescribed in Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations.
Accordingly, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at
the date of the grant over the amount an employee must pay to acquire
the stock. The Company has adopted the "disclosure only" alternative
described in SFAS 123 and SFAS 148, which require pro forma disclosures
of net income and earnings per share as if the fair value method of
accounting had been applied.
New Accounting Pronouncements - In April 2003, the FASB issued SFAS No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS 149"). This statement amends SFAS 133 to provide
clarification on the financial accounting and reporting of derivative
instruments and hedging activities and requires contracts with similar
characteristics to be accounted for on a comparable basis. The adoption
of SFAS 149 has not had a material effect on the Company's financial
position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity" ("SFAS 150"). SFAS 150 establishes standards on the
classification and measurement of financial instruments with
characteristics of both liabilities and equity. SFAS 150 became
effective for financial instruments entered into or modified after May
31, 2003. The adoption of SFAS 150 has not had a material effect on the
Company's financial position or results of operations.
4. DISTRIBUTION RIGHTS
The Company acquired these exclusive license rights to distribute
within the five boroughs of New York City valued at $5,218,462 as part
of the agreement with Prospect in May 2001. The rights consist of the
Pabst brands which make up approximately 73% of sales and include brand
names such as Colt 45, Champale and Old Milwaukee. The Pittsburgh
brands make up approximately 17% of sales and include brand names such
as Nighflight, Mustang Lager and Primetime. All other brands make up
less than 10% of the product line. The Company determined that these
rights have an indefinite life because the terms of the agreements are
indefinite. Furthermore, the franchise law of New York State, states
that any terminated distributor is entitled to get "fair market value"
for the brand distribution rights.
Effective January 1, 2002, the Company adopted SFAS Nos. 141 and 142.
SFAS 142 eliminates amortization of goodwill and certain other
intangible assets, but requires annual testing for impairment
(comparison of fair market value to carrying value). Fair value is
estimated using the present value of expected future cash flows and
other measures. The Company used a discount rate of 6%. The
transitional impairment test for the distribution rights resulted in an
non-cash charge of $860,000 in the first quarter of 2002 which was
recorded as a cumulative effect of change in accounting principle. It
was determined that a further impairment of the distribution license
was not necessary during the year ended December 31, 2002. The
impairment test concludes that the Company will recover the full amount
of the distribution license over 16 years based on forecasts which
begin with 2002 sales of the Company and actual sales as of January and
February 2003 which increase 5% annually thereafter for increased sales
and inflation.
On April 14, 2003, the Company purchased from Metropolitan Beer
Distributing Corp the exclusive right to purchase the brand rights of
Pabst Blue Ribbon Beer for the additional territory of the Bronx county
for $44,000. This permits the Company to promote, advertise, market,
sell and distribute at wholesale and retail this beverage in the five
boroughs of New York.
8
5. LOANS PAYABLE AND REVOLVING LOANS
The Company has a revolving loan with Entrepreneur Growth Capital, LLC
("EGC"). The loan limit is $2,500,000 and carries an interest rate of
prime plus 2%. The loan is collateralized by the Company's accounts
receivable, inventory, pledged property and distribution rights. The
outstanding balance was $1,534,128 and $1,882,185 at March 31, 2004 and
December 31, 2003, respectively.
On December 11, 2003, the Park Slope Group, LLC ("LLC"), a single
member limited liability company whose sole member is Addie Realty
Properties, Inc. ("Addie"), which in turn is wholly owned by certain
officers of the Company loaned the Company $2,500,000 maturing on
December 11, 2004 and accruing interest at 12% per annum.
Addie and the officers of the Company have entered into this
transaction in order to permit the Company to pay off its term loan
with EGC, to pay down a portion of its revolving credit promissory note
and agreement with ECG, and to restructure and amend its revolving
credit agreement with EGC upon terms more favorable than those
presently existing and available to the Company from EGC. Addie has
transferred certain real property to the LLC. The LLC agreed to borrow
$2,500,000, secured by a mortgage to Seaway Capital Corp. ("Seaway")
under credit terms more favorable than those which could presently be
obtained by Capital. The LLC is lending the net proceeds of its loan
from Seaway to Capital. Addie and the officers have also entered into
an agreement with EGC to pay the net proceeds of the Seaway loan to EGC
for the benefit of Capital to pay off its term loan with EGC, to pay
down a portion of Capital's revolving credit promissory note and
agreement with EGC, and to restructure and amend Capital's revolving
credit agreement with EGC upon terms more favorable than those
presently existing and available to Capital from EGC.
6. LONG-TERM DEBT
Long-term debt consists of the following on March 31, 2004:
Promissory note payable to Consolidated
paid to the State of New York,
due in monthly installments of
$10,000 including interest at
10% per annum $ 194,163
----------------
Less current portion (106,567)
----------------
$ 87,596
================
The entire long-term portion is due in 2005.
9
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking"
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. For
this purpose any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects" and
similar expressions are intended to identify forward-looking statements. These
statements involve unknown risks, uncertainties and other factors, which may
cause our actual results to differ materially from those implied by the forward
looking statements. Among the important factors that could cause actual results
to differ materially from those indicated by such forward-looking statements
include those risks identified in "Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operations" and other risks identified in
our Form 10-KSB for the year ended December 31, 2003 and presented elsewhere by
management from time to time. Such forward-looking statements represent
management's current expectations and are inherently uncertain. Investors are
warned that actual results may differ from management's expectations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Net sales for the quarter ended March 31, 2004 were $7,749,854, reflecting an
increase of $1,330,641 or 21% from the $6,419,213 of net sales for the quarter
ended March 31, 2003. This increase in the quarter ended March 31, 2004 resulted
primarily from the following events: management discounted various packages in
January and February to offset the negative impact to sales caused by the
extreme cold weather and transshipped product by various neighboring wholesalers
looking for added sales outside their authorized territories, and our
announcement that the brewery was raising our pricing on the number one selling
package on April 1st 2004 resulted in a favorable buy in from our customer base
in the month of March.
Cost of sales was $5,845,680 or 76% of net sales for the quarter ended March 31,
2004, as compared to $4,624,939 or 72% of net sales for the quarter ended March
31, 2003. The increase in cost of goods sold as a percentage of sales for the
quarter ended March 31, 2004, was due to the discounting which management deemed
necessary to offset transshipped product by neighboring wholesalers into our
territory of the Colt 45 product. This problem was detected in early January and
with the help of the Pabst Brewery a remedy was put in place going forward to
prevent this negative occurrence in the future. Management expects to return to
its traditional gross margin in the second quarter.
Selling, general and administrative expenses for the quarter ended March 31,
2004 were $1,731,769 as compared to $1,610,364 for the respective 2003 period,
reflecting an 8% increase in overall expenses. The increase in the three months
ended March 31, 2004 was due primarily to the substantial increase in our sales
volume in the month of March due to the anticipation of a price increase in
April of 2004.
Non-cash compensation of $91,724 is the amortization of deferred compensation
for warrants issued in the fourth quarter of 2003.
Interest expense for the three month period ended March 31, 2004 was $188,276 as
compared to $145,635 for the respective 2003 period. The increase in the three
month period ended March 31, 2004 was due primarily to the refinancing of our
credit facility in December of 2003. Management negotiated and finalized a new
line of credit paying a higher interest rate than previous, however, the
positive trade off is that there will be zero amortization on this loan for a
period of two years affording Capital a favorable impact on cash flow.
10
Liquidity and Capital Resources
Cash provided by operations for the three months ended March 31, 2004 was
$379,513. This was primarily due to the increase in accounts payable due to the
Pabst Brewery caused by an over abundance of purchases in inventory at the
current price anticipating a price increase in April 2004, offset primarily by
increases in accounts receivable and purchases of inventory.
Cash used in financing activities resulted primarily from payments of revolving
loans and long-term debt.
Working capital deficiency increased from ($4,028,322) at December 31, 2003 to
($4,101,264) at March 31, 2004 due to the rise in accounts payable impacted by
the future product price increase.
At March 31, 2004 the Company's primary sources of liquidity were $191,438 in
cash, $1,124,814 in accounts receivable and $3,171,483 in inventories.
Management believes it has sufficient sources of working capital to adequately
meet the Company's needs through the end of 2004.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Not applicable.
Item 4. Controls and Procedures
As of March 31, 2004, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer and Treasurer, of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based upon
that evaluation, our Chief Executive Officer and Treasurer concluded that our
disclosure controls and procedures were effective in enabling us to record,
process, summarize and report information required to be included in our
periodic SEC filings within the required time period.
There have been no changes in our internal control over financial
reporting that occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
11
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes Oxley Act of 2002
31.2 Certification of Treasurer pursuant to Section 302 of the
Sarbanes Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Treasurer
pursuant to Section 906 of the Sarbanes Oxley Act of 2002
(b) Reports on Form 8-K
During the first quarter of 2004, we did not file any reports on Form
8-K.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 21, 2004 CAPITAL BEVERAGE CORPORATION
(Registrant)
By:/s/Carmine N. Stella
-------------------------------------
Carmine N. Stella
President and Chief Executive Officer
(Principal Executive Officer)
By:/s/Carol Russell
-----------------------------------------
Carol Russell
Secretary and Treasurer (Principal
Financial Officer and Accounting Officer)
13