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 September 30, 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 November
15, 2004 was 3,792,045.
CAPITAL BEVERAGE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1. Unaudited Interim Financial Statements
Consolidated Balance Sheets(Unaudited)..........................2
Consolidated Statements of Operations(Unaudited)................3
Consolidated Statements of Cash Flows(Unaudited)................4
Notes to Consolidated Financial Statements(Unaudited).........5 to 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................9 to 10
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...............................11
Signatures................................................................12
1
Item 1. Financial Statements
CAPITAL BEVERAGE CORPORATION AND SUBSIDIARY
d/b/a DIVERSIFIED DISTRIBUTORS NETWORK
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
2004 2003
-------------- ---------------
(Unaudited)
CURRENT ASSETS:
Cash $ 54,965 $ 189,276
Accounts receivable - net of allowance for doubtful
accounts of $60,842 957,430 550,142
Inventories 2,967,317 2,500,218
Prepaid expenses and other current assets 60,790 35,473
-------------- ---------------
TOTAL CURRENT ASSETS 4,040,502 3,275,109
PROPERTY AND EQUIPMENT 138,957 155,825
DISTRIBUTION LICENSE 4,402,462 4,402,462
OTHER ASSETS 252,187 319,746
-------------- ---------------
$ 8,834,108 $ 8,153,142
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,130,089 $ 2,651,416
Accrued expenses and taxes 105,654 133,216
Revolving loans 2,266,943 1,882,185
Loan payable 2,500,000 2,500,000
Current portion of long-term debt 120,995 104,738
Current portion of capital lease obligations 56,423 31,876
-------------- ---------------
TOTAL CURRENT LIABILITIES 8,180,104 7,303,431
-------------- ---------------
CAPITAL LEASE OBLIGATIONS 18,278 58,950
LONG-TERM DEBT 29,571 114,838
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 (5,383,886) (5,222,395)
-------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 606,156 675,923
-------------- ---------------
$ 8,834,108 $ 8,153,142
============== ===============
See notes to consolidated financial statements.
2
CAPITAL BEVERAGE CORPORATION AND SUBSIDIARY
d/b/a DIVERSIFIED DISTRIBUTORS NETWORK
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -----------------------------
2004 2003 2004 2003
------------- --------------------------- ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
NET SALES $ 7,043,376 $ 7,712,658 $ 21,277,066 $ 21,376,471
COST OF SALES 5,083,885 5,847,659 15,446,912 15,823,556
------------- ----------- -------------- ------------
GROSS PROFIT 1,959,491 1,864,999 5,830,154 5,552,915
------------- ----------- -------------- ------------
COSTS AND EXPENSES:
Selling and delivery 399,969 377,604 1,160,957 1,039,204
General and administrative 1,313,987 1,343,773 4,084,798 3,974,812
Non-cash compensation - - 91,724 -
Amortization and depreciation 38,257 9,855 113,544 51,702
------------- ----------- -------------- ------------
1,752,214 1,731,232 5,451,024 5,065,718
------------- ----------- -------------- ------------
INCOME FROM OPERATIONS 207,277 133,767 379,130 487,197
INTEREST EXPENSE, net (184,666) (108,431) (540,621) (383,940)
------------- ----------- -------------- ------------
NET INCOME (LOSS) $ 22,611 $ 25,336 $ (161,491) $ 103,257
============= =========== ============== ============
INCOMES (LOSS) PER SHARE - BASIC AND DILUTED $ 0.01 $ 0.01 $ (0.04) $ 0.03
============= =========== ============== ============
WEIGHTED AVERAGE NUMBER OF SHARES
USED IN CALCULATION OF BASIC AND
DILUTED INCOME (LOSS) PER SHARE 3,792,045 3,792,045 3,792,045 3,792,045
============= =========== ============== ============
See notes to consolidated financial statements.
3
CAPITAL BEVERAGE CORPORATION AND SUBSIDIARY
d/b/a DIVERSIFIED DISTRIBUTORS NETWORK
STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
------------------------------------
2004 2003
---------------- ----------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (161,491) $ 103,257
---------------- ----------------
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 205,268 51,702
Changes in assets and liabilities:
Accounts receivable (407,288) (249,242)
Inventories (467,099) (1,121,516)
Prepaid expenses (25,317) (2,898)
Other assets (13,785) (37,764)
Accounts payable and accrued expenses 451,112 1,997,365
---------------- ----------------
Total adjustments (257,110) 637,647
---------------- ----------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (418,601) 740,904
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures (15,333) (36,550)
---------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (15,333) (36,550)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Revolving loans 384,758
Principal payments of capital lease obligations (16,125) 6,948
Payment of accrued dividends on preferred stock - (50,000)
Payments of long-term debt (69,010) (712,217)
---------------- ----------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 299,623 (755,269)
---------------- ----------------
NET DECREASE IN CASH (134,311) (50,915)
CASH - BEGINNING OF PERIOD 189,276 120,242
---------------- ----------------
CASH - END OF PERIOD $ 54,965 $ 69,327
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 456,631 $ 383,940
================ ================
See notes to consolidated financial statements.
4
CAPITAL BEVERAGE CORPORATION AND SUBSIDIARY
(d/b/a Diversified Distributors Network)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated 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
consolidated 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
consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto contained in
the Company's Annual Report on Form 10-KSB.
2. GOING CONCERN
The accompanying consolidated 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 consolidated financial statements, the
Company has a history of losses with an accumulated deficit of
$5,383,886 and $5,222,395 at September 30, 2004 and December 31, 2003,
respectively. The Company also has a working capital deficiency of
$4,139,602 and $4,028,322 at September 30, 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.
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.
5
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 nine months ended
September 30, 2004 and 2003 was $32,201 and $51,702, 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 nine months ended
September 30, 2004.
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.
6
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 - Management does not believe that
recently issued, but not yet effective accounting pronouncements if
currently adopted would have a material effect on the accompanying
consolidated financial statements.
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.
7
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 $2,266,943 and $1,882,185 at September 30, 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 September 30, 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 $ 150,566
----------------
Less current portion (120,995)
----------------
$ 29,571
================
The entire long-term portion is due in 2005.
8
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 nine months ended September 30, 2004 were $21,277,066,
reflecting a decrease of $99,405 or .47% from the $21,376,471 of net sales for
the nine months ended September 30, 2003. This decrease in the nine months ended
September 30, 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. Our third quarter sales were also
negatively impacted by an extremely cool and rainy summer.
Cost of sales was $ 15,446,912 or 73% of net sales for the nine months ended
September 30, 2004, as compared to $15,823,556 or 74% of net sales for the nine
months ended September 30, 2003. The cost of sales as a percentage of net sales
is on target with management projections. The first quarter of the year
reflected higher costs due to discounting and quantity purchases to drive sales
prior to our price increase on April 1, 2004. The second and third quarter
stabilized our costs of sales percentage due to an inventory buildup at lower
cost prior to our price increase.
Selling, general and administrative expenses for the nine months ended September
30, 2004 were $5,245,755 as compared to $5,014,016 for the respective 2003
period, reflecting a 5% increase in overall expenses. The increase in the nine
months ended September 30, 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, as well as the increased cost in union, insurance and
health benefits we incurred.
9
Non-cash compensation of $91,724 is the amortization of deferred compensation
for warrants issued in the fourth quarter of 2003.
Depreciation and amortization was $113,544 for the nine months ended September
30, 2004 as compared to $51,702 for the respective 2003 period. The increase of
$61,847 or 119% was attributable to amortization of an intangible asset of
$81,344 which we began amortizing during the 4th quarter of 2003, offset by a
decrease in depreciation expense.
Interest expense for the nine month period ended September 30, 2004 was
$540,621 compared to $383,940 for the respective 2003 period. The increase in
the nine month period ended September 30, 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 payments on this loan
for a period of two years affording Capital a favorable impact on cash flow.
Liquidity and Capital Resources
Cash used in operations for the nine months ended September 30, 2004 was
($418,601). This was primarily due to the increase in inventories and accounts
receivable offset by an increase in accounts payable.
Cash provided by financing activities resulted primarily from additional
borrowings on the Company's line of credit provided by the bank.
Working capital deficiency increased from ($4,028,322) at December 31, 2003 to
($4,139,602) at September 30, 2004 due to the net loss incurred for the nine
months.
At September 30, 2004 the Company's primary sources of liquidity were $54,965 in
cash, $957,430 in accounts receivable and $2,967,317 in inventories.
Management believes it has sufficient sources of working capital to adequately
meet the Company's needs through the end of 2004.
10
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Not applicable
Item 4. Controls and Procedures
As of September 30, 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.
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 third quarter of 2004, we did not file any reports on Form
8-K with the Securities and Exchange Commission.
11
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: November 15, 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)
12