SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REPORT ON FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2004.
[ ] 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
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(State of or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
700 Columbia Street, Erie Basin, Building # 302, Brooklyn, New York 11231
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(Address of Principal Executive Officers) (Zip Code)
Registrant's telephone number, including area code: (718) 488-8500
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)
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-K 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-K
or any amendment to this Form 10-K.[X]
Issuer's revenues for its most recent fiscal year were $27,615,065.00.
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 13, 2005, was approximately $473,011.25.
Number of shares outstanding of the issuer's Common Stock as of April
13, 2005 was 3,792,045.
DOCUMENTS INCORPORATED BY REFERENCE: None
Capital Beverage Corporation
2004 Form 10-K Annual Report
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS. .....................................................3
ITEM 2. PROPERTIES. ..................................................14
ITEM 3. LEGAL PROCEEDINGS. ...........................................14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON................................15
ITEM 6. SELECTED FINANCIAL DATA. .....................................16
ITEM 7. MANAGEMENT'S DISCUSSION ......................................17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLSOURES......................19
ITEM 8. FINANCIAL STATEMENTS. ........................................20
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ..........................20
ITEM 9A. CONTROLS AND PROCEDURES.......................................20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............21
ITEM 11. EXECUTIVE COMPENSATION........................................24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND ..........27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. ..............29
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES ......................30
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES....................31
SIGNATURES
CERTIFICATES
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
All statements included in this Annual Report, other than statements of
historical facts, regarding our strategy, future operations, financial position,
estimated revenues, projected costs, prospects, plans and objectives are
forward-looking statements. When used in this Annual Report, the words "will,"
"believe," "anticipate," "intend," "estimate," "expect," "project" and similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain these identifying words. We cannot
guarantee future results, levels of activity, performance or achievements, and
you should not place undue reliance on our forward-looking statements. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including the risks
described in Part I - Risk Factors, and elsewhere in this Annual Report. Our
forward-looking statements do not reflect the potential impact of any future
acquisitions, mergers, dispositions, joint ventures or strategic investments. In
addition, any forward-looking statements represent our expectation only as of
the day this Annual Report was first filed with the SEC and should not be relied
on as representing our expectations as of any subsequent date. While we may
elect to update forward-looking statements at some point in the future, we
specifically disclaim any obligation to do so, even if our expectations change.
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
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Distribution Rights was One Million Six Hundred Thousand Dollars ($1,600,000),
payable Eight Hundred Thousand Dollars ($800,000) in cash and the balance by
delivery of a series of 120 promissory notes, each in the amount of Ten Thousand
Dollars ($10,000) (collectively, the "Consolidated Notes"). The Consolidated
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 Consolidated
Notes, such default may result in a re-conveyance of the Pabst Distribution
Rights to Consolidated Beverage Corporation.
On April 30, 1999 Miller Brewing Company acquired certain brands of
alcoholic beverage from the Pabst Brewing Company resulting in a new
distribution agreement for certain brands held by Capital Beverage. The brands
of Olde English and Hamm's are the two brands which Capital Beverage now
contracts to purchase from the Miller Brewing Company on an exclusive basis.
On December 31, 2001 Capital sold its Miller products at the request of
the Miller Brewing Company in compliance with their national consolidation plan.
Phoenix Beverage paid Capital Beverage Two Million Six Hundred Fifty Thousand
Dollars $2,650,000 for that acquisition.
On July 18, 1998 and July 30, 1998 Capital Beverage signed two
distributor agreements with Pittsburgh Brewing Company ("Pittsburgh") to
distribute on an exclusive basis in the entire state of New York, the following
brands:
Brigade, Brigade Light, Brigade Ice, Brigade N/A, Prime Time
Lager, Prime Time Malt Liquor, Iron City, Iron City Light,
Light Twist Acapulco Lime, Iron City Twist, Rio Cherry, Old
German, Augustiner, Evil Eye Ale, Evil Eye Black Jack, Evil
Eye Amber Lager, Evil Eye Honey Brown
On June 29, 2001, pursuant to the Purchase Agreement, the Company
purchased all of the assets of Prospect's business which related to Prospect's
business of distributing beverages, including among other things, beer
distribution rights, properties, rights, leases, interests, goods and customer
lists of Prospect. The purchase price of the assets consisted of the assumption
by the Company of certain liabilities of Prospect and the issuance of an
aggregate of five hundred thousand (500,000) shares of the common stock of the
Company to the shareholders of Prospect. Inclusive with the acquisition came the
following national brands: Colt 45, Old Milwaukee, Schaefer, Schlitz, Champale,
Schmidts, Stroh, Piels, McSorleys and also an extensive list of various imports.
All of the distributor agreements are subject to termination on short
notice by the brewers. However, New York State has one of the strongest
franchise state laws in the country which provides for fair market value
compensation in the event of termination.
4
Recent Developments
On April 15, 2005, the Company entered into a letter of intent with Oak
Beverages Inc. ("Oak"), pursuant to which the Company agreed to sell to Oak its
exclusive distribution rights and saleable inventory. The proposed purchase
price for the exclusive distribution rights is $10,500,000 payable as follows:
(i) $7,500,000 to be paid at closing in immediately available funds, and (ii)
$3,000,000 to paid in 24 equal quarterly installments of $125,000 commencing 90
days following the date of the closing, inclusive of interest. In addition, Oak
will pay to the Company for the saleable inventory an amount equal to the price
paid by the Company for the inventory. According to the terms of the letter of
intent, Oak will not assume any liabilities or obligations of the Company. The
proposed transaction is subject to and conditioned upon the completion of Oak's
due diligence review of the Company, the negotiation and execution of a
definitive purchase agreement, and the satisfaction of certain conditions,
including the approval of the Company's stockholders and certain suppliers of
the Company's products. The Company believes that the definitive agreement will
be executed during the next few weeks and that the transaction will close during
the summer of 2005.
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
and increase sales and marketing efforts. The Company will continue to utilize
"pre-sell" sales people to drive distribution. In late 1999 and early 2000 the
Company added two additional brands from Pittsburgh. One of those brands, "Night
Flight" is owned and brewed by the Company. The Company applied for and received
a brewer's permit in mid 1999. As a brewer, the Company has broadened and
strengthened its strategic approach to a position as a dominant distribution
company. Owning and distributing its own product line allows the Company to
somewhat control its own destiny as it seeks to expand its product portfolio.
The Company will continue to seek other additions to its product lines
that compliment the brand portfolio.
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. At December 31, 2004 the outstanding
balance was $2,500,000.
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, 2005 and accruing
interest at 12% per annum.
5
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.
Expanding Customer Base
In 1999 the Company turned the Pittsburgh brand beer "Prime Time" and
"Night Flight" into well known brands with a substantial customer base in the
metropolitan New York area. In 2004, these brands accounted for over 405,584
case sales (16 oz. equivalents).
The Company has become an effective alternative for brands seeking
distribution in the difficult New York market. The Company will continue to look
at products that will compliment its existing brand portfolio and allow for
continued growth in its active customer base. To further this growth the Company
has initiated a plan to extend its direct distribution operation into the Long
Island, upstate New York markets as well as the neighboring states of
Pennsylvania, New Jersey and Connecticut.
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 oversee this effort. These supervisors
work on execution of the sales and marketing programs of the Company and
directly handle key accounts.
The Company creates promotional materials to assist the distribution
and sales effort.
The Company's sales personnel will continue to receive formal training
both at Company and brewery initiated seminars. The Company will continue to
utilize the efforts of a training coordinator to conduct seminars on such topics
as brewing processes, sales call role playing and time management.
The supervisors are also 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 V.P. of Sales and Marketing to assure that space
allocations and placement comply with retailer policies, distribution,
philosophies and recommendations from suppliers.
6
The Company offers bonuses to sales personnel who market and sell
additional product 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.
Distribution
The Company has implemented a strategy to achieve effective
distribution of their products in their territory. Under this strategy, the
Company acts as an exclusive distributor for its products subject to policies
and procedures determined by the brewers so that all orders for products come
through the Company. The products are sold into the marketplace in a variety of
ways.
The Company maintains its pre-sell sales force to increase its direct
distribution in the entire metropolitan market. Beyond that and because of the
size of its territory the Company also relies on independent licensed beverage
wholesalers that are responsible for hiring and maintaining their own staffs and
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 efforts.
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 various advertising programs established by the breweries. A
proposed budget of $.05 per case based upon actual sales during Fiscal 2004 and
2005 will enable the Company to allocate toward advertising.
Employees
As of December 31, 2004, the Company employed a staff of 99, including
9 sales managers, 27 sales people, 18 managerial/administrative and 45
distribution employees. The Company has a collective bargaining agreement with
Local 918 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, 2004, the Company competed with approximately 6 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.
7
Sources of Supply
In addition to purchasing products directly from Pabst and Pittsburgh
Brewing, the Company intends to purchase products from a number of nationally
known beer and beverage companies. Since there are other manufacturers of
alcoholic and nonalcoholic 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/or 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.
8
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.
Risk Factors
In addition to other information in this Annual Report on Form 10-K,
the following important factors should be carefully considered in evaluating the
Company and its business because such factors currently have a significant
impact on the Company's business, prospects, financial condition and results of
operations.
Risks related to our business
Our Business is Highly Competitive. The business conducted by the Company is
highly competitive. As of December 31, 2004, the Company competed with
approximately 6 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.
9
We Depend On Our Agreements With Pabst And Pittsburgh Brewing. The Company is
dependent on its relationship with Pabst for a significant portion of its
anticipated future revenues. The Company anticipates that a substantial portion
of such future revenues will be derived from such relationship. In addition to
purchasing products directly from Pabst and Pittsburgh Brewing, the Company
intends to purchase products from a number of nationally known beer and beverage
companies. Since there are other manufacturers of alcoholic and nonalcoholic
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/or Pittsburgh could have a materially adverse effect on the business of the
Company.
Our Business Is Subject To Seasonality And Fluctuation Of Quarterly Results Of
Operations. 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.
Our Business Is Subject To Government Regulation and the Possibility Of
Increased Governmental 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.
10
Our Business Is Subject To Possible Increase In Government Taxation. The sale of
alcoholic beverages is a business that is highly regulated and taxed at the
federal, state and local levels. 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 businesses. 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.
Our Financial Statements Include A Going Concern Opinion From Our Independent
Auditors. The Company received a going concern opinion on its financial
statements for fiscal 2004. Our auditors have stated that due to our lack of
profitability and our negative working capital, there is "substantial doubt"
about our ability to continue as a going concern. The going concern opinion from
our auditors may limit our ability to access certain types of financing, or may
prevent us from obtaining financing on acceptable terms.
Our Revenues May be Insufficient to Fund Our Operations and We May Need
Additional Financing. We believe that our anticipated cash flow from operations
could be adequate to fund our operations for the next fiscal year. There can be
no assurance, however, that we will not require additional financing prior to or
after such time. There can be no assurance that any additional financing will be
available to the Company on acceptable terms, or at all. If adequate funds are
not available, the Company may be required to delay, scale back or eliminate its
operational plans. Our inability to obtain additional financing could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Terrorist Attacks Or Acts Of War May Seriously Harm Our Business. Terrorist
attacks or acts of war may cause damage or disruption to our company, our
employees, our facilities and our customers, which could impact our revenues,
expenses and financial condition. The terrorist attacks that took place in the
United States on September 11, 2001 were unprecedented events that have created
many economic and political uncertainties, some of which may materially and
adversely affect our business, results of operations, and financial condition.
The potential for future terrorist attacks, the national and international
responses to terrorist attacks, and other acts of war or hostility have created
many economic and political uncertainties, which could materially and adversely
affect our business, results of operations, and financial condition in ways that
we currently cannot predict.
A General Economic Downturn May Reduce Our Revenues. Worldwide economic
conditions may affect demand for our products. Consumer purchases of our
products may decline during recessionary periods and also may decline at other
times when disposable income is lower.
11
Loss Of Key Personnel Could Adversely Affect Our Business. Our future success
depends to a significant degree on the skills, experience and efforts of Carmine
Stella, our President and Chief Executive Officer. The loss of the services of
Mr. Stella could have a material adverse effect on our business, results of
operations and financial condition. We also depend on the ability of our
executive officers and other members of senior management to work effectively as
a team. The loss of one or more of our executive officers and other members of
senior management could have a material adverse effect on our business, results
of operations and financial condition.
We May Not Be Able To Comply In A Timely Manner With All Of The Recently Enacted
Or Proposed Corporate Governance Provisions. Beginning with the enactment of the
Sarbanes-Oxley Act of 2002 in July 2002, a significant number of new corporate
governance requirements have been adopted or proposed. We believe that we
currently comply with all of the requirements that have become effective thus
far, and with many of the requirements that will become effective in the future.
Although we currently expect to comply with all current and future requirements,
we may not be successful in complying with these requirements at all times in
the future. In addition, certain of these requirements will require us to make
changes to our corporate governance practices. For example, one recent Nasdaq
rule approved by the Commission requires that a majority of our Board of
Directors be composed of independent directors by our 2004 Annual Meeting of
Stockholders. Currently, two (2) of the members of our Board of Directors are
considered to be independent. We may not be able to attract a sufficient number
of directors in the future to satisfy this requirement. Additionally, the
Commission recently passed a final rule that requires companies to disclose
whether a member of their Audit Committee satisfies certain criteria as a
"financial expert." We currently do not have an Audit Committee member that
satisfies this requirement and, we may not be able to satisfy this, or other,
corporate governance requirements at all times in the future, and our failure to
do so could cause the Commission or Nasdaq to take disciplinary actions against
us, including an action to delist our stock from the OTC Bulletin Board or any
other exchange or electronic trading system where our shares of common stock
trade.
Risks Related To Our Common Stock
Disappointing Quarterly Revenue Or Operating Results Could Cause The Price Of
Our Common Stock To Fall. Our quarterly revenue and operating results are
difficult to predict and may fluctuate significantly from quarter to quarter. If
our quarterly revenue or operating results fall below the expectations of
investors or securities analysts, the price of our Common Stock could fall
substantially.
Our Common Stock Is Particularly Subject To Volatility Because Of The Industry
That We Are In. The stock market in general has recently experienced extreme
price and volume fluctuations. In addition, the market prices of securities of
network marketing companies, have been extremely volatile, and have experienced
fluctuations that have often been unrelated or disproportionate to the operating
performance of such companies. These broad market fluctuations could adversely
affect the market price of our Common Stock.
12
Future Sales By Existing Security Holders Could Depress The Market Price Of Our
Common Stock. If our existing stockholders sell a large number of shares of our
Common Stock, the market price of the Common Stock could decline significantly.
Further, even the perception in the public market that our existing stockholders
might sell shares of Common Stock could depress the market price of the Common
Stock.
There Are Risks Associated With Our Stock Trading On The NASD OTC Bulletin Board
Rather Than A National Exchange. There are significant consequences associated
with our stock trading on the NASD OTC Bulletin Board rather than a national
exchange. The effects of not being able to list our securities on a national
exchange include:
- - Limited release of the market prices of our securities;
- - Limited news coverage of us;
- - Limited interest by investors in our securities;
- - Volatility of our stock price due to low trading volume;
- - Increased difficulty in selling our securities in certain states due to
"blue sky" restrictions; and
- - Limited ability to issue additional securities or to secure additional
financing.
There is No Assurance That An Active Public Trading Market Will Develop. There
has been an extremely limited public trading market for the Company's Common
Stock. There can be no assurances that a public trading market for the Common
Stock will develop or that a public trading market, if developed, will be
sustained. If for any reason a public trading market does not develop,
purchasers of the shares of Common Stock may have difficulty in selling their
securities should they desire to do so.
"Penny Stock" Regulations May Impose Certain Restrictions On The Marketability
of Our Securities. The Securities and Exchange Commission (the "Commission") has
adopted regulations which generally define "penny stock" to be any equity
security that has a market price (as defined) less than $5.00 per share, subject
to certain exceptions. Our Common Stock is presently subject to these
regulations which impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally those with assets in excess of
$1,000,000 or annual income exceeding $200,000, or $300,000 together with their
spouse). For transactions covered by these rules, the broker-dealer must make a
special suitability determination for the purchase of such securities and have
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a "penny stock", unless
exempt, the rules require the delivery, prior to the transaction, of a risk
disclosure document mandated by the Commission relating to the "penny stock"
market. The broker-dealer must also disclose the commission payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the "penny stock" held in the account and information on the
limited market in "penny stocks". Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell our securities and may negatively
affect the ability of purchasers of our shares of Common Stock to sell such
securities.
13
ITEM 2. PROPERTIES.
The main offices and warehouse location for products are at 700
Columbia Street, Erie Basin, Building #302, Brooklyn, New York 11231. There is
over 200,000 sq. ft. of usage at this location at a cost of $31,599.50 per
month. The lease on this location is with Erie Basin Marine Associates.
Management of the Company believes that the rent paid by the Company under this
lease is less than the fair market value of similar premises within the area in
which the Company's administrative offices 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.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered in this report.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock commenced trading on the Nasdaq SmallCap
Market on the effectiveness of the Company's Initial Public Offering on July 17,
1997 under the symbol "CBEV". The Common Stock is regularly quoted and traded on
the OTC Bulletin Board. The Company's securities were delisted by the NASDAQ
Stock Market on June 19, 2001.
The following table indicates the high and low closing prices for the
Company's, Common Stock for the period from January 1, 2002 to December 31, 2004
based upon information supplied by the OTC Bulletin Board. Prices represent
quotations between dealers without adjustments for retail markups, markdowns or
commissions, and may not represent actual transactions.
2002 Fiscal Year Quoted Price
- ---------------- ------------
High Low
---- ---
First Quarter .50 .11
Second Quarter 1.17 .35
Third Quarter .66 .17
Fourth Quarter .25 .07
2003 Fiscal Year Quoted Price
- ---------------- ------------
High Low
---- ---
First Quarter .21 .08
Second Quarter .43 .25
Third Quarter .40 .23
Fourth Quarter .51 .19
2004 Fiscal Year Quoted Price
- ---------------- ------------
High Low
---- ---
First Quarter .41 .25
Second Quarter .35 .28
Third Quarter .30 .16
Fourth Quarter .25 .17
15
On April 13, 2005 the closing price of the Common Stock as reported on
The OTC Bulletin Board was $.25. On April 13, 2005 there were 174 holders of
record of Common Stock.
Recent Sales of Unregistered Securities
We did not sell any unregistered securities during the fourth quarter
of the fiscal year covered in this report.
Dividends
We have not paid any cash dividends on our Common Stock to date and do
not anticipate declaring or paying any cash dividends in the foreseeable future.
In addition, future-financing arrangements, if any, may preclude or otherwise
restrict the payment of dividends.
Repurchases by the Company
During the fourth quarter of 2004, we did not repurchase any shares of
our Common Stock on our behalf or for any affiliated purchase.
ITEM 6. SELECTED FINANCIAL DATA.
The following table contains our selected consolidated financial data
and is qualified in its entirety by the more detailed consolidated financial
statements and notes thereto included elsewhere in this report. Historical
results are not necessarily indicative of future results.
December 31,
-------------- -------------- ------------- ------------- ------------
2004 2003 2002 2001 2000
-------------- -------------- ------------- ------------- ------------
Consolidated Statement of Operations Data:
Net sales $27,615,065 $28,300,623 $28,838,216 $21,337,676 $17,172,121
Gross profit 7,198,729 7,538,223 7,243,114 5,371,733 2,635,019
Selling and delivery 1,531,226 1,383,166 1,393,461 1,127,041 1,214,593
General and administrative expenses 5,777 5,187 10,710 5,335,778 2,418,094
Non-cash compensation 91,724 98,276 - - -
Impairment of distribution license 3,336,744 - - - -
Income (loss) from operations (3,538,101) 567,307 (436,479) (1,091,086) (997,658)
Interest expense (738,812) (543,136) (473,275) (341,985) (26,183)
Cumulative effect of change in accounting
principle - - (860,000) - -
Gain on sale of distribution rights 2,005,617 -
Net income (loss) (4,276,913) 24,171 (1,769,754) 572,546 (1,023,841)
Diluted income (loss) from continuing $(1.13) $0.01 $(0.55) $0.22 $(0.42)
operations per share:
Diluted weighted-average number of shares 3,792,045 3,792,045 3,229,545 2,628,409 2,528,409
outstanding:
Consolidated Balance Sheet Data (at end
of period):
Cash and cash equivalents $96,220 $189,276 $120,242 $2,272,786 $191,342
Working capital (4,915,762) (4,028,322) (2,418,137) (1,037,327) 592,543
Total assets 4,521,860 8,153,142 7,697,358 10,228,453 2,953,528
Total debt 4,630,999 4,601,761 4,472,282 5,181,933 485,252
Total stockholders' equity (deficit) (3,509,266) 675,923 553,476 2,274,140 1,321,594
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
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, 2004 Compared To Year Ended December 31, 2003
Net sales for the twelve months ended December 31, 2004 were
$27,615,065, reflecting a decrease of $685,558 or 2% from the $28,300,623 of net
sales for the twelve months ended December 31, 2003. This decrease in the twelve
months ended December 31, 2004 resulted primarily from the following events:
poor weather conditions throughout the year; transshipped product from outside
our authorized territory by neighboring Pabst wholesalers, and the increase in
price on our number one selling package, Colt 45 22oz.
Cost of sales was $20,416,336 or 73.9% of net sales for the twelve
months ended December 31, 2004, as compared to $20,762,400 or 73.4% of net sales
for the twelve months ended December 31, 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, third and fourth
quarters 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 twelve months
ended December 31, 2004 were $7,308,362 as compared to $6,872,640 for the
respective 2003 period, reflecting a 6% increase in overall expenses. The
increase in the twelve months ended December 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, as well as the increased cost
in union, transportation delivery cost, insurance and health benefits we
incurred.
Non-cash compensation of $91,724 and $98,276 for the year ended
December 31, 2004 and 2003, respectively is the amortization of deferred
compensation for warrants issued in the fourth quarter of 2003.
17
At December 31, 2004, we recorded an impairment of our distribution
license in the amount of $3,336,744. The decision to impair our distribution
license was based on our net loss for the year ended December 31, 2004. We had
revised our cash flow recoverability analysis to include the year ended December
31, 2004. The cash flow analysis showed that the Company will recover
approximately $1,021,000 twenty years from the balance sheet date.
Interest expense for the twelve month period ended December 31, 2004
was $738,812 compared to $543,136 for the respective 2003 period. The increase
in the twelve month period ended December 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 was a zero amortization on this
loan for a period of two years affording Capital a favorable impact on cash
flow.
Liquidity and Capital Resources
Year Ended December 31, 2004 Compared To Year Ended December 31, 2003
Cash used in operations for the twelve months ended December 31, 2004
was $(452,480). This was primarily due to the decrease in inventory coupled with
the increase in 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 ($4,915,762) at December 31, 2004 due to the net loss incurred for the
twelve months.
At December 31, 2004 the Company's primary sources of liquidity were
$96,220 in cash, $698,792 in accounts receivable and $2,097,338 in inventories.
Results of Operations
Year Ended December 31, 2003 Compared To Year Ended December 31, 2002
Net sales for the year ended December 31, 2003 were $28,300,623,
reflecting a decrease of $537,593 or 1.9% from the $28,838,216 of net sales for
the year ended December 31, 2002. The decrease in the year ended December 31,
2003 resulted primarily from the shift in product mix in our sales department in
two separate areas. The increased competition in the non exclusive segment of
imported Russian Beer as well as the saturation of new energy drinks in the New
York market.
18
Cost of sales was $20,762,400 or 73.4% of net sales for the year ended
December 31, 2003, as compared to $21,595,102 or 74.9% of net sales for the year
ended December 31, 2002. The decrease in cost of goods sold as a percentage of
sales for the year ended December 31, 2003, was due to changes in our
discounting policies which management put into effect in the last two quarters
of 2002, as well as favorable return rate on unredeemed deposits.
Selling, general and administrative expenses for the year ended
December 31, 2003 were $6,970,916 as compared to $7,679,593 for the respective
2002 period, reflecting a 9% improvement in overall expenses. The decrease in
the twelve months ended December 31, 2003 was due primarily to the substantial
cuts that management had implemented in the last half of the year 2002.
Personnel reductions were made in both selling and distribution. The management
has also reduced upper and middle management compensation between 10-30%. These
cost cutting measures are still in effect going forward in the year 2004.
Interest expense for the twelve month period ended December 31, 2003
was $543,136 as compared to $473,275 for the respective 2002 period. The
increase in the twelve month period ended December 31, 2003 was due primarily to
interest paid on the Entrepreneur Growth Capital line of credit which in some
cases were over the allowable caps which were in place in our present agreement.
Management has secured in December 2003 both a new revolver and term
credit facility which is more appropriate to serving Capital's present and
future growth plans.
Liquidity and Capital Resources
Year Ended December 31, 2003 Compared To Year Ended December 31, 2002
Cash provided by operations for the twelve months ended December 31,
2003 was $83,598. This was primarily due to the increase in accounts payable for
the 12 month period ended December 31, 2003.
Working capital deficiency increased from ($2,418,137) at December 31,
2002 to ($4,028,322) at December 31, 2003 due to the Company's decision to pay
off additional long term debt.
At December 31, 2003 the Company's primary sources of liquidity were
$189,276 in cash, $550,142 in accounts receivable and $2,500,218 in inventories.
19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable
ITEM 8. FINANCIAL STATEMENTS.
See financial statements following Item 15 of this Annual Report on
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There were no changes in or disagreements with our accountants on
accounting or financial disclosure during the period covered by this report.
ITEM 9A. CONTROLS AND PROCEDURES.
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Securities Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
Treasurer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, as ours are designed to do, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Treasurer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e). Based upon that evaluation, the Company's Chief Executive Officer
and Treasurer concluded that the Company's disclosure controls and procedures
are effective in enabling the Company to record, process, summarize and report
information required to be included in the Company's periodic SEC filings within
the required time period.
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.
20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
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 52 President, Chief Executive Officer,
Chairman of the Board of Directors
Anthony Stella 53 Vice President of Sales and Marketing
Carol Russell 49 Secretary, Treasurer and Director
Joseph M. Luzzi* 57 Director
Michael Matrsciani 49 Director
Daniel Matrisciani 58 Director and Vice President of Operations
Vito Cardinale* 45 Director
- -----------------------
* Member of the Compensation Committee and/or Audit Committee.
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.
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.
21
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 Controller and Operations Manager of VSI from 1991 to the
present. Mrs. Russell graduated from Central Commercial High School in New
York City in 1973.
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.
Michael Matrisciani - Mr. Matriscinai has been a Director of the
Company since June 2001. Mr. Matrisciani has been in the beverages distribution
his entire career. He managed a group of beverage centers for years before
entering into the wholesale business. Mr. Matrisciani started with Prospect
Beverages, Inc. as a sales manager and went on to become a principal and CFO.
He has certificates in finance and real estate from NYU in NYC. He is also a
Dale Carnegie graduate. Mr. Matrisciani is a board member of the New York
State Beer Wholesalers association and board member of SCI, an international
conservation and humanitarian organization.
Daniel Matrisciani - Mr. Matrisciani has been a Director and Vice
President of Operations since June 2001. Mr. Matrisciani has been involved in
the beer business for almost 40 years. He has successfully owned and operated,
with his partners a chain of Thrifty Beverage Centers in the NYC market place.
Mr. Matrisciani was a principal and director of wholesaler relations with
Prospect Beverages, Inc. a company he founded with his partners in 1981. Mr.
Matrisciani is a decorated veteran of the Vietnam conflict, having served as
a crew chief on a UH-1B helicopter gunship (huey).
Vito Cardinale - Mr. Cardinale has been a Director of the Company
since June 2001. Mr. Cardinale has held various positions as President and CEO
of Cardinale Enterprises Inc., a real estate holding and business venture
corporation. With holdings in various companies from 1981 to the present. Mr.
Cardinale is currently CEO of School Time Products, Inc., an educational
publisher and wholesaler distributor to the New York City Board of Education.
He is also President, and CEO, of Unlimited Office Products, Inc., an office
equipment company, PC and technology company selling throughout the New York
City metropolitan area. Mr. Cardinale holds a B.S. degree in Industrial and
Mechanical Engineering from the City University of N.Y. Mr. Cardinale has
held positions as President, Vice President and Board Member for various
organizations, such as Gateway Rotary, Chamber of Commerce, YMCA and Make
A Wish Foundation (Rainbow's Hope). He is also a life member of Safari Club
International, North American Hunting Club, Buck Masters, the Sheep
Foundation, Bass Masters and other various sporting organizations throughout the
world.
22
The Company has established a compensation committee and an audit
committee. The compensation committee reviews executive salaries, administers
any bonus, incentive compensation and stock option plans of the Company,
including the Company's 1996 Incentive Stock Option Plan, and approves the
salaries and other benefits of the executive officers of the Company. In
addition, the compensation committee consults with the Company's management
regarding pension and other benefit plans, and compensation policies and
practices of the Company. The compensation committee consists of Vito Cardinale
and Joseph Luzzi.
The audit committee reviews, among other matters, the professional
services provided by the Company's independent auditors, the independence of
such auditors from management of the Company, the annual financial statements of
the Company and the Company's system of internal accounting controls. The audit
committee also reviews such other matters with respect to the accounting,
auditing and financial reporting practices and procedures of the Company as it
may find appropriate or as may be brought to its attention.
The audit committee has reviewed and discussed the audited financial
statements included in the Company's Form 10-K for the fiscal year ended
December 31, 2004 with management. The audit committee has received the written
disclosures and the letter from the independent accountants reviewed by
Independence Standards Board Standard No. 1, as may be modified or supplemented,
and discussed with the auditors the auditors' independence.
Based on the review and discussions noted above, the audit committee
recommended to the Board of Directors that the audited financial statements be
included in the Company 2004 Form 10-K.
The audit committee consists of two members Vito Cardinale and Joseph
Luzzi, both of whom are "independent" for purposes of stock exchange listing
standards. The audit committee does not currently have an individual who
qualifies as an "audit committee financial expert" as defined by the rules of
the Securities and Exchange Commission.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics that applies to
our employees, officers (including our principal executive officer, principal
financial officer and controller) and directors. The Code of Business Conduct
and Ethics is not currently posted on our website but can be obtained free of
charge by sending a request to our Corporate Secretary at our address. Any
changes to or waivers under the Code of Business Conduct and Ethics as it
relates to our principal executive officer, principal financial officer,
controller or persons performing similar functions will be disclosed on our
website.
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.
23
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, 2004,
all Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were satisfied.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the compensation paid to the Named
Executive Officers for the fiscal years ending December 31, 2002, 2003 and 2004.
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
- -----------------------------------------------------------------------------------------------------------------------------------
Carmine N. Stella 2004 $208,796.88 -0- -0- -0-
President, Chief Executive Officer, 2003 $205,019.64 -0- -0- -0-
Chairman of the Board 2002 $241,105.07 -0- -0- -0-
Anthony Stella 2004 $133,272.52 -0- -0- -0-
Vice President of Sales 2003 $128,258.12 -0- -0- -0-
and Managing Director 2002 $151,709.02 -0- -0- -0-
Carol Russell 2004 $64,670.38 -0- -0- -0-
Secretary Treasurer 2003 $65,784.96 -0- -0- -0-
and Director 2002 $80,868.60 -0- -0- -0-
Daniel Matrisciani 2004 $131,797.02 -0- -0- -0-
Vice President of 2003 $133,075.80 -0- -0- -0-
Operations and Director 2002 $155,647.94 -0- -0- -0-
There were no options granted or exercised during the last fiscal year
to the Company's Chief Executive Officer and the other executive officers named
in the above Summary Compensation Table.
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.
24
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. The contract was renewed for another three years and expired in
October, 2003. In June 2004, Mr. Stella's employment agreement was extended for
an additional two years in accordance with the terms of his expired contract.
As of June 2001, the Company entered into an employment agreement with
Alex Matrisciani pursuant to which Mr. Matrisciani agreed to serve as the
Company's director of supplier relationships. The term of Mr. Matrisciani's
employment under the agreement is three years with options in favor of Mr.
Matrisciani to extend the term for an additional two years. In June 2004, Mr.
Matrisciani's employment agreement was extended for an additional two years. The
Company agreed to pay Mr. Matrisciani an annual base salary of $172,000. Mr.
Matrisciani's employment agreement contains other customary provisions including
provisions regarding confidentiality and solicitation.
As of June 2001, the Company entered into an employment agreement with
Daniel Martisciani pursuant to which Mr. Matrisciani agreed to serve as the
Company's vice president of operations. The term of Mr. Matrisciani's employment
under the agreement is three years with options in favor of Mr. Matrisciani to
extend the terms of an additional two years. In June 2004, Mr. Matrisciani's
employment agreement was extended for an additional two years. The Company
agreed to pay Mr. Matrisciani an annual base salary of $192,000. In addition to
the base salary, Mr. Matrisciani is entitled to receive bonuses based upon the
Company's performance. Mr. Matrisciani's employment agreement contains other
customary provisions including provisions regarding confidentiality and
solicitation.
As of June 2001, the Company entered into an employment agreement with
Michael Matrisciani pursuant to which Mr. Matrisciani agreed to serve as the
Company's director of administration. The term of Mr. Matrisciani's employment
under the agreement is three years in favor of Mr. Matrisciani to extend the
term for an additional two years. In June 2004, Mr. Matrisciani's employment
agreement was extended for an additional two years. The Company agreed to pay
Mr. Matrisciani an annual base salary of $192,000. In addition to the base
salary, Mr. Matrisciani is entitled to receive bonuses based upon the Company's
performance. Mr. Matrisciani's employment agreement contains other customary
provisions including provisions regarding confidentiality and solicitation.
As of June 2001, the Company entered into an employment agreement with
Monty Martisciani pursuant to which Mr. Matrisciani agreed to serve as the
Company's director of sales and marketing. The term of Mr. Matrisciani's
employment under the agreement is three years with options in favor of Mr.
Matrisciani to extend the terms of an additional two years. In June 2004, Mr.
Matrisciani's employment agreement was extended for an additional two years. The
Company agreed to pay Mr. Matrisciani an annual base salary of $192,000. In
addition to the base salary, Mr. Matrisciani is entitled to receive bonuses
based upon the Company's performance. Mr. Matrisciani's employment agreement
contains other customary provisions including provisions regarding
confidentiality and solicitation.
25
As of June 2001, the Company entered into an employment agreement with
Anthony Stella pursuant to which Mr. Stella agreed to serve as the Company's
vice president of sales and marketing. The term of Mr. Stella's employment under
the agreement is three years with options in favor of Mr. Stella to extend the
terms of an additional two years. In June 2004, Mr. Stella's employment
agreement was extended for an additional two years. The Company agreed to pay
Mr. Stella an annual base salary of $190,000. In addition to the base salary,
Mr. Stella is entitled to receive bonuses based upon the Company's performance.
Mr. Stella's employment agreement contains other customary provisions including
provisions regarding confidentiality and solicitation.
All financial consideration in each of the aforementioned employment
agreements were reduced by thirty percent (30%) for an undetermined period of
time.
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. 175,000 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.
26
The Company's 2003 Stock Option Plan, which was subject to shareholder
approval, was approved by the Compensation Committee and ratified by the Board
of Directors on December 30, 2003 and February 20, 2004, respectively. A total
of 1,500,000 shares of Common Stock were authorized and reserved for issuance
under the 2003 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. In December 2003, the Company granted 1,500,000 non-qualified
options to employees and officers of the Company pursuant to the 2003 Stock
Option Plan exercisable for 10 years at $.23 per share. Subsequently, the
Compensation Committee and Board of Directors elected not to submit the 2003
Stock Option Plan to the shareholders for approval in order to avoid the expense
of seeking shareholder approval. Since the 2003 Stock Option Plan was not
approved by the shareholders of the Company within twelve months and in
accordance with the terms of the plan, it automatically terminated. In
accordance with the terms of the plan, any options issued and outstanding prior
to termination, remain outstanding and continue to have full force and effect.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth as of April 13, 2005, certain
information with respect to the beneficial ownership of Common 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 Shares of Common Percentage (%) of
Beneficial Owner Stock Owned (3) Common Stock (3)
- ----------------- ---------------- ----------------
Carmine Stella 712,500 18.8%
Anthony Stella 237,500 6.3%
Carol Russell 0 0%
Joseph Luzzi 0 0%
Alex Matrisciani(2) 237,500 6.3%
Michael Matrisciani(2) 237,500 6.3%
Daniel Matrisiciani(2) 237,500 6.3%
Vito Cardinale 0 0%
Monty Matrisciani(2) 237,500 6.3%
Casimir Capital L.P. 1,000,000(4) 20.9%
100 Broadway, 11th Floor
New York, NY 10005
All officers and
directors as a group 1,900,000 50%
(nine (9) persons)
27
(1) The address of each Stockholder shown above except as otherwise
indicated is c/o Capital Beverage Corporation, 700 Columbia Street,
Erie Basin, Building # 302, Brooklyn, New York 11231.
(2) Alex Matrisciani, Michael Matrisciani, Daniel Matrisciani and Monty
Matrisciani are brothers. Daniel Matrisciani and Michael Mastrisciani
are each a director of the Company.
(3) Beneficial ownership as reported in the table above has been determined
in accordance with Item 403 of Regulation S-K of the Securities Act of
1933 and Rule 13(d)-3 of the Securities Exchange Act, and based upon
3,792,045 shares of Common Stock outstanding.
(4) Includes warrants to purchase an aggregate of 1,000,000 shares of
Common Stock, exercisable at $1.00 per share. Casimir Capital L.P. is
delinquent in its filing of Schedule 13D and Form 3 with the Securities
and Exchange Commission.
28
The following table presents information as of April 13, 2005 with
respect to compensation plans under which equity securities were authorized for
issuance by the Company.
Equity Compensation Plan Information
- ------------------------------- ---------------------------- --------------------------- ----------------------------
Number of securities
remaining available for
Number of Securities to be future issuance under
issued upon exercise of equity compensation plans
outstanding options, Weighted-average exercise (excluding securities
warrants and rights price of outstanding reflected in column (a)
options, warrants and
Plan category rights
- ------------------------------- ---------------------------- --------------------------- ----------------------------
(a) (b) (c)
- ------------------------------- ---------------------------- --------------------------- ----------------------------
Equity compensation plans
approved by security holders 0 -- --
- ------------------------------- ---------------------------- --------------------------- ----------------------------
Equity compensation plans not
approved by security
holders 1,850,000 $.62 0
- ------------------------------- ---------------------------- --------------------------- ----------------------------
Total 1,850,000 $.62 0
- ------------------------------- ---------------------------- --------------------------- ----------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
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, 2005 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.
29
In 2002, the Company's recycling services were provided by an entity
whose principal shareholder, Joseph Luzzi, is also a director of the Company.
The services provided were compensated through the value of scrap material
picked up by Boro Recycling.
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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit and Other Professional Fees
Consistent with the Audit Committee's responsibility for engaging our
independent auditors, subsequent to January 1, 2005, all audit and permitted
non-audit services require pre-approval by the Audit Committee. Subsequent to
January 1, 2005, all services performed by the auditors will be pre-approved.
During the fiscal years ended December 31, 2004 and 2003 fees for
services provided by Sherb & Co., LLP were as follows (rounded to the nearest
$1,000):
Audit Fees
The aggregate fees billed to the Company by Sherb & Co., LLP for the
audit of our annual financial statements for the years ended December 31, 2004
and for the review of our quarterly reports on Form 10-Q for the same year
totaled $43,500. The aggregate fees billed to the Company by Sherb & Co., LLP
for the audit of our annual financial statements for the years ended December
31, 2003 and for the review of our quarterly reports on Form 10-Q for the same
year totaled $41,000.
30
Audit Related Fees
There were no fees paid to Sherb & Co., LLP for services rendered in
connection with employee benefit plan audits, SEC registration statements, due
diligence, assistance and consultation on financial accounting and reporting
standards during the years ended December 31, 2004 and 2003.
Financial Information Systems Design and Implementation Fees
There were no fees paid to Sherb & Co., LLP for financial information
systems design or implementation during the years ended December 31, 2004 and
2003.
Tax Fees
There were no fees paid to Sherb & Co., LLP for services rendered in
connection with tax audits and appeals, advise on mergers and acquisition and
technical assistance during the years ended December 31, 2004 and 2003.
All Other Fees
There were no additional fees paid to Sherb & Co., LLP for professional
fees related to all other services during fiscal years ended December 31, 2004
and 2003.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1) Financial Statements.
Index
Independent Auditors' Report F - 2
Consolidated Financial Statement
Consolidated Balance Sheet F - 3
Consolidated Statements of Operations F - 4
Consolidated Statements of Stockholders' Equity F - 5
Statements of Cash flows F - 6
Notes to Financial Statements F - 7 -18
(a)(2) Financial Statement Schedules.
31
(b) 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 *
10.5 Agency Agreement with Vito Santoro, Inc.*
10.6 Employment Agreement between Registrant and Carmine N. Stella.*
32
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.*
10.10 Asset Purchase Agreement, dated as of May 4, 2001 between Registrant
and Prospect Beverage Corporation (Incorporated by reference to
Registrant's Current Report on Form 8-K filed on May 14, 2001.)
10.11 Voting Agreement, dated as of June 29, 2001, among Carmine Stella and
Anthony Stella, Monty Matrisciani, Michael Matrisciani, Daniel
Matrisciani and Alex Matrisciani, Registrant and Prospect Beverage
Corporation (Incorporated by reference to Registrant's Current Report
on Form 8-K/A filed on December 31, 2001.)
10.12 Employment Agreement, dated as of June 29, 2001, between Registrant and
Alex Matrisciani. (Incorporated by reference to Registrant's Annual
Report on Form 10-KSB for the annual period ending December 31, 2001.)
10.13 Employment Agreement, dated as of June 29, 2001 between Registrant and
Daniel Matrisiciani. (Incorporated by reference to Registrant's Annual
Report on Form 10-KSB for the annual period ending December 31, 2001.)
10.14 Employment Agreement, dated as of June 29, 2001, between Registrant and
Michael Matrisiciani. (Incorporated by reference to Registrant's Annual
Report on Form 10-KSB for the annual period ending December 31, 2001)
10.15 Employment Agreement, dated as of June 29, 2001, between Registrant and
Monty Matrisiciani. (Incorporated by reference to Registrant's Annual
Report on Form 10-KSB for the annual period ending December 31, 2001.)
10.16 2003 Stock Option Plan
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
* 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.
(c) Reports on Form 8-K.
None.
33
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 15th day of April, 2005.
CAPITAL BEVERAGE CORPORATION
By:/s/ Carmine N. Stella
------------------------------
Carmine N. 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 N. Stella Chief Executive Officer, April 15, 2005
- ----------------------------- President and Chairman of
Carmine N. Stella the Board of Directors
/s/Carol Russell Secretary and Treasurer April 15, 2005
- ---------------------------- and Director
Carol Russell
/s/ Joseph Luzzi Director April 15, 2005
- ----------------------------
Joseph Luzzi
/s/ Anthony Stella Vice President of Sales April 15, 2005
- ----------------------------- and Managing Director
Anthony Stella
/s/ Michael Matrisciani Director April 15, 2005
- ----------------------------
Michael Matrisciani
/s/ Daniel Matrisciani Director and Vice April 15, 2005
- ---------------------------- President of Operations
Daniel Matrisciani
/s/ Vito Cardinale Director April 15, 2005
- ----------------------------
Vito Cardinale
CAPITAL BEVERAGE CORPORATION AND SUBSIDIARY
(d/b/a Diversified Distributors Network)
FINANCIAL STATEMENTS
INDEX
Page Number
-------------------
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 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 to F - 18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Capital Beverage Corporation and Subsidiary
Brooklyn, NY
We have audited the accompanying balance sheet of Capital Beverage Corporation
and Subsidiary as of December 31, 2004 and the related statements of operations,
stockholders' deficit and cash flows for the years ended December 31, 2004 and
2003. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capital Beverage Corporation
and Subsidiary as of December 31, 2004 and the results of their operations and
their cash flows for the years ended December 31, 2004 and 2003, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred significant
losses as more fully described in Note 2. These issues raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Sherb & Co., LLP
--------------------
Certified Public Accountants
New York, New York
April 12, 2005
With respect to Note 15
April 15, 2005
F - 2
CAPITAL BEVERAGE CORPORATION AND SUBSIDIARY
-------------------------------------------
d/b/a DIVERSIFIED DISTRIBUTORS NETWORK
--------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
ASSETS
------
Year Ended December 31,
------------------------------------------
2004 2003
------------------- -------------------
CURRENT ASSETS:
Cash $ 96,220 $ 189,276
Accounts receivable, net 698,792 550,142
Inventories 2,097,338 2,366,988
Prepaid expenses and other current assets 147,905 168,703
------------------- -------------------
TOTAL CURRENT ASSETS 3,040,255 3,275,109
PROPERTY AND EQUIPMENT 127,765 155,825
DISTRIBUTION LICENSE 1,065,718 4,402,462
OTHER ASSETS 288,122 319,746
------------------- -------------------
$ 4,521,860 $ 8,153,142
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Cash overdraft $ 367,424 $ -
Accounts payable 2,846,455 2,651,416
Accrued expenses and taxes 117,328 133,216
Revolving loans 2,007,356 1,882,185
Loan payable 2,500,000 2,500,000
Current portion of long-term debt 104,738 104,738
Current portion of capital lease obligations 12,716 31,876
------------------- -------------------
TOTAL CURRENT LIABILITIES 7,956,017 7,303,431
------------------- -------------------
CAPITAL LEASE OBLIGATIONS 56,204 58,950
LONG-TERM DEBT 18,905 114,838
STOCKHOLDERS' EQUITY (DEFICIT):
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 (9,499,308) (5,222,395)
------------------- -------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (3,509,266) 675,923
------------------- -------------------
$ 4,521,860 $ 8,153,142
=================== ===================
See notes to consolidated financial statements.
F-3
CAPITAL BEVERAGE CORPORATION AND SUBSIDIARY
-------------------------------------------
d/b/a DIVERSIFIED DISTRIBUTORS NETWORK
--------------------------------------
CONSOLIDATED STATEMENTS OF OPERATION
------------------------------------
Year Ended December 31,
-------------------------------------------------------------------
2004 2003 2002
----------------- ----------------- -----------------
NET SALES $ 27,615,065 $ 28,300,623 $ 28,838,216
COST OF SALES 20,416,336 20,762,400 21,595,102
----------------- ----------------- -----------------
GROSS PROFIT 7,198,729 7,538,223 7,243,114
----------------- ----------------- -----------------
COST AND EXPENSES
Selling and delivery 1,531,226 1,383,166 1,393,461
General and administrative 5,777,136 5,489,474 6,237,042
Non-cash compensation 91,724 98,276 49,090
Impairment of distribution license 3,336,744 - -
----------------- ----------------- -----------------
10,736,830 6,970,916 7,679,593
----------------- ----------------- -----------------
INCOME (LOSS) FROM OPERATION (3,538,101) 567,307 (436,479)
INTEREST EXPENSE, net (738,812) (543,136) (473,275)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE - - (860,000)
----------------- ----------------- -----------------
NET INCOME (LOSS) $ (4,276,913) $ 24,171 $ (1,769,754)
================= ================= =================
NET INCOME (LOSS) PER SHARE:
Basic $ (1.13) $ 0.01 $ (0.55)
================= ================= =================
Diluted $ (1.13) $ 0.01 $ (0.55)
================= ================= =================
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic 3,792,045 3,792,045 3,229,545
================= ================= =================
Diluted 3,792,045 3,802,045 3,229,545
================= ================= =================
See notes to consolidated financial statements.
F-4
CAPITAL BEVERAGE CORPORATION AND SUBSIDIARY
-------------------------------------------
d/b/a DIVERSIFIED DISTRIBUTORS NETWORK
--------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------
Preferred Stock Common Stock
----------------------------- --------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
Balance December 31, 2001 - $ - 3,178,409 $ 3,179
Issuance of common stock for services - - 613,636 614
Net loss - - - -
------------ ------------ ------------ ------------
Balance December 31, 2002 - - 3,792,045 3,793
Issuance of warrants for services - - - -
Amortization of deferred compensation - - - -
Net income - - - -
------------ ------------ ------------ ------------
Balance December 31, 2003 - - 3,792,045 3,793
Amortization of deferred compensation - - - -
Net loss - - - -
------------ ------------ ------------ ------------
Balance December 31, 2004 - $ - 3,792,045 $ 3,793
============ ============ ============ ============
See notes to consolidated financial statements.
F-5
CONTINUED..
CAPITAL BEVERAGE CORPORATION AND SUBSIDIARY
-------------------------------------------
d/b/a DIVERSIFIED DISTRIBUTORS NETWORK
---------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - continued
-----------------------------------------------------------------------
Additional Total
Paid-In Deferred Accumulated Stockholders'
Capital Compensation Deficit Equity (deficit)
-------------- ---------------- --------------- --------------------
Balance December 31, 2001 $ 5,747,773 $ - $ (3,476,812) $ 2,274,140
Issuance of common stock for services 48,476 - - 49,090
Net loss - - (1,769,754) (1,769,754)
-------------- ---------------- --------------- --------------------
Balance December 31, 2002 5,796,249 - (5,246,566) 553,476
Issuance of warrants for services 190,000 (190,000) - -
Amortization of deferred compensation - 98,276 - 98,276
Net income - - 24,171 24,171
-------------- ---------------- --------------- --------------------
Balance December 31, 2003 5,986,249 (91,724) (5,222,395) 675,923
Amortization of deferred compensation - 91,724 - 91,724
Net loss - - (4,276,913) (4,276,913)
-------------- ---------------- --------------- --------------------
Balance December 31, 2004 $ 5,986,249 $ - $ (9,499,308) $ (3,509,266)
============== ================ =============== ====================
See notes to consolidated financial statements.
F-5
CAPITAL BEVERAGE CORPORATION AND SUBSIDIARY
-------------------------------------------
d/b/a DIVERSIFIED DISTRIBUTORS NETWORK
--------------------------------------
STATEMENTS OF CASH FLOWS
------------------------
Year Ended December 31,
-------------------------------------------------------------
2004 2003 2002
----------------- ----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (4,276,913) $ 24,171 $ (1,769,754)
----------------- ----------------- -----------------
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 151,851 66,991 114,018
Non-cash compensation 91,724 98,276 49,090
Impairment of distribution license 3,336,744 - -
Change in accounting principle - - 860,000
Changes in assets and liabilities:
Accounts receivable (148,650) (69,142) (99,810)
Inventories 269,650 18,592 (470,688)
Prepaid expenses 20,798 (161,780) 2,328
Other assets (76,835) (163,344) (11,355)
Accounts payable and accrued expenses 179,151 269,834 76,828
----------------- ----------------- -----------------
Total adjustments 3,824,433 59,427 520,411
----------------- ----------------- -----------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (452,480) 83,598 (1,249,343)
----------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of distribution license - (44,000) -
Return of leased equipment - - (50,468)
Capital expenditures (15,332) (34,067) (5,200)
----------------- ----------------- -----------------
NET CASH USED IN INVESTING ACTIVITIES (15,332) (78,067) (55,668)
----------------- ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Revolving loans 125,171 (86,694) 284,196
Cash overdraft 367,424 - -
Payments to officer - - (19,148)
Principal payments of capital lease obligations (21,906) (15,976) (62,882)
Payment of accrued dividends on preferred stock - (50,000) (75,000)
Payments of notes payable (95,933) - (136,361)
Proceeds from loan payable - 2,500,000 -
Payments of long-term debt - (2,283,827) (838,338)
----------------- ----------------- -----------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 374,756 63,503 (847,533)
----------------- ----------------- -----------------
INCREASE (DECREASE) IN CASH (93,056) 69,034 (2,152,544)
CASH - BEGINNING OF YEAR 189,276 120,242 2,272,786
----------------- ----------------- -----------------
CASH - END OF YEAR $ 96,220 $ 189,276 $ 120,242
================= ================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 688,812 $ 543,136 $ 475,577
================= ================= =================
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Return of leased equipment $ - $ - $ 83,189
================= ================= =================
See notes to consolidated financial statements.
F-6
CAPITAL BEVERAGE CORPORATION AND SUBSIDIARY
(d/b/a Diversified Distributors Network)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 and 2002
1. DESCRIPTION OF BUSINESS
Capital Beverage Corporation (the "Company" or "Capital") 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 Com"), a wholly-owned subsidiary, was organized to market
domestic and long distance prepaid telephone calling cards to
distributors and to the general public.
The Company entered into an Asset Purchase Agreement, dated May 4, 2001
(the "Agreement"), to acquire certain assets and liabilities of
Prospect Beverages Inc., a New York corporation ("Prospect"). Prospect
is a Brooklyn based Pabst Distributor of Colt-45 Malt Liquor and other
beverages. The Company is presently doing business as Diversified
Distributors Network.
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 $9,499,308 at December
31, 2004 and, as of that date, a working capital deficiency of
$4,915,762. 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.
Shipping and handling costs - The Company accounts for shipping and
handling costs as a component of "Cost of Sales". Cash and Cash
Equivalents - Cash and cash equivalents include cash on hand and cash
in banks in demand and time deposit accounts with maturities of 90 days
or less.
F-7
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 years ended December
31, 2004, 2003 and 2002 was $42,800, $62,680 and $67,768, 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, however the Company impaired the Distribution
License by $3,336,744 during the year ended December 31, 2004. (See
Note 4)
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. The outstanding options excluded in the
computation amounted to 1,850,000 at December 31, 2004 and 2003 and
350,000 at December 31, 2002.
F-8
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.
In December 2004, the FASB issued Statement 123r (revised 2004) which
is a revision of FASB Statement No. 123, Accounting for Stock-Based
Compensation. This Statement supersedes APB Opinion No. 25, Accounting
for Stock Issued to Employees, and its related implementation guidance.
This Statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for
goods or services. It also addresses transactions in which an entity
incurs liabilities in exchange for goods or services that are based on
the fair value of the entity's equity instruments or that may be
settled by the issuance of those equity instruments. This Statement
focuses primarily on accounting for transactions in which an entity
obtains employee services in share-based payment transactions. This
Statement requires a public entity to measure the cost of employee
services received in exchange for an award of equity instruments based
on the grant-date fair value of the award (with limited exceptions).
That cost will be recognized over the period during which an employee
is required to provide service in exchange for the award--the requisite
service period (usually the vesting period). FASB 123r will have a
significant impact on the consolidated financial statements of the
Company through the expensing of stock option grants. However the
Company does not anticipate granting any stock options in the
foreseeable future.
F-9
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 a
non-cash charge of $860,000 in the first quarter of 2002 which was
recorded as a cumulative effect of change in accounting principle.
At December 31, 2004, the Company recorded an impairment of their
distribution license in the amount of $3,336,744. The decision to
impair the distribution license was based on the Company's net loss for
the year ended December 31, 2004. The Company had revised its cash flow
recoverability analysis to include the year ended December 31, 2004.
The cash flow analysis showed that the Company will recover
approximately $1,021,000 twenty years from the balance sheet date.
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.
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. At
December 31, 2004 the outstanding balance was $2,007,356.
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, 2005 and accruing interest at 12% per annum. During the
year ended December 31, 2004, we paid $350,000 in interest which
included interest for December 2003 as well as an additional $25,000
interest payment to extend the loan one year.
F-10
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
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 at December 31:
2004 2003
-------------------- -----------------
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 $ 123,643 $ 219,576
-------------------- -----------------
Less current portion (104,738) (104,738)
-------------------- -----------------
$ 18,905 $ 114,838
==================== =================
7. INCOME TAXES
At December 31, 2004 the Company had a net operating loss carryover of
$4,364,000 available as offsets against future taxable income, if any,
which expire at various dates through 2024. The Company has a deferred
tax asset of $1,790,000 arising from net operating loss deductions and
temporary differences and has recorded a valuation allowance for the
full amount of such deferred tax asset.
F-11
The following is a reconciliation between the expected income tax
expense (benefit), assuming a statutory Federal tax rate of 35%, and
the actual income tax expense (benefit):
Year Ended December 31,
-----------------------------------------------------------
2004 2003 2002
------------------- -------------- ----------------
Expected income tax (benefit) $ (1,497,000) $ 10,000 $ (360,000)
State tax benefit, net of Federal effect (214,000) - -
Impairment of distribution license 1,335,000 - -
Deferred compensation 37,000 - -
Utilization of net operating
loss - (10,000) -
carryforward
Other permanent differences 36,000 - -
Increase in valuation allowance 303,000 - 360,000
------------------- -------------- ----------------
$ - $ - $ -
=================== ============== ================
The following is a schedule of the Company's net deferred tax assets as
of:
December 31,
--------------------------------------------
2004 2003
------------------- -------------------
Net operating loss carryforward $ 1,746,000 $ 1,443,000
Allowance for doubtful accounts 24,000 24,000
Other 20,000 20,000
Valuation allowance (1,790,000) (1,487,000)
------------------- -------------------
Net deferred tax asset $ - $ -
=================== ===================
8. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consist of the following as of
December 31:
2004 2003
----------------- -------------------
Leasehold improvements $ 87,059 $ 87,059
Machinery and equipment 283,346 268,013
----------------- -------------------
370,405 355,072
Less accumulated depreciation (242,640) (199,247)
----------------- -------------------
$ 127,765 $ 155,825
================= ===================
F-12
9. LEASE COMMITMENTS
In June 2001 the Company moved to the offices and warehouse facilities
of Prospect. This space is under a noncancellable operating lease which
requires minimum monthly payments of $31,600 through 2012. Rent expense
for the year ended December 31, 2004, 2003 and 2002 was $311,686,
$360,511 and $347,052, respectively.
10. 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 maintains its cash
balances at various financial institutions. These balances are insured
by the Federal Deposit Insurance Corporation up to $100,000. The
Company has not experienced any losses in such accounts and believes it
is not exposed to any significant credit risk on cash on deposit.
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.
11. MAJOR SUPPLIER INFORMATION
Purchases from major suppliers were approximately $15,933,480,
$16,718,000 and $14,512,000 in 2004, 2003 and 2002, respectively.
12. CONSULTING AGREEMENT
On October 2, 2003, the Company entered into a consulting agreement
with Casimir Capital L.P. ("Casimir") in which Casimir will act as
exclusive strategic and financial advisor to the Company. The initial
term shall be from October 2, 2003 to March 24, 2004. In the event that
during the initial term the Company closes a restructuring the term
shall automatically be extended for six months from the expiration date
of the initial term. The Company issued Casimir 1,000,000
non-redeemable and non-callable warrants on the date of the execution
of this agreement. The warrants are exercisable at $1.00 per share for
a period of ten years from the date of issuance. The warrants were
valued at $190,000 using the Black-Scholes option valuation model and
were recorded as deferred equity compensation to be amortized over the
term of the agreement. Amortization for the year ended December 31,
2004 and 2003 was $91,724 and $98,276, respectively.
F-13
13. STOCK OPTIONS AND WARRANTS
2003 Stock Option Plan
The Company's 2003 Incentive Stock Option Plan (the "Plan") was
approved by the Board of Directors and holders of Common Stock of the
Company on December 30, 2003 to provide for the grant of incentive
stock options to officers and employees of the Company. A total of
1,500,000 shares of Common Stock has been authorized and reserved for
issuance, subject to adjustment to reflect changes in the Company's
capitalization in the case of a stock split, stock dividend or similar
event. The Plan will be administered by the Compensation Committee,
which has the sole authority 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 provided that, (i) the exercise price of each
option granted under the 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 laws of descent and distribution. In December 2003 the
Company granted 1,500,000 options to employees and officers of the
Company pursuant to the Plan exercisable for ten years at $0.23 per
share. No options were granted during the year ended December 31, 2004.
The Company has elected to follow APB No. 25; "Accounting for Stock
Issued to Employees" ("APB 25"), and related interpretations in
accounting for its employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of the grant, no
compensation expense is recognized. Pro forma information regarding net
income per share is required by SFAS No. 123, "Accounting for
Stock-Based Compensation", and has been determined as if the Company
had accounted for its employee stock options under the fair value
method of that statement. The fair value of these options was estimated
at the date of grant using Black-Scholes option pricing model with the
following range of assumptions for the year ended December 31, 2003:
2003
---------
Risk free interest rate 5.0%
Expected dividend yield 0%
Expected lives 10 years
Expected volatility 368%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. Because the Company's employee
stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in the
Company's opinion the existing available models do not necessarily
provide a reliable single measure of the fair value of the Company's
employee stock options.
F-14
Using the Black-Scholes option valuation model, the weighted average
grant date fair value of options granted during the year ended December
31, 2003 was $.23 per option share.
For the purpose of pro forma disclosures, the estimated fair value of
the options is amortized over the vesting period.
The Company's pro forma information is as follows for the years ended
December 31, 2003 and 2002, December 31, 2004 has been excluded since
no options were issued during the year (in thousands, except per share
amounts):
December 31,
----------------------------------------------------------
2003 2002
Pro Pro
Reported Forma Reported Forma
------------ ------------ ----------- ------------
Net income (loss) $ 24 $ (511) $ (1,770) $(1,770)
Income (loss) per Share:
-Basic and Diluted 0.01 (0.15) (0.55) (0.55)
F-15
A summary of the Company's stock option activity and related information
for the years ended December 31, 2003 and 2002 is as follows (in thousands,
except per share amounts):
Weighted
Average
Shares Exercise Price
--------------- ------------
Outstanding at December 31, 2001 350 $2.00
--------------------------------------------- - -
Granted - -
Exercised - -
Cancelled --------------- ------------
Outstanding at December 31, 2002 350 2.00
Granted 1,500 0.23
Exercised - -
Cancelled - -
--------------- ------------
Outstanding as December 31, 2003 1,850 $0.62
Granted - -
Exercised - -
Cancelled - -
Outstanding as December 31, 2004 1,850 $0.62
============== ============
A summary of options outstanding and exercisable at December 31, 2004 is
as follows (in thousands, except per share amounts):
Options Outstanding Options Exercisable
------------------------------------------ ---------------------------------
Weighted Weighted
Average Average
Range of Remaining Life Exercise Range of
Exercise Prices Options (in years) Price Exercise Prices Options
-------------------------- ------- -------------- --------- ---------------- --------
December 31, 2004
$0.23 - $3.50 1,850 9 $.62 $0.23 - $3.50 1,850
December 31, 2003
$0.23 - $3.50 1,850 10 $0.62 $0.23 - $3.50 1,850
December 31, 2002
$0.50 - $3.50 350 5.50 $2.00 $0.50 - $3.50 350
F-16
Warrants
The units consisted of one share of Common Stock and Class A Redeemable
Common Stock Purchase Warrants. 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 were to expire on July 16,
2002 were extended one year to July 16, 2003 and then on more year to
July 16, 2004. These warrants expired on July 16, 2004.
In October 2003, the Company issued 1,000,000 warrants pursuant to a
consulting agreement. The Company valued the warrants using the
Black-Scholes options valuation model. (see Note 14)
A summary of the Company's stock warrant activity and related
information for the years ended December 31, 2004, 2003 and 2002 is as
follows (in thousands, except per share amounts):
Weighted Average
Warrants Exercise Price
--------------- ------------
Outstanding at December 31, 2001 1,659 $6.25
Granted - -
Exercised - -
Cancelled - -
--------------- ------------
Outstanding at December 31, 2002 1,659 6.25
Granted 1,000 1.00
Exercised - -
Cancelled - -
--------------- ------------
Outstanding as December 31, 2003 2,659 $4.28
Granted - -
Exercised - -
Expired 1,659 $6.25
--------------- ---------------
Outstanding as December 31, 2004 1,000 $1.00
========= ========
14. STOCKHOLDERS' EQUITY (DEFICIT)
In December 2002, the Company issued 613,636 shares of common stock to
officers of the Company. In consideration for these shares the officers
guaranteed the loan of the Company, related pledge and security
agreement and other valuable services provided to the Company.
Accordingly, the Company recorded the issuance of these shares as stock
based compensation for the fair market value at the date of issuance.
F-17
15. SUBSEQUENT EVENTS
On April 15, 2005, the Company entered into a letter of intent with
Oak Beverages Inc. ("Oak"), pursuant to which the Company agreed to
sell to Oak its exclusive distribution rights and saleable inventory.
The proposed purchase price for the exclusive distribution rights is
$10,500,000 payable as follows: (i) $7,500,000 to be paid at closing
in immediately available funds, and (ii) $3,000,000 to paid in 24
equal quarterly installments of $125,000 commencing 90 days following
the date of the closing, inclusive of interest. In addition, Oak will
pay to the Company for the saleable inventory an amount equal to the
price paid by the Company for the inventory. According to the terms of
the letter of intent, Oak will not assume any liabilities or
obligations of the Company. The proposed transaction is subject to and
conditioned upon the completion of Oak's due diligence review of the
Company, the negotiation and execution of a definitive purchase
agreement, and the satisfaction of certain conditions, including the
approval of the Company's stockholders and certain suppliers of the
Company's products. The Company believes that the definitive agreement
will be executed during the next few weeks and that the transaction
will close during the summer of 2005.
F - 18