ITEM 1. BUSINESS.
General
Capital Beverage Corporation ("Capital" and the "Company") was incorporated under the laws of the State of Delaware on December 5, 1995. In January 1996, the Company acquired from Consolidated Beverage Corporation, the right to become the exclusive distributor ("Pabst Distribution Rights") for certain beer and malt liquor products ("Pabst Products") manufactured by Pabst Brewing Company ("Pabst"). The consideration paid by the Company for the Pabst Distribution Rights was One Million Six Hundred Thousand Dollars ($1,600,000), payable Eight Hundred Thousand Dollars ($800,000) in cash 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 was included in the monthly $10,000 payments.
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.
Recent Developments
As of September 15, 2005, the Company, entered into an Asset Purchase Agreement (the "Asset Purchase Agreement") with Oak Beverages, Inc., a New York corporation ("Oak"), pursuant to which the Company agreed to sell, and Oak agreed to purchase (the "Asset Sale"), the Company's exclusive distribution rights for the Pabst brands, Pittsburgh brands and Ballantine brands (the "Assets"). The Asset Purchase Agreement contained customary representations and warranties, conditions to closing (including shareholder and brewer approval and the distribution by the Company of an Information Statement on Schedule 14C (the "Information Statement") to its stockholders), and termination and indemnification provisions.
Immediately following the execution of the Agreement, certain stockholders (the "Approving Stockholders") of the Company holding an aggregate of 1,900,000 shares of the Company's common stock, representing 50.1% of the shares outstanding, signed a written consent of stockholders approving the Asset Purchase Agreement and the exhibits and schedules thereto as well as the transactions contemplated thereby. The Approving Stockholders were Carmine N. Stella, the Company's President, Chief Executive Officer and Chairman of the Board, Anthony Stella, the Company's then Vice President of Sales and Marketing (and the brother of Carmine Stella), Michael Matrisciani, a director of the Company, Daniel Matrisciani, the Company's then Vice President of Operations and a director, Alex Matrisciani and Monty Matrisciani (each of whom are the brothers of Michael and Daniel Matrisciani).
The Company and Oak also entered into a Sub-Distribution Agreement dated as of September 15, 2005 (the "Sub-Distribution Agreement"), pursuant to which Oak became a Company sub-distributor of certain Pabst beers and malt beverages (the "Products"). The Sub-Distribution Agreement became effective when the Company filed an Information Statement on Schedule 14C with the Securities and Exchange Commission. Under the terms of the Sub-Distribution Agreement, Oak had the right to distribute the Products to customers located in Brooklyn, Queens, Staten Island, Manhattan and the Bronx (the "Territory"), and in exchange for such rights, Oak was required to pay Pabst directly for its Product purchases and, during the first 45 days following the effective date of the Agreement (the "45-Day Period"), Oak was required to pay to Capital the following amounts for Products received by Oak: (x) $.50 for each case of Products and (y) $2.00 for each barrel of Products. The purchase price paid by Oak to Capital in connection with the closing of the transactions contemplated by the Asset Purchase Agreement was reduced by an amount equal to the sum of: (i) $.25 for each case of Products purchased by Oak and sold by Oak to customers in the Territory, plus (ii) $.50 for each case of Products purchased by Oak but not sold to such customers, plus (iii) $1.00 for each barrel of Products purchased by Oak and sold by Oak to customers in the Territory, plus (iv) $2.00 for each barrel of Products purchased by Oak but not sold to such customers, all determined during the 45-Day Period.
Prior to the closing of the transaction, the Asset Purchase Agreement and sale of Assets to Oak were approved unanimously by the Company's Board of Directors and the terms of the transaction were submitted for stockholder approval. As permitted by Delaware law and the Company's Certificate of Incorporation, the Company received a written consent from the majority Approving Stockholders of the Company approving the Asset Purchase Agreement and the related Asset Sale. An Information Statement was furnished for the purposes of informing stockholders, in the manner required under the Securities Exchange Act of 1934, as amended, of the Asset Sale before it was consummated.
As of December 16, 2005, the Company closed the sale of the Assets to Oak, pursuant to the terms and conditions of the Asset Purchase Agreement. The purchase price paid by Oak for the Assets was Nine Million Three Hundred Thousand Dollars ($9,300,000.00), of which One Million Five Hundred Thousand Dollars ($1,500,000.00), was deposited with an escrow agent, pursuant to the terms of an escrow agreement, for at least 18 months for post closing indemnification claims which may be asserted by Oak (the "Escrow"). A substantial amount of the proceeds from the transaction were used by the Company to repay outstanding indebtedness and for working capital purposes.
As of April 11, 2006, approximately Seven Hundred Eight Thousand Sixty Dollars ($708,060) has been released from Escrow and has been used to pay outstanding liabilities of the Company.
Strategy
The Company will continue to use the proceeds from the sale of the Assets for working capital purposes, including the payment of indebtedness, trade payables and other outstanding obligations. Following the full payment of its creditors, the Company may elect to acquire another entity, issue dividend(s) to its stockholders or invest the net proceeds in the discretion of the Board of Directors and management of the Company. Management currently anticipates that additional transactions may take the form of a dissolution of the corporation, the liquidation of its remaining assets, and the ultimate distribution to stockholders of any assets remaining after satisfaction of our liabilities, including personnel termination and related costs, sale transaction expenses and final liquidation costs. In event of such dissolution, the residual proceeds of the sale of the Assets would become part of a pool of assets governed by the plan of dissolution. Alternatively, management may elect to invest the net proceeds from the sale of the Assets in assets or operations acquired by the Company. In such an event, no assets will be distributed to the stockholders.
Structure of the Company
After application of the net proceeds in the manner contemplated, and assuming ultimate release to us of the entire escrowed amount, and after deduction of transaction costs in connection with the Asset Sale, the Company will hold:
o equipment not part of the Asset Sale; and o cash in the approximate range of $250,000 to $500,000.
The Company does not have any ongoing operations subsequent to the Asset Sale, except for the collection of accounts receivable and the payment of its liabilities. As of the date hereof, the Company, as defined in Rule 12b-2 under the Exchange Act, is a "shell company," defined as a company with no or nominal assets (other than cash) and no or nominal operations.
We will continue to incur claims, liabilities and expenses, which will reduce the realizable value of our remaining assets and the amount potentially available for distribution to stockholders. Claims, liabilities and expenses from operations (such as salaries, directors' and officers' insurance, payroll and taxes, legal, accounting and consulting fees and miscellaneous office expenses) will continue to be incurred subsequent to the Asset Sale. These expenses will have to be satisfied from our remaining assets and, therefore, will reduce the net realizable value of those assets.
The Company intends to comply with the periodic reporting requirements of the Exchange Act for so long as we are subject to those requirements. We have an obligation to continue to comply with the applicable reporting requirements of the Securities Exchange Act of 1934, as amended, even though compliance with such reporting requirements is economically burdensome
Employees
As of December 2, 2005, all employees were terminated, except for Carmine Stella who will continue to serve as the Company's Chief Executive Officer.
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 Difficult To Evaluate Because We Have No Ongoing Operations and Minimal Assets. As the Company currently has no ongoing operations and only minimal assets, there is a risk that we will be unable to continue as a going concern and consummate a business combination. We have no significant assets or financial resources. We will, in all likelihood, sustain operating expenses without corresponding revenues, at least until the consummation of a business combination. This may result in our incurring a net operating loss that will increase continuously until we can consummate a business combination with a profitable business opportunity. We cannot assure you that we can identify a suitable business opportunity and consummate a business combination.
We Will Continue To Incur Claims, Liabilities And Expenses. We will continue to incur claims, liabilities and expenses, which will reduce the realizable value of our remaining assets and the amount potentially available for distribution to stockholders. Claims, liabilities and expenses from operations (such as salaries, directors' and officers' insurance, payroll and taxes, legal, accounting and consulting fees and miscellaneous office expenses) will continue to be incurred. These expenses will have to be satisfied from our remaining assets and, therefore, will reduce the net realizable value of those assets.
Our Business Will Have No Revenues Unless And Until We Merge With Or Acquire An Operating Business. As of the date hereof, the Company, as defined in Rule 12b-2 under the Exchange Act, is a "shell company," defined as a company with no or nominal assets (other than cash) and no or nominal operations. We currently have no revenues from operations. We may not realize any revenues unless and until we successfully merge with or acquire an operating business.
Future Success Is Highly Dependent On The Ability Of Management To Locate And Attract A Suitable Acquisition. The nature of our operations is highly speculative and there is a consequent risk of loss of your investment. The success of our plan of operation will depend to a great extent on the operations, financial condition and management of the identified business opportunity. While management intends to seek business combination(s) with entities having established operating histories, we cannot assure you that we will be successful in locating candidates meeting that criterion. In the event we complete a business combination, the success of our operations may be dependent upon management of the successor firm or venture partner firm, and numerous other factors beyond our control.
The Company Has No Existing Agreement For A Business Combination Or Other Transaction. We have no arrangement, agreement or understanding with respect to engaging in a merger or joint venture with, or acquisition of, a private or public entity. No assurances can be given that we will successfully identify and evaluate suitable business opportunities or that we will conclude a business combination. We cannot guarantee we will be able to negotiate a business combination on favorable terms.
We Cannot Guarantee That The Final Distributions To the Company Will Be Made From Escrow. On the closing date of the Asset Sale, the Company, Oak and Dealy and Silberstein LLP, as escrow agent, entered into an Escrow Agreement, pursuant to which at the closing, Oak deposited $1.5 million of the purchase price in an escrow account with the escrow agent (the "Escrow"). This amount is being held to satisfy potential purchase price adjustments and any claims for indemnification that Oak may have for breaches of the Company's representations, warranties, covenants or other obligations in the Asset Purchase Agreement. Upon each of the 6 month, 12 month and 18 month anniversaries of the closing date, one third of this amount (less any outstanding claims for indemnification) shall be delivered by the escrow agent to Capital. The final distribution of these funds shall be delivered by the escrow agent to Capital upon the later of the 18 month anniversary of the closing date, or the date upon which all pending claims are resolved. We cannot guarantee that the final distributions to Capital from the escrow agent will be made. As of April 11, 2006, approximately Seven Hundred Eight Thousand Sixty Dollars ($708,060) have been released from Escrow and have been used to pay outstanding liabilities of the Company.
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 2005. 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.
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 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 2005 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.
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.
ITEM 2.
ITEM 2. PROPERTIES.
Currently, the Company neither rents nor owns any properties.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
On or about February 28, 2005, the Company was named as a defendant in an action which commenced in the United States District Court for the Central District of California, captioned, Red Bull GmbH v. Vancol Industries, Inc., et al., Case No. LA CV03-6731 DDP. This matter has been settled and the action has been discontinued. The settlement in this case did not entail the payment of any monies by Capital to the plaintiffs.
On or about October 24, 2005 Amelia Wallen, a former employee of the Company filed a verified complaint with the New York City Commission on Human Rights ("NYCCHR"), captioned, Amelia Wallen v. F.V. Distribution Co., LLC, Monty Matrisciani, Tom Marigliano, Capital Beverage Corporation, Diversified Distributors Network. The complaint alleges that the Company terminated Ms. Wallen's employment and misrepresented the status of the Company based upon Ms. Wallen's age, national origin and race. Although the Company has been named as a respondent in this case, the Company believes that there is no basis for Ms. Wallen's allegations. This matter is currently pending before the NYCCHR.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Under Delaware law and our Certificate of Incorporation, the affirmative vote of a majority of the votes entitled to be cast by holders of all shares of the Company's common stock, par value $.001 per share ("Common Stock"), outstanding as of the close of business on September 15, 2005, was required to approve the Asset Purchase Agreement and sale of the Assets. Under our Certificate of Incorporation, each share of Common Stock is entitled to one vote per share. As of September 15, 2005, there were outstanding 3,792,045 shares of Common Stock, representing a total of 3,792,045 votes. As permitted by the Delaware General Corporation Law, on September 15, 2005, the Company received a written consent in lieu of a meeting of stockholders from holders of 1,900,000 shares of Common Stock representing 50.1% of the total issued and outstanding shares of voting stock of the Company approving the Asset Purchase Agreement and the Asset Sale.
On November 10, 2005, an Information Statement was furnished to the stockholders of the Company, in connection with the prior approval by our Board of Directors of, and receipt of approval by written consent of the majority Approving Stockholders of the Company for, the sale of our Assets to Oak. See "Item 1. Business--Recent Developments."
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock commenced trading on The Nasdaq SmallCap Market on the effectiveness of the Company's Initial Public Offering on July 17, 1997 under the symbol "CBEV". The Common Stock is regularly quoted and traded on the OTC Bulletin Board. The Company's securities were delisted by The NASDAQ Stock Market on June 19, 2001.
The following table indicates the high and low closing prices for the Company's, Common Stock for the period from January 1, 2003 to December 31, 2005 based upon information supplied by the OTC Bulletin Board. Prices represent quotations between dealers without adjustments for retail markups, markdowns or commissions, and may not represent actual transactions.
2003 Fiscal Year Quoted Price ($) - ---------------- ----------------- High Low ---- --- First Quarter .21 .08 Second Quarter .43 .25 Third Quarter .40 .23 Fourth Quarter .51 .19
2004 Fiscal Year Quoted Price ($) - ---------------- ----------------- High Low ---- --- First Quarter .41 .25 Second Quarter .35 .28 Third Quarter .30 .16 Fourth Quarter .25 .17
2005 Fiscal Year Quoted Price ($) - ---------------- ----------------- High Low ---- --- First Quarter .35 .15 Second Quarter .34 .17 Third Quarter .25 .13 Fourth Quarter .17 .09
On April 11, 2006 the closing price of the Common Stock as reported on The OTC Bulletin Board was $.15. On April 11, 2006 there were 181 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 2005, we did not repurchase any shares of our Common Stock on our behalf or for any affiliated purchase.
ITEM 6.
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.
ITEM 7.
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.
As of December 16, 2005, the Company closed the sale of the Assets to Oak, pursuant to the terms and conditions of the Asset Purchase Agreement. The purchase price paid by Oak for the Assets was Nine Million Three Hundred Thousand Dollars ($9,300,000.00), of which One Million Five Hundred Thousand Dollars ($1,500,000.00), was deposited with an escrow agent, pursuant to the terms of an escrow agreement, for at least 18 months for post closing indemnification claims which may be asserted by Oak (the "Escrow"). A substantial amount of the proceeds from the transaction were used by the Company to repay outstanding indebtedness and for working capital purposes.
The Company will continue to use the proceeds from the sale of the Assets for working capital purposes, including the payment of indebtedness, trade payables and other outstanding obligations. Following the full payment of its creditors, the Company may elect to acquire another entity, issue dividend(s) to its stockholders or invest the net proceeds in the discretion of the Board of Directors and management of the Company. Management currently anticipates that additional transactions may take the form of a dissolution of the corporation, the liquidation of its remaining assets, and the ultimate distribution to stockholders of any assets remaining after satisfaction of our liabilities, including personnel termination and related costs, sale transaction expenses and final liquidation costs.
After application of the net proceeds in the manner contemplated, and assuming ultimate release to us of the entire escrowed amount, and after deduction of transaction costs in connection with the Asset Sale, the Company will hold:
1. equipment not part of the Asset Sale; and 2. cash in the approximate range of $250,000 to $500,000.
We will continue to incur claims, liabilities and expenses, which will reduce the realizable value of our remaining assets and the amount potentially available for distribution to stockholders. Claims, liabilities and expenses from operations (such as salaries, directors' and officers' insurance, payroll and taxes, legal, accounting and consulting fees and miscellaneous office expenses) will continue to be incurred subsequent to the Asset Sale. These expenses will have to be satisfied from our remaining assets and, therefore, will reduce the net realizable value of those assets.
The Company intends to comply with the periodic reporting requirements of the Exchange Act for so long as we are subject to those requirements. We have an obligation to continue to comply with the applicable reporting requirements of the Securities Exchange Act of 1934, as amended, even though compliance with such reporting requirements is economically burdensome.
As of December 2, 2005, all employees were terminated, except for Carmine Stella who will continue to serve as the Company's Chief Executive Officer.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
All of the Company's indebtedness that would have posed an interest rate risk have been paid in full. As a result, the Company no longer has an interest rate risk.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS.
See financial statements following Item 15 of this Annual Report on Form 10-K.
ITEM 9.
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.
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.
As required by SEC Rule 13a-15(b), we carried out an evaluation as of December 31, 2005, under the supervision and with the participation of our management, including our Chief Executive Officer and Treasurer, of the effectiveness of the design and operation of our disclosure controls and procedures, as of the end of the quarter covered by this report. Based upon that evaluation, our Chief Executive Officer and Treasurer concluded that our disclosure controls and procedures were effective in enabling us to record, process, summarize and report information required to be included in our periodic SEC filings within the required time period.
There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART III
ITEM 10.
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 54 President, Chief Executive Officer, Chairman of the Board of Directors
Anthony Stella(1) 54 Vice President of Sales and Marketing
Carol Russell 50 Secretary, Treasurer and Director
Joseph M. Luzzi* 58 Director
Michael Matrsciani 50 Director
Daniel Matrisciani(3) 58 Director and Vice President of Operations
Vito Cardinale* 45 Director - -------------------------------------------------------------------------------- (1) Anthony Stella resigned in his capacity as Vice President of Marketing of the Company as of December 2, 2005. (2) Daniel Matrisciani resigned in his capacity as Vice President of Operations of the Company as of December 2, 2005. * 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 served as Vice President - Sales and Marketing and an employee of the Company from inception to December 2, 2005. Mr. Stella has acted as executive sales manager for Vito Santoro, Inc., Gotham Wholesale Beer, Inc., Miller Home Service, Inc. and College Point Beer Distributors over the past 15 years . Anthony Stella is the brother of Carmine Stella.
Carol Russell - Mrs. Russell has served as Secretary, Treasurer and a Director of the Company since February 1996. From 1991, Mrs. Russell has also served as 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 since June 2001. Mr. Matrisciani was Vice President of Operations from June 2001 to December 2, 2005. 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.
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, 2005 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 2005 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.
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, 2005, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten percent beneficial owners were satisfied, except as provided below:
None
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the compensation paid to the Named Executive Officers for the fiscal years ending December 31, 2003, 2004 and 2005.
Summary Compensation Table
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.
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.
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.
Payment of Accrued Unpaid Salaries and Severance
Certain members of management have not received their salaries and expenses since May 1, 2005. Accordingly, the following individuals are entitled to be paid accrued and unpaid salaries from the proceeds from the Asset Sale received by the Company in the amounts set forth adjacent to their names (such amounts calculated as of December 31, 2005): Carmine Stella ($158,431.03); Anthony Stella ($92,210.12); Michael Mastrisciani ($96,360.88); Daniel Mastrisciani ($92,626.09); Monty Mastrisciani ($93,189.10); and Alex Mastrisciani ($88,843.83). The Company has reimbursed such employees for out-of-pocket expenses incurred by them in connection with the performance of their duties which, as of December 31, 2005, of a total of approximately $60,000.
In addition, under the terms of employment agreements between the Company and such members of management, such employees are, upon the termination of their employment with the Company, entitled to severance payments equal to four (4) weeks of a base salary for each year of service provided to the Company. The proceeds from the Asset Sale were used to pay severance to following employees each of whom were terminated as of the closing date of the Asset Sale in the amounts set forth adjacent to their names: Anthony Stella ($102,000); Michael Mastrisciani ($47,000); Daniel Mastrisciani ($47,000); Monty Mastrisciani ($47,000); and Alex Mastrisciani ($41,000). Carmine Stella was not terminated as of the closing date, and therefore, he is not be entitled to any severance payment. He will, however, continue to serve as the Company's Chief Executive Officer, and will be paid $210,000 per annum.
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.
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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth as of April 11, 2006, 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(1) Stock Owed(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 100 Broadway, 11th Floor New York, NY 10005 1,000,000(4) 20.9%
All officers and directors as a group (nine (9) persons) 1,900,000 50%
(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.
The following table presents information as of April 11, 2006 with respect to compensation plans under which equity securities were authorized for issuance by the Company.
ITEM 13.
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 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 had 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 had lended the net proceeds of its loan from Seaway to Capital. Addie and the officers 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.
As of December 16, 2005, the closing date of the Asset Sale, the above-referenced loans were paid in full.
Termination of Personal Guaranties and Release of Pledged Collateral
In connection with a loan in the aggregate principal amount of $2.5 million provided to the Company by Seaway, each of Alex Mastrisciani, Daniel Mastrisciani, Michael Mastrisciani and Monty Mastrisciani pledged real property owned by them located in Brooklyn, New York as collateral for such loan. The security interest held by Seaway in such collateral was released on the closing date of the Asset Sale upon the repayment of the loan by the Company.
In connection with a revolving line of credit provided by EGC to the Company, the Company pledged all of its assets as collateral for such loan. In addition, Carmine Stella, the Company's President, and Chief Executive Officer personally guaranteed the Company's obligations to Entrepreneur Capital. The guaranty provided by Mr. Stella terminated on the closing date of the Asset Sale upon repayment of the line of credit by the Company.
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 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.
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, 2005 and 2004 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, 2005 and for the review of our quarterly reports on Form 10-Q for the same year totaled $34,000. The aggregate fees billed to the Company by Sherb & Co., LLP for the audit of our annual financial statements for the year ended December 31, 2004 and for the review of our quarterly reports on Form 10-Q for the same year totaled $45,000.
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, 2005 and 2004.
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, 2005 and 2004.
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, 2005 and 2004.
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, 2005 and 2004.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1) Financial Statements. Index
Independent Registered Auditors' Report F - 2
Consolidated Financial Statement
Consolidated Balance Sheets 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 - 19
(a)(2) Financial Statement Schedules.
(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.* 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 (Incorporated by reference to Registrant's Annual Report on Form 10-KSB for the annual period ending December 31, 2003)
10.17 Asset Purchase Agreement, dated as of September 15, 2005, between Registrant and Oak Beverages Inc. (Incorporated by reference to Registrant's Current Report on Form 8-K dated September 15, 2005)
10.18 Sub-Distribution Agreement dated as of September 15, 2005 between the Registrant and Oak Beverages Inc. (Incorporated by reference to Registrant's Current Report on Form 8-K dated September 15, 2005)
10.19 Escrow Agreement, dated as of December 16, 2005, between Registrant, Oak Beverages Inc. and escrow agent.
10.20 Amendment to Escrow Agreement, dated as of December 16, 2005, between Registrant, Oak Beverages Inc. and escrow agent.
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.
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 14th day of April, 2006.
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, - ----------------------- Presidend and Chairman of Carmine N. Stella the Board of Directors April 17, 2006
/s/ Carol Russell Secretary, Treasurer - ----------------------- and Director April 17, 2006 Carol Russell
/s/ Joseph Luzzi Director April 17, 2006 - ---------------------- Joseph Luzzi
/s/ Michael Mtrisciani Director April 17, 2006 - ---------------------- Michael Matrisciani
/s/ Daniel Matrisciani Director April 17, 2006 - ---------------------- Daniel Matrisciani
/s/ Vito Cardinale Director April 17, 2006 - ---------------------- Vito Cardinale
CAPITAL BEVERAGE CORPORATION AND SUBSIDIARY
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 - 19
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, 2005 and 2004 and the related statements of operations, stockholders' deficit and cash flows for the years ended December 31, 2005, 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, 2005 and 2004 and the results of their operations and their cash flows for the years ended December 31, 2005, 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 14, 2006
CAPITAL BEVERAGE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 and 2003
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.
As of September 15, 2005, the Company, entered into an Asset Purchase Agreement (the "Asset Purchase Agreement") with Oak Beverages, Inc., a New York corporation ("Oak"), pursuant to which the Company agreed to sell, and Oak agreed to purchase (the "Asset Sale"), the Company's exclusive distribution rights for the Pabst brands, Pittsburgh brands and Ballantine brands (the "Assets"). The Asset Purchase Agreement contained customary representations and warranties, conditions to closing (including shareholder and brewer approval and the distribution by the Company of an Information Statement on Schedule 14C (the "Information Statement") to its stockholders), and termination and indemnification provisions. On December 16, 2005, the Company closed the sale of the Assets to Oak.
The Company will continue to use the proceeds from the sale of the Assets for working capital purposes, including the payment of indebtedness, trade payables and other outstanding obligations. Following the full payment of its creditors, the Company may elect to acquire another entity, issue dividend(s) to its stockholders or invest the net proceeds in the discretion of the Board of Directors and management of the Company. Management currently anticipates that additional transactions may take the form of a dissolution of the corporation, the liquidation of its remaining assets, and the ultimate distribution to stockholders of any assets remaining after satisfaction of our liabilities, including personnel termination and related costs, sale transaction expenses and final liquidation costs. In event of such dissolution, the residual proceeds of the sale of the Assets would become part of a pool of assets governed by the plan of dissolution. Alternatively, management may elect to invest the net proceeds from the sale of the Assets in assets or operations acquired by the Company. In such an event, no assets will be distributed to the stockholders.
2. GOING CONCERN
The accompanying financial statements have been prepared on a going-concern basis, which presumes that the Company will be able to continue to meet its obligations and realize its assets in the normal course of business.
As shown in the accompanying financial statements, the Company has a history of losses with an accumulated deficit of $5,649,607 at December 31, 2005 and, as of that date, a working capital deficiency of $225,549. 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.
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.
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.
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, 2005, 2004 and 2003.
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.
In May 2005, the FASB issued FASB Statement No. 154, which replaces APB Opinion No.20 and FASB No. 3. This Statement provides guidance on the reporting of accounting changes and error corrections. It established, unless impracticable retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements to a newly adopted accounting principle. The Statement also provides guidance when the retrospective application for reporting of a change in accounting principle is impracticable. The reporting of a correction of an error by restating previously issued financial statements is also addressed by this Statement. This Statement is effective for financial statements for fiscal years beginning after December 15, 2005. Earlier application is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date of this Statement is issued. Management believes this Statement will have no impact on the financial statements of the Company once adopted.
In February 2006, the FASB issued FASB Statement No. 155, which is an amendment of FASB Statements No. 133 and 140. This Statement; a) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, b) clarifies which interest-only strip and principal-only strip are not subject to the requirements of Statement 133, c) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, d) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, e) amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This Statement is effective for financial statements for fiscal years beginning after September 15, 2006. Earlier adoption of this Statement is permitted as of the beginning of an entity's fiscal year, provided the entity has not yet issued any financial statements for that fiscal year. Management believes this Statement will have no impact on the financial statements of the Company once adopted.
In March 2006, the FASB issued FASB Statement No. 156, which amends FASB Statement No. 140. This Statement establishes, among other things, the accounting for all separately recognized servicing assets and servicing liabilities. This Statement amends Statement 140 to require that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. This Statement permits, but does not require, the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value. An entity that uses derivative instruments to mitigate the risks inherent in servicing assets and servicing liabilities is required to account for those derivative instruments at fair value. Under this Statement, an entity can elect subsequent fair value measurement to account for its separately recognized servicing assets and servicing liabilities. By electing that option, an entity may simplify its accounting because this Statement permits income statement recognition of the potential offsetting changes in fair value of those servicing assets and servicing liabilities and derivative instruments in the same accounting period. This Statement is effective for financial statements for fiscal years beginning after September 15, 2006. Earlier adoption of this Statement is permitted as of the beginning of an entity's fiscal year, provided the entity has not yet issued any financial statements for that fiscal year. Management believes this Statement will have no impact on the financial statements of the Company once adopted.
4. SALE OF DISTRIBUTION RIGHTS
As of September 15, 2005, the Company, entered into an Asset Purchase Agreement (the "Asset Purchase Agreement") with Oak Beverages, Inc., a New York corporation ("Oak"), pursuant to which the Company agreed to sell, and Oak agreed to purchase (the "Asset Sale"), the Company's exclusive distribution rights for the Pabst brands, Pittsburgh brands and Ballantine brands (the "Assets"). The Asset Purchase Agreement contained customary representations and warranties, conditions to closing (including shareholder and brewer approval and the distribution by the Company of an Information Statement on Schedule 14C (the "Information Statement") to its stockholders), and termination and indemnification provisions.
Immediately following the execution of the Agreement, certain stockholders (the "Approving Stockholders") of the Company holding an aggregate of 1,900,000 shares of the Company's common stock, representing 50.1% of the shares outstanding, signed a written consent of stockholders approving the Asset Purchase Agreement and the exhibits and schedules thereto as well as the transactions contemplated thereby. The Approving Stockholders were Carmine N. Stella, the Company's President, Chief Executive Officer and Chairman of the Board, Anthony Stella, the Company's then Vice President of Sales and Marketing (and the brother of Carmine Stella), Michael Matrisciani, a director of the Company, Daniel Matrisciani, the Company's then Vice President of Operations and a director, Alex Matrisciani and Monty Matrisciani (each of whom are the brothers of Michael and Daniel Matrisciani).
The Company and Oak also entered into a Sub-Distribution Agreement dated as of September 15, 2005 (the "Sub-Distribution Agreement"), pursuant to which Oak became a Company sub-distributor of certain Pabst beers and malt beverages (the "Products"). The Sub-Distribution Agreement became effective when the Company filed an Information Statement on Schedule 14C with the Securities and Exchange Commission. Under the terms of the Sub-Distribution Agreement, Oak had the right to distribute the Products to customers located in Brooklyn, Queens, Staten Island, Manhattan and the Bronx (the "Territory"), and in exchange for such rights, Oak was required to pay Pabst directly for its Product purchases and, during the first 45 days following the effective date of the Agreement (the "45-Day Period"), Oak was required to pay to Capital the following amounts for Products received by Oak: (x) $.50 for each case of Products and (y) $2.00 for each barrel of Products. The purchase price paid by Oak to Capital in connection with the closing of the transactions contemplated by the Asset Purchase Agreement was reduced by an amount equal to the sum of: (i) $.25 for each case of Products purchased by Oak and sold by Oak to customers in the Territory, plus (ii) $.50 for each case of Products purchased by Oak but not sold to such customers, plus (iii) $1.00 for each barrel of Products purchased by Oak and sold by Oak to customers in the Territory, plus (iv) $2.00 for each barrel of Products purchased by Oak but not sold to such customers, all determined during the 45-Day Period.
Prior to the closing of the transaction, the Asset Purchase Agreement and sale of Assets to Oak were approved unanimously by the Company's Board of Directors and the terms of the transaction were submitted for stockholder approval. As permitted by Delaware law and the Company's Certificate of Incorporation, the Company received a written consent from the majority Approving Stockholders of the Company approving the Asset Purchase Agreement and the related Asset Sale. An Information Statement was furnished for the purposes of informing stockholders, in the manner required under the Securities Exchange Act of 1934, as amended, of the Asset Sale before it was consummated.
As of December 16, 2005, the Company closed the sale of the Assets to Oak, pursuant to the terms and conditions of the Asset Purchase Agreement. The purchase price paid by Oak for the Assets was Nine Million Three Hundred Thousand Dollars ($9,300,000.00), of which One Million Five Hundred Thousand Dollars ($1,500,000.00), was deposited with an escrow agent, pursuant to the terms of an escrow agreement, for at least 18 months for post closing indemnification claims which may be asserted by Oak (the "Escrow"). A substantial amount of the proceeds from the transaction were used by the Company to repay outstanding indebtedness and for working capital purposes.
Summary of closing of sale:
Purchase price $ 9,300,000 ------------------------- Sub-Distribution credit 42,374.91 Payments to primary creditors 5,944,402.25 Primary creditor escrow 321,964.93 Secondary creditor escrow (1) 1,012,960.29 General escrow deposit (2) 1,500,000.00 Deposit to Capital 478,297.62 ------------------------- Total $ 9,300,000 =========================
(1) As of April 11, 2006, approximately Seven Hundred Eight Thousand Sixty Dollars ($708,060) has been released from Escrow and has been used to pay outstanding liabilities of the Company. The balance will be held in the escrow account in order to pay creditors for two years at which point any remaining funds will be kept by Capital.
(2) Will be released in three traunches of $500,000, on July 16, 2006, December 16, 2006 and June 16, 2007.
Gain on the sale:
Purchase price less sub-distribution credit $ 9,257,625 Carrying value 1,021,718 -------------------- Gain on sale $ 8,235,907 ====================
5. DISCONTINUED OPERATIONS
The Company's sale of its Distribution License has been accounted of under the requirements of paragraph 30 of Statements of Financial Accounting Standards ("SFAS") 144 "Accounting for the Impairment or Disposal of Long-Lived Assets", the assets and liabilities associated with the discontinued operations of the Company have been classified as Assets or Liabilities from discontinued operations on the accompanying 2004 balance sheet, while the results of operations have been presented as discontinued operations for all periods presented.
The carrying amounts of the major classes of assets and liabilities included as part of the assets and liabilities held for sale at December 31, 2004, are as follows:
Accounts receivable $ 698,792 Inventories 2,097,338 Other current assets 147,905 Property and equipment 127,765 Distribution license 1,065,718 Other assets 276,351 ------------------ Assets from discontinued operations $ 4,413,869 ==================
Revolving loans $ 2,007,356 Loan payable 2,500,000 Long-term debt 123,643 ------------------ Liabilities from discontinued operations $ 4,630,999 ==================
6. OTHER RECEIVABLE
On October 21, 2005 the Company signed a Stipulation of Settlement with Blue Ox Distributors, LLC (Blue Ox), where as Blue Ox has agreed to pay the Company as further consideration for the termination of the Exclusive United States Distribution Agreement in the amount of $100,000 plus interest of $8,425.93. Blue Ox will pay Capital $6,023.66 per month beginning April 1, 2006 until the balance is paid in full. The Company classified $54,213 of this balance as current and the remaining as long-term.
7. INCOME TAXES
At December 31, 2005 the Company had a net operating loss carryover of $335,000 available as offsets against future taxable income, if any, which expire at various dates through 2025. The Company has a deferred tax asset of $219,000 arising from net operating loss deductions and an alternative minimum tax credit and has recorded a valuation allowance for the full amount of such deferred tax asset.
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):
The following is a schedule of the Company's net deferred tax assets as of:
December 31, ------------------------------- 2005 2004 -------------- --------------
Net operating loss carryforward $ 134,000 $ 1,746,000 Alternative minimum tax 85,000 - Allowance for doubtful accounts - 24,000 Other - 20,000 Valuation allowance (219,000) (1,790,000) -------------- -------------- Net deferred tax asset $ - $ - ============== ==============
8. CONCENTRATION OF CREDIT RISK
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.
9. 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.
10. 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:
---------- 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.
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, December 31, 2005 and 2004 have been excluded since no options were issued during the year (in thousands, except per share amounts):
December 31, 2003 ------------------------------- Pro Reported Forma ---------- -------- Net income (loss) $ 24 $ (511) Income (loss) per Share: -Basic and Diluted 0.01 (0.15)
A summary of the Company's stock option activity and related information for the years ended December 31, 2005, 2004 and 2003 is as follows (in thousands, except per share amounts):
Weighted Average Shares Exercise Price --------- -------------- Outstanding at December 31, 2002 350 $ 2.00 Granted 1,500 0.23 Exercised - - Cancelled - - --------- -------------- Outstanding at December 31, 2003 1,850 $ 0.62 Granted - - Exercised - - Cancelled - - --------- -------------- Outstanding as December 31, 2004 1,850 $ 0.62
Granted - - Exercised - - Cancelled - -
Outstanding as December 31, 2005 1,850 $ 0.62 ========= ==============
A summary of options outstanding and exercisable at December 31, 2005 is as follows (in thousands, except per share amounts):
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, 2002 1,659 $6.25 Granted 1,000 1.00 Exercised - - Cancelled - - ------------ ------------ Outstanding at December 31, 2003 2,659 4.28 Granted - - Exercised - - Cancelled 1,659 $6.25 ------------ ------------ Outstanding as December 31, 2004 1,000 $1.00 Granted - - Exercised - - Expired - - ------------ ------------ Outstanding as December 31, 2005 1,000 $1.00 ============ ============
Note 11 - Selected Quarterly Financial Data - (UNAUDITED)