Capital Beverage Corp – ‘10KSB40’ for 12/31/97

As of:  Wednesday, 4/15/98   ·   For:  12/31/97   ·   Accession #:  950123-98-3819   ·   File #:  1-13181

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Annual Report — Small Business — [x] Reg. S-B Item 405   —   Form 10-KSB
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10KSB40     Form 10-Ksb                                           35    140K 
 2: EX-27       Financial Data Schedule                                1      6K 

10KSB40   —   Form 10-Ksb
Document Table of Contents

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 REPORT ON FORM 10-KSB

/X/      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE                   
SECURITIES EXCHANGE ACT OF 1934                               

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997.                                    

/ /      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF                   
THE SECURITIES EXCHANGE ACT OF 1934                           

      FOR THE TRANSITION PERIOD FROM ________________ TO ________________.

COMMISSION FILE NO. 0-13181                                                     

CAPITAL BEVERAGE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE                                      13-3878747
 (STATE OF OR OTHER JURISDICTION               (IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)                                               

1111 EAST TREMONT AVENUE                                                        
BRONX, NEW YORK                                          10460          
(ADDRESS OF PRINCIPAL                                    (ZIP CODE)         
EXECUTIVE OFFICERS)                                                       

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (718) 409-2337              

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE.               

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:                     

 COMMON STOCK, PAR VALUE $.001 PER SHARE
(TITLE OF CLASS)

UNITS CONSISTING OF ONE (1) SHARE OF COMMON STOCK, PAR VALUE $.001 PER SHARE
AND ONE-HALF (1/2) CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANT 
(TITLE OF CLASS)

CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANT
(TITLE OF CLASS)

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         INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE        
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH 
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X   NO                            

       INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF THE REGULATION S-B IS NOT CONTAINED IN THIS FORM, AND NO DISCLOSURE 
WILL BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR
INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-KSB
OR ANY AMENDMENT TO THIS FORM 10-KSB. [X]                                       

     ISSUER'S REVENUES FOR ITS MOST RECENT FISCAL YEAR WERE $13,687,634.

       THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT, COMPUTED BY REFERENCE TO THE CLOSING PRICE OF SUCH STOCK AS  
OF MARCH 31, 1998, WAS APPROXIMATELY $8,960,312.00.                             

NUMBER OF SHARES OUTSTANDING OF THE ISSUER'S COMMON STOCK AS OF MARCH 31, 1998  
WAS 2,378,409.                                                                  

DOCUMENTS INCORPORATED BY REFERENCE:

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PART I

ITEM 1. BUSINESS.                                                               

GENERAL                                                                         

     Capital Beverage Corporation was incorporated under the laws of the
State of Delaware on December 5, 1995. In January 1996, the Company acquired    
from Consolidated Beverage Corporation, the right to become the exclusive       
distributor ("Pabst Distribution Rights") for certain beer and malt liquor      
products ("Pabst Products") manufactured by Pabst Brewing Company ("Pabst"). The
consideration paid by the Company for the Pabst Distribution Rights was One     
Million Six Hundred Thousand Dollars ($1,600,000), payable Eight Hundred        
Thousand Dollars ($800,000) in cash at or prior to closing, and the balance by  
delivery of a series of 120 promissory notes, each in the amount of Ten Thousand
Dollars ($10,000) (collectively, the "Pabst Notes"). The Pabst Notes bear       
interest at 9% per annum, which interest is included in the monthly $10,000     
payments. If the Company defaults in payment of any of the Pabst Notes, such    
default may result in a re-conveyance of the Pabst Distribution Rights to       
Consolidated Beverage Corporation. Any such loss of the Pabst Distribution      
Rights may have a materially adverse effect on the Company's financial condition
and results of operations.                                                      

        Subject to the conditions set forth in the agreement pursuant to which
the Company acquired the Pabst Distribution Rights, the Company became the      
exclusive distributor of the following Pabst Products in the following areas    
(collectively, the "Territory"):                                                

       Borough of Manhattan: Pabst Blue Ribbon Beer, Pabst Extra Light Beer,
Pabst Light Beer, Pabst Genuine Draft Beer, Pabst 10E Draft Beer, Pabst Non Ala 
Beer, Andeker Beer, Hamm's Beer, Hamm's Special Light Beer, Hamm's Genuine Draft
Beer, Big Bear Malt Liquor, Olde English "800" Malt Liquor, Olde English "800"  
Genuine Draft Malt Liquor, "800" Ice Malt Liquor and Old Tankard Ale.           

      Borough of the Bronx: Hamm's Beer, Hamm's Special Light Beer, Hamm's
Genuine Draft Beer, Olde English "800" Malt Liquor, Olde English "800" Genuine  
Draft Malt Liquor and "800" Ice Malt Liquor.                                    

       Borough of Queens: In that portion of Queens County situated west and
north of the following described boundary lines: starting at a point in Flushing
Bay at the boat basin; thence southerly along Grand Central Parkway to the      
intersection of Union Turnpike and Interborough Parkway to the western boundary 
of Queens County, thence northerly along the western boundary of Queens County  
to the East River, being the terminal of Queens County: Olde English "800" Malt 
Liquor, Olde English "800" Genuine Draft Malt Liquor and "800" Ice Malt Liquor. 

     Borough of Staten Island: Pabst Blue Ribbon Beer, Pabst Extra Light
Beer, Pabst Light Beer, Pabst Genuine Draft Beer, Pabst 10E Draft Beer, Pabst   
Non Ala Beer, Andeker Beer, Hamm's Beer,                                        

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Hamm's Special Light Beer, Hamm's Genuine Draft Beer, Big Bear Malt Liquor, Olde
English "800" Malt Liquor, Olde English "800" Genuine Draft Malt Liquor, "800"  
Ice Malt Liquor and Old Tankard Ale.                                            

    Westchester County: In that portion of Westchester County situated
south of Interstate Highway No. 287, but not including the Towns of Ardsley and 
Dobbs Ferry: Hamm's Beer, Hamm's Special Light Beer and Hamm's Genuine Draft    
Beer.                                                                           

State of New York: Old Tankard Ale.                           

DISTRIBUTORSHIP AGREEMENT WITH PABST                                            

         Duties and Responsibilities: At the time the Company acquired the Pabst
Distribution Rights, it simultaneously entered into an agreement with Pabst (the
"Distributorship Agreement") to become the exclusive distributor for Pabst      
Products within the Territory. Pursuant to the Distributorship Agreement, the   
Company is required to solicit and seek to service every retail account within  
the Territory and to use its best efforts to market, promote and sell the Pabst 
Products within such Territory. The Company is prohibited under the             
Distributorship Agreement from selling or supplying Pabst Products to customers 
located outside the Territory.                                                  

         The responsibilities of the Company under the Distributorship Agreement
include, but are not limited to: (i) establishment and maintenance of a planned 
overall sales and contact program on a continuing basis; (ii) establishment and 
maintenance of a place of business within the Territory, including distribution 
and warehouse facilities; (iii) establishment and maintenance of stock rotation 
procedures for the Pabst Products in the warehouse, on trucks and in retail     
accounts to the extent permitted by law and adherence to all stated policies of 
Pabst in regard to overage Pabst Products (with the cost of replacing overage   
products to be absorbed by the Company); (iv) establishment and maintenance of a
fleet of trucks; (v) cooperation with Pabst in the distribution of point-of-sale
materials necessary to support Pabst Products; (vi) personal involvement of     
management of the Company in maintaining satisfactory contact with all accounts;
(vii) maintenance of adequate capital and cash flow to insure competitive       
strength in facilities, inventory, equipment, personnel, advertising and        
promotions; (viii) maintenance of a continuous in-house training program where  
practicable and attendance at sales meetings and training schools scheduled by  
Pabst; and (ix) maintenance of sufficient inventories and mix of package types  
as reasonably requested by Pabst and justified by market conditions existing in 
the Territory.                                                                  

        Terms of Sale. Any orders for the Pabst Products placed by the Company
will be subject to the written approval of Pabst, and Pabst shall not be        
obligated to fill such order. Sales made by Pabst to the Company shall be upon  
such terms and prices as are approved by the Pabst Credit and Pricing           
Departments from time to time in their discretion. The Company is required under
the Distributorship Agreement to grant to Pabst a security interest in the Pabst
Products to secure the performance of all obligations owed by it to Pabst.      

Termination. Pabst may terminate the Distributorship Agreement
immediately upon the                                                            

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occurrence of any of the following events: (i) assignment or attempted          
assignment for the benefit of creditors by the Company or insolvency of the     
Company; (ii) institution of voluntary or involuntary bankruptcy proceedings or 
for receivership or dissolution; (iii) non-payment by the Company of sums past  
due and owing to Pabst, which sums continue to remain owing upon the expiration 
of twenty (20) days after written notice of non-payment to the Company by Pabst;
(iv) fraudulent conduct of the Company; (v) loss by the Company of any federal, 
state or local license required by law or necessary in order to carry out the   
Company's duties as a distributor of Pabst Products; (vi) attempted assignment  
of the Distributorship Agreement by the Company or change in control of the     
Company's business without the prior written consent of Pabst; (vii) violation  
by the Company of its obligations to sell and distribute the Pabst's Products   
only within the Territory and/or its obligation to solicit every retail account 
within the Territory and to use its best efforts to market and promote Pabst    
Products and protect their quality.                                             

      Deficiency Termination. Pabst may also terminate the Distributorship
Agreement if any of the following occurs: (i) the Company fails to perform its  
duties and responsibilities in the reasonable judgment of Pabst; or (ii) other  
breaches by the Company of its obligations contained in the Distributorship     
Agreement (a "deficiency termination"). In the case of any such default, Pabst  
has agreed to provide the Company with notice of the manner in which such       
default has occurred and to allow the Company not less than ninety (90) days to 
cure such default. Moreover, in the event of any such deficiency termination,   
Pabst will pay the Company an amount equal to twice the Company's pre-tax net   
earnings arising from the sale and distribution of the Pabst Products during the
immediate preceding annual accounting period of the Company. In addition, Pabst 
will purchase from the Company its entire inventory of saleable Pabst Products  
at an amount equal to the cost of such inventory plus a handling charge of $.10 
per case, $.50 per half-barrel and $5.25 per quarter-barrel. Upon request by the
Company, Pabst will purchase from the Company, at the then fair market value,   
those local delivery vehicles regularly used by the Company in the sale and     
distribution of Pabst Products.                                                 

Uniform Termination. Pabst also has the right to terminate the
Distributorship Agreement if Pabst simultaneously terminates all other          
agreements that are substantially similar to the Distributorship Agreement      
between the Company and Pabst.                                                  

         Partial Termination. Pabst has the right to assign any individual brand
of beer listed as a Pabst Product to another distributor if, in the reasonable  
judgment of Pabst, the Company cannot or does not adequately promote and/or     
market such brand of beer. Pabst also has the right to effect a termination of  
the part of the Company's Territory if, in its reasonable judgment, the Company 
does not adequately promote and market Pabst Products in that part of the       
Territory.                                                                      

      Change of Control Termination. Pabst also has the right to terminate
the Distributorship Agreement if there is a change in ownership or control in   
the Company's business which occurs without the prior written consent of Pabst  
(which consent may not be unreasonably withheld). For purposes of the           
Distributorship Agreement, the term "control" means record or beneficial        
ownership of (i) thirty-three percent (33%) or more of the Company's voting     
stock; (ii) thirty-three percent                                                

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(33%) or more of its business; or (iii) thirty-three percent (33%) or more      
interest in an entity which owns fifty-one percent (51%) or more of the         
Company's voting stock.                                                         

STRATEGY                                                                        

   Management of the Company believes it has developed a strategy to
effectively market, sell and distribute Pabst Products throughout the Territory.
This strategy includes plans to expand the Company's customer base; to increase 
sales and marketing efforts; and to develop a distribution network utilizing    
independent licensed distributor wholesalers ("Wholesalers") that will result in
reduced costs. The Company is also seeking to acquire other competing brand     
wholesalers in order to achieve greater economics of scale and synergy. The     
Company believes that such acquisitions would significantly lower the cost of   
doing business and would also achieve the Company's goal of expanding retail    
account access and obtaining brands that would complement rather than compete   
with the Company's products.                                                    

EXPANDING CUSTOMER BASE                                                         

In order to expand its customer base for Pabst Products in the
Territory, the Company intends to concentrate its efforts on increasing its     
sales of Pabst Products through supermarket chains, such as Waldbaums, A&P,     
Grand Union and Pathmark; chain convenience stores, such as 7-Elevens, Mobil    
Marts, Hess Stores and Shell Marts; and beverage centers such as Thrifty        
Beverage, Beverage Barn and Empire Beverage Centers. In addition, only 10% of   
the approximately 10,000 potential retail accounts for Pabst Products within the
Territory are currently being serviced by the Company, and the Company has      
recently implemented a marketing and sales strategy for increasing such         
percentage. The recently implemented strategy includes the hiring of 15 direct  
sales personnel who service the marketing territory. The Company has also       
streamlined the sale process by reorganizing the sale territory and increasing  
the supervision of the sales staff.                                             

         The Company will also attempt to sell Pabst Products at Yankee and Shea
Stadiums, Madison Square Garden, New York theaters, the Jacob K. Javits Center, 
the World Trade Center, South Street Seaport, the Port Authority, Grand Central 
Station and Pennsylvania Station, where such products are not currently being   
sold. In addition, the Company intends to promote and sell Pabst Products at    
special events, such as Harlem Week, Latin and Cuban Days and the Caribbean Day 
Parade.                                                                         

SALES AND MARKETING                                                             

   The Company employs sales people to obtain new accounts for Pabst
Products and to increase sales of Pabst Products to existing accounts for such  
products in the Territory. In addition to employing a sales staff, the Company  
employs sales supervisors who recommend sales policies and incentive programs to
the Wholesalers in order to motivate these Wholesalers and their sales personnel
to sell Pabst Products within the Territory. The Company also creates           
promotional materials and has formulated marketing plans to increase sales by   
the Company and the other                                                       

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Wholesalers within the Territory. The Company's sales personnel receive formal  
training both at Company and Pabst sponsored seminars. The Company also intends 
to hire a training coordinator to conduct seminars, covering such topics as     
draft technology, brewing processes and role-playing. Sales personnel are       
responsible for preparing weekly schematics on key store resets (both shelf and 
cooler) to secure the most visible positions for maximum consumer exposure.     
Shelf allocations are periodically reviewed under the supervision of the        
Vice-President of Sales and Marketing to assure that space allocations and      
placement comply with retailer policies, distribution philosophies, and         
recommendations from suppliers. The Company has also implemented merchandising  
services to handle trade problems and seek future sales opportunities.          

   The Company offers bonuses to sales personnel who market and sell
additional Pabst Products to existing customers and maintain established goals  
on reorders of Pabst Products. This incentive program is designed to achieve    
long and steady growth for additional product placements.                       

    Consistent with the Company's plan to expand its customer base, it
expects to incur additional selling and marketing costs of approximately        
$150,000 in the next fiscal year. Such estimates have been derived from         
managements plans and budgets for 1998.                                         

DISTRIBUTION                                                                    

The Company has implemented a strategy to achieve effective   
distribution of Pabst Products in the Territory. Under this strategy, the       
Company acts as an exclusive distributor for Pabst Products, subject to policies
and procedures determined by Pabst, so that all orders for Pabst Products come  
through the Company. Because of the expansiveness of the Territory, the Company 
relies on independent, licensed beverage wholesalers that are responsible for   
hiring and maintaining their own staffs, maintaining trucking fleets to         
distribute Products to the wholesale and/or retail customers.                   

The Company's objective in utilizing these alternate means of 
distribution to service each sector within the Territory is to increase         
effective sales and distribution of all Pabst Products while not incurring the  
total expense of such sales and distribution efforts. Specific strategies       
include: developing sales incentives with the cooperation of Pabst              
representatives for wholesalers that meet sales goals for both "on-premises" and
"off-premises" accounts; establishing a method of monitoring accounts within the
Territory that do not purchase Pabst Products and establishing incentives for   
wholesalers who reverse such pattern; scheduling monthly promotions for all     
on-premises accounts; and utilizing and promoting "Brewery Rebate" programs.    

ADVERTISING                                                                     

         The Company intends to present to the trade and the consumer an ongoing
marketing campaign. To achieve this, the Company will establish and maintain an 
advertising and marketing budget. Such budget will be used primarily to         
participate in cooperative radio and billboard advertising programs established 
by Pabst. A proposed budget of $.05 per case based upon monthly estimated sales 
during Fiscal 1998 of 60,000 cases will enable the Company to allocate $3,000   
per month toward this advertising.                                              

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EMPLOYEES                                                                       

        As of December 31, 1997, the Company employed a staff of 28, including
one (1) sales supervisor, two (2) sales manager, thirteen (13) sales people, and
twelve (12) managerial/administrative and distribution employees. The Company   
does not have any collective bargaining agreements and has not experienced any  
work stoppages as a result of labor disputes. The Company considers its employee
relations to be good.                                                           

COMPETITION                                                                     

    The business conducted by the Company is highly competitive. As of
December 31, 1997, the Company competed with approximately ten (10) other       
companies in the metropolitan New York area that are engaged in businesses that 
are substantially similar to that engaged in by the Company. Some of the        
Company's competitors are better capitalized, better financed, more established 
and more experienced than the Company and may offer beer, beverage and related  
products at lower prices or concessions than the Company. Should the Company not
be able to compete effectively, its results of operations and financial         
condition could be materially adversely affected.                               

SOURCES OF SUPPLY                                                               

   In addition to purchasing Pabst Products directly from Pabst, the
Company intends to purchase products (other than Pabst Products) from a number  
of nationally known beer and beverage companies. Since there are many           
manufacturers of alcoholic and non-alcoholic products sold by the Company, the  
Company does not anticipate difficulty in obtaining such products if its        
relationship with one or more of its suppliers terminates. Management of the    
Company believes that except for Pabst, the loss of any one supplier will not   
adversely affect the Company's business. Termination of the Company's           
Distributorship Agreement with Pabst could have a materially adverse effect on  
the business of the Company.                                                    

SEASONALITY                                                                     

       The Company's business is subject to substantial seasonal variations.
Historically, a significant portion of the Company's net sales and net earnings 
have been realized during the month of December and the months of May through   
September, and levels of net sales and net earnings have generally been         
significantly lower during the period from October through April (excluding     
December). The Company believes that this is the general pattern associated with
other beverage distributors with which it competes. If for any reason the       
Company's sales were to be substantially below seasonal norms during the month  
of December and/or the months of May through September, the Company's           
anticipated revenues and earnings could be materially and adversely affected.   

GOVERNMENT REGULATION                                                           

       Wholesale and retail distribution of alcoholic beverages is regulated
by federal and state law. The Company's business is highly regulated by federal,
state and local laws and regulations. The                                       

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company must comply with extensive laws and regulations regarding such matters  
as state and regulatory approval and licensing requirements, trade and pricing  
practices, permitted and required labeling, advertising, promotion and marketing
practices, relationships with distributors and related matters. Since the       
Company intends to distribute such alcoholic beverages in New York State, the   
Company is required to obtain authorization from the Federal Bureau of Alcohol, 
Tobacco and Firearms (BATF) and the New York State Liquor Authority (SLA). The  
Company has received from the BATF and SLA its required licenses. In the        
experience of management, although such agencies may impose conditions on the   
grant of such licenses, such licenses are ordinarily granted. In the event,     
either the SLA or the BATF should impose conditions on the grant of such        
licenses, the Company intends to take all steps necessary to satisfy such       
conditions. Pending receipt of its licenses, the Company has appointed VSI,     
which is a licensed distributor, to act as its agent for distribution of Pabst  
Products. There can be no assurance that the various governmental regulations   
applicable to the beverage industry will not be changed so as to impose more    
stringent requirements on the Company. If the Company was to fail to be in      
compliance with any applicable governmental regulation, such failure could cause
the Company's licenses to be revoked and have a material adverse effect on the  
business of the Company. The Company's beer operations may be subject to        
increased taxation by federal, state and local governmental agencies as compared
with those of non-alcohol related business. In addition, if federal or state    
excise taxes are increased, the Company may have to raise prices to maintain    
present profit margins. The Company does not believe that a price increase due  
to increased taxes will reduce unit sales, but the actual effect will depend on 
the amount of any such increase, general economic conditions and other factors. 
Higher taxes may reduce overall demand for beer, and thus negatively impact     
sales of the Company's beer products.                                           

ITEM 2. PROPERTIES.                                                             

     In January 1996, the Company entered into a lease with East Tremont
Partners for the premises located at 1111 East Tremont Avenue, Bronx, New York  
10460, under which it agreed to lease 15,000 square feet of administrative      
office and warehousing space for a term of five (5) years commencing on April 1,
1996 and continuing until May 31, 2001. Total monthly payments under such lease 
are $5,000, subject to increases during subsequent years of the lease term. East
Tremont Partners is a New York partnership in which Mr. Stella holds a one-sixth
interest. Management of the Company believes that the rent paid by the Company  
under this lease is less than what it would be required to pay for similar      
premises within the area in which the Company's administrative offices are      
located.                                                                        

      In December 1995, the Company entered into a lease with East Tremont
Partners for the premises located at 415 DeVoe Avenue, Bronx, New York 10460,   
pursuant to which it agreed to lease approximately 7,000 square feet of retail  
and warehousing space for a term of five (5) years commencing on April 1, 1996  
and continuing until May 31, 2001. Total monthly payments under such lease are  
$5,000, subject to increases during subsequent years of the lease term.         
Management of the Company believes that the rent paid by it under this lease is 
also less than the fair market value of similar premises within the area in     
which such premises are located.                                                

        Management believes that the facilities used by it in the operation of
its business are                                                                

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adequately covered by insurance and are suitable and adequate for their         
respective purposes.                                                            

ITEM 3. LEGAL PROCEEDINGS.                                                      

    Except as set forth below, management is not aware of any material
legal proceedings pending against the Company.                                  

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.                    

     No matters were submitted to a vote of the holders of the Company's
Common Stock during the last quarter of its fiscal year ended December 31, 1997.

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 PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.  

  The Company's Units, Common Stock and Class A Warrants commenced
trading on the Nasdaq SmallCap Market on the effectiveness of the Company's     
Initial Public Offering on July 17, 1997 under the symbols "CBEVU," "CBEV" and  
"CBEVW," respectively. The Common Stock and Warrants are regularly quoted and   
traded on the Nasdaq SmallCap Market. The Company's Units were de-listed from   
trading on August 29, 1997                                                      

   The following table indicates the high and low bid prices for the
Company's Units, Common Stock and Class A Warrants for the period from July 17, 
1997 to December 31, 1997 based upon information supplied by the NASDAQ system. 
Prices represent quotations between dealers without adjustments for retail      
markups, markdowns or commissions, and may not represent actual transactions.   

                                                                [Download Table]

Units                                                                       
                  1997 Fiscal Year                          Quoted Bid Price
                  ----------------                          ----------------
                                                            High      Low   
                                                            ----      ---   
                                                                            
                  First Quarter                             DID NOT TRADE   
                  Second Quarter                            DID NOT TRADE   
                  Third Quarter                             9 7/8   6 1/2   
                  Fourth Quarter                            DID NOT TRADE   

                                                                [Download Table]

Common                                                                      
Stock                                                                       
                  1997 Fiscal Year                          Quoted Bid Price
                  ----------------                          ----------------
                                                            High      Low   
                                                            ----      ---   
                                                                            
                  First Quarter                             DID NOT TRADE   
                  Second Quarter                            DID NOT TRADE   
                  Third Quarter                             8 3/8   4 3/8   
                  Fourth Quarter                            6 1/2   5       

                                                                [Download Table]

Class A                                                                     
Warrants                                                                    
                  1997 Fiscal Year                          Quoted Bid Price
                  ----------------                          ----------------
                                                            High      Low   
                                                            ----      ---   
                                                                            
                  First Quarter                             DID NOT TRADE   
                  Second Quarter                            DID NOT TRADE   
                  Third Quarter                             3 3/8     3/4   
                  Fourth Quarter                            1 7/8     7/8   

        On March 31, 1998 the closing price of the Common Stock as reported on
NASDAQ SmallCap Market was $6 5/8. On March 31, 1998 the closing price for the  
Class A Warrant reported on NASDAQ SmallCap was $1 1/4. The Units did not trade.
On March 31, 1998 there were 13 holders of record of Common Stock.              

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ITEM 6:                                                                         

CAPITAL BEVERAGE CORPORATION                                                    
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION                     
AND RESULTS OF OPERATIONS                                                       

  The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the       
Company's results of operations and financial operations and financial          
conditions. This discussion should be read in conjunction with the financial    
statements and notes thereto appearing elsewhere herein.                        

RESULTS OF OPERATIONS                                                           

       Year ended December 31, 1997 ("fiscal 1997") as compared to year 1996
("fiscal 1996"):                                                                

  Net sales for the year ended December 31, 1997 were $13,687,634,
reflecting an increase of approximately $1,454,027 or approximately 12% from the
$12,233,607 of net sales for the year ended December 31, 1996. Net sales for    
1997 were favorably impacted by the Company's acquisition, in January 1996 of   
its license to distribute certain products (the "Pabst Products") of the Pabst  
Brewery Company in the five boroughs of New York city and certain other         
surrounding counties. Net sales for 1997 were also favorably impacted due to a  
decrease in selling prices to its larger customer. This reduced significantly   
the product coming into Capital's territory by other sources. Without this      
supplier, the Company determined that it would not be able to compete with other
distributors and/or independent wholesalers who have actively engaged in        
transshipping of Pabst Products. Net sales of Pabst products were approximately 
$5,814,134 during the fiscal year end 1997.                                     

        Cost of sales was $12,400,645 or 90% of net sales, for fiscal 1997, as
compared to $10,893,582 or 89% of net sales, for fiscal 1996. The increase, in  
dollar terms, of $1,507,063 in cost of sales from 1996 to fiscal 1997 reflects  
the significantly higher net sales in fiscal 1997 as compared to fiscal 1996.   

         The Company's gross margin was $1,286,989 or 9.4% of net sales, in 1997
as compared to $1,340,025 or 11% of net sales, in fiscal 1996. The decrease in  
gross margin percentage is due to the decision of management to reduce its      
selling prices to compete in this marketplace with its entire Pabst Product     
line. The Company's gross margin on sales of Pabst Products are significantly   
higher than on sales of other products, and management expects an improvement in
both net sales and gross margin in 1998 due to an increase implemented in the   
first quarter. Management can give no assurance that these prices will maintain 
themselves over a guaranteed period, as a result of increased competition and   
other risk factors.                                                             

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        Selling and delivery expenses were $371,603 in fiscal 1997 as compared
to $141,834 for fiscal 1996 reflecting additional marketing and incentives      
offered in fiscal 1997.                                                         

        General and administrative were $1,455,264 for fiscal 1997 as compared
to $1,212,293 for fiscal 1996. This represents an increase of $242,971 or 20%,  
from fiscal 1996 to fiscal 1997. Amortization of intangible assets was $160,000 
in fiscal 1997, as compared to $160,000 in fiscal 1996, as a result of the      
license acquired in January 1996. The cost of the license is being amortized    
over ten (10) years. Other general and administrative expenses increased from   
fiscal 1996 to fiscal 1997 as a result of increases in salaries (including      
officer salaries) office expense, utilities and repairs, maintenance expenses,  
necessary to support the high level of sales in fiscal 1997 as compared to      
fiscal 1996.                                                                    

    Interest expense was $97,245 for 1997, as compared to $164,319 for
1996. This represents a decrease of $67,074. The decrease in interest expense is
a result of paying off debt.                                                    

MATERIAL CHANGE IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES         

       The Company's working capital increased from $245,666 at December 31,
1996 to $3,706,851 at December 31, 1997. The increase of $3,461,185 was due to  
the funds raised in connection with the Company's initial public offering.      

       At December 31, 1997, the Company's primary sources of liquidity were
$2,843,870 in cash, $855,472 in accounts receivable and $426,290 in inventories.

ITEM 7. FINANCIAL STATEMENTS.                                                   

     See financial statements following Item 13 of this Annual Report on
Form 10-KSB.                                                                    

ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.                                                     

None.                                                         

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PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.                         

DIRECTORS AND EXECUTIVE OFFICERS                                                

         The names and ages of the directors, executive officers and significant
employees, and promoters of the Company are set forth below.                    

                                                                [Download Table]

      NAME             AGE  POSITION HELD                                
                                                                         
Carmine N. Stella      45   President, Chief Executive Officer,          
                            Chairman of the Board                        

Robert A. Vessa        47   Director                                     

Anthony Stella         46   Vice President of Sales and Managing Director

Carol Russell          41   Secretary and Treasurer                      

Eugene Fernandez, Jr*  35   Director                                     

Dawn A. Collins        28   Director                                     

Joseph M. Luzzi        49   Director                                     

----------                                                                      

     * Mr. Fernandez resigned from the Board of Directors on October 29,
1997.                                                                           

         Carmine N. Stella - Mr. Stella has served as President, Chief Executive
Officer and Chairman of the Board of Directors of the Company since its         
inception in December 1995. From 1991 to the present, Mr. Stella has been the   
sole officer, director and shareholder of VSI, a wholesale and retail seller of 
alcoholic and nonalcoholic beverages with $12,000,000 of sales during fiscal    
1994 and $7,000,000 of sales during fiscal 1995. From 1986 to 1990, Mr. Stella  
served as President and a director of Gotham Wholesale Beer Distributors, a beer
and non-alcoholic beverage wholesaler with annual sales in excess of            
$20,000,000. Mr. Stella served as a President and Director of the Empire State  
Beer Distributors Association from 1984 to 1988. Mr. Stella received a B.B.A. in
Accounting from Bernard M. Baruch College, New York, New York in 1973.          

      Robert A. Vessa - Mr. Vessa has served as Vice President - Sales and
Marketing since February 1996, and has been a Director of the Company since     
October 29, 1997. From 1984, Mr. Vessa has acted as Business Affairs Coordinator
and a member of the Board of Directors of the                                   

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Empire State Beer Distributors Association. Mr. Vessa received a B.B.A. degree  
in Marketing and Advertising from Bernard M. Baruch College, City University of 
New York in 1973.                                                               

      Anthony Stella - Mr. Stella has served as Vice President - Sales and
Marketing and an employee of the Company since inception. Mr. Stella has acted  
as executive sales manager for Vito Santoro, Inc., Gotham Wholesale Beer, Inc., 
Miller Home Service, Inc. and College Point Beer Distributors over the past 15  
years. Anthony Stella is the brother of Carmine Stella.                         

       Carol Russell - Mrs. Russell has served as Secretary, Treasurer and a
Director of the Company since February 1996. From 1991. Mrs. Russell has also   
served as Comptroller and Operations Manager of VSI from 1991 to the present.   
Mrs. Russell graduated from Central Commercial High School in New York City in  
1973.                                                                           

        Dawn A. Collins - Ms. Collins has been a Director of the Company since
October 29, 1997. Ms. Collins has also served as an accountant for Restaurant   
Systems International, Inc. since 1995. From 1993 to 1995, Ms. Collins served as
an accountant for Ocean View Management. From 1991 to 1993, Ms. Collins was an  
accountant with Barr Beatty Devlin & Co., Inc. Ms. Collins received a B.B.A. in 
accounting from Baruch College in 1992.                                         

      Joseph M. Luzzi - Mr. Luzzi has been a Director of the Company since
October 29, 1997. Mr. Luzzi has also served as President, Chief Executive       
Officer and Chairman of the Board of Directors of Boro Recycling, Inc. since its
inception in December 1980. From 1973 to 1980, Mr. Luzzi was the New York City  
sales manager for the Sunshine Biscuit Company, a subsidiary of American Brands,
Inc. Mr. Luzzi attended New York City Community College from 1967 to 1969.      

      COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

   Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten   
percent (10%) of a registered class of the Company's equity securities, to file 
with the Securities and Exchange Commission initial reports of ownership and    
reports of changes in ownership of common stock and other equity securities of  
the Company. Officers, directors and greater than ten percent shareholders are  
required by SEC regulation to furnish the Company with copies of all Section    
16(a) forms they file.                                                          

       Except as provided below, to the Company's knowledge, based solely on
its review of the copies of such reports furnished to the Company during the    
year ended December 31, 1997, all Section 16(a) filing requirements applicable  
to its officers, directors and greater than ten percent beneficial owners were  
satisfied.                                                                      

ITEM 10. EXECUTIVE COMPENSATION.                                                

   The following table sets forth the compensation paid to the Named
Executive Officers for the fiscal year ending December 31, 1997.                

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Summary Compensation Table

                                                        [Enlarge/Download Table]

                                           Annual Compensation Awards   Long-Term Compensation              
        (a)                          (b)    (c)               (d)                  (e)               (f)    
                                                          Other Annual         Restricted       Stock Option
Name and Principal Position          Year  Salary         Compensation         Award               Grants   
                                                                                                            
Carmine N. Stella                    1997  $291,763.68        -0-              -0-                -0-       
President, Chief Executive Officer,                                                                         
Chairman of the Board                                                                                       

Anthony Stella                       1997  $161,648.68        -0-              -0-                -0-       
Vice President of Sales                                                                                     
and Managing Director                                                                                       

Carol Russell                        1997  $105,846.24        -0-              -0-                -0-       

    The following table sets forth certain information with respect to
options granted during the last fiscal year to the Company's Chief Executive    
Officer and the other executive officers named in the above Summary Compensation
Table.                                                                          

 OPTION/SAR GRANTS IN LAST FISCAL YEAR

                                                                [Download Table]

      Number of Securities                                                        
           Underlying           Percent of Total      Exercise or                 
          Options/SARS       Options/SARS Granted to   Base Price                 
Name       Granted (#)      Employees in Fiscal Year     ($/Sh)    Expiration Date
                                                                                  
               -0-                     -0-                -0-            -0-      

----------                                                                      

(1)      Options are exercisable for shares of Common Stock.                    

    The following table sets forth certain information with respect to
options exercised during the last fiscal year by the Company's Chief Executive  
Officer and the executive officers named in the Summary Compensation Table, and 
with respect to unexercised options held by such persons at the end of the last 
fiscal year:                                                                    

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AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END          
OPTION/SAR VALUES                                                               

                                                        [Enlarge/Download Table]

           Shares                           Number of Securities          Value of Unexercised in the  
        Acquired on    Value Realized      Underlying Unexercised            Money Options/SARs at     
Name  Exercise (#)(1)        $           Options/SARS at FY-End (#)              FY-End ($) (2)        
----  ---------------       ---          --------------------------             ---------------        
                                       Exercisable       Unexercisable  Exercisable       Unexercisable
                                       -----------       -------------  -----------       -------------
                                                                                                       
             -0-           -0-           -0-              -0-           -0-               -0-          

Each director of the Company is entitled to receive reasonable
out-of-pocket expenses incurred in attending meetings of the Board of Directors 
of the Company. The members of the Board of Directors meet at least quarterly   
during the Company's fiscal year, and at such other times duly called.          

EMPLOYMENT AGREEMENTS                                                           

     The Company entered into an employment agreement with Mr. Stella on
October 1, 1996 which provides for a three-year term and includes annual        
compensation of $300,000, plus certain fringe benefits including health and life
insurance.                                                                      

STOCK OPTION PLANS AND AGREEMENTS                                               

    The Company's 1996 Incentive Stock Option Plan was approved by the
Board of Directors and holders of Common Stock of the Company on June 19, 1996  
to provide for the grant of incentive stock options within the meaning of       
Section 422 of the Internal Revenue Code of 1986 to officers and employees of   
the Company. A total of 350,000 shares of Common Stock has been authorized and  
reserved for issuance under the 1996 Incentive Stock Option Plan, subject to    
adjustment to reflect changes in the Company's capitalization in the case of a  
stock split, stock dividend or similar event. No options have been granted under
the Company's 1996 Incentive Stock Option Plan. The 1996 Incentive Stock Option 
Plan will be administered by the Compensation Committee, which has the sole     
authority to interpret the 1996 Incentive Stock Option Plan, to determine the   
persons to whom options will be granted, to determine the basis upon which the  
options will be granted, and to determine the exercise price, duration and other
terms of options to be granted under the 1996 Incentive Stock Option Plan;      
provided that, (i) the exercise price of each option granted under the 1996     
Incentive Stock Option Plan may not be less than the fair market value of the   
Common Stock on the day of the grant of the option, (ii) the exercise price must
be paid in cash and or stock upon exercise of the option, (iii) no option may be
exercisable for more than 10 years after the date of grant, and (iv) no option  
is transferable other than by will or the laws of descent and distribution. No  
option is exercisable after an optionee ceases to be employed by the Company or 
a subsidiary of the Company, subject to the right of the Compensation Committee 
to extend the exercise period for not more than 90 days following the date of   
termination of an optionee's employment. If an optionee's employment is         
terminated by reason of disability, the Compensation Committee has the authority
to extend the exercise period for not more than one year following the date of  
termination of the                                                              

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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                                     

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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.        

The following table sets forth as of March 31, 1998, certain  
information with respect to the beneficial ownership of Common Stock and        
Preferred Stock by each person or entity known by the Company to be the         
beneficial owner of 5% or more of such shares, each officer and director of the 
Company, and all officers and directors of the Company as a group:              

                                                                [Download Table]

Name and Address of               Shares of Common  Percentage (%) of
Beneficial Owner (1)              Stock Owned       Common Stock     
--------------------              -----------       ------------     
                                                                     
Carmine Stella(2)                 494,091           17.2%            
Eugene Fernandez(3)               354,545           14.9%            
Anthony Stella(4)                 177,273            7.5%            
Carol Russell                           0            0               
Dawn Collins                            0            0               
Joseph Luzzi                            0            0               
Robert Vessa                            0            0               
All officers and  directors as a                                     
group (seven (7) persons)         940,909           39.6%            

(1)      The address of each Stockholder shown above except as otherwise        
  indicated is c/o Capital Beverage Corporation, 1111 East Tremont
Avenue, Bronx, New York 10460.                                

(2)      Does not include (i) 300,000 shares of Common Stock that may be        
        acquired by Mr. Stella upon conversion of the 300,000 shares of Series
       B Preferred Stock that were issued to Mr. Stella upon consummation of
         the Merger; or (ii) 333,600 shares of Common stock that may be acquired
by Mr. Stella beginning July 17, 1998 upon exercise of 333,600
additional Class A Warrants held by Mr. Stella.               

(3)      Does not include 167,000 shares of Common stock that may be acquired by
         Mr. Fernandez, beginning July 17, 1998 upon exercise of 167,000 Class A
Warrants held by Mr. Fernandez.                               

(4)      Does not include 83,400 shares of Common Stock that may be acquired by 
    Mr. Anthony Stella beginning July 17, 1998 upon exercise of 83,400
Class A Warrants held by him.                                 

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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.                        

       Upon formation of the Company in December 1995, the Company issued an
aggregate of 709,091 shares of Common Stock to Mr. Carmine Stella, 354,545      
shares of Common Stock to Mr. Eugene Fernandez and 177,273 shares of Common     
Stock to Mr. Anthony Stella, in consideration of the payment by each of such    
individuals of $.001 per share, and issued 333,600 Class A Warrants to Mr.      
Carmine Stella, 1,667,000 Class A Warrants to Mr. Eugene Fernandez and to a     
corporation wholly owned by Mr. Fernandez, and 83,400 Class A Warrants to Mr.   
Anthony Stella. The Company also issued 886,364 additional shares of Common     
Stock and 416,000 additional Class A Warrants to four other individuals involved
in its formation but repurchased all of such additional shares and Class A      
Warrants for nominal consideration in January 1996. All such reacquired shares  
of Common Stock and all such reacquired Class A Warrants have been canceled. In 
January 1996, in order to facilitate the raising of additional capital for the  
Company, Mr. Fernandez and American Marketing & Sales, Ltd. voluntarily agreed  
to the cancellation of 600,000 and 900,000 of the Class A Warrants,             
respectively, that had previously been issued to them in order to change the    
capital structure of the Company.                                               

      In December 1995, the Company entered into a lease with East Tremont
Partners for the premises located at 415 DeVoe Avenue, Bronx, New York 10460,   
pursuant to which it agreed to lease approximately 7,000 square feet of retail  
and warehousing space for a term of five (5) years commencing on April 1, 1996  
and continuing until May 31, 2001. Total monthly payments under such lease are  
$5,000, subject to adjustment during subsequent years of the lease term. East   
Tremont Partners is a New York partnership in which Mr. Stella holds a one-sixth
interest. Management of the Company believes that the rent paid by it under this
lease is less than the fair market value of similar premises within the area in 
which such premises are located.                                                

     In January 1996, the Company entered into a lease with East Tremont
Partners for the premises located at 1111 East Tremont Avenue, Bronx, New York  
10460 under which it agreed to lease 15,000 square feet of administrative office
and warehousing space for a term of five (5) years commencing on April 1, 1996  
and continuing until May 31, 2001. The initial monthly rent under such lease is 
$5,000, subject to adjustment during the term of the lease. East Tremont        
Partners is a New York partnership in which Mr. Stella holds a one-sixth        
interest. Management of the Company believes that the rent paid by the Company  
under this lease is less than what it would be required to pay for similar      
premises within the area in which the Company's administrative offices are      
located.                                                                        

     In March 1996, Mr. Carmine Stella made an interest free loan to the
Company in the amount of $185,000 to provide it with cash flow during the       
operating deficit that occurred during the first quarter of 1996. The Company   
repaid Mr. Stella the entire amount of such loan during the second and third    
quarters of fiscal 1996.                                                        

        In June 1996, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with VSI pursuant to which VSI would be merged with and
into the Company. All of the outstanding stock of VSI is owned by Mr. Carmine   
Stella, who is the Chairman of the Board, President, and Chief Executive Officer
of the Company. On the effective date of the Merger                             

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("Merger Date") each share of common stock of VSI presently outstanding shall be
automatically canceled and converted into the right to receive 3,000 fully paid 
and non-assessable shares of the Company's Series B Preferred Stock and such    
shares of the Preferred Stock will be distributed to Mr. Stella. In May 1996,   
the Company obtained an appraisal of the business of VSI from 1st Class         
Management Inc., a non-affiliated company with in excess of 25 years' experience
in performing business appraisals. No member of the board of directors or       
officer of the Company is affiliated with such appraiser. 1st Class Management  
Inc. estimated the value of VSI to be between $1,000,000 and $1,500,000. It was 
agreed between the Company and Mr. Stella that the value of VSI for purposes of 
determining the number of shares of Series B Preferred Stock to be issued to Mr.
Stella in the Merger is $1,200,000.                                             

    Under the terms of an Option Agreement between the Company and Mr.
Stella dated as of December 6, 1995, the Company and Mr. Stella agreed that the 
consideration to be paid to Mr. Stella for VSI would be that number of shares of
the Company's Series B Preferred Stock equal to the value of VSI as determined  
by an independent appraiser, with each share of Series B Preferred Stock having 
a value of $4.00. The value for such Series B Preferred Stock was established by
attributing to the shares of such stock the same approximate value as was paid  
for the Company's Series A Preferred Stock in the Company's Units Financing that
occurred between January and March of 1996.                                     

      The terms of the Company's Series A and Series B Preferred Stock are
substantially similar except that the Series B Preferred Stock ranks junior to  
the Series A Preferred Stock with respect to payment of dividends and payment   
upon liquidation, and the Series B Preferred Stock is convertible into Common   
Stock of the Company at any time during the three (3) year period commencing 180
days and terminating three (3) years after the Effective Date, whereas the      
Series A Preferred Stock may be converted into Common Stock of the Company      
during the period commencing 180 days and terminating 365 days after the        
Effective Date (unless the Representative consents to the conversion thereof    
prior to such 180th day).                                                       

Under the terms of the Merger Agreement, VSI made certain     
representations and warranties to the Company in connection with its business,  
operations, assets and liabilities and agreed that it would perform certain     
covenants. In order to ensure the accuracy of such representations and          
warranties and the performance of the covenants of VSI contained in the Merger  
Agreement, Mr. Stella agreed to deposit with an escrow agent all of the Series B
Preferred Stock received by him in the Merger. The Company's sole remedy in the 
event of a breach of any representation, warranty or covenant is to recover that
number of shares of Series B Preferred Stock as may then be equal in value to   
the loss incurred by the Company resulting from the breach, and the Company is  
not entitled under the Merger Agreement to assert a claim against Mr. Stella    
personally in connection with any such breach. Moreover, any claim for          
indemnification under the Merger Agreement must be brought within two years and 
may not be brought unless monetary damages incurred by the Company in connection
with such claim exceed $60,000 individually and $250,000 in the aggregate, in   
which event the Company may only recover those damages that are in excess of    
such $250,000 amount. Since the sole remedy of the Company for breaches of      
representations, warranties and covenants in the Merger Agreement is limited to 
the value of the Series B Preferred Stock placed in escrow, the                 

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Company may incur losses arising out of such breaches for which it would not be 
indemnified.                                                                    

    Although the Company has no present intention of entering into any
affiliated transactions, the Company believes that material affiliated          
transactions between the Company and its directors, officers, principal         
shareholders or any affiliates thereof should be in the future on terms no less 
favorable than could be obtained from unaffiliated third parties.               

 With respect to each of the foregoing transactions, the Company
believes that the terms of such transactions were as fair to the Company as     
could be obtained from an unrelated third party. Future transactions with       
affiliates will be on terms no less favorable than could be obtained from       
unaffiliated parties and will be approved by a majority of the independent      
and/or disinterested members of the board of directors.                         

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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K                                       

ITEM a. EXHIBITS AND REPORTS ON FORM 8-K                                        

(a)(1) FINANCIAL STATEMENTS.                                                    

     The following financial statements are included in Part II, Item 7:

Index to Financial Statements                                     F - 1         

Report of Independent Certified Public Accountants                F - 2         

Balance Sheet as of December 31, 1997                             F - 3         

Statements of Operations for the years ended                                    
December 31, 1997 and 1996                                       F - 4        

Statements of Stockholders' Equity for the years                                
ended December 31, 1997 and 1996                                F - 5       

Statements of Cash Flows for the years ended                                    
December 31, 1997 and 1996                                       F - 6        

Notes to financial statements                                     F - 7 - F - 10

(a) (2) EXHIBITS                                                                

         A list and description of exhibits filed as part of this Form 10-KSB is
provided in the attached Exhibit Index.                                         

ITEM 27.          EXHIBITS.                                                     

1.1     Form of Underwriting Agreement.*                                      
1.2     Form of Agreement Among Underwriters.*                                
1.3     Form of Selected Dealer Agreement.*                                   
3.1     Certificate of Incorporation.*                                        
3.2     Certificate of Designations, As Amended,  Relating to Series A        
Preferred Stock.*                                             
3.3     Form of Certificate of Designations Relating to Series B Preferred    
Stock.*                                                       
3.4     ByLaws.*                                                              
4.1     Specimen Common Stock Certificate.*                                   
4.2     Specimen Series A Preferred Stock Certificate.*                       
4.3     Specimen Series B Preferred Stock Certificate.*                       
4.4     Specimen Class A Warrant Certificate.*                                
4.5     Form of Convertible Bridge Note.*                                     
4.6     Form of Class A Warrants Issued to Certain Members of Management.*    

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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.*                       

*        Incorporated by reference to Registrant's Registration Statement on    
       Form SB-2, and amendments thereto, Registration No. 333-9995 declared
effective on July 17, 1997.                                   

(b)      REPORTS ON FORM 8-K.                                                   

None.                                       

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CAPITAL BEVERAGE CORPORATION

FINANCIAL STATEMENTS

 INDEX

                                                                [Download Table]

                                                                        Page    
                                                                       Number   
                                                                    ------------
                                                                                
INDEPENDENT AUDITORS' REPORT                                           F - 2    
FINANCIAL STATEMENTS:                                                           

    Balance Sheet                                                      F - 3    

    Statement of Operations                                            F - 4    

    Statement of Stockholders' Equity                                  F - 5    

    Statement of Cash Flows                                            F - 6    

    Notes to Financial Statements                                     F - 7-10  

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INDEPENDENT AUDITORS' REPORT

Capital Beverage Corporation                                                    
Bronx, New York                                                                 

We have audited the accompanying balance sheet of Capital Beverage  
Corporation as of December 31, 1997 and the related statements of operations,   
stockholders' equity and cash flows for the years ended December 31, 1997 and   
1996. These financial statements are the responsibility of the Company's        
management. Our responsibility is to express an opinion on these financial      
statements based on our audit.                                                  

 We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain 
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting  
the amounts and disclosures in the financial statements. An audit also includes 
assessing the accounting principles used and significant estimates made by      
management, as well as evaluating the overall financial statement presentation. 
We believe that our audit provides a reasonable basis for our opinion.          

      In our opinion, the financial statements referred to above present fairly,
the financial position of Capital Beverage Corporation as of December 31, 1997  
and the results of its operations and its cash flows for the years ended        
December 31, 1997 and 1996 in conformity with generally accepted accounting     
principles.                                                                     

                                 /s/ Feldman Radin & Co., P.C.
                             Feldman Radin & Co., P.C.

New York, New York                                                              
February 5, 1998                                                                

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CAPITAL BEVERAGE CORPORATION

 BALANCE SHEET

 DECEMBER 31, 1997

                                                        [Enlarge/Download Table]
                                                                                           
                               ASSETS                                                      

CURRENT ASSETS:                                                                            
     Cash                                                                      $ 2,843,870 
     Accounts receivable - trade, net of allowance for doubtful                            
         accounts of $65,000                                                       855,472 
     Inventories                                                                   426,290 
     Prepaid expenses and other                                                      9,548 
                                                                               ----------- 
         TOTAL CURRENT ASSETS                                                    4,135,180 

PROPERTY AND EQUIPMENT, less accumulated depreciation                                      
     of $61,965                                                                     50,058 

OTHER ASSETS:                                                                              
     Intangible assets, less accumulated amortization of $320,000                1,280,000 
     Deposits                                                                        3,290 
                                                                               ----------- 

                                                                               $ 5,468,528 
                                                                               =========== 

                      LIABILITIES AND STOCKHOLDERS' EQUITY                                 

CURRENT LIABILITIES:                                                                       
     Accounts payable                                                          $    67,135 
     Accrued expenses and taxes                                                    112,601 
     Current portion of long-term debt                                              62,480 
     Accrued dividends on preferred stock                                          186,113 
                                                                               ----------- 
         TOTAL CURRENT LIABILITIES                                                 428,329 
                                                                               ----------- 

LONG-TERM DEBT                                                                     627,676 
                                                                               ----------- 

STOCKHOLDERS' EQUITY:                                                                      
       7% Cumulative Series B Preferred Stock, par value $.01;                             
         issued and outstanding 300,000 shares (Liquidation value $1,200,000)        3,000 
     Common stock, $.001 par value; authorized 20,000,000 shares;                          
         issued and outstanding 2,378,409 shares                                     2,379 
     Additional paid-in capital                                                  5,365,573 
     Accumulated deficit                                                          (958,429)
                                                                               ----------- 
         TOTAL STOCKHOLDERS' EQUITY                                              4,412,523 
                                                                               ----------- 
                                                                               $ 5,468,528 
                                                                               =========== 

 See notes to financial statements

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CAPITAL BEVERAGE CORPORATION

 STATEMENT OF OPERATIONS

                                                                [Download Table]

                                                Years Ended December 31,     
                                             ------------------------------- 
                                                1997                1996     
                                            ------------        ------------ 
                                                                             
REVENUES:                                                                    
     Net sales                              $ 13,687,634        $ 12,233,607 
     Cost of goods sold                       12,400,645          10,893,582 
                                            ------------        ------------ 
        GROSS PROFIT                           1,286,989           1,340,025 
                                            ------------        ------------ 

COSTS AND EXPENSES:                                                          
     Selling and delivery                        371,603             141,834 
     General and administrative                1,455,264           1,212,293 
                                            ------------        ------------ 
                                               1,826,867           1,354,127 
                                            ------------        ------------ 

LOSS FROM OPERATIONS                            (539,878)            (14,102)

INTEREST EXPENSE                                  97,245             164,319 

INTEREST INCOME                                  (63,101)               --   
                                            ------------        ------------ 

NET LOSS                                        (574,022)           (178,421)

PREFERRED STOCK DIVIDENDS                         49,613             115,500 
                                            ------------        ------------ 

NET LOSS APPLICABLE TO COMMON SHAREHOLDERS  $   (623,635)       $   (293,921)
                                            ============        ============ 

LOSS PER  COMMON SHARE                      $      (0.35)       $      (0.24)
                                            ============        ============ 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES       1,762,263           1,240,909 
                                            ============        ============ 

 See notes to financial statements

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CAPITAL BEVERAGE CORPORATION

 STATEMENT OF STOCKHOLDERS' EQUITY

                                                        [Enlarge/Download Table]


                                                                     Preferred Stock              Common Stock        
                                                                 ------------------------   --------------------------
                                                                  Shares        Amount        Shares           Amount 
                                                                 --------     -----------   ----------       ---------
                                                                                                                      
Balance January 1, 1996                                           300,000     $     3,000    1,240,909       $   1,241

  Net loss                                                             --              --           --              --

  Proceeds from issuance of Preferred Stock, less related costs   337,500       1,215,000           --              --

  Dividends payable to preferred shareholders                          --              --           --              --

  Distributions to common shareholders                                 --              --           --              --
                                                                 --------     -----------   ----------       ---------

Balance December 31, 1996                                         637,500       1,218,000    1,240,909           1,241

  Net loss                                                             --              --           --              --

  Dividends payable to preferred shareholders                          --              --           --              --

  Conversion of Series A Preferred Stock                         (337,500)     (1,215,000)     337,500             338

  Proceeds from issuance of units, less related costs                  --              --      800,000             800

                                                                 --------     -----------   ----------       ---------
Balance December 31, 1997                                         300,000     $     3,000    2,378,409       $   2,379
                                                                 ========     ===========   ==========       =========

                                                        [Enlarge/Download Table]

                                                                 Additional                  Total     
                                                                  Paid-In    Accumulated  Stockholders'
                                                                  Capital      Deficit       Equity    
                                                                 ----------   ---------   -----------  
                                                                                                       
Balance January 1, 1996                                          $  348,333   $  (8,576)  $   343,998  

  Net loss                                                               --    (178,421)     (178,421) 

  Proceeds from issuance of Preferred Stock, less related costs          --           --    1,215,000  

  Dividends payable to preferred shareholders                            --    (115,500)     (115,500) 

  Distributions to common shareholders                                   --     (32,297)      (32,297) 
                                                                 ----------   ---------   -----------  

Balance December 31, 1996                                           348,333    (334,794)    1,232,780  

  Net loss                                                               --    (574,022)     (574,022) 

  Dividends payable to preferred shareholders                            --     (49,613)      (49,613) 

  Conversion of Series A Preferred Stock                          1,214,662          --            --  

  Proceeds from issuance of units, less related costs             3,802,578          --     3,803,378  

                                                                 ----------   ---------   -----------  
Balance December 31, 1997                                        $5,365,573   $(958,429)  $ 4,412,523  
                                                                 ==========   =========   ===========  

 See notes to financial statements

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CAPITAL BEVERAGE CORPORATION

 STATEMENT OF CASH FLOWS

                                                        [Enlarge/Download Table]

                                                                           Years Ended December 31,    
                                                                        ------------------------------ 
                                                                            1997              1996     
                                                                         -----------       ----------- 
                                                                                                       
CASH FLOWS FROM OPERATING ACTIVITIES:                                                                  
     Net loss                                                            $  (574,022)      $  (178,421)
                                                                         -----------       ----------- 
     Adjustments to reconcile net loss to net cash used in operating                                   
          activities:                                                                                  
              Depreciation and amortization                                  167,292           170,423 

     Changes in assets and liabilities:                                                                
         (Increase) in accounts receivable                                  (358,993)         (496,479)
         (Increase) decrease in inventories                                  (82,946)          117,096 
         (Increase) decrease in prepaid expenses                              (8,027)            5,887 
         (Decrease) increase in accounts payable and accrued expenses        (49,870)          135,446 
                                                                         -----------       ----------- 
                                                                            (332,544)          (67,627)
                                                                         -----------       ----------- 

NET CASH USED IN OPERATING ACTIVITIES                                       (906,566)         (246,048)
                                                                         -----------       ----------- 

CASH FLOWS FROM INVESTING ACTIVITIES                                                                   
     Purchases of equipment                                                   (7,023)             --   
     Acquisition of Pabst rights                                                --            (906,491)
                                                                         -----------       ----------- 
                                                                              (7,023)         (906,491)
                                                                         -----------       ----------- 

CASH FLOWS FROM FINANCING ACTIVITIES:                                                                  
     Net proceeds from sale of common stock                                3,803,378              --   
     (Repayment) proceeds of bridge loan                                    (250,000)          250,000 
     Decrease (Increase) in deferred registration costs                      130,783          (130,783)
     Decrease (Increase) in due from affiliate                                57,837           (52,837)
     Issuance of preferred stock                                                --           1,215,000 
     Distributions to stockholders                                           (49,613)          (32,297)
     Payments of long-term debt                                              (61,853)             --   

                                                                         -----------       ----------- 
NET CASH PROVIDED BY FINANCING ACTIVITIES                                  3,630,532         1,249,083 
                                                                         -----------       ----------- 

INCREASE IN CASH                                                           2,716,943            96,544 

CASH - BEGINNING OF YEAR                                                     126,927            30,383 
                                                                         -----------       ----------- 

CASH - END OF YEAR                                                       $ 2,843,870       $   126,927 
                                                                         ===========       =========== 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW                                                                   
     INFORMATION:                                                                                      

     Cash paid for interest                                              $   117,245       $   144,319 
                                                                         ===========       =========== 

SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES:                                                            

     Common Stock issued upon conversion of Series "A" Preferred Stock   $ 1,215,000       $      --   
                                                                         ===========       =========== 

 See notes to financial statements

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CAPITAL BEVERAGE CORPORATION

 NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1997 AND 1996

1.    BASIS OF PRESENTATION AND BUSINESS                                        

    Capital Beverage Corporation (the "Company") was formed in December 1995
    to operate as a wholesale distributor of beer and other beverages in New
 York City. On January 31, 1997, the Company merged with Vito Santoro,
Inc., ("VSI"), a company related through common ownership. The sole 
  stockholder of VSI, and also a significant stockholder of the Company,
    received 300,000 shares of the Company's Series B Cumulative Convertible
 Preferred Stock in the transaction. The merger was accounted for as a
combination of commonly controlled entities and was recorded at the 
     transferor's historical cost basis. Accordingly, the financial statements
    present the financial position, results of operations and cash flows for
VSI and the Company as if they had been combined for all periods    
presented.                                                          

2.    SIGNIFICANT ACCOUNTING POLICIES                                           

   Inventory - Inventory consisting of beer and other beverage products is
      stated at the lower of cost, determined by the first-in, first-out method,
or market.                                                          

      Property and Equipment - Property and equipment are stated at cost and are
      depreciated over the estimated useful lives of the related assets, ranging
 from 6 to 15 years. Depreciation is computed on the straight-line and
     accelerated methods for both financial reporting and income tax purposes.

Income Taxes - The Company follows Statement of Financial Accounting
Standards No. 109 - Accounting for Income Taxes, which requires     
      recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been included in the financial 
 statements or tax returns. Under this method, deferred tax assets and
    liabilities are based on the differences between the financial statement
     and tax bases of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse.      

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    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.                                         

 Intangibles - Intangible assets are primarily a license to distribute
      certain beverage products in New York City, and are recorded at cost, less
amortization provided on a straight-line basis over ten years.      

      Revenue Recognition - Wholesale sales are recognized at the time goods are
shipped.                                                            

Recently Adopted Accounting Pronouncements - In 1995, the Financial 
Accounting Standards Board issued Statement of Financial Accounting 
   Standard No.123 "Accounting for Stock-Based Compensation" ("SFAS 123").
  SFAS 123 encourages companies, among other things, to establish a fair
   value based method of accounting for stock-based compensation plans and
   requires disclosure thereof on a fair value basis. The adoption of SFAS
     123 did not have a material impact on the Company's financial statements.
   The Company has elected to continue to account for employee stock-based
      compensation in accordance with Accounting Principal Board Opinion No. 25,
   "Accounting for Stock Issued to Employees," using intrinsic values with
appropriate disclosures using the fair value based method.          

In February 1997, the Financial Accounting Standards Board issued   
      Statement of Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings
 per Share". SFAS 128 is effective for financial statements issued for
interim and annual periods ending after December 15, 1997; after the
    effective date, all prior period earnings per share data are required to
     be restated. The Company believes that adoption of SFAS 128 will not have
a material impact on its financial statements.                      

     Deferred Registration Costs - Costs incurred in the sale of the Company's
common stock were charged to additional paid-in capital.            

      Loss per common share - Net loss per common share is based on the weighted
    average number of shares outstanding. Potential common shares includable
      in the computation of fully diluted per share results are not presented in
the financial statements as their effect would be anti-dilutive.    

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3.    ACQUISITION OF LICENSE                                                    

    In January 1996, the Company acquired an exclusive license to distribute
Pabst Products within the "territory", as defined in the licensing  
  agreement. The Company agreed to pay $1,600,000, of which $800,000 was
paid at the closing and the balance in a note payable in 120 monthly
installments of $10,000 each, inclusive of interest at 9% per annum.

      Maturities of the notes over the next five years are: 1998 - $62,480, 1999
- $68,131, 2000 - $74,292, 2001 - $81,011, 2002 - $88,338.          

4.    STOCKHOLDERS' EQUITY                                                      

In July 1997, the Company sold 800,000 units for $3,803,000 after   
   expenses. The units consisted of one share of Common Stock and one half
  Class A Redeemable Common Stock Purchase Warrant. Two Class A warrants
 entitle the holder to purchase one share of Common Stock at $6.25 per
      share. The warrants are exercisable commencing July 17, 1998 and expire on
  July 16, 2002. The warrants are redeemable by the Company at $.001 per
    warrant under terms as defined in the warrant agreement. At December 31,
1997, 1,659,000 Class A warrants were issued and outstanding.       

   The Company issued a unit purchase warrant to the underwriter for $100,
  enabling the underwriter to purchase up to 80,000 units at an exercise
     price of at least 120 percent of the initial offering price of the units.
The Company has reserved 120,000 shares of Common Stock to cover the
exercise of such warrant.                                           

5.    INCOME TAXES                                                              

   At December 31, 1997, the Company had a net operating loss carryover of
      $600,000 available as offsets against future taxable income, if any, which
      expire at various dates through 2012. The Company had a deferred tax asset
of $240,000 arising from such net operating loss deductions and has 
   recorded a valuation allowance for the full amount of such deferred tax
asset.                                                              

    The difference between the recorded income tax benefits and the computed
tax benefits using a 40 percent effective rate are as follows:      

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                                                                [Download Table]

                                              Years Ended December 31, 
                                             ------------------------- 
                                               1997             1996   
                                             ---------        -------- 
                                                                       
Computed expected income tax (benefit)       $(229,600)       $(71,200)

Non-deductible items                            19,600          15,200 

Temporary differences                            6,000          20,000 

Benefits not recorded                          204,000          36,000 
                                             ---------        -------- 
                                             $      --        $     -- 
                                             =========        ======== 

6.    LEASE COMMITMENTS                                                         

     The Company is obligated under leases of its warehouse and administrative
   facilities for minimum rental payments of $10,000 per month through May
    2001. A principal shareholder in the Company has a one-sixth interest in
     the lessor. Minimum rental payments of $120,000 per annum are due for the
   years 1998 through 2000 and $55,000 for 2001. Rent expense for 1997 and
1996 was $120,000 in each year.                                     

7.    CONCENTRATION OF CREDIT RISK                                              

The Company is subject to credit risk through trade receivables and 
      short-term cash investments. Credit risk with respect to trade receivables
   is mitigated to a degree because of management's knowledge of the local
      marketplace and the relative creditworthiness of the customers to which it
   extends credit. Short-term cash investments are placed with high credit
 quality financial institutions, thereby limiting the amount of credit
exposure.                                                           

    The Company's operations, and therefore its revenues are concentrated in
  the New York City Metropolitan area. Additionally, the majority of the
Company's revenues are derived from the sale of alcoholic beverages.
    Downturns in New York City's economic activities and/or negative changes
   in the publics perception of the consumption of alcoholic beverages may
adversely affect the Company's operations.                          

8.    MAJOR CUSTOMER AND SUPPLIER INFORMATION                                   

    Sales to three customers were approximately 51% of net sales in 1997 and
55% to two customers in 1996. Purchases of Pabst products were      
   approximately $4,600,000 and $5,400,000 in 1997 and 1996, respectively.

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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 13th day of April, 1998.                        

                      CAPITAL BEVERAGE CORPORATION

                 By:  /s/ Carmine Stella
                      ------------------
                  Carmine Stella
                                      President, Chief Executive Officer
                                          and Chairman of the Board of Directors

         In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant in the capacities and on the dates
indicated                                                                       

                                                                [Download Table]

Signature                            Title                  Date     
                                                                     
/s/ Carmine Stella          Chief Executive Officer,   April 13, 1998
--------------------------  President and Chairman of                
Carmine Stella              the Board of Directors                   

/s/ Robert Vessa            Director                   April 13, 1998
--------------------------                                           
Robert Vessa                                                         

 /s/Carol Russell           Secretary and Treasurer    April 14, 1998
--------------------------                                           
Carol Russell                                                        

/s/ Dawn Collins            Director                   April 13, 1998
--------------------------                                           
Dawn Collins                                                         

 /s/ Joseph Luzzi           Director                   April 13, 1998
--------------------------                                           
Joseph Luzzi                                                         

/s/ Anthony Stella          Vice President of Sales    April 13, 1998
--------------------------  and Director                             
Anthony Stella                                                       

Dates Referenced Herein   and   Documents Incorporated by Reference

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