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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________________ to _________________.
Commission File Number: 33-26617A
CBR BREWING COMPANY, INC.
(Exact name of Registrant as specified in its charter)
Florida 65-0145422
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
433 North Camden, Suite 1200
Beverly Hills, California 90210
(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 274-5172
Securities Registered Under Section 12(b) of the Act:
None
Securities Registered Under Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No[_]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 15, 1996, 5,000,013 shares of Class A Common Stock and
3,000,000 shares of Class B Common Stock were outstanding. The aggregate market
value of the outstanding stock of the Registrant held by non-affiliates on March
15, 1996 was $0 as there was no trading market in the Company's Common Stock.
Documents incorporated by reference: None.
The total number of sequential pages in this report is 126.
The exhibit index is located on pages 45 through 48.
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PART I.
ITEM 1. BUSINESS.
CBR Brewing Company, Inc., a Florida corporation (the "Company", which
term shall include, when the context so requires, its subsidiaries and
affiliates), is the parent of High Worth Holdings, Ltd., a British Virgin
Islands corporation ("Holdings"). Holdings, in turn, owns a 60% interest in
Zhaoqing Blue Ribbon High Worth Brewery Ltd., a Sino-foreign joint venture
("High Worth JV"), which, through its affiliates, is engaged in the production
of beer in the People's Republic of China ("China" or the "PRC"). All of the
beer currently sold by the Company is marketed under the Pabst Blue Ribbon label
and is brewed under a sublicense agreement from Guangdong Blue Ribbon Group Co.
Ltd. ("Guangdong Blue Ribbon") which obtained its license from Pabst Brewing
Company ("Pabst US").
DESCRIPTION OF BUSINESS
- -----------------------
The Company is engaged in the business of brewing, distributing and
marketing Pabst Blue Ribbon beer in China. The Company's subsidiaries and
affiliates control all the production and sale of Pabst Blue Ribbon beer in
China. Currently, the Company owns effective interests of 60% and 24% in the
two facilities currently producing Pabst Blue Ribbon beer in China, both of
which are managed by the Company. The Company is also responsible for the
marketing and sale of all Pabst Blue Ribbon beer in China.
China is currently ranked as the second largest beer producer in the
world behind the United States. The management of the Company believes that
Pabst Blue Ribbon beer is currently the leading foreign label sold in China,
both in number of units sold and total sales. Pabst Blue Ribbon is considered a
premium brand in China, along with such other labels as Tsingtao, Carlsberg,
Miller, Budweiser, Coors and Heileman.
The Company produces Pabst Blue Ribbon in China to avoid import
tariffs that range as high as 120%. Currently, all production is centered in
Zhaoqing City, which is approximately 100 miles from Hong Kong in the Guangdong
Province of China. Pabst US provides quality control assistance and oversight
to the Company on a regular basis. The Company markets Pabst Blue Ribbon in
every province in China. The Company currently maintains offices in Beverly
Hills, California, Hong Kong and Zhaoqing City.
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The following is a diagrammatic description of the group structure.
[GRAPH APPEARS HERE]
Holdings is a British Virgin Islands corporation and a wholly owned
subsidiary of CBR Brewing Company, Inc. Holdings, in turn, owns a 60% interest
in High Worth JV, a Sino-foreign joint venture. High Worth JV holds certain
licensing rights for Pabst Blue Ribbon (See "PABST LICENSING ARRANGEMENTS AND
TRADEMARKS"). In addition, High Worth JV owns 100% of Zhaoqing Brewery, a PRC
company. Zhaoqing Brewery owns and operates a Pabst Blue Ribbon brewing complex
(collectively referred to as the "Zhaoqing Brewery"). In addition, Zhaoqing
Brewery owns a 40% interest in Zhaoqing Blue Ribbon Brewery Noble, Ltd. (the
"Noble Brewery"), a Sino-foreign joint venture which owns a second Pabst Blue
Ribbon brewing complex. The Noble Brewery is also managed by Zhaoqing Brewery.
Zhaoqing Brewery also owns a 70% interest in Zhaoqing Blue Ribbon Beer Marketing
Company Limited, a PRC company (the "Marketing Company") which presently
conducts the sales, advertising, and promotional efforts for all Pabst Blue
Ribbon beer sales in China. The remaining interest in the Marketing Company is
owned by
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Guangdong Blue Ribbon. See "MARKETING AND OPERATIONS - Summary of Operations"
PROPERTY AND PRODUCTION FACILITIES
The Zhaoqing Brewery
- --------------------
The Zhaoqing Brewery is situated on a site containing approximately
968,751 square feet and is three miles from Zhaoqing City, Guangdong Province.
The Zhaoqing Brewery occupies the site pursuant to a certificate of land use
right issued by the local government. The certificate does not specify a period
for the use of the land, but normally it does not exceed 70 years.
The original facilities of the Zhaoqing Brewery were constructed
between 1978 and 1980 with annual production capacity based on old brewing
technology of approximately 50,000 metric tons or 425,000 barrels of beer.
Prior to 1995, the Zhaoqing Brewery had produced exclusively domestic brands
under the names Zhaoqing beer, Dinghu beer and Xile beer. In the middle of
1994, with the assistance of Pabst US, the Zhaoqing Brewery commenced the
conversion and refinement of its original facilities and adopted a new brewing
technology in order to produce beer under the Pabst Blue Ribbon label. In early
1995, the production of all domestic brands ceased, and the Zhaoqing Brewery is
now only producing beer under the Pabst Blue Ribbon label. With the
implementation of the new brewing technology and the purchase of additional
equipment, the Zhaoqing Brewery reached an annual production capacity of 100,000
metric tons or 850,000 barrels by the end of 1995.
Annually, the Zhaoqing Brewery shuts down portions of the facility for
a short period of time to provide regular and scheduled maintenance. No major
refurbishing, maintenance or replacement of equipment is currently anticipated.
The Zhaoqing Brewery has access to replacement parts that can be manufactured by
several local toolmakers in Zhaoqing.
Noble Brewery
- -------------
The Noble Brewery is situated on a site containing approximately
1,453,000 square feet and is three miles from Zhaoqing City. The Noble Brewery
has land use rights of 50 years ending in the year 2043.
The Noble Brewery consists of the original facilities constructed
between 1988 and 1990 by Pabst Blue Ribbon Brewery (Zhaoqing) Co. Ltd. ("Pabst
Zhaoqing"), the operator of the facilities prior to the establishment of the
Noble Brewery. These facilities had an annual production capacity of
approximately 80,000 metric tons or 680,000 barrels of beer per year. The
second phase of brewing facilities which were completed in July 1994 has a
production capacity of approximately 120,000 metric tons or 1,020,000 barrels of
beer per year. Pabst US supplied the majority of the equipment in both the
first and second phase of
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the brewing facilities, in addition to offering technical assistance in its
installation and maintenance. The brewing equipment is in good condition and
there is no specific limitation to its life span when properly maintained. On an
annual basis, the Noble Brewery shuts down portions of the factory for a short
period of time during low season, normally in December to provide regular and
scheduled maintenance. The Noble Brewery has access to replacement parts that
can be manufactured by several local toolmakers in Zhaoqing.
The Noble Brewery conducted and completed trial production runs of
beer for the second phase of brewing facilities in July 1994, and production of
beer for commercial sale started with full quantities in late 1994.
MARKETING AND OPERATIONS
Summary of Operations
- ---------------------
The Company's distribution and marketing operations are being
conducted by the Marketing Company. The Marketing Company began purchasing the
output of beer from the Noble Brewery in July 1995 and from the Zhaoqing Brewery
in April 1995 and is responsible for the distribution thereof. The Marketing
Company is also responsible for the promotion and advertising of Pabst Blue
Ribbon beer in China.
Pabst Blue Ribbon Beer
- ----------------------
Both the Noble Brewery and the Zhaoqing Brewery now exclusively
produce Pabst Blue Ribbon Beer. There are two products in Pabst Blue Ribbon
brand breweries' portfolio: 11-degree light processed beer and draught beer.
The 11-degree light processed beer is packaged in 640 ml. and 355 ml bottles and
355 ml. cans and is the breweries' primary product. The draught beer is sold
only in kegs.
In early 1996, the Zhaoqing Brewery introduced a new package for Blue
Ribbon beer in a 946 ml. glass bottle.
Sales of the 11-degree processed beer in 640 and 355 ml. bottles and
355 ml. cans accounted for approximately 63.4%, 2.9% and 31%, respectively, of
the sales volume of the Noble Brewery in 1994, while the respective percentage
to sales volume of the Company in 1995 was 68.1%, 4.5% and 24.8%.
Pabst Blue Ribbon beer is marketed and sold as a premium beer in
higher-priced establishments such as restaurants, bars, alcohol and tobacco
companies and retail stores, primarily in urban centers all over China.
Management anticipates that the breweries will continue to expand the
distribution of these products in new China markets, subject to the limitations
of the transportation network and the ability of the breweries to produce
adequate quantities of Pabst Blue Ribbon beer to meet demand in these markets.
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The specifications and characteristics of the beers produced by the
breweries are set out below:
<TABLE>
<CAPTION>
TYPE OF BEER PACKAGE GENERAL DESCRIPTION
- ---------------------------- ------------------ ---------------------------
<S> <C> <C>
11-degree light processed Can (355 ml.) 11-degree malt content,
beer Bottle (946 ml., alcohol content 3.3% (w/w)
640 ml. & 355 ml.)
Draught beer Keg (30 liter) 11-degree malt content,
alcohol content 3.4% (w/w)
</TABLE>
(1) w/w refers to weight by weight (i.e., measurement of alcoholic content of
beer by weight of beer).
Brand Performance: The 11-degree light processed beer is the biggest
-----------------
selling beer in the Company's Pabst Blue Ribbon beer portfolio, accounting for
approximately 97.3% of the Noble Brewery's output in 1994 and 97.4% of the
Company's output in 1995.
The 11-degree light processed beer is a beverage that offers Chinese
consumers an attractive alternative to their traditional malt-based beverage.
[Sales of this product were expanded to 32 provinces and cities in China in
1994.]
Sales: The Company's highest volume sales for Pabst Blue Ribbon beer
-----
have been in the provinces of Guangdong, Fujian and Zhejiang. The Company
utilizes a network of non-exclusive regional distributors whose field sales
force maintains customer contact and satisfaction. Sales of Blue Ribbon beer
were 187,662 metric tons or approximately 1,595,127 barrels in 1995, a 56%
increase over 1994.
Domestic Brand Name Beer
- ------------------------
Prior to the end of 1994, the Zhaoqing Brewery produced beer exclusively
under domestic brand names, namely Zhaoqing beer, Dinghu beer and Xile beer, all
of which were non-premium beers which targeted the low-middle range customers.
Sales of domestic brand beer were approximately 33,000 metric tons or 280,500
barrels in 1994, almost the same as in 1993. Production of these local brand
beers was completely discontinued in March, 1995 when the Zhaoqing Brewery
commenced producing exclusively Pabst Blue Ribbon beer.
The Pabst Blue Ribbon beer is targeted to the premium beer market in
China while the domestic brand beer previously produced by the Zhaoqing Brewery
was non-premium.
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The following table demonstrates the 1995 sales and volume of beer sold
by the Noble Brewery (which were exclusively Pabst Blue Ribbon Beer) and that of
the Zhaoqing Brewery. During February 1995, the Marketing Company was
established to conduct the distribution, marketing and promotion of Pabst Blue
Ribbon beer throughout China. The Marketing Company also sells mineral water
and non-carbonated soft drinks produced by Guangdong Blue Ribbon under the Blue
Ribbon brand name. The Zhaoqing Brewery owns a 70% interest and Guangdong Blue
Ribbon owns a 30% interest in the Marketing Company. The Zhaoqing Brewery and
the Noble Brewery commenced selling their production of Pabst Blue Ribbon beer
through the Marketing Company in April 1995 and July 1995, respectively.
Accordingly, such sales by each brewery are also reflected as sales by the
Marketing Company in 1995.
<TABLE>
<CAPTION>
Net Net Sales
Sales Volume Sold per Ton
------- ----------- ---------
Rmb'000 metric tons Rmb'000
<S> <C> <C> <C>
Noble Brewery 681,724 161,200 4.2
Zhaoqing Brewery
Local Brands 27,735 11,388 2.4
Pabst Blue Ribbon 149,664 34,320 4.4
Marketing Company
Blue Ribbon Beer 486,212 95,627 5.1
Non-alcoholic drinks 62,286 26,300 2.4
</TABLE>
Seasonality
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The beer industry in China is seasonal. The Company's sales are usually
at their lowest in the months of October and November and highest in the months
of March through September.
LOCATION
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The breweries are located adjacent to each other in the City of Zhaoqing.
The municipality of Zhaoqing is one of the major municipal areas of Guangdong
Province. It is strategically located at the lower and middle reaches of the
Zijiang River, 62 miles from
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Guangzhou, the provincial capital, by road and 142 sea miles from Hong Kong by
water. The area enjoys a mild, sunny climate with adequate amount of rainfall.
The climate and soil conditions provide an important base of agriculture and
forestry for Guangdong Province.
The Guangdong Province is the fifth most populous province in China with
a population of approximately 65,000,000, of whom over 7,000,000 are located in
the metropolitan Guangzhou area. The Municipality of Zhaoqing covers a total
area of 8,500 square miles and has a population of approximately 5,700,000. The
metropolitan City of Zhaoqing has an population of approximately 400,000 and
covers an area of 254 square miles. Zhaoqing enjoys a well-developed
infrastructure, including transportation facilities, reliable power,
communication and service infrastructure. The area contains extensive
agricultural activity and a large population base. Due to the quality of the
local infrastructure, Company management believes that the breweries are ideally
positioned to compete within the fast growing beer industry in China.
QUALITY CONTROL
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Rigorously applied quality control is critical to ensure a consistently
high quality standard for the products produced by the breweries. In 1990,
quality control experts were sent by Pabst US to Zhaoqing to teach brewery
personnel appropriate inspection, quality control measures and production
procedures. In addition, Pabst US experts trained the brewery's personnel in the
specific brewing techniques required in order to meet the standards set by Pabst
US. An engineer from Pabst US has been staying in Zhaoqing to test random
production samples and perform quality control on a continuing basis. In
addition, the breweries send samples of their beer on a monthly basis to Pabst
US in the United States for content examination and testing to ensure that
quality standards are adhered to on a consistent basis. Pabst US participated
in the conversion of the brewery facilities of the Zhaoqing Brewery to Pabst
Blue Ribbon and provided technical assistance and training.
RAW MATERIALS
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The breweries use all-natural ingredients in their brewing process. The
primary raw materials utilized are mainly malt, husked rice, hops and water. The
aggregate cost of the primary raw materials represents approximately 23% of the
direct cost of production, excluding depreciation, of Pabst Blue Ribbon beer and
76% of the domestic brand beers. Cost of packaging represents approximately 73%
of the total direct cost of production, excluding depreciation, of Pabst Blue
Ribbon beer and 12% of the domestic brand beers.
Malt: Virtually all of the malt utilized for producing Pabst Blue Ribbon
-----
beer is purchased from regional malt manufacturers, primarily Guangzhou Malting
Company. Guangzhou Malting Company imports the barley used in producing the malt
from suppliers in Australia, Canada and Europe. Malt for domestic brand beer
was sourced from other domestic suppliers. The cost of malt represented
approximately 43% of the primary raw
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material cost in the direct cost of production, separate from depreciation and
packaging, of Pabst Blue Ribbon beer and 41% for the domestic brand beers.
Husked Rice: Husked rice is grown on irrigated farmland under contractual
------------
agreements with a variety of local farmers in the Zhaoqing region. Given the
extensive agricultural activity in the region, management believes that there is
an abundant and reliable supply of rice to meet ongoing production needs. The
cost of husked rice represents approximately 13% of the primary raw material
cost in the direct cost of production, separate from depreciation and packaging,
of Pabst Blue Ribbon beer and 13% of the domestic brand beers.
Hops: The hops utilized for producing Pabst Blue Ribbon beer are acquired
-----
primarily from one supplier in the United States and through a local importer.
Hops for producing domestic brand beers were sourced from domestic suppliers.
The cost of hops represents approximately 3% of the primary raw material cost in
the direct cost of production, separate from depreciation and packaging, of
Pabst Blue Ribbon beer and 4% of the domestic brand beers.
Water: The breweries utilize naturally filtered water from deep
------
underground wells adjacent to the brewery facilities that tap the Beriling Shan
water source. The pristine water quality and composition were primary factors in
choosing this particular water source. Specifically, the Beriling Shan water
source contains a relatively low mineral content making it very suitable for
brewing the breweries' particular beers, The breweries intensively monitor the
quality of the water used in the brewing processes for compliance with the
Company's own stringent quality standards. The breweries have recently expanded
their water system to ensure an adequate supply so as to meet all of the
breweries' present requirements. However, the breweries continue to add water
reservoir capacity to provide for long-term strategic growth plans and to
sustain brewing operations in the event of a prolonged drought.
CONTAINERS
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The Company now uses five types of containers for its beer: 946 ml.
bottles, 640 ml. bottles, 355 ml. bottles, 355 ml. aluminum cans and , for its
draught beer, beer kegs. In 1995, approximately 24.8% of the Company's products
were packaged in aluminum cans and 72.8% were packaged in glass bottles. The
remainder of the malt beverages sold in 1995 representing 2.4% of production was
packaged in stainless steel kegs. In 1995, the Zhaoqing Brewery's domestic
brand beers were primarily packaged in 640 ml. bottles. The cost of aluminum
and glass containers represents the single largest cost element in the
production and packaging of the breweries' beer.
To date, all of the beer bottles required by the Company have been
supplied by four regional glass manufacturers. Currently, there is not a
recycling program in place and the Company uses only new bottles and cans in
bottling its beer. The primary supplier of glass
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bottles to the Company is Guangdong Glass Factory in Guangzhou, with the balance
of the bottle requirements being sourced from Zhaoqing Glass Factory. Shenzhen
Hua Jing Glass Ltd. and Zhanjiang Glass Factory which is located in an adjacent
province. In addition, a variety of other bottle manufacturers are located in
the Guangdong Province and neighboring provinces. These suppliers represent an
easily available alternative source of supply of bottles in addition to the
breweries' major suppliers listed above. In 1994, the Zhaoqing Brewery
maintained a bottle recycling program when it was producing local brand beer,
and, therefore, the containers represented a much smaller proportion of the
overall cost. Following the conversion of the facilities for the exclusive
production of Pabst Blue Ribbon beer, the Zhaoqing Brewery ceased its recycling
program. Accordingly, the container cost for the Zhaoqing Brewery was
substantially similar to that of the Noble Brewery.
American National Can (Zhaoqing) Company Limited ("American National
Can") supplies approximately 90% of the aluminum cans used by the breweries.
American National Can utilizes an automatic easy-open production line from Italy
and current annual output is 185 million cans. Plans are currently underway to
increase annual output to 240 million cans. The company produces cans of high
quality that meet the ISO standard. The manufacturing facility for American
National Can is located within the same industrial complex as the breweries.
American National Can supplies cans pursuant to supply contracts with each of
the breweries which have no fixed expiration date. American National Can has
agreed to meet the breweries' can supply requirements at a pre-negotiated price.
TRANSPORTATION/DISTRIBUTION
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In view of the single location of the breweries and the wide geographic
market in China, the Company is constantly reviewing the methods of distributing
its malt beverages. In this regard, management is currently evaluating both new
brewery development and acquisitions in Northern China. This would assist
additional distribution in the Northern region by facilitating deliveries and
reducing overall costs to the customer.
Transportation: During 1995, 35% of the Company's products sold were
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shipped by insulated rail tank cars from Zhaoqing to distributors throughout the
Guangdong Province. The railcars assigned to the breweries by the shipping
railroads are specially built and insulated to maintain temperature control en
route.
The remaining 65% of the Company's volume is shipped by truck (40%) and
boat (25%) directly to distributors. Transportation vehicles are insulated to
keep malt beverage products at proper temperatures until they are delivered to
distributor locations.
Domestic brand beers made by the Zhaoqing Brewery were primarily
transported by trucks and shipped within the regional markets.
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Distribution: For Pabst Blue Ribbon beer, delivery to retail markets in
-------------
Guangdong Province and the rest of China is accomplished through a network of
non-exclusive regional distributors who, in turn, sell to tobacco and alcohol
companies, bars, restaurants, and retail stores. The Marketing Company has over
400 distributors throughout China. Most distributors make a deposit (500,000 -
1,000,000 Rmb), which is set in correlation to the volume of their order flow.
For such distributors, payment for individual orders is made via bank-to-bank
settlement after the product is loaded for shipment. Other distributors pay in
advance when an order is placed. As a matter of policy, each regional
distributor works on a non-exclusive basis. The breweries typically appoint
only one distributor (except for a large region in which more than one may be
appointed) in each region to ensure that such distributor devotes adequate
effort and resources to the development of a broad based retail distribution
network for Pabst Blue Ribbon beer in that distributor's region. These
distribution arrangements include the flexibility for the breweries to replace
distributors, or reach different arrangements with existing distributors, if it
is in their best interest. No single distributor accounted for more than
approximately 5% of 1995 barrel sales.
In order to ensure the highest product quality, the Company has one of
the most advanced distributor monitoring programs for the beer industry in
China. This program is designed to ensure that guidelines for proper
refrigeration and rotation of the Group's malt beverage products at both the
wholesale and retail levels are followed. Distributors are responsible for
maintaining proper rotation of the products at retail accounts and are required
to replace the Group's malt beverage products at their own expense if sales to
consumers have not occurred within the prescribed time period.
In 1995, approximately US$7.8 million was allocated to promotional
advertising for Pabst Blue Ribbon beer. Advertising media include television,
radio, billboards, magazines, and newspapers. In addition, the breweries
provide their distributors with promotional gift items and sales incentive
bonuses. Pabst Blue Ribbon has also been featured in beer festivals organized
by the National Beer Industry Cooperative District Organizations in major,
highly populated urban centers such as Beijing, Shanghai and Guangzhou.
MARKETS AND COMPETITION
- -----------------------
In general, the demand for Pabst Blue Ribbon beer in the Chinese market
far exceeds supply and thus production capacity is the single most important
factor in determining the sales volume.
There is a considerable difference in the prices at which local or
regional beer is sold in China as compared to the price of foreign or premium
brands such as Pabst Blue Ribbon beer or the San Miguel, Foster's or Carlsberg
brands. On average, a 640 ml. bottle of local beer would typically sell for 1-2
Rmb ($0.12 US to $0.24 US) compared to premium beers which sell for 4-6 Rmb
($0.47 US to $0.71 US).
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Markets: The beer market in China is experiencing tremendous growth in
--------
rates of production and demand. However, the industry is largely fragmented and
highly regionalized. A key reason for the fragmented market is the lack of an
effective transportation system. China's system of highways is in an early
stage of development and this, combined with heavy traffic, makes the
distribution of beer over long distances very challenging. Other reasons are
that local breweries are generally small in capacity and lack the financial
resources and capability to launch a national distribution network and promotion
program.
Approximately 850 breweries exist in China, over 90% of which are small
local breweries that produce non-premium beer for local or regional consumption.
With rising consumer affluence, premium brands such as Pabst Blue Ribbon are
gaining in market share. In addition, certain Chinese taxes based on volume
rather than sales price favor the higher priced premium beer factories.
Competition: Of the brands comprising the premium sector, Tsing Tao and
------------
Pabst are still the leaders. Tsing Tao is the largest brewer of beer in China
and in 1995 produced approximately 349,413 metric tons or 2,970,011 barrels of
beer. In addition, Tsing Tao plans to increase its production capacity to
500,000 metric tons. Tsing Tao is one of the best selling beers in China and the
largest Chinese exported brand. It is sold in 32 countries and is China's
number one exported beer to the U.S. However, the Company has been able to
attract distributors from Tsing Tao due to the faster growth rate of Pabst Blue
Ribbon beer as well as by offering higher margins. Other companies seeking
market share in the China market include Carlsberg, Singha, San Miguel, Beck's
Lowenbrau, Anheuser-Busch, Stroh's, Miller, Foster's, Coor's, and Heileman.
Sales for most of these brands in China are substantially lower than sales of
beer produced under the Pabst Blue Ribbon and Tsing Tao labels.
CAPITAL EXPANSION
- -----------------
In 1994, the Company launched an expansion program to increase brewing
capacity to fulfill projected volume requirements in the foreseeable future.
The Noble Brewery spent approximately US$26 million in 1994 to construct the 2nd
phase brewing facilities, and US$0.6 million to perform routine maintenance in
all plants and to make incremental capital upgrades to all production
facilities. The Zhaoqing Brewery spent US$3.7 million in 1994 to convert the
facilities to produce Pabst Blue Ribbon beer and US$0.2 million to perform
routine maintenance. In order to expand the annual production capacity from
50,000 metric tons to 100,000 metric tons, the Zhaoqing Brewery commenced its
expansion program in early 1995 and had completed all major equipment
installation by the end of 1995. The total cost of this expansion program was
budgeted at approximately US$15.4 million, of which US$10.2 million was expended
in 1995 and US$5.2 million will be expended in 1996.
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RESEARCH AND DEVELOPMENT
- ------------------------
The Company is continually engaged in research and development programs
and has developed various improvements in raw materials, processes and packaging
systems and in the development of innovative, quality products.
The Company's research and development expenditures are primarily devoted
to new product development, its brewing process and ingredients, brewing
equipment, improved manufacturing techniques for packaging supplies and
environmental improvements in the Company's operational processes. The focus of
these programs is to improve the quality and value of its malt beverage products
while reducing costs through more efficient processing techniques, equipment
design and improved varieties of raw materials.
ENERGY
- ------
The breweries use both heavy oil and electricity as primary sources of
energy. Heavy oil is used as the primary fuel in the breweries' steam
generation system and is supplied from regional sources with which it has annual
fixed price supply contracts.
Electricity is supplied by the Zhaoqing City Electricity Bureau. Since
the breweries are one of the larger employers in the region, the breweries are
given priority in obtaining electricity. The breweries have not experienced any
energy supply problems to date. As an alternative source of energy, the company
also has fuel oil and propane available. The breweries do not anticipate future
supply problems for these natural resources.
EMPLOYEES
- ---------
There are approximately 1,531 employees employed by the Zhaoqing Brewery,
the Noble Brewery and the Marketing Company categorized as follows:
<TABLE>
<CAPTION>
ZHAOQING NOBLE MARKETING
FUNCTION TOTAL BREWERY BREWERY COMPANY
- -------- ----- -------- ------- ---------
<S> <C> <C> <C> <C>
(1) Production 816 365 451 --
(2) Engineering and Technology 111 24 87 --
and Quality Control
(3) Management and 174 61 95 18
Administration
(4) Warehouse 129 15 39 75
(5) Others 301 100 110 91
----- --- --- ---
1,531 565 782 184
===== === === ===
</TABLE>
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In 1995, labor costs (including the cost of benefits) accounted for
approximately 2.3% and 4.2% of the total costs of production for the Noble
Brewery and Zhaoqing Brewery, respectively. The Company expects average wage
rates of the employees to remain modest in the near future.
Each full time employee is a member of a local trade union. Labor
relations have remained positive and the breweries have not had any employee
strikes or major labor disputes. Unlike trade unions in the western countries,
trade unions in most parts of China are organizations mobilized by the
Government and the enterprises' management.
PABST LICENSING ARRANGEMENTS AND TRADEMARKS
Pabst Trademarks in China
- -------------------------
The arrangements regarding the use of Pabst trademarks in China were
formalized in an agreement dated August 30, 1993 (the "License Agreement")
between Pabst US and Pabst Zhaoqing which was wholly owned at that time by
Zhaoqing Brewery (which in turn was owned by Guangdong Blue Ribbon). The
License Agreement was for a period of fifteen years from November 7, 1988.
Under the terms of the License Agreement, Pabst Zhaoqing obtained the exclusive
right to produce and market products under Pabst trademarks in China, the non-
exclusive right to market such Pabst products in other Asian countries except
Hong Kong, Macau, Japan and South Korea and the right to sublicense the use of
the Pabst trademarks to any other enterprise in China subject to approval of
Pabst US. Royalties are payable to Pabst US based on the volume (units) of beer
produced and are payable quarterly.
By a Transferring Agreement dated May 20, 1994 made between Pabst
Zhaoqing, Pabst US and Guangdong Blue Ribbon, all right and duties of the
License Agreement were assigned and transferred from Pabst Zhaoqing to Guangdong
Blue Ribbon. Guangdong Blue Ribbon agreed to fulfill the obligation as
sublicensor under the license agreement between Pabst Zhaoqing as sublicensor
and Noble Brewery and High Worth JV as sublicensee respectively, which are
described below.
Noble Brewery
- -------------
By a Sublicense Agreement dated October 12, 1993 (the "Noble Sublicense
Agreement") made between Pabst Zhaoqing and the Noble Brewery and approved by
Pabst US, Pabst Zhaoqing granted to the Noble Brewery a sublicense to use beer-
related Pabst trademarks, the non-exclusive right to produce beer in accordance
with its then production capacity under the sublicensed trademarks and the non-
exclusive right to market such Pabst products in China and other Asian countries
except Hong Kong, Macau, Japan and South Korea. Royalties calculated on the
same basis as those payable to Pabst US are payable by
15
<PAGE>
the Noble Brewery to Pabst Zhaoqing. Under the terms of the Noble Sublicense
Agreement, Pabst Zhaoqing agreed that, except to the enterprises of Guangdong
Blue Ribbon, it would not grant further sublicenses to any other enterprises in
Guangdong Province to use the Pabst trademarks thereby granted. At the time of
the Noble Sublicense Agreement, the Zhaoqing Brewery was a member enterprise of
Guangdong Blue Ribbon.
High Worth JV/Zhaoqing Brewery
- ------------------------------
By a Sublicense Agreement dated May 6, 1994 (the "High Worth Sublicense
Agreement") made between Pabst Zhaoqing and High Worth JV and approved by Pabst
US on September 18, 1994, Pabst Zhaoqing granted to High Worth JV a sublicense
to allow the Zhaoqing Brewery to use beer-related Pabst trademarks to produce
beer in accordance with its then production ability under the sublicensed Pabst
trademarks and to market such Pabst products in China and other Asian countries
except Hong Kong, Macau, Japan and South Korea. With respect to the production
of Pabst Blue Ribbon beer in Guangdong Province, since the Zhaoqing Brewery was
a member enterprise of Guangdong Blue Ribbon at the time of the Noble Sublicense
Agreement, the Zhaoqing Brewery was entitled to produce such beer in Guangdong
Province.
Under the terms of the High Worth Sublicense Agreement, High Worth JV has
the right to grant further sublicenses from Pabst Zhaoqing for the use of the
beer-related Pabst trademarks to its affiliates provided that they are located
outside Guangdong Province. Further, Pabst Zhaoqing covenanted that it would
not grant further sublicenses in respect of the beer-related Pabst trademarks to
any other enterprises except as to High Worth JV or its affiliates. Accordingly,
High Worth JV controls all future sublicensing for the production of Pabst Blue
Ribbon beer in China. Sales of such beer can be made throughout China and other
Asian countries, excluding Hong Kong, Macau, Japan and South Korea.
The term of the High Worth Sublicense Agreement is the same as the
License Agreement. Royalties are calculated by reference to volume of beer
produced and are payable quarterly by High Worth JV to Pabst Zhaoqing.
THE JOINT VENTURE COMPANIES
Formation of the Joint Venture Companies
- ----------------------------------------
In 1980, Zhaoqing Brewery was initially established as a state-owned
enterprise which had been manufacturing beer and non-alcohol beverages. In
1992, the Zhaoqing Brewery became an affiliate (member) of Guangdong Blue
Ribbon. In June 1993, the Zhaoqing Brewery entered into a Joint Venture
Agreement with Goldjinsheng to form the Noble Brewery (the "Noble Joint Venture
Agreement"). Upon formation, the Noble Brewery consisted of the beer production
facilities and assets of Pabst Zhaoqing, the then subsidiary of Zhaoqing
Brewery, relating to the manufacture and distribution of beer under the Pabst
Blue
16
<PAGE>
Ribbon brand name. The Zhaoqing Brewery continued to manufacture beer under
local brands in its separate facility.
In May 1994, Guangdong Blue Ribbon and Holdings entered into a Joint
Venture Agreement providing for the establishment of High Worth JV. The term of
the joint venture is 50 years, and is subject to extension by agreement of the
parties and government approval. Holdings contributed 60% of the capital which
was the capital used by High Worth JV to purchase from Guangdong Blue Ribbon the
Zhaoqing Brewery, including the 40% interest in the Noble Brewery and the assets
of the Zhaoqing Brewery which, at that time, were used to manufacture and
distribute beer under local brands. All of the governmental approvals for the
ownership transfer of the Zhaoqing Brewery to High Worth JV were completed in
November 1994. As stated above, the Company acquired all of the shares of
Holdings in December, 1994.
Operation of the Joint Venture Companies
- ----------------------------------------
The establishment and activities of High Worth JV and the Noble Brewery
are governed by the joint venture law and regulations of China and the
applicable joint venture agreements. Holdings has an interest in the profits of
High Worth JV in the same proportion (i.e., 60%) as its investment in High Worth
JV. Likewise, Zhaoqing Brewery has an interest in the profits of the Noble
Brewery in the same proportion (i.e., 40%) as its investment in the Noble
Brewery.
With regard to the Noble Brewery, pursuant to the Noble Joint Venture
Agreement, the term of the joint venture is for 20 years which may be extended
upon the agreement of the two joint venture partners and approval from the
applicable Chinese governmental agencies. Under the Noble Joint Venture
Agreement, the Noble Brewery is governed by a board of directors consisting of
five individuals, three of whom, including the Chairman, are nominated by
Goldjinsheng, with the remaining two, including the Vice Chairman, by Zhaoqing
Brewery. The operation and management of the Noble Brewery is the
responsibility of Zhaoqing Brewery. Accordingly, Zhaoqing Brewery has the
decision making authority on substantially all aspects of the daily operations
of the Noble Brewery such as purchasing, production, sales and marketing,
finance and human resources. Goldjinsheng may appoint staff to participate in
the accounting functions of the Noble Brewery. All matters to be approved by
the Board of Directors require either unanimous vote or the vote of four out of
the five directors. Accordingly, no board decision can be made without the
approval of Zhaoqing Brewery's designee.
With regard to High Worth JV, pursuant to the High Worth JV Joint Venture
Agreement, High Worth JV is governed by a board of directors consisting of seven
individuals, four of whom are appointed by Holdings and three of whom are
appointed by Guangdong Blue Ribbon. The Board of Directors controls the
management and operation of High Worth JV. Generally, votes on the board of
directors are taken by majority vote, except
17
<PAGE>
for the following matters relating to the existence and legal structure of the
joint venture, all of which require a unanimous vote: amendments to the
articles of association, termination or dissolution of the joint venture,
increase in, or transfer of, the registered capital of the joint venture,
establishment of subsidiaries or combination with other entities and change in
the share structure. The general manager is appointed by the Board of Directors
and is responsible for carrying out the decisions of the Board as well as for
the day-to-day management of High Worth JV.
Goldjinsheng Agreement
- ----------------------
Pursuant to a provisional agreement dated as of May 10, 1995 (the
"Goldjinsheng Agreement") among Goldjinsheng Holding Ltd. (the owner of the
remaining 60% interest in the Noble Brewery), Zhaoqing Brewery, the Noble
Brewery, High Worth JV and Guangdong Blue Ribbon, the parties made certain
modifications to the then existing agreements between them and agreed to take
certain steps to more effectively coordinate the development, sales and
marketing of Pabst Blue Ribbon beer produced by the Noble Brewery and the
Zhaoqing Brewery. Among other things, High Worth JV granted to Goldjinsheng the
right to purchase either 30% or 40% of the Zhaoqing Brewery on terms specified
therein. The Goldjinsheng Agreement also provided for the establishment of
distribution companies to be owned by Zhaoqing Brewery and the Noble Brewery and
a marketing company to coordinate the sale of beer produced by the Noble Brewery
and Zhaoqing Brewery. Additionally, the Goldjinsheng Agreement provides for
certain expansion rights of High Worth JV and its affiliates in the Guangdong
Province together with the grant of a right in favor of Goldjinsheng to purchase
up to a 40% interest in any additional facility of High Worth JV in Guangdong.
The Goldjinsheng Agreement is subject to the approval of the applicable Chinese
governmental agencies and the execution of separate definitive agreements with
respect to the various matters referred to therein.
OPERATING IN CHINA
- ------------------
Because the operations of the Company are based exclusively in China, the
Company is subject to rules and restrictions governing China's legal and
economic system as well as general economic and political conditions in that
country.
Inflation/Economic Policies. General economic conditions in China could
---------------------------
have a significant impact on the Company. The economy of China differs in
certain material respects from that of the United States, including its
structure, levels of development and capital reinvestment, growth rate,
government involvement, resource allocation, rate of inflation and balance of
payments position. Although the majority of China's productive assets is still
owned by the state, the adoption of an economic reform policy since 1978 has
resulted in the gradual reduction in the role of state economic plans and the
allocation of resources, pricing and management of such assets, with increased
emphasis on the utilization
18
<PAGE>
of market forces, and rapid growth in the Chinese economy. The success of the
Company depends in substantial part on the continued economic growth of China.
In recent years, the Chinese economy has experienced periods of rapid
economic growth as well as high rates of inflation, which in turn, has resulted
in the adoption by the Chinese government from time to time of various
corrective measures designed to regulate growth and contain inflation. Since
1993, the Chinese government has implemented an economic program to control
inflation which has resulted in the tightening of working capital available to
Chinese state-owned enterprises, and in the slowing of the pace of economic
growth and general market consumption.
Currency Matters. The State Administration for Exchange Control
----------------
("SAEC"), under the authority of the People's Bank of China ("PBOC"), controls
the conversion of Renminbi, the Chinese currency ("Rmb") into foreign currency.
Prior to January 1, 1994, Rmb could be converted to foreign currency through the
Bank of China or other authorized institutions at official rates fixed daily by
the SAEC. Rmb could also be converted at swap centers ("Swap Centers") open to
Chinese enterprises and foreign-invested Chinese enterprises, subject to SAEC
approval of each foreign currency trade, at exchange rates negotiated by the
parties for each transaction. In the year ended December 31, 1993, as much as
80% by value of all foreign exchange transactions in China took place through
the Swap Centers. The exchange rate quoted by the Bank of China differed
substantially from that available in the Swap Centers. Effective January 1,
1994, a unitary exchange rate system was introduced in China, replacing the
dual-rate system previously in effect. In connection with the creation of a
unitary exchange rate, the establishment of the China Foreign Exchange Trading
System inter-bank foreign exchange market and phasing out of the Swap Centers
was announced. However, it has now been announced that the Swap Centers will be
retained, and foreign-invested enterprises are currently permitted to satisfy
foreign exchange requirements through the Swap Centers. The conversion rate
from Rmb to foreign currency has traditionally be substantially higher at the
official rates compared to the rates available at the Swap Centers. However,
conversion using the official rate is highly restricted. Normally, only Chinese
enterprises with appropriate quotas can convert to foreign currencies at the
official rate.
Legal System. Since 1979, many laws and regulations dealing with
------------
economic matters in general and foreign investment in particular have been
promulgated in China. The Chinese constitution adopted in 1989 authorizes
foreign investment, and guaranties the "lawful rights and interests" of foreign
investors in China. The trend of legislation over the past twelve years has
significantly enhanced the protection afforded foreign investment and allowed
for more active control by foreign parties of foreign investment enterprises in
China. There can be no assurance, however, that the current trend and economic
legislation toward promoting market reforms and experimentation will not be
slowed, curtailed or reversed, especially in the event of a change in
leadership, social or political disruption, or unforeseen circumstances
affecting China's political, economic or social life.
19
<PAGE>
Despite some progress in developing a legal system, China does not have a
comprehensive system of laws. The interpretation of Chinese laws may be subject
to policy changes reflecting domestic political factors. Enforcement of
existing laws may be uncertain and sporadic, and implementation and
interpretation may be inconsistent. The Chinese judiciary is relatively
inexperienced in enforcing the laws or terms of contract, leading to a higher
than usual degree of uncertainty as the outcome of litigation. Even where
adequate laws exist in China, it may be impossible to obtain swift and equitable
law enforcement, or to obtain enforcement of a judgment by a court of another
jurisdiction. As the Chinese legal system develops, the promulgation of new
laws, changes to existing laws and the preemption of local regulations by
national laws may adversely affect foreign investors, such as the Company.
The Company's activities in China may be by law subject, in some cases,
to administrative review and approval by various national, provincial and local
agencies of the Chinese government. While China has promulgated an
administrative procedural law permitting redress to the courts with respect to
certain administrative actions, this law appears to be largely untested in its
context.
Tax Matters. The Company's operations in China are subject to four types
-----------
of taxes: Income Tax, Value Added Tax ("VAT"), Consumption Tax and other Sales
Tax.
The Noble Brewery and High Worth JV are governed by the Income Tax Law of
China concerning Foreign Investment Enterprises and Foreign Enterprises (the
"FIE Law"). Under the current FIE Law, the Noble Brewery and High Worth JV will
be exempted from payment of Income tax for the first two taxation years in which
the Noble Brewery and High Worth JV become profitable. The Income Tax rate for
the following three years will be reduced by half and thereafter at full rate.
The current Income Tax rate on profit is 27% for the Noble Brewery and 33% for
the High Worth JV unless specifically exempted or reduced by the local
authorities.
In addition to the FIE Law which is computed on profits, the Noble
Brewery and the Zhaoqing Brewery are also subject to two kinds of turnover taxes
for their respective sales, namely the VAT and Consumption Tax. The applicable
VAT rate is 17% for brewery products sold in China. The amount of VAT liability
is determined by applying the applicable tax rate to the invoiced amount less
VAT paid on purchases made with the relevant invoices in support. The
Consumption Tax rate together with a Government Surcharge for brewery products
is Rmb 220 per metric ton. The Consumption Tax is determined on the volume of
sales within China.
Currently, there are no withholding taxes imposed on dividends paid by
High Worth JV to Holdings.
20
<PAGE>
Distribution of Profits. Applicable Chinese laws and regulations require
-----------------------
that, before a Sino-foreign joint venture enterprise (such as High Worth JV and
the Noble Brewery) distributes profits to investors, it must (1) satisfy all tax
liabilities; (2) provide for losses in previous years; and (3) make allocations
in proportions determined at the sole discretion of the Board of Directors to a
general reserve fund, an enterprise development fund and a staff welfare and
employee bonus fund. Distribution of profits by the Joint Ventures to the
Company and their other equity investors are required to be in proportion to
each party's investment in the joint venture.
Regulations
- -----------
Central, Provincial and local laws and regulations govern the operations
of breweries; the Central government and all provinces in which the Company's
malt beverage products are distributed, regulate trade practices, advertising
and marketing practices, relationships with distributors and related matters.
Governmental entities also levy various taxes, license fees and other similar
charges and may require bonds to ensure compliance with applicable laws and
regulations.
BUSINESS DEVELOPMENT
- --------------------
The Company was organized as Video Promotions, Inc., on April 20, 1988.
The Company subsequently changed its name to National Sweepstakes, Inc. and then
to Natural Fuels, Inc.
For a period of time prior to December 16, 1994, the business of the
Company was devoted to seeking potential acquisition or merger opportunities.
On December 16, 1994, the Company acquired all of the outstanding shares of
Holdings from Oriental Win Holdings Ltd. ("Oriental Win") and Goldchamp Ltd.
("Goldchamp") in exchange for 3,960,000 shares and 240,000 shares of the
Company's Class A Common Stock issued to Oriental Win and Goldchamp,
respectively, and 3,000,000 shares of the Company's Class B Common Stock issued
to Oriental Win. The Class B shares carry two votes per share but are otherwise
equivalent to the Class A Common Stock. In addition, the Company issued an
aggregate of 600,000 shares of the Company's Class A Common Stock to various
parties for consulting services in connection with the acquisition. At the time
of the acquisition, Holdings owned a 60% interest in High Worth JV.
On November 22, 1994, the Company effected a 1 for 22 reverse stock split
in anticipation of the reverse acquisition.
On March 15, 1995, the Company changed its name to CBR Brewing Company,
Inc. The name change was effected to more accurately reflect the business of
the Company.
21
<PAGE>
ITEM 2. PROPERTIES.
The Company's major facilities are set out below:
<TABLE>
<CAPTION>
FACILITY LOCATION PRODUCT
- -------- -------- -------
<S> <C> <C>
Noble Brewery City of Zhaoqing on site Malt Beverages
containing approximately
135,000 square meters
Zhaoqing Brewery City of Zhaoqing on site Malt Beverages
containing approximately
90,000 square meters
</TABLE>
All of the Company's facilities are well maintained and suitable for
their respective operations.
In 1995, the Company estimates the combined brewing facilities operated
at over 80% of their theoretical brewing capacity. Annual production capacity
can vary due to product mix, packaging mix and seasonality.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property subject to, any
pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1995.
22
<PAGE>
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
CBR Brewing Company, Inc. Class A Common Stock is listed for trading on
the NASD's Electronic Bulletin Board under the symbol BLUE. During 1993, 1994
and 1995, there were no bids for the Class A Common Stock.
The approximate number of record security holders of the Class A
Common Stock at March 15, 1996 was 24.
The Company has paid no cash dividends on its Common Stock and has no
present intention of paying cash dividends in the foreseeable future. It is the
present policy of the Board of Directors to retain all earnings to provide for
the growth of the Company. Payment of cash dividends in the future will depend
upon, among other things, future cash flow and requirements for capital
improvements.
ITEM 6. SELECTED FINANCIAL DATA.
The following data have been derived from the audited consolidated
financial statements, and should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this document.
All amounts are in RMB. As of December 31, 1995, the exchange rate was US$1.00
= RMB 8.32.
23
<PAGE>
<TABLE>
<CAPTION>
CBR Brewing Company, Inc.
(in RMB) and Subsidiaries (3)(4) Zhaoqing Brewery and Subsidiaries (3)
------------------------------ ------------------------------------------
Two Months Ten Months
Year Ended Ended Ended Years Ended December 31,
December 31, December 31, October 31, ---------------------------
1995 1994 1994 1993 1992
------------- ------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Consolidated Statement
of Income Data:
Sales, net of sales taxes 566,786,939 11,400,806 57,287,429 191,582,526 154,440,090
Gross profit 71,133,533 4,226,389 19,027,672 89,167,691 71,100,982
Operating income 6,458,405 2,978,087 11,616,044 67,013,472 51,011,530
Net income 19,625,968 3,713,687 42,012,446 106,586,492 135,719
Net income per common share (1)(2) 2.45 .46 5.25 13.32 .02
Cash dividends declared per
common share -0- -0- -0- -0- -0-
<CAPTION>
As of December 31, As of December 31,
---------------------------- ------------------
1995 1994 1993
----------- ----------- -------------
<S> <C> <C> <C>
Consolidated Balance
Sheet Data:
Net working capital (97,555,553) (40,970,594) (112,717,589)
Total assets 746,898,874 357,149,524 326,758,328
Long term liabilities 98,692,239 102,814,846 28,035,303
Shareholders' equity 127,376,673 107,750,705 99,707,666
</TABLE>
24
<PAGE>
(1) Net income per common share is presented on a pro forma basis for the ten
months ended October 31, 1994 and the years ended December 31, 1993, 1992
and 1991, assuming that the 8,000,013 shares of common stock issued and
outstanding for the year ended December 31, 1995 and the two months ended
December 31, 1994 were also issued and outstanding for all prior periods.
(2) Adjusted for the 1-for-22 reverse stock split effective November 22, 1994.
(3) Holdings was formed to acquire a 60% interest in High Worth JV, a Sino-
foreign equity joint venture enterprise, which in turn acquired a 100%
interest in the Zhaoqing Brewery on October 31, 1994. The consideration
for this purchase transaction was approximately US$20,000,000. See "ITEM
1. BUSINESS - THE JOINT VENTURE COMPANIES" for additional information
regarding this transaction.
(4) On December 16, 1994, Holdings was acquired by the Company, a United
States-based public company, in a reverse acquisition. This transaction
has been accounted for as a recapitalization of Holdings with Holdings as
the acquirer. See "ITEM 1. BUSINESS - BUSINESS DEVELOPMENT" for
additional information regarding this transaction.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
- --------
Effective December 16 1994, the Company acquired Holdings, which,
through its subsidiaries and affiliates, manages and controls all of the
production and sale of Pabst Blue Ribbon beer in China. Holdings is a holding
company which was formed solely to effect the acquisition of a 60% interest in
High Worth JV. On October 31, 1994, High Worth JV acquired a 100% interest in
the Zhaoqing Brewery, including the Zhaoqing Brewery's 40% interest in the Noble
Brewery.
The acquisition of the Zhaoqing Brewery, including the Zhaoqing
Brewery's 40% interest in the Noble Brewery, has been accounted for under the
purchase method of accounting. The consolidated financial statements include
the results of operations of the Zhaoqing Brewery on a consolidated basis and
the Noble Brewery under the equity method of accounting for investments
commencing October 31, 1994. Accordingly, the Company's post-acquisition
consolidated statements of income are presented for the two months ended
December 31, 1994 and the year ended December 31, 1995; a comparative
consolidated statement of income for the year ended December 31, 1994 is not
presented, although certain comparative financial information is provided
separately for the operations of the Zhaoqing Brewery and its affiliate, the
Noble Brewery.
25
<PAGE>
For accounting purposes, the acquisition of Holdings by the Company
has been treated as a recapitalization of Holdings with Holdings as the acquirer
(reverse acquisition). Accordingly, the historical financial statements prior
to December 16, 1994 are those of Holdings.
During February 1995, the Marketing Company was established to conduct
the distribution, marketing and promotion of Pabst Blue Ribbon beer throughout
China. The Marketing Company also sells mineral water and non-carbonated soft
drinks produced by Guangdong Blue Ribbon under the Blue Ribbon brand name. The
Zhaoqing Brewery owns a 70% interest and Guangdong Blue Ribbon owns a 30%
interest in the Marketing Company. The Zhaoqing Brewery and the Noble Brewery
commenced selling their production of Pabst Blue Ribbon beer through the
Marketing Company in April 1995 and July 1995, respectively. The Marketing
Company generally requires a 50% cash deposit from its customers as security.
The consolidated financial statements include the results of operations of the
Marketing Company on a consolidated basis commencing April 1, 1995.
Prior to March 1995, the Zhaoqing Brewery had produced exclusively
domestic brands of beer, and had an annual production capacity of 50,000 metric
tons or 425,000 barrels of beer. In late 1994, the Zhaoqing Brewery commenced
the conversion and refinement of its original facilities and adopted a new
brewing technology in order to produce beer under the Pabst Blue Ribbon label.
During March 1995, the Zhaoqing Brewery discontinued the production of all
domestic brand beer and commenced exclusive production of Pabst Blue Ribbon beer
on a full-scale basis. However, approximately 5% of beer production normally
does not meet Pabst Blue Ribbon quality standards and is packaged and
distributed as lower-priced, local brand beer. With the implementation of the
new brewing technology and the purchase of additional equipment during 1995, the
Zhaoqing Brewery reached its current full-scale production capacity of 100,000
metric tons or 850,000 barrels of beer at the end of 1995.
The Noble Brewery has produced Pabst Blue Ribbon beer exclusively
since it commenced operations. Prior to 1994, the Noble Brewery had an annual
production capacity of 80,000 metric tons or 680,000 barrels of beer. With the
completion of a second brewing facility in July 1994, the Noble Brewery reached
its full-scale annual production capacity of 200,000 metric tons or 1,700,000
barrels of beer in late 1994.
26
<PAGE>
Consolidated Results of Operations:
- ----------------------------------
During the three months ended December 31, 1995, certain year-end
accounting adjustments were recorded that related to prior interim periods
during 1995. See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -
SELECTED 1995 QUARTERLY FINANCIAL INFORMATION" for the effect of these
adjustments on the quarterly consolidated results of operation, as previously
reported.
Sales
- -----
During the year ended December 31, 1995, the Zhaoqing Brewery produced
42,318 metric tons and delivered 45,708 metric tons of beer, of which 11,388
metric tons (24.9%) were local brand beer and 34,320 metric tons (75.1%) were
Pabst Blue Ribbon beer. Of the 11,388 metric tons of local brand beer produced
in 1995, 8,324 metric tons (73.1%) were produced during the quarter ended March
31, 1995. During the year ended December 31, 1994 and the two months ended
December 31, 1994, the Zhaoqing Brewery delivered 33,000 metric tons and 4,686
metric tons of beer, respectively, 100% of which was local brand beer. Total
beer delivered increased by 12,708 metric tons or 38.5% from 1994 to 1995, as a
result of a shift in product mix from local brand beer to Pabst Blue Ribbon
beer, which allowed the Company to take advantage of growing consumer demand in
China for premium beers such as Pabst Blue Ribbon beer as compared to local
brand beer.
During the year ended December 31, 1995, the Noble Brewery produced
155,974 metric tons and delivered 161,200 metric tons of beer, as compared to
120,300 metric tons of beer delivered in 1994. Total beer delivered increased
by 40,900 metric tons or 34.0% from 1994 to 1995, as a result of the completion
of the second brewing facility at the Noble Brewery, which allowed the Company
to take advantage of growing consumer demand in China for premium beers such as
Pabst Blue Ribbon beer.
For the year ended December 31, 1995, net sales were RMB 566,786,939,
consisting of sales both by the Zhaoqing Brewery directly and sales through the
Marketing Company, of which RMB 504,500,315 (89.0%) represented 107,015 metric
tons of beer sales and RMB 62,286,624 (11.0%) represented the sales of mineral
water and non-carbonated soft drinks. During the year ended December 31, 1995,
the Marketing Company purchased RMB 327,805,406 of beer products from the Noble
Brewery for resale, and RMB 61,708,086 of mineral water and non-carbonated soft
drinks from Guangdong Blue Ribbon for resale. Approximately 95% of total sales
in 1995 were provided from the sale and distribution of products under the Pabst
Blue Ribbon brand name. For the two months ended December 31, 1994, net sales
were RMB 11,400,806, consisting exclusively of 4,687 metric tons of beer sales
by the Zhaoqing Brewery directly.
27
<PAGE>
Gross Profit
- ------------
For the year ended December 31, 1995, gross profit was RMB 71,133,533
or 12.6% of net sales. For the two months ended December 31, 1994, gross profit
was RMB 4,226,389 or 37.1% of net sales. As a result of the change in product
mix, increased discounts offered to distributors, increased raw material costs,
and, in particular, the establishment and operating structure of the Marketing
Company, the Company does not expect that its gross margin will return to pre-
1995 levels.
The Company expects continuing pressure on its gross profit during
1996 as a result of two factors. First, a general softening of consumer demand
in China as a result of increasing competition from foreign premium brand beers
and the central government's regulatory controls and economic policies. Second,
an increase in 1996 raw material and packaging costs in excess of 10%, which,
because of the softening of consumer demand, may be difficult for the Company to
fully pass on to its customers. Accordingly, the Company is considering the
introduction of a bottle recycling program in 1996 in an effort to reduce
production costs.
Selling and Administrative Expenses
- -----------------------------------
For the year ended December 31, 1995, selling and administrative
expenses were RMB 64,675,128 or 11.4% of net sales, consisting of selling
expenses of RMB 32,821,498 and general and administrative expenses of RMB
31,853,630. Selling expenses include costs relating to the advertising,
promotion, marketing and distribution of Pabst Blue Ribbon beer in China, and
have been incurred in conjunction with the increase in the production capacity
of the Zhaoqing Brewery and the increase in sales volume. During 1995, the
Company recorded an allowance for doubtful accounts of RMB 5,600,000.
During 1995, the Marketing Company was established to market
throughout China the Pabst Blue Ribbon beer produced by the Zhaoqing Brewery and
the Noble Brewery. The Marketing Company assumed the responsibility for
marketing the Zhaoqing Brewery's production of Pabst Blue Ribbon beer in April
1995, and incurred most of the 1995 selling expenses. General and
administrative costs include the costs associated with the operation of the
Company's executive offices, and the legal and accounting costs associates with
the operation of a public company. For the two months ended December 31,1994,
selling and administrative expenses were RMB 1,248,302 or 10.9% of net sales.
As a result of softening consumer demand and increasing competition
from foreign premium brand beers, the Company anticipates that it will implement
a substantially expanded advertising and promotional program in 1996 in order to
stimulate consumer demand and maintain the market position of Pabst Blue Ribbon
beer in China.
28
<PAGE>
Corporate Reorganization Expenses
- ---------------------------------
For the two months ended December 31,1994, corporate reorganization
expenses of RMB 2,551,921 consisted of management's estimate of the fair value
of the shares of common stock issued to certain merchant bankers, consultants
and several executives of the Company in conjunction with the reverse
acquisition effective December 16, 1994.
Interest Expense
- ----------------
For the year ended December 31, 1995, interest expense, net of amounts
capitalized, was RMB 3,236,058. For the two months ended December 31, 1994,
interest expense, net of amounts capitalized, was RMB 1,317,178.
Income Taxes
- ------------
For the year ended December 31, 1995, income tax expense was RMB
1,000,000. Although the Company's operations in China were subject to a tax
holiday in 1995, deferred income taxes of RMB 1,000,000 were recorded in 1995 as
a result of temporary timing differences with respect to accelerated
depreciation of property, plant and equipment during the tax exemption period.
For the two months ended December 31, 1994, no income tax expense was incurred.
Net Income
- ----------
For the year ended December 31, 1995, net income was RMB 19,625,968 or
3.5% of net sales. For the two months ended December 31, 1994, net income was
RMB 3,713,687 or 32.6% of net sales.
The Noble Brewery
- -----------------
Sales
- -----
For the year ended December 31, 1995, net sales were RMB 681,724,168,
consisting of 161,200 metric tons of beer, including RMB 327,805,406 of beer
products sold to the Marketing Company for resale. For the two months ended
December 31, 1994, net sales were RMB 126,438,179, consisting of 26,272 metric
tons of beer.
Gross Profit
- ------------
For the year ended December 31, 1995, gross profit was RMB 155,864,163
or 22.9% of net sales. For the two months ended December 31, 1994, gross profit
was RMB 36,414,406 or 28.8% of net sales. As a result of increased discounts
offered to distributors, increased raw material costs, and, in particular, the
establishment and operating structure of
29
<PAGE>
the Marketing Company, the Company does not expect that its gross margin will
return to pre-1995 levels.
Selling and Administrative Expenses
- -----------------------------------
For the year ended December 31, 1995, selling and administrative
expenses were RMB 60,819,562 or 8.9% of net sales, consisting of selling
expenses of RMB 31,794,779 and general and administrative expenses of RMB
29,024,783. Selling expenses include costs relating to the advertising,
promotion, marketing and distribution of Pabst Blue Ribbon beer in China, and
have been incurred in conjunction with the increase in the production capacity
of the Noble Brewery. During 1995, the Noble Brewery recorded an allowance for
doubtful accounts of RMB 786,740.
During 1995, the Marketing Company was established to market
throughout China the Pabst Blue Ribbon beer produced by the Zhaoqing Brewery and
the Noble Brewery. The Marketing Company assumed the responsibility for
marketing the Noble Brewery's production of Pabst Blue Ribbon beer in July 1995.
For the two months ended December 31, 1994, selling and administrative expenses
were RMB 16,488,878 or 13.0% of net sales.
Interest Expense
- ----------------
For the year ended December 31, 1995, interest expense was RMB
2,240,015. For the two months ended December 31, 1994, no interest expense was
incurred.
Income Taxes
- ------------
For the year ended December 31, 1995, income tax expense was RMB
2,200,000. For the two months ended December 31, 1994, income tax expense was
RMB 720,000. Although the Company's operations in China were subject to a tax
holiday in 1995, deferred income taxes of RMB 2,200,000 and RMB 720,000 were
recorded in 1995 and 1994, respectively, as a result of temporary timing
differences with respect to accelerated depreciation of property, plant and
equipment during the tax exemption period.
Net Income
- ----------
For the year ended December 31, 1995, net income was RMB 94,450,587 or
13.9% of net sales. For the two months ended December 31, 1994, net income was
RMB 19,530,979 or 15.4% of net sales.
30
<PAGE>
Consolidated Financial Condition - December 31, 1995:
- ----------------------------------------------------
Liquidity and Capital Resources
- -------------------------------
For the year ended December 31, 1995, the Company's operations
generated cash resources of RMB 124,992,527. The major components of the cash
generated by operations in 1995 were the increase of RMB 119,863,548 in deposits
received from customers, and the increase of RMB 154,185,606 in due to an
associated company (the Noble Brewery) for the purchase of beer products for
resale. The Company's cash balance increased by RMB 50,050,378 to RMB
57,448,305 at December 31, 1995, as compared to RMB 7,397,927 at December 31,
1994. The Company's net working capital deficit increased by RMB 56,584,959 to
RMB 97,555,553 at December 31, 1995, as compared to RMB 40,970,594 at December
31, 1994. However, the Company's current ratio improved to .77:1 at December
31, 1995 as compared .39:1 at December 31, 1994.
The Company's principal shareholder, Oriental Win, and Guangdong Blue
Ribbon, a related party, have undertaken to provide continuing financial support
to the Company, as further described below.
The conversion and expansion of the Zhaoqing Brewery has required
substantial capital to finance the costs of expansion and to support
substantially higher sales levels. Guangdong Blue Ribbon has committed to
provide Zhaoqing Brewery with sufficient financing to purchase new machinery and
equipment in connection with the planned expansion of the Zhaoqing Brewery to an
annual production capacity of 100,000 metric tons of beer.
For the year ended December 31, 1995, additions to property, plant and
equipment in connection with the planned expansion of the Zhaoqing Brewery to an
annual production capacity of 100,000 metric tons of beer, aggregated RMB
89,365,441 and were financed by new loans for leased assets aggregating RMB
21,250,000 and cash provided by operations as described above. During 1996, the
Company currently plans to expend RMB 43,168,954 for the installation of new
packaging lines and related packaging equipment and materials, which the Company
expects to fund through a combination of cash provided by operations, capital
lease financing and bank loans.
During the year ended December 31, 1995, the Company's secured short-
term bank loans increased by RMB 24,000,000, while secured long-term bank loans
decreased by RMB 18,000,000. The secured bank loans bear interest at rates
ranging from 10.8% to 14.5%, and are repayable in 1996. Unsecured short-term
bank loans remained stable during 1995 at approximately RMB 8,600,000, with
interest at rates ranging from 10.8% and 12.1%. A substantial portion of the
bank loans has been utilized to fund the expansion of the Zhaoqing Brewery.
During 1995, interest costs of RMB 10,831,662 were incurred, of which
31
<PAGE>
RMB 7,595,604 or approximately 70% were capitalized. During 1996, the interest
expense on such loans will be charged to operations.
During 1995, the Noble Brewery declared and paid a dividend relating
to earnings prior to October 31, 1994, resulting in a dividend to the Zhaoqing
Brewery of RMB 28,644,569.
Oriental Win and Guangdong Blue Ribbon are providing continuing
financial support to the Company. The existing loan payable at December 31,
1995 to Oriental Win was incurred in connection with the acquisition of High
Worth JV by Holdings and totalled RMB 73,794,948 at December 31, 1995,
equivalent to approximately US$8,870,000. The loan is denominated in USD, is
unsecured, interest free, and is not due and payable unless alternate long-term
debt or equity funds are available to the Company.
During the year ended December 31, 1995, Guangdong Blue Ribbon and its
affiliated companies provided the Company with raw materials financing
aggregating RMB 5,100,000, which obligations are unsecured, interest free and
repayable on demand. In addition, during the year ended December 31, 1995,
companies beneficially owned by Guangdong Blue Ribbon and directors of the
Company provided loans in the form of advances to the Company aggregating RMB
8,100,000, which obligations are unsecured, bear interest at 3% above the Hong
Kong dollar prime rate and are repayable in 1996.
The Company anticipates that its operating cash flow, combined with
cash on hand, bank lines of credit, and other external credit sources, and the
credit facilities provided by affiliates or related parties, are adequate to
satisfy the Company's working capital requirements for the fiscal year ending
December 31, 1996. In order to finance the continuing capital requirements of
the Company subsequent to the completion of the Zhaoqing Brewery expansion, the
Company has begun negotiations to arrange additional long-term bank or lease
financing. In addition, accelerated development or acquisition of additional
brewing facilities or other support facilities may require the use of long-term
borrowing or equity financing by the Company.
Inflation and Currency Matters:
- ------------------------------
In recent years, the Chinese economy has experienced periods of rapid
economic growth as well as high rates of inflation, which in turn has resulted
in the periodic adoption by the Chinese government of various corrective
designed to regulate growth and contain inflation. Since 1993, the Chinese
government has implemented an economic program designed to control inflation,
which has resulted in the tightening of working capital to Chinese business
enterprises. The success of the Company depends on substantial part on the
continued growth and development of the Chinese economy.
32
<PAGE>
Foreign operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, and
fluctuations in the relative value of currencies. Changes in the relative
values of currencies occur periodically and may, in certain instances,
materially affect the Company's results of operations.
The Zhaoqing Brewery and the Noble Brewery conduct virtually all of
their business in China and, accordingly, the sale of their products are settled
primarily in RMB. As a result, continued devaluation of the RMB against the USD
will adversely affect their financial performance when measured in USD, and may
have material adverse effects upon the results of operations and financial
condition. In addition, a significant portion of revenues will need to be
converted into USD on a continuing basis to meet foreign currency obligations.
Although prior to 1994, the RMB experienced significant devaluation against the
USD, the RMB has remained fairly stable during 1994 and 1995. The swap center
rate was US$1.00 to RMB 8.70 at December 31, 1993, RMB 8.45 at December 31,
1994, and RMB 8.32 at December 31, 1995.
Environmental
- -------------
The Company considers it a priority to ensure compliance with all
national and local environment protection laws and regulations. In 1995,
compliance with the provisions of all national and local environmental laws and
regulations did not have a material effect upon the capital expenditures,
earnings or competitive position of the Company
The Company also continues its commitment to programs directed toward
efficient use of resources, waste reduction and pollution prevention. Programs
currently underway include that all waste and emissions must pass through a
comprehensive sewage treatment system to reduce organic matters and the use of
heavy oil instead of coal for power in order to reduce level of carbon dioxide.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and exhibits are listed at "ITEM 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K".
Selected 1995 Quarterly Financial Information, in RMB (unaudited):
Selected quarterly financial information for 1995 interim periods is
presented below. High Worth JV acquired the Zhaoqing Brewery, including the
Zhaoqing Brewery's 40% interest in the Noble Brewery, effective October 31,
1994. The consolidated results of operations includes the results of operations
of the Zhaoqing Brewery on a consolidated basis and the Noble Brewery under the
equity method of accounting, commencing October 31, 1994, to reflect the post-
acquisition consolidated results of operations of the Zhaoqing Brewery and the
Noble Brewery attributable to the Company. Since High Worth JV had no
33
<PAGE>
operations prior to this transaction, comparable selected quarterly financial
information for 1994 interim periods is not presented.
The Zhaoqing Brewery and the Noble Brewery commenced selling their
production of Pabst Blue Ribbon beer through the Marketing Company in April 1995
and July 1995, respectively. The commencement of the Marketing Company's
operations, which are presented on a consolidated basis, resulted in a
significant change in the Company's operating structure and income statement
presentation during 1995. Accordingly, a comparison by quarter of results of
operations for 1995 interim periods is not necessarily meaningful.
<TABLE>
<CAPTION>
As
Previously As
Reported Adjusted(1)
----------- -----------
<S> <C> <C>
Three Months Ended March 31, 1995:
- ---------------------------------
Sales, net, of sales taxes 32,924,512 32,494,522
Gross profit 7,401,635 7,220,540
Operating income (loss) 1,048,920 (18,539)
Net income 8,670,737 6,327,097
Net income per common share 1.08 .79
Three Months Ended June 30, 1995:
- ---------------------------------
Sales, net sales taxes 94,880,814 94,880,814
Gross profit 13,716,288 13,716,288
Operating income 2,944,896 1,473,384
Net income 6,371,369 3,882,265
Net income per common share .80 .48
Three Months Ended September 30, 1995:
- --------------------------------------
Sales, net of sales taxes 250,040,388 250,040,388
Gross profit 30,752,081 30,752,081
Operating income 6,709,893 4,453,277
Net income 6,811,619 4,843,457
Net income per common share .85 .61
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
As
Previously As
Reported Adjusted(1)
----------- -----------
<S> <C> <C>
Three Months Ended December 31, 1995:
- ------------------------------------
Sales, net of sales taxes - 189,371,215
Gross profit - 19,444,624
Operating income - 550,283
Net income - 4,573,149
Net income per common share - .57
Year Ended December 31, 1995:
- --------------------------------
Sales, net of sales taxes - 566,786,939
Gross profit - 71,133,533
Operating income - 6,458,405
Net income - 19,625,968
Net income per common share - 2.45
</TABLE>
(1) Reflects certain year-end adjustments properly allocable to prior 1995
interim periods, including additional charges by the Zhaoqing Brewery for
the staff welfare fund and by the Marketing Company for the provision for
doubtful accounts, accrued liability for sales commissions, and unrecorded
renovation expenses. With respect to the Noble Brewery, an unconsolidated
subsidiary, additional charges due to improper cut-offs, unrecorded
expenses and account misclassifications resulted in an understatement of
cost of sales and of selling, general and administrative expenses.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On December 16, 1994, the Company (which was then known as Natural
Fuels, Inc.), acquired all of the outstanding shares of Holdings. The firm of
Williams, Dickerson, Allen & Co., L.L.P. ("Williams") audited the balance sheet
of the Company as of December 31, 1993, 1992 and 1991 and the related statements
of operations, stockholders' equity and cash flows for the years then ended.
Effective January 30, 1995, the Company dismissed Williams as the
Company's independent accountants, and engaged Ernst & Young as the Company's
new independent accountants. Prior to the engagement of Ernst & Young, the
Company did not consult with that firm regarding the application of accounting
principles to a specified
35
<PAGE>
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Company's financial statements.
The decision to change accountants was approved by the Company's Board
of Directors.
None of the reports on such financial statements contained an adverse
opinion or a disclaimer of opinion, or were qualified or modified as to
uncertainty, audit scope of accounting principles except that (a) the report of
Williams dated February 26, 1993, was qualified as to the uncertainty of Company
to continue as a going concern in view of the Company's cash flows.
During the above mentioned audit engagements and during the year ended
December 31, 1994 and the period from January 1, 1995 through January 30, 1995,
there were no disagreements with Williams on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of Williams would have
caused Williams to make reference to the subject matter of the disagreements in
connection with the firm's reports on the Company's financial statements.
36
<PAGE>
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(A) DIRECTORS
The Company's current directors are listed below. Directors are
elected to serve until the following annual shareholders meeting.
<TABLE>
<CAPTION>
Name Age First Elected
- ---- --- -------------
<S> <C> <C>
Liu Yun Zhong 52 1994
Victor Choi 39 1994
Niu Zi Hang 47 1994
John Zhao Li 41 1994
Kevin Sheung Wai Chan 36 1994
Wong Lee Tak 39 1995
Chan Chung 33 1995
</TABLE>
37
<PAGE>
(B) EXECUTIVE OFFICERS
The Company's current executive officers are listed below. Executive officers
are elected to serve until the following annual meeting of the Company's Board
of Directors.
<TABLE>
<CAPTION>
Name Age Office First Elected
- ---- --- ------ -------------
<S> <C> <C> <C>
Liu Yun Zhong 52 Chairman 1994
Niu Zi Hang 47 Vice President and 1994
Chief Operating
Officer
John Zhao Li 41 President 1994
Ge Ming 45 Chief Financial 1995
Officer
Wong Lee Tak 39 Vice Chairman 1995
</TABLE>
LIU YUN ZHONG
Mr. Liu, the Chairman of CBR, has over 30 years experience in
manufacturing. Since the early 1980's, Mr. Liu had acted as senior management
in several manufacturing enterprises in China including mechanical and
petrochemical enterprises. Since 1986, Mr. Liu has moved to drink and food
manufacturing operations and since 1989, Mr. Liu acted as the general manager of
the Guangdong Blue Ribbon. In 1994, he took the position of the General Manager
of High Worth JV overseeing the operations of the Noble Brewery and the Zhaoqing
Brewery.
NIU ZI HANG
Mr. Niu, the Chief Operating Officer of the Company, has over 25 years
experience in manufacturing. Since 1974, Mr. Niu had acted as senior management
in several manufacturing enterprises. Between 1986 to 1993, he was the general
manager of Pabst Zhaoqing and became the general manager of the Noble Brewery
when the Noble Brewery was formed to take over the business of Pabst Zhaoqing.
JOHN LI
Mr. Li, the President of the Company, for the past five years, has
been in senior management with an international investment company in the United
States. During such period,
38
<PAGE>
he was actively involved in consulting for Pabst Zhaoqing in the project
management of the development of the first and second phases of the Noble
Brewery.
LAI JIANG SHENG
Mr. Lai, the General Manager of the Zhaoqing Brewery, was in senior
management since 1970 in Zhaoqing Electrical Plant. In early 1980, Mr. Lai
acted as deputy factory manager of the Zhaoqing Brewery. In 1986, he moved to
the position of deputy general manager of Pabst Zhaoqing and became deputy
general manager of the Noble Brewery in 1993. In late 1994, he moved to the
Zhaoqing Brewery again as general manager to handle the conversion of the
production facilities to produce Blue Ribbon beer.
ON JIANG LUE
Mr. On, the Chief of Research and Development, has been engaged in
manufacturing operations since mid 1970. Mr. On has a reputable position in the
beer industry in China. He is the committee member of the Beer Association of
China. He is one of the few qualified beer appraisers recognized by the
government of China.
GE MING
Mr. Ge, the Chief Financial Officer of the Company, received his
Masters Degree in international accounting from the Research Institute of Fiscal
Science in Beijing, China in 1982. As part of his studies, he worked at an
international accounting firm in their Chicago and Cleveland offices for a one
year internship. After graduation in 1983, he joined the China Certified Public
Accountants (CCPA), the leading accounting firm in China, working as an Audit
Manager and Group Manager in the auditing and consulting fields for 12 years,
specializing in the food and soft-drinking industries in China. Mr. Ge also
worked as the Executive Director in a management consulting joint venture
company in Hong Kong since 1984. Mr. Ge is a senior member of China Institute
of Certified Public Accountants (CICPA) and the director of China Asset
Valuation Association (CAVA).
KEVIN SHEUNG WAI CHAN
Mr. Chan, a director, was the Chief Financial Officer of the Company
from 1994 to September 18, 1995. Mr. Chan graduated from the University of Hong
Kong with a degree of Bachelor of Social Science in 1985. After graduation, he
worked in the Hong Kong office of the audit division of Arthur Andersen & Co.
for four years. In 1989, he left for the corporate finance division of Morgan
Grenfell Hong Kong Ltd., an international merchant bank. He was an associate
director of that division until 1994 when he left for the position of deputy
managing director of a regional merchant banking firm.
39
<PAGE>
VICTOR CHOI
Victor Choi, a director, has been engaged in the business of real
estate and stock investments for the past eight years through a company that he
controls.
WONG LEE TAK
Wong Lee Tak, a director, has been in senior management engaged in the
investment planning and syndication business. He has participated in brewery
and soft drinks investment projects in China.
CHAN CHUNG
Chan Chung, a director, has been engaged in the business of China
trade and real estate investment in China for the past five years. He also
assisted Guangdong Blue Ribbon in building up the sales and marketing network in
China.
As of March 15, 1996, the Company was not subject to the reporting
requirements of Section 16 of the Securities Exchange Act of 1934 as it did not
have any class of equity securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934.
ITEM 11. EXECUTIVE COMPENSATION.
A total of US$107,266 of compensation was accrued to John Li, the
Company's President and Director, as compensation from the Company for the year
ended December 31, 1995. None of the other officers of the Company were awarded
or received total compensation in excess of US$100,000, and none of the officers
exercised any stock options or received any grants of stock options or SAR's.
Other directors of the Company received a total of US$58,038 as compensation in
1995 for their serving on the board.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of March 15,
1996 of the shares of the Company's Common Stock (Class A and Class B)
beneficially owned by (i) each person who, as of March 15, 1996, was known by
the Company to own beneficially more than 5% of its Common Stock, (ii) the
individual directors of the Company and (iii) the executive officers and
directors of the Company as a group.
40
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature of
Name of Beneficial Owner Beneficial Ownership(1) Percent of Class(2)
- ------------------------ ----------------------- -------------------
<S> <C> <C>
Oriental Win Holdings Ltd. 6,960,000(3) 87.0
("Oriental Win")
West Coast Star
Enterprises Ltd.
("West Coast") 6,960,000(4) 87.0
Mapesbury Limited
("Mapesbury") 6,960,000(5) 87.0
Redcliffe Holdings Ltd.
("Redcliffe") 6,960,000(6) 87.0
Kevin Chan 240,000(7) 3.0
Liu Yun Zhong 0(8) 0
Niu Zi Hang 0(9) 0
Victor Choi 0(10) 0
John Li 0(11) 0
Wong Lee Tak 0(12) 0
Chan Chung 0(13) 0
Executive Officers and
Directors as a Group
(7 persons) 240,000(14) 3.0
</TABLE>
____________________
(1) Number of shares beneficially held on a post 1 for 22 reverse stock split
basis. The Company's Class B shares are equivalent to the Company's Class
A shares except that the Class B shares carry voting rights of 2 to 1.
(2) Based on 8,000,013 shares outstanding of which 5,000,013 shares are Class A
and 3,000,000 are Class B Common Stock.
41
<PAGE>
(3) Consists of 3,960,000 shares of Class A Common Stock and 3,000,000 shares
of Class B Common Stock.
(4) West Coast is the record owner of 60% of the capital stock of Oriental Win.
West Coast has entered into a shareholders agreement with Mapesbury and
Redcliffe which provides, inter alia, that the consent of shareholders
----- ----
holding at least 75% of the issued shares of Oriental Win is required to
approve certain actions, including the sale, transfer, lease, assignment or
other disposition of a material part of the assets relating to the beer
production business of the Company. West Coast also has the right to
appoint the majority of the directors of Oriental Win. Accordingly, West
Coast may be deemed to be the beneficial owner of all of the issued shares
of Oriental Win although West Coast disclaims beneficial ownership of the
shares held by Mapesbury and Redcliffe.
(5) Mapesbury is the record owner of 20% of the capital stock of Oriental Win.
Mapesbury has entered into a shareholders agreement with West Coast and
Redcliffe, which provides, inter alia, that the consent of shareholders
----- ----
holding at least 75% of the issued shares of Oriental Win is required to
approve certain actions, including the sale, transfer, lease, assignment or
other disposition of a material part of the assets relating to the beer
production business of the Company. Accordingly, Mapesbury may be deemed
to be the beneficial owner of all of the issued shares of Oriental Win
although Mapesbury disclaims beneficial ownership of the shares held by
Oriental Win, West Coast and Redcliffe.
(6) Redcliffe is the record owner of 20% of the capital stock of Oriental Win.
Redcliffe has entered into a shareholders agreement with West Coast and
Mapesbury, which provides, inter alia, that the consent of shareholders
----- ----
holding at least 75% of the issued shares of Oriental Win is required to
approve certain actions, including the sale, transfer, lease, assignment or
other disposition of a material part of the assets relating to the beer
production business of the Company. Accordingly, Redcliffe may be deemed
to be the beneficial owner of all of the issued shares of Oriental Win
although Redcliffe disclaims beneficial ownership of the shares held by
Oriental Win, West Coast and Mapesbury.
(7) Consists of 240,000 shares of Class A Common Stock owned by Goldchamp Ltd.,
of which Mr. Chan is the beneficial owner.
(8) Mr. Liu is a minority shareholder of West Coast, but disclaims any
beneficial ownership of the shares held by West Coast.
(9) Mr. Niu is a minority shareholder of West Coast, but disclaims any
beneficial ownership of the shares held by West Coast.
(10) Mr. Choi is the beneficial owner of Silvercliff Venture Inc. which owns 50%
of the capital stock of Redcliffe.
42
<PAGE>
(11) Mr. Li is a minority shareholder of West Coast, but disclaims any
beneficial ownership of the shares held by West Coast.
(12) Mr. Wong is a minority shareholder of West Coast, but disclaims any
beneficial ownership of the shares held by West Coast.
(13) Mr. Chan Chung is a minority shareholder of West Coast, but disclaims any
beneficial ownership of the shares held by West Coast.
(14) See footnotes (8) - (13).
The Company is unaware of any arrangements the operation of which may
at a subsequent date result in the change of control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
As stated in "ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT," Messrs. Liu, Niu, Chan, Wong and Li, directors and
executive officers of the Company, are shareholders of West Coast which is the
controlling stockholder of Oriental Win. Oriental Win, in turn, is the
controlling shareholder of the Company. Oriental Win acquired its control
position pursuant to the transfer of the capital stock of Holdings, its then
subsidiary, to the Company in an arm's length transaction. Mr. Kevin Chan, the
former Chief Financial Officer and a director of the Company, provided advisory
services to Holdings for a fee, part of which was exchanged for shares of
Holdings, which were then exchanged for shares of the Class A Common Stock of
the Company.
In connection with the acquisition of High Worth JV by Holdings,
Oriental Win loaned Holdings US$8,869,585. The loan bears no interest and is
not repayable unless the Company obtains long term debt or equity capital.
During the year ended December 31, 1995, the Company purchased
packaging materials from Guangdong Blue Ribbon and its affiliated companies
aggregating RMB 27,657,968.
During the year ended December 31, 1995, the Company purchased mineral
water and non-carbonated soft drinks from Guangdong Blue Ribbon and its
affiliated companies aggregating RMB 61,708,086 for resale.
During the year ended December 31, 1995, the Company purchased beer
products from the Noble Brewery aggregating RMB 327,805,406 for resale. As of
December 31, 1995, RMB 154,185,606 was due to the Noble Brewery for the purchase
of beer products, and was unsecured, interest free and repayable on demand.
43
<PAGE>
During the year ended December 31, 1995, RMB 3,454,067 was paid to
Guangdong Blue Ribbon as a royalty fee for the right to use the Pabst Blue
Ribbon trademarks in the Guangdong Province of China.
As of December 31, 1995, RMB 46,411,779 was due from Guangdong Blue
Ribbon and its affiliated companies, representing trade deposits received on
behalf of the Company and expenses paid on behalf of Guangdong Blue Ribbon and
its affiliated companies. Except for approximately RMB 16,000,000 payable to
Guangdong Blue Ribbon, which bears interest at 15% per annum, the obligation is
interest free and repayable on demand. The entire obligation is unsecured.
As of December 31, 1995, the Company had the following obligations to
related parties:
(a) approximately RMB 10,500,000 (of which approximately RMB 5,100,000
was incurred during 1995 and RMB 5,400,000 was incurred during 1994) was due to
companies affiliated with Guangdong Blue Ribbon for the purchases of raw
materials, and was unsecured, interest free and repayable on demand;
(b) approximately RMB 3,300,000 (which was incurred during 1995) was
due to Wealth Guide Development Limited, a company affiliated with Guangdong
Blue Ribbon, as an advance, and was unsecured, bears interest at 3% above the
Hong Kong dollar prime rate, and is repayable in 1996;
(c) approximately RMB 2,200,000 and RMB 1,400,000 (which were incurred
during 1995) were due to Evermoni Trading Limited and Very Temper Limited,
respectively, companies beneficially owned by Wong Lee Tak, a director of the
Company, as advances, and were unsecured, bear interest at 3% above the Hong
Kong dollar prime rate, and are repayable in 1996; and
(d) approximately RMB 1,200,000 (which was incurred during 1995) was
due to Trade Link Investment Limited, a company beneficially owned by Victor
Choi, a director of the Company, as an advance, and was unsecured, bears
interest at 3% above the Hong Kong dollar prime rate, and is repayable in 1996.
For the year ended December 31, 1995, interest expense with respect to
the above obligations relating to Blue Ribbon Group and its affiliated companies
was RMB 3,091,364 and to the other related parties was RMB 328,207.
On December 31, 1995, the Zhaoqing Brewery agreed to pay Guangdong
Blue Ribbon a management fee of RMB 3,780,000 per annum for a three year period
commencing January 1, 1996.
44
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following financial statements and exhibits are filed
with and as a part of this Report.
<TABLE>
<CAPTION>
Page No.(s)
-----------
<S> <C>
(1) Financial Statements.
---------------------
(A) CBR Brewing Company, Inc.
Report of Independent Auditors 52
Consolidated balance sheets 53
Consolidated statements of income 54
Consolidated statements of changes 55
in shareholders' equity
Consolidated statements of cash flows 56
Notes to consolidated financial statements 57-73
(B) Zhaoqing Brewery
Report of Independent Auditors 76
Consolidated balance sheet 77
Consolidated statements of income 78
Consolidated statements of equity 79
Consolidated statements of cash flows 80-81
Notes to consolidated financial statements 82-105
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Page No.(s)
-----------
<S> <C>
(C) Zhaoqing Blue Ribbon Brewery Noble Ltd.
Report of Independent Auditors 108
Balance sheets 109
Statements of income 110
Statements of equity 111
Statements of cash flows 112
Notes to financial statements 113-126
</TABLE>
(2) Exhibits
Exhibit No. Description of Document
- ----------- -----------------------
2.1 Share Exchange Agreement, dated November 1994, with
Amendment among the Company, Oriental Win and Holdings(1)
3(i).1 Articles of Incorporation and Amendments(2)
3(i).2 Certificate of Amendment of Articles of Incorporation (3)
3(ii) Bylaws(2)
10.1 Joint Venture Agreement dated June 10, 1993 between Zhaoqing
Brewery and Goldjinsheng regarding Noble Brewery with
amendments, with English translation(3)
10.2 Joint Venture Agreement dated May 6, 1994 between Guangdong
Blue Ribbon and Holdings, as supplemented by Supplementary
Joint Venture Agreement dated September 5, 1994 among
Holdings, Guangdong Blue Ribbon and Star Quality Ltd.
regarding Zhaoqing High Worth, with English translation(3).
46
<PAGE>
Exhibit No. Description of Document
- ----------- -----------------------
10.3 Assets Transferring Agreement dated September 6, 1994 among
Guangdong Blue Ribbon, the Zhaoqing Brewery and High Worth
JV regarding High Worth JV, with English translation(3).
10.4 Agreement on License of Transferring and Using the
registered trademarks of Pabst Blue Ribbon dated August 30,
1993, between Pabst Zhaoqing and Pabst US, with English
translation(3)
10.5 Agreement on Quality of Pabst Beer dated August 30, 1993
between Pabst Zhaoqing and Pabst US, with English
translation(3).
10.6 Power of Attorney between Pabst US and Pabst Zhaoqing, dated
August 30, 1993(3).
10.7 Sublicense Agreement on Using the Registered Trademarks of
Pabst Blue Ribbon dated October 12, 1993 between Pabst
Zhaoqing and the Noble Brewery, with English translation(3)
10.8 Sublicense on Using the Registered Trademarks of Pabst Blue
Ribbon dated May 6, 1994 between Pabst Zhaoqing and High
Worth JV, with English translation(3)
10.9 Transferring Agreement dated May 20, 1994 among Pabst
Zhaoqing, Pabst US and Guangdong Blue Ribbon, with English
translation(3).
10.10 Deed dated December 5, 1994 between Oriental Win and
Holdings regarding the Shareholder Loan, with supplementary
documentation(3).
47
<PAGE>
22 The Company's subsidiaries are:
<TABLE>
<CAPTION>
Percentage
Name of Subsidiary Ownership Place of Incorporation
- ------------------ ---------- ----------------------
<S> <C> <C>
High Worth Holdings, Ltd. 100 British Virgin Islands
CBR Finance (B.V.I.) Ltd. 100 British Virgin Islands
Zhaoqing Blue Ribbon
High Worth Brewery, Ltd. 60 (effective interest) People's Republic of China
(Sino-foreign joint venture)
Zhaoqing Brewery 60 (effective interest) People's Republic of China
Zhaoqing Blue Ribbon
Brewery Noble, Ltd. 24 (effective interest) People's Republic of China
(Sino-foreign joint venture)
Zhaoqing Blue Ribbon
Beer Marketing Company
Limited 42 (effective interest) People's Republic of China
</TABLE>
27 Financial Data Schedule (Electronic filing only).
(1) Filed as an Exhibit to the Company's current report on Form 8-K filed on
December 30, 1994 and herein incorporated by reference.
(2) Filed as Exhibits to the Company's Registration Statement No. 33-26617A on
Form S-18 filed January 19, 1989 and herein incorporated by reference.
(3) Filed as Exhibits to the Company's Annual Report on Form 10-K for fiscal
year ended December 31, 1994.
(b) No Reports on Form 8-K were filed during or related to the fourth quarter
of 1995.
48
<PAGE>
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CBR Brewing Company, Inc.
Date: June 5, 1996 By: /s/ John Zhao Li
----------------------------------
John Zhao Li, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C>
Date: June 5, 1996 By: /s/ John Zhao Li
------------------------------------
John Zhao Li, President and Director
Date: June 5, 1996 By: /s/ Ge Ming
------------------------------------
Ge Ming, Chief Financial Officer
and Chief Accounting Officer
Date: June 5, 1996 By: /s/ Kevin Sheung Wai Chan
------------------------------------
Kevin Sheung Wai Chan, Director
Date: June 5, 1996 By: /s/ Niu Zi Hang
------------------------------------
Niu Zi Hang, Director
Date: June 5, 1996 By: /s/ Liu Yun Zhong
------------------------------------
Liu Yun Zhong, Director
Date: June 5, 1996 By: /s/ Victor Choi
------------------------------------
Victor Choi, Director
Date: June 5, 1996 By: /s/ Wong Lee Tak
------------------------------------
Wong Lee Tak, Director
Date: June 5, 1996 By: /s/ Chan Chung
------------------------------------
Chan Chung, Director
</TABLE>
49
<PAGE>
Audited Financial Statements
CBR BREWING COMPANY, INC.
December 31, 1995 and 1994
ERNST & YOUNG
HONG KONG
<PAGE>
CBR BREWING COMPANY, INC.
CONTENTS
Pages
-----
<TABLE>
<S> <C>
REPORT OF INDEPENDENT AUDITORS C-1
FINANCIAL STATEMENTS
Consolidated balance sheets C-2
Consolidated statements of income C-3
Consolidated statements of changes in shareholders' equity C-4
Consolidated statements of cash flows C-5
Notes to consolidated financial statements C-6 - C-22
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the shareholders of
CBR Brewing Company, Inc.
We have audited the accompanying consolidated balance sheets of CBR Brewing
Company, Inc. and its subsidiaries as of December 31, 1995 and 1994, the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the year ended December 31, 1995 and the period from October 31, 1994
to December 31, 1994. These financial statements are the responsibility of CBR
Brewing Company, Inc.'s management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of CBR
Brewing Company, Inc. and its subsidiaries as of December 31, 1995 and 1994, and
the consolidated results of their operations and their cash flows for the year
ended December 31, 1995 and the period from October 31, 1994 to December 31,
1994 in conformity with generally accepted accounting principles in the United
States of America.
Ernst & Young
Hong Kong
March 28, 1996
C-1
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Notes 1995 1994 1995
RMB RMB USD
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash 57,448,305 7,397,927 6,904,844
Accounts receivable 4 158,677,644 927,248 19,071,832
Inventories 5 56,838,801 16,110,606 6,831,587
Prepayments, deposits and other receivables 7,423,161 2,125,180 892,207
Due from related companies 18 46,411,779 - 5,578,339
----------- ----------- ----------
Total current assets 326,799,690 26,560,961 39,278,809
Deferred tax assets 12 48,444 1,048,444 5,823
Property, plant and equipment, net 6 197,308,264 112,366,132 23,714,936
Interests in an associated company 7 222,742,476 217,173,987 26,771,932
----------- ----------- ----------
Total assets 746,898,874 357,149,524 89,771,500
=========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank loans 8 32,574,400 8,595,000 3,915,192
Other loans 9 - 5,000,000 -
Obligation under capital lease 10 5,634,848 3,651,607 677,265
Deposits received from customers 123,817,626 3,954,078 14,881,926
Accounts payable and accrued liabilities 56,279,181 22,081,062 6,764,325
Due to related companies 18 18,629,685 5,430,655 2,239,145
Due to an associated company 154,185,606 - 18,531,924
Sales taxes payable 11 33,233,897 18,819,153 3,994,459
----------- ----------- ----------
Total current liabilities 424,355,243 67,531,555 51,004,236
Long term liabilities:
Bank loans 8 - 18,000,000 -
Shareholder's loan 13 73,794,948 74,947,990 8,869,585
Obligation under capital lease 10 24,897,291 9,866,856 2,992,463
----------- ----------- ----------
Total long term liabilities 98,692,239 102,814,846 11,862,048
Minority interests 96,474,719 79,052,418 11,595,519
Shareholders' equity:
Capital stock - common stock
Class A par value US$0.0001 each, 90,000,000
(1994: 95,000,000) shares authorized,
5,000,013 shares outstanding 4,265 4,265 513
Class B par value US$0.0001 each, 10,000,000
(1994: 5,000,000) shares authorized,
3,000,000 shares outstanding 2,559 2,559 307
Additional paid-in capital 104,030,194 104,030,194 12,503,629
Reserve funds 2,159,613 219,062 259,570
Retained earnings 21,180,042 3,494,625 2,545,678
----------- ----------- ----------
Total shareholders' equity 127,376,673 107,750,705 15,309,697
----------- ----------- ----------
Total liabilities and shareholders' equity 746,898,874 357,149,524 89,771,500
=========== =========== ==========
</TABLE>
The consolidated financial statements were approved by
the board of directors of CBR Brewing Company, Inc. on March 28, 1996.
The accompanying notes are an integral part of
the consolidated financial statements.
C-2
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM
OCTOBER 31, 1994 TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
Period from
October 31,
Year ended 1994 to Year ended
December 31, December 31, December 31,
Notes 1995 1994 1995
RMB RMB USD
<S> <C> <C> <C> <C>
Sales 580,260,386 12,562,589 69,742,835
Sales taxes 11 (13,473,447) (1,161,783) ( 1,619,405)
------------ ----------- ------------
Sales, net of sales taxes 566,786,939 11,400,806 68,123,430
Cost of sales, including inventory purchased
from related companies of RMB417,171,460
and RMB450,961; and royalty fee paid to
related company of RMB3,454,067 and nil (495,653,406) ( 7,174,417) (59,573,727)
------------ ----------- ------------
Gross profit 71,133,533 4,226,389 8,549,703
Expenses:
Selling and administrative expenses (64,675,128) (1,248,302) (7,773,453)
------------ ----------- ------------
Operating income 6,458,405 2,978,087 776,250
Other income:
Foreign exchange gains 1,614,652 1,217,119 194,069
Other expenses:
Corporate reorganisation expenses - (2,551,921) -
Loss on disposal of property, plant
and equipment (1,001,788) (394,988) (120,407)
Interest expense, including interest
expense paid or payable to related
companies of nil and RMB328,207 (3,236,058) (1,317,178) (388,949)
------------ ----------- ------------
Total other expenses (4,237,846) (4,264,087) (509,356)
------------ ----------- ------------
Profit/(loss) before income taxes 3,835,211 (68,881) 460,963
Income taxes 12 (1,000,000) - (120,192)
------------ ----------- ------------
Profit/(loss) before equity in earnings of an
associated company 2,835,211 (68,881) 340,771
Equity in earnings of an associated company 7 34,213,058 7,812,392 4,112,146
------------ ----------- ------------
Net income before minority interests 37,048,269 7,743,511 4,452,917
Minority interests (17,422,301) (4,029,824) (2,094,027)
------------ ----------- ------------
Net income for the year/period 19,625,968 3,713,687 2,358,890
============ =========== ============
Net income per share 2.45 0.46 0.30
============ =========== ============
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
C-3
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM OCTOBER 31, 1994 TO
DECEMBER 31, 1994
<TABLE>
<CAPTION>
Number of Par value of
shares of common stock US$0.0001 each Additional
Class A Class B Class A Class B paid-in Reserve Retained
common common common common capital funds earnings
RMB RMB RMB RMB RMB
(Note 15) (Note 15)
<S> <C> <C> <C> <C> <C> <C> <C>
At November 1, 1994 - - - - - - -
Issue of common stock to the
Company's existing stockholders 155,013 - 132 - 1,077,785 - -
Issue of common stock to merchant
bankers, consultants and
several executives of the
Company 645,000 - 550 - 2,756,710 - -
Issue of common stock in
consideration for the entire
issued share capital of
High Worth Holdings Limited 4,200,000 3,000,000 3,583 2,559 100,195,699 - -
Net income for the period - - - - - - 3,713,687
Appropriation - - - - - 219,062 (219,062)
---------- --------- ------- ------- ----------- --------- ----------
At January 1, 1995 5,000,013 3,000,000 4,265 2,559 104,030,194 219,062 3,494,625
Net income for the year - - - - - - 19,625,968
Appropriation - - - - - 1,940,551 (1,940,551)
---------- --------- ------- ------- ----------- --------- ----------
At December 31, 1995 5,000,013 3,000,000 4,265 2,559 104,030,194 2,159,613 21,180,042
========== ========= ======= ======= =========== ========= ==========
</TABLE>
Holders of Class A common stock are entitled to one vote per share. Holders of
Class B common stock are entitled to two votes per share. Each share of Class B
common stock is convertible into one share of Class A common stock at the option
of the holders.
On March 31, 1995, the Company changed the authorised share capital of Class A
common stock from 95,000,000 shares to 90,000,000 shares and Class B common
stock from 5,000,000 shares to 10,000,000 shares.
The accompanying notes are an integral part of the consolidated
financial statements.
C-4
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM
OCTOBER 31, 1994 TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
Period from
October 31,
Year ended 1994 to Year ended
December 31, December 31, December 31,
1995 1994 1995
RMB RMB USD
<S> <C> <C> <C>
Cash flows from operating activities:
Net income 19,625,968 3,713,687 2,358,890
Adjustments to reconcile net income to net
cash provided by operating activities:
Minority interests 17,422,301 4,029,824 2,094,027
Equity in earnings of an associated company (34,213,058) (7,812,392) (4,112,146)
Depreciation and amortization 9,459,519 606,130 1,136,961
Loss on disposal of property, plant and equipment 1,001,788 394,988 120,407
Foreign exchange gains (1,737,759) (1,141,284) (208,865)
Deferred income taxes 1,000,000 - 120,192
Corporate reorganisation expenses - 2,551,921 -
Allowance for doubtful debts 5,600,000 - 673,077
------------ ----------- -----------
18,158,759 2,342,874 2,182,543
Changes in working capital:
(Increase)/decrease in accounts receivable (163,350,396) 108,264 (19,633,461)
Increase in inventories (40,728,195) (4,067,782) (4,895,216)
(Increase)/decrease in prepayments, deposits
and other receivables (5,297,981) 1,098,544 (636,777)
Increase in amount due to related companies - 2,446,970 -
Increase/(decrease) in deposits received from
customers 119,863,548 (6,418,891) 14,406,677
Increase in accounts payable and accrued liabilities 27,746,442 422,196 3,334,909
Increase in amount due to an associate company 154,185,606 - 18,531,923
Increase/(decrease) in sales taxes payable 14,414,744 (1,891,878) 1,732,541
------------ ----------- -----------
Net cash provided/(used) by operating activities 124,992,527 (5,968,703) 15,023,139
Cash flows from investing activities:
Dividend received from an associated company 28,644,569 - 3,442,857
Increase in amount due from related companies (46,411,779) - ( 5,578,339)
Purchases of property, plant and equipment (89,365,441) (8,076,187) (10,741,039)
Purchase of subsidiaries - 7,584,942 -
Proceeds from disposal of property, plant
and equipment 413,679 991,973 49,721
------------ ----------- -----------
Net cash provided/(used) by investing activities (106,718,972) 500,728 (12,826,800)
Cash flows from financing activities:
New bank loans 22,574,400 8,595,000 2,713,269
New other loans - 5,000,000 -
New loans for leased assets 21,250,000 - 2,554,087
Increase in amount due to related companies 13,199,030 - 1,586,423
Repayment of bank loans (16,595,000) (150,000) ( 1,994,591)
Repayment of other loans (5,000,000) - ( 600,962)
Repayment of obligation under capital lease (3,651,607) (579,098) ( 438,895)
------------ ----------- -----------
Net cash provided by financing activities 31,776,823 12,865,902 3,819,331
------------ ----------- -----------
Net increase in cash 50,050,378 7,397,927 6,015,670
Cash at beginning of year/period 7,397,927 - 889,174
------------ ----------- -----------
Cash at end of year/period 57,448,305 7,397,927 6,904,844
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
C-5
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES
CBR Brewing Company, Inc. (the "Company"), formerly Natural Fuels, Inc. and
National Sweepstakes, Inc., was originally incorporated as Video Promotions,
Inc. on April 20, 1988 under the laws of the State of Florida. The Company and
its subsidiaries are collectively referred to as the "Group".
The Company is a holding company and its principal subsidiaries are engaged
in the production and sale of beer and beer products in the People's Republic of
China (the "PRC").
On December 16, 1994, the Company issued 3,960,000 shares of Class A common
stock and 3,000,000 shares of Class B common stock to Oriental Win Holdings Ltd.
("Oriental Win") and 240,000 shares of Class A common stock to Goldchamp Limited
("Goldchamp") in consideration for the entire issued share capital of High Worth
Holdings Limited ("High Worth Holdings"). Upon completion of the share exchange
on December 16, 1994, High Worth Holdings became a wholly-owned subsidiary of
the Company. The Company is a holding company and its principal subidiaries are
engaged in the production and sale of beer and beer products in the PRC.
This transaction has been treated as a recapitalisation of High Worth
Holdings with High Worth Holdings as the acquirer (reverse acquisition). The
historical financial statements prior to December 16, 1994 are those of High
Worth Holdings.
High Worth Holdings is a holding company formed solely to effect the
acquisition of a 60% interest in Zhao Qing Blue Ribbon High Worth Brewery Ltd.
("High Worth Brewery"). High Worth Brewery is a Sino-foreign equity joint
venture enterprise registered in the PRC on July 2, 1994 in which Star Quality
Limited ("Star Quality"), Guang Dong Blue Ribbon Group Co. Ltd. ("Blue Ribbon
Group") and High Worth Holdings each hold 38%, 2% and 60% interests,
respectively. During the year ended December 31, 1995, Star Quality transferred
its 38% interest to Blue Ribbon Group. Accordingly, Blue Ribbon Group and High
Worth Holdings each hold 40% and 60% interests, respectively. Apart from the
investment in High Worth Brewery which was partly financed by a loan from
Oriental Win, High Worth Holdings has no other significant assets and
liabilities. The following is a summary of the acquisition undertaken by High
Worth Holdings, through its subsidiary, High Worth Brewery, during the period
ended December 31, 1994.
On October 31, 1994, High Worth Brewery acquired a 100% interest in
Zhaoqing Brewery, including Zhaoqing Brewery's 40% interest in Zhaoqing Blue
Ribbon Brewery Noble Ltd. ("Blue Ribbon Noble"). The consideration for the
acquisition of an effective 60% interest in Zhaoqing Brewery by High Worth
Holdings was approximately US$20 million. Prior to the acquisition of the entire
interest in Zhaoqing Brewery by High Worth Brewery, Zhaoqing Brewery was the
then wholly-owned subsidiary of Blue Ribbon Group. Blue Ribbon Noble is a Sino-
foreign equity joint venture enterprise registered in the PRC on October 8, 1993
in which Goldjinsheng Holding Limited, an unrelated party, and Zhaoqing Brewery
each hold 60% and 40% interests, respectively. Zhaoqing Brewery and Blue Ribbon
Noble are both engaged in the production and sale of beer and beer products in
the PRC.
Commencing from April 1995, Zhaoqing Brewery ceased the production of
Zhaoqing beer and started to produce Blue Ribbon beer. Pursuant to the terms of
the sublicense agreement, Zhaoqing Brewery was granted by Blue Ribbon Group the
right for the production and distribution of Blue Ribbon beer under Pabst
trademarks in the PRC at royalty fee of US$11.70 for each ton produced.
Blue Ribbon Noble's principal line of product is Blue Ribbon beer under
Pabst trademarks which were granted by Blue Ribbon Group. Pursuant to the terms
of the sublicense agreement, Blue Ribbon Noble was granted by Blue Ribbon Group
the right in the PRC to use the two specific Pabst trademarks for the
production, promotion, distribution and sale of beer under such trademarks. The
sublicense agreement is valid until November 7, 2003. In consideration for the
sublicense granted, the Blue Ribbon Noble is committed to pay Blue Ribbon Group
a royalty fee of US$0.10 for each carton of bottled or canned beer produced.
C-6
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
On February 19, 1995, Zhaoqing Blue Ribbon Beer Marketing Company Limited
("Blue Ribbon Marketing") owned as to 70% by Zhaoqing Brewery and 30% by Blue
Ribbon Group, was registered as a limited company to conduct the distribution,
marketing and promotion of beer products produced by Zhaoqing Brewery and Blue
Ribbon Noble. Blue Ribbon Marketing commenced to purchase beer products from
Zhaoqing Brewery and Blue Ribbon Noble in April 1995 and July 1995,
respectively. Its principal trading product is Blue Ribbon beer which
constitutes approximately 72% of the Group's sales. Blue Ribbon Marketing is
also engaged in the trading of mineral water and non-carbonated soft drinks
purchased from Blue Ribbon Group and its group of companies.
On April 5, 1995, CBR Finance (BVI) Ltd. ("Finance Company"), which is
wholly owned by the Company, was incorporated in the British Virgin Islands
("BVI"). Finance Company remained dormant upon incorporation.
The following unaudited consolidation pro forma information for the years
ended December 31, 1994 and 1993 is prepared on the basis as if the acquisition
of a 60% interest in Zhaoqing Brewery had occurred on January 1, 1993, including
the beginning of the tax exemption period. This information is extracted from
the Group's unaudited pro forma financial statements which have been prepared
for comparative purposes only and do not purport to indicate the results of
operations which would actually have occurred had the acquisition been in effect
on January 1, 1993 or which may occur in the future. The pro forma information
does not include the effect of Blue Ribbon Marketing.
<TABLE>
<CAPTION>
1994 1993
RMB RMB
Unaudited Unaudited
<S> <C> <C>
Sales, net of sales taxes 68,088,628 63,175,224
========== ==========
Net income 29,097,029 17,005,664
========== ==========
Net income per share 3.64 2.13
========== ==========
</TABLE>
NOTE 2 - BASIS OF PRESENTATION
The acquisition of a 60% interest in Zhaoqing Brewery by High Worth
Holdings on October 31, 1994, as more fully described in note 1, has been
accounted for in the consolidated financial statements using the purchase method
of accounting. Since the Company had no operations prior to this acquisition,
the Company's consolidated financial statements were prepared for the period
from October 31, 1994 (the date of acquisition of Zhaoqing Brewery) to December
31, 1994 to reflect the post-acquisition consolidated operating results of
Zhaoqing Brewery attributable to the Company for the period ended December 31,
1994.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America ("US
GAAP"). This basis of accounting differs from that used in the preparation of
the statutory financial statements of each relevant PRC subsidiary which are
prepared in accordance with the accounting principles and relevant financial
regulations established by the Ministry of Finance of the PRC.
The major adjustments made to the relevant PRC statutory financial
statements to conform to US GAAP include the following:
. The reclassification of certain expense items from income appropriations
to charges against income;
. Adjustment for sales, other income and purchases recognized on a cash
basis;
. Adjustment for depreciation charges;
C-7
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - BASIS OF PRESENTATION (continued)
. Adjustment for deferred taxation; and
. Adjustment for revaluation of fixed assets.
The consolidated financial statements have been prepared on a going concern
basis notwithstanding that the Group has a net current liability position at
December 31, 1994 and 1995 as Oriental Win, the Company's principal shareholder,
and Blue Ribbon Group have undertaken to provide continuing financial support.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of accounting
The consolidated financial statements have been prepared under
the historical cost convention.
(b) Consolidation principles
The consolidated financial statements include the financial
statements of the Company and its subsidiaries which are more
than 50% owned. All material intercompany accounts and
transactions are eliminated on consolidation.
Investments, in which the Company exercises significant influence
but does not own greater than a 50% voting interest, are
accounted for under the equity basis.
(c) Revenue recognition
Sales represent the net invoiced value of goods sold, net of
returns and allowances. Sales are recognised upon delivery of
goods to customers.
(d) Inventories
Inventories are stated at the lower of cost and market value.
Cost, which comprises direct materials and, where applicable,
direct labour costs and those overhead items that have been
incurred in bringing the inventories to their present location
and condition, is calculated using the first-in, first-out
method.
(e) Property, plant and equipment
Property, plant and equipment are stated at cost less allowance
for depreciation and amortization.
Depreciation and amortization are provided using the straight-
line method to write off the cost of property, plant and
equipment over their estimated useful lives. The estimated useful
lives are as follows:
Land use rights 50 years
Buildings 50 years
Plant, machinery and equipment 5 - 15 years
Motor vehicles 5 - 10 years
According to the laws of the PRC, the title to all PRC land is
retained by the PRC government. The land use rights, which
represent the cost for the rights to use the land for premises
granted by the State Land Administration Bureau, have no definite
term of use. The land use rights are stated at cost and are
amortised over 50 years on the same basis as the buildings.
C-8
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Construction in progress represents buildings, plant under
construction and deposits and prepayments made on machinery
pending installation. Cost comprises direct costs of construction
and finance expenses arising from borrowings used to finance the
construction of buildings and plant and machinery until the
construction, installation and testing is complete. The amount of
finance expenses capitalised is the interest cost which could
theoretically have been avoided if the expenditure on the
qualifying asset had not been made.
No depreciation is provided on construction in progress until the
relevant assets have been put into commercial use.
(f) Leased assets
Leases that transfer substantially all the rewards and risks of
ownership of assets to the Group are accounted for as capital
leases. At the inception of a capital lease, the cost of the
leased asset is capitalised at the present value of the minimum
lease payments and recorded together with the obligation,
excluding the interest element, to reflect the purchase and
financing. Assets held under capital leases are included in
property, plant and equipment and are depreciated over the
estimated useful lives.
(g) Advertising expenses
Advertising expenses are charged to the statements of income as
incurred.
(h) Income taxes
Income taxes are determined under the liability method as
required by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes".
(i) Foreign currency translation
In preparing the consolidated financial statements, the financial
statements of the Group are measured using Renminbi as the
functional currency. All foreign currency transactions are
translated into Renminbi using the applicable rates of exchange,
quoted by the Zhaoqing foreign exchange adjustment center (the
"swap center"). Monetary assets and liabilities denominated in
foreign currencies have been translated into Renminbi using the
rate of exchange quoted by the swap center prevailing at the
balance sheet date. The resulting exchange gains or losses have
been credited or charged to the statements of income for the
period in which they occur.
The Company's share capital is denominated in United States
dollars ("USD") and for reporting purposes, the USD share capital
amounts have been translated into RMB at the applicable rates
prevailing on the transaction dates.
Translation of amounts from Renminbi ("RMB") into United States
dollars for the convenience of the reader has been made at the
swap center rate as quoted by the People's Bank of China on
December 31, 1995 of USD1.00 = RMB8.32. No representation is made
that the Renminbi amounts could have been, or could be, converted
into United States dollars at that rate or at any other rate.
C-9
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(j) Net income per share
The calculation of net income per share is based on the net
income for the year ended December 31, 1995 of RMB19,625,968
(Period ended December 31, 1994: RMB3,713,687) and the 8,000,013
(1994: 8,000,013) shares of common stock issued and outstanding
as of December 31, 1995.
(k) 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 amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
NOTE 4 - ACCOUNTS RECEIVABLE
Accounts receivable comprises:
<TABLE>
<CAPTION>
1995 1994
RMB RMB
<S> <C> <C>
Accounts receivables - trade 164,277,644 927,248
Less : Provision for doubtful
accounts (5,600,000) -
----------- ----------
158,677,644 927,248
=========== ==========
Movement of provision for doubtful
account
1995 1994
RMB RMB
Doubtful accounts provided
during the year and as at
December 31, 5,600,000 -
=========== ==========
</TABLE>
NOTE 5 - INVENTORIES
<TABLE>
<CAPTION>
1995 1994
RMB RMB
<S> <C> <C>
Raw materials 14,154,395 6,953,480
Work in progress 3,713,686 2,156,171
Finished goods 38,970,720 7,000,955
----------- ----------
56,838,801 16,110,606
=========== ==========
</TABLE>
C-10
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
1995 1994
RMB RMB
<S> <C> <C>
At cost:
Land use rights and buildings 44,776,692 43,266,975
Plant, machinery and equipment 72,235,275 55,625,970
Motor vehicles 3,950,171 1,092,768
Construction in progress 84,573,286 12,986,549
----------- -----------
205,535,424 112,972,262
----------- -----------
Accumulated depreciation and amortization:
Land use rights and buildings 1,088,171 144,275
Plant, machinery and equipment 6,470,764 445,797
Motor vehicles 668,225 16,058
----------- -----------
8,227,160 606,130
----------- -----------
Net book value 197,308,264 112,366,132
=========== ===========
</TABLE>
Interest capitalised for construction in progress for the year ended
December 31, 1995 amounted to RMB7,595,604 (Period ended December 31, 1994:
RMB44,820).
The analysis of the Group's cost and accumulated depreciation and
amortization of property, plant and equipment held under capital leases at the
balance sheet date is set out below:
<TABLE>
<CAPTION>
1995 1994
RMB RMB
<S> <C> <C>
At cost:
Plant, machinery and equipment 33,747,792 14,573,648
Construction in progress - 1,897,257
---------- ----------
33,747,792 16,470,905
Accumulated depreciation and amortization:
Plant, machinery and equipment 2,195,237 129,705
---------- ----------
Net book value 31,552,555 16,341,200
========== ==========
</TABLE>
Depreciation and amortization charges in respect of property, plant
and equipment held under capital leases for the year ended December 31, 1995
amounted to RMB2,065,532 (Period ended December 31, 1994: RMB129,705).
C-11
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INTERESTS IN AN ASSOCIATED COMPANY
<TABLE>
<CAPTION>
1995 1994
RMB RMB
<S> <C> <C>
Unlisted investment, at cost 209,361,595 209,361,595
The Group's share of undistributed
post acquisition earnings of
an associated company 13,380,881 7,812,392
----------- -----------
222,742,476 217,173,987
=========== ===========
</TABLE>
The unlisted investment represents the Group's 40% equity interest in
Blue Ribbon Noble held by a 60% owned subsidiary. Please refer to note 1 to the
consolidated financial statements for a description of its principal activities.
Upon the acquisition of Blue Ribbon Noble by the Group on October 31,
1994, the Group's share of the underlying net assets of the associated company
exceeded the Group's investment by approximately RMB20 million. This difference
is being amortised to income over 20 years.
Due to an associated company principally represented the balance
arising from the purchases of raw materials. The balance is unsecured, interest-
free and repayable on demand.
The summarized information of Blue Ribbon Noble are:
<TABLE>
<CAPTION>
1995 1994
RMB RMB
<S> <C> <C>
Balance sheet
-------------
Current assets 349,596,574 327,716,783
Property, plant and equipment 462,021,855 461,959,504
----------- -----------
Total assets 811,618,429 789,676,287
=========== ===========
Current liabilities 189,758,137 192,855,162
Deferred income taxes 5,500,000 3,300,000
Equity 616,360,292 593,521,125
----------- -----------
Total liabilities and equity 811,618,429 789,676,287
=========== ===========
Statement of income
-------------------
Sales, net of sales taxes 681,724,168 126,438,179
=========== ===========
Gross profit 155,864,163 36,414,406
=========== ===========
Net income 94,450,587 19,530,979
=========== ===========
The Group's share of net income
after the deduction of unrealised
intercompany profit 34,213,058 7,812,392
=========== ===========
</TABLE>
C-12
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - BANK LOANS
<TABLE>
<CAPTION>
1995 1994
RMB RMB
<S> <C> <C>
Secured long term bank loans - 18,000,000
Secured short term bank loans 24,000,000 -
Unsecured short term bank loans 8,574,400 8,595,000
----------- -----------
32,574,400 26,595,000
Portion classified as current
liabilities (32,574,400) (8,595,000)
----------- -----------
Long term portion - 18,000,000
=========== ===========
</TABLE>
The bank loans of RMB24,000,000 (1994: RMB18,000,000) are secured by
certain property, plant and equipment of the Group (see note 22), bear fixed
interest rate ranging from 10.8% to 14.5% (1994: fixed rate at 12.1%) per annum
and are wholly repayable in 1996. The weighted average interest rate as of
December 31, 1995 is 13.1% (1994: 12.1%) per annum.
The unsecured bank loans of RMB5,574,400 and RMB3,000,000 bear fixed
interest rate at 10.8% (1994: 12.0%) and 12.1% (1994: 12.0%) per annum,
respectively. The outstanding balance in respect of unsecured bank loans
denominated in United States dollars was equivalent to RMB5,574,400 (1994:
RMB8,595,000). The weighted average interest rate as of December 31, 1995 is
11.3% (1994: 12.0%) per annum.
NOTE 9 - OTHER LOANS
The other loans as of December 31, 1994 included short term debentures
of RMB3,000,000 which were unsecured, bore fixed interest rate at 14.0% per
annum and were wholly redeemable in 1995.
The remaining balance of other loans as of December 31, 1994 of
RMB2,000,000 were unsecured, bore fixed interest rate at 2.1% per month and were
wholly repayable in 1995.
The weighted average interest rate for other loans as of December 31,
1994 was 18.5% per annum.
NOTE 10 - OBLIGATION UNDER CAPITAL LEASE
The details of collaterialized property, plant and equipment held
under capital leases are disclosed in note 6 to the consolidated financial
statements.
The obligation under capital lease as of December 31, 1995 bears fixed
interest of 14.2% (1994: ranging from 12.7% to 14.0%) per annum and floating
interest rates ranging from 1.75% to 2.25% (1994: 1.75%) over LIBOR per annum
and are repayable semi-annually to 1998 and 2000, respectively. As of December
31, 1995, the floating interest rates are ranged from 7.6% to 7.9% (1994: 7.1%).
The outstanding balances in respect of obligation under capital lease
denominated in United States dollars are equivalent to RMB29,421,907 (1994:
RMB9,869,555).
The obligation under capital lease maturing during each of the years
in the five year period subsequent to the balance sheet date are:
C-13
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - OBLIGATION UNDER CAPITAL LEASE (continued)
<TABLE>
<CAPTION>
1995
RMB
<S> <C>
Year ending December 31,
1996 8,012,380
1997 10,762,632
1998 8,354,603
1999 6,164,585
2000 2,912,229
----------
36,206,429
Implicit interest (5,674,290)
----------
30,532,139
Portion classified as current
liabilities (5,634,848)
----------
Long term portion 24,897,291
===========
</TABLE>
NOTE 11 - SALES TAXES
The Group is subject to three kinds of sales taxes, being the value
added tax ("VAT"), the consumption tax and other sales taxes. The applicable VAT
tax rate is 17% for beverage products sold in the PRC and nil for exported
goods. The amount of VAT liability is determined by applying the applicable tax
rate to the invoiced amount of goods sold less VAT paid on purchases made with
the relevant invoices in support. VAT is collected from customers by the Group
on behalf of the PRC tax authorities and is therefore not expensed to the
statement of income. The applicable consumption tax rate in respect of brewery
products produced and sold by brewing company is RMB220 (1994: RMB220) per ton
and nil for the trading of brewery products. No consumption tax is levied on
non-alcoholic beverage products. The consumption tax expensed to the statement
of income is determined based on the volume of sales of brewing company within
the PRC and exported goods are exempt. The other sales taxes are assessed as a
percentage of consumption tax and VAT.
NOTE 12 - INCOME TAXES
The board of directors of the Company has undertaken to permanently
reinvest all the income attributable to the Company earned by High Worth
Brewery, its PRC subsidiary, Zhaoqing Brewery, Blue Ribbon Marketing and Blue
Ribbon Noble, the associated company of Zhaoqing Brewery, for the period from
October 31, 1994 to December 31, 1995. Accordingly, no United States tax
attributable to the earnings of High Worth Brewery is provided. At December 31,
1994 and 1995, the Group's share on distributable profits for Zhaoqing Brewery,
its subsidiary and associated company approximately amounted to RMB4,083,000 and
RMB40,643,000, respectively. However, the determination of unrecognized
deferred tax liability for temporary differences related to investments in
foreign subsidiaries and foreign associated company is not practicable.
The Group's investments in PRC subsidiaries are held by High Worth
Holdings, a company incorporated in the BVI. Under current BVI laws, dividends
and capital gains arising from the BVI subsidiary's investments are not subject
to income taxes, and no withholding tax is imposed on payments of dividends by
the BVI subsidiaries to the Company.
No income tax is provided on the Company, High Worth Holdings and
Finance Company as the respective companies did not generate any assessable
profits for the year ended December 31, 1995 and the period ended December 31,
1994.
C-14
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - INCOME TAXES (continued)
The Company's PRC subsidiaries, High Worth Brewery, Zhaoqing Brewery,
Blue Ribbon Marketing, and its associated company, Blue Ribbon Noble, are
governed by the relevant income tax laws in the PRC.
With a tax concession obtained from the tax authority, High Worth
Brewery and Blue Ribbon Noble are exempt from income taxes for two financial
years commencing with its first profitable year of operations, and thereafter
with a 50% exemption for the next three financial years. Based on the local
statutory financial statements, Blue Ribbon Noble have attained its first
profitable year of operation for the year ended December 31, 1994 and December
31, 1993 respectively. As Blue Ribbon Noble only earned profits for two months
in 1993, Blue Ribbon Noble has applied for an extension of the tax holiday
period to 1995 which is approved by the PRC tax authority. Accordingly, no
current income taxes were provided by Blue Ribbon Noble for 1994 and 1995. The
aggregate income tax benefit from the tax exemption for the year amounted to
approximately RMB6,300,000 (Period ended December 31, 1994: 1,300,000),
representing RMB0.79 (Period ended December 31, 1994: RMB0.16) per share.
Deferred income taxes are based on the liability method prescribed by
Statement of Financial Accounting Standards No. 109. The Group's deferred tax
assets mainly represents the temporary differences in respect of the revaluation
of property, plant and equipment recorded on the application of the purchase
method of accounting over the differences in tax.
The reconciliation of effective income tax rates of the Group stated
in the statement of income, excluding the corporate reorganization expenses, to
the statutory income tax rate in the PRC is as follows:
<TABLE>
<CAPTION>
Two months
Year ended ended
December 31, December 31,
1995 1994
<S> <C> <C>
Statutory tax rate 33% 33%
Tax holiday (33%) (33%)
Accelerated depreciation allowances
during the tax exemption period 26% -
--- ---
26% -
=== ====
</TABLE>
NOTE 13 - SHAREHOLDER'S LOAN
The loan obtained from Oriental Win is denominated in United States
dollars, unsecured, interest-free (1994: interest bearing at 3.5% per annum) and
is not repayable unless alternate long term funds are available to the Group.
C-15
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - FOREIGN CURRENCY EXCHANGE
On January 1, 1994, the PRC government introduced a single rate of
exchange as quoted by the People's Bank of China. The unified exchange rate is
quoted at levels similar to those quoted by the swap centers. However, the
unification of exchange rates does not imply full convertibility of Renminbi
into United States dollars or other foreign currencies. All foreign exchange
transactions continue to take place either through the Bank of China or other
institutions authorized to buy and sell foreign currencies or the swap centers
at the exchange rates quoted by the People's Bank of China. In April 1994, the
National Foreign Exchange Trading Center in Shanghai (the "exchange center")
commenced operations. Enterprises operating in the PRC can enter into exchange
transactions at the exchange center through the Bank of China or other
authorized institutions. Payments for imported materials and remittances of
earnings outside the PRC are subject to the availability of foreign currency
which are dependent on the foreign currency denominated earnings of each
relevant PRC company within the Group or must be arranged through exchange
center. Approval for exchange at the exchange center is granted to enterprises
in the PRC for valid reasons such as purchases of imported materials and
remittance of earnings. While conversion of Renminbi into United States dollars
or other foreign currencies can generally be effected at the exchange center,
there is no guarantee that it can be effected at all times.
The unified exchange rate of RMB equivalent of US$1.00 as of December
31, 1995 was 8.32.
NOTE 15 - DISTRIBUTION OF PROFITS
The Company's ability to pay dividends is primarily dependent on the
Company receiving distributions from its PRC subsidiaries through High Worth
Holdings.
Pursuant to the relevant laws and regulations of sino-foreign joint
venture enterprises, the profits of High Worth Brewery, which is based on their
statutory financial statements, are available for distribution in the form of
cash dividends after the PRC companies satisfy all tax liabilities, provide for
losses in previous years, and make appropriations to reserve funds, as
determined at the discretion of the board of directors in accordance with the
PRC accounting standards and regulations.
As stipulated by the relevant laws and regulations for enterprises
operating in the PRC, Zhaoqing Brewery and Blue Ribbon Marketing are required to
make annual appropriations to two reserve funds consisting of the statutory
surplus and collective welfare funds. In accordance with the relevant PRC
regulations and the companies' articles of association, the companies are
required to allocate a certain percentage of their profits after taxation, as
determined in accordance with the PRC accounting standards applicable to the
companies, to the statutory surplus reserve until such reserve reaches 50% of
the registered capital of the companies. Based on the business licences as of
December 31, 1995, the registered capital of Zhaoqing Brewery and Blue Ribbon
Marketing were RMB33,670,000 and RMB10 million, respectively. Subject to
certain restrictions as set out in the relevant PRC regulations and the
companies' articles of association, the statutory surplus reserve may be
distributed to equity holders in the form of bonus issues and/or dividends when
such reserve exceeds 25% of the registered capital of the companies.
The percentage of annual appropriations to statutory surplus and
collective welfare funds of Zhaoqing Brewery for 1994 were 10% and 5% on the
profits reported in its statutory financial statements. No appropriations to
these reserve funds were made by Zhaoqing Brewery and Blue Ribbon Marketing for
1995 as the percentage of annual appropriations have not yet been determined by
its board of directors.
High Worth Brewery and Blue Ribbon Noble are also required to make
appropriations to a general reserve fund, an enterprise development fund and an
employee welfare and incentive fund, in which the percentage of annual
appropriations are subject to the joint venture agreement. The employee welfare
and incentive fund are charged to the statement of income. The other
appropriations are accounted for as reserve funds in the balance sheet and are
not available for distribution as dividends to the joint venture partners of the
companies. Under the joint venture agreement, the board of directors shall
determine the appropriations having regard to the economic situation of the
companies. The percentage of annual appropriations to a general reserve fund,
an enterprise development fund and an employee welfare and incentive fund of
High Worth Brewery and Blue Ribbon Noble for 1995 has already been determined by
the board of directors and the appropriation has been reported in its statutory
financial statements.
C-16
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - DISTRIBUTION OF PROFITS (continued)
As described in note 2 to the consolidated financial statements, the
net income as reported in the US GAAP financial statements differ from those as
reported in the statutory financial statements. In accordance with the relevant
laws and regulations in the PRC, the profits available for distribution are
based on the statutory financial statements. At December 31, 1994 and 1995, the
Group's distributable profits approximately amounted to RMB97,000 and
RMB21,180,000, respectively.
If the Group has foreign currency available after meeting its
operational needs, the Group may make its profit distributions in foreign
currency to the extent it is available. Otherwise, it will be necessary to
obtain approval and convert such distributions at the exchange centers.
NOTE 16 - SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Interest paid, net of capitalised interest during the year ended
December 31, 1995 amounted to RMB6,886,576 (Period ended December 31, 1994:
RMB618,571).
The major non-cash transactions undertaken by the Group for the year
ended December 31, 1995 and the period ended December 31, 1994 are summarised as
follows:
(a) The consideration for the purchase of subsidiaries was discharged by
the issuance of common stock. Further details of the acquisition is set out
below.
<TABLE>
<CAPTION>
RMB
<S> <C>
Fair value of net assets acquired:
Cash 7,584,942
Accounts receivable 1,035,512
Inventories 12,033,824
Prepayment and deposits 602,672
Other receivables 2,621,052
Deferred tax assets 1,048,444
Property, plant and equipment 106,283,036
Interest in an associated company 209,361,595
Bank loans (18,150,000)
Lease payables (14,529,275)
Deposits received from customers (10,372,969)
Accounts payable and accrued liabilities (21,658,866)
Due to a related company (2,983,685)
Sales taxes payable (20,711,031)
Shareholder's loan (75,657,560)
Minority interests (75,022,594)
-----------
101,485,097
===========
Discharged by:
Common stock issued 101,485,097
===========
</TABLE>
C-17
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION (continued)
(b) Corporate reorganization expenses incurred of RMB2,551,921 were
discharged by common stock issued and allotted.
NOTE 17 - ADVERTISING EXPENSES
The Group incurred advertising expenses of RMB18,793,663 (Period ended
December 31, 1994: RMB1,157,766) for the year ended December 31, 1995.
NOTE 18 - RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
(a) Purchases of packing materials
During the year ended December 31, 1995, the Group purchased
packaging materials from Blue Ribbon Group and its group of
companies amounting to RMB27,657,968 (Period ended December 31,
1994: RMB450,961).
(b) Purchases of non-alcoholic beverage
During the year ended December 31, 1995, the Group purchased non-
alcoholic beverage from Blue Ribbon Group and its group of
companies amounting to RMB61,708,086 (Period ended December 31,
1994: Nil) for resale.
(c) Purchases of beer products
During the year ended December 31, 1995, the Group purchased beer
products from Blue Ribbon Noble amounting to RMB327,805,406
(Period ended December 31, 1994: Nil) for resale.
(d) Interest expenses
The interest expense of RMB3,091,364 and RMB328,207 were payable
to Blue Ribbon Group and related companies for the amount
advanced which is more fully disclosed in (f) and (g) below.
(e) Royalty fee
During the year ended December 31, 1995, the royalty fee of
RMB3,454,067 (Period ended December 31, 1994: Nil) was payable to
Blue Ribbon Group in respect of the right to use Pabst trademarks
in the Guangdong Province of the PRC.
(f) Due from related companies
The amounts due from related companies mainly represented
receivable balances from Blue Ribbon Group and its group of
companies.
The balances with Blue Ribbon Group and its group of companies
principally represented trade deposits received on behalf of the
Group and expenses paid on their behalf. Included in the amount
due from Blue Ribbon Group is the amount payable of RMB16 million
to the Group, which bears interest of 15% per annum. Save
aforementioned, the balance with Blue Ribbon Group is unsecured,
interest-free and repayable on demand.
C-18
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (continued)
(g) Due to related companies
As of December 31, 1995, the amounts due to related companies
mainly represented payable balances to group companies of Blue
Ribbon Group, Evermoni Trading Limited ("Evermoni"), Trade Link
Investment Limited ("Trade Link"), Very Temper Limited ("Very
Temper") and Wealth Guide Development Limited ("Wealth Guide")
amounting to approximately RMB10.5 million (1994: RMB5.4
million), RMB2.2 million (1994: Nil), RMB1.2 million (1994: Nil),
RMB1.4 millon (1994: Nil) and RMB3.3 million (1994: Nil),
respectively.
Evermoni and Very Temper are beneficially held by Wong Lee Tak
who is the director of the Company. Trade Link is beneficially
held by Victor Choi who is the director of the Company. Wealth
Guide is beneficially held by Blue Ribbon Group.
The balances with group companies of Blue Ribbon Group, except
Wealth Guide, represented the balances arising from the purchases
of raw materials from them. The balances are unsecured, interest-
free and repayable on demand.
The balances with Evermoni, Trade Link, Very Temper and Wealth
Guide are advances in nature. The amounts due to such related
companies are unsecured, bear interest at 3% above Hong Kong
dollar prime rate (as of December 31, 1995: 11.75%) and repayable
in 1996.
(h) Shareholder's loan
As more fully described in note 13 to the consolidated financial
statements, the loan from Oriental Win is unsecured, interest-
free and is not repayable unless alternate long term financing is
obtained by the Group.
NOTE 19 - RETIREMENT PLAN
The Company, High Worth Holdings, Finance Company and High Worth
Brewery do not have any retirement plans in operation.
As stipulated by the PRC government regulations, Zhaoqing Brewery and
Marketing Company has defined contribution retirement plans for all their
permanent staff. Zhaoqing Brewery and its staff are required to contribute to
PRC insurance companies organized by the PRC government which are responsible
for the payments of pension benefits to retired staff. During the year ended
December 31, 1995, the monthly contribution of Zhaoqing Brewery and of the
permanent staff were calculated at 14.6% and 2% of the basic salary of the
permanent staff, respectively. The pension costs expensed by the Group during
the year ended December 31, 1995 amounted to RMB706,566 (Period ended December
31, 1994: RMB32,410).
NOTE 20 - FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for current assets
and current liabilities, except for bank loans, qualifying as financial
instruments approximate their fair values because of the short maturity of such
instruments. Cash denominated in foreign currency has been translated at the
applicable unified exchange rate.
The carrying values and estimated fair values of bank loans, based on
the borrowing rates currently available at December 31, 1995 for borrowings with
similar terms and average maturities, are RMB32,574,400 (1994: RMB26,595,000)
and RMB29,251,151 (1994: RMB22,003,631), respectively. The fair value of the
shareholders' loan, due to no compatible borrowing terms currently available at
December 31, 1995, is not able to be determined.
C-19
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - CONCENTRATION OF RISKS
The Group's operating assets and primary source of income and cash
flow are its interest in the subsidiaries and associated company in the PRC. The
PRC economy has, for many years, been a centrally-planned economy, operating on
the basis of annual, five-year and ten-year state plans adopted by central PRC
governmental authorities which set out national production and development
targets. The PRC government has been pursuing economic reforms since it first
adopted its "open-door" policy in 1978. There is no assurance that the PRC
government will continue to pursue economic reforms or that there will not be
any significant change in its economic or other policies, particularly in the
event of any change in the political leadership of, or the political, economic
or social conditions in, the PRC. There is also no assurance that the Group will
not be adversely affected by any such change in governmental policies or any
unfavourable change in the political, economic or social conditions, the laws or
regulations or the rate or method of taxation in the PRC.
As many of the economic reforms which have been or are being
implemented by the PRC government are unprecedented or experimental, they may be
subject to adjustment or refinement which may have adverse effects on the Group.
Further, through state plans and other economic and fiscal measures, it remains
possible for the PRC government to exert significant influence on the PRC
economy.
The sale and distribution of products under the "Pabst Blue Ribbon"
brandname accounts for 95% of the Group's turnover.
The Group purchases Pabst Blue Ribbon beer from Blue Ribbon Noble and
recognises its heavy dependence on Blue Ribbon Noble. Stoppages of production
and/or supply from Blue Ribbon Noble for reasons within or without their control
could affect the Group's operation, although so far the Group has never
encountered any problems in securing adequate supplies from Blue Ribbon Noble.
The Group currently uses foreign currency to pay for imported raw
materials, obtains foreign currency loans from shareholders to acquire the
subsidiaries in the PRC and foreign currency loans for working capital purposes.
For the relevant risk in foreign currency, please refer to note 14 for details.
The Group's financial instruments that are exposed to concentration of
credit risk consists primarily of cash and accounts receivable from customers.
Cash is maintained with major banks in the PRC. The Group's business activity
is with customers in the PRC. The Group periodically performs credit analysis
and monitors the financial condition of its clients in order to minimize credit
risk. As of December 31, 1995, allowance for doubtful debts of RMB5,600,000
(1994: Nil) was provided.
NOTE 22 - PLEDGE OF ASSETS
Certain property, plant and equipment were collaterialized to banks
for borrowing facilities granted to the Group, the net book value of which
amounted to RMB162,554,656 (1994: RMB25,119,539) as of December 31, 1995.
C-20
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23 - COMMITMENTS
As of December 31, 1995, the Group was committed to capital
expenditures of RMB43,168,954 (1994: RMB8,934,597).
Blue Ribbon Group entered into licensing arrangements with Pabst Blue
Ribbon whereby Blue Ribbon Group was granted the exclusive right to produce and
market products under four specific Pabst trademarks in the PRC, the non-
exclusive right to market such products in other Asian countries except Hong
Kong, Macau, Japan and South Korea, and the right to sublicense the use of the
trademarks to any other enterprise in the PRC. Pursuant to the terms of the
sublicense agreement, High Worth Brewery was granted by Blue Ribbon Group the
right in the Guangdong Province of the PRC to use the two specific Pabst
trademarks in its production capacity for the production, promotion,
distribution and sale of beer under such trademarks to a maximum production
capacity of 300,000 tons per annum. In addition, Blue Ribbon Group will also
grant the right to use the two specific Pabst trademarks for the production,
promotion, distribution and sale of beer to High Worth Brewery or those
enterprises owned by High Worth Brewery which are located outside Guangdong
Province in the PRC. The sublicense agreement is valid until November 7, 2003.
In consideration for the sublicense granted, High Worth Brewery is committed to
pay Blue Ribbon Group a royalty fee of US$11.70 for each ton produced.
A provisional agreement, subject to governmental approval, was made
among CBR Brewing Company, Inc. and its subsidiary, the group companies of Noble
China Inc. and Blue Ribbon Group on May 10, 1995 to the effect that:
(a) Zhaoqing Brewery was entitled to be granted from Blue Ribbon
Group the right to brew and sell beer under the Pabst Blue Ribbon
label produced in its brewing facilities up to a maximum
production capacity of 100,000 tons per annum.
(b) High Worth Brewery and/or companies that High Worth Brewery has
an interest was entitled to be granted a sublicense from Blue
Ribbon Group with the right to produce and sell beer under the
Pabst Blue Ribbon label in the Guangdong Province of the PRC
("Additional Facility") to a maximum production capacity of
300,000 tons per annum.
In the event that High Worth Brewery desires to obtain any
sublicense for any Additional Facility, Goldjinsheng Holding
Limited ("Goldjinsheng") has the right to purchase up to a 40%
interest in such Additional Facility. The purchase price for such
interest shall be the actual cost in such Additional Facility
multiplied by the percentage interest that Goldjinsheng elects to
purchase.
(c) High Worth Brewery granted Goldjinsheng an option to purchase up
to a 40% interest in the brewery facilities operated by Zhaoqing
Brewery, excluding Zhaoqing Brewery's 40% interest in Blue Ribbon
Noble. This option may be exercised between August 31, 1996 and
September 30, 1996. The purchase consideration for the first 30%
and the remaining 10% interest is to be determined based on
earning multiples of 8.5 times and 15 times, respectively, of the
brewery factory's audited net income for the year ending June 30,
1997. However, the consideration shall not be less than 1.2 times
of 30% of the net book value of the brewery operation for the
first 30% interest and 2 times of 10% of the net book value for
the remaining 10% interest.
(d) Distribution companies owned by the Company and Blue Ribbon Noble
and another marketing company owned by Blue Ribbon Group, High
Worth Brewery and Goldjinsheng, will be formed, subject to the
governmental approval, to handle and organise the sales of Pabst
Blue Ribbon beer produced by Zhaoqing Brewery and Blue Ribbon
Noble.
Another agreement was made among Goldjinsheng, Blue Ribbon Group and
Blue Ribbon Noble on May 10, 1995 to the effect that Blue Ribbon Noble agreed to
pay Blue Ribbon Group a management fee of RMB2,035,000 per annum for a period of
five years.
C-21
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23 - COMMITMENTS (continued)
As of December 31, 1995, the Group has total minimum future rental
payments on the office occupied by Marketing Company of RMB447,240 (1994: Nil)
for the year ending December 31, 1996.
An agreement was made between Blue Ribbon Group and High Worth
Brewery on December 31, 1995 to the effect that High Worth Brewery agreed to pay
Blue Ribbon Group a management fee of RMB3,780,000 per annum for a period of
three years commencing on January 1, 1996.
C-22
<PAGE>
Financial Statements
ZHAOQING BREWERY
(Established in the People's Republic of China)
For the two years ended December 31, 1993 and
the ten months ended October 31, 1994
ERNST & YOUNG
HONG KONG
<PAGE>
ZHAOQING BREWERY
CONTENTS
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
REPORT OF INDEPENDENT AUDITORS Z-1
FINANCIAL STATEMENTS
Consolidated balance sheet Z-2
Consolidated statements of income Z-3
Consolidated statements of equity Z-4
Consolidated statements of cash flows Z-5 - Z-6
Notes to consolidated financial statements Z-7 - Z-30
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the shareholders of
CBR Brewing Company, Inc.
We have audited the accompanying consolidated balance sheet of
Zhaoqing Brewery and its subsidiaries as of December 31, 1993 and the related
consolidated statements of income, equity and cash flows for each of the two
years ended December 31, 1993 and the ten months ended October 31, 1994. These
consolidated financial statements are the responsibility of Zhaoqing Brewery's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Zhaoqing Brewery and its subsidiaries as of December 31, 1993 and
the consolidated results of their operations and their cash flows for each of
the two years ended December 31, 1993 and the ten months ended October 31, 1994
in conformity with generally accepted accounting principles in the United States
of America.
Ernst & Young
Hong Kong
March 31, 1995,
Except for note 20, as to which the date is May 10, 1995
Z-1
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1993
<TABLE>
<CAPTION>
Notes RMB
<S> <C> <C>
ASSETS
Current assets:
Cash 34,899,018
Inventories 4 11,478,668
Prepayments, deposits and other receivables 3,920,084
Due from a related company 2 36,000,000
-----------
Total current assets 86,297,770
Property, plant and equipment, net 5 43,576,107
Interests in associated companies 6 196,884,451
-----------
Total assets 326,758,328
===========
LIABILITIES AND EQUITY
Current liabilities:
Bank loans 7 20,595,000
Other loans 8 20,655,000
Lease payables 9 13,629,021
Other payables 2 69,980,235
Accounts payable and accrued liabilities 6,575,244
Due to ultimate holding company 15 54,945,687
Sales taxes payable 10 12,635,172
-----------
Total current liabilities 199,015,359
Long term liabilities:
Bank loans 7 23,000,000
Lease payables 9 2,035,303
Deferred income taxes 11 3,000,000
-----------
Total long term liabilities 28,035,303
Equity 99,707,666
-----------
Total liabilities and equity 326,758,328
===========
</TABLE>
________________________ ________________________
Director Director
The consolidated financial statements were approved by the
board of directors of CBR Brewing Company, Inc. on May 10, 1995.
The accompanying notes are an integral part of
the consolidated financial statements.
Z-2
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE TWO YEARS ENDED DECEMBER 31, 1993 AND
THE TEN MONTHS ENDED OCTOBER 31, 1994
<TABLE>
<CAPTION>
Ten months
ended Year ended
October 31, December 31,
Notes 1994 1993 1992
RMB RMB RMB
<S> <C> <C> <C> <C>
Sales 15 64,540,646 212,437,411 168,411,036
Sales taxes 10 (7,253,217) (20,854,885) (13,970,946)
----------- ------------ -----------
Sales, net of sales taxes 57,287,429 191,582,526 154,440,090
Cost of sales (38,259,757) (102,414,835) (83,339,108)
----------- ------------ -----------
Gross profit 19,027,672 89,167,691 71,100,982
Expenses:
Selling and administrative
expenses (7,411,628) (22,154,219) (20,089,452)
----------- ------------ -----------
Operating income 11,616,044 67,013,472 51,011,530
Other income:
Gain on disposal of property,
plant, equipment and business
of a subsidiary 2 - 75,879,235 -
Gain on disposal of property,
plant and equipment - 355,757 -
Foreign exchange gains 67,874 - -
----------- ------------ -----------
Total other income 67,874 76,234,992 -
Other expense:
Interest expense (4,101,175) (23,682,512) (18,715,141)
Foreign exchange losses - (17,825,176) (31,560,670)
----------- ------------ -----------
Total other expenses (4,101,175) (41,507,688) (50,275,811)
----------- ------------ -----------
Income before income taxes 7,582,743 101,740,776 735,719
Provision for deferred income taxes 11 (540,000) (640,000) (600,000)
----------- ------------ -----------
Income before equity in earnings
of associated companies 7,042,743 101,100,776 135,719
Equity in earnings of associated
companies 6 34,969,703 5,485,716 -
----------- ------------ -----------
Net income for the period/year 13 42,012,446 106,586,492 135,719
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
Z-3
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE TWO YEARS ENDED DECEMBER 31, 1993 AND
THE TEN MONTHS ENDED OCTOBER 31, 1994
<TABLE>
<CAPTION>
Sales tax Statutory
concession surplus and
development collective Capital Retained Reserve
fund welfare funds reserve earnings funds
RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C>
(Note 10)
(Note 13)
At December 31, 1991 30,874,951 - - (34,922,547) (4,047,596)
Net income for the year - - - 135,719 135,719
Appropriation 36,654,973 1,735,849 - (38,390,822) -
Appropriation of staff quarters
upon corporate reorganization - - - 2,966,949) (2,966,949)
----------- --------- ----------- ----------- -----------
At December 31, 1992 67,529,924 1,735,849 - (76,144,599) (6,878,826)
Net income for the year - - - 106,586,492 106,586,492
Appropriation 5,700,000 2,267,875 - (7,967,875) -
----------- --------- ----------- ----------- -----------
At December 31, 1993 73,229,924 4,003,724 - 22,474,018 99,707,666
Net income for the ten months
ended October 31, 1994 - - - 42,012,446 42,012,446
Appropriation - 1,282,812 - (1,282,812) -
Dividends - - - (105,511,921) (105,511,921)
Capital contribution upon
corporate reorganization
- note 1 - - 156,339,945 - 156,339,945
Amount realized upon disposal of
a subsidiary (54,233,023) - - 54,233,023 -
----------- --------- ----------- ----------- -----------
At October 31, 1994 18,996,901 5,286,536 156,339,945 11,924,754 192,548,136
=========== ========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Z-4
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWO YEARS ENDED DECEMBER 31, 1993 AND
THE TEN MONTHS ENDED OCTOBER 31, 1994
<TABLE>
<CAPTION>
Ten months
ended Year ended
October 31, December 31,
Notes 1994 1993 1992
RMB RMB RMB
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income 42,012,446 106,586,492 135,719
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in earnings of associated companies (34,969,703) (5,485,716) -
Depreciation and amortization 3,898,431 11,337,972 11,885,967
Gain on disposal of property, plant,
equipment and business of a subsidiary 2 - (75,879,235) -
Gain on disposal of property, plant
and equipment - (355,757) -
Deferred income taxes 540,000 640,000 600,000
Foreign exchange losses - 17,425,333 30,347,115
----------- ----------- ----------
11,481,174 54,269,089 42,968,801
Changes in working capital:
(Increase)/decrease in accounts receivable (1,035,512) 3,062,763 (3,180,045)
(Increase)/decrease in inventories (555,156) 4,419,262 (243,396)
(Increase)/decrease in prepayments, deposits
and other receivables 696,360 5,652,162 (6,823,907)
Increase in amount due from a fellow subsidiary - - (2,421,619)
Increase in amount due from a related company (28,958) - -
(Increase)/decrease in balances with
ultimate holding company 742,529 30,421,298 (177,114)
Increase/(decrease) in accounts payable
and accrued liabilities (1,091,439) (19,951,503) 14,922,089
Increase in deposits received from customers 10,372,969 - -
Increase/(decrease) in amount due to a
fellow subsidiary 12,643 (437,878) (82,049)
Increase/(decrease) in sales taxes payable 8,075,859 (5,122,125) 483,337
----------- ----------- ----------
Net cash provided by operating activities 28,670,469 72,313,068 45,446,097
----------- ----------- ----------
</TABLE>
Z-5
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWO YEARS ENDED DECEMBER 31, 1993 AND
THE TEN MONTHS ENDED OCTOBER 31, 1994
<TABLE>
<CAPTION>
Ten months ended Year ended
October 31, December 31,
Notes 1994 1993 1992
RMB RMB RMB
<S> <C> <C> <C> <C>
Cash flows from investing activities:
Purchases of property, plant and equipment (10,303,054) (97,311,649) (77,483,587)
Net cash outflow on disposal of a subsidiary 14(c) (4,083,959) - -
Proceeds from disposal of property, plant
and equipment - 646,824 -
Proceeds from disposal of property, plant,
equipment and business of a subsidiary 2 18,000,000 249,564,000 -
Costs incurred for construction in progress
of an associated company 2 (43,568,550) - -
Loans from/(to) an associated company 38,912,910 (48,494,458) -
----------- ------------ -----------
Net cash provided by/(used in) investing activities (1,042,653) 104,404,717 (77,483,587)
----------- ------------ -----------
Cash flows from financing activities:
New loans 3,150,000 57,750,000 65,595,367
Repayment of bank loans (12,000,000) (87,225,000) (34,430,000)
Repayment of other loans (17,655,000) (164,119,086) (14,065,712)
Repayment of lease payables (12,156,742) (13,884,645) (10,175,042)
Loans from/(to) ultimate holding company (16,429,306) 51,440,721 15,123,587
Loans from/(to) fellow subsidiaries - 275,414 (1,550,080)
----------- ------------ -----------
Net cash provided by/(used in) financing activities (55,091,048) (155,762,596) 20,498,120
----------- ------------ -----------
Effect of foreign exchange rate changes on cash - 2,700,404 168,490
----------- ------------ -----------
Net increase/(decrease) in cash (27,463,232) 23,655,593 (11,370,880)
Cash at beginning of period/year 34,899,018 11,243,425 22,614,305
----------- ------------ -----------
Cash at end of period/year 7,435,786 34,899,018 11,243,425
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Z-6
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES
Zhaoqing Brewery (the "Company") was established in the People's
Republic of China (the "PRC") as a State-owned enterprise in 1980. Pursuant to
a reorganization implemented by the Municipality of Zhaoqing in October 1990,
Guang Dong Blue Ribbon Group Co. Ltd. ("Blue Ribbon Group") (formerly Zhao Qing
Blue Ribbon Group Co., Ltd.), a State-owned enterprise in the PRC, was formed
and the Company then became a wholly-owned subsidiary of Blue Ribbon Group. The
Company is principally engaged in the production and sale of beer and beer
products in the PRC.
Prior to October 1994, the Company owned all of the capital of Pabst
Blue Ribbon Brewery (Zhaoqing) Co. Ltd. ("Pabst Blue Ribbon") which was
established on November 7, 1986 in the PRC for a term of fifteen years. The
term was further extended to October 11, 2007 with the approval of the relevant
PRC government authorities. Pabst Blue Ribbon is engaged in the production and
sale of beer and beer products in the PRC. In October 1994, the remaining net
assets of Pabst Blue Ribbon were disposed of as dividend to Blue Ribbon Group at
its carrying value.
Pursuant to an arrangement which changed Blue Ribbon Group from a
State-owned enterprise to a share capital company in July 1992, certain assets
of all group companies of Blue Ribbon Group, including those of the Company and
its subsidiaries (collectively referred to as the "Group"), were revalued on a
current replacement cost basis by State-owned Properties Evaluation Service of
Zhaoqing Municipality as at July 31, 1992. Since there was no change in the
beneficial owner of the Group before and after the arrangement, the revalued
assets of the Group were restated at historical cost for the purpose of
preparing these consolidated financial statements.
Z-7
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
Pursuant to the joint venture agreements and with the approval of the
relevant PRC government authorities, the property, plant, equipment and the
business of Pabst Blue Ribbon were disposed of to Zhaoqing Blue Ribbon Brewery
Noble Ltd. ("Blue Ribbon Noble") as capital contribution to Blue Ribbon Noble, a
new Sino-foreign equity joint venture enterprise registered in the PRC on
October 8, 1993 in which Goldjinsheng Holding Limited, an unrelated party, and
the Company each hold 60% and 40% interests, respectively. The venture term of
Blue Ribbon Noble is for twenty years which term may be extended upon mutual
agreement of the joint venture parties and approval from the relevant PRC
government authorities. Blue Ribbon Noble is principally engaged in the
production and sale of beer and beer products in the PRC and commenced business
on November 6, 1993. Under the joint venture agreements, the Company is given
control over the daily operations and management of Blue Ribbon Noble and
decisions of the board of directors of Blue Ribbon Noble will require approval
of both joint venture partners.
Apart from the 40% interest in Blue Ribbon Noble, prior to October
1994, the Company also owned a 30% interest in Zhaoqing Blue Ribbon Beverage Co.
("Blue Ribbon Beverage"), which is a Sino-foreign equity joint venture
enterprise registered in the PRC on July 18, 1993. Blue Ribbon Beverage is
principally engaged in the production and sale of natural fruit juices in the
PRC and commenced commercial production in July 1993. In October 1994, the
Group's entire interest in Blue Ribbon Beverage was disposed of as dividend to
Blue Ribbon Group at its carrying value.
Pursuant to a corporate reorganization undertaken by Blue Ribbon
Group, an additional capital contribution to the Company amounting to
RMB151,348,294 was made by Blue Ribbon Group. The additional capital is not
available for distribution as dividends to the equity holder.
On October 31, 1994, High Worth Holdings Limited, a wholly-owned
subsidiary of CBR Brewing Company, Inc., acquired an effective 60% interest in
the Company from Blue Ribbon Group.
Z-8
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - BASIS OF PRESENTATION
As more fully described in note 1, the property, plant, equipment and
the business of Pabst Blue Ribbon, the Company's subsidiary, were disposed of to
Blue Ribbon Noble in November 1993 as capital contribution to Blue Ribbon Noble,
an associated company. Accordingly, the operating results of the business
previously run by Pabst Blue Ribbon were consolidated into the consolidated
financial statements up to November 1993. The operating results of the business
acquired and currently run by Blue Ribbon Noble were thereafter equity accounted
for in the consolidated financial statements.
The information for the disposal of property, plant, equipment and the
business of Pabst Blue Ribbon, the Company's subsidiary, to Blue Ribbon Noble,
an associated company, are summarized below:
<TABLE>
<CAPTION>
RMB
<S> <C>
Consideration received:
Cash paid by Goldjinsheng Holding Limited 249,564,000
Due from Goldjinsheng Holding Limited 36,000,000
40% interest in Blue Ribbon Noble 139,789,843
------------
425,353,843
The carrying value of net assets disposed of:
Property, plant and equipment, including
construction in progress at the date of disposal (316,966,208)
Estimated costs to completion for construction
in progress (32,508,400)
------------
Total net assets disposed of (349,474,608)
------------
Gain on disposal 75,879,235
============
</TABLE>
The anticipated costs and actual payables related to the construction in
progress have been reflected in other payables on the consolidated balance
sheet.
Z-9
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - BASIS OF PRESENTATION (continued)
The property, plant and equipment, including construction in progress,
and the business of Pabst Blue Ribbon were disposed of by the Company as a
capital contribution to Blue Ribbon Noble, a company in which Goldjinsheng
Holding Limited and the Company each hold 60% and 40% interests, respectively.
Under the terms of the joint venture agreements, the Company, being the sole
partner responsible for the overall construction of the production facilities of
Blue Ribbon Noble, was responsible for the cost of completion of construction in
progress in excess of RMB224 million. Blue Ribbon Group agreed to undertake any
cost of completion of construction in progress in excess of RMB224 million paid
by the Company.
The amount receivable from Goldjinsheng Holding Limited is unsecured,
interest-free and repayable on demand.
On October 31, 1994, High Worth Holdings Limited, a wholly-owned
subsidiary of CBR Brewing Company, Inc., acquired an effective 60% interest in
the Company. Accordingly, the Company's consolidated statements of income and
cash flows were prepared for the ten months ended October 31, 1994 to show the
pre-acquisition consolidated operating results and cash flows of the Company
prior to the acquisition.
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of America
("US GAAP"). This basis of accounting differs from that used in the preparation
of the statutory financial statements of each company within the Group which are
prepared in accordance with the accounting principles and relevant financial
regulations established by the Ministry of Finance of the PRC.
The major adjustments made to the statutory financial statements to
conform to US GAAP include the following:
. The restatement of monetary assets and liabilities denominated in
foreign currencies to reflect the exchange rates quoted by the
Zhaoqing foreign exchange adjustment center prevailing at the balance
sheet date;
Z-10
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - BASIS OF PRESENTATION (continued)
. The restatement of certain assets of the Group revalued on July 31,
1992 to historical cost;
. The reclassification of certain expense items from income
appropriations to charges against income;
. Adjustment for sales, other income and purchases recognized on a cash
basis; and
. Adjustment for deferred taxation.
The financial statements have been prepared on a going concern basis
notwithstanding that the Group has a net current liability position at December
31, 1993 and October 31, 1994 as Oriental Win Holdings Ltd., its ultimate
holding company, and Blue Ribbon Group have undertaken to provide continuing
financial support.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of accounting
The consolidated financial statements have been prepared under the
historical cost convention.
(b) Consolidation principles
The consolidated financial statements include the financial statements
of the Company and its subsidiaries which are more than 50% owned. All
material intercompany accounts and transactions are eliminated on
consolidation.
Investments, in which the Company exercises significant influence but
does not own greater than a 50% voting interest, are accounted for
under the equity basis.
(c) Revenue recognition
Sales represent the net invoiced value of goods sold, net of returns
and allowances. Sales are recognized upon delivery of goods to
customers.
Z-11
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(d) Inventories
Inventories are stated at the lower of cost and market value. Cost,
which comprises direct materials and, where applicable, direct labour
costs and those overhead items that have been incurred in bringing the
inventories to their present location and condition, is calculated
using the first-in, first-out method.
(e) Property, plant and equipment
Property, plant and equipment are stated at cost less allowance for
depreciation and amortization.
Depreciation and amortization are provided using the straight-line
method to write off the cost of property, plant and equipment over
their estimated useful lives. The estimated useful lives are as
follows:
<TABLE>
<S> <C>
Land use rights 50 years
Buildings 50 years
Plant, machinery and
equipment 5 - 15 years
Motor vehicles 5 - 10 years
</TABLE>
(e) Property, plant and equipment (continued)
According to the laws of the PRC, the title to all PRC land is
retained by the PRC government. The land use rights, which represent
the cost for the rights to use the land for premises granted by the
State Land Administration Bureau, have no definite term of use. The
land use rights are stated at cost and are amortised over 50 years on
the same basis as the buildings.
Z-12
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Construction in progress represents buildings, plant under
construction and deposits and prepayments made on machinery pending
installation. Cost comprises direct costs of construction and finance
expenses arising from borrowings used to finance the construction of
buildings and plant and machinery until the construction, installation
and testing is complete. The amount of finance expenses capitalised is
the interest cost which could theoretically have been avoided if the
expenditure on the qualifying asset had not been made.
No depreciation is provided on construction in progress until the
relevant assets have been put into commercial use.
(f) Leased assets
Leases that transfer substantially all the rewards and risks of
ownership of assets to the Group are accounted for as capital leases.
At the inception of a capital lease, the cost of the leased asset is
capitalised at the present value of the minimum lease payments and
recorded together with the obligation, excluding the interest element,
to reflect the purchase and financing. Assets held under capital
leases are included in property, plant and equipment and are
depreciated over the shorter of the lease terms and the estimated
useful lives.
(g) Income taxes
Income taxes are determined under the liability method as required by
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes".
Z-13
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(h) Foreign currency translation
The financial records and the statutory financial statements of the
Group are maintained in Renminbi. In preparing the statutory financial
statements, foreign currency transactions and monetary assets and
liabilities denominated in foreign currencies are translated into
Renminbi at the rates of exchange set by the PRC government from time
to time (the "official exchange rate").
In preparing the consolidated financial statements, the financial
statements of the Group are measured using Renminbi as the functional
currency. All foreign currency transactions are translated into
Renminbi using the applicable rates of exchange, quoted by the
Zhaoqing foreign exchange adjustment center (the "swap center") for
the respective periods. Monetary assets and liabilities denominated in
foreign currencies have been translated into Renminbi using the rates
of exchange quoted by the swap center prevailing at the balance sheet
date. The resulting exchange gains or losses have been credited or
charged to the statements of income for the period in which they
occur.
On January 1, 1994, the PRC government abolished the dual exchange
rate system, comprising the official rates and the swap center rates,
and introduced a single rate of exchange as quoted by the People's
Bank of China (the "unified exchange rate"). The unified exchange rate
is quoted at levels similar to those quoted by the swap centers.
However, the unification of exchange rates does not imply full
convertibility of Renminbi into United States dollars or other foreign
currencies.
Z-14
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - INVENTORIES
<TABLE>
<CAPTION>
1993
RMB
<S> <C>
Raw materials 7,500,186
Work in progress 3,473,660
Finished goods 504,822
----------
11,478,668
==========
</TABLE>
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
1993
RMB
<S> <C>
At cost:
Land use rights and buildings 7,531,154
Plant, machinery and equipment 58,839,161
Motor vehicles 602,309
Construction in progress 530,877
----------
67,503,501
Accumulated depreciation and amortization:
Land use rights and buildings 1,543,513
Plant, machinery and equipment 22,143,753
Motor vehicles 240,128
----------
23,927,394
Net book value 43,576,107
==========
</TABLE>
Interest capitalised in construction in progress for the year ended
December 31, 1992 amounted to RMB9,187,402. As more fully described in note 1,
the property, plant and equipment, including construction in progress, of Pabst
Blue Ribbon were disposed of to the Company and then to Blue Ribbon Noble.
Pabst Blue Ribbon's capitalised interest in construction in progress for the
period from January 1, 1993 up to November 6, 1993, the date of transfer of
property, plant and equipment, amounted to RMB9,279,134.
The analysis of the Group's cost and accumulated depreciation and
amortization of property, plant and equipment held under capital leases at the
balance sheet date is set out below:
Z-15
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT, NET (continued)
<TABLE>
<CAPTION>
1993
RMB
<S> <C>
At cost:
Plant, machinery and equipment 14,682,869
Construction in progress 1,000,000
----------
15,682,869
Accumulated depreciation and amortization:
Plant, machinery and equipment 5,506,076
----------
Net book value 10,176,793
==========
</TABLE>
Depreciation and amortization charges in respect of property, plant
and equipment held under capital leases for the years ended December 31, 1992
and 1993 and the ten months ended October 31, 1994 amounted to RMB1,730,948,
RMB917,679 and RMB344,890, respectively.
NOTE 6 - INTERESTS IN ASSOCIATED COMPANIES
<TABLE>
<CAPTION>
1993
RMB
<S> <C>
Unlisted investments, at cost 142,904,277
Loans to an associated company 10,095,000
Due from an associated company 38,399,458
The Group's share of post acquisition earnings
less losses of associated companies 5,485,716
-----------
196,884,451
===========
</TABLE>
The unlisted investments as at December 31, 1993 represent the Group's
40% and 30% equity interests in Blue Ribbon Noble and Blue Ribbon Beverage
respectively. Please refer to note 1 to the consolidated financial statements
for description of the principal activities of the respective associated
companies.
As at December 31, 1993, the Group's share of the underlying net
assets of associated companies exceeded the Group's investments by approximately
RMB54,471,723. This difference is being amortised to income over 20 years.
The Group's share of post acquisition earnings retained by associated
companies as at December 31, 1993 amounted to RMB5,485,716.
Z-16
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - INTERESTS IN ASSOCIATED COMPANIES (continued)
As at December 31, 1993, the loans to and the amount due from an
associated company were unsecured, interest-free and repayable on demand.
The summarized information of Blue Ribbon Noble are:
<TABLE>
<CAPTION>
1993
RMB
<S> <C>
Balance sheet
-------------
Current assets 90,359,254
Property, plant and equipment 473,606,583
-----------
Total assets 563,965,837
===========
Current liabilities 74,194,064
Equity 489,771,773
-----------
Total liabilities and equity 563,965,837
===========
</TABLE>
<TABLE>
<CAPTION>
Ten months Two months
ended ended
October 31, December 31,
1994 1993
RMB RMB
<S> <C> <C>
Statement of income
-------------------
Sales, net of sales taxes 392,693,554 66,593,478
=========== ============
Net income 84,218,373 13,831,773
=========== ============
</TABLE>
As the operating results of and the assets and liabilities of Blue
Ribbon Beverage are insignificant to the Group's consolidated operating results
and the assets and liabilities, no separate summarized information of Blue
Ribbon Beverage is disclosed.
Z-17
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - BANK LOANS
<TABLE>
<CAPTION>
1993
RMB
<S> <C>
Secured bank loans (see note 18) 35,000,000
Unsecured bank loans 8,595,000
-----------
43,595,000
Portion classified as current liabilities (20,595,000)
-----------
Long term portion 23,000,000
===========
</TABLE>
The bank loans as at December 31, 1993 bore fixed interest rates
ranging from 9.4% to 12.1% per annum with varying maturities ranging from 1994
to 1996. The weighted average interest rate of the short term bank loans as at
December 31, 1993 was 11.0%.
The outstanding balances in respect of bank loans denominated in
United States dollars as at December 31, 1993 were equivalent to RMB8,595,000.
The bank loans maturing during each of the years in the five year
period subsequent to the balance sheet date are:
<TABLE>
<CAPTION>
1993
RMB
<S> <C>
Year ending December 31,
1994 20,595,000
1996 23,000,000
----------
43,595,000
==========
</TABLE>
NOTE 8 - OTHER LOANS
Other loans include short term debentures as at December 31, 1993
amounting to RMB5,000,000. The short term debentures bore interest at the
weighted average rate of 10.5% per annum and were redeemable one year after
issuance.
The other loans as at December 31, 1993 were unsecured, bore fixed
interest at the weighted average rate of 11.8% per annum and floating interest
rates of 1.2% over LIBOR and are wholly repayable in 1994.
Z-18
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - LEASE PAYABLES
The details of collateralized property, plant and equipment held under
capital leases were disclosed in note 5 to the consolidated financial
statements.
The lease payables as at December 31, 1993 bore interest ranging from
5.2% to 12.7% per annum and are repayable semi-annually to 1995. The
outstanding balances in respect of lease payables denominated in United States
dollars as at December 31, 1993 amounted to RMB14,664,324.
The lease payables maturing during each of the years in the five year
period subsequent to the balance sheet date are:
<TABLE>
<CAPTION>
1993
RMB
<S> <C>
Year ending December 31,
1994 15,235,026
1995 2,179,760
-----------
17,414,786
Implicit interest (1,750,462)
-----------
15,664,324
Portion classified as
current liabilities (13,629,021)
-----------
Long term portion 2,035,303
===========
</TABLE>
NOTE 10 - SALES TAXES
<TABLE>
<CAPTION>
Ten months
ended Year ended
October 31, December 31,
1994 1993 1992
RMB RMB RMB
<S> <C> <C> <C>
Sales taxes originally
assessed 7,253,217 26,554,885 50,625,919
Less: tax concession - (5,700,000) (36,654,973)
--------- ---------- -----------
Net sales taxes 7,253,217 20,854,885 13,970,946
========= ========== ===========
</TABLE>
Z-19
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - SALES TAXES (continued)
Before the recent tax reform effective January 1, 1994, the Company
was liable to pay sales taxes on the value of brewery products sold, net of
certain packaging costs, pursuant to the sales tax rules and regulations in the
PRC. The effective sales tax rates applicable to each of the two years ended
December 31, 1993 are summarized below.
<TABLE>
<CAPTION>
Period Effective tax rate
<S> <C>
January 1992 to February 1993 16% to 40%
March 1993 to December 1993 16% to 27%
</TABLE>
The rate of sales tax applicable to the Group for any one year may be
reduced upon application for tax concession by the Group in the following year.
The Group has applied for and received tax relief for each of the two years
ended December 31, 1993. The tax authority in the PRC has restricted the use of
the tax concession to the repayment of borrowings and these are not available
for distribution to the equity holders. The amounts of tax concession were
therefore appropriated from retained earnings to a reserve account in the
respective periods.
Effective January 1, 1994, the Group is subject to three kinds of
sales taxes, being the value added tax ("VAT"), the consumption tax and other
sales taxes. The applicable VAT tax rate is 17% for brewery products sold in the
PRC and nil for exported goods. The amount of VAT liability is determined by
applying the applicable tax rate to the invoiced amount of goods sold less VAT
paid on purchases made with the relevant invoices in support. VAT is collected
from customers by the Group on behalf of the PRC tax authorities and is
therefore not expensed to the statement of income. The applicable consumption
tax rate in respect of brewery products is RMB220 per ton. The consumption tax
expensed to the statement of income is determined based on the volume of sales
within the PRC and exported goods are exempt. The other sales taxes are assessed
as a percentage of consumption tax and VAT.
Z-20
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - INCOME TAXES
The Company's subsidiary, Pabst Blue Ribbon is governed by the
relevant income tax laws in the PRC. With a tax concession obtained from the tax
authority, Pabst Blue Ribbon is exempt from income taxes for two years
commencing with its first profitable year of operations, and thereafter with a
50% exemption for the next three years. Based on its local statutory financial
statements, Pabst Blue Ribbon has attained its first profitable year of
operation for the year ended December 31, 1992. In view of the tax holiday
granted, no current income taxes were provided by Pabst Blue Ribbon for the two
years ended December 31, 1993. Based on its local statutory financial
statements, Pabst Blue Ribbon has suffered an operating loss for the ten months
ended October 31, 1994 and, accordingly, no income tax was provided for the
period by Pabst Blue Ribbon.
The Company's profits are however taxable under the income tax laws in
the PRC. Pursuant to an arrangement agreed with the tax authority, the income
tax of Blue Ribbon Group and its related companies, including the income tax of
the Company, were assessed on a combined basis and were paid and borne by Blue
Ribbon Group. No current income taxes were provided by the Company for the two
years ended December 31, 1993 and the ten months ended October 31, 1994 as the
management considered that any such allocation to the Company would be
insignificant. A tax indemnity letter has also been issued by Blue Ribbon Group
which waived all its right to claim from the Group for all unpaid income tax
liabilities for periods on or before October 31, 1994.
The provision for deferred income taxes is based on the liability
method prescribed by Statement of Financial Accounting Standards No. 109. The
Group's temporary differences mainly represented the accelerated depreciation
allowances provided on property, plant and equipment during tax reduced periods.
Z-21
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - INCOME TAXES (continued)
The reconciliation of effective income tax rates of the Group stated
in the statements of income to the statutory income tax rate in the PRC is as
follows:
<TABLE>
<CAPTION>
Ten months
ended Year ended
October 31, December 31,
1994 1993 1992
<S> <C> <C> <C>
Statutory tax rate 33% 33% 33%
Reduction in tax due to arrangement
with PRC tax authorities (33%) (33%) (33%)
Accelerated depreciation allowances
during tax reduced periods 7% 1% 81%
---- ---- ----
Effective tax rate 7% 1% 81%
==== ==== ====
</TABLE>
NOTE 12 - FOREIGN CURRENCY EXCHANGE
The Renminbi is not freely convertible into foreign currencies. Prior
to January 1, 1994, all foreign exchange transactions involving Renminbi in the
PRC took place either through the Bank of China or other institutions authorized
to buy and sell foreign exchange, or at an approved swap center in the PRC. The
swap centers are institutions which belong to the State Administration of
Exchange Control and its branches. The exchange rates used for transactions
through the Bank of China and other authorized institutions were set by the
government, through the State Administration of Exchange Control, from time to
time. The exchange rates available at a swap center are determined largely by
supply and demand based on foreign currency and Renminbi requirements of
enterprises operating or doing business in the PRC.
Z-22
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - FOREIGN CURRENCY EXCHANGE (continued)
On January 1, 1994, the PRC government abolished the dual exchange
rate system, comprising the official rates and the swap center rates, and
introduced a single rate of exchange as quoted by the People's Bank of China.
The unified exchange rate is quoted at levels similar to those quoted by the
swap centers. However, the unification of exchange rates does not imply full
convertibility of Renminbi into United States dollars or other foreign
currencies. All foreign exchange transactions continue to take place either
through the Bank of China or other institutions authorized to buy and sell
foreign currencies or the swap centers at the exchange rates quoted by the
People's Bank of China. In April 1994, the National Foreign Exchange Trading
Center in Shanghai (the "exchange center") commenced operations. Enterprises
operating in the PRC can enter into exchange transactions at the exchange center
through the Bank of China or other authorized institutions. Payments for
imported materials are subject to the availability of foreign currency which is
dependent on the foreign currency denominated earnings of each company within
the Group or must be arranged through an exchange center. Approval for exchange
at the exchange center is granted to enterprises in the PRC for valid reasons
such as purchases of imported materials. While conversion of Renminbi into
United States dollars or other foreign currencies can generally be effected at
the exchange center, there is no guarantee that it can be effected at all times.
The official exchange rates and swap center/unified exchange rates as
of December 31, 1992 and 1993 were as follows:
<TABLE>
<CAPTION>
December 31,
1993 1992
<S> <C> <C>
RMB equivalent of US$1.00:
Official exchange rate 5.80 5.73
Swap center/unified exchange rate 8.65 7.60
==== ====
</TABLE>
Z-23
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - DISTRIBUTION OF PROFITS
As stipulated by the relevant laws and regulations for enterprises
operating in PRC, Pabst Blue Ribbon, the Company's subsidiary,is required to
make appropriations to a general reserve fund, an enterprise development fund
and an employee welfare and incentive fund, in which the percentage of annual
appropriations are subject to the articles of association of Pabst Blue Ribbon.
The allocations to the employee welfare and the incentive fund should be charged
to the statement of income. The other appropriations should be accounted for as
a transfer from retained earnings to reserve funds in the balance sheet and
should not be available for distribution as dividends to the equity holder.
Under the articles of association, the board of directors shall determine the
appropriations having regard to the economic situation of Pabst Blue Ribbon. No
appropriations to these reserve funds and provision for employee welfare and
incentive fund were made for the period from January 1, 1992 to October 31,
1994. In the opinion of the management, the required appropriation of the funds
in the respective periods would be insignificant.
The Company's associated companies, Blue Ribbon Noble and Blue Ribbon
Beverage, are also required to make the same appropriations as Pabst Blue
Ribbon. The percentage of annual appropriations, if any, determined by the
board of directors in the respective periods is also insignificant.
The Company is required to make annual appropriations to two reserve
funds including statutory surplus and collective welfare fund. In accordance
with the relevant PRC regulations and the Company's articles of association, the
Company is required to allocate a certain percentage of its profit after
taxation, as determined in accordance with the PRC accounting standards and
regulations applicable to the Company, to the statutory surplus reserve until
such reserve reaches 50% of the registered capital of the Company. Based on the
statutory financial statements as of December 31, 1993, the registered capital
of the Company was RMB79,220,000. Subject to certain restrictions as set out in
the relevant PRC regulations and the Company's articles of association, the
statutory surplus reserve may be distributed to equity holders in the form of
bonus issues and/or dividends when such reserve exceeds 25% of the registered
capital of the Company.
Z-24
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - DISTRIBUTION OF PROFITS (continued)
In accordance with the relevant PRC regulations and the Company's
articles of association, the Company's collective welfare fund, which is
determined annually at the discretion of the equity holders, is appropriated
from retained earnings. The collective welfare fund is restricted to payments
of capital expenditure incurred on welfare facilities provided to employee.
As described in note 2 to the consolidated financial statements, the
profits as reported in the US GAAP financial statements differ from those as
reported in the statutory financial statements. In accordance with the relevant
laws and regulations in the PRC, the profits available for distribution are
declared based on the statutory financial statements.
If the Group has foreign currency available after meeting its
operational needs, the Group may make its profit distributions in foreign
currency to the extent it is available. Otherwise, it will be necessary to
convert such distributions at an exchange center.
NOTE 14- SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
Ten months
ended Year ended
October 31, December 31,
1994 1993 1992
RMB RMB RMB
<S> <C> <C> <C>
New capital leases 14,031,675 1,000,000 -
Interest paid by cash,
net of capitalised
interest 4,697,857 23,220,209 17,058,853
========== ========== ==========
</TABLE>
The major non-cash transactions undertaken by the Group for the two
years ended December 31, 1993 and the ten months ended October 31, 1994 are
summarized as follows:
(a) Certain property, plant and equipment of the Company were disposed of at
carrying value of RMB3,114,434 as capital contribution to Blue Ribbon
Beverage, an associated company, in return for a 30% equity interest.
Z-25
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14- SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION (continued)
(b) Please refer to note 2 to the consolidated financial statements for the
disposal of property, plant and equipment and the business of Pabst Blue
Ribbon, the Company's subsidiary, to the Company as capital contribution to
Blue Ribbon Noble, an associated company.
(c) Please refer to note 1 to the consolidated financial statements for the
disposal of the Group's remaining net assets in Pabst Blue Ribbon and the
entire interest in Blue Ribbon Beverage as dividends to Blue Ribbon Group
at their carrying values.
The details of the remaining net assets of Pabst Blue Ribbon disposed of to
Blue Ribbon Group are summarized below:
<TABLE>
<CAPTION>
RMB
<S> <C>
Net assets of a subsidiary disposed of:
Cash 4,083,959
Due from ultimate holding company 97,016,729
Due from a related company 18,000,000
Bank loans (5,000,000)
Other loans (3,000,000)
Lease payables (3,009,982)
Other payables (26,411,685)
-----------
81,679,021
===========
Satisfied by:
Dividend payable to Blue Ribbon Group 81,679,021
===========
</TABLE>
The details of the interest in Blue Ribbon Beverage disposed of to Blue
Ribbon Group are summarized below:
<TABLE>
<CAPTION>
RMB
<S> <C>
Interest in an associated company disposed of:
Investment cost in an associated company 3,114,434
Loans to an associated company 8,595,000
Amount due from an associated company 986,548
The Group's share of post acquisition
losses of an associated company (332,388)
----------
12,363,594
==========
Satisfied by:
Dividend payable to Blue Ribbon Group 12,363,594
==========
</TABLE>
Z-26
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14- SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
(continued)
(d) Dividends totalling RMB105,511,921 were declared and payable to Blue Ribbon
Group, of which RMB81,679,021 and RMB12,363,594, as set out in note (c)
above, were declared in consideration for the disposal of the Group's
remaining net assets in Pabst Blue Ribbon and the entire interest in Blue
Ribbon Beverage respectively.
(e) Please refer to note 1 to the consolidated financial statements for the
additional capital of RMB151,348,294 contributed by Blue Ribbon Group,
including loans assumed totalling RMB11,595,000.
NOTE 15- RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
(a) Major customer
The Group sold finished goods and raw materials to Blue Ribbon Group, the
then ultimate holding company, under a distribution arrangement. The sales
to Blue Ribbon Group, inclusive of the profit rebates received under the
distribution arrangement and net of sales taxes, for the years ended
December 31, 1992 and 1993 were RMB154,081,728 and RMB191,101,092,
respectively. On January 1, 1994, the Group terminated its distribution
arrangement and no finished goods and raw materials were sold to Blue
Ribbon Group thereafter. The Group then traded with retailers directly.
(b) Purchases of packing materials
The Company purchased packing materials from American National Can
(Zhaoqing) Co., Ltd. (formerly Zhao Gang Can Manufacturing Co.), a company
in which Blue Ribbon Group has an equity interest. The purchases made
during the years ended December 31, 1992 and 1993 and the ten months ended
October 31, 1994 amounted to RMB587,950, RMB2,262,364 and RMB1,535,738,
respectively.
(c) Purchases of packing materials and sales of raw materials
Z-27
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15- RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (continued)
The Company purchased packing materials from and sold raw materials to
Zhaoqing Blue Ribbon Carton Manufacturing Co., a then fellow subsidiary of
the Company.
The significant related party transactions are set out below:
<TABLE>
<CAPTION>
Ten months ended Year ended
October 31, December 31,
1994 1993 1992
RMB RMB RMB
<S> <C> <C> <C>
Purchases of packing
materials 1,997,721 11,914,670 4,001,785
Sales of raw materials 626,362 245,695 -
========= ========== =========
</TABLE>
(d) Due to ultimate holding company
As at December 31, 1993, the amount due to Blue Ribbon Group represented
the net balances of accounts receivable from sales of finished goods and
short term advances to the Group. The balance was unsecured, interest-free
and repayable on demand.
NOTE 16 - CONCENTRATION OF CREDIT RISKS
The financial instruments that are exposed to concentration of credit
risk consist primarily of cash and accounts receivable from a related company.
Cash is maintained with major banks in the PRC. The Company periodically
performs credit analysis and monitors the financial condition of the related
company in order to minimize credit risk.
Z-28
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - RETIREMENT PLAN
As stipulated by the PRC government regulations, the Group has defined
contribution retirement plans for all their permanent staff. The Group and its
staff are required to contribute to PRC insurance companies organized by the PRC
government which are responsible for the payments of pension benefits to retired
staff. During the two years ended December 31, 1993 and from January 1, to June
30, 1994, the monthly contribution of the Group was calculated at 9.3% of the
basic salary of the permanent staff and the monthly contribution of each
permanent staff remained at RMB2. Effective July 1, 1994, the monthly
contributions of the Company and of the permanent staff were calculated at 14.6%
and 2% of the basic salary of the permanent staff, respectively. The pension
costs expensed by the Group during the years ended December 31, 1992 and 1993
and the ten months ended October 31, 1994 amounted to RMB158,930, RMB194,435 and
RMB178,232, respectively.
NOTE 18 - FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for current assets
and current liabilities, except for borrowings, qualifying as financial
instruments approximate their fair values because of the short maturity of such
instruments. Cash denominated in foreign currency has been translated at the
applicable swap center rate.
The fair values of borrowings are based on the borrowing rates
currently available at December 31, 1993 for borrowings with similar terms and
average maturities are:
<TABLE>
<CAPTION>
Carrying value Estimated fair value
RMB RMB
<S> <C> <C>
Bank loans 43,595,000 35,371,456
Other loans 20,655,000 18,777,273
========== ==========
</TABLE>
NOTE 19 - PLEDGE OF ASSETS
Certain property, plant and equipment were collateralized to banks and
finance lessors for borrowing facilities granted to the Group and related
companies, the net book value of which amounted to RMB13,889,658 as at December
31, 1993.
Z-29
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - SUBSEQUENT EVENTS
On February 19, 1995, a marketing company is formed and owned as to
30% by Blue Ribbon Group and 70% by the Company. The marketing company will
market Pabst Blue Ribbon beer and beverages in the PRC.
An agreement was made among CBR Brewing Company, Inc. and its
subsidiaries, the group companies of Noble China Inc. and Blue Ribbon Group on
May 10, 1995 to the effect that:
(a) The Company was granted from Blue Ribbon Group the right to brew and
sell beer under the Pabst Blue Ribbon label produced in its brewing
facilities up to a maximum production capacity of 100,000 tons per
annum.
(b) Zhao Qing Blue Ribbon High Worth Brewery Ltd., the Company's immediate
holding company, granted Goldjinsheng Holding Limited ("Goldjinsheng")
an option to purchase up to a 40% interest in the brewery factory
operated by the Company, excluding the Company's 40% interest in Blue
Ribbon Noble. This option may be exercised between August 31, 1996 and
September 30, 1996. The purchase consideration for the first 30% and
the remaining 10% interest is to be determined based on earning
multiples of 8.5 times and 15 times, respectively, of the brewery
factory's audited net income for the year ending June 30, 1997.
However, the consideration shall not be less than 1.2 times of 30% of
the net book value of the brewery operation for the first 30% interest
and 2 times of 10% of the net book value for the remaining 10%
interest.
(c) Distribution companies owned by the Company and Blue Ribbon Noble and
another marketing company owned by Blue Ribbon Group, High Worth
Brewery and Goldjinsheng, will be formed, subject to the governmental
approval, to handle and organize the sales of Pabst Blue Ribbon beer
produced by the Company and Blue Ribbon Noble.
Z-30
<PAGE>
Financial Statements
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
(Registered in the People's Republic of China)
December 31, 1995 and 1994
ERNST & YOUNG
HONG KONG
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
CONTENTS
<TABLE>
<CAPTION>
Pages
<S> <C>
REPORT OF INDEPENDENT AUDITORS ZB-1
FINANCIAL STATEMENTS
Balance sheets ZB-2
Statements of income ZB-3
Statements of equity ZB-4
Statements of cash flows ZB-5
Notes to financial statements ZB-6 - ZB-19
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the shareholders of
CBR Brewing Company, Inc.
We have audited the accompanying balance sheets of Zhaoqing Blue Ribbon
Brewery Noble Ltd. as of December 31, 1995 and 1994 and the related statements
of income, equity and cash flows for the year ended December 31, 1995, the two
months ended December 31, 1994, the ten months ended October 31, 1994 and the
two months ended December 31, 1993. These financial statements are the
responsibility of Zhaoqing Blue Ribbon Brewery Noble Ltd.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Zhaoqing Blue Ribbon Brewery
Noble Ltd. as of December 31, 1995 and 1994 and the results of its operation and
its cash flows for the year ended December 31, 1995 and the two months ended
December 31, 1994, the ten months ended October 31, 1994 and the two months
ended December 31, 1993 in conformity with generally accepted accounting
principles in the United States of America.
Ernst & Young
Hong Kong
March 28, 1996
ZB-1
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Notes 1995 1994 1995
RMB RMB USD
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash 118,046,066 66,821,381 14,188,229
Accounts receivable 4 1,056,823 99,037,866 127,022
Inventories 6 33,025,879 53,069,739 3,969,457
Prepayments and deposits 28,842,225 17,380,466 3,466,614
Due from related companies 15 168,625,581 91,407,331 20,267,497
----------- ----------- ----------
Total current assets 349,596,574 327,716,783 42,018,819
Property, plant and equipment,
net 7 462,021,855 461,959,504 55,531,473
----------- ----------- ----------
Total assets 811,618,429 789,676,287 97,550,292
=========== =========== ==========
LIABILITIES AND EQUITY
Current liabilities:
Bank loans 8 13,500,000 17,200,000 1,622,596
Accounts payable and accrued
liabilities 60,515,291 53,239,182 7,273,472
Employee welfare and
incentive fund 9,727,271 4,199,788 1,169,143
Deposits received from
customers - 61,464,582 -
Due to related companies 15 26,998,322 17,493,795 3,244,991
Sales taxes payable 10 79,017,253 39,257,815 9,497,266
----------- ----------- ----------
Total current liabilities 189,758,137 192,855,162 22,807,468
Long term liabilities:
Deferred income taxes 5 5,500,000 3,300,000 661,058
Equity 616,360,292 593,521,125 74,081,766
----------- ----------- ----------
Total liabilities and equity 811,618,429 789,676,287 97,550,292
=========== =========== ==========
</TABLE>
............................. .............................
Director Director
The financial statements were approved by the board of directors of CBR
Brewing Company, Inc. on March 28, 1996.
The accompanying notes are an integral part of the financial statements.
ZB-2
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
STATEMENTS OF INCOME
FOR THE TWO MONTHS ENDED DECEMBER 31, 1993,
THE TEN MONTHS ENDED OCTOBER 31, 1994,
THE TWO MONTHS ENDED DECEMBER 31, 1994
AND THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Two months Ten months Two months
Year ended ended ended ended Year ended
December 31, December 31, October 31, December 31, December 31,
Notes 1995 1994 1994 1993 1995
RMB RMB RMB RMB USD
<S> <C> <C> <C> <C> <C> <C>
Sales, including sales
to related company of
RMB327,805,406 in 1995
and nil for prior periods 724,233,282 133,139,232 413,361,747 79,311,837 87,047,270
Sales taxes 10 (42,509,114) (6,701,053) (20,668,193) (12,718,359) (5,109,269)
------------ ------------ ------------ ----------- ------------
Sales, net of sales taxes 681,724,168 126,438,179 392,693,554 66,593,478 81,938,001
Cost of sales, including
inventory purchased from
related companies of
RMB91,355,485; RMB23,523,734;
RMB71,158,767; RMB60,061,379
and royalty fee paid to related
company of RMB15,434,144;
RMB3,327,093; RMB9,755,178 and
RMB1,169,300 (525,860,005) (90,023,773) (275,455,836) (50,354,247) (63,204,328)
------------ ------------ ------------ ----------- ------------
Gross profit 155,864,163 36,414,406 117,237,718 16,239,231 18,733,673
Expenses:
Selling and
administrative expenses,
including management fee
paid to related company
of RMB2,035,000 in
1995 and nil for
prior periods (60,819,562) (16,488,878) (31,302,496) (2,407,458) (7,310,044)
------------ ------------ ------------ ----------- ------------
Operating income 95,044,601 19,925,528 85,935,222 13,831,773 11,423,629
Bank interest income 3,846,001 325,451 863,151 - 462,260
Interest expenses (2,240,015) - - - (269,233)
------------ ------------ ------------ ----------- ------------
Income before income taxes 96,650,587 20,250,979 86,798,373 13,831,773 11,616,656
Provision for deferred
income taxes 5 (2,200,000) (720,000) (2,580,000) - (264,423)
------------ ------------ ------------ ----------- ------------
Net income for the
year/period 94,450,587 19,530,979 84,218,373 13,831,773 11,352,233
============ ============ ============ =========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
ZB-3
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
STATEMENTS OF EQUITY
FOR THE TWO MONTHS ENDED DECEMBER 31, 1993,
THE TEN MONTHS ENDED OCTOBER 31, 1994,
THE TWO MONTHS ENDED DECEMBER 31, 1994
AND THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
General
reserve and
enterprise
Contributed development Retained
capital funds earnings Equity
RMB RMB RMB RMB
(Note 9) (Note 12) (Note 13)
<S> <C> <C> <C> <C>
At beginning of period - - - -
Contributed capital 475,940,000 - - 475,940,000
Net income for the
period ended
December 31, 1993 - - 13,831,773 13,831,773
----------- ----------- ------------ ------------
At December 31, 1993 475,940,000 - 13,831,773 489,771,773
Net income for the
ten months ended
October 31, 1994 - - 84,218,373 84,218,373
----------- ----------- ------------ ------------
At October 31, 1994 475,940,000 - 98,050,146 573,990,146
Net income for the
two months ended
December 31, 1994 - - 19,530,979 19,530,979
Appropriation of reserve - 4,199,788 (4,199,788) -
----------- ----------- ------------ ------------
At December 31, 1994 475,940,000 4,199,788 113,381,337 593,521,125
Net income for the
year ended
December 31, 1995 - - 94,450,587 94,450,587
Appropriation of:
Reserve - 5,527,483 (5,527,483) -
Dividend - - (71,611,420) (71,611,420)
----------- ----------- ------------ ------------
At December 31, 1995 475,940,000 9,727,271 130,693,021 616,360,292
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
ZB-4
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
STATEMENTS OF CASH FLOWS
FOR THE TWO MONTHS ENDED DECEMBER 31, 1993,
THE TEN MONTHS ENDED OCTOBER 31, 1994,
THE TWO MONTHS ENDED DECEMBER 31, 1994
AND THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Two months Ten months Two months
Year ended ended ended ended Year ended
December 31, December 31, October 31, December 31, December 31,
1995 1994 1994 1993 1995
RMB RMB RMB RMB USD
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income 94,450,587 19,530,979 84,218,373 13,831,773 11,352,233
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 30,115,484 6,063,562 14,840,444 2,333,417 3,619,650
Deferred income taxes 2,200,000 720,000 2,580,000 - 264,423
Allowance for doubtful debts 786,740 - - - 94,560
------------ ----------- ----------- ----------- -----------
127,552,811 26,314,541 101,638,817 16,165,190 15,330,866
Changes in working capital:
(Increase)/decrease in accounts
receivable 97,194,303 (26,866,386) (40,321,210) (31,850,270) 11,682,007
(Increase)/decrease in inventories 20,043,860 (23,200,138) (11,930,272) (17,939,329) 2,409,118
(Increase)/decrease in prepayments
and deposits (11,461,759) 2,089,933 (19,072,269) (398,130) (1,377,615)
Increase in amounts due from
related companies (77,218,250) (5,223,518) (47,477,712) (38,706,101) (9,281,040)
Increase in accounts payable
and accrued liabilities 7,276,109 17,226,020 31,276,709 4,736,453 874,533
Increase in employee welfare
and incentive fund 5,527,483 4,199,788 - - 664,361
Increase/(decrease) in deposits
received from customers (61,464,582) 5,804,093 36,094,489 19,566,000 (7,387,570)
Increase/(decrease) in amounts
due to related companies 9,504,527 15,579,727 (33,242,589) 35,156,657 1,142,371
Increase/(decrease) in sales
taxes payable 39,759,438 (6,847,842) 34,610,703 11,494,954 4,778,779
------------ ----------- ----------- ----------- -----------
Net cash provided by/(used in)
operating activities 156,713,940 9,076,218 51,576,666 (1,774,576) 18,835,810
------------ ----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchases of property, plant
and equipment (31,927,658) (7,191,395) (2,065,532) - (3,837,459)
Sales proceeds on disposal of
property, plant and equipment 1,749,823 - - - 210,315
------------ ----------- ----------- ----------- -----------
Net cash used in investing activities (30,177,835) (7,191,395) (2,065,532) - (3,627,144)
------------ ----------- ----------- ----------- -----------
Cash flows from financing activities:
New bank loans 13,500,000 17,200,000 - - 1,622,596
New loans from related companies - - - 3,240,000 -
Repayment of bank loans (17,200,000) - - - (2,067,307)
Repayment of loans from related
companies - - (3,240,000) - -
Dividend paid (71,611,420) - - - (8,607,142)
------------ ----------- ----------- ----------- -----------
Net cash provided by/(used in)
financing activities (75,311,420) 17,200,000 (3,240,000) (3,240,000) (9,051,853)
------------ ----------- ----------- ----------- -----------
Net increase in cash 51,224,685 19,084,823 46,271,134 1,465,424 6,156,813
Cash at beginning of year/period 66,821,381 47,736,558 1,465,424 - 8,031,416
------------ ----------- ----------- ----------- -----------
Cash at end of year/period 118,046,066 66,821,381 47,736,558 1,465,424 14,188,229
============ =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
ZB-5
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITY
Zhaoqing Blue Ribbon Brewery Noble Ltd. (the "Company") is a Sino-
foreign equity joint venture enterprise registered in the People's Republic of
China (the "PRC") in October 1993 in which Goldjinsheng Holding Limited
("Goldjinsheng") and Zhaoqing Brewery each hold 60% and 40% interest,
respectively. The venture term of the Company is for twenty years which term may
be extended upon mutual agreement of the joint venture parties and approval from
the relevant PRC government authorities.
Pursuant to the joint venture agreements and with the approval of the
relevant PRC government authorities, the property, plant, equipment and the
business of Pabst Blue Ribbon Brewery (Zhaoqing) Co. Ltd. ("Pabst Blue Ribbon")
were disposed of to Zhaoqing Brewery and then to the Company as capital
contribution.
The Company is principally engaged in the production and sale of beer
and beer products in the PRC since its commencement of business on November 6,
1993. The Company's principal line of product is Blue Ribbon beer under Pabst
trademarks which were granted by Blue Ribbon Group (see note 20). Malt, rice and
packing materials are the major raw materials in the production of Blue Ribbon
beer. Effective from July 1995, all beer products produced by the Company are
sold to Zhaoqing Blue Ribbon Beer Marketing Company Limited ("Blue Ribbon
Marketing") which was formed to promote and distribute beverage products. Blue
Ribbon Marketing is owned as to 70% by Zhaoqing Brewery and 30% by Guang Dong
Blue Ribbon Group Co. Ltd. ("Blue Ribbon Group").
NOTE 2 - BASIS OF PRESENTATION
The financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America ("US
GAAP"). This basis of accounting differs from that used in the preparation of
the statutory financial statements of the Company which are prepared in
accordance with the accounting principles and relevant financial regulations
established by the Ministry of Finance of the PRC.
The major adjustments made to the statutory financial statements to
conform with US GAAP include the adjustments for sales, interest income and
purchases recognized on a cash basis, depreciation and deferred taxation.
On October 31, 1994, High Worth Holdings Limited, a wholly-owned
subsidiary of CBR Brewing Company, Inc., acquired an effective 60% interest in
Zhaoqing Brewery,
ZB-6
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
NOTES TO FINANCIAL STATEMENTS
including Zhaoqing Brewery's 40% interest in the Company. Accordingly, the
Company's statements of income and cash flows were prepared for the ten months
ended October 31, 1994 and for the two months ended December 31, 1994 to show
the pre-acquisition and the post-acquisition operating results and cash flows of
the Company attributable to CBR Brewing Company, Inc. for the period ended
December 31, 1994.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of accounting
The financial statements have been prepared under the historical
cost convention.
(b) Revenue recognition
Sales represent the net invoiced value of goods sold, net of
returns and allowances. Sales are recognized upon delivery of
goods to customers.
(c) Inventories
Inventories are stated at the lower of cost and market value.
Cost, which comprises direct materials and, where applicable,
direct labor costs and those overhead items that have been
incurred in bringing the inventories to their present location
and condition, is calculated using the first-in, first-out
method.
(d) Property, plant and equipment
Property, plant and equipment are stated at cost less allowance
for depreciation and amortization. Cost includes the fair value
of property, plant and equipment transferred from Pabst Blue
Ribbon.
Depreciation and amortization are provided using the straight-
line method to write off the cost of property, plant and
equipment over their estimated useful lives. The estimated
useful lives are as follows:
Land use rights 20 years
Buildings 20 years
Plant, machinery and equipment 15 years
Motor vehicles 10 years
ZB-7
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
NOTES TO FINANCIAL STATEMENTS
According to the laws of the PRC, the title to all PRC land is
retained by the PRC government. The land use rights represent
the cost for the rights to use the land for premises granted by
the State Land Administration Bureau. The land use rights are
stated at cost and are amortised over the shorter of the venture
term of the Company and their lease terms.
Construction in progress represents buildings, plant under
construction and deposits and prepayments made on machinery
pending installation. Cost comprises direct costs of
construction and finance expenses arising from borrowings used
to finance the construction of buildings and plant and machinery
until construction, installation and testing are complete. The
amount of finance expenses capitalised is the interest cost
which could theoretically have been avoided if the expenditure
on the qualifying asset had not been made.
No depreciation is provided on construction in progress until
the relevant assets have been put into commercial use.
(e) Advertising expenses
Advertising expenses are charged to the statement of income as
incurred.
(f) Income taxes
Income taxes are determined under the liability method as
required by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes".
(g) Foreign currency translation
The financial records and the statutory financial statements of
the Company are maintained in Renminbi. In preparing the
financial statements, all foreign currency transactions are
translated into Renminbi using the applicable rates of exchange,
quoted by the Zhaoqing foreign exchange adjustment center (the
"swap center") for the respective periods. Monetary assets and
liabilities denominated in foreign currencies have been
translated into Renminbi using the rate of exchange quoted by
the swap center prevailing at the balance sheet date. The
resulting exchange gains or losses have been credited or charged
to the statement of income for the period in which they occur.
Translation of amounts from Renminbi ("RMB") into United States
dollars ("US$") for the convenience of the reader has been made
at the swap center rate as quoted by the People's Bank of China
on December 31, 1995 of US$1.00 =
ZB-8
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
NOTES TO FINANCIAL STATEMENTS
RMB8.32. No representation is made that the Renminbi amounts
could have been, or could be, converted into United States
dollars at that rate or at any other rate.
(h) 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 amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
NOTE 4 - ACCOUNTS RECEIVABLE
Accounts receivable comprises:
<TABLE>
<CAPTION>
1995 1994
RMB RMB
<S> <C> <C>
Accounts receivables - trade
1,843,563 99,037,866
Less: Provision for doubtful accounts (786,740)
--------- ----------
1,056,823 99,037,866
========= ==========
</TABLE>
Movement of provision for doubtful
accounts:
1995 1994
RMB RMB
<TABLE>
<CAPTION>
<S> <C> <C>
Doubtful accounts provided
during the year and as at
December 31,
786,740 -
========= ==========
</TABLE>
NOTE 5 - INCOME TAXES
The Company is governed by the Income Tax Laws of the PRC concerning
Foreign Investment Enterprises and Foreign Enterprises and various rules and
regulations (the "Income Tax Laws"). Pursuant to the Income Tax Laws, foreign
investment enterprises engaging in
ZB-9
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
NOTES TO FINANCIAL STATEMENTS
production business located in Zhaoqing are subject to income tax at the rate of
27% (1994: 33%) on income as reported in its statutory financial statements.
Pursuant to the Income Tax Laws, if the investor of a foreign
investment enterprise reinvests its share of distributed profits from the
enterprise, the investor is entitled to receive a tax refund of the income tax
paid on the reinvested amount.
With a tax concession obtained from the tax authority, the Company is
exempt from income taxes for two financial years commencing with its first
profitable year of operations, and thereafter with a 50% exemption for the next
three financial years. Based on its local statutory financial statements, the
Company has attained its first profitable year of operations for the financial
year ended December 31, 1993. As the Company only earned profits for two months
in 1993, the Company has applied for an extension of the tax holiday period to
1995 which was approved by the PRC tax authority. Accordingly, no current income
taxes were provided by the Company for the two months ended December 31, 1993,
the ten months ended October 31, 1994, the two months ended December 31, 1994
and the year ended December 31, 1995.
The provision for deferred income taxes is based on the liability
method prescribed by Statement of Financial Accounting Standards No. 109. The
Company's temporary differences mainly represented the accelerated depreciation
allowances provided on property, plant and equipment.
The reconciliation of the effective income tax rates of the Company to
the relevant statutory income tax rate in the PRC is as follows:
<TABLE>
<CAPTION>
Two months Ten months Two months
Year ended ended ended ended
December 31, December 31, October 31, December 31,
1995 1994 1994 1993
<S> <C> <C> <C> <C>
Statutory tax rate 27% 33% 33% 33%
Tax holiday (27%) (33%) (33%) (33%)
Accelerated depreciation
allowances 3% 4% 3% -
Change in tax rate (1%) - - -
--- --- --- ---
Effective tax rate 2% 4% 3% -
=== === === ===
</TABLE>
ZB-10
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
NOTES TO FINANCIAL STATEMENTS
The aggregate income tax benefit from the tax exemption status for the
year ended December 31, 1995, the two months ended December 31, 1994, the ten
months ended October 31, 1994 and the two months ended December 31, 1993
amounted to approximately RMB26,100,000, RMB6,683,000, RMB28,644,000 and
RMB4,565,000, respectively.
NOTE 6 - INVENTORIES
<TABLE>
<CAPTION>
1995 1994
RMB RMB
<S> <C> <C>
Raw materials 20,296,779 26,132,257
Work in progress 11,334,431 17,317,429
Finished goods 1,394,669 9,620,053
---------- ----------
33,025,879 53,069,739
========== ==========
</TABLE>
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
1995 1994
RMB RMB
<S> <C> <C>
At cost:
Land use rights and buildings 157,686,309 156,005,113
Plant, machinery and equipment 349,397,573 323,869,506
Motor vehicles 3,727,084 2,989,579
Construction in progress 4,563,796 2,332,729
----------- -----------
515,374,762 485,196,927
----------- -----------
Accumulated depreciation and amortization:
Land use rights and buildings 9,507,492 1,707,236
Plant, machinery and equipment 43,160,798 21,181,403
Motor vehicles 684,617 348,784
----------- -----------
53,352,907 23,237,423
----------- -----------
Net book value 462,021,855 461,959,504
=========== ===========
</TABLE>
ZB-11
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - BANK LOANS
The bank loans as at December 31, 1995 were secured by certain
property, plant and equipment of the Company (see note 19), bore fixed interest
rate at 13.3% and 13.2% per annum (1994: 11.0%) for the bank loan of
RMB12,000,000 and RMB1,500,000 (1994: RMB17,200,000), respectively and are
wholly repayable in 1996. The weighted average interest rate as of December 31,
1995 is 13.3% (1994: 11.0%) per annum.
NOTE 9 - CONTRIBUTED CAPITAL
The Company was registered with a capital of US$50,000,000. At the
balance sheet date, a total of RMB475,940,000 (US$55,998,824) was contributed by
the joint venture parties.
NOTE 10 - SALES TAXES
Before the tax reform effective January 1, 1994, the Company was
liable to pay sales taxes on the value of brewery products sold, net of certain
packaging costs, pursuant to the sales tax rules and regulations in the PRC. The
effective sales tax rate during the period ended December 31, 1993 was 25%. The
Company had applied for a tax reduction during the period but the result of such
application is still not known. Accordingly, the 25% rate is adopted.
Effective from January 1, 1994, the Company is subject to three kinds
of sales taxes, being the value added tax ("VAT"), the consumption tax and other
sales taxes. The applicable VAT rate is 17% for brewery products sold in the PRC
and nil for exported goods. The amount of VAT liability is determined by
applying the applicable tax rate to the invoiced amount of goods sold less VAT
paid on purchases made with the relevant invoices in support. VAT is collected
from customers by the Company on behalf of the PRC tax authorities and is
therefore not expensed to the statement of income. The applicable consumption
tax rate in respect of brewery products is RMB220 (1994: RMB220) per ton. The
consumption tax expensed to the statement of income is determined based on the
volume of sales within the PRC and exported goods are exempt. The other sales
taxes are assessed as a percentage of consumption tax and VAT.
ZB-12
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - FOREIGN CURRENCY EXCHANGE
The Renminbi is not freely convertible into foreign currencies. Prior
to January 1, 1994, all foreign exchange transactions involving Renminbi in the
PRC took place either through the Bank of China or other institutions authorized
to buy and sell foreign exchange, or at an approved swap center in the PRC. The
swap centers are institutions which belong to the State Administration of
Exchange Control and its branches. The exchange rates used for transactions
through the Bank of China and other authorized institutions were set by the PRC
government, through the State Administration of Exchange Control, from time to
time. The exchange rates available at a swap center are determined largely by
supply and demand based on foreign currency and Renminbi requirements of
enterprises operating or doing business in the PRC.
On January 1, 1994, the PRC government abolished the dual exchange
rate system, comprising the official rates and the swap center rates, and
introduced a single rate of exchange as quoted by the People's Bank of China.
The unified exchange rate is quoted at levels similar to those quoted by the
swap centers. However, the unification of exchange rates does not imply full
convertibility of Renminbi into United States dollars or other foreign
currencies. All foreign exchange transactions continue to take place either
through the Bank of China or other institutions authorized to buy and sell
foreign currencies or the swap centers at the exchange rates quoted by the
People's Bank of China. In April 1994, the National Foreign Exchange Trading
Center in Shanghai (the "exchange center") commenced operations. Enterprises
operating in the PRC can enter into exchange transactions at the exchange center
through the Bank of China or other authorized institutions. Payments for
imported materials and remittances of earnings outside the PRC are subject to
the availability of foreign currency which is dependent on the foreign currency
denominated earnings of the Company or must be arranged through exchange center.
Approval for exchange at the exchange center is granted to enterprises in the
PRC for valid reasons such as purchases of imported materials and remittances of
earnings. While conversion of Renminbi into United States dollars or other
foreign currencies can generally be effected at an exchange center, there is no
guarantee that it can be effected at all times.
NOTE 12 - GENERAL RESERVE AND ENTERPRISE DEVELOPMENT FUNDS
As stipulated by the relevant laws and regulations for foreign
investment enterprises, the Company is required to make appropriations to a
general reserve fund, an enterprise development fund and an employee welfare and
incentive fund, in which the percentage of annual appropriations are subject to
the joint venture agreement. The employee welfare and incentive fund are charged
to the statement of income. The other appropriations are accounted for as
reserve funds in the balance sheet and are not available for distribution as
ZB-13
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
NOTES TO FINANCIAL STATEMENTS
dividends to the joint venture partners of the Company. Under the joint venture
agreement, the board of directors shall determine the appropriations having
regard to the economic situation of the Company. The percentage of annual
appropriations to a general reserve fund, an enterprise development fund and an
employee welfare and incentive fund for 1995 has already been determined by the
board of directors and the appropriation has been reported in its statutory
financial statements.
NOTE 13 - RETAINED EARNINGS
As described in note 2 to the financial statements, the profits as
reported in the US GAAP financial statements differ from those as reported in
its statutory financial statements. In accordance with the relevant laws and
regulations for sino-foreign joint venture enterprises, the profits available
for distribution are declared based on the statutory financial statements. If
the Company has foreign currency available after meeting its operational needs,
the Company may make its profit distributions in foreign currency to the extent
it is available. Otherwise, it will be necessary to convert such distributions
at an exchange center. At December 31, 1994 and 1995, the retained earnings
available for distribution approximately amounted to RMB71,709,000 and
RMB99,593,000, respectively.
NOTE 14 - ADVERTISING EXPENSES
The Company incurred advertising expenses of RMB25,517,797,
RMB3,168,384, RMB13,986,841 and RMB402,806 for the year ended December 31, 1995,
two months ended December 31, 1994, the ten months ended October 31, 1994 and
the two months ended December 31, 1993, respectively.
NOTE 15 - RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
(a) Due from related companies
The amounts due from related companies mainly represented receivable
balances from Blue Ribbon Group, Zhaoqing Brewery, Goldjinsheng
Holding Limited and Blue Ribbon Marketing amounting to approximately
RMB12.9 million (1994: RMB81.8 million), RMB0.5 million (1994: Nil),
RMB0.3 million (1994: RMB9.6 million) and RMB154.9 million (1994:
Nil), respectively.
The balance with Blue Ribbon Group principally represented expenses
paid on its behalf by the Company.
ZB-14
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
NOTES TO FINANCIAL STATEMENTS
The balances with Zhaoqing Brewery and Goldjinsheng principally
represented payment of expenses on behalf of them.
The balance with Blue Ribbon Marketing was operating in nature and
principally represented accounts receivable from sales of finished
goods. Subsequent to the balance sheet date, a total amount of
approximately RMB112.8 million has been repaid by Blue Ribbon
Marketing.
The amounts due from related companies are unsecured, interest-free
and repayable on demand.
(b) Due to related companies
As of December 31, 1995 and 1994, the amounts due to related companies
principally represented balances arising from the purchases of raw
materials from American National Can (Zhaoqing) Co., Ltd. and Zhaoqing
Blue Ribbon Carton Manufacturing Co. in which Blue Ribbon Group have
equity interests.
The balances were unsecured, interest-free and repayable on demand.
ZB-15
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
NOTES TO FINANCIAL STATEMENTS
(c) Related party transactions
The Company had transactions with companies in which Blue Ribbon Group
or Zhaoqing Brewery have equity interests. These significant
transactions are summarized below:
<TABLE>
<CAPTION>
Two months Ten months Two months
Year ended ended ended ended
December 31, December 31, October 31, December 31,
1995 1994 1994 1993
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
Sales of beer
products to Blue
Ribbon Marketing 327,805,406 - - -
Purchases of raw
materials and
finished goods
from Pabst Blue
Ribbon - - - 60,061,379
Purchases of raw
materials from
American National
Can (Zhaoqing)
Co., Ltd. 78,818,909 19,225,776 59,339,382 -
Purchases of raw
materials from
Zhaoqing Blue
Ribbon Carton
Manufacturing Co. 12,536,576 4,297,958 11,819,385 -
Royalty fee paid to
Blue Ribbon Group 15,434,144 3,327,093 9,755,178 1,169,300
Management fee paid to
Blue Ribbon Group 2,035,000 - - -
============ ============ =========== ============
</TABLE>
ZB-16
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 16 - RETIREMENT PLAN
As stipulated by the PRC government regulations, the Company has
defined contribution retirement plans for all its permanent staff. The Company
and staff are required to contribute to the PRC insurance companies organized by
the PRC government which are responsible for the payment of pension benefits to
retired staff. Prior to June 30, 1994, the monthly contribution of the Company
was calculated at 9.3% of the basic salary of the permanent staff and the
monthly contribution of each permanent staff was RMB2. Effective July 1, 1994,
the monthly contributions of the Company and the permanent staff were calculated
at 14.6% and 2% of the basic salary of the permanent staff, respectively. The
pension costs expensed by the Company for the year ended December 31, 1995, the
two months ended December 31, 1994, the ten months ended October 31, 1994 and
the two months ended December 31, 1993, amounted to RMB472,371, RMB45,400,
RMB226,987 and RMB45,400, respectively.
NOTE 17 - FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for current assets
and current liabilities qualifying as financial instruments approximate their
fair values because of the short maturity of such instruments.
NOTE 18 - CONCENTRATION OF RISKS
The Company's operating assets and primary source of income and cash
flow are dominated in the PRC. The PRC economy has, for many years, been a
centrally-planned economy, operating on the basis of annual, five-year and ten-
year state plans adopted by central PRC governmental authorities which set out
national production and development targets. The PRC government has been
pursuing economic reforms since it first adopted its "open-door" policy in 1978.
There is no assurance that the PRC government will continue to pursue economic
reforms or that there will not be any significant change in its economic or
other policies, particularly in the event of any change in the political
leadership of, or the political, economic or social conditions in, the PRC.
There is also no assurance that the Company will not be adversely affected by
any such change in government policies or any unfavorable change in the
political, economic or social conditions, the laws or regulations or the rate or
method of taxation in the PRC.
As many of the economic reforms which have been or are being
implemented by the PRC government are unprecedented or experimental, they may be
subject to adjustment or refinement which may have adverse effects on the
Company. Further, through state plans and
ZB-17
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
NOTES TO FINANCIAL STATEMENTS
other economic and fiscal measures, it remains possible for the PRC government
to exert significant influence on the PRC economy.
All the Company's revenue are derived from the sale of Pabst Blue
Ribbon beer.
The Company sells 45% of its products to Blue Ribbon Marketing and
recognizes its heavy dependence on the sales to the related company.
The Company currently uses foreign currency to pay for imported raw
materials and dividend. For the relevant risk in foreign currency, please refer
to note 11 for details.
The financial instruments that are exposed to concentration of credit
risk consist primarily of cash and accounts receivable from customers and
related companies. Cash is maintained with the major banks in the PRC. The
Company's business activity is with customers and related companies in the PRC.
The Company periodically performs credit analysis and monitors the financial
condition of its customers and related companies in order to minimize credit
risk. As of December 31, 1995, allowance for doubtful debts of RMB786,740 (1994:
Nil) was provided.
NOTE 19 - PLEDGE OF ASSETS
Land use rights and buildings and certain plant, machinery and
equipment of the Company with a net book value amounting to RMB148,178,817 as at
December 31, 1995 were collateralized to secure borrowings of RMB13,500,000.
NOTE 20 - COMMITMENTS
Blue Ribbon Group entered into licensing arrangements with Pabst Blue
Ribbon whereby Blue Ribbon Group was granted the exclusive right to produce and
market products under four specific Pabst trademarks in the PRC, the non-
exclusive right to market such products in other Asian countries except Hong
Kong, Macau, Japan and South Korea, and the right to sublicense the use of the
trademarks to any other enterprise in the PRC. Pursuant to the terms of the
sublicense agreement, the Company was granted by Blue Ribbon Group the right in
the PRC to use the two specific Pabst trademarks for the production, promotion,
distribution and sale of beer under such trademarks. The sublicense agreement is
valid until November 7, 2003. In consideration for the sublicense granted, the
Company is committed to pay Blue Ribbon Group a royalty fee of US$0.10 for each
carton of bottled or canned beer produced.
ZB-18
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
NOTES TO FINANCIAL STATEMENTS
An agreement was made among Goldjinsheng, Blue Ribbon Group and Blue
Ribbon Noble on May 10, 1995 to the effect that Blue Ribbon Noble agreed to pay
Blue Ribbon Group management fees of RMB2,035,000 per annum for a period of five
years commencing January 1, 1995.
A provisional agreement, subject to governmental approval, was made
among CBR Brewing Company, Inc. and its subsidiaries, the group companies of
Noble China Inc. and Blue Ribbon Group on May 10, 1995 to the effect that a
marketing company ("Marketing Company"), a company owned as to 8% by Blue Ribbon
Group, 52% by Zhao Qing Blue Ribbon High Worth Brewery Ltd. and 40% by
Goldjinsheng Holding Limited, will be formed to handle and organize the sales of
Pabst Blue Ribbon beer produced by Zhaoqing Brewery and the Company. Each of
Zhaoqing Brewery and the Company will create a separate distribution company or
division of their own. The distribution company of Zhaoqing Brewery will have
the sole right to acquire 100% of the production of Zhaoqing Brewery and 40% of
the production of the Company; whilst the distribution company of the Company
will have the sole right to acquire 60% of the production of the Company. The
respective distribution companies will appoint the Marketing Company as their
sole and exclusive agent to market Pabst Blue Ribbon beer in the PRC.
NOTE 21 - COMPARATIVE AMOUNTS
Certain comparative amounts have been reclassified to conform with the
current year's presentation.
ZB-19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 6,904,844
<SECURITIES> 0
<RECEIVABLES> 19,071,832
<ALLOWANCES> 0
<INVENTORY> 6,831,587
<CURRENT-ASSETS> 39,278,809
<PP&E> 23,714,936
<DEPRECIATION> 0
<TOTAL-ASSETS> 89,771,500
<CURRENT-LIABILITIES> 51,004,236
<BONDS> 0
0
0
<COMMON> 820
<OTHER-SE> 15,309,697
<TOTAL-LIABILITY-AND-EQUITY> 89,771,500
<SALES> 68,123,430
<TOTAL-REVENUES> 68,123,430
<CGS> 59,573,727
<TOTAL-COSTS> 59,573,727
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 388,949
<INCOME-PRETAX> 460,963
<INCOME-TAX> 120,192
<INCOME-CONTINUING> 2,358,890
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,358,890
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
</TABLE>
