<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1996
-------------
[_] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _______________ to _______________
Commission File Number 33-26617A
---------
CBR BREWING COMPANY, INC.
-------------------------------------
(Exact name of registrant as specified in its charter)
Florida 65-0145422
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number)
433 North Camden, Suite 1200
Beverly Hills, California 90210
- ------------------------------- -------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 274-5172
--------------
Not applicable
--------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act 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
----- -----
Common shares outstanding at June 30, 1996 Class A 5,000,013
Class B 3,000,000
Total sequentially numbered pages in this document: 26
1
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
------------------------------------------
INDEX
-----
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets (unaudited)-
June 30, 1996 and December 31, 1995
Condensed Consolidated Statements of Income (unaudited)-
Three months and six months ended June 30, 1996 and 1995
Condensed Consolidated Statements of Cash Flows
(unaudited) -
Six months ended June 30, 1996 and 1995
Notes to Condensed Consolidated Financial Statements
(unaudited) -
Three months and six months ended June 30, 1996 and 1995
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
SIGNATURES
2
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
--------------------------- ----------------------------
RMB USD RMB USD
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash 71,666,560 8,610,664 57,448,305 6,902,356
Accounts receivable 166,053,990 19,951,218 158,677,644 19,064,958
Inventories (Note 3) 97,980,140 11,772,215 56,838,801 6,829,124
Prepayments, deposits and other
receivables 9,101,819 1,093,574 7,423,161 891,885
Due from related companies 7,191,895 864,099 46,411,779 5,576,328
----------- ---------- ----------- ----------
Total current assets 351,994,404 42,291,770 326,799,690 39,264,651
Deferred tax assets - - 48,444 5,820
Property, plant and equipment,
net 245,492,536 29,495,679 197,308,264 23,706,388
Interest in an associated
company (Note 5) 191,436,128 23,000,857 222,742,476 26,762,282
----------- ---------- ----------- ----------
Total assets 788,923,068 94,788,306 746,898,874 89,739,141
=========== ========== =========== ==========
</TABLE>
(continued)
3
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
-------------------------- ---------------------------
RMB USD RMB USD
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Bank loans 36,074,400 4,334,303 32,574,400 3,913,781
Obligation under capital lease 4,630,048 556,296 5,634,848 677,021
Deposits received from customers 74,272,742 8,923,794 123,817,626 14,876,562
Accounts payable
and accrued liabilities 130,394,453 15,666,761 56,279,181 6,761,887
Due to related companies 31,269,657 3,757,018 18,629,685 2,238,338
Due to an associated company 129,059,602 15,506,380 154,185,606 18,525,244
Sales taxes payable 47,470,939 5,703,585 33,233,897 3,993,019
----------- ---------- ----------- ----------
Total current liabilities 453,171,841 54,448,137 424,355,243 50,985,852
Long term liabilities:
Deferred tax liabilities 451,555 54,254 - -
Shareholder's loan (Note 4) 73,794,948 8,866,388 73,794,948 8,866,388
Obligation under capital lease 24,897,291 2,991,384 24,897,291 2,991,384
----------- ---------- ----------- ----------
Total long term liabilities 99,143,794 11,912,026 98,692,239 11,857,772
Minority interests 100,558,369 12,081,986 96,474,719 11,591,339
Shareholders' equity:
Capital stock - common stock
Class A par value US$0.0001 each,
90,000,000 shares authorized,
5,000,013 shares outstanding 4,265 512 4,265 512
Class B par value US$0.0001 each,
10,000,000 shares authorized,
3,000,000 shares outstanding 2,559 308 2,559 308
Additional paid-in capital 104,030,194 12,499,122 104,030,194 12,499,122
Statutory surplus and collective
welfare funds 2,159,610 259,475 2,159,613 259,475
Retained earnings 29,852,436 3,586,740 21,180,042 2,544,761
----------- ---------- ----------- ----------
Total shareholders' equity 136,049,064 16,346,157 127,376,673 15,304,178
----------- ---------- ----------- ----------
Total liabilities
and shareholders' equity 788,923,068 94,788,306 746,898,874 89,739,141
=========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Three Months Ended Six Months Ended Ended Six Months Ended
June 30, 1996 June 30, 1996 June 30, 1995 June 30, 1995
---------------------------- --------------------------- ------------- -------------
RMB USD RMB USD RMB RMB
------------- ------------ ------------- ----------- ------------- -------------
(As Adjusted (As Adjusted
- Note 2) - Note 2)
<S> <C> <C> <C> <C> <C> <C>
Sales 359,976,876 43,250,856 643,570,569 77,324,350 99,583,814 134,949,038
Sales taxes (6,318,003) (759,102) (12,379,930) (1,487,436) (4,703,000) (7,573,702)
------------ ----------- ------------ ----------- ----------- ------------
Sales, net of sales taxes 353,658,873 42,491,754 631,190,639 75,836,914 94,880,814 127,375,336
Costs of sales, including
inventory purchased from
related companies of RMB
214,570,411; RMB
422,930,227; RMB
21,920,274 and RMB
26,817,648, respectively;
and royalty fee paid
to related company of RMB
2,356,675; RMB 4,133,561;
RMB 1,241,406 and RMB
1,525,521, respectively (297,959,607) (35,799,544) (531,984,151) (63,917,355) (81,164,526) (106,438,508)
------------ ----------- ------------ ----------- ----------- ------------
Gross profit 55,699,266 6,692,210 99,206,488 11,919,559 13,716,288 20,936,828
Selling and administrative
expenses, including advertising
expenses paid or payable to
related company of RMB
20,500,000; RMB 33,406,488;
RMB 4,380,000 and RMB
4,380,000, respectively (45,222,589) (5,433,448) (81,776,073) (9,825,312) (12,242,904) (19,481,983)
------------ ----------- ------------ ----------- ----------- ------------
Operating Income 10,476,677 1,258,762 17,430,415 2,094,247 1,473,384 1,454,845
Foreign exchange gains 170,340 20,466 159,751 19,194 1,374,714 1,552,106
Other income (expense):
Sales tax refund - - - - - 1,375,000
Sales of scrap - - - - 499,055 736,494
Interest expense, including
interest expense paid or
payable to related
companies of RMB
2,889,424; RMB
6,599,712; nil and nil,
respectively (7,005,251) (841,674) (12,825,652) (1,540,989) (2,531,964) (4,361,735)
------------ ----------- ------------ ----------- ----------- ------------
Income before income taxes 3,641,766 437,554 4,764,514 572,452 815,189 756,710
Income taxes (250,000) (30,037) (500,000) (60,075) - -
------------ ----------- ------------ ----------- ----------- ------------
Income before equity in earnings
of an associated company 3,391,766 407,517 4,264,514 512,377 815,189 756,710
Equity in earnings of an
associated company 4,480,286 538,302 8,491,530 1,020,248 6,550,090 19,776,478
------------ ----------- ------------ ----------- ----------- ------------
Net income before minority
interests 7,872,052 945,819 12,756,044 1,532,625 7,365,279 20,533,188
Minority interests (2,871,495) (345,007) (4,083,650) (490,646) (3,483,014) (10,323,826)
------------ ----------- ------------ ----------- ----------- ------------
Net income for the period 5,000,557 900,812 8,672,394 1,041,979 3,882,265 10,209,362
============ =========== ============ =========== =========== ============
Net income per common share 0.63 0.08 1.08 0.13 0.49 1.28
============ =========== ============ =========== =========== ============
Weighted average shares of
common stock 8,000,013 8,000,013 8,000,013 8,000,013 8,000,013 8,000,013
============ =========== ============ =========== =========== ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995
------------------------------- -------------
RMB USD RMB
----------- ----------- --------------
(As adjusted
- Note 2)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income 8,672,394 1,041,979 10,209,362
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Minority interests 4,083,650 490,646 10,323,826
Equity in earnings of an associated company (8,491,530) (1,020,249) (19,776,478)
Depreciation and amortization 13,221,251 1,588,521 6,291,307
Allowance for doubtful accounts 1,330,000 159,798 -
Income taxes 500,000 60,074 -
Foreign exchange gains (159,751) (19,194) (1,552,106)
----------- ---------- -----------
19,156,014 2,301,575 5,495,911
Changes in working capital:
(Increase) Decrease in -
Accounts receivable (8,136,346) (977,574) (61,066,484)
Inventories (41,141,339) (4,943,090) (14,904,323)
Prepayments, deposits and other receivables (1,678,658) (201,689) (5,592,206)
Increase (Decrease) in -
Accounts payable and accrued liabilities 74,115,272 8,904,875 41,031,001
Deposits received from customers (49,544,884) (5,952,767) 27,796,211
Due to an associated company (25,126,004) (3,018,863) -
Sales taxes payable 14,237,042 1,710,566 9,812,305
----------- ---------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (18,118,903) (2,176,967) 2,572,415
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (61,815,776) (7,427,103) (14,599,896)
Due from related companies 39,219,884 4,712,230 (31,960)
Dividend from an associated company 39,797,878 4,781,674 28,657,828
----------- ---------- -----------
NET CASH PROVIDED BY INVESTING
ACTIVITIES 17,201,986 2,066,801 14,025,972
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of other loans - - (8,000,000)
New other loans - - 3,000,000
Increase in shareholder's loan - - 1,298,395
New bank loans 3,500,000 420,521 8,000,000
Due to related companies 12,639,972 1,518,680 (5,430,655)
Repayment of obligation under capital lease (1,004,800 (120,726) (1,751,325)
----------- ---------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 15,135,172 1,818,475 (2,883,585)
----------- ---------- -----------
Net increase in cash 14,218,255 1,708,309 13,714,802
Cash at beginning of period 57,448,305 6,902,355 7,397,927
----------- ---------- -----------
Cash at end of period 71,666,560 8,610,664 21,112,729
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Organization - CBR Brewing Company, Inc. (the "Company," which term shall
- ------------
include, when the context so requires, its subsidiaries and affiliates),
formerly known as 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 adopted its current name on March 15,
1995.
Reverse Acquisition - 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 capital stock of High Worth Holdings, Ltd., a British Virgin Islands
corporation ("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 shares of Class B Common Stock 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 Class A Common Stock to various
parties for consulting services in connection with the acquisition. The shares
of Class A and Class B Common Stock issued in conjunction with the acquisition
represent approximately 98.1% of the issued and outstanding shares of the
Company, after all shares were issued and a 1-for-22 reverse stock split which
was effected on November 22, 1994.
The Company's subsidiaries and affiliates manage and contractually have the
right to control all of the production and sale of Pabst Blue Ribbon beer in the
People's Republic of China ("China" or the "PRC"). Holdings is a holding company
that was formed solely to effect the acquisition of Zhaoqing Blue Ribbon High
Worth Brewery, Ltd., a Sino-foreign joint venture ("High Worth JV"), which was
registered in the PRC on July 2, 1994, in which Guangdong Blue Ribbon Group Co.
Ltd. ("Guangdong Blue Ribbon") owns a 40% interest and Holdings owns a 60%
interest.
High Worth JV owns a 100% interest in Zhaoqing Brewery, a PRC company, which is
engaged in the brewery business in China. Zhaoqing Brewery also owns a 40%
interest in Zhaoqing Blue Ribbon Brewery Noble, Ltd., a Sino-foreign joint
venture ("Noble Brewery"), which is also engaged in the brewery business in
China. Noble Brewery is a Sino-foreign equity joint venture enterprise
registered in the PRC on October 8, 1993, in which Goldjinsheng Holding Ltd., an
unrelated party, and Zhaoqing Brewery hold 60% and 40% interests, respectively.
Accordingly,
7
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION (continued)
the Company owns effective interests of 60% in Zhaoqing Brewery and 24% in Noble
Brewery. The brewery operations are located in Zhaoqing City, which is situated
approximately 100 miles from Hong Kong in the Guangdong Province of China.
Substantially all of the beer currently sold by the Company is now marketed
under the Pabst Blue Ribbon label. During 1995, Zhaoqing Blue Ribbon Marketing
Company, a PRC company (the "Marketing Company"), was established to conduct the
distribution, marketing and promotion of Pabst Blue Ribbon beer in China.
Zhaoqing Brewery owns a 70% interest and Guangdong Blue Ribbon owns a 30%
interest in the Marketing Company. Zhaoqing Brewery and Noble Brewery commenced
the distribution of their production of Pabst Blue Ribbon beer through the
Marketing Company during April 1995 and July 1995, respectively.
Apart from the investment in High Worth JV which was partly financed by a loan
from Oriental Win, Holdings has no other significant assets or liabilities. On
October 31, 1994, prior to the reverse acquisition effective December 16, 1994,
High Worth JV acquired a 100% interest in Zhaoqing Brewery, including Zhaoqing
Brewery's 40% interest in Noble Brewery, for approximately USD20,000,000. Prior
to the acquisition of the Zhaoqing Brewery by High Worth JV, Zhaoqing Brewery
was a wholly-owned subsidiary of Guangdong Blue Ribbon.
For accounting purposes, the acquisition of Holdings by the Company has been
treated as a recapitalization of Holdings with Holdings as the acquiror (reverse
acquisition). Accordingly, the historical financial statements prior to December
16, 1994 are those of Holdings.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America ("US
GAAP"). The acquisition on October 31, 1994 of Zhaoqing Brewery, including
Zhaoqing Brewery's 40% interest in Noble Brewery, has been accounted for under
the purchase method of accounting. Since High Worth JV had no operations prior
to this acquisition, consolidated financial statements have been prepared
commencing October 31, 1994, to reflect the post-acquisition consolidated
results of the operations of Zhaoqing Brewery and Noble Brewery attributable to
the Company. The consolidated financial statements include the results of
operations of Zhaoqing Brewery on a consolidated basis and Noble Brewery under
the equity method of accounting for investments. All material intercompany
accounts and transactions are eliminated on consolidation. The consolidated
financial statements have been prepared on a going concern basis notwithstanding
that the Company has a net current liability position at December 31, 1995 and
June 30, 1996,
8
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION (continued)
as Oriental Win, the Company's principal shareholder, and Guangdong Blue Ribbon,
a related party, have undertaken to provide continuing financial support.
Foreign Currency Translation - In preparing the consolidated financial
statements, the financial statements of the Company are measured using Renminbi
("RMB") as the functional currency. All foreign currency transactions are
translated into RMB using the applicable rates of exchange, as quoted by the
People's Bank of China (the "unified exchange rate"). Monetary assets and
liabilities denominated in foreign currencies have been translated into RMB
using the unified exchange rate prevailing at the balance sheet dates. The
resulting exchange gains or losses have been credited or charged to the
statements of income for the periods in which they occur.
The Company's share capital is denominated in United States dollars ("USD") and
the reporting currency is the RMB. For financial reporting purposes, the USD
share capital amounts have been translated into RMB at the applicable rates
prevailing on the transaction dates.
For financial reporting purposes, translation of amounts from RMB into United
States dollars ("USD") for the convenience of the reader has been made at the
rate of exchange as quoted by the People's Bank of China on June 30, 1996, of
USD1.00 = RMB8.32. No representation is made that the RMB amounts could have
been, or could be, converted into USD at that rate or at any other rate.
NOTE 2 -- COMMENTS
The accompanying condensed consolidated financial statements are unaudited but,
in the opinion of the management of the Company, contain all adjustments
necessary to present fairly the financial position at June 30, 1996, the results
of operations for the three months and six months ended June 30, 1996 and 1995,
and the changes in cash flows for the six months ended June 30, 1996 and 1995.
These adjustments are of a normal recurring nature. The consolidated balance
sheet as of December 31, 1995 is derived from the Company's audited financial
statements. Certain information and footnote disclosures normally included in
financial statements that have been prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission, although
management of the Company believes that the disclosures contained in these
financial statements are adequate to make the information presented therein not
misleading. For further information, refer to the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1995, as filed with the Securities and
Exchange Commission.
9
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
NOTE 2 -- COMMENTS (continued)
The results of operations for the three months and six months ended June 30,
1996 are not necessary indicative of the results of operations to be expected
for the full fiscal year ending December 31, 1996.
The calculation of net income per share is based on the weighted average number
of shares of Class A and Class B Common Stock issued and outstanding during each
respective period.
In conjunction with the audit of the Company's consolidated financial statements
as of and for the year ended December 31, 1995, the Company identified certain
year-end adjustments properly allocable to prior 1995 interim periods, including
additional charges by Zhaoqing Brewery for the staff welfare fund and by the
Marketing Company for the provision for doubtful accounts and accrued liability
for sales commissions. With respect to 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. Accordingly, the Company has
restated the accompanying statements of income and cash flows for the three
months and six months ended June 30, 1995 to reflect these adjustments.
<TABLE>
<CAPTION>
As Previously Reported As Adjusted
---------------------- -----------
Three Months Ended June 30, 1995: RMB RMB
- -------------------------------- --- ---
<S> <C> <C>
Sales, net of 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 0.80 0.49
<CAPTION>
As Previously Reported As Adjusted
---------------------- -----------
Six Months Ended June 30, 1995: RMB RMB
- ------------------------------ --- ---
<S> <C> <C>
Sales, net of sales taxes 127,805,326 127,375,336
Gross profit 21,117,923 20,936,828
Operating income 3,993,816 1,454,845
Net income 15,042,106 10,209,362
Net income per common share 1.88 1.28
</TABLE>
10
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
NOTE 3 -- INVENTORIES
Inventories consisted of the following at June 30, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------------------ ----------------------
RMB USD RMB USD
--- --- --- ---
<S> <C> <C> <C> <C>
Raw materials 17,688,490 2,125,254 14,154,395 1,700,636
Work in progress 8,019,558 963,542 3,713,686 446,197
Finished goods 72,272,092 8,683,419 38,970,720 4,682,291
---------- ---------- ---------- ---------
97,980,140 11,772,215 56,838,801 6,829,124
========== ========== ========== =========
</TABLE>
NOTE 4 -- SHAREHOLDER'S LOAN
The shareholder's loan of RMB 73,794,948 (USD8,866,388) at June 30, 1996 and
December 31, 1995 was provided by Oriental Win in connection with the
acquisition of High Worth JV by Holdings. 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.
NOTE 5 -- INTEREST IN AN ASSOCIATED COMPANY
The unlisted investment consists of the Company's 40% equity interest in Noble
Brewery held by a 60% owned subsidiary as follows:
11
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
NOTE 5 -- INTEREST IN AN ASSOCIATED COMPANY (continued)
<TABLE>
<CAPTION>
RMB
-----------
<S> <C>
Unlisted investment, at cost, October 31, 1994 209,361,595
The Company's share of earnings and
dividends of an associated company:
Earnings -
Two months ended December 31, 1994 7,812,392
For the year ended December 31, 1995 34,213,058
Three months ended March 31, 1996 4,011,244
Three months ended June 30, 1996 4,480,286
Dividends -
Declared and paid during 1995 (28,644,569)
Declared and paid during 1996 (39,797,878)
-----------
Unlisted investment, June 30, 1996 191,436,128
===========
</TABLE>
The condensed statements of operations of Noble Brewery for the three months and
six months ended June 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Three Months
Three Months Ended Six Months Ended Ended Six Months Ended
June 30, 1996 June 30, 1996 June 30, 1995 June 30, 1995
------------------------ ------------------------ -------------- -----------------
RMB USD RMB USD RMB RMB
----------- ---------- ----------- ---------- -------------- -----------------
(As Adjusted (As Adjusted
- Note 2) - Note 2)
<S> <C> <C> <C> <C> <C> <C>
Sales, net of sales taxes 180,540,618 21,691,722 342,594,136 41,162,338 131,295,743 362,873,489
=========== ========== =========== ========== =========== ===========
Net income 18,405,386 2,211,388 35,168,171 4,225,420 16,375,226 49,441,195
=========== ========== =========== ========== =========== ===========
The Company's share of net
income after deduction of
unrealised intercompany profit 4,480,286 538,302 8,491,530 1,020,248 6,550,090 19,776,478
=========== ========== =========== ========== =========== ===========
</TABLE>
12
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
NOTE 6 -- MARKETING COMPANY
The Marketing Company was established during 1995 to conduct the distribution,
marketing and promotion of Pabst Blue Ribbon beer in China. The Marketing
Company also sells mineral water and non-carbonated soft drinks bearing the Blue
Ribbon label produced by Guangdong Blue Ribbon. In May 1996, the Marketing
Company commenced distribution of a red wine product labelled "Blue Eagle" which
was developed by Guangdong Blue Ribbon. Sales of this product through June 30,
1996 have been insignificant. Zhaoqing Brewery owns a 70% interest and Guangdong
Blue Ribbon owns a 30% interest in the Marketing Company. Zhaoqing Brewery and
Noble Brewery commenced the distribution of their production of Pabst Blue
Ribbon beer through the Marketing Company during April 1995 and July 1995,
respectively. The consolidated financial statements include the results of
operations of the Marketing Company on a consolidated basis.
The Marketing Company commenced operations on April 1, 1995. 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 of results of
operations for three months and six months ended June 30, 1996 to results of
operations for the three months and six months ended June 30, 1995, is not
necessarily meaningful.
13
<PAGE>
ITEM 2 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 has the contractual right to
control 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 Zhaoqing Brewery, including Zhaoqing Brewery's 40% interest
in Noble Brewery.
The acquisition of Zhaoqing Brewery, including Zhaoqing Brewery's 40%
interest in Noble Brewery, has been accounted for under the purchase method of
accounting. The consolidated financial statements include the results of
operations of Zhaoqing Brewery on a consolidated basis and Noble Brewery under
the equity method of accounting for investments, commencing October 31, 1994, to
reflect the post-acquisition consolidated results of operations of Zhaoqing
Brewery and Noble Brewery attributable to the Company.
For accounting purposes, the acquisition of Holdings by the Company has been
treated as a recapitalization of Holdings with Holdings as the acquiror (reverse
acquisition). Accordingly, the historical financial statements prior to December
16, 1994 are those of Holdings.
During 1995, the Marketing Company was established to conduct the
distribution, marketing and promotion of Pabst Blue Ribbon beer in China. The
Marketing Company also sells mineral water and non-carbonated soft drinks
bearing the Blue Ribbon label produced by Guangdong Blue Ribbon. In May 1996,
the Marketing Company commenced distribution of a red wine product labelled
"Blue Eagle" which was developed by Guangdong Blue Ribbon. Sales of this product
through June 30, 1996 have been insignificant. Zhaoqing Brewery owns a 70%
interest and Guangdong Blue Ribbon owns a 30% interest in the Marketing Company.
Zhaoqing Brewery and Noble Brewery commenced the distribution of their
production of Pabst Blue Ribbon beer through the Marketing Company during April
1995 and July 1995, respectively. The Marketing Company generally requires a 50%
cash deposit from its customers as security. However, for those customers
located in Guangdong Province, the deposit policy has been replaced by cash-on-
delivery or pre-approved credit terms. The consolidated financial statements
include the results of operations of the Marketing Company on a consolidated
basis.
Business:
Pabst Blue Ribbon beer is distributed and sold throughout China. In general,
the beer market in China is still undergoing a rapid growth stage. There is a
substantial difference in the price at which local or regional beer is sold in
China as compared to the price of foreign or premium brands of beer. On average,
a 640 ml. bottle of local or regional beer would typically sell for 1 - 2 RMB,
as compared to a foreign or premium beer which would sell for 4 - 6 RMB.
14
<PAGE>
The beer industry in China is seasonal, with sales at their lowest in the
months of October and November, and at their highest in the months of March
through September.
The Company's brewing facilities consist of the following:
Zhaoqing Brewery: The original facilities of Zhaoqing Brewery were
----------------
constructed between 1978 and 1980 with annual production capacity based on old
brewing technology of 50,000 metric tons or 425,000 barrels of beer. With the
implementation of the new brewing technology and the purchase of additional
equipment, Zhaoqing Brewery reached an annual production capacity of 100,000
metric tons or 850,000 barrels by the end of 1995. Prior to March 1995, Zhaoqing
Brewery had produced exclusively domestic brands of beer. In mid-1994, with the
assistance of Pabst Brewing Company, 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,
Zhaoqing Brewery discontinued production of all domestic brands and commenced
exclusive production of Pabst Blue Ribbon beer on a full-scale basis. However,
beer that does not meet Pabst Blue Ribbon quality standards is generally
packaged and distributed as local brand beer.
Noble Brewery: The original facilities of Noble Brewery were constructed
-------------
between 1988 and 1990 with annual production capacity of approximately 80,000
metric tons or 680,000 barrels of beer. During July 1994, a second brewing
facility was completed, which increased annual production capacity by an
additional 120,000 metric tons or 1,020,000 barrels of beer. The second brewing
facility commenced full-scale production during late 1994. Noble Brewery has
produced Pabst Blue Ribbon beer exclusively since it commenced operations.
Consolidated Results of Operations:
Zhaoqing Brewery and Noble Brewery commenced distribution of their production
of Pabst Blue Ribbon beer through the Marketing Company during 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 of results of operations for the three months and six
months ended June 30, 1996 to results of operations for the three months and six
months ended June 30, 1995 is not necessarily meaningful.
Three Months Ended June 30, 1996 and 1995 -
Sales: During the three months ended June 30, 1996, Zhaoqing Brewery
produced 24,409 metric tons and sold 24,436 metric tons of beer, of which 507
metric tons (2.1%) were local brand beer and 23,929 metric tons (97.9%) were
Pabst Blue Ribbon beer. During the three months ended June 30, 1995, Zhaoqing
Brewery produced 13,103 metric tons and sold 14,694 metric tons, of which 517
metric tons (3.5%) were local brand beer and 14,177 metric tons (96.5%) were
Pabst Blue Ribbon beer. As a result of increased demand for Pabst Blue Ribbon
beer, in conjunction with the implementation of the new brewing technology and
the installation of new equipment to increase the production capacity at the end
of 1995, total beer sold increased by 9,742 metric tons or 66.3% from 1995 to
1996.
15
<PAGE>
During the three months ended June 30, 1996, Noble Brewery produced 42,255
metric tons and sold 42,269 metric tons of beer, as compared to 43,237 metric
tons of beer produced and 28,562 metric tons of beer sold for the three months
ended June 30, 1995. As a result of increased demand for Pabst Blue Ribbon beer,
total beer sold increased by 13,707 metric tons or 48.0% from 1995 to 1996.
For the three months ended June 30, 1996, net sales, all of which were
conducted through the Marketing Company, were RMB 353,658,873, of which RMB
330,743,618 (93.5%) were attributable to beer sales and RMB 22,915,255 (6.5%)
were attributable to the sales of mineral water, non-carbonated soft drinks and
red wine. During the three months ended June 30, 1996, the Marketing Company
purchased RMB 191,262,164 of beer products from Noble Brewery for resale, and
RMB 23,308,247 of mineral water, non-carbonated soft drinks and red wine from
Guangdong Blue Ribbon for resale. Approximately 99.7% of total beer sales during
the three months ended June 30, 1996 were provided from the sale and
distribution of products under the Pabst Blue Ribbon brand name. For the three
months ended June 30, 1995, net sales were RMB 94,880,814, of which 76% were
attributable to beer sales and 24% were attributable to the sales of mineral
water and non-carbonated soft drinks.
Gross Profit: For the three months ended March 31, 1996, total gross profit
was RMB 55,699,266 or 15.7% of total net sales, and consisted of gross profit
from beer sales of RMB 53,955,041 or 16.3% of net sales of beer and gross profit
from sales of mineral water, non-carbonated soft drinks and red wine of RMB
1,744,225 or 7.6% of net sales of mineral water, non-carbonated soft drinks and
red wine. For the three months ended June 30, 1995, total gross profit was RMB
13,716,288 or 14.5% of total net sales and consisted of gross profit from beer
sales of RMB 12,606,685 or 17.5% of net sales of beer and gross profit from
sales of mineral water and non-carbonated soft drinks of RMB 1,109,603 or 5% of
net sales of mineral water and non-carbonated soft drinks.
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 introduced a bottle
recycling program in early 1996 in an effort to reduce production costs.
During July 1996, Renhe Trading Company ("Renhe"), a trading company located
in Shenzhen, PRC, commenced importing and distributing U.S.-brewed Pabst Blue
Ribbon beer in Southern China, and has advertised widely throughout Southern
China that Pabst Brewing Company USA has granted it the exclusive right to
distribute U.S.-brewed Pabst Blue Ribbon beer in China. Pabst Brewing Company
USA has officially denied granting such authorization.
As a result, during July 1996, preliminary indications are that the Company's
shipments of Pabst Blue Ribbon beer in Southern China unexpectedly decreased by
approximately 15% as compared to June 1996. Accordingly, the Company anticipates
that the aforementioned matter will have an adverse effect on the results of
operations for the three months ended September
16
<PAGE>
30, 1996. The Company's joint venture partner and the exclusive license holder
of the Pabst Blue Ribbon brand in China, Guangdong Blue Ribbon, is reviewing and
evaluating its legal options to stop the importation of Pabst Blue Ribbon beer
into China.
Selling and Administrative Expenses: For the three months ended June 30,
1996, selling and administrative expenses were RMB 45,222,589 or 12.8% of net
sales, consisting of selling expenses of RMB 33,586,502 and general and
administrative expense of RMB 11,636,087. 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 Zhaoqing Brewery and the increase in sales volume.
For the three months ended June 30, 1996, the Company recorded an allowance for
doubtful accounts of RMB 570,000 to provide for estimated losses on accounts
receivable for the period.
During 1995, the Marketing Company was established to market the Pabst Blue
Ribbon beer produced by Zhaoqing Brewery and Noble Brewery throughout China. The
Marketing Company assumed the responsibility for marketing Zhaoqing Brewery's
production of Pabst Blue Ribbon beer in April 1995, and has incurred most of the
selling expenses since that date. General and administrative costs include the
costs associated with the operation of the Company's executive offices, and the
legal and accounting costs associated with the operation of a public company.
As a result of softening consumer demand and increasing competition from
foreign premium brand beers, the Company is implementing 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.
Interest Expense: For the three months ended June 30, 1996, interest expense
increased by RMB 4,473,287 or 176.7% to RMB 7,005,251, as compared to RMB
2,531,964 for the three months ended June 30, 1995. Interest expense increased
in 1996 as compared to 1995 as a result of the increase in bank loans, capital
lease obligations and amounts payable to Guangdong Blue Ribbon as a result of
its advances for the expansion of Zhaoqing Brewery.
Operating Income: For the three months ended June 30, 1996, operating income
was RMB 10,476,677 or 3.0% of net sales. For the three months ended June 30,
1995, operating income was RMB 1,473,384 or 1.6% of net sales.
Income Taxes: For the three months ended June 30, 1996, income tax expense
was RMB 250,000. Although the Company's operations in China were subject to a
tax holiday in 1996, deferred income tax of RMB 250,000 were recorded for the
three months ended June 30, 1996 as a result of temporary timing differences
with respect to accelerated depreciation of property, plant and equipment during
the tax exemption period. For the three months ended June 30, 1995, no income
tax expense was incurred.
Net Income: As a result of increased sales, net income increased to RMB
5,000,557 for the three months ended June 30, 1996, as compared to RMB 3,882,265
for the three months ended June 30, 1995.
17
<PAGE>
Six Months Ended June 30, 1996 and 1995 -
Sales: During the six months ended June 30, 1996, Zhaoqing Brewery produced
43,040 metric tons and sold 43,020 metric tons of beer, of which 1,021 metric
tons (2.4%) were local brand beer and 41,999 metric tons (97.6%) were Pabst Blue
Ribbon beer. During the six months ended June 30, 1995, Zhaoqing Brewery
produced 23,816 metric tons and sold 25,841 metric tons, of which 8,841 metric
tons (34.2%) were local brand beer and 17,000 metric tons (65.8%) were Pabst
Blue Ribbon beer. As a result of increased demand for Pabst Blue Ribbon beer, in
conjunction with the implementation of the new brewing technology and the
installation of new equipment to increase the production capacity at the end of
1995, total beer sold increased by 17,179 metric tons or 66.5% from 1995 to
1996. Of the 11,388 metric tons of local brand beer produced in 1995, 8,841
metric tons (77.6%) were produced during the six months ended June 30, 1995.
During the six months ended June 30, 1996, Noble Brewery produced 78,999
metric tons and sold 79,046 metric tons of beer, as compared to 92,845 metric
tons of beer produced and 82,477 metric tons of beer sold for the six months
ended June 30, 1995. Total beer sold decreased by 3,431 metric tons or 4.2% from
1995 to 1996, as a result of the regulation of sales by the Marketing Company,
which purchases beer from the two breweries in accordance with their respective
production capacities. The reduction in beer sold by Noble Brewery had the
effect of reducing the Company's share of earnings in an associated company for
the six months ended June 30, 1996 as compared to the six months ended June 30,
1995.
For the six months ended June 30, 1996, net sales, all of which were
conducted through the Marketing Company, were RMB 631,190,639, of which RMB
588,167,083 (93.2%) were attributable to beer sales and RMB 43,023,556 (6.8%)
were attributable to the sales of mineral water, non-carbonated soft drinks and
red wine. During the six months ended June 30, 1996, the Marketing Company
purchased RMB 363,025,917 of beer products from Noble Brewery for resale, and
RMB 39,760,792 of mineral water, non-carbonated soft drinks and red wine from
Guangdong Blue Ribbon for resale. Approximately 99.7% of total beer sales during
the six months ended June 30, 1996 were provided from the sale and distribution
of products under the Pabst Blue Ribbon brand name. For the six months ended
June 30, 1995, net sales were RMB 127,375,336, of which 82% were attributable to
beer sales and 18% were attributable to the sales of mineral water and non-
carbonated soft drinks.
Gross Profit: For the six months ended June 30, 1996, total gross profit was
RMB 99,206,488 or 15.7% of total net sales, and consisted of gross profit from
beer sales of RMB 95,943,694 or 16.3% of net sales of beer and gross profit from
sales of mineral water, non-carbonated soft drinks and red wine of RMB 3,262,794
or 7.6% of net sales of mineral water, non-carbonated soft drinks and red wine.
For the six months ended June 30, 1995, total gross profit was RMB 20,936,828 or
16.4% of total net sales and consisted of gross profit from beer sales of RMB
19,827,225 or 19% of net sales of beer and gross profit from sales of mineral
water and non-carbonated soft drinks of RMB 1,109,603 or 5% of net sales of
mineral water and non-carbonated soft drinks.
18
<PAGE>
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 introduced a bottle
recycling program in early 1996 in an effort to reduce production costs.
During July 1996, Renhe Trading Company ("Renhe"), a trading company located
in Shenzhen, PRC, commenced importing and distributing U.S.-brewed Pabst Blue
Ribbon beer in Southern China, and has advertised widely throughout Southern
China that Pabst Brewing Company USA has granted it the exclusive right to
distribute U.S.-brewed Pabst Blue Ribbon beer in China. Pabst Brewing Company
USA has officially denied granting such authorization.
As a result, during July 1996, preliminary indications are that the Company's
shipments of Pabst Blue Ribbon beer in Southern China unexpectedly decreased by
approximately 15% as compared to June 1996. Accordingly, the Company anticipates
that the aforementioned matter will have an adverse effect on the results of
operations for the three months ended September 30, 1996. The Company's joint
venture partner and the exclusive license holder of the Pabst Blue Ribbon brand
in China, Guangdong Blue Ribbon, is reviewing and evaluating its legal options
to stop the importation of Pabst Blue Ribbon beer into China.
Selling and Administrative Expenses: For the six months ended June 30, 1996,
selling and administrative expenses were RMB 81,776,073 or 13.0% of net sales,
consisting of selling expenses of RMB 55,016,280 and general and administrative
expense of RMB 26,759,793. 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 Zhaoqing Brewery and the increase in sales volume. For the six
months ended June 30, 1996, the Company recorded an allowance for doubtful
accounts of RMB 1,330,000 to provide for estimated losses on accounts receivable
for the period.
During 1995, the Marketing Company was established to market the Pabst Blue
Ribbon beer produced by Zhaoqing Brewery and Noble Brewery throughout China. The
Marketing Company assumed the responsibility for marketing Zhaoqing Brewery's
production of Pabst Blue Ribbon beer in April 1995, and has incurred most of the
selling expenses since that date. General and administrative costs include the
costs associated with the operation of the Company's executive offices, and the
legal and accounting costs associated with the operation of a public company.
As a result of softening consumer demand and increasing competition from
foreign premium brand beers, the Company is implementing 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.
Interest Expense: For the six months ended June 30, 1996, interest expense
increased by RMB 8,463,917 or 194.0% to RMB 12,825,652, as compared to RMB
4,361,735 for the six months ended June 30, 1995. Interest expense increased in
1996 as compared to 1995 as a
19
<PAGE>
result of the increase in bank loans, capital lease obligations and amounts
payable to Guangdong Blue Ribbon as a result of its advances for the expansion
of Zhaoqing Brewery.
Operating Income: For the six months ended June 30, 1996, operating income
was RMB 17,430,415 or 2.8% of net sales. For the six months ended June 30, 1995,
operating income was RMB 1,454,845 or 1.1% of net sales.
Income Taxes: For the six months ended June 30, 1996, income tax expense was
RMB 500,000. Although the Company's operations in China were subject to a tax
holiday in 1996, deferred income taxes of RMB 500,000 were recorded for the six
months ended June 30, 1996 as a result of temporary timing differences with
respect to accelerated depreciation of property, plant and equipment during the
tax exemption period. For the six months ended June 30, 1995, no income tax
expense was incurred.
Net Income: As a result of the decreased sales and earnings of Noble Brewery,
increased selling expenses incurred by the Marketing Company, and increased
interest expense, net income decreased to RMB 8,672,394 for the six months ended
June 30, 1996, as compared to RMB 10,209,362 for the six months ended June 30,
1995.
Noble Brewery:
- -------------
Three Months Ended June 30, 1996 and 1995 -
Sales: For the three months ended June 30, 1996 and 1995, net sales were RMB
180,540,618 and RMB 131,295,743, respectively.
Gross Profit: For the three months ended June 30, 1996 and 1995, gross profit
was RMB 33,853,144 or 18.8% of net sales and RMB 31,495,076 or 24.0% of net
sales, respectively.
Selling and Administrative Expenses: For the three months ended June 30,
1996, selling and administrative expenses totalled RMB 9,463,105 or 5.2% of net
sales, consisting of selling expenses of RMB 2,591,184 and general and
administrative expenses of RMB 6,871,921. For the three months ended June 30,
1995, selling and administrative expenses totalled RMB 14,118,688 or 10.8% of
net sales, consisting of selling expenses of RMB 8,097,001 and general and
administrative expenses of RMB 6,021,687. Selling expenses include costs
relating to the advertising, promotion, marketing and distribution of Pabst Blue
Ribbon beer in China and were incurred in conjunction with the increase in the
production capacity of Noble Brewery.
During 1995, the Marketing Company was established to market the Pabst Blue
Ribbon beer produced by Zhaoqing Brewery and Noble Brewery throughout China. The
Marketing Company assumed the responsibility for marketing Noble Brewery's
production of Pabst Blue Ribbon beer in July 1995.
Operating Income: For the three months ended June 30, 1996 and 1995,
operating income was RMB 24,390,039 or 13.5% of net sales and RMB 17,376,388 or
13.2% of net sales, respectively.
20
<PAGE>
Income Taxes: The two-year income tax holiday for Noble Brewery expired on
December 31, 1995. In 1996, Noble Brewery is required to pay local income tax at
half the normal rate of 33% on its profit as determined in accordance with PRC
accounting standards applicable to Noble Brewery. Accordingly, RMB 5,374,807 has
been recorded as income tax expense for the three months ended June 30, 1996.
Net Income: For the three months ended June 30, 1996, net income increased to
RMB 18,405,386 or 10.2% of net sales, as compared to RMB 16,375,226 or 12.5% of
net sales for the three months ended June 30, 1995.
Six Months Ended June 30, 1996 and 1995 -
Sales: For the six months ended June 30, 1996 and 1995, net sales were RMB
342,594,136 and RMB 362,873,489, respectively.
Gross Profit: For the six months ended June 30, 1996 and 1995, gross profit
was RMB 69,881,713 or 20.4% of net sales and RMB 90,081,114 or 24.8% of net
sales, respectively.
Selling and Administrative Expenses: For the six months ended June 30, 1996,
selling and administrative expenses totalled RMB 24,458,916 or 7.1% of net
sales, consisting of selling expenses of RMB 7,244,455 and general and
administrative expenses of RMB 17,214,461. For the six months ended June 30,
1995, selling and administrative expenses totalled RMB 37,119,861 or 10.2% of
net sales, consisting of selling expenses of RMB 18,959,431 and general and
administrative expenses of RMB 18,160,430. Selling expenses include costs
relating to the advertising, promotion, marketing and distribution of Pabst Blue
Ribbon beer in China and were incurred in conjunction with the increase in the
production capacity of Noble Brewery.
During 1995, the Marketing Company was established to market the Pabst Blue
Ribbon beer produced by Zhaoqing Brewery and Noble Brewery throughout China. The
Marketing Company assumed the responsibility for marketing Noble Brewery's
production of Pabst Blue Ribbon beer in July 1995.
Operating Income: For the six months ended June 30, 1996 and 1995, operating
income was RMB 45,422,797 or 13.3% of net sales and RMB 52,961,253 or 14.6% of
net sales, respectively.
Income Taxes: The two-year income tax holiday for Noble Brewery expired on
December 31, 1995. In 1996, Noble Brewery is required to pay local income tax at
half the normal rate of 33% on its profit as determined in accordance with PRC
accounting standards applicable to Noble Brewery. Accordingly, RMB 9,773,607 has
been recorded as income tax expense for the six months ended June 30, 1996.
Net Income: As a result of decreased sales and gross margin, only partially
offset by decreased selling expenses, and increased income taxes, net income
decreased to RMB
21
<PAGE>
35,168,171 or 10.3% of net sales for the six months ended June 30, 1996, as
compared to RMB 49,441,195 or 13.6% of net sales for the six months ended June
30, 1995.
Consolidated Financial Condition - Six Months Ended June 30, 1996:
Liquidity and Capital Resource - For the six months ended June 30, 1996, the
Company's operations utilized cash resources of RMB 18,118,903. The Company's
cash balance increased by RMB 14,218,255 to RMB 71,666,560 at June 30, 1996, as
compared to RMB 57,448,305 at December 31, 1995. The Company's net working
capital deficit decreased by RMB 3,621,884 to RMB 101,177,437 at June 30, 1996,
as compared to RMB 97,555,553 at December 31, 1995, and the Company's current
ratio at June 30, 1996 was 0.78: 1, as compared to 0.77: 1 at December 31, 1995.
The Company's inventories increased by RMB 41,141,339 or 72.4% to RMB
97,980,140 at June 30, 1996, as compared to RMB 56,838,801 at December 31, 1995.
Such increase resulted from the expansion of production to meet the growth in
market demand for beer products, and consisted primarily of an increase in
finished goods in order to satisfy expected market demand during the peak season
from July to September.
The amounts due from related companies mainly represented receivable balances
from Guangdong Blue Ribbon and its affiliated companies. The amounts due from
related companies decreased by RMB 39,219,884 or 84.5% to RMB 7,191,895 at June
30, 1996, as compared to RMB 46,411,779 at December 31, 1995. The decrease was
primarily due to the increase in payments by Guangdong Blue Ribbon and the
increase in transaction volume with other related companies under normal
operating levels during the period.
The Company's accounts payable and accrued liabilities balance increased by
RMB 74,115,272 or 131.7% to RMB 130,394,453 at June 30, 1996 as compared to RMB
56,279,181 at December 31, 1995. Such increase was mainly due to the increase in
purchases of raw materials and packing materials in anticipation of the expected
peak season in sales and production from July to September, and the increase in
accrued expenses as a result of the expansion of production and operating
activities.
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 described below.
The conversion and expansion of Zhaoqing Brewery has required substantial
capital to finance the costs of expansion and to support substantially higher
sales levels. Guangdong Blue Ribbon has provided and committed to provide
Zhaoqing Brewery a line of credit, or to otherwise arrange financing, sufficient
to finance the purchase of new machinery and equipment in connection with the
planned expansion of Zhaoqing Brewery to an annual production capacity of
100,000 metric tons of beer.
For the six months ended June 30, 1996, additions to property, plant and
equipment in connection with the planned expansion of Zhaoqing Brewery to an
annual production capacity
22
<PAGE>
of 100,000 metric tons of beer aggregated RMB 46,122,765 and were financed by
advances under the line of credit from Guangdong Blue Ribbon, and other sources
of working capital. In addition, during the six months ended June 30, 1996,
other capital expenditures relating to the installation and final testing of
machinery and equipment and the related construction costs at Zhaoqing Brewery
aggregated RMB 4,558,883, and various other additions to property, plant and
equipment aggregated RMB 1,571,923. The Company anticipates that additional
capital expenditures in connection with the continuing expansion of Zhaoqing
Brewery during the remainder of 1996 will be minimal.
During the six months ended June 30, 1996, Zhaoqing Brewery acquired
undeveloped land near the existing plant site with a total area of 51,034 square
metres for future expansion purposes. The total capital expenditures incurred in
this regard during the six months ended June 30, 1996 were RMB 9,562,205, which
included the acquisition cost of the land and related site preparation costs.
The Company anticipates that additional capital expenditures in connection with
the development of the land during the remainder of 1996 will be approximately
RMB 10,000,000.
During the six months ended June 30, 1996, the Company increased its short-
term bank borrowings by RMB 3,500,000, resulting in net short-term bank
borrowings outstanding at June 30, 1996 of RMB 36,074,400.
Oriental Win and Guangdong Blue Ribbon are providing continuing financial
support to the Company. The existing loan payable to Oriental Win was incurred
in connection with the acquisition of High Worth JV by Holdings and totaled RMB
73,794,948 at June 30, 1996, equivalent to approximately USD 8,866,000. The loan
is denominated in United States Dollar, is unsecured, interest free and is not
due and payable unless alternate long-term debt or equity funds are available to
the Company.
The Company anticipates that its operating cash flow, combined with cash on
hand, bank lines of credit and other external credit sources, and the line of
credit and other 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 for long term bank or
lease financing. In addition, the accelerated development or acquisition of
additional brewing 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 measures 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
available to Chinese business enterprises. The success of the Company depends in
substantial part on the continued growth and development of the Chinese economy.
23
<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 value
of currencies occur periodically and may, in certain instances, materially
affect the Company's results of operations.
Zhaoqing Brewery and 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 position of the
Company. In addition, a significant portion of revenues will need to be
converted into USD to meet foreign currency obligations. Although prior to 1994
the RMB experienced significant devaluation against the USD, the RMB has
remained fairly stable from 1994 to present. The unified exchange rate was
US$1.00 to RMB8.65 at December 31, 1993, RMB8.45 at December 31, 1994, RMB8.32
at December 31, 1995, RMB 8.34 at March 31, 1996 and RMB 8.32 at June 30, 1996.
24
<PAGE>
PART II. OTHER INFORMATION
- ---------------------------
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K -
Three Months Ended June 30, 1996: None.
25
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CBR BREWING COMPANY, INC.
----------------------------
(Registrant)
Date: August 14, 1996 By /s/ JOHN Z. LI
-------------------------
John Z. Li
President and Director
(Duly authorized officer)
Date: August 14, 1996 By /s/ GARY C. K. LUI
-------------------------
Gary C. K. Lui
Chief Financial Officer
(Chief Financial Officer)
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 8,610,664
<SECURITIES> 0
<RECEIVABLES> 19,951,218
<ALLOWANCES> 0
<INVENTORY> 11,772,215
<CURRENT-ASSETS> 42,291,770
<PP&E> 29,495,679
<DEPRECIATION> 0
<TOTAL-ASSETS> 94,788,306
<CURRENT-LIABILITIES> 54,448,137
<BONDS> 2,991,384
0
0
<COMMON> 820
<OTHER-SE> 16,345,337
<TOTAL-LIABILITY-AND-EQUITY> 94,788,306
<SALES> 75,836,914
<TOTAL-REVENUES> 75,836,914
<CGS> 63,917,355
<TOTAL-COSTS> 63,917,355
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,540,989
<INCOME-PRETAX> 572,452
<INCOME-TAX> 60,075
<INCOME-CONTINUING> 1,041,979
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,041,979
<EPS-PRIMARY> .13
<EPS-DILUTED> 0
</TABLE>
