<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 March 31, 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, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
_______ _________
Common shares outstanding at March 31, 1996 Class A 5,000,013
Class B 3,000,000
Total sequentially numbered pages in this document : 22
1
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
-------------------------------------------
INDEX
-----
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets (unaudited) -
March 31, 1996 and December 31, 1995
Condensed Consolidated Statements of Income (unaudited) -
Three months ended March 31, 1996 and 1995
Condensed Consolidated Statements of Cash Flows (unaudited) -
Three months ended March 31, 1996 and 1995
Notes to Condensed Consolidated Financial Statements (unaudited) -
Three months ended March 31, 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>
March 31, 1996 December 31, 1995
------------------------ ------------------------
RMB USD RMB USD
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash 58,128,310 6,969,821 57,448,305 6,888,286
Accounts receivable 164,206,714 19,689,054 158,677,644 19,026,095
Inventories (Note 3 ) 85,802,110 10,288,023 56,838,801 6,815,204
Prepayments, deposits and other
receivables 14,214,185 1,704,339 7,423,161 890,067
Due from related companies 12,814,472 1,536,507 46,411,779 5,564,961
----------- ---------- ----------- ----------
Total current assets 335,165,791 40,187,744 326,799,690 39,184,613
Deferred tax assets - - 48,444 5,809
Property, plant and equipment, net 237,992,559 28,536,278 197,308,264 23,658,064
Interest in an associated
company (Note 5) 226,753,720 27,188,695 222,742,476 26,707,730
----------- ---------- ----------- ----------
Total assets 799,912,070 95,912,717 746,898,874 89,556,216
=========== ========== =========== ==========
</TABLE>
(continued)
3
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
------------------------ ------------------------
RMB USD RMB USD
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Bank loans 34,574,400 4,145,612 32,574,400 3,905,803
Obligation under capital lease 5,634,848 675,641 5,634,848 675,641
Deposits received from customers 106,008,000 12,710,791 123,817,626 14,846,237
Accounts payable
and accrued liabilities 104,268,873 12,502,263 56,279,181 6,748,103
Due to related companies 33,237,059 3,985,259 18,629,685 2,233,774
Due to an associated company 150,709,847 18,070,725 154,185,606 18,487,483
Sales taxes payable 37,849,868 4,538,352 33,233,897 3,984,879
----------- ---------- ----------- ----------
Total current liabilities 472,282,895 56,628,643 424,355,243 50,881,920
Long term liabilities:
Deferred tax liabilities 201,555 24,167 - -
Shareholder's loan (Note 4) 73,794,948 8,848,315 73,794,948 8,848,315
Obligation under capital lease 24,897,291 2,985,287 24,897,291 2,985,287
----------- ---------- ----------- ----------
Total long term liabilities 98,893,794 11,857,769 98,692,239 11,833,602
Minority interests 97,686,874 11,713,054 96,474,719 11,567,712
Shareholders' equity:
Capital stock - common stock
Class A par value US$0.0001 each,
90,000,000 shares authorized,
5,000,013 shares outstanding 4,265 511 4,265 511
Class B par value US$0.0001 each,
10,000,000 shares authorized,
3,000,000 shares outstanding 2,559 307 2,559 307
Additional paid-in capital 104,030,194 12,473,645 104,030,194 12,473,645
Statutory surplus and collective
welfare funds 2,159,610 258,947 2,159,613 258,947
Retained earnings 24,851,879 2,979,841 21,180,042 2,539,572
----------- ---------- ----------- ----------
Total shareholders' equity 131,048,507 15,713,251 127,376,673 15,272,982
----------- ---------- ----------- ----------
Total liabilities
and shareholders' equity 799,912,070 95,912,717 746,898,874 89,556,216
=========== ========== =========== ==========
</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 Ended Three Months Ended
March 31, 1996 March 31, 1995
---------------------------- -------------------
RMB USD RMB
------------- ------------ -------------------
(As adjusted
- Note 2)
<S> <C> <C> <C>
Sales 283,593,693 34,004,040 35,365,224
Sales taxes (6,061,927) (726,850) (2,870,702)
------------ ----------- -----------
Sales, net of sales taxes 277,531,766 33,277,190 32,494,522
Cost of sales, including inventory
purchased from related companies of
RMB208,359,816 (USD24,983,191) in
1996 and RMB4,897,374 in 1995; and
royalty fee paid to related company of
RMB1,776,886 (USD213,056) in 1996
and RMB284,115 in 1995 (234,024,544) (28,060,497) (25,273,982)
------------ ----------- -----------
Gross profit 43,507,222 5,216,693 7,220,540
Selling and administrative expenses (36,553,484) (4,382,912) (7,239,079)
------------ ----------- -----------
Operating income (loss) 6,953,738 833,781 (18,539)
Foreign exchange (losses) gains (10,589) (1,269) 177,392
Other income (expense):
Sales tax refund - - 1,375,000
Sales of scrap - - 237,439
Interest expense, including interest
expense paid or payable to related
companies of RMB3,710,288
(USD444,879) in 1996 and nil in 1995 (5,820,401) (697,890) (1,829,771)
------------ ----------- -----------
Income (Loss) before income taxes 1,122,748 134,622 (58,479)
Income taxes (250,000) (29,976) -
------------ ----------- -----------
Income (Loss) before equity in
earnings of an associated company 872,748 104,646 (58,479)
Equity in earnings
of an associated company 4,011,244 480,965 13,226,388
------------ ----------- -----------
Net income before minority interests 4,883,992 585,611 13,167,909
Minority interests (1,212,155) (145,342) (6,840,812)
------------ ----------- -----------
Net income for the period 3,671,837 440,269 6,327,097
============ =========== ===========
Net income per common share 0.46 0.06 0.79
============ =========== ===========
Weighted average
shares of common stock 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>
Three Months Ended Three Months Ended
March 31, 1996 March 31, 1995
-------------------------- ------------------
RMB USD RMB
------------ ----------- ------------
(As adjusted
- Note 2)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 3,671,837 440,269 6,327,097
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Minority interests 1,212,155 145,342 6,840,812
Equity in earnings of an associated company (4,011,244) (480,965) (13,226,388)
Depreciation and amortization 6,015,822 721,322 1,643,391
Allowance for doubtful accounts 760,000 91,127 -
Income taxes 250,000 29,976 -
Foreign exchange losses (gains) 10,589 1,269 (177,392)
----------- ---------- -----------
7,909,159 948,340 1,407,520
Changes in working capital:
(Increase) Decrease in -
Accounts receivable (6,289,070) (754,085) (8,798,026)
Inventories (28,963,309) (3,472,819) (11,103,544)
Prepayments, deposits and other receivables (6,791,024) (814,271) (378,133)
Increase (Decrease) in -
Accounts payable and accrued liabilities 47,989,692 5,754,160 19,552,083
Deposits received from customers (17,809,626) (2,135,446) (2,056,515)
Due to an associated company (3,475,759) (416,758) -
Sales taxes payable 4,615,971 553,473 2,925,300
----------- ---------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (2,813,966) (337,406) 1,548,685
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (46,710,710) (5,600,805) (16,074,776)
Due from related companies 33,597,307 4,028,454 -
----------- ---------- -----------
NET CASH USED IN INVESTING ACTIVITIES (13,113,403) (1,572,351) (16,074,776)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
New bank loans 2,000,000 239,808 -
Due to related companies 14,607,374 1,751,484 13,157,567
New other loans - - 3,000,000
Increase in shareholder's loan - accrued interest - - 654,241
Repayment of obligation under capital lease - - (1,751,325)
----------- ---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 16,607,374 1,991,292 15,060,483
----------- ---------- -----------
Net increase in cash 680,005 81,535 534,392
Cash at beginning of period 57,448,305 6,888,286 7,397,927
----------- ---------- -----------
Cash at end of period 58,128,310 6,969,821 7,932,319
=========== ========== ===========
</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 ENDED MARCH 31, 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 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.
7
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION (continued)
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.,
and unrelated party, and Zhaoqing Brewery hold 60% and 40% interests,
respectively. Accordingly, 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.
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.
8
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION (continued)
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
March 31, 1996, 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 transaction are
translated into RMB using the applicable rates of exchange, 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.
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 March 31, 1996, of USD1.00 = RMB8.34. 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.
9
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
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 March 31, 1996, the
results of operations for the three months ended March 31, 1996 and 1995, and
the changes in cash flows for the three months ended March 31, 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.
The results of operations for the three months ended March 31, 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 the
period.
10
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
NOTE 2 -- COMMENTS (continued)
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. With
respect to Noble Brewery, an unconsolidated subsidiary, additional charges due
to improper cut-offs and unrecorded expenses 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 ended March 31, 1995 to reflect these adjustments.
<TABLE>
<CAPTION>
As Previously Reported As Adjusted
------------------------ ------------
Three Months Ended March 31, 1995: RMB RMB
---------- ------------
<S> <C> <C>
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 0.79
</TABLE>
NOTE 3 -- INVENTORIES
Inventories consisted of the following at March 31, 1996 and December 31,
1995 :
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
------------------------ ------------------------
RMB USD RMB USD
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Raw materials 16,284,905 1,952,626 14,154,395 1,697,170
Work in progress 6,156,598 738,201 3,713,686 445,286
Finished goods 63,360,607 7,597,196 38,970,720 4,672,748
---------- ---------- ---------- -----------
85,802,110 10,288,023 56,838,801 6,815,204
========== ========== ========== ===========
</TABLE>
11
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
NOTE 4 -- SHAREHOLDER'S LOAN
The shareholder's loan of RMB 73,794,948 (USD8,848,315) at March 31, 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:
<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
Dividends -
Declared and paid for the year ended
December 31, 1995 (28,644,569)
-----------
Unlisted investment, March 31, 1996 226,753,720
===========
</TABLE>
12
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
NOTE 5 -- INTEREST IN AN ASSOCIATED COMPANY (continued)
The condensed statements of operations of Noble Brewery for the three months
ended March 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1996 March 31, 1995
------------------------ ------------------
RMB USD RMB
----------- ---------- ------------------
<S> <C> <C> <C>
(As adjusted
- Note 2)
Sales, net of sales taxes 162,053,518 19,430,877 231,577,746
=========== ========== ==================
Net income 16,762,785 2,009,926 33,065,969
=========== ========== ==================
The Company's share
of net income after
deduction of unrealised
intercompany profit 4,011,244 480,965 13,226,388
=========== ========== ==================
</TABLE>
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. 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 ended March 31, 1996 to results of
operations for the three months ended March 31, 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 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 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. 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. 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 demand for Pabst Blue Ribbon beer in China presently exceeds
available supply, and thus production capacity is the single most important
factor in determining sales volume. In addition, there is a significant
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 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 result of operations for
the three months ended March 31, 1996 to results of operations for the three
months ended March 31, 1995 is not necessarily meaningful.
Three Months Ended March 31, 1996 and 1995 -
Sales: During the three months ended March 31, 1996, Zhaoqing Brewery
produced 18,631 metric tons and delivered 18,569 metric tons of beer, of which
498 metric tons (2.7%) were local brand beer and 18,071 metric tons (97.3%) were
Pabst Blue Ribbon beer. During the three months ended March 31, 1995, Zhaoqing
Brewery produced 10,713 metric tons and delivered 11,147 metric tons of which
8,324 metric tons (74.7%) were local brand beer and 2,823 metric tons (25.3%)
were Pabst Blue Ribbon beer. Total beer delivered increased by 7,422 metric
tons or 66.6% from 1995 to 1996, as a result of the implementation of the new
brewing
15
<PAGE>
technology and the installation of new equipment to increase the production
capacity at the end of 1995. Of the 11,388 metric tons of local brand beer
produced in 1995, 8,324 metric tons (73.1%) were produced during the three
months ended March 31, 1995.
During the three months ended March 31, 1996, Noble Brewery produced 36,744
metric tons and delivered 36,777 metric tons of beer, as compared to 49,608
metric tons of beer produced and 53,915 metric tons of beer delivered for the
three months ended March 31, 1995. Total beer delivered decreased by 17,138
metric tons or 31.8% 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
delivered by Noble Brewery had the effect of reducing the Company's share of
earnings in an associated company for the three months ended March 31, 1996 as
compared to the three months ended March 31, 1995.
For the three months ended March 31, 1996, net sales, all of which were
conducted through the Marketing Company, were RMB 277,531,766, of which RMB
258,104,542 (93%) was attributable to beer sales and RMB 19,427,224 (7%) was
attributable to the sales of mineral water and non-carbonated soft drinks.
During the three months ended March 31, 1996, the Marketing Company purchased
RMB 171,763,754 of beer products from the Noble Brewery and Zhaoqing Brewery for
resale, and RMB 18,550,258 of mineral water and non-carbonated soft drinks from
Guangdong Blue Ribbon for resale. Approximately 99.6% of total sales during the
three months ended March 31, 1996 were provided from the sale and distribution
of products under the Pabst Blue Ribbon brand name. For the three months ended
March 31, 1995, net sales were RMB 32,494,522, all of which were attributable to
beer sales.
Gross Profit: For the three months ended March 31, 1996, total gross
profit was RMB 43,507,222 or 15.7% of total net sales, and consisted of gross
profit from beer sales of RMB 41,981,233 or 15.9% of beer net sales and gross
profit from sales of mineral water and non-carbonated soft drinks of RMB
1,525,989 or 7.7% of net sales of mineral water and non-carbonated soft
drinks. For the three months ended March 31, 1995, total gross profit was RMB
7,220,540 or 22.2% of total net sales, all from beer sales.
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.
Selling and Administrative Expenses: For the three months ended March 31,
1996, selling and administrative expenses were RMB 36,553,484 or 13.2% of net
sales, consisting of selling expenses of RMB 21,429,778 and general and
administrative expense of RMB 15,123,706. Selling expenses include costs
relating to the advertising, promotion, marketing and distribution
16
<PAGE>
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 March 31, 1996, the Company recorded
an allowance for doubtful accounts of RMB 760,000 to provide for estimated
losses on accounts receivable for the period.
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
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 March 31, 1996, interest
expense increased by RMB 3,990,630 or 218.1% to RMB 5,820,401, as compared to
RMB 1,879,721 for the three months ended March 31, 1995. Interest expense
increased in 1996 as compared to 1995 as a result of the increase in bank loan,
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 March 31, 1996, operating
income was RMB 6,953,738 or 2.5% of net sales. For the three months ended March
31, 1995, the operating loss was RMB 18,539 or 0.1% of net sales.
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, for the three months ended March 31, 1996, net
income decreased to RMB 3,671,837, as compared to RMB 6,327,097 for the three
months ended March 31, 1995.
Noble Brewery:
- -------------
Three Months Ended March 31, 1996 and 1995 -
Sales: For the three months ended March 31, 1996 and 1995, net sales were
RMB 162,053,518 and RMB 231,577,746, respectively.
Gross Profit: For the three months ended March 31, 1996 and 1995, gross
profit was RMB 36,028,569 or 22.2% of net sales and RMB 58,586,038 or 25.3% of
net sales, respectively.
17
<PAGE>
Selling and Administrative Expenses: For the three months ended March 31,
1996, selling and administrative expenses totalled RMB 14,995,811 or 9.3% of net
sales, consisting of selling expenses of RMB 4,653,271 and general and
administrative expenses of RMB 10,342,540. For the three months ended March 31,
1995, selling and administrative expenses totalled RMB 23,099,679 or 10.0% of
net sales, consisting of selling expenses of RMB 10,862,430 and general and
administrative expenses of RMB 12,237,249. 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 throughout
China the Pabst Blue Ribbon beer produced by Zhaoqing Brewery and Noble Brewery.
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 March 31, 1996 and 1995,
operating income was RMB 21,032,758 or 13.0% of net sales and RMB 35,486,359 or
15.3% 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
4,398,800 has been recorded as income tax expense for the three months ended
March 31, 1996.
Net Income: As a result of decreased sales and gross margin, only
partially offset by decreased selling expenses, and increased income tax
expense, for the three months ended March 31, 1996, net income decreased to RMB
16,762,785 or 10.3% of net sales, as compared to RMB 33,065,969 or 14.3% of net
sales for the three months ended March 31, 1995.
CONSOLIDATED FINANCIAL CONDITION - MARCH 31, 1996:
Liquidity and Capital Resources -
For the three months ended March 31, 1996, the Company's operations
utilized cash resources of RMB 2,813,966. The Company's cash balance increased
by RMB 680,005 to RMB 58,128,310 at March 31, 1996, as compared to RMB
57,448,305 at December 31, 1995. The Company's net working capital deficit
increased by RMB 39,561,551 to RMB 137,117,104 at March 31, 1996, as compared to
RMB 97,555,553 at December 31, 1995, resulting in a decline in the current ratio
at March 31, 1996 to 0.71: 1, as compared to 0.77 : 1 at December 31, 1995.
The Company's inventories increased by RMB 28,963,309 or 51.0% to RMB
85,802,110 at March 31, 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
18
<PAGE>
products, and consisted primarily of an increase in finished goods in order to
satisfy expected market demand during the peak season, which commenced in April.
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 33,597,307 or 72.4% to RMB
12,814,472 at March 31, 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 47,989,692 or 85.3% to RMB 104,268,873 at March 31, 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 which commenced in April, 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 three months ended March 31, 1996, additions to property, plant
and equipment in connection with the planned expansion of Zhaoqing Brewery to an
annual production capacity 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. 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 three months ended March 31, 1996, the Company increased its
short-term bank borrowings by RMB 2,000,000, resulting in net short-term bank
borrowings outstanding at March 31, 1996 of RMB 34,574,400.
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 March 31, 1996, equivalent to approximately USD 8,848,000. The
loan is denominated in USD, is unsecured,
19
<PAGE>
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.
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 and RMB8.34 at March 31, 1996.
20
<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 March 31, 1996: None.
21
<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: June 28, 1996 By /s/ John Z. Li
------------------------------------------------
John Z. Li
President and Director
(Duly authorized officer)
Date: June 28, 1996 By /s/ Ge Ming
-----------------------------------------------
Ge Ming
Chief Financial Officer
(Chief Financial Offier and
Chief Accounting Officer)
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1996 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 6,969,821
<SECURITIES> 0
<RECEIVABLES> 19,689,054
<ALLOWANCES> 0
<INVENTORY> 10,288,023
<CURRENT-ASSETS> 40,187,744
<PP&E> 28,536,278
<DEPRECIATION> 0
<TOTAL-ASSETS> 95,912,717
<CURRENT-LIABILITIES> 56,628,643
<BONDS> 2,985,287
0
0
<COMMON> 818
<OTHER-SE> 15,712,433
<TOTAL-LIABILITY-AND-EQUITY> 95,912,717
<SALES> 33,277,190
<TOTAL-REVENUES> 33,277,190
<CGS> 28,060,497
<TOTAL-COSTS> 28,060,497
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 697,890
<INCOME-PRETAX> 134,622
<INCOME-TAX> 29,976
<INCOME-CONTINUING> 440,269
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 440,269
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
