<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, 1997
-------------
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to ____________
Commission File 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 or organization) Identification Number)
433 North Camden Drive, 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 of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of June 30, 1997, the Company had 5,000,013 shares of Class A Common Stock
and 3,000,000 shares of Class B Common Stock issued and outstanding.
Total sequentially numbered pages in this document: 29.
1
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
------------------------------------------
INDEX
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) -
June 30, 1997 and December 31, 1996
Condensed Consolidated Statements of Income (unaudited) -
Three months and six months ended June 30, 1997 and 1996
Condensed Consolidated Statements of Cash Flows
(unaudited) - Six months ended June 30, 1997 and 1996
Notes to Condensed Consolidated Financial Statements
(unaudited) - Three months and six months ended June 30,
1997 and 1996
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, 1997 December 31, 1996
------------------------ ------------------------
RMB USD RMB USD
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash 52,656,713 6,328,932 39,709,594 4,772,788
Accounts and bills receivable 241,052,738 28,972,685 207,499,153 24,939,802
Inventories (Note 3) 141,804,864 17,043,854 87,549,836 10,522,817
Amounts due from related companies 29,930,773 3,597,449 33,089,333 3,977,083
Prepayments, deposits and other
receivables 33,757,910 4,057,441 17,779,904 2,137,008
----------- ----------- ----------- ----------
Total current assets 499,202,998 60,000,361 385,627,820 46,349,498
Interest in an associated company
(Note 5) 205,222,028 24,666,109 216,984,220 26,079,834
Property, plant and equipment, net 214,769,879 25,813,687 223,890,108 26,909,869
----------- ----------- ----------- ----------
Total assets 919,194,905 110,480,157 826,502,148 99,339,201
=========== =========== =========== ==========
</TABLE>
(continued)
3
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------------------- ------------------------
RMB USD RMB USD
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings 43,500,000 5,228,365 40,500,000 4,867,789
Capital lease obligations 3,559,916 427,875 9,034,742 1,085,907
Accounts payable
and accrued liabilities 133,425,715 16,036,746 104,207,246 12,524,909
Customer deposits 5,600,000 673,077 59,003,600 7,091,779
Amounts due to related companies 38,000,206 4,567,332 21,357,655 2,567,026
Amount due to an associated company 246,516,402 29,629,375 166,501,751 20,012,230
Income taxes payable 260,000 31,250 260,000 31,250
Sales taxes payable 53,242,726 6,399,366 63,904,235 7,680,798
Deferred tax liabilities 6,173,000 741,947 4,413,000 530,409
----------- ----------- ----------- ----------
Total current liabilities 530,277,965 63,735,333 469,182,229 56,392,097
----------- ----------- ----------- ----------
Long term liabilities:
Capital lease obligations 15,862,549 1,906,556 15,862,549 1,906,556
----------- ----------- ----------- ----------
Minority interests 132,766,559 15,957,520 120,073,940 14,431,964
----------- ----------- ----------- ----------
Shareholders' advances and
shareholders' equity:
Advances from shareholders (Note 4) 73,794,948 8,869,585 73,794,948 8,869,585
----------- ----------- ----------- ----------
Common stock
-Class A, US$0.0001 par value,
90,000,000 shares authorized,
5,000,013 shares outstanding 4,265 513 4,265 513
-Class B, US$0.0001 par value,
10,000,000 shares authorized,
3,000,000 shares outstanding 2,559 307 2,559 307
Additional paid-in capital 104,030,194 12,503,629 104,030,194 12,503,629
General reserve and enterprise
development funds 4,823,561 579,754 4,823,561 579,754
Retained earnings 57,632,305 6,926,960 38,727,903 4,654,796
----------- ----------- ----------- ----------
Total shareholders' equity 166,492,884 20,011,163 147,588,482 17,738,999
----------- ----------- ----------- ----------
Total shareholders' advances and
shareholders' equity 240,287,832 28,880,748 221,383,430 26,608,584
----------- ----------- ----------- ----------
Total liabilities and shareholders'
equity 919,194,905 110,480,157 826,502,148 99,339,201
=========== =========== =========== ==========
</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 Six
Three Months Ended Six Months Ended Months Ended Months Ended
June 30, 1997 June 30, 1997 June 30, 1996 June 30, 1996
-------------------------- -------------------------- -------------- --------------
RMB USD RMB USD RMB RMB
------------ ----------- ------------ ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Sales, including sales to related
companies of RMB 2,530,695 and
RMB 6,530,457 for the three months
and six months ended June 30, 1997,
respectively, and nil and nil for
the three months and six months
ended June 30, 1996, respectively 337,665,295 40,584,771 654,604,471 78,678,422 359,976,876 643,570,569
Sales taxes (6,520,036) (783,658) (12,563,696) (1,510,059) (6,318,003) (12,379,930)
----------- ----------- ------------ ----------- ------------ ------------
Net sales 331,145,259 39,801,113 642,040,775 77,168,363 353,658,873 631,190,639
Cost of sales, including inventory
purchased from related companies of
RMB 233,106,207 and RMB 410,004,981
for the three months and six months
ended June 30, 1997, respectively, and
RMB 214,570,411 and RMB 422,930,227
for the three months and six months
ended June 30, 1996, respectively;
and royalty fee paid to a related
company of RMB 2,322,234 and
RMB 4,183,719 for the three months
and six months ended June 30, 1997,
respectively, and RMB 2,356,675 and
RMB 4,133,561 for the three months
and six months ended June 30, 1996,
respectively (267,582,228) (32,161,325) (523,756,143) (62,951,459) (297,959,607) (531,984,151)
------------ ----------- ------------ ----------- ------------ ------------
Gross profit 63,563,031 7,639,788 118,284,632 14,216,904 55,699,266 99,206,488
Selling, general and administrative
expenses, including management
fee paid to a related company of
RMB 945,000 for the three months ended
June 30, 1996 and 1997, respectively,
and RMB 1,890,000 for the six months
ended June 30, 1996 and 1997,
respectively (49,292,975) (5,924,636) (97,836,653) (11,759,213) (45,222,589) (81,776,073)
------------ ----------- ------------ ----------- ------------ ------------
Operating income 14,270,056 1,715,152 20,447,979 2,457,691 10,476,677 17,430,415
Foreign exchange gains (losses) (89,994) (10,817) (11,856) (1,425) 170,340 159,751
Other expense:
Interest expense, including interest
paid to related companies of
RMB 1,432,373 and RMB 3,120,181 for
the three months and six months ended
June 30, 1997, respectively, and
RMB 2,899,424 and RMB 6,599,712 for
the three months and six months ended
June 30, 1996, respectively (6,325,617) (760,291) (9,730,422) (1,169,522) (7,005,251) (12,825,652)
------------ ----------- ------------ ----------- ------------ ------------
Income before income taxes 7,854,445 944,044 10,705,701 1,286,744 3,641,766 4,764,514
Income taxes - - (1,760,000) (211,538) (250,000) (500,000)
------------ ------------ ----------- ----------- ------------ ------------
</TABLE>
(continued)
5
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)(CONTINUED)
<TABLE>
<CAPTION>
Three Six
Three Months Ended Six Months Ended Months Ended Months Ended
June 30, 1997 June 30, 1997 June 30, 1996 June 30, 1996
---------------------- ----------------------- ------------- -------------
RMB USD RMB USD RMB RMB
--------- -------- --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Income before equity in earnings of an
associated company 7,854,445 944,044 8,945,701 1,075,206 3,391,766 4,264,514
Equity in earnings of an associated company 7,621,496 916,045 22,651,320 2,722,514 4,480,286 8,491,530
---------- --------- ----------- ---------- ---------- ----------
Income before minority interests 15,475,941 1,860,089 31,597,021 3,797,720 7,872,052 12,756,044
Minority interests (5,769,305) (693,427) (12,692,619) (1,525,556) (2,871,495) (4,083,650)
---------- --------- ----------- ---------- ---------- ----------
Net income for the period 9,706,636 1,166,662 18,904,402 2,272,164 5,000,557 8,672,394
========== ========= =========== ========== ========== ==========
Net income per common share 1.21 0.15 2.36 0.28 0.63 1.08
========== ========= =========== ========== ========== ==========
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.
6
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
-------------------------- -----------------
RMB USD RMB
------------ ----------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 18,904,402 2,272,164 8,672,394
Adjustments to reconcile net income
to net cash provided by operating
activities:
Allowance for doubtful accounts 11,958,000 1,437,260 1,330,000
Depreciation and amortization 16,747,303 2,012,897 13,221,251
Foreign exchange (gains) losses 11,856 1,425 (159,751)
Minority interests 12,692,619 1,525,556 4,083,650
Equity in earnings of an associated company (22,651,320) (2,722,514) (8,491,530)
Dividend received from an associated company 34,413,512 4,136,239 39,797,878
Income taxes payable 1,760,000 211,538 500,000
----------- ---------- -----------
73,836,372 8,874,565 58,953,892
Changes in operating assets and liabilities:
(Increase) decrease in -
Accounts and bills receivable (45,511,585) (5,470,143) (8,136,346)
Inventories (54,255,028) (6,521,037) (41,141,339)
Amounts due from related companies 3,158,560 379,635 39,219,884
Prepayments, deposits and other receivables (15,978,006) (1,920,433) (1,678,658)
Increase (decrease) in -
Accounts payable and accrued liabilities 29,218,469 3,511,835 74,115,272
Customer deposits (53,403,600) (6,418,703) (49,544,884)
Amount due to an associated company 80,014,651 9,617,145 (25,126,004)
Sales taxes payable (10,661,509) (1,281,431) 14,237,042
----------- ---------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 6,418,324 771,433 60,898,859
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (7,638,930) (918,141) (61,815,776)
----------- ---------- -----------
NET CASH USED IN INVESTING
ACTIVITIES (7,638,930) (918,141) (61,815,776)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
New bank borrowings 3,000,000 360,577 3,500,000
Increase in amounts due to related companies 16,642,551 2,000,307 12,639,972
Repayment of capital lease obligations (5,474,826) (658,032) (1,004,800)
----------- ---------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 14,167,725 1,702,852 15,135,172
----------- ---------- -----------
Net increase in cash 12,947,119 1,556,144 14,218,255
Cash at beginning of period 39,709,594 4,772,788 57,448,305
----------- ---------- -----------
Cash at end of period 52,656,713 6,328,932 71,666,560
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
7
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
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. Subsequently, on October 14, 1996,
Oriental Win transferred the 3,960,000 shares of Class A Common Stock and the
3,000,000 shares of Class B Common Stock to its shareholders. As a result, West
Coast Star Enterprises Ltd., as the 60% shareholder of Oriental Win, became the
Company's controlling shareholder. 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, through its subsidiaries and affiliates, is engaged in 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.
Holdings owns a 60% interest in High Worth JV, a Sino-foreign joint venture.
High Worth JV holds certain licensing rights for Pabst Blue Ribbon beer and also
directly owns 100% of a Pabst Blue Ribbon brewing complex ("Zhaoqing Brewery").
High Worth JV also owns 100% of a PRC holding company, ("Zhaoqing Brewery HC").
Zhaoqing Brewery HC owns a 40% interest in Zhaoqing Blue Ribbon Brewery Noble
Ltd., a Sino-foreign joint venture ("Noble Brewery"), which owns a second Pabst
Blue Ribbon brewing complex that is also managed by Zhaoqing
8
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION (continued)
Brewery. Goldjinsheng Holdings Ltd., a wholly-owned subsidiary of Noble China
Inc., an unaffiliated company, owns the other 60% interest in Noble Brewery. In
addition, Zhaoqing Brewery HC owns a 70% interest in Zhaoqing Blue Ribbon Beer
Marketing Company Limited, a PRC company (the "Marketing Company"), which was
formed in February 1995 to conduct the distribution, marketing and promotion
throughout China of the Pabst Blue Ribbon beer produced by Zhaoqing Brewery and
Noble Brewery. 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 remaining 30% interest in the
Marketing Company is directly owned by Guangdong Blue Ribbon. Through its
ownership in High Worth JV, Guangdong Blue Ribbon also has a 28% indirect
interest in the Marketing Company, resulting in the Company owning a 42% net
interest in the Marketing Company. 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.
In January 1996, Zhaoqing Brewery HC transferred all of its operating assets and
liabilities to High Worth JV pursuant to the original Joint Venture Agreement,
the Asset Transfer Agreement signed in May 1994, and the relevant government
regulations. Subject to the completion of certain legal procedures and
documentation, the investments in Noble Brewery and the Marketing Company
currently held by Zhaoqing Brewery HC will be transferred to High Worth JV.
Zhaoqing Brewery HC is currently acting as the nominee for High Worth JV with
respect to the investments in Noble Brewery and the Marketing Company.
In the following text, "Zhaoqing Brewery" refers to the brewing complex, which
was transferred to High Worth JV in January 1996, and "Zhaoqing Brewery HC"
refers to the PRC entity that previously owned the brewing complex from November
1994 through December 1995.
The Company conducts a substantial portion of its purchases through related
parties, and has additional significant continuing transactions with such
parties.
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 HC, including
Zhaoqing Brewery HC's 40% interest in Noble Brewery, for approximately
USD20,000,000. Prior to the acquisition of Zhaoqing Brewery HC by High Worth
JV, Zhaoqing Brewery HC 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.
9
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
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 HC, including
Zhaoqing Brewery HC'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, 1996 and
June 30, 1997. The Company believes that its operating cash flow, combined with
cash on hand, bank line of credit and other external credit resources, and the
credit facilities provided by affiliates or related parties are adequate to
satisfy the Company's working capital requirements for the foreseeable future.
Certain prior period amounts have been reclassified to conform with the current
year's presentation.
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 June 30, 1997, 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.
10
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
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, 1997, the results
of operations for the three months and six months ended June 30, 1997 and 1996,
and the changes in cash flows for the six months ended June 30, 1997 and 1996.
These adjustments are of a normal recurring nature. The consolidated balance
sheet as of December 31, 1996 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, 1996, as filed with the Securities and
Exchange Commission.
The results of operations for the three months and six months ended June 30,
1997 are not necessary indicative of the results of operations to be expected
for the full fiscal year ending December 31, 1997.
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.
NOTE 3 -- INVENTORIES
Inventories consisted of the following at June 30, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------------------- ----------------------
RMB USD RMB USD
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Raw materials 31,841,049 3,827,049 30,935,530 3,718,213
Work in progress 9,070,442 1,090,197 6,224,036 748,081
Finished goods 100,893,373 12,126,608 50,390,270 6,056,523
----------- ---------- ---------- ----------
141,804,864 17,043,854 87,549,836 10,522,817
=========== ========== ========== ==========
</TABLE>
11
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
NOTE 4 -- ADVANCES FROM SHAREHOLDERS
In connection with the acquisition of High Worth JV, Oriental Win advanced
US$8,869,585 to Holdings during 1994. The rights to collect US$8,000,000 of the
advance were transferred from Oriental Win to its shareholders in proportion to
their respective shareholder interests in August 1996 (West Coast Star
Enterprises Ltd. - US$4,800,000; Mapesbury Limited - US$1,600,000; Redcliffe
Holdings Ltd. - US$1,600,000). The advances bear no interest and are not
repayable unless the Company obtains additional long term debt or equity
financing. Repayments of the advances are at the discretion of the Company and
the shareholders have no right to demand repayment. The Company has the option
of offsetting or repaying the advance or part thereof by allotment of shares at
par value in Holdings. As of June 30, 1997 and December 31, 1996, advances from
such shareholders, West Coast Star Enterprises Ltd., Mapesbury Limited,
Redcliffe Holdings Ltd., and Oriental Win were approximately RMB 39,900,000, RMB
13,300,000, RMB 13,300,000 and RMB 7,300,000, respectively.
12
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
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
For the year ended December 31, 1996 34,039,622
Three months ended March 31, 1997 15,029,824
Three months ended June 30, 1997 7,621,496
Dividends -
Declared and paid during 1995 (28,644,569)
Declared and paid during 1996 (39,797,878)
Declared and paid during 1997 (34,413,512)
-----------
Unlisted investment, June 30, 1997 205,222,028
===========
</TABLE>
The condensed statements of operations of Noble Brewery for the three months and
six months ended June 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Three Six
Three Months Ended Six Months Ended Months Ended Months Ended
June 30, 1997 June 30, 1997 June 30, 1996 June 30, 1996
------------------------ ------------------------ ------------- -------------
RMB USD RMB USD RMB RMB
----------- ---------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net sales 200,222,817 24,065,242 367,405,364 44,159,298 180,540,618 342,594,136
=========== ========== =========== ========== ============= =============
Net income 30,942,645 3,719,068 62,611,612 7,525,434 18,405,386 35,168,171
=========== ========== =========== ========== ============= =============
The Company's share
of net income after
adjustment of unrealised
intercompany profit 7,621,496 916,045 22,651,320 2,722,514 4,480,286 8,491,530
=========== ========== =========== ========== ============= =============
</TABLE>
13
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
NOTE 6 -- PRODUCTION BY GUANGDONG BLUE RIBBON
In late 1996, Guangdong Blue Ribbon established a wholly-owned subsidiary in Le
Shang City, Sichuan Province, PRC, and started converting an existing brewery
with an annual production capacity of 20,000 metric tons into a Pabst Blue
Ribbon brewing complex ("Sichuan Brewery"). Production and sale of Pabst Blue
Ribbon beer commenced in April 1997.
To the extent that total market demand or sales for Pabst Blue Ribbon beer is
less than the aggregate production capacity of Zhaoqing Brewery and Noble
Brewery, the Company would face competition from Guangdong Blue Ribbon in China.
As a result, the value of the Company's sublicense rights and its ability to
expand in provinces outside of Guangdong could be affected if the Company does
not establish additional affiliated breweries in the near future.
The Company currently estimates that the Sichuan Brewery will produce from
16,000 to 18,000 metric tons of Pabst Blue Ribbon beer in 1997. In order to
facilitate the efficient distribution and sale of Pabst Blue Ribbon beer in
China, the Company has agreed with Guangdong Blue Ribbon for the coordination of
the sales of Pabst Blue Ribbon beer in an orderly manner. In April 1997, the
Marketing Company and the Sichuan Brewery entered into a Memorandum of
Understanding. The Memorandum of Understanding requires the Sichuan Brewery to
sell all of its production of Pabst Blue Ribbon beer to the Marketing Company at
mutually agreed ex-factory prices, and grants the Marketing Company the right to
regulate production to reflect market demand.
Since the Marketing Company is only allowed to mark-up the cost of Pabst Blue
Ribbon beer purchased in order to adequately cover the selling, advertising,
promotional, distribution and administrative expenses incurred in selling to
distributors, the sale of the Sichuan Brewery's production by the Marketing
Company is not expected to have a material effect on consolidated results of
operations. However, to the extent that the production of Pabst Blue Ribbon
beer by the Sichuan Brewery causes a commensurate reduction in beer production
and sales by Zhaoqing Brewery and/or Noble Brewery, the Company's consolidated
results of operations could be adversely affected. The Company currently
estimates that the Sichuan Brewery's 1997 production will represent
approximately 6% of the Company's total 1997 sales.
As the Company and Guangdong Blue Ribbon are the only entities that can produce
Pabst Blue Ribbon beer in China outside of Guangdong Province, the Company is
now seeking expansion and cooperation opportunities to extend its brewing
operation into other provinces either with Guangdong Blue Ribbon or with other
local strategic brewers.
14
<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, is engaged in 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 HC,
including Zhaoqing Brewery HC's 40% interest in Noble Brewery.
The acquisition of Zhaoqing Brewery HC, including Zhaoqing Brewery HC'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 February 1995, the Marketing Company was established to conduct the
distribution, marketing and promotion of Pabst Blue Ribbon beer in China. Prior
to November 1996, the Marketing Company also sold mineral water, non-carbonated
soft drinks and red wine produced by Guangdong Blue Ribbon and bearing the Blue
Ribbon label. Zhaoqing Brewery HC owns a 70% interest and Guangdong Blue Ribbon
directly owns a 30% interest in the Marketing Company. Through its ownership in
High Worth JV, Guangdong Blue Ribbon also has a 28% indirect interest in the
Marketing Company, resulting in the Company owning a 42% net 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. Commencing April 1997,
the Marketing Company also began purchasing the Sichuan Brewery's production of
Pabst Blue Ribbon beer for distribution. The consolidated financial statements
include the results of operations of the Marketing Company on a consolidated
basis.
In January 1996, Zhaoqing Brewery HC transferred all of its operating assets
and liabilities to High Worth JV pursuant to the original Joint Venture
Agreement, the Asset Transfer Agreement signed in May 1994, and the relevant
government regulations. Subject to the completion of certain legal procedures
and documentation, the investments in Noble Brewery and the Marketing Company
currently held by Zhaoqing Brewery HC will be transferred to High Worth JV.
Zhaoqing Brewery HC is currently acting as the nominee for High Worth JV with
respect to the investments in Noble Brewery and the Marketing Company.
15
<PAGE>
Upon the completion of the required procedures and documentation, all of the
assets and liabilities formerly controlled by Zhaoqing Brewery will have been
transferred to High Worth JV. During 1996, the operating activities of Zhaoqing
Brewery were part of High Worth JV. The consensus and approval from the local
tax authority was recently obtained. In the following text, "Zhaoqing Brewery"
refers to the brewing complex, which was transferred to High Worth JV in January
1996, and "Zhaoqing Brewery HC" refers to the PRC entity that previously owned
the brewing complex from November 1994 through December 1995.
Recent Event:
In late 1996, Guangdong Blue Ribbon established a wholly-owned subsidiary in
Le Shang City, Sichuan Province, PRC, and started converting an existing brewery
with an annual production capacity of 20,000 metric tons into a Pabst Blue
Ribbon brewing complex ("Sichuan Brewery"). Production and sale of Pabst Blue
Ribbon beer commenced in April 1997.
To the extent that total market demand or sales for Pabst Blue Ribbon beer is
less than the aggregate production capacity of Zhaoqing Brewery and Noble
Brewery, the Company would face competition from Guangdong Blue Ribbon in China.
As a result, the value of the Company's sublicense rights and its ability to
expand in provinces outside of Guangdong could be affected if the Company does
not establish additional affiliated breweries in the near future.
The Company currently estimates that the Sichuan Brewery will produce from
16,000 to 18,000 metric tons of Pabst Blue Ribbon beer in 1997. In order to
facilitate the efficient distribution and sale of Pabst Blue Ribbon beer in
China, the Company has agreed with Guangdong Blue Ribbon for the coordination of
the sales of Pabst Blue Ribbon beer in an orderly manner. In April 1997, the
Marketing Company and the Sichuan Brewery entered into a Memorandum of
Understanding. The Memorandum of Understanding requires the Sichuan Brewery to
sell all of its production of Pabst Blue Ribbon beer to the Marketing Company at
mutually agreed ex-factory prices, and grants the Marketing Company the right to
regulate production to reflect market demand.
Since the Marketing Company is only allowed to mark-up the cost of Pabst Blue
Ribbon beer purchased in order to adequately cover the selling, advertising,
promotional, distribution and administrative expenses incurred in selling to
distributors, the sale of the Sichuan Brewery's production by the Marketing
Company is not expected to have a material effect on consolidated results of
operations. However, to the extent that the production of Pabst Blue Ribbon
beer by the Sichuan Brewery causes a commensurate reduction in beer production
and sales by Zhaoqing Brewery and/or Noble Brewery, the Company's consolidated
results of operations could be adversely affected. The Company currently
estimates that the Sichuan Brewery's 1997 production will represent
approximately 6% of the Company's total 1997 sales.
As the Company and Guangdong Blue Ribbon are the only entities that can
produce Pabst Blue Ribbon beer in China outside of Guangdong Province, the
Company is now seeking
16
<PAGE>
expansion and cooperation opportunities to extend its brewing operation into
other provinces either with Guangdong Blue Ribbon or with other local strategic
brewers.
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. Generally,
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.
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:
Three Months Ended June 30, 1997 and 1996 -
Sales: During the three months ended June 30, 1997, Zhaoqing Brewery
produced 24,271 metric tons and sold 24,646 metric tons of beer, of which 296
metric tons (1.2%) were local brand beer and 24,350 metric tons (98.8%) were
Pabst Blue Ribbon beer. During the three
17
<PAGE>
months ended June 30, 1996, Zhaoqing Brewery produced 24,409 metric tons and
sold 24,436 metric tons, of which 507 metric tons (2.1%) were local brand beer
and 23,929 metric tons (97.9%) were Pabst Blue Ribbon beer. Total beer sold
increased by 210 metric tons or 0.9% from 1996 to 1997.
During the three months ended June 30, 1997, Noble Brewery produced 49,717
metric tons and sold 48,663 metric tons of beer, as compared to 42,255 metric
tons of beer produced and 42,269 metric tons of beer sold for the three months
ended June 30, 1996. Total beer sold increased by 6,394 metric tons or 15.1%
from 1996 to 1997, 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.
For the three months ended June 30, 1997, net sales, all of which were
conducted through the Marketing Company, were RMB 331,145,259, all of which were
attributable to beer sales. During the three months ended June 30, 1997, the
Marketing Company purchased RMB 212,711,166 and RMB 20,395,041 of beer products
from Noble Brewery and Sichuan Brewery, respectively, for resale. Approximately
99.8% of total beer sales during the three months ended June 30, 1997 were
provided from the sale and distribution of beer products under the Pabst Blue
Ribbon brand name. 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.
Net sales decreased by RMB 22,513,614 or 6.4% in 1997 as compared to 1996,
which was attributable to the Company's elimination of the sales of mineral
water, non-carbonated soft drinks and red wine in 1997. During 1996, the
Company sold mineral water, non-carbonated soft drinks and red wine, which were
purchased from Guangdong Blue Ribbon. The Company discontinued the sale of
mineral water, non-carbonated soft drinks and red wine in late 1996. During the
three months ended June 30, 1997, revenues from the sale of beer products
increased by RMB 401,641 or .1% to RMB 331,145,259, as compared to RMB
330,743,618 for the three months ended June 30, 1996.
Gross Profit: For the three months ended June 30, 1997, total gross profit
was RMB 63,563,031 or 19.2% of total net sales, all of which consisted of gross
profit from beer sales. For the three months ended June 30, 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.
Gross margin increased in 1997 as compared to 1996 as a result of the
discontinuation in 1997 of sales of mineral water, non-carbonated soft drinks
and red wine, which products have a lower gross margin than beer products, and a
shift in the sales mix to higher margin products in 1997 as compared to 1996.
18
<PAGE>
The Company expects that it will experience pressure on its gross profit
margin during 1997 as a result of the following factors: a general softening of
consumer demand in China, caused in substantial part by the central government
of China's regulatory controls and economic policies; increasing competition
from foreign premium brand beers; an increase in raw material and packaging
costs estimated to be in excess of 8% during 1997, which the Company may not be
able to pass on to its customers in full; and potential competition from the
Sichuan Brewery.
Selling, General and Administrative Expenses: For the three months ended June
30, 1997, selling, general and administrative expenses were RMB 49,292,975 or
14.9% of net sales, consisting of selling expenses of RMB 25,278,619 and general
and administrative expenses of RMB 24,014,356. Net of an allowance for doubtful
accounts of RMB 7,848,000, general and administrative expenses were RMB
16,166,356.
For the three months ended June 30, 1996, selling, general 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 expenses of RMB
11,636,087. Net of an allowance for doubtful accounts of RMB 570,000, general
and administrative expenses were RMB 11,066,087.
Selling expenses include costs relating to the advertising, promotion,
marketing and distribution of Pabst Blue Ribbon beer in China. Selling expenses
decreased by RMB 8,307,883 or 24.7% in 1997 as compared to 1996, and as a
percent of net sales, to 7.6% in 1997 from 9.5% in 1996. Selling expenses
decreased in 1997 as compared to 1996, both on an absolute basis and as a
percentage of sales. The increase in selling expenses in 1997 related to beer
products was more than offset by a reduction in selling expenses related to
mineral water, non-carbonated soft drinks and red wine, which products the
Company sold in 1996 but is not selling in 1997. During 1997, the Company
implemented a substantially expanded advertising and promotional program to
stimulate consumer demand and maintain the market position of Pabst Blue Ribbon
beer in China, as a result of softening consumer demand and increasing
competition from foreign premium brand beer.
General and administrative expenses 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. Excluding the allowance for
doubtful accounts, general and administrative expenses increased by RMB
5,100,269 or 46.1% in 1997 as compared to 1996, and as a percentage of net
sales, to 4.9% in 1997 from 3.1% in 1996. General and administrative expenses
increased in 1997 as compared in 1996 primarily as a result of increased
personnel and personnel related costs.
The allowance for doubtful accounts, which is calculated based primarily on
the age of outstanding accounts receivable, increased to 2.4% of the net sales
in 1997 as compared to .2% in 1996, as a result of the increased age of accounts
receivable outstanding in 1997. Accounts receivable are typically outstanding
for a longer period of time in China than in the United States.
19
<PAGE>
Operating Income: For the three months ended June 30, 1997, operating income
was RMB 14,270,056 or 4.3% of net sales. For the three months ended June 30,
1996, operating income was RMB 10,476,677 or 3.0% of net sales.
Interest Expense: For the three months ended June 30, 1997, interest expense
decreased by RMB 679,634 or 9.7% to RMB 6,325,617, as compared to RMB 7,005,251
for the three months ended June 30, 1996. Interest expense decreased in 1997
as compared to 1996 as a result of the decrease in customer deposits and capital
lease obligations.
Income Taxes: For the three months ended June 30, 1997, no income tax
expense was provided, as Zhaoqing Brewery's operations in China were subject to
a 100% tax exemption in 1997. For the three months ended June 30, 1996,
deferred income tax expense of RMB 250,000 was recorded.
Net Income: Net income increased to RMB 9,706,636 (RMB 1.21 per share) for
the three months ended June 30, 1997, as compared to RMB 5,000,557 (RMB .63 per
share) for the three months ended June 30, 1996.
Six Months Ended June 30, 1997 and 1996 -
Sales: During the six months ended June 30, 1997, Zhaoqing Brewery produced
43,851 metric tons and sold 43,511 metric tons of beer, of which 657 metric tons
(1.5%) were local brand beer and 42,854 metric tons (98.5%) were Pabst Blue
Ribbon beer. During the six months ended June 30, 1996, Zhaoqing Brewery
produced 43,040 metric tons and sold 43,020 metric tons, of which 1,021 metric
tons (2.4%) were local brand beer and 41,999 metric tons (97.6%) were Pabst Blue
Ribbon beer. Total beer sold increased by 491 metric tons or 1.1% from 1996 to
1997.
During the six months ended June 30, 1997, Noble Brewery produced 87,817
metric tons and sold 85,155 metric tons of beer, as compared to 78,999 metric
tons of beer produced and 79,046 metric tons of beer sold for the six months
ended June 30, 1996. Total beer sold increased by 6,109 metric tons or 7.7%
from 1996 to 1997, 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.
For the six months ended June 30, 1997, net sales, all of which were
conducted through the Marketing Company, were RMB 642,040,775, all of which were
attributable to beer sales. During the six months ended June 30, 1997, the
Marketing Company purchased RMB 389,609,940 and RMB 20,395,041 of beer products
from Noble Brewery and Sichuan Brewery, respectively, for resale. Approximately
99.8% of total beer sales during the six months ended June 30, 1997 were
provided from the sale and distribution of beer products under the Pabst Blue
Ribbon brand name. 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
20
<PAGE>
(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.
Net sales increased by RMB 10,850,136 or 1.7% in 1997 as compared to 1996.
This nominal increase in sales was attributable to the Company's elimination of
the sales of mineral water, non-carbonated soft drinks and red wine in 1997.
During 1996, the Company sold mineral water, non-carbonated soft drinks and red
wine, which were purchased from Guangdong Blue Ribbon. The Company discontinued
the sale of mineral water, non-carbonated soft drinks and red wine in late 1996.
During the six months ended June 30, 1997, revenues from the sale of beer
products increased by RMB 53,873,692 or 9.2% to RMB 642,040,775, as compared to
RMB 588,167,083 for the six months ended June 30, 1996.
Gross Profit: For the six months ended June 30, 1997, total gross profit was
RMB 118,284,632 or 18.4% of total net sales, all of which consisted of gross
profit from beer sales. 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.
Gross margin increased in 1997 as compared to 1996 as a result of the
discontinuation in 1997 of sales of mineral water, non-carbonated soft drinks
and red wine, which products have a lower gross margin than beer products, and a
shift in the sales mix to higher margin products in 1997 as compared to 1996.
The Company expects that it will experience pressure on its gross profit
margin during 1997 as a result of the following factors: a general softening of
consumer demand in China, caused in substantial part by the central government
of China's regulatory controls and economic policies; increasing competition
from foreign premium brand beers; an expected increase in raw material and
packaging costs in excess of 8% during 1997, which the Company may not be able
to pass on to its customers in full; and potential competition from the Sichuan
Brewery.
Selling, General and Administrative Expenses: For the six months ended June
30, 1997, selling, general and administrative expenses were RMB 97,836,653 or
15.2% of net sales, consisting of selling expenses of RMB 56,723,512 and general
and administrative expenses of RMB 41,113,141. Net of an allowance for doubtful
accounts of RMB 11,958,000, general and administrative expenses were RMB
29,155,141.
For the six months ended June 30, 1996, selling, general 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 expenses of RMB
26,759,793. Net of an allowance for doubtful accounts of RMB 1,330,000, general
and administrative expenses were RMB 25,429,793.
21
<PAGE>
Selling expenses include costs relating to the advertising, promotion,
marketing and distribution of Pabst Blue Ribbon beer in China. Selling expenses
increased by RMB 1,707,232 or 3.1% in 1997 as compared to 1996, and remained
relatively constant as a percent of net sales, at 8.8% in 1997 as compared to
8.7% in 1996. The increase in selling expenses in 1997 related to beer products
was offset by a reduction in selling expenses related to mineral water, non-
carbonated soft drinks and red wine, which products the Company sold in 1996 but
is not selling in 1997. During 1997, the Company implemented a substantially
expanded advertising and promotional program to stimulate consumer demand and
maintain the market position of Pabst Blue Ribbon beer in China, as a result of
softening consumer demand and increasing competition from foreign premium brand
beer.
General and administrative expenses 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. Excluding the allowance for
doubtful accounts, general and administrative expenses increased by RMB
3,725,348 or 14.6% in 1997 as compared to 1996, and as a percentage of net
sales, to 4.5% in 1997 from 4.0% in 1996. General and administrative expenses
increased in 1997 as compared to 1996 primarily as a result of increased
personnel and personnel related costs.
The allowance for doubtful accounts, which is calculated based primarily on
the age of outstanding accounts receivable, increased to 1.9% of net sales in
1997 as compared to .2% in 1996, as a result of the increased age of accounts
receivable outstanding in 1997. Accounts receivable are typically outstanding
for a longer period of time in China than in the United States.
Operating Income: For the six months ended June 30, 1997, operating income
was RMB 20,447,979 or 3.2% of net sales. For the six months ended June 30,
1996, operating income was RMB 17,430,415 or 2.8% of net sales.
Interest Expense: For the six months ended June 30, 1997, interest expense
decreased by RMB 3,095,230 or 24.1% to RMB 9,730,422 , as compared to RMB
12,825,652 for the six months ended June 30, 1996. Interest expense decreased
in 1997 as compared to 1996 as a result of the decrease in customer deposits and
capital lease obligations.
Income Taxes: For the six months ended June 30, 1997, income tax expense was
RMB 1,760,000. Although Zhaoqing Brewery's operations in China were subject to
a 100% tax exemption in 1997, deferred income taxes were recorded for the six
months ended June 30, 1997 primarily as a result of a potential United States
Federal tax liability resulting from dividends paid by Noble Brewery to Zhaoqing
Brewery HC. For the six months ended June 30, 1996, deferred income tax expense
of RMB 500,000 was recorded.
Net Income: Net income increased to RMB 18,904,402 (RMB 2.36 per share) for
the six months ended June 30, 1997, as compared to RMB 8,672,394 (RMB 1.08 per
share) for the six months ended June 30, 1996.
22
<PAGE>
Noble Brewery:
- -------------
Three Months Ended June 30, 1997 and 1996 -
Sales: For the three months ended June 30, 1997 and 1996, net sales were RMB
200,222,817 and RMB 180,540,618, respectively.
Gross Profit: For the three months ended June 30, 1997 and 1996, gross
profit was RMB 52,699,609 or 26.3% of net sales and RMB 33,853,144 or 18.8% of
net sales, respectively.
Selling, General and Administrative Expenses: For the three months ended
June 30, 1997, selling, general and administrative expenses totalled RMB
15,638,151 or 7.8% of net sales, consisting of selling expenses of RMB 531,616
and general and administrative expenses of RMB 15,106,535. For the three months
ended June 30, 1996, selling, general 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. Selling expenses
consist of warehousing, storage and freight costs.
Operating Income: For the three months ended June 30, 1997 and 1996,
operating income was RMB 37,061,458 or 18.5% of net sales and RMB 24,390,039 or
13.5% of net sales, respectively.
Income Taxes: The two-year income tax holiday for Noble Brewery expired on
December 31, 1995. Commencing in 1996, Noble Brewery was 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 5,761,593 has been recorded as income tax expense for the three
months ended June 30, 1997. For the three months ended June 30, 1996, income
tax expense of RMB 5,374,807 was recorded.
Net Income: Net income increased to RMB 30,942,645 or 15.5% of net sales for
the three months ended June 30, 1997, as compared to RMB 18,405,386 or 10.2% of
net sales for the three months ended June 30, 1996.
Six Months Ended June 30, 1997 and 1996 -
Sales: For the six months ended June 30, 1997 and 1996, net sales were RMB
367,405,364 and RMB 342,594,136, respectively.
Gross Profit: For the six months ended June 30, 1997 and 1996, gross profit
was RMB 101,089,065 or 27.5% of net sales and RMB 69,881,713 or 20.4% of net
sales, respectively.
Selling, General and Administrative Expenses: For the six months ended June
30, 1997, selling, general and administrative expenses totalled RMB 27,161,027
or 7.4% of net sales, consisting of selling expenses of RMB 1,732,687 and
general and administrative expenses of
23
<PAGE>
RMB 25,428,340. For the six months ended June 30, 1996, selling, general 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. Selling expenses consist of warehousing, storage and freight
costs.
Operating Income: For the six months ended June 30, 1997 and 1996, operating
income was RMB 73,928,038 or 20.1% of net sales and RMB 45,422,797 or 13.3% of
net sales, respectively.
Income Taxes: The two-year income tax holiday for Noble Brewery expired on
December 31, 1995. Commencing in 1996, Noble Brewery was 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 11,533,619 has been recorded as income tax expense for the six
months ended June 30, 1997. For the six months ended June 30, 1996, income tax
expense of RMB 9,773,607 was recorded.
Net Income: Net income increased to RMB 62,611,612 or 17.0% of net sales for
the six months ended June 30, 1997, as compared to RMB 35,168,171 or 10.3% of
net sales for the six months ended June 30, 1996.
Consolidated Financial Condition - June 30, 1997:
Liquidity and Capital Resources - For the six months ended June 30, 1997, the
Company's operations provided cash resources of RMB 6,418,324. The Company's
cash balance increased by RMB 12,947,119 to RMB 52,656,713 at June 30, 1997, as
compared to RMB 39,709,594 at December 31, 1996. The Company's net working
capital deficit decreased by RMB 52,479,442 to RMB 31,074,967 at June 30, 1997,
as compared to RMB 83,554,409 at December 31, 1996, and the Company's current
ratio at June 30, 1997 was 0.94:1, as compared to 0.82:1 at December 31, 1996.
Accounts and bills receivable increased by RMB 33,553,585 or 16.2% to RMB
241,052,738 at June 30, 1997, as compared to RMB 207,499,153 at December 31,
1996, as a result of the seasonal nature of the business, and as a result of a
change in credit policy by the Marketing Company implemented in 1997.
Commencing January 1, 1997, as a result of more intensive competition from other
premium band beers in China, the Marketing Company abolished the customer
deposit requirement except for certain new customers which are required to make
a cash deposit as security for their purchases. Customers with material
transaction volume are required to issue bills of exchange from their respective
banks to secure part or all of the payment on the due date. The Marketing
Company has also provided extended credit terms to certain distributors that
meet minimum financial criteria. At June 30, 1997, bills receivable had
increased to RMB 61,670,980 or 25.6% of total accounts and bills receivable, as
compared to RMB 38,653,659 or 18.6% of total accounts and bills receivable at
December 31, 1996.
24
<PAGE>
The Company's inventories increased by RMB 54,255,028 or 62.0% to RMB
141,804,864 at June 30, 1997, as compared to RMB 87,549,836 at December 31,
1996. 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 Company's accounts payable and accrued liabilities increased by RMB
29,218,469 or 28.0% to RMB 133,425,715 at June 30, 1997, as compared to RMB
104,207,246 at December 31, 1996. The increase in accounts payable was mainly
due to the increase in purchases of raw materials and packing materials for the
peak season sales and production which runs from July to September, and the
increase in accrued liabilities was a result of the expansion of production and
operating activities.
Customer deposits decreased by RMB 53,403,600 or 90.5% to RMB 5,600,000 at
June 30, 1997, as compared to RMB 59,003,600 at December 31, 1996, as a result
of the change in credit policy implemented by the Marketing Company in 1997 in
response to the changing market environment. Since the Company pays interest on
customer deposits, the decrease in customer deposits outstanding during 1997 has
also contributed to a decrease in interest expenses in 1997 as compared to 1996.
The amount due to an associated company increased by RMB 80,014,651 or 48.1%
to RMB 246,516,402 at June 30, 1997, as compared to RMB 166,501,751 at December
31, 1996, and represents the amounts due to Noble Brewery from its sale of Pabst
Blue Ribbon beer to the Marketing Company. Contributing to the increase were
the seasonal nature of the business, and, as a result of the extended credit
terms provided by the Marketing Company to certain distributors, accounts and
bills receivable increased, which caused a commensurate increase in the amount
due to an associated company, reflecting the lengthened collection cycle.
The amounts due to related companies increased by RMB 16,642,551 or 77.9% to
RMB 38,000,206 at June 30, 1997, as compared to RMB 21,357,655 at December 31,
1996, and consist primarily of payable balances resulting from seasonal
increases in purchases of packaging materials.
For the six months ended June 30, 1997, additions to property, plant and
equipment aggregated RMB 7,638,930. The Company anticipates that additional
capital expenditures in connection with the continuing expansion of Zhaoqing
Brewery during the remainder of 1997 will be approximately RMB 8,000,000.
Guangdong Blue Ribbon had previously provided and committed to provide
Zhaoqing Brewery with 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. Because of the previously described activities
of Guangdong Blue Ribbon with respect to the Sichuan Brewery, and since the
expansion of Zhaoqing Brewery was substantially completed during early part of
1997, the
25
<PAGE>
Company does not anticipate that Guangdong Blue Ribbon will provide or need to
provide any additional funds or advances to finance the continuing development
of Zhaoqing Brewery in the near future. The Company believes that it will be
able to fund expected capital expenditures with respect to the continuing
development and any future expansion of Zhaoqing Brewery through internal cash
flow and external resources.
During the six months ended June 30, 1997, Noble Brewery declared and paid a
dividend relating to earnings for the year ended December 31, 1996, resulting in
a dividend to Zhaoqing Brewery HC of RMB 34,413,512.
In connection with the acquisition of High Worth JV, Oriental Win advanced
US$8,869,585 to Holdings during 1994. The rights to collect US$8,000,000 of the
advance were transferred from Oriental Win to its shareholders in proportion to
their respective shareholder interests in August 1996 (West Coast Star
Enterprises Ltd. - US$4,800,000; Mapesbury Limited -US$1,600,000; Redcliffe
Holdings Ltd. - US$1,600,000). The advances bear no interest and are not
repayable unless the Company obtains additional long term debt or equity
financing. Repayments of the advances are at the discretion of the Company and
the shareholders have no right to demand repayment. The Company has the option
of offsetting or repaying the advance or part thereof by allotment of shares at
par value in Holdings. As of June 30, 1997 and December 31, 1996, advances from
such shareholders, West Coast Star Enterprises Ltd., Mapesbury Limited,
Redcliffe Holdings Ltd. and Oriental Win were approximately RMB 39,900,000, RMB
13,300,000, RMB 13,300,000 and RMB 7,300,00, respectively.
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, 1997. 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, any additional expansion of
Zhaoqing Brewery or the accelerated development or acquisition of additional
brewing facilities or other support facilities may require the use of debt or
equity financings by the Company.
Inflation and Currency Matters - In recent years, the Chinese economy has
experienced periods of rapid economic growth as well as relatively 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
26
<PAGE>
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, devaluation of the RMB against the USD would adversely affect their
financial performance when measured in USD, and could have material adverse
effects upon the results of operations and financial condition of the Company.
In addition, a significant portion of revenues will need to be converted into
USD on a continuing basis to meet foreign currency obligations. Although prior
to 1994 the RMB experienced significant devaluation against the USD, the RMB has
remained fairly stable 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 8.32 at December 31, 1996, and RMB 8.32 at June 30,
1997.
27
<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, 1997: None.
28
<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: September 17, 1997 By: /s/ ZHI-SHOU CHEN
------------------
Zhi-shou Chen
President and Director
(Duly authorized officer)
Date: September 17, 1997 By: /s/ GARY C.K. LUI
-------------------
Gary C.K. Lui
Chief Financial Officer
(Chief Financial Officer)
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S
QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 6,328,932
<SECURITIES> 0
<RECEIVABLES> 28,972,685
<ALLOWANCES> 0
<INVENTORY> 17,043,854
<CURRENT-ASSETS> 60,000,361
<PP&E> 25,813,687
<DEPRECIATION> 0
<TOTAL-ASSETS> 110,480,157
<CURRENT-LIABILITIES> 63,735,333
<BONDS> 1,906,556
0
0
<COMMON> 820
<OTHER-SE> 20,010,343
<TOTAL-LIABILITY-AND-EQUITY> 110,480,157
<SALES> 77,168,363
<TOTAL-REVENUES> 77,168,363
<CGS> 62,951,459
<TOTAL-COSTS> 62,951,459
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,437,260
<INTEREST-EXPENSE> 1,169,522
<INCOME-PRETAX> 1,286,744
<INCOME-TAX> 211,538
<INCOME-CONTINUING> 2,272,164
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,272,164
<EPS-PRIMARY> .28
<EPS-DILUTED> 0
</TABLE>
