<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 September 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 September 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: 26.
1
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
------------------------------------------
INDEX
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) - September 30, 1997
and December 31, 1996
Condensed Consolidated Statements of Income (unaudited) - Three months
and nine months ended September 30, 1997 and 1996
Condensed Consolidated Statements of Cash Flows (unaudited) - Nine
months ended September 30, 1997 and 1996
Notes to Condensed Consolidated Financial Statements (unaudited) -
Three months and nine months ended September 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>
September 30, 1997 December 31, 1996
------------------------- ------------------------
RMB USD RMB USD
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash 73,212,975 8,799,636 39,709,594 4,772,788
Accounts and bills receivable, net Inventories 210,261,329 25,283,814 207,499,153 24,939,802
(Note 3) 98,518,366 11,841,150 87,549,836 10,522,817
Amounts due from related companies 27,847,494 3,347,055 33,089,333 3,977,083
Prepayments, deposits and other receivables 27,404,040 3,293,755 17,779,904 2,137,008
----------- ----------- ----------- ----------
Total current assets 437,344,204 52,565,410 385,627,820 46,349,498
Interest in an associated company (Note 5) 218,764,729 26,293,838 216,984,220 26,079,834
Property, plant and equipment, net 208,636,289 25,076,477 223,890,108 26,909,869
----------- ----------- ----------- ----------
Total assets 864,745,222 103,935,725 826,502,148 99,339,201
=========== =========== =========== ==========
</TABLE>
(continued)
3
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------------- ------------------------
RMB USD RMB USD
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings 40,500,000 4,867,789 40,500,000 4,867,789
Capital lease obligations 7,461,958 896,870 9,034,742 1,085,907
Accounts payable and accrued liabilities 109,680,054 13,182,699 104,207,246 12,524,909
Customer deposits 4,400,000 528,846 59,003,600 7,091,779
Amounts due to related companies 33,705,824 4,051,182 21,357,655 2,567,026
Amounts due to an associated company 211,456,372 25,415,429 166,501,751 20,012,230
Income taxes payable 260,000 31,250 260,000 31,250
Sales taxes payable 57,558,998 6,918,149 63,904,235 7,680,798
Deferred tax liabilities 6,173,000 741,947 4,413,000 530,409
----------- ----------- ----------- ----------
Total current liabilities 471,196,206 56,634,161 469,182,229 56,392,097
----------- ----------- ----------- ----------
Long term liabilities:
Capital lease obligations 10,108,179 1,214,925 15,862,549 1,906,556
----------- ----------- ----------- ----------
Minority interests 137,200,018 16,490,388 120,073,940 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 63,585,292 7,642,463 38,727,903 4,654,796
----------- ----------- ----------- ----------
Total shareholders' equity 172,445,871 20,726,666 147,588,482 17,738,999
----------- ----------- ----------- ----------
Total shareholders' advances and shareholders'
equity 246,240,819 29,596,251 221,383,430 26,608,584
----------- ----------- ----------- ----------
Total liabilities and shareholders' equity 864,745,222 103,935,725 826,502,148 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 Nine
Months Ended Months Ended
Three Months Ended Nine Months Ended September 30, September 30,
September 30, 1997 September 30, 1997 1996 1996
---------------------------------- ---------------------------- -------------- --------------
RMB USD RMB USD RMB RMB
------------------- ------------ ------------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Sales, including sales to
related companies of RMB
2,174,552 and RMB 8,705,009
for the three months and
nine months ended September
30, 1997, respectively, and
nil and nil for the three
months and nine months
ended September 30, 1996,
respectively 290,194,242 34,879,116 944,798,713 113,557,538 306,718,479 950,289,048
Sales taxes (5,206,871) (625,826) (17,770,567) (2,135,885) (5,812,980) (18,192,910)
------------------ ----------- ------------ ----------- ------------- -------------
Net sales 284,987,371 34,253,290 927,028,146 111,421,653 300,905,499 932,096,138
Cost of sales, including
inventory purchased from
related companies of
RMB 147,129,339 and RMB
557,134,320 for the three
months and nine months
ended September 30, 1997,
respectively, and RMB 202,
392,696 and RMB 605,179,405
for the three months and
nine months ended September
30, 1996, respectively;
and royalty fee paid to a
related company of RMB
1,469,494 and RMB 5,653,213
for the three months and nine
months ended September 30,
1997, respectively, and RMB
2,261,653 and RMB 6,395,214
for the three months and nine
months ended September 30,
1996, respectively (242,867,703) (29,190,830) (766,623,846) (92,142,289) (255,919,347) (787,903,498)
------------- ------------ ------------- ------------ ------------- ------------
Gross profit 42,119,668 5,062,460 160,404,300 19,279,364 44,986,152 144,192,640
Selling, general and
administrative expenses,
including management fee paid to
a related company of RMB 945,000
for the three months ended September
30, 1996 and 1997, respectively,
and RMB 2,835,000 for the nine
months ended September 30, 1996
and 1997, respectively (41,445,191) (4,981,393) (139,281,844) (16,740,606) (37,320,069) (119,096,142)
------------ ----------- ------------- ------------ ------------ -------------
Operating income 674,477 81,067 21,122,456 2,538,758 7,666,083 25,096,498
Foreign exchange gains
(losses) (41,061) (4,935) (52,917) (6,360) 374,708 534,459
Other expense:
Interest expense, including
interest paid to related companies
of RMB 1,873,841 and RMB
4,994,022 for the three months
and nine months ended September
30, 1997, respectively, and
RMB 2,778,908 and RMB 9,378,620
for the three months and nine
months ended September 30, 1996,
respectively (3,789,671) (455,489) (13,520,093) (1,625,011) (4,728,093) (17,553,745)
----------- ----------- ------------ ----------- ----------- ------------
Income (loss) before income
taxes (3,156,255) (379,357) 7,549,446 907,387 3,312,698 8,077,212
Income taxes - - (1,760,000) (211,538) (473,587) (973,587)
----------- ----------- ------------ ----------- ----------- -----------
</TABLE>
(continued)
5
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
Three Nine
Months Ended Months Ended
Three Months Ended Nine Months Ended September 30, September 30,
September 30, 1997 September 30, 1997 1996 1996
----------------------------- -------------------------- -------------- --------------
RMB USD RMB USD RMB RMB
------------- ------------- ------------ ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before equity in
earnings of an associated
company (3,156,255) (379,357) 5,789,446 695,849 2,839,111 7,103,625
Equity in earnings of an associated
company 13,542,701 1,627,729 36,194,021 4,350,243 6,567,324 15,058,854
---------- --------- ----------- ---------- ---------- ----------
Income before minority interests 10,386,446 1,248,372 41,983,467 5,046,092 9,406,435 22,162,479
Minority interests (4,433,459) (532,869) (17,126,078) (2,058,425) (5,417,228) (9,500,878)
---------- --------- ----------- ---------- ---------- ----------
Net income for the period 5,952,987 715,503 24,857,389 2,987,667 3,989,207 12,661,601
========== ========= =========== ========== ========== ==========
Net income per common share 0.74 0.09 3.11 0.37 0.50 1.58
========== ========= =========== ========== ========== ==========
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>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
-------------------------- -------------------
RMB USD RMB
------------ ----------- -------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 24,857,389 2,987,667 12,661,601
Adjustments to reconcile net income
to net cash provided by operating
activities:
Allowance for doubtful accounts 11,958,000 1,437,260 2,131,251
Depreciation and amortization 24,551,961 2,950,957 20,582,444
Foreign exchange (gains) losses 52,917 6,360 (534,459)
Minority interests 17,126,078 2,058,425 9,500,878
Equity in earnings of an associated company (36,194,021) (4,350,243) (15,058,854)
Dividend received from an associated company 34,413,512 4,136,239 39,797,878
Income taxes payable 1,760,000 211,538 3,910,971
----------- ---------- -----------
78,525,836 9,438,203 72,991,710
Changes in operating assets and liabilities:
(Increase) decrease in -
Accounts and bills receivable (14,820,176) (1,781,271) 1,388,756
Inventories (10,968,530) (1,318,333) (71,932,578)
Amounts due from related companies 5,241,839 630,029 25,588,630
Prepayments, deposits and other receivables (9,624,136) (1,156,747) (1,402,199)
Increase (decrease) in -
Accounts payable and accrued liabilities 5,472,808 657,789 64,817,290
Customer deposits (54,603,600) (6,562,933) (54,768,813)
Amount due to an associated company 44,954,621 5,403,200 10,332,572
Sales taxes payable (6,345,237) (762,649) 19,402,816
----------- ---------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 37,833,425 4,547,288 66,418,184
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (9,351,059) (1,123,926) (70,112,223)
----------- ---------- -----------
NET CASH USED IN INVESTING
ACTIVITIES (9,351,059) (1,123,926) (70,112,223)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
New bank borrowings - - 13,500,000
Increase in amounts due to related companies 12,348,169 1,484,155 7,539,127
Repayment of capital lease obligations (7,327,154) (880,669) (2,834,883)
----------- ---------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 5,021,015 603,486 18,204,244
----------- ---------- -----------
Net increase in cash 33,503,381 4,026,848 14,510,205
Cash at beginning of period 39,709,594 4,772,788 57,448,305
----------- ---------- -----------
Cash at end of period 73,212,975 8,799,636 71,958,510
=========== ========== ===========
</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 NINE MONTHS ENDED SEPTEMBER 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 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
8
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
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.
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
September 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
9
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
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 September 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.
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 September 30, 1997, the
results of operations for the three months and nine months ended September 30,
1997 and 1996, and the cash flows for the nine months ended September 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 nine months ended September
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.
10
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
NOTE 3 -- INVENTORIES
Inventories consisted of the following at September 30, 1997 and December 31,
1996:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
RMB USD RMB USD
--- --- --- ---
<S> <C> <C> <C> <C>
Raw materials 32,135,380 3,862,425 30,935,530 3,718,213
Work in progress 6,441,597 774,230 6,224,036 748,081
Finished goods 59,941,389 7,204,495 50,390,270 6,056,523
---------- ---------- ---------- ----------
98,518,366 11,841,150 87,549,836 10,522,817
========== ========== ========== ==========
</TABLE>
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 September 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.
11
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 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
Three months ended September 30, 1997 13,542,701
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, September 30, 1997 218,764,729
===========
</TABLE>
The condensed statements of operations of Noble Brewery for the three months and
nine months ended September 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Three Nine
Months Ended Months Ended
Three Months Ended Nine Months Ended September 30, September 30,
September 30, 1997 September 30, 1997 1996 1996
--------------------------- ------------------------ ------------- -------------
RMB USD RMB USD RMB RMB
------------ ------------ ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net sales 131,444,252 15,798,588 498,849,616 59,957,886 166,186,130 508,780,266
============ ============ =========== ========== ============= =============
Net income 21,263,958 2,555,764 83,875,570 10,081,198 20,730,412 55,898,583
============ ============ =========== ========== ============= =============
The Company's share
of net income after
adjustment of unrealised
intercompany profit 13,542,701 1,627,729 36,194,021 4,350,243 6,567,324 15,058,854
============ ============ =========== ========== ============= =============
</TABLE>
12
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
NOTE 6 -- PRODUCTION AND SALE OF PABST BLUE RIBBON BEER 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 April 1997,
in order to facilitate the efficient distribution and sale of Pabst Blue Ribbon
beer in China, the Marketing Company and the Sichuan Brewery entered into a
Memorandum of Understanding. Pursuant to the Memorandum of Understanding,
Sichuan Brewery will sell all of its production of Pabst Blue Ribbon beer to the
Marketing Company at mutually agreed ex-factory prices, and will grant 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 volume. For the six month
period from April 1, 1997 to September 30, 1997, the Marketing Company purchased
an aggregate of 6,963 tons of Pabst Blue Ribbon beer produced by the Sichuan
Brewery, which represents 3.9% of the Company's total sales volume for the nine
months ended September 30, 1997.
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.
In early October 1997, the Sichuan Brewery advised the Marketing Company that it
intends to commence selling its production of Pabst Blue Ribbon beer directly
and that it will therefore cease selling its production of Pabst Blue Ribbon
beer to the Marketing Company, effective immediately. The Company is currently
in discussions with Guangdong Blue Ribbon and the Sichuan Brewery with regard to
the termination of the Memorandum of Understanding between the Sichuan Brewery
and the Marketing Company. The Company is also reviewing its legal options in
the PRC with respect to the termination of the Memorandum of Understanding, but
is currently unable to predict the ultimate resolution of this matter.
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, 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.
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.
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.
14
<PAGE>
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 April 1997,
in order to facilitate the efficient distribution and sale of Pabst Blue Ribbon
beer in China, the Marketing Company and the Sichuan Brewery entered into a
Memorandum of Understanding. Pursuant to the Memorandum of Understanding,
Sichuan Brewery will sell all of its production of Pabst Blue Ribbon beer to the
Marketing Company at mutually agreed ex-factory prices, and will grant 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 volume. For the six month
period from April 1, 1997 to September 30, 1997, the Marketing Company purchased
an aggregate of 6,963 tons of Pabst Blue Ribbon beer produced by the Sichuan
Brewery, which represents 3.9% of the Company's total sales volume for the nine
months ended September 30, 1997.
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.
In early October 1997, the Sichuan Brewery advised the Marketing Company
that it intends to commence selling its production of Pabst Blue Ribbon beer
directly and that it will therefore cease selling its production of Pabst Blue
Ribbon beer to the Marketing Company, effective immediately. The Company is
currently in discussions with Guangdong Blue Ribbon and the Sichuan Brewery with
regard to the termination of the Memorandum of Understanding between the Sichuan
Brewery and the Marketing Company. The Company is also reviewing its legal
options in the PRC with respect to the termination of the Memorandum of
Understanding, but is currently unable to predict the ultimate resolution of
this matter.
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:
15
<PAGE>
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 September 30, 1997 and 1996 -
Sales: For the three months ended September 30, 1997, net sales, all of
which were conducted through the Marketing Company, were RMB 284,987,371, all of
which were attributable to beer sales. During the three months ended September
30, 1997, the Marketing Company purchased RMB 139,504,962 and RMB 7,624,377 of
beer products from Noble Brewery and Sichuan Brewery, respectively, for resale.
Approximately 99.7% of total beer sales during the three months ended September
30, 1997 were provided from the sale and distribution of beer products under the
Pabst Blue Ribbon brand name. For the three months ended September 30, 1996,
net sales, all of which were conducted through the Marketing Company, were RMB
300,905,499, of which RMB 273,815,456 (91.0%) were attributable to beer sales
and RMB 27,090,043 (9.0%) were attributable to the sales of mineral water, non-
carbonated soft drinks and red wine.
Net sales decreased by RMB 15,918,128 or 5.3% in 1997 as compared to 1996,
as a result of 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 September 30, 1997, net sales of beer products increased by RMB 11,171,915
or 4.1% to RMB 284,987,371, as compared to RMB 273,815,456 for the three months
ended September 30, 1996. The Company sold 58,400 metric tons of beer to
distributors in 1997 as compared to 57,475 metric tons of beer in 1996. The
increase in net sales of beer products in 1997 as compared to 1996 was primarily
attributable to a shift in the sales mix to higher value products in 1997.
During the three months ended September 30, 1997, Zhaoqing Brewery sold
15,505 metric tons of beer to the Marketing Company, of which 499 metric tons
(3.2%) were local brand beer and 15,006 metric tons (96.8%) were Pabst Blue
Ribbon beer. During the three months ended September 30, 1996, Zhaoqing Brewery
sold 23,412 metric tons of beer to the Marketing Company, of which 504 metric
tons (2.2%) were local brand beer and 22,908 metric tons (97.8%) were Pabst Blue
Ribbon beer. Total beer sold by Zhaoqing Brewery to the Marketing Company
decreased by 7,907 metric tons or 33.8% from 1996 to 1997.
The Marketing Company regulates the production of Pabst Blue Ribbon beer by
Zhaoqing Brewery and Noble Brewery in accordance with their respective
production capacities in order to balance warehouse inventory levels and
accommodate projected market demand. As a result of heavy rains in China during
the
16
<PAGE>
three months ended September 30, 1997, which caused widespread flooding and
washed out many roads, the Company's ability to ship its beer products to
distributors was significantly impaired during this period. In addition, the
Company believes that the widespread flooding also caused a temporary decrease
in consumer's discretionary income available to purchase the Company's products.
As a result of these factors, total beer sold by Zhaoqing Brewery and Noble
Brewery to the Marketing Company decreased during the three months ended
September 30, 1997 as compared to the three months ended September 30, 1996, as
the Company reduced production to correspond to lower demand in an effort to
avoid excessive finished goods inventory.
Gross Profit: For the three months ended September 30, 1997, total gross
profit was RMB 42,119,668 or 14.8% of total net sales, all of which consisted of
gross profit from beer sales. For the three months ended September 30, 1996,
total gross profit was RMB 44,986,152 or 15.0% of total net sales, and consisted
of gross profit from beer sales of RMB 43,076,486 or 15.7% of net sales of beer
and gross profit from sales of mineral water, non-carbonated soft drinks and red
wine of RMB 1,909,666 or 7.0% of net sales of mineral water, non-carbonated soft
drinks and red wine.
Gross margin from beer sales decreased to 14.8% in 1997 as compared to
15.7% in 1996 as a result of a shift in the sales mix to slightly lower margin
products in 1997 in response to changing market conditions.
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
September 30, 1997, selling, general and administrative expenses were RMB
41,445,191 or 14.5% of net sales, consisting of selling expenses of RMB
29,985,061 and general and administrative expenses of RMB 11,460,130. The
Company did not record an allowance for doubtful accounts for the three months
ended September 30, 1997, as the Company recovered some previously written-off
accounts receivable during the period.
For the three months ended September 30, 1996, selling, general and
administrative expenses were RMB 37,320,069 or 12.4% of net sales, consisting of
selling expenses of RMB 29,142,163 and general and administrative expenses of
RMB 8,177,906. Net of an allowance for doubtful accounts of RMB 801,251,
general and administrative expenses were RMB 7,376,655.
Selling expenses include costs relating to the advertising, promotion,
marketing and distribution of Pabst Blue Ribbon beer in China. Selling expenses
increased by RMB 842,898 or 2.9% in 1997 as compared to 1996, and as a percent
of net sales, to 10.5% in 1997 from 9.7% in 1996. Selling expenses increased in
1997 as compared to 1996, both on an absolute basis and as a percentage of
sales, as a result of the increase in selling expenses in 1997 related to beer
products exceeding the 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
4,083,475 or 55.4% in 1997 as compared to 1996, and as a percentage of net
sales, to 4.0% in 1997 from 2.5% in 1996. General and administrative expenses
increased in 1997 as compared in 1996 primarily as a result of increased
personnel and personnel related costs.
17
<PAGE>
Operating Income: For the three months ended September 30, 1997, operating
income was RMB 674,477 or 0.2% of net sales. For the three months ended
September 30, 1996, operating income was RMB 7,666,083 or 2.5% of net sales.
The decrease in operating income is primarily attributable to the elimination of
the sales of mineral water, non-carbonated soft drinks and red wine and
increased selling, general and administrative expenses. The adjustment and
regulation of production between Zhaoqing Brewery and Noble Brewery by the
Marketing Company also contributed to the decrease in operating income.
Interest Expense: For the three months ended September 30, 1997, interest
expense decreased by RMB 938,422 or 19.8% to RMB 3,789,671, as compared to RMB
4,728,093 for the three months ended September 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 September 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 September 30, 1996,
deferred income tax expense of RMB 473,587 was recorded.
Net Income: Net income increased to RMB 5,952,987 (RMB 0.74 per share) for
the three months ended September 30, 1997, as compared to RMB 3,989,207 (RMB
0.50 per share) for the three months ended September 30, 1996.
Nine Months Ended September 30, 1997 and 1996 -
Sales: For the nine months ended September 30, 1997, net sales, all of
which were conducted through the Marketing Company, were RMB 927,028,146, all of
which were attributable to beer sales. During the nine months ended September
30, 1997, the Marketing Company purchased RMB 529,114,902 and RMB 28,019,418 of
beer products from Noble Brewery and Sichuan Brewery, respectively, for resale.
Approximately 99.8% of total beer sales during the nine months ended September
30, 1997 were provided from the sale and distribution of beer products under the
Pabst Blue Ribbon brand name. For the nine months ended September 30, 1996, net
sales, all of which were conducted through the Marketing Company, were RMB
932,096,138, of which RMB 861,982,510 (92.5%) were attributable to beer sales
and RMB 70,113,628 (7.5%) were attributable to the sales of mineral water, non-
carbonated soft drinks and red wine.
Net sales decreased by RMB 5,067,992 or 0.5% in 1997 as compared to 1996,
as a result of 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 nine months
ended September 30, 1997, net sales of beer products increased by RMB 65,045,636
or 7.5% to RMB 927,028,146, as compared to RMB 861,982,510 for the nine months
ended September 30, 1996. The Company sold 181,973 metric tons of beer to
distributors in 1997 as compared to 174,198 metric tons of beer in 1996. The
increase in net sales of beer products in 1997 as compared to 1996 was primarily
attributable to a shift in the sales mix to higher value products in 1997.
During the nine months ended September 30, 1997, Zhaoqing Brewery sold
59,016 metric tons of beer to the Marketing Company, of which 1,156 metric tons
(2.0%) were local brand beer and 57,860 metric tons (98.0%) were Pabst Blue
Ribbon beer. During the nine months ended September 30, 1996, Zhaoqing Brewery
sold 66,432 metric tons of beer to the Marketing Company, of which 1,526 metric
tons (2.3%) were local brand beer and 64,906 metric tons (97.7%) were Pabst Blue
Ribbon beer. Total beer sold by Zhaoqing Brewery to the Marketing Company
decreased by 7,416 metric tons or 11.2% from 1996 to 1997.
The Marketing Company regulates the production of Pabst Blue Ribbon beer by
Zhaoqing Brewery and Noble Brewery in accordance with their respective
production capacities in order to balance warehouse inventory levels and
accommodate projected market demand. As a result of heavy rains in China during
the
18
<PAGE>
three months ended September 30, 1997, which caused widespread flooding and
washed out many roads, the Company's ability to ship its beer products to
distributors was significantly impaired during this period. In addition, the
Company believes that the widespread flooding also caused a temporary decrease
in consumer's discretionary income available to purchase the Company's products.
As a result of these factors, total beer sold by Zhaoqing Brewery and Noble
Brewery to the Marketing Company decreased during the nine months ended
September 30, 1997 as compared to the nine months ended September 30, 1996, as
the Company reduced production to correspond to lower demand in an effort to
avoid excessive finished goods inventory.
Gross Profit: For the nine months ended September 30, 1997, total gross
profit was RMB 160,404,300 or 17.3% of total net sales, all of which consisted
of gross profit from beer sales. For the nine months ended September 30, 1996,
total gross profit was RMB 144,192,640 or 15.5% of total net sales, and
consisted of gross profit from beer sales of RMB 139,020,181 or 16.1% of net
sales of beer and gross profit from sales of mineral water, non-carbonated soft
drinks and red wine of RMB 5,172,459 or 7.4% of net sales of mineral water, non-
carbonated soft drinks and red wine.
Gross margin from beer sales increased to 17.3% in 1997 as compared to
16.1% in 1996 as a result a shift in the sales mix to higher margin products in
1997 in response to changing market conditions.
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 nine months ended
September 30, 1997, selling, general and administrative expenses were RMB
139,281,844 or 15.0% of net sales, consisting of selling expenses of RMB
86,708,573 and general and administrative expenses of RMB 52,573,271. Net of an
allowance for doubtful accounts of RMB 11,958,000, general and administrative
expenses were RMB 40,615,271.
For the nine months ended September 30, 1996, selling, general and
administrative expenses were RMB 119,096,142 or 12.8% of net sales, consisting
of selling expenses of RMB 84,158,443 and general and administrative expenses of
RMB 34,937,699. Net of an allowance for doubtful accounts of RMB 2,131,251,
general and administrative expenses were RMB 32,806,448.
Selling expenses include costs relating to the advertising, promotion,
marketing and distribution of Pabst Blue Ribbon beer in China. Selling expenses
increased by RMB 2,550,130 or 3.0% in 1997 as compared to 1996, and increased as
a percent of net sales, to 9.4% in 1997 from 9.0% in 1996. Selling expenses
increased in 1997 as compared to 1996, both on an absolute basis and as a
percentage of net sales, as a result of the increase in selling expenses in 1997
related to beer products exceeding the 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
7,808,823 or 23.8% in 1997 as compared to 1996, and as a percentage of net
sales, to 4.4% in 1997 from 3.5% in 1996. General and administrative expenses
increased in 1997 as compared to 1996 primarily as a result of increased
personnel and personnel related costs.
19
<PAGE>
The allowance for doubtful accounts, which is calculated based primarily on
the age of outstanding accounts receivable, increased to 1.3% of net sales in
1997 as compared to 0.2% 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 nine months ended September 30, 1997, operating
income was RMB 21,122,456 or 2.3% of net sales. For the nine months ended
September 30, 1996, operating income was RMB 25,096,498 or 2.7% of net sales.
The decrease in operating income is primarily attributable to the elimination of
the sale of mineral water, non-carbonated soft drinks and red wine and increased
selling, general and administrative expenses. The adjustment and regulation of
production between the two breweries Zhaoqing Brewery and Noble Brewery by the
Marketing Company also contributed to the decrease in operating income.
Interest Expense: For the nine months ended September 30, 1997, interest
expense decreased by RMB 4,033,652 or 23.0% to RMB 13,520,093, as compared to
RMB 17,553,745 for the nine months ended September 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 nine months ended September 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 nine months ended September 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 nine months ended September 30, 1996,
deferred income tax expense of RMB 973,587 was recorded.
Net Income: Net income increased to RMB 24,857,389 (RMB 3.11 per share)
for the nine months ended September 30, 1997, as compared to RMB 12,661,601 (RMB
1.58 per share) for the nine months ended September 30, 1996.
Noble Brewery:
- -------------
Three Months Ended September 30, 1997 and 1996 -
Sales: For the three months ended September 30, 1997 and 1996, net sales
were RMB 131,444,252 and RMB 166,186,130, respectively.
During the three months ended September 30, 1997, Noble Brewery sold 31,214
metric tons of beer to the Marketing Company, as compared to 42,587 metric tons
of beer during the three months ended September 30, 1996. Total beer sold by
Noble Brewery to the Marketing Company decreased by 11,373 metric tons or 26.7%
from 1996 to 1997.
Gross Profit: For the three months ended September 30, 1997 and 1996,
gross profit was RMB 30,887,795 or 23.5% of net sales and RMB 36,443,517 or
21.9% of net sales, respectively.
Selling, General and Administrative Expenses: For the three months ended
September 30, 1997, selling, general and administrative expenses totalled RMB
5,706,367 or 4.3% of net sales, consisting of selling expenses of RMB 1,522,315
and general and administrative expenses of RMB 4,184,052. For the three months
ended September 30, 1996, selling, general and administrative expenses totalled
RMB 11,753,658 or 7.1% of net sales, consisting of selling expenses of RMB
5,290,666 and general and administrative expenses of RMB 6,462,992. Selling
expenses consist of warehousing, storage and freight costs.
20
<PAGE>
Operating Income: For the three months ended September 30, 1997 and 1996,
operating income was RMB 25,181,428 or 19.2% of net sales and RMB 24,689,859 or
14.9% 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 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 3,565,846 has been recorded as income tax expense for the three
months ended September 30, 1997. For the three months ended September 30, 1996,
income tax expense of RMB 4,477,400 was recorded.
Net Income: Net income increased to RMB 21,263,958 or 16.2% of net sales
for the three months ended September 30, 1997, as compared to RMB 20,730,412 or
12.5% of net sales for the three months ended September 30, 1996.
Nine Months Ended September 30, 1997 and 1996 -
Sales: For the nine months ended September 30, 1997 and 1996, net sales
were RMB 498,849,616 and RMB 508,780,266, respectively.
During the nine months ended September 30, 1997, Noble Brewery sold 116,369
metric tons of beer to the Marketing Company, as compared to 121,633 metric tons
of beer during the nine months ended September 30, 1996. Total beer sold by
Noble Brewery to the Marketing Company decreased by 5,264 metric tons or 4.3%
from 1996 to 1997.
Gross Profit: For the nine months ended September 30, 1997 and 1996, gross
profit was RMB 131,976,860 or 26.5% of net sales and RMB 106,325,230 or 20.9% of
net sales, respectively.
Selling, General and Administrative Expenses: For the nine months ended
September 30, 1997, selling, general and administrative expenses totalled RMB
32,867,394 or 6.6% of net sales, consisting of selling expenses of RMB 3,255,002
and general and administrative expenses of RMB 29,612,392. For the nine months
ended September 30, 1996, selling, general and administrative expenses totalled
RMB 36,212,574 or 7.1% of net sales, consisting of selling expenses of RMB
12,535,121 and general and administrative expenses of RMB 23,677,453. Selling
expenses consist of warehousing, storage and freight costs.
Operating Income: For the nine months ended September 30, 1997 and 1996,
operating income was RMB 99,109,466 or 19.9% of net sales and RMB 70,112,656 or
13.8% 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 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 15,099,465 has been recorded as income tax expense for the nine
months ended September 30, 1997. For the nine months ended September 30, 1996,
income tax expense of RMB 14,251,007 was recorded.
Net Income: Net income increased to RMB 83,875,570 or 16.8% of net sales
for the nine months ended September 30, 1997, as compared to RMB 55,898,583 or
11.0% of net sales for the nine months ended September 30, 1996.
Consolidated Financial Condition - September 30, 1997:
Liquidity and Capital Resources - For the nine months ended September 30,
1997, the Company's operations provided cash resources of RMB 37,833,425. The
Company's cash balance increased by RMB 33,503,381 to RMB 73,212,975 at
September 30, 1997, as compared to RMB 39,709,594 at December 31, 1996. The
Company's net working capital deficit decreased by RMB 49,702,407 to RMB
33,852,002 at
21
<PAGE>
September 30, 1997, as compared to RMB 83,554,409 at December 31, 1996, and the
Company's current ratio at September 30, 1997 was 0.93:1, as compared to 0.82:1
at December 31, 1996.
Net of an allowance for doubtful accounts of RMB 11,958,000 for the nine
months ended September 30, 1997, accounts and bills receivable increased by RMB
2,862,176 or 1.4% to RMB 210,361,329 at September 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 September 30,
1997, bills receivable had increased to RMB 62,689,815 or 29.8% 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.
The Company's inventories increased by RMB 10,968,530 or 12.5% to RMB
98,518,366 at September 30, 1997, as compared to RMB 87,549,836 at December 31,
1996, as a result of weaker than normal demand during the three months ended
September 30, 1997 as previously discussed, and consisted primarily of an
increase in finished goods.
The Company's accounts payable and accrued liabilities increased by RMB
5,472,808 or 5.3% to RMB 109,680,054 at September 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 54,603,600 or 92.5% to RMB 4,400,000 at
September 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 44,954,621 or
27.0% to RMB 211,456,372 at September 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 12,348,169 or 57.8%
to RMB 33,705,824 at September 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 nine months ended September 30, 1997, additions to property, plant
and equipment aggregated RMB 9,351,059. The Company anticipates that additional
capital expenditures in connection with the continuing expansion and improvement
of production facilities at Zhaoqing Brewery during the remainder of 1997 will
be approximately RMB 20,000,000, a portion of which is expected to be funded by
lease financing.
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
22
<PAGE>
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 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 nine months ended September 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 September 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 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
23
<PAGE>
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 September 30, 1997.
24
<PAGE>
PART II. OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K -
Three Months Ended September 30, 1997: None.
25
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CBR BREWING COMPANY, INC.
-------------------------
(Registrant)
Date: November 10, 1997 By: /s/ ZI-SHOU CHEN
------------------
Zi-shou Chen
President and Director
(Duly authorized officer)
Date: November 10, 1997 By: /s/ GARY C.K. LUI
-------------------
Gary C.K. Lui
Chief Financial Officer
(Chief financial officer)
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S
QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 8,799,636
<SECURITIES> 0
<RECEIVABLES> 25,283,814
<ALLOWANCES> 0
<INVENTORY> 11,841,150
<CURRENT-ASSETS> 52,565,410
<PP&E> 25,076,477
<DEPRECIATION> 0
<TOTAL-ASSETS> 103,935,725
<CURRENT-LIABILITIES> 56,634,161
<BONDS> 1,214,925
0
0
<COMMON> 820
<OTHER-SE> 20,725,846
<TOTAL-LIABILITY-AND-EQUITY> 103,935,725
<SALES> 111,421,653
<TOTAL-REVENUES> 111,421,653
<CGS> 92,142,289
<TOTAL-COSTS> 92,142,289
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,437,260
<INTEREST-EXPENSE> 1,625,011
<INCOME-PRETAX> 907,387
<INCOME-TAX> 211,538
<INCOME-CONTINUING> 2,981,667
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,987,667
<EPS-PRIMARY> .37
<EPS-DILUTED> 0
</TABLE>
