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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
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[ ] 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
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CBR BREWING COMPANY, INC.
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(Exact name of registrant as specified in its charter)
Florida 65-0145422
- ------------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
433 North Camden, Suite 1200
Beverly Hills, California 90210
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(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (310) 274-5172
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of July 31,1997, 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.
The aggregate market value of the outstanding voting common stock held by
non-affiliates of the registrant on July 31,1997 was $0, as there was no trading
market in the Company's common stock.
Documents incorporated by reference: None.
The total number of sequential pages in this report is 168.
The exhibit index is located on pages 65 through 68.
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PART I.
ITEM 1. BUSINESS
CBR Brewing Company, Inc., a Florida corporation (the "Company", which
term shall include, when the context so requires, its subsidiaries and
affiliates), is the parent of High Worth Holdings, Ltd., a British Virgin
Islands corporation ("Holdings"). Since November 1994, Holdings has owned a 60%
interest in Zhaoqing Blue Ribbon High Worth Brewery Ltd., a Sino-foreign joint
venture ("High Worth JV"), which, 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"). The other 40% interest in High Worth
JV is owned by Guangdong Blue Ribbon Group Co. Ltd. ("Guangdong Blue Ribbon").
See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS". Substantially all of the
beer currently sold by the Company is marketed under the Pabst Blue Ribbon
label, and is brewed under a sublicense agreement with Guangdong Blue Ribbon,
which obtained its license from Pabst Brewing Company ("Pabst US").
DESCRIPTION OF BUSINESS
The Company is engaged in the business of brewing, distributing and
marketing Pabst Blue Ribbon beer in China. Currently, the Company owns
effective interests of 60% and 24% in the two brewing facilities currently
producing Pabst Blue Ribbon beer in China, both of which are managed by the
Company. The Company is also presently responsible for the marketing and sale
in China of the Pabst Blue Ribbon beer produced by the two brewing facilities.
China is currently ranked as the second largest beer producer in the
world behind the United States. The management of the Company believes that
Pabst Blue Ribbon beer is currently the leading foreign label sold in China,
both in number of units sold and total sales. Pabst Blue Ribbon is considered a
premium brand in China, along with such other labels as Tsingtao, Carlsberg,
Miller, Budweiser, Coors and Heileman.
The Company produces Pabst Blue Ribbon beer in China to avoid import
tariffs that range as high as 120%. Presently, all production is centered in
Zhaoqing City, which is approximately 100 miles from Hong Kong in the Guangdong
Province of China. Pabst US provides quality control assistance and oversight
to the Company on a regular basis. The Company markets Pabst Blue Ribbon beer
in every province in China. The Company currently maintains offices in Beverly
Hills, California, Hong Kong and Zhaoqing City.
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Holdings is a British Virgin Islands corporation and a wholly owned
subsidiary of CBR Brewing Company, Inc. 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 (See "PABST LICENSING ARRANGEMENTS AND
TRADEMARKS") 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 in turn 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. See "THE JOINT VENTURE COMPANIES". In addition,
Zhaoqing Brewery HC owns a 70% interest in Zhaoqing Blue Ribbon Beer Marketing
Company Limited, a PRC company (the "Marketing Company"), which presently
conducts the sales, advertising and promotional efforts for the Company's
production of Pabst Blue Ribbon beer in China. 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 (See "MARKETING AND OPERATIONS - Summary of
Operations"), resulting in the Company owning a 42% net interest in the
Marketing Company.
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 (See "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS").
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PROPERTY AND PRODUCTION FACILITIES
Zhaoqing Brewery
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Zhaoqing Brewery is situated on a site containing approximately
1,421,492 square feet and is three miles from Zhaoqing City, Guangdong Province.
Zhaoqing Brewery occupies the site pursuant to certificates of land use rights
issued by the local government. The certificates do not specify a period for
the use of the land, but normally it does not exceed 70 years.
The original facilities of Zhaoqing Brewery were constructed between
1978 and 1980 with annual production capacity based on old brewing technology of
approximately 50,000 metric tons or 425,000 barrels of beer. Prior to 1995,
Zhaoqing Brewery had produced exclusively domestic brands under the names
Zhaoqing beer, Dinghu beer and Xile beer. In the middle of 1994, with the
assistance of Pabst US, Zhaoqing Brewery commenced the conversion and refinement
of its original facilities and adopted a new brewing technology in order to
produce beer under the Pabst Blue Ribbon label. In early 1995, the production
of all domestic brands ceased, and Zhaoqing Brewery is now only producing beer
under the Pabst Blue Ribbon label. With the implementation of the new brewing
technology and the purchase of additional equipment, Zhaoqing Brewery reached an
annual production capacity of 100,000 metric tons or 850,000 barrels by the end
of 1995.
Zhaoqing Brewery annually shuts down portions of the facility for a
short period of time during the low season, normally in December, to provide
regular and scheduled maintenance. Zhaoqing Brewery has access to replacement
parts that can be manufactured by several local toolmakers in Zhaoqing city.
Noble Brewery
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Noble Brewery is situated on a site adjacent to Zhaoqing Brewery
containing approximately 1,453,000 square feet and is three miles from Zhaoqing
City. Noble Brewery has land use rights of 50 years ending in the year 2043.
Noble Brewery consists of the original facilities constructed between
1988 and 1990 by Pabst Blue Ribbon Brewery (Zhaoqing) Co. Ltd. ("Pabst
Zhaoqing"), the operator of the facilities prior to the establishment of Noble
Brewery. These facilities had an annual production capacity of approximately
80,000 metric tons or 680,000 barrels of beer per year. The second phase of
brewing facilities, which was completed in July 1994, has a production capacity
of approximately 120,000 metric tons or 1,020,000 barrels of beer per year.
Pabst US supplied the majority of the equipment in both the first and second
phase of the brewing facilities, in addition of offering technical assistance in
its installation and maintenance. The brewing equipment is in good condition
and there is no specific limitation to its life
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span when properly maintained. On an annual basis, Noble Brewery shuts down
portions of the facility for a short period of time during the low season,
normally in December, to provide regular and scheduled maintenance. Noble
Brewery has access to replacement parts that can be manufactured by several
local toolmakers in Zhaoqing.
Noble Brewery conducted and completed trial production runs of beer
for the second phase of brewing facilities in July 1994, and production of beer
for commercial sale started with full quantities in late 1994.
MARKETING AND OPERATIONS
Summary of Operations
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The Marketing Company was incorporated in February 1995 as a limited
liability company under the laws of the PRC, in which Zhaoqing Brewery HC owns a
70% interest and Guangdong Blue Ribbon directly owns a 30% interest and
indirectly owns a 28% interest. As a result, the Company owns a 42% net
interest in the Marketing Company.
The Company's distribution and marketing operations are being
conducted by the Marketing Company. The Marketing Company began purchasing the
output of beer from Noble Brewery in July 1995, Zhaoqing Brewery in April 1995
and the Sichuan Brewery in April 1997 (See "PABST LICENSING ARRANGEMENTS AND
TRADEMARKS - Production by Guangdong Blue Ribbon"), and is responsible for its
distribution throughout China. The Marketing Company is also responsible for
the promotion and advertising of the Company's production of Pabst Blue Ribbon
beer in China.
Pursuant to the long term purchase contracts signed between the
Marketing Company, Zhaoqing Brewery and Noble Brewery in April 1995 and July
1995, respectively, the Marketing Company is required to purchase all the Pabst
Blue Ribbon beer produced by Zhaoqing Brewery and Noble Brewery at mutually
agreed ex-factory prices. The Marketing Company is allowed to mark-up the
prices of the Pabst Blue Ribbon beer purchased in order to adequately cover the
selling, advertising, promotional, distribution and administrative expenses
incurred in selling these beer products to the ultimate distributors or
customers.
Pabst Blue Ribbon Beer
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Both Noble Brewery and Zhaoqing Brewery now produce only Pabst Blue
Ribbon Beer. There are two products in Pabst Blue Ribbon brand breweries'
portfolio: 11-degree light processed beer and draught beer. The 11-degree
light
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processed beer is packaged in 946 ml., 640 ml. and 355 ml. bottles and 500 ml.
and 355 ml. cans and is the breweries' primary product. The draught beer is
sold only in kegs.
The 946 ml. glass bottle and 500 ml. can packages for Pabst Blue
Ribbon beer were newly introduced by Zhaoqing Brewery in 1996, and are expected
to be newly introduced by Noble Brewery in 1997.
Sales of the 11-degree processed beer in 946 ml., 640 ml. and 355 ml.
bottles and 500 ml. and 355 ml. cans accounted for approximately 7.1%, 60.0%,
1.8%, 0.1% and 28.7%, respectively, of the sales volume of the Company in 1996.
Sales of the 11-degree processed beer in 640 ml. and 355 ml. bottles
and 355 ml. cans accounted for approximately 68.1%, 4.5% and 24.8%,
respectively, of the sales volume of the Company in 1995.
Pabst Blue Ribbon beer is marketed and sold as a premium beer in
higher-priced establishments such as restaurants, bars alcohol and tobacco
companies and retail stores, primarily in urban centers all over China.
Management anticipates that the breweries will continue to expand the
distribution of these products in new China markets, subject to the limitations
of the transportation network and the Company's ability to expand its market
share in these markets.
The specifications and characteristics of the beers produced by the
breweries are set out below :
<TABLE>
<CAPTION>
TYPE OF BEER PACKAGE GENERAL DESCRIPTION
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<S> <C> <C>
11-degree light processed Can (500 ml. & 355 ml.) 11-degree malt content,
beer Bottle (946 ml., alcohol content 3.3% (w/w)
640 ml. & 355 ml.)
Draught beer Keg (30 liter) 11-degree malt content,
alcohol content 3.4% (w/w)
</TABLE>
Note : w/w refers to weight by weight (i.e., measurement of alcoholic content
of beer by weight of beer).
Brand Performance: The 11-degree light processed beer is the biggest
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selling beer in the Company's Pabst Blue Ribbon beer portfolio, accounting for
approximately 97.7% of the Company's production in 1996 and 97.4% of the
Company's production in 1995.
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The 11-degree light processed beer is a beverage that offers Chinese
consumers an attractive alternative to their traditional malt-based beverage.
Sales of this product were expanded to 32 provinces and cities in China in 1995
and 1996.
Sales: The Company's highest volume sales for Pabst Blue Ribbon beer
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have been in the provinces of Guangdong, Fujian and Zhejiang. The Company
utilizes a network of non-exclusive regional distributors whose field sales
force maintains customer contact and satisfaction. Sales of Pabst Blue Ribbon
beer were 229,540 metric tons or approximately 1,951,090 barrels in 1996, a 22%
increase over 1995. Sales of Pabst Blue Ribbon beer were 187,662 metric tons or
approximately 1,595,127 barrels in 1995, a 56% increase over 1994.
Domestic Brand Name Beer
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Prior to the end of 1994, Zhaoqing Brewery produced beer exclusively
under domestic brand names, namely Zhaoqing beer, Dinghu beer and Xile beer, all
of which were non-premium beers which targeted customers in the low to middle
economic range. Sales of domestic brand beer were approximately 33,000 metric
tons or 280,500 barrels in 1994, almost the same as in 1993. Production of
these local brand beers was completely discontinued in March 1995 when Zhaoqing
Brewery commenced producing Pabst Blue Ribbon beer on an exclusive basis.
However, beer that does not meet Pabst Blue Ribbon quality standards is
generally packaged and distributed as local brand beer.
Pabst Blue Ribbon beer is targeted to the premium beer market in China
while the domestic brand beer previously produced by Zhaoqing Brewery was
targeted to the non-premium market.
The following tables present information with respect to the sales and
volume of beer sold by Noble Brewery (which produces Pabst Blue Ribbon beer
exclusively) and by Zhaoqing Brewery in 1995 and 1996. In February 1995, the
Marketing Company was established to conduct the distribution, marketing and
promotion of the Company's production of Pabst Blue Ribbon beer throughout
China. The Marketing Company also sells mineral water and non-carbonated soft
drinks produced by Guangdong Blue Ribbon under the Blue Ribbon brand name.
Zhaoqing Brewery HC owns a 70% interest and Guangdong Blue Ribbon directly owns
a 30% interest and indirectly owns a 28% interest in the Marketing Company. As
a result, the Company owns a 42% net interest in the Marketing Company.
Zhaoqing Brewery and Noble Brewery commenced selling their production of Pabst
Blue Ribbon beer through the Marketing Company in April 1995 and July 1995,
respectively. Accordingly, such sales by each brewery are reflected as either
sales or inventory on the books of the Marketing Company.
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<TABLE>
<CAPTION>
Net Sales
1995 Net Sales Volume Sold per Ton
---------------- ---------- ------------- ----------
(RMB'000) (metric tons) (RMB'000)
<S> <C> <C> <C>
Noble Brewery 681,724 161,200 4.2
Zhaoqing Brewery
Local Brands 27,735 11,388 2.4
Pabst Blue Ribbon 149,664 34,320 4.4
Marketing Company
Pabst Blue Ribbon 486,212 95,627 5.1
Non-alcoholic drinks 62,286 26,300 2.4
<CAPTION>
Net Sales
1996 Net Sales Volume Sold per Ton
--------------- --------- ------------ ---------
(RMB'000) (metric tons) (RMB'000)
<S> <C> <C> <C>
Noble Brewery 655,317 154,435 4.2
Zhaoqing Brewery
Local Brands 5,666 2,526 2.2
Pabst Blue Ribbon 367,213 80,913 4.5
Marketing Company
Pabst Blue Ribbon 1,173,060 229,540 5.1
Non-alcoholic drinks 75,186 30,687 2.5
</TABLE>
Seasonality
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The beer industry in China is seasonal. The Company's sales are
usually at their lowest in the months of October and November and highest in the
months of March through September.
LOCATION
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The breweries are located adjacent to each other in the City of
Zhaoqing. The municipality of Zhaoqing is one of the major municipal areas of
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Guangdong Province. It is strategically located at the lower and middle reaches
of the Zijiang River, 62 miles from Guangzhou, the provincial capital, by road
and 142 sea miles from Hong Kong by water. The area enjoys a mild, sunny
climate with adequate amount of rainfall. The climate and soil conditions
provide an important base of agriculture and forestry for Guangdong Province.
Guangdong Province is the fifth most populous province in China with a
population of approximately 65,000,000, of whom over 7,000,000 are located in
the metropolitan Guangdong area. The Municipality of Zhaoqing covers a total
area of 8,500 square miles and has a population of approximately 5,700,000.
The metropolitan City of Zhaoqing has an population of approximately 400,000 and
covers an area of 254 square miles. Zhaoqing enjoys a well-developed
infrastructure, including transportation facilities, reliable power,
communication and service infrastructure. The area contains extensive
agricultural activity and a large population base. Due to the quality of the
local infrastructure, Company management believes that the breweries are ideally
positioned to compete within the fast growing beer industry in China.
QUALITY CONTROL
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Rigorously applied quality control is critical to ensure a
consistently high quality standard for the products produced by the breweries.
In 1990, quality control experts were sent by Pabst US to Zhaoqing to teach
brewery personnel appropriate inspection, quality control measures and
production procedures. In addition, Pabst US experts trained the brewery's
personnel in the specific brewing techniques required in order to meet the
standards set by Pabst US. An engineer from Pabst US is stationed in Zhaoqing
to test random production samples and perform quality control on a continuing
basis. In addition, the breweries send samples of their beer on a monthly basis
to Pabst US in the United States for content examination and testing to ensure
that quality standards are adhered to on a consistent basis. Pabst US
participated in the conversion of the brewery facilities of Zhaoqing Brewery to
Pabst Blue Ribbon beer and provided technical assistance and training.
RAW MATERIALS
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The breweries use all-natural ingredients in their brewing process.
The primary raw materials utilized are mainly malt, husked rice, hops and water.
The aggregate cost of the primary raw materials represents approximately 19% of
the direct cost of production, excluding depreciation, of Pabst Blue Ribbon beer
and 20% of the domestic brand beers. Cost of packaging represents
approximately 50% of the total direct cost of production, excluding
depreciation, of Pabst Blue Ribbon beer and 52% of the domestic brand beers.
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Malt: Virtually all of the malt utilized for producing Pabst Blue
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Ribbon beer is purchased from regional malt manufacturers, primarily Guangzhou
Malting Company, an unaffiliated company. Guangdong Malting Company imports the
barley used in producing the malt from suppliers in Australia, Canada and
Europe. Malt for domestic brand beer was sourced from other domestic suppliers.
The cost of malt represented approximately 70% of the primary raw material cost
in the direct cost of production, excluding depreciation and packaging, of Pabst
Blue Ribbon beer and 68% for the domestic brand beers.
Husked Rice: Husked rice is grown on irrigated farmland under
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contractual agreements with a variety of local farmers in the Zhaoqing region.
Given the extensive agricultural activity in the region, management believes
that there is an abundant and reliable supply of rice to meet ongoing production
needs. The cost of husked rice represents approximately 20% of the primary raw
material cost in the direct cost of production, excluding depreciation and
packaging, of Pabst Blue Ribbon beer and 19% of the domestic brand beers.
Hops: The hops utilized for producing Pabst Blue Ribbon beer are
----
acquired primarily from one supplier in the United States and through a local
importer. The cost of hops represents approximately 6% of the primary raw
material cost in the direct cost of production, excluding depreciation and
packaging, of Pabst Blue Ribbon beer and 6% of the domestic brand beers.
Water: The breweries utilize naturally filtered water from deep
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underground wells adjacent to the brewery facilities that tap the Beriling Shan
water source. The pristine water quality and composition were primary factors
in choosing this particular water source. Specifically, the Beriling Shan water
source contains a relatively low mineral content making it very suitable for
brewing the breweries' particular types of beers, The breweries intensively
monitor the quality of the water used in the brewing processes for compliance
with the Company's own stringent quality standards. The breweries have recently
expanded their water system to ensure an adequate supply so as to meet all of
the breweries' present requirements. However, the breweries continue to add
water reservoir capacity to provide for long-term strategic growth plans and to
sustain brewing operations in the event of a prolonged drought.
CONTAINERS
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Zhaoqing Brewery used six types of containers for its beer in 1996:
946 ml. bottles, 640 ml. bottles, 355 ml. bottles, 500 ml. and 355 ml. aluminum
cans and, for its draught beer, beer kegs. In 1996, approximately 28.8% of
Zhaoqing Brewery's products were packaged in aluminum cans and 68.9% were
packaged in glass bottles. The remainder of the malt beverages sold in 1996
representing 2.3% of production were packaged in stainless steel kegs. In 1996,
Zhaoqing Brewery's
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domestic brand beers were primarily packaged in 640 ml. bottles. The cost of
aluminum and glass containers represents the single largest cost element in the
production and packaging of Zhaoqing Brewery's beer.
Noble Brewery used four types of containers for its beer in 1996: 640
ml. bottles, 355 ml. bottles and 355 ml. aluminum cans and, for its draught
beer, beer kegs. In 1996, approximately 30.5% of Noble Brewery's products were
packaged in aluminum cans and 67.0% were packaged in glass bottles. The
remainder of the malt beverages sold in 1996 representing 2.5% of production
were packaged in stainless steel kegs. The cost of aluminum and glass
containers represents the single largest cost element in the production and
packaging of Noble Brewery's beer.
To date, all of the beer bottles required by the Company have been
supplied by four unaffiliated regional glass manufacturers. Currently, there is
a recycling bottle program in place and the Company uses both new and recycled
bottles, and new cans in packaging its beer. The primary supplier of glass
bottles to the Company is Guangdong Glass Factory in Guangzhou, with the balance
of the bottle requirements being sourced from Zhaoqing Glass Factory, Shenzhen
Hua Jing Glass Ltd. and Zhanjiang Glass Factory, which are located in an
adjacent province. In addition, a variety of other bottle manufacturers are
located in the Guangdong Province and neighboring provinces, and represent an
easily available alternative source of supply of bottles. As a result of both
Zhaoqing Brewery and Noble Brewery maintaining a bottle recycling program in
1996, the containers represented a much smaller proportion of the overall cost.
American National Can (Zhaoqing) Company Limited ("American National
Can"), an unaffiliated company, supplies approximately 90% of the aluminum cans
used by the breweries. American National Can utilizes an automatic easy-open
production line from Italy and current annual output is 185 million cans. Plans
are currently underway to increase annual output to 360 million cans. American
National Can produces cans of high quality that meet the ISO standard. The
manufacturing facility for American National Can is located within the same
industrial complex as the breweries. American National Can supplies cans
pursuant to supply contracts with each of the breweries that have no fixed
expiration date. American National Can has agreed to meet the breweries' can
supply requirements at a pre-negotiated price.
TRANSPORTATION/DISTRIBUTION
- ---------------------------
In view of the single location of the breweries and the wide
geographic market in China, the Company is constantly reviewing the methods of
distributing its malt beverages.
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Transportation: During 1996, 35% of the Company products sold were
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shipped by rail tank cars from Zhaoqing to distributors throughout the Guangdong
Province. The railcars assigned to the breweries by the shipping railroads are
specially built and insulated to maintain temperature control en route.
The remaining 65% of the Company's volume is shipped by truck (40%)
and boat (25%) directly to distributors. Transportation vehicles are
insulated to keep malt beverage products at proper temperatures until they are
delivered to distributor locations.
Domestic brand beers made by Zhaoqing Brewery were primarily
transported by trucks and shipped within the regional markets.
Distribution: Delivery of Pabst Blue Ribbon beer to retail markets in
------------
Guangdong Province and the rest of China is accomplished through a network of
non-exclusive regional distributors which sell to tobacco and alcohol companies,
bars, restaurants and retail stores. The Marketing Company has over 400
distributors throughout China. During 1995 and 1996, the Marketing Company
generally required a 50% cash deposit from its customers as security, based on
the volume of their order flow. However, for those customers located in
Guangdong Province, the deposit policy had been replaced by cash-on-delivery or
pre-approved credit terms. Commencing January 1, 1997, as a result of more
intensive competition from the breweries 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. Customers with material
transaction volume are required to issue bills of exchange from their respective
banks to secure payment on the due date. As a matter of policy, each regional
distributor works on a non-exclusive basis. The breweries typically appoint
only one distributor in each region (except for a large region in which more
than one may be appointed) to ensure that such distributor devotes adequate
effort and resources to the development of a broad based retail distribution
network for Pabst Blue Ribbon beer in that distributor's region. These
distribution arrangements include the flexibility for the breweries to replace
distributors, or reach different arrangements with existing distributors, if it
is in their best interest. No single distributor accounted for more than
approximately 5% of 1996 barrel sales.
In order to ensure the highest product quality, distributors must
maintain proper rotation of the products at retail accounts and are required to
replace the Company's malt beverage products at their own expense if sales to
consumers have not occurred within the prescribed time period.
In 1996, approximately RMB 63,000,000 was allocated to promotional
advertising for Pabst Blue Ribbon beer. Advertising media include television,
radio, billboards, magazines, and newspapers. In addition, the breweries
provide their
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distributors with promotional gift items and sales incentive bonuses. Pabst
Blue Ribbon beer has also been featured in beer festivals organized by the
National Beer Industry Cooperative District Organizations in major, highly
populated urban centers such as Beijing, Shanghai and Guangzhou.
MARKETS AND COMPETITION
- -----------------------
With the recent influx of foreign branded beer into the China markets,
the Company anticipates that competition among all premium beers will grow and
more marketing and advertising efforts will have to be utilized in order to
maintain its market leadership.
There is a considerable difference in the prices at which local or
regional beer is sold in China as compared to the price of foreign or premium
brands such as Pabst Blue Ribbon beer or the San Miguel, Foster's or Carlsberg
brands. Generally, a 640 ml. bottle of local beer typically sells for 1-2 RMB
($0.12 U.S. to $0.24 U.S.), compared to premium beers which sells for 4-6 RMB
($0.48 U.S. to $0.72 U.S.).
Markets: The beer market in China is experiencing tremendous growth
-------
in rates of production and demand. However, the industry is largely fragmented
and highly regionalized. A key reason for the fragmented market is the lack of
an effective transportation system. China's system of highways is in an early
stage of development, and combined with heavy traffic, makes it inefficient to
distribute beer over long distances. Another reason for the fragmented market
is that local breweries are generally small in capacity and lack the financial
resources and capability to launch a national distribution network and promotion
program.
Approximately 850 breweries exist in China, over 90% of which are
small local breweries that produce non-premium beer for local or regional
consumption. With rising consumer affluence, premium brands such as Pabst Blue
Ribbon are gaining in market share. In addition, certain Chinese taxes based on
volume rather than sales price favor the higher priced premium beer breweries.
Competition: Of the brands comprising the premium sector, Tsing Tao
-----------
and Pabst Blue Ribbon are the market leaders. Tsing Tao is the largest brewer
of beer in China, producing approximately 348,000 metric tons or 2,958,000
barrels of beer in 1996. In addition, Tsing Tao has announced plans to increase
its production capacity to 500,000 metric tons. Tsing Tao is one of the best
selling beers in China and the largest Chinese exported brand. It is sold in 32
countries and is China's number one exported beer to the U.S. However, the
Company has been able to attract distributors from Tsing Tao due to the faster
growth rate of Pabst Blue Ribbon beer as well as by offering higher margins.
Other companies seeking market share in the Chinese market include Carlsberg,
Singha, San Miguel, Beck's, Lowenbrau,
14
<PAGE>
Anheuser-Busch, Stroh's, Miller, Foster's, Coor's and Heileman. Sales for most
of these brands in China are substantially lower than sales of beer produced
under the Pabst Blue Ribbon and Tsing Tao labels.
The Company also faces competition from Guangdong Blue Ribbon and its
wholly-owned affiliates with respect to the production and distribution of Pabst
Blue Ribbon beer (See "PABST LICENSING ARRANGEMENTS AND TRADEMARKS - Production
by Guangdong Blue Ribbon"). Other than Guangdong Blue Ribbon and its wholly-
owned affiliates, the Company's subsidiary, High Worth JV and its affiliates
(including Noble Brewery), are the only entities that can produce Pabst Blue
Ribbon beer in China. Guangdong Blue Ribbon Group has commenced its own
production in the Sichuan province of China. By voluntary agreement with the
Company, the Sichuan production is marketed and sold through the Company's
marketing subsidiary, thus enabling the management of an orderly market. If the
demand for Pabst Blue Ribbon continues to grow, the Sichuan production can fill
the new demand and may not cause any substantial adverse effect on the Company.
In the event that demand deteriorates and fails to exceed the aggregate
production capacity of all the Pabst Blue Ribbon producing breweries in China,
the Sichuan production could be considered competitive and could have an adverse
effect on the Company.
CAPITAL EXPANSION
- -----------------
In 1994, the Company launched an expansion program to increase brewing
capacity to fulfill projected volume requirements for the foreseeable future.
Noble Brewery spent approximately RMB 216,300,000 in 1994 to construct the
second phase brewing facilities and RMB 5,000,000 to perform routine maintenance
in all plants and to make incremental capital upgrades to all production
facilities. Zhaoqing Brewery spent approximately RMB 30,800,000 in 1994 to
convert the facilities to produce Pabst Blue Ribbon beer and RMB 1,700,000 to
perform routine maintenance. In order to expand the annual production capacity
from 50,000 metric tons to 10,000 metric tons, Zhaoqing Brewery commenced its
expansion program in early 1995 and had completed all major equipment
installation by the end of 1995. Zhaoqing Brewery spent approximately RMB
139,800,000 in 1995 and early 1996 for this expansion program.
The Company estimates that capital expenditures in 1997 in connection
with the continuing expansion of Zhaoqing Brewery and the installation of new
packaging lines at Noble Brewery will total approximately RMB15,000,000 and
RMB32,010,000, respectively.
15
<PAGE>
RESEARCH AND DEVELOPMENT
- ------------------------
The Company is continually engaged in research and development
programs and has developed various improvements in raw materials, processes and
packaging systems and in the development of innovative, quality products.
The Company's research and development expenditures are primarily
devoted to new product development, its brewing process and ingredients, brewing
equipment, improved manufacturing techniques for packaging supplies and
environmental improvements in the Company's operational processes. The focus of
these programs is to improve the quality and value of its malt beverage products
while reducing costs through more efficient processing techniques, equipment
design and improved varieties of raw materials.
ENERGY
- ------
The breweries use both heavy oil and electricity as primary sources of
energy. Heavy oil is used as the primary fuel in the breweries' steam
generation system and is supplied from regional sources with which it has
annual fixed price supply contracts.
Electricity is supplied by the Zhaoqing City Electricity Bureau.
Since the breweries are one of the larger employers in the region, the breweries
are given priority in obtaining electricity. The breweries have not experienced
any energy supply problems to date. As an alternative source of energy, the
Company also has fuel oil and propane available. Management of the Company does
not anticipate any supply problems in the future with respect to these natural
resources.
EMPLOYEES
- ---------
There are approximately 1,537 employees employed by Zhaoqing Brewery,
Noble Brewery and the Marketing Company, categorized as follows:
16
<PAGE>
<TABLE>
<CAPTION>
FUNCTION
- -------- ZHAOQING NOBLE MARKETING
TOTAL BREWERY BREWERY COMPANY
-------- -------- ------- ---------
<S> <C> <C> <C> <C>
(1) Production 795 303 492 --
(2) Engineering and Technology
and Quality Control 131 60 71 --
(3) Management and
Administration 178 46 70 62
(4) Warehouse 152 22 40 90
(5) Others 281 131 107 43
----- --- --- ---
1,537 562 780 195
===== === === ===
</TABLE>
In 1996, labor costs (including the cost of benefits) accounted for
approximately 3.2% and 4.5% of the total costs of production for Noble Brewery
and Zhaoqing Brewery, respectively. The Company expects average wage rates of
the employees will increase by approximately 12% in 1997.
Each full time employee is a member of a local trade union. Labor
relations have remained positive and the breweries have not had any employee
strikes or major labor disputes. Unlike trade unions in the western countries,
trade unions in most parts of China are organizations mobilized by the
Government and the enterprises' management.
PABST LICENSING ARRANGEMENTS AND TRADEMARKS
Pabst Trademarks in China
- -------------------------
The arrangements regarding the use of Pabst trademarks in China were
formalized in an agreement dated August 30, 1993 (the "License Agreement")
between Pabst US and Pabst Zhaoqing. Pabst Zhaoqing was wholly owned at that
time by Zhaoqing Brewery, which was owned by Guangdong Blue Ribbon. The License
Agreement was for a period of fifteen years from November 7, 1988. Under the
terms of the License Agreement, Pabst Zhaoqing obtained the exclusive right to
produce and market products under Pabst trademarks in China, the non-exclusive
right to market such Pabst products in other Asian countries except Hong Kong,
Macau, Japan and South Korea, and the right to sublicense the use of the Pabst
trademarks to any other enterprise in China, subject to approval of Pabst US.
Royalties are payable quarterly to Pabst US based on the volume (units) of beer
produced.
By an Assets Transferring Agreement dated May 20, 1994 between Pabst
Zhaoqing, Pabst US and Guangdong Blue Ribbon, all rights and duties of the
17
<PAGE>
License Agreement were assigned and transferred from Pabst Zhaoqing to Guangdong
Blue Ribbon. Guangdong Blue Ribbon agreed to fulfill the obligation as
sublicensor under the License Agreement between Pabst Zhaoqing as sublicensor,
and Noble Brewery and High Worth JV as sublicensee, respectively, which are
described below.
Noble Brewery
- -------------
By a Sublicense Agreement dated October 12, 1993 (the "Noble
Sublicense Agreement") between Pabst Zhaoqing and Noble Brewery and approved by
Pabst US, Pabst Zhaoqing granted to Noble Brewery a sublicense to use beer-
related Pabst trademarks, the non-exclusive right to produce beer in accordance
with its production capacity under the sublicensed trademarks, and the non-
exclusive right to market such Pabst products in China and other Asian countries
except Hong Kong, Macau, Japan and South Korea. Royalties calculated on the
same basis as those payable to Pabst US are payable by Noble Brewery to Pabst
Zhaoqing. Under the terms of the Noble Sublicense Agreement, Pabst Zhaoqing
agreed that, except to the enterprises of Guangdong Blue Ribbon, it would not
grant further sublicenses to any other enterprises in Guangdong Province to use
the Pabst trademarks thereby granted. At the time of the Noble Sublicense
Agreement, Zhaoqing Brewery was a member enterprise of Guangdong Blue Ribbon.
High Worth JV/Zhaoqing Brewery
- ------------------------------
By a Sublicense Agreement dated May 6, 1994, (the "High Worth
Sublicense Agreement") made between Pabst Zhaoqing and High Worth JV and
approved by Pabst US on September 18, 1994, Pabst Zhaoqing granted to High Worth
JV a sublicense to allow Zhaoqing Brewery to use Pabst trademarks to produce
beer in accordance with its then production capacity under the sublicensed Pabst
trademarks and to market such Pabst products in China and other Asian countries
except Hong Kong, Macau, Japan and South Korea. With respect to the production
of Pabst Blue Ribbon beer in Guangdong Province, since Zhaoqing Brewery was a
member enterprise of Guangdong Blue Ribbon at the time of the Noble Sublicense
Agreement, Zhaoqing Brewery was entitled to produce Pabst Blue Ribbon beer in
Guangdong Province.
Under the terms of the High Worth Sublicense Agreement, High Worth JV
and/or its affiliates have the sole right to be granted further sublicenses by
Pabst Zhaoqing for the use of the Pabst trademarks to produce beer in China
provided that they are located outside Guangdong Province. Further, Pabst
Zhaoqing covenanted that it would not grant further sublicenses in respect of
the Pabst trademarks to produce beer to any other enterprises except High Worth
JV or its affiliates. Accordingly, High Worth JV controls all future
sublicensing for the production of Pabst Blue Ribbon beer in China, which can be
sold throughout China and other Asian countries, excluding Hong Kong, Macau,
Japan and South Korea.
18
<PAGE>
The term of the High Worth Sublicense Agreement is the same as the
License Agreement. Royalties are payable quarterly by High Worth JV to Pabst
Zhaoqing based on the volume (units) of beer produced.
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
19
<PAGE>
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.
THE JOINT VENTURE COMPANIES
Formation of the Joint Venture Companies
- ----------------------------------------
In 1980, Zhaoqing Brewery was initially established as a state-owned
enterprise to manufacture beer and non-alcoholic beverages. In 1992, Zhaoqing
Brewery became a member enterprise (affiliate) of Guangdong Blue Ribbon. In
June 1993, Zhaoqing Brewery entered into a Joint Venture Agreement with
Goldjinsheng Holding Ltd. ("Goldjinsheng") to form Noble Brewery (the "Noble
Joint Venture Agreement"), pursuant to which Goldjinsheng acquired a 60%
interest and Zhaoqing Brewery acquired a 40% interest. Goldjinsheng was a
wholly owned subsidiary of Noble China Inc., a company listed on the Toronto
Stock Exchange, Canada. Upon formation of the joint venture, Noble Brewery
consisted of the beer production facilities and assets of Pabst Zhaoqing, the
then subsidiary of Zhaoqing Brewery, which were utilized to produce and
distribute beer under the Pabst Blue Ribbon brand name. Zhaoqing Brewery
continued to produce beer under local brands in its separate facility.
In May 1994, Guangdong Blue Ribbon and Holdings entered into a Joint
Venture Agreement providing for the establishment of High Worth JV. The term of
the joint venture is 50 years, and is subject to extension by agreement of the
parties and approval from the government. Holdings contributed 60% of the
capital, which was used by High Worth JV to purchase Zhaoqing Brewery from
Guangdong Blue Ribbon, including its 40% interest in Noble Brewery. Holdings
and Guangdong Blue Ribbon then owned 60% and 40% interests, respectively, in
High Worth JV. All of the governmental approvals for the ownership transfer of
Zhaoqing Brewery to High Worth JV were completed in November 1994. Zhaoqing
Brewery produced and distributed beer under local brands at the time of this
transaction. Subsequently, in December 1994, the Company acquired all of the
shares of Holdings (See "BUSINESS DEVELOPMENT").
Operation of the Joint Venture Companies
- ----------------------------------------
The establishment and activities of High Worth JV and Noble Brewery
are governed by the joint venture law and regulations of China and the
applicable joint venture agreements. Holdings' interest in the profits of High
Worth JV is in the same proportion (i.e., 60%) as its investment in High Worth
JV; Zhaoqing Brewery's interest in the profits of Noble Brewery is in the same
proportion (i.e., 40%) as its investment in Noble Brewery.
20
<PAGE>
With regard to Noble Brewery, pursuant to the Noble Joint Venture
Agreement, the term of the joint venture is for 20 years which may be extended
upon the agreement of the two joint venture partners and approval from the
applicable Chinese governmental agencies. Under the Noble Joint Venture
Agreement, Noble Brewery is governed by a board of directors consisting of five
individuals, three of whom, including the Chairman, are nominated by
Goldjinsheng, with the remaining two, including the Vice Chairman, by Zhaoqing
Brewery. The operation and management of Noble Brewery is the responsibility
of Zhaoqing Brewery. Accordingly, Zhaoqing Brewery has the decision making
authority on substantially all aspects of the daily operations of Noble Brewery
such as purchasing, production, sales and marketing, finance and human
resources. Goldjinsheng may appoint staff to participate in the accounting
functions of Noble Brewery. All matters to be approved by the Board of
Directors require either unanimous vote or the vote of four out of the five
directors. Accordingly, no board decision can be made without the approval of
Zhaoqing Brewery's designee.
With regard to High Worth JV, pursuant to the High Worth JV Joint
Venture Agreement, High Worth JV is governed by a board of directors consisting
of seven individuals, four of whom are appointed by Holdings and three of whom
are appointed by Guangdong Blue Ribbon. The Board of Directors controls the
management and operation of High Worth JV. Generally, votes on the board of
directors are taken by majority vote, except for the following matters relating
to the existence and legal structure of the joint venture, all of which require
a unanimous vote: amendments to the articles of association; termination or
dissolution of the joint venture; increase in, or transfer of, the registered
capital of the joint venture; establishment of subsidiaries or combination with
other entities; and change in the share structure. The general manager is
appointed by the Board of Directors and is responsible for carrying out the
decisions of the Board as well as for the day-to-day management of High Worth
JV.
Goldjinsheng Agreement
- ----------------------
A provisional agreement, subject to the approval of the applicable
Chinese governmental agencies and the execution of separate definitive
agreements with respect to the various matters referred to as below, was made
among Goldjinsheng the owner of the remaining 60% interest in Noble Brewery,
Zhaoqing Brewery, Noble Brewery, High Worth JV and Guangdong Blue Ribbon on May
10, 1995 (the "Goldjinsheng Agreement") confirming that:
(a) High Worth JV was entitled to brew and sell beer under the Pabst Blue
Ribbon label produced in its brewing facilities up to a maximum production
capacity of 100,000 tons per annum.
21
<PAGE>
(b) High Worth JV and/or companies in which High Worth JV has an interest are
entitled to be granted a sublicense from Guangdong Blue Ribbon with the
right to produce and sell beer under the Pabst Blue Ribbon label in the
Guangdong Province of the PRC ("Additional Facility") to a maximum
production capacity of 300,000 tons per annum.
In the event that High Worth JV desires to obtain a sublicense for any
Additional Facility, Goldjinsheng has the right to purchase up to a 40%
interest in such Additional Facility. The purchase price for such interest
shall be the actual cost of such Additional Facility multiplied by the
percentage interest that Goldjinsheng elects to purchase.
(c) A marketing company, owned as to 8% by Guangdong Blue Ribbon, 52% by High
Worth JV and 40% by Goldjingsheng, will handle and organize the sales of
Pabst Blue Ribbon beer produced by High Worth JV and the Noble Brewery.
Each of High Worth JV and the Noble Brewery will create a separate
distribution company or division of their own. The distribution company of
High Worth JV will have the sole right to acquire 100% of the production of
High Worth JV and 40% of the production of the Noble Brewery; while the
distribution company of the Noble Brewery will have the sole right to
acquire 60% of the production of the Noble Brewery. The respective
distribution companies will appoint the marketing company as their sole and
exclusive agent to market Pabst Blue Ribbon beer in the PRC. If the
provisions as to ownership are implemented, the respective interests of
Guangdong Blue Ribbon and the Company in the Marketing Company will be
adjusted. (See "BUSINESS - DESCRIPTION OF BUSINESS" and "MARKETING AND
OPERATIONS - Summary of Operations").
Subsequent to the signing of the Goldjinsheng Agreement, the Company,
Guangdong Blue Ribbon and Goldjinsheng have attempted to complete the respective
separate definitive agreements. In December 1996, Guangdong Blue Ribbon and
Goldjinsheng advised the Company that they intend to modify some of the terms of
the Goldjinsheng Agreement and to propose incorporating those modifications in
the respective separate definitive agreements. The Company is unable to predict
when the respective separate definitive agreements will be completed.
OPERATING IN CHINA
- ------------------
Because the operations of the Company are based exclusively in China,
the Company is subject to rules and restrictions governing China's legal and
economic system as well as general economic and political conditions in that
country.
22
<PAGE>
Inflation/Economic Policies. General economic conditions in China
---------------------------
could have a significant impact on the Company. The economy of China differs in
certain material respects from that of the United States, including its
structure, levels of development and capital reinvestment, growth rate,
government involvement, resource allocation, rate of inflation and balance of
payments position. Although the majority of China's productive assets is still
owned by the state, the adoption of an economic reform policy since 1978 has
resulted in the gradual reduction in the role of state economic plans and the
allocation of resources, pricing and management of such assets, with increased
emphasis on the utilization of market forces, and rapid growth in the Chinese
economy. The success of the Company depends in substantial part on the
continued economic growth in the Chinese economy.
In recent years, the Chinese economy has experienced periods of rapid
economic growth as well as high rates of inflation, which in turn, has resulted
in the adoption by the Chinese government from time to time of various
corrective measures designed to regulate growth and contain inflation. Since
1993, the Chinese government has implemented an economic program to control
inflation which has resulted in the tightening of working capital available to
Chinese state-owned enterprises, and in the slowing of the pace of economic
growth and general market consumption.
Currency Matters. The State Administration for Exchange Control
----------------
("SAEC"), under the authority of the People's Bank of China ("PBOC"), controls
the conversion of Renminbi, the Chinese currency ("RMB") into foreign currency.
Prior to January 1, 1994, RMB could be converted into foreign currency through
the Bank of China or other authorized institutions at official rates fixed daily
by the SAEC. RMB could also be converted at swap centers ("Swap Centers") open
to Chinese enterprises and foreign-funded Chinese enterprises, subject to SAEC
approval of each foreign currency trade, at exchange rates negotiated by the
parties for each transaction. In the year ended December 31, 1993, as much as
80% by value of all foreign exchange transactions in China took place through
the Swap Centers. The exchange rate quoted by the Bank of China differed
substantially from that available in the Swap Centers. Effective January 1,
1994, a unitary exchange rate system was introduced in China, replacing the
dual-rate system previously in effect. In connection with the creation of a
unitary exchange rate, the establishment of the China Foreign Exchange Trading
System inter-bank foreign exchange market and the phasing out of the Swap
Centers were announced. However, the Swap Centers were retained, and foreign-
funded enterprises have been permitted to satisfy foreign exchange requirements
through the Swap Centers.
Effective July 1, 1996, the government of China began to take steps to
make its currency fully convertible on a "current account" basis by the end of
1996. This will allow foreign-funded enterprises, whether wholly owned or joint
ventures with Chinese, to buy and sell foreign exchange in banks for purposes of
trade,
23
<PAGE>
services, debt repayment and profit repatriation. The "current account"
measures the flow of money into and out of a nation, including the net balance
on trade in goods and services, plus remittances.
Legal System. Since 1979, many laws and regulations dealing with
------------
economic matters in general and foreign investment in particular have been
promulgated in China. The Chinese constitution adopted in 1989 authorizes
foreign investment, and guaranties the "lawful rights and interests" of foreign
investors in China. The trend of legislation over the past twelve years has
significantly enhanced the protection afforded foreign investment and allowed
for more active control by foreign parties of foreign investment enterprises in
China. There can be no assurance, however, that the current trend and economic
legislation toward promoting market reforms and experimentation will not be
slowed, curtailed or reversed, especially in the event of a change in
leadership, social or political disruption, or unforeseen circumstances
affecting China's political, economic or social life.
Despite some progress in developing a legal system, China does not
have a comprehensive system of laws. The interpretation of Chinese laws may be
subject to policy changes reflecting domestic political factors. Enforcement of
existing laws may be uncertain and sporadic, and implementation and
interpretation may be inconsistent. The Chinese judiciary is relatively
inexperienced in enforcing the laws or terms of contracts, leading to a higher
than usual degree of uncertainty as to the outcome of litigation. Even where
adequate laws exist in China, it may be impossible to obtain swift and equitable
law enforcement, or to obtain enforcement of a judgment by a court of another
jurisdiction. As the Chinese legal system develops, the promulgation of new
laws, changes to existing laws and the preemption of local regulations by
national laws may adversely affect foreign investors, such as the Company.
The Company's activities in China may by law be subject, in some
cases, to administrative review and approval by various national, provincial and
local agencies of the Chinese government. While China has promulgated an
administrative procedural law permitting redress to the courts with respect to
certain administrative actions, this law appears to be largely untested in its
context.
Tax Matters. The Company's operations in China are subject to four
-----------
types of taxes: Income Tax, Value Added Tax ("VAT"), Consumption Tax and other
Sales Tax.
Noble Brewery and High Worth JV are governed by the Income Tax Law of
China concerning Foreign Investment Enterprises and Foreign Enterprises (the
"FIE Law"). Under the current FIE Law, Noble Brewery and High Worth JV are
exempt from payment of Income Tax for the first two taxation years in which
Noble Brewery and High Worth JV become profitable. The Income Tax rate for the
24
<PAGE>
following three years is reduced by 50% and is thereafter calculated at the full
rate. The 100% tax exemption for High Worth JV and the 50% tax exemption for
Noble Brewery commenced on January 1, 1996. The current Income Tax rate on
profits for Noble Brewery is 27% (33% less a 6% temporary reduction provided as
an economic incentive by the Chinese government) and for High Worth JV is 33%,
unless specifically exempted or reduced by the local authorities.
In addition to the FIE Law, which is computed on profits, Noble
Brewery and Zhaoqing Brewery are also subject to two kinds of turnover taxes for
their respective sales, namely the VAT and Consumption Tax. The applicable VAT
rate is 17% for brewery products sold in China. The amount of VAT liability is
determined by applying the applicable tax rate to the invoiced amount less
VAT paid on purchases made with the relevant invoices in support. The
Consumption Tax rate together with a Government Surcharge for brewery products
is RMB 220 per metric ton. The Consumption Tax is determined on the volume of
sales within China.
Currently, there are no withholding taxes imposed on dividends paid by
High Worth JV to Holdings.
Distribution of Profits. Applicable Chinese laws and regulations
-----------------------
require that, before a Sino-foreign joint venture enterprise (such as High Worth
JV and Noble Brewery) distributes profits to investors, it must (1) satisfy all
tax liabilities; (2) provide for losses in previous years; and (3) make
allocations in proportions determined at the sole discretion of the Board of
Directors to a general reserve fund, an enterprise development fund and a staff
welfare and employee bonus fund. Distribution of profits by the Joint Ventures
to the Company and their other equity investors are required to be in
proportion to each party's respective investment in the joint venture.
Regulations
- -----------
Central, provincial and local laws and regulations govern the
operations of the breweries. The central government and all provinces in which
the Company's malt beverage products are distributed regulate trade practices,
advertising and marketing practices, relationships with distributors and related
matters. Governmental entities also levy various taxes, license fees and other
similar charges and may require bonds to ensure compliance with applicable laws
and regulations.
BUSINESS DEVELOPMENT
- --------------------
The Company was organized in the state of Florida as Video Promotions,
Inc. on April 20, 1988. The Company subsequently changed its name to
25
<PAGE>
National Sweepstakes, Inc. and then to Natural Fuels, Inc. For a period of time
prior to December 16, 1994, the business of the Company was devoted to seeking
potential acquisition or merger opportunities.
On December 16, 1994, the Company acquired all of the outstanding
shares of Holdings from Oriental Win Holdings Ltd. ("Oriental Win") and
Goldchamp Ltd. ("Goldchamp") in exchange for 3,960,000 shares and 240,000 shares
of the Company's Class A Common Stock issued to Oriental Win and Goldchamp,
respectively, and 3,000,000 shares of the Company's Class B Common Stock issued
to Oriental Win. The Class B shares carry two votes per share but are otherwise
equivalent to the Class A Common Stock. In addition, the Company issued an
aggregate of 600,000 shares of the Company's Class A Common Stock to various
parties for consulting services in connection with the acquisition. At the time
of the acquisition, Holdings owned a 60% interest in High Worth JV. This
transaction was accounted for as a recapitalization of Holdings with Holdings as
the acquirer (reverse acquisition).
On November 22, 1994, the Company effected a 1-for-22 reverse stock
split in anticipation of the transaction.
On March 15, 1995, the Company changed its name to CBR Brewing
Company, Inc.
ITEM 2. PROPERTIES
The Company's major facilities are set forth below:
<TABLE>
<CAPTION>
FACILITY LOCATION PRODUCT
- -------- -------- -------
<S> <C> <C>
Noble Brewery City of Zhaoqing on site Malt Beverages
containing approximately
135,000 square meters
Zhaoqing Brewery City of Zhaoqing on site Malt Beverages
containing approximately
131,000 square meters
</TABLE>
All of the Company's facilities are well maintained and suitable for
their respective operations.
In 1996, the Company estimates that Zhaoqing Brewery and Noble Brewery
operated at approximately 83% and 77%, respectively, of their theoretical
26
<PAGE>
brewing capacities. Annual production capacity can vary due to product mix,
packaging mix and seasonality.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property subject to,
any pending legal proceedings. The Company, however, is contemplating
commencing legal proceedings in the PRC against Guangdong Blue Ribbon in
connection with the establishments of the Sichuan Brewery as well as against Yun
Zhong Liu and Zi Hang Niu, former directors of the Company, who are the General
Manager and Deputy General Manager, respectively, of Guangdong Blue Ribbon.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 1996.
27
<PAGE>
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Class A Common Stock of CBR Brewing Company, Inc. is listed for
trading on the NASD's Electronic Bulletin Board under the symbol CBRB. During
1994, 1995 and 1996, there was no trading activity.
The approximate number of security holders of record of the Class A
Common Stock at July 31, 1997 was 16.
The Company has never paid cash dividends on its Common Stock and has
no present intention of paying cash dividends in the foreseeable future. It is
the present policy of the Board of Directors to retain all earnings to provide
for the growth of the Company.
The Company's ability to pay dividends to its shareholders is
dependent on the Company receiving distributions through Holdings from its PRC
subsidiaries and affiliates, which generate all of the Company's earnings. The
Company is required to provide for U.S. Federal income taxes on the earnings
distributed in the form of dividends from Noble Brewery.
Pursuant to the relevant laws and regulations of Sino-foreign joint
venture enterprises, the profits of High Worth JV, calculated pursuant to
generally accepted accounting principles in the PRC ("PRC GAAP"), are available
for distribution in the form of cash dividends to each equity investor, in
proportion to each investor's interest in the joint venture, after satisfaction
of all tax liabilities, provision for any losses in previous years, and
appropriations to reserve funds, as determined at the discretion of the board of
directors in accordance with PRC accounting standards and regulations. The
principal adjustments necessary to conform PRC GAAP financial statements to
financial statements prepared in accordance with generally accepted accounting
principles in the United States ("US GAAP") are the reclassification of certain
expense items from income appropriations to charges against income, adjustments
for sales, other income and purchases recognized on a cash basis, depreciation
charges, deferred taxation and revaluation of fixed assets.
In accordance with the relevant laws and regulations in the PRC, the
profits available for distribution are based on the PRC GAAP financial
statements. If High Worth JV has foreign currency available after meeting the
operational needs of its PRC subsidiaries, it may make a profit distribution to
Holdings. Otherwise, it will be necessary to obtain approval and convert such
distributions at the exchange centers. At December 31, 1996, the Company's
distributable profits were approximately RMB 38,727,000.
28
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following financial data has been derived from the audited consolidated
financial statements, and should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this document.
All amounts are in RMB. The exchange rate was US$1.00 to RMB 8.45 at December
31, 1994, RMB 8.32 at December 31, 1995 and RMB 8.32 at December 31, 1996.
29
<PAGE>
<TABLE>
<CAPTION>
CBR Brewing Company, Inc.
(in RMB) and Subsidiaries (3) (4) Zhaoqing Brewery and Subsidiaries (3)
-------------------------------------------- ---------------------------------
Two Months Ten Months
Years Ended December 31 Ended Ended Years Ended December 31,
----------------------- December 31, October 31, ------------------------
1996 1995 1994 1994 1993 1992
------------- ----------- ----------- ---------- ------------ -----------
Consolidated Statement
of Income Data:
<S> <C> <C> <C> <C> <C> <C>
Sales, net of sales taxes 1,233,277,624 566,786,939 11,400,806 57,287,429 191,582,526 154,440,090
Gross profit 194,138,432 71,133,533 4,226,389 19,027,672 89,167,691 71,100,982
Operating income 25,325,483 6,458,405 2,978,087 11,616,044 67,013,472 51,011,530
Net income 20,211,809 19,625,968 3,713,687 42,012,446 106,586,492 135,719
Net income per common share (1) (2) 2.53 2.45 .46 5.25 13.32 .02
Cash dividends declared per
common share -0- -0- -0- -0- -0- -0-
<CAPTION>
As of December 31, As of December 31,
-------------------------------------------- ------------------
1996 1995 1994 1993
---- ---- ---- ----
Consolidated Balance
Sheet Data:
<S> <C> <C> <C> <C>
Net working capital (deficiency) (83,554,409) (97,555,553) (40,970,594) (112,717,589)
Total assets 826,502,148 746,898,874 357,149,524 326,758,328
Long term liabilities 15,862,549 24,897,291 27,866,856 28,035,303
Advances from shareholders 73,794,948 73,794,948 74,947,990 -
Shareholders' equity 147,588,482 127,376,673 107,750,705 99,707,666
</TABLE>
30
<PAGE>
(1) Net income per common share is presented for the ten months ended October
31, 1994 and the years ended December 31, 1993 and 1992, assuming that the
8,000,013 shares of common stock issued and outstanding for the years ended
December 31, 1996 and 1995, and the two months ended December 31, 1994,
were also issued and outstanding for all prior periods.
(2) Adjusted for the 1-for-22 reverse stock split effective November 22, 1994.
(3) Holdings was formed to acquire a 60% interest in High Worth JV, a Sino-
foreign equity joint venture enterprise, which in turn acquired a 100%
interest in Zhaoqing Brewery on October 31, 1994. The consideration for
this purchase transaction was approximately RMB 166,400,000 (See "ITEM 1.
BUSINESS - THE JOINT VENTURE COMPANIES").
(4) On December 16, 1994, Holdings was acquired by the Company, a United
States- based public company, in a reverse acquisition. This transaction
has been accounted for as a recapitalization of Holdings with Holdings as
the acquirer (See "ITEM 1. BUSINESS - BUSINESS DEVELOPMENT").
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
- --------
Effective December 16, 1994, the Company acquired Holdings, which,
through its subsidiaries and affiliates, 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,
including Zhaoqing Brewery's 40% interest in Noble Brewery.
The acquisition of Zhaoqing Brewery, including Zhaoqing Brewery's 40%
interest in the Noble Brewery, has been accounted for under the purchase method
of accounting. The consolidated financial statement include the results of
operations of Zhaoqing Brewery on a consolidated basis and Nobel Brewery under
the equity method of accounting for investments commencing October 31, 1994.
Accordingly, the Company's post-acquisition consolidated statements of income
are presented for the two months ended December 31, 1994, and the years ended
December 31, 1995 and 1996; a comparative consolidated statement of income for
the year ended December 31, 1994 is not presented, although certain comparative
financial information is provided separately for the operations of Zhaoqing
Brewery and its affiliate, Noble Brewery.
31
<PAGE>
For accounting purposes, the acquisition of Holdings by the Company
has been treated as a recapitalization of Holdings with Holdings as the acquirer
(reverse acquisition). Accordingly, the historical financial statements prior
to December 16, 1994 are those of Holdings.
During February 1995, the Marketing Company was established to conduct
the distribution, marketing and promotion throughout China of the Pabst Blue
Ribbon beer produced by Zhaoqing Brewery and Noble Brewery. The Marketing
Company also sells mineral water and non-carbonated soft drinks produced by
Guangdong Blue Ribbon under the Blue Ribbon brand name. Zhaoqing Brewery HC
owns a 70% interest and Guangdong Blue Ribbon owns a direct 30% interest and an
indirect 28% interest in the Marketing Company. As a result, the Company owns a
42% net interest in the Marketing Company. Zhaoqing Brewery and Noble Brewery
commenced selling their production of Pabst Blue Ribbon beer through the
Marketing Company in April 1995 and July 1995, respectively. The consolidated
financial statements include the results of operations of the Marketing Company
on a consolidated basis commencing from April 1, 1995. The Company has a
controlling interest in the Marketing Company even though it has an effective
interest of only 42% because of the Company's 60% interest in High Worth JV and
70% interest in the Marketing Company (through Zhaoqing Brewery HC), and because
the Company controls the majority of the votes on the board of directors of the
Marketing Company and Zhaoqing Brewery HC.
Prior to March 1995, Zhaoqing Brewery had produced exclusively
domestic brands of beer, and had an annual production capacity of 50,000 metric
tons or 425,000 barrels of beer. In late 1994, 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 the production of all domestic brand
beer and commenced exclusive production of Pabst Blue Ribbon beer on a full-
scale basis. However, approximately 5% of beer production normally does not
meet Pabst Blue Ribbon quality standard and is packed and distributed as lower-
priced, local brand beer. With the implementation of the new brewing technology
and the purchase of additional equipment during 1995, Zhaoqing Brewery reached
its current full-scale annual production capacity of 100,000 metric tons or
850,000 barrels of beer at the end of 1995.
Noble Brewery has produced Pabst Blue Ribbon beer exclusively since it
commenced operations. Prior to 1994, Noble Brewery had an annual production
capacity of 80,000 metric tons or 680,000 barrels of beer. With the completion
of a second brewing facility in July 1994, Noble Brewery reached its full-scale
annual production capacity of 200,000 metric tons or 1,700,000 barrels of beer
in late 1994.
32
<PAGE>
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
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. To the extent that total market
demand 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. During 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
33
<PAGE>
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.
Consolidated Results of Operations:
- ----------------------------------
Zhaoqing Brewery and Noble Brewery commenced distribution of their
production of Pabst Blue Ribbon beer through the Marketing Company during April
1995 and July 1995, respectively. The commencement of the Marketing Company's
operations, which are presented on a consolidated basis, resulted in a
significant change in the Company's operating structure and income statement
presentation during 1995. Accordingly, a comparison of results of operations
for the year ended December 31, 1996 to results of operations for the year ended
December 31, 1995 is not necessarily meaningful.
The Company conducts a substantial portion of its purchases through
related parties, and has additional significant continuing transactions with
such parties (See "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS")
Years Ended December 31, 1996 and 1995 :
Sales:
- -----
During the year ended December 31, 1996, Zhaoqing Brewery produced
83,494 metric tons and sold 83,439 metric tons of beer, of which 2,526 metric
tons (3.0%) were local brand beer and 80,913 metric tons (97.0%) were Pabst Blue
Ribbon beer. The 2,526 metric tons of local brand beer were produced throughout
1996. During the year ended December 31, 1995, Zhaoqing Brewery produced 42,318
metric tons and sold 45,708 metric tons of beer, of which 11,388 metric tons
(24.9%) were local brand beer and 34,320 metric tons (75.1%) were Pabst Blue
Ribbon beer. Of the 11,388 metric tons of local brand beer produced in
34
<PAGE>
1995, 8,324 metric tons (73.1%) were produced during the three months ended
March 31, 1995. As a result of increased demand for Pabst Blue Ribbon beer, in
conjunction with the implementation of the new brewing technology and the
installation of new equipment to increase the production capacity at the end of
1995, total beer sold increased by 37,731 metric tons or 82.5% from 1995 to
1996.
For the year ended December 31, 1996, net sales, almost all of which
were conducted through the Marketing Company, were RMB1,233,277,624, of which
RMB 1,158,091,595 (93.9%) was from the sale of 232,066 metric tons of beer and
RMB 75,186,029 (6.1%) was from the sale of mineral water and non-carbonated soft
drinks. During the year ended December 31, 1996, the Marketing Company
purchased for resale RMB 695,150,225 of beer products from Noble Brewery and RMB
69,166, 604 of mineral water and non-carbonated soft drinks from Guangdong Blue
Ribbon. Approximately 99% of total sales in 1996 were from products with the
Pabst Blue Ribbon brand name.
For the year ended December 31, 1995, net sales, consisting of sales
both by Zhaoqing Brewery directly and through the Marketing Company, were RMB
566,786,939, of which RMB 504,500,315 (89.0%) was from the sale of 107,015
metric tons of beer and RMB 62,286,624 (11.0%) was from the sale of mineral
water and non-carbonated soft drinks. During the year ended December 31, 1995,
the Marketing Company purchased for resale RMB 327,805,406 of beer products from
Noble Brewery and RMB 61,708,086 of mineral water and non-carbonated soft drinks
from Guangdong Blue Ribbon. Approximately 95% of total sales in 1995 were from
products with the Pabst Blue Ribbon brand name.
Gross Profit:
- ------------
For the year ended December 31, 1996, gross profit was RMB 194,138,432
or 15.7% of net sales, as compared to RMB 71,133,533 or 12.6% of net sales for
the year ended December 31, 1995. The increase in the gross profit margin of
3.1% on an absolute basis or 24.6% in 1996 as compared to 1995 was a result of a
change in the product mix, an increase in sales unit volume, an increase in
sales prices, the introduction of a bottle recycling program during 1996, and
the Marketing Company handling the distribution of all of the Company's
production of Pabst Blue Ribbon beer throughout 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 party by the
central government of China's regulatory controls and economic policies;
increasing competition from foreign premium brand beers; and potential
competition from the brewery being established by Guangdong Blue Ribbon in
Sichuan Province.
35
<PAGE>
During July 1996, Renhe Trading Company, a trading company located in
Shenzhen, PRC, commenced importing and distributing U.S. - brewed Pabst Blue
Ribbon beer in Southern China, and advertised widely throughout Southern China
that Pabst US had granted it the exclusive right to distribute U.S. - brewed
Pabst Blue Ribbon beer in China. Pabst US officially denied granting such
authorization.
The Company and its joint venture partner, Guangdong Blue Ribbon,
which is the exclusive license holder of the Pabst Blue Ribbon brand in China,
jointly undertook actions to stop the importation of U.S. - brewed Pabst Blue
Ribbon beer by making successful applications to the head offices of the Customs
Bureau and the Industrial and Commercial Bureau in Beijing for protection of the
trademark and the exclusive license rights. During September 1996, the head
office of the Customs Bureau officially notified all Provincial Customs
Departments to confiscate all imported Pabst Blue Ribbon beer. In addition, the
Industrial and Commercial Bureau instructed its provincial branches to
confiscate any imported U.S. - brewed Pabst Blue Ribbon beer that appeared in
the retail market. Accordingly, the influx of imported U.S. - brewed Pabst Blue
Ribbon beer was substantially reduced after September 1996. However, there can
be no assurances that this problem will not reoccur in the future.
Selling, General and Administrative Expenses:
- --------------------------------------------
For the year ended December 31, 1996, selling, general and
administrative expenses were RMB 168,812,949 (13.7% of net sales), consisting of
selling expenses of RMB 103,460,671 and general and administrative expenses of
RMB 65,352,278. For the year ended December 31, 1995, selling, general and
administrative expenses were RMB 64,675,128 (11.4% of net sales), consisting of
selling expenses of RMB 32,821,498 and general and administrative expenses of
RMB 31,853,630.
Selling expenses include costs relating to the advertising, promotion,
marketing and distribution of Pabst Blue Ribbon beer in China. During 1995, the
Marketing Company was established to market throughout China the Pabst Blue
Ribbon beer produced by Zhaoqing Brewery and Noble Brewery. The Marketing
Company assumed the responsibility for marketing the Pabst Blue Ribbon beer
produced by Zhaoqing Brewery and Noble Brewery during April 1995 and July 1995,
respectively, and incurred most of the 1995 and almost all of the 1996 selling
expenses. 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.
Selling expenses increased by RMB 70,639,173 or 215.2% in 1996 as
compared to 1995, and represented 8.4% of net sales in 1996 as compared to 5.8%
of
36
<PAGE>
net sales in 1995, as a result of increased marketing and promotion costs
incurred during 1996 to support increased marketing efforts necessitated by the
increased production capacity of Zhaoqing Brewery and Noble Brewery. General
and administrative expenses increased by RMB 33,498,648 or 105.2% in 1996 as
compared to 1995, and represented 5.3% of net sales in 1996 as compared to 5.6%
of net sales in 1995. During the year ended December 31, 1996, the Company
recorded an allowance for doubtful accounts of RMB 9,914,114, as compared to an
allowance for doubtful accounts of RMB 5,600,000 for the year ended December 31,
1995.
As a result of softening consumer demand and increasing competition
from foreign premium brand beers, the Company anticipates that it will continue
to implement an expanded advertising and promotional program in 1997 in order to
stimulate consumer demand and maintain the market position of Pabst Blue Ribbon
beer in China.
Operating Income:
- ----------------
For the year ended December 31, 1996, operating income was RMB
25,325,483 or 2.1% of net sales, as compared to operating income of RMB
6,458,405 or 1.1% of net sales for the year ended December 31, 1995.
Interest Income and Interest Expense:
- ------------------------------------
For the year ended December 31, 1996, interest income was RMB
6,119,470. There was no interest income for the year ended December 31, 1995.
The increase in interest income in 1996 as compared to 1995 is primarily the
result of interest earned on amounts due from Guangdong Blue Ribbon during 1996.
For the year ended December 31, 1996, interest expense, net of amounts
capitalized, was RMB 20,767,252, as compared to RMB 3,236,058 for the year ended
December 31, 1995. The increase in interest expense in 1996 as compared to 1995
is primarily the result of amounts borrowed from Guangdong Blue Ribbon,
increased borrowings by Zhaoqing Brewery and the amounts borrowed from related
companies that are controlled by beneficial shareholders of the Company.
Income Taxes:
- ------------
For the year ended December 31, 1996, income tax expense was RMB
4,721,444. Although the Company's operations in China were subject to a 100%
tax exemption in 1995 and 1996, deferred income taxes were recorded in 1996
primarily as a result of a United States Federal tax liability of RMB 4,413,000
resulting from dividends declared during January 1997 by Noble Brewery on its
December 31, 1996 retained earnings, payable to Zhaoqing Brewery HC. For the
year ended December
37
<PAGE>
31, 1995, income tax expense was RMB 1,000,000, which represented deferred
income taxes as a result of temporary timing differences with respect to
accelerated depreciation of property, plant and equipment.
Net Income:
- ----------
For the year ended December 31, 1996, net income was RMB 20,211,809
(RMB 2.53 per share) or 1.6% of net sales, as compared to net income of RMB
19,625,968 (RMB 2.45 per share ) or 3.5% of net sales for the year ended
December 31, 1995.
Year Ended December 31, 1995 and Two Months Ended December 31, 1994 :
Sales:
- -----
During the year ended December 31, 1995, Zhaoqing Brewery produced
42,318 metric tons and sold 45,708 metric tons of beer, of which 11,388 metric
tons (24.9%) were local brand beer and 34,320 metric tons (75.1%) were Pabst
Blue Ribbon beer. Of the 11,388 metric tons of local brand beer produced in
1995, 8,324 metric tons (73.1%) were produced during the three months ended
March 31, 1995. During the year ended December 31, 1994 and the two months
ended December 31, 1994, Zhaoqing Brewery sold 33,000 metric tons and 4,686
metric tons of beer, respectively, 100% of which was local brand beer. Total
beer sold increased by 12,708 metric tons or 38.5% from 1994 to 1995 as a result
of a shift in product mix from local brand beer to Pabst Blue Ribbon beer, which
allowed the Company to take advantage of growing consumer demand in China for
premium beers such as Pabst Blue Ribbon beer as compared to local brand beer.
For the year ended December 31, 1995, net sales, consisting of sales
both by Zhaoqing Brewery directly and through the Marketing Company, were RMB
566,786,939, of which RMB 504,500,315 (89.0%) was from the sale of 107,015
metric tons of beer and RMB 62,286,624 (11.0%) was from the sale of mineral
water and non-carbonated soft drinks. During the year ended December 31, 1995,
the Marketing Company purchased for resale RMB 327, 805,406 of beer products
from Noble Brewery and RMB 61,708,086 of mineral water and non-carbonated soft
drinks from Guangdong Blue Ribbon. Approximately 95% of total sales in 1995
were from products with the Pabst Blue Ribbon brand name. For the two months
ended December 31, 1994, net sales were RMB 11,400,806, consisting exclusively
of 4,687 metric tons of beer sales by Zhaoqing Brewery directly.
38
<PAGE>
Gross Profit:
- ------------
For the year ended December 31, 1995, gross profit was RMB 71,133,533
or 12.6% of net sales. For the two months ended December 31, 1994, gross profit
was RMB 4,226,389 or 37.1% of net sales. As a result of the change in the
product mix, increased discounts offered to distributors, increased raw material
costs, and, in particular, the establishment and operating structure of the
Marketing Company, gross margins will not return to pre-1995 levels.
Selling, General and Administrative Expenses:
- --------------------------------------------
For the year ended December 31, 1995, selling, general and
administrative expenses were RMB 64,675,128 (11.4% of net sales), consisting of
selling expenses of RMB 32,821,498 and general and administrative expenses of
RMB 31,853,630. For the two months ended December 31, 1994, selling, general
and administrative expenses were RMB 1,248,302 (10.9% of net sales). During
1995, the Company recorded an allowance for doubtful accounts of RMB 5,600,000.
Selling expenses include costs relating to the advertising, promotion,
marketing and distribution of Pabst Blue Ribbon beer in China. During 1995, the
Marketing Company was established to market throughout China the Pabst Blue
Ribbon beer produced by Zhaoqing Brewery and Noble Brewery. The Marketing
Company assumed the responsibility for marketing the Pabst Blue Ribbon beer
produced by Zhaoqing Brewery and Noble Brewery during April 1995 and July 1995,
respectively, and incurred most of the 1995 selling expenses. 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.
Operating Income:
- ----------------
For the year ended December 31, 1995, operating income was RMB
6,458,405 or 1.1% of net sales. For the two months ended December 31, 1994,
operating income was RMB 2,978,087 or 26.1% of net sales.
Corporate Reorganization Expenses:
- ---------------------------------
For the two months ended December 31, 1994, corporate reorganization
expenses were RMB 2,551,921, and consisted of management's estimate of the fair
value of the shares of common stock issued to certain merchant bankers,
consultants and several executives of the Company in conjunction with the
reverse acquisition of Holdings by the Company effective December 16, 1994.
39
<PAGE>
Interest Income and Interest Expense:
- ------------------------------------
There was no interest income for the year ended December 31, 1995 and
for the two months ended December 31, 1994.
For the year ended December 31, 1995, interest expense, net of amounts
capitalized, was RMB 3,236,058. For the two months ended December 31, 1994,
interest expense, net of amounts capitalized, was RMB 1,317,178.
Income Taxes:
- ------------
For the year ended December 31, 1995, income tax expense was RMB
1,000,000. Although the Company's operations in China were subject to a tax
holiday in 1995, deferred income taxes were recorded as a result of temporary
timing differences with respect to accelerated depreciation of property, plant
and equipment. For the two months ended December 31, 1994, no income tax
expense was incurred.
Net Income:
- ----------
For the year ended December 31, 1995, net income was RMB 19,625,968
(RMB 2.45 per share) or 3.5% of net sales. For the two months ended December
31, 1994, net income was RMB 3,713,687 (RMB .46 per share) or 32.6% of net
sales.
NOBLE BREWERY
- -------------
Years Ended December 31, 1996 and 1995:
Sales:
- -----
During the year ended December 31, 1996, Noble Brewery produced
155,506 metric tons and sold 154,435 metric tons of beer, as compared to 155,974
metric tons produced and 161,200 metric tons of beer sold during the year ended
December 31, 1995. Total beer sold decreased by 6,765 metric tons or 4.2% from
1995 to 1996 as a result of the regulation of sales by the Marketing Company,
which purchases beer from the two breweries in accordance with their respective
production capacities.
For the year ended December 31, 1996, net sales were RMB 655,316,991,
consisting of 154,435 metric tons of beer sold to the Marketing Company for
resale. For the year ended December 31, 1995, net sales were RMB
40
<PAGE>
681,724,168, consisting of 161,200 metric tons of beer sold, including RMB
327,805,406 of beer sold to the Marketing Company for resale.
Gross Profit:
- ------------
For the year ended December 31, 1996, gross profit was RMB 145,150,002
or 22.1% of net sales, as compared to gross profit of RMB 155,864,163 or 22.9%
of net sales for the year ended December 31, 1995. The decrease in the gross
profit margin of .8% on an absolute basis or 3.4% in 1996 as compared to 1995
was a result of a change in the product mix, the increase in cost of raw
materials, and the Marketing Company handling the distribution of all of the
Company's production of Pabst Blue Ribbon beer throughout 1996.
Selling, General and Administrative Expenses:
- --------------------------------------------
For the year ended December 31, 1996, selling, general and
administrative expenses were RMB 38,937,354 (5.9% of net sales), consisting of
selling expenses of RMB 6,057,013 and general and administrative expenses of
RMB 32,880,341. For the year ended December 31, 1995, selling, general and
administrative expenses were RMB 60,819,562 (8.9% of net sales), consisting of
selling expenses of RMB 31,794,779 and general and administrative expenses of
RMB 29,024,783. Selling expenses consist of warehousing, storage and freight
costs, and, in 1995, also included advertising, promotion, marketing and
distribution costs prior to the Marketing Company commencing the distribution of
Noble Brewery's production in July 1995.
During 1995, the Marketing Company was established to market
throughout China the Pabst Blue Ribbon beer produced by Zhaoqing Brewery and
Noble Brewery. The Marketing Company assumed the responsibility for marketing
the Pabst Blue Ribbon beer produced by Noble Brewery during July 1995, and
incurred most of the 1995 and almost all of the 1996 selling expenses.
Selling expenses decreased by RMB 25,737,766 or 80.9% in 1996 as
compared to 1995, and represented 0.9% of net sales in 1996 as compared to 4.7%
of net sales in 1995, as a result of the establishment of the Marketing Company
in 1995. General and administrative expenses increased by RMB 3,855,558 or
13.3% in 1996 as compared to 1995, and represented 5.0% of net sales in 1996 as
compared to 4.2% of net sales in 1995. During the year ended December 31, 1996,
Noble Brewery recorded an allowance for doubtful accounts of RMB 1,459,963, as
compared to an allowance for doubtful accounts of RMB 786,740 for the year ended
December 31, 1995.
41
<PAGE>
Operating Income:
- ----------------
For the year ended December 31, 1996, operating income was RMB
106,212,648 or 16.2% of net sales, as compared to operating income of RMB
95,044,601 or 13.9% of net sales for the year ended December 31, 1995.
Interest Income and Interest Expense:
- ------------------------------------
For the year ended December 31, 1996, interest income was RMB
3,901,929, as compared to interest income of RMB 3,846,001 for the year ended
December 31, 1995.
For the year ended December 31, 1996, interest expense was RMB
3,450,585, as compared to interest expense of RMB 2,240,015 for the year ended
December 31, 1995, as a result of higher borrowings.
Income Taxes:
- ------------
For the year ended December 31, 1996, income tax expense was RMB
16,535,421, which consisted of RMB 13,053,421 for PRC income taxes and RMB
3,500,000 for deferred income taxes as a result of temporary timing differences
with respect to accelerated depreciation of property, plant and equipment. For
the year ended December 31, 1995, income tax expense was RMB 2,200,000, which
represented the deferred income taxes as a result of temporary timing
differences with respect to accelerated depreciation of property, plant and
equipment. During 1996 and 1995, Noble Brewery was subject to a 50% and 100%
tax exemption, respectively.
Net Income:
- ----------
For the year ended December 31, 1996, net income was RMB 90,128,571 or
13.8% of net sales, as compared to RMB 94,450,587 or 13.9% of net sales for the
year ended December 31, 1995.
Year Ended December 31, 1995 and Two Months Ended December 31, 1994 :
Sales:
- -----
For the year ended December 31, 1995, net sales were RMB 681,724,168,
consisting of 161,200 metric tons of beer, including RMB 327,805,406 of beer
sold to the Marketing Company for resale. For the two months ended December 31,
1994, net sales were RMB 126,438,179, consisting of 26,272 metric tons of beer.
42
<PAGE>
Gross Profit:
- ------------
For the year ended December 31, 1995, gross profit was RMB 155,864,163
or 22.9% of net sales. For the two months ended December 31, 1994, gross profit
was RMB 36,414,406 or 28.8% of net sales. As a result of increased discounts
offered to distributors, increased raw material costs, and, in particular, the
establishment and operating structure of the Marketing Company, gross margins
will not return to pre-1995 levels.
Selling, General and Administrative Expenses:
- --------------------------------------------
For the year ended December 31, 1995, selling, general and
administrative expenses were RMB 60,819,562 (8.9% of net sales), consisting of
selling expenses of RMB 31,794,779 and general and administrative expenses of
RMB 29,024,783. Selling expenses consist of warehousing, storage and freight
costs, and, in 1995, also included advertising, promotion, marketing and
distribution costs prior to the Marketing Company commencing the distribution of
Noble Brewery's production in July 1995. For the two months ended December 31,
1994, selling, general and administrative expenses were RMB 16,488,878 or 13.0%
of net sales.
During 1995, the Marketing Company was established to market
throughout China the Pabst Blue Ribbon beer produced by Zhaoqing Brewery and
Noble Brewery. The Marketing Company assumed the responsibility for marketing
the Pabst Blue Ribbon beer produced by Noble Brewery during July 1995, and
incurred most of the 1995 selling expenses.
During the year ended December 31, 1995, Noble Brewery recorded an
allowance for doubtful accounts of RMB 786,740.
Operating Income:
- ----------------
For the year ended December 31, 1995, operating income was RMB
95,044,601 or 13.9% of net sales. For the two months ended December 31, 1994,
operating income was RMB 19,925,528 or 15.8% of net sales.
Interest Income and Interest Expense:
- ------------------------------------
For the year ended December 31, 1995, interest income was RMB
3,846,001. For the two months ended December 31, 1994, interest income was RMB
325,451.
43
<PAGE>
For the year ended December 31, 1995, interest expense was RMB
2,240,015. For the two months ended December 31, 1994, there was no interest
expense.
Income Taxes:
- ------------
For the year ended December 31, 1995, income tax expense was RMB
2,200,000. For the two months ended December 31, 1994, income tax expense was
RMB 720,000. Although Noble Brewery's operations were subject to a 100% tax
exemption during 1994 and 1995, deferred income taxes were recorded as a result
of temporary timing differences with respect to accelerated depreciation of
property, plant and equipment.
Net Income:
- ----------
For the year ended December 31, 1995, net income was RMB 94,450,587 or
13.9% of net sales. For the two months ended December 31, 1994, net income was
RMB 19,530,979 or 15.4% of net sales.
Consolidated Financial Condition - December 31, 1996:
- ----------------------------------------------------
Liquidity and Capital Resources
- -------------------------------
For the year ended December 31, 1996, the Company's operations
provided cash resources of RMB 19,407,707. The major components of the cash
provided from operations in 1996 were the increase of RMB 47,928,065 in accounts
payable and accrued liabilities, the dividends received from an associated
company of RMB 39,797,878, and the increase of RMB 30,670,338 in sales taxes
payable. The Company's cash balance decreased by RMB 17,738,711 to RMB
39,709,594 at December 31, 1996, as compared to RMB 57,448,305 at December 31,
1995. The Company's net working capital deficit decreased by RMB 14,001,144 to
RMB 83,554,409 at December 31, 1996, as compared to RMB 97,555,553 at December
31, 1995. As a result, the Company's current ratio improved to 0.82:1 at
December 31, 1996 as compared 0.77:1 at December 31, 1995.
The Company's inventories increased by RMB 30,711,035 or 54.0% to RMB
87,549,836 at December 31, 1996, as compared to RMB 56,838,801 at December 31,
1995. Such increase resulted from the expansion of production to meet the
growth in market demand for beer products, and consisted primarily of an
increase in finished goods in order to satisfy expected market demand.
The amounts due from related companies mainly represented receivable
balances from Guangdong Blue Ribbon and its affiliated companies. The amounts
due
44
<PAGE>
from related companies decreased by RMB 13,322,446 or 28.7% to RMB 33,089,333 at
December 31, 1996, as compared to RMB 46,411,779 at December 31, 1995. The
decrease was primarily due to the increase in payments by Guangdong Blue Ribbon
and the increase in transaction volume with other related companies under normal
operating levels during the year. The amounts due from Guangdong Blue Ribbon
and its affiliates were short term in nature and should be wholly repayable in
1997.
The Company's accounts payable increased by RMB 9,696,390 or 48.3% and
accrued liabilities increased by RMB 38,231,675 or 105.7% to an aggregate of RMB
104,207,246 at December 31, 1996 as compared to RMB 56,279,181 at December 31,
1995. The increase in accounts payable was primarily due to the increase in
purchases of raw materials and packing materials to support the expanded sales
and production volume in 1996, and the increase in accrued expenses was a result
of the expansion of production and operating activities.
The conversion and expansion of Zhaoqing Brewery has required
substantial capital to finance the costs of expansion and to support
substantially higher sales levels. Guangdong Blue Ribbon has provided and
committed to provide Zhaoqing Brewery a line of credit, or to otherwise arrange
financing, sufficient to finance the purchase of new machinery and equipment in
connection with the expansion of Zhaoqing Brewery to an annual production
capacity of 100,000 metric tons of beer.
For the year ended December 31, 1996, additions to property, plant and
equipment in connection with the planned expansion of Zhaoqing Brewery to an
annual production capacity of 100,000 metric tons of beer aggregated RMB
46,786,402, and were financed by advances under the line of credit from
Guangdong Blue Ribbon, bank borrowings, and dividends from an associated
company. The Company anticipates that additional capital expenditures in
connection with the continuing expansion of Zhaoqing Brewery in 1997 will be
approximately RMB 15,000,000.
During the year ended December 31, 1996, the Company's secured and
unsecured short-term bank loans increased by RMB 7,925,600. The bank loans bear
interest at rates ranging from 10.8% to 12.1%, and are repayable in 1997. A
substantial portion of the bank loans have been utilized to fund the expansion
of Zhaoqing Brewery.
During 1996, Noble Brewery declared and paid a dividend relating to
earnings for the year ended December 31, 1995, resulting in a dividend to the
Zhaoqing Brewery HC of RMB 39,797,878.
45
<PAGE>
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 shareholdings 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 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.
During the year ended December 31, 1996, Guangdong Blue Ribbon and its
affiliated companies provided the Company with raw materials financing
aggregating RMB 21,357,655, which obligations are unsecured, interest free and
repayable on demand. In addition, during the year ended December 31, 1996,
companies beneficially owned by Guangdong Blue Ribbon and directors of the
Company provided loans in the form of advances to the Company aggregating RMB
10,000,000, which obligations are unsecured, bear interest at 12% per annum and
are repayable in 1997.
The Company anticipates that its operating cash flow, combined with
cash on hand, bank lines of credit, and other external credit sources, and the
credit facilities provided by affiliates or related parties, are adequate to
satisfy the Company's working capital requirements for the fiscal year ending
December 31, 1997. In order to finance the continuing capital requirements of
the Company subsequent to the completion of Zhaoqing Brewery expansion, the
Company has begun negotiations to arrange additional long-term bank or lease
financing. In addition, accelerated development or acquisition of additional
brewing facilities or other support facilities may require the use of long-term
borrowing or equity financing by the Company.
Inflation and Currency Matters:
- ------------------------------
In recent years, the Chinese economy has experienced periods of rapid
economic growth as well as relatively high rates of inflation, which in turn has
resulted in the periodic adoption by the Chinese government of various
corrective designed to regulate growth and contain inflation. Since 1993, the
Chinese government has implemented an economic program designed to control
inflation, which has resulted in the tightening of working capital to Chinese
business
46
<PAGE>
enterprises. The success of the Company depends on 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
values 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. In addition, a significant portion of revenues will need to be
converted into USD on a continuing basis to meet foreign currency obligations.
Although prior to 1994 the RMB experienced significant devaluation against the
USD, the RMB has remained fairly stable during 1994, 1995 and 1996. The swap
center rate was US$1.00 to RMB 8.70 at December 31, 1993, RMB 8.45 at December
31, 1994, RMB 8.32 at December 31, 1995, and RMB 8.32 at December 31, 1996.
Environmental Matters:
- ---------------------
Management believes that the Company complies with all national and
local environmental protection laws and regulations of the PRC. In 1996,
compliance with the provisions of all national and local environmental laws and
regulations did not have a material effect upon earnings, capital expenditures
or the competitive position of the Company.
The Company also continues its commitment to programs directed toward
efficient use of resources, waste reduction and pollution prevention. Programs
currently underway include that all waste and emissions must pass through a
comprehensive sewage treatment system to reduce organic matters and the use of
heavy oil instead of coal for power in order to reduce carbon dioxide levels.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and exhibits are listed at ITEM 14 "EXHIBITS,
FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K".
Selected 1995 and 1996 Quarterly Financial Information, in RMB
(unaudited):
47
<PAGE>
Selected quarterly financial information for 1995 and 1996 interim
periods is presented below. High Worth JV acquired Zhaoqing Brewery, including
Zhaoqing Brewery's 40% interest in Noble Brewery, effective October 31, 1994.
The consolidated results of operations includes the results of operations of
Zhaoqing Brewery on a consolidated basis and Noble Brewery under the equity
method of accounting, commencing October 31, 1994, to reflect the post-
acquisition consolidated results of operations of Zhaoqing Brewery and Noble
Brewery attributable to the Company.
On February 19, 1995, the Marketing Company was established and was
registered as a limited company and owned 70% by Zhaoqing Brewery HC and 30% by
Guangdong Blue Ribbon. Through its ownership in High Worth JV, Guangdong Blue
Ribbon also has a 28% indirect interest in the Marketing Company. The Company
has a controlling interest in the Marketing Company even though it has an
effective interest of only 42% because of the Company's 60% interest in High
Worth JV and 70% interest in the Marketing Company (through Zhaoqing Brewery
HC), and because the Company controls the majority of the votes on the board of
directors of the Marketing Company and Zhaoqing Brewery HC. The Marketing
Company was appointed as the sole distributor to conduct the distribution,
marketing and promotion of all Pabst Blue Ribbon beer products produced by
Zhaoqing Brewery and Noble Brewery. Zhaoqing Brewery and Noble Brewery
commenced selling their production of Pabst Blue Ribbon beer through the
Marketing Company in April 1995 and July 1995, respectively. The commencement
of the Marketing Company's operations, which are presented on a consolidated
basis, resulting in a significant change in the Company's operating structure
and income statement presentation during 1995.
48
<PAGE>
<TABLE>
<CAPTION>
1995
----------------------------------------
1996 As Previously Reported As Adjusted (1)
------------ ---------------------- ---------------
<S> <C> <C> <C>
Three Months Ended March 31:
- ----------------------------
Sales, net of sales taxes 277,531,766 39,924,512 32,494,522
Gross profit 43,507,222 7,401,635 7,220,540
Operating income (loss) 6,953,738 1,048,920 (18,539)
Net income 3,671,837 8,670,737 6,327,097
Net income per common share .46 1.08 .79
Three Months Ended June 30:
- ---------------------------
Sales, net of sales taxes 353,658,873 94,880,814 94,880,814
Gross profit 55,699,266 13,716,288 13,716,288
Operating income 10,476,677 2,944,896 1,473,384
Net income 5,000,557 6,371,369 3,882,265
Net income per common share .63 .80 .48
Three Months Ended September 30:
- --------------------------------
Sales, net of sales taxes 300,905,499 250,040,388 250,040,388
Gross profit 44,986,152 30,752,081 30,752,081
Operating income 7,666,083 6,709,893 4,453,277
Net income 3,989,207 6,811,619 4,843,457
Net income per common share .50 .85 .61
Three Months Ended December 31:
- -------------------------------
Sales, net of sales taxes 301,181,486 - 189,371,215
Gross profit 49,945,792 - 19,444,624
Operating income 228,985 - 550,283
Net income 7,550,208 - 4,573,149
Net income per common share .94 - .57
Year Ended December 31:
- -----------------------
Sales, net of sales taxes 1,233,277,624 - 566,786,939
Gross profit 194,138,432 - 71,133,533
Operating income 25,325,483 - 6,458,405
Net income 20,211,809 - 19,625,968
Net income per common share 2.53 - 2.45
</TABLE>
(1) Reflects certain year-end adjustments properly allocable to prior 1995
interim periods, including additional charges by Zhaoqing Brewery for the
staff welfare fund and by the Marketing Company for the provision for
doubtful accounts, accrued liability for sales commissions, and unrecorded
renovation expenses. With respect to Noble Brewery, an unconsolidated
subsidiary, additional charges due to improper cut-offs, unrecorded expenses
and account misclassifications resulted in an understatement of cost of
sales and of selling, general and administrative expenses.
49
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 16, 1994, the Company (which was then known as Natural
Fuels, Inc.), acquired all of the outstanding shares of Holdings. The firm of
Williams, Dickerson, Allen & Co., L.L.P. ("Williams") had audited the balance
sheet of the Company as of December 31, 1993, 1992 and 1991 and the related
statements of operations, stockholders' equity and cash flows for the years then
ended.
Effective January 30, 1995, the Company dismissed Williams as the
Company's independent accountants, and engaged Ernst & Young as the Company's
new independent accountants. Prior to the engagement of Ernst & Young, the
Company did not consult with that firm regarding the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on the Company's financial statements.
Ernst & Young were the independent accountants for Zhaoqing Brewery.
The decision to change accountants was approved by the Company's Board
of Directors.
None of the reports by Williams on such financial statements contained
an adverse opinion or a disclaimer of opinion, or were qualified or modified as
to uncertainty, audit scope or accounting principles, except that (a) the report
of Williams dated February 26, 1994, was qualified with respect to the
uncertainty of the Company's ability to continue as a going concern in view of
the Company's limited cash flow.
During the years ended December 31, 1993 and 1994 and the period from
January 1, 1995 through January 30, 1995, there were no disagreements with
Williams on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of Williams would have caused Williams to make
reference to the subject matter of the disagreements in connection with the
firm's reports on the Company's financial statements.
Effective November 22, 1996, the Company dismissed Ernst & Young as
the Company's independent accountants, and engaged Deloitte Touche Tohmatsu as
the Company's new independent accountants. Prior to the engagement of Deloitte
Touche Tohmatsu, the Company did not consult with that firm regarding the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the Company's
50
<PAGE>
financial statements. Deloitte Touche Tohmatsu were the independent accountants
for Noble Brewery.
The decision to change accountants was approved by the Company's Board
of Directors.
None of the reports by Ernst & Young on such financial statements
contained an adverse opinion or a disclaimer of opinion, or were qualified or
modified as to uncertainty, audit scope or accounting principles.
During the ten months ended October 31, 1994, the two months ended
December 31, 1994, the year ended December 31, 1995 and the period from January
1, 1996 through November 22, 1996, there were no disagreements with Ernst &
Young on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of Ernst & Young would have caused Ernst & Young to make
reference to the subject matter of the disagreements in connection with the
firm's reports on the Company's financial statements.
51
<PAGE>
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following tables and text sets forth the names and ages of all
directors and executive officers of the Company as of July 31, 1997, and their
positions and offices with the Company. The Board of Directors of the Company
is comprised of only one class. All of the directors will serve until the next
annual meeting of shareholders and until their successors are elected and
qualified, or until their earlier death, retirement, resignation or removal.
Executive officers serve at the discretion of the Board of Directors, and are
appointed to serve until the first Board of Directors' meeting following the
annual meeting of shareholders. There are no family relationships among
directors and executive officers. Also provided is a brief description of the
business experience of each director and executive officer during the past five
years and an indication of directorships held by each director in other
companies subject to the reporting requirements under the Federal securities
laws.
In conjunction with the formation of the Company in 1994, Oriental Win
acquired a controlling interest in the Company, and received the right to
appoint a majority of the members of the Board of Directors for so long as it
held its shares. As a result of the distribution by Oriental Win to its
shareholders during October 1996 of all of the shares of Common Stock of the
Company that it owned, West Coast Star Enterprises Ltd. became the controlling
shareholder of the Company and acquired the right to appoint a majority of the
members of the Board of Directors for so long as it holds its shares.
<TABLE>
<CAPTION>
DIRECTORS
---------
Date Elected
Name Age as Director
- ---- --- --------------
<S> <C> <C>
John Zhao Li 42 November 1994
Lee Tak Wong 40 September 1995
Jin-qiang Zhang 55 July 1997
Zi-shou Chan 56 July 1997
Deng-chen Yin 56 July 1997
Long-sheng Zhu 31 July 1997
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS
------------------
Date Elected
Name Age Position(s) as Officer
- ---- --- ---------------- -------------
<S> <C> <C> <C>
Jin-qiang Zhang 55 Chairman August 1997
Zi-shou Chan 56 President August 1997
John Zhao Li 42 Vice President November 1994
Kai Cheng Chen 46 Vice President December 1996
Long-sheng Zhu 31 Vice President August 1997
Gary Chun Kin Lui 36 Chief Financial April 1996
Officer
</TABLE>
Biographies of Directors and Executive Officers
- -----------------------------------------------
JIN-QIANG ZHANG
Mr. Zhang, Chairman and a director of the Company, has over 30 years
experience in manufacturing. Since the early 1980's, Mr. Zhang has held senior
management positions in several manufacturing enterprises in China which were
engaged principally in the electronics industry. During the last past five
years, he has participated extensively in syndication financing, property
development and project investment in China.
ZI-SHOU CHAN
Mr. Chan, President and a director of the Company, has over 30 years
experience in the Chinese manufacturing sector. Since the early 1980's, Mr.
Chan has held senior management positions in several manufacturing enterprises
in China which were mainly engaged in the electronics industry. During the past
five years, he has participated extensively in syndication financing, property
development and project investment in China.
JOHN ZHAO LI
Mr. Li, Vice President and a director of the Company, held a senior
management position with an international investment company in the United
States
53
<PAGE>
from 1992 to 1994. During this period, he was actively involved in consulting
for Pabst Zhaoqing with respect to the project management for the development of
the first and second phases of Noble Brewery. Mr. Li was President of the
Company from 1994 until July 31, 1997.
LEE TAK WONG
Mr. Wong, a Director of the Company, is a member of senior management
engaged in the investment planning and syndication business. During the last
five years, he has participated in brewery and soft drink investment projects in
China. He is currently a Director of Guang Yin International (Holdings)
Limited.
DENG-CHEN YIN
Mr. Yin, a director of the Company, has over 30 years experience in
manufacturing. Since 1970's, Mr. Yin has held senior management positions in
several manufacturing enterprises in China which were engaged in the plastics
and electronics industry. During the past five years, he has participated in
many project investments in China.
LONG-SHENG ZHU
Mr. Zhu, Vice President and a director of the Company, received his
Master's Degree majoring in Mechanical Engineering. He has been engaged in
project management and investment in China for 9 years.
KAI CHENG CHEN
Mr. Chen, Vice President of the Company, received his Master's Degree
majoring in Corporate Accounting from the Research Institute of Fiscal Science
in Beijing, China, and a Master's in Business Administration Degree majoring in
Finance from the University of Rochester, New York, USA. Mr. Chen has been an
auditor and financial consultant in both the United States and China. He
practiced as a CPA in China and was Vice President of China Consultants of
Accounting and Financial Management, Inc., a leading accounting firm in China.
GARY CHUN KIN LUI
Mr. Lui, Chief Financial Officer of the Company, graduated from the
University of Hong Kong with a degree of Bachelor of Social Sciences in 1987.
After graduation, he worked in the Hong Kong office of the Corporate Recovery
Division of Arthur Andersen & Co. for three years. In 1990, he joined a ship
building company listed in Hong Kong as the Group Assistant Financial Controller
54
<PAGE>
and was the Financial Controller of the Group's major ship yard in Singapore.
From 1992 to 1994, Mr. Lui was the General Manager of a private investment
company with extensive joint venture projects in Northeastern China. Prior to
joining the Company in 1995, Mr. Lui was the Project Controller of a Hong Kong
listed investment company with major investments in Eastern China.
Section 16(a) Beneficial Ownership Reporting Compliance:
During the year ended December 31, 1996, the Company did not have any
class of equity securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended, and accordingly, was not subject to the
reporting requirements of Section 16 of the Securities Exchange Act of 1934, as
amended.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company
during the last three fiscal years.
<TABLE>
<CAPTION>
Summary Compensation Table (US$)
--------------------------------
Name and Other
Principal Annual
Position Year Salary Bonus Compensation
- ---------- ---- --------- -------- -------------
<S> <C> <C> <C> <C>
John Zhao Li(1) 1996 $140,000 $27,644 $6,000
President 1995 $101,266 $ 6,010 $6,000
1994 (2) (2) (2)
Lee Tak Wong(3) 1996 $135,951 $27,644 $6,000
Vice President 1995 - $ 6,010 $2,000
1994 (2) (2) (2)
- --------------------
</TABLE>
(1) Mr. Li was President of the Company until July 31, 1997. Mr Li continues
as an officer and director of the Company.
(2) There was no compensation paid or accrued during the two months ended
December 31, 1994.
55
<PAGE>
(3) Mr. Wong was a Vice President of the Company until July 31, 1997. Mr. Wong
continues as a director of the Company.
Compensation Agreements:
The Company has not entered into any long-term employment or
consulting agreements with its officers or directors.
Board of Directors:
During the year ended December 31, 1996, 10 meetings of the Board of
Directors were held. All directors receive compensation of US$500 per month for
serving on the Board of Directors, which aggregated $40,000 during the year
ended December 31, 1996. All directors are reimbursed for any out-of-pocket
expenses incurred in attending board meetings. The Company had no audit,
nominating, or compensation committees, or committees performing similar
functions, during the year ended December 31, 1996.
Stock Option Plan:
The Company has not adopted a stock option plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As used in this section, the term beneficial ownership with respect to
a security is defined by Rule 13d-3 under the Securities Exchange Act of 1934,
as amended, as consisting of sole or shared voting power (including the power to
vote or direct the vote) and/or sole or shared investment power (including the
power to dispose of or direct the disposition of) with respect to the security
through any contract, arrangement, understanding, relationship or otherwise,
subject to community property laws where applicable.
As of July 31, 1997, the Company had a total of 8,000,013 shares of
Common Stock issued and outstanding, consisting of 5,000,013 shares of Class A
Common Stock ($.0001 par value) and 3,000,000 shares of Class B Common Stock
($.0001 par value). The Class A Common Stock and Class B Common Stock are
identical, except that the Class A Common Stock has one vote per share and the
Class B Common Stock has two votes per share. Each share of Class B Common
Stock is convertible into one share of Class A Common Stock at the option of the
holder. All
56
<PAGE>
common share amounts reflect the 1-for-22 reverse stock split effective November
22, 1994. There are no other classes of equity securities outstanding.
The following table sets forth, as of July 31, 1997: (a) the names
and addresses of each beneficial owner of more than five percent (5%) of the
Company's Common Stock known to the Company, the number of shares of Common
Stock beneficially owned by each such person, and the percent of the Company's
Common Stock so owned; and (b) the number of shares of Common Stock of the
Company beneficially owned, and the percentage of the Company's Common Stock so
owned, by each director, and by all directors and officers of the Company as a
group. Each such person has sole voting and investment power with respect to
the shares of Common Stock, except as otherwise indicated. Beneficial ownership
consists of a direct interest in the shares of Common Stock, except as otherwise
indicated.
57
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature of Percent of Shares
Name of Beneficial Owner Beneficial Ownership of Common Stock
- ------------------------ -------------------- -----------------
<S> <C> <C>
West Coast Star 4,176,000(1)(2) 52.2%
Enterprises Ltd.
21/F., Pearl Oriental Centre
189 Gloucester Road
Wanchai, Hong Kong
Mapesbury Limited 1,392,000(1)(3) 17.4%
Unit 2202M, 22/F.,
Nan Fung Centre
264-298 Castle Peak Road
Tsuen Wan, Hong Kong
Redcliffe Holdings Ltd. 1,392,000(1)(4) 17.4%
25/F., Wyndham Place
40-44 Wyndham Street
Central, Hong Kong
Jin-qiang Zhang 0(5) -
Zi-shou Chan 0(6) -
John Zhao Li 0(7) -
Lee Tak Wong 0(8) -
Deng-chen Yin 0(9) -
Long-sheng Zhu 0(10) -
All Directors and 240,000(11) 3.0%
Executive Officers
as a Group
(10 persons)
</TABLE>
___________________
(1) On October 14, 1996, Oriental Win distributed to its shareholders a total
of 6,960,000 shares of the Company's Common Stock, consisting of 3,960,000
shares of Class A Common Stock and 3,000,000 shares of Class B Common
Stock, which represented Oriental Win's entire 87% interest in the Company.
The shareholders of Oriental Win received such shares in proportion to
their respective shareholder interests in Oriental Win (West Coast Star
Enterprises Ltd. - 60%; Mapesbury Limited - 20%; Redcliffe Holdings Ltd. -
20%). In conjunction with the distribution of such shares by Oriental Win,
the shareholders' agreement among Oriental Win, West Coast Star Enterprises
58
<PAGE>
Ltd., ("West Coast") Mapesbury Limited and Redcliffe Holdings Ltd. was
terminated.
(2) Consists of 2,376,000 shares of Class A Common Stock and 1,800,000 shares
of Class B Common Stock.
(3) Consists of 792,000 shares of Class A Common Stock and 600,000 shares of
Class B Common Stock.
(4) Consists of 792,000 shares of Class A Common Stock and 600,000 shares of
Class B Common Stock. Victor Choi, a former Director, is the beneficial
owner of Silvercliff Venture Inc., which owns 50% of the capital stock of
Redcliffe Holdings Ltd.
(5) Mr. Zhang is a minority shareholder of West Coast, but disclaims any
beneficial ownership of such shares. Mr. Zhang owns 35% of the capital
stock of West Coast.
(6) Mr. Chan is a minority shareholder of West Coast, but disclaims any
beneficial ownership of such shares. Mr. Chan owns 15% of the capital
stock of West Coast.
(7) Mr. Li is a minority shareholder of West Coast, but disclaims any
beneficial ownership of such shares. Mr. Li owns 5% of the capital stock
of West Coast.
(8) Mr. Wong is a minority shareholder of West Coast, but disclaims any
beneficial ownership of such shares. Mr. Wong owns 5% of the capital stock
of West Coast.
(9) Mr. Yin is a minority shareholder of West Coast, but disclaims any
beneficial ownership of such shares. Mr. Yin owns 20% of the capital stock
of West Coast.
(10) Mr. Zhu is a minority shareholder of West Cost, but disclaims any
beneficial ownership of such shares. Mr. Zhu owns 10% of the capital stock
of West Coast.
(11) See footnotes (5) through (10)
Changes in Control:
59
<PAGE>
The Company is unaware of any contract or other arrangement, the
operation of which may at a subsequent date result in a change in control of the
Company.
60
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Shareholder Loans
- -----------------
In connection with the acquisition of High Worth JV, Oriental Win
advanced US$8,869,585 to Holdings during 1994. The right to collect
US$8,000,000 of the advance was transferred from Oriental Win to its
shareholders in proportion to their respective shareholdings 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 the
issuance of shares at par value in Holdings. As of 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.
Noble Brewery
- -------------
During the years ended December 31, 1995 and 1996, the Company
purchased for resale beer products from Noble Brewery aggregating RMB
327,805,406 and RMB 695,150,225, respectively. As of December 31, 1995 and
1996, RMB 154,185,606 and RMB 166,501,751, respectively, was due to Noble
Brewery for the purchase of beer products, and was unsecured, interest free and
repayable on demand.
Guangdong Blue Ribbon
- ---------------------
Until July 31, 1997, Liu Yun Zhong and Niu Zi Hang were directors and
executive officers of the Company. Messrs. Liu and Niu are the General Manager
and Deputy General Manager, respectively, of Guangdong Blue Ribbon. Guangdong
Blue Ribbon owns 40% of High Worth JV.
During the years ended December 31, 1995 and 1996, the Company
purchased packaging materials from Guangdong Blue Ribbon and its affiliated
companies aggregating RMB 27,657,968 and RMB 44,778,187, respectively.
During the year ended December 31, 1996, the Company sold beer
products to Guangdong Blue Ribbon aggregating RMB 6,169,170.
61
<PAGE>
During the years ended December 31, 1995 and 1996, the Company
purchased for resale mineral water and non-carbonated soft drinks from Guangdong
Blue Ribbon and its affiliated companies aggregating RMB 61,708,086 and RMB
69,166,604, respectively.
During the years ended December 31, 1995 and 1996, the Company paid
RMB 3,454,067 and RMB 7,945,874, respectively, equivalent to US$11.70 per ton of
beer production, to Guangdong Blue Ribbon as a royalty fee for the right to use
the Pabst Blue Ribbon trademarks in the Guangdong Province of China.
During the year ended December 31, 1996, the Company paid Guangdong
Blue Ribbon a management fee of RMB 3,780,000 pursuant to a three year agreement
commencing January 1, 1996.
As of December 31, 1995 and 1996, amount due from related companies
aggregated RMB 46,411,779 and RMB 33,089,333, respectively, and consisted of
amounts due from Guangdong Blue Ribbon and its affiliated companies for trade
deposits received on behalf of the Company and expenses paid on behalf of
Guangdong Blue Ribbon and its affiliated companies. Included in the net amounts
due from related companies at December 31, 1996 is RMB 27,500,000 (RMB
16,000,000 in 1995), which bears interest at 15% per annum, and RMB 38,200,000
(nil in 1995), which bears interest at 10% per annum, due from Guangdong Blue
Ribbon and its affiliated companies. The remaining amounts due from Guangdong
Blue Ribbon and its affiliated companies are unsecured, interest-free and
repayable on demand.
As of December 31, 1995 and 1996, the Company owed an aggregate of
approximately RMB 18,600,000 and RMB 21,400,000, respectively, to related
parties as follows:
(a) approximately RMB 11,400,000 (RMB 10,500,000 in 1995) was due to
companies affiliated with Guangdong Blue Ribbon for the purchases of raw
materials, and was unsecured, interest free and repayable on demand;
(b) approximately RMB 3,100,000 (RMB 3,300,000 in 1995) was due to
Wealth Guide Development Limited, a company affiliated with Guangdong Blue
Ribbon, as an advance, and was unsecured, bears interest at 12% per annum, and
is repayable in 1997;
For the year ended December 31, 1996, interest expense with respect to
the above obligations relating to Guangdong Blue Ribbon and its affiliated
companies was RMB 9,282,985 and to the other related parties was RMB 948,513.
62
<PAGE>
For the year ended December 31, 1996, interest income from Guangdong Blue Ribbon
was RMB 3,981,278.
For the year ended December 31, 1995, interest expense with respect to
the above obligations relating to Guangdong Blue Ribbon and its affiliated
companies was RMB 3,091,364 and to the other related parties was RMB 328,207.
Other Transactions
- ------------------
Approximately RMB 5,700,000 and RMB nil (RMB 2,200,000 and RMB
1,400,000 in 1995) were due to Evermoni Trading Limited and Very Temper Limited,
respectively, companies beneficially owned by Wong Lee Tak, a director of the
Company, as advances, and were unsecured, bear interest at 12% per annum, and
are repayable in 1997; and
Approximately RMB 1,200,000 (RMB 1,200,000 in 1995) was due to Trade
Link Investment Limited, a company beneficially owned by Victor Choi, a former
director of the Company, as an advance, and was unsecured, bears interest at 12%
per annum, and is repayable in 1997.
63
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following financial statements and exhibits are filed with and as a
part of this document.
(1) Financial Statements
CBR Brewing Company, Inc.
-------------------------
Report of Independent Auditors
Deloitte Touche Tohmatsu
Ernst & Young
Consolidated Balance Sheets
- As of December 31, 1995 and 1996
Consolidated Statements of Income
- Period from October 31, 1994 to December 31, 1994,
and years ended December 31, 1995 and 1996
Consolidated Statements of Shareholders' Equity
- Period from November 1, 1994 through
December 31, 1996
Consolidated Statements of Cash Flows
- Period from October 31, 1994 to December 31, 1994,
and years ended December 31, 1995 and 1996
Notes to Consolidated Financial Statements
Zhaoqing Blue Ribbon Brewery Noble Ltd.
---------------------------------------
Report of Independent Auditors
Deloitte Touche Tohmatsu
Ernst & Young
Balance Sheets
- As of December 31, 1995 and 1996
64
<PAGE>
Statements of Income
- Ten months ended October 31, 1994, two months
ended December 31, 1994, and years ended
December 31, 1995 and 1996
Statements of Equity
- Period from January 1, 1994 through
December 31, 1996
Statements of Cash Flows
- Ten months ended October 31, 1994, two months
ended December 31, 1994, and years ended
December 31, 1995 and 1996
Notes to Financial Statements
Zhaoqing Brewery
----------------
Report of Independent Auditors
Ernst & Young
Consolidated Statement of Income
- For the ten months ended October 31, 1994
Consolidated Statement of Equity
- For the ten months ended October 31, 1994
Consolidated Statement of Cash Flows
- For the ten months ended October 31, 1994
Notes to Consolidated Financial Statements
(2) Exhibits
Exhibit No. Description of Document
- ----------- -----------------------
2.1 (P) Share Exchange Agreement, dated November
1994, with Amendment among the Company,
Oriental Win and Holdings(1).
3(I).1 (P) Articles of Incorporation and Amendments(2).
3(I).2 (P) Certificate of Amendment of Articles of
Incorporation(3).
3(ii) (P) Bylaws(2).
10.1 (P) Joint Venture Agreement dated June 10,
1993 between Zhaoqing Brewery and
Goldjinsheng regarding Noble Brewery with
amendments, with English translation(3).
10.2 (P) Joint Venture Agreement dated May 6, 1994
between Guangdong Blue Ribbon and
Holdings, as supplemented by Supplementary
Joint Venture Agreement dated September 5,
1994 among Holdings, Guangdong Blue
Ribbon and Star Quality Ltd. regarding
65
<PAGE>
Exhibit No. Description of Document
- ----------- -----------------------
Zhaoqing High Worth, with English
translation(3).
10.3 (P) Assets Transferring Agreement dated
September 6, 1994 among Guangdong Blue
Ribbon, Zhaoqing Brewery and High Worth
JV regarding High Worth JV, with English
translation(3).
10.4 (P) Agreement on License of Transferring and
Using the registered trademarks of Pabst
Blue Ribbon dated August 30, 1993,
between Pabst Zhaoqing and Pabst US, with
English translation(3).
10.5 (P) Agreement on Quality of Pabst Beer dated
August 30, 1993 between Pabst Zhaoqing
and Pabst US, with English translation(3).
10.6 (P) Power of Attorney between Pabst US and
Pabst Zhaoqing, dated August 30, 1993(3).
10.7 (P) Sublicense Agreement on Using the
Registered Trademarks of Pabst Blue Ribbon
dated October 12, 1993 between Pabst
Zhaoqing and Noble Brewery, with English
translation(3).
10.8 (P) Sublicense on Using the Registered Trademarks
of Pabst Blue Ribbon dated May 6, 1994 between
Pabst Zhaoqing and High Worth JV, with
English translation(3).
10.9 (P) Transferring Agreement dated May 20, 1994
among Pabst Zhaoqing, Pabst US and
Guangdong Blue Ribbon, with English
translation(3).
10.10 (P) Deed dated December 5, 1994 between
Oriental Win and Holdings regarding the
Shareholder Loan, with supplementary
documentation(3).
66
<PAGE>
Exhibit No. Description of Document Page No.(s)
- ----------- ----------------------- -----------
10.11 Long Term Purchase Agreement dated
April 1, 1995 between the Marketing
Company and Zhaoqing Brewery (English
Translation). 167
10.12 Long Term Purchase Agreement dated
July 11, 1995 between the Marketing
Company and Noble Brewery (English
Translation). 168
22 The Company's subsidiaries are:
<TABLE>
<CAPTION>
Percentage
Name of Subsidiary Ownership Place of Incorporation
- ------------------ ---------- ----------------------
<S> <C> <C>
High Worth Holdings Ltd. 100% British Virgin Islands
CBR Finance (B.V.I.) Ltd. 100% British Virgin Islands
Zhaoqing Blue Ribbon
High Worth Brewery, Ltd. 60% (effective interest) People's Republic of
(Sino-foreign joint venture) China
Zhaoqing Brewery 60% (effective interest) People's Republic of
China
Zhaoqing Blue Ribbon
Brewery Noble, Ltd. 24% (effective interest) People's Republic of
(Sino-foreign joint venture) China
Zhaoqing Blue Ribbon
Beer Marketing Company
Limited 42% (effective interest) People's Republic of
China
</TABLE>
67
<PAGE>
Exhibit No. Description of Document
----------- -----------------------
27 Financial Data Schedule (Electronic filing only).
(1) Filed as an Exhibit to the Company's Current Report on Form 8-K filed
on December 30, 1994 and incorporated herein by reference.
(2) Filed as Exhibits to the Company's Registration Statement No. 33-
26617A on Form S-18 filed January 19, 1989 and incorporated herein by
reference.
(3) Filed as Exhibits to the Company's Annual Report on Form 10-K for
fiscal year ended December 31, 1994, and incorporated herein by
reference.
(P) Indicates that document was originally filed with the Securities
and Exchange Commission in paper form and that there have been no
changes or amendments to the document which would require filing of
the document electronically with this Form 10-K.
(b) Reports on Form 8-K - Three Months Ended December 31, 1996 -
(1) A Current Report on Form 8-K dated October 23, 1996, was filed to
report a change in control of the Company (Item 1) as a result of the
distribution of the Company's shares of Common Stock by Oriental Win.
(2) A Current Report on Form 8-K dated November 11, 1996, and subsequently
amended on November 22, 1996, was filed to report the termination of
Ernst & Young and the retention of Deloitte Touche Tohmatsu as the
Company's independent accountants (Item 4).
68
<PAGE>
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CBR Brewing Company, Inc.
-------------------------
(Registrant)
Date: August 12, 1997 By: /s/ Zi-shou Chan
----------------------
Zi-shou Chan
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: August 12, 1997 By: /s/ Zi-shou Chan
----------------------
Zi-shou Chan
President and Director
Date: August 12, 1997 By: /s/ John Zhao Li
----------------------
John Zhao Li
Vice President and Director
Date: August 12, 1997 By: /s/ Gary Chun Kin Lui
----------------------
Gary Chun Kin Lui
Chief Financial Officer
Date: August 12, 1997 By: /s/ Lee Tak Wong
---------------------------
Lee Tak Wong
Director
Date: August 12, 1997 By: /s/ Jin-qiang Zhang
---------------------------
Jin-qiang Zhang
Director
69
<PAGE>
Date: August 12, 1997 By: /s/ Long-sheng Zhu
---------------------------
Long-sheng Zhu
Director
Date: August 12, 1997 By: /s/ Deng-chen Yin
---------------------------
Deng-chen Yin
Director
70
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
REPORTS AND FINANCIAL STATEMENTS FOR THE PERIOD
FROM OCTOBER 31, 1994 TO DECEMBER 31, 1994,
AND THE YEARS ENDED DECEMBER 31, 1995 AND 1996
- -----------------------------------------------
<TABLE>
<CAPTION>
CONTENTS PAGE(S)
- -------- -------
<S> <C>
REPORT OF INDEPENDENT AUDITORS................................... F - 1
REPORT OF PREDECESSOR AUDITORS................................... F - 2
CONSOLIDATED BALANCE SHEETS...................................... F - 3 - F - 4
CONSOLIDATED STATEMENTS OF INCOME................................ F - 5 - F - 6
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY.................. F - 7
CONSOLIDATED STATEMENTS OF CASH FLOWS............................ F - 8 - F - 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS....................... F - 10 - F - 42
</TABLE>
71
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To The Board of Directors and Shareholders of
CBR Brewing Company, Inc.
We have audited the accompanying consolidated balance sheet of CBR Brewing
Company, Inc. and its subsidiaries as of December 31, 1996, and the related
consolidated statements of income, shareholders' equity and cash flows for
the year ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of CBR Brewing Company, Inc.
and its subsidiaries as of December 31, 1996, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
We draw your attention to notes 14, 21 and 24 to the consolidated financial
statements which state that the Company is exposed to foreign currency
exchange risk and other risks through its operation in the People's
Republic of China, and the risk of its business which could be adversely
affected as a result of new competition.
/s/ Deloitte Touche Tohmatsu
Hong Kong
June 27, 1997
F - 1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the shareholders of
CBR Brewing Company, Inc.
We have audited the accompanying consolidated balance sheets of CBR Brewing
Company, Inc. and its subsidiaries as of December 31, 1995 and 1994, and related
consolidated statements of income, changes in shareholders' equity and cash
flows for the year ended December 31, 1995 and the period from October 31, 1994
to December 31, 1994. These financial statements are the responsibility of CBR
Brewing Company, Inc.'s management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
CBR Brewing Company, Inc. and its subsidiaries as of December 31, 1995 and 1994,
and the consolidated results of their operations and their cash flows for the
year ended December 31, 1995 and the period from October 31, 1994 to December
31, 1994 in conformity with generally accepted accounting principles in the
United States of America.
/s/ Ernst & Young
Hong Kong
March 28, 1996
F-2
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------
1995 1996 1996
---- ---- ----
RMB RMB US$
(Note 3)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ 57,448,305 39,709,594 4,772,788
Accounts receivable, net of allowance for doubtful
accounts of RMB5,600,000 and RMB14,921,542
for 1995 and 1996, respectively (note 4)........... 158,677,644 168,845,494 20,293,930
Bills receivable (note 5)............................ - 38,653,659 4,645,872
Inventories (note 6)................................. 56,838,801 87,549,836 10,522,817
Amounts due from related companies (note 18)......... 46,411,779 33,089,333 3,977,083
Prepayments, deposits and other receivables.......... 7,423,161 17,779,904 2,137,008
----------- ----------- ----------
Total current assets................................. 326,799,690 385,627,820 46,349,498
Interest in an associated company (note 7)............. 222,742,476 216,984,220 26,079,834
Deferred tax assets (note 11).......................... 48,444 - -
Property, plant and equipment, net of accumulated
depreciation and amortization of RMB8,227,160
and RMB26,410,498 for 1995 and 1996,
respectively (note 8)................................ 197,308,264 223,890,108 26,909,869
----------- ----------- ----------
Total assets......................................... 746,898,874 826,502,148 99,339,201
=========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings (note 9)................................ 32,574,400 40,500,000 4,867,789
Capital lease obligations (note 10)..................... 5,634,848 9,034,742 1,085,907
Accounts payable........................................ 20,095,488 29,791,878 3,580,755
Accrued liabilities..................................... 36,183,693 74,415,368 8,944,154
Customer deposits....................................... 123,817,626 59,003,600 7,091,779
Amounts due to related companies (note 18).............. 18,629,685 21,357,655 2,567,026
Amount due to an associated company (note 7)............ 154,185,606 166,501,751 20,012,230
Income taxes payable (note 11).......................... - 260,000 31,250
Sales taxes payable (note 12)........................... 33,233,897 63,904,235 7,680,798
Deferred tax liabilities (note 11)...................... - 4,413,000 530,409
----------- ----------- ----------
Total current liabilities............................... 424,355,243 469,182,229 56,392,097
----------- ----------- ----------
Long term liabilities:
Capital lease obligations (note 10)..................... 24,897,291 15,862,549 1,906,556
----------- ----------- ----------
Minority interests........................................ 96,474,719 120,073,940 14,431,964
----------- ----------- ----------
Commitments and contingencies (notes 14, 21, 23 and 24)...
Shareholders' advances and shareholders' equity:
Advances from shareholders (note 13).................... 73,794,948 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 4,265 513
- Class B, US$0.0001 par value, 10,000,000 shares
authorized, 3,000,000 shares outstanding............ 2,559 2,559 307
Additional paid-in capital.............................. 104,030,194 104,030,194 12,503,629
General reserve and enterprise development funds........ 2,159,613 4,823,561 579,754
Retained earnings....................................... 21,180,042 38,727,903 4,654,796
----------- ----------- ----------
</TABLE>
F - 3
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
<TABLE>
<S> <C> <C> <C>
Total shareholders' equity.............................. 127,376,673 147,588,482 17,738,999
----------- ----------- ----------
Total shareholders' advances and shareholders'
equity.................................................. 201,171,621 221,383,430 26,608,584
----------- ----------- ----------
Total liabilities and shareholders' equity.............. 746,898,874 826,502,148 99,339,201
=========== =========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements
F - 4
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Period from
October 31, 1994 Year ended December 31,
to ----------------------------------------------------
December 31, 1994 1995 1996 1996
------------------ ----------- ------------- --------------
RMB RMB RMB US$
(Note 3)
<S> <C> <C> <C> <C>
Sales, including sales to related companies of
RMB6,169,170 in 1996 (note 18a)....................... 12,562,589 580,260,386 1,255,940,985 150,954,445
Sales taxes (note 12)................................... 1,161,783 13,473,447 22,663,361 2,723,962
---------- ----------- ------------- -----------
Net sales............................................... 11,400,806 566,786,939 1,233,277,624 148,230,483
Cost of sales, including inventory purchased
from related companies of RMB450,961,
RMB417,171,460 and RMB809,095,016 in 1994, 1995
and 1996, respectively; and royalty fee paid to a
related
company of RMB3,454,067 and RMB7,945,874 in 1995
and 1996, respectively (note 18b to e)................ 7,174,417 495,653,406 1,039,139,192 124,896,538
---------- ----------- ------------- -----------
Gross profit............................................ 4,226,389 71,133,533 194,138,432 23,333,945
Selling, general and administrative expenses,
including management fee paid to a related
company of RMB3,780,000 in 1996 (note 18f)........... 1,248,302 64,675,128 168,812,949 20,290,018
---------- ----------- ------------- -----------
Operating income........................................ 2,978,087 6,458,405 25,325,483 3,043,927
---------- ----------- ------------- -----------
Other income:
Interest income, including interest income from
a related company of RMB3,981,278 in 1996
(note 18g).......................................... - - 6,119,470 735,513
Foreign exchange gains................................ 1,217,119 1,614,652 119,907 14,412
Others................................................ - - 695,244 83,563
---------- ----------- ------------- -----------
Total other income.................................... 1,217,119 1,614,652 6,934,621 833,488
---------- ----------- ------------- -----------
Other expenses:
Corporate reorganization expenses..................... 2,551,921 - - -
Interest expense, including interest paid to related
companies of RMB328,207 and RMB10,231,528
for 1995 and 1996, respectively (note 18h).......... 1,317,178 3,236,058 20,767,252 2,496,064
Loss on disposal of property, plant and
equipment........................................... 394,988 1,001,788 - -
---------- ----------- ------------- -----------
Total other expenses.................................. 4,264,087 4,237,846 20,767,252 2,496,064
---------- ----------- ------------- -----------
(Loss) income before income taxes....................... (68,881) 3,835,211 11,492,852 1,381,351
Income taxes (note 11).................................. - 1,000,000 4,721,444 567,481
---------- ----------- ------------- -----------
(Loss) income before equity in earnings of an
associated company.................................... (68,881) 2,835,211 6,771,408 813,870
Equity in earnings of an associated company............. 7,812,392 34,213,058 34,039,622 4,091,301
---------- ----------- ------------- -----------
Income before minority interests........................ 7,743,511 37,048,269 40,811,030 4,905,171
Minority interests...................................... 4,029,824 17,422,301 20,599,221 2,475,868
---------- ----------- ------------- -----------
Net income for the period/year.......................... 3,713,687 19,625,968 20,211,809 2,429,303
========== =========== ============= ===========
Net income per share.................................... 0.46 2.45 2.53 0.30
========== =========== ============= ===========
</TABLE>
F - 5
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
<TABLE>
<S> <C> <C> <C> <C>
Average number of shares outstanding.................... 8,000,013 8,000,013 8,000,013 8,000,013
========= ========= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements
F - 6
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
<TABLE>
<CAPTION>
Common stock
----------------------------------------------------------------------
Shares Amount
outstanding par value of US$0.0001 each Additional
----------- --------------------------- paid-in Reserves Retained
Class A Class B Class A Class B capital funds earnings
------- ------- ------- ------- ----------- -------- ---------
RMB RMB RMB RMB RMB
(Note 15) (Note 15)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at November 1, 1994.. - - - - - - -
Issue of common stock to the
Company's existing
stockholders............... 55,013 - 132 - 1,077,785 - -
Issue of common stock to
merchant bankers,
consultants and several
executives of the
Company.................... 645,000 - 550 - 2,756,710 - -
Issue of common stock in
consideration for the
entire issued share
capital of High Worth
Holdings Limited........... 4,200,000 3,000,000 3,583 2,559 104,030,194 - -
Net income................... - - - - - 3,713,687
Appropriation................ - - - - - 219,062 (219,062)
Advances from shareholders... - - - - - - -
---------- ---------- ------ ------ ------------- ---------- ------------
Balance at December 31, 1994. 5,000,013 3,000,000 4,265 2,559 104,030,194 219,062 3,494,625
Net income................... - - - - - - 19,625,968
Appropriation................ - - - - - 1,940,551 (1,940,551)
---------- ---------- ------ ------ ------------- ---------- ------------
Balance at December 31, 1995. 5,000,013 3,000,000 4,265 2,559 104,030,194 2,159,613 21,180,042
Net income................... - - - - - - 20,211,809
Appropriation................ - - - - - 2,663,948 (2,663,948)
---------- ---------- ------ ------ ------------- ---------- ------------
Balance at December 31, 1996. 5,000,013 3,000,000 4,265 2,559 104,030,194 4,823,561 38,727,903
========== ========== ====== ====== ============= ========== ============
Converted to US$
Balance at December 31, 1996
(note 3).................... 5,000,013 3,000,000 US$513 US$307 US$12,503,629 US$579,754 US$4,654,796
========== ========== ====== ====== ============= ========== ============
</TABLE>
Holders of Class A common stock are entitled to one vote per share. Holders of
Class B common stock are entitled to two votes per share. Each share of Class B
common stock is convertible into one share of Class A common stock at the option
of the holders.
On March 31, 1995, the Company changed the authorized share capital of Class A
common stock from 95,000,000 shares to 90,000,000 shares and Class B common
stock from 5,000,000 shares to 10,000,000 shares.
See accompanying notes to the consolidated financial statements
F - 7
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
October 31, 1994 Year ended December 31,
to ------------------------------------------------------
December 31, 1994 1995 1996 1996
------------------ ------------- ------------------------ -----------
RMB RMB RMB US$
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................... 3,713,687 19,625,968 20,211,809 2,429,303
Adjustments to reconcile net income to net cash
provided by operating activities:
Allowance for doubtful accounts................... - 5,600,000 9,914,114 1,191,600
Corporate reorganization expenses................. 2,551,921 - - -
Depreciation and amortization..................... 606,130 9,459,519 18,703,203 2,247,981
Foreign exchange gains............................ (1,141,284) (1,737,759) (119,907) (14,412)
Loss on disposal of property, plant and equipment. 394,988 1,001,788 - -
Minority interests................................ 4,029,824 17,422,301 20,599,221 2,475,868
Equity in earnings of an associated company....... (7,812,392) (34,213,058) (34,039,622) (4,091,301)
Dividend received from an associated company...... - 28,644,569 39,797,878 4,783,400
Deferred income taxes............................. - 1,000,000 4,461,444 536,231
Income taxes payable.............................. - - 260,000 31,250
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable.......... 108,264 (163,350,396) (20,081,964) (2,413,698)
Increase in inventories............................. (4,076,782) (40,728,195) (30,711,035) (3,691,231)
(Increase) decrease in amounts due from related
companies......................................... - (46,411,779) 13,322,446 1,601,256
Decrease (increase) in prepayments, deposits and
other receivables.................................. 1,098,544 (5,297,981) (10,356,743) (1,244,800)
Increase in bills receivable........................ - - (38,653,659) (4,645,873)
(Decrease) increase in customer deposits............ (6,418,891) 119,863,548 (64,814,026) (7,790,147)
Increase in accounts payable and accrued
liabilities....................................... 422,196 27,746,442 47,928,065 5,760,585
Increase in amount due to an associated company..... - 154,185,606 12,316,145 1,480,306
Increase in amounts due to related companies........ 2,446,970 - - -
(Decrease) increase in sales taxes payable.......... (1,891,878) 14,414,744 30,670,338 3,686,340
---------- ------------ ----------- ----------
Net cash (used) provided by operating activities...... (5,968,703) 107,225,317 19,407,707 2,332,658
---------- ------------ ----------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment.......... (8,076,187) (89,365,441) (46,786,402) (5,623,366)
Purchase of subsidiaries............................ 7,584,942 - - -
Proceeds from disposal of property, plant and
equipment......................................... 991,973 413,679 1,501,355 180,451
---------- ------------ ----------- ----------
Net cash provided (used) by investing activities.... 500,728 (88,951,762) (45,285,047) (5,442,915)
---------- ------------ ----------- ----------
Cash flows from financing activities:
New bank borrowings................................. 8,595,000 22,574,400 48,500,000 5,829,327
New other borrowings................................ 5,000,000 - - -
New loans for leased assets......................... - 21,250,000 - -
Contribution by minority interests.................. - - 3,000,000 360,577
Increase in amounts due to related companies........ - 13,199,030 2,727,970 327,881
Repayment of bank borrowings........................ (150,000) (16,595,000) (40,574,400) (4,876,731)
Repayment of other borrowings....................... - (5,000,000) - -
Repayment of capital lease obligations.............. (579,098) (3,651,607) (5,514,941) (662,853)
---------- ------------ ----------- ----------
Net cash provided by financing activities........... 12,865,902 31,776,823 8,138,629 978,201
---------- ------------ ----------- ----------
</TABLE>
F - 8
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
<TABLE>
<S> <C> <C> <C> <C>
Net increase (decrease) in cash....................... 7,397,927 50,050,378 (17,738,711) (2,132,056)
Cash at beginning of the period/year.................. - 7,397,927 57,448,305 6,904,844
---------- ------------ ----------- ----------
Cash at end of the period/year........................ 7,397,927 57,448,305 39,709,594 4,772,788
========== ============ =========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements
F - 9
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
CBR Brewing Company, Inc. (the "Company"), formerly Natural Fuels, Inc. and
National Sweepstakes, Inc., was originally incorporated as Video
Promotions, Inc. on April 20, 1988 under the laws of the State of Florida.
The Company and its subsidiaries are collectively referred to as the
"Group".
The Company is a holding company and its principal subsidiaries are engaged
in the production and sale of beer and beer products in the People's
Republic of China ("PRC").
On December 16, 1994, the Company issued 3,960,000 shares of Class A common
stock and 3,000,000 shares of Class B common stock to Oriental Win Holdings
Ltd. ("Oriental Win") and 240,000 shares of Class A common stock to
Goldchamp Limited ("Goldchamp"), both of these companies and their
shareholders were unrelated to the Company prior to becoming shareholders,
in consideration for the entire issued share capital of High Worth Holdings
Limited ("High Worth Holdings"). Upon completion of the share exchange on
December 16, 1994, High Worth Holdings became a wholly-owned subsidiary of
the Company.
This transaction has been treated as a recapitalization of High Worth
Holdings with High Worth Holdings as the acquirer (reverse acquisition).
The historical financial statements prior to December 16, 1994 are those of
High Worth Holdings.
High Worth Holdings is a holding company formed solely to effect the
acquisition of a 60% interest in Zhao Qing Blue Ribbon High Worth Brewery
Ltd. ("High Worth Brewery"). High Worth Brewery is a Sino-foreign equity
joint venture enterprise registered in the PRC on July 2, 1994 in which
Star Quality Limited ("Star Quality"), Guangdong Blue Ribbon Group Co.,
Ltd. ("Blue Ribbon Group"), a joint stock limited company incorporated in
PRC and High Worth Holdings held 38%, 2% and 60% interests, respectively.
Star Quality and Blue Ribbon Group are not connected with the Group.
During the year ended December 31, 1995, Star Quality transferred its 38%
interest to Blue Ribbon Group. Accordingly, Blue Ribbon Group and High
Worth Holdings hold 40% and 60% interests, respectively. Apart from the
investment in High Worth Brewery which was partly financed by a long term,
interest free advance from Oriental Win (see note 13), High Worth Holdings
has no other significant assets and liabilities. The following is a
summary of the acquisition undertaken by High Worth Holdings, through its
subsidiary, High Worth Brewery, during the period ended December 31, 1994.
On October 31, 1994, High Worth Brewery acquired a 100% interest in
Zhaoqing Brewery, including Zhaoqing Brewery's 40% interest in Zhaoqing
Blue Ribbon Brewery Noble Ltd. ("Blue Ribbon Noble"). The consideration for
the acquisition of an effective 60% interest in Zhaoqing Brewery by High
Worth Holdings through High Worth Brewery was approximately US$20 million.
Prior to the acquisition of the entire interest in Zhaoqing Brewery by High
Worth Brewery, Zhaoqing Brewery was the then wholly-owned subsidiary of
Blue Ribbon Group. Blue Ribbon Noble is a Sino-foreign equity joint
venture enterprise registered in the PRC on October 8, 1993 in which
Goldjinsheng Holding Limited, an unrelated party, and Zhaoqing Brewery hold
F - 10
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
60% and 40% interests, respectively. Zhaoqing Brewery and Blue Ribbon
Noble are both engaged in the production and sale of beer and beer products
in the PRC.
F - 11
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
1. ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
Commencing from April 1995, Zhaoqing Brewery ceased the production of
Zhaoqing beer and started to produce Blue Ribbon beer. Pursuant to the
terms of the sublicense agreement, Zhaoqing Brewery was granted by Blue
Ribbon Group the right for the production and distribution of Blue Ribbon
beer under Pabst trademarks in the PRC at royalty fee of US$11.70 for each
ton produced.
Blue Ribbon Noble's principal line of product is Blue Ribbon beer under
Pabst trademarks which were granted by Blue Ribbon Group. Pursuant to the
terms of the sublicense agreement, Blue Ribbon Noble was granted by Blue
Ribbon Group the right in the PRC to use the two specific Pabst trademarks
for the production, promotion, distribution and sale of beer under such
trademarks. The production right of Blue Ribbon Noble however is confined
exclusively for the Guangdong Province only and it does not preclude High
Worth Brewery's production rights in Guangdong as described in notes 23(a)
and 23(b). The sublicense agreement is valid until November 7, 2003. In
consideration for the sublicense granted, Blue Ribbon Noble is committed to
pay Blue Ribbon Group a royalty fee of US$0.10 for each carton of bottled
or canned beer produced.
On February 19, 1995, Zhaoqing Blue Ribbon Beer Marketing Company Limited
("Blue Ribbon Marketing") was registered as a limited company and owned as
to 70% by Zhaoqing Brewery and 30% by Blue Ribbon Group. Blue Ribbon
Marketing was appointed as the sole distributor to conduct the
distribution, marketing and promotion of all Pabst Blue Ribbon beer
products produced by Zhaoqing Brewery and Blue Ribbon Noble. Blue Ribbon
Marketing commenced to purchase beer products from Zhaoqing Brewery and
Blue Ribbon Noble in April 1995 and July 1995, respectively. Its principal
trading product is Blue Ribbon beer which constitutes approximately 94% of
the Group's sales. Blue Ribbon Marketing is also engaged in the trading of
mineral water and non-carbonated soft drinks purchased from Blue Ribbon
Group and its group of companies.
On April 5, 1995, CBR Finance (BVI) Ltd. ("Finance Company"), which is
wholly owned by the Company, was incorporated in the British Virgin Islands
("BVI"). The Finance Company has remained dormant since incorporation.
In January 1996, Zhaoqing Brewery transferred all of its operating assets
and liabilities to High Worth Brewery 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, investments in Blue Ribbon Noble and
the Blue Ribbon Marketing, will be transferred to High Worth Brewery.
Zhaoqing Brewery is currently acting as the nominee for High Worth Brewery
with respect to the investments in Blue Ribbon Noble and the Blue Ribbon
Marketing.
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 Brewery. During 1996, the operating
activities of Zhaoqing Brewery were part of High Worth
F - 12
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
Brewery. The consensus and approval of the local tax authority with
respect to this transfer was recently obtained.
F - 13
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
1. ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
The following unaudited consolidated pro forma information for the year
ended December 31, 1994 is prepared on the basis as if the acquisition of a
60% interest in Zhaoqing Brewery had occurred on January 1, 1993, including
the beginning of the tax exemption period. This information is extracted
from the Group's unaudited pro forma financial statements which have been
prepared for comparative purposes only and do not purport to indicate the
results of operations which would actually have occurred had the
acquisition been in effect on January 1, 1993 or which may occur in the
future. The pro forma information does not include the effect of Blue
Ribbon Marketing.
<TABLE>
<CAPTION>
1994
----
RMB
(Unaudited)
<S> <C>
Sales, net of sales taxes........ 68,088,628
==========
Net income....................... 29,097,029
==========
Net income per share............. 3.64
==========
</TABLE>
2. BASIS OF PRESENTATION
The acquisition of a 60% interest in Zhaoqing Brewery by High Worth
Holdings on October 31, 1994, as more fully described in note 1, has been
accounted for in the consolidated financial statements using the purchase
method of accounting. Since the Company had no operations prior to this
acquisition, the Company's consolidated financial statements were prepared
for the period from October 31, 1994 (the date of acquisition of Zhaoqing
Brewery) to December 31, 1994 to reflect the post-acquisition consolidated
operating results of Zhaoqing Brewery attributable to the Company for the
period ended December 31, 1994.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America
("US GAAP"). This basis of accounting differs from that used in the
preparation of the statutory financial statements of each relevant PRC
subsidiary which are prepared in accordance with the accounting principles
and relevant financial regulations established by the Ministry of Finance
of the PRC.
F - 14
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
2. BASIS OF PRESENTATION - continued
The major adjustments made to the relevant PRC statutory financial
statements to conform with US GAAP include the following:
. The reclassification of certain expense items from income
appropriations to charges against income;
. Adjustment for sales, other income and purchases recognized on a cash
basis;
. Adjustment for depreciation charges;
. Adjustment for deferred taxation; and
. Adjustment for revaluation of fixed assets.
The consolidated financial statements have been prepared on a going concern
basis notwithstanding that the Group has a net current liability position
as of December 31, 1994, 1995 and 1996. The Company believes that its
operating cash flow, combined with cash on hand, bank lines of credit, and
other external credit sources, and the credit facilities provided by
affiliates or related parties are adequate to satisfy the Company's working
capital requirements for the foreseeable future.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING - The consolidated financial statements have been
prepared under the historical cost convention.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the financial statements of the Company and its subsidiaries which the
Company has an effective controlling interest including High Worth
Holdings, High Worth Brewery, Zhaoqing Brewery, Finance Company and Blue
Ribbon Marketing. All material intercompany balances and transactions have
been eliminated on consolidation. Investments in affiliates over which the
Company exercises significant influence but does not have effective control
and own greater than a 50% or less than a 20% voting interest including 40%
investment in Blue Ribbon Noble, are accounted for using the equity method.
REVENUE RECOGNITION - Sales represent the invoiced value of goods sold, net
of returns and discounts. Sales and sales discounts are recognized upon
delivery of goods to customers. Sales returns are recognized upon receipt
of goods returned from customers.
INVENTORIES - Inventories are stated at the lower of cost or market value.
Cost, which comprises direct materials, direct labor costs and overheads
associated with the manufacturing process, is calculated using the first-
in, first-out method.
F - 15
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at
cost less an allowance for depreciation and amortization. Depreciation and
amortization are provided on the straight line method based on the
estimated useful lives of the assets as follows:
Land use rights................... 50 years
Buildings......................... 50 years
Plant, machinery and equipment.... 5 - 15 years
Motor vehicles.................... 5 - 10 years
According to the laws of the PRC, the title to all PRC land is retained by
the PRC government. The land use rights, which represent the cost for the
rights to use the land for premises granted by the State Land
Administration Bureau, have no definite term of use. The land use rights
are stated at cost and are amortized over 50 years on the same basis as the
buildings.
Construction in progress is stated at cost which comprises the direct costs
of buildings, plant under construction and deposits and prepayments made on
machinery pending installation. Cost comprises the direct cost of
construction and finance expenses arising from borrowings used to finance
the construction of buildings, plant and machinery until the construction,
installation and testing is complete. The amount of finance expenses
capitalized is the interest cost which could theoretically have been
avoided if the expenditure on the qualifying asset had not been made. No
depreciation is provided until the relevant assets have been put into
commercial use.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company regularly reviews its long-
lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable based
upon undiscounted cash flows expected to be produced by such assets over
their expected useful lives.
LEASED ASSETS - Leases that transfer substantially all the rewards and
risks of ownership of assets to the Group are accounted for as capital
leases. At the inception of a capital lease, the cost of the leased asset
is capitalized at the present value of the minimum lease payments and
recorded together with the obligation, excluding the interest element, to
reflect the purchase and financing. Assets held under capital leases are
included in property, plant and equipment and are depreciated over their
estimated useful lives.
ADVERTISING EXPENSES - Advertising expenses are charged to expense in the
statements of income as incurred.
INCOME TAXES - Income taxes are determined under the liability method in
accordance with Statement of Financial Accounting Standards No.109,
"Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires deferred
taxes be adjusted to reflect the tax rates at which future taxable amounts
will be settled or recognized. The effects of tax rate changes on future
deferred tax liabilities and deferred tax benefits, as well as other
changes in income tax laws, are recognized in net earnings in the period
when such changes are enacted.
F - 16
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on
hand, cash accounts, interest bearing saving accounts, and short-term
bank deposits with original maturities of three months or less.
F - 17
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
FOREIGN CURRENCY TRANSLATION - The financial records and the statutory
financial statements of the Company's subsidiaries and associated companies
in PRC are maintained in Renminbi. In preparing the financial statements,
all foreign currency transactions are translated into Renminbi using the
applicable rates of exchange, quoted by the Zhaoqing Foreign Exchange
Adjustment Center (the "swap center") for the respective periods. Monetary
assets and liabilities denominated in foreign currencies have been
translated into Renminbi using the rate of exchange quoted by the swap
center prevailing at the balance sheet date. The resulting exchange gains
or losses have been credited or charged to the statement of income for the
period in which they occur.
The Company's share capital is denominated in United States dollars ("US$")
and for reporting purposes, the US$ share capital amounts have been
translated into Renminbi ("RMB") at the applicable rates prevailing on the
transaction dates.
Translation of amounts from RMB into US$ is for the convenience of the
reader only and has been made at the swap center rate as quoted by the
People's Bank of China on December 31, 1996 of US$1.00 = RMB8.32. No
representation is made that the Renminbi amounts could have been, or could
be, converted into United States dollars at that rate or at any other rate.
EARNINGS PER SHARE - Earnings per share is based on the net income and the
average number of shares of common stock issued and outstanding during each
of the years/period.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS - The United States Financial
Accounting Standards Board ("FASB") has issued SFAS No.121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of". This statement requires that the Company review for
impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS No.121 was effective for the Company's fiscal year
beginning January 1, 1996. The adoption of this statement did not have a
material impact on the Company's financial position or results of
operations for the year ended December 31, 1996. The FASB also issued SFAS
No.123, "Accounting for Stock-Based Compensation". The Company was required
to adopt SFAS No.123 for the fiscal year beginning January 1, 1996. This
statement establishes accounting and disclosure requirements using a fair
value-based method of accounting for stock-based employee compensation
plans. Under SFAS No.123, the Company may either adopt the new fair value-
based accounting method or continue the intrinsic value-based method and
provide pro forma disclosures of net income and earnings per share as if
the fair value accounting provisions of this statement had been adopted.
The Company adopted only the disclosure requirements of SFAS No.123;
therefore such adoption had no effect on the Company's financial position
or results of operations for the fiscal year ended
F - 18
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
December 31, 1996. The FASB has also issued SFAS No.128,
"Earning Per Share" in February, 1996. Management of the Company
believed that adoption of this statement did not have a material
impact on the Company's earning per share.
F - 19
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
4. ACCOUNTS RECEIVABLE
Accounts receivable comprises:
<TABLE>
<CAPTION>
1995 1996
---- ----
RMB RMB
<S> <C> <C>
Accounts receivables - trade................... 164,277,644 183,767,036
Less: Allowance for doubtful accounts.......... (5,600,000) (14,921,542)
----------- -----------
158,677,644 168,845,494
=========== ===========
Movement of allowance for doubtful accounts:
1995 1996
---- ----
RMB RMB
Balance as at January 1........................ -- 5,600,000
Provided during the year....................... 5,600,000 9,914,114
Written off during the year.................... -- (592,572)
----------- -----------
Balance as at December 31...................... 5,600,000 14,921,542
=========== ===========
</TABLE>
5. BILLS RECEIVABLE
Bills receivable represents accounts receivable in form of bills of
exchange whose acceptances and settlements are handled by banks.
6. INVENTORIES
<TABLE>
<CAPTION>
1995 1996
---- ----
RMB RMB
<S> <C> <C>
Inventories comprise:
Raw materials........... 14,154,395 30,935,530
Work in progress........ 3,713,686 6,224,036
Finished goods.......... 38,970,720 50,390,270
---------- ----------
56,838,801 87,549,836
========== ==========
</TABLE>
F - 20
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
7. INTERESTS IN AN ASSOCIATED COMPANY
<TABLE>
<CAPTION>
1995 1996
---- ----
RMB RMB
<S> <C> <C>
Unlisted investment, at cost.......................... 209,361,595 209,361,595
The Group's share of undistributed post acquisition
earnings of an associated company................... 13,380,881 7,622,625
----------- -----------
222,742,476 216,984,220
=========== ===========
</TABLE>
The unlisted investment represents the Group's 40% equity interest in Blue
Ribbon Noble held by a 60% owned subsidiary. Please refer to note 1 for a
description of its principal activities.
Upon the acquisition of Blue Ribbon Noble by the Group on October 31, 1994,
the Group's share of the underlying net assets of the associated company of
RMB229 million exceeded the Group's investment of RMB209 million by
approximately RMB20 million. This difference is being amortized to income
over 20 years.
Amount due to an associated company principally represented the balances
arising from the purchases of beer products for resale. The balance is
unsecured, interest-free and repayable on demand.
The summarized information of Blue Ribbon Noble is presented below:
<TABLE>
<CAPTION>
1995 1996
---- ----
RMB RMB
<S> <C> <C>
Balance sheets
- --------------
Current assets................................. 349,596,574 388,296,705
Property, plant and equipment.................. 462,021,855 433,480,695
----------- -----------
Total assets................................... 811,618,429 821,777,400
=========== ===========
Current liabilities............................ 189,758,137 205,848,080
Deferred income taxes.......................... 5,500,000 9,000,000
Equity......................................... 616,360,292 606,929,320
----------- -----------
Total liabilities and equity................... 811,618,429 821,777,400
=========== ===========
Statements of income
- --------------------
Sales, net of sales taxes...................... 681,724,168 655,316,991
=========== ===========
Gross profit................................... 155,864,163 145,150,002
=========== ===========
Net income..................................... 94,450,587 90,128,571
=========== ===========
The Group's share of net income after the
</TABLE>
F - 21
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
<TABLE>
<S> <C> <C>
deduction of unrealized intercompany profit... 34,213,058 34,039,622
=========== ===========
</TABLE>
F - 22
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
1995 1996
---- ----
RMB RMB
<S> <C> <C>
At cost:
Land use rights and buildings..................... 44,776,692 74,276,962
Plant, machinery and equipment.................... 72,235,275 166,921,345
Motor vehicles.................................... 3,950,171 5,213,923
Construction in progress.......................... 84,573,286 3,888,376
----------- -----------
Total........................................... 205,535,424 250,300,606
Less: Accumulated depreciation and amortization... (8,227,160) (26,410,498)
----------- -----------
197,308,264 223,890,108
=========== ===========
</TABLE>
Depreciation and amortization charges in respect of property, plant and
equipment for the period ended December 31, 1994 and the years ended
December 31, 1995 and 1996 were RMB606,130, RMB9,459,519 and RMB18,703,203,
respectively.
Interest capitalized in construction in progress for the period ended
December 31, 1994 and the years ended December 31, 1995 and 1996 were
RMB44,820, RMB7,595,604 and nil, respectively.
Included in property, plant and equipment are assets acquired under capital
leases with the following net book values:
<TABLE>
<CAPTION>
1995 1996
---- ----
RMB RMB
<S> <C> <C>
At cost:
Plant, machinery and equipment.................... 33,747,792 33,747,792
Less: Accumulated depreciation and amortization... (2,195,237) (5,570,016)
---------- ----------
31,552,555 28,177,776
========== ==========
</TABLE>
Depreciation and amortization charges in respect of property, plant and
equipment held under capital leases for the period ended December 31, 1994
and the years ended December 31, 1995 and 1996 were RMB129,705,
RMB2,065,532 and RMB3,374,779, respectively.
F - 23
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
9. BANK BORROWINGS
<TABLE>
<CAPTION>
1995 1996
---- ----
RMB RMB
<S> <C> <C>
Bank borrowings consist of:
Secured bank borrowings....... 24,000,000 40,500,000
Unsecured bank borrowings..... 8,574,400 -
---------- ----------
32,574,400 40,500,000
========== ==========
</TABLE>
The bank borrowings are interest bearing and repayable within the next
twelve months.
The weighted average interest rate as of December 31, 1995 and 1996 were
13.1% and 11.3%, respectively per annum for the secured bank loans. The
weighted average interest rate of the unsecured bank loans as of December
31, 1995 was 11.3%.
There are no significant covenants or financial restrictions relating to
the Company's short-term debt. Details of assets pledged by the Company
are described in note 22.
10. CAPITAL LEASE OBLIGATIONS
The capital lease obligations maturing during each of the years in the four
year period subsequent to the balance sheet date are:
<TABLE>
<CAPTION>
1996
----
RMB
<S> <C>
Year ending December 31,
1997..................................... 10,742,329
1998..................................... 8,349,260
1999..................................... 6,191,979
2000..................................... 2,922,233
----------
Total minimum lease payments.............. 28,205,801
Less: Amount representing interest........ (3,308,510)
----------
Present value of minimum lease payments... 24,897,291
Less: Current portion..................... (9,034,742)
----------
Long term portion......................... 15,862,549
==========
</TABLE>
F - 24
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
11. INCOME TAXES
The components of (loss) income before income taxes, equity in earnings of
an associated company and minority interests are as follows:
<TABLE>
<CAPTION>
Year ended
Period ended December 31,
December 31, ------------------
1994 1995 1996
---- ---- ----
RMB RMB RMB
<S> <C> <C> <C>
United States of America... - - (7,420,000)
PRC........................ (68,881) 3,835,211 18,912,852
------- --------- ----------
(68,881) 3,835,211 11,492,852
======= ========= ==========
</TABLE>
United States of America
The Company is subject to taxes in the United States of America. The
Company's share of the dividend declared by the Company's associated
company on its retained earnings on December 31, 1996 amounted to
approximately RMB20,648,000. After the deduction of the expenses and
outgoings incurred by the Company of approximately RMB7,668,000, the deemed
taxable income of Company for the year ended December 31, 1996 would be
RMB12,980,000. The income tax provision for 1996 amounted to RMB4,413,000,
which has been computed using a rate of 34% for taxes in the United States
of America. The Company had no taxable income for the period ended
December 31, 1994 and year ended December 31, 1995.
PRC
The Company's subsidiaries incorporated in the PRC are subject to Chinese
income taxes at the applicable tax rate (currently 33%) on the taxable
income as reported in their Chinese statutory financial statements in
accordance with the relevant income tax laws applicable to foreign
enterprises. Pursuant to the same income tax laws, the subsidiary, High
Worth Brewery, and the associated company, Blue Ribbon Noble, are fully
exempt from Chinese income tax for two years starting from the first profit
making year, followed by a 50% exemption for the next three years. The 50%
exemption for Blue Ribbon Noble and the tax holiday for High Worth Brewery
commenced on January 1, 1996.
Had these tax holidays and concessions not been available, the tax charge
would have been higher by approximately RMB1,300,000, RMB6,300,000 and
RMB14,080,000, representing RMB0.16, RMB0.79 and RMB1.76 per share, for the
period ended December 31, 1994, and the years ended December 31, 1995 and
1996 respectively.
British Virgin Islands
The Company's subsidiaries incorporated in the British Virgin Islands
("BVI") are not taxed in BVI. Under current BVI laws, dividends and capital
gains arising from the BVI subsidiary's
F - 25
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
investments are not subject to income taxes, and no withholding tax is
imposed on payments of dividends by the BVI subsidiaries to the
Company.
F - 26
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
11. INCOME TAXES - continued
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year ended
Period ended December 31,
December 31, ------------------------
1994 1995 1996
------------ ------------ ---------
RMB RMB RMB
<S> <C> <C> <C>
Current
- PRC........................ - - 260,000
Deferred
- United States of America... - - 4,413,000
- PRC........................ - 1,000,000 48,444
- 1,000,000 4,461,444
- 1,000,000 4,721,444
</TABLE>
The reconciliation of effective income tax rates of the Group to the
statutory income tax rate in the PRC is as follows:
<TABLE>
<CAPTION>
Year ended
Period ended December 31,
December 31, -----------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate...................... 33% 33% 33%
Tax holiday............................. (33%) (33%) (30%)
Accelerated depreciation allowances
during the tax exemption period........ - 26% -
Tax on dividend declared by an
associated company..................... - - 36%
Reversal of deferred tax asset arised
from the revaluation of property,
plant and equipment.................... - - 1%
Difference in tax rate.................. - - 1%
---- ---- ----
- 26% 41%
==== ==== ====
</TABLE>
Deferred income taxes are based on the liability method prescribed by
Statement of Financial Accounting Standards No. 109. The Group's deferred
tax liabilities mainly represents the temporary differences in respect of
the time when dividends declared by the Company's subsidiaries and
associated company, and at the time when the Company received those
F - 27
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
dividends. The Group's share of dividends declared by the Company's
associated company on its retained earnings at December 31, 1996 in January
1997 amounted to approximately RMB20,648,000.
F - 28
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
12. SALES TAXES
The Group is subject to three kinds of sales taxes, being the value added
tax ("VAT"), the consumption tax and other sales taxes. The applicable VAT
tax rate is 17% for beverage products sold in the PRC and nil for exported
goods. The amount of VAT liability is determined by applying the
applicable tax rate to the invoiced amount of goods sold less VAT paid on
purchases made with the relevant supporting invoices. VAT is collected
from customers by the Group on behalf of the PRC tax authorities and is
therefore not expensed to the statement of income. The applicable
consumption tax rate in respect of brewery products sold by a brewing
company is RMB220 per ton. No consumption tax is levied on wholesale
trading of brewery products, on exported goods or on non-alcoholic beverage
products. The other sales taxes are assessed as a percentage of
consumption tax and VAT.
13. ADVANCES FROM SHAREHOLDERS
In connection with the acquisition of High Worth Brewery, Oriental Win
advanced US$8,869,585 to the High Worth 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 shareholdings 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 High Worth
Holdings.
As of December 31, 1996, advances from respective shareholders, namely
Mapesbury Limited, Redcliffe Holdings Ltd., West Coast Star Enterprises
Ltd. and Oriental Win were approximately RMB13.3 million (US$1.6 million),
RMB13.3 million (US$1.6 million), RMB39.9 million (US$4.8 million) and
RMB7.3 million (US$0.9 million), respectively.
F - 29
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
14. FOREIGN CURRENCY EXCHANGE
On January 1, 1994, the PRC government abolished the dual exchange rate
system, comprising the official rates and swap center rates, and introduced
a single rate of exchange as quoted by the People's Bank of China. The
unified exchange rate is quoted at levels similar to those quoted by the
swap centers. However, the unification of exchange rates does not imply
full convertibility of Renminbi into United States dollars or other foreign
currencies. All foreign exchange transactions continue to take place
either through the Bank of China or other institutions authorized to buy
and sell foreign currencies or the swap centers at the exchange rates
quoted by the People's Bank of China. In April 1994, the National Foreign
Exchange Trading Center in Shanghai (the "exchange center") commenced
operations. Enterprises operating in the PRC can enter into exchange
transactions at the exchange center through the Bank of China or other
authorized institutions. Payments for imported materials and remittances
of earnings outside the PRC are subject to the availability of foreign
currency which are dependent on the foreign currency denominated earnings
of each relevant PRC company within the Group or must be arranged through
the exchange center. Approval for exchange at the exchange center is
granted to enterprises in the PRC for valid reasons such as purchases of
imported materials and remittances of earnings. While conversion of
Renminbi into United States dollars or other foreign currencies can
generally be effected at the exchange center, there is no guarantee that it
can be effected at all times.
Effectively July 1, 1996, the PRC government began to take steps to make
its currency fully convertible on a "current account" basis. This will
allow foreign-funded enterprises, whether wholly owned or joint ventures
with Chinese, to buy and sell foreign exchange in banks for purposes of
trade, services, debt repayment and profit repatriation. The "current
account" measures the flow of money into and out of a nation, including the
net balance on trade in goods and services, plus remittances.
The unified exchange rate of the RMB equivalent of US$1.00 as of December
31, 1994, 1995 and 1996 was 8.45, 8.32 and 8.32, respectively.
15. DISTRIBUTION OF PROFITS
The Company's ability to pay dividends is primarily dependent on the
Company receiving distributions from its PRC subsidiaries through High
Worth Holdings.
Pursuant to the relevant laws and regulations of Sino-foreign joint venture
enterprises, the profits of High Worth Brewery, which are based on their
statutory financial statements, are available for distribution in the form
of cash dividends after the PRC companies satisfy all tax liabilities,
provide for losses in previous years, and make appropriations to reserve
funds, as determined at the discretion of the board of directors in
accordance with the PRC accounting standards and regulations.
F - 30
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
15. DISTRIBUTION OF PROFITS - continued
As stipulated by the relevant laws and regulations for enterprises
operating in the PRC, Zhaoqing Brewery and Blue Ribbon Marketing are
required to make annual appropriations to two reserve funds consisting of
the statutory surplus and collective welfare funds. In accordance with the
relevant PRC regulations and the companies' articles of association, the
companies are required to allocate a certain percentage of their profits
after taxation, as determined in accordance with the PRC accounting
standards applicable to the companies, to the statutory surplus reserve
until such reserve reaches 50% of the registered capital of the companies.
Based on the business licences, the registered capital of Zhaoqing Brewery
and Blue Ribbon Marketing is RMB33,670,000 and RMB10,000,000, respectively.
Subject to certain restrictions as set out in the relevant PRC regulations
and the companies' articles of association, the statutory surplus reserve
may be distributed to equity holders in the form of bonus issues and/or
dividends when such reserve exceeds 25% of the registered capital of the
companies.
The percentage of annual appropriations to statutory surplus and collective
welfare funds of Zhaoqing Brewery for 1994 were 10% and 5%, respectively,
on the profits reported in its statutory financial statements. No
appropriations to these reserve funds were made by Zhaoqing Brewery and
Blue Ribbon Marketing for 1995 and 1996 as Zhaoqing Brewery was acting as a
nominee of High Worth Brewery from October 31, 1994 onwards and Blue Ribbon
Marketing made losses in those financial years.
High Worth Brewery and Blue Ribbon Noble are also required to make
appropriations to a general reserve fund, an enterprise development fund
and an employee welfare and incentive fund, in which the percentage of
annual appropriations are subject to the joint venture agreement. The
employee welfare and incentive fund are charged to the statement of income.
The other appropriations are accounted for as reserve funds in the balance
sheet and are not available for distribution as dividends to the joint
venture partners of the companies. Under the joint venture agreement, the
board of directors shall determine the appropriations regarding to the
economic situation of the companies. The percentage of annual
appropriations to a general reserve fund, an enterprise development fund
and an employee welfare and incentive fund of Blue Ribbon Noble for 1996
has already been determined by the board of directors and the appropriation
has been reported in its statutory financial statements.
Respective appropriations in High Worth Brewery for 1996 has not yet been
determined by its board of directors and was not reported in its statutory
financial statements.
As described in note 2 to the consolidated financial statements, the net
income as reported in the US GAAP financial statements differs from that as
reported in the statutory financial statements. In accordance with the
relevant laws and regulations in the PRC, the profits available for
distribution are based on the statutory financial statements. If the Group
has foreign currency available after meeting its operational needs, the
Group may make its profit distributions in foreign currency to the extent
it is available. Otherwise, it will be necessary to obtain approval and
convert such distributions at the exchange centers. At December 31, 1994,
1995 and 1996,
F - 31
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
the Group's distributable profits amounted to approximately RMB97,000,
RMB21,180,000 and RMB38,727,000, respectively.
F - 32
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
16. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Interest paid, net of capitalized interest during the period ended December
31, 1994 and the years ended December 31, 1995 and 1996 was RMB618,571,
RMB6,886,576 and RMB20,767,252, respectively.
17. ADVERTISING EXPENSES
The Group incurred advertising expenses of RMB1,157,766, RMB18,793,663 and
RMB65,475,345 for the period ended December 31, 1994 and the years ended
December 31, 1995 and 1996, respectively.
18. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
(a) Sales of beer products
During the year ended December 31, 1996, sales to Blue Ribbon Group and its
group of companies amounted to RMB6,169,170. Blue Ribbon Group has a 40%
interest in High Worth Brewery, but is otherwise unrelated to the Company
and has no shareholders in common.
(b) Purchases of packing materials
During the period ended December 31, 1994 and the years ended December 31,
1995 and 1996, the Group purchased packing materials from Blue Ribbon Group
and its group of companies amounting to RMB450,961, RMB27,657,968 and
RMB44,778,187, respectively.
(c) Purchases of non-alcoholic beverage
During the years ended December 31, 1995 and 1996, the Group purchased non-
alcoholic beverage from Blue Ribbon Group and its group of companies
amounting to RMB61,708,086 and RMB69,166,604, respectively, for resale.
(d) Purchases of beer products
During the years ended December 31, 1995 and 1996, the Group purchased beer
products from Blue Ribbon Noble amounting to RMB327,805,406 and
RMB695,150,225, respectively, for resale.
(e) Royalty fee
F-33
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
During the years ended December 31, 1995 and 1996, the royalty fee of
RMB3,454,067 and RMB7,945,874, respectively, was payable to Blue Ribbon
Group in respect of the right to use Pabst trademarks in the Guangdong
Province of the PRC.
F-34
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
18. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS - continued
(f) Management fee
Management fee paid to Blue Ribbon Group for the year ended December 1996
was RMB3,780,000.
(g) Interest income
Interest income from the Blue Ribbon Group for the year ended December 31,
1996 was RMB3,981,278.
(h) Interest expense
Interest expense for the years ended December 31, 1995 and 1996 included
RMB3,091,364 and RMB9,282,985, respectively, payable to Blue Ribbon Group
and RMB328,207 and RMB948,543, respectively, payable to other related
companies, related to the advances which are more fully disclosed in (i)
and (j) below.
(i) Amounts due from related companies
The amounts due from related companies mainly represented receivable
balances from Blue Ribbon Group and its group of companies.
The balances with Blue Ribbon Group and its group of companies principally
represented trade deposits received on behalf of the Group and expenses
paid on their behalf. Included in the net amounts due from Blue Ribbon
Group at December 31, 1995 and 1996 are RMB16 million and RMB27.5 million,
respectively, payable to the Group, which bear interest of 15% per annum.
Amounts also include an amount due from the Blue Ribbon Group of
RMB38,200,000 (1995: Nil) as of December 31, 1996 which bears interest at
10% per annum. Save aforementioned, the remaining balances with the group
companies of the Blue Ribbon Group are unsecured, interest-free and
repayable on demand.
F-35
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
18. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS - continued
(j) Amounts due to related companies
As of December 31, 1996, the amounts due to related companies mainly
comprises of payable balances to the following companies:
<TABLE>
<CAPTION>
As of December 31,
----------------------------
1995 1996
------------ ------------
RMB RMB
(in million) (in million)
<S> <C> <C>
American National Can (Zhaoqing) Co., Ltd.
("American National Can") 5.3 4.8
Blue Ribbon Mineral Water Factory ("Mineral Water") 3.6 4.2
Evermoni Trading Limited ("Evermoni") 2.2 5.7
Trade Link Investment Limited ("Trade Link") 1.2 1.2
Very Temper Limited ("Very Temper") 1.4 -
Wealth Guide Development Limited ("Wealth Guide") 3.3 3.1
Other subsidiaries and associated companies
of Blue Ribbon Group 1.6 2.4
---- ----
18.6 21.4
==== ====
</TABLE>
American National Can and Mineral Water are companies in which Blue
Ribbon Group has equity interests.
Evermoni and Very Temper are beneficially owned by Wong Lee Tak who is
a director of the Company. Trade Link is beneficially owned by Victor
Choi who is a former director of the Company. Wealth Guide is
beneficially owned by Blue Ribbon Group.
The balances with group companies of Blue Ribbon Group, except Wealth
Guide, represented the balances arising from the purchases of raw
materials from them. The balances are unsecured, interest-free and
repayable on demand.
The balances with Evermoni, Trade Link, Very Temper and Wealth Guide
are advances in nature. The amounts due to such related companies are
unsecured, bear interest at 3% above Hong Kong dollar prime rate in
1995 (11.75% as of December 31, 1995) and 3.5% above the Hong Kong
dollar prime rate (12% as of December 31, 1996) and are repayable on
demand.
(k) Shareholders' advances
Reference is made to note 13.
F-36
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
19. RETIREMENT PLAN
The Company, High Worth Holdings and the Finance Company do not have any
retirement plans in operation. High Worth Brewery did not have any
retirement plans in operation until December 31, 1995, the date when
transfer of the legal ownership of the brewery facilities and all assets
and liabilities held by Zhaoqing Brewery to High Worth Brewery was approved
by the PRC Government. The application to the PRC Government for the legal
title transfer of a 70% interest in Blue Ribbon Marketing and a 40%
interest in Blue Ribbon Noble is still in progress.
As stipulated by the PRC government regulations, High Worth Brewery,
Zhaoqing Brewery and Blue Ribbon Marketing have defined contribution
retirement plans for all their permanent staff. Zhaoqing Brewery and its
staff are required to contribute to PRC insurance companies organized by
the PRC government which are responsible for the payments of pension
benefits to retired staff. During the year ended December 31, 1996, the
monthly contributions of both High Worth Brewery and Blue Ribbon Marketing
for permanent staff were calculated at 14.6% and 2% respectively of the
basic salary of the permanent staff. The pension costs expensed by the
Group during the period ended December 31, 1994 and the years ended
December 31, 1995 and 1996 amounted to RMB32,410, RMB706,566 and
RMB3,236,633, respectively.
20. FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets at December 31, 1995
and 1996 for current assets and current liabilities, except for bank loans,
qualifying as financial instruments approximate their fair values because
of the short maturity of such instruments. Cash denominated in foreign
currency has been translated at the applicable unified exchange rate.
The carrying values and estimated fair values of bank loans, based on the
borrowing rates for borrowings with similar terms and average maturities
are RMB32,574,000 and RMB29,251,151, respectively, at December 31, 1995 and
RMB40,500,000 and RMB40,500,000, respectively, at December 31, 1996. The
fair value of the shareholders' advances is not able to be determined
because no comparable borrowing terms are currently available.
F-37
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
21. CONCENTRATION OF RISKS
The Group's operating assets and primary source of income and cash flow are
its interest in subsidiaries and associated company in the PRC. The PRC
economy has, for many years, been a centrally-planned economy, operating on
the basis of annual, five-year and ten-year state plans adopted by central
PRC governmental authorities which set out national production and
development targets. The PRC government has been pursuing economic reforms
since it first adopted its "open-door" policy in 1978. There is no
assurance that the PRC government will continue to pursue economic reforms
or that there will not be any significant change in its economic or other
policies, particularly in the event of any change in the political
leadership of, or the political, economic or social conditions in, the PRC.
There is also no assurance that the Group will not be adversely affected by
any such change in governmental policies or any unfavorable change in the
political, economic or social conditions, the laws or regulations or the
rate or method of taxation in the PRC.
As many of the economic reforms which have been or are being implemented by
the PRC government are unprecedented or experimental, they may be subject
to adjustment or refinement which may have adverse effects on the Group.
Further, through state plans and other economic and fiscal measures, it
remains possible for the PRC government to exert significant influence on
the PRC economy.
The sale and distribution of products under the "Pabst Blue Ribbon"
brandname in 1995 and 1996 accounted for 95% and 94%, respectively of the
Group's turnover. The Group purchases Pabst Blue Ribbon beer from Blue
Ribbon Noble and recognizes its heavy dependence on Blue Ribbon Noble.
Stoppages of production and/or supply from Blue Ribbon Noble for reasons
within or outside their control could affect the Group's operation,
although so far the Group has never encountered any problems in securing
adequate supplies from Blue Ribbon Noble.
In November, 1996, Blue Ribbon Group advised the Company that it believed
it had the right to brew Pabst Blue Ribbon beer in the PRC either by itself
or through one or more of its affiliates. Blue Ribbon Group had recently
established a wholly-owned subsidiary in Le Shang City, Sichuan Province of
the PRC, with an intention to convert a brewery with an annual production
capacity of 20,000 metric tons, (the "Sichuan Brewery"), into a brewing
complex for the production of Pabst Blue Ribbon beer in 1997. Although the
Company believes that the terms of the sublicense agreement legally
preclude Blue Ribbon Group from brewing Pabst Blue Ribbon beer in the PRC,
the Company has been advised by its legal counsel in the PRC that it is
uncertain if the Company will prevail in this matter.
In the event that Blue Ribbon Group is able to successfully assert its
position and commence the production of Pabst Blue Ribbon beer in the
Sichuan Brewery, the Company would face competition from Blue Ribbon Group
in the PRC. As a result, the value of the Company's sublicense rights could
be diminished, and the Company's practical ability to expand in the PRC
could be affected. The Company is currently in discussions with Blue Ribbon
Group in an attempt to resolve this dispute in an amicable manner, but
there can be no assurances that the Company will be successful in this
regard.
F-38
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
21. CONCENTRATION OF RISKS - continued
The Group currently uses foreign currency to pay for imported raw
materials. In addition, the Group obtained foreign currency loans from
shareholders to acquire the subsidiaries in the PRC and obtained foreign
currency loans for working capital purposes. For the risks relating to
foreign currency, please refer to note 14.
The Group's financial instruments that are exposed to concentration of
credit risk consists primarily of cash and accounts receivable from
customers. Cash is maintained with major banks in the PRC. The Group's
business activity is with customers in the PRC. The Group periodically
performs credit analysis and monitors the financial condition of its
clients in order to minimize credit risk.
22. PLEDGE OF ASSETS
Certain assets of High Worth Brewery were collaterialized to secure bank
borrowings. The net book value of the property, plant and equipment and the
carrying amounts of the other assets pledged to banks as of December 31,
1996 amounted to RMB193,594,443 and RMB203,209,679 respectively. The net
book value of property, plant and equipment pledged to banks as of December
31, 1995 amounted to RMB162,554,656.
23. COMMITMENTS AND CONTINGENCIES
As of December 31, 1996, the Group had no capital commitments. The Group
was committed to capital expenditures of RMB43,168,954 as of December 31,
1995.
Blue Ribbon Group entered into licensing arrangements with Pabst Brewery
Company whereby Blue Ribbon Group was granted the exclusive right to
produce and market products under four specific Pabst trademarks in the
PRC, the non-exclusive right to market products in other Asian countries
except Hong Kong, Macau, Japan and South Korea, and the right to sublicense
the use of the trademarks to any other enterprise in the PRC. Pursuant to
the terms of the sublicense agreement, High Worth Brewery was granted by
Blue Ribbon Group the right in the Guangdong Province of the PRC to use two
specific Pabst trademarks in its production, promotion, distribution and
sale of beer under such trademarks. In addition, Blue Ribbon Group also
granted the right to use two specific Pabst trademarks for the production,
promotion, distribution and sale of beer to High Worth Brewery or those
enterprises owned by High Worth Brewery which are located outside Guangdong
Province in the PRC. The sublicense agreement is valid until November 7,
2003. In consideration for the sublicense granted, High Worth Brewery is
committed to pay Blue Ribbon Group a royalty fee of US$11.70 for each ton
produced.
F-39
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
23. COMMITMENTS AND CONTINGENCIES - continued
A provisional agreement, subject to governmental approval, was made among
CBR Brewing Company, Inc. and its subsidiary, the group companies of Noble
China Inc., a company incorporated in Canada and Blue Ribbon Group on May
10, 1995 to the effect that:
(a) High Worth Brewery was entitled to be granted from Blue Ribbon Group
the right to brew and sell beer under the Pabst Blue Ribbon label
produced in its brewing facilities up to a maximum production capacity
of 100,000 tons per annum.
(b) High Worth Brewery and/or companies that High Worth Brewery has an
interest in are entitled to be granted a sublicense from Blue Ribbon
Group with the right to produce and sell beer under the Pabst Blue
Ribbon label in the Guangdong Province of the PRC ("Additional
Facility") to a maximum production capacity of 300,000 tons per annum.
In the event that High Worth Brewery desires to obtain sublicense for
any Additional Facility, Goldjinsheng Holding Limited ("Goldjinsheng")
has the right to purchase up to a 40% interest in such Additional
Facility. The purchase price for such interest shall be the actual
cost of such Additional Facility multiplied by the percentage interest
that Goldjinsheng elects to purchase.
(c) A proposed new marketing company ("New Marketing Company"), owned as
to 8% by Blue Ribbon Group, 52% by High Worth Brewery and 40% by
Goldjinsheng, shall be formed to handle and organize the sales of
Pabst Blue Ribbon beer produced by Zhaoqing Brewery and the Blue
Ribbon Noble. Each of Zhaoqing Brewery and the Blue Ribbon Noble will
create a separate distribution company or division of their own. The
distribution company of Zhaoqing Brewery will have the sole right to
acquire 100% of the production of Zhaoqing Brewery and 40% of the
production of the Blue Ribbon Noble; whilst the distribution company
of the Blue Ribbon Noble will have the sole right to acquire 60% of
the production of the Blue Ribbon Noble. The respective distribution
companies will appoint the New Marketing Company as their sole and
exclusive agent to market Pabst Blue Ribbon beer in the PRC.
Another agreement was made among Goldjinsheng, Blue Ribbon Group and Blue
Ribbon Noble on May 10, 1995 to the effect that Blue Ribbon Noble agreed to
pay Blue Ribbon Group a management fee of RMB2,035,000 per annum for a
period of five years.
As of December 31, 1995, the Group was committed to pay operating lease in
respect of rental expenses of RMB447,240 for the year ended December 31,
1996.
As of December 31, 1996, the Group has no operating lease commitments.
An agreement was made between Blue Ribbon Group and High Worth Brewery on
December 31, 1995 to the effect that High Worth Brewery agreed to pay Blue
Ribbon Group a management fee
F-40
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
of RMB3,780,000 per annum for a period of three years commencing on January
1, 1996 (see note 18(f)).
F-41
<PAGE>
CBR BREWING COMPANY, INC.
- -------------------------
24. POST BALANCE SHEET EVENTS
(a) Subsequent to the balance sheet date, certain allegations were raised
against Blue Ribbon Noble by the former chairman and CEO of Noble
China Inc., ultimate holding company of Blue Ribbon Noble concerning
irregularities on the financial statements of Blue Ribbon Noble in
previous years. Having considered Blue Ribbon Noble's position and on
the advice of legal counsel, the directors of Blue Ribbon Noble are of
the opinion that the allegations were of no substance and,
accordingly, will not have any material adverse effect to Blue Ribbon
Noble.
(b) In April 1997, the Sichuan Brewery commenced the production and sale
of Pabst Blue Ribbon beer. 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 the same month, in order to
facilitate the efficient distribution and sale of Pabst Blue Ribbon
beer in the PRC, the Blue Ribbon Marketing 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 Blue Ribbon Marketing at
mutually agreed ex-factory prices, and grants Blue Ribbon Marketing
the right to regulate production to reflect market demand. In signing
the Memorandum of Understanding, the Company does not consent to, or
waives any rights with respect to, Blue Ribbon Group's assertion that
Blue Ribbon Group has the right to brew Pabst Blue Ribbon beer in the
PRC either by itself or through one or more of its affiliates.
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 Blue Ribbon Noble, the Company's
consolidated results of operations could be adversely affected. The
Company currently estimates that the Sichuan Brewery's 1997 production
volume will represent approximately 6% of the Company's budgeted
volume of sales in 1997.
F-42
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
- ---------------------------------------
(Registered in the People's Republic of China)
REPORTS AND FINANCIAL STATEMENTS FOR THE TEN MONTHS
ENDED OCTOBER 31, 1994, TWO MONTHS ENDED DECEMBER 31,
1994, AND THE YEARS ENDED DECEMBER 31, 1995 AND 1996
- -----------------------------------------------------
<TABLE>
<CAPTION>
CONTENTS PAGES
- -------- -----
<S> <C>
REPORT OF INDEPENDENT AUDITORS...................................... FS - 1
REPORT OF PREDECESSOR AUDITORS...................................... FS - 2
BALANCE SHEETS...................................................... FS - 3
STATEMENTS OF INCOME................................................ FS - 4
STATEMENTS OF EQUITY................................................ FS - 5
STATEMENTS OF CASH FLOWS............................................ FS - 6
NOTES TO FINANCIAL STATEMENTS....................................... FS - 7 - FS - 21
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the board of directors and shareholders of
CBR Brewing Company, Inc.
We have audited the accompanying balance sheet of Zhaoqing Blue Ribbon Brewery
Noble Ltd. as of December 31, 1996 and the related statements of income, equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of Zhaoqing Blue Ribbon Brewery Noble Ltd. as
of December 31, 1996 and the results of its operation and its cash flows for the
year then ended in conformity with generally accepted accounting principles in
the United States in America.
We draw your attention to notes 11, 19 and 22 to the financial statements which
state that the Company is exposed to foreign exchange risk and other risks
through its operation in the People's Republic of China, and the risk of its
business which could be adversely affected as a result of new competition.
/s/ Deloitte Touche Tohmatsu
Hong Kong
June 27, 1997
FS-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the shareholders of
CBR Brewing Company, Inc.
We have audited the accompanying balance sheets of Zhaoqing Blue Ribbon
Brewery Noble Ltd. as of December 31, 1995 and 1994 and the related statements
of income, equity and cash flows for the year ended December 31, 1995, the two
months ended December 31, 1994, the ten months ended October 31, 1994 and the
two months ended December 31, 1993. These financial statements are the
responsibility of Zhaoqing Blue Ribbon Brewery Noble Ltd.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Zhaoqing Blue Ribbon Brewery
Noble Ltd. as of December 31, 1995 and 1994 and the results of its operation and
its cash flows for the year ended December 31, 1995 and the two months ended
December 31, 1994, the ten months ended October 31, 1994 and the two months
ended December 31, 1993 in conformity with generally accepted accounting
principles in the United States of America.
/s/ Ernst & Young
Hong Kong
March 28, 1996
FS-2
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------
1995 1996 1996
---- ---- ----
RMB RMB US$
(Note 3)
ASSETS
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents 118,046,066 123,938,892 14,896,501
Accounts receivable, net of allowance for
doubtful accounts of RMB786,740 and
RMB2,246,703 for 1995 and 1996,
respectively (note 4) 1,056,823 7,223,259 868,180
Inventories (note 5) 33,025,879 40,577,951 4,877,158
Prepayments and deposits 28,842,225 40,205,803 4,832,428
Amounts due from related companies (note 16a) 168,625,581 176,350,800 21,196,010
----------- ----------- ----------
Total current assets 349,596,574 388,296,705 46,670,277
Property, plant and equipment, net of accumulated
depreciation and amortization of RMB53,352,907
and RMB89,983,400 for 1995 and 1996,
respectively (notes 6 and 20) 462,021,855 433,480,695 52,101,045
----------- ----------- ----------
Total assets 811,618,429 821,777,400 98,771,322
=========== =========== ==========
</TABLE>
LIABILITIES AND EQUITY
<TABLE>
<CAPTION>
Current liabilities:
<S> <C> <C> <C>
Bank loans (note 7) 13,500,000 13,500,000 1,622,596
Accounts payable 47,500,745 58,293,169 7,006,391
Accrued liabilities 13,014,546 34,972,066 4,203,373
Employee welfare and incentive fund 9,727,271 6,217,309 747,272
Amounts due to related companies (note 16b) 26,998,322 29,286,818 3,520,050
Sales taxes payable (note 9) 79,017,253 50,543,297 6,074,916
Income taxes payable (note 8) - 13,035,421 1,566,757
----------- ----------- ----------
Total current liabilities 189,758,137 205,848,080 24,741,355
Long term liabilities:
Deferred income taxes (note 8) 5,500,000 9,000,000 1,081,731
Commitments and contingencies
(notes 11, 19, 21 and 22)
Equity:
Contributed capital 475,940,000 475,940,000 57,204,327
General reserve and enterprise development funds 9,727,271 14,506,926 1,743,621
Retained earnings 130,693,021 116,482,394 14,000,288
----------- ----------- ----------
Total equity 616,360,292 606,929,320 72,948,236
----------- ----------- ----------
Total liabilities and equity 811,618,429 821,777,400 98,771,322
=========== =========== ==========
</TABLE>
See accompanying notes to the financial statements
FS-3
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Ten months Two months Year ended December 31,
ended ended -------------------------------------------
October 31, 1994 December 31, 1994 1995 1996 1996
---------------- ----------------- ------------ ------------- ------------
RMB RMB RMB RMB US$
(Note 3)
<S> <C> <C> <C> <C> <C>
Sales, including sales to a related
company of RMB327,805,406 and
RMB695,150,225 in 1995 and 1996
respectively (note 16c) 413,361,747 133,139,232 724,233,282 695,150,225 83,551,710
Sales taxes (note 9) (20,668,193) (6,701,053) (42,509,114) (39,833,234) (4,787,648)
------------ ----------- ------------ ------------ -----------
Net sales 392,693,554 126,438,179 681,724,168 655,316,991 78,764,062
Cost of sales, including inventory
purchased from related companies
of RMB94,682,501,
RMB91,355,485 and
RMB117,344,580 in 1994, 1995
and 1996 respectively and royalty fee
paid to a related company of
RMB13,082,271, RMB15,434,144 and
RMB15,106,029 in 1994, 1995
and 1996 respectively (note 16c) (275,455,836) (90,023,773) (525,860,005) (510,166,989) (61,318,148)
------------ ----------- ------------ ------------ -----------
Gross profit 117,237,718 36,414,406 155,864,163 145,150,002 17,445,914
Selling, general and administrative
expenses, including management
fee paid to a related company of
RMB2,035,000 and
RMB2,035,000 in 1995 and 1996
respectively (note 16c) (31,302,496) (16,488,878) (60,819,562) (38,937,354) (4,679,970)
------------ ----------- ------------ ------------ -----------
Operating income 85,935,222 19,925,528 95,044,601 106,212,648 12,765,944
Interest income 863,151 325,451 3,846,001 3,901,929 468,982
Interest expense - - (2,240,015) (3,450,585) (414,734)
------------ ----------- ------------ ------------ -----------
Income before income taxes 86,798,373 20,250,979 96,650,587 106,663,992 12,820,192
Income taxes (note 8) (2,580,000) (720,000) (2,200,000) (16,535,421) (1,987,430)
------------ ----------- ------------ ------------ -----------
Net income 84,218,373 19,530,979 94,450,587 90,128,571 10,832,762
============ =========== ============ ============ ===========
</TABLE>
See accompanying notes to the financial statements
FS-4
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
General
reserve and
enterprise
Contributed development Retained
capital funds earnings Equity
-------------- ------------- -------------- --------------
RMB RMB RMB RMB
(Note 10) (Note 12) (Note 13)
<S> <C> <C> <C> <C>
Balance at January 1, 1994 475,940,000 - 13,831,773 489,771,773
Net income for the period - - 84,218,373 84,218,373
------------- ------------ ------------- -------------
Balance at October 31, 1994 475,940,000 - 98,050,146 573,990,146
Net income for the period - - 19,530,979 19,530,979
Appropriation of reserve - 4,199,788 (4,199,788) -
------------- ------------ ------------- -------------
Balance at December 31, 1994 475,940,000 4,199,788 113,381,337 593,521,125
Net income for the year - - 94,450,587 94,450,587
Appropriation of:
Reserve - 5,527,483 (5,527,483) -
Dividend - - (71,611,420) (71,611,420)
------------- ------------ ------------- -------------
Balance at December 31, 1995 475,940,000 9,727,271 130,693,021 616,360,292
Net income for the year - - 90,128,571 90,128,571
Appropriation of:
Reserve - 4,779,655 (4,779,655) -
Dividend - - (99,559,543) (99,559,543)
------------- ------------ ------------- -------------
Balance at December 31, 1996 475,940,000 14,506,926 116,482,394 606,929,320
============= ============ ============= =============
Converted to US$
Balance at December 31, 1996
(note 3) US$57,204,327 US$1,743,621 US$14,000,288 US$72,948,236
============= ============ ============= =============
</TABLE>
See accompanying notes to the financial statements
FS-5
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Ten months Two months Year ended December 31,
ended ended -------------------------------------------
October 31, 1994 December 31, 1994 1995 1996 1996
---------------- ----------------- ------------ ------------ -------------
RMB RMB RMB RMB US$
(Note 3)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
NET INCOME........................ 84,218,373 19,530,979 94,450,587 90,128,571 10,832,761
ADJUSTMENTS TO RECONCILE NET
INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Depreciation and amortization..... 14,840,444 6,063,562 30,115,484 36,630,493 4,402,703
Deferred income taxes............. 2,580,000 720,000 2,200,000 3,500,000 420,673
Allowance for doubtful accounts... - - 786,740 1,459,963 175,476
Provision for income tax.......... - - - 13,035,421 1,566,757
CHANGES IN OPERATING ASSETS
AND LIABILITIES:
Accounts receivable............... (40,321,210) (26,866,386) 97,194,303 (7,626,399) (916,634)
Prepayments and deposits.......... (19,072,269) 2,089,933 (11,461,759) (11,363,578) (1,365,815)
Inventories....................... (11,930,272) (23,200,138) 20,043,860 (7,552,072) (907,701)
Amounts due from related companies (47,477,712) (5,223,518) (77,218,250) (7,725,219) (928,512)
Accounts payable and accrued
liabilities...................... 31,276,709 17,226,020 7,276,109 32,685,096 3,936,291
Employee welfare and incentive
fund............................. - 4,199,788 5,527,483 (3,509,962) (421,871)
Deposits received from customers.. 36,094,489 5,804,093 (61,464,582) - -
Amounts due to related companies.. (33,242,589) 15,579,727 9,504,527 2,288,496 275,060
Sales taxes payable............... 34,610,703 (6,847,842) 39,759,438 (28,473,956) (3,422,350)
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES............. 51,576,666 9,076,218 156,713,940 113,476,854 13,646,838
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchases of property, plant and
equipment........................ (2,065,532) (7,191,395) (31,927,658) (8,089,333) (972,275)
Proceeds from disposals of
property, plant and equipment.... - - 1,749,823 - -
----------- ----------- ----------- ----------- -----------
NET CASH USED IN INVESTING
ACTIVITIES....................... (2,065,532) (7,191,395) (30,177,835) (8,089,333) (972,275)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES
New bank loans.................... - 17,200,000 13,500,000 - -
Repayment of bank loans........... - - (17,200,000) - -
Repayment of loans from related
companies........................ (3,240,000) - - - -
Dividend paid..................... - - (71,611,420) (99,494,695) (11,966,291)
----------- ----------- ----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES............. (3,240,000) 17,200,000 (75,311,420) (99,494,695) (11,966,291)
----------- ----------- ----------- ----------- -----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS................. 46,271,134 19,084,823 51,224,685 5,892,826 708,272
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR/PERIOD...... 1,465,424 47,736,558 66,821,381 118,046,066 14,188,229
----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR/PERIOD............ 47,736,558 66,821,381 118,046,066 123,938,892 14,896,501
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to the financial statements
FS-6
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
1. ORGANIZATION AND PRINCIPAL ACTIVITY
Zhaoqing Blue Ribbon Brewery Noble Ltd. (the "Company") is a Sino-foreign
equity joint venture enterprise registered in the People's Republic of
China ("PRC") in October 1993 in which Goldjinsheng Holding Limited
("Goldjinsheng") and Zhaoqing Brewery hold 60% and 40% interests,
respectively. The venture term of the Company is twenty years which term
may be extended upon mutual agreement of the joint venture parties and
approval from the relevant PRC government authorities.
Pursuant to the joint venture agreements and with the approval of the
relevant PRC government authorities, the property, plant, equipment and the
business of Pabst Blue Ribbon Brewery (Zhaoqing) Co. Ltd. ("Pabst Blue
Ribbon") an unrelated PRC owned enterprise, were disposed of to Zhaoqing
Brewery and then to the Company as capital contribution.
The Company is principally engaged in the production and sale of beer and
beer products in the PRC since commencement of business on November 6,
1993. The Company's principal line of product is Blue Ribbon beer under
non exclusive Pabst trademarks which were granted by Blue Ribbon Group (see
note 21), an unrelated PRC owned enterprise. Malt, rice, water and packing
materials are the major raw materials in the production of Blue Ribbon
beer. Effective from July 1995, all beer products produced by the Company
were sold to Zhaoqing Blue Ribbon Beer Marketing Company Limited ("Blue
Ribbon Marketing"), which was formed to promote and distribute beverage
products. Blue Ribbon Marketing is owned as to 70% by Zhaoqing Brewery
which acts as a nominee on behalf of Zhaoqing Blue Ribbon High Worth
Brewery Ltd. ("High Worth Brewery") 60% owned indirectly by CBR Brewing
Company, Inc. ("CBR") and 40% by Blue Ribbon Group, and 30% directly by
Guangdong Blue Ribbon Group Co., Ltd. ("Blue Ribbon Group"). The Blue
Ribbon Group also owns indirectly 28% of the Blue Ribbon Marketing.
Goldjinsheng is a wholly owned subsidiary of Noble China Inc., a company
listed in the Toronto Stock Exchange and Pabst Blue Ribbon was a subsidiary
of the Blue Ribbon Group.
Zhaoqing Brewery is a wholly owned subsidiary of High Worth Brewery, a
Sino-foreign equity joint venture enterprise registered in the PRC in which
Blue Ribbon Group and High Worth Holdings Limited, a wholly owned
subsidiary of CBR, hold 40% and 60% interests, respectively.
FS-7
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
2. BASIS OF PRESENTATION
The financial statements have been prepared in accordance with generally
accepted accounting principles in the United States of America ("US GAAP").
This basis of accounting differs from that used in the preparation of the
statutory financial statements of the Company which are prepared in
accordance with the accounting principles and relevant financial
regulations established by the Ministry of Finance of the PRC.
The major adjustments made to the PRC statutory financial statements to
conform with the accrual basis under US GAAP include the adjustments for
sales, interest income and purchases recognized on a cash basis,
depreciation and deferred taxation.
On October 31, 1994, High Worth Holdings Limited, a wholly-owned subsidiary
of CBR Brewing Company, Inc., acquired an effective 60% interest in
Zhaoqing Brewery, including Zhaoqing Brewery's 40% interest in the Company.
Accordingly, the Company's statements of income and cash flows were
prepared for the ten months ended October 31, 1994 and for the two months
ended December 31, 1994 to show the pre-acquisition and the post-
acquisition operating results and cash flows of the Company attributable to
CBR Brewing Company, Inc. for the period ended December 31, 1994.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING - The financial statements have been prepared under the
historical cost convention.
REVENUE RECOGNITION - Sales represent the invoiced value of goods sold, net
of returns and discounts. Sales and sales discounts are recognized upon
delivery of goods to customers. Sales returns are recognized upon receipt
of goods returned from customers.
INVENTORIES - Inventories are stated at the lower of cost or market value.
Cost, which comprises direct materials, direct labor costs and overhead
associated with the manufacturing process, is calculated using the first-
in, first-out method.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at
cost less allowance for depreciation and amortization. Cost includes the
fair value of property, plant and equipment transferred from Pabst Blue
Ribbon.
Depreciation and amortization are provided using the straight-line method
to write off the cost of property, plant and equipment over their estimated
useful lives as follows:
FS-8
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Land use rights................. 20 years
Buildings....................... 20 years
Plant, machinery and equipment.. 15 years
Motor vehicles.................. 10 years
According to the laws of the PRC, the title to all PRC land is retained by
the PRC government. The land use rights represent the cost for the rights
to use the land for premises granted by the State Land Administration
Bureau. The land use rights are stated at cost and are amortized over the
shorter of the venture term of the Company or the term of the land use
right.
Construction in progress is stated at cost which comprises the direct cost
of buildings, plant under construction and deposits and prepayments made on
machinery pending installation. Cost comprises the direct costs of
construction and installation. No depreciation is provided until the
relevant assets have been put into commercial use.
The Company regularly reviews its property, plant and equipment for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable based upon undiscounted
cash flows expected to be produced by such assets over their expected
useful lives.
ADVERTISING EXPENSES - Advertising expenses are charged to expense in the
statements of income as incurred.
INCOME TAXES - Income taxes are determined under the liability method in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires deferred
taxes be adjusted to reflect the tax rates at which future taxable amounts
will be settled or recognized. The effects of tax rate changes on future
deferred tax liabilities and deferred tax benefits, as well as other
changes in income tax laws, are recognized in net earnings in the period
such changes are enacted.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand,
cash accounts, interest bearing saving accounts, and short-term bank
deposits with maturities of three months or less.
FOREIGN CURRENCY TRANSLATION - The financial records and the statutory
financial statements of the Company are maintained in Renminbi. In
preparing the financial statements, all foreign currency transactions are
translated into Renminbi using the applicable rates of exchange, quoted by
the Zhaoqing Foreign Exchange Adjustment Center (the "swap center") for the
respective periods. Monetary assets and liabilities denominated in foreign
currencies
FS-9
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
have been translated into Renminbi using the rate of exchange quoted by the
swap center prevailing at the balance sheet date. The resulting exchange
gains or losses have been credited or charged to the statement of income
for the period in which they occur.
Translation of amounts from Renminbi ("RMB") into United States dollars
("US$") is for the convenience of the reader only and has been made at the
swap center rate as quoted by the People's Bank of China on December 31,
1996 of US$1.00 = RMB8.32. No representation is made that the Renminbi
amounts could have been, or could be, converted into United States dollars
at that rate or at any other rate.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS - The United States Financial
Accounting Standards Board ("FASB") has issued SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of". This statement requires that the Company review for
impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS No. 121 was effective for the Company's fiscal year
beginning January 1, 1996. The adoption of this statement did not have a
material impact on the Company's financial position or results of
operations for the year ended December 31, 1996. The FASB also issued SFAS
No. 123, "Accounting for Stock-Based Compensation". The Company was
required to adopt SFAS No. 123 for the fiscal year beginning January 1,
1996. This statement establishes accounting and disclosure requirements
using a fair value-based method of accounting for stock-based employee
compensation plans. Under SFAS No. 123, the Company may either adopt the
new fair value-based accounting method or continue the intrinsic value-
based method and provide pro forma disclosures of net income and earnings
per share as if the fair value accounting provisions of this statement had
been adopted. The Company adopted only the disclosure requirements of SFAS
No. 123; therefore such adoption had no effect on the Company's financial
position or results of operations for the fiscal year ended December 31,
1996.
FS-10
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
4. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
Accounts receivable comprises:
1995 1996
----------- -----------
RMB RMB
<S> <C> <C>
Accounts receivables - trade....................... 1,843,563 9,469,962
Less: Allowance for doubtful accounts.............. (786,740) (2,246,703)
----------- -----------
1,056,823 7,223,259
=========== ===========
Movement of allowance for doubtful accounts:
Balance as at January 1............................ - 786,740
Provided during the year........................... 786,740 1,459,963
----------- -----------
Balance as at December 31.......................... 786,740 2,246,703
=========== ===========
5. INVENTORIES
1995 1996
----------- -----------
RMB RMB
Raw materials..................................... 20,296,779 30,136,756
Work in progress.................................. 11,334,431 8,247,938
Finished goods.................................... 1,394,669 2,193,257
----------- -----------
33,025,879 40,577,951
=========== ===========
6. PROPERTY, PLANT AND EQUIPMENT
1995 1996
----------- -----------
RMB RMB
At cost:
Land use rights and buildings..................... 157,686,309 162,700,681
Plant, machinery and equipment.................... 349,397,573 354,772,134
Motor vehicles.................................... 3,727,084 5,991,280
Construction in progress.......................... 4,563,796 -
----------- -----------
Total............................................. 515,374,762 523,464,095
Less: Accumulated depreciation and amortization... (53,352,907) (89,983,400)
----------- -----------
462,021,855 433,480,695
=========== ===========
</TABLE>
FS-11
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
7. BANK LOANS
The short-term bank loans as at December 31, 1996 were collaterized by
certain property, plant and equipment of the Company, bore fixed interest
rates of 13.3% and 13.2% in 1995 (1994: 11.0%) and 12.3% in 1996 and are
wholly repayable in 1997. The weighted average interest rates as of
December 31, 1995 and 1996 are 13.3% and 12.3% per annum, respectively.
There are no significant covenants or financial restrictions relating to
the Company's short-term bank borrowings. Details of assets pledged by the
Company are described in note 20.
8. INCOME TAXES
The Company is governed by the Income Tax Laws of the PRC concerning
Foreign Investment Enterprises and Foreign Enterprises and various rules
and regulations (the "Income Tax Laws"). Pursuant to the Income Tax Laws,
foreign investment enterprises engaging in a production business located in
Zhaoqing are subject to income tax at the rate of 27% on income as reported
in its statutory financial statements.
Pursuant to the Income Tax Laws, if the investor of a foreign investment
enterprise reinvests its share of distributed profits from the enterprise,
the investor is entitled to receive a tax refund of the income tax paid on
the reinvested amount.
With a tax concession obtained from the tax authority, the Company is
exempt from income taxes for the two financial years commencing with its
first profitable year of operations, and thereafter with a 50% reduction
for the next three financial years. Based on its local statutory financial
statements, the Company has attained its first profitable year of
operations for the financial year ended December 31, 1993. As the Company
only earned profits for two months in 1993, the Company has applied for an
extension of the tax holiday period to 1995 which was approved by the PRC
tax authority. Accordingly, no current income taxes were provided by the
Company for the ten months ended October 31, 1994, the two months ended
December 31, 1994 and the year ended December 31, 1995. For the year ended
December 31, 1996, current income taxes based on the 50% reduction rule
were provided.
The provision for deferred income taxes is based on the liability method
prescribed by Statement of Financial Accounting Standards No. 109. The
Company's temporary differences mainly represented the accelerated
depreciation allowances provided on property, plant and equipment.
The reconciliation of the effective income tax rates of the Company to the
relevant statutory income tax rate in the PRC is an follows:
FS-12
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
<TABLE>
<CAPTION>
Ten months Two months Year Year
ended ended ended ended
October, 31 December 31, December 31, December 31,
1994 1994 1995 1996
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Statutory tax rate......... 33% 33% 27% 27%
Tax holiday................ (33%) (33%) (27%) (15%)
Accelerated depreciation
allowances................ 3% 4% 3% 4%
Change in tax rate......... - - (1%) -
---- ---- ---- ----
Effective tax rate......... 3% 4% 2% 16%
==== ==== ==== ====
</TABLE>
The aggregate income tax benefit from the tax exemption and reduction
status for the ten months ended October 31, 1994, the two months ended
December 31, 1994 and the years ended December 31, 1995 and 1996 amounted
to approximately RMB28,644,000, RMB6,683,000, RMB26,100,000 and
RMB16,000,000, respectively.
9. SALES TAXES
Effective from January 1, 1994, the Company is subject to three kinds of
sales taxes, being the value added tax ("VAT"), the consumption tax and
other sales taxes. The applicable VAT rate is 17% for brewery products sold
in the PRC and nil for exported goods. The amount of VAT liability is
determined by applying the applicable tax rate to the invoiced amount of
goods sold less VAT paid on purchases made with the relevant invoices in
support. VAT is collected from customers by the Company on behalf of the
PRC tax authorities and is therefore not expensed to the statement of
income. The applicable consumption tax rate in respect of brewery products
is RMB220 per ton. The consumption tax expensed to the statement of income
is determined based on the volume of sales within the PRC. Exported goods
are exempt. The other sales taxes are assessed as a percentage of
consumption tax and VAT.
10. CONTRIBUTED CAPITAL
The Company was registered with a capital of US$50,000,000. At the balance
sheet date, a total of RMB475,940,000 was contributed by the joint venture
parties.
FS-13
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
11. FOREIGN CURRENCY EXCHANGE
The Renminbi is not freely convertible into foreign currencies. Prior to
January 1, 1994, all foreign exchange transactions involving Renminbi in
the PRC took place either through the Bank of China or other institutions
authorized to buy and sell foreign exchange, or at an approved swap center
in the PRC. The swap centers are institutions which belong to the State
Administration of Exchange Control and its branches. The exchange rates
used for transactions through the Bank of China and other authorized
institutions were set by the PRC government, through the State
Administration of Exchange Control, from time to time. The exchange rates
available at a swap center are determined largely by supply and demand
based on foreign currency and Renminbi requirements of enterprises
operating or doing business in the PRC.
On January 1, 1994, the PRC government abolished the dual exchange rate
system, comprising the official rates and the swap center rates, and
introduced a single rate of exchange as quoted by the People's Bank of
China. The unified exchange rate is quoted at levels similar to those
quoted by the swap centers. However, the unification of exchange rates does
not imply full convertibility of Renminbi into United States dollars or
other foreign currencies. All foreign exchange transactions continue to
take place either through the Bank of China or other institutions
authorized to buy and sell foreign currencies or the swap centers at the
exchange rates quoted by the People's Bank of China. In April 1994, the
National Foreign Exchange Trading Center in Shanghai (the "exchange
center") commenced operations. Enterprises operating in the PRC can enter
into exchange transactions at the exchange center through the Bank of China
or other authorized institutions. Payments for imported materials and
remittances of earnings outside the PRC are subject to the availability of
foreign currency which are dependent on the foreign currency denominated
earnings of the Company or must be arranged through the exchange center.
Approval for exchange at the exchange center is granted to enterprises in
the PRC for valid reasons such as purchases of imported materials and
remittances of earnings. While conversion of Renminbi into United States
dollars or other foreign currencies can generally be effected at an
exchange center, there is no guarantee that it can be effected at all
times.
Effectively July 1, 1996, the PRC government began to take steps to make
its currency fully convertible on a "current account" basis. This will
allow foreign-funded enterprises, whether wholly owned or joint ventures
with Chinese, to buy and sell foreign exchange in banks for purposes of
trade, services, debt repayment and profit repatriation. The "current
account" measures the flow of money into and out of a nation, including the
net balance on trade in goods and services, plus remittances.
The unified exchange rates of the RMB equivalent of US$1.00 as of December
31, 1994, 1995 and 1996 were 8.45, 8.32 and 8.32, respectively.
FS-14
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
12. GENERAL RESERVE AND ENTERPRISE DEVELOPMENT FUNDS
As stipulated by the relevant laws and regulations for foreign investment
enterprises, the Company is required to make appropriations to a general
reserve fund, an enterprise development fund and an employee welfare and
incentive fund, in which the percentage of annual appropriations are
subject to the joint venture agreement. The employee welfare and incentive
fund are charged to the statement of income. The other appropriations are
accounted for as reserve funds in the balance sheet and are not available
for distribution as dividends to the joint venture partners of the Company.
Under the joint venture agreement, the board of directors shall determine
the appropriations by regard to the economic situation of the Company. The
percentage of annual appropriations to a general reserve fund, an
enterprise development fund and an employee welfare and incentive fund for
1996 has already been determined by the board of directors and the
appropriation has been reported in the statutory financial statements.
13. RETAINED EARNINGS
As described in note 2, the net income as reported in the US GAAP financial
statements differs from that as reported in the PRC statutory financial
statements. In accordance with the relevant laws and regulations for Sino-
foreign equity joint venture enterprises, the profits available for
distribution are based on the statutory financial statements. If the
Company has foreign currency available after meeting its operational needs,
the Company may make profit distributions in foreign currency to the extent
it is available. Otherwise, it will be necessary to convert such
distributions at an exchange center. At December 31, 1995 and 1996, the
retained earnings available for distribution amounted to approximately
RMB99,593,000 and RMB86,034,000, respectively.
14. ADVERTISING EXPENSES
The Company incurred advertising expenses of RMB13,986,841, RMB3,168,384,
RMB25,517,797 and RMB3,298,054 for the ten months ended October 31, 1994,
the two months ended December 31, 1994 and the years ended December 31,
1995 and 1996, respectively.
15. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Interest paid during the years ended December 31, 1995 and 1996 was
RMB2,240,015 and RMB3,450,585, respectively. No interest was paid during
1994.
FS-15
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
16. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
(a) Amounts due from related companies
The amounts receivable from related companies mainly represented the
receivable balances from companies of the Blue Ribbon Group, High
Worth Brewery, (Zhaoqing Brewery in 1995) Goldjinsheng Holding Limited
and Blue Ribbon Marketing amounting to approximately RMB12.9 million,
RMB0.5 million, RMB0.3 million and RMB154.9 million, respectively, for
1995 and RMB9.1 million, RMB0.2 million, RMB0.1 million and RMB167
million, respectively, for 1996.
The balance with Blue Ribbon Group principally represented expenses
paid on its behalf by the Company.
The balances with High Worth Brewery and Goldjinsheng Holding Limited
principally represented payment of expenses on their behalf.
The balance with Blue Ribbon Marketing was operating in nature and
principally represented accounts receivable from sales of finished
goods. Subsequent to the balance sheet date, a total amount of
approximately RMB46 million has been repaid by Blue Ribbon Marketing.
The amounts receivable from related companies are unsecured, interest-
free and repayable on demand.
(b) Amounts due to related companies
As of December 31, 1995 and 1996, the amounts due to related companies
principally represented balances arising from the purchases of raw
materials from American National Can (Zhaoqing) Co., Ltd. and Zhaoqing
Blue Ribbon Carton Manufacturing Co. in which Blue Ribbon Group has
equity interests.
The balances were unsecured, interest-free and repayable on demand.
FS-16
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
16. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS - continued
(c) Related party transactions
The Company had transactions with companies in which Blue Ribbon Group
or High Worth Brewery have equity interests. These significant
transactions are summarised below:
<TABLE>
<CAPTION>
Ten months Two months Year Year
ended ended ended ended
October, 31 December 31, December 31, December 31,
1994 1994 1995 1996
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales of beer products to
Blue Ribbon Marketing........ - - 327,805,406 695,150,225
Purchases of raw materials
from American National
Can (Zhaoqing) Co., Ltd...... 59,339,382 19,225,776 78,818,909 94,037,194
Purchases of raw materials
from Zhaoqing Blue
Ribbon Carton
Manufacturing Co............. 11,819,385 4,297,958 12,536,576 23,307,386
Royalty fee paid to Blue
Ribbon Group................. 9,755,178 3,327,093 15,434,144 15,106,029
Management fee paid to
Blue Ribbon Group............ - - 2,035,000 2,035,000
========== ========== =========== ============
</TABLE>
17. RETIREMENT PLAN
As stipulated by the PRC government regulations, the Company has defined
contribution retirement plans for all its permanent staff. The Company and
its staff are required to contribute to the PRC insurance companies
organized by the PRC government which are responsible for the payment of
pension benefits to retired staff. Prior to June 30, 1994, the monthly
contribution of the Company was calculated at 9.3% of the basic salary of
the permanent staff and the monthly contribution of each permanent staff
was RMB2. Effective from July 1, 1994, the monthly contributions of the
Company and the permanent staff were calculated at 14.6% and 2%,
respectively of the basic salary of the permanent staff. The pension costs
expensed by the Company for the ten months ended October 31, 1994, the two
months ended December 31, 1994 and the years ended December 31, 1995 and
1996 amounted to RMB226,987, RMB45,400, RMB472,371 and RMB337,760,
respectively.
FS-17
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
18. FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for current assets and
current liabilities qualifying as financial instruments approximate their
fair values because of the short maturity of such instruments.
19. CONCENTRATION OF RISKS
The Company's operating assets and primary source of income and cash flow
are in the PRC. The PRC economy has, for many years, been a centrally-
planned economy, operating on the basis of annual, five-year and ten-year
state plans adopted by central PRC governmental authorities which set out
national production and development targets. The PRC government has been
pursuing economic reforms since it first adopted its "open-door" policy in
1978. There is no assurance that the PRC government will continue to
pursue economic reforms or that there will not be any significant change in
its economic or other policies, particularly in the event of any change in
the political leadership of, or the political, economic or social
conditions in, the PRC. There is also no assurance that the Company will
not be adversely affected by any such change in government policies or any
unfavorable change in the political, economic or social conditions, the
laws or regulations or the rate or method of taxation in the PRC.
As many of the economic reforms which have been or are being implemented by
the PRC government are unprecedented or experimental, they may be subject
to adjustment or refinement which may have adverse effects on the Company.
Further, through state plans and other economic and fiscal measures, it
remains possible for the PRC government to exert significant influence on
the PRC economy.
All the Company's revenue are wholly derived from the sale of Pabst Blue
Ribbon beer.
The Company sold 45% and 100% of its products to Blue Ribbon Marketing in
1995 and 1996, respectively and recognizes its heavy dependence on the
sales to the related company.
The Company currently uses foreign currency to pay for imported raw
materials and its dividend. For details of foreign currency risks, please
refer to note 11.
The financial instruments that are exposed to concentration of credit risk
consist primarily of cash and accounts receivable from customers and
related companies. Cash is maintained with major banks in the PRC. The
Company's business activity is with customers and related companies in the
PRC. The Company periodically performs credit analysis and
FS-18
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
19. CONCENTRATION OF RISKS - continued
monitors the financial condition of its customers and related companies in
order to minimize credit risk.
In November 1996, the Company awared that Blue Ribbon Group had established
a wholly-owned subsidiary in Le Shang City, Sichuan Province of the PRC,
with an intention to convert a brewery with an annual production capacity
of 20,000 metric tons, (the "Sichuan Brewery"), into a brewing complex for
the production of Pabst Blue Ribbon beer in 1997.
In the event that Blue Ribbon Group is able to successfully assert its
position and commence the production of Pabst Blue Ribbon beer in the
Sichuan Brewery, the Company would face competition from Blue Ribbon Group
in the PRC. As a result, the Company's business could be adversely
affected.
20. PLEDGE OF ASSETS
Land use rights and buildings and certain plant, machinery and equipment of
the Company with a net book value amounting to RMB148,178,817 and
RMB138,497,516 as at December 31, 1995 and 1996, respectively, were
collateralized to secure bank borrowings of RMB13,500,000.
21. COMMITMENTS AND CONTINGENCIES
Blue Ribbon Group entered into licensing arrangements with Pabst Brewing
Company whereby Blue Ribbon Group was granted the exclusive right to
produce and market products under four specific Pabst trademarks in the
PRC, the non-exclusive right to market such products in other Asian
countries except Hong Kong, Macau, Japan and South Korea, and the right to
sublicense the use of the trademarks to any other enterprise in the PRC.
Pursuant to the terms of the sublicense agreement, the Company was granted
by Blue Ribbon Group the right to use the two specific Pabst trademarks for
the production, promotion, distribution and sale of beer under such
trademarks. The production right of the Company however is confined
exclusively for the Guangdong Province only and it does not preclude High
Worth Brewery's production rights in Guangdong as described in (a) and (b)
below.
The sublicense agreement is valid until November 7, 2003. In consideration
for the sublicense granted, the Company is committed to pay Blue Ribbon
Group a royalty fee of US$0.10 for each carton of bottled or canned beer
produced.
FS-19
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
21. COMMITMENTS AND CONTINGENCIES - continued
A provisional agreement, subject to governmental approval, was made among
CBR Brewing Company, Inc. and its subsidiary, the group companies of Noble
China Inc., a company incorporated in Canada and Blue Ribbon Group on May
10, 1995 to the effect that:
(a) High Worth Brewery was entitled to be granted from Blue Ribbon Group
the right to brew and sell beer under the Pabst Blue Ribbon label
produced in its brewing facilities up to a maximum production capacity
of 100,000 tons per annum.
(b) High Worth Brewery and/or companies that High Worth Brewery has an
interest in are entitled to be granted a sublicense from Blue Ribbon
Group with the right to produce and sell beer under the Pabst Blue
Ribbon label in the Guangdong Province of the PRC ("Additional
Facility") to a maximum production capacity of 300,000 tons per annum.
In the event that High Worth Brewery desires to obtain sublicense for
any Additional Facility, Goldjinsheng has the right to purchase up to
a 40% interest in such Additional Facility. The purchase price for
such interest shall be the actual cost of such Additional Facility
multiplied by the percentage interest that Goldjinsheng elects to
purchase.
(c) A proposed new marketing company ("New Marketing Company"), owned as
to 8% by Blue Ribbon Group, 52% by High Worth Brewery and 40% by
Goldjinsheng, shall be formed to handle and organize the sales of
Pabst Blue Ribbon beer produced by Zhaoqing Brewery and the Blue
Ribbon Noble. Each of Zhaoqing Brewery and the Blue Ribbon Noble will
create a separate distribution company or division of their own. The
distribution company of Zhaoqing Brewery will have the sole right to
acquire 100% of the production of Zhaoqing Brewery and 40% of the
production of the Blue Ribbon Noble; whilst the distribution company
of the Blue Ribbon Noble will have the sole right to acquire 60% of
the production of the Blue Ribbon Noble. The respective distribution
companies will appoint the New Marketing Company as their sole and
exclusive agent to market Pabst Blue Ribbon beer in the PRC.
Another agreement was made among Goldjinsheng, Blue Ribbon Group and the
Company on May 10, 1995 to the effect that the Company agreed to pay Blue
Ribbon Group management fees of RMB2,035,000 per annum for a period of five
years commencing January 1, 1995 (see note 16(c).
The Company has commitments of approximately, RMB32,010,000 for capital
expenditure in respect of property, plant and equipment at December 31,
1996.
FS-20
<PAGE>
ZHAOQING BLUE RIBBON BREWERY NOBLE LTD.
---------------------------------------
(Registered in the People's Republic of China)
21. COMMITMENTS AND CONTINGENCIES - continued
For contingencies relates to foreign currency exchange risk and
concentration of risks, see notes 11 and 19.
22. POST BALANCE SHEET EVENTS
(a) Subsequent to the balance sheet date, certain allegations were raised
against the Company by the former chairman and CEO of Noble China Inc.
concerning irregularities on the financial statements of the Company
in previous years. Having considered the Company's position and on
the advice of legal counsel, the directors of the Company are of the
opinion that the allegations were of no substance and, accordingly,
will not have any material adverse effect to the Company.
(b) In April 1997, the Sichuan Brewery commenced the production and sale
of Pabst Blue Ribbon beer. 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 the same month, in order to
facilitate the efficient distribution and sale of Pabst Blue Ribbon
beer in the PRC, the Blue Ribbon Marketing 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 Blue Ribbon Marketing at
mutually agreed ex-factory prices, and grants Blue Ribbon Marketing
the right to regulate production to reflect market demand.
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 the Company, the Company's results of operations could be
adversely affected. The Company currently estimates that the Sichuan
Brewery's 1997 production volume will represent approximately 8% of
the Company's budgeted volume of sales in 1997.
FS-21
<PAGE>
ZHAOQING BREWERY
CONTENTS
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
REPORT OF INDEPENDENT AUDITORS Z-1
FINANCIAL STATEMENTS
Consolidated balance sheet Z-2
Consolidated statements of income Z-3
Consolidated statements of equity Z-4
Consolidated statements of cash flows Z-5 - Z-6
Notes to consolidated financial statements Z-7 - Z-30
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the shareholders of
CBR Brewing Company, Inc.
We have audited the accompanying consolidated balance sheet of
Zhaoqing Brewery and its subsidiaries as of December 31, 1993 and the related
consolidated statements of income, equity and cash flows for each of the two
years ended December 31, 1993 and the ten months ended October 31, 1994. These
consolidated financial statements are the responsibility of Zhaoqing Brewery's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Zhaoqing Brewery and its subsidiaries as of December 31, 1993 and
the consolidated results of their operations and their cash flows for each of
the two years ended December 31, 1993 and the ten months ended October 31, 1994
in conformity with generally accepted accounting principles in the United States
of America.
Ernst & Young
Hong Kong
March 31, 1995,
Except for note 20, as to which the date is May 10, 1995
Z-1
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1993
<TABLE>
<CAPTION>
Notes RMB
<S> <C> <C>
ASSETS
Current assets:
Cash 34,899,018
Inventories 4 11,478,668
Prepayments, deposits and other receivables 3,920,084
Due from a related company 2 36,000,000
-----------
Total current assets 86,297,770
Property, plant and equipment, net 5 43,576,107
Interests in associated companies 6 196,884,451
-----------
Total assets 326,758,328
===========
LIABILITIES AND EQUITY
Current liabilities:
Bank loans 7 20,595,000
Other loans 8 20,655,000
Lease payables 9 13,629,021
Other payables 2 69,980,235
Accounts payable and accrued liabilities 6,575,244
Due to ultimate holding company 15 54,945,687
Sales taxes payable 10 12,635,172
-----------
Total current liabilities 199,015,359
Long term liabilities:
Bank loans 7 23,000,000
Lease payables 9 2,035,303
Deferred income taxes 11 3,000,000
-----------
Total long term liabilities 28,035,303
Equity 99,707,666
-----------
Total liabilities and equity 326,758,328
===========
</TABLE>
________________________ ________________________
Director Director
The consolidated financial statements were approved by the
board of directors of CBR Brewing Company, Inc. on May 10, 1995.
The accompanying notes are an integral part of
the consolidated financial statements.
Z-2
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE TWO YEARS ENDED DECEMBER 31, 1993 AND
THE TEN MONTHS ENDED OCTOBER 31, 1994
<TABLE>
<CAPTION>
Ten months
ended Year ended
October 31, December 31,
Notes 1994 1993 1992
RMB RMB RMB
<S> <C> <C> <C> <C>
Sales 15 64,540,646 212,437,411 168,411,036
Sales taxes 10 (7,253,217) (20,854,885) (13,970,946)
----------- ------------ -----------
Sales, net of sales taxes 57,287,429 191,582,526 154,440,090
Cost of sales (38,259,757) (102,414,835) (83,339,108)
----------- ------------ -----------
Gross profit 19,027,672 89,167,691 71,100,982
Expenses:
Selling and administrative
expenses (7,411,628) (22,154,219) (20,089,452)
----------- ------------ -----------
Operating income 11,616,044 67,013,472 51,011,530
Other income:
Gain on disposal of property,
plant, equipment and business
of a subsidiary 2 - 75,879,235 -
Gain on disposal of property,
plant and equipment - 355,757 -
Foreign exchange gains 67,874 - -
----------- ------------ -----------
Total other income 67,874 76,234,992 -
Other expense:
Interest expense (4,101,175) (23,682,512) (18,715,141)
Foreign exchange losses - (17,825,176) (31,560,670)
----------- ------------ -----------
Total other expenses (4,101,175) (41,507,688) (50,275,811)
----------- ------------ -----------
Income before income taxes 7,582,743 101,740,776 735,719
Provision for deferred income taxes 11 (540,000) (640,000) (600,000)
----------- ------------ -----------
Income before equity in earnings
of associated companies 7,042,743 101,100,776 135,719
Equity in earnings of associated
companies 6 34,969,703 5,485,716 -
----------- ------------ -----------
Net income for the period/year 13 42,012,446 106,586,492 135,719
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
Z-3
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE TWO YEARS ENDED DECEMBER 31, 1993 AND
THE TEN MONTHS ENDED OCTOBER 31, 1994
<TABLE>
<CAPTION>
Sales tax Statutory
concession surplus and
development collective Capital Retained Reserve
fund welfare funds reserve earnings funds
RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C>
(Note 10)
(Note 13)
At December 31, 1991 30,874,951 - - (34,922,547) (4,047,596)
Net income for the year - - - 135,719 135,719
Appropriation 36,654,973 1,735,849 - (38,390,822) -
Appropriation of staff quarters
upon corporate reorganization - - - 2,966,949) (2,966,949)
----------- --------- ----------- ----------- -----------
At December 31, 1992 67,529,924 1,735,849 - (76,144,599) (6,878,826)
Net income for the year - - - 106,586,492 106,586,492
Appropriation 5,700,000 2,267,875 - (7,967,875) -
----------- --------- ----------- ----------- -----------
At December 31, 1993 73,229,924 4,003,724 - 22,474,018 99,707,666
Net income for the ten months
ended October 31, 1994 - - - 42,012,446 42,012,446
Appropriation - 1,282,812 - (1,282,812) -
Dividends - - - (105,511,921) (105,511,921)
Capital contribution upon
corporate reorganization
- note 1 - - 156,339,945 - 156,339,945
Amount realized upon disposal of
a subsidiary (54,233,023) - - 54,233,023 -
----------- --------- ----------- ----------- -----------
At October 31, 1994 18,996,901 5,286,536 156,339,945 11,924,754 192,548,136
=========== ========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Z-4
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWO YEARS ENDED DECEMBER 31, 1993 AND
THE TEN MONTHS ENDED OCTOBER 31, 1994
<TABLE>
<CAPTION>
Ten months
ended Year ended
October 31, December 31,
Notes 1994 1993 1992
RMB RMB RMB
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income 42,012,446 106,586,492 135,719
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in earnings of associated companies (34,969,703) (5,485,716) -
Depreciation and amortization 3,898,431 11,337,972 11,885,967
Gain on disposal of property, plant,
equipment and business of a subsidiary 2 - (75,879,235) -
Gain on disposal of property, plant
and equipment - (355,757) -
Deferred income taxes 540,000 640,000 600,000
Foreign exchange losses - 17,425,333 30,347,115
----------- ----------- ----------
11,481,174 54,269,089 42,968,801
Changes in working capital:
(Increase)/decrease in accounts receivable (1,035,512) 3,062,763 (3,180,045)
(Increase)/decrease in inventories (555,156) 4,419,262 (243,396)
(Increase)/decrease in prepayments, deposits
and other receivables 696,360 5,652,162 (6,823,907)
Increase in amount due from a fellow subsidiary - - (2,421,619)
Increase in amount due from a related company (28,958) - -
(Increase)/decrease in balances with
ultimate holding company 742,529 30,421,298 (177,114)
Increase/(decrease) in accounts payable
and accrued liabilities (1,091,439) (19,951,503) 14,922,089
Increase in deposits received from customers 10,372,969 - -
Increase/(decrease) in amount due to a
fellow subsidiary 12,643 (437,878) (82,049)
Increase/(decrease) in sales taxes payable 8,075,859 (5,122,125) 483,337
----------- ----------- ----------
Net cash provided by operating activities 28,670,469 72,313,068 45,446,097
----------- ----------- ----------
</TABLE>
Z-5
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWO YEARS ENDED DECEMBER 31, 1993 AND
THE TEN MONTHS ENDED OCTOBER 31, 1994
<TABLE>
<CAPTION>
Ten months ended Year ended
October 31, December 31,
Notes 1994 1993 1992
RMB RMB RMB
<S> <C> <C> <C> <C>
Cash flows from investing activities:
Purchases of property, plant and equipment (10,303,054) (97,311,649) (77,483,587)
Net cash outflow on disposal of a subsidiary 14(c) (4,083,959) - -
Proceeds from disposal of property, plant
and equipment - 646,824 -
Proceeds from disposal of property, plant,
equipment and business of a subsidiary 2 18,000,000 249,564,000 -
Costs incurred for construction in progress
of an associated company 2 (43,568,550) - -
Loans from/(to) an associated company 38,912,910 (48,494,458) -
----------- ------------ -----------
Net cash provided by/(used in) investing activities (1,042,653) 104,404,717 (77,483,587)
----------- ------------ -----------
Cash flows from financing activities:
New loans 3,150,000 57,750,000 65,595,367
Repayment of bank loans (12,000,000) (87,225,000) (34,430,000)
Repayment of other loans (17,655,000) (164,119,086) (14,065,712)
Repayment of lease payables (12,156,742) (13,884,645) (10,175,042)
Loans from/(to) ultimate holding company (16,429,306) 51,440,721 15,123,587
Loans from/(to) fellow subsidiaries - 275,414 (1,550,080)
----------- ------------ -----------
Net cash provided by/(used in) financing activities (55,091,048) (155,762,596) 20,498,120
----------- ------------ -----------
Effect of foreign exchange rate changes on cash - 2,700,404 168,490
----------- ------------ -----------
Net increase/(decrease) in cash (27,463,232) 23,655,593 (11,370,880)
Cash at beginning of period/year 34,899,018 11,243,425 22,614,305
----------- ------------ -----------
Cash at end of period/year 7,435,786 34,899,018 11,243,425
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Z-6
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES
Zhaoqing Brewery (the "Company") was established in the People's
Republic of China (the "PRC") as a State-owned enterprise in 1980. Pursuant to
a reorganization implemented by the Municipality of Zhaoqing in October 1990,
Guang Dong Blue Ribbon Group Co. Ltd. ("Blue Ribbon Group") (formerly Zhao Qing
Blue Ribbon Group Co., Ltd.), a State-owned enterprise in the PRC, was formed
and the Company then became a wholly-owned subsidiary of Blue Ribbon Group. The
Company is principally engaged in the production and sale of beer and beer
products in the PRC.
Prior to October 1994, the Company owned all of the capital of Pabst
Blue Ribbon Brewery (Zhaoqing) Co. Ltd. ("Pabst Blue Ribbon") which was
established on November 7, 1986 in the PRC for a term of fifteen years. The
term was further extended to October 11, 2007 with the approval of the relevant
PRC government authorities. Pabst Blue Ribbon is engaged in the production and
sale of beer and beer products in the PRC. In October 1994, the remaining net
assets of Pabst Blue Ribbon were disposed of as dividend to Blue Ribbon Group at
its carrying value.
Pursuant to an arrangement which changed Blue Ribbon Group from a
State-owned enterprise to a share capital company in July 1992, certain assets
of all group companies of Blue Ribbon Group, including those of the Company and
its subsidiaries (collectively referred to as the "Group"), were revalued on a
current replacement cost basis by State-owned Properties Evaluation Service of
Zhaoqing Municipality as at July 31, 1992. Since there was no change in the
beneficial owner of the Group before and after the arrangement, the revalued
assets of the Group were restated at historical cost for the purpose of
preparing these consolidated financial statements.
Z-7
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
Pursuant to the joint venture agreements and with the approval of the
relevant PRC government authorities, the property, plant, equipment and the
business of Pabst Blue Ribbon were disposed of to Zhaoqing Blue Ribbon Brewery
Noble Ltd. ("Blue Ribbon Noble") as capital contribution to Blue Ribbon Noble, a
new Sino-foreign equity joint venture enterprise registered in the PRC on
October 8, 1993 in which Goldjinsheng Holding Limited, an unrelated party, and
the Company each hold 60% and 40% interests, respectively. The venture term of
Blue Ribbon Noble is for twenty years which term may be extended upon mutual
agreement of the joint venture parties and approval from the relevant PRC
government authorities. Blue Ribbon Noble is principally engaged in the
production and sale of beer and beer products in the PRC and commenced business
on November 6, 1993. Under the joint venture agreements, the Company is given
control over the daily operations and management of Blue Ribbon Noble and
decisions of the board of directors of Blue Ribbon Noble will require approval
of both joint venture partners.
Apart from the 40% interest in Blue Ribbon Noble, prior to October
1994, the Company also owned a 30% interest in Zhaoqing Blue Ribbon Beverage Co.
("Blue Ribbon Beverage"), which is a Sino-foreign equity joint venture
enterprise registered in the PRC on July 18, 1993. Blue Ribbon Beverage is
principally engaged in the production and sale of natural fruit juices in the
PRC and commenced commercial production in July 1993. In October 1994, the
Group's entire interest in Blue Ribbon Beverage was disposed of as dividend to
Blue Ribbon Group at its carrying value.
Pursuant to a corporate reorganization undertaken by Blue Ribbon
Group, an additional capital contribution to the Company amounting to
RMB151,348,294 was made by Blue Ribbon Group. The additional capital is not
available for distribution as dividends to the equity holder.
On October 31, 1994, High Worth Holdings Limited, a wholly-owned
subsidiary of CBR Brewing Company, Inc., acquired an effective 60% interest in
the Company from Blue Ribbon Group.
Z-8
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - BASIS OF PRESENTATION
As more fully described in note 1, the property, plant, equipment and
the business of Pabst Blue Ribbon, the Company's subsidiary, were disposed of to
Blue Ribbon Noble in November 1993 as capital contribution to Blue Ribbon Noble,
an associated company. Accordingly, the operating results of the business
previously run by Pabst Blue Ribbon were consolidated into the consolidated
financial statements up to November 1993. The operating results of the business
acquired and currently run by Blue Ribbon Noble were thereafter equity accounted
for in the consolidated financial statements.
The information for the disposal of property, plant, equipment and the
business of Pabst Blue Ribbon, the Company's subsidiary, to Blue Ribbon Noble,
an associated company, are summarized below:
<TABLE>
<CAPTION>
RMB
<S> <C>
Consideration received:
Cash paid by Goldjinsheng Holding Limited 249,564,000
Due from Goldjinsheng Holding Limited 36,000,000
40% interest in Blue Ribbon Noble 139,789,843
------------
425,353,843
The carrying value of net assets disposed of:
Property, plant and equipment, including
construction in progress at the date of disposal (316,966,208)
Estimated costs to completion for construction
in progress (32,508,400)
------------
Total net assets disposed of (349,474,608)
------------
Gain on disposal 75,879,235
============
</TABLE>
The anticipated costs and actual payables related to the construction in
progress have been reflected in other payables on the consolidated balance
sheet.
Z-9
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - BASIS OF PRESENTATION (continued)
The property, plant and equipment, including construction in progress,
and the business of Pabst Blue Ribbon were disposed of by the Company as a
capital contribution to Blue Ribbon Noble, a company in which Goldjinsheng
Holding Limited and the Company each hold 60% and 40% interests, respectively.
Under the terms of the joint venture agreements, the Company, being the sole
partner responsible for the overall construction of the production facilities of
Blue Ribbon Noble, was responsible for the cost of completion of construction in
progress in excess of RMB224 million. Blue Ribbon Group agreed to undertake any
cost of completion of construction in progress in excess of RMB224 million paid
by the Company.
The amount receivable from Goldjinsheng Holding Limited is unsecured,
interest-free and repayable on demand.
On October 31, 1994, High Worth Holdings Limited, a wholly-owned
subsidiary of CBR Brewing Company, Inc., acquired an effective 60% interest in
the Company. Accordingly, the Company's consolidated statements of income and
cash flows were prepared for the ten months ended October 31, 1994 to show the
pre-acquisition consolidated operating results and cash flows of the Company
prior to the acquisition.
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of America
("US GAAP"). This basis of accounting differs from that used in the preparation
of the statutory financial statements of each company within the Group which are
prepared in accordance with the accounting principles and relevant financial
regulations established by the Ministry of Finance of the PRC.
The major adjustments made to the statutory financial statements to
conform to US GAAP include the following:
. The restatement of monetary assets and liabilities denominated in
foreign currencies to reflect the exchange rates quoted by the
Zhaoqing foreign exchange adjustment center prevailing at the balance
sheet date;
Z-10
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - BASIS OF PRESENTATION (continued)
. The restatement of certain assets of the Group revalued on July 31,
1992 to historical cost;
. The reclassification of certain expense items from income
appropriations to charges against income;
. Adjustment for sales, other income and purchases recognized on a cash
basis; and
. Adjustment for deferred taxation.
The financial statements have been prepared on a going concern basis
notwithstanding that the Group has a net current liability position at December
31, 1993 and October 31, 1994 as Oriental Win Holdings Ltd., its ultimate
holding company, and Blue Ribbon Group have undertaken to provide continuing
financial support.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of accounting
The consolidated financial statements have been prepared under the
historical cost convention.
(b) Consolidation principles
The consolidated financial statements include the financial statements
of the Company and its subsidiaries which are more than 50% owned. All
material intercompany accounts and transactions are eliminated on
consolidation.
Investments, in which the Company exercises significant influence but
does not own greater than a 50% voting interest, are accounted for
under the equity basis.
(c) Revenue recognition
Sales represent the net invoiced value of goods sold, net of returns
and allowances. Sales are recognized upon delivery of goods to
customers.
Z-11
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(d) Inventories
Inventories are stated at the lower of cost and market value. Cost,
which comprises direct materials and, where applicable, direct labour
costs and those overhead items that have been incurred in bringing the
inventories to their present location and condition, is calculated
using the first-in, first-out method.
(e) Property, plant and equipment
Property, plant and equipment are stated at cost less allowance for
depreciation and amortization.
Depreciation and amortization are provided using the straight-line
method to write off the cost of property, plant and equipment over
their estimated useful lives. The estimated useful lives are as
follows:
<TABLE>
<S> <C>
Land use rights 50 years
Buildings 50 years
Plant, machinery and
equipment 5 - 15 years
Motor vehicles 5 - 10 years
</TABLE>
(e) Property, plant and equipment (continued)
According to the laws of the PRC, the title to all PRC land is
retained by the PRC government. The land use rights, which represent
the cost for the rights to use the land for premises granted by the
State Land Administration Bureau, have no definite term of use. The
land use rights are stated at cost and are amortised over 50 years on
the same basis as the buildings.
Z-12
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Construction in progress represents buildings, plant under
construction and deposits and prepayments made on machinery pending
installation. Cost comprises direct costs of construction and finance
expenses arising from borrowings used to finance the construction of
buildings and plant and machinery until the construction, installation
and testing is complete. The amount of finance expenses capitalised is
the interest cost which could theoretically have been avoided if the
expenditure on the qualifying asset had not been made.
No depreciation is provided on construction in progress until the
relevant assets have been put into commercial use.
(f) Leased assets
Leases that transfer substantially all the rewards and risks of
ownership of assets to the Group are accounted for as capital leases.
At the inception of a capital lease, the cost of the leased asset is
capitalised at the present value of the minimum lease payments and
recorded together with the obligation, excluding the interest element,
to reflect the purchase and financing. Assets held under capital
leases are included in property, plant and equipment and are
depreciated over the shorter of the lease terms and the estimated
useful lives.
(g) Income taxes
Income taxes are determined under the liability method as required by
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes".
Z-13
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(h) Foreign currency translation
The financial records and the statutory financial statements of the
Group are maintained in Renminbi. In preparing the statutory financial
statements, foreign currency transactions and monetary assets and
liabilities denominated in foreign currencies are translated into
Renminbi at the rates of exchange set by the PRC government from time
to time (the "official exchange rate").
In preparing the consolidated financial statements, the financial
statements of the Group are measured using Renminbi as the functional
currency. All foreign currency transactions are translated into
Renminbi using the applicable rates of exchange, quoted by the
Zhaoqing foreign exchange adjustment center (the "swap center") for
the respective periods. Monetary assets and liabilities denominated in
foreign currencies have been translated into Renminbi using the rates
of exchange quoted by the swap center prevailing at the balance sheet
date. The resulting exchange gains or losses have been credited or
charged to the statements of income for the period in which they
occur.
On January 1, 1994, the PRC government abolished the dual exchange
rate system, comprising the official rates and the swap center rates,
and introduced a single rate of exchange as quoted by the People's
Bank of China (the "unified exchange rate"). The unified exchange rate
is quoted at levels similar to those quoted by the swap centers.
However, the unification of exchange rates does not imply full
convertibility of Renminbi into United States dollars or other foreign
currencies.
Z-14
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - INVENTORIES
<TABLE>
<CAPTION>
1993
RMB
<S> <C>
Raw materials 7,500,186
Work in progress 3,473,660
Finished goods 504,822
----------
11,478,668
==========
</TABLE>
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
1993
RMB
<S> <C>
At cost:
Land use rights and buildings 7,531,154
Plant, machinery and equipment 58,839,161
Motor vehicles 602,309
Construction in progress 530,877
----------
67,503,501
Accumulated depreciation and amortization:
Land use rights and buildings 1,543,513
Plant, machinery and equipment 22,143,753
Motor vehicles 240,128
----------
23,927,394
Net book value 43,576,107
==========
</TABLE>
Interest capitalised in construction in progress for the year ended
December 31, 1992 amounted to RMB9,187,402. As more fully described in note 1,
the property, plant and equipment, including construction in progress, of Pabst
Blue Ribbon were disposed of to the Company and then to Blue Ribbon Noble.
Pabst Blue Ribbon's capitalised interest in construction in progress for the
period from January 1, 1993 up to November 6, 1993, the date of transfer of
property, plant and equipment, amounted to RMB9,279,134.
The analysis of the Group's cost and accumulated depreciation and
amortization of property, plant and equipment held under capital leases at the
balance sheet date is set out below:
Z-15
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT, NET (continued)
<TABLE>
<CAPTION>
1993
RMB
<S> <C>
At cost:
Plant, machinery and equipment 14,682,869
Construction in progress 1,000,000
----------
15,682,869
Accumulated depreciation and amortization:
Plant, machinery and equipment 5,506,076
----------
Net book value 10,176,793
==========
</TABLE>
Depreciation and amortization charges in respect of property, plant
and equipment held under capital leases for the years ended December 31, 1992
and 1993 and the ten months ended October 31, 1994 amounted to RMB1,730,948,
RMB917,679 and RMB344,890, respectively.
NOTE 6 - INTERESTS IN ASSOCIATED COMPANIES
<TABLE>
<CAPTION>
1993
RMB
<S> <C>
Unlisted investments, at cost 142,904,277
Loans to an associated company 10,095,000
Due from an associated company 38,399,458
The Group's share of post acquisition earnings
less losses of associated companies 5,485,716
-----------
196,884,451
===========
</TABLE>
The unlisted investments as at December 31, 1993 represent the Group's
40% and 30% equity interests in Blue Ribbon Noble and Blue Ribbon Beverage
respectively. Please refer to note 1 to the consolidated financial statements
for description of the principal activities of the respective associated
companies.
As at December 31, 1993, the Group's share of the underlying net
assets of associated companies exceeded the Group's investments by approximately
RMB54,471,723. This difference is being amortised to income over 20 years.
The Group's share of post acquisition earnings retained by associated
companies as at December 31, 1993 amounted to RMB5,485,716.
Z-16
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - INTERESTS IN ASSOCIATED COMPANIES (continued)
As at December 31, 1993, the loans to and the amount due from an
associated company were unsecured, interest-free and repayable on demand.
The summarized information of Blue Ribbon Noble are:
<TABLE>
<CAPTION>
1993
RMB
<S> <C>
Balance sheet
-------------
Current assets 90,359,254
Property, plant and equipment 473,606,583
-----------
Total assets 563,965,837
===========
Current liabilities 74,194,064
Equity 489,771,773
-----------
Total liabilities and equity 563,965,837
===========
</TABLE>
<TABLE>
<CAPTION>
Ten months Two months
ended ended
October 31, December 31,
1994 1993
RMB RMB
<S> <C> <C>
Statement of income
-------------------
Sales, net of sales taxes 392,693,554 66,593,478
=========== ============
Net income 84,218,373 13,831,773
=========== ============
</TABLE>
As the operating results of and the assets and liabilities of Blue
Ribbon Beverage are insignificant to the Group's consolidated operating results
and the assets and liabilities, no separate summarized information of Blue
Ribbon Beverage is disclosed.
Z-17
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - BANK LOANS
<TABLE>
<CAPTION>
1993
RMB
<S> <C>
Secured bank loans (see note 18) 35,000,000
Unsecured bank loans 8,595,000
-----------
43,595,000
Portion classified as current liabilities (20,595,000)
-----------
Long term portion 23,000,000
===========
</TABLE>
The bank loans as at December 31, 1993 bore fixed interest rates
ranging from 9.4% to 12.1% per annum with varying maturities ranging from 1994
to 1996. The weighted average interest rate of the short term bank loans as at
December 31, 1993 was 11.0%.
The outstanding balances in respect of bank loans denominated in
United States dollars as at December 31, 1993 were equivalent to RMB8,595,000.
The bank loans maturing during each of the years in the five year
period subsequent to the balance sheet date are:
<TABLE>
<CAPTION>
1993
RMB
<S> <C>
Year ending December 31,
1994 20,595,000
1996 23,000,000
----------
43,595,000
==========
</TABLE>
NOTE 8 - OTHER LOANS
Other loans include short term debentures as at December 31, 1993
amounting to RMB5,000,000. The short term debentures bore interest at the
weighted average rate of 10.5% per annum and were redeemable one year after
issuance.
The other loans as at December 31, 1993 were unsecured, bore fixed
interest at the weighted average rate of 11.8% per annum and floating interest
rates of 1.2% over LIBOR and are wholly repayable in 1994.
Z-18
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - LEASE PAYABLES
The details of collateralized property, plant and equipment held under
capital leases were disclosed in note 5 to the consolidated financial
statements.
The lease payables as at December 31, 1993 bore interest ranging from
5.2% to 12.7% per annum and are repayable semi-annually to 1995. The
outstanding balances in respect of lease payables denominated in United States
dollars as at December 31, 1993 amounted to RMB14,664,324.
The lease payables maturing during each of the years in the five year
period subsequent to the balance sheet date are:
<TABLE>
<CAPTION>
1993
RMB
<S> <C>
Year ending December 31,
1994 15,235,026
1995 2,179,760
-----------
17,414,786
Implicit interest (1,750,462)
-----------
15,664,324
Portion classified as
current liabilities (13,629,021)
-----------
Long term portion 2,035,303
===========
</TABLE>
NOTE 10 - SALES TAXES
<TABLE>
<CAPTION>
Ten months
ended Year ended
October 31, December 31,
1994 1993 1992
RMB RMB RMB
<S> <C> <C> <C>
Sales taxes originally
assessed 7,253,217 26,554,885 50,625,919
Less: tax concession - (5,700,000) (36,654,973)
--------- ---------- -----------
Net sales taxes 7,253,217 20,854,885 13,970,946
========= ========== ===========
</TABLE>
Z-19
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - SALES TAXES (continued)
Before the recent tax reform effective January 1, 1994, the Company
was liable to pay sales taxes on the value of brewery products sold, net of
certain packaging costs, pursuant to the sales tax rules and regulations in the
PRC. The effective sales tax rates applicable to each of the two years ended
December 31, 1993 are summarized below.
<TABLE>
<CAPTION>
Period Effective tax rate
<S> <C>
January 1992 to February 1993 16% to 40%
March 1993 to December 1993 16% to 27%
</TABLE>
The rate of sales tax applicable to the Group for any one year may be
reduced upon application for tax concession by the Group in the following year.
The Group has applied for and received tax relief for each of the two years
ended December 31, 1993. The tax authority in the PRC has restricted the use of
the tax concession to the repayment of borrowings and these are not available
for distribution to the equity holders. The amounts of tax concession were
therefore appropriated from retained earnings to a reserve account in the
respective periods.
Effective January 1, 1994, the Group is subject to three kinds of
sales taxes, being the value added tax ("VAT"), the consumption tax and other
sales taxes. The applicable VAT tax rate is 17% for brewery products sold in the
PRC and nil for exported goods. The amount of VAT liability is determined by
applying the applicable tax rate to the invoiced amount of goods sold less VAT
paid on purchases made with the relevant invoices in support. VAT is collected
from customers by the Group on behalf of the PRC tax authorities and is
therefore not expensed to the statement of income. The applicable consumption
tax rate in respect of brewery products is RMB220 per ton. The consumption tax
expensed to the statement of income is determined based on the volume of sales
within the PRC and exported goods are exempt. The other sales taxes are assessed
as a percentage of consumption tax and VAT.
Z-20
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - INCOME TAXES
The Company's subsidiary, Pabst Blue Ribbon is governed by the
relevant income tax laws in the PRC. With a tax concession obtained from the tax
authority, Pabst Blue Ribbon is exempt from income taxes for two years
commencing with its first profitable year of operations, and thereafter with a
50% exemption for the next three years. Based on its local statutory financial
statements, Pabst Blue Ribbon has attained its first profitable year of
operation for the year ended December 31, 1992. In view of the tax holiday
granted, no current income taxes were provided by Pabst Blue Ribbon for the two
years ended December 31, 1993. Based on its local statutory financial
statements, Pabst Blue Ribbon has suffered an operating loss for the ten months
ended October 31, 1994 and, accordingly, no income tax was provided for the
period by Pabst Blue Ribbon.
The Company's profits are however taxable under the income tax laws in
the PRC. Pursuant to an arrangement agreed with the tax authority, the income
tax of Blue Ribbon Group and its related companies, including the income tax of
the Company, were assessed on a combined basis and were paid and borne by Blue
Ribbon Group. No current income taxes were provided by the Company for the two
years ended December 31, 1993 and the ten months ended October 31, 1994 as the
management considered that any such allocation to the Company would be
insignificant. A tax indemnity letter has also been issued by Blue Ribbon Group
which waived all its right to claim from the Group for all unpaid income tax
liabilities for periods on or before October 31, 1994.
The provision for deferred income taxes is based on the liability
method prescribed by Statement of Financial Accounting Standards No. 109. The
Group's temporary differences mainly represented the accelerated depreciation
allowances provided on property, plant and equipment during tax reduced periods.
Z-21
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - INCOME TAXES (continued)
The reconciliation of effective income tax rates of the Group stated
in the statements of income to the statutory income tax rate in the PRC is as
follows:
<TABLE>
<CAPTION>
Ten months
ended Year ended
October 31, December 31,
1994 1993 1992
<S> <C> <C> <C>
Statutory tax rate 33% 33% 33%
Reduction in tax due to arrangement
with PRC tax authorities (33%) (33%) (33%)
Accelerated depreciation allowances
during tax reduced periods 7% 1% 81%
---- ---- ----
Effective tax rate 7% 1% 81%
==== ==== ====
</TABLE>
NOTE 12 - FOREIGN CURRENCY EXCHANGE
The Renminbi is not freely convertible into foreign currencies. Prior
to January 1, 1994, all foreign exchange transactions involving Renminbi in the
PRC took place either through the Bank of China or other institutions authorized
to buy and sell foreign exchange, or at an approved swap center in the PRC. The
swap centers are institutions which belong to the State Administration of
Exchange Control and its branches. The exchange rates used for transactions
through the Bank of China and other authorized institutions were set by the
government, through the State Administration of Exchange Control, from time to
time. The exchange rates available at a swap center are determined largely by
supply and demand based on foreign currency and Renminbi requirements of
enterprises operating or doing business in the PRC.
Z-22
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - FOREIGN CURRENCY EXCHANGE (continued)
On January 1, 1994, the PRC government abolished the dual exchange
rate system, comprising the official rates and the swap center rates, and
introduced a single rate of exchange as quoted by the People's Bank of China.
The unified exchange rate is quoted at levels similar to those quoted by the
swap centers. However, the unification of exchange rates does not imply full
convertibility of Renminbi into United States dollars or other foreign
currencies. All foreign exchange transactions continue to take place either
through the Bank of China or other institutions authorized to buy and sell
foreign currencies or the swap centers at the exchange rates quoted by the
People's Bank of China. In April 1994, the National Foreign Exchange Trading
Center in Shanghai (the "exchange center") commenced operations. Enterprises
operating in the PRC can enter into exchange transactions at the exchange center
through the Bank of China or other authorized institutions. Payments for
imported materials are subject to the availability of foreign currency which is
dependent on the foreign currency denominated earnings of each company within
the Group or must be arranged through an exchange center. Approval for exchange
at the exchange center is granted to enterprises in the PRC for valid reasons
such as purchases of imported materials. While conversion of Renminbi into
United States dollars or other foreign currencies can generally be effected at
the exchange center, there is no guarantee that it can be effected at all times.
The official exchange rates and swap center/unified exchange rates as
of December 31, 1992 and 1993 were as follows:
<TABLE>
<CAPTION>
December 31,
1993 1992
<S> <C> <C>
RMB equivalent of US$1.00:
Official exchange rate 5.80 5.73
Swap center/unified exchange rate 8.65 7.60
==== ====
</TABLE>
Z-23
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - DISTRIBUTION OF PROFITS
As stipulated by the relevant laws and regulations for enterprises
operating in PRC, Pabst Blue Ribbon, the Company's subsidiary,is required to
make appropriations to a general reserve fund, an enterprise development fund
and an employee welfare and incentive fund, in which the percentage of annual
appropriations are subject to the articles of association of Pabst Blue Ribbon.
The allocations to the employee welfare and the incentive fund should be charged
to the statement of income. The other appropriations should be accounted for as
a transfer from retained earnings to reserve funds in the balance sheet and
should not be available for distribution as dividends to the equity holder.
Under the articles of association, the board of directors shall determine the
appropriations having regard to the economic situation of Pabst Blue Ribbon. No
appropriations to these reserve funds and provision for employee welfare and
incentive fund were made for the period from January 1, 1992 to October 31,
1994. In the opinion of the management, the required appropriation of the funds
in the respective periods would be insignificant.
The Company's associated companies, Blue Ribbon Noble and Blue Ribbon
Beverage, are also required to make the same appropriations as Pabst Blue
Ribbon. The percentage of annual appropriations, if any, determined by the
board of directors in the respective periods is also insignificant.
The Company is required to make annual appropriations to two reserve
funds including statutory surplus and collective welfare fund. In accordance
with the relevant PRC regulations and the Company's articles of association, the
Company is required to allocate a certain percentage of its profit after
taxation, as determined in accordance with the PRC accounting standards and
regulations applicable to the Company, to the statutory surplus reserve until
such reserve reaches 50% of the registered capital of the Company. Based on the
statutory financial statements as of December 31, 1993, the registered capital
of the Company was RMB79,220,000. Subject to certain restrictions as set out in
the relevant PRC regulations and the Company's articles of association, the
statutory surplus reserve may be distributed to equity holders in the form of
bonus issues and/or dividends when such reserve exceeds 25% of the registered
capital of the Company.
Z-24
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - DISTRIBUTION OF PROFITS (continued)
In accordance with the relevant PRC regulations and the Company's
articles of association, the Company's collective welfare fund, which is
determined annually at the discretion of the equity holders, is appropriated
from retained earnings. The collective welfare fund is restricted to payments
of capital expenditure incurred on welfare facilities provided to employee.
As described in note 2 to the consolidated financial statements, the
profits as reported in the US GAAP financial statements differ from those as
reported in the statutory financial statements. In accordance with the relevant
laws and regulations in the PRC, the profits available for distribution are
declared based on the statutory financial statements.
If the Group has foreign currency available after meeting its
operational needs, the Group may make its profit distributions in foreign
currency to the extent it is available. Otherwise, it will be necessary to
convert such distributions at an exchange center.
NOTE 14- SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
Ten months
ended Year ended
October 31, December 31,
1994 1993 1992
RMB RMB RMB
<S> <C> <C> <C>
New capital leases 14,031,675 1,000,000 -
Interest paid by cash,
net of capitalised
interest 4,697,857 23,220,209 17,058,853
========== ========== ==========
</TABLE>
The major non-cash transactions undertaken by the Group for the two
years ended December 31, 1993 and the ten months ended October 31, 1994 are
summarized as follows:
(a) Certain property, plant and equipment of the Company were disposed of at
carrying value of RMB3,114,434 as capital contribution to Blue Ribbon
Beverage, an associated company, in return for a 30% equity interest.
Z-25
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14- SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION (continued)
(b) Please refer to note 2 to the consolidated financial statements for the
disposal of property, plant and equipment and the business of Pabst Blue
Ribbon, the Company's subsidiary, to the Company as capital contribution to
Blue Ribbon Noble, an associated company.
(c) Please refer to note 1 to the consolidated financial statements for the
disposal of the Group's remaining net assets in Pabst Blue Ribbon and the
entire interest in Blue Ribbon Beverage as dividends to Blue Ribbon Group
at their carrying values.
The details of the remaining net assets of Pabst Blue Ribbon disposed of to
Blue Ribbon Group are summarized below:
<TABLE>
<CAPTION>
RMB
<S> <C>
Net assets of a subsidiary disposed of:
Cash 4,083,959
Due from ultimate holding company 97,016,729
Due from a related company 18,000,000
Bank loans (5,000,000)
Other loans (3,000,000)
Lease payables (3,009,982)
Other payables (26,411,685)
-----------
81,679,021
===========
Satisfied by:
Dividend payable to Blue Ribbon Group 81,679,021
===========
</TABLE>
The details of the interest in Blue Ribbon Beverage disposed of to Blue
Ribbon Group are summarized below:
<TABLE>
<CAPTION>
RMB
<S> <C>
Interest in an associated company disposed of:
Investment cost in an associated company 3,114,434
Loans to an associated company 8,595,000
Amount due from an associated company 986,548
The Group's share of post acquisition
losses of an associated company (332,388)
----------
12,363,594
==========
Satisfied by:
Dividend payable to Blue Ribbon Group 12,363,594
==========
</TABLE>
Z-26
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14- SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
(continued)
(d) Dividends totalling RMB105,511,921 were declared and payable to Blue Ribbon
Group, of which RMB81,679,021 and RMB12,363,594, as set out in note (c)
above, were declared in consideration for the disposal of the Group's
remaining net assets in Pabst Blue Ribbon and the entire interest in Blue
Ribbon Beverage respectively.
(e) Please refer to note 1 to the consolidated financial statements for the
additional capital of RMB151,348,294 contributed by Blue Ribbon Group,
including loans assumed totalling RMB11,595,000.
NOTE 15- RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
(a) Major customer
The Group sold finished goods and raw materials to Blue Ribbon Group, the
then ultimate holding company, under a distribution arrangement. The sales
to Blue Ribbon Group, inclusive of the profit rebates received under the
distribution arrangement and net of sales taxes, for the years ended
December 31, 1992 and 1993 were RMB154,081,728 and RMB191,101,092,
respectively. On January 1, 1994, the Group terminated its distribution
arrangement and no finished goods and raw materials were sold to Blue
Ribbon Group thereafter. The Group then traded with retailers directly.
(b) Purchases of packing materials
The Company purchased packing materials from American National Can
(Zhaoqing) Co., Ltd. (formerly Zhao Gang Can Manufacturing Co.), a company
in which Blue Ribbon Group has an equity interest. The purchases made
during the years ended December 31, 1992 and 1993 and the ten months ended
October 31, 1994 amounted to RMB587,950, RMB2,262,364 and RMB1,535,738,
respectively.
(c) Purchases of packing materials and sales of raw materials
Z-27
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15- RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (continued)
The Company purchased packing materials from and sold raw materials to
Zhaoqing Blue Ribbon Carton Manufacturing Co., a then fellow subsidiary of
the Company.
The significant related party transactions are set out below:
<TABLE>
<CAPTION>
Ten months ended Year ended
October 31, December 31,
1994 1993 1992
RMB RMB RMB
<S> <C> <C> <C>
Purchases of packing
materials 1,997,721 11,914,670 4,001,785
Sales of raw materials 626,362 245,695 -
========= ========== =========
</TABLE>
(d) Due to ultimate holding company
As at December 31, 1993, the amount due to Blue Ribbon Group represented
the net balances of accounts receivable from sales of finished goods and
short term advances to the Group. The balance was unsecured, interest-free
and repayable on demand.
NOTE 16 - CONCENTRATION OF CREDIT RISKS
The financial instruments that are exposed to concentration of credit
risk consist primarily of cash and accounts receivable from a related company.
Cash is maintained with major banks in the PRC. The Company periodically
performs credit analysis and monitors the financial condition of the related
company in order to minimize credit risk.
Z-28
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - RETIREMENT PLAN
As stipulated by the PRC government regulations, the Group has defined
contribution retirement plans for all their permanent staff. The Group and its
staff are required to contribute to PRC insurance companies organized by the PRC
government which are responsible for the payments of pension benefits to retired
staff. During the two years ended December 31, 1993 and from January 1, to June
30, 1994, the monthly contribution of the Group was calculated at 9.3% of the
basic salary of the permanent staff and the monthly contribution of each
permanent staff remained at RMB2. Effective July 1, 1994, the monthly
contributions of the Company and of the permanent staff were calculated at 14.6%
and 2% of the basic salary of the permanent staff, respectively. The pension
costs expensed by the Group during the years ended December 31, 1992 and 1993
and the ten months ended October 31, 1994 amounted to RMB158,930, RMB194,435 and
RMB178,232, respectively.
NOTE 18 - FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for current assets
and current liabilities, except for borrowings, qualifying as financial
instruments approximate their fair values because of the short maturity of such
instruments. Cash denominated in foreign currency has been translated at the
applicable swap center rate.
The fair values of borrowings are based on the borrowing rates
currently available at December 31, 1993 for borrowings with similar terms and
average maturities are:
<TABLE>
<CAPTION>
Carrying value Estimated fair value
RMB RMB
<S> <C> <C>
Bank loans 43,595,000 35,371,456
Other loans 20,655,000 18,777,273
========== ==========
</TABLE>
NOTE 19 - PLEDGE OF ASSETS
Certain property, plant and equipment were collateralized to banks and
finance lessors for borrowing facilities granted to the Group and related
companies, the net book value of which amounted to RMB13,889,658 as at December
31, 1993.
Z-29
<PAGE>
ZHAOQING BREWERY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - SUBSEQUENT EVENTS
On February 19, 1995, a marketing company is formed and owned as to
30% by Blue Ribbon Group and 70% by the Company. The marketing company will
market Pabst Blue Ribbon beer and beverages in the PRC.
An agreement was made among CBR Brewing Company, Inc. and its
subsidiaries, the group companies of Noble China Inc. and Blue Ribbon Group on
May 10, 1995 to the effect that:
(a) The Company was granted from Blue Ribbon Group the right to brew and
sell beer under the Pabst Blue Ribbon label produced in its brewing
facilities up to a maximum production capacity of 100,000 tons per
annum.
(b) Zhao Qing Blue Ribbon High Worth Brewery Ltd., the Company's immediate
holding company, granted Goldjinsheng Holding Limited ("Goldjinsheng")
an option to purchase up to a 40% interest in the brewery factory
operated by the Company, excluding the Company's 40% interest in Blue
Ribbon Noble. This option may be exercised between August 31, 1996 and
September 30, 1996. The purchase consideration for the first 30% and
the remaining 10% interest is to be determined based on earning
multiples of 8.5 times and 15 times, respectively, of the brewery
factory's audited net income for the year ending June 30, 1997.
However, the consideration shall not be less than 1.2 times of 30% of
the net book value of the brewery operation for the first 30% interest
and 2 times of 10% of the net book value for the remaining 10%
interest.
(c) Distribution companies owned by the Company and Blue Ribbon Noble and
another marketing company owned by Blue Ribbon Group, High Worth
Brewery and Goldjinsheng, will be formed, subject to the governmental
approval, to handle and organize the sales of Pabst Blue Ribbon beer
produced by the Company and Blue Ribbon Noble.
Z-30
<PAGE>
EXHIBIT 10.11
LONG TERM PURCHASE AGREEMENT
----------------------------
Purchaser: Zhaoqing Blue Ribbon Beer Marketing Co., Ltd.
Supplier: Zhaoqing Blue Ribbon High Worth Brewery, Ltd.
1. Products
--------
The Purchaser will purchase on a long term basis all the Pabst Blue
Ribbon beer products produced by the Supplier (including 640 ml
bottled, 355 ml canned and 355 ml bottled beer).
All the products must meet the hygienic standards and the corresponding
packaging requirements. The Supplier hereby agreed to sell the Pabst
Blue Ribbon beer product exclusively to the Purchaser only, and the
Supplier agreed not to sell these beer products to any other customers
except for the Purchaser.
2. Prices & Quantities
-------------------
The Purchaser will negotiate the purchase prices and the order
quantities with the Supplier on a monthly basis. The Supplier must
produce and deliver timely the products to the Purchaser in accordance
with the Purchaser's ordering instructions. The Supplier has no rights
to enquire about the customers information from the Purchaser. The
Purchaser will guarantee the purchase prices and the order quantities
for each month.
3. Payment Terms
-------------
The sale and purchase transactions are held on an open account basis.
The Supplier will issue the good delivery notes and sales invoices to
the Purchaser on a monthly basis. The Purchaser must pay to the
Supplier within one month after receiving the products.
4. Others
------
All the products sold to the Purchaser are not returnable to the
Supplier except for those products appear to have quality defects.
After the Purchaser receiving the products, all the risks are then
borne by the Purchaser, and the Purchaser must pay to the Supplier
promptly in accordance with the payment terms specified in this
agreement.
The Purchaser and the Supplier each holds one executed copy of this agreement.
/s/ Zhaoqing Blue Ribbon Beer Marketing Co., Ltd.
- -------------------------------------------------
/s/ Zhaoqing Blue Ribbon High Worth Brewery, Ltd.
- -------------------------------------------------
Date: April 1, 1995
<PAGE>
EXHIBIT 10.12
LONG TERM PURCHASE AGREEMENT
----------------------------
Purchaser: Zhaoqing Blue Ribbon Beer Marketing Co., Ltd.
Supplier: Zhaoqing Blue Ribbon Brewery Noble, Ltd.
1. Products
--------
The Purchaser will purchase on a long term basis all the Pabst Blue
Ribbon beer products produced by the Supplier (including 640 ml
bottled, 355 ml canned and 355 ml bottled beer).
All the products must meet the hygienic standards and the corresponding
packaging requirements. The Supplier hereby agreed to sell the Pabst
Blue Ribbon beer product exclusively to the Purchaser only, and the
Supplier agreed not to sell these beer products to any other customers
except for the Purchaser.
2. Prices & Quantities
-------------------
The Purchaser will negotiate the purchase prices and the order
quantities with the Supplier on a monthly basis. The Supplier must
produce and deliver timely the products to the Purchaser in accordance
with the Purchaser's ordering instructions. The Supplier has no rights
to enquire about the customers information from the Purchaser. The
Purchaser will guarantee the purchase prices and the order quantities
for each month.
3. Payment Terms
-------------
The sale and purchase transactions are held on an open account basis.
The Supplier will issue the good delivery notes and sales invoices to
the Purchaser on a monthly basis. The Purchaser must pay to the
Supplier within one month after receiving the products.
4. Others
------
All the products sold to the Purchaser are not returnable to the
Supplier except for those products appear to have quality defects.
After the Purchaser receiving the products, all the risks are then
borne by the Purchaser, and the Purchaser must pay to the Supplier
promptly in accordance with the payment terms specified in this
agreement.
The Purchaser and the Supplier each holds one executed copy of this agreement.
/s/ Zhaoqing Blue Ribbon Beer Marketing Co., Ltd.
- -------------------------------------------------
/s/ Zhaoqing Blue Ribbon Brewery Noble, Ltd.
- --------------------------------------------
Date: July 11, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S ANNUAL REPORT ON
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,772,788
<SECURITIES> 0
<RECEIVABLES> 22,087,384
<ALLOWANCES> 1,793,454
<INVENTORY> 10,522,817
<CURRENT-ASSETS> 46,349,498
<PP&E> 30,084,208
<DEPRECIATION> 3,174,339
<TOTAL-ASSETS> 99,339,201
<CURRENT-LIABILITIES> 56,392,097
<BONDS> 1,906,556
0
0
<COMMON> 820
<OTHER-SE> 17,738,179
<TOTAL-LIABILITY-AND-EQUITY> 99,339,201
<SALES> 148,230,483
<TOTAL-REVENUES> 148,230,483
<CGS> 124,896,538
<TOTAL-COSTS> 124,896,538
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,191,600
<INTEREST-EXPENSE> 2,496,064
<INCOME-PRETAX> 1,381,351
<INCOME-TAX> 567,481
<INCOME-CONTINUING> 2,429,303
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,429,303
<EPS-PRIMARY> .30
<EPS-DILUTED> 0
</TABLE>
