<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended SEPTEMBER 30, 1998
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to ____________
Commission File Number: 33-26617A
CBR BREWING COMPANY, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 65-0145422
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
433 North Camden Drive, Suite 600
Beverly Hills, California 90210
------------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (310) 274-5172
Not applicable
--------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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 [ ]
As of October 31, 1998, the Company had 5,010,013 shares of Class A
Common Stock and 3,000,000 shares of Class B Common Stock issued and
outstanding.
1
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) -
September 30, 1998 and December 31, 1997
Condensed Consolidated Statements of Income (Unaudited) -
Three Months and Nine Months Ended September 30, 1998 and
1997
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Nine Months Ended September 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements
(Unaudited) - Nine Months Ended September 30, 1998 and 1997
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
-------------------------- ----------------------------
RMB USD RMB USD
------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash 111,612,486 13,447,287 76,092,954 9,167,826
Accounts and bills receivable, net 185,821,943 22,388,186 156,022,333 18,797,871
Inventories (Note 4) 92,364,870 11,128,298 89,583,442 10,793,186
Amounts due from related companies 22,476,892 2,708,059 29,667,015 3,574,339
Prepayments, deposits and other
receivables 86,054,771 10,368,045 24,017,911 2,893,724
------------- ----------- ----------- ----------
Total current assets 498,330,962 60,039,875 375,383,655 45,226,946
Interest in an associated company
(Note 6) 234,927,599 28,304,530 234,997,255 28,312,922
Property, plant and equipment, net
(Note 7) 266,710,183 32,133,757 210,015,830 25,303,112
Non-current assets 16,397,500 1,975,602 14,697,800 1,770,819
------------- ----------- ----------- ----------
Total assets 1,016,366,244 122,453,764 835,094,540 100,613,799
------------- ----------- ----------- ----------
------------- ----------- ----------- ----------
</TABLE>
(continued)
3
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
--------------------------- -------------------------
RMB USD RMB USD
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings 102,672,800 12,370,217 35,500,000 4,277,108
Capital lease obligations 7,349,698 885,506 7,349,698 885,506
Accounts payable
and accrued liabilities 199,143,796 23,993,228 97,815,003 11,784,940
Customer deposits - - 6,680,000 804,819
Amounts due to related companies 13,916,367 1,676,671 77,166,596 9,297,181
Amount due to an associated company 269,431,590 32,461,637 209,083,335 25,190,763
Income taxes payable 4,656,782 561,058 260,000 31,325
Sales taxes payable 18,953,140 2,283,511 39,841,282 4,800,154
Deferred tax liabilities 4,413,000 531,687 4,413,000 531,687
------------- ----------- ----------- -----------
Total current liabilities 620,537,173 74,763,515 478,108,914 57,603,483
------------- ----------- ----------- -----------
Long-term liabilities:
Bank borrowings 8,000,000 963,855 8,000,000 963,855
Capital lease obligations 1,599,929 192,763 8,512,851 1,025,645
------------- ----------- ----------- -----------
Total long-term liabilities 9,599,929 1,156,618 16,512,851 1,989,500
------------- ----------- ----------- -----------
Minority interests (Note 9) 112,988,160 13,613,031 88,503,839 10,663,113
------------- ----------- ----------- -----------
Shareholders' advances and
shareholders' equity:
Advances from shareholders (Note 5) 73,617,552 8,869,585 73,617,552 8,869,585
------------- ----------- ----------- -----------
Shareholders' equity (Note 8):
Common stock
-Class A, US$0.0001 par value,
90,000,000 shares authorized,
5,010,013 shares and 5,000,013
shares outstanding at
September 30, 1998 and
December 31, 1997, respectively 4,273 515 4,265 514
-Class B, US$0.0001 par value,
10,000,000 shares authorized,
3,000,000 shares outstanding 2,559 308 2,559 308
Additional paid-in capital 106,315,134 12,809,052 104,030,194 12,533,758
General reserve and enterprise
development funds 8,341,785 1,005,034 8,341,785 1,005,034
Retained earnings 84,959,679 10,236,106 65,972,581 7,948,504
------------- ----------- ----------- -----------
Total shareholders' equity 199,623,430 24,051,016 178,351,384 21,488,118
------------- ----------- ----------- -----------
Total shareholders' advances and
shareholders' equity 273,240,982 32,920,600 251,968,936 30,357,703
------------- ----------- ----------- -----------
Total liabilities, shareholders'
advances and shareholders'
equity 1,016,366,244 122,453,764 835,094,540 100,613,799
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
4
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998 September 30, 1997 September 30, 1997
-------------------------- -------------------------- ------------------ ------------------
RMB USD RMB USD RMB RMB
------------- ----------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sales, including sales
to related companies
of nil and RMB 573,401
for the three months
and nine months ended
September 30, 1998,
respectively, and RMB
2,174,552, and RMB
8,705,009 for the three
months and nine months
ended September 30, 1997,
respectively 266,425,164 32,099,417 903,090,208 108,806,049 290,194,242 944,798,713
Sales taxes (5,880,100) (708,446) (18,484,919) (2,227,099) (5,206,871) (17,770,567)
------------- ----------- ------------- ------------ ------------- -------------
Net sales 260,545,064 31,390,971 884,605,289 106,578,950 284,987,371 927,028,146
Cost of sales, including
inventory purchased from
related companies of RMB
160,725,559 and RMB
549,097,276 for the three
months and nine months
ended September 30, 1998,
respectively, and RMB
147,129,339 and RMB
557,134,320 for the three
months and nine months
ended September 30, 1997,
respectively; and royalty
fee paid to a related
company of RMB 1,770,900
and RMB 5,829,858 for the
three months and nine months
ended September 30, 1998,
respectively, and RMB
1,469,494 and RMB 5,653,213
for the three months and
nine months ended September
30, 1997, respectively (218,951,393) (26,379,685) (731,531,779) (88,136,358) (242,867,703) (766,623,846)
------------- ----------- ------------- ------------ ------------- -------------
Gross profit 41,593,671 5,011,286 153,073,510 18,442,592 42,119,668 160,404,300
Selling, general and
administrative expenses,
including management fee
paid to a related company
of RMB 945,000 for the
three months ended
September 30, 1998 and
1997, and RMB 2,835,000
for the nine months ended
September 30, 1998 and 1997 (45,789,244) (5,516,777) (150,692,889) (18,155,770) (41,445,191) (139,281,844)
Fair value of warrants,
stock options and common
stock issued for services
rendered (Note 8) (174,445) (21,017) (2,284,948) (275,295) - -
------------- ----------- ------------- ------------ ------------- -------------
Operating income (loss) (4,370,018) (526,508) 95,673 11,527 674,477 21,122,456
Foreign exchange losses - - (329,565) (39,707) (41,061) (52,917)
Other expense:
Interest expense, including
interest paid to related
companies of RMB nil and
RMB 106,674 for the three
months and nine months
ended September 30, 1998,
respectively, and RMB
1,873,841 and RMB 4,994,022
for the three months and
nine months ended September
30, 1997, respectively (1,236,672) (148,997) (4,143,690) (499,240) (3,789,671) (13,520,093)
------------- ----------- ------------- ------------ ------------- -------------
Income (loss) before income
taxes (5,606,690) (675,505) (4,377,582) (527,420) (3,156,255) 7,549,446
Income taxes (1,064,933) (128,305) (4,479,069) (539,647) - (1,760,000)
------------- ----------- ------------- ------------ ------------- -------------
</TABLE>
(continued)
5
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)(CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998 September 30, 1997 September 30, 1997
------------------------ ------------------------ --------------- ------------------
RMB USD RMB USD RMB RMB
----------- ---------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before equity
in earnings of an associated
company (6,671,623) (803,810) (8,856,651) (1,067,067) (3,156,255) 5,789,446
Equity in earnings of an
associated company 10,582,697 1,275,024 39,152,070 4,717,117 13,542,701 36,194,021
----------- ---------- ----------- ---------- ------------ ------------
Income before minority
interests 3,911,074 471,214 30,295,419 3,650,050 10,386,446 41,983,467
Minority interests (609,301) (73,410) (11,308,321) (1,362,448) (4,433,459) (17,126,078)
----------- ---------- ----------- ---------- ------------ ------------
Net income 3,301,773 397,804 18,987,098 2,287,602 5,952,987 24,857,389
----------- ---------- ----------- ---------- ------------ ------------
----------- ---------- ----------- ---------- ------------ ------------
Net income per common share
(Note 3) - Basic 0.41 0.05 2.37 0.29 0.74 3.11
----------- ---------- ----------- ---------- ------------ ------------
----------- ---------- ----------- ---------- ------------ ------------
- Diluted 0.41 0.05 2.37 0.29 0.74 3.11
----------- ---------- ----------- ---------- ------------ ------------
----------- ---------- ----------- ---------- ------------ ------------
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
6
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
-------------------------- ------------------
RMB USD RMB
------------ ------------ ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 18,987,098 2,287,602 24,857,389
Adjustments to reconcile net income
to net cash provided by
operating activities:
Fair value of warrants, stock options
and common stock issued for services
rendered 2,284,948 275,295 -
Allowance for doubtful accounts 5,554,517 669,219 11,958,000
Depreciation and amortization 18,522,060 2,231,573 24,551,961
Foreign exchange losses 329,565 39,707 52,917
Minority interests 11,308,321 1,362,448 17,126,078
Equity in earnings of an associated company (39,152,070) (4,717,117) (36,194,021)
Income taxes payable 4,396,782 529,733 1,760,000
Dividend received from an associated company 39,221,726 4,725,509 34,413,512
Changes in operating assets and liabilities:
(Increase) decrease in -
Accounts and bills receivable (35,354,127) (4,259,533) (14,820,176)
Inventories (2,781,428) (335,112) (10,968,530)
Amounts due from related companies 7,190,123 866,280 5,241,839
Prepayments, deposits and other receivables (62,036,860) (7,474,320) (9,624,136)
Increase (decrease) in -
Accounts payable and accrued liabilities 101,328,793 12,208,288 5,472,808
Customer deposits (6,680,000) (804,819) (53,603,600)
Amount due to an associated company 60,348,255 7,270,874 44,954,621
Sales taxes payable (20,888,142) (2,516,644) (6,345,237)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 102,579,561 12,358,983 37,833,425
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures on non-current assets (1,699,700) (204,783) -
Purchases of property, plant and equipment (46,265,978) (5,574,214) (9,351,059)
Purchase of interest in brewery (16,104,000) (1,940,241) -
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (64,069,678) (7,719,238) (9,351,059)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
New bank borrowings 67,172,800 8,093,108 -
Increase (decrease) in amounts due to related
companies (22,874,634) (2,755,980) 12,348,169
Repayment of capital lease obligations (6,912,922) (832,882) (7,327,154)
Payment of cash dividend to minority interests (40,375,595) (4,864,530) -
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (2,990,351) (360,283) 5,021,015
----------- ----------- -----------
Net increase in cash 35,519,532 4,279,462 33,503,381
Cash at beginning of period 76,092,954 9,167,826 39,709,594
----------- ----------- -----------
Cash at end of period 111,612,486 13,447,287 73,212,975
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
7
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION - CBR Brewing Company, Inc. (the "Company," which term shall
include, when the context so requires, its subsidiaries and affiliates),
formerly known as Natural Fuels, Inc. and National Sweepstakes, Inc., was
originally incorporated as Video Promotions, Inc. on April 20, 1988 under the
laws of the State of Florida. The Company adopted its current name on March
15, 1995.
For a period of time prior to December 16, 1994, the business of the Company
was devoted to seeking potential acquisition or merger opportunities. On
December 16, 1994, the Company acquired all of the outstanding shares of
capital stock of High Worth Holdings, Ltd., a British Virgin Islands
corporation ("Holdings"), from Oriental Win Holdings Ltd. ("Oriental Win")
and Goldchamp Ltd. ("Goldchamp") in exchange for 3,960,000 shares and 240,000
shares of the Company's Class A Common Stock issued to Oriental Win and
Goldchamp, respectively, and 3,000,000 shares of the Company's Class B Common
Stock issued to Oriental Win. Subsequently, on October 14, 1996, Oriental Win
transferred the 3,960,000 shares of Class A Common Stock and the 3,000,000
shares of Class B Common Stock to its shareholders. As a result, West Coast
Star Enterprises Ltd., as the 60% shareholder of Oriental Win, became the
Company's controlling shareholder. The shares of Class B Common Stock carry
two votes per share but are otherwise equivalent to the shares of Class A
Common Stock. In addition, the Company issued an aggregate of 600,000 shares
of Class A Common Stock to various parties for consulting services in
connection with the acquisition. The shares of Class A and Class B Common
Stock issued in conjunction with the acquisition represented approximately
98.1% of the issued and outstanding shares of the Company, after all shares
were issued and a 1-for-22 reverse stock split which was effected on November
22, 1994.
BUSINESS - The Company, through its subsidiaries and affiliates, is engaged
in the production and sale of Pabst Blue Ribbon beer in the People's Republic
of China ("China" or the "PRC"). Holdings is a holding company that was
formed solely to effect the acquisition of Zhaoqing Blue Ribbon High Worth
Brewery, Ltd., a Sino-foreign joint venture ("High Worth JV"), which was
registered in the PRC on July 2, 1994, in which Guangdong Blue Ribbon Group
Co. Ltd. ("Guangdong Blue Ribbon") owns a 40% interest and Holdings owns a
60% interest.
High Worth JV holds certain sublicensing rights for Pabst Blue Ribbon beer
and also directly owns 100% of a Pabst Blue Ribbon brewing complex ("Zhaoqing
Brewery"). High Worth JV also owns 100% of a PRC holding company ("Zhaoqing
Brewery HC"). Zhaoqing Brewery HC owns a 40% interest in Zhaoqing Blue Ribbon
Brewery Noble Ltd., a Sino-foreign joint venture ("Noble Brewery"), which
owns a second Pabst Blue Ribbon brewing complex that is also managed by
Zhaoqing Brewery.
8
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
Goldjinsheng Holdings Ltd., a wholly-owned subsidiary of Noble China Inc., an
unaffiliated company, owns the other 60% interest in Noble Brewery. In
addition, Zhaoqing Brewery HC owns a 70% interest in Zhaoqing Blue Ribbon
Beer Marketing Company Limited, a PRC company (the "Marketing Company"),
which was formed in February 1995 to conduct the distribution, marketing and
promotion throughout China of the Pabst Blue Ribbon beer produced by Zhaoqing
Brewery and Noble Brewery. Zhaoqing Brewery and Noble Brewery commenced the
distribution of their production of Pabst Blue Ribbon beer through the
Marketing Company during April 1995 and July 1995, respectively. The
remaining 30% interest in the Marketing Company is directly owned by
Guangdong Blue Ribbon. Through its ownership in High Worth JV, Guangdong Blue
Ribbon also has a 28% indirect interest in the Marketing Company, resulting
in the Company owning a 42% net interest in the Marketing Company. The
Company owns effective interests of 60% in Zhaoqing Brewery and 24% in Noble
Brewery. The brewery operations of Zhaoqing Brewery and Noble Brewery are
located in Zhaoqing City, which is situated approximately 100 miles from Hong
Kong in the Guangdong Province of China.
In January 1996, Zhaoqing Brewery HC transferred all of its operating assets
and liabilities to High Worth JV pursuant to the original Joint Venture
Agreement, the Asset Transfer Agreement signed in May 1994, and the relevant
government regulations. Subject to the completion of certain legal procedures
and documentation, the investments in Noble Brewery and the Marketing Company
currently held by Zhaoqing Brewery HC will be transferred to High Worth JV.
Zhaoqing Brewery HC is currently acting as the nominee for High Worth JV with
respect to the investments in Noble Brewery and the Marketing Company. In the
following text, "Zhaoqing Brewery" refers to the brewing complex, which was
transferred to High Worth JV in January 1996, and "Zhaoqing Brewery HC"
refers to the PRC entity that previously owned the brewing complex from
November 1994 through December 1995.
In January 1998, the Company, through High Worth JV, established a brewery in
Hubei Province pursuant to a joint venture agreement in which High Worth JV
acquired a 55% interest in Zao Yang Blue Ribbon High Worth Brewery Ltd. ("Zao
Yang High Worth Brewery"), equivalent to an effective interest of 33%. Zao
Yang High Worth Brewery commenced the production of Pabst Blue Ribbon beer in
June 1998. Commencing June 1998, the Marketing Company also began purchasing
Zao Yang High Worth Brewery's production of Pabst Blue Ribbon beer for
distribution.
Effective December 31, 1997, the Company, through High Worth JV, entered into
a Settlement Agreement which will allowed it to acquire a 51% interest in
Sichuan Brewery. On February 12, 1998, the Board of Directors of High Worth
JV resolved that the new shareholding structure for Sichuan Brewery should be
revised to reflect 60% owned by High Worth JV (equivalent to an effective
interest of 36%) and 40% owned by E Mei Brewery upon completion of the
acquisition. Sichuan Brewery commenced the production of Pabst Blue Ribbon
beer in April 1997.
9
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
On January 20, 1998, Zhaoqing Brewery and Goldjinsheng entered into an
agreement which calls for the interest of Goldjinsheng in Noble Brewery to be
transferred to Linchpin Holdings Limited, a subsidiary of Noble China Inc.
Upon receipt of approval from and registration by the relevant PRC
authorities, Linchpin Holdings Limited and High Worth JV will own 60% and 40%
equity interests in Noble Brewery, respectively.
The Company conducts a substantial portion of its purchases through related
parties, and has additional significant continuing transactions with such
parties.
Apart from the investment in High Worth JV which was partly financed by a
loan from Oriental Win, Holdings has no other significant assets or
liabilities. On October 31, 1994, prior to the reverse acquisition effective
December 16, 1994, High Worth JV acquired a 100% interest in Zhaoqing Brewery
HC, including Zhaoqing Brewery HC's 40% interest in Noble Brewery, for
approximately USD20,000,000. Prior to the acquisition of Zhaoqing Brewery HC
by High Worth JV, Zhaoqing Brewery HC was a wholly-owned subsidiary of
Guangdong Blue Ribbon.
BASIS OF PRESENTATION - For accounting purposes, the acquisition of Holdings
by the Company has been treated as a recapitalization of Holdings with
Holdings as the acquiror (reverse acquisition). Accordingly, the historical
financial statements prior to December 16, 1994 are those of Holdings.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America ("US
GAAP"). The acquisition on October 31, 1994 of Zhaoqing Brewery HC, including
Zhaoqing Brewery HC's 40% interest in Noble Brewery, has been accounted for
under the purchase method of accounting. Since High Worth JV had no
operations prior to this acquisition, consolidated financial statements have
been prepared commencing October 31, 1994, to reflect the post-acquisition
consolidated results of the operations of Zhaoqing Brewery and Noble Brewery
attributable to the Company. The consolidated financial statements include
the results of operations of Zhaoqing Brewery, the Marketing Company and Zao
Yang High Worth Brewery on a consolidated basis and Noble Brewery under the
equity method of accounting for investments. All material intercompany
accounts and transactions are eliminated on consolidation. The consolidated
financial statements have been prepared on a going concern basis
notwithstanding that the Company has a net current liability position at
December 31, 1997 and September 30, 1998. The Company believes that its
operating cash flow, combined with cash on hand, bank line of credit and
other external credit resources, and the credit facilities provided by
affiliates or related parties, are adequate to satisfy the Company's working
capital requirements for the foreseeable future.
Certain prior period amounts have been reclassified to conform with the
current year's presentation.
10
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
FOREIGN CURRENCY TRANSLATION - In preparing the consolidated financial
statements, the financial statements of the Company are measured using
Renminbi ("RMB") as the functional currency. All foreign currency
transactions are translated into RMB using the applicable rates of exchange,
quoted by the People's Bank of China (the "unified exchange rate"). Monetary
assets and liabilities denominated in foreign currencies have been translated
into RMB using the unified exchange rate prevailing at the balance sheet
dates. The resulting exchange gains or losses have been credited or charged
to the statements of income for the periods in which they occur.
The Company's share capital is denominated in United States dollars ("USD")
and the reporting currency is the RMB. For financial reporting purposes, the
USD share capital amounts have been translated into RMB at the applicable
rates prevailing on the transaction dates.
Translation of amounts from RMB into USD for the convenience of the reader
has been made at the rate of exchange as quoted by the People's Bank of China
on September 30, 1998 of USD1.00 = RMB8.3. No representation is made that the
RMB amounts could have been, or could be, converted into USD at that rate or
at any other certain rate.
NOTE 2. COMMENTS
The accompanying condensed consolidated financial statements are unaudited,
but in the opinion of the management of the Company, contain all adjustments
necessary to present fairly the financial position at September 30, 1998, the
results of operations for the three months and nine months ended September
30, 1998 and 1997, and the cash flows for the nine months ended September 30,
1998 and 1997. These adjustments are of a normal recurring nature. The
consolidated balance sheet as of December 31, 1997 is derived from the
Company's audited financial statements. Certain information and footnote
disclosures normally included in financial statements that have been prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities
and Exchange Commission, although management of the Company believes that the
disclosures contained in these financial statements are adequate to make the
information presented therein not misleading. For further information, refer
to the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997, as filed with the Securities and Exchange Commission.
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 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.
The results of operations for the three months and nine months ended
September 30, 1998 are not necessary indicative of the results of operations
to be expected for the full fiscal year ending December 31, 1998.
11
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 3. EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which
establishes standards for computing and presenting earnings per share. SFAS
No. 128 replaces the presentation of primary earnings per share and fully
diluted earnings per share with basic earnings per share and diluted earnings
per share, respectively. Basic earnings per share excludes the dilutive
effects of options and convertible securities, if any, and is computed by
dividing net income (loss) available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted
earnings per share is computed assuming the exercise or conversion of common
equivalent shares, if dilutive, consisting of unissued shares under stock
options, warrants and debt instruments. In accordance with SFAS No. 128, all
prior periods presented have been restated to conform to the new presentation.
At September 30, 1998, potentially dilutive securities representing 280,000
shares of common stock were outstanding, consisting of stock options
exercisable at price ranging from $3.87 to $4.26 per share (which was in
excess of average fair market value during 1998) to purchase 280,000 shares
of common stock (Note 8). The common shares issuable upon exercise of the
stock options were excluded from the calculation of diluted net income per
share for 1998 since the exercise price exceeded the average fair market
value of the common stock during the respective periods. These dilutive
securities were not outstanding during 1997.
The following tables present the components of basic and diluted earnings per
share for the three months and nine months ended September 30, 1997 and 1998:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- --------------------------------------
1998 1997 1998 1997
----------------------- --------- ------------------------ ----------
RMB USD RMB RMB USD RMB
---------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings Per
Share Computation
- ------------------------
Net income - as reported 3,301,773 397,804 5,952,987 18,987,098 2,287,602 24,857,389
--------- ------- --------- ---------- --------- ----------
--------- ------- --------- ---------- --------- ----------
Weighted average number
of shares of common
stock outstanding 8,010,013 8,010,013 8,000,013 8,007,791 8,007,791 8,000,013
--------- ------- --------- ---------- --------- ----------
--------- ------- --------- ---------- --------- ----------
Net income per common
share - Basic 0.41 0.05 0.74 2.37 0.29 3.11
--------- ------- --------- ---------- --------- ----------
--------- ------- --------- ---------- --------- ----------
</TABLE>
12
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 3. EARNINGS PER SHARE (continued)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------ ----------------------------------------
1998 1997 1998 1997
----------------------- --------- ------------------------- ----------
RMB USD RMB RMB USD RMB
---------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Diluted Earnings Per
Share Computation
- ------------------------
Net income - as reported 3,301,773 397,804 5,952,987 18,987,098 2,287,602 24,857,389
--------- --------- --------- ---------- --------- ---------
--------- --------- --------- ---------- --------- ---------
Weighted average number
of shares of common
stock outstanding 8,010,013 8,010,013 8,000,013 8,007,791 8,007,791 8,000,013
Net shares of common
stock issuable upon
exercise of stock
options - - - - - -
--------- --------- --------- ---------- --------- ---------
Weighted average number
of shares of common
stock and common stock
equivalents outstanding 8,010,013 8,010,013 8,000,013 8,007,791 8,007,791 8,000,013
--------- --------- --------- ---------- --------- ---------
--------- --------- --------- ---------- --------- ---------
Net income per
share - Diluted 0.41 0.05 0.74 2.37 0.29 3.11
--------- --------- --------- ---------- --------- ---------
--------- --------- --------- ---------- --------- ---------
</TABLE>
NOTE 4. INVENTORIES
Inventories consisted of the following at September 30, 1998 and December 31,
1997:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------------- -----------------------
RMB USD RMB USD
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Raw materials 27,207,369 3,277,996 26,189,345 3,155,343
Work in progress 6,616,454 797,163 7,164,153 863,151
Finished goods 58,541,047 7,053,139 6,229,944 6,774,692
----------- ---------- ---------- ----------
92,364,870 11,128,298 89,583,442 10,793,186
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
</TABLE>
13
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 5. ADVANCES FROM SHAREHOLDERS
In connection with the acquisition of High Worth JV, Oriental Win advanced
US$8,869,585 to Holdings during 1994. The rights to collect US$8,000,000 of
the advance were transferred from Oriental Win to its shareholders in
proportion to their respective shareholder interests in August 1996 (West
Coast Star Enterprises Ltd. - 60%; Mapesbury Limited - 20%; Redcliffe
Holdings Ltd. - 20%). 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 any part thereof by allotment of shares
at par value in Holdings. On September 8, 1998, the remaining rights to
collect US$848,000 of the advance were also transferred from Oriental Win to
its shareholders in proportion to their respective shareholder interests. As
of September 30, 1998 and December 31, 1997, advances from such shareholders,
West Coast Star Enterprises Ltd., Top Link Development Limited (assigned by
Mapesbury Limited in February 1998), Redcliffe Holdings Ltd. and Oriental Win
were approximately RMB 44,063,000 and RMB 39,800,000, RMB 14,688,000 and RMB
13,300,000, RMB 14,688,000 and RMB 13,300,000, and RMB 179,000 and RMB
7,200,000, respectively. Mapesbury Limited also transferred its shares in the
Company to Top Link Development Limited.
NOTE 6. INTEREST IN AN ASSOCIATED COMPANY
The unlisted investment consists of the Company's 40% equity interest in Noble
Brewery held by a 60% owned subsidiary as follows:
<TABLE>
<CAPTION>
RMB
------------
<S> <C>
Unlisted investment, at cost,
October 31, 1994 209,361,595
The Company's share of earnings and
dividends of an associated company:
Earnings -
Two months ended December 31, 1994 7,812,392
For the year ended December 31, 1995 34,213,058
For the year ended December 31, 1996 34,039,622
For the year ended December 31, 1997 52,426,546
Three months ended March 31, 1998 12,918,084
Three months ended June 30, 1998 15,651,289
Three months ended September 30, 1998 10,582,697
Dividends -
Declared and paid during 1995 (28,644,569)
Declared and paid during 1996 (39,797,878)
Declared and paid during 1997 (34,413,511)
Declared and paid during the nine
months ended September 30, 1998 (39,221,726)
-----------
Unlisted investment, September 30, 1998 234,927,599
-----------
-----------
</TABLE>
14
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 6. INTEREST IN AN ASSOCIATED COMPANY (continued)
The condensed statements of operations of Noble Brewery for the three months
and nine months ended September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
September 30, 1998 September 30,1998 September 30, 1997 September 30, 1997
---------------------------- --------------------------- ------------------ ------------------
RMB USD RMB USD RMB RMB
----------- ---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales 137,942,379 16,619,564 476,053,877 57,355,889 131,444,252 498,849,616
----------- ---------- ----------- ---------- ----------- -----------
----------- ---------- ----------- ---------- ----------- -----------
Net income 24,680,600 2,973,566 97,079,501 11,696,325 21,263,958 83,875,570
----------- ---------- ----------- ---------- ----------- -----------
----------- ---------- ----------- ---------- ----------- -----------
The Company's share
of net income after
intercompany profit 10,582,697 1,275,024 39,152,070 4,717,117 13,542,701 36,194,021
----------- ---------- ----------- ---------- ----------- -----------
----------- ---------- ----------- ---------- ----------- -----------
</TABLE>
NOTE 7. ACQUISITION OF INTEREST IN BREWERY
On January 13, 1998, High Worth JV entered into a joint venture contract with
Zao Yang Brewery in Hubei Province to establish a new brewery with an initial
annual production capacity of 40,000 metric tons or 340,000 barrels of beer.
The new brewery is designated Zao Yang Blue Ribbon High Worth Brewery Ltd.
("Zao Yang High Worth Brewery"), with a total capital investment of RMB
29,280,000, allocated 55% to High Worth JV and 45% to Zao Yang Brewery. High
Worth JV is responsible for transferring the technical know-how and
production techniques to brew Pabst Blue Ribbon beer to Zao Yang High Worth
Brewery, as well as assisting in the renovation of existing equipment, in
order to convert the brewery into another Pabst Blue Ribbon brewing complex.
Zao Yang High Worth Brewery commenced the production of Pabst Blue Ribbon
beer in June 1998.
During the nine months ended September 30, 1998, High Worth JV paid RMB
16,104,000, representing its 55% capital investment in the joint venture, and
recorded such transaction under the purchase method of accounting as follows:
<TABLE>
<CAPTION>
RMB
-----------
<S> <C>
Property, plant and equipment 29,280,000
Minority interests (13,176,000)
-----------
16,104,000
-----------
-----------
</TABLE>
No proforma results of operations have been presented for the three months and
nine months ended September 30, 1997, as Zao Yang High Worth Brewery did not
commence operations until June 1998, and the results of operations of Zao Yang
High Worth Brewery for such periods would not have had a material effect on the
Company's consolidated results of operations.
15
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 8. SHAREHOLDERS' EQUITY
Stock Option Plan -
On January 2, 1998, the 1998 Stock Option Plan (the "Plan") was adopted by
the majority of the shareholders of the Company and approved by the Board of
Directors. The Plan provides for the granting of stock options from time to
time to eligible persons to purchase an aggregate of up to 800,000 shares of
Class A Common Stock, as either incentive stock options ("ISOs") or
nonqualified stock options ("NSOs"). The exercise price of all ISOs will be
equal to the fair market value of a share of common stock on the date the
option is granted, except that in the case of ISOs granted to any person
possessing more than 10% of the total combined voting power of all classes of
stock of the Company or any affiliate, the price will be not less than 110%
of such fair market value.
On January 2, 1998, options to purchase 210,000 shares of Class A Common
Stock at an exercise price of US$3.87 per share were granted to four
directors and five employees, and options to purchase 70,000 shares of Class
A Common Stock at an exercise price of US$4.26 were granted to two directors,
each of whom possesses indirectly more than 10% of the total combined voting
power of all classes of common stock of the Company. From 50% to 70% of such
stock options vested on April 1, 1998, and the remaining portion of the stock
options vest in varying amounts through April 1, 2000. The stock options
expire on dates ranging from December 31, 2001 through December 31, 2005.
The stock options issued to non-employee directors were accounted for
pursuant to Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"). Under SFAS 123, the fair value of
stock options is calculated according to the Black-Scholes pricing model and
amortized to expense over the vesting period. As a result, the Company
recognized RMB 174,445 and RMB 2,044,248 of compensation expense during the
three months and nine months ended September 30, 1998, respectively.
16
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 8. SHAREHOLDERS' EQUITY (continued)
Consulting Contract -
On March 2, 1998, the Company entered into a contract with Worldwide
Corporate Finance, a corporate financial consulting company, to provide
financial and business consulting services to the Company. The Company paid
an initial non-refundable retainer by issuing 10,000 shares of Class A Common
Stock, which were recorded as a charge to operations for the nine months
ended September 30, 1998 at their estimated fair market value of RMB 240,700
(US$29,000). A total of 40,000 shares of the Company's Class A Common Stock
and warrants to purchase 150,000 shares of Class A Common Stock were issuable
based on the consulting company completing certain pre-defined objectives
(the "Contingent Securities").
The initial term of the contract with Worldwide Corporate Finance was through
June 17, 1998, but it was subsequently extended to August 18, 1998. The
contract expired on August 18, 1998 with none of the objectives having been
completed that would have required the issuance of any portion of the
Contingent Securities. Accordingly, the Contingent Securities were not
included in the calculation of earnings per share for the three months and
nine months ended September 30, 1998.
The Company accounts for warrants granted to non-employees in accordance with
SFAS 123, which requires non-cash compensation expense be recognized over the
expected period of benefit. The Company recorded non-cash compensation
expense related to such warrants of RMB 333,104 during the three months ended
March 31, 1998. However, as a result of the subsequent expiration of the
contract with none of the objectives having been completed, the Company
reversed such expense during the three months ended June 30, 1998 in order to
reflect the change in estimate. The Company did not record any non-cash
compensation expense during the three months ended September 30, 1998.
NOTE 9. DIVIDEND TO MINORITY INTERESTS
On November 25, 1997, the Board of Directors of High Worth JV declared the
first dividend distribution, in which Holdings was entitled to approximately
RMB 83,000,000. The dividend is being distributed in instalments in order to
avoid any disruption to High Worth JV's normal operating cash flow position.
During the year ended December 31, 1997, partial dividends of RMB 15,000,000
and RMB 10,000,000 were distributed to Guangdong Blue Ribbon and Holdings,
respectively. During the nine months ended September 30, 1998, the balance of
the dividends of RMB 40,375,595 and RMB 73,063,392 were distributed to
Guangdong Blue Ribbon and Holdings, respectively.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This Quarterly Report on Form 10-Q for the three months ended September
30, 1998 contains "forward-looking" statements within the meaning of the
Federal securities laws. These forward-looking statements include, among
others, statements concerning the Company's expectations regarding sales
trends, gross margin trends, operating costs, the availability of funds to
finance capital expenditures and operations, facility expansion plans, and
other statements of expectations, beliefs, future plans and strategies,
anticipated events or trends, and similar expressions concerning matters that
are not historical facts. The forward-looking statements in this Quarterly
Report on Form 10-Q for the three months ended September 30, 1998 are subject
to risks and uncertainties that could cause actual results to differ
materially from those results expressed in or implied by the statements
contained herein.
Overview:
Effective December 16, 1994, the Company acquired Holdings, which,
through its subsidiaries and affiliates, is engaged in the production and
sale of Pabst Blue Ribbon beer in China. Holdings is a holding company which
was formed solely to effect the acquisition of a 60% interest in High Worth
JV. On October 31, 1994, High Worth JV acquired a 100% interest in Zhaoqing
Brewery HC, including Zhaoqing Brewery HC's 40% interest in Noble Brewery.
The acquisition of Zhaoqing Brewery HC, including Zhaoqing Brewery HC's
40% interest in Noble Brewery, has been accounted for under the purchase
method of accounting. The consolidated financial statements include the
results of operations of Zhaoqing Brewery on a consolidated basis and Noble
Brewery under the equity method of accounting for investments, commencing
October 31, 1994, to reflect the post-acquisition consolidated results of
operations of Zhaoqing Brewery and Noble Brewery attributable to the Company.
For accounting purposes, the acquisition of Holdings by the Company has
been treated as a recapitalization of Holdings with Holdings as the acquiror
(reverse acquisition). Accordingly, the historical financial statements prior
to December 16, 1994 are those of Holdings.
During February 1995, the Marketing Company was established to conduct
the distribution, marketing and promotion of Pabst Blue Ribbon beer in China.
Prior to November 1996, the Marketing Company also sold mineral water,
non-carbonated soft drinks and red wine produced by Guangdong Blue Ribbon and
bearing the Blue Ribbon label. Zhaoqing Brewery HC owns a 70% interest and
Guangdong Blue Ribbon directly owns a 30% interest in the Marketing Company.
Through its ownership in High Worth JV, Guangdong Blue Ribbon also has a 28%
indirect interest in the Marketing Company, resulting in the Company owning a
42% net interest in the Marketing Company. Zhaoqing Brewery and Noble Brewery
commenced the distribution of their production of Pabst Blue Ribbon beer
through the Marketing Company during April 1995 and July 1995, respectively.
Commencing April 1997, the Marketing Company began purchasing Sichuan
Brewery's production of Pabst Blue Ribbon beer for distribution. Commencing
June 1998, the Marketing Company began purchasing Zao Yang High Worth
Brewery's production of Pabst Blue Ribbon beer for distribution. The
consolidated financial statements include the results of operations of the
Marketing Company on a consolidated basis.
18
<PAGE>
The Marketing Company regulates the production of Pabst Blue Ribbon beer
by Zhaoqing Brewery, Noble Brewery, Sichuan Brewery and Zao Yang High Worth
Brewery in accordance with their respective production capacities in order to
balance warehouse inventory levels and accommodate projected market demand.
In January 1996, Zhaoqing Brewery HC transferred all of its operating
assets and liabilities to High Worth JV pursuant to the original Joint
Venture Agreement, the Asset Transfer Agreement signed in May 1994, and the
relevant government regulations. Subject to the completion of certain legal
procedures and documentation, the investments in Noble Brewery and the
Marketing Company currently held by Zhaoqing Brewery HC will be transferred
to High Worth JV. Zhaoqing Brewery HC is currently acting as the nominee for
High Worth JV with respect to the investments in Noble Brewery and the
Marketing Company.
Upon the completion of the required procedures and documentation, all of
the assets and liabilities formerly controlled by Zhaoqing Brewery will have
been transferred to High Worth JV. During the year ended December 31, 1997
and the nine months ended September 30, 1998, the operating activities of
Zhaoqing Brewery were part of High Worth JV. The consensus and approval from
the local tax authority were obtained in 1996. 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 January 1998, the Company, through High Worth JV, established a
brewery in Hubei Province pursuant to a joint venture agreement in which High
Worth JV acquired a 55% interest in Zao Yang Blue Ribbon High Worth Brewery
Ltd. ("Zao Yang High Worth Brewery"), equivalent to an effective interest of
33%. Zao Yang High Worth Brewery commenced the production of Pabst Blue
Ribbon beer in June 1998. The consolidated financial statements include the
accounts of Zao Yang High Worth Brewery on a consolidated basis.
Effective December 31, 1997, the Company, through High Worth JV, entered
into a Settlement Agreement which allow it to acquire a 51% interest in
Sichuan Brewery. Sichuan Brewery will be restructured and renamed Sichuan
Blue Ribbon High Worth Brewery E Mei Limited ("Sichuan High Worth Brewery").
On February 12, 1998, the Board of Directors of High Worth JV resolved that
the new shareholding structure for Sichuan High Worth Brewery should be
revised to reflect 60% owned by High Worth JV (equivalent to an effective
interest of 36%) and 40% owned by E Mei Brewery upon completion of the
acquisition. The existing assets in Sichuan Brewery will be revalued to
derive their fair market value prior to the completion of the formal
restructuring. Due to the complexity of the revaluation procedures and the
complicated verification regulations, the expected completion date of the
acquisition has been extended through the end of 1998.
On January 20, 1998, Zhaoqing Brewery and Goldjinsheng entered into an
agreement which calls for the interest of Goldjinsheng in Noble Brewery to be
transferred to Linchpin Holdings Limited, a subsidiary of Noble China Inc.
Upon receipt of approval from and registration by the relevant PRC
authorities, Linchpin Holdings Limited and High Worth JV will own 60% and 40%
equity interests in Noble Brewery, respectively.
19
<PAGE>
Business:
The Company produces Pabst Blue Ribbon beer for distribution throughout
China. In general, the beer market in China is experiencing a steady overall
growth rate, although the growth has recently shifted from premium beers to
lower priced beers. There is a substantial difference in the price at which
local or regional beer is sold in China as compared to the price of foreign
or premium brands. Generally, a 640 ml. bottle of local or regional beer
would typically sell for 1 - 2 RMB, as compared to a foreign or premium beer,
which would sell for 4 - 6 RMB.
Due in part to the recent economic turmoil in Asia, the growth in China's
economy has begun to decline. As a result, demand for goods and services by
Chinese consumers has been weakening, causing a softening of the premium beer
market in China. Management anticipates that the market demand for high
priced foreign premium labels will be stagnant as consumers shift to lower
priced beer products. The competition among major Chinese breweries to
maintain market share under the current economic conditions is also expected
to place continuing pressure on the Company's operating results during the
remainder of 1998 and during 1999. Management has responded to changing
market conditions by broadening its product line, expanding distribution and
acquiring new breweries.
The Company's brewing facilities consist of the following:
Zhaoqing Brewery: The original facilities of Zhaoqing Brewery were
constructed between 1978 and 1980 with annual production capacity based on
old brewing technology of 50,000 metric tons or 425,000 barrels of beer. With
the implementation of the new brewing technology and the purchase of
additional equipment, Zhaoqing Brewery reached an annual production capacity
of 100,000 metric tons or 850,000 barrels by the end of 1995. Prior to March
1995, Zhaoqing Brewery had produced exclusively domestic brands of beer. In
mid- 1994, with the assistance of Pabst Brewing Company, Zhaoqing Brewery
commenced the conversion and refinement of its original facilities and
adopted a new brewing technology in order to produce beer under the Pabst
Blue Ribbon label. During March 1995, Zhaoqing Brewery discontinued
production of all domestic brands and commenced exclusive production of Pabst
Blue Ribbon beer on a full- scale basis. However, beer that does not meet
Pabst Blue Ribbon quality standards is generally packaged and distributed as
local brand beer.
Noble Brewery: The original facilities of Noble Brewery were constructed
between 1988 and 1990 with annual production capacity of approximately 80,000
metric tons or 680,000 barrels of beer. During July 1994, a second brewing
facility was completed, which increased annual production capacity by an
additional 120,000 metric tons or 1,020,000 barrels of beer. The second
brewing facility commenced full-scale production during late 1994. Noble
Brewery has produced Pabst Blue beer exclusively since it commenced
operations.
Zao Yang High Worth Brewery: Zao Yang High Worth Brewery is situated on
a site containing approximately 752,688 square feet and is located within the
vicinity of Zao Yang City, Hubei Province. Zao Yang High Worth Brewery
occupies the site pursuant to a certificate of land use rights issued by the
local government. The land use right is part of the assets acquired by Zao
Yang High Worth Brewery from Zao Yang Brewery.
The original facilities of Zao Yang High Worth Brewery were constructed
between 1980 and 1985 with annual production capacity based on old brewing
technology of approximately 40,000 metric tons or 340,000 barrels of beer.
20
<PAGE>
High Worth JV, pursuant to the joint venture agreement, is assisting Zao
Yang High Worth Brewery to modernize its brewing technology and renovate its
existing equipment in order to convert the brewery into another Pabst Blue
Ribbon brewing complex. Through September 30, 1998, the Company had expended
approximately RMB 37,300,000 for the conversion and renovation of Zao Yang
High Worth Brewery.
By the end of April 1998, the technical renovation process to convert the
old brewing facilities of Zao Yang High Worth Brewery into a Pabst Blue
Ribbon brewing complex had been substantially completed. Zao Yang High Worth
Brewery commenced the production of Pabst Blue Ribbon beer in June 1998. For
the three months and nine months ended September 30, 1998, the Marketing
Company distributed 428 metric tons and 982 metric tons, respectively, of
Pabst Blue Ribbon beer produced by Zao Yang High Worth Brewery.
Sichuan Brewery: Sichuan Brewery is situated on a site containing
approximately 1,089,000 square feet and is located within the vicinity of Le
Shan City, Sichuan Province, which is approximately 160 kilometers from
Chengdu, the provincial capital of Sichuan Province. The original facilities
of Sichuan Brewery were constructed in 1988 with annual production capacity,
based on old brewing technology, of approximately 20,000 metric tons or
170,000 barrels of beer. Prior to late 1996, the facilities were used
exclusively to produce beer under domestic local brands. Guangdong Blue
Ribbon acquired the brewery as its branch and began to convert the facility
into a Pabst Blue Ribbon brewing complex in late 1996. In April 1997, Sichuan
Brewery commenced the production of beer under the Pabst Blue Ribbon label,
which was sold to the Marketing Company for resale. For the three month and
nine months ended September 30, 1998, the Marketing Company has distributed
3,737 metric tons and 10,972 tons, respectively, of Pabst Blue Ribbon beer
produced by Sichuan Brewery. As the acquisition procedures have not been
completed, the operating results of Sichuan Brewery have not been included in
the Company's consolidated results of operations for the three months and
nine months ended September 30, 1998.
Consolidated Results of Operations:
Three Months Ended September 30, 1998 and 1997 -
Sales: For the three months ended September 30, 1998, net sales were RMB
260,545,064. During the three months ended September 30, 1998, the Marketing
Company purchased RMB 147,263,053 and RMB 13,462,506 of beer products from
Noble Brewery and Sichuan Brewery, respectively, for resale. Substantially
all beer sales during the three months ended September 30, 1998 were provided
from the sale and distribution of beer products under the Pabst Blue Ribbon
brand. For the three months ended September 30, 1997, net sales were RMB
284,987,371. During the three months ended September 30, 1997, the Marketing
Company purchased RMB 139,504,962 and RMB 7,624,377 of beer products from
Noble Brewery and Sichuan Brewery, respectively, for resale. Substantially
all beer sales during the three months ended September 30, 1997 were provided
from the sale and distribution of beer products under the Pabst Blue Ribbon
brand. All sales during the three months ended September 30, 1998 and 1997
were conducted through the Marketing Company and were attributable to beer
sales.
During the three months ended September 30, 1998, net sales of beer products
decreased by RMB 24,442,307 or 8.6% to RMB 260,545,064, as compared to RMB
284,987,371 for the three months ended September 30, 1997. The Company sold
57,035 metric tons of beer to distributors in 1998 as compared to 58,400 metric
tons of beer in 1997, a decrease of 2.3%. The decrease in net sales of beer
products during the three months ended September 30, 1998 as compared to the
three months ended September 30, 1997 was primarily attributable to the
21
<PAGE>
decrease in sale volume and the shift in consumer demand to lower priced beer
products.
Contributing to the decrease in sales revenues in 1998 was the recent
summer flooding in China, which impacted consumer demand, and, as a result of
flooded roads (particularly in the Hubei and Hunan Provinces), interfered
with the Company's ability to deliver beer to its distributors in the
affected provinces. The Company expects that the flooding will continue to
have a negative effect on sales, although on a diminishing basis, through the
remainder of 1998.
In response to changing market conditions and competitive pressures, the
Company introduced two new Pabst Blue Ribbon beer products during March 1998.
The new products cost less to produce as a result of containing less malt and
having a lower alcoholic content, and are sold in newly designed packaging.
The Company believes that these new products will not have a significant
effect on demand for the Company's premium brand beer, but will appeal to a
different market segment that is seeking a premium brand beer at a lower
price, and will allow the Company to maintain and attempt to expand its
market share in China.
During the three months ended September 30, 1998, Zhaoqing Brewery sold
18,668 metric tons of beer to the Marketing Company, of which 17,843 metric
tons (95.6%) were Pabst Blue Ribbon beer and 825 metric tons (4.4%) were
local brand beer. During the three months ended September 30, 1997, Zhaoqing
Brewery sold 15,505 metric tons to the Marketing Company, of which 499 metric
tons (3.2%) were local brand beer and 15,006 metric tons (96.8%) were Pabst
Blue Ribbon beer. Total beer sold by Zhaoqing Brewery to the Marketing
Company increased by 3,163 metric tons or 20.4% from 1997 to 1998.
During the three months ended September 30, 1998, Zao Yang High Worth
Brewery sold 428 metric tons of beer to the Marketing Company, all of which
was Pabst Blue Ribbon beer.
During the three months ended September 30, 1998 and 1997, Sichuan
Brewery sold 3,737 metric tons and 2,081 metric tons of beer, respectively,
to the Marketing Company, all of which was Pabst Blue Ribbon beer.
Gross Profit: For the three months ended September 30, 1998, total gross
profit was RMB 41,593,671 or 16.0% of total net sales. For the three months
ended September 30, 1997, total gross profit was RMB 42,119,668 or 14.8% of
total net sales. Although gross profit margin increased from 14.8% in 1997 to
16.0% in 1998 due to effective cost control measures, gross profit from beer
sales decreased by RMB 525,997 to RMB 41,593,671 in 1998 as compared to RMB
42,119,668 in 1997 as a result of reduced sales.
The Company expects that it will experience pressure on its gross profit
margin during the remainder of 1998 and during 1999 as a result of a general
softening of consumer demand in China, caused in part by the economic turmoil
in Asia, continued competition from major breweries in China seeking to
protect their market share, and the increase in sales of lower margin
products.
Selling, General and Administrative Expenses: For the three months ended
September 30, 1998, selling, general and administrative expenses were RMB
45,789,244 or 17.6% of net sales, consisting of selling expenses of RMB
25,985,659 and general and administrative expenses of RMB 19,803,585. Net of
an allowance for doubtful accounts of RMB 1,431,647 for the three months
ended September 30, 1998, general and administrative expenses were RMB
18,371,938. For the three months ended September 30, 1997, selling, general
and administrative expenses were RMB 41,445,191 or 14.5% of net sales,
consisting of selling expenses of RMB 29,985,061 and general and
administrative expenses
22
<PAGE>
of RMB 11,460,130. The Company did not record an allowance for doubtful
accounts for the three months ended September 30, 1997, as the Company
recovered some previously written-off accounts receivable during the period.
Selling expenses include costs relating to the advertising, promotion,
marketing and distribution of Pabst Blue Ribbon beer in China. Selling
expenses decreased by RMB 3,999,402 or 13.3% in 1998 as compared to 1997, and
as a percentage of net sales, to 10.0% in 1998 from 10.5% in 1997. Selling
expenses decreased in 1998 as compared to 1997, both on an absolute basis and
as a percentage of sales, as a result of the Company's adjusting its
advertising and promotional program to reflect changing market conditions.
Selling expenses are recognized through the consolidation of the
operations of the Marketing Company. The Marketing Company incurs such
expenses on behalf of all of the Pabst Blue Ribbon brewing facilities in
China, even though not all of such facilities' results of operations are
reflected in the Company's operating income (loss). Although the Marketing
Company is budgeted annually to operate at break-even levels, based on agreed
upon ex-factory prices that the Marketing Company pays to the breweries to
purchase their production of Pabst Blue Ribbon beer, actual profitability,
particularly on an interim basis, is subject to substantial variability.
During the three months ended September 30, 1998, the Marketing Company
incurred an operating loss of approximately RMB 10,932,000, which reduced
consolidated operating income commensurately.
General and administrative expenses consist of the management office
operation costs of Zhaoqing Brewery, the Marketing Company and Zao Yang High
Worth Brewery, the costs associated with the operation of the Company's
executive offices, and the legal and accounting costs associated with the
operation of a public company. Excluding the allowance for doubtful accounts,
general and administrative expenses increased by RMB 6,911,808 or 60.3% in
1998 as compared to 1997, and as a percentage of net sales, to 7.1% in 1998
from 4.0% in 1997. General and administrative expenses increased in 1998 as
compared in 1997 primarily as a result of increased personnel related costs
and costs associated with the operation of a public company.
On January 2, 1998, options to purchase 210,000 shares of Class A Common
Stock at an exercise price of US$3.87 per share were granted to four
directors and five employees, and options to purchase 70,000 shares of Class
A Common Stock at an exercise price of US$4.26 were granted to two directors,
each of whom possesses indirectly more than 10% of the total combined voting
power of all classes of common stock of the Company. From 50% to 70% of such
stock options vested on April 1, 1998, and the remaining portion of the stock
options vest in varying amounts through April 1, 2000. The stock options
expire on dates ranging from December 31, 2001 through December 31, 2005. The
stock options issued to non-employee directors were accounted for pursuant to
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). Under SFAS 123, the fair value of
stock options is calculated according to the Black-Scholes pricing model and
amortized to expense over the vesting period. As a result, the Company
recognized RMB 174,445 of compensation expense during the three months ended
September 30, 1998.
On March 2, 1998, the Company entered into a contract with Worldwide
Corporate Finance, a corporate financial consulting company, to provide
financial and business consulting services to the Company. The Company paid
an initial non-refundable retainer by issuing 10,000 shares of Class A Common
Stock, which were recorded as a charge to operations for the nine months
ended September 30, 1998 at their estimated fair market value of RMB 240,700
(US$29,000). A total of 40,000 shares of the Company's Class A Common Stock
and warrants to purchase 150,000 shares of Class A Common Stock were issuable
23
<PAGE>
based on the consulting company completing certain pre-defined objectives
(the "Contingent Securities").
The initial term of the contract with Worldwide Corporate Finance was
through June 17, 1998, but it was subsequently extended to August 18, 1998.
The contract expired on August 18, 1998 with none of the objectives having
been completed that would have required the issuance of any portion of the
Contingent Securities.
The Company accounts for warrants granted to non-employees in accordance
with SFAS 123, which requires non-cash compensation expense be recognized
over the expected period of benefit. The Company recorded non-cash
compensation expense related to such warrants of RMB 333,104 during the three
months ended March 31, 1998. However, as a result of the subsequent
expiration of the contract with none of the objectives having been completed,
the Company reversed such expense during the three months ended June 30, 1998
in order to reflect the change in estimate. The Company did not record any
non-cash compensation expense during the three months ended September 30,
1998.
Operating Income (Loss): For the three months ended September 30, 1998,
operating loss was (RMB 4,370,018) or (1.7%) of net sales. For the three
months ended September 30, 1997, operating income was RMB 674,477 or 0.2% of
net sales. The operating loss was primarily attributable to the shift in
sales mix to lower margin products, increased selling, general and
administrative expenses, and the Marketing Company's operating loss. The
adjustment and regulation of production between Zhaoqing Brewery, Noble
Brewery, Sichuan Brewery and Zao Yang High Worth Brewery by the Marketing
Company also contributed to the operating loss.
Interest Expense: For the three months ended September 30, 1998, interest
expense decreased by RMB 2,552,999 or 67.4% to RMB 1,236,672, as compared to
RMB 3,789,671 for the three months ended September 30, 1997. Interest expense
decreased in 1998 as compared to 1997 as a result of decreases in customer
deposits, capital lease obligations and amounts due to related companies.
Income Taxes: The two-year income tax holiday for High Worth JV expired
on December 31, 1997. Commencing in 1998, High Worth JV is required to pay
local income tax at half of the normal rate of 33% on its profit as
determined in accordance with PRC accounting standards applicable to High
Worth JV. Accordingly, for the three months ended September 30, 1998, income
tax expense of RMB 1,064,933 was recorded. For the three months ended
September 30, 1997, no income tax expense was recorded.
Net Income: Net income decreased to RMB 3,301,773 for the three months
ended September 30, 1998, as compared to RMB 5,952,987 for the three months
ended September 30, 1997.
Nine Months Ended September 30, 1998 and 1997 -
Sales: For the nine months ended September 30, 1998, net sales were RMB
884,605,289. During the nine months ended September 30, 1998, the Marketing
Company purchased RMB 506,434,409 and RMB 42,662,867 of beer products from
Noble Brewery and Sichuan Brewery, respectively, for resale. Substantially
all beer sales during the nine months ended September 30, 1998 were provided
from the sale and distribution of beer products under the Pabst Blue Ribbon
brand. For the nine months ended September 30, 1997, net sales were RMB
927,028,146. During the nine months ended September 30, 1997, the Marketing
Company purchased RMB 529,114,902 and RMB 28,019,418 of beer products from
Noble Brewery and Sichuan Brewery, respectively, for resale. Substantially
all beer
24
<PAGE>
sales during the nine months ended September 30, 1997 were provided from the
sale and distribution of beer products under the Pabst Blue Ribbon brand. All
sales during the nine months ended September 30, 1998 and 1997 were conducted
through the Marketing Company and were attributable to beer sales.
During the nine months ended September 30, 1998, net sales of beer
products decreased by RMB 42,422,857 or 4.6% to RMB 884,605,289, as compared
to RMB 927,028,146 for the nine months ended September 30, 1997. The Company
sold 184,746 metric tons of beer to distributors in 1998 as compared to
181,973 metric tons of beer in 1997, an increase of 1.5%. The decrease in net
sales of beer products during the nine months ended September 30, 1998 as
compared to the nine months ended September 30, 1997 was primarily
attributable to a shift in consumer demand to lower priced beer products. As
a result, during the nine months ended September 30, 1998 as compared to the
nine months ended September 30, 1997, although the Company recorded a 1.5%
increase in the volume of beer sold, it incurred a decrease of 4.6% in sales,
reflecting a lower average sales price per metric ton of beer.
Contributing to the decrease in sales revenues in 1998 was the recent
summer flooding in China, which impacted consumer demand, and, as a result of
flooded roads (particularly in the Hubei and Hunan Provinces), interfered
with the Company's ability to deliver beer to its distributors in the
affected provinces. The Company expects that the flooding will continue to
have a negative effect on sales, although on a diminishing basis, through the
remainder of 1998.
In response to changing market conditions and competitive pressures, the
Company introduced two new Pabst Blue Ribbon beer products during March 1998.
The new products cost less to produce as a result of containing less malt and
having a lower alcoholic content, and are sold in newly designed packaging.
The Company believes that these new products will not have a significant
effect on demand for the Company's premium brand beer, but will appeal to a
different market segment that is seeking a premium brand beer at a lower
price, and will allow the Company to maintain and attempt to expand its
market share in China.
During the nine months ended September 30, 1998, Zhaoqing Brewery sold
59,908 metric tons of beer to the Marketing Company, of which 1,635 metric
tons (2.7%) were local brand beer and 58,273 metric tons (97.3%) were Pabst
Blue Ribbon beer. During the nine months ended September 30, 1997, Zhaoqing
Brewery sold 59,016 metric tons to the Marketing Company, of which 1,156
metric tons (2.0%) were local brand beer and 57,860 metric tons (98.0%) were
Pabst Blue Ribbon beer. Total beer sold by Zhaoqing Brewery to the Marketing
Company increased by 892 metric tons or 1.5% from 1997 to 1998.
During the nine months ended September 30, 1998, Zao Yang High Worth
Brewery sold 982 metric tons of beer to the Marketing Company, all of which
was Pabst Blue Ribbon beer.
During the nine months ended September 30, 1998 and 1997, Sichuan Brewery
sold 10,972 metric tons and 6,310 metric tons of beer, respectively, to the
Marketing Company, all of which was Pabst Blue Ribbon beer.
Gross Profit: For the nine months ended September 30, 1998, total gross
profit was RMB 153,073,510 or 17.3% of total net sales. For the nine months
ended September 30, 1997, total gross profit was RMB 160,404,300 or 17.3% of
total net sales. Gross profit from beer sales decreased by RMB 7,330,790 to
RMB 153,073,510 in 1998 as compared to RMB 160,404,300 in 1997 as a result of
reduced sales.
25
<PAGE>
The Company expects that it will experience pressure on its gross profit
margin during the remainder of 1998 and during 1999 as a result of a general
softening of consumer demand in China, caused in part by the economic turmoil
in Asia, continued competition from major breweries in China seeking to
protect their market share, and the increase in sales of lower margin
products.
Selling, General and Administrative Expenses: For the nine months ended
September 30, 1998, selling, general and administrative expenses were RMB
150,692,889 or 17.0% of net sales, consisting of selling expenses of RMB
91,132,707 and general and administrative expenses of RMB 59,560,182. Net of
an allowance for doubtful accounts of RMB 5,554,517 for the nine months ended
September 30, 1998, general and administrative expenses were RMB 54,005,665.
For the nine months ended September 30, 1997, selling, general and
administrative expenses were RMB 139,281,844 or 15.0% of net sales,
consisting of selling expenses of RMB 86,708,573 and general and
administrative expenses of RMB 52,573,271. Net of an allowance for doubtful
accounts of RMB 11,958,000 for the nine months ended September 30, 1997,
general and administrative expenses were RMB 40,615,271.
Selling expenses include costs relating to the advertising, promotion,
marketing and distribution of Pabst Blue Ribbon beer in China. Selling
expenses increased by RMB 4,424,134 or 5.1% in 1998 as compared to 1997, and
as a percentage of net sales, to 10.3% in 1998 from 9.4% in 1997. Selling
expenses increased in 1998 as compared to 1997, both on an absolute basis and
as a percentage of sales, as a result of the Company's substantially expanded
advertising and promotional program implemented in order to maintain and
stimulate consumer demand and maintain the market position of Pabst Blue
Ribbon beer in China, in an attempt to counteract softening consumer demand
and increasing competition from foreign premium brand beer.
Selling expenses are recognized through the consolidation of the
operations of the Marketing Company. The Marketing Company incurs such
expenses on behalf of all of the Pabst Blue Ribbon brewing facilities in
China, even though not all of such facilities' results of operations are
reflected in the Company's operating income (loss). Although the Marketing
Company is budgeted annually to operate at break-even levels, based on agreed
upon ex-factory prices that the Marketing Company pays to the breweries to
purchase their production of Pabst Blue Ribbon beer, actual profitability,
particularly on an interim basis, is subject to substantial variability.
During the nine months ended September 30, 1998, the Marketing Company
incurred an operating loss of approximately RMB 30,275,000, which reduced
consolidated operating income commensurately.
General and administrative expenses consist of the management office
operation costs of Zhaoqing Brewery, the Marketing Company and Zao Yang High
Worth Brewery, the costs associated with the operation of the Company's
executive offices, and the legal and accounting costs associated with the
operation of a public company. Excluding the allowance for doubtful accounts,
general and administrative expenses increased by RMB 13,390,394 or 33.0% in
1998 as compared to 1997, and as a percentage of net sales, to 6.1% in 1998
from 4.4% in 1997. General and administrative expenses increased in 1998 as
compared in 1997 primarily as a result of increased personnel related costs
and costs associated with the operation of a public company.
26
<PAGE>
On January 2, 1998, options to purchase 210,000 shares of Class A Common
Stock at an exercise price of US$3.87 per share were granted to four
directors and five employees, and options to purchase 70,000 shares of Class
A Common Stock at an exercise price of US$4.26 were granted to two directors,
each of whom possesses indirectly more than 10% of the total combined voting
power of all classes of common stock of the Company. From 50% to 70% of such
stock options vested on April 1, 1998, and the remaining portion of the stock
options vest in varying amounts through April 1, 2000. The stock options
expire on dates ranging from December 31, 2001 through December 31, 2005. The
stock options issued to non-employee directors were accounted for pursuant to
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). Under SFAS 123, the fair value of
stock options is calculated according to the Black-Scholes pricing model and
amortized to expense over the vesting period. As a result, the Company
recognized RMB 2,044,248 of compensation expense during the nine months ended
September 30, 1998.
On March 2, 1998, the Company entered into a contract with Worldwide
Corporate Finance, a corporate financial consulting company, to provide
financial and business consulting services to the Company. The Company paid
an initial non-refundable retainer by issuing 10,000 shares of Class A Common
Stock, which were recorded as a charge to operations for the six months ended
June 30, 1998 at their estimated fair market value of RMB 240,700
(US$29,000). A total of 40,000 shares of the Company's Class A Common Stock
and warrants to purchase 150,000 shares of Class A Common Stock are issuable
based on the consulting company completing certain pre-defined objectives
(the "Contingent Securities").
The initial term of the contract with Worldwide Corporate Finance was
through June 17, 1998, but it was subsequently extended to August 18, 1998.
The contract expired on August 18, 1998 with none of the objectives having
been completed that would have required the issuance of any portion of the
Contingent Securities.
The Company accounts for warrants granted to non-employees in accordance
with SFAS 123, which requires non-cash compensation expense be recognized
over the expected period of benefit. The Company recorded non-cash
compensation expense related to such warrants of RMB 333,104 during the three
months ended March 31, 1998. However, as a result of the subsequent
expiration of the contract with none of the objectives having been completed,
the Company reversed such expense during the three months ended June 30, 1998
in order to reflect the change in estimate. The Company did not record any
non-cash compensation expense during the three months ended September 30,
1998 or the nine months ended September 30, 1998.
Operating Income: For the nine months ended September 30, 1998, operating
income was RMB 95,673 or 0.1% of net sales. For the nine months ended
September 30, 1997, operating income was RMB 21,122,456 or 2.3% of net sales.
The decrease in operating income is primarily attributable to the shift in
sales mix to lower margin products, increased selling, general and
administrative expenses, and the Marketing Company's operating loss. The
adjustment and regulation of production between Zhaoqing Brewery, Noble
Brewery, Sichuan Brewery and Zao Yang High Worth Brewery by the Marketing
Company also contributed to the decrease in operating income.
Interest Expense: For the nine months ended September 30, 1998, interest
expense decreased by RMB 9,376,403 or 69.4% to RMB 4,143,690, as compared to
RMB 13,520,093 for the nine months ended September 30, 1997. Interest expense
decreased in 1998 as compared to 1997 as a result of decreases in customer
deposits, capital lease obligations and amounts due to related companies.
27
<PAGE>
Income Taxes: The two-year income tax holiday for High Worth JV expired
on December 31, 1997. Commencing in 1998, High Worth JV is required to pay
local income tax at half of the normal rate of 33% on its profit as
determined in accordance with PRC accounting standards applicable to High
Worth JV. Accordingly, for the nine months ended September 30, 1998, income
tax expense of RMB 4,479,069 was recorded. For the nine months ended
September 30, 1997, deferred income tax expense of RMB 1,176,000 was recorded.
Net Income: Net income decreased to RMB 18,987,098 for the nine months
ended September 30, 1998, as compared to RMB 24,857,389 for the nine months
ended September 30, 1997.
Results of Operations - Noble Brewery:
Three Months Ended September 30, 1998 and 1997 -
Sales: For the three months ended September 30, 1998 and 1997, net sales
were RMB 137,942,379 and RMB 131,444,252, respectively.
During the three months ended September 30, 1998, Noble Brewery sold
35,679 metric tons of beer to the Marketing Company, as compared to 31,214
metric tons of beer the three months ended September 30, 1997. Total beer
sold by Noble Brewery to the Marketing Company increased by 4,465 metric tons
or 14.3% from 1997 to 1998.
Gross Profit: For the three months ended September 30, 1998 and 1997,
gross profit was RMB 36,509,602 or 26.5% of net sales and RMB 30,887,795 or
23.5% of net sales, respectively.
Selling, General and Administrative Expenses: For the three months ended
September 30, 1998, selling, general and administrative expenses totalled RMB
7,563,599 or 5.5% of net sales, consisting of selling expenses of RMB 139,846
and general and administrative expenses of RMB 7,423,753. For the three
months ended September 30, 1997, selling, general and administrative expenses
totalled RMB 5,706,367 or 4.3% of net sales, consisting of selling expenses
of RMB 1,522,315 and general and administrative expenses of RMB 4,148,052.
Selling expenses consist of warehousing, storage and freight costs.
Operating Income: For the three months ended September 30, 1998 and
1997, operating income was RMB 28,946,003 or 21.0% of net sales and RMB
25,181,428 or 19.2% of net sales, respectively.
Income Taxes: The two-year income tax holiday for Noble Brewery expired
on December 31, 1995. Commencing in 1996, Noble Brewery is required to pay
local income tax at half the normal rate of 33% on its profit as determined
in accordance with PRC accounting standards applicable to Noble Brewery.
Accordingly, for the three months ended September 30, 1998, income tax
expense of RMB 4,265,403 was recorded. For the three months ended September
30, 1997, income tax expense of RMB 3,565,846 was recorded.
Net Income: Net income increased to RMB 24,680,600 or 17.9% of net sales
for the three months ended September 30, 1998, as compared to RMB 21,263,958
or 16.2% of net sales for the three months ended September 30, 1997.
28
<PAGE>
Nine Months Ended June 30, 1998 and 1997 -
Sales: For the nine months ended September 30, 1998 and 1997, net sales
were RMB 476,053,877 and RMB 498,849,616, respectively.
During the nine months ended September 30, 1998, Noble Brewery sold
116,611 metric tons of beer to the Marketing Company, as compared to 116,369
metric tons of beer during the nine months ended September 30, 1997. Total
beer sold by Noble Brewery to the Marketing Company increased by 242 metric
tons or 0.2% from 1997 to 1998.
Gross Profit: For the nine months ended September 30, 1998 and 1997,
gross profit was RMB 143,757,961 or 30.2% of net sales and RMB 131,976,860 or
26.5% of net sales, respectively.
Selling, General and Administrative Expenses: For the nine months ended
September 30, 1998, selling, general and administrative expenses totalled RMB
31,470,248 or 6.6% of net sales, consisting of selling expenses of RMB
3,103,000 and general and administrative expenses of RMB 28,367,248. For the
nine months ended September 30, 1997, selling, general and administrative
expenses totalled RMB 32,867,394 or 6.6% of net sales, consisting of selling
expenses of RMB 3,255,002 and general and administrative expenses of RMB
29,612,392. Selling expenses consist of warehousing, storage and freight
costs.
Operating Income: For the nine months ended September 30, 1998 and 1997,
operating income was RMB 112,287,713 or 23.6% of net sales and RMB 99,109,466
or 19.9% of net sales, respectively.
Income Taxes: The two-year income tax holiday for Noble Brewery expired
on December 31, 1995. Commencing in 1996, Noble Brewery is required to pay
local income tax at half the normal rate of 33% on its profit as determined
in accordance with PRC accounting standards applicable to Noble Brewery.
Accordingly, for the nine months ended September 30, 1998, income tax expense
of RMB 15,395,133 was recorded. For the nine months ended September 30, 1997,
income tax expense of RMB 15,099,465 was recorded.
Net Income: Net income increased to RMB 97,079,501 or 20.4% of net sales
for the nine months ended September 30, 1998, as compared to RMB 83,875,570
or 16.8% of net sales for the nine months ended September 30, 1997.
Consolidated Financial Condition - September 30, 1998:
Liquidity and Capital Resources -
For the nine months ended September 30, 1998, the Company's operations
provided cash resources of RMB 102,579,561. The Company's cash balance
increased by RMB 35,519,532 to RMB 111,612,486 at September 30, 1998, as
compared to RMB 76,092,954 at December 31, 1997. The Company's net working
capital deficit increased by RMB 19,480,952 to RMB 122,206,211 at September
30, 1998, as compared to RMB 102,725,259 at December 31, 1997, and the
Company's current ratio at September 30, 1998 was 0.80:1, as compared to
0.79:1 at December 31, 1997.
29
<PAGE>
Net of an allowance for doubtful accounts of RMB 5,554,517 for the nine
months ended September 30, 1998, accounts and bills receivable increased by
RMB 35,354,127 or 22.7% to RMB 185,821,943 at September 30, 1998, as compared
to RMB 156,022,333 at December 31, 1997, as a result of the seasonal nature
of the business and a general slowdown in collections. Commencing January 1,
1997, as a result of more intense competition from other premium band beers
in China, the Marketing Company abolished the customer deposit requirement
except for certain new customers which are required to make a cash deposit as
security for their purchases. Customers with material transaction volume are
required to issue bills of exchange from their respective banks to secure
part or all of the payment on the due date. The Marketing Company has also
provided extended credit terms to certain distributors that meet minimum
financial criteria. The rate of increase of bills receivable has slowed
considerably during the nine months ended September 30, 1998. At September
30, 1998, bills receivable had increased to RMB 35,947,530, as compared to
RMB 35,555,400 at December 31, 1997. Bills receivable represented 19.3% of
total accounts and bills receivable at September 30, 1998, as compared to
22.8% of accounts and bills receivable at December 31, 1997.
The Company's inventories increased by RMB 2,781,428 or 3.1% to RMB
92,364,870 at September 30, 1998, as compared to RMB 89,583,442 at December
31, 1997.
The Company's prepayments, deposits and other receivables increased by
RMB 62,036,860 or 258.3% to RMB 86,054,771 at September 30, 1998, as compared
to RMB 24,017,911 at December 31, 1997. The increase in prepayments, deposits
and other receivables was mainly due to an increase in prepayments related to
expanded advertising and promotional programs scheduled for the remainder of
1998 and for 1999.
The Company's accounts payable and accrued liabilities increased by RMB
101,328,793 or 103.6% to RMB 199,143,796 at September 30, 1998, as compared
to RMB 97,815,003 at December 31, 1997. The increase in accounts payable and
accrued liabilities was mainly due to the extended and deferred payment terms
allowed by certain suppliers to settle obligations related to the purchases
of raw materials, packing materials and similar items.
Customer deposits decreased by RMB 6,680,000 or 100.0% to RMB nil at
September 30, 1998, as compared to RMB 6,680,000 at December 31, 1997, as a
result of the change in credit policy implemented by the Marketing Company in
1997 in response to the changing market environment. Since the Company pays
interest on customer deposits, the decrease in customer deposits during 1998
has also contributed to a decrease in interest expense in 1998 as compared to
1997.
The amount due to an associated company increased by RMB 60,348,255 or
28.9% to RMB 269,431,590 at September 30, 1998, as compared to RMB
209,083,335 at December 31, 1997, and represents the amounts due to Noble
Brewery for the Marketing Company's purchases of Pabst Blue Ribbon beer. As a
result of the extended credit terms provided by the Marketing Company to
certain distributors, accounts and bills receivable increased, which caused a
commensurate increase in the amount due to an associated company, reflecting
the lengthened collection cycle.
Net of the cash dividend of RMB 40,375,595 paid to Guangdong Blue Ribbon
by High Worth JV, the amounts due to related companies decreased by RMB
22,874,634 or 29.6% to RMB 13,916,367 at September 30, 1998, as compared to
RMB 77,166,596 at December 31, 1997. The decrease in amounts due to related
companies reflected the repayment by the Company of most of the advances from
related companies during the nine months ended September 30, 1998. Since the
Company
30
<PAGE>
pays interest on advances from related companies, the decrease in outstanding
amounts due to related companies at September 30, 1998 has also contributed
to a decrease in interest expense during the three months and nine months
ended September 30, 1998, as compared to the three months and nine months
ended September 30, 1997.
During the nine months ended September 30, 1998, the Company's short-term
secured bank loans increased by RMB 67,172,800. The bank loans bear interest
at rates ranging from 9% to 12.1%. A substantial portion of the bank loans
have been utilized to fund working capital requirements of High Worth JV and
Zao Yang High Worth Brewery.
On November 25, 1997, the Board of Directors of High Worth JV declared
the first dividend distribution, in which Holdings was entitled to
approximately RMB 83,000,000. The dividend is being distributed in
instalments in order to avoid any disruption to High Worth JV's normal
operating cash flow position. During the year ended December 31, 1997,
partial dividends of RMB 15,000,000 and RMB 10,000,000 were distributed to
Guangdong Blue Ribbon and Holdings, respectively. During the nine months
ended September 30, 1998, the balance of the dividends of RMB 40,375,595 and
RMB 73,063,392 was distributed to Guangdong Blue Ribbon and Holdings,
respectively.
On January 13, 1998, High Worth JV entered into a joint venture contract
with Zao Yang Brewery in Hubei Province to establish a new brewery with an
initial annual production capacity of 40,000 metric tons or 340,000 barrels
of beer. The new brewery is designated Zao Yang Blue Ribbon High Worth
Brewery Ltd. ("Zao Yang High Worth Brewery"), with a total capital investment
of RMB 29,280,000, allocated 55% to High Worth JV and 45% to Zao Yang
Brewery. High Worth JV is responsible for transferring the technical know-how
and production techniques to brew Pabst Blue Ribbon beer to Zao Yang High
Worth Brewery, as well as assisting in the renovation of existing equipment,
in order to convert the brewery into another Pabst Blue Ribbon brewing
complex. Zao Yang High Worth Brewery commenced the production of Pabst Blue
Ribbon beer in June 1998. During the nine months ended September 30, 1998,
High Worth JV paid RMB 16,104,000, representing its 55% capital investment in
the joint venture.
For the nine months ended September 30, 1998, additions to property,
plant and equipment aggregated RMB 46,265,978, which include approximately
RMB 37,300,000 spent on conversion and renovation of Zao Yang High Worth
Brewery. The Company anticipates that additional capital expenditures in
connection with the continuing improvement of production facilities at
Zhaoqing Brewery during the remainder of 1998 will be approximately RMB
16,000,000, a portion of which is expected to be financed through capital
leases. The Company anticipates that additional capital expenditures in
connection with the continuous technical renovation process in converting the
old brewing facilities of Zao Yang High Worth Brewery into a Pabst Blue
Ribbon brewing complex during the remainder of 1998 will be approximately RMB
6,000,000, a portion of which is expected to be financed by new bank
borrowings.
In connection with the acquisition of High Worth JV, Oriental Win
advanced US$8,869,585 to Holdings during 1994. The rights to collect
US$8,000,000 of the advance were transferred from Oriental Win to its
shareholders in proportion to their respective shareholder interests in
August 1996 (West Coast Star Enterprises Ltd. - 60%; Mapesbury Limited - 20%;
Redcliffe Holdings Ltd. - 20%). 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 any part thereof by allotment
of shares at par value in Holdings. On September 8, 1998, the remaining
rights to collect US$848,000 of
31
<PAGE>
the advance were also transferred from Oriental Win to its shareholders in
proportion to their respective shareholder interests. As of September 30,
1998 and December 31, 1997, advances from such shareholders, West Coast Star
Enterprises Ltd., Top Link Development Limited (assigned by Mapesbury Limited
in February 1998), Redcliffe Holdings Ltd. and Oriental Win were
approximately RMB 44,063,000 and RMB 39,800,000, RMB 14,688,000 and RMB
13,300,000, RMB 14,688,000 and RMB 13,300,000, and RMB 179,000 and RMB
7,200,000, respectively. Mapesbury Limited also transferred its shares in the
Company to Top Link Development Limited.
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 foreseeable
future. In order to finance the continuing capital requirements of the
Company, the Company is continuing its efforts to arrange for long-term bank
loans or lease financing. In addition, accelerated development or acquisition
of additional brewing facilities or other support facilities may require the
use of long-term borrowings or equity financings by the Company.
Inflation and Currency Matters -
In recent years, the Chinese economy has experienced periods of rapid
economic growth as well as relatively high rates of inflation, which in turn
has resulted in the periodic adoption by the Chinese government of various
corrective measures designed to regulate growth and contain inflation. Since
1993, the Chinese government has implemented an economic program designed to
control inflation, which has resulted in the tightening of working capital
available to Chinese business enterprises. The recent Asian financial crisis
has resulted in a general reduction in domestic production and sales, and a
general tightening of credit, throughout China. The success of the Company
depends in substantial part on the continued growth and development of the
Chinese economy.
Foreign operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, and
fluctuations in the relative value of currencies. The Company conducts
virtually all of its business in China and, accordingly, the sale of its
products is settled primarily in RMB. As a result, devaluation of the RMB
against the USD would adversely affect the Company's financial performance
when measured in USD. Although prior to 1994 the RMB experienced significant
devaluation against the USD, the RMB has remained fairly stable since then.
In addition, the RMB is not freely convertible into foreign currencies, and
the ability to convert the RMB is subject to the availability of foreign
currencies. Effective December 1, 1998, all foreign exchange transactions
involving the RMB must take place through authorized banks in China at the
prevailing exchange rates quoted by the People's Bank of China.
The continuing Asian financial crisis has inhibited the growth and
general level of activity of the Chinese economy, thus reducing consumer
demand in China, which has had a negative impact on the Company's results of
operations, financial condition and cash flows. In addition, as a result of
the Asian financial crisis, China recently tightened foreign exchange
controls. Although the central government of China has recently indicated
that it does not intend to devalue its currency in the near future,
devaluation still remains a possibility. Should the central government of
China decide to devalue its currency, the Company does not believe that such
an action would have a detrimental effect on the Company's operations, since
the Company conducts virtually all of its business in China, and the sale of
its products is settled in RMB. As of September 30, 1998, the Company's only
significant USD-
32
<PAGE>
denominated obligation, which would be more expensive to repay in the event
of a devaluation, is the advances from shareholders of RMB 73,617,552, which
is not currently scheduled for repayment.
The Company has historically relied on dividend distributions, converted
from RMB into USD, to fund its activities outside of China. The Company does
not expect that the recently tightened foreign exchange controls will affect
the ability of High Worth JV to continue to distribute such dividends.
However, in the event of a devaluation, High Worth JV could elect to
distribute dividends in RMB, which would then be converted into other
currencies at the then prevailing market rates.
Year 2000 Issue:
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year.
Computer programs that have sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
Based on a recent internal assessment, the Company does not believe that
the cost to modify its existing software and/or convert to new software will
be significant.
33
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K -
Three Months Ended September 30, 1998: None.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CBR BREWING COMPANY, INC.
-------------------------
(Registrant)
Date: November 6, 1998 By: /s/ ZI-SHOU CHEN
------------------
Zi-shou Chen
President and Director
(Duly authorized officer)
Date: November 6, 1998 By: /s/ GARY C.K. LUI
-------------------
Gary C.K. Lui
Chief Financial Officer
(Principal financial officer)
35
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 13,447,287
<SECURITIES> 0
<RECEIVABLES> 22,388,186
<ALLOWANCES> 0
<INVENTORY> 11,128,298
<CURRENT-ASSETS> 60,039,875
<PP&E> 32,133,757
<DEPRECIATION> 0
<TOTAL-ASSETS> 122,453,764
<CURRENT-LIABILITIES> 74,763,515
<BONDS> 1,156,618
0
0
<COMMON> 823
<OTHER-SE> 24,050,193
<TOTAL-LIABILITY-AND-EQUITY> 122,453,764
<SALES> 106,578,950
<TOTAL-REVENUES> 106,578,950
<CGS> 88,136,358
<TOTAL-COSTS> 88,136,358
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 669,219
<INTEREST-EXPENSE> 499,240
<INCOME-PRETAX> (527,420)
<INCOME-TAX> 539,647
<INCOME-CONTINUING> 2,287,602
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,287,602
<EPS-PRIMARY> .29
<EPS-DILUTED> .29
</TABLE>
