<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 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 June 30, 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) - June 30, 1998
and December 31, 1997
Condensed Consolidated Statements of Income (Unaudited) - Three
Months and Six Months Ended June 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows (Unaudited) - Six
Months Ended June 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements
(Unaudited) - Six Months Ended June 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>
June 30, 1998 December 31, 1997
-------------------------- --------------------------
RMB USD RMB USD
------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash 92,508,866 11,145,647 76,092,954 9,167,826
Accounts and bills receivable, net 254,916,207 30,712,795 156,022,333 18,797,871
Inventories (Note 4) 93,486,324 11,263,413 89,583,442 10,793,186
Amounts due from related companies 21,233,491 2,558,252 29,667,015 3,574,339
Prepayments, deposits and other
receivables 67,047,046 8,077,958 24,017,911 2,893,724
------------- ----------- ----------- -----------
Total current assets 529,191,934 63,758,065 375,383,655 45,226,946
Interest in an associated company
(Note 6) 232,189,247 27,974,608 234,997,255 28,312,922
Property, plant and equipment, net
(Note 7) 266,463,547 32,104,042 210,015,830 25,303,112
Non-current assets 16,397,500 1,975,602 14,697,800 1,770,819
------------- ----------- ----------- -----------
Total assets 1,044,242,228 125,812,317 835,094,540 100,613,799
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
(continued)
</TABLE>
3
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
--------------------------- -------------------------
RMB USD RMB USD
------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings 70,172,800 8,454,554 35,500,000 4,277,108
Capital lease obligations 7,349,698 885,506 7,349,698 885,506
Accounts payable
and accrued liabilities 213,825,452 25,762,102 97,815,003 11,784,940
Customer deposits - - 6,680,000 804,819
Amounts due to related companies 17,343,059 2,089,525 77,166,596 9,297,181
Amount due to an associated company 303,340,657 36,547,067 209,083,335 25,190,763
Income taxes payable 3,591,849 432,753 260,000 31,325
Sales taxes payable 32,462,161 3,911,104 39,841,282 4,800,154
Deferred tax liabilities 4,413,000 531,687 4,413,000 531,687
------------- ----------- ----------- -----------
Total current liabilities 652,498,676 78,614,298 478,108,914 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) 112,378,859 13,539,622 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 June 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 106,140,689 12,788,035 104,030,194 12,533,758
General reserve and enterprise
development funds 8,341,785 1,005,034 8,341,785 1,005,034
Retained earnings 81,657,906 9,838,302 65,972,581 7,948,504
------------- ----------- ----------- -----------
Total shareholders' equity 196,147,212 23,632,194 178,351,384 21,488,118
------------- ----------- ----------- -----------
Total shareholders' advances and
shareholders' equity 269,764,764 32,501,779 251,968,936 30,357,703
------------- ----------- ------------ -----------
Total liabilities, shareholders'
advances and shareholders'
equity 1,044,242,228 125,812,317 835,094,540 100,613,799
------------- ----------- ------------ -----------
------------- ----------- ------------ -----------
</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 Six Months Ended Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998 June 30, 1997 June 30, 1997
--------------------------- ------------ ------------ ------------------- ----------------
RMB USD RMB USD RMB RMB
------------- ------------ ------------ ------------ ------------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Sales, including sales to related
companies of RMB 77,044 and
RMB 573,401 for the three months
and six months ended June 30, 1998,
respectively, and RMB 2,530,695 and
RMB 6,530,457 for the three months
and six months ended June 30, 1997,
respectively 344,858,031 41,549,160 636,665,044 76,706,632 337,665,295 654,604,471
Sales taxes (6,430,312) (774,736) (12,604,819) (1,518,653) (6,520,036) (12,563,696)
----------- ---------- ----------- ---------- ----------- -----------
Net sales 338,427,719 40,774,424 624,060,225 75,187,979 331,145,259 642,040,775
Cost of sales, including inventory
purchased from related companies of
RMB 222,304,793 and RMB 388,371,717
for the three months and six months
ended June 30, 1998, respectively,
and RMB 233,106,207 and RMB
410,004,981 for the three months
and six months ended June 30, 1997,
respectively; and royalty fee paid
to a related company of RMB
2,295,010 and RMB 4,058,958 for the
three months and six months ended
June 30, 1998, respectively, and
RMB 2,322,234 and RMB 4,183,719 for
the three months and six months
ended June 30, 1997, respectively (277,281,340) (33,407,390) (512,580,386) (61,756,673) (267,582,228) (523,756,143)
----------- ---------- ----------- ---------- ----------- -----------
Gross profit 61,146,379 7,367,034 111,479,839 13,431,306 63,563,031 118,284,632
Selling, general and administrative
expenses, including management fee
paid to a related company of RMB
945,000 for the three months ended
June 30, 1998 and 1997, and RMB
1,890,000 for the six months
ended June 30, 1998 and 1997 (60,592,594) (7,300,313) (104,903,645) (12,638,994) (49,292,975) (97,836,653)
Fair value of warrants, stock options
and common stock issued for services
rendered (Note 8) 158,659 19,116 (2,110,503) (254,277) - -
----------- ---------- ----------- ---------- ----------- -----------
Operating income 712,444 85,837 4,465,691 538,035 14,270,056 20,447,979
Foreign exchange losses - - (329,565) (39,707) (89,994) (11,856)
Other expense:
Interest expense, including interest
paid to related companies of RMB
nil and RMB 106,674 for the three
months and six months ended June 30,
1998, respectively, and RMB 1,432,373
and RMB 3,120,181 for the three
months and six months ended June 30,
1997, respectively (1,648,539 )(198,619) (2,907,018) (350,242) (6,325,617) (9,730,422)
----------- ---------- ----------- ---------- ----------- -----------
Income (loss) before income taxes (936,095) (112,782) 1,229,108 148,086 7,854,445 10,705,701
Income taxes (2,293,208) (276,290) (3,414,136) (411,342) - (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 Six Months Ended Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998 June 30, 1997 June 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 (3,229,303) (389,072) (2,185,028) (263,256) 7,854,445 8,945,701
Equity in earnings of an
associated company 15,651,289 1,885,697 28,569,373 3,442,093 7,621,496 22,651,320
------------ ---------- ------------ ----------- ----------- ------------
Income before minority
interests 12,421,986 1,496,625 26,384,345 3,178,837 15,475,941 31,597,021
Minority interests (3,811,678) (459,238) (10,699,020) (1,289,039) (5,769,305) (12,692,619)
------------ ---------- ------------ ----------- ----------- ------------
Net income 8,610,308 1,037,387 15,685,325 1,889,798 9,706,636 18,904,402
------------ ---------- ------------ ----------- ----------- ------------
------------ ---------- ------------ ----------- ----------- ------------
Net income per share (Note 3)
-- Basic 1.07 0.13 1.96 0.24 1.21 2.36
------------ ---------- ------------ ----------- ----------- ------------
------------ ---------- ------------ ----------- ----------- ------------
-- Diluted 1.07 0.13 1.95 0.23 1.21 2.36
------------ ---------- ------------ ----------- ----------- ------------
------------ ---------- ------------ ----------- ----------- ------------
</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>
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
-------------------------- ----------------
RMB USD RMB
----------- ------------ ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 15,685,325 1,889,798 18,904,402
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 2,110,503 254,277 -
Allowance for doubtful accounts 4,122,870 496,731 11,958,000
Depreciation and amortization 12,887,373 1,552,696 16,747,303
Foreign exchange losses 329,565 39,707 11,856
Minority interests 10,699,020 1,289,039 12,692,619
Equity in earnings of an associated company (28,569,373) (3,442,093) (22,651,320)
Income taxes payable 3,331,849 401,428 1,760,000
Dividend received from an associated company 31,377,381 3,780,407 34,413,512
Changes in operating assets and liabilities:
(Increase) decrease in -
Accounts and bills receivable (103,016,744) (12,411,656) (45,511,585)
Inventories (3,902,882) (470,227) (54,255,028)
Amounts due from related companies 8,433,524 1,016,087 3,158,560
Prepayments, deposits and other receivables (43,029,135) (5,184,234) (15,978,006)
Increase (decrease) in -
Accounts payable and accrued liabilities 116,010,449 13,977,163 29,218,469
Customer deposits (6,680,000) (804,819) (53,403,600)
Amount due to an associated company 94,257,322 11,356,304 80,014,651
Sales taxes payable (7,379,121) (889,051) (10,661,509)
----------- ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 106,667,926 12,851,557 6,418,324
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures on non-current assets (1,699,700) (204,783) -
Purchases of property, plant and equipment (40,384,655) (4,865,621) (7,638,930)
Purchase of interest in brewery (16,104,000) (1,940,241) -
----------- ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (58,188,355) (7,010,645) (7,638,930)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
New bank borrowings 34,672,800 4,177,446 3,000,000
Increase (decrease) in amounts due to related
companies (19,447,942) (2,343,125) 16,642,551
Repayment of capital lease obligations (6,912,922) (832,882) (5,474,826)
Payment of cash dividend to minority interests (40,375,595) (4,864,530) -
----------- ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (32,063,659) (3,863,091) 14,167,725
----------- ------------ ------------
Net increase in cash 16,415,912 1,977,821 12,947,119
Cash at beginning of period 76,092,954 9,167,826 39,709,594
----------- ------------ ------------
Cash at end of period 92,508,866 11,145,647 52,656,713
----------- ------------ ------------
----------- ------------ ------------
</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)
SIX MONTHS ENDED JUNE 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)
SIX MONTHS ENDED JUNE 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 allow 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)
SIX MONTHS ENDED JUNE 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 June 30, 1998. The Company
believes that its operating cash flow, combined with cash on hand, bank lines
of credit and other external credit sources, and the credit facilities
provided by affiliates or related parties, are adequate to satisfy the
Company's working capital requirements for the foreseeable future.
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)
SIX MONTHS ENDED JUNE 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 June 30, 1998 of USD1.00 = RMB8.30. 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 June 30, 1998, the
results of operations for the three months and six months ended June 30, 1998
and 1997, and the cash flows for the six months ended June 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 results of operations for the three months and six months ended June 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)
SIX MONTHS ENDED JUNE 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 requires
the presentation of basic and diluted earnings per share. Basic earnings per
share are calculated by dividing net income by the weighted average number of
shares of common stock (Class A and Class B) outstanding during the period.
Diluted earnings per share are calculated by dividing net income by the basic
common shares and all dilutive securities, but does not include the impact of
contingently issuable securities or potential common shares which would be anti-
dilutive. Net income per share for the three months and six months ended June
30, 1997 was not restated as a result of SFAS 128.
Potentially dilutive securities outstanding at June 30, 1998 consist of 40,000
contingently issuable shares of common stock, warrants to purchase 150,000
shares of common stock and stock options to purchase 280,000 shares of common
stock. These dilutive securities were not outstanding during 1997.
The following tables present the components of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 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 8,610,308 1,037,387 9,706,636 15,685,325 1,889,798 18,904,402
--------- --------- --------- ---------- --------- ----------
--------- --------- --------- ---------- --------- ----------
Weighted average
common shares
outstanding 8,010,013 8,010,013 8,000,013 8,006,680 8,006,680 8,000,013
--------- --------- --------- ---------- --------- ----------
--------- --------- --------- ---------- --------- ----------
Net income per
share - Basic 1.07 0.13 1.21 1.96 0.24 2.36
--------- --------- --------- ---------- --------- ----------
--------- --------- --------- ---------- --------- ----------
Diluted Earnings Per
Share Computation
- --------------------
Net income 8,610,308 1,037,387 9,706,636 15,685,325 1,889,798 18,904,402
--------- --------- --------- ---------- --------- ----------
--------- --------- --------- ---------- --------- ----------
Weighted average
common shares
outstanding 8,010,013 8,010,013 8,000,013 8,006,680 8,006,680 8,000,013
Net shares issuable
Upon exercise of
stock options and
warrants 57,820 57,820 - 50,593 50,593 -
--------- --------- --------- ---------- --------- ----------
Diluted common
shares outstanding 8,067,833 8,067,833 8,000,013 8,057,273 8,057,273 8,000,013
--------- --------- --------- ---------- --------- ----------
--------- --------- --------- ---------- --------- ----------
Net income per
share - Diluted 1.07 0.13 1.21 1.95 0.23 2.36
--------- --------- --------- ---------- --------- ----------
--------- --------- --------- ---------- --------- ----------
</TABLE>
12
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
NOTE 4. INVENTORIES
Inventories consisted of the following at June 30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------------------ -----------------------
RMB USD RMB USD
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Raw materials 19,420,893 2,339,867 26,189,345 3,155,343
Work in progress 7,263,000 875,060 7,164,153 863,151
Finished goods 66,802,431 8,048,486 6,229,944 6,774,692
---------- ---------- ---------- ----------
93,486,324 11,263,413 89,583,442 10,793,186
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
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. - US$4,800,000; Mapesbury Limited - US$1,600,000; Redcliffe
Holdings Ltd. - US$1,600,000). The advances bear no interest and are not
repayable unless the Company obtains additional long-term debt or equity
financing. Repayments of the advances are at the discretion of the Company and
the shareholders have no right to demand repayment. The Company has the option
of offsetting or repaying the advances or any part thereof by allotment of
shares at par value in Holdings. As of June 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 39,800,000, RMB
13,300,000, RMB 13,300,000 and RMB 7,200,000, respectively. Mapesbury Limited
also transferred its shares in the Company to Top Link Development Limited.
13
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
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
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 six
months ended June 30, 1998 (31,377,381)
-----------
Unlisted investment, June 30, 1998 232,189,247
-----------
-----------
</TABLE>
The condensed statements of operations of Noble Brewery for the three months
and six months ended June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Three Months Ended Six Months Ended
June 30, 1998 June 30,1998 June 30, 1997 June 30, 1997
----------------------- ------------------------ ------------------ ----------------
RMB USD RMB USD RMB RMB
----------- ---------- ----------- ---------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Net sales 192,096,472 23,144,153 338,111,498 40,736,325 200,222,817 367,405,364
----------- ---------- ----------- ---------- ----------- -----------
----------- ---------- ----------- ---------- ----------- -----------
Net income 42,336,205 5,100,748 72,398,901 8,722,759 30,942,645 62,611,612
----------- ---------- ----------- ---------- ----------- -----------
----------- ---------- ----------- ---------- ----------- -----------
The Company's share
of net income after
adjustment of unrealised
intercompany profit 15,651,289 1,885,697 28,569,373 3,442,093 7,621,496 22,651,320
----------- ---------- ----------- ---------- ----------- -----------
----------- ---------- ----------- ---------- ----------- -----------
</TABLE>
14
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
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 six months ended June 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 pro forma results of operations have been presented for the three months
and six months ended June 30, 1997, as Zao Yang High Worth Brewery did not
commence operations until June 1998, and had nominal revenues for such month.
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 the 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.
15
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
NOTE 8. SHAREHOLDERS' EQUITY (continued)
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 1,869,803 of compensation expense during the
three months and six months ended June 30, 1998, respectively.
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 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 was through
June 17, 1998, but was subsequently extended to August 18, 1998. The
warrants to purchase 150,000 shares of Class A Common Stock will be
exercisable for a period of 2.5 years from the date the objectives are
reached, and will consist of 50,000 warrants exercisable at US$3.50, 50,000
warrants exercisable at US$4.50 and 50,000 warrants exercisable at US$5.50
per share.
As of June 30, 1998, none of the objectives that would require the issuance
of any portion of the Contingent Securities had been completed. Although the
Company has extended the period for the consulting company to complete the
pre-defined objectives to August 18, 1998, the Company currently estimates
that none of the pre-defined objectives will be reached as of such date.
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 previously described change in
estimate, the Company reversed such expense during the three months ended
June 30, 1998. Accordingly, the Contingent Securities were not included in
the calculation of earnings per share for the three months and six months
ended June 30, 1998.
16
<PAGE>
CBR BREWING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
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 six months ended June 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 June 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 June 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.
In January 1996, Zhaoqing Brewery HC transferred all of its operating
assets and liabilities to High Worth JV pursuant to the original Joint Venture
18
<PAGE>
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 six months ended June 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 will 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.
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 experience a decline. As a result, demand for goods and
services by Chinese consumers has been weakening, causing a softening of the
19
<PAGE>
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 1998.
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.
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 June 30, 1998, the Company had expended
approximately RMB 34,100,000 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 six months ended June 30, 1998, the Marketing Company
distributed 554 metric tons of Pabst Blue Ribbon beer produced by Zao Yang
High Worth Brewery.
Sichuan Brewery: Sichuan Brewery is situated on a site containing
20
<PAGE>
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 six months ended June 30, 1998, the Marketing Company distributed
4,437 metric tons and 7,235 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 six
months ended June 30, 1998.
Consolidated Results of Operations:
Three Months Ended June 30, 1998 and 1997 -
Sales: For the three months ended June 30, 1998, net sales were RMB
338,427,719. During the three months ended June 30, 1998, the Marketing
Company purchased RMB 204,206,270 and RMB 18,098,523 of beer products from
Noble Brewery and Sichuan Brewery, respectively, for resale. All the beer
sales during the three months ended June 30, 1998 were provided from the sale
and distribution of beer products under the Pabst Blue Ribbon brand. For the
three months ended June 30, 1997, net sales were RMB 331,145,259. During the
three months ended June 30, 1997, the Marketing Company purchased RMB
212,711,166 and RMB 20,395,041 of beer products from Noble Brewery and
Sichuan Brewery, respectively, for resale. Approximately 99.8% of total beer
sales during the three months ended June 30, 1997 were provided from the sale
and distribution of beer products under the Pabst Blue Ribbon brand. All
sales during the three months ended June 30, 1998 and 1997 were conducted
through the Marketing Company and were attributable to beer sales.
During the three months ended June 30, 1998, net sales of beer products
increased by RMB 7,282,460 or 2.2% to RMB 338,427,719, as compared to RMB
331,145,259 for the three months ended June 30, 1997. The Company sold
71,732 metric tons of beer to distributors in 1998 as compared to 64,324
metric tons of beer in 1997, an increase of 11.5%. The increase in net sales
of beer products during the three months ended June 30, 1998 as compared to
the three months ended June 30, 1997 was primarily attributable to the
increase in sale volume.
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 expand its market share in
China.
During the three months ended June 30, 1998, Zhaoqing Brewery sold
22,339 metric tons of beer to the Marketing Company, all of which was Pabst
Blue Ribbon beer. During the three months ended June 30, 1997, Zhaoqing
Brewery sold 24,646 metric tons to the Marketing Company, of which 296 metric
tons
21
<PAGE>
(1.2%) were local brand beer and 24,350 metric tons (98.8%) were Pabst Blue
Ribbon beer. Total beer sold by Zhaoqing Brewery to the Marketing Company
decreased by 2,307 metric tons or 9.4% from 1997 to 1998.
During the three months ended June 30, 1998, Zao Yang High Worth Brewery
sold 554 metric tons of beer to the Marketing Company, all of which was Pabst
Blue Ribbon beer.
During the three months ended June 30, 1998 and 1997, Sichuan Brewery
sold 4,437 metric tons and 4,229 metric tons of beer, respectively, to the
Marketing Company, all of which was Pabst Blue Ribbon beer.
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.
Gross Profit: For the three months ended June 30, 1998, total gross
profit was RMB 61,146,379 or 18.1% of total net sales. For the three months
ended June 30, 1997, total gross profit was RMB 63,563,031 or 19.2% of total
net sales. Gross profit from beer sales decreased by RMB 2,416,652 to RMB
61,146,379 in 1998 as compared to RMB 63,563,031 in 1997 as a result of the
shift in sales mix to lower margin products.
The Company expects that it will experience pressure on its gross profit
margin during the remainder of 1998 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. The
Company also expects that the recent flooding in China will have a negative
impact on results of operations for the three months ending September 30,
1998, by causing reduced consumer demand and, as a result of flooded roads
(particularly in Hubei and Hunan Provinces), by interfering with the
Company's ability to deliver beer to its distributors in the affected
provinces.
Selling, General and Administrative Expenses: For the three months
ended June 30, 1998, selling, general and administrative expenses were RMB
60,592,594 or 17.9% of net sales, consisting of selling expenses of RMB
37,856,807 and general and administrative expenses of RMB 22,735,787. Net of
an allowance for doubtful accounts of RMB 2,146,679 for the three months
ended June 30, 1998, general and administrative expenses were RMB 20,589,108.
For the three months ended June 30, 1997, selling, general and
administrative expenses were RMB 49,292,975 or 14.9% of net sales, consisting
of selling expenses of RMB 25,278,619 and general and administrative expenses
of RMB 24,014,356. Net of an allowance for doubtful accounts of RMB
7,848,000 for the three months ended June 30, 1997, general and
administrative expenses were RMB 16,166,356.
Selling expenses include costs relating to the advertising, promotion,
marketing and distribution of Pabst Blue Ribbon beer in China. Selling
expenses increased by RMB 12,578,188 or 49.8% in 1998 as compared to 1997,
and as a percent of net sales, to 11.2% in 1998 from 7.6% 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 implementation of a
substantially expanded advertising and promotional program to stimulate
consumer demand and maintain the market position of Pabst Blue Ribbon beer in
China, as a result of softening consumer demand and increasing competition
from foreign premium brand beer.
Selling expenses are recognized through the consolidation of the
operations of the Marketing Company. The Marketing Company incurs such
22
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expenses on behalf of all of the Pabst Blue Ribbon brewing facilities in
China, even though not all of such facilities' operations are included in the
Company's operating results. 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 June 30, 1998, the Marketing Company incurred an operating loss
of approximately RMB 14,024,000, which reduced operating income commensurately.
General and administrative expenses include the costs associated with
the operation of the Company's executive offices, and the legal and
accounting costs associated with the operation of a public company.
Excluding the allowance for doubtful accounts, general and administrative
expenses increased by RMB 4,422,752 or 27.4% in 1998 as compared to 1997, and
as a percentage of net sales, to 6.1% in 1998 from 4.9% 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
June 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 was through
June 17, 1998, but was subsequently extended to August 18, 1998. The
warrants to purchase 150,000 shares of Class A Common Stock will be
exercisable for a period of 2.5 years from the date the objectives are
reached, and will consist of 50,000 warrants exercisable at US$3.50 per
share, 50,000 warrants exercisable at US$4.50 per share and 50,000 warrants
exercisable at US$5.50 per share.
As of June 30, 1998, none of the objectives that would require the
issuance of any portion of the Contingent Securities had been completed.
Although the Company has extended the period of completing the pre-defined
objectives to August 18, 1998, the Company does not expect that the
pre-defined objectives will be reached when the contract expires on August
18, 1998.
23
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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 previously
described change in estimate, the Company reversed such expense during the
three months ended June 30, 1998.
Operating Income: For the three months ended June 30, 1998, operating
income was RMB 712,444 or 0.2% of net sales. For the three months ended June
30, 1997, operating income was RMB 14,270,056 or 4.3% 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 three months ended June 30, 1998, interest
expense decreased by RMB 4,677,078 or 73.9% to RMB 1,648,539, as compared to
RMB 6,325,617 for the three months ended June 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 June 30, 1998, income tax
expense of RMB 2,293,208 was recorded. For the three months ended June 30,
1997, no income tax expense was recorded.
Net Income: Net income decreased to RMB 8,610,308 for the three months
ended June 30, 1998, as compared to RMB 9,706,636 for the three months ended
June 30, 1997.
Six Months Ended June 30, 1998 and 1997 -
Sales: For the six months ended June 30, 1998, net sales were RMB
624,060,225. During the six months ended June 30, 1998, the Marketing
Company purchased RMB 359,171,356 and RMB 29,200,361 of beer products from
Noble Brewery and Sichuan Brewery, respectively, for resale. Approximately
99.7% of total beer sales during the six months ended June 30, 1998 were
provided from the sale and distribution of beer products under the Pabst Blue
Ribbon brand. For the six months ended June 30, 1997, net sales were RMB
642,040,775. During the six months ended June 30, 1997, the Marketing
Company purchased RMB 389,609,940 and RMB 20,395,041 of beer products from
Noble Brewery and Sichuan Brewery, respectively, for resale. Approximately
99.8% of total beer sales during the six months ended June 30, 1997 were
provided from the sale and distribution of beer products under the Pabst Blue
Ribbon brand. All sales during the six months ended June 30, 1998 and 1997
were conducted through the Marketing Company and were attributable to beer
sales.
During the six months ended June 30, 1998, net sales of beer products
decreased by RMB 17,980,550 or 2.8% to RMB 624,060,225, as compared to RMB
642,040,775 for the six months ended June 30, 1997. The Company sold 127,711
metric tons of beer to distributors in 1998 as compared to 122,861 metric
tons of beer in 1997, an increase of 3.9%. The decrease in net sales of beer
products during the six months ended June 30, 1998 as compared to the six
24
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months ended June 30, 1997 was primarily attributable to a shift in consumer
demand to lower priced beer products. As a result, during the six months
ended June 30, 1998 as compared to the six months ended June 30, 1997,
although the Company recorded a 3.9% increase in the volume of beer sold, it
incurred a decrease of 2.8% in sales, reflecting a lower average sales price
per metric ton of beer.
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 expand its market share in
China.
During the six months ended June 30, 1998, Zhaoqing Brewery sold 41,240
metric tons of beer to the Marketing Company, of which 810 metric tons (2.0%)
were local brand beer and 40,430 metric tons (98.0%) were Pabst Blue Ribbon
beer. During the six months ended June 30, 1997, Zhaoqing Brewery sold
43,511 metric tons to the Marketing Company, of which 657 metric tons (1.5%)
were local brand beer and 42,854 metric tons (98.5%) were Pabst Blue Ribbon
beer. Total beer sold by Zhaoqing Brewery to the Marketing Company decreased
by 2,271 metric tons or 5.2% from 1997 to 1998.
During the six months ended June 30, 1998, Zao Yang High Worth Brewery
sold 554 metric tons of beer to the Marketing Company, all of which was Pabst
Blue Ribbon beer.
During the six months ended June 30, 1998 and 1997, Sichuan Brewery sold
7,235 metric tons and 4,229 metric tons of beer, respectively, to the
Marketing Company, all of which was Pabst Blue Ribbon beer.
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.
Gross Profit: For the six months ended June 30, 1998, total gross
profit was RMB 111,479,839 or 17.9% of total net sales. For the six months
ended June 30, 1997, total gross profit was RMB 118,284,632 or 18.4% of total
net sales. Gross profit from beer sales decreased by RMB 6,804,793 to RMB
111,479,839 in 1998 as compared to RMB 118,284,632 in 1997 as a result of the
shift in sales mix to lower margin products.
The Company expects that it will experience pressure on its gross profit
margin during the remainder of 1998 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. The
Company also expects that the recent flooding in China will have a negative
impact on results of operations for the three months ending September 30,
1998, by causing reduced consumer demand and, as a result of flooded roads
(particularly in Hubei and Hunan Provinces), by interfering with the
Company's ability to deliver beer to its distributors in the affected
provinces.
Selling, General and Administrative Expenses: For the six months ended
June 30, 1998, selling, general and administrative expenses were RMB
104,903,645 or 16.8% of net sales, consisting of selling expenses of RMB
65,147,048 and general and administrative expenses of RMB 39,756,597. Net of
25
<PAGE>
an allowance for doubtful accounts of RMB 4,122,870 for the six months ended
June 30, 1998, general and administrative expenses were RMB 35,633,727. For
the six months ended June 30, 1997, selling, general and administrative
expenses were RMB 97,836,653 or 15.2% of net sales, consisting of selling
expenses of RMB 56,723,512 and general and administrative expenses of RMB
41,113,141. Net of an allowance for doubtful accounts of RMB 11,958,000 for
the six months ended June 30, 1997, general and administrative expenses were
RMB 29,155,141.
Selling expenses include costs relating to the advertising, promotion,
marketing and distribution of Pabst Blue Ribbon beer in China. Selling
expenses increased by RMB 8,423,536 or 14.9% in 1998 as compared to 1997, and
as a percent of net sales, to 10.4% in 1998 from 8.8% 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 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' operations are included in the
Company's operating results. 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 six
months ended June 30, 1998, the Marketing Company incurred an operating loss
of approximately RMB 19,343,000, which reduced operating income
commensurately.
General and administrative expenses include the costs associated with
the operation of the Company's executive offices, and the legal and
accounting costs associated with the operation of a public company.
Excluding the allowance for doubtful accounts, general and administrative
expenses increased by RMB 6,478,586 or 22.2% in 1998 as compared to 1997, and
as a percentage of net sales, to 5.7% in 1998 from 4.5% 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 1,869,803 of compensation expense during the six months ended
June 30, 1998.
26
<PAGE>
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 was through
June 17, 1998, but was subsequently extended to August 18, 1998. The
warrants to purchase 150,000 shares of Class A Common Stock will be
exercisable for a period of 2.5 years from the date the objectives are
reached, and will consist of 50,000 warrants exercisable at US$3.50 per
share, 50,000 warrants exercisable at US$4.50 per share and 50,000 warrants
exercisable at US$5.50 per share.
As of June 30, 1998, none of the objectives that would require the
issuance of any portion of the Contingent Securities had been completed.
Although the Company has extended the period of completing the pre-defined
objectives to August 18, 1998, the Company does not expect that the
pre-defined objectives will be reached when the contract expires on August
18, 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. As a result of the Company's
expectations that the objectives will not be achieved, the Company did not
record a non-cash charge to operations related to such warrants during the
six months ended June 30, 1998.
Operating Income: For the six months ended June 30, 1998, operating
income was RMB 4,465,691 or 0.7% of net sales. For the six months ended June
30, 1997, operating income was RMB 20,447,979 or 3.2% 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 six months ended June 30, 1998, interest
expense decreased by RMB 6,823,404 or 70.1% to RMB 2,907,018, as compared to
RMB 9,730,422 for the six months ended June 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 six months ended June 30, 1998, income tax
expense of RMB 3,414,136 was recorded. For the six months ended June 30,
1997, deferred income tax expense of RMB 1,176,000 was recorded.
Net Income: Net income decreased to RMB 15,685,325 for the six months
ended June 30, 1998, as compared to RMB 18,904,402 for the six months ended
June 30, 1997.
27
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Results of Operations - Noble Brewery:
Three Months Ended June 30, 1998 and 1997 -
Sales: For the three months ended June 30, 1998 and 1997, net sales
were RMB 192,096,472 and RMB 200,222,817, respectively.
During the three months ended June 30, 1998, Noble Brewery sold 46,706
metric tons of beer to the Marketing Company, as compared to 48,663 metric
tons of beer during the three months ended June 30, 1997. Total beer sold by
Noble Brewery to the Marketing Company decreased by 1,957 metric tons or 4.0%
from 1997 to 1998.
Gross Profit: For the three months ended June 30, 1998 and 1997, gross
profit was RMB 62,629,296 or 32.6% of net sales and RMB 52,699,609 or 26.3%
of net sales, respectively.
Selling, General and Administrative Expenses: For the three months
ended June 30, 1998, selling, general and administrative expenses totalled
RMB 13,439,911 or 7.0% of net sales, consisting of selling expenses of RMB
1,172,920 and general and administrative expenses of RMB 12,266,991. For the
three months ended June 30, 1997, selling, general and administrative
expenses totalled RMB 15,638,151 or 7.8% of net sales, consisting of selling
expenses of RMB 531,616 and general and administrative expenses of RMB
15,106,535. Selling expenses consist of warehousing, storage and freight
costs.
Operating Income: For the three months ended June 30, 1998 and 1997,
operating income was RMB 49,189,385 or 25.6% of net sales and RMB 37,061,458
or 18.5% of net sales, respectively.
Income Taxes: The two-year income tax holiday for Noble Brewery expired
on December 31, 1995. Commencing in 1996, Noble Brewery was required to pay
local income tax at half the normal rate of 33% on its profit as determined
in accordance with PRC accounting standards applicable to Noble Brewery.
Accordingly, for the three months ended June 30, 1998, income tax expense of
RMB 6,853,180 was recorded. For the three months ended June 30, 1997, income
tax expense of RMB 5,761,593 was recorded.
Net Income: Net income increased to RMB 42,336,205 or 22.0% of net
sales for the three months ended June 30, 1998, as compared to RMB 30,942,645
or 15.5% of net sales for the three months ended June 30, 1997.
Six Months Ended June 30, 1998 and 1997 -
Sales: For the six months ended June 30, 1998 and 1997, net sales were
RMB 338,111,498 and RMB 367,405,364, respectively.
During the six months ended June 30, 1998, Noble Brewery sold 80,932
metric tons of beer to the Marketing Company, as compared to 85,155 metric
tons of beer during the six months ended June 30, 1997. Total beer sold by
Noble Brewery to the Marketing Company decreased by 4,223 metric tons or 5.0%
from 1997 to 1998.
Gross Profit: For the six months ended June 30, 1998 and 1997, gross
profit was RMB 107,248,359 or 31.7% of net sales and RMB 101,089,065 or 27.5%
of net sales, respectively.
Selling, General and Administrative Expenses: For the six months ended
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June 30, 1998, selling, general and administrative expenses totalled RMB
23,906,649 or 7.1% of net sales, consisting of selling expenses of RMB
2,963,154 and general and administrative expenses of RMB 20,943,495. For the
six months ended June 30, 1997, selling, general and administrative expenses
totalled RMB 27,161,027 or 7.4% of net sales, consisting of selling expenses
of RMB 1,732,687 and general and administrative expenses of RMB 25,428,340.
Selling expenses consist of warehousing, storage and freight costs.
Operating Income: For the six months ended June 30, 1998 and 1997,
operating income was RMB 83,341,710 or 24.6% of net sales and RMB 73,928,038
or 20.1% of net sales, respectively.
Income Taxes: The two-year income tax holiday for Noble Brewery expired
on December 31, 1995. Commencing in 1996, Noble Brewery was required to pay
local income tax at half the normal rate of 33% on its profit as determined
in accordance with PRC accounting standards applicable to Noble Brewery.
Accordingly, for the six months ended June 30, 1998, income tax expense of
RMB 11,129,730 was recorded. For the six months ended June 30, 1997, income
tax expense of RMB 11,533,619 was recorded.
Net Income: Net income increased to RMB 72,398,901 or 21.4% of net sales
for the six months ended June 30, 1998, as compared to RMB 62,611,612 or 17.0%
of net sales for the six months ended June 30, 1997.
Consolidated Financial Condition - June 30, 1998:
Liquidity and Capital Resources -
For the six months ended June 30, 1998, the Company's operations
provided cash resources of RMB 106,667,926. The Company's cash balance
increased by RMB 16,415,912 to RMB 92,508,866 at June 30, 1998, as compared
to RMB 76,092,954 at December 31, 1997. The Company's net working capital
deficit increased by RMB 20,581,483 to RMB 123,306,742 at June 30, 1998, as
compared to RMB 102,725,259 at December 31, 1997, and the Company's current
ratio at June 30, 1998 was 0.81:1, as compared to 0.79:1 at December 31, 1997.
Net of an allowance for doubtful accounts of RMB 4,122,870 for the six
months ended June 30, 1998, accounts and bills receivable increased by RMB
103,016,744 or 66.0% to RMB 254,916,207 at June 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 brand 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
substantially during the six months ended June 30, 1998. At June 30, 1998,
bills receivable had increased to RMB 38,052,930, as compared to RMB
35,555,400 at December 31, 1997. Bills receivable represented 14.9% of total
accounts and bills receivable at June 30, 1998, as compared to 22.8% of
accounts and bills receivable at December 31, 1997.
The Company's inventories increased by RMB 3,902,882 or 4.4% to RMB
93,486,324 at June 30, 1998, as compared to RMB 89,583,442 at December 31,
1997.
29
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The Company's prepayments, deposits and other receivables increased by
RMB 43,029,135 or 179.2% to RMB 67,047,046 at June 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.
The Company's accounts payable and accrued liabilities increased by RMB
116,010,449 or 118.6% to RMB 213,825,452 at June 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
June 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 94,257,322 or
45.1% to RMB 303,340,657 at June 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
19,447,942 or 25.2% to RMB 17,343,059 at June 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 six months ended June 30, 1998. Since the
Company pays interest on advances from related companies, the decrease in
outstanding amounts due to related companies at June 30, 1998 has also
contributed to a decrease in interest expense during the three months and six
months ended June 30, 1998, as compared to the three months and six months
ended June 30, 1997.
During the six months ended June 30, 1998, the Company's short-term
secured bank loans increased by RMB 34,672,800. 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 the 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 six months ended
June 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.
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
30
<PAGE>
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 six months ended June 30, 1998, High Worth JV
paid RMB 16,104,000, representing its 55% capital investment in the joint
venture.
For the six months ended June 30, 1998, additions to property, plant and
equipment aggregated RMB 40,384,655, which includes approximately RMB
34,100,000 spent on the 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
20,000,000, 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 of 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
10,000,000, 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. - US$4,800,000; Mapesbury
Limited - US$1,600,000; Redcliffe Holdings Ltd. - US$1,600,000). The
advances bear no interest and are not repayable unless the Company obtains
additional long-term debt or equity financing. Repayments of the advances
are at the discretion of the Company and the shareholders have no right to
demand repayment. The Company has the option of offsetting or repaying the
advances or any part thereof by allotment of shares at par value in Holdings.
As of June 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 39,800,000, RMB 13,300,000, RMB 13,300,000 and RMB
7,200,00, 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 an equity financing by the Company.
Inflation and Currency Matters
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.
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
31
<PAGE>
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.
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.
The continuing negative impact of the Asian financial crisis has had an
indirect impact on the Company's operations through its effect on consumer
demand in China. 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 June 30, 1998, the Company's only
significant USD-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. In addition,
although historically High Worth JV has distributed dividends in USD, in the
event of a devaluation, it could elect to distribute dividends in RMB.
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 anticipate that the cost of
any needed modifications will have a material effect on results of
operations.
32
<PAGE>
PART II. OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K -
Three Months Ended June 30, 1998: None.
33
<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: August 18, 1998 By: /s/ ZI-SHOU CHEN
-----------------------------
Zi-shou Chen
President
(Duly authorized officer)
Date: August 18, 1998 By: /s/ GARY C. K. LUI
-----------------------------
Gary C. K. Lui
Chief Financial Officer
(Principal financial officer)
34
<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
JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 11,145,647
<SECURITIES> 0
<RECEIVABLES> 30,712,795
<ALLOWANCES> 0
<INVENTORY> 11,263,413
<CURRENT-ASSETS> 63,758,065
<PP&E> 32,104,042
<DEPRECIATION> 0
<TOTAL-ASSETS> 125,812,317
<CURRENT-LIABILITIES> 78,614,298
<BONDS> 1,156,618
0
0
<COMMON> 823
<OTHER-SE> 23,631,371
<TOTAL-LIABILITY-AND-EQUITY> 125,812,317
<SALES> 75,187,979
<TOTAL-REVENUES> 75,187,979
<CGS> 61,756,673
<TOTAL-COSTS> 61,756,673
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 496,731
<INTEREST-EXPENSE> 350,242
<INCOME-PRETAX> 148,086
<INCOME-TAX> 411,342
<INCOME-CONTINUING> 1,889,798
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,889,798
<EPS-PRIMARY> .24
<EPS-DILUTED> .23
</TABLE>
